Table of 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 JUNE 30, 2010** |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                 |
| **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 of registrant asspecified 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 telephone number including area code:    **(781) 894-9770**

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements during the past 90 days.    Yesx    Noo

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).    Yes o    Noo

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definition of “accelerated filer” 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 mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).     Yes o    No x

 

Number of shares of CommonStock issued and outstanding as of August 4, 2010**:**

 
|   | Class A |   | 477,952    |
|--------|--------------|--------|------------|
|   | Ordinary     |   | 11,598,337 |
|   | Total        |   | 12,076,289 |

 

 

 

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

**FORM 10-Q**

**INDEX**

 
| **PART I**   | **FINANCIAL STATEMENTS**                                                                                | ** ** |
|-------------------|---------------------------------------------------------------------------------------------------------|------------|
| ** **        | ** **                                                                                              | ** ** |
| **Item 1.**       | **Condensed  Consolidated Financial Statements:**                                                       |       |
| ** **        | ** **                                                                                              |       |
|              | Condensed Consolidated Statements of Operations Three  and six months ended June 30, 2010 and 2009 | 3          |
|              |                                                                                                    |       |
|              | Condensed Consolidated Balance Sheets June 30,  2010 and December 31, 2009                    | 4          |
|              |                                                                                                    |       |
|              | Condensed Consolidated Statements of Cash Flows Six  months ended June 30, 2010 and 2009           | 5          |
|              |                                                                                                    |       |
|              | Condensed Consolidated Statement of Stockholders’  Equity Six months ended June 30, 2010      | 6          |
|              |                                                                                                    |       |
|              | Notes to Condensed Consolidated Financial Statements                                                    | 7          |
|              |                                                                                                    |       |
| **Item 2.**       | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**         | 20         |
| ** **        | ** **                                                                                              |       |
| **Item 3.**       | **Quantitative  and Qualitative Disclosures about Market Risk**                                         | 29         |
| ** **        | ** **                                                                                              |       |
| **Item 4.**       | **Controls and  Procedures**                                                                            | 29         |
| ** **        | ** **                                                                                              |       |
| **PART II.** | **OTHER INFORMATION**                                                                                   |       |
| ** **        | ** **                                                                                              |       |
| **Item  6.**      | **Exhibits**                                                                                            | 29         |
| ** **        | ** **                                                                                              |       |
|              | **Signatures**                                                                                          | 30         |

 

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**PART I****                                                      ****FINANCIALSTATEMENTS**

 

**ITEM 1****                                                       ****CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

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

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**Unaudited**

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

 
| ** **                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|
| ** **                          | ** ** | **2010**                              | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net sales                           |       | $                                     | 78,248     |                               | $          | 72,113 |   | $ | 146,791 |   | $ | 142,104 |   |
| Cost of sales                       |       | 56,085                                |       | 53,215                             |       | 103,304 |   | 104,597 |   |
|                                |       |                                  |       |                               |       |   |   |   |   |
| Gross profit                        |       | 22,163                                |       | 18,898                             |       | 43,487 |   | 37,507 |   |
|                                |       |                                  |       |                               |       |   |   |   |   |
| Operating expenses:                 |       |                                  |       |                               |       |   |   |   |   |
| Sales and marketing                 |       | 10,032                                |       | 9,860                              |       | 20,169 |   | 20,480 |   |
| General and administrative          |       | 6,598                                 |       | 7,248                              |       | 13,717 |   | 14,702 |   |
| Other operating expenses            |       | 392                                   |       | 283                                |       | 737 |   | 869 |   |
| Total operating expenses            |       | 17,022                                |       | 17,391                             |       | 34,623 |   | 36,051 |   |
|                                |       |                                  |       |                               |       |   |   |   |   |
| Income from operations              |       | 5,141                                 |       | 1,507                              |       | 8,864 |   | 1,456 |   |
|                                |       |                                  |       |                               |       |   |   |   |   |
| Other expense (income),  net        |       | 658                                   |       | (253                               | )          | (809 | ) | (811 | ) |
| Net gain on extinguishment  of debt |       | (104                                  | )          | —                             |       | (104 | ) | (3,434 | ) |
| Interest income                     |       | (287                                  | )          | (420                               | )          | (744 | ) | (982 | ) |
| Interest expense                    |       | 2,782                                 |       | 2,936                              |       | 5,598 |   | 6,020 |   |
| Total non-operating  expenses       |       | 3,049                                 |       | 2,263                              |       | 3,941 |   | 793 |   |
|                                |       |                                  |       |                               |       |   |   |   |   |
| Income (loss) before  income taxes  |       | 2,092                                 |       | (756                               | )          | 4,923 |   | 663 |   |
|                                |       |                                  |       |                               |       |   |   |   |   |
| Income tax provision  (benefit)     |       | 912                                   |       | (136                               | )          | 1,943 |   | 278 |   |
|                                |       |                                  |       |                               |       |   |   |   |   |
| Net income (loss)                   |       | $                                     | 1,180      |                               | $          | (620 | ) | $ | 2,980 |   | $ | 385 |   |
|                                |       |                                  |       |                               |       |   |   |   |   |
| Earnings per share:                 |       |                                  |       |                               |       |   |   |   |   |
| Basic                               |       | $                                     | 0.10       |                               | $          | (0.07 | ) | $ | 0.27 |   | $ | 0.05 |   |
| Diluted                             |       | $                                     | 0.10       |                               | $          | (0.07 | ) | $ | 0.26 |   | $ | 0.05 |   |
|                                |       |                                  |       |                               |       |   |   |   |   |
| Weighted average shares:            |       |                                  |       |                               |       |   |   |   |   |
| Basic                               |       | 12,019,468                            |       | 8,533,259                          |       | 11,226,649 |   | 8,533,259 |   |
| Diluted                             |       | 12,098,725                            |       | 8,533,259                          |       | 11,291,021 |   | 8,537,619 |   |

 

See notes to condensed consolidated financial statements.

 

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**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**Unaudited**

**(In Thousands)**

 
| ** **                                                                                                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                               | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Assets                                                                                                                   |       |              |       |                  |       |
| Current assets                                                                                                           |       |              |       |                  |       |
| Cash                                                                                                                     |       | $                 | 92,063     |                  | $          | 65,873 |   |
| Accounts, notes, and other  receivables, net of allowances of  $13,916 and $13,643 in 2010 and 2009, respectively        |       | 46,852            |       | 45,073                |       |
| Inventories                                                                                                              |       | 151,868           |       | 158,030               |       |
| Prepaid expenses and other  current assets                                                                               |       | 13,698            |       | 13,499                |       |
| Deferred tax assets                                                                                                      |       | 12,272            |       | 11,431                |       |
| Total current assets                                                                                                     |       | $                 | 316,753    |                  | $          | 293,906 |   |
|                                                                                                                     |       |              |       |                  |       |
| Property, plant and  equipment, net of accumulated depreciation of  $106,416 and $105,744 in 2010 and 2009, respectively |       | 84,933            |       | 89,538                |       |
| Trademarks                                                                                                               |       | 14,614            |       | 15,284                |       |
| Goodwill                                                                                                                 |       | 21,929            |       | 24,063                |       |
| Other intangibles, net                                                                                                   |       | 3,520             |       | 4,183                 |       |
| Other assets                                                                                                             |       | 12,343            |       | 12,663                |       |
| Long-term deferred tax  assets                                                                                           |       | 11,135            |       | 10,153                |       |
|                                                                                                                     |       |              |       |                  |       |
| Total assets                                                                                                             |       | $                 | 465,227    |                  | $          | 449,790 |   |
|                                                                                                                     |       |              |       |                  |       |
| Liabilities and  stockholders’ equity                                                                               |       |              |       |                  |       |
| Current liabilities:                                                                                                     |       |              |       |                  |       |
| Debt                                                                                                                     |       | $                 | 1,131      |                  | $          | 537 |   |
| Accounts payable                                                                                                         |       | 9,961             |       | 9,764                 |       |
| Other current liabilities                                                                                                |       | 37,616            |       | 36,395                |       |
| Total current liabilities                                                                                                |       | 48,708            |       | 46,696                |       |
|                                                                                                                     |       |              |       |                  |       |
| Long-term debt                                                                                                           |       | 151,976           |       | 157,703               |       |
| Deferred tax liabilities                                                                                                 |       | 7,087             |       | 7,124                 |       |
| Pension and other  postretirement benefit liabilities                                                                    |       | 33,236            |       | 35,766                |       |
| Other non-current  liabilities                                                                                           |       | 5,505             |       | 6,005                 |       |
| Total liabilities                                                                                                        |       | 246,512           |       | 253,294               |       |
|                                                                                                                     |       |              |       |                  |       |
| Commitments and contingent  liabilities                                                                                  |       |              |       |                  |       |
|                                                                                                                     |       |              |       |                  |       |
| Stockholders’ equity:                                                                                               |       |              |       |                  |       |
| Common stock                                                                                                             |       | 14                |       | 12                    |       |
| Additional paid-in capital                                                                                               |       | 153,135           |       | 125,192               |       |
| Retained earnings                                                                                                        |       | 129,289           |       | 126,415               |       |
| Accumulated other  comprehensive loss                                                                                    |       | (17,004           | )          | (7,851                | )          |
| Treasury stock, at cost                                                                                                  |       | (46,719           | )          | (47,272               | )          |
| Total stockholders’ equity                                                                                          |       | 218,715           |       | 196,496               |       |
|                                                                                                                     |       |              |       |                  |       |
| Total liabilities and  stockholders’ equity                                                                         |       | $                 | 465,227    |                  | $          | 449,790 |   |

 

See notes to condensed consolidated financial statements.

