Tableof Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 
| **x**  | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009** |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                      |
| **o**  | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                  |

 

**COMMISSIONFILE NUMBER 001-11911**

 

**STEINWAYMUSICAL INSTRUMENTS, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

Registrant’s telephonenumber including area code:     **(781) 894-9770**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements duringthe past 90 days.    Yes x  No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).    Yes o  Noo

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definition of “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer x         |
|------------------------------------------------|--------|-----------------------------|
|                                           |   |                        |
| Non-accelerated filer o                        |   | Smaller reporting company o |
| (Do not check if a  smaller reporting company) |   |                        |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).    Yes o  Nox

 

Number of sharesof Common Stock issued and outstanding as of November 6, 2009**:**

 
|   | Class A |   | 477,952    |
|--------|--------------|--------|------------|
|   | Ordinary     |   | 9,817,816  |
|   | Total        |   | 10,295,768 |

 

 

 

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**STEINWAY MUSICAL INSTRUMENTS, INC. ANDSUBSIDIARIES**

**FORM 10-Q**

**INDEX**

 
| **PART I**   | **FINANCIAL INFORMATION**                                                                                     |   |
|-------------------|---------------------------------------------------------------------------------------------------------------|--------|
| ** **        | ** **                                                                                                    |   |
| **Item 1.**       | **Condensed Consolidated Financial  Statements:**                                                             |   |
| ** **        | ** **                                                                                                    |   |
|              | Condensed Consolidated Statements of Operations Three  and nine months ended September 30, 2009 and 2008 | 3      |
|              |                                                                                                          |   |
|              | Condensed Consolidated Balance Sheets  September 30, 2009 and December 31, 2008                     | 4      |
|              |                                                                                                          |   |
|              | Condensed Consolidated Statements of Cash Flows Nine  months ended September 30, 2009 and 2008           | 5      |
|              |                                                                                                          |   |
|              | Condensed Consolidated Statement of Stockholders’  Equity Nine months ended September 30, 2009      | 6      |
|              |                                                                                                          |   |
|              | Notes to Condensed Consolidated Financial Statements                                                          | 7      |
|              |                                                                                                          |   |
| **Item 2.**       | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations**               | 22     |
| ** **        |                                                                                                          |   |
| **Item 3.**       | **Quantitative and Qualitative  Disclosures about Market Risk**                                               | 32     |
| ** **        | ** **                                                                                                    |   |
| **Item 4.**       | **Controls and Procedures**                                                                                   | 32     |
| ** **        | ** **                                                                                                    |   |
| **PART II.** | **OTHER INFORMATION**                                                                                         |   |
| ** **        | ** **                                                                                                    |   |
| **Item 6.**       | **Exhibits**                                                                                                  | 33     |
| ** **        | ** **                                                                                                    |   |
|              | **Signatures**                                                                                                | 34     |

 

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| **PART I** | **FINANCIAL INFORMATION**                        |
|-----------------|--------------------------------------------------|
|            |                                             |
| **ITEM 1**      | **CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS** |

 

**STEINWAY MUSICAL INSTRUMENTS, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**Unaudited**

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

 
| ** **                                       | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                       | ** ** | **2009**                                                 | ** ** | **2008**                                                | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  sales                                       |       | $                                                        | 82,634     |                                                    | $          | 100,488 |   | $ | 224,738 |   | $ | 293,195 |   |
| Cost  of sales                                   |       | 59,229                                                   |       | 70,559                                                  |       | 163,826 |   | 206,829 |   |
|                                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Gross  profit                                    |       | 23,405                                                   |       | 29,929                                                  |       | 60,912 |   | 86,366 |   |
|                                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Operating  expenses:                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Sales  and marketing                             |       | 9,638                                                    |       | 11,682                                                  |       | 30,118 |   | 37,023 |   |
| General  and administrative                      |       | 7,491                                                    |       | 9,037                                                   |       | 22,860 |   | 26,971 |   |
| Other  operating expense                         |       | 145                                                      |       | 68                                                      |       | 347 |   | 537 |   |
| Facility  rationalization and impairment charges |       | 976                                                      |       | 8,555                                                   |       | 976 |   | 9,617 |   |
| Total  operating expenses                        |       | 18,250                                                   |       | 29,342                                                  |       | 54,301 |   | 74,148 |   |
|                                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Income  from operations                          |       | 5,155                                                    |       | 587                                                     |       | 6,611 |   | 12,218 |   |
|                                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Other  income, net                               |       | (223                                                     | )          | (405                                                    | )          | (1,034 | ) | (388 | ) |
| Net  gain on extinguishment of debt              |       | —                                                   |       | —                                                  |       | (3,434 | ) | (636 | ) |
| Interest  income                                 |       | (320                                                     | )          | (602                                                    | )          | (1,302 | ) | (2,343 | ) |
| Interest  expense                                |       | 2,954                                                    |       | 2,980                                                   |       | 8,974 |   | 9,154 |   |
| Total  non-operating expenses                    |       | 2,411                                                    |       | 1,973                                                   |       | 3,204 |   | 5,787 |   |
|                                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Income  (loss) before income taxes               |       | 2,744                                                    |       | (1,386                                                  | )          | 3,407 |   | 6,431 |   |
|                                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Income  tax provision (benefit)                  |       | 2,107                                                    |       | (1,126                                                  | )          | 2,385 |   | 1,671 |   |
|                                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Net  income (loss)                               |       | $                                                        | 637        |                                                    | $          | (260 | ) | $ | 1,022 |   | $ | 4,760 |   |
|                                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Earnings  (loss) per share                       |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                                            |       | $                                                        | 0.07       |                                                    | $          | (0.03 | ) | $ | 0.12 |   | $ | 0.56 |   |
| Diluted                                          |       | $                                                        | 0.07       |                                                    | $          | (0.03 | ) | $ | 0.12 |   | $ | 0.55 |   |
|                                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted  average shares:                        |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                                            |       | 8,581,343                                                |       | 8,538,264                                               |       | 8,549,287 |   | 8,565,928 |   |
| Diluted                                          |       | 8,583,320                                                |       | 8,538,264                                               |       | 8,551,885 |   | 8,652,571 |   |

 

See notes tocondensed consolidated financial statements.

 

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**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**Unaudited**

**(In Thousands)**

 
| ** **                                                                                                              | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Assets                                                                                                                  |       |                         |       |                        |       |
| Current assets:                                                                                                         |       |                         |       |                        |       |
| Cash                                                                                                                    |       | $                            | 50,254     |                        | $          | 44,380 |   |
| Accounts, notes and  other receivables, net of allowances  of $16,192 and $15,895 in 2009 and 2008, respectively        |       | 59,448                       |       | 60,581                      |       |
| Inventories, net                                                                                                        |       | 167,997                      |       | 166,508                     |       |
| Prepaid expenses and  other current assets                                                                              |       | 12,732                       |       | 14,156                      |       |
| Deferred tax assets                                                                                                     |       | 11,707                       |       | 11,642                      |       |
| Total current assets                                                                                                    |       | 302,138                      |       | 297,267                     |       |
|                                                                                                                    |       |                         |       |                        |       |
| Property, plant and  equipment, net of accumulated depreciation  of $105,421 and $99,140 in 2009 and 2008, respectively |       | 88,932                       |       | 88,708                      |       |
| Trademarks                                                                                                              |       | 15,386                       |       | 16,148                      |       |
| Goodwill                                                                                                                |       | 24,389                       |       | 23,708                      |       |
| Other intangibles, net                                                                                                  |       | 4,493                        |       | 5,568                       |       |
| Other assets                                                                                                            |       | 11,610                       |       | 12,380                      |       |
| Long-term deferred tax  assets                                                                                          |       | 9,265                        |       | 9,539                       |       |
|                                                                                                                    |       |                         |       |                        |       |
| Total assets                                                                                                            |       | $                            | 456,213    |                        | $          | 453,318 |   |
|                                                                                                                    |       |                         |       |                        |       |
| Liabilities and  stockholders’ equity                                                                              |       |                         |       |                        |       |
| Current liabilities:                                                                                                    |       |                         |       |                        |       |
| Debt                                                                                                                    |       | $                            | 561        |                        | $          | 3,325 |   |
| Accounts payable                                                                                                        |       | 13,295                       |       | 16,947                      |       |
| Other current  liabilities                                                                                              |       | 33,297                       |       | 42,282                      |       |
| Total current  liabilities                                                                                              |       | 47,153                       |       | 62,554                      |       |
|                                                                                                                    |       |                         |       |                        |       |
| Long-term debt                                                                                                          |       | 192,565                      |       | 183,425                     |       |
| Deferred tax  liabilities                                                                                               |       | 7,647                        |       | 6,263                       |       |
| Pension and other  postretirement benefit liabilities                                                                   |       | 37,291                       |       | 37,543                      |       |
| Other non-current  liabilities                                                                                          |       | 6,076                        |       | 6,452                       |       |
| Total liabilities                                                                                                       |       | 290,732                      |       | 296,237                     |       |
|                                                                                                                    |       |                         |       |                        |       |
| Commitments and  contingent liabilities                                                                                 |       |                         |       |                        |       |
|                                                                                                                    |       |                         |       |                        |       |
| Stockholders’ equity:                                                                                              |       |                         |       |                        |       |
| Common stock                                                                                                            |       | 11                           |       | 11                          |       |
| Additional paid-in  capital                                                                                             |       | 97,675                       |       | 96,180                      |       |
| Retained earnings                                                                                                       |       | 122,101                      |       | 121,079                     |       |
| Accumulated other  comprehensive loss                                                                                   |       | (7,034                       | )          | (12,917                     | )          |
| Treasury stock, at cost                                                                                                 |       | (47,272                      | )          | (47,272                     | )          |
| Total stockholders’  equity                                                                                        |       | 165,481                      |       | 157,081                     |       |
|                                                                                                                    |       |                         |       |                        |       |
| Total liabilities and  stockholders’ equity                                                                        |       | $                            | 456,213    |                        | $          | 453,318 |   |

 

See notes to condensedconsolidated financial statements.

 

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**STEINWAY MUSICAL INSTRUMENTS, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**Unaudited**

**(In Thousands)**

 
| ** **                                                                    | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2009**                                                | ** ** | **2008** | ** ** |
| Cash  flows from operating activities:                                        |       |                                                    |       |   |   |
| Net  income                                                                   |       | $                                                       | 1,022      |   | $ | 4,760 |   |
| Adjustments  to reconcile net income to cash flows from operating activities: |       |                                                    |       |   |   |
| Depreciation  and amortization                                                |       | 7,845                                                   |       | 8,217 |   |
| Amortization  of bond discount                                                |       | 114                                                     |       | 122 |   |
| Net  gain on extinguishment of debt                                           |       | (3,434                                                  | )          | (636 | ) |
| Facility  rationalization charges                                             |       | —                                                  |       | 1,062 |   |
| Intangible  asset impairment                                                  |       | 976                                                     |       | 8,555 |   |
| Stock-based  compensation expense                                             |       | 890                                                     |       | 811 |   |
| Excess  tax benefits from stock-based awards                                  |       | —                                                  |       | (4 | ) |
| Tax  benefit from stock option exercises                                      |       | —                                                  |       | 5 |   |
| Deferred  tax expense (benefit)                                               |       | 169                                                     |       | (3,920 | ) |
| Other                                                                         |       | 1,007                                                   |       | 742 |   |
| Changes  in operating assets and liabilities:                                 |       |                                                    |       |   |   |
| Accounts,  notes and other receivables                                        |       | 674                                                     |       | (3,494 | ) |
| Inventories                                                                   |       | (1,244                                                  | )          | (12,544 | ) |
| Prepaid  expenses and other assets                                            |       | 2,026                                                   |       | (1,582 | ) |
| Accounts  payable                                                             |       | (3,724                                                  | )          | 5,185 |   |
| Other  liabilities                                                            |       | (7,790                                                  | )          | (9,681 | ) |
| Cash  flows from operating activities                                         |       | (1,469                                                  | )          | (2,402 | ) |
|                                                                          |       |                                                    |       |   |   |
| Cash  flows from investing activities:                                        |       |                                                    |       |   |   |
| Capital  expenditures                                                         |       | (2,996                                                  | )          | (3,834 | ) |
| Proceeds  from disposals of property, plant and equipment                     |       | 24                                                      |       | 817 |   |
| Acquisition  of businesses, net of cash acquired                              |       | (820                                                    | )          | (3,181 | ) |
| Cash  flows from investing activities                                         |       | (3,792                                                  | )          | (6,198 | ) |
|                                                                          |       |                                                    |       |   |   |
| Cash  flows from financing activities:                                        |       |                                                    |       |   |   |
| Borrowings  under lines of credit                                             |       | 231,793                                                 |       | 5,923 |   |
| Repayments  under lines of credit                                             |       | (214,552                                                | )          | (5,395 | ) |
| Repayments  of long-term debt, net of discount                                |       | (7,280                                                  | )          | (4,981 | ) |
| Proceeds  from issuance of common stock                                       |       | 605                                                     |       | 817 |   |
| Purchase  of treasury stock                                                   |       | —                                                  |       | (1,981 | ) |
| Excess  tax benefits from stock-based awards                                  |       | —                                                  |       | 4 |   |
| Cash  flows from financing activities                                         |       | 10,566                                                  |       | (5,613 | ) |
|                                                                          |       |                                                    |       |   |   |
| Effect  of foreign exchange rate changes on cash                              |       | 569                                                     |       | (803 | ) |
|                                                                          |       |                                                    |       |   |   |
| Change  in cash                                                               |       | 5,874                                                   |       | (15,016 | ) |
| Cash,  beginning of period                                                    |       | 44,380                                                  |       | 37,304 |   |
| Cash,  end of period                                                          |       | $                                                       | 50,254     |   | $ | 22,288 |   |
|                                                                          |       |                                                    |       |   |   |
| Supplemental  Cash Flow Information                                           |       |                                                    |       |   |   |
| Interest  paid                                                                |       | $                                                       | 13,482     |   | $ | 12,398 |   |
| Income  taxes paid                                                            |       | $                                                       | 4,139      |   | $ | 11,942 |   |

 

See notes to condensedconsolidated financial statements.

