**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

**FORM 10-K**

** **

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**FOR THE FISCAL YEAR ENDEDDECEMBER 31, 2006**

** **

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**COMMISSION FILE NUMBER001-11911**

 

**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**

** **

Securities registered pursuant to Section 12(b) of theAct:

 

| Title of each class                          |   | Name of each  exchange on which registered |
|----------------------------------------------|--------|--------------------------------------------|
| **Ordinary  Common Shares, $.001 par value** |   | **New  York Stock Exchange**               |

 

Securities registeredpursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act. Yes o    No x

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

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 x    No o

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of the Form 10-K or anyamendment to this Form 10-K.  x

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

Large accelerated filer o               Acceleratedfiler x               Non-acceleratedfiler o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o No x

The aggregate market value of the Common Stock held by non-affiliates ofthe registrant was $118,731,406 as of June 30, 2006.
| Number of shares of Common Stock outstanding as  of March 8, 2007: |   | Class A  |   | 477,952   |
|--------------------------------------------------------------------|--------|----------|--------|-----------|
|                                                               |   | Ordinary |   | 7,985,952 |
|                                                               |   | Total    |   | 8,463,904 |

##  

## **DOCUMENTS INCORPORATED BY REFERENCE**

Part III - Items 10-14 - Definitive Proxy Statement of the Registrant tobe filed pursuant to Regulation 14A, Parts I-IV - Final Prospectus of theRegistrant dated August 1, 1996 filed pursuant to Rule 424(b).

 

----

**Note Regarding Forward-LookingStatements**

Certain statements contained throughout this Annual Report on Form 10-Kare “forward-looking statements” within the meaning of Section 21E of theSecurities Exchange Act of 1934, as amended. These forward-looking statements represent our present expectations orbeliefs concerning future events.  Wecaution readers that such statements are necessarily based on certainassumptions that are subject to risks and uncertainties, which could causeactual results to differ materially from those indicated in this report.  These risk factors include, but are notlimited to, the factors discussed in Item 1A of this report.  We encourage investors to read Item 1Acarefully.  Undue reliance should not beplaced on the forward-looking statements contained in this report.  These statements, like all statementscontained in this report, speak only as of the date of this report (unlessanother date is indicated) and we undertake no obligation to update or revisethe statements except as required by law.

### **NoteRegarding Incorporation By Reference**

The Securities and Exchange Commission (“SEC”) allows us to disclosecertain information by referring the reader to other documents we have filedwith the SEC.  The information to whichwe refer is “incorporated by reference” into this Annual Report on Form10-K.  Please read that information.

### **PART I**

### **Item1.  Business**

### **CompanyHistory**

Steinway Musical Instruments, Inc., through its wholly ownedsubsidiaries, is a global leader in the design, manufacture, marketing anddistribution of high quality musical instruments.  We are the largest domestic manufacturer ofmusical instruments.  Whenever we referto the “Company” or to “us,” or use the terms “we” or “our” in this annualreport, we are referring to Steinway Musical Instruments, Inc. and itssubsidiaries.

Steinway Musical Instruments, Inc., formerly Selmer Industries, Inc.,was incorporated in 1993, at which time it purchased The Selmer Company, Inc.(“Selmer”), the largest U.S. manufacturer of band & orchestralinstruments.  In May of 1995, wepurchased Steinway Musical Properties, Inc. (“Steinway”), a manufacturer anddistributor of acoustic pianos.  InAugust of 1996, Steinway Musical Instruments, Inc. became publicly held.

In September of 2000, we acquired United Musical Instruments Holdings,Inc. (“UMI”), the second largest manufacturer of band & orchestralinstruments in the United States and on January 1, 2003 Selmer and UMI mergedinto Conn-Selmer, Inc. (“Conn-Selmer”). In August of 2004, we acquired the assets of G. Leblanc Corporation, amanufacturer of high quality band instruments with production facilities inWisconsin and France.

We are a Delaware corporation with our principal executive officeslocated at 800 South Street, Suite 305, Waltham, Massachusetts 02453, and ourtelephone number is (781) 894-9770. Through our corporate website, www.steinwaymusical.com, we provideaccess free of charge to all of our filings with the SEC, including our AnnualReports on Form 10-K, quarterly reports on Form 10-Q, and current reports onForm 8-K.  These reports are availableimmediately following filing with the SEC. Information contained on or connected to our website is not incorporatedby reference into this Annual

2

----

 

Report on Form10-K and should not be considered part of this report or any other filing thatwe make with the SEC.  Additionally, theSEC maintains an Internet site at www.sec.gov that contains reports, proxy andinformation statements and other information regarding issuers that fileelectronically with the SEC.

**Financial Information by Segment and GeographicLocation**

Information on business segmentsand geographic areas in which we operated for the years ended December 31,2006, 2005 and 2004 is contained in Note 17 to the Consolidated FinancialStatements included in this report.

**Musical Instrument Industry**

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

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

For several years, increases in piano imports, mainly low-priced modelsfrom China and Indonesia, contributed to an increase in grand piano unit salesin the United States, the world’s largest grand piano market.  In 2006, Asian imports declined sharply asdid total grand piano sales in the United States. Since Steinway realizes themajority of its profit from high-end grand piano sales, our results aregenerally more affected by economic cycles, demographics, and the public’scontinued interest in music than by industry trends.  Accordingly, our Steinway grand sales faredsignificantly better than the market in general. The piano market in China isgrowing at a rapid pace and is now the second largest grand piano marketoutside the United States.  We continueto target this region in our distribution strategies.

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

In recent years, there has been an increase in unitsimported into the domestic market from offshore low-cost producers. This hascreated a highly price sensitive domestic market where manufacturers haveimplemented aggressive pricing programs in an attempt to maintain market sharepositions.  To remain competitive in thismarket, we now import some student woodwind and brass instruments, primarilyentry-level, made to our specifications. The impact of lower priced imported instruments has also led toconsolidation within the industry, leaving Conn-Selmer, Yamaha and Jupiter asthe top three remaining competitors.

3

----

** **

**Business andProducts**

**Piano Segment**

The Family ofSteinway-Designed Pianos is a comprehensive offering of the world’s finestpianos at three distinct price points to suit every buyer looking to purchase afine quality piano.  The family iscomprised of our three brands: Steinway & Sons, Boston and Essex. Steinway & Sonsgrand pianos, handcrafted in New York and Germany, are considered by many to bethe highest quality pianos in the world and have one of the most widelyrecognized and prestigious brand names. We also offer upright pianos as well as two mid-priced lines of pianosunder the Boston and Essex brand names.

**Steinway & Sons Pianos** - Steinway pianos differ from allothers in design specifications, materials used and the assembly process.  We offertwo premium-priced product lines under the Steinway & Sons brand: grandpianos and upright pianos.  Grand pianoshistorically have accounted for the majority of our production.  We offer seven sizes of the grand pianoranging from the 5’1” baby grand to the largest 9’ concert grand.  The smaller grands are sold to bothindividual and institutional customers, while the concert grands are soldprimarily to institutions.  Steinwaygrand pianos are premium pianos in terms of quality and price, with retailprices for ebony pianos generally ranging from $47,200 to $119,200 in theUnited States.  Limited edition pianosand pianos with unique veneers sell for retail prices of up to $163,800.  In 2006, we sold 3,134 grand pianos, of which 2,034 units were shippedfrom our New York facility to dealers in the Americas.  The remaining 1,100 units were shipped fromour German facility primarily to Europe and Asia.  Our upright pianos offer dealers a completeline of quality pianos to satisfy the needs of institutions and other customerswho are constrained by space limitations. We also provide services such as repair, replacement part sales, tuningand regulation of pianos, and restoration. Restoration services range fromrepairs of minor damage to complete restorations of vintage pianos.

**Boston and Essex Pianos** - Weintroduced the Boston line in the early 1990s to allow us to compete in themid-price category.  Today we offer twocomplete lines of grand and upright pianos for the mid-priced piano marketunder the Boston and Essex brand names.  Together, the Boston and Essex product lines offer17 upright and grand piano sizes, with retail prices ranging from $3,990 to$39,990 in the United States. With certain limited exceptions, we allowonly Steinway dealers to carry the Boston and Essex piano lines, therebyensuring that these pianos will be marketed as complementary product lines tothe Steinway line.  These pianos, whichwere designed by us and are produced for us in Asia, provide our dealers with an opportunity to realize better margins in thisprice range while capturing sales that would have otherwise gone to acompetitor.  Also, since our researchindicates that the vast majority of Steinway customers have previously ownedanother piano, Boston and Essex pianos provide future Steinway piano customerswith the opportunity to join the Steinway family of owners sooner.  The Family of Steinway*-*DesignedPianos increases our business with our dealers, making us their primarysupplier in many instances.

**Band Segment**

We are the largest domestic producer of band &orchestral instruments and offer a complete line of brass, woodwind, percussionand string instruments with well-known brand names.  We have complemented our domesticmanufacturing strategy with a sourcing strategy from Asia to remain competitivein the global marketplace.  Over the pastfew years, we have established relationships with several overseasmanufacturers to produce entry-level student instruments to our designspecifications.

4

----

 

In 2006, sales of sourced products accounted for approximately40% of our band division revenue. Approximately 30% of these sales were fromour imported entry-level student woodwind and brass instruments.

**Woodwind and BrassInstruments** - Wemanufacture piccolos, flutes, clarinets, oboes, bassoons, saxophones, trumpets,French horns, tubas, and trombones in our manufacturing facilities in Indiana,Ohio, Wisconsin, and France.  We sell student level instruments in threedistinct product groupings: “good” entry-level imported instruments, “better”mid-priced instruments, which are either imported or manufactured by us, and“best” instruments, which are primarily manufactured by us.  In addition, we also manufacture intermediateand professional level woodwind and brass instruments.  Sales ofwoodwind and brass instruments accounted for 67% of our band division revenuein 2006.

We sell our woodwind and brassproducts under the brand names**Bach, Selmer,C.G. Conn, Leblanc, King, Armstrong, Holton, Martin, Yanagisawa, Vito, Emerson,Noblet, Artley and Benge.  Suggested retail prices generally range from$300 to $2,300 for student instruments and from $1,000 to $11,000 forintermediate and professional instruments. We often customize the products that we sell to professional musiciansso that the product meets requested design specifications or has certain soundcharacteristics.  We believe thatspecialization of products helps maintain a competitive edge in quality andproduct design.  Our specialized woodwindand brass instruments sell for up to $27,000.

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

**Percussion Instruments** - We manufacture, source, and distributeacoustical and tuned percussion instruments, including outfit drums, marchingdrums, concert drums, marimbas, xylophones, vibraphones, orchestra bells, andchimes.  We manufacture percussionproducts in North Carolina and Illinois under the Ludwig and Musser brandnames.  Ludwig is considered a leadingbrand name in acoustical drums and timpani and Musser has a strong marketposition in tuned percussion products. Suggested retail prices range from $400 to $5,000 for acoustical drumoutfits and from $1,000 to $15,000 for tuned percussion instruments, withspecialized tuned instruments purchased by symphonies and orchestras sellingfor up to $21,000.  Sales of percussioninstruments accounted for 16% of our band division revenue in 2006.

**String Instruments** - We assemble and distribute violins, violas,cellos, and basses.  Products are soldunder the brand names Glaesel, Scherl & Roth, and William Lewis & Son. Suggested retail prices generally range from $175 to $3,000 for studentinstruments and from $900 to $4,500 for intermediate and advanced instruments,with specialized instruments selling for up to $13,500. Components areprimarily imported from Europe and Asia and assembled at our factory inOhio.  Sales of string instrumentsaccounted for 3% of our band division revenue in 2006.

**Accessories** - We manufacture mouthpieces anddistribute accessories such as music stands, batons, mallets, straps, mutes,reeds, pads, chin rests, strings, bows, cases and instrument careproducts.  Sales of accessories accountedfor 14% of our band division revenue in 2006.

5

----

** **

**Customers**

**Piano Segment**

Most Steinway grand piano salesare to individuals, both professional artists and amateur pianists.  Our typical customer is between 40 and 50years old and has an intermediate to advanced level of musical skill.  He or she holds a graduate degree and reportsan annual household income over $300,000.

We also sell pianos toinstitutions such as concert halls, conservatories, colleges, universities andmusic schools.  Approximately 20% ofpianos sold in 2006 were to institutional customers.  We have a specific program focused onincreasing piano sales to music schools, as this market segment is typicallyless sensitive to economic cycles. Institutions can earn the “All-Steinway School” designation by owningprimarily Steinway-designed pianos, enabling them to provide their students and faculties with thebest instruments possible for the study of music, from the practice room to therecital hall.  As of December 31, 2006, 68 schools andconservatories worldwide have earned the designation “All-Steinway School.”

We sell the majority of our pianos in the UnitedStates, which is the largest grand piano market in the world. Outside theUnited States, our strongest markets are Germany, Switzerland, the UnitedKingdom, and France. We also continue to expand our presence in former EasternBloc countries.

Outside of the UnitedStates, China is currently the second largest grand piano market in theworld.  With our three piano lines, webelieve our market share of grand piano units is currently 3% in China.  In 2004, we opened a distribution andselection facility in Shanghai.  Our 2006unit sales in China increased more than 85%over 2005 and we expect a large portion ofour long-term growth to come from this market.

In 2006, approximately 52% of piano sales were in theUnited States, 35% in Europe and the remaining 13% primarily in Asia.  Our largest piano dealer accounted forapproximately 4% of piano sales in 2006, while the top 15 accounts represented26% of piano sales.

## **BandSegment**

Band & orchestral instrumentsare sold to student, amateur and professional musicians, and institutions.  The majority of our instruments are purchasedor rented from dealers by students enrolled in music education programs in theUnited States.  Traditionally, studentsjoin school bands or orchestras at age 10 or 11 and learn on beginner levelinstruments, progressing to intermediate or professional level instruments inhigh school or college.  We estimate thatapproximately 85% of our domestic band sales are generated through educationalprograms.  The remaining domestic bandsales are to amateur or professional musicians or performing groups, includingorchestras and symphonies. Student level instruments accounted for approximately 65% of band &orchestral unit sales and approximately 40% of instrument revenues in 2006,with intermediate and professional instruments representing the balance.

Historically, over 80% of our band sales have been inthe United States.  We believe that theAsian and European markets present significant opportunities for growth due tothe quality of our instruments and the strength of our brand names.

6

----

 

In 2006, approximately 80% of band sales were in theUnited States, 9% in Europe and the remaining 11% primarily in Canada andAsia.  Ourlargest band dealer accounted for approximately 12% of band sales in 2006,while the top 15 accounts represented approximately 41% of band sales.

**Sales and Marketing**

### **Piano Segment**

Wedistribute our pianos worldwide through approximately 200 independent dealerswho operate 325 showrooms.  We also sellour pianos through nine company-operated retail showrooms:  four in the United States and five in Europe.  We havesubsidiaries and dealers in both Japan and China that provide direct access tothe growing Asian piano market. Sales to dealers accounted for approximately75% of piano segment revenue in 2006. The remaining 25% was generated fromsales made directly by us at one of our nine company-operated retail showrooms.

We employ district sales managers whoseresponsibilities include developing close working relationships with pianodealers. These highly experienced professionals provide dealers with salestraining and technical support, and develop sales and marketing programs forthe consumer and institutional markets. These sales managers are also responsible for promoting the SteinwayArtist Program.

**Steinway Artist Program** - Steinway Artists are world-class pianists whovoluntarily endorse Steinway & Sons by selecting the Steinway piano.  Our Steinway Artist program is unique in thatwe do not pay artists to endorse our instruments.  To become a Steinway Artist, a pianist mustnot only meet certain performance and professional criteria, he or she mustalso own a Steinway piano.  We use theserenowned artists in our marketing programs to help reinforce recognition of theSteinway brand name and its association with quality.  The Steinway Artist Program currentlyincludes more than 1,300 of the world’s finest pianists who perform on Steinwaypianos.  In return for theirendorsements, Steinway Artists are provided with access to the Concert andArtist Piano Bank.

**Concert and Artist PianoBank** - To ensure that allpianists, especially Steinway Artists, have a broad selection of instruments tomeet their individual touch and tonal preferences, we maintain the Concert andArtist Piano Bank.  The Piano Bankincludes approximately 400 instruments worldwide.  Of these instruments, approximately 300 are locatedin the United States.  In New York Cityalone, the Piano Bank includes approximately 135 concert grands available forvarious occasions.  The remainingdomestic-based pianos are leased to dealers around the country who activelysupport the Steinway Artists program. The Piano Bank promotes our instruments in the music industry andprovides management with continual feedback on the quality and performance ofrecently produced instruments from our most critical customer, the professionalpianist.  The Piano Bank instruments aregenerally sold after four or five years and replaced with new pianos.

### **Band Segment**

Our band & orchestral, string and percussion instruments andrelated accessories are distributed worldwide through approximately 1,600independent musical instrument dealers and distributors.

In North America, we market our products throughdistrict sales managers and telemarketing representatives who are responsiblefor sales within assigned geographic territories. Each district sales manageris also responsible for developing relationships with band & orchestraldirectors.  These 

7

----

 

directors represent all levels of music educators,from those who teach elementary school children through those involved at thecollege and professional levels. These individuals are the primary influencersin the choice of an instrument brand as they will generally refer students todesignated dealers for the purchase of instruments.

As part of our band director outreach and supportstrategy, we have developed Conn-Selmer Institute (“CSI”).  Originally created to help graduatesthat major in music education transition into teaching careers, we haveexpanded CSI to include three additional tracks: one for experienced musiceducators, another for music dealer representatives and the third for musicbusiness students.  We also have an educational director who travelsextensively, lecturing and motivating students, educators and parents on thevalue of music in a child’s development. We believe that our well-established, long-standing relationships withinfluential music educators are an important component of our distributionstrategy and that our CSI efforts will further enhance these relationships.

To reach international markets, we primarily sellour instruments through distributors.  We reorganized our internationalsales staff to include a Vice President of International Sales as well asregional sales directors who have more direct contact with our customersoverseas.

We support our dealers and distributors through incentiveprograms, advertising and promotional activities.  We reach our customers through tradeshows, educator conferences, print media, direct mail, telemarketing, theInternet and personal sales calls. We also actively advertise in educator andtrade publications and provide educational materials, catalogs and productspecifications to students, educators, dealers and distributors.

**Competition**

### **PianoSegment**

**Steinway & Sons Pianos** - The level ofcompetition our pianos face depends on the market definition.  Steinway & Sons pianos hold a uniqueposition at the top end of the grand piano market, both in terms of quality andprice.  While there are many makers ofpianos, only a few compete directly with our Steinway brand.  Other manufacturers of primarily higherpriced pianos include Bösendorfer and Fazioli.

Because Steinway pianos are built to last forgenerations, used Steinways are the primary competition in our marketsegment.  It is difficult to estimate thesignificance of used piano sales, since most are conducted in the privateaftermarket.  However, we have increasedour emphasis on restoration services and the procurement, refurbishment andsale of used Steinway pianos to help us mitigate the impact of these aftermarketsales on our piano business.

**Boston and Essex Pianos**- While ourmid-priced pianos compete with brands such as Baldwin and Schimmel, our primarycompetition has been from Japanese and Korean manufacturers such as Kawai,Yamaha and Young Chang.  By working withmanufacturers in the same geographic areas, we have been able to enjoy laborcosts and manufacturing efficiencies similar to those of our primarycompetitors while offering consumers the added benefit of pianos designed bySteinway & Sons.

In recent years, piano manufacturing in China has been growing at a rapid pace.  While the vast majority of the productioncontinues to be upright pianos, Chinese manufacturers have begun producinglow-priced, smaller grand pianos.  In2005, to supplement existing Korean production we established an OEMrelationship with Pearl River Piano Group, the largest piano manufacturer inChina, to build pianos for our Essex line. In June of 2006, we

8

----

 

successfullyre-launched our Essex line, introducing several new Essex models in a variety offinishes. We now offer pianos priced in a considerably more competitive pricerange than previously available, bringing a good measure of Steinway designbenefits to a wider reach of consumers.

### **BandSegment**

We are the largest domestic producer of band & orchestralinstruments.  We enjoy leading marketshares with many of our professional level instruments.  Yamaha, a Japanese corporation, is ourlargest competitor.  New entrants intothe domestic market generally experience difficulty competing due to the needfor both brand recognition and an effective distribution system.

Competition for sales of student level instruments in the United Stateshas intensified in recent years due to the growth of offshoremanufacturers.  These producers benefitfrom low labor costs, enabling them to offer instruments at highly competitiveprices.  It is difficult to quantify theimpact of imported musical instruments since the majority of offshoremanufacturers do not report data through industry channels.

**Patents and Trademarks**

Steinway & Sons pioneered the development of the modern piano withover 125 patents granted since our founding. While we have several patents effective and pending in the United Statesand in several foreign countries, we do not believe our business is materiallydependent upon any single patent.

Wealso have some of the most well-known brand names in the music industry.  Our piano trademarks include Steinway,Steinway & Sons, the Lyre design, Boston, Heirloom Collection, Crown Jewel Collection and Essex. Our band & orchestraltrademarks include Bach, Selmer, C.G. Conn, Leblanc, King, Armstrong, Ludwig,Musser, Holton, Vito, Glaesel, Scherl & Roth, Emerson, William Lewis &Son, Noblet, and Artley.  We consider ourtrademarks to be important and valuable assets. It is possible that the termination, expiration or infringement of oneor more of our trademarks may have an adverse affect on our business, dependingon the trademark and the jurisdiction. Accordingly, we maintain trademark registrations in appropriatejurisdictions on an ongoing basis and vigorously pursue any infringement bycompetitors.

### **RawMaterials, Component Parts, and Sourced Products**

Our raw materials consist primarily of metals and woods.  The majority of these materials is sourced fromthe Americas, with the balance coming from Europe, Asia and Africa.  We manufacture our own piano plates and pianokeys, which are critical component parts of our Steinway pianos.  Component parts for string and percussioninstruments are imported from Europe and Asia. We have had adequate supplies of raw materials and component parts inthe past and do not expect any disruption to the supply of these items during2007 or in the future.

Currently, our Boston pianos are sourced from a singlemanufacturer, as are our Selmer Paris instruments and certain other componentparts.  Although we may experience delaysin availability of product due to the lead times required by thesemanufacturers, we do not anticipate any material disruptions to the supply ofthese products.  Some of our entry-levelband instruments are also sourced from single manufacturers.  We continually scrutinize these suppliers andthe quality of products that they manufacture for us and we believe that wehave a sufficient number of qualified suppliers to ensure availability of alloffered products in the upcoming year.

9

----

** **

**Labor**

As of December 31, 2006, we employed 2,363 people, consisting of 1,786hourly production workers and 577 salaried employees.  Of the 2,363 employees, 1,790 were employedin the United States and the remaining 573 were employed primarily in Europe.

Approximately 50% of our active workforce in the United States isrepresented by labor unions.  On April 1,2006, our labor contract with approximately 230 employees at our brassinstrument manufacturing facility in Elkhart, Indiana expired.  These employees, who are represented by Local364 of the United Auto Workers, have been on strike since that time.  By the end of 2006, we had hired our desirednumber of permanent replacement workers for this facility.  While we continue to negotiate with theunion’s representatives, we cannot predict when or if we will be able to reachan agreement.  Members of Local 364 arenot included in our workforce statistics below.

The following table indicates the union representationand the current status of our other collective bargaining agreements in theUnited States:
| Location        | ** ** | **Union affiliation**                                                                             | ** ** | **Type of manufacturing** | ** ** | **Number of employees** | ** ** | **Agreement expiration** |
|-----------------|------------|---------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|-------------------------------|
| Elkhart, IN     |       | United Auto Workers                                                                               |       | Band instrument warehouse |       | 13                      |       | March 31, 2007                |
| Springfield, OH |       | Glass, Molders, Pottery, Plastics & Allied  Workers                                           |       | Piano plates              |       | 34                      |       | November 8, 2007              |
| LaGrange, IL    |       | Carpenters                                                                                        |       | Percussion instruments    |       | 33                      |       | November 16, 2007             |
| Eastlake, OH    |       | United Auto Workers                                                                               |       | Band instruments          |       | 250                     |       | February 16, 2008             |
| Elkhorn, WI     |       | International Brotherhood of Boilermakers, Iron  Shipbuilders, Blacksmiths, Forgers & Helpers |       | Band instruments          |       | 61                      |       | July 20, 2008                 |
| New York, NY    |       | United Furniture Workers                                                                          |       | Pianos                    |       | 460                     |       | December 31, 2009             |

 

In Germany, the workers’ council represents all employees other thanmanagement.  Nevertheless, mostemployment contract conditions are settled in collective bargaining agreementsmade between various trade unions and the employer organizations to which webelong. Generally, agreements are negotiated on an annual basis.  We believe that relations with our employeesand these unions are generally good.

10

----

** **

**Item1A.  Risk Factors**

An investment in our company involves risk. Inaddition to the other information in this report, prospective investors shouldcarefully consider the following risks before making an investment.  The risks described below are not the onlyrisks we face.  There may be additionalrisks and uncertainties that we do not presently know of or that we currentlyconsider immaterial. All of these risks could adversely affect our business,financial condition, or results of operations.

#### **We operatein competitive markets**

Oursuccess depends upon our ability to maintain our share of the musicalinstrument market by providing high quality instruments at competitive prices.Increased competition could lead to price reductions, fewer large sales toinstitutions, reduced operating margins and loss of market share.  Our piano division currently competes withcompanies such as Bechstein, Bösendorfer, Fazioli, Kawai and Yamaha, which alsoproduce and market pianos at the higher end of the market.  Because of the potential savings associatedwith buying a used instrument, as well as the durability of the Steinway piano,a relatively largemarket exists for used Steinway pianos.  Webelieve that used Steinway pianos provide the most significant competition inthe high-end piano market.  Our band& orchestral division competes with a number of domestic and Asianmanufacturers of musical instruments, including Jupiter and Yamaha.  Any of our competitors may concentrate theirresources upon efforts to compete in our markets.  In addition, Asian musical instrumentmanufacturers have made significant strides in recent years to improve theirproduct quality.  They now offer a broadrange of quality products at highly competitive prices and represent asignificant competitive challenge for us. Our failure to compete effectively could have a negative impact on ourresults of operations.

###### **Economicdownturns and changes in consumer preferences could adversely affect ourbusiness**

Our business is subject to a number of generaleconomic factors, many of which are out of our control, that may, among otherthings, result in a decrease in sales and net income. Sales of musicalinstruments are dependent in part upon discretionary consumer spending, whichmay be affected by general economic conditions. For example, Steinway, which represents more than half of our net sales,sells a relatively small number of Steinway & Sons grand pianos each year(3,134 in 2006).  Given the small numberof pianos we sell, even a slight decrease in sales could adversely affect ourprofitability.  Band & orchestralsales are also dependent upon the continued interest of school-aged children inplaying musical instruments.  Anydecrease in consumer spending or reduction in school-aged children’s interestin music could result in decreased sales, which could adversely affect ourbusiness and operating results.  Furthermore, terrorist activities, war orother armed conflict involving the United States or its interests abroad mayresult in a downturn in the U.S and global economies, thus reducing spending onluxury goods and may exacerbate the risks to our business.

**We could be subject to workstoppages or other business interruptions as a result of our unionized workforce**

Asignificant portion of our hourly employees are represented by various unionlocals and covered by collective bargaining agreements.  These agreements contain various expirationdates and must be renegotiated upon expiration. If we are unableto negotiate any of our collective bargaining agreements on satisfactory termsprior to expiration, we could experience disruptions in our operations.  Our most recent work stoppage began at ourband manufacturing plant in Elkhart, Indiana in April 2006 and continues as ofthe date of this report.  Any futureprolonged work stoppage or delay in renegotiating collective bargainingagreements could have a material adverse effect on our operations.

11

----

** **

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

OurBoston piano line, many of our Essex piano models, our Selmer Parisinstruments, and many of our student level band & orchestral instrumentsare sourced from single foreign manufacturers. We are highly dependent on the availability of essential materials and purchasedcomponents from our suppliers, some of which may be available only from limitedresources.  Moreover, we are dependentupon the availability of our suppliers to provide material that meetsspecifications, quality standards and delivery schedules.  Our suppliers’ failure to provide expected rawmaterials or component parts could adversely affect production schedules andprofitability.

Althoughwe have had adequate supplies of raw materials and component parts in the past,there is no assurance that we may not experience serious interruptions in thefuture.  Our continued supply ofmaterials is subject to a number of risks including: the destruction of oursuppliers’ facilities or their distribution infrastructure; work stoppages orstrikes by our suppliers’ employees; the failure of our suppliers to providematerials of the requisite quality; the failure of essential equipment at oursuppliers’ plants; the failure or shortage of supply of raw materials to oursuppliers; and contractual amendments and disputes with our suppliers.