 

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

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**Unaudited**

**(In Thousands)**

 
| ** **                                                                    | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                    | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| Cash flows from operating  activities:                                        |       |                               |       |   |   |
| Net income                                                                    |       | $                                  | 2,980      |   | $ | 385 |   |
| Adjustments to reconcile  net income to cash flows from operating activities: |       |                               |       |   |   |
| Depreciation and  amortization                                                |       | 5,050                              |       | 5,362 |   |
| Amortization of bond  discount                                                |       | 74                                 |       | 77 |   |
| Net gain on extinguishment  of debt                                           |       | (104                               | )          | (3,434 | ) |
| Stock based compensation  expense                                             |       | 741                                |       | 562 |   |
| Excess tax benefits from  stock-based awards                                  |       | 64                                 |       | — |   |
| Tax benefit from stock  option exercises                                      |       | 4                                  |       | — |   |
| Deferred tax benefit                                                          |       | (1,207                             | )          | (679 | ) |
| Other                                                                         |       | 335                                |       | 703 |   |
| Changes in operating  assets and liabilities:                                 |       |                               |       |   |   |
| Accounts, notes and other  receivables                                        |       | (2,655                             | )          | 3,744 |   |
| Inventories                                                                   |       | 306                                |       | (7,357 | ) |
| Prepaid expenses and other  assets                                            |       | (552                               | )          | 1,997 |   |
| Accounts payable                                                              |       | 472                                |       | (3,395 | ) |
| Other liabilities                                                             |       | 2,603                              |       | (3,946 | ) |
| Cash flows from operating  activities:                                        |       | 8,111                              |       | (5,981 | ) |
|                                                                          |       |                               |       |   |   |
| Cash flows from investing activities:                                         |       |                               |       |   |   |
| Capital expenditures                                                          |       | (1,150                             | )          | (2,212 | ) |
| Proceeds from disposals of  property, plant and equipment                     |       | 7                                  |       | 24 |   |
| Other                                                                         |       | 78                                 |       | — |   |
| Acquisition of businesses,  net of cash acquired                              |       | —                             |       | (820 | ) |
| Cash flows from investing  activities                                         |       | (1,065                             | )          | (3,008 | ) |
|                                                                          |       |                               |       |   |   |
| Cash flows from financing  activities:                                        |       |                               |       |   |   |
| Borrowings under lines of  credit                                             |       | 799                                |       | 126,693 |   |
| Repayments under lines of  credit                                             |       | (264                               | )          | (109,006 | ) |
| Repayments of long-term  debt, net of discount                                |       | (5,633                             | )          | (7,280 | ) |
| Proceeds from issuance of  common stock                                       |       | 27,647                             |       | — |   |
| Excess tax benefits from  stock-based awards                                  |       | (64                                | )          | — |   |
| Cash flows from financing  activities                                         |       | 22,485                             |       | 10,407 |   |
|                                                                          |       |                               |       |   |   |
| Effect of foreign exchange  rate changes on cash                              |       | (3,341                             | )          | (98 | ) |
|                                                                          |       |                               |       |   |   |
| Change in cash                                                                |       | 26,190                             |       | 1,320 |   |
| Cash, beginning of period                                                     |       | 65,873                             |       | 44,380 |   |
| Cash, end of period                                                           |       | $                                  | 92,063     |   | $ | 45,700 |   |
|                                                                          |       |                               |       |   |   |
| Supplemental Cash Flow  Information:                                          |       |                               |       |   |   |
| Interest paid                                                                 |       | $                                  | 6,144      |   | $ | 7,208 |   |
| Income taxes paid                                                             |       | $                                  | 5,080      |   | $ | 2,882 |   |

 

See notes to condensed consolidated financial statements.

 

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

**CONDENSEDCONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

**Unaudited**

**(In Thousands Except Share Data)**

** **
| ** **                                                 | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Treasury  Stock** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|---------------------|------------|---------------------------------------|------------|
| Balance, January 1,  2010                             |       | $                 | 12         |                             | $          | 125,192                |       | $                                           | 126,415    |                | $          | (7,851                                | )          | $ | (47,272 | ) | $ | 196,496 |   |
| Comprehensive loss:                                        |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Net income                                                 |       |              |       |                             |       | 2,980                  |       |                                        |       |                |       | 2,980                                 |       |
| Foreign currency  translation adjustments                  |       |              |       |                             |       |                   |       | (9,213                                      | )          |                |       | (9,213                                | )          |
| Changes in pension and  other postretirement benefits, net |       |              |       |                             |       |                   |       | 60                                          |       |                |       | 60                                    |       |
| Total comprehensive loss                                   |       |              |       |                             |       |                   |       |                                        |       |                |       | (6,173                                | )          |
| Exercise of 23,700 options  for shares of common stock     |       | —            |       |                             |       | (106                   | )          |                                        |       | 553                 |       | 447                                   |       |
| Tax benefit of options  exercised                          |       |              |       | 4                                |       |                   |       |                                        |       |                |       | 4                                     |       |
| Stock-based compensation                                   |       |              |       | 741                              |       |                   |       |                                        |       |                |       | 741                                   |       |
| Issuance of 1,700,000  shares of common stock              |       | 2                 |       | 27,198                           |       |                   |       |                                        |       |                |       | 27,200                                |       |
| Balance, June 30,  2010                               |       | $                 | 14         |                             | $          | 153,135                |       | $                                           | 129,289    |                | $          | (17,004                               | )          | $ | (46,719 | ) | $ | 218,715 |   |

 

See notes to condensed consolidated financial statements.

 

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**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED**

**FINANCIAL STATEMENTS**

**JUNE 30, 2010**

**Unaudited**

**(Tabular Amounts In Thousands ExceptShare, Per Share, Option, and Per Option Data)**

 

**(1)           Basis ofPresentation**

 

The accompanying condensed consolidated financial statements ofSteinway Musical Instruments, Inc. and subsidiaries (the “Company”) for thethree and six months ended June 30, 2010 and 2009 are unaudited. In the opinionof management, these statements have been prepared on the same basis as theaudited consolidated financial statements as of and for the year ended December31, 2009, and include all adjustments which are of a normal and recurringnature, 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 risk factors,consolidated financial statements and notes thereto contained in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2009 filed with theSecurities and Exchange Commission (“SEC”). The results of operations for thethree and six months ended June 30, 2010 are not necessarily indicative of theresults that may be expected for the entire year.

 

Throughout this report “we,” “us,” and “our” refer to Steinway MusicalInstruments, Inc. and subsidiaries taken as a whole.

 

**(2)           Summary of SignificantAccounting Policies**

 

**Principles of Consolidation** - Ourcondensed consolidated financial statements include the accounts of all directand indirect subsidiaries, all of which are wholly owned, including the piano (“Steinway”),band (“Conn-Selmer”), and online music (“Arkiv”) divisions. Intercompanybalances have been eliminated in consolidation.

 

**Use of Estimates****- Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America necessarily requires us tomake estimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at the date ofthe financial statements, and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from those estimates.

 

**Income Taxes** - We providefor income taxes using an asset and liability approach. We compute deferredincome tax assets and liabilities for differences between the financial statementand tax bases of assets and liabilities that will result in taxable ordeductible amounts in the future based on enacted tax laws and rates applicableto the periods in which the differences are expected to affect taxable income.We establish valuation allowances when necessary to reduce deferred tax assetsto 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.

 

Incometax-related interest and penalties is reported as a component of income taxexpense. We file income taxreturns at the U.S. federal, state, and local levels, as well as in severalforeign jurisdictions. With few exceptions, our returns are no longer subjectto examinations for years before 2006.

 

There were no material changes to the liability for uncertain taxpositions in the first six months of 2010. Although we believe our taxestimates are appropriate, the final determination of tax audits and anyrelated litigation could result in changes in our estimates.

 

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**Stock-based Compensation** - We recordcompensation cost on a straight-line basis over the award’s requisite serviceperiod for all share-based awards granted. We estimate the fair value of ourstock option awards (less estimated forfeitures) and employee stock purchaseplan rights on the date of grant using the Black-Scholes option valuation model.

 

**Earnings per Common Share** - We computeearnings per share using the weighted-average number of common sharesoutstanding during each period. Diluted earnings per common share reflects thedilutive impact of shares subscribed under the Employee Stock Purchase Plan (“PurchasePlan”) and effect of our outstanding options using the treasury stock method,except when such options would be antidilutive.

 

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

 
| ** **                                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                         | ** ** | **2010**                        | ** ** | **2009**                      | ** ** | **2010** | ** ** | **2009** | ** ** |
| Weighted-average shares:                           |       |                            |       |                          |       |   |   |   |   |
| For basic earnings (loss)  per share               |       | 12,019,468                      |       | 8,533,259                     |       | 11,226,649 |   | 8,533,259 |   |
| Dilutive effect of  stock-based compensation plans |       | 79,257                          |       | —                        |       | 64,372 |   | 4,360 |   |
| For diluted earnings  (loss) per share             |       | 12,098,725                      |       | 8,533,259                     |       | 11,291,021 |   | 8,537,619 |   |

 

We did not include any ofthe 797,716 outstanding options to purchase shares of common stock in thecomputation of diluted (loss) earnings per share for the three and six monthsended June 30, 2009 because generally their exercise prices were more than theaverage market price of our common shares, and therefore antidilutive. We didnot include 711,580 or 735,756 outstanding options to purchase shares of commonstock in the computation of diluted earnings per share for the three and sixmonths ended June 30, 2010, respectively, because they were antidilutive.

 

**Accumulated OtherComprehensive Loss** - Accumulated other comprehensive loss is comprisedof foreign currency translation adjustments and pension and otherpostretirement benefits. The components of accumulated other comprehensive lossare as follows:

 
| ** **                                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|--------------|------------|------------------|------------|
| ** **                                  | ** ** | **2010**     | ** ** | **2009**         | ** ** |
| Accumulated other  comprehensive loss:      |       |         |       |             |       |
| Foreign currency  translation adjustment    |       | $            | (1,933     | )                | $          | 7,280 |   |
| Pension and other  postretirement benefits  |       | (15,071      | )          | (15,131          | )          |
| Total accumulated other  comprehensive loss |       | $            | (17,004    | )                | $          | (7,851 | ) |

 

The components ofcomprehensive loss are as follows:

 
| ** **                                      | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                      | ** ** | **2010**                        | ** ** | **2009**                      | ** ** | **2010** | ** ** | **2009** | ** ** |
| Comprehensive loss:                             |       |                            |       |                          |       |   |   |   |   |
| Net income (loss)                               |       | $                               | 1,180      |                          | $          | (620 | ) | $ | 2,980 |   | $ | 385 |   |
| Foreign currency  translation adjustment        |       | (5,223                          | )          | 4,402                         |       | (9,213 | ) | 1,114 |   |
| Pension and other postretirement  benefits, net |       | 60                              | (1)        | —                        |       | 60 | (1) | — |   |
| Total comprehensive loss                        |       | $                               | (3,983     | )                             | $          | 3,782 |   | $ | (6,173 | ) | $ | 1,499 |   |

 

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(1) Represents a grosschange of $83, net of $23 in related tax impact.