 

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**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’EQUITY**

**Unaudited**

**(In ThousandsExcept Share Data)**

** **
| ** **                                                 | ** ** | **Common********Stock** | ** ** | **Additional********Paid-In********Capital** | ** ** | **Retained********Earnings** | ** ** | **Accumulated********Other********Comprehensive********Loss** | ** ** | **Treasury********Stock** | ** ** | **Total********Stockholders’********Equity** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|----------------------------------------------|------------|------------------------------|------------|---------------------------------------------------------------|------------|---------------------------|------------|---------------------------------------------------|------------|
|                                                       |       |                    |       |                                         |       |                         |       |                                                          |       |                      |       |                                              |       |
| Balance,  January 1, 2009                             |       | $                       | 11         |                                         | $          | 96,180                       |       | $                                                             | 121,079    |                      | $          | (12,917                                           | )          | $ | (47,272 | ) | $ | 157,081 |   |
| Comprehensive  income:                                     |       |                    |       |                                         |       |                         |       |                                                          |       |                      |       |                                              |       |
| Net  income                                                |       |                    |       |                                         |       | 1,022                        |       |                                                          |       |                      |       | 1,022                                             |       |
| Changes  in pension and other postretirement benefits, net |       |                    |       |                                         |       |                         |       | 2,193                                                         |       |                      |       | 2,193                                             |       |
| Foreign  currency translation adjustments                  |       |                    |       |                                         |       |                         |       | 3,690                                                         |       |                      |       | 3,690                                             |       |
| Total  comprehensive income                                |       |                    |       |                                         |       |                         |       |                                                          |       |                      |       | 6,905                                             |       |
| Stock-based  compensation                                  |       |                    |       | 890                                          |       |                         |       |                                                          |       |                      |       | 890                                               |       |
| Issuance  of 62,509 shares of common stock                 |       |                    |       | 605                                          |       |                         |       |                                                          |       |                      |       | 605                                               |       |
| Balance,  September 30, 2009                          |       | $                       | 11         |                                         | $          | 97,675                       |       | $                                                             | 122,101    |                      | $          | (7,034                                            | )          | $ | (47,272 | ) | $ | 165,481 |   |

 

See notes to condensedconsolidated financial statements.

 

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**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED**

**FINANCIALSTATEMENTS**

**SEPTEMBER30, 2009**

**Unaudited**

**(TabularAmounts In Thousands Except Share, Per Share, Option, and Per Option Data)**

 

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

 

Theaccompanying condensed consolidated financial statements of Steinway MusicalInstruments, Inc. and subsidiaries (the “Company”) for the three and ninemonths ended September 30, 2009 and 2008 are unaudited. In the opinion ofmanagement, these statements have been prepared on the same basis as theaudited consolidated financial statements as of and for the year ended December 31,2008, and include all adjustments which are of a normal and recurring nature,necessary for the fair presentation of financial position, results ofoperations and cash flows for the interim periods. We encourage you to read thecondensed consolidated financial statements in conjunction with the riskfactors, consolidated financial statements and notes thereto contained in theCompany’s Annual Report on Form 10-K for the year ended December 31,2008 filed with the Securities and Exchange Commission (“SEC”). The results ofoperations for the three and nine months ended September 30, 2009 are notnecessarily indicative of the results that may be expected for the entire year.

 

Throughoutthis report “we,” “us,” and “our” refer to Steinway Musical Instruments, Inc.and subsidiaries taken as a whole.

 

**(2)****                                ****Summary of Significant AccountingPolicies**

 

**Principlesof Consolidation**- Our condensed consolidated financial statements include the accounts of alldirect and indirect subsidiaries, all of which are wholly owned, including thepiano (“Steinway”), band (“Conn-Selmer”), and online music (“Arkiv”) divisions.We have included results for Arkiv within the piano segment elsewhere in thisreport. We also acquired a retail store in Dusseldorf, Germany in February 2009.Results for this entity, which are not material, have been included within thepiano segment since the date of acquisition. Intercompany balances have beeneliminated in consolidation.

 

**Use ofEstimates****- The preparation of financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America necessarily requires us to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the date of the financial statements, andthe reported amounts of revenues and expenses during the reporting period.Actual results could differ from those estimates.

 

**IncomeTaxes** - Weprovide for income taxes using an asset and liability approach. We computedeferred income tax assets and liabilities for differences between thefinancial statement and tax bases of assets and liabilities that will result intaxable or deductible amounts in the future based on enacted tax laws and ratesapplicable to the periods in which the differences are expected to affecttaxable income. We establish valuation allowances when necessary to reducedeferred tax assets to the amount that more likely than not will be realized.

 

We provide reserves for potential payments of tax to various taxauthorities related to uncertain tax positions and other issues. Reservesrelated to uncertain tax positions are based on a determination of whether andhow much of a tax benefit taken in our tax filings or positions is more likelythan not to be realized, assuming that the matter in question will be raised bythe tax authorities. Potential interest and penalties associated with suchuncertain tax positions are recorded as a component of income tax expense. Webelieve appropriate provisions for outstanding issues have been made.

 

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Income tax-related interestand penalties is reported as a component of income tax expense. We file income tax returns at theU.S. federal, state, and local levels, as well as in several foreignjurisdictions. With few exceptions, our returns are no longer subject toexaminations for years before 2005.

 

Theliability for uncertain tax positions decreased $0.9 million in the first ninemonths of 2009 as a result of settlements with state and local taxingauthorities. Although we believe our tax estimates are appropriate, the finaldetermination of tax audits and any related litigation could result in changesin our estimates.

 

**Stock-basedCompensation** - Werecord compensation cost on a straight-line basis over the award’s requisiteservice period for all share-based awards granted. We estimate the fair valueof our stock option awards (less estimated forfeitures) and employee stockpurchase plan rights on the date of grant using the Black-Scholes optionvaluation model.

 

**Earnings (loss) per Common Share** - We compute earnings (loss) per shareusing the weighted-average number of common shares outstanding during eachperiod. Diluted earnings (loss) per common share reflects the dilutive impactof shares subscribed under the Employee Stock Purchase Plan (“Purchase Plan”)and effect of our outstanding options using the treasury stock method, exceptwhen such options would be antidilutive.

 

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

 
| ** **                                         | ** ** | **Three  Months Ended September 30,** | ** ** | **Nine  Months Ended September 30,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                         | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| Weighted-average  shares:                          |       |                                       |       |                                      |       |   |   |   |   |
| For  basic earnings per share                      |       | 8,581,343                                  |       | 8,538,264                                 |       | 8,549,287 |   | 8,565,928 |   |
| Dilutive  effect of stock-based compensation plans |       | 1,977                                      |       | —                                    |       | 2,598 |   | 86,643 |   |
| For  diluted earnings per share                    |       | 8,583,320                                  |       | 8,538,264                                 |       | 8,551,885 |   | 8,652,571 |   |

 

We did not include any of the 1,141,016 outstandingoptions to purchase shares of common stock in the computation of dilutedearnings per share for the three and nine months ended September 30, 2009because generally their exercise prices were more than the average market priceof our common shares and, therefore, antidilutive. We did not include any ofthe 807,876 outstanding options to purchase shares of common stock in thecomputation of diluted earnings per share for the three months ended September 30,2008, because they were antidilutive. For the nine months ended September 30,2008, 195,300 shares were antidilutive and excluded from the calculation.

 

**Accumulated Other Comprehensive Loss** - Accumulated other comprehensive lossis comprised of foreign currency translation adjustments and pension and otherpost-retirement benefits. The components of accumulated other comprehensiveloss are as follows:

 
| ** **                       | ** ** | **Foreign  Currency********Translation  Adjustments** | ** ** | **Pension &  Other  Post-Retirement  Benefits** | ** ** | **Tax  Impact of  Pension & Other  Post-Retirement  Benefits** | ** ** | **Accumulated  Other  Comprehensive Loss** | ** ** |
|----------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|--------------------------------------------|------------|
|                             |       |                                                  |       |                                                     |       |                                                                    |       |                                       |       |
| Balance  January 1, 2009    |       | $                                                     | 5,050      |                                                     | $          | (29,985                                                                 | )          | $                                          | 12,018     |   | $ | (12,917 | ) |
| Activity                         |       | 3,690                                                 |       | 3,656                                                    |       | (1,463                                                                  | )          | 5,883                                      |       |
| Balance  September 30, 2009 |       | $                                                     | 8,740      |                                                     | $          | (26,329                                                                 | )          | $                                          | 10,555     |   | $ | (7,034 | ) |

 
| ** **                       | ** ** | **Foreign  Currency********Translation  Adjustments** | ** ** | **Pension &  Other  Post-Retirement  Benefits** | ** ** | **Tax  Impact of  Pension & Other  Post-Retirement  Benefits** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** |
|----------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
|                             |       |                                                  |       |                                                     |       |                                                                    |       |                                                 |       |
| Balance  January 1, 2008    |       | $                                                     | 9,041      |                                                     | $          | (11,616                                                                 | )          | $                                                    | 4,348      |   | $ | 1,773 |   |
| Activity                         |       | (2,584                                                | )          | —                                                   |       | —                                                                  |       | (2,584                                               | )          |
| Balance  September 30, 2008 |       | $                                                     | 6,457      |                                                     | $          | (11,616                                                                 | )          | $                                                    | 4,348      |   | $ | (811 | ) |

 

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**RecentAccounting Pronouncements**— In September 2009, we adopted Financial Accounting StandardsBoard (“FASB”) Accounting Standards Codification (“ASC”) 105-10, “Generally Accepted Accounting Principles —Overall.”  FASB ASC 105-10 establishes the FASBAccounting Standards Codification (“Codification”) to become the source ofauthoritative U.S. generally accepted accounting principles (“U.S. GAAP”)recognized by the FASB to be applied by nongovernmental entities.  Rules andinterpretive releases of the Securities and Exchange Commission (“SEC”) underauthority of federal securities laws are also sources of authoritative U.S.GAAP for SEC registrants. The adoption of this standard did not have a materialimpact on our consolidated financial position or results of operations.

 

In June 2009, the FASB issued a new accountingstandard, ASC 810,* *whichchanges the consolidation rules as they relate to variable interestentities. Specifically, the new standard makes significant changes to the modelfor determining who should consolidate a variable interest entity, and alsoaddresses how often this assessment should be performed. We will be required tocomply with this new standard on January 1, 2010. We do not expect theadoption will have a material impact on our consolidated financial statements.

 

In August 2009, theFASB issued a new accounting standard, Accounting Standards Update (“ASU”)2009-05, which provides additional guidance on the measurement of liabilitiesat fair value. Specifically, when a quoted price in an active market forthe identical liability is not available, the new standard requires that thefair value of a liability be measured using one or more of the valuationtechniques that should maximize the use of relevant observable inputs andminimize the use of unobservable inputs. In addition, an entity is notrequired to include a separate input or adjustment to other inputs relating tothe existence of a restriction that prevents the transfer of aliability. We will be required to comply with this standard in the fourthquarter of 2009. We do not expect the adoption will have a material impact onour consolidated financial statements.