Wecannot assure investors that our suppliers will continue to provide products tous at attractive prices or at all, or that we will be able to obtain suchproducts in the future from these or other providers on the scale and withinthe time periods we require. Furthermore, we cannot assure investors that substitute raw materials orcomponent parts will meet the strict specification and quality standards weimpose.  If we are not able to obtain keymaterials, supplies, components or sourced instruments on a timely basis and ataffordable costs, or we experience significant delays or interruptions of theirsupply, it could have a material adverse effect on our business, financialcondition and results of operations.

**We experience inherent concentration of credit risk in our accountsreceivable**

We establish reserves for accounts receivable andnotes receivable.  We review overall collectibility trends and customercharacteristics such as debt leverage, solvency, and outstanding balances inorder to develop our reserve estimates.  Historically, a large portion ofour sales at both the piano and band divisions have been generated by our top15 customers.  As a result, we experience some inherent concentration ofcredit risk in our accounts receivable due to its composition and the relativeproportion of large customer receivables to the total. This is especially trueat our band division, which characteristically has the majority of ourconsolidated accounts receivable balance.  We consider the credit healthand solvency of our customers when developing our receivable reserveestimates.  Previously, our bad debtexpense has been low.  However, two ofour significant customers filed for bankruptcy in 2006, causing us to incur asignificant increase in bad debt expense. If other customers fail to pay a significant portion of theiroutstanding receivable balances, our results of operations could be negativelyimpacted.

**We may be unable to successfullyintegrate acquisitions of related companies into our business**

Wehave historically acquired other businesses whose operations or product linescomplement our existing business, including Leblanc in August 2004.  We continually explore new opportunities toenter into business combinations with other companies in order to maintain andgrow our revenues and market presence. These potential transactions with other companies create risks such asdifficulty in assimilating the personnel, customers, technology, products andoperations with our personnel, customers, technology, products and operations; disruption ofour ongoing business, including loss of management focus on existingbusinesses; and impairment of relationships with existing executives,employees, customers and business partners. In addition, we may not be able to identify suitable candidates forthese transactions, or obtain financing or otherwise make these transactions onacceptable terms.

12

----

 

Furthermore, the benefits that we anticipate fromthese potential transactions may not develop as expected and we cannot be surethat we will recover our investment in any such strategic transaction.

**Shifts in our product mix mayresult in declines in our gross margins and profit levels**

Ourgross margins vary among our product groups and have fluctuated from quarter toquarter as a result of shifts in product mix (that is, how much of each producttype we sell in any particular quarter). The introduction of new band products, decreases in average selling pricesand shifts in the proportion of student level instruments to professional levelinstruments may cause variances in our gross margins.  We also experience variances in our grossmargins as a result of shifts in the proportion of our piano retail sales towholesale sales, as well as changes in amounts of piano sales to territorieswhere we realize more favorable pricing. For example, our product sales in the former Eastern Bloc countriesgenerally produce higher margins because most sales are at retail prices.  We expect fluctuations in gross margins tocontinue in the future.

**Failure of our new products togain market acceptance may adversely affect our operating results**

Newproducts may not achieve significant market acceptance or generate sufficientsales to permit us to recover development, manufacturing and marketing costsassociated with these products. Achieving market acceptance for new products may also requiresubstantial marketing efforts and expenditures to expand consumer demand.  These requirements could strain ourmanagement, financial and operational resources.  Furthermore, failure of our new products toachieve market acceptance could prevent us from maintaining our existingcustomer base, gaining new customers or expanding our markets and could have amaterial adverse effect on our business, financial condition and results ofoperations.  Additionally, pricecompetition among our various brand names may adversely affect our sales,revenues and profitability.  For example,our mid-priced Essex line of pianos may be priced lower than our Boston line,therefore potentially diminishing sales of our Boston pianos.

**Since we have a limited number offacilities, any loss of use of any of our facilities could adversely affect ouroperations**

Ouroperations with respect to specific products are concentrated in a limitednumber of manufacturing facilities. Because we are heavily dependent on each of these facilities, ouroperations would be adversely affected if we experience a disruption in business at anyparticular facility for a prolonged period of time because we would not haveadequate substitute facilities available to us.

**Our operations may subject us toliabilities for environmental matters, the costs of which could be material**

Ourmanufacturing operations involve the use, handling, storage, treatment anddisposal of materials and waste products that may be toxic or hazardous.  Consequently, we are subject to numerousfederal, state and local environmental laws and regulations, specifically thoserelating to discharges to air, water and land, the handling and disposal ofsolid and hazardouswaste and the cleanup of properties contaminated by hazardous substances.  Many environmental laws impose strict,retroactive, joint and several liability broadly upon owners and operators ofproperties, including with respect to environmental matters that occurred priorto the time the party became an owner or operator.  In addition, we may have liability withrespect to third-party sites to which we sent wastes for disposal in thepast.  Our potential liability at any ofthese sites is affected by many factors including, but not limited to, themethod of remediation, our portion of the hazardous substances at the siterelative to that of other responsible parties, the number of responsible parties,the financial capabilities of other parties, and contractual rights andobligations.

We have obligations and liability with respect tothe remediation of current and former properties and third party waste disposalsites.  The liabilities and obligationsin some cases are covered by

13

----

 

indemnificationagreements and we have accrued liabilities for sites where the liability isprobable and can be estimated.  We cannotguarantee the indemnitors will continue to fund the cleanup liability or thatthe actual costs of cleanup will not exceed our present accruals.  Furthermore, we may be required to fundadditional remedial programs in connection with other additional current,former or future facilities.

Future events, such as the discovery of additional contamination orother information concerning past releases of hazardous substances at ourmanufacturing sites (or at sites to which we sent wastes for disposal), changesin existing environmental laws or their interpretation, and more rigorousefforts by regulatory authorities, may require additional expenditures by us tomodify operations, install pollution control equipment, clean contaminatedsites or curtail our operations.  Theseexpenditures could have a material negative impact on our operations.

**We may not be able to protect ourproprietary information**

Werely in part on patent, trade secret, unfair competition, trade dress andtrademark laws to protect our rights to aspects of our business and products,including product designs, proprietary manufacturing processes andtechnologies.  The laws of many foreigncountries do not protect proprietary rights to the same extent as laws in theUnited States.  In addition, although wemay have rights to a particular trademark in a given country, we may not havesimilar rights to that trademark in other countries.

**Changes in our effective taxrates could affect future results**

Asan international company, we are subject to taxation in the United States andvarious other foreign jurisdictions in which we do business.  Some of these foreign jurisdictions havehigher statutory rates than those in the United States, and certain of ourinternational earnings are also taxable in the United States.  Accordingly, our effective tax rates willvary depending on the relative proportion of foreign to U.S. income andabsorption of foreign tax credits, changes in the valuation of our deferred taxassets and liabilities, and changes in tax laws.  In addition, we are subject to examination ofour income tax returns by the U.S. Internal Revenue Service and other taxauthorities.  We regularly assess thelikelihood of adverse outcomes resulting from these examinations to determinethe adequacy of our income tax reserves and expense.  Should actual events or results differ fromour current expectations, charges or credits to our income tax expense reservesand income tax expense may become necessary. Any such adjustments could have a significant impact on our results ofoperations.

**Our foreign operations areexposed to risks associated with foreign regulations, exchange ratefluctuations, trade restrictions and political, economic and social instability**

Wemanufacture, market and distribute our products worldwide.  As a result, we are subject to the risksnormally associated with foreign operations. For example, foreign regulations may limit our ability to produce andsell some of our products or repatriate profits to the United States.  In addition, a foreign government may imposetrade or foreign exchange restrictions or increased tariffs, which couldadversely affect our operations.  Ouroperations may also be negatively impacted by political, economic and socialinstability in foreign countries in which we operate.  We are also exposed to risks associated withforeign currency fluctuations.  Astrengthening of the U.S. dollar, the Japanese yen, the British pound, theChinese yuan or the euro relative to each other or other foreign currenciescould have a negative impact on us. Although we sometimes engage in transactions to protect against risksassociated with foreign currency fluctuations, we cannot be sure that thesefluctuations will not have an adverse effect on us.  Sales outside the United States accounted forapproximately 35% of our net sales in 2006.

**Therequirements of complying with the Sarbanes-Oxley Act may strain our resourcesand distract management**

As a public company, we are subject to the reportingrequirements of the Sarbanes-Oxley Act. Sarbanes-Oxley requires that we maintain effective disclosure controlsand procedures, corporate

14

----

 

governance standards and internal controls over financialreporting.  Although we devotesignificant time and resources to ensure ongoing compliance with the reportingrequirements of Sarbanes-Oxley, we can give no assurance that we will continueto meet these requirements in the future or that reportable conditions ormaterial weakness in our internal controls and procedures may not arise despiteour best efforts to prevent them.  Whilewe have taken and continue to take all steps necessary to comply withSarbanes-Oxley, our failure to meet the requirements of Sarbanes-Oxley couldnegatively impact our business, financial condition and results ofoperations.  In addition, the effort tocomply with these obligations may divert management’s attention from otherbusiness concerns.

**Messrs. Kirkland and Messinaexercise significant control over us, which could adversely affect investors**

Mr.Kyle R. Kirkland, Chairman of the Board, and Mr. Dana D. Messina, ChiefExecutive Officer, hold in the aggregate 100% of our Class A common stock,representing approximately 86% of the voting power of our company’s capitalstock.  So long as Messrs. Kirkland andMessina continue to hold a majority of the voting power, they will be able,acting together, to exercise a controlling influence over our company,including with respect to the composition of our board of directors and,through it, the direction and policies of the Company.  We cannot assure that Messrs. Kirkland andMessina will not pursue other business interests that will conflict withinvestors’ interests.

**Item 1B.  Unresolved StaffComments**

None.

15

----

 

**Item 2.  Properties**

We own most of our manufacturing andwarehousing facilities, as well as the building that includes Steinway Hall inNew York City.  The remaining Steinwayretail stores are leased.  Substantiallyall of the domestic real estate has been pledged to secure our debt.

The following table lists our significantowned and leased facilities:
| **Location**              | ** ** | **Owned/  Leased** | ** ** | **Approximate  Floor Space  (Square Feet)** | ** ** | **Type of Facility and Activity Performed** |
|---------------------------|------------|--------------------|------------|---------------------------------------------|------------|---------------------------------------------|
| Long Island City, NY      |       | Owned              |       |                                        | 450,000    |                                        |   | Piano manufacturing; restoration center;  administrative offices |
| New York, NY              |       | Owned              |       |                                        | 217,000    |                                        |   | Piano retail store/showroom; office rental property |
| Westport, CT              |       | Leased             |       |                                        | 11,000     |                                        |   | Piano retail store/showroom |
| Coral Gables, FL          |       | Leased             |       |                                        | 6,000      |                                        |   | Piano retail store/showroom |
| Paramus, NJ               |       | Leased             |       |                                        | 4,000      |                                        |   | Piano retail store/showroom |
| Springfield, OH           |       | Owned              |       |                                        | 110,000    |                                        |   | Piano plate manufacturing |
| Hamburg, Germany          |       | Owned              |       |                                        | 221,000    |                                        |   | Piano manufacturing; executive offices |
|                      |       | Leased             |       |                                        | 6,000      |                                        |   | Piano retail store/showroom |
| Munich, Germany           |       | Leased             |       |                                        | 15,000     |                                        |   | Piano retail store/showroom |
| Berlin, Germany           |       | Leased             |       |                                        | 7,000      |                                        |   | Piano retail store/showroom/service workshop |
| Wuppertal, Germany        |       | Leased             |       |                                        | 27,000     |                                        |   | Piano key manufacturing |
| Wilkow, Poland            |       | Owned              |       |                                        | 10,000     |                                        |   | Piano key manufacturing |
| Shanghai, China           |       | Leased             |       |                                        | 18,000     |                                        |   | Piano warehouse/showroom/workshop |
| London, England           |       | Leased             |       |                                        | 10,000     |                                        |   | Piano showroom |
|                      |       | Leased             |       |                                        | 6,000      |                                        |   | Piano workshop/storage |
| Tokyo, Japan              |       | Leased             |       |                                        | 9,000      |                                        |   | Piano selection center; warehouse |
|                      |       | Leased             |       |                                        | 2,000      |                                        |   | Administrative offices |
| Eastlake, OH              |       | Owned              |       |                                        | 160,000    |                                        |   | Brass instrument manufacturing |
| Elkhart, IN               |       | Owned              |       |                                        | 150,000    |                                        |   | Brass instrument manufacturing |
|                      |       | Owned              |       |                                        | 88,000     |                                        |   | Woodwind manufacturing; warehouse; office |
|                      |       | Owned              |       |                                        | 81,000     |                                        |   | Warehouse |
|                      |       | Owned              |       |                                        | 25,000     |                                        |   | Administrative offices |
| Elkhorn, WI               |       | Owned              |       |                                        | 58,000     |                                        |   | Brass instrument manufacturing |
| Kenosha, WI               |       | Owned              |       |                                        | 95,000     |                                        |   | Woodwind manufacturing; warehouse |
| LaGrange, IL              |       | Owned              |       |                                        | 35,000     |                                        |   | Percussion instrument manufacturing |
| Monroe, NC                |       | Leased             |       |                                        | 154,000    |                                        |   | Drum and case manufacturing |
| Cleveland, OH             |       | Leased             |       |                                        | 62,000     |                                        |   | String instrument manufacturing |
| London, England           |       | Leased             |       |                                        | 8,000      |                                        |   | Band instrument office; warehouse |
| LaCouture Boussey, France |       | Owned              |       |                                        | 32,000     |                                        |   | Woodwind manufacturing |

 

We spent $5.5 million for capital improvementsin 2006 consisting primarily of software and computer system conversions andupgrades, machinery and production equipment, and plant and facilityimprovements.  We expect capital spendingin 2007 to be in the range of $5.0-$7.0 million, relating to facilitymaintenance and improvements, computer system maintenance and upgrades, andproduction equipment purchases.

16

----

###  

### **Item 3.  Legal Proceedings**

**General**

We are involved in certain legal proceedingsregarding environmental matters, which are described below.  Further, in the ordinary course of business,we are party to various legal actions that management believes are routine innature and incidental to the operation of the business.  While the outcome of such actions cannot bepredicted with certainty, we believe that, based on our experience in dealingwith these matters, their ultimate resolution will not have a material adverseimpact on our business, financial condition or results of operations orprospects.

### **Environmental Matters**

We are required to comply with various federal,state, local and foreign environmental laws, including those relating todischarges to air, water and land, the handling and disposal of solid andhazardous waste and the cleanup of properties contaminated by hazardoussubstances, including chlorinated solvents. Our operations are subject to environmental laws and regulations thatrequire us to obtain and maintain permits from regulatory authorities.  Non-compliance with environmental laws andregulations or the permits we have been issued could give rise to significantfines, penalties and other costs.  Wecurrently do not expect to incur material expenditures relating toenvironmental compliance in 2007.

Certain environmental laws, such as theComprehensive Environmental Response, Compensation, and Liability Act, asamended (“CERCLA”), impose strict, retroactive, joint and several liabilityupon persons responsible for releases of hazardous substances, which liabilityis broadly construed.  Under CERCLA andother laws, we may have liability for investigation and cleanup costs and otherdamages relating to our current or former properties, or third-party sites towhich we sent wastes for disposal.  Ourpotential liability at any of these sites is affected by many factorsincluding, but not limited to, the method of remediation, our portion of thehazardous substances at the site relative to that of other parties, the numberof responsible parties, the financial capabilities of other parties, andcontractual rights and obligations.

In this regard, we operate certain manufacturingfacilities which were previously owned by Philips Electronics North AmericaCorporation (“Philips”).  When wepurchased these facilities, Philips agreed to indemnify us for certainenvironmental matters resulting from activities of Philips occurring prior toDecember 29, 1988 (the “Environmental Indemnity Agreement”).  To date, Philips has fully performed itsobligations under the Environmental Indemnity Agreement, which terminates onDecember 29, 2008, however, we cannot assure investors that it will continue todo so in the future.  Four matterscovered by the Environmental Indemnity Agreement are currently pending.  Philips has entered into Consent Orders withthe Environmental Protection Agency (“EPA”) for one site and the North CarolinaDepartment of Environment, Health and Natural Resources for a second site,whereby Philips has agreed to pay required response costs.  On October 22, 1998, we were joined asdefendant in an action involving a third site formerly occupied by a businesswe acquired in Illinois.  Philips hasaccepted the defense of this action pursuant to the terms of the EnvironmentalIndemnity Agreement.  At the fourth site,which is a third party waste disposal site, four Conn-Selmer predecessorentities are among the potentially responsible parties (“PRP”) group.  The PRP group has recently entered into aConsent Order with the EPA, the site owners, and the largest contributor.  For two of the Conn-Selmer predecessorentities, which were previously owned by Philips, this matter was tendered toPhilips pursuant to the Environmental Indemnity Agreement.  Philips is a party to the Consent Order andhas paid its share of the liability.  Thefour Conn-Selmer predecessor entities paid approximately $0.1 million in 2006and settled this claim

17

----

 

exceptfor the possibility of a contingent remedial action, should any additionalenvironmental issues be discovered.  Webelieve the likelihood of a contingency assessment to be remote and, our shareof the liability, if any, would not be material.

In addition, we are continuing an existingenvironmental remediation plan at a facility we acquired in 2000.  We estimate our costs, which approximate $0.9million, over a 14-year period.  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 4.54%.  A summary ofexpected payments associated with this project is as follows:

|            | ** ** | **Environmental  Payments** | ** ** |
|------------|------------|-----------------------------|------------|
| 2007       |       | $                           | 72         |   |
| 2008       |       | 60                          |       |
| 2009       |       | 61                          |       |
| 2010       |       | 61                          |       |
| 2011       |       | 60                          |       |
| Thereafter |       | 546                         |       |
| Total      |       | $                           | 860        |   |

 

In 2004, we acquired two manufacturing facilitiesfrom G. Leblanc Corporation, now Grenadilla, Inc. (“Grenadilla”), for whichenvironmental remediation plans had already been established.  In connection with the acquisition, weassumed the existing accrued liability of approximately $0.8 million for thecost of these remediation activities. Based on a review of past and ongoing investigatory and remedial work byour environmental consultants, and discussions with state regulatory officials,as well as recent sampling, we estimate the remaining costs of such remedialplans to be $2.6 million.  Pursuant tothe purchase and sale agreement, we have sought indemnification from Grenadillafor anticipated costs above the original estimate in the amount of $2.5million.  We filed a claim against theescrow and recorded a corresponding receivable for this amount in prepaidexpenses and other current assets in our consolidated balance sheet.  We have reached an agreement with Grenadillawhereby future environmental costs will be paid directly out of theescrow.  Should the escrow be reduced tozero, we would seek indemnification from Grenadilla for these additional costs.However, we cannot be assured that we will be able to recover such costs.

Based on our past experience and currently availableinformation, the matters described above and our other liabilities andcompliance costs arising under environmental laws are not expected to have amaterial impact on our capital expenditures, earnings or competitive positionin an individual year.  However, somerisk of environmental liability is inherent in the nature of our current andformer business and we may, in the future, incur material costs to meet currentor more stringent compliance, cleanup, or other obligations pursuant toenvironmental laws.

### **Item 4.  Submission of Matters to a Vote of SecurityHolders**

No matters were submitted to a vote of oursecurity holders during the fourth quarter of the year ended December 31,2006.

18

----

 

**PART II**

### **Item 5.  Markets for Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities**

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

| Year Ended December 31, 2006 | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------------------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter                                    |       | $          | 34.90      |     | $          | 25.45   |       |
| Second Quarter                                   |       | 33.50      |       | 23.71    |       |
| Third Quarter                                    |       | 29.18      |       | 22.50    |       |
| Fourth Quarter                                   |       | 32.50      |       | 26.86    |       |
|                                             |       |       |       |     |       |
|                                                  |            |            |            |          |            |         |            |  |  |

 

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

 

We have two classes of common stock: Class Aand Ordinary.  With the exception ofdisparate voting power, both classes are substantially identical.  Each share of Class A common stock entitlesthe holder to 98 votes.  Holders ofOrdinary common stock are entitled to one vote per share.  Class A common stock shall automaticallyconvert to Ordinary common stock if, at any time, the Class A common stock isnot owned by an original Class A holder.

**Holders of Record** - As of March 5, 2007, there were 2,455beneficial shareholders of our Ordinary common stock and two holders of recordof the Class A common stock.

**Dividends**- Prior to 2006, we were restricted by the terms ofour domestic credit facility and indenture relating to our 8.75% Senior Notesfrom paying cash dividends on our common stock. During the year we restructured our debt agreements.  Under our new domestic credit facilityagreement, and our 7.00% Senior Note indenture, we are permitted, withincertain limitations, to pay cash dividends on our common stock.

On February 13, 2007, we declared a dividendof $3.00 per share for shareholders of record as of February 23, 2007.  This dividend payment, which amounted to$25.2 million, was paid on March 7, 2007. As a result of this dividend, we have reached the limit on our permitteddividend payments under our domestic credit facility.  Although the limits under our debt agreementsincrease as our earnings increase over time, we do not anticipate payingadditional cash dividends on our common stock in the foreseeable future.

The payment of any future dividends will bedetermined by the Board of Directors in light of conditions then existing,including our results of operations, financial condition, cash requirements,limitations or restrictions in financing agreements, tax treatment ofdividends, business conditions and other factors.

**PerformanceGraph***-*The following line graphcompares the yearly percentage change in our cumulative total shareholderreturn on our Ordinary common stock for the period from December 31,

19

----

 

2001to December 31, 2006, to the cumulative total return for the Russell 2000 StockIndex (“Russell 2000”) and the cumulative total return for a peer group (“PeerGroup”) consisting of Guitar Center, Inc., Harley-Davidson, Inc., Callaway GolfCompany, and Fleetwood Enterprises.

The Peer Group was selected by management based on thestatus of each as a manufacturer and/or distributor of consumer goods in theluxury or musical instrument categories. The performance graph assumes a $100 investment on December 31, 2001 ineach of our Ordinary common stock, the Russell 2000, and the common stock ofthe Peer Group.  Steinway MusicalInstruments, Inc. is included in the Russell 2000.  Total shareholder return for Steinway MusicalInstruments, Inc. as well as the Russell 2000 and the Peer Group is based onthe cumulative amount of dividends for a period (assuming dividendreinvestment) and the difference between the share price at the beginning andat the end of the period.

 
| ** **                          | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2001**              | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| Steinway Musical  Instruments, Inc. |       | $                     | 100.00     |   | $ | 97.95 |   | $ | 148.71 |   | $ | 174.23 |   | $ | 153.58 |   | $ | 186.94 |   |
| Russell 2000                        |       | $                     | 100.00     |   | $ | 78.42 |   | $ | 117.89 |   | $ | 133.38 |   | $ | 137.81 |   | $ | 161.24 |   |
| Peer Group                          |       | $                     | 100.00     |   | $ | 85.62 |   | $ | 109.47 |   | $ | 143.34 |   | $ | 130.65 |   | $ | 141.56 |   |

###  

### **Issuer Purchases of EquitySecurities***—*There was no common stock repurchased or sales ofunregistered securities for the fourth quarter ended December 31, 2006.

20

----

###  

### **EquityCompensation Plans**

Thefollowing table sets forth the equity compensation plan information for ourEmployee Stock Purchase Plans and our Stock Plans, which are described in Note12:
| **Plan Category**                                   | ** ** | **Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights (a)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights  (b)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a))  (c)** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | ** **                                                                                                                                               | ** ** | ** **                                                                                                       | ** ** | ** **                                                                                                                                                                                                            | ** ** |
| Equity compensation  plans approved by security holders: |       |                                                                                                                                                     |       |                                                                                                             |       |                                                                                                                                                                                                                  |       |
| 1996 Stock Plan                                          |       | 594,500                                                                                                                                                  |       | $                                                                                                                | 20.98      |                                                                                                                                                                                                                  | —     |   |
| 2006 Stock Plan                                          |       | —                                                                                                                                                   |       | N/A                                                                                                              |       | 1,000,000                                                                                                                                                                                                             |       |
| 1996 Purchase Plan                                       |       | —                                                                                                                                                   |       | N/A                                                                                                              |       | —                                                                                                                                                                                                                |       |
| 2006 Purchase Plan                                       |       | 11,281                                                                                                                                                   |       | $                                                                                                                | 20.80      |                                                                                                                                                                                                                  | 388,719    |   |
|                                                     |       |                                                                                                                                                     |       |                                                                                                             |       |                                                                                                                                                                                                                  |       |
| Total                                                    |       | 605,781                                                                                                                                                  |       | $                                                                                                                | 20.98      |                                                                                                                                                                                                                  | 1,388,719  |   |

 

21

----

** **

**Item 6.  Selected Financial Data**

The following table setsforth our selected consolidated financial data as of and for each of the fiveyears in the period ended December 31, 2006, as derived from our auditedfinancial statements.  The table should beread in conjunction with our Consolidated Financial Statements, including thefootnotes, and “Management’s Discussion and Analysis of Financial Condition andResults of Operations” included elsewhere in this report.
| **(In thousands except share and per share data)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|
| **Years Ended December 31,**                                           | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004 (1)** | ** ** | **2003**   | ** ** | **2002**   | ** ** |
| **Income statement data:**                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                                             |       | $          | 384,620    |       | $          | 387,143           |       | $          | 375,034    |       | $          | 337,220 |   | $ | 332,297 |   |
| Gross profit                                                                          |       | 107,407    |       | 111,534    |       | 109,133           |       | 92,553     |       | 97,151     |       |
| Income from operations                                                                |       | 18,378     |       | 34,837     |       | 34,241            |       | 22,824     |       | 31,399     |       |
| Net (loss) income                                                                     |       | (668       | )          | 13,792     |       | 15,867            |       | 9,698      |       | 14,909     |       |
| (Loss) earnings per  share:                                                           |       |       |       |       |       |              |       |       |       |       |       |
| Basic                                                                                 |       | $          | (0.08      | )          | $          | 1.71              |       | $          | 1.97       |       | $          | 1.09 |   | $ | 1.68 |   |
| Diluted                                                                               |       | $          | (0.08      | )          | $          | 1.67              |       | $          | 1.91       |       | $          | 1.09 |   | $ | 1.68 |   |
|                                                                                  |       |       |       |       |       |              |       |       |       |       |       |
| **Weighted average shares:**                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                                 |       | 8,303,770  |       | 8,069,721  |       | 8,046,256         |       | 8,924,578  |       | 8,877,256  |       |
| Diluted                                                                               |       | 8,303,770  |       | 8,265,234  |       | 8,304,066         |       | 8,925,672  |       | 8,882,165  |       |
|                                                                                  |       |       |       |       |       |              |       |       |       |       |       |
| **Balance sheet data (at December  31):**                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash                                                                                  |       | $          | 30,409     |       | $          | 34,952            |       | $          | 27,372     |       | $          | 42,283 |   | $ | 19,099 |   |
| Current assets                                                                        |       | 282,678    |       | 295,731    |       | 308,761           |       | 288,270    |       | 267,346    |       |
| Total assets                                                                          |       | 447,175    |       | 455,655    |       | 477,545           |       | 445,665    |       | 423,731    |       |
| Current liabilities                                                                   |       | 66,048     |       | 71,881     |       | 72,893            |       | 61,304     |       | 53,302     |       |
| Total debt                                                                            |       | 178,411    |       | 204,692    |       | 221,208           |       | 196,602    |       | 200,636    |       |
| Stockholders’ equity                                                             |       | 158,001    |       | 148,830    |       | 145,553           |       | 152,635    |       | 131,208    |       |
|                                                                                  |       |       |       |       |       |              |       |       |       |       |       |
| **Other financial data:**                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital expenditures                                                                  |       | $          | 5,549      |       | $          | 5,004             |       | $          | 5,186      |       | $          | 5,462 |   | $ | 5,604 |   |
|                                                                                  |       |       |       |       |       |              |       |       |       |       |       |
| **Margins:**                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross profit                                                                          |       | 27.9       | %          | 28.8       | %          | 29.1              | %          | 27.4       | %          | 29.2       | %          |
| Operating                                                                             |       | 4.8        | %          | 9.0        | %          | 9.1               | %          | 6.8        | %          | 9.4        | %          |

----

(1)             Weacquired Leblanc in August 2004.

22

----

 

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

**Introduction**

The following discussion provides anassessment of the results of our operations and liquidity and capital resourcestogether with a brief description of certain accounting policies.  Accordingly, the following discussion shouldbe read in conjunction with our Consolidated Financial Statements and the Notesto Consolidated Financial Statements included within this report.

**Overview**

We, through our operatingsubsidiaries, are one of the world’s leading manufacturers of musicalinstruments.  Our strategy is tocapitalize on our strong brand names, leading market positions, strongdistribution networks, and quality products.