 

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**Recent Accounting Pronouncements** - In January2010, the Financial Accounting Standards Board (“FASB”) issued guidance whichamends the existing fair value measurements and disclosures guidance. Theseamendments require a greater level of disaggregated information as well as moredisclosure around valuation techniques and inputs to fair value measurements.The amendments also provide guidance on employers’ disclosures about postretirementbenefit plan assets to require that disclosures be provided by classes ofassets instead of by major categories of assets. We were required to complywith this new standard as of January 1, 2010. Its adoption did not have amaterial impact on our consolidated financial statements.

 

In March 2010, the FASBissued new guidance which clarifies the scope exception for embedded creditrelated derivatives. We will be required to comply with this new standard onJuly 1, 2010. We do not expect a material impact on our financial statementsfrom the adoption of this guidance.

 

**(3)           Inventories**

 
| ** **      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|--------------|------------|------------------|------------|
| ** **      | ** ** | **2010**     | ** ** | **2009**         | ** ** |
| Raw materials   |       | $            | 16,170     |             | $          | 18,413 |   |
| Work-in-process |       | 35,354       |       | 42,121           |       |
| Finished goods  |       | 100,344      |       | 97,496           |       |
| Total inventory |       | $            | 151,868    |             | $          | 158,030 |   |

 

**(4)           Goodwill,Trademarks, and Other Intangible Assets**

 

Intangible assets other thangoodwill and indefinite-lived trademarks are amortized on a straight-line basisover their estimated useful lives. Deferred financing costs are amortized overthe repayment periods of the underlying debt. We performed our annual goodwilland intangible asset impairment test as of July 31, 2009. Based on ouranalysis, it was determined that a portion of the trademarks associated withthe online music business of the piano division was impaired. Accordingly, wewrote down the trademarks by $1.0 million in 2009. Our analysis of the otherpiano and band division trademarks did not indicate an impairment; therefore,no charge was taken against those assets or any other intangible assetsattributable to those divisions. No other events or circumstances occurredsubsequent to our annual impairment test which would have indicated that theseassets may be impaired.

 

The changes in carrying amounts of goodwill and trademarks are asfollows:

 
| ** **                           | ** ** | **Piano** | ** ** | **Band** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|-----------|------------|----------|------------|-----------|------------|
| Goodwill:                            |       |      |       |     |       |      |       |
| Balance, January 1, 2010             |       | $         | 24,063     |     | $          | —    |       | $ | 24,063 |   |
| Foreign currency  translation impact |       | (2,134    | )          | —   |       | (2,134    | )          |
| Balance, June 30, 2010               |       | $         | 21,929     |     | $          | —    |       | $ | 21,929 |   |
|                                 |       |      |       |     |       |      |       |
| Trademarks:                          |       |      |       |     |       |      |       |
| Balance, January 1, 2010             |       | $         | 9,460      |     | $          | 5,824     |       | $ | 15,284 |   |
| Foreign currency  translation impact |       | (670      | )          | —   |       | (670      | )          |
| Balance, June 30, 2010               |       | $         | 8,790      |     | $          | 5,824     |       | $ | 14,614 |   |

 

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We also carry certainintangible assets that are amortized. Once fully amortized, these assets areremoved from both the gross and accumulated amortization balances. These assetsconsist of the following:

 

 
| ** **                              | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------------|------------|--------------------|------------|------------------------|------------|
| Gross deferred financing  costs         |       | $                  | 5,088      |                   | $          | 5,333 |   |
| Accumulated amortization                |       | (3,262             | )          | (3,135                 | )          |
| Deferred financing costs,  net          |       | $                  | 1,826      |                   | $          | 2,198 |   |
|                                    |       |               |       |                   |       |
| Gross non-compete  agreements           |       | $                  | 250        |                   | $          | 250 |   |
| Accumulated amortization                |       | (106               | )          | (81                    | )          |
| Non-compete agreements,  net            |       | $                  | 144        |                   | $          | 169 |   |
|                                    |       |               |       |                   |       |
| Gross customer  relationships           |       | $                  | 512        |                   | $          | 506 |   |
| Accumulated amortization                |       | (221               | )          | (166                   | )          |
| Customer relationships,  net            |       | $                  | 291        |                   | $          | 340 |   |
|                                    |       |               |       |                   |       |
| Gross website and  developed technology |       | $                  | 2,176      |                   | $          | 2,176 |   |
| Accumulated amortization                |       | (917               | )          | (700                   | )          |
| Website and developed  technology, net  |       | $                  | 1,259      |                   | $          | 1,476 |   |
|                                    |       |               |       |                   |       |
| Total gross other  intangibles          |       | $                  | 8,026      |                   | $          | 8,265 |   |
| Accumulated amortization                |       | (4,506             | )          | (4,082                 | )          |
| Other intangibles, net                  |       | $                  | 3,520      |                   | $          | 4,183 |   |

 

Deferred financing costswere impacted by our purchase of $5.8 million of our Senior Notes in May andJune, 2010. These repurchases are described more fully in Note 6. Theweighted-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, whichincludes amortization of deferred financing costs, is as follows:

 
| ** **           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **           | ** ** | **2010**                        | ** ** | **2009**                      | ** ** | **2010** | ** ** | **2009** | ** ** |
| Amortization expense |       | $                               | 305        |                          | $          | 332 |   | $ | 611 |   | $ | 667 |   |
|                      |            |                                 |            |                               |            |  |  |  |  |  |  |  |  |

 

The following table shows the total estimated amortization expense forthe remainder of 2010 and beyond:

 
| Remainder of 2010 |   | $     | 599    |   |
|-------------------|--------|-------|--------|--------|
| 2011              |   | 1,138 |   |
| 2012              |   | 1,026 |   |
| 2013              |   | 674   |   |
| 2014              |   | 80    |   |
| Thereafter        |   | 3     |   |
| Total             |   | $     | 3,520  |   |

 

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**(5)           Other CurrentLiabilities**

** **
| ** **                                                               | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| Accrued payroll and  related benefits                                    |       | $                  | 12,443     |                   | $          | 9,326 |   |
| Current portion of pension  and other postretirement benefit liabilities |       | 1,129              |       | 1,456                  |       |
| Accrued warranty expense                                                 |       | 1,432              |       | 1,553                  |       |
| Accrued interest                                                         |       | 3,545              |       | 3,675                  |       |
| Deferred income                                                          |       | 7,124              |       | 7,210                  |       |
| Environmental liabilities                                                |       | 2,290              |       | 2,377                  |       |
| Income and other taxes  payable                                          |       | 1,992              |       | 3,383                  |       |
| Other accrued expenses                                                   |       | 7,661              |       | 7,415                  |       |
| Total                                                                    |       | $                  | 37,616     |                   | $          | 36,395 |   |

 

Accrued warranty expense is recorded at the time of sale forinstruments that have a warranty period ranging from one to ten years. Theaccrued expense recorded is generally calculated on a ratio of warranty coststo sales based on our warranty history and is adjusted periodically followingan analysis of actual warranty claims. The accrued warranty expense activityfor the six months ended June 30, 2010 and 2009, and the year ended December31, 2009 is as follows:

 
| ** **                           | ** ** | **June 30,  2010** | ** ** | **June 30,  2009** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------|------------|--------------------|------------|--------------------|------------|------------------------|------------|
| Beginning balance                    |       | $                  | 1,553      |               | $          | 1,451                  |       | $ | 1,451 |   |
| Additions                            |       | 433                |       | 432                |       | 945                    |       |
| Claims and reversals                 |       | (460               | )          | (494               | )          | (865                   | )          |
| Foreign currency  translation impact |       | (94                | )          | 21                 |       | 22                     |       |
| Ending balance                       |       | $                  | 1,432      |               | $          | 1,410                  |       | $ | 1,553 |   |

 

**(6)           Long-Term Debt**

 

Our long-term debt consists of the following:

 
| ** **                | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------|------------|--------------------|------------|------------------------|------------|
| Senior Notes              |       | $                  | 152,506    |                   | $          | 158,326 |   |
| Unamortized bond discount |       | (530               | )          | (623                   | )          |
| Overseas lines of credit  |       | 1,131              |       | 537                    |       |
| Total                     |       | 153,107            |       | 158,240                |       |
| Less: current portion     |       | 1,131              |       | 537                    |       |
| Long-term debt            |       | $                  | 151,976    |                   | $          | 157,703 |   |

 

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Scheduled repayments of long-term debt as of June 30, 2010 are asfollows:

 
| Remainder of 2010 |   | $       | 1,131   |   |
|-------------------|--------|---------|---------|--------|
| 2011              |   | —  |    |
| 2012              |   | —  |    |
| 2013              |   | —  |    |
| 2014              |   | 152,506 |    |
| Total             |   | $       | 153,637 |   |

 

During the second quarter of2010, we repurchased $5.8 million of our Senior Notes at prices ranging from95.0% to 98.0% plus interest. As a result, we recorded a net gain onextinguishment of debt of $0.1 million. A summary of the transactions is asfollows:

 
| Principal repurchased                  |   | $      | 5,820  |   |
|----------------------------------------|--------|--------|--------|--------|
| Less:                                  |   |   |   |
| Cash paid                              |   | (5,633 | )      |
| Write-off of deferred  financing costs |   | (64    | )      |
| Write-off of bond discount             |   | (19    | )      |
| Net gain on extinguishment  of debt    |   | $      | 104    |   |

 

**(7)           Fair Values of Financial Instruments**

 

Our financial instruments, which are recorded at fair value, consistprimarily of foreign currency contracts and marketable equity securities. Weassess the inputs used to measure fair value using the following three-tierhierarchy, which indicates the extent to which inputs used are observable inthe market.

 

Level1                              Valuation isbased upon unadjusted quoted prices for identical instruments traded in activemarkets.

 

Level 2                                Valuation isbased upon quoted prices for identical or similar instruments such as interestrates, foreign currency exchange rates, commodity rates and yield curves, andmodel-based valuation techniques for which all significant assumptions areobservable in the market.

 

Level 3                                Valuation isgenerated from model-based techniques that use at least one significantassumption not observable in the market. These unobservable assumptions includemanagement’s own judgments about the assumptions market participants would usein pricing the asset or liability. Valuation techniques include use of optionpricing models, discounted cash flow models and similar techniques. (We do nothave any assets or liabilities carried at Level 3 fair value.)

 

We value our foreign currency contracts using internal models withobservable inputs, including currency forward and spot prices. Estimated fairvalue has been determined as the difference between the current forward rateand the contract rate, multiplied by the notional amount of the contract, orupon the estimated fair value of purchased option contracts.