 

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

 
| ** **      | ** ** | **September 30,********2009** | ** ** | **December 31,********2008** | ** ** |
|-----------------|------------|------------------------------------|------------|-----------------------------------|------------|
| Raw  materials  |       | $                                  | 17,931     |                              | $          | 17,930 |   |
| Work-in-process |       | 46,170                             |       | 51,057                            |       |
| Finished  goods |       | 103,896                            |       | 97,521                            |       |
|            |       | $                                  | 167,997    |                              | $          | 166,508 |   |

 

**(4)****                                ****Goodwill, Trademarks, and OtherIntangible Assets**

 

Intangible assets other than goodwill and indefinite-lived trademarksare amortized on a straight-line basis over their estimated useful lives.Deferred financing costs are amortized over the repayment periods of theunderlying debt. We performed our annual goodwill and intangible assetimpairment test as of July 31, 2009. Based on our analysis, it wasdetermined that a portion of the trademarks associated with the online music businessof the piano division was impaired. Our fall budgeting and planning process providesmulti-year cash flows which we use to conduct our annual impairment testing ofintangible assets. This testing indicated a decline in estimated forecasted discountedcash flows expected by the online music business largely as a result of theeconomic downturn. Accordingly, we wrote down the trademarks by $1.0million during the period. Our analysis of the other piano and band divisiontrademarks did not indicate an impairment; therefore, no charge was takenagainst those assets or any other intangible assets attributable to thosedivisions. No other events or circumstances occurred subsequent to our annualimpairment test which would have indicated that these assets may be impaired.

 

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The changes in carryingamounts of goodwill and trademarks are as follows:

 
| ** **                           | ** ** | **Piano** | ** ** | **Band** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|-----------|------------|----------|------------|-----------|------------|
| Goodwill:                            |       |      |       |     |       |      |       |
| Balance,  January 1, 2009       |       | $         | 23,708     |     | $          | —    |       | $ | 23,708 |   |
| Foreign  currency translation impact |       | 681       |       | —   |       | 681       |       |
| Balance,  September 30, 2009    |       | $         | 24,389     |     | $          | —    |       | $ | 24,389 |   |
|                                 |       |      |       |     |       |      |       |
| Trademarks:                          |       |      |       |     |       |      |       |
| Balance,  January 1, 2009       |       | $         | 10,324     |     | $          | 5,824     |       | $ | 16,148 |   |
| Impairment  charge                   |       | (976      | )          | —   |       | (976      | )          |
| Foreign  currency translation impact |       | 214       |       | —   |       | 214       |       |
| Balance,  September 30, 2009    |       | $         | 9,562      |     | $          | 5,824     |       | $ | 15,386 |   |

 

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

 
| ** **                               | ** ** | **September 30,********2009** | ** ** | **December 31,********2008** | ** ** |
|------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| Gross  deferred financing costs:         |       | $                                  | 5,336      |                              | $          | 5,640 |   |
| Accumulated  amortization                |       | (2,979                             | )          | (2,636                            | )          |
| Deferred  financing costs, net           |       | $                                  | 2,357      |                              | $          | 3,004 |   |
|                                     |       |                               |       |                              |       |
| Gross  non-compete agreements:           |       | $                                  | 250        |                              | $          | 750 |   |
| Accumulated  amortization                |       | (69                                | )          | (469                              | )          |
| Non-compete  agreements, net             |       | $                                  | 181        |                              | $          | 281 |   |
|                                     |       |                               |       |                              |       |
| Gross  customer relationships:           |       | $                                  | 508        |                              | $          | 425 |   |
| Accumulated  amortization                |       | (138                               | )          | (53                               | )          |
| Customer  relationships, net             |       | $                                  | 370        |                              | $          | 372 |   |
|                                     |       |                               |       |                              |       |
| Gross  website and developed technology: |       | $                                  | 2,176      |                              | $          | 2,176 |   |
| Accumulated  amortization                |       | (591                               | )          | (265                              | )          |
| Website  and developed technology, net   |       | $                                  | 1,585      |                              | $          | 1,911 |   |
|                                     |       |                               |       |                              |       |
| Total  gross other intangibles:          |       | $                                  | 8,270      |                              | $          | 8,991 |   |
| Accumulated  amortization                |       | (3,777                             | )          | (3,423                            | )          |
| Other  intangibles, net                  |       | $                                  | 4,493      |                              | $          | 5,568 |   |

 

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Deferred financing costswere impacted by our purchase of $10.9 million of our Senior Notes in March 2009.This repurchase is described more fully in Note 6. Customer relationships wasimpacted by the purchase price allocation of less than $0.1 million relating toour acquisition of a retail store in Dusseldorf, Germany in February 2009.The weighted-average amortization period for deferred financing costs is sevenyears, and the weighted-average amortization period for all other amortizableintangibles is approximately five years. Total amortization expense is asfollows:

 
| ** **            | ** ** | **Three  Months Ended September 30,** | ** ** | **Nine  Months Ended June 30,** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|--------------------------------------|------------|
| ** **            | ** ** | **2009**                                   | ** ** | **2008**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                  |       |                                       |       |                                 |       |   |   |   |   |
| Amortization  expense |       | $                                          | 328        |                                 | $          | 336 |   | $ | 995 |   | $ | 795 |   |
|                       |            |                                            |            |                                      |            |  |  |  |  |  |  |  |  |

 

The following table showsthe total estimated amortization expense for the remainder of 2009 and beyond:

 
| Remainder  of 2009 |   | $     | 310    |   |
|--------------------|--------|-------|--------|--------|
| 2010               |   | 1,219 |   |
| 2011               |   | 1,150 |   |
| 2012               |   | 1,036 |   |
| 2013               |   | 684   |   |
| 2014               |   | 94    |   |
| Total              |   | $     | 4,493  |   |

 

**(5)****                                ****Other Current Liabilities**

 
| ** **                                                               | ** ** | **September 30,********2009** | ** ** | **December 31,********2008** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| Accrued  payroll and related benefits                                    |       | $                                  | 11,494     |                              | $          | 14,100 |   |
| Current  portion of pension and other postretirement benefit liabilities |       | 1,416                              |       | 1,357                             |       |
| Accrued  warranty expense                                                |       | 1,446                              |       | 1,451                             |       |
| Accrued  interest                                                        |       | 918                                |       | 4,022                             |       |
| Deferred  income                                                         |       | 5,908                              |       | 7,531                             |       |
| Environmental  liabilities                                               |       | 2,382                              |       | 2,577                             |       |
| Income  and other taxes payable                                          |       | 1,220                              |       | 2,557                             |       |
| Other  accrued expenses                                                  |       | 8,513                              |       | 8,687                             |       |
| Total                                                                    |       | $                                  | 33,297     |                              | $          | 42,282 |   |

 

Accrued warranty expense isrecorded at the time of sale for instruments that have a warranty periodranging from one to ten years. The accrued expense recorded is generallycalculated on a ratio of warranty costs to sales based on our warranty historyand is adjusted periodically following an analysis of actual warranty claims.

 

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The accrued warranty expense activity for the nine months ended September 30,2009 and 2008, and the year ended December 31, 2008 is as follows:

 
| ** **                           | ** ** | **September 30,********2009** | ** ** | **September 30,********2008** | ** ** | **December 31,******** 2008** | ** ** |
|--------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|-----------------------------------------|------------|
| Beginning  balance                   |       | $                                  | 1,451      |                               | $          | 1,541                                   |       | $ | 1,541 |   |
| Additions                            |       | 570                                |       | 788                                |       | 1,044                                   |       |
| Claims  and reversals                |       | (610                               | )          | (742                               | )          | (1,075                                  | )          |
| Foreign  currency translation impact |       | 35                                 |       | (32                                | )          | (59                                     | )          |
| Ending  balance                      |       | $                                  | 1,446      |                               | $          | 1,555                                   |       | $ | 1,451 |   |

 

**(6)****                                ****Long-Term Debt**

 

Our long-term debtconsists of the following:

 
| ** **                 | ** ** | **September 30,********2009** | ** ** | **December 31,******** 2008** | ** ** |
|----------------------------|------------|------------------------------------|------------|-----------------------------------------|------------|
| 7.00%  Senior Notes        |       | $                                  | 158,326    |                                    | $          | 169,250 |   |
| Unamortized  bond discount |       | (661                               | )          | (825                                    | )          |
| Domestic  line of credit   |       | 34,900                             |       | 15,000                                  |       |
| Overseas  lines of credit  |       | 561                                |       | 3,325                                   |       |
| Total                      |       | 193,126                            |       | 186,750                                 |       |
| Less:  current portion     |       | 561                                |       | 3,325                                   |       |
| Long-term  debt            |       | $                                  | 192,565    |                                    | $          | 183,425 |   |

 

Scheduled payments ofdebt are as follows:

 
| ** **         | ** ** | **September 30,********2009** | ** ** |
|--------------------|------------|------------------------------------|------------|
| Remainder  of 2009 |       | $                                  | 561        |   |
| 2010               |       | —                             |       |
| 2011               |       | 34,900                             |       |
| 2012               |       | —                             |       |
| 2013               |       | —                             |       |
| Thereafter         |       | 158,326                            |       |
| Total              |       | $                                  | 193,787    |   |

 

In March 2009,we repurchased $10.9 million of our Senior Notes at prices ranging from 65.5%to 68.0% plus interest. As a result, we recorded a net gain on extinguishmentof debt of $3.4 million. A summary of these

 

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transactions is asfollows:

 
| Principal  repurchased              |   | $      | 10,924 |   |
|-------------------------------------|--------|--------|--------|--------|
| Less:                               |   |   |   |
| Cash  paid                          |   | (7,280 | )      |
| Deferred  financing costs write-off |   | (160   | )      |
| Bond  discount write-off            |   | (50    | )      |
| Net  gain on extinguishment of debt |   | $      | 3,434  |   |

 

**(7)****                                ****FairValues of Financial Instruments**

 

Ourfinancial instruments, which are recorded at fair value, consist primarily offoreign currency contracts and marketable equity securities. We assess theinputs used to measure fair value using the following three-tier hierarchy,which indicates the extent to which inputs used are observable in the market.

 
| Level  1 | Valuation  is based upon unadjusted quoted prices for identical instruments traded in  active markets.                                                                                                                                                                                                                                                                                                                                                                                     |
|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| Level  2 | Valuation  is based upon quoted prices for identical or similar instruments such as  interest rates, foreign currency exchange rates, commodity rates and yield  curves, and model-based valuation techniques for which all significant  assumptions are observable in the market.                                                                                                                                                                                                         |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| Level  3 | Valuation  is generated from model-based techniques that use at least one significant  assumption not observable in the market. These unobservable assumptions  include management’s own judgments about the assumptions market participants  would use in pricing the asset or liability. Valuation techniques include use  of option pricing models, discounted cash flow models and similar techniques.  (We do not have any assets or liabilities carried at Level 3 fair value.) |

 

Wevalue our foreign currency contracts using internal models with observableinputs, including currency forward and spot prices. Estimated fair value hasbeen determined as the difference between the current forward rate and thecontract rate, multiplied by the notional amount of the contract, or upon theestimated fair value of purchased option contracts.

 

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Thefollowing table presents information about our assets and liabilities measuredat fair value on a recurring basis as of September 30, 2009 and December 31,2008 and the fair value hierarchy of the valuation techniques we utilized.

 
| ** **                                    | ** ** | **September 30,********2009** | ** ** | **December 31,********2008** | ** ** |
|-----------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| Financial  assets:                            |       |                               |       |                              |       |
| Trading  securities(1) - Level 1         |       | $                                  | 1,537      |                              | $          | 1,242 |   |
| Foreign  currency contracts(2) - Level 2 |       | 135                                |       | 584                               |       |
|                                          |       | $                                  | 1,672      |                              | $          | 1,826 |   |
|                                          |       |                               |       |                              |       |
| Financial  liabilities:                       |       |                               |       |                              |       |
| Foreign  currency contracts(2) - Level 2 |       | $                                  | 189        |                              | $          | 55 |   |

 

----

(1)          Our trading securitiespertain to the Supplemental Executive Retirement Plan (“SERP”) and are held ina Rabbi Trust. We record a corresponding liability for the same amount in ourfinancial statements, which represents our obligation to SERP participants.

 

(2)          Our foreign currencycontracts pertain to obligations or potential obligations to purchase or selleuros, pounds, U.S. dollars, and yen under various option and forwardcontracts.

 

We base the estimated fair value of our debton institutional quotes currently available to us. The historical cost netcarrying value and estimated fair value are as follows:

 
| ** **              | ** ** | **September 30,  2009**   | ** ** | **December 31,  2008**     | ** ** |
|-------------------------|------------|--------------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **Net  Carrying********Value** | ** ** | **Estimated********Fair Value** | ** ** | **Net  Carrying********Value** | ** ** | **Estimated********Fair Value** | ** ** |
| Financial  liabilities: |       |                           |       |                            |       |   |   |   |   |
| Debt                    |       | $                              | 193,787    |                            | $          | 170,038 |   | $ | 187,575 |   | $ | 135,954 |   |
|                         |            |                                |            |                                 |            |  |  |  |  |  |  |  |  |

 

The carrying values of accounts, notes and other receivables,marketable equity securities, and accounts payable approximate fair value.