**Piano Segment —**Sales of our pianos are influenced by generaleconomic conditions, demographic trends and general interest in music and thearts.  The operating results of our pianosegment are primarily affected by Steinway & Sons grand piano sales.  Given the total number of these pianos thatwe sell in any year (3,134 sold in 2006), a slight change in units sold canhave a material impact on our business and operating results.  Our results are also influenced by sales ofBoston and Essex pianos, which together represented almost 60% of total pianounits sold but less than 20% of total piano revenues in 2006.  Our Boston piano line and many of our Essexpiano models are sourced from Asia by single manufacturers.  The ability of these manufacturers to produceand ship products to us could impact our business and operating results.  In 2006, approximately 52% of piano saleswere in the United States, 35% in Europe and the remaining 13% primarily inAsia.  Forthe year ended December 31, 2006, our piano segment sales were $214.2 million,representing 56% of our total revenues.

### **Piano Outlook for 2007** — Overall, we expect a relatively stable year forour piano segment with respect to sales and gross profit.  Similar to 2006, we anticipate someunevenness domestically, which should be offset by continued improvementoverseas.  We intend to focus on reducingexisting inventory levels, developing our distribution structure in China, andimplementing various manufacturing improvement initiatives in the upcoming year.  We currently have sufficient, but notexcessive, manufacturing capacity to meet anticipated or increased demand.

**Band Segment****—**Ourstudent band instrument sales are influenced by trends in school enrollment,general attitudes toward music and the arts, and our ability to providecompetitively priced products to our dealer network.  Management estimates that 85% of our domesticband sales are generated through educational programs; the remainder is salesto amateur or professional musicians or performing groups, including symphoniesand orchestras.

Recently, our sales growthhas been adversely affected by the ongoing strike at our Elkhart, Indiana brassinstrument plant, which started April 1, 2006. Further, two of our large dealers filed for bankruptcy in 2006, whichnegatively impacted demand for certain products.

With respect to sourced products, we continue toexpand our offerings to include quality, competitively priced brand-nameimported instruments that are built to our specifications.  Our product offerings are tailored to theneeds of traditional school music dealers who provide full-service rentalprograms to beginning band students, as well as music retailers and e-commercedealers selling directly to end

23

----

 

consumers from their stores or through theInternet.  We believe our productofferings have helped us remain competitive at various price points and willcontinue to do so in the future.

In 2006, beginnerinstruments accounted for approximately 65% of band & orchestral unitshipments and approximately 40% of band instrument revenues, with advanced andprofessional instruments representing the balance. In 2006, approximately 80%of band sales were in the United States, 9% in Europe and the remaining 11%primarily in Canada and Asia.  For the year ended December 31, 2006, our bandsales were $170.4 million, representing 44% of our total revenues.

**Band Outlook for 2007 —**We are entering 2007 with backorders forproducts made at our Elkhart, Indiana brass instrument manufacturing facilitywhich is currently on strike, and have backorders for other U.S. made andsourced products.  We expect to havereplacement workers at the brass facility fully trained and producingefficiently by the end of 2007.  Further,we expect the production improvements at our other facilities to continue in2007 and are working with our sourced product suppliers to improve availabilityand output as we add new models to our existing product lines.  However, we do have some large dealers thathave reduced their order volume significantly from the prior period, due tobankruptcies and changes in strategic growth initiatives due to acquisitions.  Barring any further changes in our dealer networkor orders in the current year, we expect stable revenue and improved marginstowards the end of 2007.

**Inflation and Foreign Currency Impact —**Although we cannot accurately predict theprecise effect of inflation on our operations, we do not believe that inflationhas had a material effect on sales or results of operations in recent years.

Sales to customers outside the United Statesrepresented 35% of consolidated sales in 2006. We record sales in euro, Japanese yen, British pounds, and Chineseyuan.  In 2006, we generated 75% of ourinternational sales through our piano segment. Foreign exchange rate changes impacted sales by approximately $1.2million in the current year.  Althoughcurrency fluctuation affects international sales, it also affects cost of salesand related operating expenses. Consequently, it generally has not had a material impact on operatingincome.  We use financial instrumentssuch as forward exchange contracts and currency options to reduce the impact ofexchange rate fluctuations on firm and anticipated cash flow exposures andcertain assets and liabilities denominated in currencies other than thefunctional currency of the affected division. We do not purchase currency-related financial instruments for purposesother than exchange rate risk management.

**Taxes —**We are subject to U.S. income taxes as well as tax in several foreignjurisdictions in which we do business. Some of these foreign jurisdictions have higher statutory rates than theUnited States.  In addition, certain ofour operations are subject to both U.S. and foreign taxes.  However, in such cases we receive a creditagainst our U.S. taxes for foreign taxes paid equal to the percentage that suchforeign income (as adjusted for reallocated interest) represents of the totalincome subject to U.S. tax.  Accordingly,our effective tax rates will vary depending on the relative proportion offoreign to U.S. income and the absorption of foreign tax credits in the UnitedStates.

In 2004, we were able to use the majority, but notall, of the foreign tax credits generated in that period.  However, because the American Jobs CreationAct of 2004 (the “Act”) extended the foreign tax credit carryover period, wewere able to recognize a partial benefit for the excess foreign tax creditsgenerated in 2004.  In 2005, we wereunable to utilize approximately one third of the foreign tax credits generatedduring the year.  This, coupled with theincome generated in higher rate jurisdictions such as Germany, resulted in anincrease in our overall tax rate in that year. In 2006, we were unable to utilize any

24

----

 

of the foreign tax credits generated in the current period as we incurreda loss from operations subject to U.S. tax due to our debt restructuring costsand the strike at one of our brass instrument plants.  Based on the carryforward period, the impactof an anticipated reduction in the German tax rates in 2008, and other taxplanning strategies, we have recognized the full benefit for the excess foreigntax credits generated in the current year. The overall effective tax rate of (75.3%) in 2006 differs from thestatutory rate primarily due to foreign taxes that are not creditable againstU.S. taxes, permanent differences between book and tax income and expenses, andstate taxes.  The overall effective rateis also a function of the insignificant level of loss before income taxes, forwhich a small change in any amount results in a large percentage change ineffective tax rate.  We currentlyanticipate a return to a more normal overall effective tax rate ofapproximately 40% for 2007.

**Results of Operations**

Fiscal Year 2006 Compared to Fiscal Year2005
| ** **                                                    | ** ** | ** ** | ** ** | ** **  | ** ** | **Change** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|-------------|------------|------------|------------|
| **For the years ended December 31,** | ** ** | **2006**   | ** ** | ** **  | ** ** | **2005**   | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
|                                                          |       |       |       |        |       |       |       |   |   |   |   |   |   |
| Net sales                                                     |       |       |       |        |       |       |       |   |   |   |   |   |   |
| Band                                                          |       | $          | 170,426    |        |       |       | $          | 183,626 |   |   |   | (13,200 | ) | (7.2 | ) |
| Piano                                                         |       | 214,194    |       |        |       | 203,517    |       |   |   | 10,677 |   | 5.2 |   |
| Total sales                                                   |       | 384,620    |       |        |       | 387,143    |       |   |   | (2,523 | ) | (0.7 | ) |
|                                                          |       |       |       |        |       |       |       |   |   |   |   |   |   |
| Cost of sales                                                 |       |       |       |        |       |       |       |   |   |   |   |   |   |
| Band                                                          |       | 138,745    |       |        |       | 146,168    |       |   |   | (7,423 | ) | (5.1 | ) |
| Piano                                                         |       | 138,468    |       |        |       | 129,441    |       |   |   | 9,027 |   | 7.0 |   |
| Total cost of  sales                                          |       | 277,213    |       |        |       | 275,609    |       |   |   | 1,604 |   | 0.6 |   |
|                                                          |       |       |       |        |       |       |       |   |   |   |   |   |   |
| Gross profit                                                  |       |       |       |        |       |       |       |   |   |   |   |   |   |
| Band                                                          |       | 31,681     |       | 18.6%  |       | 37,458     |       | 20.4%  |   | (5,777 | ) | (15.4 | ) |
| Piano                                                         |       | 75,726     |       | 35.4%  |       | 74,076     |       | 36.4%  |   | 1,650 |   | 2.2 |   |
| Total gross  profit                                           |       | 107,407    |       |        |       | 111,534    |       |   |   | (4,127 | ) | (3.7 | ) |
|                                                          |       | 27.9%      |       |        |       | 28.8%      |       |   |   |   |   |   |   |
|                                                          |       |       |       |        |       |       |       |   |   |   |   |   |   |
| Operating  expenses                                           |       | 79,879     |       |        |       | 76,273     |       |   |   | 3,606 |   | 4.7 |   |
| Provision for  doubtful accounts                              |       | 9,150      |       |        |       | 424        |       |   |   | 8,726 |   | 2,058.0 |   |
| Total operating  expenses                                     |       | 89,029     |       |        |       | 76,697     |       |   |   | 12,332 |   | 16.1 |   |
|                                                          |       |       |       |        |       |       |       |   |   |   |   |   |   |
| Income from  operations                                       |       | 18,378     |       |        |       | 34,837     |       |   |   | (16,459 | ) | (47.2 | ) |
|                                                          |       |       |       |        |       |       |       |   |   |   |   |   |   |
| Other income,  net                                            |       | (2,170     | )          |        |       | (1,338     | )          |   |   | (832 | ) | 62.2 |   |
| Loss on  extinguishment of debt                               |       | 9,674      |       |        |       | 538        |       |   |   | 9,136 |   | 1,698.1 |   |
| Net interest  expense                                         |       | 11,255     |       |        |       | 13,645     |       |   |   | (2,390 | ) | (17.5 | ) |
|                                                          |       |       |       |        |       |       |       |   |   |   |   |   |   |
| (Loss) income  before income taxes                            |       | (381       | )          |        |       | 21,992     |       |   |   | (22,373 | ) | (101.7 | ) |
|                                                          |       |       |       |        |       |       |       |   |   |   |   |   |   |
| Income tax  provision                                         |       | 287        |       | (75.3)%     |       | 8,200      |       | 37.3%  |   | (7,913 | ) | (96.5 | ) |
|                                                          |       |       |       |        |       |       |       |   |   |   |   |   |   |
| Net (loss)  income                                            |       | $          | (668       | )           |       |       | $          | 13,792 |   |   |   | (14,460 | ) | (104.8 | ) |

 

**Overview —**In 2006 our band business suffered due to the strike at our Elkhart,Indiana brass instrument plant, which has been ongoing since April 1st , and the bankruptcy filings of two largecustomers.

25

----

 

Although productionlevels at most of our other facilities were either stable or improved, bothband division sales and gross margins deteriorated in the current year.

Ourpiano division sales improved marginally in the United States and moresignificantly abroad, as customers reacted favorably to our Essex productre-launch.  Piano margins declinedslightly due to reduced production at the domestic manufacturing facility inthe first half of the year.

**Net Sales**— Net sales decreased $2.5 million due to an estimated $19.3 million inlower brass instrument sales caused by the strike which began April 1st at one of our Elkhart, Indiana manufacturingfacilities.  Overall band unit shipmentsremained stable as the 6% decrease in band units was offset by increases instringed and percussion unit shipments. Total piano sales improved $10.7 million to $214.2 million in 2006.  Domestic sales increased $2.4 million,despite lower Steinway grand unit shipments, due to the increase in total pianounit shipments of 10%, which was largely attributable to our Essex productre-launch mid-year. Overseas, revenues increased $8.3 million, (including $1.2million attributable to foreign currency translation).  This resulted from improved demand for allproduct lines in both Europe and Asia.

**Gross Profit**—**Gross profitdecreased $4.1 million due to band division results for the period.  We estimate lost gross profit of $6.5 millionon the lost brass instrument sales mentioned above.  Band gross profit was also adversely impactedby $3.9 million of unabsorbed overhead at the Elkhart, Indiana brass instrumentmanufacturing plant, approximately half of which was incurred in the second andthird quarters and resulted from the lack of production due to the strike.  The remainder was incurred in the fourthquarter and was due to production inefficiencies as we trained replacementworkers at that location.   Band marginswere less affected by atypical charges in the current period. These coststotaled $0.1 million in 2006, compared to $1.6 million in 2005, and arose fromthe sell through of purchased Leblanc inventory, which was written up to fairvalue upon acquisition. Improved production at other facilities, such as thewoodwind manufacturing facility, helped mitigate the margin deteriorationcaused by the strike.

Piano segment grossprofit increased $1.7 million due to the increase in piano division sales.   However, margins deteriorated slightly from36.4% to 35.4% primarily due to three weeks of additional plant shutdown at ourdomestic manufacturing facility, which were taken to control inventory levels.

**Operating Expenses**— Operating expenses increased $12.3 million, mostly due to the $8.7million increase in the provision for doubtful accounts, which increased due tobankruptcy filings of two large band division customers in July and November 2006.   The remaining increase in operating expensesresulted from band division recruiting and personnel relocation activities of$0.5 million and legal costs of $0.7 million, a large portion of which isattributable to the strike.  An increasein bonuses of $0.5 million for the overseas piano divisions and an increase inpromotion and sales costs associated with our Essex re-launch of $0.5 millionaccounted for most of the remaining increase.

**Non-operating Expenses**— Non-operating expenses increased $5.9million in 2006 due to the loss on extinguishment of debt of $9.7 millionresulting from the refinancing of our 8.75% Senior Notes and the earlyrepayment of our acquisition term loan. This net loss was comprised of premiums paid to bondholders of $7.7million, the write-off of term loan related deferred financing fees of $1.0million, and the write-off of bond related deferred financing fees of $2.2million, which were offset in part by the write-off of bond premium of $1.3million.  We incurred $0.5 million inloss on extinguishment of debt in the prior year period resulting from therepurchase of $8.2 million of our 8.75% Senior Notes and the write-off of theassociated deferred financing fees.

26

----

 

Other income, net improved $0.8 million due to ashift of $0.7 million from foreign exchange losses to foreign exchange gainsduring the period. Net interest expense decreased $2.4 million as a result of$1.2 million increase in interest income, which resulted from interest earnedon our higher average cash balance at higher interest rates during the currentperiod.  Lower interest expense of $1.2million due to our debt refinancing and lower borrowings on our creditfacilities also contributed to the net interest expense decrease.

**Results of Operations**

Fiscal Year 2005 Compared to Fiscal Year2004
| ** **                                                    | ** ** | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** **  | ** ** | **Change** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|-------------|------------|------------|------------|-------------|------------|------------|------------|
| **For the years ended December 31,** | ** ** | **2005**   | ** ** | ** **  | ** ** | **2004**   | ** ** | ** **  | ** ** | **$**      | ** ** | **%** | ** ** |
|                                                          |       |       |       |        |       |       |       |        |       |       |       |   |   |
| Net sales                                                     |       |       |       |        |       |       |       |        |       |       |       |   |   |
| Band                                                          |       | $          | 183,626    |        |       |       | $          | 171,346     |       |       |       | 12,280 |   | 7.2 |   |
| Piano                                                         |       | 203,517    |       |        |       | 203,688    |       |        |       | (171       | )          | (0.1 | ) |
| Total sales                                                   |       | 387,143    |       |        |       | 375,034    |       |        |       | 12,109     |       | 3.2 |   |
|                                                          |       |       |       |        |       |       |       |        |       |       |       |   |   |
| Cost of sales                                                 |       |       |       |        |       |       |       |        |       |       |       |   |   |
| Band                                                          |       | 146,168    |       |        |       | 137,779    |       |        |       | 8,389      |       | 6.1 |   |
| Piano                                                         |       | 129,441    |       |        |       | 128,122    |       |        |       | 1,319      |       | 1.0 |   |
| Total cost of  sales                                          |       | 275,609    |       |        |       | 265,901    |       |        |       | 9,708      |       | 3.7 |   |
|                                                          |       |       |       |        |       |       |       |        |       |       |       |   |   |
| Gross profit                                                  |       |       |       |        |       |       |       |        |       |       |       |   |   |
| Band                                                          |       | 37,458     |       | 20.4%  |       | 33,567     |       | 19.6%  |       | 3,891      |       | 11.6 |   |
| Piano                                                         |       | 74,076%    |       | 36.4%  |       | 75,566     |       | 37.1%  |       | (1,490     | )          | (2.0 | ) |
| Total gross  profit                                           |       | 111,534    |       |        |       | 109,133    |       |        |       | 2,401      |       | 2.2 |   |
|                                                          |       | 28.8%      |       |        |       | 29.1%      |       |        |       |       |       |   |   |
|                                                          |       |       |       |        |       |       |       |        |       |       |       |   |   |
| Operating  expenses                                           |       | 76,697     |       |        |       | 75,255     |       |        |       | 1,442      |       | 1.9 |   |
| Facility  rationalization                                     |       | —     |       |        |       | (363       | )          |        |       | 363        |       | (100.0 | ) |
| Total operating  expenses                                     |       | 76,697     |       |        |       | 74,892     |       |        |       | 1,805      |       | 2.4 |   |
|                                                          |       |       |       |        |       |       |       |        |       |       |       |   |   |
| Income from  operations                                       |       | 34,837     |       |        |       | 34,241     |       |        |       | 596        |       | 1.7 |   |
|                                                          |       |       |       |        |       |       |       |        |       |       |       |   |   |
| Other income,  net                                            |       | (800       | )          |        |       | (3,163     | )          |        |       | 2,363      |       | (74.7 | ) |
| Net interest  expense                                         |       | 13,645     |       |        |       | 13,437     |       |        |       | 208        |       | 1.5 |   |
|                                                          |       |       |       |        |       |       |       |        |       |       |       |   |   |
| Income before  income taxes                                   |       | 21,992     |       |        |       | 23,967     |       |        |       | (1,975     | )          | (8.2 | ) |
|                                                          |       |       |       |        |       |       |       |        |       |       |       |   |   |
| Income tax  provision                                         |       | 8,200      |       | 37.3%  |       | 8,100      |       | 33.8%  |       | 100        |       | 1.2 |   |
|                                                          |       |       |       |        |       |       |       |        |       |       |       |   |   |
| Net income                                                    |       | $          | 13,792     |        |       |       | $          | 15,867      |       |       |       | (2,075 | ) | (13.1 | ) |

 

**Overview —**In 2005 we continued strengthening our band business.  Our purchase of substantially all of theassets of G. Leblanc Corporation in August 2004 resulted in sales growth forthe segment.  We merged theadministrative office operations of Leblanc into our existing operations in May2005, thereby eliminating duplicative administrative costs.   Production at our woodwind facility, whichwas low in the early part of the year as we trained new workers, hadsignificantly improved by the end of the period, and we continued to experienceperiod over period improvement in our band segment margins.

27

----

 

Ourdomestic piano division sales decreased due to unusually high turnover in salespersonnel at the retail level, coupled with decreased demand for our Bostonpiano lines.  However, overall pianosegment sales remained stable, primarily due to the revenue generated by ourEuropean divisions.  Piano marginsdeclined slightly due to inefficiencies at both piano manufacturing facilities.

**Net Sales**— Net sales increased $12.1 million as a result of the increase in banddivision sales, which was caused primarily by incremental sales of Leblancproduct through the first three quarters of 2005.  Overall band unit shipments increased 5.9%due to the increase in brass and woodwind unit shipments of 9.5% (the largest componentof the band business).  Total piano salesremained stable at $203.5 million. Domestically, sales declined, in part due to attrition of retail salesstaff in the early part of the year, as well as the 11% decrease in unitshipments of our Boston piano lines.  Inthe United States, mid and lower-priced piano sales were being adverselyimpacted by the influx of low-priced Asian imports.  However, the shift in mix towards higherpriced units sold by our German division resulted in consistent piano segmentrevenues.

**Gross Profit**—**Gross profitimproved $2.4 million driven by an increase in band sales and bandmargins.  Band margins were less affectedby atypical charges in the current period. These costs totaled $1.6 million in2005, and arose from the sell through of purchased Leblanc inventory, which waswritten up to fair value upon acquisition. In the prior period, atypical charges totaled $2.6 million, comprised of$1.2 million from the sell through of purchased Leblanc inventory, and $1.4 millionfrom severance costs associated with plant closures.  Band margins also benefited from a large,high margin sales transaction in the beginning of the fourth quarter.  Piano segment gross profit decreased $1.5million despite the beneficial sales mix towards higher margin grands sold byour German division. The adverse impact of factory inefficiencies due in partto the disruptions caused by implementing production line improvements, as wellas a larger book-to-physical inventory adjustment at our domestic pianomanufacturing facility were the primary causes of the piano margin decrease.

**Operating Expenses**— Operating expenses increased $1.8 million, despite the decrease inexternal costs associated with Sarbanes-Oxley compliance efforts, which were approximately$1.2 million less in 2005.  Theincremental operating expenses are primarily sales and marketing, $0.9 millionof which resulted from commissions associated with the large sales transactiondescribed above.  Piano sales commissionsalso increased as a result of the favorable performance by the Germandivision.  In addition, this division hadincremental public relations and advertising costs of $0.2 million as a resultof its 125th anniversary celebrations.Lastly, $0.9 million in additional operating expenses were associated withLeblanc, and were incurred in the early part of the year, prior to theconsolidation of band administrative offices.

**Non-operating Expenses**— Non-operating expenses increased $2.6million in 2005.  Approximately $0.5 millionof this increase related to losses on extinguishment of debt, which resultedfrom the buyback of $8.2 million of our 8.75% Senior Notes at 105%, and thewrite-off of the corresponding deferred financing costs.  A shift of $0.3 million from foreign exchangegains to foreign exchange losses also contributed to the expense increase.  We incurred additional interest costs ofapproximately $0.2 million due to the increase in interest rates during theyear.   The remainder of the expenseincrease primarily resulted from reclassification of certain items fromnon-operating expenses to operating expenses.

28

----

*** ***

***Liquidity and Capital Resources***

We have relied primarily upon cash providedby operations, supplemented as necessary by seasonal borrowings under ourdomestic working capital line, to finance our operations, repay long-termindebtedness, finance acquisitions, and fund our capital expenditures.  Our overseas divisions, particularly in Asia,are normally in a borrowing position on their lines.  These borrowings are likely to be less than$10.0 million at any given time. In 2004, our domestic line borrowings peakedat approximately $23.0 million, as a result of our acquisition of the netassets of Leblanc, and in 2005 our borrowings peaked at approximately $11.0million due to seasonal borrowings. In 2006, our borrowings peaked at$13.9 million, due to the repayment of our term loan in September.

**Cash Flows**— Our statements of cash flows are summarized as follows:
| **For the years ended December 31,**                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net (loss)  income:                                                                       |       | $        | (668       | )        | $          | 13,792   |       | $ | 15,867 |   |
| Changes in operating assets and liabilities                                               |       | 8,607    |       | 6,324    |       | (1,305   | )          |
| Other adjustments to reconcile net (loss) income to cash  flows from operating activities |       | 21,281   |       | 11,313   |       | 9,311    |       |
| Cash flows from  operating activities                                                     |       | 29,220   |       | 31,429   |       | 23,873   |       |
|                                                                                      |       |     |       |     |       |     |       |
| Cash flows from  investing activities                                                     |       | (3,798   | )          | (5,756   | )          | (40,720  | )          |
|                                                                                      |       |     |       |     |       |     |       |
| Cash flows from  financing activities                                                     |       | (31,978  | )          | (15,860  | )          | 1,019    |       |
|                                                                                           |            |          |            |          |            |          |            |  |  |  |

 

In 2006, cash flows from operating activities, which decreased $2.2million, were impacted by many factors. The decrease in net income was the largest factor, and resulted frommany items which are added back in adjustments to cash flows from operatingactivities.  Cash provided by inventoryincreased $2.2 million due to increased piano sales combined with reducedproduction at our Elkhart brass instrument facility.  Cash used by accounts receivable increased$5.8 million due to increased sales and extended payment terms offered as partof the Essex re-launch promotional activities and an increase in our banddivision aged receivable balance.

Cash flows from operating activities was also impacted by the $1.4million purchase of securities (which are classified as trading) for oursupplemental executive retirement plan (“SERP”).  This purchase was funded by the sale ofexisting SERP securities and is described below.  We realized gains of $0.2 million on the saleof these securities.  Realized gains onthe newly purchased securities were less than $0.1 million for the year endedDecember 31, 2006.

In 2005, cash flows from operating activitiesincreased $7.6 million despite the increase in cash used for accounts payableof $1.9 million.  This improvement waslargely due to the increase in cash provided by inventory and receivables of$8.7 million, which resulted from improved management of work-in-processinventory and receivables collections at our band division.  In 2004, cash flows from operating activitiesdecreased $7.0 million.  This resultedprimarily from working capital changes, as inventory increased in part tosupport our expansion in Asia, and receivables increased in conjunction withband sales increases.  Collectively, theseworking capital changes used $8.4 million more than in the prior period.  Cash transferred to workers’ compensation andenvironmental depositary trust funds (which replaced more expensive letters ofcredit previously used) also negatively impacted cash flows from operatingactivities.

29

----

 

In 2006 the use of cash for investingactivities decreased $2.0 million as we sold all of the securities in our SERP,which were classified as available-for-sale securities, recognizing $1.4million in gross proceeds in the current period. The remainder of the decreasewas due to the absence of acquisition activity in the current period, ascompared to $2.2 million in 2005.   Theuse of cash for investing activities decreased $35.0 million in 2005 as $36.8million was used to fund our acquisition of Leblanc in 2004.  In 2005, cash used for acquisitions waslimited to the $2.2 million final purchase price adjustment for Leblanc.  Capital expenditures were slightly higherthan in prior periods at $5.5 million in 2006, $5.0 million in 2005 and $5.2million in 2004.  (See CapitalExpenditures discussion below.)

Cash used for financing activities in 2006increased $16.1 million due largely to our debt restructuring activities.  We refinanced our bonds, which generatedproceeds of $173.7 million, offset by the extinguishment of $166.2 million ofour 8.75% Senior Note debt, and the repayment of our acquisition and realestate term loans.  Although we hadadditional proceeds from the issuance of stock of $5.1 million, premiums paidon the extinguishment of debt of $7.7 million and costs related to the bond anddomestic credit facility refinancing of $4.6 million caused the increased useof cash in the current period.  In 2005,cash flows from financing activities decreased $16.9 million due in part to the$4.0 million decrease in proceeds from issuance of stock.  In addition, we repaid approximately $1.5million on our line borrowings in the current year, whereas borrowings providedcash of $2.9 million in the prior period. Lastly, in December 2005, we repurchased $8.2 million of our own 8.75%Senior Notes at 105% of face value, which resulted in a use of cash of $8.6million.  In 2004, cash provided byfinancing activities of $1.0 million resulted from stock option exercises andemployee stock purchase plan activities totaling $5.7 million, which more thanoffset the $4.6 million in net borrowings and scheduled debt repayments.

**Capital Expenditures**— Our capitalexpenditures consist primarily of softwareand computer system conversions and upgrades, machinery and productionequipment, and plant and facility improvements. We expect capital spending in 2007 to be in the range of $5.0-$7.0million, relating to facility maintenance and improvements, computer systemmaintenance and upgrades, and production equipment purchases.

**Seasonality**— Consistent with industry practice, we sell band instruments almostentirely on credit utilizing the two financing programs described below.  Due to these programs, we have large workingcapital requirements during certain times of the year when band instrumentreceivable balances reach highs of approximately $75-$80 million in August andSeptember, and lesser requirements when they are at lows of approximately$55-$65 million in January and February. The financing options, intended to assist dealers with the seasonalityinherent in the industry and facilitate the rent-to-own programs offered tostudents by many retailers, also allow us to match our production and deliveryschedules.  The following forms offinancing are offered to qualified band instrument dealers:

a)            **Receivabledating**— Payments on purchasesmade from October through August of the following year are due in October.  Dealers are offered discounts for earlypayment.

b)           **Notereceivable financing**— Dealersthat meet certain credit qualifications may convert open accounts to a notepayable to us.  The note program isoffered primarily in October and coincides with the receivable datingprogram.  The terms of the notesgenerally include payment over a nine to twelve month period with interestranging from 9%-13.25%.  Interest ratesare contingent upon credit ratings and borrowing periods.  In certain situations, long term arrangementsfor up to 36 months

30

----

                        have been offered.  In mostinstances, the note receivable is secured by dealer inventories andreceivables.

**Off Balance Sheet Arrangements** — In 2004, certain customers of our Leblancsubsidiary financed notes receivable with a third party, to which we have arecourse obligation.  As of December 31,2005, $0.5 million of these notes remain outstanding.  We have included a corresponding recourseobligation of $0.1 million in our financial statements at period-end.  As of December 31, 2006, these notes andrelated reserves were less than $0.1 million. Our total maximum recourse obligationunder this arrangement includes the outstanding balance on the notes, as wellas any interest or late fees that may be incurred by our customers.

We generally do not provideextended financing arrangements to our piano dealers.  To facilitate long-term financing required bysome dealers, we have arranged financing through third-party providers.  We generally provide no guarantees withrespect to these arrangements.

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

This program ceased in the first quarter of2003. Nevertheless, because our obligation continues until the bank is paid infull by the customer, our commitment can remain outstanding for up to 8 years —the maximum term of the consumer loan.

Our maximum obligation under this arrangementis estimated to be approximately €0.4 million ($0.5 million at the December 31,2006 exchange rate).  To date, we havenot been required to repurchase any pianos under this program and we believethe likelihood of such repurchases in the future is remote.  Accordingly, we have not recognized aliability for this obligation in our financial statements.  Further, in the unlikely event of arepurchase, we believe the proceeds received upon our resale of the piano wouldexceed the amount payable to the bank.