 

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The following table presents information about our assets andliabilities measured at fair value on a recurring basis as of June 30, 2010 andDecember 31, 2009 and the fair value hierarchy of the valuation techniques weutilized.

 
| ** **                               | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------|------------|--------------------|------------|------------------------|------------|
| Financial assets:                        |       |               |       |                   |       |
| Trading securities(1) -  Level 1         |       | $                  | 1,584      |                   | $          | 1,623 |   |
| Foreign currency  contracts(2) - Level 2 |       | 867                |       | 82                     |       |
|                                     |       | $                  | 2,451      |                   | $          | 1,705 |   |
|                                     |       |               |       |                   |       |
| Financial liabilities:                   |       |               |       |                   |       |
| Foreign currency  contracts(2) - Level 2 |       | $                  | 704        |                   | $          | 3 |   |

 

----

(1)          Our tradingsecurities pertain to the Supplemental Executive Retirement Plan (“SERP”) andare held in a Rabbi Trust. We record a corresponding liability for the sameamount in our financial statements, which represents our obligation to SERPparticipants.

 

(2)          Our foreigncurrency contracts pertain to obligations or potential obligations to purchaseor sell euros, pounds, U.S. dollars, and yen under various forward contracts.

 

We base the estimated fair value of our debt on institutional quotescurrently available to us. The historical cost, net carrying value, andestimated fair value are as follows:

 
| ** **             | ** ** | **June 30, 2010**       | ** ** | **December 31, 2009**     | ** ** |
|------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **             | ** ** | **Net Carrying  Value** | ** ** | **Estimated  Fair Value** | ** ** | **Net Carrying  Value** | ** ** | **Estimated  Fair Value** | ** ** |
| Financial liabilities: |       |                    |       |                      |       |   |   |   |   |
| Debt                   |       | $                       | 153,637    |                      | $          | 146,774 |   | $ | 158,863 |   | $ | 144,218 |   |
|                        |            |                         |            |                           |            |  |  |  |  |  |  |  |  |

 

The carrying values ofaccounts, notes and other receivables, and accounts payable approximate fairvalue.

 

**(8)           Stockholders’ Equity and Stock-basedCompensation Arrangements**

 

Our common stock iscomprised of two classes: Class A and Ordinary. With the exception of disparatevoting power, both classes are substantially identical. Each share of Class Acommon stock entitles the holder to 98 votes. Holders of Ordinary common stockare entitled to one vote per share. Each share of Class A common stock shallautomatically convert to Ordinary common stock if, at any time, that share ofClass A common stock is not owned by an original Class A holder. In March 2010Samick Musical Instruments Co., Ltd. (“Samick”) exercised its right to purchase1,700,000 shares of our ordinary common stock at a price of $16.00 per share,which resulted in a cash payment to us of $27.2 million. As of June 30, 2010our Chairman and our Chief Executive Officer collectively owned 100% of theClass A common shares, representing approximately 80% of the combined votingpower of the Class A common stock and Ordinary common stock.

 

**Employee Stock Purchase Plan** - We have anemployee stock purchase plan under which substantially all employees maypurchase Ordinary common stock through payroll deductions at a purchase priceequal to 85% of the lower of the fair market values as of the beginning or endof each twelve-month offering period. Stock purchases under the Purchase Planare limited to 5% of an employee’s annual base earnings. We have reserved400,000 shares of common stock for issuance under this plan.

 

**Stock Plans** - The 2006 Stock Plan provides for thegranting of 1,000,000 stock options (including incentive stock optionsand non-qualified stock options), stock appreciation rights and other stockawards to certain key employees, consultants and advisors. Our stock optionsgenerally have five-year vesting terms and ten-year option terms.

 

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Our 1996 Stock Plan hasexpired but still has vested and unvested options outstanding. We reached ourregistered share limitation in early 2007, and had previously reserved 721,750treasury stock shares to issue under this plan. We have since issued 122,674shares of treasury stock to cover options exercised, with 338,276 remainingoptions outstanding. Since in most instances the average cost of the treasurystock exceeded the price of the options exercised, the difference between theproceeds received and the average cost of the treasury stock issued resulted ina reduction of retained earnings. This reduction was $0.1 million for the threeand six months ended June 30, 2010. There were no stock option exercises duringthe three and six months ended June 30, 2009.

 

The compensation cost and the income tax benefit recognized for theseplans is as follows:

 
| ** **                                                        | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                                        | ** ** | **2010**                        | ** ** | **2009**                      | ** ** | **2010** | ** ** | **2009** | ** ** |
| Compensation cost included  in basic and diluted income per share |       | $                               | 0.03       |                          | $          | 0.03 |   | $ | 0.05 |   | $ | 0.06 |   |
| Stock-based compensation  expense                                 |       | 375                             |       | 293                           |       | 741 |   | 562 |   |
| Income tax benefit                                                |       | 68                              |       | 43                            |       | 135 |   | 85 |   |
|                                                                   |            |                                 |            |                               |            |  |  |  |  |  |  |  |  |

 

We measured the fair valueof options on their grant date, including the valuation of the option featureimplicit in our Purchase Plan, using the Black-Scholes option-pricing model.The risk-free interest rate is based on the weighted-average of U.S. Treasuryrates over the expected life of the stock option or the contractual life of theoption feature in the Purchase Plan. The expected life of a stock option is basedon historical data of similar option holders. We have segregated our employeesinto two groups based on historical exercise and termination behavior. Theexpected life of the option feature in the Purchase Plan is the same as itscontractual life. Expected volatility is based on historical volatility of ourstock over the expected life of the option, as our options are not readilytradable.

 

There were no optionsgranted during the three or six months ended June 30, 2010 or 2009. Thefollowing table sets forth information regarding the Stock Plans:

 
| ** **                    | ** ** | **Number of  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contract  Life  (in years)** | ** ** | **Aggregate  Intrinsic  Value  (in whole $)** | ** ** |
|-------------------------------|------------|------------------------|------------|-----------------------------------------|------------|---------------------------------------------------------------|------------|-----------------------------------------------|------------|
| Outstanding, January 1,  2010 |       | 1,129,176              |       | $                                       | 20.61      |                                                          |       |                                          |       |   |
| Granted                       |       | —                 |       | —                                  |       |                                                          |       |                                          |       |
| Exercised                     |       | (23,700                | )          | 18.84                                   |       |                                                          |       |                                          |       |
| Forfeited                     |       | (15,320                | )          | 24.58                                   |       |                                                          |       |                                          |       |
| Outstanding, June 30, 2010    |       | 1,090,156              |       | $                                       | 20.59      |                                                          | 6.7        |                                          | $          | 2,371,645 |   |
|                          |       |                   |       |                                    |       |                                                          |       |                                          |       |
| Exercisable, June 30, 2010    |       | 508,576                |       | $                                       | 23.67      |                                                          | 4.5        |                                          | $          | 6,370 |   |

 

There were no optionsexercised during the three months ended June 30, 2010. The total intrinsicvalue of the options exercised during the six months ended June 30, 2010 wasnominal. There were no options exercised during the three and six months endedJune 30, 2009. As of June 30, 2010, there was $3.4 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 3.4 years. Cash received from option exercisesunder the Stock Plans for the period ended June 30, 2010 was $0.4 million.

 

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The following tables set forth information regarding the Purchase Plan:

 
| ** **                                                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                                   | ** ** | **2010**                        | ** ** | **2009**                      | ** ** | **2010** | ** ** | **2009** | ** ** |
| Risk-free interest rate                                      |       | 0.5%                            |       | 2.2%                          |       | 0.5% |   | 2.2% |   |
| Weighted-average expected  life of option feature (in years) |       | 1.0                             |       | 1.0                           |       | 1.0 |   | 1.0 |   |
| Expected volatility of  underlying stock                     |       | 27.9%                           |       | 25.3%                         |       | 27.9% |   | 25.3% |   |
| Expected dividends                                           |       | n/a                             |       | n/a                           |       | n/a |   | n/a |   |
| Weighted-average fair  value of option feature               |       | $2.79                           |       | $6.71                         |       | $2.79 |   | $6.71 |   |

 
| ** **                    | ** ** | **Number of  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Remaining  Contract  Life  (in years)** | ** ** | **Aggregate  Intrinsic  Value  (in whole $)** | ** ** |
|-------------------------------|------------|------------------------|------------|-----------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------|------------|
| Outstanding, January 1,  2010 |       | 24,382                 |       | $                                       | 9.65       |                                      |       |                                          |       |   |
| Granted                       |       | 27,307                 |       | 9.65                                    |       |                                      |       |                                          |       |
| Exercised                     |       | —                 |       | —                                  |       |                                      |       |                                          |       |
| Forfeited                     |       | (957                   | )          | 9.65                                    |       |                                      |       |                                          |       |
| Outstanding, June 30, 2010    |       | 50,732                 |       | $                                       | 9.65       |                                      | 0.1        |                                          | $          | 419,046 |   |
|                               |            |                        |            |                                         |            |                                           |            |                                               |            |  |  |

 

**(9)****                                ****OtherExpense (Income), Net**

 
| ** **                             | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **2010**                        | ** ** | **2009**                      | ** ** | **2010** | ** ** | **2009** | ** ** |
| West 57th Street building income  |       | $                               | (961       | )                             | $          | (1,553 | ) | $ | (3,393 | ) | $ | (3,058 | ) |
| West 57th Street building expense |       | 1,689                           |       | 971                           |       | 3,461 |   | 2,186 |   |
| Foreign exchange (gain)  loss, net     |       | (217                            | )          | 635                           |       | (713 | ) | 349 |   |
| Miscellaneous, net                     |       | 147                             |       | (306                          | )          | (164 | ) | (288 | ) |
| Other expense (income),  net           |       | $                               | 658        |                          | $          | (253 | ) | $ | (809 | ) | $ | (811 | ) |

 

Our building on West 57th Street in New York City is managed by anoutside company. West 57th Street building income includes all rent andother income attributable to the property; and West 57th Street building expense includes the landlease, real estate taxes, depreciation, and other building costs. Since weutilize a portion of the leasable space for our own retail store, we haveallocated a ratable portion of the building expenses to sales and marketingexpenses.