 

**(8)****                                ****Stockholders’Equity and Stock-based Compensation Arrangements**

 

Our common stock iscomprised of two classes: Class A and Ordinary. With the exception ofdisparate voting power, both classes are substantially identical. Each share ofClass A common stock entitles the holder to 98 votes. Holders of Ordinarycommon stock are entitled to one vote per share. Each share of Class Acommon stock shall automatically convert to Ordinary common stock if, at anytime, that share of Class A common stock is not owned by an original Class Aholder. As of September 30, 2009 our Chairman and our Chief ExecutiveOfficer collectively owned 100% of the Class A common shares, representingapproximately 85% of the combined voting power of the Class A common stockand Ordinary common stock.

 

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**EmployeeStock Purchase Plan**- We have an employee stock purchase plan under which substantially allemployees may purchase Ordinary common stock through payroll deductions at apurchase price equal to 85% of the lower of the fair market values as of thebeginning or end of each twelve-month offering period. Stock purchases underthe Purchase Plan are limited to 5% of an employee’s annual base earnings. Wehave reserved 400,000 shares of common stock for issuance under this plan.

 

**Stock Plans** - The 2006 StockPlan provides for the granting of 1,000,000 stock options (includingincentive stock options and non-qualified stock options), stock appreciationrights and other stock awards to certain key employees, consultants andadvisors. Our stock options generally have five-year vesting terms and ten-yearoption terms.

 

Our 1996 Stock Plan has expired but still hasvested and unvested options outstanding. We reached our registered sharelimitation in early 2007, and had previously reserved 721,750 treasury stockshares to issue under this plan. We have since issued 98,974 shares of treasurystock to cover options exercised, with 372,376 remaining options outstanding.Since in most instances the average cost of the treasury stock exceeded theprice of the options exercised, the difference between the proceeds receivedand the average cost of the treasury stock issued resulted in a reduction ofretained earnings. This reduction was less than $0.1 million for the three andnine months ended September 30, 2008. There were no stock option exercisesduring the three and nine months ended September 30, 2009.

 

The compensation cost and the income tax benefitrecognized for these plans is as follows:

 
| ** **                                                        | ** ** | **Three  Months Ended********September 30,** | ** ** | **Nine  Months Ended********September 30,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                        | ** ** | **2009**                                          | ** ** | **2008**                                         | ** ** | **2009** | ** ** | **2008** | ** ** |
| Compensation  cost included in basic and diluted income per share |       | $0.03                                             |       | $0.03                                            |       | $0.09 |   | $0.08 |   |
| Stock-based  compensation expense                                 |       | 328                                               |       | 300                                              |       | 890 |   | 811 |   |
| Income  tax benefit                                               |       | 51                                                |       | 46                                               |       | 136 |   | 131 |   |

 

We measured thefair value of options on their grant date, including the valuation of theoption feature implicit in our Purchase Plan, using the Black-Scholesoption-pricing model. The risk-free interest rate is based on theweighted-average of U.S. Treasury rates over the expected life of the stockoption or the contractual life of the option feature in the Purchase Plan. Theexpected life of a stock option is based on historical data of similar option holders.We have segregated our employees into two groups based on historical exerciseand termination behavior. The expected life of the option feature in thePurchase Plan is the same as its contractual life. Expected volatility is basedon historical volatility of our stock over the expected life of the option, asour options are not readily tradable.

 

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Key assumptionsused to apply this pricing model to the 2006 Stock Plan are as follows:

 
| ** **                                 | ** ** | **Three  Months Ended********September 30,** | ** ** | **Nine  Months Ended********September 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                 | ** ** | **2009**                                          | ** ** | **2008**                                         | ** ** | **2009** | ** ** | **2008** | ** ** |
| Risk  free interest rate                   |       | 3.1%                                              |       | 3.1%                                             |       | 3.1% |   | 3.4% |   |
| Weighted  average expected life (in years) |       | 7.4                                               |       | 6.7                                              |       | 7.4 |   | 7.2 |   |
| Expected  volatility of underlying stock   |       | 32.6%                                             |       | 26.0%                                            |       | 32.6% |   | 25.9% |   |
| Expected  dividends                        |       | n/a                                               |       | n/a                                              |       | n/a |   | n/a |   |
| Weighted  average fair value               |       | $4.70                                             |       | $9.92                                            |       | $4.70 |   | $9.94 |   |

 

The followingtable sets forth information regarding the Stock Plans:

 
| ** **                              | ** ** | **Number  of  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Remaining  Contractual  Life********(in years)** | ** ** | **Aggregate********Intrinsic********Value********(not in 000s)** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-----------------------------------------|------------|----------------------------------------------------|------------|------------------------------------------------------------------|------------|
| Outstanding  at January 1, 2009    |       | 807,216                 |       | $                                       | 24.92      |                                               |       |                                                             |       |   |
| Granted                                 |       | 355,000                 |       | 11.20                                   |       |                                               |       |                                                             |       |
| Exercised                               |       | —                  |       | —                                  |       |                                               |       |                                                             |       |
| Forfeited                               |       | (21,200                 | )          | 23.50                                   |       |                                               |       |                                                             |       |
| Outstanding  at September 30, 2009 |       | 1,141,016               |       | $                                       | 20.68      |                                               | 7.2        |                                                             | $          | 244,950 |   |
|                                    |       |                    |       |                                    |       |                                               |       |                                                             |       |
| Exercisable  at September 30, 2009 |       | 470,596                 |       | $                                       | 22.66      |                                               | 4.4        |                                                             | $          | — |   |

 

There were no options exercised during the three and nine months ended September 30,2009. The total intrinsic value of the options exercised during the three andnine months ended September 30, 2008 was less than $0.1 million.

 

As of September 30, 2009, there was $4.4 million of unrecognizedcompensation cost related to nonvested share-based compensation arrangementsgranted under the Stock Plan. This compensation cost is expected to berecognized over a period of 4.2 years.

 

Cash received from option exercises under the Stock Plans for theperiod ended September 30, 2008 was $0.1 million. Cash flows from taxbenefits resulting from tax deductions in excess of the compensation costrecognized for stock-based awards under a fair value basis (excess taxbenefits) are required to be classified as a cash flow from financing activities.Accordingly, for the period ended September 30, 2008, less than $0.1million of excess tax benefits has been classified as an outflow from operatingactivities and an inflow from financing activities in the statement of cashflows. For the period ended September 30, 2008, less than $0.1 million oftax benefit from stock option exercises is presented as a cash inflow fromoperating activities.

 

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The followingtables set forth information regarding the Purchase Plan:

 
| ** **                                                   | ** ** | **Three  Months Ended********September 30,** | ** ** | **Nine  Months Ended********September 30,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                   | ** ** | **2009**                                          | ** ** | **2008**                                         | ** ** | **2009** | ** ** | **2008** | ** ** |
| Risk-free  interest rate                                     |       | 1.9%                                              |       | 3.8%                                             |       | 2.0% |   | 4.3% |   |
| Weighted-average  expected life of option feature (in years) |       | 1.0                                               |       | 1.0                                              |       | 1.0 |   | 1.0 |   |
| Expected  volatility of underlying stock                     |       | 25.8%                                             |       | 25.6%                                            |       | 25.7% |   | 25.7% |   |
| Expected  dividends                                          |       | n/a                                               |       | n/a                                              |       | n/a |   | n/a |   |
| Weighted-average  fair value of option feature               |       | $5.97                                             |       | $7.88                                            |       | $6.12 |   | $8.27 |   |

 
| ** **                              | ** ** | **Number  of  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Remaining  Contractual  Life********(in years)** | ** ** | **Aggregate********Intrinsic********Value********(not in 000s)** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-----------------------------------------|------------|----------------------------------------------------|------------|------------------------------------------------------------------|------------|
| Outstanding  at January 1, 2009    |       | 11,828                  |       | $                                       | 23.36      |                                               |       |                                                             |       |   |
| Shares  subscribed                      |       | 61,512                  |       | 9.68                                    |       |                                               |       |                                                             |       |
| Exercised                               |       | (62,509                 | )          | 9.68                                    |       |                                               |       |                                                             |       |
| Canceled                                |       | (1,763                  | )          | 9.68                                    |       |                                               |       |                                                             |       |
| Outstanding  at September 30, 2009 |       | 9,068                   |       | $                                       | 9.65       | (1)                                                | 0.8        |                                                             | $          | 20,312 |   |
|                                         |            |                         |            |                                         |            |                                                    |            |                                                                  |            |  |  |

 

----

(1) Reflectsthe price set on August 3, 2009, the first business day of the new Purchase Planyear.

 

Cash received from shares issued under the Purchase Plan was $0.6million and $0.7 million for the nine months ended September 30, 2009 and 2008,respectively.

 

**(9)****                                ****Other Income, Net**

** **
| ** **                         | ** ** | **Three  Months Ended September 30,** | ** ** | **Nine  Months Ended September 30,** | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                         | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|                               |       |                                       |       |                                      |       |   |   |   |   |
| West  57th Street building income  |       | $                                          | (1,552     | )                                         | $          | (1,163 | ) | $ | (4,610 | ) | $ | (3,490 | ) |
| West  57th Street building expense |       | 1,214                                      |       | 823                                       |       | 3,400 |   | 2,464 |   |
| Foreign  exchange loss (gain), net |       | 541                                        |       | (178                                      | )          | 890 |   | 180 |   |
| Miscellaneous                      |       | (426                                       | )          | 113                                       |       | (714 | ) | 458 |   |
| Other  income, net                 |       | $                                          | (223       | )                                         | $          | (405 | ) | $ | (1,034 | ) | $ | (388 | ) |

 

Prior to January 1, 2009, our building on West 57th Street in New York City was under a masterlease agreement whereby all of our interest was leased back to the owner of theland. Rental expense on the land and rental income associated with the masterlease were included, along with other real estate costs, in Other Income, Net.The master lease agreement expired on December 31, 2008 and, therefore, weengaged an outside company to manage this property. West 57th Street building income includes all rent andother income attributable to the property; and West 57th Street building expenses include the landlease, real estate taxes, depreciation, and other building costs. Since weretain a portion of the leasable space for our own retail store use, we haveallocated a ratable portion of the building cost to sales and marketingexpenses.

 

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**(10)****                         ****Commitments and ContingentLiabilities**

 

We are involved in certain legal proceedings regarding environmentalmatters, which are described below. Further, in the ordinary course ofbusiness, we are party to various legal actions that we believe are routine innature and incidental to the operation of our business. While the outcome ofsuch actions cannot be predicted with certainty, we believe that, based on ourexperience in dealing with these matters, their ultimate resolution will nothave a material adverse impact on our business, financial condition, results ofoperations or prospects.

 

Certain environmental laws, such as the Comprehensive EnvironmentalResponse, Compensation, and Liability Act, as amended (“CERCLA”), imposestrict, retroactive, joint and several liability upon persons responsible forreleases of hazardous substances, which liability is broadly construed. UnderCERCLA and other laws, we may have liability for investigation and cleanupcosts and other damages relating to our current or former properties, orthird-party sites to which we sent wastes for disposal. Our potential liabilityat any of these sites is affected by many factors including, but not limitedto, the method of remediation, our portion of the hazardous substances at thesite relative to that of other parties, the number of responsible parties, thefinancial capabilities of other parties, and contractual rights andobligations.

 

We are continuing an existing environmentalremediation plan at a facility we acquired in 2000 and subsequently sold. Weestimate our costs, which approximate $0.7 million, over a 12-year period. Wehave accrued approximately $0.5 million for the estimated remaining cost ofthis remediation program, which represents the present value total cost using adiscount rate of 4.54%. A summary of expected payments associated with thisproject is as follows:

 
| ** **        | ** ** | **Environmental********Payments** | ** ** |
|-------------------|------------|-----------------------------------|------------|
| Remainder of 2009 |       | $                                 | 21         |   |
| 2010              |       | 61                                |       |
| 2011              |       | 61                                |       |
| 2012              |       | 61                                |       |
| 2013              |       | 61                                |       |
| Thereafter        |       | 423                               |       |
| Total             |       | $                                 | 688        |   |

 

In 2004, we acquired two manufacturing facilities from G. LeblancCorporation, now Grenadilla, Inc. (“Grenadilla”), for which environmentalremediation plans had already been established. In connection with theacquisition, we assumed the existing accrued liability of approximately $0.8million for the cost of these remediation activities. Based on a review of pastand ongoing investigatory and remedial work by our environmental consultants,and discussions with state regulatory officials, as well as periodic sampling,we estimate the remaining costs of such remedial plans to be $1.8 million.Pursuant to the purchase and sale agreement, we sought indemnification fromGrenadilla for anticipated costs above the original estimate.We filed a claimagainst the escrow and recorded a corresponding receivable for this amount inprepaid expenses and other current assets in our consolidated balance sheet.Based on the current estimated costs of remediation, this receivable totaled$2.1 million as of September 30, 2009. We have reached an agreement withGrenadilla whereby environmental costs are paid directly out of the escrow.Should the escrow be reduced to zero, we would seek further indemnificationfrom Grenadilla for these additional costs. However, we cannot be assured thatwe will be able to recover such costs.