**Pensionsand Other Postretirement Benefits**— Whendetermining the amounts to be recognized in the consolidated financialstatements related to our domestic pension, we used a long-term rate of returnon plan assets of 9%, which was developed with input from our actuaries and ourinvestment committee, and is consistent with prior years.  We believe that 9% is consistent with thehistorical long-term return trends on our domestic pension assets and ourexpectations for future returns. The discount rate utilized for determiningfuture pension and other postretirement benefit obligations for our domesticplans is based on long-term bonds receiving an AA- or better rating by arecognized rating agency.  The discountrate used for December 31, 2006 and 2005 was 5.75%.

The discount rates and rates of return onplan assets for our foreign pension and other postretirement benefit plans weresimilarly developed utilizing long-term rates of return and discount ratesreasonably expected to occur in the applicable jurisdiction.

**Borrowing Activities and Availability**— During the year ended December 31, 2006, wesignificantly restructured our long-term debt. In February 2006 we repaid our larger, higher interest term loan, whichhad an outstanding balance of $16.0 million at the time of payoff.  We also issued $175.0 million of 7.00% SeniorNotes and extended a tender offer to purchase the $166.2 million of ouroutstanding 8.75% Senior Notes.  Weissued our new 7.00% Senior Notes at 99.2435%, and received proceeds of $170.2million, net of associated fees.  We usedthe proceeds from this issuance to extinguish $114.6 million of

31

----

 

the8.75% Senior Notes pursuant to our tender offer in the first quarter of2006.  The remaining proceeds,supplemented by borrowings on our line of credit, were used to exercise ourright to call the remaining $51.6 million of 8.75% Senior Notes on April 17,2006.

On September 29, 2006 we restructured our domesticcredit facility and used our first borrowing, supplemented by cash on hand, torepay our remaining term loan, which had a balance of $14.6 million at the timeof payoff.  Our restructured domesticcredit facility provides us with a potential borrowing capacity of $110.0million in revolving credit loans, and expires on September 29, 2011.  It also provides for borrowings at eitherLondon Interbank Offering Rate (“LIBOR”) plus a range from 1.25% to 1.75% oras-needed borrowings at an alternate base rate, plus a range from 0.00% to0.25%; both ranges depend upon availability at the time of borrowing.  Borrowings are collateralized by our domesticaccounts receivable, inventory and fixed assets.

Our non-domestic credit facilities provided forborrowings equivalent to $27.0 million as of December 31, 2006.  There have been no material changes to ourborrowing abilities overseas, and we typically are in a borrowing position ofless than $10.0 million at any given time. Our non-domestic credit facilities are discussed more fully in Note 11to the consolidated financial statements.

At December 31, 2006, our total outstandingindebtedness amounted to $179.6 million, consisting of $175.0 million of 7.00%Senior Notes and $4.6 million of notes payable to foreign banks.  Cash interest paid was $14.7 million in 2006,$19.4 million in 2005, and $17.5 million in 2004.

All of our debt agreements contain covenants thatplace certain restrictions on us, including our ability to incur additionalindebtedness, to make investments in other entities, and limitations on cashdividend payments. We were in compliance with all such covenants as of December31, 2006 and do not anticipate any compliance issues in 2007. Our bondindenture contains limitations, based on net income (among other things), onthe amount of discretionary repurchases we may make of our Ordinary commonstock.  Our intent and ability torepurchase additional Ordinary common stock either directly from shareholdersor on the open market is directly affected by this limitation.

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

We experience longproduction and inventory turnover cycles, which we constantly monitor sincefluctuations in demand can have a significant impact on these cycles.  We were able to effectively utilize cash flowfrom operations to fund our debt and capital requirements and paid off ourseasonal borrowings on our domestic line of credit.  Looking forward to 2007, we anticipate thatboth our piano and band divisions will perform consistently throughout theperiod.  Our intention is to manageaccounts receivable, reduce inventory levels, and repay credit facilityborrowings.

Other than the dividend described below, wedo not have any current plans or intentions that will have a material impact onour liquidity in 2007, although we may consider acquisitions that may requirefunding from operations or from our credit facilities.  Other than those described, we are not awareof any trends, demands, commitments, or costs of resources that are expected tomaterially impact our liquidity or capital resources.  Accordingly, we believe that cash on hand,together with cash flows anticipated from operations and available borrowingsunder the Credit Facility, will be adequate to meet our debt servicerequirements, fund continuing capital requirements and satisfy our workingcapital and general corporate needs through 2007.

32

----

*** ***

***Recent Events***

On February 13, 2007, we declared a dividend of$3.00 per share for shareholders of record as of February 23, 2007.  This dividend payment, which amounted to$25.2 million, was paid on March 7, 2007. We used existing cash on hand and borrowed approximately $9.0 milliondomestically to facilitate this payment.

33

----

** **

**Contractual Obligations**— The following table provides a summary of ourcontractual obligations at December 31, 2006.
| ** **                         | ** ** | **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)                |       | $                                         | 267,456    |   | $ | 16,914 |   | $ | 24,500 |   | $ | 24,500 |   | $ | 201,542 |   |
| Capital leases                     |       | 53                                        |       | 14 |   | 33 |   | 6 |   | — |   |
| Operating leases  (2)              |       | 266,955                                   |       | 5,163 |   | 8,798 |   | 8,275 |   | 244,719 |   |
| Purchase  obligations (3)          |       | 23,220                                    |       | 23,186 |   | 26 |   | 8 |   | — |   |
| Other  non-current liabilities (4) |       | 37,075                                    |       | 4,254 |   | 4,015 |   | 3,859 |   | 24,947 |   |
| Total                              |       | $                                         | 594,759    |   | $ | 49,531 |   | $ | 37,372 |   | $ | 36,648 |   | $ | 471,208 |   |

 

**Notes toContractual Obligations:**

(1) Long-term debtrepresents long-term debt obligations, the fixed interest on our 7.0% SeniorNotes, and the variable interest on our other loans.  We estimated the future variable interestobligation using the applicable December 31, 2006 rates.  The nature of our long-term debt obligationsis described more fully in the “Borrowing Availability and Activities” sectionof “Liquidity and Capital Resources.”

(2) Approximately $253.2 million of ouroperating lease obligations are attributable to the ninety-nine year land leaseassociated with the purchase of Steinway Hall, which is described in Note 13 inthe Notes to Consolidated Financial Statements included within this filing; theremainder is attributable to the leasing of other facilities and equipment.

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

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

34

----

** **

**CriticalAccounting Estimates**

The Securities and Exchange Commission (“SEC”) hasissued disclosure guidance for “critical accounting policies.” The SEC defines“critical accounting policies” as those that require application ofmanagement’s most difficult, subjective or complex judgments, often as a resultof the need to make estimates about the effect of matters that are inherentlyuncertain and may change in subsequent periods.

Management is required to make certain estimates andassumptions during the preparation of the consolidated financial statements.These estimates and assumptions impact the reported amount of assets andliabilities and disclosures of contingent assets and liabilities as of the dateof the consolidated financial statements. Estimates and assumptions arereviewed periodically and the effects of revisions are reflected in theconsolidated financial statements in the period they are determined to benecessary. Actual results could differ from those estimates.

The significant accounting policies are described inNote 2 of the Notes to Consolidated Financial Statements included in theCompany’s 2006 Annual Report on Form 10-K. Not all of these significantaccounting policies require management to make difficult, subjective or complexjudgments or estimates. However, management considers the following to becritical accounting policies based on the definition above.

**Accounts Receivable**

We establish reserves for accounts receivable and notes receivable(including recourse reserves when our customers have financed notes receivablewith a third party).  We review overallcollectibility trends and customer characteristics such as debt leverage,solvency, and outstanding balances in order to develop our reserveestimates.  Historically, a large portionof our sales at both our piano and band divisions have been generated by ourtop 15 customers.  As a result, weexperience some inherent concentration of credit risk in our accountsreceivable due to its composition and the relative proportion of large customerreceivables to the total. This is especially true at our band division, whichcharacteristically has the majority of our consolidated accounts receivablebalance.  We consider the credit healthand solvency of our customers when developing our receivable reserve estimates.

**Inventory**

We establish inventory reserves for items such aslower-of-cost-or-market and obsolescence. We review inventory levels on a detailed basis, concentrating on the ageand amounts of raw materials, work-in-process, and finished goods, as well asrecent usage and sales dates and quantities to help develop our estimates.Ongoing changes in our business strategy, including a shift from batchprocessing to single piece production flow, coupled with increased offshoresourcing, could affect our ability to realize the current cost of ourinventory, and are considered by management when developing our estimates. Wealso establish reserves for anticipated book-to-physical adjustments based uponour historical level of adjustments from our annual physical inventories.  We cost our inventory using standard costs.  Accordingly, variances between actual andstandard costs that are not abnormal in nature are capitalized into inventoryand released based on calculated inventory turns.

35

----

** **

**Workers’ Compensation and Self-Insured Health Claims**

We establish workers’ compensation and self-insured health claimsreserves based on our trend analysis of data provided by third-partyadministrators regarding historical claims and anticipated future claims.

**Warranty**

We establish reserves for warranty claims based on our analysis ofhistorical claims data, recent claims trends, and the various lengths of timefor which we warranty our products.

**Long-lived Assets**

We review long-livedassets, such as property, plant, and equipment, for impairment whenever eventsor changes in circumstances indicate that the carrying amount of an asset maynot be recoverable.  We measurerecoverability by comparing the carrying amount of the asset to the estimatedfuture cash flows the asset is expected to generate.

We test our goodwill andindefinite-lived trademark assets for impairment annually or on an interimbasis if events or circumstances indicate that the fair value of an asset mayhave decreased below its carrying value. Our assessment is based on several analyses, including multi-year cashflows and a comparison of estimated fair values to our market capitalization.

**Pensions and Other Postretirement Benefit Costs**

We make certain assumptions when calculating our benefit obligationsand expenses.  We base our selection ofassumptions, such as discount rates and long-term rates of return, oninformation provided by our actuaries, investment advisors, investmentcommittee, current rate trends, and historical trends for our pension assetportfolio.  Our benefit obligations andexpenses can fluctuate significantly based on the assumptions managementselects.

**Income Taxes**

A valuation allowance has been recorded for certain deferred tax assetsrelated to foreign tax credit carryforwards and state net operating losscarryforwards.  When assessing therealizability of deferred tax assets, we consider whether it is more likelythan not that the deferred tax assets will be fully realized.  The ultimate realization of these assets isdependent upon many factors, including the ratio of foreign source income tooverall income and generation of sufficient future taxable income in the statesfor which we have loss carryforwards. When establishing or adjusting valuation allowances, we consider thesefactors, as well as anticipated trends in foreign source income and taxplanning strategies which may impact future realizability of these assets.

36

----

** **

**Stock-Based Compensation**

We grant stock-based compensation awards which generally vest over aspecified period.  When determining thefair value of stock options and subscriptions to purchase shares under thePurchase Plan, we use the Black-Scholes option valuation model, which requiresinput of certain management assumptions, including dividend yield, expectedvolatility, risk-free interest rate, expected life of stock options grantedduring the period, and the life applicable to the Purchase Plansubscriptions.  The estimated fair valueof the options and subscriptions to purchase shares, and the resultantstock-based compensation expense, can fluctuate based on the assumptions usedby management.

**Environmental Liabilities**

We make certain assumptions when calculating our environmentalliabilities.  We base our selection ofassumptions, such as cost and length of time for remediation, on data providedby our environmental consultants, as well as information provided by regulatoryauthorities. We also make certain assumptions regarding the indemnifications wehave received from others, including whether remediation costs are within thescope of the indemnification, the indemnifier’s ability to perform under theagreement, and whether past claims have been successful.  Our environmental obligations and expensescan fluctuate significantly based on management’s assumptions.

We believe the assumptions made by management providea reasonable basis for the estimates reflected in our financial statements.

**RecentAccounting Pronouncements**

InJune 2006, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 48 “Accounting for Uncertainty in Income Taxes - aninterpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 sets amore-likely-than-not threshold for financial statement recognition andmeasurement of a tax position taken or expected to be taken in a taxreturn.  FIN 48 also provides guidance onderecognition of income tax assets and liabilities, classification of currentand deferred positions, accounting for income taxes in interim periods, andincome tax disclosures.  FIN 48 iseffective for fiscal years beginning after December 15, 2006 and cumulativeeffects of its application will be recorded as an adjustment to retainedearnings as of January 1, 2007.  We arecurrently evaluating the requirements of FIN 48 and have not yet determined theimpact on our consolidated financial position and results of operations.

OnSeptember 13, 2006, the SEC issued Staff Accounting Bulletin No. 108,“Considering the Effects of Prior Year Misstatements When QuantifyingMisstatements in Current Year Financial Statements” (“SAB 108”).SAB 108 provides guidance on how the effects of the carryover or reversalof prior year financial statement misstatements should be considered inquantifying a current year misstatement. The adoption of SAB 108 did nothave a material impact on our consolidated financial position and results ofoperations.

OnSeptember 15, 2006, the FASB issued Statement of Financial Accounting StandardNo. 157, “Fair Value Measurements” (“SFAS No. 157”).  SFAS No. 157 defines fair value, establishesa framework for measuring fair value and expands disclosures about fair valuemeasurements.  SFAS No. 157 is effectivefor financial statements issued for fiscal years beginning after November 15,2007.  We are currently evaluating therequirements of SFAS No. 157 and have not yet determined the impact, if any,its adoption will have on our consolidated financial position and results ofoperations.

37

----

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 providesentities with an option to report selected financial assets and liabilities atfair value, with the objective to reduce both the complexity in accounting forfinancial instruments and the volatility in earnings caused by measuringrelated assets and liabilities differently. We will be required to adopt SFASNo. 159 in the first quarter of fiscal year 2008. We are currently evaluatingthe requirements of SFAS No. 159 and have not yet determined the impact, ifany, of its adoption on our consolidated financial position and results ofoperations.

**Item 7A.  Quantitative andQualitative Disclosures About Market Risk**

**Foreign Currency Risk**

We are subject to market risk associated withchanges in foreign currency exchange rates and interest rates.  We mitigate some of our cash flow exposure toforeign currency fluctuations by holding forward foreign currencycontracts.  These contracts are notdesignated as hedges for accounting purposes. The contracts relate primarily to intercompany transactions and are notused for trading or speculative purposes. The fair value of the forward foreigncurrency exchange contracts is sensitive to changes in foreign currencyexchange rates.  As of December 31, 2006,a 10% negative change in foreign currency exchange rates from market rateswould decrease the fair value of the contracts by $0.5 million.  Gains and losses on the foreign currencyexchange contracts are defined as the difference between the contract rate atits inception date and the current forward rate.  However, we would offset any such gains andlosses by corresponding losses and gains, respectively, on the related asset orliability.

**Interest Risk**

Our interest rate exposure is limitedprimarily to interest rate changes on our variable rate debt.  Our revolving loans bear interest at ratesthat fluctuate with changes in PRIME, LIBOR, TIBOR, and EURIBOR and aretherefore sensitive to changes in market interest rates.  Our term loans, which were repaid during theyear, also bore interest at rates which fluctuated with changes in LIBOR.  For the year ended December 31, 2006, ahypothetical 10% increase in interest rates would have increased our interestexpense by approximately $0.2 million.

Our long-term debt includes $175.0 million ofSenior Notes with a fixed interest rate. Accordingly, there would be no immediate impact on our interest expenseassociated with these Notes due to fluctuations in market interest rates.  However, based on a hypothetical 10%immediate decrease in market interest rates, the fair value of our SeniorNotes, which would be sensitive to such interest rate changes, would beincreased by approximately $4.4 million as of December 31, 2006.

**Item 8.  Financial Statements AndSupplementary Data**

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

CONSOLIDATEDFINANCIAL STATEMENTS:

ConsolidatedStatements of Operations for the Years Ended December 31, 2006, 2005, and 2004

Consolidated BalanceSheets as of December 31, 2006 and 2005

ConsolidatedStatements of Cash Flows for the Years Ended December 31, 2006, 2005, and 2004

ConsolidatedStatements of Stockholders’ Equity for the Years Ended December 31, 2006, 2005,and 2004

Notes toConsolidated Financial Statements

38

----

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofSteinway Musical Instruments, Inc.Waltham, Massachusetts

We have audited the accompanying consolidated balance sheets ofSteinway Musical Instruments, Inc. and subsidiaries (the “Company”) as ofDecember 31, 2006 and 2005, and the related consolidated statements ofoperations, stockholders’ equity, and cash flows for each of the three years inthe period ended December 31, 2006. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of Steinway MusicalInstruments, Inc. and subsidiaries as of December 31, 2006 and 2005, and theresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2006, in conformity with accounting principlesgenerally accepted in the United States of America.

Asdiscussed in Note 1 to the consolidated financial statements, the Companyadopted the recognition and disclosure provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 158, *Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans — an amendment of FASBStatements No. 87, 88, 106 and 132(R),*effective December31, 2006 and SFAS No. 123(R), *Share-Based Payment*,effective January 1, 2006.

We have also audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the effectiveness of theCompany’s internal control over financial reporting as of December 31, 2006,based on the criteria established in *InternalControl-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated March 16, 2007expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anunqualified opinion on the effectiveness of the Company’s internal control overfinancial reporting.

/s/ DELOITTE & TOUCHE LLP

Boston, MassachusettsMarch 16, 2007

 

39

----

 

Steinway Musical Instruments, Inc. andSubsidiaries**CONSOLIDATED STATEMENTS OFOPERATIONS**(InThousands Except Share and Per Share Data)
| **For the years ended December 31,** | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|---------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                                                          |       |      |       |      |       |      |       |
| Net sales                                                     |       | $         | 384,620    |      | $          | 387,143   |       | $ | 375,034 |   |
| Cost of sales                                                 |       | 277,213   |       | 275,609   |       | 265,901   |       |
|                                                          |       |      |       |      |       |      |       |
| Gross profit                                                  |       | 107,407   |       | 111,534   |       | 109,133   |       |
|                                                          |       |      |       |      |       |      |       |
| Operating expenses:                                           |       |      |       |      |       |      |       |
| Sales and  marketing                                          |       | 45,586    |       | 45,475    |       | 43,846    |       |
| Provision for  doubtful accounts                              |       | 9,150     |       | 424       |       | 486       |       |
| General and  administrative                                   |       | 33,062    |       | 29,200    |       | 29,263    |       |
| Amortization                                                  |       | 812       |       | 1,116     |       | 1,094     |       |
| Other operating  expenses                                     |       | 419       |       | 482       |       | 566       |       |
| Facility  rationalization                                     |       | —    |       | —    |       | (363      | )          |
| Total operating  expenses                                     |       | 89,029    |       | 76,697    |       | 74,892    |       |
|                                                          |       |      |       |      |       |      |       |
| Income from operations                                        |       | 18,378    |       | 34,837    |       | 34,241    |       |
|                                                          |       |      |       |      |       |      |       |
| Other income,  net                                            |       | (2,170    | )          | (1,338    | )          | (3,163    | )          |
| Loss on  extinguishment of debt                               |       | 9,674     |       | 538       |       | —    |       |
| Interest income                                               |       | (4,565    | )          | (3,335    | )          | (2,829    | )          |
| Interest expense                                              |       | 15,820    |       | 16,980    |       | 16,266    |       |
| Total  non-operating expenses                                 |       | 18,759    |       | 12,845    |       | 10,274    |       |
|                                                          |       |      |       |      |       |      |       |
| (Loss) income before  income taxes                            |       | (381      | )          | 21,992    |       | 23,967    |       |
|                                                          |       |      |       |      |       |      |       |
| Income tax provision                                          |       | 287       |       | 8,200     |       | 8,100     |       |
|                                                          |       |      |       |      |       |      |       |
| Net (loss) income                                             |       | $         | (668       | )         | $          | 13,792    |       | $ | 15,867 |   |
|                                                          |       |      |       |      |       |      |       |
| (Loss) earnings per  share - basic                            |       | $         | (0.08      | )         | $          | 1.71      |       | $ | 1.97 |   |
|                                                          |       |      |       |      |       |      |       |
| (Loss) earnings per share  - diluted                          |       | $         | (0.08      | )         | $          | 1.67      |       | $ | 1.91 |   |
|                                                          |       |      |       |      |       |      |       |
| Weighted average  shares:                                     |       |      |       |      |       |      |       |
| Basic                                                         |       | 8,303,770 |       | 8,069,721 |       | 8,046,256 |       |
| Diluted                                                       |       | 8,303,770 |       | 8,265,234 |       | 8,304,066 |       |

 

See notes to consolidated financial statements.

40

----

 

Steinway MusicalInstruments, Inc. and Subsidiaries**CONSOLIDATED BALANCESHEETS**(InThousands Except Share and Per Share Data)
| **December 31,**                                                                                                                                                                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Assets                                                                                                                                                                                                                       |       |     |       |     |       |
| Current assets:                                                                                                                                                                                                              |       |     |       |     |       |
| Cash                                                                                                                                                                                                                         |       | $        | 30,409     |     | $          | 34,952 |   |
| Accounts, notes and other receivables, net                                                                                                                                                                                   |       | 75,161   |       | 81,880   |       |
| Inventories, net                                                                                                                                                                                                             |       | 154,623  |       | 159,310  |       |
| Prepaid expenses and other current assets                                                                                                                                                                                    |       | 12,711   |       | 11,653   |       |
| Deferred tax assets                                                                                                                                                                                                          |       | 9,774    |       | 7,936    |       |
| Total current  assets                                                                                                                                                                                                        |       | 282,678  |       | 295,731  |       |
|                                                                                                                                                                                                                         |       |     |       |     |       |
| Property, plant  and equipment, net                                                                                                                                                                                          |       | 95,598   |       | 96,664   |       |
| Trademarks                                                                                                                                                                                                                   |       | 13,671   |       | 13,233   |       |
| Goodwill                                                                                                                                                                                                                     |       | 31,481   |       | 30,088   |       |
| Other  intangibles, net                                                                                                                                                                                                      |       | 4,725    |       | 4,128    |       |
| Other assets                                                                                                                                                                                                                 |       | 12,988   |       | 15,811   |       |
| Long-term  deferred tax asset                                                                                                                                                                                                |       | 6,034    |       | —   |       |
|                                                                                                                                                                                                                         |       |     |       |     |       |
| Total assets                                                                                                                                                                                                                 |       | $        | 447,175    |     | $          | 455,655 |   |
|                                                                                                                                                                                                                         |       |     |       |     |       |
| Liabilities and  stockholders’ equity                                                                                                                                                                                   |       |     |       |     |       |
| Current  liabilities:                                                                                                                                                                                                        |       |     |       |     |       |
| Current portion of long-term debt                                                                                                                                                                                            |       | $        | 4,595      |     | $          | 12,977 |   |
| Accounts payable                                                                                                                                                                                                             |       | 16,805   |       | 13,805   |       |
| Other current liabilities                                                                                                                                                                                                    |       | 44,648   |       | 45,099   |       |
| Total current  liabilities                                                                                                                                                                                                   |       | 66,048   |       | 71,881   |       |
|                                                                                                                                                                                                                         |       |     |       |     |       |
| Long-term debt                                                                                                                                                                                                               |       | 173,816  |       | 191,715  |       |
| Deferred tax  liabilities                                                                                                                                                                                                    |       | 11,754   |       | 15,326   |       |
| Pension and  other postretirement benefit liabilities                                                                                                                                                                        |       | 32,847   |       | 24,318   |       |
| Other  non-current liabilities                                                                                                                                                                                               |       | 4,709    |       | 3,585    |       |
| Total  liabilities                                                                                                                                                                                                           |       | 289,174  |       | 306,825  |       |
|                                                                                                                                                                                                                         |       |     |       |     |       |
| Commitments and  contingent liabilities                                                                                                                                                                                      |       |     |       |     |       |
|                                                                                                                                                                                                                         |       |     |       |     |       |
| Stockholders’  equity:                                                                                                                                                                                                  |       |     |       |     |       |
| Class A common stock, $.001 par value, 5,000,000  shares authorized, 477,952 shares issued and outstanding                                                                                                                   |       | —   |       | —   |       |
| Ordinary common stock, $.001 par value, 90,000,000  shares authorized, 9,943,502 and 9,680,508 shares issued in 2006 and 2005,  respectively, and 7,898,052 and 7,635,058 shares outstanding in 2006 and  2005, respectively |       | 10       |       | 10       |       |
| Additional paid-in capital                                                                                                                                                                                                   |       | 90,266   |       | 83,062   |       |
| Retained earnings                                                                                                                                                                                                            |       | 125,711  |       | 126,379  |       |
| Accumulated other comprehensive loss                                                                                                                                                                                         |       | (10,550  | )          | (13,185  | )          |
| Treasury stock, at cost (2,045,450 shares of   Ordinary common stock in 2006 and 2005)                                                                                                                                       |       | (47,436  | )          | (47,436  | )          |
| Total  stockholders’ equity                                                                                                                                                                                             |       | 158,001  |       | 148,830  |       |
|                                                                                                                                                                                                                         |       |     |       |     |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                             |       | $        | 447,175    |     | $          | 455,655 |   |

 

See notes to consolidated financial statements.

41

----

 

Steinway MusicalInstruments, Inc. and Subsidiaries**CONSOLIDATED STATEMENTS OFCASH FLOWS**(InThousands)
| **For the years ended December 31,**                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows from  operating activities:                                               |       |     |       |     |       |     |       |
| Net (loss) income                                                                    |       | $        | (668       | )        | $          | 13,792   |       | $ | 15,867 |   |
| Adjustments to reconcile net (loss) income to cash flows  from operating activities: |       |     |       |     |       |     |       |
| Depreciation and amortization                                                        |       | 10,659   |       | 11,267   |       | 11,183   |       |
| Amortization of bond discount                                                        |       | 140      |       | —   |       | —   |       |
| Amortization of bond premium                                                         |       | (42      | )          | (252     | )          | (230     | )          |
| Loss on extinguishment of debt                                                       |       | 9,674    |       | 538      |       | —   |       |
| Stock-based compensation expense                                                     |       | 1,174    |       | —   |       | —   |       |
| Excess tax benefits from stock-based awards                                          |       | (431     | )          |     |       |     |       |
| Tax benefit from stock option exercises                                              |       | 945      |       | 170      |       | 759      |       |
| Deferred tax benefit                                                                 |       | (8,127   | )          | (682     | )          | (2,497   | )          |
| Provision for doubtful accounts                                                      |       | 9,150    |       | 424      |       | 486      |       |
| Purchase of trading securities                                                       |       | (1,393   | )          | —   |       | —   |       |
| Other                                                                                |       | (468     | )          | (152     | )          | (390     | )          |
| Changes in operating assets and liabilities:                                         |       |     |       |     |       |     |       |
| Accounts, notes and other receivables                                                |       | (845     | )          | 4,955    |       | (293     | )          |
| Inventories                                                                          |       | 7,730    |       | 5,488    |       | 2,003    |       |
| Prepaid expenses and other assets                                                    |       | (4,785   | )          | 1,189    |       | (5,488   | )          |
| Accounts payable                                                                     |       | 2,261    |       | (503     | )          | 1,419    |       |
| Other current and non-current liabilities                                            |       | 4,246    |       | (4,805   | )          | 1,054    |       |
| Cash flows from  operating activities                                                |       | 29,220   |       | 31,429   |       | 23,873   |       |
|                                                                                 |       |     |       |     |       |     |       |
| Cash flows from  investing activities:                                               |       |     |       |     |       |     |       |
| Capital expenditures                                                                 |       | (5,549   | )          | (5,004   | )          | (5,186   | )          |
| Proceeds from sales of property, plant and equipment                                 |       | 365      |       | 1,415    |       | 1,233    |       |
| Proceeds from sale of available-for-sale securities                                  |       | 1,386    |       | —   |       | —   |       |
| Acquisition of business, net of cash acquired                                        |       | —   |       | (2,167   | )          | (36,767  | )          |
| Cash flows from  investing activities                                                |       | (3,798   | )          | (5,756   | )          | (40,720  | )          |
|                                                                                 |       |     |       |     |       |     |       |
| Cash flows from  financing activities:                                               |       |     |       |     |       |     |       |
| Borrowings under lines of credit                                                     |       | 79,169   |       | 188,844  |       | 159,787  |       |
| Repayments under lines of credit                                                     |       | (79,756  | )          | (190,297 | )          | (156,852 | )          |
| Debt issuance costs                                                                  |       | (4,638   | )          | —   |       | (105     | )          |
| Proceeds from issuance of debt                                                       |       | 173,676  |       | —   |       | —   |       |
| Repayments of long-term debt                                                         |       | (198,205 | )          | (15,763  | )          | (7,555   | )          |
| Premium paid on extinguishment of debt                                               |       | (7,740   | )          | (407     | )          | —   |       |
| Proceeds from issuance of stock                                                      |       | 5,085    |       | 1,763    |       | 5,744    |       |
| Excess tax benefits from stock-based awards                                          |       | 431      |       | —   |       | —   |       |
| Cash flows from  financing activities                                                |       | (31,978  | )          | (15,860  | )          | 1,019    |       |
|                                                                                 |       |     |       |     |       |     |       |
| Effects of  foreign exchange rate changes on cash                                    |       | 2,013    |       | (2,233   | )          | 917      |       |
|                                                                                 |       |     |       |     |       |     |       |
| (Decrease)  increase in cash                                                         |       | (4,543   | )          | 7,580    |       | (14,911  | )          |
| Cash, beginning  of year                                                             |       | 34,952   |       | 27,372   |       | 42,283   |       |
|                                                                                 |       |     |       |     |       |     |       |
| Cash, end of  year                                                                   |       | $        | 30,409     |     | $          | 34,952   |       | $ | 27,372 |   |
|                                                                                 |       |     |       |     |       |     |       |
| Supplemental  cash flow information:                                                 |       |     |       |     |       |     |       |
| Interest paid                                                                        |       | $        | 14,687     |     | $          | 19,437   |       | $ | 17,470 |   |
| Income taxes paid                                                                    |       | $        | 8,243      |     | $          | 11,160   |       | $ | 9,623 |   |
| Non-cash transaction:                                                                |       |     |       |     |       |     |       |
| Purchase of Ordinary common stock by issuance of  bonds                              |       | $        | —     |     | $          | —   |       | $ | 31,583 |   |

 

See notes to consolidated financial statements.