 

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**(10)         Commitments and Contingent Liabilities**

 

We are involved in certainlegal proceedings regarding environmental matters, which are described below.Further, in the ordinary course of business, we are party to various legalactions that we believe are routine in nature and incidental to the operationof our business. While the outcome of such actions cannot be predicted withcertainty, we believe that, based on our experience in dealing with thesematters, their ultimate resolution will not have a material adverse impact onour business, financial condition, results of operations or prospects.

 

Certain environmental laws,such as the Comprehensive Environmental Response, Compensation, and LiabilityAct, as amended (“CERCLA”), impose strict, retroactive, joint and severalliability upon persons responsible for releases of hazardous substances, whichliability is broadly construed. Under CERCLA and other laws, we may haveliability for investigation and cleanup costs and other damages relating to ourcurrent or former properties, or third-party sites to which we sent wastes fordisposal. Our potential liability at any of these sites is affected by manyfactors including, but not limited to, the method of remediation, our portionof the hazardous substances at the site relative to that of other parties, thenumber of responsible parties, the financial capabilities of other parties, andcontractual rights and obligations.

 

We are continuing anexisting environmental remediation plan at a facility we acquired in 2000 andsubsequently sold. We estimate our costs, which approximate $0.7 million, overan 11-year period. We have accrued approximately $0.5 million for the estimatedremaining cost of this remediation program, which represents the present valuetotal cost using a discount rate of 4.54%. A summary of expected paymentsassociated with this project is as follows:

 
| ** **         | ** ** | **Environmental  Payments** | ** ** |
|--------------------|------------|-----------------------------|------------|
| Remainder  of 2010 |       | $                           | 44         |   |
| 2011               |       | 61                          |       |
| 2012               |       | 61                          |       |
| 2013               |       | 61                          |       |
| 2014               |       | 61                          |       |
| Thereafter         |       | 362                         |       |
| Total              |       | $                           | 650        |   |

 

In 2004, we acquired twomanufacturing facilities from G. Leblanc Corporation, now Grenadilla, Inc.(“Grenadilla”), for which environmental remediation plans had already been established.In connection with the acquisition, we assumed the existing accrued liabilityof approximately $0.8 million for the cost of these remediation activities.Based on a review of past and ongoing investigatory and remedial work by ourenvironmental consultants, and discussions with state regulatory officials, aswell as periodic sampling, we estimate the remaining costs of such remedialplans to be $1.8 million. Pursuant to the purchase and sale agreement, wesought indemnification from Grenadilla for anticipated costs above the originalestimate.We filed a claim against the escrow and recorded a correspondingreceivable for this amount in prepaid expenses and other current assets in ourconsolidated balance sheet. Based on the current estimated costs ofremediation, this receivable totaled $2.1 million as of June 30, 2010. Wehave reached an agreement with Grenadilla whereby related environmental costsare paid directly out of the escrow. Currently, the escrow balance exceeds ourreceivable balance. Should the escrow be reduced to zero, we would seek furtherindemnification from Grenadilla for these additional costs. However, we cannotbe assured that we will be able to recover such costs.

 

Based on our past experienceand currently available information, the matters described above and our otherliabilities and compliance costs arising under environmental laws are notexpected to have a material impact on our capital expenditures, earnings orcompetitive position in an individual year. However, some risk of environmentalliability is inherent in the nature of our current and former businesses and wemay, in the future, incur material costs to meet current or more stringentcompliance, cleanup, or other obligations pursuant to environmental laws.

 

In May 2008 we acquired 100%of the membership interest in ArkivMusic, LLC, an online retailer of classicalmusic. Under the purchase agreement, we are obligated to pay an amount equal to5% of the net operating profits of Arkiv, if any, in 2010, the sum of which isnot to exceed $2.5 million. The final purchase price is dependent upon acalculation derived from the 2010 net operating profits which, when finalized,is expected to result in an additional payment between $0.0 million and $2.0million. To date we have not recorded any liability or additional purchaseprice associated with this acquisition. However, we may have to do so in thelatter part of 2010.

 

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**(11)         Retirement Plans**

 

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

 
| ** **                                   | ** ** | **Domestic Plan**                     | ** ** | **Foreign Plans**                     | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
| ** **                                   | ** ** | **2010**                              | ** ** | **2009**                              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service cost                                 |       | $                                     | 82         |                                  | $          | 89 |   | $ | 148 |   | $ | 141 |   |
| Interest cost                                |       | 884                                   |       | 858                                   |       | 408 |   | 432 |   |
| Expected return on plan  assets              |       | (1,047                                | )          | (871                                  | )          | (72 | ) | (73 | ) |
| Amortization of prior  service cost (credit) |       | 28                                    |       | 52                                    |       | (13 | ) | — |   |
| Amortization of net loss                     |       | 486                                   |       | 647                                   |       | 46 |   | 2 |   |
| Net periodic pension cost                    |       | $                                     | 433        |                                  | $          | 775 |   | $ | 517 |   | $ | 502 |   |

 
| ** **                                   | ** ** | **Domestic Plan**                  | ** ** | **Foreign Plans**                  | ** ** |
|----------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                                   | ** ** | **Six Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
| ** **                                   | ** ** | **2010**                           | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service cost                                 |       | $                                  | 175        |                               | $          | 193 |   | $ | 319 |   | $ | 274 |   |
| Interest cost                                |       | 1,728                              |       | 1,722                              |       | 861 |   | 838 |   |
| Expected return on plan  assets              |       | (2,097                             | )          | (1,746                             | )          | (167 | ) | (140 | ) |
| Amortization of prior  service cost (credit) |       | 56                                 |       | 103                                |       | (13 | ) | — |   |
| Amortization of net loss                     |       | 978                                |       | 1,255                              |       | 80 |   | 4 |   |
| Net periodic pension cost                    |       | $                                  | 840        |                               | $          | 1,527 |   | $ | 1,080 |   | $ | 976 |   |

 

On April 1, 2010, we amended our U.K. pension plan prospectivelyto both limit active participants’ annual increases in pensionable salary andreduce the rate at which participants accrue final benefits. We remeasuredthe plan’s benefit obligation, plan assets and net periodic pension cost as aresult of the plan amendment. Assumptions utilized are as follows:

 
| ** **                     | ** ** | **Benefit Obligation** | ** ** | **Net Periodic Pension Cost** | ** ** |
|--------------------------------|------------|------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **April 1,**      | ** ** | **January 1,**           | ** ** | **April 1,** | ** ** | **January 1,** | ** ** | **Weighted-** | ** ** |
| ** **                     | ** ** | **2010**               | ** ** | **2010**                      | ** ** | **2010** | ** ** | **2010** | ** ** | **Average** | ** ** |
| Discount rate                  |       | 5.50%                  |       | 5.80%                         |       | 5.50% |   | 5.80% |   | 5.67% |   |
| Expected return on assets      |       | n/a                    |       | n/a                           |       | 5.30% |   | 5.30% |   | 5.30% |   |
| Rate of compensation  increase |       | 3.80%                  |       | 4.80%                         |       | 3.80% |   | 4.80% |   | 4.37% |   |

 

The decrease in our long-term pension benefit obligation was more thanoffset by an increase in our actuarial loss due to the change in valuationassumptions when the plan was remeasured. The plan amendment resulted in agross decrease in our pension benefit obligation of $0.6 million throughrecognition of a prior service credit, which will be amortized over a period of12 years. On a net basis, our long term pension benefit obligation increased byless than $0.1 million and our accumulated other comprehensive loss decreasedby $0.1 million, net of tax.

 

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We provide postretirementhealth care and life insurance benefits to a limited number of certain eligiblehourly retirees and their dependents. As a result of terminating one of ourcollective bargaining agreements in 2009, we have a limited number ofparticipants receiving health care benefits under this plan. Once theseparticipants reach age sixty-five and are eligible for Medicare, nopostretirement health care benefits will be provided under this plan. We willcontinue to provide life insurance benefits for eligible retirees. During thequarter ended June 30, 2010, we made a settlement payment of $0.1 millionassociated with this plan. This payment had no material impact on the plan. Thecomponents of net periodic postretirement benefit cost for these benefits areas follows:

 
| ** **                                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                          | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service cost                                        |       | $                                     | 4          |                                | $          | 2 |   | $ | 5 |   | $ | 3 |   |
| Interest cost                                       |       | 8                                     |       | 19                                  |       | 21 |   | 36 |   |
| Amortization of prior  service credit               |       | (28                                   | )          | (13                                 | )          | (57 | ) | (26 | ) |
| Settlement                                          |       | 6                                     |       | —                              |       | 6 |   | — |   |
| Net periodic postretirement  benefit cost (benefit) |       | $                                     | (10        | )                                   | $          | 8 |   | $ | (25 | ) | $ | 13 |   |

 

Based on federal laws andregulations, we are not required to make a contribution to our domestic pensionplan in 2010. We made a payment of less than $0.1 million to this plan duringthe period and are currently evaluating what additional amount, if any, we willcontribute to this plan in 2010. Our anticipated contributions to the pensionplan of our U.K. subsidiary approximate $0.8 million for the current year. Asof June 30, 2010, we have made contributions of $0.4 million to this plan.The pension plans of our German entities do not hold any assets and useoperating cash to pay participant benefits as they become due. Expected 2010benefit payments under these plans are $1.1 million, of which $0.6 million waspaid through June 2010.