 

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Based on our past experience and currently available information, thematters described above and our other liabilities and compliance costs arisingunder environmental laws are not expected to have a material impact on ourcapital expenditures, earnings or competitive position in an individual year.However, some risk of environmental liability is inherent in the nature of ourcurrent and former business and we may, in the future, incur material costs tomeet current or more stringent compliance, cleanup, or other obligationspursuant to environmental laws.

 

**(11)****                         ****Retirement Plans**

 

We have definedbenefit pension plans covering the majority of our employees, including certainemployees in Germany and the U.K. The components of net periodic pension cost(benefit) for these plans are as follows:

** **
| ** **                           | ** ** | **Domestic  Plan**                                | ** ** | **Foreign  Plans**                                | ** ** |
|--------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                           | ** ** | **Three  Months Ended********September 30,** | ** ** | **Three  Months Ended********September 30,** | ** ** |
| ** **                           | ** ** | **2009**                                          | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service  cost                        |       | $                                                 | 83         |                                              | $          | 104 |   | $ | 144 |   | $ | 204 |   |
| Interest  cost                       |       | 852                                               |       | 853                                               |       | 438 |   | 486 |   |
| Expected  return on plan assets      |       | (921                                              | )          | (1,284                                            | )          | (67 | ) | (96 | ) |
| Amortization  of prior service cost  |       | 36                                                |       | 51                                                |       | — |   | — |   |
| Amortization  of net loss            |       | 575                                               |       | 12                                                |       | 2 |   | 23 |   |
| Curtailment  loss                    |       | 241                                               |       | —                                            |       | — |   | — |   |
| Net  periodic pension cost (benefit) |       | $                                                 | 866        |                                              | $          | (264 | ) | $ | 517 |   | $ | 617 |   |

** **
| ** **                           | ** ** | **Domestic  Plan**                               | ** ** | **Foreign  Plans**                               | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **Nine  Months Ended********September 30,** | ** ** | **Nine  Months Ended********September 30,** | ** ** |
| ** **                           | ** ** | **2009**                                         | ** ** | **2008**                                         | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service  cost                        |       | $                                                | 276        |                                             | $          | 311 |   | $ | 418 |   | $ | 616 |   |
| Interest  cost                       |       | 2,574                                            |       | 2,558                                            |       | 1,276 |   | 1,465 |   |
| Expected  return on plan assets      |       | (2,667                                           | )          | (3,851                                           | )          | (207 | ) | (298 | ) |
| Amortization  of prior service cost  |       | 139                                              |       | 153                                              |       | — |   | — |   |
| Amortization  of net loss            |       | 1,830                                            |       | 36                                               |       | 6 |   | 71 |   |
| Curtailment  loss                    |       | 241                                              |       | —                                           |       | — |   | — |   |
| Net  periodic pension cost (benefit) |       | $                                                | 2,393      |                                             | $          | (793 | ) | $ | 1,493 |   | $ | 1,854 |   |

 

OnJuly 30, 2009, our collective bargaining agreement with the strikingworkers of the Elkhart, Indiana brass instrument manufacturing facility wasterminated as the result of the union’s decertification. The termination of theagreement triggered a remeasurement of the benefit obligation and assets of thedomestic plan. The benefit obligation and net periodic pension cost weremeasured using a discount rate of 6.2%, and plan assets were measured using anexpected rate of return of 9.0%.  As aresult, our long term pension liability decreased by $3.3 million and ouraccumulated other comprehensive income increased by $2.0 million, net of tax.We also recognized a curtailment loss of $0.2 million which represents theremaining unrecognized prior service cost for this group.

 

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Weprovide postretirement health care and life insurance benefits to certaineligible hourly retirees and their dependents. The components of net periodicpostretirement benefit cost for these benefits are as follows:

 
| ** **                                | ** ** | **Three  Months Ended********September 30,** | ** ** | **Nine  Months Ended********September 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                          | ** ** | **2008**                                         | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service  cost                             |       | $                                                 | 1          |                                             | $          | — |   | $ | 4 |   | $ | 4 |   |
| Interest  cost                            |       | 13                                                |       | (1                                               | )          | 49 |   | 51 |   |
| Amortization  of prior service costs      |       | (23                                               | )          | (13                                              | )          | (49 | ) | (39 | ) |
| Recognized  gain                          |       | —                                            |       | (16                                              | )          | — |   | — |   |
| Net  periodic postretirement benefit cost |       | $                                                 | (9         | )                                                | $          | (30 | ) | $ | 4 |   | $ | 16 |   |

 

OnJuly 30, 2009, we recognized a plan amendment relating to the terminationof our collective bargaining agreement and the elimination of medical and lifeinsurance benefits for former employees of the Elkhart, Indiana brassinstrument manufacturing facility. The termination of the agreement triggered aremeasurement of the benefit obligation and postretirement benefit cost, whichwere measured using a discount rate of 6.1%. As a result, our long termpostretirement benefit obligation decreased by $0.4 million and our accumulatedother comprehensive income increased by $0.2 million, net of tax. We willrecognize the reduction in our postretirement benefit obligation over a periodof approximately seven years as a reduction of prior service costs.

 

We contributed $0.1 million to our domestic pension plan in 2009. Basedon federal laws and regulations, we are not required to make additionalcontributions this year, and currently do not intend to do so. Our anticipated contributions to thepension plan of our U.K. subsidiary approximate $0.8 million for the currentyear. As of September 30, 2009, we have made contributions of $0.5 millionto this plan. The pension plans of our German entities do not hold any assetsand use operating cash to pay participant benefits as they become due. Expected2009 benefit payments under these plans are $1.2 million, of which $0.9 millionwas paid through September 2009.

 

**(12)****                         ****Segment Information**

 

Wehave identified two reportable 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 regular basis.We have included the results of our online music division within the “U.S.Piano Segment” as we believe its results are not material and its products andcustomer base are most correlated with piano operations. Management and thechief operating decision maker use income from operations as a meaningfulmeasurement of profit or loss for the segments. Income from operations for thereportable segments includes certain corporate costs allocated to the segmentsbased primarily on revenue, as well as intercompany profit. Amounts reported as“Other & Elim” contain corporate costs that were not allocated to thereportable segments, and the remaining intercompany profit elimination.

 

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The following tablespresent information about our operating segments for the three and nine monthsended September 30, 2009 and 2008:

 

**Threemonths ended 2009**

 
| ** **                      | ** ** | **Piano  Segment** | ** ** | **Band  Segment** | ** ** | **Other** | ** ** | **Consol** | ** ** |
|---------------------------------|------------|--------------------|------------|-------------------|------------|-----------|------------|------------|------------|
| ** **                      | ** ** | **U.S.**           | ** ** | **Germany**       | ** ** | **Other** | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Europe** | ** ** | **Total** | ** ** | **&  Elim** | ** ** | **Total** | ** ** |
| Net sales to external customers |       | $                  | 21,123     |              | $          | 12,535    |       | $          | 11,275     |   | $ | 44,933 |   | $ | 36,173 |   | $ | 1,528 |   | $ | 37,701 |   | $ | — |   | $ | 82,634 |   |
| Income  (loss) from operations  |       | (1,314             | )          | 1,639             |       | 1,675     |       | 2,000      |       | 3,858 |   | 210 |   | 4,068 |   | (913 | ) | 5,155 |   |
|                            |       |               |       |              |       |      |       |       |       |   |   |   |   |   |   |   |   |   |   |
| **Three months ended 2008**     |       |               |       |              |       |      |       |       |       |   |   |   |   |   |   |
| ** **                      |       |               |       |              |       |      |       |       |       |   |   |   |   |   |   |   |   |   |   |
| ** **                      | ** ** | **Piano Segment**  | ** ** | **Band Segment**  | ** ** | **Other** | ** ** | **Consol** | ** ** |
| ** **                      | ** ** | **U.S.**           | ** ** | **Germany**       | ** ** | **Other** | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Europe** | ** ** | **Total** | ** ** | **& Elim** | ** ** | **Total** | ** ** |
| Net sales to external customers |       | $                  | 28,988     |              | $          | 17,236    |       | $          | 9,482      |   | $ | 55,706 |   | $ | 42,841 |   | $ | 1,941 |   | $ | 44,782 |   | $ | — |   | $ | 100,488 |   |
| Income  (loss) from operations  |       | 1,242              |       | 4,954             |       | 482       |       | 6,678      |       | (5,225 | ) | 203 |   | (5,022 | ) | (1,069 | ) | 587 |   |
|                            |       |               |       |              |       |      |       |       |       |   |   |   |   |   |   |   |   |   |   |
| **Nine months ended 2009**      |       |               |       |              |       |      |       |       |       |   |   |   |   |   |   |
| ** **                      |       |               |       |              |       |      |       |       |       |   |   |   |   |   |   |   |   |   |   |
| ** **                      | ** ** | **Piano Segment**  | ** ** | **Band Segment**  | ** ** | **Other** | ** ** | **Consol** | ** ** |
| ** **                      | ** ** | **U.S.**           | ** ** | **Germany**       | ** ** | **Other** | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Europe** | ** ** | **Total** | ** ** | **& Elim** | ** ** | **Total** | ** ** |
| Net sales to external customers |       | $                  | 57,739     |              | $          | 36,363    |       | $          | 30,510     |   | $ | 124,612 |   | $ | 96,483 |   | $ | 3,643 |   | $ | 100,126 |   | $ | — |   | $ | 224,738 |   |
| Income  (loss) from operations  |       | (3,956             | )          | 5,380             |       | 2,896     |       | 4,320      |       | 4,797 |   | 406 |   | 5,203 |   | (2,912 | ) | 6,611 |   |
|                            |       |               |       |              |       |      |       |       |       |   |   |   |   |   |   |   |   |   |   |
| **Nine months ended 2008**      |       |               |       |              |       |      |       |       |       |   |   |   |   |   |   |   |   |
| ** **                      |       |               |       |              |       |      |       |       |       |   |   |   |   |   |   |   |   |   |   |
| ** **                      | ** ** | **Piano Segment**  | ** ** | **Band Segment**  | ** ** | **Other** | ** ** | **Consol** | ** ** |
| ** **                      | ** ** | **U.S.**           | ** ** | **Germany**       | ** ** | **Other** | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Europe** | ** ** | **Total** | ** ** | **& Elim** | ** ** | **Total** | ** ** |
| Net sales to external customers |       | $                  | 81,515     |              | $          | 52,292    |       | $          | 34,088     |   | $ | 167,895 |   | $ | 119,484 |   | $ | 5,816 |   | $ | 125,300 |   | $ | — |   | $ | 293,195 |   |
| Income  (loss) from operations  |       | 3,093              |       | 13,871            |       | 2,693     |       | 19,657     |       | (3,551 | ) | (1,312 | ) | (4,863 | ) | (2,576 | ) | 12,218 |   |

 

**(13) Subsequent Events**

 

On November 5, 2009, we entered into a privateplacement transaction agreement with Samick Musical Instruments Co., Ltd.(“Samick”) which gave Samick the right to immediately purchase 1,700,000 sharesof our ordinary common stock at a price of $16.00 per share. Samick also hasthe right to purchase an additional 1,700,000 shares, also at a price of $16.00per share, by March 31, 2010.

 

Samick purchased 1,700,000 shares on November 5,2009, which resulted in a cash payment to us of $27.2 million. We intend to usethese funds to pay down debt and for general corporate purposes.

 

No other event has occurred up to the date of thisreport which would require disclosure as a subsequent event.