42

----

 

SteinwayMusical Instruments, Inc. and Subsidiaries**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**(InThousands Except Share Data)
| ** **                                                    | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Treasury  Stock** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|---------------------|------------|---------------------------------------|------------|
| Balance, January 1, 2004                                      |       | $                 | 10         |                             | $          | 74,626                 |       | $                                           | 96,720     |                | $          | (2,868                                | )          | $ | (15,853 | ) | $ | 152,635 |   |
| Comprehensive income:                                         |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Net  income                                                   |       |              |       |                             |       | 15,867                 |       |                                        |       |                |       | 15,867                                |       |
| Foreign  currency translation adjustment                      |       |              |       |                             |       |                   |       | 4,520                                       |       |                |       | 4,520                                 |       |
| Additional  minimum pension liability, net                    |       |              |       |                             |       |                   |       | (2,439                                      | )          |                |       | (2,439                                | )          |
| Holding  gain on marketable securities, net                   |       |              |       |                             |       |                   |       | 50                                          |       |                |       | 50                                    |       |
| Total comprehensive  income                                   |       |              |       |                             |       |                   |       |                                        |       |                |       | 17,998                                |       |
|                                                          |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Exercise of 267,327  options for shares  of common stock |       |              |       | 5,274                            |       |                   |       |                                        |       |                |       | 5,274                                 |       |
| Tax benefit of options  exercised                             |       |              |       | 759                              |       |                   |       |                                        |       |                |       | 759                                   |       |
| Issuance of 33,018  shares of common stock                    |       | —            |       | 470                              |       |                   |       |                                        |       |                |       | 470                                   |       |
| Purchase of 1,271,450  shares of common stock                 |       |              |       |                             |       |                   |       |                                        |       | (31,583             | )          | (31,583                               | )          |
|                                                          |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Balance, December 31,  2004                                   |       | 10                |       | 81,129                           |       | 112,587                |       | (737                                        | )          | (47,436             | )          | 145,553                               |       |
| Comprehensive income:                                         |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Net  income                                                   |       |              |       |                             |       | 13,792                 |       |                                        |       |                |       | 13,792                                |       |
| Foreign  currency translation adjustment                      |       |              |       |                             |       |                   |       | (8,377                                      | )          |                |       | (8,377                                | )          |
| Additional  minimum pension liability, net                    |       |              |       |                             |       |                   |       | (4,105                                      | )          |                |       | (4,105                                | )          |
| Holding  gain on marketable securities, net                   |       |              |       |                             |       |                   |       | 34                                          |       |                |       | 34                                    |       |
| Total comprehensive  income                                   |       |              |       |                             |       |                   |       |                                        |       |                |       | 1,344                                 |       |
|                                                          |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Exercise of 64,100  options for shares  of common stock  |       |              |       | 1,244                            |       |                   |       |                                        |       |                |       | 1,244                                 |       |
| Tax benefit of options  exercised                             |       |              |       | 170                              |       |                   |       |                                        |       |                |       | 170                                   |       |
| Issuance of 20,663  shares of common stock                    |       | —            |       | 519                              |       |                   |       |                                        |       |                |       | 519                                   |       |
|                                                          |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Balance, December 31,  2005                                   |       | 10                |       | 83,062                           |       | 126,379                |       | (13,185                                     | )          | (47,436             | )          | 148,830                               |       |
|                                                          |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Comprehensive income:                                         |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Net  loss                                                     |       |              |       |                             |       | (668                   | )          |                                        |       |                |       | (668                                  | )          |
| Foreign  currency translation adjustment                      |       |              |       |                             |       |                   |       | 6,440                                       |       |                |       | 6,440                                 |       |
| Additional  minimum pension liability, net                    |       |              |       |                             |       |                   |       | (108                                        | )          |                |       | (108                                  | )          |
| Realized  gain on available-for-sale securities, net          |       |              |       |                             |       |                   |       | (128                                        | )          |                |       | (128                                  | )          |
| Total comprehensive  income                                   |       |              |       |                             |       |                   |       |                                        |       |                |       | 5,536                                 |       |
|                                                          |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| SFAS  No. 158 transition obligation, net                      |       |              |       |                             |       |                   |       | (3,569                                      | )          |                |       | (3,569                                | )          |
| Exercise of 236,873  options for shares  of common stock |       |              |       | 4,551                            |       |                   |       |                                        |       |                |       | 4,551                                 |       |
| Tax benefit of options  exercised                             |       |              |       | 945                              |       |                   |       |                                        |       |                |       | 945                                   |       |
| Stock-based compensation                                      |       |              |       | 1,174                            |       |                   |       |                                        |       |                |       | 1,174                                 |       |
| Issuance of 26,121  shares of common stock                    |       | —            |       | 534                              |       |                   |       |                                        |       |                |       | 534                                   |       |
|                                                          |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Balance, December 31, 2006                                    |       | $                 | 10         |                             | $          | 90,266                 |       | $                                           | 125,711    |                | $          | (10,550                               | )          | $ | (47,436 | ) | $ | 158,001 |   |

 

See notes to consolidated financial statements.

43

----

 

SteinwayMusical Instruments, Inc. and Subsidiaries**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**Years Ended December 31, 2006, 2005, and 2004(Tabular Amounts in Thousands Except Share and Per Share Data)

**1.****             ****Nature of Business**

Steinway Musical Instruments, Inc. andsubsidiaries (the “Company”) is one of the world’s leading manufacturers ofmusical instruments.  The Company,through its piano (“Steinway”) and band (“Conn-Selmer”) divisions, manufacturesand distributes products within the musical instrument industry.  Steinway produces the highest quality pianoin the world and has one of the most widely recognized and prestigious brandnames.  Conn-Selmer is the leadingdomestic manufacturer of band & orchestral instruments and relatedaccessories, including complete lines of brass, woodwind, percussion and stringinstruments.  Selmer Paris saxophones,Bach Stradivarius trumpets, C.G. Conn French horns, Leblanc clarinets, Kingtrombones and Ludwig snare drums are considered by many to be the finest suchinstruments in the world.

Throughout these financial statements “we”, “us”,and “our” refer to Steinway Musical Instruments, Inc. and subsidiaries taken asa whole.

**2.****             ****Significant Accounting Policies**

**Principles of Consolidation** — Ourconsolidated financial statements include the accounts of all direct and indirect subsidiaries, all of which arewholly-owned.  All intercompany balanceshave been eliminated in consolidation.

**Use of Estimates** — The preparationof financial statements in conformity with accounting principles generally accepted in the United States ofAmerica requires us to make estimates and assumptions that affect the reportedamounts of assets and liabilities, the disclosure of assets and contingentliabilities at the date of the financial statements, and the reported amountsof revenues and expenses during the reporting period.  Actual results could differ from thoseestimates. The significant estimates in the financial statements includeaccounts receivable reserves, inventory reserves, workers’ compensation andself-insured health claims, warranty reserves, impairment of long-lived assets,pension and other post retirement benefit cost assumptions, stock basedcompensation assumptions, deferred income tax valuation allowances, andenvironmental liabilities.

**Revenue Recognition** — Generally,revenue for wholesale transactions is recognized upon shipment followingreceipt of a valid dealer order.  Retail revenue is generally recognized upondelivery to the customer in accordance with the customer’s purchase agreement,and restoration revenue is recognized based on the completed contractmethod.   We provide for the estimatedcosts of warranties, discounts and returns at the time of revenue recognition.

**Inventories** — Inventories are stated at the lower of cost, determined on afirst-in, first-out basis, or market.

44

----

** **

**Depreciation and Amortization** — Property, plantand equipment are recorded at cost.Depreciation is provided using the straight-line method over the estimateduseful lives of the assets.  Leaseholdimprovements are amortized using the straight-line method over the estimateduseful lives of the improvements or the remaining term of the respective lease,whichever is shorter.  Estimated usefullives are as follows:

| Buildings and improvements            |   | 15 – 40 years |   |
|---------------------------------------|--------|--------------------|--------|
| Leasehold  improvements               |   | 5 – 15 years  |   |
| Machinery,  equipment and tooling     |   | 3 – 10 years  |   |
| Office furniture  and fixtures        |   | 3 – 10 years  |   |
| Concert and Artist and  rental pianos |   | 15 years           |   |

 

When impairment indicators are present, weevaluate the recoverability of our long-lived assets by comparing the estimatedfuture undiscounted cash flows expected to be generated by those assets totheir carrying value.  Should theassessment indicate an impairment, the affected assets are written down to fairvalue.  Assets held-for-sale are recordedat the lower of cost or net realizable value.

**Goodwill, Trademarks, and Other Intangible Assets** —Intangible assets other than goodwill and indefinite-lived trademarks areamortized on a straight-line basis over their estimated useful lives.  Deferred financing costs are amortized overthe repayment periods of the underlying debt. We test our goodwill and indefinite-lived trademark assets forimpairment annually or on an interim basis if events or circumstances indicatethat the fair value of an asset may have decreased below its carryingvalue.  Should an impairment be present,the affected asset would be adjusted to its fair value.  Our annual impairment assessment is inJuly.  We have not recognized anyimpairments for the years ended December 31, 2006, 2005, and 2004.

**Advertising** — Advertisingcosts are expensed as incurred. Advertising expense was $7.4million for the year ended December 31, 2006, $7.6 million for the year endedDecember 31, 2005, and $7.5 millionfor the year ended December 31, 2004.

**Accounts, Notes and Other Receivables, Net**— Accounts, notes and other receivables arerecorded net of allowances for bad debts, discounts and returns.

| December 31,                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |
| Accounts  receivable                 |       | $        | 74,922     |     | $          | 70,090 |   |
| Notes and other  receivables         |       | 21,879   |       | 24,113   |       |
|                                 |       | 96,801   |       | 94,203   |       |
| Allowance for  doubtful accounts     |       | (17,869  | )          | (9,207   | )          |
| Allowance for  discounts and returns |       | (3,771   | )          | (3,116   | )          |
|                                 |       | $        | 75,161     |     | $          | 81,880 |   |

 

45

----

 

A summary of theactivity in the allowance for doubtful accounts is as follows:

 

| For the years ended December 31, | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                      |       |     |       |     |       |     |       |
| Beginning  balance                                        |       | $        | 9,207      |     | $          | 11,811   |       | $ | 9,944 |   |
| Additions  charged to costs and expenses                  |       | 9,150    |       | 424      |       | 486      |       |
| Acquisitions                                              |       | —   |       | —   |       | 1,555    |       |
| Foreign currency  translation adjustments                 |       | 87       |       | (109     | )          | 39       |       |
| Deductions and  other                                     |       | (575     | )          | (2,919   | )          | (213     | )          |
| Ending balance                                            |       | $        | 17,869     |     | $          | 9,207    |       | $ | 11,811 |   |

 

**Income Taxes** — We provide forincome taxes using an asset and liability approach.  We compute deferred income tax assets and liabilities annuallyfor differences between the financial statement and tax bases of assets andliabilities that will result in taxable or deductible amounts in the futurebased on enacted tax laws and rates applicable to the periods in which thedifferences are expected to affect taxable income.  When necessary, we establish valuationallowances to reduce deferred tax assets to the amount that more likely thannot will be realized.

**Foreign Currency Translation andRemeasurement** — We translate assets and liabilities of non-U.S.operations into U.S. dollars atyear end rates, and revenues and expenses at average rates of exchangeprevailing during the year.  We reportthe resulting translation adjustments as a separate component of accumulatedother comprehensive income or loss.  Werecognize foreign currency transaction gains and losses in the consolidatedstatements of income as incurred.

**Foreign Currency ExchangeContracts** — We enter into foreign currency exchange contracts to mitigate therisks from foreign currencyfluctuations on certain intercompany transactions.  These contracts are not designated as hedginginstruments for accounting purposes, and are not used for trading or speculativepurposes.  Gains and losses arising fromfluctuations in exchange rates are recognized at the end of each reportingperiod.  Such gains and losses offset theforeign currency exchange gains or losses associated with the correspondingreceivable, payable, or forecasted transaction. We have credit risk to the extent the counterparties are unable tofulfill their obligations on the foreign currency exchange contracts.  However, we enter into these contracts withreputable financial institutions and we believe we have no significant creditrisk.

**Stock-Based Compensation** — We have anemployee stock purchase plan (“Purchase Plan”) and a stock award plan (“Stock Plan”), which aredescribed in Note 12.

EffectiveJanuary 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”)  No.123(R), “Share-Based Payment,” (“SFASNo. 123(R)”) which requires a company to measure the grant date fair valueof equity awards given to employees in exchange for services and recognize thatcost over the period that such services are performed. This Standard is arevision of SFAS No. 123, “Accounting for Stock-Based Compensation,” andsupersedes Accounting Principles Board (“APB”) Opinion 25, “Accounting forStock Issued to Employees,” and its related implementation guidance. We adoptedthe provisions of SFAS No. 123(R) using the modified prospective applicationmethod. Under this method, restatement of prior period results is not requiredand (i) compensation expense is recognized on all share-based awards grantedprior to, but not yet vested, as of adoption based on the grant date fair valueestimated in accordance with the original provisions of SFAS No. 123, lessestimated forfeitures, and (ii) compensation cost for all share-based awardsgranted subsequent to January 1, 2006, based on the grant

46

----

 

date fair value estimated inaccordance with the provisions of SFAS No. 123(R), less estimated forfeitures.We recognize the cost of share-based awards on a straight-line basis over theaward’s requisite service period. We estimate the fair value of our stockoption awards and employee stock purchase plan rights on the date of grantusing the Black-Scholes option valuation model. See Note 12 for additionalinformation regarding the impact of SFAS No. 123(R) on our financialstatements.

InNovember 2005, the Financial Accounting Standards Board (“FASB”) issued FASBStaff Position (“FSP”) FAS 123(R)-3, “Transition Election Related to Accountingfor the Tax Effects of Share-Based Payment Awards” (“FAS 123(R)-3”). Effectiveupon issuance, this FSP describes an alternative transition method forcalculating the tax effects of stock-based compensation to establish thebeginning balance of the additional paid-in capital pool (“APIC pool”) relatedto the tax effects of employee stock-based compensation, and to determine thesubsequent impact on the APIC pool and the statement of cash flows of the taxeffects of employee stock-based compensation awards that are outstanding uponadoption of SFAS No. 123(R). During the year ended December 31, 2006, weelected the “Long” method, as defined in the FAS 123(R)-3.

Priorto January 1, 2006, the Company applied the intrinsic value method in APBOpinion 25 and related interpretations in accounting for our stock plans andthe disclosure-only provisions SFAS No. 148, “Accounting for Stock-BasedCompensation-Transitional and Disclosure-An Amendment of FASB Statement No. 123”.

**(Loss) earnings per Common Share** —Basic (loss) earnings per common share is computed using the weighted-averagenumber of common shares outstanding during each year.  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:
| **For the years ended December 31,** | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|---------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                                                          |       |      |       |      |       |      |       |
| Weighted-average  shares for basic earnings per share         |       | 8,303,770 |       | 8,069,721 |       | 8,046,256 |       |
| Dilutive effect  of stock options                             |       | —    |       | 195,513   |       | 257,810   |       |
| Weighted-average  shares for diluted earnings per share       |       | 8,303,770 |       | 8,265,234 |       | 8,304,066 |       |

 

We did not include any of the 594,500outstanding options to purchase shares of common stock or the right to purchaseshares under our employee stock purchase plan of 11,281 in the computation ofdiluted loss per common share for the year ended December 31, 2006 becausetheir impact would have been antidilutive. All outstanding options were included in the computation of dilutedearnings per common share for the years ended December 31, 2006 and 2005.

**Environmental Matters** — Potentialenvironmental liabilities are recorded when it is probable that a loss has beenincurred and its amount can reasonably be estimated. (See Note 13.)

**Segment Reporting** — We have tworeportable segments: the piano segment and the band & orchestral instrument segment.  We consider these two segments reportable asthey are managed separately and the operating results of each segment areseparately reviewed and evaluated by our senior management on a regularbasis.  The Company’s chief operatingdecision maker is the Chief Executive Officer.

**Retirement Plans —**We have defined benefit pension planscovering the majority of our employees, including certain employees in foreigncountries. Certain domestic hourly employees are covered by multi-employerdefined benefit pension plans to which we make contributions. We also providepostretirement health care and life insurance benefits to certain eligiblehourly retirees and their dependents.

**Benefits under the pension andother postretirement benefit plans are generally based on age at retirement andyears of service and for some pension plans, benefits are also based on theemployee’s annual earnings. The net cost of our pension and other postretirementplans is determined using the projected unit credit method and several actuarialassumptions, the most significant of which are the discount rate, the long-termrate of asset return, and current rate trends (rate of growth for medicalcosts). A portion of net periodic pension and other postretirement income orexpense is not recognized in net earnings in the year incurred because it isallocated to production as product costs, and reflected in inventory at the endof a reporting period.**

**Effective December 31, 2006, weadopted Statement of Financial Accounting Standard (“SFAS”) No. 158, “Employee’sAccounting for Defined Benefit Pension and Other Postretirement Plans—anamendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”) whichrequires that the balance sheet reflects the funded status of the pension andpostretirement plans. In future reporting periods, the difference betweenactual amounts and estimates based on actuarial assumptions will be recognizedin other comprehensive loss in the period in which they occur.**

47

----

** **

**Comprehensive Income****(Loss)** — Comprehensive income (loss) iscomprised of net income (loss), foreign currency translation adjustments,pension liabilities, and unrealized gains and losses on available-for-sale (AFS)marketable securities and is reported in the consolidated statements ofstockholders’ equity for all periods presented. The components of accumulated other comprehensive loss are as follows:
| ** **                      | ** ** | **Foreign  Currency  Translation  Adjustment** | ** ** | **Holding  Gain/(Loss)  on AFS  Marketable  Securities** | ** ** | **Tax Impact of  Gain/(Loss)  on AFS  Marketable  Securities** | ** ** | **Additional  Minimum  Pension  Liability** | ** ** | **Tax Impact of  Additional  Minimum  Pension  Liability** | ** ** | **Pension &  Other Post-  Retirement  Benefits** | ** ** | **Tax Impact of  Pension &  Other Post-  Retirement  Benefits** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** |
|---------------------------------|------------|------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
|                            |       |                                           |       |                                                          |       |                                                                          |       |                                        |       |                                                                 |       |                                                           |       |                                                                                    |       |                                        |       |
| Balance January  1, 2004        |       | $                                              | 1,226      |                                                          | $          | 73                                                                            |       | $                                           | (29        | )                                                                    | $          | (6,853                                                         | )          | $                                                                                       | 2,715      |                                        | $          | — |   | $ | — |   | $ | (2,868 | ) |
| Activity                        |       | 4,520                                          |       | 84                                                            |       | (34                                                                           | )          | (3,949                                      | )          | 1,510                                                                |       | —                                                         |       | —                                                                                  |       | 2,131                                       |       |
| Balance December  31, 2004      |       | 5,746                                          |       | 157                                                           |       | (63                                                                           | )          | (10,802                                     | )          | 4,225                                                                |       | —                                                         |       | —                                                                                  |       | (737                                        | )          |
| Activity                        |       | (8,377                                         | )          | 56                                                            |       | (22                                                                           | )          | (6,622                                      | )          | 2,517                                                                |       | —                                                         |       | —                                                                                  |       | (12,448                                     | )          |
|  Balance December 31, 2005 |       | (2,631                                         | )          | 213                                                           |       | (85                                                                           | )          | (17,424                                     | )          | 6,742                                                                |       | —                                                         |       | —                                                                                  |       | (13,185                                     | )          |
| Activity                        |       | 6,440                                          |       | (213                                                          | )          | 85                                                                            |       | (31                                         | )          | (77                                                                  | )          | —                                                         |       | —                                                                                  |       | 6,204                                       |       |
| Adoption of SFAS  No. 158       |       | —                                         |       | —                                                        |       | —                                                                        |       | 17,455                                      |       | (6,665                                                               | )          | (23,235                                                        | )          | 8,876                                                                                   |       | (3,569                                      | )          |
| Balance December 31,  2006      |       | $                                              | 3,809      |                                                          | $          | —                                                                        |       | $                                           | —     |                                                                 | $          | —                                                         |       | $                                                                                       | —     |                                        | $          | (23,235 | ) | $ | 8,876 |   | $ | (10,550 | ) |

 

**Recent Accounting Pronouncements** — In June 2006, the Financial AccountingStandards Board (“FASB”) issued Interpretation No. 48 “Accounting forUncertainty in Income Taxes - an interpretation of FASB Statement No. 109”(“FIN 48”). FIN 48 sets a more-likely-than-not threshold for financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return.  FIN 48 alsoprovides guidance on derecognition of income tax assets and liabilities,classification of current and deferred positions, accounting for income taxesin interim periods, and income tax disclosures.  FIN 48 is effective for fiscal years beginningafter December 15, 2006 and cumulative effects of its application will berecorded as an adjustment to retained earnings as of January 1, 2007.  We are currently evaluating the requirementsof FIN 48 and have not yet determined the impact on our consolidated financialposition and results of operations.

OnSeptember 13, 2006, the Securities and Exchange Commission (“SEC”) issued StaffAccounting Bulletin No. 108, “Considering the Effects of Prior YearMisstatements When Quantifying Misstatements in Current Year FinancialStatements” (“SAB 108”). SAB 108 provides guidance on how the effectsof the carryover or reversal of prior year financial statement misstatementsshould be considered in quantifying a current year misstatement. The adoptionof SAB 108 did not have a material impact on our consolidated financialposition and results of operations.

OnSeptember 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFASNo. 157”).  SFAS No. 157 defines fairvalue, establishes a framework for measuring fair value and expands disclosuresabout fair value measurements.  SFAS No.157 is effective for financial statements issued for fiscal years beginningafter November 15, 2007.  We arecurrently evaluating the requirements of SFAS No. 157 and have not yetdetermined the impact, if any, its adoption will have on our consolidatedfinancial position and results of operations.

In February 2007, the FASBissued SFAS No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities” (“SFAS No. 159”). SFAS No. 159 provides entities with an option toreport selected financial assets and liabilities at fair value, with theobjective to reduce both the complexity in accounting for financial instrumentsand the volatility in earnings caused by measuring related assets andliabilities differently. We will be required to adopt SFAS No. 159 in the firstquarter of fiscal year 2008.

48

----

 

We are currently evaluating the requirements of SFASNo. 159 and have not yet determined the impact, if any, of its adoption on ourconsolidated financial position and results of operations.

**3.****             ****Acquisition**

On August 12, 2004, weacquired substantially all of the assets and assumed the operating liabilitiesof G. Leblanc Corporation (“Leblanc”) of Wisconsin, a high-quality bandinstrument manufacturer.  We haveincluded the operating results and net assets of Leblanc in our financialstatements since the date of acquisition.

We acquired Leblanc becauseits line of instruments and accessories is complementary to our existingproduct lines, enabling us to gain or strengthen market share in certaininstrument categories. The Company disbursed $37.6 million for the purchaseprice, of which $2.6 million is being held in escrow pending resolution ofoutstanding claims.  The final purchaseprice was dependent upon a calculation derived from the closing balance sheet,which resulted in an additional payment of $1.4 million in June 2005.  The total purchase price of $38.9 million has been allocated to acquired assets andassumed liabilities as of August 12, 2004 as follows:

| Inventories                           |   | $      | 20,723 |   |
|---------------------------------------|--------|--------|--------|--------|
| Receivables and  other current assets |   | 12,680 |   |
| Property, plant  and equipment        |   | 7,469  |   |
| Trademarks                            |   | 3,153  |   |
| Non-compete agreements                |   | 500    |   |
| Other assets                          |   | 674    |   |
| Accounts payable                      |   | (1,451 | )      |
| Recourse  reserves                    |   | (1,138 | )      |
| Environmental  reserves               |   | (815   | )      |
| Other  liabilities                    |   | (2,856 | )      |
|                                  |   | $      | 38,939 |   |

 

Weacquired a manufacturing facility via this transaction that had been scheduledfor closure by the predecessor owner. We vacated this facility in early 2005 and did not incur significantunaccrued costs as a result of this closure. This acquired facility and a previously closed woodwind manufacturingfacility in Elkhart, Indiana were sold in 2005 for combined net proceeds of$1.0 million.  The gain on the sales wasless than $0.2 million and related primarily to the closed woodwindmanufacturing facility.

**4.****             ****Inventories, net**

| December 31, | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
| Raw materials     |       | $        | 20,989     |     | $          | 23,218 |   |
| Work-in-process   |       | 49,316   |       | 47,511   |       |
| Finished goods    |       | 84,318   |       | 88,581   |       |
|              |       | $        | 154,623    |     | $          | 159,310 |   |

 

49

----

 

A summary of theactivity in the inventory reserves is as follows:
| **For the years ended December 31,** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                          |       |     |       |     |       |     |       |
| Beginning  balance                                            |       | $        | 8,722      |     | $          | 7,574    |       | $ | 5,715 |   |
| Additions  charged to costs and expenses                      |       | 3,729    |       | 2,548    |       | 1,229    |       |
| Acquisitions                                                  |       | —   |       | —   |       | 2,703    |       |
| Foreign currency  translation adjustments                     |       | 122      |       | (95      | )          | 30       |       |
| Deductions and  reclassifications                             |       | (3,296   | )          | (1,305   | )          | (2,103   | )          |
| Ending balance                                                |       | $        | 9,277      |     | $          | 8,722    |       | $ | 7,574 |   |

 

**5.****             ****Property, Plant andEquipment, Net**

| December 31,                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Land                                            |       | $        | 19,694     |     | $          | 19,180 |   |
| Buildings and  improvements                     |       | 70,571   |       | 69,004   |       |
| Leasehold  improvements                         |       | 4,359    |       | 4,073    |       |
| Machinery, equipment  and tooling               |       | 54,049   |       | 52,176   |       |
| Office furniture  and fixtures                  |       | 12,458   |       | 10,984   |       |
| Concert and  Artist and rental pianos           |       | 16,874   |       | 15,829   |       |
| Construction-in-progress                        |       | 1,979    |       | 1,152    |       |
|                                            |       | 179,984  |       | 172,398  |       |
| Less accumulated  depreciation and amortization |       | (84,386  | )          | (75,734  | )          |
|                                            |       | $        | 95,598     |     | $          | 96,664 |   |

 

Depreciation expense was $9.8 million in2006, $10.2 million in 2005, and $10.1 million in 2004.