 

**(12)         Segment Information**

 

We have identified tworeportable segments: the piano segment and the band & orchestralinstrument segment. We consider these two segments reportable as they aremanaged separately and the operating results of each segment are separatelyreviewed and evaluated by our senior management on a regular basis. We haveincluded the results of our online music division within the “U.S. PianoSegment” 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 tables present information about our operating segmentsfor the three and six months ended June 30, 2010 and 2009:

 
| **Three Months Ended 2010**      | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Other &** | ** ** | **Consol** | ** ** |
|----------------------------------|------------|-------------------|------------|------------------|------------|----------------------|------------|------------|------------|
| ** **                       | ** ** | **U.S.**          | ** ** | **Germany**      | ** ** | **Other**            | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Europe** | ** ** | **Total** | ** ** | **Elim** | ** ** | **Total** | ** ** |
| Net sales to external  customers |       | $                 | 21,366     |             | $          | 12,943               |       | $          | 10,813     |   | $ | 45,122 |   | $ | 32,144 |   | $ | 982 |   | $ | 33,126 |   | $ | — |   | $ | 78,248 |   |
| Income (loss) from  operations   |       | 223               |       | 2,365            |       | 999                  |       | 3,587      |       | 2,031 |   | 67 |   | 2,098 |   | (544 | ) | 5,141 |   |
|                                  |            |                   |            |                  |            |                      |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| **Three 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 |       | $                 | 17,779     |             | $          | 13,076               |       | $          | 11,545     |   | $ | 42,400 |   | $ | 28,755 |   | $ | 958 |   | $ | 29,713 |   | $ | — |   | $ | 72,113 |   |
| Income (loss) from  operations  |       | (1,005            | )          | 1,791            |       | 1,085                |       | 1,871      |       | 556 |   | 85 |   | 641 |   | (1,005 | ) | 1,507 |   |
|                                 |            |                   |            |                  |            |                      |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| **Six Months Ended 2010**       | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Other &** | ** ** | **Consol** | ** ** |
|---------------------------------|------------|-------------------|------------|------------------|------------|----------------------|------------|------------|------------|
| ** **                      | ** ** | **U.S.**          | ** ** | **Germany**      | ** ** | **Other**            | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Europe** | ** ** | **Total** | ** ** | **Elim** | ** ** | **Total** | ** ** |
| Net sales to external customers |       | $                 | 40,206     |             | $          | 22,665               |       | $          | 21,427     |   | $ | 84,298 |   | $ | 60,424 |   | $ | 2,069 |   | $ | 62,493 |   | $ | — |   | $  | 146,791 |   |
| Income (loss) from  operations  |       | 579               |       | 3,085            |       | 1,973                |       | 5,637      |       | 4,542 |   | 157 |   | 4,699 |   | (1,472 | ) | 8,864 |   |
|                                 |            |                   |            |                  |            |                      |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| **Six 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 |       | $                 | 36,616     |             | $          | 23,828               |       | $          | 19,235     |   | $ | 79,679 |   | $ | 60,310 |   | $ | 2,115 |   | $ | 62,425 |   | $ | — |   | $  | 142,104 |   |
| Income (loss) from  operations   |       | (2,642            | )          | 3,704            |       | 1,258                |       | 2,320      |       | 939 |   | 196 |   | 1,135 |   | (1,999 | ) | 1,456 |   |
|                                  |            |                   |            |                  |            |                      |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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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 world leader in thedesign, manufacture, marketing, and distribution of high quality musicalinstruments. Our piano division concentrates on the high-end grand pianosegment of the industry, handcrafting Steinway pianos in New York and Germany.We also offer upright pianos and two mid-priced lines of pianos under theBoston 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 base consistsof professional artists, amateur pianists, and institutions such as concerthalls, 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.

 

**Critical Accounting Policies and Estimates**

 

The Securities and ExchangeCommission (“SEC”) has issued disclosure guidance for “critical accountingpolicies and estimates.” The SEC defines “critical accounting policies andestimates” as those that require application of management’s most difficult,subjective or complex judgments, often as a result of the need to makeestimates about the effect of matters that are inherently uncertain and maychange in subsequent periods.

 

Management is required tomake certain estimates and assumptions during the preparation of the condensedconsolidated financial statements. These estimates and assumptions impact thereported amount of assets and liabilities and disclosures of contingent assetsand liabilities as of the date of the consolidated financial statements.Estimates and assumptions are reviewed periodically and the effects ofrevisions are reflected in the consolidated financial statements in the periodthey are determined to be necessary. Actual results could differ from thoseestimates.

 

The significant accountingpolicies are described in Note 2 of the Notes to Consolidated FinancialStatements included in the Company’s 2009 Annual Report on Form 10-K. Notall of these significant accounting policies require management to makedifficult, subjective or complex judgments or estimates. However, managementconsiders the following to be critical accounting policies and estimates basedon the definition above.

 

**AccountsReceivable**

 

We establish reserves for accounts receivableand notes receivable. We review overall collectibility trends and customercharacteristics such as debt leverage, solvency, and outstanding balances inorder to develop our reserve estimates. Historically, a large portion of oursales at both our piano and band divisions has been generated by our topfifteen customers. As a result, we experience some inherent concentration ofcredit risk in our accounts receivable due to its composition and the relativeproportion of large customer receivables to the total. This is especially trueat our band division, which characteristically has a majority of ourconsolidated accounts receivable balance. We consider the credit health andsolvency of our customers when developing our receivable reserve estimates.

 

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**Inventory**

 

We establish inventoryreserves for items such as lower-of-cost-or-market and obsolescence. We reviewinventory levels on a detailed basis, concentrating on the age and amounts ofraw materials, work-in-process, and finished goods, as well as recent usage andsales dates and quantities to help develop our estimates. Ongoing changes inour business strategy, including a shift from batch processing to single pieceproduction flow, coupled with increased offshore sourcing, could affect ourability to realize the current cost of our inventory, and are considered by managementwhen developing our estimates. We also establish reserves for anticipatedbook-to-physical adjustments based upon our historical level of adjustmentsfrom our annual physical inventories. We account for our inventory usingstandard costs. Accordingly, variances between actual and standard costs thatare not abnormal in nature are capitalized into inventory and released based oncalculated inventory turns. Abnormal costs are expensed in the period in whichthey occur.

 

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

 

We establish self-insuredworkers’ compensation and health claims reserves based on our trend analysis ofdata provided by third-party administrators regarding historical claims andanticipated future claims.

 

**Warranty**

 

We establish reserves forwarranty claims based on our analysis of historical claims data, recent claimstrends, and the various lengths of time for which we warranty 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.

 

**Pensionsand Other Postretirement Benefit Costs**

 

Wemake certain assumptions when calculating our benefit obligations and expenses.We base our selection of assumptions, such as discount rates and long-termrates of return, on information provided by our actuaries, investment advisors,investment committee, current rate trends, and historical trends for ourpension asset portfolio. Our benefit obligations and expenses can fluctuatesignificantly based on the assumptions management selects.

 

**IncomeTaxes**

 

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 jurisdictions for which we have losscarryforwards. When establishing or adjusting valuation allowances, we considerthese factors, as well as anticipated trends in foreign source income and taxplanning strategies which may impact future realizability 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.

 

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**Stock-BasedCompensation**

 

We grant stock-basedcompensation awards which generally vest over a specified period. Whendetermining the fair value of stock options and subscriptions to purchaseshares under the employee stock purchase plan (“Purchase Plan”), we use theBlack-Scholes option valuation model, which requires input of certainmanagement assumptions, including dividend yield, expected volatility,risk-free interest rate, expected life of stock options granted during theperiod, and the life applicable to the Purchase Plan subscriptions. Theestimated fair value of the options and subscriptions to purchase shares, andthe resultant stock-based compensation expense, can fluctuate based on theassumptions used by management.

 

**EnvironmentalLiabilities**

 

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

 

We believe the assumptionsmade by management provide a reasonable basis for the estimates reflected inour financial statements.

 

**Forward-Looking Statements**

 

Certain statements containedin this document are “forward-looking statements” within the meaning of Section 21Eof the Securities and Exchange Act of 1934, as amended. These forward-lookingstatements represent our present expectations or beliefs concerning futureevents. We caution that such statements are necessarily based on certainassumptions which are subject to risks and uncertainties which could causeactual results to differ materially from those indicated in this report. Theserisk factors include, but are not limited to, the following: changes in generaleconomic conditions; reductions in school budgets; increased competition; workstoppages and slowdowns; ability to successfully consolidate bandmanufacturing; impact of dealer consolidations on orders; ability of dealers toobtain financing; exchange rate fluctuations; variations in the mix of productssold; market acceptance of new products, ability of suppliers to meet demand;concentration of credit risk; ability to lease office space; and fluctuationsin effective tax rates resulting from shifts in sources of income. Furtherinformation on these risk factors is included in Item 1A of our Annual Reporton Form 10-K for the year ended December 31, 2009. We encourage youto read those descriptions carefully. We caution investors not to place unduereliance on the forward-looking statements contained in this report. Thesestatements, like all statements contained in this report, speak only as of thedate of this report (unless another date is indicated) and we undertake noobligation to update or revise the statements except as required by law.

 

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**Results of Operations**

 

Three Months Ended June 30, 2010 Compared to Three Months Ended June 30,2009

 
| ** **                          | ** ** | **Three Months Ended  June 30,** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **2010**                              | ** ** | ** ** | ** ** | **2009**   | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
| Net sales                           |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Band                                |       | $                                     | 33,126     |       |       |       | $          | 29,713 |   |   |   | 3,413 |   | 11.5 |   |
| Piano                               |       | 45,122                                |       |       |       | 42,400     |       |   |   | 2,722 |   | 6.4 |   |
| Total sales                         |       | 78,248                                |       |       |       | 72,113     |       |   |   | 6,135 |   | 8.5 |   |
|                                |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Cost of sales                       |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Band                                |       | 25,822                                |       |       |       | 23,484     |       |   |   | 2,338 |   | 10.0 |   |
| Piano                               |       | 30,263                                |       |       |       | 29,731     |       |   |   | 532 |   | 1.8 |   |
| Total cost of sales                 |       | 56,085                                |       |       |       | 53,215     |       |   |   | 2,870 |   | 5.4 |   |
|                                |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Gross profit                        |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Band                                |       | 7,304                                 |       | 22.0%      |       | 6,229      |       | 21.0% |   | 1,075 |   | 17.3 |   |
| Piano                               |       | 14,859                                |       | 32.9%      |       | 12,669     |       | 29.9% |   | 2,190 |   | 17.3 |   |
| Total gross profit                  |       | 22,163                                |       |       |       | 18,898     |       |   |   | 3,265 |   | 17.3 |   |
|                                |       | 28.3%                                 |       |       |       | 26.2%      |       |   |   |   |   |   |   |
|                                |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Operating expenses                  |       | 17,022                                |       |       |       | 17,391     |       |   |   | (369 | ) | (2.1 | ) |
|                                |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Income from operations              |       | 5,141                                 |       |       |       | 1,507      |       |   |   | 3,634 |   | 241.1 |   |
|                                |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Other expense (income),  net        |       | 658                                   |       |       |       | (253       | )          |   |   | 911 |   | (360.1 | ) |
| Net gain on extinguishment  of debt |       | (104                                  | )          |       |       | —     |       |   |   | (104 | ) | 100.0 |   |
| Net interest expense                |       | 2,495                                 |       |       |       | 2,516      |       |   |   | (21 | ) | (0.8 | ) |
| Non-operating expenses              |       | 3,049                                 |       |       |       | 2,263      |       |   |   | 786 |   | 34.7 |   |
|                                |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Income (loss) before  income taxes  |       | 2,092                                 |       |       |       | (756       | )          |   |   | 2,848 |   | (376.7 | ) |
|                                |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Income tax provision  (benefit)     |       | 912                                   |       | 43.6%      |       | (136       | )          | 18.0% |   | 1,048 |   | (770.6 | ) |
|                                |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Net income (loss)                   |       | $                                     | 1,180      |       |       |       | $          | (620 | ) |   |   | 1,800 |   | (290.3 | ) |

 

**Overview*—*****Piano divisionrevenue improved due to a 20% increase in domestic piano division sales. Piano profitsbenefited from higher sales as well as more efficient production at bothfactories. Band division sales increased due to improved orders and pent updemand for many instruments. Band margins increased as a result of betterproduction efficiencies and a shift in mix to higher margin brass instruments.