 

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| **ITEM 2** | ** ** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|------------|------------|-------------------------------------------------------------------------------------------------|
|       |       | **(Tabular Amounts in Thousands  Except Percentages, Share and Per Share Data)**                |

 

**Introduction**

 

We are a worldleader in the design, manufacture, marketing, and distribution of high qualitymusical instruments. Our piano division concentrates on the high-end grandpiano segment of the industry, handcrafting Steinway pianos in New York andGermany. We also offer upright pianos and two mid-priced lines of pianos underthe Boston and Essex brand names. We are also an online retailer of classicalmusic. Through our band division, we are the largest domestic producer of bandand orchestral instruments and offer a complete line of brass, woodwind,percussion and string instruments and related accessories with well-known brandnames such as Bach, Selmer, C.G. Conn, Leblanc, King, and Ludwig. We sell ourproducts through dealers and distributors worldwide. Our piano customer baseconsists of professional artists, amateur pianists, and institutions such asconcert halls, universities, and music schools. Our band and orchestral instrumentcustomer base consists primarily of middle school and high school students, butalso includes adult amateur and professional musicians.

 

**CriticalAccounting Policies**

 

The Securities andExchange Commission (“SEC”) has issued disclosure guidance for “criticalaccounting policies.” The SEC defines “critical accounting policies” as thosethat require application of management’s most difficult, subjective or complexjudgments, often as a result of the need to make estimates about the effect ofmatters that are inherently uncertain and may change in subsequent periods.

 

Management isrequired to make certain estimates and assumptions during the preparation ofthe condensed consolidated financial statements. These estimates andassumptions impact the reported amount of assets and liabilities anddisclosures of contingent assets and liabilities as of the date of theconsolidated financial statements. Estimates and assumptions are reviewedperiodically and the effects of revisions are reflected in the consolidated financialstatements in the period they are determined to be necessary. Actual resultscould differ from those estimates.

 

The significantaccounting policies are described in Note 2 of the Notes to ConsolidatedFinancial Statements included in the Company’s 2008 Annual Report on Form 10-K.Not all of these significant accounting policies require management to makedifficult, subjective or complex judgments or estimates. However, managementconsiders the following to be critical accounting policies based on thedefinition above.

 

**AccountsReceivable**

 

Weestablish reserves for accounts receivable and notes receivable. We reviewoverall collectibility trends and customer characteristics such as debtleverage, solvency, and outstanding balances in order to develop our reserveestimates. Historically, a large portion of our sales at both our piano andband divisions has been generated by our top 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 a majority of our consolidated accounts receivablebalance. We consider the credit health and solvency of our customers whendeveloping our receivable reserve estimates.

 

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**Inventory**

 

Weestablish inventory reserves for items such as lower-of-cost-or-market andobsolescence. We review inventory levels on a detailed basis, concentrating onthe age and amounts of raw materials, work-in-process, and finished goods, aswell as recent usage and sales dates and quantities to help develop ourestimates. Ongoing changes in our business strategy, including a shift frombatch processing to single piece production flow, coupled with increasedoffshore sourcing, could affect our ability to realize the current cost of our inventory,and are considered by management when developing our estimates. We alsoestablish reserves for anticipated book-to-physical adjustments based upon ourhistorical level of adjustments from our annual physical inventories. Weaccount for our inventory using standard costs. Accordingly, variances betweenactual and standard costs that are not abnormal in nature are capitalized intoinventory and released based on calculated inventory turns. Abnormal costs areexpensed in the period in which they occur.

 

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

 

Weestablish self-insured workers’ compensation and health claims reserves basedon our trend analysis of data provided by third-party administrators regardinghistorical claims and anticipated future claims.

 

**Warranty**

 

Weestablish reserves for warranty claims based on our analysis of historicalclaims data, recent claims trends, and the various lengths of time for which wewarranty our products.

 

**Long-livedAssets**

 

We review long-lived assets,such as property, plant, and equipment, for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. We measure recoverability by comparing the carrying amount ofthe asset to the estimated future cash flows the asset is expected to generate.

 

We establish long-livedintangible assets based on estimated fair values, and amortize finite-livedintangibles over their estimated useful lives. 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 severalanalyses, including a comparison of net book value to estimated fair values,market capitalization, and multi-year cash flows.

 

**Pensions and Other PostretirementBenefit Costs**

 

We make certain assumptions when calculating our benefit obligationsand expenses. We base our selection of assumptions, such as discount rates andlong-term rates of return, on information provided by our actuaries, investmentadvisors, investment committee, current rate trends, and historical trends forour pension asset portfolio. Our benefit obligations and expenses can fluctuatesignificantly based on the assumptions management selects.

 

**Income Taxes**

 

Werecord valuation allowances for certain deferred tax assets related to foreigntax credit carryforwards and state net operating loss carryforwards. Whenassessing the realizability of deferred tax assets, we consider whether it ismore likely than not that the deferred tax assets will be fully realized. Theultimate realization of these assets is dependent upon many factors, includingthe ratio of foreign source income to overall income and generation ofsufficient future taxable income in the states for which we have loss

 

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carryforwards. When establishing or adjustingvaluation allowances, we consider these factors, as well as anticipated trendsin foreign source income and tax planning strategies which may impact futurerealizability of these assets.

 

Aliability has been recorded for uncertain tax positions. When analyzing thesepositions, we consider the probability of various outcomes which could resultfrom examination, negotiation, or settlement with various taxing authorities.The final outcome on these positions could differ significantly from ouroriginal estimates due to the following: expiring statutes of limitations;availability of detailed historical data; results of audits or examinationsconducted by taxing authorities or agents that vary from management’santicipated results; identification of new tax contingencies; release ofapplicable administrative tax guidance; management’s decision to settle orappeal assessments; or the rendering of court decisions affecting our estimatesof tax liabilities; as well as other factors.

 

**Stock-Based Compensation**

 

We grant stock-based compensation awards which generally vest over aspecified period. When determining the fair value of stock options andsubscriptions to purchase shares under the employee stock purchase plan (“PurchasePlan”), we use the Black-Scholes option valuation model, which requires inputof 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 Plan subscriptions.The estimated fair value of the options and subscriptions to purchase shares,and the resultant stock-based compensation expense, can fluctuate based on theassumptions used by management.

 

**Environmental Liabilities**

 

Wemake certain assumptions when calculating our environmental liabilities. Webase our selection of assumptions, such as cost and length of time forremediation, on data provided by our environmental consultants, as well asinformation provided by regulatory authorities. We also make certainassumptions regarding the indemnifications we have received from others,including whether remediation costs are within the scope of theindemnification, the indemnifier’s ability to perform under the agreement, andwhether past claims have been successful. Our environmental obligations andexpenses can fluctuate significantly based on management’s assumptions.

 

We believe the assumptions made by managementprovide a reasonable basis for the estimates reflected in our financialstatements.

 

**Forward-Looking Statements**

 

Certain statements contained in this document are “forward-lookingstatements” within the meaning of Section 21E of the Securities andExchange Act of 1934, as amended. These forward-looking statements represent ourpresent expectations or beliefs concerning future events. We caution that suchstatements are necessarily based on certain assumptions which are subject torisks and uncertainties which could cause actual results to differ materiallyfrom those indicated in this report. These risk factors include, but are notlimited to, the following: changes in general economic conditions;reductions in school budgets; increased competition; work stoppages andslowdowns; ability to successfully consolidate band manufacturing; impact ofdealer consolidations on orders; ability of dealers to obtain financing;exchange rate fluctuations; variations in the mix of products sold; marketacceptance of new products, ability of suppliers to meet demand; concentrationof credit risk; fluctuations in effective tax rates resulting from shifts insources of income; and the ability to successfully operate acquired businesses. Further information on these riskfactors is included in Item 1A of our Annual Report on Form 10-K for theyear ended December 31, 2008. We encourage you to read those descriptionscarefully. We caution investors not to place undue reliance on theforward-looking statements

 

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contained in this report. These statements, like allstatements contained in this report, speak only as of the date of this report(unless another date is indicated) and we undertake no obligation to update orrevise the statements except as required by law.

 

**Results of Operations**

 

Three Months Ended September 30,2009 Compared to Three Months Ended September 30, 2008

* *
| ** **                                      | ** ** | **Three  Months Ended September 30,** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                      | ** ** | **2009**                                   | ** ** | ** ** | ** ** | **2008**   | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
|                                            |       |                                       |       |       |       |       |       |   |   |   |   |   |   |
| Net  sales                                      |       |                                       |       |       |       |       |       |   |   |   |   |   |   |
| Band                                            |       | $                                          | 37,701     |       |       |       | $          | 44,782 |   |   |   | (7,081 | ) | (15.8 | ) |
| Piano                                           |       | 44,933                                     |       |       |       | 55,706     |       |   |   | (10,773 | ) | (19.3 | ) |
| Total  sales                                    |       | 82,634                                     |       |       |       | 100,488    |       |   |   | (17,854 | ) | (17.8 | ) |
|                                            |       |                                       |       |       |       |       |       |   |   |   |   |   |   |
| Cost  of sales                                  |       |                                       |       |       |       |       |       |   |   |   |   |   |   |
| Band                                            |       | 28,284                                     |       |       |       | 34,405     |       |   |   | (6,121 | ) | (17.8 | ) |
| Piano                                           |       | 30,945                                     |       |       |       | 36,154     |       |   |   | (5,209 | ) | (14.4 | ) |
| Total  cost of sales                            |       | 59,229                                     |       |       |       | 70,559     |       |   |   | (11,330 | ) | (16.1 | ) |
|                                            |       |                                       |       |       |       |       |       |   |   |   |   |   |   |
| Gross  profit                                   |       |                                       |       |       |       |       |       |   |   |   |   |   |   |
| Band                                            |       | 9,417                                      |       | 25.0%      |       | 10,377     |       | 23.2% |   | (960 | ) | (9.3 | ) |
| Piano                                           |       | 13,988                                     |       | 31.1%      |       | 19,552     |       | 35.1% |   | (5,564 | ) | (28.5 | ) |
| Total  gross profit                             |       | 23,405                                     |       |       |       | 29,929     |       |   |   | (6,524 | ) | (21.8 | ) |
|                                            |       | 28.3%                                      |       |       |       | 29.8%      |       |   |   |   |   |   |   |
|                                            |       |                                       |       |       |       |       |       |   |   |   |   |   |   |
| Operating  expenses                             |       | 17,274                                     |       |       |       | 20,787     |       |   |   | (3,513 | ) | (16.9 | ) |
| Facility rationalization and impairment charges |       | 976                                        |       |       |       | 8,555      |       |   |   | (7,579 | ) | (88.6 | ) |
| Income  from operations                         |       | 5,155                                      |       |       |       | 587        |       |   |   | 4,568 |   | 778.2 |   |
|                                            |       |                                       |       |       |       |       |       |   |   |   |   |   |   |
| Other  income, net                              |       | (223                                       | )          |       |       | (405       | )          |   |   | 182 |   | (44.9 | ) |
| Net  interest expense                           |       | 2,634                                      |       |       |       | 2,378      |       |   |   | 256 |   | 10.8 |   |
| Non-operating  expenses                         |       | 2,411                                      |       |       |       | 1,973      |       |   |   | 438 |   | 22.2 |   |
|                                            |       |                                       |       |       |       |       |       |   |   |   |   |   |   |
| Income  (loss) before income taxes              |       | 2,744                                      |       |       |       | (1,386     | )          |   |   | 4,130 |   | (298.0 | ) |
|                                            |       |                                       |       |       |       |       |       |   |   |   |   |   |   |
| Income  tax provision (benefit)                 |       | 2,107                                      |       | 76.8%      |       | (1,126     | )          | 81.2% |   | 3,233 |   | (287.1 | ) |
|                                            |       |                                       |       |       |       |       |       |   |   |   |   |   |   |
| Net  income (loss)                              |       | $                                          | 637        |       |       |       | $          | (260 | ) |   |   | 897 |   | (345.0 | ) |

 

**Overview*-*****Pianodivision revenue was adversely affected by the current economic crisis as wellas our dealers’ access to available financing. Piano margins continued to benegatively impacted by lower production volume at both of our manufacturingfacilities. Band division sales decreased as a result of reduced consumerdemand, similar credit restrictions, and dealers’ tendency to only orderproducts that can be resold quickly. However, band margins improved due tolower cash discounts and sales program costs.

 

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Piano divisionresults include the operations of our online music division, which recorded animpairment charge of $1.0 million on its trademark assets during the period.

 

**Net Sales** -****Net salesdeteriorated 18% in the current period. Many of our piano dealers continue toexperience difficulty obtaining financing and, consequently, are utilizing cashto pay down existing credit lines rather than replenishing inventories. Banddealers are prolonging the usefulness of existing inventory by refurbishing andreutilizing rental pool instruments instead of purchasing new ones, whichenables them to generate and preserve cash. As a result, orders and shipmentsdecreased at both the piano and band divisions.