**6.     Goodwill, Trademarks, and Other Intangible Assets**

| December 31,                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Non-amortizing  intangible assets: |       |     |       |     |       |
| Goodwill                           |       | $        | 31,481     |     | $          | 30,088 |   |
| Trademarks                         |       | $        | 13,671     |     | $          | 13,233 |   |
|                               |       |     |       |     |       |
| Amortizing  intangible assets:     |       |     |       |     |       |
| Deferred financing costs           |       | $        | 5,750      |     | $          | 8,467 |   |
| Accumulated amortization           |       | (1,287   | )          | (4,701   | )          |
| Deferred financing costs, net      |       | $        | 4,463      |     | $          | 3,766 |   |
|                               |       |     |       |     |       |
| Covenants not to compete           |       | $        | 500        |     | $          | 500 |   |
| Accumulated amortization           |       | (238     | )          | (138     | )          |
| Covenants not to  compete, net     |       | $        | 262        |     | $          | 362 |   |

 

50

----

 

The changes in the carrying amounts ofgoodwill and trademarks are as follows:
| ** **                           | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|-----------|------------|
| Goodwill:                            |       |                   |       |                  |       |      |       |
| Balance at  January 1, 2005          |       | $                      | 23,299     |                  | $          | 8,555     |       | $ | 31,854 |   |
| Foreign currency  translation impact |       | (1,766                 | )          | —                |       | (1,766    | )          |
| Balance at  December 31, 2005        |       | 21,533                 |       | 8,555                 |       | 30,088    |       |
| Foreign currency  translation impact |       | 1,393                  |       | —                |       | 1,393     |       |
| Balance at December 31,  2006        |       | $                      | 22,926     |                  | $          | 8,555     |       | $ | 31,481 |   |

 
| ** **                                                        | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|-----------|------------|
| Trademarks:                                                       |       |                   |       |                  |       |      |       |
| Balance at  January 1, 2005                                       |       | $                      | 7,964      |                  | $          | 4,361     |       | $ | 12,325 |   |
| Additions based  on purchase  price allocation to acquired assets |       | —                 |       | 1,463                 |       | 1,463     |       |
| Foreign currency  translation impact                              |       | (555                   | )          | —                |       | (555      | )          |
| Balance at  December 31, 2005                                     |       | 7,409                  |       | 5,824                 |       | 13,233    |       |
| Foreign currency  translation impact                              |       | 438                    |       | —                |       | 438       |       |
| Balance at  December 31, 2006                                     |       | $                      | 7,847      |                  | $          | 5,824     |       | $ | 13,671 |   |

 

The weighted-averageamortization period for deferred financing costs is seven years, and theweighted-average amortization period of covenants not to compete is fiveyears.  The following table summarizes amortization expense, which includesamortization of deferred financing costs:
| **For the years ended December 31,** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Total amortization  expense                                   |       | $        | 812        |     | $          | 1,116    |       | $ | 1,094 |   |
|                                                               |            |          |            |          |            |          |            |  |  |  |

 

The following tableshows the estimated amortization expense for intangible assets for each of thefive succeeding fiscal years:

| Estimated amortization expense: | ** ** | **Amount** | ** ** |
|-------------------------------------------|------------|------------|------------|
| 2007                                      |       | $          | 790        |   |
| 2008                                      |       | 788        |       |
| 2009                                      |       | 745        |       |
| 2010                                      |       | 665        |       |
| 2011                                      |       | 625        |       |
| Thereafter                                |       | 1,112      |       |
|                                           |            |            |            |  |

 

51

----

** **

**7.     OtherAssets**

| December 31,          | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Intangible  pension assets |       | $        | —     |     | $          | 2,961 |   |
| Notes receivable           |       | 5,267    |       | 6,067    |       |
| Marketable  securities     |       | 1,547    |       | 1,132    |       |
| Deposits                   |       | 4,571    |       | 4,374    |       |
| Other assets               |       | 1,603    |       | 1,277    |       |
| Total                      |       | $        | 12,988     |     | $          | 15,811 |   |

 

Deposits include $2.5 million set aside for potentialworkers’ compensation liabilities and $1.9 million set aside forenvironmental remediation; therefore the use of these funds is restrictedunless we replace the deposits with a letter of credit of a similar amount.

**8.****          ****Other Current Liabilities**
| **December 31,**                                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Accrued payroll  and related benefits                                    |       | $        | 16,397     |     | $          | 17,622 |   |
| Current portion  of pension and other postretirement benefit liabilities |       | 1,461    |       | 3,441    |       |
| Accrued warranty  expense                                                |       | 1,888    |       | 1,857    |       |
| Accrued interest                                                         |       | 4,178    |       | 3,134    |       |
| Deferred income                                                          |       | 6,348    |       | 5,482    |       |
| Environmental  liabilities                                               |       | 3,232    |       | 3,820    |       |
| Income and other  taxes payable                                          |       | 3,012    |       | 2,325    |       |
| Other accrued  expenses                                                  |       | 8,132    |       | 7,418    |       |
| Total                                                                    |       | $        | 44,648     |     | $          | 45,099 |   |

 

Accrued warranty expense isrecorded at the time of sale for instruments that have a warranty periodranging from one to ten years.  Theaccrued expense recorded is generally based on a historical warranty costs as apercentage of sales and is adjusted periodically following an analysis ofwarranty activity.  A summary of theactivity in accrued warranty expense is as follows:
| **For the years ended December 31,** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Accrued warranty  expense:                                    |       |     |       |     |       |     |       |
| Beginning  balance                                            |       | $        | 1,857      |     | $          | 2,139    |       | $ | 2,602 |   |
| Additions                                                     |       | 806      |       | 858      |       | 932      |       |
| Claims and reversals                                          |       | (849     | )          | (1,045   | )          | (1,455   | )          |
| Foreign currency  translation                                 |       | 74       |       | (95      | )          | 60       |       |
| Ending balance                                                |       | $        | 1,888      |     | $          | 1,857    |       | $ | 2,139 |   |

 

52

----

** **

**9.****          ****OtherIncome, Net**
| **For the years ended December 31,** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| West 57th  Building income                                    |       | $        | (4,653     | )        | $          | (4,653   | )          | $ | (4,653 | ) |
| West 57th  Building expenses                                  |       | 3,282    |       | 3,269    |       | 3,254    |       |
| Foreign exchange  (gain) loss, net                            |       | (432     | )          | 271      |       | (41      | )          |
| Miscellaneous,  net                                           |       | (367     | )          | (225     | )          | (1,723   | )          |
| Total                                                         |       | $        | (2,170     | )        | $          | (1,338   | )          | $ | (3,163 | ) |

 

**10.****      ****Income Taxes**

The components of the income tax provision are asfollows:
| **For the years ended December 31,** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| U.S. federal:                                                 |       |     |       |     |       |     |       |
| Current                                                       |       | $        | (259       | )        | $          | 1,167    |       | $ | 2,838 |   |
| Deferred                                                      |       | (8,001   | )          | 98       |       | (1,990   | )          |
| U.S. state and  local:                                        |       |     |       |     |       |     |       |
| Current                                                       |       | 553      |       | 464      |       | 877      |       |
| Deferred                                                      |       | 278      |       | (171     | )          | (166     | )          |
| Foreign:                                                      |       |     |       |     |       |     |       |
| Current                                                       |       | 8,120    |       | 7,251    |       | 6,882    |       |
| Deferred                                                      |       | (404     | )          | (609     | )          | (341     | )          |
| Total                                                         |       | $        | 287        |     | $          | 8,200    |       | $ | 8,100 |   |

 

Thecomponents of (loss) income before income taxes are as follows:
| **For the years ended December 31,** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| U.S. operations                                               |       | $        | (20,077    | )        | $          | 4,265    |       | $ | 6,847 |   |
| Non-U.S.  operations                                          |       | 19,696   |       | 17,727   |       | 17,120   |       |
| Total                                                         |       | $        | (381       | )        | $          | 21,992   |       | $ | 23,967 |   |

 

53

----

 

Our income tax provision differed from that using the statutory U.S.federal rate as follows:
| **For the years ended December 31,**        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory  federal rate applied to (loss) income before income taxes |       | $   | (133       | )        | $     | 7,697    |       | $  | 8,388 |   |
| Increase  (decrease) in income taxes resulting from:                 |       |     |       |     |       |     |       |
| Foreign income taxes (net of federal benefit) (1)                    |       | 6,680    |       | 1,817    |       | 1,621    |       |
| State income taxes (net of federal benefit)                          |       | 267      |       | 642      |       | 773      |       |
| Benefit of excess foreign tax credits (2)                            |       | (7,182   | )          | (938     | )          | (865     | )          |
| Detriment (benefit) of state net operating losses  (3)               |       | 364      |       | (562     | )          | —   |       |
| Other                                                                |       | 291      |       | (456     | )          | (1,817   | )          |
| Income tax  provision                                                |       | $        | 287        |     | $          | 8,200    |       | $ | 8,100 |   |

----

(1)             Includesthe impact of foreign taxes in excess of the U.S. statutory rate of 35% as wellas foreign income also subject to U.S. tax, less the foreign tax credit allowedin the current year.  No foreign taxcredits were used in 2006.

(2)             Representsthe impact of excess foreign taxes eligible to offset U.S. taxes over thecredit taken, less an associated valuation allowance of $938 in 2005 and $865in 2004.  All foreign tax creditsgenerated in 2006 were excess foreign tax credits.

(3)             Representsthe impact of state net operating losses available to offset current and futuretaxable income at the state level.

At December 31, 2006, accumulated retainedearnings of non-U.S. subsidiaries totaled $10.4 million.  We did not provide for U.S. income taxes or foreignwithholding taxes for these subsidiaries because our current intention is toreinvest such earnings for the foreseeable future.

54

----

 

Thecomponents of net deferred taxes are as follows:
| **December 31,**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                                        |       |     |       |     |       |
| Uniform capitalization and reserve adjustments to  inventory |       | $        | 2,396      |     | $          | 2,385 |   |
| Allowance for doubtful accounts                              |       | 3,557    |       | 2,083    |       |
| Accrued expenses and other current assets and  liabilities   |       | 8,061    |       | 7,730    |       |
| Additional minimum pension liability                         |       | —   |       | 6,742    |       |
| OCI - pension and OPEB plans                                 |       | 8,876    |       | —   |       |
| Net operating losses                                         |       | 5,694    |       | 4,019    |       |
| Foreign tax credits                                          |       | 18,914   |       | 10,749   |       |
| Total deferred tax assets                                    |       | 47,498   |       | 33,708   |       |
|                                                         |       |     |       |     |       |
| Deferred tax  liabilities:                                   |       |     |       |     |       |
| Pension contributions                                        |       | (3,164   | )          | (3,332   | )          |
| Fixed assets                                                 |       | (18,839  | )          | (19,007  | )          |
| Unamortized tax method change                                |       | —   |       | (448     | )          |
| Intangibles                                                  |       | (8,030   | )          | (7,481   | )          |
| Total deferred tax liabilities                               |       | (30,033  | )          | (30,268  | )          |
| Net deferred taxes before valuation allowances               |       | 17,465   |       | 3,440    |       |
| Valuation allowances                                         |       | (13,411  | )          | (10,830  | )          |
| Net deferred taxes                                           |       | $        | 4,054      |     | $          | (7,390 | ) |

 

The valuation allowances generally take intoconsideration limitations imposed upon the use of the tax attributes and reducethe value of such items to the likely net realizable amount.  The valuation allowances relate to foreign taxcredits and state net operating loss carryforwards generated in excess ofamounts we more likely than not expect to utilize.  Gross state tax net operating losscarryforwards totaled $122.6 million as of December 31, 2006 and expire invarying amounts from 2007 through 2026. Our foreign tax credits expire in varying amounts from 2009 through2016.

Valuation allowances increased $2.6 millionduring 2006 and $0.6 million during 2005. Valuation allowances relating to the acquisition of Steinway totaled $3.1million as of December 31, 2006 and $2.9 million as of December 31, 2005.  The difference results primarily fromexchange rate fluctuations.  If thesevaluation allowances are removed, the reversal reduces goodwill.

We have provided reserves for certain taxmatters, which we believe could result in additional tax being due. Our taxreserves were approximately $0.3 million at December 31, 2006.  Any additional assessment or reduction ofthese contingent liabilities will be reflected at our effective tax rate.

 

55

----

 

**11.****      ****Long-Term Debt**

During the year ended December 31, 2006, wesignificantly restructured our long-term debt. In February 2006 we repaid our larger, higher interest term loan, whichhad an outstanding balance of $16.0 million at the time of payoff.  We also issued $175.0 million of 7.00% SeniorNotes and extended a tender offer to purchase the $166.2 million of ouroutstanding 8.75% Senior Notes.  Weissued our new 7.00% Senior Notes at 99.2435%, and received proceeds of $170.2million, net of associated fees.  We usedthe proceeds from this issuance to extinguish $114.6 million of the 8.75%Senior Notes pursuant to our tender offer in the first quarter of 2006.  The remaining proceeds, supplemented byborrowings on our line of credit, were used to exercise our right to call theremaining $51.6 million of 8.75% Senior Notes on April 17, 2006.

On September 29, 2006 we restructured our domesticcredit facility and used our first borrowing, supplemented by cash on hand, torepay our remaining term loan, which had a balance of $14.6 million at the timeof payoff.  Our restructured domesticcredit facility provides us with a potential borrowing capacity of $110.0million in revolving credit loans, and expires on September 29, 2011.  It also provides for borrowings at eitherLondon Interbank Offering Rate (“LIBOR”) plus a range from 1.25% to 1.75% oras-needed borrowings at an alternate base rate, plus a range from 0.00% to0.25%; both ranges depend upon availability at the time of borrowing.  Borrowings are collateralized by our domesticaccounts receivable, inventory and fixed assets. As a result of these debtrestructuring activities, our long-term debt consists of the following:
| **December 31,**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
| 7.00% Senior Notes                                       |       | $        | 175,000    |     | —     |   |
| 8.75% Senior Notes                                       |       | —   |       | 166,194  |       |
| Unamortized bond  premium                                |       | —   |       | 1,332    |       |
| Unamortized bond  discount                               |       | (1,184   | )          | —   |       |
| Term loans                                               |       | —   |       | 32,011   |       |
| Open account loans,  payable on demand to a foreign bank |       | 4,595    |       | 5,155    |       |
| Total                                                    |       | 178,411  |       | 204,692  |       |
| Less current portion                                     |       | 4,595    |       | 12,977   |       |
| Long-term debt                                           |       | $        | 173,816    |     | $          | 191,715 |   |
|                                                          |            |          |            |          |            |  |  |

 

In conjunction with ourdebt restructuring activities, we recorded a net loss on extinguishment of debtof $9.7 million for the year ended December 31, 2006, which consists of thefollowing:
| **For the year  ended December 31,**                     | ** ** | **2006** | ** ** |
|----------------------------------------------------------|------------|----------|------------|
| Deferred  financing costs write-off - term loan          |       | $        | 977        |   |
| Deferred  financing costs write-off - 8.75% Senior Notes |       | 2,247    |       |
| Premiums  pursuant to the tender offer and call          |       | 7,740    |       |
| Bond premium  write-off                                  |       | (1,290   | )          |
| Total net loss on  extinguishment of debt                |       | $        | 9,674      |   |

 

56

----

 

Scheduledpayments of long-term debt as of December 31, 2006 are as follows:

 

|            | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
|       |       |       |       |
| 2007       |       | $          | 4,595      |   |
| 2008       |       | —     |       |
| 2009       |       | —     |       |
| 2010       |       | —     |       |
| 2011       |       | —     |       |
| Thereafter |       | 175,000    |       |
| Total      |       | $          | 179,595    |   |

 

Our non-domestic credit facilities originating fromtwo German banks provide for borrowings by foreign subsidiaries of up to €17.5million ($23.1 million at the December 31, 2006 exchange rate), net ofborrowing restrictions of €0.8 million ($1.0 million at the December 31, 2006exchange rate) and are payable on demand.  These borrowings arecollateralized by most of the assets of the borrowing subsidiaries.  Aportion of the loans can be converted into a maximum of £0.5 million ($1.0million at the December 31, 2006 exchange rate) for use by our U.K. branch and¥300 million ($2.5 million at the December 31, 2006 exchange rate) for use byour Japanese subsidiary. Our Chinese subsidiary also has the ability to convertthe equivalent of up to €2.5 million into U.S. dollars or Chinese yuan ($3.3million at the December 31, 2006 exchange rate).  Euro loans bear interest at rates of EuroInterbank Offered Rate (“EURIBOR”) plus a margin determined at the time ofborrowing.  Margins fluctuate based onthe loan amount and the borrower’s bank rating. The remaining demand borrowings bear interest at fixed margins at ratesof London Interbank Offered Rate (“LIBOR”) plus 1% for British pound loans(6.4% at December 31, 2006), LIBOR plus 1% for U.S. dollar loans of our Chinesesubsidiary (6.4% at December 31, 2006), and Tokyo Interbank Offered Rate (“TIBOR”)plus 0.86% for Japanese yen loans (1.3% at December 31, 2006).  We had $1.7 million outstanding as ofDecember 31, 2006 on these credit facilities.

Our Japanese subsidiary maintains a separaterevolving loan agreement that provides additional borrowing capacity of up to¥460 million ($3.9 million at the December 31, 2006 exchange rate) based oneligible inventory balances. The revolving loan agreement bears interest at anaverage 30-day TIBOR rate plus 0.85% (1.3% at December 31, 2006) and expires onJanuary 31, 2010.  As of December 31, 2006, we had $2.9 millionoutstanding on this revolving loan agreement.

All of our debt agreements contain covenantsthat place certain restrictions on us, including our ability to incuradditional indebtedness, to make investments in other entities, and to pay cashdividends.  We were in compliance withall such covenants as of December 31, 2006.

**12.****   **** Stockholders’ Equity and StockArrangements**

Our common stock is comprised of two classes: ClassA and Ordinary.  With the exception ofdisparate voting power, both classes are substantially identical.  Each share of Class A common stock entitlesthe holder to 98 votes.  Holders ofOrdinary common stock are entitled to one vote per share.  Class A common stock shall automaticallyconvert to Ordinary common stock if, at any time, the Class A common stock isnot owned by an original Class A holder. The Chairman and Chief Executive Officer own 100% of the Class A commonshares, representing 86% of the combined voting power of the Class A commonstock and Ordinary common stock.

57

----

 

Effective January 1, 2006, we adopted SFAS No.123(R), “Share-Based Payment” to account for our stock compensationarrangements, using the modified prospective application transitionmethod.  Accordingly, we did not restatethe results of prior periods.  Prior toJanuary 1, 2006, we applied Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees” and did not recognize anycompensation expense associated with employee stock options because theexercise price was equal to the market price at the date of option grant.  SFAS No. 123(R) requires that stock-basedcompensation cost be recognized over the period from the date of grant to thedate when the award is no longer contingent upon the employee providing additionalservice.

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 prior to January 1, 2006:
| **For the years ended December 31,**                                                                                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                                                 |       |     |       |     |       |
| Net income, as  reported                                                                                                                                             |       | $        | 13,792     |     | $          | 15,867 |   |
| Less: Total  stock-based employee compensation expense determined under fair-value method  for all awards, net of related tax effects of $141 and $150, respectively |       | (933     | )          | (1,040   | )          |
| Pro forma net income                                                                                                                                                 |       | $        | 12,859     |     | $          | 14,827 |   |
| Earnings per  share:                                                                                                                                                 |       |     |       |     |       |
| As reported -  Basic                                                                                                                                                 |       | $        | 1.71       |     | $          | 1.97 |   |
| As reported -  Diluted                                                                                                                                               |       | $        | 1.67       |     | $          | 1.91 |   |
| Pro forma -  Basic                                                                                                                                                   |       | $        | 1.59       |     | $          | 1.84 |   |
| Pro forma -  Diluted                                                                                                                                                 |       | $        | 1.57       |     | $          | 1.79 |   |

 

The compensation cost that has beenrecognized relating to these plans was $1.2 million for the year ended December31, 2006.  The income tax benefitrecognized for share-based compensation arrangements was $0.2 million for theyear ended December 31, 2006.  Basic anddiluted loss per share includes $0.12 of stock based compensation cost, net ofrelated tax benefit, for the twelve months ended December 31, 2006.

We measured the fair value of options on their grantdate, including the valuation of the option feature implicit in our PurchasePlan, using the Black-Scholes option-pricing model.  The risk-free interest rate is based on theweighted-average of U.S. Treasury rates over the expected life of the stockoption granted under the Stock Plan or the contractual life of the optionfeature in the Purchase Plan. The expected life of a stock option is based onhistorical data of similar option holders. We have segregated our employees into two groups based on historicalexercise and termination behavior. The expected life of the option feature inthe Purchase Plan is the same as its contractual life.  Expected volatility is based on historicalvolatility of our stock over its expected life, as our options are not readilytradable.

**Employee Stock Purchase Plan** — Under ouremployee stock purchase plan substantially all employees may purchase Ordinary common stock through payrolldeductions at a purchase price equal to 85% of the lower of the fair marketvalues as of the beginning or end of each twelve-month offering period.  Stock purchases under the Purchase Plan arelimited to 5% of an employee’s annual base earnings.  We had reserved 500,000 shares for issuanceunder this plan and we could grant options to purchase shares up to ten yearsfrom the plan’s commencement.  This planexpired on July 31, 2006.  Shares issuedunder the

58

----

 

PurchasePlan were 26,121 during 2006, 20,663 during 2005, and 33,018 during 2004 and196,788 shares went unused under the plan. Our stockholders approved a newPurchase Plan effective August 1, 2006 during our annual stockholders meeting.  The characteristics of the plan were notchanged.  Our Board of Directors hasauthorized an aggregate of 400,000 shares of common stock for issuance underthis plan.  No shares have been issuedout of the new Purchase Plan as of December 31, 2006.

Key assumptions used to apply this pricing model to the option featurein the Purchase Plan are as follows:
| **For the years ended December 31,**                     | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk-free  interest rate                                                          |       | 4.32     | %          | 2.83     | %          | 1.51     | %          |
| Weighted-average  expected life of option feature in the Purchase Plan (in years) |       | 1.0      |       | 1.0      |       | 1.0      |       |
| Expected  volatility of underlying stock                                          |       | 23.6     | %          | 25.0     | %          | 26.6     | %          |
| Expected dividends                                                                |       | n/a      |       | n/a      |       | n/a      |       |

 

Theweighted-average fair value of the option feature in the Purchase Plan is asfollows:
| **For the years ended December 31,** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Option feature  in Purchase Plan                              |       | $        | 6.83       |     | $          | 7.29     |       | $ | 5.16 |   |
|                                                               |            |          |            |          |            |          |            |  |  |  |

 

**Stock Plan** — The 1996 StockPlan, as amended, provides for the granting of 1,500,000 stock options (including incentive stock options andnon-qualified stock options), stock appreciation rights and other stock awardsto certain key employees, consultants and advisors through July 31, 2006.  Our stock options generally have five-yearvesting terms and ten-year option terms. Upon option exercise, we issue shares of Ordinary common stock and wewill continue to issue shares until we have reached our registered sharelimitations.  At that time, we will issueshares out of treasury stock.  We hadreserved 721,750 treasury stock shares under the 1996 Stock Plan for thispurpose.  As of December 31, 2006,804,700 shares of Ordinary common stock were reserved for issuance under theStock Plan. Outstanding options totaled 594,500 as of December 31, 2006,therefore 210,200 shares went unused under this plan.  Our stockholders approved the new “2006 StockPlan” effective August 1, 2006 during our annual stockholders meeting. Whilethe new plan was updated to conform to recent tax law changes, the basiccharacteristics of the plan were not changed. Our Board of Directors hasauthorized an aggregate of 1,000,000 shares of common stock for issuance underthe 2006 Stock Plan.  No shares have beenissued out of the new Stock Plan as of December 31, 2006.

Key assumptions used to apply this pricing model to the Stock Plan are asfollows:
| **For the years ended December 31,** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk-free  interest rate                                      |       | 4.98     | %          | 4.19     | %          | n/a      |       |
| Weighted-average  expected life                               |       | 7.1      |       | 7.5      |       | n/a      |       |
| Expected  volatility of underlying stock                      |       | 24.4     | %          | 26.1     | %          | n/a      |       |
| Expected dividends                                            |       | n/a      |       | n/a      |       | n/a      |       |

 

59

----

 

The weighted-average fair values of options granted under the StockPlan are as follows:
| **For the years ended December 31,** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Stock Plan                                                    |       | $        | 10.95      |     | $          | 10.68    |       | $ | — |   |
|                                                               |            |          |            |          |            |          |            |  |  |  |

 

The following table sets forth information regarding the Purchase Plan:
| ** **                        | ** ** | **Number of  Options** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted -  Average  Remaining  Contractual Life  (in years)** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|---------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| Outstanding at  January 1, 2006   |       | 9,476                       |       | $                                           | 25.42      |                                                                            |       |   |
| Shares  subscribed                |       | 29,393                      |       | 20.57                                       |       |                                                                            |       |
| Exercised                         |       | (26,121                     | )          | 20.43                                       |       |                                                                            |       |
| Canceled                          |       | (1,467                      | )          | 20.47                                       |       |                                                                            |       |
| Outstanding at  December 31, 2006 |       | 11,281                      |       | $                                           | 20.80      |                                                                            | 0.6        |   |

 

The following table sets forth information regarding the Stock Plan:
| ** **                                       | ** ** | **Number of  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted -  Average  Remaining  Contractual Life  (in years)** | ** ** | **Aggregate  Intrinsic  Value  (not in 000s)** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Outstanding at  January 1, 2006                  |       | 826,773                     |       | $                                       | 20.33      |                                                                            |       |                                                     |       |   |
| Granted                                          |       | 25,000                      |       | 27.66                                   |       |                                                                            |       |                                                     |       |
| Exercised                                        |       | (236,873                    | )          | 19.21                                   |       |                                                                            |       |                                                     |       |
| Forfeited                                        |       | (20,400                     | )          | 23.60                                   |       |                                                                            |       |                                                     |       |
| Outstanding at  December 31, 2006                |       | 594,500                     |       | $                                       | 20.98      |                                                                            | 6.1        |                                                     | $          | 5,846,738 |   |
|                                             |       |                        |       |                                    |       |                                                                            |       |                                                     |       |
| Exercisable at  December 31, 2006                |       | 385,600                     |       | $                                       | 20.17      |                                                                            | 5.6        |                                                     | $          | 4,102,664 |   |
| Vested or expected to  vest at December 31, 2006 |       | 553,252                     |       | $                                       | 20.92      |                                                                            | 6.0        |                                                     | $          | 5,474,054 |   |

 

The total intrinsic value ofthe options exercised during the years ended December 31, 2006, 2005, and 2004was $2.8 million, $0.6 million, and $2.7 million, respectively.

As of December 31, 2006,there was $1.3 million of unrecognized compensation cost related to non-vestedshare-based compensation arrangements granted under the Stock Plan.  The compensation cost is expected to berecognized over a period of two years.

As reported in the statementof cash flows, cash received from option exercises under the Stock Plan andshares issued under the Purchase Plan for the year ended December 31, 2006 was$5.1 million.  

60

----

 

SFAS No. 123(R) requires that cash flows from tax benefits resultingfrom tax deductions in excess of the compensation cost recognized forstock-based awards under a fair value basis (excess tax benefits) be classifiedas a cash flow from financing activities. Prior to the adoption of SFAS No. 123(R), such excess tax benefits wereclassified as operating cash flows. Accordingly, $0.9 million of tax benefit from stock option exercises ispresented as a cash inflow from operating activities and $0.4 million of excesstax benefits has been classified as an outflow from operating activities and aninflow from financing activities in the statement of cash flows.

**13.****      ****Commitments and Contingent Liabilities**

**Lease Commitments** — We lease variousfacilities and equipment under non-cancelable operating lease arrangements.  These leases expire at various times through2018.  Rent expense was $5.6 million forthe year ended December 31, 2006 and $5.7 million for the years ended December31, 2005 and 2004.

In March 1999, we acquired the building thatincludes the Steinway Hall retail store on West 57th Street in New York City for approximately$30.8 million.  We entered into aninety-nine year land lease as part of the transaction.  Annual rent payable under the land lease is$2.2 million in the first ten years, $2.8 million for the subsequent ten-yearperiod and will be adjusted every twenty years thereafter to the greater of theexisting rent or 4% of the fair market value of the land and buildingcombined.  Rent expense is beingrecognized on a straight-line basis over the initial twenty-year fixed rentperiod.  We also entered into a ten-yearmaster lease whereby all of our interest in the land and building was leasedback to the owner of the land.  Rentalexpense and rental income associated with these leases was included, along withother real estate costs, in Other Income, Net (see Note 9). Future minimumlease payments for our non-cancelable operating leases, excluding the landlease discussed above, and future rental income under the master lease are asfollows:
| **For the years ending December 31,** | ** ** | **Lease  Payments** | ** ** | **Rental  Income** | ** ** |
|----------------------------------------------------------------|------------|---------------------|------------|--------------------|------------|
| 2007                                                           |       | $                   | 5,106      |               | $          | 4,653 |   |
| 2008                                                           |       | 2,761               |       | 4,653              | (1)        |
| 2009                                                           |       | 1,790               |       | —             |       |
| 2010                                                           |       | 1,501               |       | —             |       |
| 2011                                                           |       | 1,200               |       | —             |       |
| Thereafter                                                     |       | 4,082               |       | —             |       |
| Total                                                          |       | $                   | 16,440     |               | $          | 9,306 |   |

----

(1)             In2008, if the master lease is not renewed or replaced we would then directlyreceive the rental income from all other tenants in the building.

**Employment Agreements and Other Obligations** — We maintain employment agreements withcertain employees and consultants.  Mostof these agreements have one-year terms and contain automatic renewalprovisions.  Our obligation under theseagreements at current compensation levels is approximately $2.2 million peryear.

Our employment agreementswith our Chairman and Chief Executive Officer contain provisions whereby if wedo not offer to renew them, we would be obligated to pay out an additional $3.4million.

