Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**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 MARCH 31,  2010** |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                 |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                    |

 

**COMMISSION FILE NUMBER 001-11911**

 

**STEINWAY MUSICAL INSTRUMENTS,INC.**

(Exact name ofregistrant as specified in its charter)

 

| **DELAWARE**                     | ** ** | **35-1910745**       |
|----------------------------------|------------|----------------------|
| (State or Other  Jurisdiction of |       | (I.R.S. Employer     |
| Incorporation or  Organization)  |       | Identification  No.) |

 

| **800 South Street, Suite 305**      | ** ** | ** ** |
|-------------------------------------------|------------|------------|
| **Waltham,  Massachusetts**               | ** ** | **02453**  |
| (Address of  Principal Executive Offices) |       | (Zip Code) |

 

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

 

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

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).   Yes o  No o

 

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

 

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

 

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

 

Number of sharesof Common Stock issued and outstanding as of May 7, 2010**:**

** **
|   | Class A | 477,952    |
|--------|--------------|------------|
|   | Ordinary     | 11,541,516 |
|   | Total        | 12,019,468 |

 

 

 

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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 months ended March 31, 2010  and 2009     | 3      |
|              |                                                                                                  |   |
|              | Condensed  Consolidated Balance Sheets  March 31, 2010 and December 31, 2009                | 4      |
|              |                                                                                                  |   |
|              | Condensed  Consolidated Statements of Cash Flows Three months ended March 31, 2010  and 2009     | 5      |
|              |                                                                                                  |   |
|              | Condensed Consolidated Statement of Stockholders’ Equity Three months ended March 31,  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**                                       | 28     |
| ** **        | ** **                                                                                            |   |
| **Item 4.**       | **Controls and  Procedures**                                                                          | 28     |
| ** **        | ** **                                                                                            |   |
| **PART II.** | **OTHER INFORMATION**                                                                                 |   |
| ** **        | ** **                                                                                            |   |
| **Item 6.**       | **Exhibits**                                                                                          | 29     |
| ** **        | ** **                                                                                            |   |
|              | **Signatures**                                                                                        | 30     |

 

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**PART I****                 ****FINANCIAL STATEMENTS**

 

**ITEM 1****                 ****CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

** STEINWAY MUSICAL INSTRUMENTS, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**Unaudited**

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

 
| ** **                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|
| ** **                             | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Net sales                              |       | $                                      | 68,543     |   | $ | 69,991 |   |
| Cost of sales                          |       | 47,219                                 |       | 51,382 |   |
|                                   |       |                                   |       |   |   |
| Gross profit                           |       | 21,324                                 |       | 18,609 |   |
|                                   |       |                                   |       |   |   |
| Operating expenses:                    |       |                                   |       |   |   |
| Sales and marketing                    |       | 10,137                                 |       | 10,620 |   |
| General and administrative             |       | 7,425                                  |       | 7,789 |   |
| Other operating expense                |       | 39                                     |       | 251 |   |
| Total operating expenses               |       | 17,601                                 |       | 18,660 |   |
|                                   |       |                                   |       |   |   |
| Income (loss) from operations          |       | 3,723                                  |       | (51 | ) |
|                                   |       |                                   |       |   |   |
| Other income, net                      |       | (1,467                                 | )          | (558 | ) |
| Net gain on extinguishment of debt     |       | —                                 |       | (3,434 | ) |
| Interest income                        |       | (457                                   | )          | (562 | ) |
| Interest expense                       |       | 2,816                                  |       | 3,084 |   |
| Total non-operating expenses  (income) |       | 892                                    |       | (1,470 | ) |
|                                   |       |                                   |       |   |   |
| Income before income taxes             |       | 2,831                                  |       | 1,419 |   |
|                                   |       |                                   |       |   |   |
| Income tax provision                   |       | 1,031                                  |       | 414 |   |
|                                   |       |                                   |       |   |   |
| Net income                             |       | $                                      | 1,800      |   | $ | 1,005 |   |
|                                   |       |                                   |       |   |   |
| Earnings per share                     |       |                                   |       |   |   |
| Basic                                  |       | $                                      | 0.17       |   | $ | 0.12 |   |
| Diluted                                |       | $                                      | 0.17       |   | $ | 0.12 |   |
|                                   |       |                                   |       |   |   |
| Weighted average shares:               |       |                                   |       |   |   |
| Basic                                  |       | 10,433,830                             |       | 8,533,259 |   |
| Diluted                                |       | 10,482,704                             |       | 8,535,278 |   |