 

Domestically,piano division revenues dropped $7.9 million. Domestic Steinway grand unitshipments decreased 39% while overall unit shipments decreased 30%, as ourmid-priced piano lines fared better during the period. While domestic wholesalesales deteriorated, retail sales increased $0.5 million, supported by animprovement in institutional sales. Although sales by our Asian divisionsincreased $1.9 million, overseas piano division revenues decreased $2.9 millionfor the period. Overseas Steinway grand unit shipments decreased 10%, whilemid-priced piano line shipments decreased only 3%, due to improved availabilityof certain Essex models.

 

Band divisionrevenues decreased $7.1 million as a result of the 27% reduction in unitshipments. Sales of intermediate and professional level instrumentsdeteriorated less than student instruments. Although we had sufficientinventory to supply our dealers for the back to school season, dealers did notorder instruments at the levels anticipated going into the fall season. Also,orders to restock after the selling season were weaker than in prior periods.

 

**GrossProfit*****-*******Grossprofit declined due to lower sales, coupled with lower gross margins at thepiano division. Domestically, piano margins dropped from 27.6% to 26.2% due toreduced production, which was implemented in an effort to control inventorylevels. Overseas margins dropped from 43.2% to 35.5% largely due to thereduction in production at our factory in Germany. Severance costs of $0.5million, which were incurred due to layoffs, were also a factor in the overseaspiano margin decrease.

 

The band division’sgross margin improved from 23.2% to 25.0% during the period. Although pensioncosts increased $1.0 million, these were more than offset by reduced cashdiscounts and sales program costs, which were $1.5 million higher in theyear-ago period. Production was lower, resulting in unabsorbed overhead, butoverall factory variances were comparable to the prior period.

 

**OperatingExpenses** -Operating expenses decreased $3.5 million due to several factors. Sales andmarketing expenses decreased $2.0 million due to lower salaries, commissions,and bonuses, as well as decreased spending for trade shows and advertising.General and administrative costs were lowered $1.5 million through reductionsin headcount, wages, benefits, and outside services.

 

**FacilityRationalization and Impairment Charges —**Facility rationalization and impairment chargesdecreased $7.6 million. We wrote off $8.6 million of band division goodwill inthe year-ago period, whereas in the current period, impairment charges werelimited to the $1.0 million write down of piano division trademarks associatedwith our online music business.

 

**Non-operatingExpenses** -Non-operating expenses were $0.4 million higher than in the prior period.Higher net interest expense, which resulted from lower interest income on banddivision financed receivables, as well as a shift from foreign exchange gainsto foreign exchange losses, resulted in the increase.

 

**IncomeTaxes** -**We recorded an income tax expense of $2.1 million,reflecting our anticipated rate of 48% associated with current year income, aswell $0.6 million associated with uncertain tax positions. The combination ofthese items resulted in an effective tax rate of 77% for the period. The rateof 81% in the year-

 

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ago periodreflected 39% associated with 2008 year to date loss and a $0.7 million benefitrelating to uncertain tax positions.

 

Nine Months Ended September30, 2009 Compared to Nine Months Ended September 30, 2008

 
| ** **                                       | ** ** | **Nine  Months Ended September 30,** | ** ** | ** ** | ** ** | **Change** | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                                       | ** ** | **2009**                             | ** ** | ** ** | ** ** | **2008**   | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
|                                             |       |                                 |       |       |       |       |       |   |   |   |   |   |   |
| Net  sales                                       |       |                                 |       |       |       |       |       |   |   |   |   |   |   |
| Band                                             |       | $                                    | 100,126    |       |       |       | $          | 125,300 |   |   |   | (25,174 | ) | (20.1 | ) |
| Piano                                            |       | 124,612                              |       |       |       | 167,895    |       |   |   | (43,283 | ) | (25.8 | ) |
| Total  sales                                     |       | 224,738                              |       |       |       | 293,195    |       |   |   | (68,457 | ) | (23.3 | ) |
|                                             |       |                                 |       |       |       |       |       |   |   |   |   |   |   |
| Cost  of sales                                   |       |                                 |       |       |       |       |       |   |   |   |   |   |   |
| Band                                             |       | 77,635                               |       |       |       | 97,445     |       |   |   | (19,810 | ) | (20.3 | ) |
| Piano                                            |       | 86,191                               |       |       |       | 109,384    |       |   |   | (23,193 | ) | (21.2 | ) |
| Total  cost of sales                             |       | 163,826                              |       |       |       | 206,829    |       |   |   | (43,003 | ) | (20.8 | ) |
|                                             |       |                                 |       |       |       |       |       |   |   |   |   |   |   |
| Gross  profit                                    |       |                                 |       |       |       |       |       |   |   |   |   |   |   |
| Band                                             |       | 22,491                               |       | 22.5%      |       | 27,855     |       | 22.2% |   | (5,364 | ) | (19.3 | ) |
| Piano                                            |       | 38,421                               |       | 30.8%      |       | 58,511     |       | 34.8% |   | (20,090 | ) | (34.3 | ) |
| Total  gross profit                              |       | 60,912                               |       |       |       | 86,366     |       |   |   | (25,454 | ) | (29.5 | ) |
|                                             |       | 27.1%                                |       |       |       | 29.5%      |       |   |   |   |   |   |   |
|                                             |       |                                 |       |       |       |       |       |   |   |   |   |   |   |
| Operating  expenses                              |       | 53,325                               |       |       |       | 64,531     |       |   |   | (11,206 | ) | (17.4 | ) |
| Facility  rationalization and impairment charges |       | 976                                  |       |       |       | 9,617      |       |   |   | (8,641 | ) | (89.9 | ) |
| Income  from operations                          |       | 6,611                                |       |       |       | 12,218     |       |   |   | (5,607 | ) | (45.9 | ) |
|                                             |       |                                 |       |       |       |       |       |   |   |   |   |   |   |
| Other  income, net                               |       | (1,034                               | )          |       |       | (388       | )          |   |   | (646 | ) | 166.5 |   |
| Net  gain on extinguishment of debt              |       | (3,434                               | )          |       |       | (636       | )          |   |   | (2,798 | ) | 439.9 |   |
| Net  interest expense                            |       | 7,672                                |       |       |       | 6,811      |       |   |   | 861 |   | 12.6 |   |
| Non-operating  expenses                          |       | 3,204                                |       |       |       | 5,787      |       |   |   | (2,583 | ) | (44.6 | ) |
|                                             |       |                                 |       |       |       |       |       |   |   |   |   |   |   |
| Income  before income taxes                      |       | 3,407                                |       |       |       | 6,431      |       |   |   | (3,024 | ) | (47.0 | ) |
|                                             |       |                                 |       |       |       |       |       |   |   |   |   |   |   |
| Income  tax provision                            |       | 2,385                                |       | 70.0%      |       | 1,671      |       | 26.0% |   | 714 |   | 42.7 |   |
|                                             |       |                                 |       |       |       |       |       |   |   |   |   |   |   |
| Net  income                                      |       | $                                    | 1,022      |       |       |       | $          | 4,760 |   |   |   | (3,738 | ) | (78.5 | ) |

 

**Overview** - The same economic conditions discussedabove, which we expect to continue at least through the end of 2009, negativelyimpacted both the piano and band divisions’ revenue through the end of theperiod. Although the band margin improved slightly overall, lower productionvolumes at our piano and band instrument manufacturing facilities adverselyimpacted margins. Management has reduced headcount, lowered salaries, suspendedor reduced benefits, and taken other cost saving measures throughout theCompany to help offset these factors.

 

Piano divisionresults include the operations of our online music business, which recognizedan impairment charge of $1.0 million on its trademark assets during the period.

 

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**Net Sales** - Net sales deteriorated 23% in thecurrent period. Although online music sales were $3.2 million higher than theyear-ago period, domestic piano division revenues dropped $23.8 million.Domestic Steinway grand unit shipments decreased 43% and overall unit shipmentsdecreased 31%. Overseas, piano division revenues decreased $19.5 million, whichincludes a $5.1 million reduction attributable to foreign currency translation.Overseas Steinway grand unit shipments decreased 27%, while mid-priced pianoline shipments decreased 16%. Overall, our mid-priced piano line shipments havebeen less affected by the economic downturn.

 

Band divisionrevenues were $25.2 million lower due primarily to the 28% decrease in unitshipments. Sales of intermediate and professional level instrumentsdeteriorated less than student instruments. Dealers are ordering only thoseinstruments for which there is an immediate need.

 

**GrossProfit*****-***Gross profit declined $25.5 million due to lower sales at both divisions and lowergross margins at the piano division. Domestically, piano margins dropped from29.1% to 25.6% as the factory has produced 40% fewer new Steinway grand pianosthan in the year-ago period in order to manage inventory levels. This resultedin higher unabsorbed overhead and product costs, which adversely impacted themargin. Overseas margins dropped from 40.3% to 35.3% as our factory in Germanyalso reduced production of Steinway grands by 40% compared to 2008.

 

The band division’sgross margin increased slightly, from 22.2% to 22.5% during the period. Pensioncosts increased $2.6 million due primarily to pension asset portfoliodeterioration. This was more than offset by reduced cash discounts and salesprogram costs, which were $3.3 million higher in the year-ago period. Theabsence of severance costs associated with our facility rationalizationproject, which were $0.9 million in the year-ago period, and the shift in mixto certain higher margin instruments helped mitigate the unabsorbed overhead resultingfrom lower production.

 

**OperatingExpenses** -Operating expenses decreased $11.2 million, or 17%, during the period. Salesand marketing expenses decreased $6.9 million due to lower salaries,commissions, and bonuses, as well as decreased spending for trade shows andadvertising. Due to reductions in headcount, wages, benefits, and outsideservices, general and administrative costs were $4.1 million less than in 2008.

 

**FacilityRationalization and Impairment Charges –**Facility rationalization and impairment chargesdecreased $8.6 million. In 2008, we wrote off $8.6 million of band divisiongoodwill and we incurred $1.1million in fixed asset impairment chargesassociated with the sales and closures of band division facilities. In thecurrent period, impairment charges were limited to the $1.0 million write downof piano division trademarks associated with our online music business.

 

**Non-operatingExpenses** -Non-operating expenses improved $2.6 million due to the extinguishment of $10.9million of our Senior Notes, which resulted in a $3.4 million net gain, ascompared to the $0.6 million gain in 2008. Net interest expense was $0.9million higher due to lower interest income on band division financedreceivables. Foreign exchange losses were $0.7 million more than the year agoperiod. However, these expenses were partially offset by the shift from lossesto gains on our SERP assets and increased net income from our Steinway Hallproperty.

 

**IncomeTaxes** -**Our effective tax rate of 70% is comprised of approximately48% associated with current year income, and 22% relating primarily to activityassociated with our uncertain tax positions. Our effective tax rate can bematerially impacted by shifts in sources of income, as well as the estimatedtax obligation in relative proportion to the pretax income. In addition, theeffective tax rate becomes more volatile at lower levels of pretax income asrelatively stable permanent differences between book and tax income become aproportionately larger factor. Accordingly, this rate could shift significantlyduring the remainder of 2009. In

 

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2008, our tax ratewas comprised of 39% associated with 2008 income, and a benefit of 13% relatingto uncertain tax positions.

 

**Liquidityand Capital Resources**

 

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

 

Ourstatements of cash flows for the nine months ended September 30, 2009 and 2008are summarized as follows:

 
| ** **                                                                   | ** ** | **2009** | ** ** | **2008** | ** ** | **Change** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Net  income:                                                                 |       | $        | 1,022      |     | $          | 4,760      |       | $ | (3,738 | ) |
| Changes  in operating assets and liabilities                                 |       | (10,058  | )          | (22,116  | )          | 12,058     |       |
| Other  adjustments to reconcile net income to cash from operating activities |       | 7,567    |       | 14,954   |       | (7,387     | )          |
| Cash  flows from operating activities                                        |       | (1,469   | )          | (2,402   | )          | 933        |       |
|                                                                         |       |     |       |     |       |       |       |
| Cash  flows from investing activities                                        |       | (3,792   | )          | (6,198   | )          | 2,406      |       |
|                                                                         |       |     |       |     |       |       |       |
| Cash  flows from financing activities                                        |       | 10,566   |       | (5,613   | )          | 16,179     |       |
|                                                                              |            |          |            |          |            |            |            |  |  |  |

 

Cash flows fromoperating activities improved $0.9 million over the year-ago period. Lowersales and increased credit restrictions resulted in a $4.2 million shift fromuse of cash to source of cash provided by accounts receivable. Cash used forliabilities increased $7.0 million, reflecting payments to vendors, as well aslower payable balances resulting from reduced spending and fewer purchases dueto our lower sales volume. Cash used for inventory was $11.3 million lower dueto reduced production and purchasing.