61

----

 

Although the agreementsexpired in 2006 and specific terms are still under negotiation, renewal offershave been made and accepted.  TheChairman and Chief Executive Officer collectively hold 100% of the Class Acommon shares, representing 86% of the combined voting power of the Class Acommon stock and Ordinary common stock. Further, these individuals have established a limited liabilitycorporation to which we pay reimbursement of certain rent, overhead andtravel-related expenses.  These expensestotaled $0.2 million in each of the years ended December 31, 2006, 2005, and2004. We included less than $0.1 million in accounts payable related to theseexpenses at December 31, 2006 and 2005.

**NotesReceivable Financed with Recourse** — In 2004, certain customers of our Leblanc subsidiary financed notesreceivable with a third party, to which we have a recourse obligation.  As of December 31, 2006, less than $0.1million of these notes remain outstanding. We have included a corresponding recourse obligation of less than $0.1million in our financial statements at December 31, 2006.  Our total maximum recourse obligation underthis arrangement includes the outstanding balance on the notes, as well as anyinterest or late fees that may be incurred by our customers.

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

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

This program ceased in the first quarter of2003. Nevertheless, because our obligation continues until the bank is paid infull by the customer, our commitment can remain outstanding for up to 8 years —the maximum term of the consumer loan.

Our maximum obligation under this arrangementis estimated to be approximately €0.4 million ($0.5 million at the December 31,2006 exchange rate).  To date, we havenot been required to repurchase any pianos under this program and we believethe likelihood of such repurchases in the future is remote.  Accordingly, we have not recognized aliability for this obligation in our financial statements.  Further, in the unlikely event of arepurchase, we believe the proceeds received upon our resale of the piano wouldexceed the amount payable to the bank.

With limited exceptions, wedo not provide extended financing arrangements to our dealers.  To facilitate long-term financing required bysome dealers, we have arranged financing through third-party providers.  We generally provide no guarantees withrespect to these arrangements.

**Legal and Environmental Matters** — We are involved in certain legalproceedings regarding environmental matters, which are described below.  Further, in the ordinary course of business,we are party to various legal actions that we believe are routine in nature andincidental to the operation of our business. While the outcome of such actions cannot be predicted with certainty, webelieve that, based on our experience in dealing with these matters, theirultimate resolution will not have a material adverse impact on our business,financial condition, results of operations or prospects.

Certain environmental laws, such as theComprehensive Environmental Response, Compensation, and Liability Act, asamended (“CERCLA”), impose strict, retroactive, joint and several liabilityupon persons responsible for releases of hazardous substances, which liabilityis broadly construed.  Under

 

62

----

 

CERCLAand other laws, we may have liability for investigation and cleanup costs andother damages relating to our current or former properties, or third-partysites to which we sent wastes for disposal. Our potential liability at any of these sites is affected by manyfactors including, but not limited to, the method of remediation, our portionof the hazardous substances at the site relative to that of other parties, thenumber of responsible parties, the financial capabilities of other parties, andcontractual rights and obligations.

In this regard, we operate certain manufacturingfacilities which were previously owned by Philips Electronics North AmericaCorporation (“Philips”).  When wepurchased these facilities, Philips agreed to indemnify us for certainenvironmental matters resulting from activities of Philips occurring prior toDecember 29, 1988 (the “Environmental Indemnity Agreement”).  To date, Philips has fully performed itsobligations under the Environmental Indemnity Agreement, which terminates onDecember 29, 2008, however, we cannot assure investors that it will continue todo so in the future.  Four matterscovered by the Environmental Indemnity Agreement are currently pending.  Philips has entered into Consent Orders withthe Environmental Protection Agency (“EPA”) for one site and the North CarolinaDepartment of Environment, Health and Natural Resources for a second site,whereby Philips has agreed to pay required response costs.  On October 22, 1998, we were joined as defendantin an action involving a third site formerly occupied by a business we acquiredin Illinois.  Philips has accepted thedefense of this action pursuant to the terms of the Environmental IndemnityAgreement.  At the fourth site, which isa third party waste disposal site, four Conn-Selmer predecessor entities areamong the potentially responsible parties (“PRP”) group.  The PRP group has recently entered into aConsent Order with the EPA, the site owners, and the largest contributor.  For two of the Conn-Selmer predecessorentities, which were previously owned by Philips, this matter was tendered toPhilips pursuant to the Environmental Indemnity Agreement.  Philips is a party to the Consent Order andhas paid its share of the liability.  Thefour Conn-Selmer predecessor entities paid approximately $0.1 million in 2006and settled this claim except for the possibility of a contingent remedialaction, should any additional environmental issues be discovered.  We believe the likelihood of a contingencyassessment to be remote and, our share of the liability, if any, would not bematerial.

In addition, we are continuing an existingenvironmental remediation plan at a facility we acquired in 2000.  We estimate our costs, which approximate $0.9million, over a 14-year period.  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 4.54%.  A summary ofexpected payments associated with this project is as follows:

|            | ** ** | **Environmental  Payments** | ** ** |
|------------|------------|-----------------------------|------------|
| 2007       |       | $                           | 72         |   |
| 2008       |       | 60                          |       |
| 2009       |       | 61                          |       |
| 2010       |       | 61                          |       |
| 2011       |       | 60                          |       |
| Thereafter |       | 546                         |       |
| Total      |       | $                           | 860        |   |

 

In 2004, we acquired two manufacturing facilitiesfrom G. Leblanc Corporation, now Grenadilla, Inc. (“Grenadilla”), for whichenvironmental remediation plans had already been established.  In connection with the acquisition, weassumed the existing accrued liability of approximately $0.8 million for thecost

63

----

 

ofthese remediation activities.  Based on areview of past and ongoing investigatory and remedial work by our environmentalconsultants, and discussions with state regulatory officials, as well as recentsampling, we estimate the remaining costs of such remedial plans to be $2.6million.  Pursuant to the purchase andsale agreement, we have sought indemnification from Grenadilla for anticipatedcosts above the original estimate in the amount of $2.5 million.  We filed a claim against the escrow andrecorded a corresponding receivable for this amount in prepaid expenses andother current assets in our consolidated balance sheet.  We have reached an agreement with Grenadillawhereby future environmental costs will be paid directly out of the escrow.  Should the escrow be reduced to zero, wewould seek indemnification from Grenadilla for these additional costs. However,we cannot be assured that we will be able to recover such costs.

Based on our past experience and currently availableinformation, the matters described above and our other liabilities and compliancecosts arising under environmental laws are not expected to have a materialimpact on our capital expenditures, earnings or competitive position in anindividual year.  However, some risk ofenvironmental liability is inherent in the nature of our current and formerbusiness and we may, in the future, incur material costs to meet current ormore stringent compliance, cleanup, or other obligations pursuant toenvironmental laws.

**14.          Retirement Plans**

We have defined benefit pension plans covering the majorityof our employees, including certain employees in foreign countries.  Certain domestic hourly employees are coveredby multi-employer defined benefit pension plans to which we make contributions.  These contributions totaled $1.0 million in2006, and $1.1 million in 2005 and 2004. The corresponding pension plan assetsand liabilities belong to third parties and, accordingly, are not reflected inthis Note or our financial statements.

Our plan assets are invested primarily in commonstocks and fixed income securities.  Wemake contributions to our domestic plan with the objective of maintaining a 90%funded status for the projected benefit obligation.  At a minimum, our contributions equal theamounts required by federal laws and regulations.  Foreign plans are funded in accordance withthe requirements of the regulatory bodies governing each plan.

In 2003, we combined all of our domestic pensionplans into one plan, “The Steinway Musical Pension Plan,” to facilitate planmonitoring and plan investment management. Effective June 1, 2005 weestablished a master trust for this combined plan and we will continue toevaluate this plan’s funded status and make any required minimum contributionsannually.

OnDecember 31, 2006 we adopted the recognition and disclosure provisions of SFASNo. 158, which requires us to recognize the funded status of our definedbenefit pension plans and post-retirement benefit plan on our balance sheet asof December 31, 2006, with a corresponding adjustment to accumulated othercomprehensive income (loss), net of taxes. The funded status of the plans is measured as the differencebetween the plan assets at fair value and the projected benefit obligation. Wehave recognized the aggregate of all underfunded plans in other current and pensionand other postretirement liabilities. The portion of the amount by which theactuarial present value of benefits included in the projected benefitobligation exceeds the fair value of plan assets, payable in the next twelvemonths, is reflected in other current liabilities.

In accordance with SFAS No. 158, our 2005 accountingand related disclosures were not affected by the adoption of the new standard.The table below summarizes the incremental effects of adoption on theindividual line items on our balance sheet at December 31, 2006:

64

----

 
| ** **                                                      | ** ** | **Pre-SFAS  No. 158  Adoption** | ** ** | **Effect of  adopting SFAS  No. 158** | ** ** | **As reported at  December 31,  2006** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------------|------------|
|                                                            |       |                                 |       |                                                 |       |                                                  |       |
| Assets:                                                         |       |                                 |       |                                                 |       |                                                  |       |
| Other assets                                                    |       | $                                    | 15,519     |                                                 | $          | (2,531                                                | )          | $ | 12,988 |   |
| Long-term deferred tax  asset                                   |       | 3,823                                |       | 2,211                                                |       | 6,034                                                 |       |
| Total assets:                                                   |       | $                                    | 447,495    |                                                 | $          | (320                                                  | )          | $ | 447,175 |   |
|                                                            |       |                                 |       |                                                 |       |                                                  |       |
| Liabilities:                                                    |       |                                 |       |                                                 |       |                                                  |       |
| Other current and pension  and other postretirement liabilities |       | $                                    | 74,246     |                                                 | $          | 3,249                                                 |       | $ | 77,495 |   |
|                                                            |       |                                 |       |                                                 |       |                                                  |       |
| Stockholders’ equity:                                      |       |                                 |       |                                                 |       |                                                  |       |
| Accumulated other  comprehensive loss                           |       | (6,981                               | )          | (3,569                                               | )          | (10,550                                               | )          |
|                                                            |       |                                 |       |                                                 |       |                                                  |       |
| Total Liabilities and Stockholders’ equity:                |       | $                                    | 447,495    |                                                 | $          | (320                                                  | )          | $ | 447,175 |   |

 

65

----

 

The following table sets forth the funded status andamounts recognized for our defined benefit pension plans:
| ** **                                             | ** ** | **Domestic Plans** | ** ** | **Foreign Plans** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| **December 31,**                                  | ** ** | **2006**                | ** ** | **2005**               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Change in benefit  obligation:                         |       |                    |       |                   |       |   |   |   |   |
| Benefit  obligation, beginning of year                 |       | $                       | 52,949     |                   | $          | 48,876 |   | $ | 29,587 |   | $ | 28,763 |   |
| Service cost                                           |       | 866                     |       | 852                    |       | 910 |   | 701 |   |
| Interest cost                                          |       | 2,949                   |       | 2,915                  |       | 1,309 |   | 1,278 |   |
| Plan  participants’ contributions                 |       | 11                      |       | 11                     |       | 64 |   | 60 |   |
| Amendments                                             |       | —                  |       | 631                    |       | — |   | — |   |
| Actuarial loss                                         |       | 4,152                   |       | 2,294                  |       | 1,005 |   | 3,712 |   |
| Foreign currency  exchange rate changes                |       | —                  |       | —                 |       | 3,713 |   | (3,742 | ) |
| Curtailment gain                                       |       | —                  |       | —                 |       | — |   | — |   |
| Benefits paid                                          |       | (2,805                  | )          | (2,630                 | )          | (1,205 | ) | (1,185 | ) |
| Benefit obligation, end  of year                       |       | 58,122                  |       | 52,949                 |       | 35,383 |   | 29,587 |   |
|                                                   |       |                    |       |                   |       |   |   |   |   |
| Change in plan assets:                                 |       |                    |       |                   |       |   |   |   |   |
| Fair value of  plan assets, beginning of year          |       | 48,820                  |       | 47,397                 |       | 4,790 |   | 4,476 |   |
| Actual return on  plan assets                          |       | 8,174                   |       | 2,542                  |       | 429 |   | 694 |   |
| Employer  contribution                                 |       | 1,500                   |       | 1,500                  |       | 1,250 |   | 1,255 |   |
| Employee  contributions                                |       | 11                      |       | 11                     |       | 64 |   | 60 |   |
| Foreign currency  exchange rate changes                |       | —                  |       | —                 |       | 696 |   | (510 | ) |
| Benefits paid                                          |       | (2,805                  | )          | (2,630                 | )          | (1,205 | ) | (1,185 | ) |
| Fair value of plan  assets, end of year                |       | 55,700                  |       | 48,820                 |       | 6,024 |   | 4,790 |   |
|                                                   |       |                    |       |                   |       |   |   |   |   |
| Funded status                                          |       | (2,422                  | )          | (4,129                 | )          | (29,359 | ) | (24,797 | ) |
|                                                   |       |                    |       |                   |       |   |   |   |   |
| Unrecognized net  actuarial loss                       |       | —                  |       | 12,251                 |       | — |   | 6,339 |   |
| Unrecognized prior service  cost                       |       | —                  |       | 2,961                  |       | — |   | — |   |
| Net amount recognized                                  |       | $                       | (2,422     | )                      | $          | 11,083 |   | $ | (29,359 | ) | $ | (18,458 | ) |
|                                                   |       |                    |       |                   |       |   |   |   |   |
| Amounts recognized on  the balance sheet consist of:   |       |                    |       |                   |       |   |   |   |   |
| Pension and  other post retirement benefit liabilities |       | $                       | (2,422     | )                      | $          | (4,129 | ) | $ | (29,359 | ) | $ | (23,631 | ) |
| Other assets                                           |       | —                  |       | 2,961                  |       | — |   | — |   |
| Accumulated  other comprehensive loss                  |       | —                  |       | 12,251                 |       | — |   | 5,173 |   |
| Net amount recognized                                  |       | $                       | (2,422     | )                      | $          | 11,083 |   | $ | (29,359 | ) | $ | (18,458 | ) |

 

66

----

 

The weighted-average assumptions used to determine our benefitobligations are as follows:
| ** **                     | ** ** | **Domestic Plans** | ** ** | **Foreign Plans** | ** ** |
|--------------------------------|------------|-------------------------|------------|------------------------|------------|
| **December 31,**          | ** ** | ** **              | ** ** | **2006**               | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Discount rate                  |       | 5.75                    | %          | 5.75                   | %          | 4.62% |   | 4.21% |   |
| Rate of compensation  increase |       | n/a                     |       | n/a                    |       | 3.42% |   | 2.55% |   |
|                                |            |                         |            |                        |            |  |  |  |  |  |  |

 

The weighted-average assumptions used to determineour net periodic benefit cost are as follows:
| ** **                                                    | ** ** | **Domestic Plans** | ** ** | **Foreign Plans** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| **For the years ended December 31,** | ** ** | **2006**                | ** ** | **2005**               | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Discount rate                                                 |       | 5.75                    | %          | 6.00                   | %          | 6.50 | % | 4.59 | % | 4.31 | % | 4.95 | % |
| Expected return  on assets                                    |       | 9.00                    | %          | 9.00                   | %          | 9.00 | % | 6.00 | % | 6.00 | % | 6.75 | % |
| Rate of  compensation increase                                |       | n/a                     |       | n/a                    |       | n/a |   | 3.33 | % | 2.55 | % | 2.56 | % |
|                                                          |       |                    |       |                   |       |   |   |   |   |   |   |   |   |

 

The components of net pension expense for the yearsended December 31 are as follows:
| **For the years ended December 31,** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic Plans:                                               |       |     |       |     |       |     |       |
| Service cost                                                  |       | $        | 866        |     | $          | 852      |       | $ | 785 |   |
| Interest cost                                                 |       | 2,949    |       | 2,915    |       | 2,837    |       |
| Expected return  on plan assets                               |       | (4,337   | )          | (4,221   | )          | (3,820   | )          |
| Amortization of  prior service cost                           |       | 431      |       | 471      |       | 585      |       |
| Recognized  actuarial loss                                    |       | 642      |       | 378      |       | 269      |       |
| Curtailment loss                                              |       | —   |       | —   |       | 461      |       |
| Net pension  expense                                          |       | $        | 551        |     | $          | 395      |       | $ | 1,117 |   |
|                                                          |       |     |       |     |       |     |       |
| Foreign Plans:                                                |       |     |       |     |       |     |       |
| Service cost                                                  |       | $        | 910        |     | $          | 701      |       | $ | 593 |   |
| Interest cost                                                 |       | 1,309    |       | 1,278    |       | 1,295    |       |
| Expected return  on plan assets                               |       | (309     | )          | (287     | )          | (223     | )          |
| Recognized  actuarial loss                                    |       | 257      |       | —   |       | —   |       |
| Net pension expense                                           |       | $        | 2,167      |     | $          | 1,692    |       | $ | 1,665 |   |

 

Estimated amounts that will be amortized from accumulated othercomprehensive loss into net periodic (benefit) cost in 2007 are as follows:
| ** **         | ** ** | **Domestic Plans** | ** ** | **Foreign Plans** | ** ** |
|--------------------|------------|-------------------------|------------|------------------------|------------|
| Net actuarial loss |       | $                       | 588        |                   | $          | 112 |   |
| Prior service cost |       | 431                     |       | n/a                    |       |
|                    |            |                         |            |                        |            |  |  |

 

67

----

 

The projected benefit obligation, accumulatedbenefit obligation, and fair value of plan assets for pension plans withaccumulated benefit obligations in excess of plan assets were as follows:
| ** **                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Projected benefit obligation    |       | $        | 93,505     |     | $          | 82,536 |   |
| Accumulated benefit  obligation |       | 91,288   |       | 81,370   |       |
| Fair value of plan  assets      |       | 61,724   |       | 53,610   |       |
|                                 |            |          |            |          |            |  |  |

 

The accumulated benefit obligation for our domesticpension plans was $58.1 million in 2006 and $52.9 million in 2005.  The accumulated benefit obligation for ourforeign pension plans was $33.2 million in 2006 and $28.4 million in 2005.

Theweighted-average asset allocations of our invested assets held in our domesticdefined benefit plans were as follows:
| **December 31,**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| Asset category:         |       |     |       |     |       |
| Debt securities         |       | 26%      |       | 35%      |       |
| Equity securities       |       | 67%      |       | 58%      |       |
| Cash reserves and other |       | 7%       |       | 7%       |       |
| Total                   |       | 100%     |       | 100%     |       |

 

Domestic plan assets include 52,631 shares of theCompany’s Ordinary common stock, which was valued at $1.6 million as of December31, 2006 and $1.3 million as of December 31, 2005.  This represents less than 3% of the totalplan assets.

Our investment strategy includes the following rangeof target asset allocation percentages:
| **Asset category:**                   | ** ** | **Minimum** | ** ** | **Maximum** | ** ** |
|--------------------------------------------|------------|-------------|------------|-------------|------------|
|                                       |       |        |       |        |       |
| Domestic equity  securities                |       | 25%         |       | 65%         |       |
| International and other  equity securities |       | 5%          |       | 30%         |       |
| International debt  securities             |       | 5%          |       | 15%         |       |
| Domestic debt securities                   |       | 20%         |       | 40%         |       |

 

The objective of our investment policy is tomaximize the return on invested assets while maintaining an appropriate levelof diversification to manage risk.  Ourpolicy sets forth specific criteria used in the selection and ongoingevaluation of individual funds.

Our investment committee generally meets on aquarterly basis with an outside registered investment advisor to review actualperformance against relevant benchmarks, such as the S&P 500 Index.  Consistent with our policy, changes in fundsare made when a fund falls outside of our predetermined guidelines for anextended period.

68

----

Theinvestment committee reviews our domestic benefit obligations no less thanannually with the objective of maintaining a 90% funded status for theprojected benefit obligation.  Wheneverpossible, our annual contribution is expected to cover the short-term liquidityrequirements of the plan, so as to maintain the plan’s assets for long-terminvestment.  The performance goal set forthe plan’s assets is to achieve a long-term rate of return no less than 8.5%.

 

For the periods ended December 31, 2006, 2005, and 2004 weused an assumed long-term rate of return on domestic plan assets of 9%.  These rates were developed with input fromour actuaries and our investment committee and are based on long-term rates ofreturn for the assets held.  This rate isconsistent with previous rates we have used and lower than the historicalreturn trends on our plan assets. 

 

For the periods ended December 31, 2006 and 2005, we usedan assumed long-term rate of return on foreign plan assets of 6.00%.  We used 6.75% for the period ended December31, 2004. In accordancewith the requirements of local regulations, our German plans do not hold assetsand pay participant benefits as incurred. Expected 2007 benefit payments under these plans are $1.2 million.  

 

We made contributions to our domestic pension plan of $1.5million in 2006 and 2005. Based on federal laws and regulations, we are notrequired to make a contribution to our domestic pension plan in 2007 due to ourplan’s current funded status as calculated under ERISA guidelines.  Nevertheless, we anticipate contributingapproximately $2.0 million in 2007. The domestic plan invests a small portion of its assets in a groupannuity contract.  We expect benefits tobe covered by this contract in 2007 to be $0.2 million.

 

Contributionsto our U.K. plan totaled $0.2 million in 2006 and $0.3 million in 2005.  We anticipate contributing approximately $0.2million to this plan in 2007.  Due to theunfunded status of the German plans, 2007 anticipated contributions are equalto anticipated benefit payments of $1.2 million.

 

Thedomestic and foreign pension plans expect to pay benefits in each year from2007 through 2016 as follows:

 

|             | ** ** | **Domestic Plans** | ** ** | **Foreign Plans** | ** ** |
|-------------|------------|-------------------------|------------|------------------------|------------|
| 2007        |       | $                       | 2,943      |                   | $          | 1,392 |   |
| 2008        |       | 3,061                   |       | 1,405                  |       |
| 2009        |       | 3,217                   |       | 1,458                  |       |
| 2010        |       | 3,353                   |       | 1,491                  |       |
| 2011        |       | 3,467                   |       | 1,585                  |       |
| 2012 - 2016 |       | 19,280                  |       | 9,182                  |       |
| Total       |       | $                       | 35,321     |                   | $          | 16,513 |   |

 

Weprovide postretirement health care and life insurance benefits to certain eligiblehourly retirees and their dependents. The health care plan is contributory, with retiree contributionsadjusted based on the changes in the union contract, which is negotiated everythree years. Although we are negotiating this union contract, the members havebeen on strike since April 2006, which resulted in the decrease inpostretirement benefit cost and benefits paid in the current year.  The plan is unfunded and we pay part of thehealth care premium and the full amount of the life insurance cost for eligibleplan participants.

69

----

Thefollowing table sets forth the funded status of our postretirement benefit planand accrued postretirement benefit cost reflected in our consolidated balancesheets:
| **December 31,**                                                   | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Change in  benefit obligation:                                          |       |       |       |     |       |
| Benefit obligation, beginning of year                                   |       | $          | 2,535      |     | $          | 1,597    |       |
| Service cost                                                            |       | 40         |       | 47       |       |
| Interest cost                                                           |       | 143        |       | 147      |       |
| Plan participants’ contributions                                   |       | 44         |       | 69       |       |
| Actuarial (gain) loss                                                   |       | (161       | )          | 1,081    |       |
| Benefits paid                                                           |       | (74        | )          | (406     | )          |
| Benefit obligation, end of year                                         |       | 2,527      |       | 2,535    |       |
|                                                                    |       |       |       |     |       |
| Fair value of plan assets                                               |       | —     |       | —   |       |
|                                                                    |       |       |       |     |       |
| Funded status                                                           |       | (2,527     | )          | (2,535   | )          |
| Unrecognized net actuarial (gain) loss                                  |       | —     |       | 849      |       |
| Unrecognized prior service cost                                         |       | —     |       | 276      |       |
| Accrued postretirement benefit cost                                     |       | $          | (2,527     | )        | $          | (1,410   | )          |
| Amounts recognized on the balance sheet consist of:                     |       |       |       |     |       |
| Other current and pension and other postretirement  benefit liabilities |       | $          | 2,527      |     | $          | 1,410    |       |

 

Theassumed weighted-average discount rate used to determine benefit obligations asof December 31 was 5.75% in 2006 and 2005. The assumed weighted-average discount rate used to determine our netpostretirement benefit cost for the years ended December 31 was 5.75% in 2006,6.00% in 2005, and 6.50% in 2004.  Theannual assumed rate of increase in the per capita cost of covered health carebenefits was 9.00% in 2006 and is assumed to decrease gradually to 5.50% in 2016,and remain at that level thereafter.

 

Netpostretirement benefit costs are as follows:
| **For the years ended December 31,** | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                                                  |       | $          | 40         |     | $          | 47       |       | $        | 24         |   |
| Interest cost                                                 |       | 143        |       | 147      |       | 110      |       |
| Net loss  recognition                                         |       | 50         |       | 47       |       | —   |       |
| Amortization of  prior service cost                           |       | 35         |       | 35       |       | 146      |       |
| Recognition of  gain due to strike                            |       | (156       | )          | —   |       | —   |       |
| Net postretirement  benefit cost                              |       | $          | 112        |     | $          | 276      |       | $        | 280        |   |

 

Estimatedamounts to be amortized from accumulated other comprehensive loss into netperiodic (benefit) cost in 2007 include net actuarial losses and prior servicecredits of less than $0.1 million.

70

----

Assumed health care costtrend rates have a significant effect on the amounts reported for the healthcare plan.  A one-percentage-point changein assumed health care cost trend rates would have the following effects:
| ** **                                               | ** ** | **1% Increase** | ** ** | **1% Decrease** | ** ** |
|----------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
|                                                     |       |                 |       |                 |       |
| Effect on total  of service and interest cost components |       | $                    | 6          |                 | $          | (5 | ) |
| Effect on the  postretirement benefit obligation         |       | 70                   |       | (60                  | )          |
|                                                          |            |                      |            |                      |            |  |  |

 

The domestic postretirementhealth care and life insurance plan expects to pay benefits in each year from2007 through 2016 as follows:
| 2007       |   | $     | 298    |   |
|------------|--------|-------|--------|--------|
| 2008       |   | 300   |   |
| 2009       |   | 295   |   |
| 2010       |   | 305   |   |
| 2011       |   | 315   |   |
| Thereafter |   | 1,685 |   |
| Total      |   | $     | 3,198  |   |

 

We sponsor 401(k) retirement savings plans for eligibleemployees.  Discretionary employercontributions, as determined annually by the Board of Directors, are made totwo of these plans and approximated $0.6 million for 2006, 2005, and 2004.  Non-discretionary contributions approximated$0.4 million for the years ended December 31, 2006, 2005, and 2004.

We establisheda supplemental executive retirement plan (“SERP”) for a select group of ourexecutives who constitute a “top hat” group as defined by ERISA.  Discretionary employer contributions made tothis plan, as determined annually by the Board of Directors, are held in aRabbi Trust (“Trust”). During the year, we sold all of the securities in theSERP, which were classified as available-for-sale and repurchased newsecurities which have been classified as trading.  The SERP assets are included in our financialstatements as trading investments 2006 and available-for-sale investments for2005 within other assets (see Notes 7 and 16). Contributions to the SERP approximated $0.2 million in 2006, 2005, and2004.  We anticipate making contributionsof $0.2 million in 2007.

** **

**15.****   ****Foreign Currency Exchange Contracts**

 

      One of our German divisions, whosefunctional currency is the euro, secures option and forward contracts forJapanese yen, British pounds, and U.S. dollars to mitigate cash flow exposureto currency fluctuations.  At December31, 2006, this division had forward contracts to purchase $0.6 million, sell$0.8 million, and sell £2.0 million. These instruments had various maturitydates through December 2007.  At December31, 2005, this division had forward and option contracts to purchase $0.2million, sell $3.3 million, and sell £1.4 million. These instruments hadvarious maturity dates through January 2007. Since we do not designate these instruments as hedges for accountingpurposes, we carry these instruments at fair value and recognize the change infair value in earnings.  Such amountswere not material during the years ended December 31, 2006, 2005, or 2004.

71

----

**16.****   ****Fair Values of Financial Instruments**

 

      Estimated fair values of financialinstruments have been developed using appropriate methodologies; however,considerable judgment is required to develop these estimates.  The estimated fair value of existinglong-term debt is based on rates currently available to us for debt withsimilar terms and remaining maturities. The estimated fair value of foreign currency contracts (used to mitigatecash flow exposures) has been determined as the difference between the currentforward rate and the contract rate, multiplied by the notional amount of thecontract, or upon the estimated fair value of purchased option contracts. Theestimates presented below are not necessarily indicative of amounts that couldbe realized in a current market exchange. Use of different assumptions or methodologies could have a significanteffect on these estimates.

 

The net carrying value and estimated fair value of certain financialinstruments are as follows: 

 
| **December 31,**       | ** ** | ** **                   | ** ** | **2006**                       | ** ** | **2005**                     | ** ** |
|-----------------------------|------------|------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                  | ** ** | **Net Carrying  Value** | ** ** | **Estimated  Fair Value** | ** ** | **Net Carrying  Value** | ** ** | **Estimated  Fair Value** | ** ** |
| Financial  liabilities:     |       |                         |       |                           |       |                         |       |   |   |
| Debt                        |       | $                            | 179,595    |                           | $          | 175,658                      |       | $ | 203,360 |   | $ | 211,670 |   |
| Foreign currency  contracts |       | (53                          | )          | (53                            | )          | (94                          | )          | (94 | ) |
|                             |            |                              |            |                                |            |                              |            |  |  |  |  |  |  |  |  |

 

The carrying value of accounts,notes and other receivables, marketable equity securities, and accounts payableapproximate fair value.