 

**Net Sales** —****Due to a 12% increase in domestic Steinway grand unitshipments, domestic piano division revenues improved $3.6 million. Priceincreases, which were implemented at the beginning of the year, as well as ashift in mix towards retail sales, also enhanced revenues. Overseas Steinwaygrand unit shipments increased 2% and mid-priced piano lines shipments were 30%higher. However, overseas revenues deteriorated $0.9 million due to foreigncurrency translation and the shift in mix towards mid-priced upright pianos.

 

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Band division revenues were$3.4 million higher as a result of a 13% increase in unit shipments. Asexpected, both orders and shipments were higher since the back-to-schoolselling season is approaching and dealers had immediate needs for inventory.Promotional incentives on select inventory models also contributed to therevenue improvement.

 

**Gross Profit***-*****Gross profitimproved $3.3 million as a result of higher sales and improved margins at boththe piano and band divisions. Domestically, piano margins increased from 25.0%to 28.7% and overseas margins rose from 33.4% to 36.7%. Changes in productionschedules and fewer unplanned shutdown days at both factories bolstered factoryefficiency. A domestic shift in mix towards retail units also helped improvethe margins.

 

The band division’s grossmargin improved from 21.0% to 22.0% during the period despite a $0.7 millionincrease in inventory reserve charges. These charges were more than offset by ashift towards higher margin brass instruments as well as improved factoryefficiency.

 

**Operating Expenses** - Operatingexpenses decreased $0.4 million. Although bad debt expense decreased $0.3million, sales and marketing expenses increased $0.2 million due to increaseddomestic retail sales staff and the addition of a new store. General andadministrative costs were $0.7 million lower primarily as a result of lowercompensation related costs and professional service fees.

 

**Non-operating Expenses** —Non-operating expenses increased $0.8 million despite a $0.9 million shift fromforeign exchange losses to foreign exchange gains during the period. Thisdeterioration is primarily attributable to the lower rental income ($1.2million) at our West 57th Street building. We expect to incur atemporary loss on this facility until we have leased the remaining availablespace to new tenants. We repurchased $5.8 million of our Senior Notes duringthe period, which resulted in a gain of $0.1 million. Net interest expense wasvirtually unchanged as the decrease in interest income associated with financedreceivables at the band division was offset by lower interest expense due tolower outstanding borrowings.

 

**Income Taxes** -**We recorded an income tax expense of $0.9 million,reflecting our anticipated annual effective income tax rate of 39.8% associatedwith current year income, offset by a nominal benefit associated with uncertaintax positions. The combination of these items resulted in an effective tax rateof 43.6% for the period. The rate of 18.0% in the year-ago period wasabnormally low primarily due to no anticipated U.S. federal tax liability. Therate reflected an anticipated annual effective income tax rate of 22.0% relatedto income for that period, as well as discrete items.

 

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Six Months Ended June 30, 2010 Compared to Six Months Ended June 30,2009

 
| ** **                          | ** ** | **Six Months Ended June 30,** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------------|------------|------------------------------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **2010**                           | ** ** | ** ** | ** ** | **2009**   | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
| Net sales                           |       |                               |       |       |       |       |       |   |   |   |   |   |   |
| Band                                |       | $                                  | 62,493     |       |       |       | $          | 62,425 |   |   |   | 68 |   | 0.1 |   |
| Piano                               |       | 84,298                             |       |       |       | 79,679     |       |   |   | 4,619 |   | 5.8 |   |
| Total sales                         |       | 146,791                            |       |       |       | 142,104    |       |   |   | 4,687 |   | 3.3 |   |
|                                |       |                               |       |       |       |       |       |   |   |   |   |   |   |
| Cost of sales                       |       |                               |       |       |       |       |       |   |   |   |   |   |   |
| Band                                |       | 46,734                             |       |       |       | 49,351     |       |   |   | (2,617 | ) | (5.3 | ) |
| Piano                               |       | 56,570                             |       |       |       | 55,246     |       |   |   | 1,324 |   | 2.4 |   |
| Total cost of sales                 |       | 103,304                            |       |       |       | 104,597    |       |   |   | (1,293 | ) | (1.2 | ) |
|                                |       |                               |       |       |       |       |       |   |   |   |   |   |   |
| Gross profit                        |       |                               |       |       |       |       |       |   |   |   |   |   |   |
| Band                                |       | 15,759                             |       | 25.2%      |       | 13,074     |       | 20.9% |   | 2,685 |   | 20.5 |   |
| Piano                               |       | 27,728                             |       | 32.9%      |       | 24,433     |       | 30.7% |   | 3,295 |   | 13.5 |   |
| Total gross profit                  |       | 43,487                             |       |       |       | 37,507     |       |   |   | 5,980 |   | 15.9 |   |
|                                |       | 29.6%                              |       |       |       | 26.4%      |       |   |   |   |   |   |   |
|                                |       |                               |       |       |       |       |       |   |   |   |   |   |   |
| Operating expenses                  |       | 34,623                             |       |       |       | 36,051     |       |   |   | (1,428 | ) | (4.0 | ) |
|                                |       |                               |       |       |       |       |       |   |   |   |   |   |   |
| Income from operations              |       | 8,864                              |       |       |       | 1,456      |       |   |   | 7,408 |   | 508.8 |   |
|                                |       |                               |       |       |       |       |       |   |   |   |   |   |   |
| Other income, net                   |       | (809                               | )          |       |       | (811       | )          |   |   | 2 |   | (0.2 | ) |
| Net gain on extinguishment  of debt |       | (104                               | )          |       |       | (3,434     | )          |   |   | 3,330 |   | (97.0 | ) |
| Net interest expense                |       | 4,854                              |       |       |       | 5,038      |       |   |   | (184 | ) | (3.7 | ) |
| Non-operating expenses              |       | 3,941                              |       |       |       | 793        |       |   |   | 3,148 |   | 397.0 |   |
|                                |       |                               |       |       |       |       |       |   |   |   |   |   |   |
| Income before income taxes          |       | 4,923                              |       |       |       | 663        |       |   |   | 4,260 |   | 642.5 |   |
|                                |       |                               |       |       |       |       |       |   |   |   |   |   |   |
| Income tax provision                |       | 1,943                              |       | 39.5%      |       | 278        |       | 41.9% |   | 1,665 |   | 598.9 |   |
|                                |       |                               |       |       |       |       |       |   |   |   |   |   |   |
| Net income                          |       | $                                  | 2,980      |       |       |       | $          | 385 |   |   |   | 2,595 |   | 674.0 |   |

 

**Overview*-*****Piano divisionrevenue improved primarily due to increased domestic demand for our products.Piano margins were better due to more efficient production at bothmanufacturing facilities. Band division sales were stable, as the reluctance ofdealers to place orders in the first quarter was offset by improved orders andshipments in the second quarter. Band margins improved due to more normalproduction schedules and improved production efficiencies than in the year-agoperiod.

 

**Net Sales** —****Domestic piano division revenues were $3.6 million (10%)higher due to a combination of a 3% increase in Steinway grand units, strongerretail sales, and a shift in mix from lower priced upright pianos to higherpriced grand pianos. Price increases, which were implemented at the beginningof the year, were also a factor. Overseas revenues increased $1.0 millionsupported by an improvement in sales by our divisions in Asia, which mitigatedthe impact of a 2% decrease in Steinway grand unit shipments. Overseasmid-priced piano line shipments rose 36% due in part to improved availabilityof certain models, although a shift in mix from grands to uprights precludedany revenue increase.

 

Band division revenues wereflat. Improved sales of percussion instruments helped offset the 5% decrease inwoodwind and brass instruments. While we had sufficient inventory to supply ourdealers, we did not offer pricing incentives or rebates to entice dealers toorder early. Accordingly, orders and shipments have shifted to later in theyear, picking up in the latter part of the second quarter, when dealers neededinventory.

 

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**Gross Profit***—*****Gross profitimproved even more significantly than sales primarily as result of highermargins at both the piano and band divisions. Domestically, piano marginsincreased from 25.3% to 29.8% due to changes in production schedules, whichbolstered factory efficiency, as well as better retail sales, which generatehigher margins. Overseas margins went from 35.2% to 35.8%, as a shift in shipmentsto lower margin territories in the first quarter was more than offset byimprovements in factory efficiency in the second quarter.

 

The band division’s grossmargin improved from 20.9% to 25.2% during the period. Production scheduleshave stabilized, resulting in improved overhead absorption and lower factoryvariances for the first half of 2010.

 

**Operating Expenses** - Operatingexpenses decreased $1.4 million. Sales and marketing expenses decreased $0.3million primarily due to lower bad debt expense of $0.6 million, which waspartially offset by costs associated with incremental retail sales personnel.General and administrative costs were $1.0 million lower as a result of costsaving measures implemented during 2009 and lower compensation related costs.

 

**Non-operating Expenses** —Non-operating expenses increased $3.1 million due to the reduction in net gainson extinguishment of debt of $3.3 million. The benefit of a shift from foreignexchange losses to foreign exchange gains of $1.1 million was offset by lowerrental income of the same amount at our West 57th Streetbuilding.

 

**Income Taxes** -**We recorded an income tax expense of $1.9 million,reflecting our anticipated annual effective income tax rate of 39.8% associatedwith current year income, offset by a nominal benefit associated with uncertaintax positions. The combination of these items resulted in an effective tax rateof 39.5% for the period. The rate of 41.9% in the year-ago period reflected ananticipated effective income tax rate of 22.0% related to income for thatperiod, largely due to no anticipated U.S. federal tax liability, and 19.9%relating to uncertain tax positions and discrete items.