 

Cash flows usedfor investing activities decreased $2.4 million. In the prior period, werecorded a $3.2 million investment in subsidiary related to the purchase ofArkiv, and only $0.8 million in the current year related to the purchase of ourretail store in Dusseldorf, Germany. Capital expenditures were $3.0 million,$0.8 million lower than the year-ago period. We expect capital expenditures forthe full year to be in the range of $3.0 to $4.5 million for normal capitalprojects, including improvements and renovations at our building in New YorkCity.

 

Cash flowsprovided by financing activities increased $16.2 million due to increased netborrowings on our credit facilities of $16.7 million. This was partially offsetby the extinguishment of $10.9 million of our Senior Notes, as compared to $5.8million in the year-ago period.

 

**BorrowingActivities and Availability**-****We have a domesticcredit facility with a syndicate of domestic lenders (the “Credit Facility”)with a potential borrowing capacity of $110.0 million in revolving creditloans, which expires on September 29, 2011. It provides for periodic borrowingsat either London Interbank Offering Rate (“LIBOR”) plus a range from 1.25% to1.75%, or as-needed borrowings at an alternate base rate, plus a range from0.00% to 0.25%; both ranges depend upon borrowing availability at the time ofborrowing. The Credit Facility is collateralized by our domestic accountsreceivable, inventory, and property, plant and equipment. As of September 30,2009, there was $34.9 million outstanding on our Credit Facility, and borrowingavailability, net of letters of credit, was approximately $73.9 million.

 

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We also have certainnon-domestic credit facilities originating from two German banks that providefor borrowings by foreign subsidiaries of up to €19.3 million ($28.2 million atthe September 30, 2009 exchange rate), net of borrowing restrictions of €1.8million ($2.6 million at the September 30, 2009 exchange rate) and are payable on March 1,2011. These borrowings are collateralized by most of the assets of theborrowing subsidiaries. A portion of the loans can be converted into a maximumof £0.8 million ($1.2 million at the September 30, 2009 exchange rate) for use by our U.K. branchand ¥300 million ($3.3 million at the September 30, 2009 exchange rate) for use by our Japanesesubsidiary. Our Chinese subsidiary also has the ability to convert theequivalent of up to €2.5 million into U.S. dollars or Chinese yuan ($3.7million at the September 30, 2009 exchange rate). Euro loans bear interest at rates ofEuro Interbank Offered Rate (“EURIBOR”) plus a margin determined at the time ofborrowing. Margins fluctuate based on the loan amount and the borrower’s bankrating. The remaining demand borrowings bear interest rates of LIBOR plus 0.8%for British pound loans, LIBOR plus 1.0% for U.S. dollar loans of our Chinesesubsidiary, and Tokyo Interbank Offered Rate (“TIBOR”) plus 1.2% for Japaneseyen loans (outstanding borrowings at 1.6% at September 30, 2009). We hadvirtually nothing outstanding as of September 30, 2009 on these credit facilities.

 

Our Japanese subsidiaryalso maintains a separate revolving loan agreement that provides additionalborrowing capacity of up to ¥460 million ($5.1 million at the September 30,2009 exchange rate)based on eligible inventory balances. The revolving loan agreement bearsinterest at an average 30-day TIBOR rate plus 0.9% (outstanding borrowings at1.2% at September 30, 2009) and expires on January 31, 2010. As of September 30, 2009, we had $0.6 million outstanding on thisrevolving loan agreement.

 

At September 30,2009, our totaloutstanding indebtedness amounted to $193.8 million, consisting of $158.3million of 7.00% Senior Notes, $34.9 million on our domestic line of credit,and $0.6 million of notes payable to foreign banks.

 

All of our debt agreementscontain covenants that place certain restrictions on us, including our abilityto incur additional indebtedness, to repurchase Senior Notes, to makeinvestments in other entities, and limitations on cash dividend payments. Wewere in compliance with all such covenants as of September 30, 2009 and do notanticipate any compliance issues in the future. Our bond indenture containslimitations, based on net income (among other things), on the amount ofdiscretionary repurchases we may make of our Ordinary common stock. Our intentand ability to repurchase additional Ordinary common stock either directly fromshareholders or on the open market is directly affected by this limitation. In May2008 we announced a share repurchase program, which permits us to makediscretionary purchases of up to $25.0 million of our Ordinary common stock. Wehave not made any repurchases in 2009.

 

We experience longproduction and inventory turnover cycles, which we constantly monitor sincefluctuations in demand can have a significant impact on these cycles. In normaleconomic conditions, we are able to effectively utilize cash flow fromoperations to fund our debt and capital requirements and pay off seasonalborrowings on our domestic line of credit. However, given the current globaleconomy, we anticipate the remainder of 2009 to be challenging. Our intention isto manage accounts receivable and credit risk, and control inventory levels viareduced purchases and production schedules. We have also reduced headcount,minimized non-critical expenditures, cut salaries, and forgone wage increasesand discretionary benefit program contributions. Our intention is to managecash outflow and maintain sufficient operating cash on hand to meet short-termrequirements.

 

We donot have any current plans or intentions that will have a material adverseimpact on our liquidity in 2009, although we may consider acquisitions that mayrequire funding from operations or from our credit facilities. On November 5,2009, we sold 1,700,000 shares of our ordinary common stock at a price of$16.00. We intend to use the proceeds from this transaction to pay down debtand for general corporate purposes. Other than those described, we are notaware of any trends, demands, commitments, or costs of resources that areexpected to materially impact our liquidity or capital resources. Accordingly,we believe that cash on hand, together with cash flows anticipated fromoperations and available borrowings under the Credit

 

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Facility, will beadequate to meet our debt service requirements, fund regular capitalrequirements and satisfy our working capital and general corporate needsthrough the remainder of 2009.

 

**ContractualObligations** - Thefollowing table provides a summary of our contractual obligations at September 30,2009.

 
| ** **                       | ** ** | **Payments due by period** | ** ** |
|----------------------------------|------------|----------------------------|------------|
| ** **                       | ** ** | **Total**                  | ** ** | **Less than********1 year** | ** ** | **1 - 3 years** | ** ** | **3 - 5 years** | ** ** | **More than********5 years** | ** ** |
|                             |       |                       |       |   |   |   |   |   |   |   |   |
| **Contractual  Obligations**     |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term  debt (1)              |       | $                          | 243,781    |   | $ | 12,168 |   | $ | 57,586 |   | $ | 174,027 |   | $ | — |   |
| Capital  leases                  |       | 31                         |       | 20 |   | 11 |   | — |   | — |   |
| Operating  leases (2)            |       | 261,105                    |       | 5,802 |   | 10,004 |   | 8,308 |   | 236,991 |   |
| Purchase  obligations (3)        |       | 27,022                     |       | 26,792 |   | 230 |   | — |   | — |   |
| Other  long-term liabilities (4) |       | 41,590                     |       | 3,915 |   | 6,116 |   | 4,965 |   | 26,594 |   |
| Total                            |       | $                          | 573,529    |   | $ | 48,697 |   | $ | 73,947 |   | $ | 187,300 |   | $ | 263,585 |   |

 

----

**Notes to Contractual Obligations:**
| (1)    |   | Long-term debt  represents long-term debt obligations, the fixed interest on our Notes, and  the variable interest on our other loans. We estimated the future variable  interest obligation using the applicable September 30,  2009 rates. The  nature of our long-term debt obligations, including changes to our long-term  debt structure, is described more fully in the “Borrowing Availability and  Activities” section of “Liquidity and Capital Resources.”                                                                       |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (2)    |   | Approximately $246.9  million of our operating lease obligations are attributable to the land lease  associated with the purchase of Steinway Hall, which has eighty eight years  remaining. The rest is attributable to the leasing of other facilities and  equipment.                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (3)    |   | Purchase obligations  consist of firm purchase commitments for raw materials, finished goods, and  equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (4)    |   | Our other  long-term liabilities consist primarily of the long-term portion of our  pension obligations, which are described in Note 11 in the Notes to Condensed  Consolidated Financial Statements included within this filing, liabilities  relating to uncertain tax positions which are expected to be settled within  one year, and obligations under employee and consultant agreements. We have  not included $0.5 million of liabilities relating to uncertain tax positions  within this schedule due to the uncertainty of the payment date, if any. |

 

**Recent Accounting Pronouncements**

 

In September 2009, we adopted Financial AccountingStandards Board (“FASB”) Accounting Standards Codification (“ASC”) 105-10, “Generally Accepted Accounting Principles –Overall.”  FASB ASC 105-10establishes the FASB Accounting Standards Codification (“Codification”) tobecome the source of authoritative U.S. generally accepted accountingprinciples (“U.S. GAAP”) recognized by the FASB to be applied bynongovernmental entities.  Rules andinterpretive releases of the Securities and Exchange Commission (“SEC”) underauthority of federal securities laws are also sources of authoritative U.S.GAAP for SEC registrants. The adoption of this standard did not have a materialimpact on our consolidated financial position or results of operations.

 

In June 2009, the FASB issued a new accountingstandard, ASC 810,**which changesthe consolidation rules as they relate to variable interest entities.Specifically, the new standard makes significant changes to the model fordetermining who should consolidate a variable interest entity, and alsoaddresses how often this assessment should be performed. We will be required tocomply with this new standard on January 1, 2010. We do not expect the adoptionwill have a material impact on our consolidated financial statements.

 

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In August 2009, the FASBissued a new accounting standard, Accounting Standards Update (“ASU”) 2009-05,which provides additional guidance on the measurement of liabilities at fairvalue. Specifically, when a quoted price in an active market for the identicalliability is not available, the new standard requires that the fair value of aliability be measured using one or more of the valuation techniques that shouldmaximize the use of relevant observable inputs and minimize the use ofunobservable inputs. In addition, an entity is not required to include aseparate input or adjustment to other inputs relating to the existence of arestriction that prevents the transfer of a liability. We will be required tocomply with this standard in the fourth quarter of 2009. We do not expect theadoption will have a material impact on our consolidated financial statements.

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

 

We are exposed to marketrisk associated with changes in foreign currency exchange rates and interestrates. We mitigate a portion of our foreign currency exchange rate risk bymaintaining foreign currency cash balances and holding option and forwardforeign currency contracts. They are not designated as hedges for accountingpurposes. These contracts relate primarily to intercompany transactions and arenot used for trading or speculative purposes. The fair value of the option andforward foreign currency exchange contracts is sensitive to changes in foreigncurrency exchange rates. The impact of an adverse change in foreign currencyexchange rates would not be materially different than that disclosed in ourAnnual Report on Form 10-K for the year ended December 31, 2008.

 

Our revolving loans bearinterest at rates that fluctuate with changes in Prime, LIBOR, TIBOR, andEURIBOR. As such, our interest expense on our revolving loans and the fairvalue of our fixed long-term debt are sensitive to changes in market interestrates. The effect of an adverse change in market interest rates on our interestexpense would not be materially different than that disclosed in our AnnualReport on Form 10-K for the year ended December 31, 2008.

 

The majority of ourlong-term debt is at a fixed interest rate. Therefore, the associated interestexpense is not sensitive to fluctuations in market interest rates. However, thefair value of our fixed interest debt would be sensitive to market ratechanges. Such fair value changes may affect our decision whether to retain,replace, or retire this debt.

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

 

Our principal executive officer and our principalfinancial officer, after evaluating together with management the design andoperation of our disclosure controls and procedures, have concluded that ourdisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) were effective as of September 30, 2009, the end of the periodcovered by this report. In designing disclosure controls and procedures,management recognizes that any controls, no matter how well designed andoperated, can only provide reasonable, not absolute, assurance of achieving thedesired control objectives.

 

During the quarter covered by this report, there wereno significant changes in our internal controls that materially affected, orare reasonably likely to materially affect, internal control over financialreporting.

 

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| **PART II** | **OTHER INFORMATION** |
|-------------|-----------------------|
| ** **  | ** **            |
| **ITEM 6**  | **EXHIBITS**          |

 

(i)             Exhibits

 

31.1  Certification of thePrincipal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Actof 2002

 

31.2  Certification of thePrincipal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Actof 2002

 

32.1  Certification of thePrincipal Executive Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on their behalf by the undersigned, thereuntoduly authorized.

 

 
|                   | STEINWAY MUSICAL  INSTRUMENTS, INC.              |
|------------------------|--------------------------------------------------|
|                   |                                             |
|                   | /s/ Dana D. Messina                              |
|                   | Dana D. Messina                                  |
|                   | Director, President and  Chief Executive Officer |
|                   |                                             |
|                   | /s/ Dennis M. Hanson                             |
|                   | Dennis M. Hanson                                 |
|                   | Senior Executive Vice  President and             |
|                   | Chief Financial Officer                          |
|                   |                                             |
| Date: November 9, 2009 |                                             |

 

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