Our marketable equitysecurities pertain to the SERP and are included as a component of other assets(see Notes 7 and 14).  Investments in marketableequity securities are categorized as trading, available-for-sale, orheld-to-maturity.  During 2006, we soldall of the securities in our SERP, recognizing $1.4 million in gross proceeds,and realized a gain of $0.2 million on the sale.  We used these funds to purchase $1.4 millionof marketable equity securities for our SERP. We held only trading securities as of December 31, 2006.  We recognized a gain of $0.2 million ontrading securities held as of December 31, 2006.  On December 31, 2005, we had onlyavailable-for-sale securities, which were stated at fair value, with unrealizedgains (there were no unrealized losses), net of deferred taxes, reported inaccumulated other comprehensive loss. There were no realized gains or losses for the periods ended December31, 2005 and 2004.  Gross unrealizedgains on these investments were as follows: 

| December 31, | ** ** | ** ** | ** ** | **2005** | ** ** |
|-------------------|------------|------------|------------|----------|------------|
|              |       |       |       |
| Fair value        |       | $          | 1,132      |     |
| Cost              |       | 919        |       |
| Unrealized gains  |       | $          | 213        |     |

 

 

 

72

----

**17.****   ****Segment Information**

 

As discussed in Note 2, wehave identified two reportable segments: the piano segment and the band &orchestral 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.

Intercompany transactionsare generally recorded at a small discount from comparable third-party prices.Income from operations for the reportable segments includes intercompanyprofit, as well as certain corporate costs allocated to the segments basedprimarily on revenue.  Amounts reportedas “Other & Elim” include those corporate costs that were not allocated tothe reportable segments and the remaining intercompany profit elimination.  It also includes corporate assets,elimination of intercompany interest, and investments in subsidiaries that donot eliminate within the segments. 

The following tables present informationabout our reportable segments:
| ** **                        | ** ** | **Piano Segment** | ** ** | **Band & Orchestral Segment** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------------------|------------|--------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                        | ** ** | **U.S.**               | ** ** | **Germany**                                      | ** ** | **Other**  | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Other** | ** ** | **Total** | ** ** | **Other & Elim** | ** ** | **Consolidated** | ** ** |
| **2006**                          | ** ** | ** **             | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues from  external customers |       | $                      | 117,238    |                                             | $          | 59,549     |       | $          | 37,407     |   | $ | 214,194 |   | $ | 162,709 |   | $ | 7,717 |   | $ | 170,426 |   | $ | — |   | $ | 384,620 |   |
| Operating profit                  |       | 8,704                  |       | 16,263                                           |       | 3,126      |       | 28,093     |       | (6,801 | ) | 336 |   | (6,465 | ) | (3,250 | ) | 18,378 |   |
| Interest income                   |       | (1,520                 | )          | (232                                             | )          | (152       | )          | (1,904     | )          | (2,342 | ) | — |   | (2,342 | ) | (319 | ) | (4,565 | ) |
| Interest expense                  |       | 10,301                 |       | 36                                               |       | 283        |       | 10,620     |       | 9,339 |   | 251 |   | 9,590 |   | (4,390 | ) | 15,820 |   |
| Depreciation and  amortization    |       | 4,293                  |       | 1,368                                            |       | 399        |       | 6,060      |       | 3,838 |   | 116 |   | 3,954 |   | 645 |   | 10,659 |   |
| Income tax  provision (benefit)   |       | 430                    |       | (947                                             | )          | 1,068      |       | 551        |       | (2,070 | ) | 158 |   | (1,912 | ) | 1,648 |   | 287 |   |
| Net income (loss)                 |       | 1,352                  |       | 17,538                                           |       | 1,940      |       | 20,830     |       | (12,966 | ) | (61 | ) | (13,027 | ) | (8,471 | ) | (668 | ) |
| Capital  expenditures             |       | 2,140                  |       | 818                                              |       | 228        |       | 3,186      |       | 2,221 |   | 83 |   | 2,304 |   | 59 |   | 5,549 |   |
| Property, plant  and equipment    |       | 54,138                 |       | 15,067                                           |       | 2,404      |       | 71,609     |       | 22,287 |   | 1,544 |   | 23,831 |   | 158 |   | 95,598 |   |
| Total assets                      |       | 138,584                |       | 83,018                                           |       | 29,057     |       | 250,659    |       | 205,567 |   | 10,715 |   | 216,282 |   | (19,766 | ) | 447,175 |   |
|                              |       |                   |       |                                             |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| **2005**                          | ** ** | ** **             | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues from  external customers |       | $                      | 114,803    |                                             | $          | 54,359     |       | $          | 34,355     |   | $ | 203,517 |   | $ | 176,514 |   | $ | 7,112 |   | $ | 183,626 |   | $ | — |   | $ | 387,143 |   |
| Operating profit                  |       | 10,915                 |       | 14,912                                           |       | 2,842      |       | 28,669     |       | 8,710 |   | (11 | ) | 8,699 |   | (2,531 | ) | 34,837 |   |
| Interest income                   |       | (1,617                 | )          | (144                                             | )          | (163       | )          | (1,924     | )          | (2,929 | ) | — |   | (2,929 | ) | 1,518 |   | (3,335 | ) |
| Interest expense                  |       | 10,788                 |       | 20                                               |       | 287        |       | 11,095     |       | 26,352 |   | — |   | 26,352 |   | (20,467 | ) | 16,980 |   |
| Depreciation and  amortization    |       | 4,313                  |       | 1,296                                            |       | 422        |       | 6,031      |       | 4,546 |   | 135 |   | 4,681 |   | 555 |   | 11,267 |   |
| Income tax  provision (benefit)   |       | 814                    |       | 5,191                                            |       | 781        |       | 6,786      |       | 1,036 |   | (251 | ) | 785 |   | 629 |   | 8,200 |   |
| Net income (loss)                 |       | 2,034                  |       | 10,187                                           |       | 1,875      |       | 14,096     |       | (15,505 | ) | (56 | ) | (15,561 | ) | 15,257 |   | 13,792 |   |
| Capital  expenditures             |       | 1,410                  |       | 761                                              |       | 312        |       | 2,483      |       | 2,429 |   | - |   | 2,429 |   | 92 |   | 5,004 |   |
| Property, plant  and equipment    |       | 55,904                 |       | 13,514                                           |       | 2,121      |       | 71,539     |       | 23,522 |   | 1,419 |   | 24,941 |   | 184 |   | 96,664 |   |
| Total assets                      |       | 181,265                |       | 72,967                                           |       | 22,199     |       | 276,431    |       | 219,219 |   | 10,249 |   | 229,468 |   | (50,244 | ) | 455,655 |   |
|                              |       |                   |       |                                             |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| **2004**                          | ** ** | ** **             | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues from  external customers |       | $                      | 120,387    |                                             | $          | 48,348     |       | $          | 34,953     |   | $ | 203,688 |   | $ | 165,652 |   | $ | 5,694 |   | $ | 171,346 |   | $ | — |   | $ | 375,034 |   |
| Operating profit                  |       | 13,688                 |       | 11,968                                           |       | 3,999      |       | 29,655     |       | 7,175 |   | (156 | ) | 7,019 |   | (2,433 | ) | 34,241 |   |
| Interest income                   |       | (23                    | )          | (44                                              | )          | (181       | )          | (248       | )          | (2,581 | ) | — |   | (2,581 | ) | — |   | (2,829 | ) |
| Interest expense                  |       | 9,690                  |       | 35                                               |       | 250        |       | 9,975      |       | 25,862 |   | 3 |   | 25,865 |   | (19,574 | ) | 16,266 |   |
| Depreciation and  amortization    |       | 4,427                  |       | 1,369                                            |       | 348        |       | 6,144      |       | 4,477 |   | 36 |   | 4,513 |   | 526 |   | 11,183 |   |
| Income tax  provision (benefit)   |       | 3,870                  |       | 3,093                                            |       | 1,336      |       | 8,299      |       | (3,829 | ) | 61 |   | (3,768 | ) | 3,569 |   | 8,100 |   |
| Net income (loss)                 |       | 1,780                  |       | 9,929                                            |       | 2,878      |       | 14,587     |       | (12,052 | ) | (177 | ) | (12,229 | ) | 13,509 |   | 15,867 |   |
| Capital  expenditures             |       | 2,229                  |       | 915                                              |       | 304        |       | 3,448      |       | 1,621 |   | 44 |   | 1,665 |   | 73 |   | 5,186 |   |
| Property, plant  and equipment    |       | 57,931                 |       | 15,799                                           |       | 2,211      |       | 75,941     |       | 25,765 |   | 1,057 |   | 26,822 |   | 181 |   | 102,944 |   |
| Total assets                      |       | 178,262                |       | 85,033                                           |       | 23,349     |       | 286,644    |       | 371,786 |   | 11,476 |   | 383,262 |   | (192,361 | ) | 477,545 |   |

 

73

----

**18.   Subsequent Events**

** **

On January 16 2007, weprovided a notice of termination of the asset purchase agreement dated December15, 2006 with Dennis Bamber, Inc. d/b/a The Woodwind & The Brasswind, ourlarge band instrument dealer which filed for bankruptcy in November 2006.  Based on the due diligence performed, weconcluded that there would be a failure of certain conditions necessary toclose the transaction and therefore exercised our right to terminate theagreement.  Under the asset purchaseagreement we were required to tender a $2.0 million deposit, which is currentlyresiding in escrow.  We anticipate areturn of these funds in 2007 and have recorded this amount in our currentassets on our balance sheet for December 31, 2006.

** **

On February 13, 2007, wedeclared a dividend of $3.00 per share for shareholders of record as ofFebruary 23, 2007.  This dividendpayment, which amounted to $25.2 million, was paid out on March 7, 2007.

 

**19.   Quarterly Financial Data (Unaudited)**

 

The net earnings for thefourth quarter of 2006 were impacted by the following items which varied fromour results in the first three quarters. We recorded a charge to provision fordoubtful accounts for $4.4 million, primarily as a result of the bankruptcyfiling of one of our large band dealers. Also, the fourth quarter resultsproduced a lower than expected foreign tax credit utilization, due largely tolower domestic income.  This resulted inan increase in our effective tax rate from the 60% estimate in the thirdquarter to (75.3%) for the full fiscal year. 

74

----

The following is a summary of unauditedresults of operations, in thousands except share and per share data.
| **For the years ended December 31,** | ** ** | ** **         | ** ** | **2006**            | ** ** |
|---------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                                    | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|                                                          |       |               |       |                |       |   |   |   |   |
| Net sales                                                     |       | $                  | 95,194     |                | $          | 92,423 |   | $ | 90,876 |   | $ | 106,127 |   |
| Gross profit                                                  |       | 25,992             |       | 23,149              |       | 26,045 |   | 32,221 |   |
| Net income  (loss)                                            |       | (1,842             | )          | (861                | )          | 968 |   | 1,067 |   |
|                                                          |       |               |       |                |       |   |   |   |   |
| Basic earnings  (loss) per share                              |       | $                  | (0.23      | )                   | $          | (0.10 | ) | $ | 0.12 |   | $ | 0.13 |   |
| Diluted earnings  (loss) per share                            |       | $                  | (0.23      | )                   | $          | (0.10 | ) | $ | 0.11 |   | $ | 0.13 |   |
|                                                          |       |               |       |                |       |   |   |   |   |
| Weighted average  shares:                                     |       |               |       |                |       |   |   |   |   |
| Basic                                                         |       | 8,152,369          |       | 8,331,652           |       | 8,357,153 |   | 8,373,904 |   |
| Diluted                                                       |       | 8,152,369          |       | 8,331,652           |       | 8,430,306 |   | 8,515,969 |   |

 
| ** **                  | ** ** | **2005**           | ** ** |
|-----------------------------|------------|--------------------|------------|
| ** **                  | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|                        |       |               |       |   |   |   |   |   |   |
| Net sales                   |       | $                  | 91,342     |   | $ | 89,761 |   | $ | 95,914 |   | $ | 110,126 |   |
| Gross profit                |       | 25,697             |       | 26,126 |   | 27,496 |   | 32,215 |   |
| Net income                  |       | 2,598              |       | 2,418 |   | 3,743 |   | 5,033 |   |
|                        |       |               |       |   |   |   |   |   |   |
| Basic earnings  per share   |       | $                  | 0.32       |   | $ | 0.30 |   | $ | 0.46 |   | $ | 0.62 |   |
| Diluted earnings  per share |       | $                  | 0.32       |   | $ | 0.29 |   | $ | 0.45 |   | $ | 0.61 |   |
|                        |       |               |       |   |   |   |   |   |   |
| Weighted average  shares:   |       |               |       |   |   |   |   |   |   |
| Basic                       |       | 8,030,879          |       | 8,052,418 |   | 8,088,022 |   | 8,107,564 |   |
| Diluted                     |       | 8,241,196          |       | 8,276,096 |   | 8,284,461 |   | 8,254,717 |   |

 

75

----

**Item 9.  Changes in andDisagreements With Accountants on Accounting and Financial Disclosure**

Notapplicable.

**Item 9A.Controls and Procedures**

### Disclosure Controls andProcedures

Our principal executiveofficer and our principal financial officer, after evaluating together withmanagement, the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) as of December 31, 2006, the end of the period covered by thisreport, have concluded that, as of such date, our disclosure controls andprocedures were adequate and effective to ensure that material informationrelating to our Company and our consolidated subsidiaries would be made knownto them by others within those entities.

### **InternalControl Over Financial Reporting**

### There were changes in our Company’sinternal control over financial reporting that occurred during the fourthquarter of 2006 which resulted from control improvement and remediationefforts.  These changes have notmaterially affected, and are not likely to materially affect, our Company’sinternal control over financial reporting.

**MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIALREPORTING**

The management of SteinwayMusical Instruments, Inc. and its subsidiaries (the “Company”) is responsiblefor establishing and maintaining adequate internal control over financialreporting as defined in Rules 13a-15(f) and 15d-15(f) under the SecuritiesExchange Act of 1934.  The Company’sinternal control over financial reporting is a process designed by, or underthe supervision of, the Company’s principal executive and principal financialofficers, and effected by the Company’s board of directors, management andother personnel, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of the Company’s financial statementsfor external purposes in accordance with generally accepted accountingprinciples.  Internal control overfinancial reporting includes those policies and procedures that:

(1)                                pertain to the maintenance of records that,in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the Company;

(2)                                provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles;

(3)                                provide reasonable assurance that receiptsand expenditures of the Company are being made only in accordance withauthorizations of management and directors of the Company; and

(4)                                provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof the Company’s assets that could have a material effect on the financialstatements.

76

----

Internal Control over financial reporting includesthe controls themselves, monitoring and internal auditing practices and actionstaken to correct deficiencies as identified.

Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

The Company’s management assessed the effectivenessof the Company’s internal control over financial reporting as of December 31,2006. In making this assessment, the Company’s management used the criteria setforth by the Committee of Sponsoring Organizations of the Treadway Commission(COSO) in *Internal Control - Integrated Framework*.  Management reviewed the results of itsassessment with the Audit Committee of its Board of Directors.

Based on its assessment, management determined that,as of December 31, 2006, the Company’s internal control over financialreporting is effective.

Deloitte & Touche LLP, the independentregistered public accounting firm that audited the financial statementsincluded in this annual report, has issued an attestation report on management’sassessment of the Company’s internal control over financial reporting, whichappears below.
| By: /s/      |   | Dana D. Messina          |   |
|--------------|--------|--------------------------|--------|
|    |   | Dana D. Messina          |   |
|         |   | Chief Executive  Officer |   |
|         |   | March 16, 2007           |   |

 
| By: /s/      |   | Dennis M. Hanson         |   |
|--------------|--------|--------------------------|--------|
|    |   | Dennis M. Hanson         |   |
|         |   | Chief Executive  Officer |   |
|         |   | March 16, 2007           |   |

 

77

----

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofSteinway Musical Instruments, Inc.Waltham, Massachusetts

Wehave audited management’s assessment, included in the accompanying Management’sAnnual Report on Internal Control Over Financial Reporting, that SteinwayMusical Instruments, Inc. and its subsidiaries (the “Company”) maintainedeffective internal control over financial reporting as of December 31, 2006based on criteria established in *Internal Control -Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. The Company’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting.  Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects.  Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances.  We believe that our audit provides areasonable basis for our opinions.

Acompany’s internal control over financial reporting is a process designed by,or under the supervision of, the company’s principal executive and principalfinancial officers, or persons performing similar functions, and effected bythe company’s board of directors, management, and other personnel to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Becauseof the inherent limitations of internal control over financial reporting,including the possibility of collusion or improper management override ofcontrols, material misstatements due to error or fraud may not be prevented ordetected on a timely basis.  Also,projections of any evaluation of the effectiveness of the internal control overfinancial reporting to future periods are subject to the risk that the controlsmay become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

Inour opinion, management’s assessment that the Company maintained effectiveinternal control over financial reporting as of December 31, 2006, is fairlystated, in all material respects, based on the criteria established in *Internal Control - Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission.  Also in our opinion, the Company maintained,in all material respects, effective internal control over financial reportingas of December 31, 2006, based on the criteria established in *Internal Control - Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission.

78

----

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated financialstatements as of and for the year ended December 31, 2006 of the Company andour report dated March 16, 2007 expressed an unqualified opinion on thosefinancial statements and included an explanatory paragraph regarding theCompany’s change in accounting for pension and postretirement benefits andshare-based payments.

/s/DELOITTE & TOUCHE LLP

Boston,MassachusettsMarch 16, 2007

 

79

----

 

**Item 9B.**                 Other Information

None.

### **PART III**

**Item 10.**                   Directors,Executive Officers and Corporate Governance

The information called for by this item ishereby incorporated by reference to the Registrant’s definitive Proxy Statementfor the fiscal year ended December 31, 2006, which Proxy Statement will befiled with the Securities and Exchange Commission no later than 120 days afterthe end of the fiscal year covered by this report.

**Item 11.**                   ExecutiveCompensation

The information called for by this item is herebyincorporated by reference to the Registrant’s definitive Proxy Statement forthe fiscal year ended December 31, 2006, which Proxy Statement will be filedwith the Securities and Exchange Commission no later than 120 days after theend of the fiscal year covered by this report.

**Item 12.**                   SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

The information called for by this item ishereby incorporated by reference to the Registrant’s definitive Proxy Statementfor the fiscal year ended December 31, 2006, which Proxy Statement will befiled with the Securities and Exchange Commission no later than 120 days afterthe end of the fiscal year covered by this report.

**Item 13.**                   CertainRelationships and Related Transactions, and Director Independence

The information called for by this item ishereby incorporated by reference to the Registrant’s definitive Proxy Statementfor the fiscal year ended December 31, 2006, which Proxy Statement will befiled with the Securities and Exchange Commission no later than 120 days afterthe end of the fiscal year covered by this report.

**Item 14.**                   PrincipalAccounting Fees and Services

The information called for by this item ishereby incorporated by reference to the Registrant’s definitive Proxy Statementfor the fiscal year ended December 31, 2006, which Proxy Statement will befiled with the Securities and Exchange Commission no later than 120 days afterthe end of the fiscal year covered by this report.

80

----

### ** **

### **PART IV**

**Item 15.**                   Exhibits, FinancialStatement Schedules

(a)           The following documents are filed asa part of this report:

1.                       Financial Statements

|                                                               | ** ** | **Sequential**       | ** ** |
|---------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                    | ** ** | **Page Number** | ** ** |
| Report of Independent Registered Public Accounting  Firm      |       | 39                   |       |
| Consolidated Statements of Operations                         |       |                 |       |
| Years Ended December 31, 2006, 2005, and 2004                 |       | 40                   |       |
| Consolidated  Balance Sheets as of December 31, 2006 and 2005 |       | 41                   |       |
| Consolidated Statements of Cash Flows for the                 |       |                 |       |
| Years Ended December 31, 2006, 2005, and 2004                 |       | 42                   |       |
| Consolidated Statements of Stockholders’ Equity for  the |       |                 |       |
| Years Ended December 31, 2006, 2005, and 2004                 |       | 43                   |       |
| Notes to Consolidated Financial Statements                    |       | 44                   |       |

 

2.                       Exhibits*:* The Exhibits listed below are filed as part of, orincorporated by reference into, this report.
| Exhibit | ** ** | ** **      |
|---------|------------|-----------------|
| **No.** | ** ** | **Description** |
|    | 3.1        |            |   | Restated Certificate of Incorporation of Registrant  (5) |
|    | 3.2        |            |   | Bylaws of Registrant (3) |
|    | 3.3        |            |   | Amendment No. 1 to Bylaws of Registrant (3) |
|    | 4.1        |            |   | Indenture, dated as of February 23, 2006, among  Steinway Musical Instruments, Inc., as Issuer; the subsidiary guarantors; and  the Bank of New York Trust Company, N.A., as Trustee (11) |
|         | 10.1       |            |   | Employment Agreement, dated May 8, 1989, between  Steinway Musical Properties, Inc. and Thomas Kurrer (2) |
|    | 10.2       |            |   | Employment Agreement, dated as of May 1, 1995,  between Steinway Musical Properties, Inc. and Bruce Stevens (2) |
|    | 10.3       |            |   | Employment Agreement Renewal and Amendment dated  January 1, 1997 by and between Steinway Musical Instruments, Inc. and Bruce  Stevens (5) |
|    | 10.4       |            |   | Employment Agreement, dated as of May 1, 1995, between  Steinway Musical Properties, Inc. and Dennis Hanson (2) |
|    | 10.5       |            |   | Employment Agreement Renewal and Amendment dated  January 1, 1997 by and between Steinway Musical Instruments, Inc. and Dennis  Hanson (5) |
|    | 10.6       |            |   | Employment Agreement, dated as of January 4, 1999,  between the Registrant and Dana Messina (6) |
|    | 10.7       |            |   | Employment Agreement, dated as of January 4, 1999,  between the Registrant and Kyle Kirkland (6) |
|    | 10.8       |            |   | Environmental Indemnification and Non-Competition  Agreement, dated as of August 9, 1993, between The Selmer Company, Inc. and  Philips Electronics North American Corporation (1) |
|    | 10.9       |            |   | Distribution Agreement, dated November 1, 1952, by  and between H. & A. Selmer, Inc. and Henri Selmer & Cie (1) |
|    | 10.10      |            |   | Form of Non-compete Agreement dated July 1996  between Steinway Musical Instruments, Inc. and each of Thomas Burzycki, Bruce  Stevens, Dennis Hanson and Michael Vickrey (4) |
|    | 10.11      |            |   | Employment Agreement dated November 11, 2002 between  Conn-Selmer, Inc. and John M. Stoner, Jr. (7) |
|    | 10.12      |            |   | Third Amended and Restated Credit Agreement, dated  as of September 29, 2006, among Conn-Selmer, Inc., f/k/a The Selmer  Company, Inc., and the surviving corporation of the merger of United Musical  Instruments USA, Inc., United Musical Instruments Holdings, Inc.  and The SMI Trust with and into Conn-Selmer, Inc., Steinway, Inc.,  Boston Piano Company, Inc., and together with Conn-Selmer and Steinway,  as borrowers, those signatories identified as guarantors, the lenders, and  GMAC Commercial Finance LLC (successor by merger to GMAC Commercial  Credit, LLC), as Administrative Agent (13) |
|    | 10.13      |            |   | Asset Purchase Agreement dated as of  December 15, 2006, by and between Steinway Musical  Instruments, Inc. and Dennis Bamber, Inc., d/b/a The Woodwind & The  Brasswind, and its Chapter 11 Estate (14) |
|    | 10.14      |            |   | Agreement between Conn-Selmer, Inc. and U.A.W. Local  2359 (9) |
|    | 10.15      |            |   | Labor Contract Agreement between Musser Division and  Carpenter Local 1027 Mill-Cabinet-Industrial Division affiliate of Chicago  Regional Counsel of Carpenters of the United Brotherhood of Carpenters and  Jointers of America (10) |
|    | 10.16      |            |   | Labor Contract Agreement between Frank Holton  Company and Local No. M94 of the International Brotherhood of Boilermakers,  Iron Shipbuilders, Blacksmiths, Forgers, and Helpers (10) |
|    | 10.17      |            |   | Summary Description of Compensation for Non-Employee  Directors (12) |
|    | 14.0       |            |   | Code of Ethics and Professional Conduct (8) |
|    | 21.1       |            |   | List of Subsidiaries of the Registrant |
|    | 23.1       |            |   | Consent of Independent Registered Public Accounting  Firm - Deloitte & Touche LLP |

 

81

----

 
|        | 31.1 |   |   | Certification of the Chief Executive Officer  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                     |
|--------|------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 31.2 |   |   | Certification of the Chief Financial Officer  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                     |
|   | 32.1 |   |   | Certification of the Principal Executive Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|   | 32.2 |   |   | Certification of the Principal Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

----

(1)             Previouslyfiled with the Commission on February 8, 1994 as an exhibit to the Registrant’sRegistration Statement on Form S-1.

(2)             Previouslyfiled with the Commission on June 7, 1995 as an exhibit to the Registrant’sRegistration Statement on Form S-4.

(3)             Previouslyfiled with the Commission on May 14, 1996 as an exhibit to the Registrant’sRegistration Statement on Form S-1.

(4)             Previouslyfiled with the Commission on July 25, 1996 as an exhibit to the Registrant’sAmendment No. 2 to Registration Statement on Form S-1.

(5)             Previouslyfiled with the Commission on March 27, 1997 as an exhibit to the Registrant’sAnnual Report on Form 10-K.

(6)             Previouslyfiled with the Commission on August 16, 1999 as an exhibit to the Registrant’sQuarterly Report on Form 10-Q.

(7)             Previouslyfiled with the Commission on March 18, 2003 as an exhibit to the Registrant’sAnnual Report on Form 10-K.

(8)             Previouslyfiled with the Commission on March 31, 2005 as an exhibit to the Registrant’sAnnual Report on Form 10-K.

(9)             Previouslyfiled with the Commission on May 10, 2005 as an exhibit to the Registrant’sQuarterly Report on Form 10-Q.

(10)       Previouslyfiled with the Commission on November 9, 2005 as an exhibit to the Registrant’sQuarterly Report on Form 10-Q.

(11)       Previouslyfiled with the Commission on February 27, 2006 as an exhibit to the Registrant’sCurrent Report on Form 8-K.

(12)       Previouslyfiled with the Commission on May 20, 2005 in the Registrant’s Current Report onForm 8-K.

(13)       Previouslyfiled with the Commission on October 4, 2006 as an exhibit to the Registrant’sCurrent Report on Form 8-K.

(14)       Previouslyfiled with the Commission on December 20, 2006 as an exhibit to theRegistrant’s Current Report on Form 8-K.

82

----

 

**Signatures**

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

Steinway Musical Instruments, Inc.
| By              | /s/ DANA D.  MESSINA |   | March 16, 2007 |   |
|-----------------|----------------------|--------|----------------|--------|
| Dana D. Messina |                 |   |           | (Date) |   |
|                 |                      |        |                |        |  |  |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed by the followingpersons on behalf of the registrant and in the capacities listen below on March16, 2007:
| Signature                | ** ** | **Title**                                                             |
|--------------------------|------------|-----------------------------------------------------------------------|
|                     |       |                                                                  |
| /s/ DANA D.  MESSINA     |       | Director and Chief Executive Officer (Principal  Executive Officer)   |
| Dana D. Messina          |       |                                                                  |
|                     |       |                                                                  |
| /s/ DENNIS M.  HANSON    |       | Chief Financial Officer (Principal Financial and  Accounting Officer) |
| Dennis M. Hanson         |       |                                                                  |
|                     |       |                                                                  |
| /s/ KYLE R.  KIRKLAND    |       | Chairman of the Board                                                 |
| Kyle R. Kirkland         |       |                                                                  |
|                     |       |                                                                  |
| /s/ JOHN M.  STONER, JR. |       | Director                                                              |
| John M. Stoner, Jr.      |       |                                                                  |
|                     |       |                                                                  |
| /s/ BRUCE A.  STEVENS    |       | Director                                                              |
| Bruce A. Stevens         |       |                                                                  |
|                     |       |                                                                  |
| /s/ PETER  MCMILLAN      |       | Director                                                              |
| Peter McMillan           |       |                                                                  |
|                     |       |                                                                  |
| /s/ A. CLINTON  ALLEN    |       | Director                                                              |
| A. Clinton Allen         |       |                                                                  |
|                     |       |                                                                  |
| /s/ RUDOLPH K.  KLUIBER  |       | Director                                                              |
| Rudolph K. Kluiber       |       |                                                                  |

 

83

----