 

**Liquidity and CapitalResources**

 

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

 

Our statements of cash flows for the six months ended June 30,2010 and 2009 are summarized as follows:

 
| ** **                                                                    | ** ** | **2010** | ** ** | **2009** | ** ** | **Change** | ** ** |
|-------------------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Net income:                                                                   |       | $        | 2,980      |     | $          | 385        |       | $ | 2,595 |   |
| Changes in operating  assets and liabilities                                  |       | 174      |       | (8,957   | )          | 9,131      |       |
| Other adjustments to  reconcile net income to  cash from operating activities |       | 4,957    |       | 2,591    |       | 2,366      |       |
| Cash flows from operating  activities                                         |       | 8,111    |       | (5,981   | )          | 14,092     |       |
|                                                                          |       |     |       |     |       |       |       |
| Cash flows from investing  activities                                         |       | (1,065   | )          | (3,008   | )          | 1,943      |       |
|                                                                          |       |     |       |     |       |       |       |
| Cash flows from financing  activities                                         |       | 22,485   |       | 10,407   |       | 12,078     |       |
|                                                                               |            |          |            |          |            |            |            |  |  |  |

 

Cash flows from operatingactivities improved $14.1 million over the year-ago period. Although the salesincrease caused a shift from source to use of cash for accounts receivable of$6.4 million, we also used $7.7 million less for inventory since the salesimprovement helped reduce our inventory. We generated $10.4 million more fromaccounts payable and accrued expenses in the current period. In 2009, we hadimplemented cost cutting measures to conserve cash and reduce expenditures. In2010, spending patterns have normalized. The timing of payroll and vacationpayments also contributed to the improved cash flow.

 

Cash flows used forinvesting activities decreased $1.9 million. In the prior period we used $0.8million to acquire a subsidiary. In the current period, our capitalexpenditures were $1.1 million lower. We expect capital expenditures for thefull year to be in the range of $3.0 to $4.0 million for normal capitalprojects, and an additional $1.0 million for improvements and renovations atour building in New York City.

 

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Cash flows provided byfinancing activities increased $12.1 million as we generated $27.6 millionthrough stock sales in 2010.  Also, wedid not use our domestic line of credit in 2010, so cash provided by borrowingswas $17.2 million lower than the year-ago period.

 

**Borrowing Activities and Availability**-****Wehave a domestic credit facility with a syndicate of domestic lenders (the “CreditFacility”) with a potential borrowing capacity of $110.0 million in revolvingcredit loans, which expires on September 29, 2011. It provides forperiodic borrowings at either London Interbank Offering Rate (“LIBOR”) plus arange from 1.25% to 1.75%, or as-needed borrowings at an alternate base rate,plus a range from 0.00% to 0.25%; both ranges depend upon borrowingavailability at the time of borrowing. The Credit Facility is collateralized byour domestic accounts receivable, inventory, and property, plant and equipment.As of June 30, 2010, there was nothing outstanding on our Credit Facility,and borrowing availability was approximately $104.6 million.

 

We also have certain non-domestic credit facilities originating fromtwo German banks that provide for borrowings by foreign subsidiaries of up to€16.5 million ($20.2 million at the June 30, 2010 exchange rate), net ofborrowing restrictions of €2.0 million ($2.4 million at the June 30, 2010exchange rate) which are payable in April 2012. These borrowings arecollateralized by most of the assets of the borrowing subsidiaries. A portionof the loans can be converted into a maximum of £0.7 million ($1.1 million atthe June 30, 2010 exchange rate) for use by our U.K. branch and ¥300million ($3.4 million at the June 30, 2010 exchange rate) for use by ourJapanese subsidiary. Our Chinese subsidiary also has the ability to convert theequivalent of up to €2.5 million into U.S. dollars or Chinese yuan ($3.1million at the June 30, 2010 exchange rate). Euro loans bear interest atrates of Euro Interbank Offered Rate (“EURIBOR”) plus a margin determined atthe time of borrowing. Margins fluctuate based on the loan amount and theborrower’s bank rating. The remaining demand borrowings bear interest rates ofLIBOR plus 0.8% for British pound loans, LIBOR plus 1.0% for U.S. dollar loansof our Chinese subsidiary, and Tokyo Interbank Offered Rate (“TIBOR”) plus 1.3%for Japanese yen loans. We had nothing outstanding as of June 30, 2010 onthese credit facilities.

 

Our Japanese subsidiary also maintains a separate revolving loanagreement that provides additional borrowing capacity of up to ¥500 million($5.7 million at the June 30, 2010 exchange rate). The revolving loanagreement bears interest at an average 30-day TIBOR rate plus 0.9% (outstandingborrowings at 1.1% at June 30, 2010) and expires on January 31, 2011.As of June 30, 2010, we had $1.1 million outstanding on this revolvingloan agreement.

 

At June 30, 2010, ourtotal outstanding indebtedness amounted to $153.6 million, consisting of $152.5million of our 7.00% Senior Notes due March 1, 2014 and $1.1 million ofnotes payable to foreign banks. We repurchased $5.8 million of our Senior Notesduring the quarter ended June 30, 2010. We may consider additionalrepurchases in the future, contingent upon our cash availability and thetrading price of our Notes.

 

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 June 30, 2010 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 May 2008we announced a share repurchase program, which permits us to make discretionarypurchases of up to $25.0 million of our Ordinary common stock. To date, we haverepurchased 80,300 shares and approximately $22.9 million remains authorizedfor repurchases under this program. We did not make any repurchases in 2009 andhave not made any repurchases in 2010.

 

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 from operationsto fund our debt and capital requirements and pay off seasonal borrowings onour domestic line of credit. While we anticipate the remainder of 2010 to bechallenging, we do not expect any adverse impact in our liquidity as we hadover $90.0 million in cash as of June 30, 2010. We intend to manageaccounts receivable and credit risk, and control inventory levels by monitoringpurchases and production schedules. We have also reduced headcount, minimizednon-critical expenditures, and forgone wage increases and discretionary benefitprogram contributions. Our intention is to manage cash outflow and maintainsufficient operating cash on hand to meet short-term requirements.

 

We do not have any currentplans or intentions that will have a material adverse impact on our liquidityin 2010, although we may consider acquisitions that may require funding fromoperations or from our credit facilities. Other than 

 

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those described, we are not aware of any trends, demands, commitments,or costs of resources that are expected to materially impact our liquidity orcapital resources. Accordingly, we believe that cash on hand, together withcash flows anticipated from operations and available borrowings under theCredit Facility, will be adequate to meet our debt service requirements, fundregular capital requirements and satisfy our working capital and generalcorporate needs through the remainder of 2010.

 

**Contractual Obligations** - The following tableprovides a summary of our contractual obligations at June 30, 2010.

 
| ** **                      | ** ** | **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)               |       | $                          | 192,793    |   | $ | 11,819 |   | $ | 21,351 |   | $ | 159,623 |   | $ | — |   |
| Capital leases                  |       | 14                         |       | 10 |   | 4 |   | — |   | — |   |
| Operating leases(2)             |       | 258,340                    |       | 5,811 |   | 9,771 |   | 8,244 |   | 234,514 |   |
| Purchase obligations(3)         |       | 26,374                     |       | 25,421 |   | 953 |   | — |   | — |   |
| Other long-term  liabilities(4) |       | 37,868                     |       | 4,747 |   | 4,785 |   | 4,668 |   | 23,668 |   |
| Total                           |       | $                          | 515,389    |   | $ | 47,808 |   | $ | 36,864 |   | $ | 172,535 |   | $ | 258,182 |   |

 

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Notes to Contractual Obligations:

 

(1)     Long-term debt representslong-term debt obligations, the fixed interest on our Notes, and the variableinterest on our other loans. We estimated the future variable interestobligation using the applicable June 30, 2010 rates. The nature of ourlong-term debt obligations, including changes to our long-term debt structure,is described more fully in the “Borrowing Availability and Activities” sectionof “Liquidity and Capital Resources.”

 

(2)     Approximately $244.8 millionof our operating lease obligations are attributable to the land leaseassociated with the purchase of Steinway Hall, which has eighty seven yearsremaining. The rest is attributable to the leasing of other facilities andequipment.

 

(3)     Purchase obligations consistof firm purchase commitments for raw materials, finished goods, and serviceagreements.

 

(4)     Our other long-termliabilities consist primarily of the long-term portion of our pensionobligations, which are described in Note 11 in the Notes to CondensedConsolidated Financial Statements included within this filing, liabilitiesrelating to uncertain tax positions which are expected to be settled within oneyear, and obligations under employee and consultant agreements. We have notincluded $0.3 million of liabilities relating to uncertain tax positions withinthis schedule due to the uncertainty of the payment date, if any.

 

**Recent Accounting Pronouncements**

 

In January 2010, theFinancial Accounting Standards Board (“FASB”) issued guidance which amends theexisting fair value measurements and disclosures guidance. These amendmentsrequire a greater level of disaggregated information as well as more disclosurearound valuation techniques and inputs to fair value measurements. Theamendments also provide guidance on employers’ disclosures about postretirementbenefit plan assets to require that disclosures be provided by classes of assetsinstead of by major categories of assets. We were required to comply with thisnew standard as of January 1, 2010. Its adoption did not have a materialimpact on our consolidated financial statements.

 

In March 2010, the FASBissued new guidance which clarifies the scope exception for embedded creditrelated derivatives. We will be required to comply with this new standard on July 1,2010. We do not expect a material impact on our financial statements from theadoption of this guidance.

 

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**ITEM 3****                                                       ****QUANTITATIVEAND 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, 2009.

 

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, 2009.

 

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****                                                       ****CONTROLSAND PROCEDURES**

 

Our principal executiveofficer and our principal financial officer, after evaluating together withmanagement the design and operation of our disclosure controls and procedures,have concluded that our disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of June 30,2010, the end of the period covered by this report. In designing disclosurecontrols and procedures, management recognizes that any controls, no matter howwell designed and operated, can only provide reasonable, not absolute,assurance of achieving the desired control objectives.

 

During the quarter coveredby this report, there were no significant changes in our internal controls thatmaterially affected, or are reasonably likely to materially affect, internalcontrol over financial reporting.

 

**PART II****                                                  ****OTHERINFORMATION**

 

**ITEM 6****                                                       ****EXHIBITS**

 

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

 

31.2 Certification of thePrincipal Financial Officer pursuant to Section 302 of the Sarbanes-OxleyAct of 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

 

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

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on their behalf by theundersigned, thereunto duly authorized.

 

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

 

 

Date: August 9, 2010

 

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