 

See notes tocondensed consolidated financial statements.

 

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**STEINWAY MUSICAL INSTRUMENTS, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**Unaudited**

**(InThousands)**

 
| ** **                                                                                                                | ** ** | **March 31,********2010** | ** ** | **December 31,   2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| Assets                                                                                                                    |       |                           |       |                         |       |
| Current assets:                                                                                                           |       |                           |       |                         |       |
| Cash                                                                                                                      |       | $                              | 91,286     |                         | $          | 65,873 |   |
| Accounts, notes and other  receivables, net of allowances   of $13,581 and $13,643 in 2010 and 2009, respectively         |       | 45,735                         |       | 45,073                       |       |
| Inventories, net                                                                                                          |       | 158,687                        |       | 158,030                      |       |
| Prepaid expenses and other current assets                                                                                 |       | 14,337                         |       | 13,499                       |       |
| Deferred tax assets                                                                                                       |       | 11,430                         |       | 11,431                       |       |
| Total current assets                                                                                                      |       | 321,475                        |       | 293,906                      |       |
|                                                                                                                      |       |                           |       |                         |       |
| Property, plant and equipment, net  of accumulated depreciation   of $106,553 and $105,744 in 2010 and 2009, respectively |       | 87,203                         |       | 89,538                       |       |
| Trademarks                                                                                                                |       | 15,025                         |       | 15,284                       |       |
| Goodwill                                                                                                                  |       | 23,239                         |       | 24,063                       |       |
| Other intangibles, net                                                                                                    |       | 3,875                          |       | 4,183                        |       |
| Other assets                                                                                                              |       | 12,491                         |       | 12,663                       |       |
| Long-term deferred tax assets                                                                                             |       | 10,472                         |       | 10,153                       |       |
|                                                                                                                      |       |                           |       |                         |       |
| Total assets                                                                                                              |       | $                              | 473,780    |                         | $          | 449,790 |   |
|                                                                                                                      |       |                           |       |                         |       |
| Liabilities and stockholders’ equity                                                                                 |       |                           |       |                         |       |
| Current liabilities:                                                                                                      |       |                           |       |                         |       |
| Debt                                                                                                                      |       | $                              | 535        |                         | $          | 537 |   |
| Accounts payable                                                                                                          |       | 11,117                         |       | 9,764                        |       |
| Other current liabilities                                                                                                 |       | 34,087                         |       | 36,395                       |       |
| Total current liabilities                                                                                                 |       | 45,739                         |       | 46,696                       |       |
|                                                                                                                      |       |                           |       |                         |       |
| Long-term debt                                                                                                            |       | 157,740                        |       | 157,703                      |       |
| Deferred tax liabilities                                                                                                  |       | 7,101                          |       | 7,124                        |       |
| Pension and other postretirement benefit liabilities                                                                      |       | 34,731                         |       | 35,766                       |       |
| Other non-current liabilities                                                                                             |       | 6,146                          |       | 6,005                        |       |
| Total liabilities                                                                                                         |       | 251,457                        |       | 253,294                      |       |
|                                                                                                                      |       |                           |       |                         |       |
| Commitments and contingent liabilities                                                                                    |       |                           |       |                         |       |
|                                                                                                                      |       |                           |       |                         |       |
| Stockholders’ equity:                                                                                                |       |                           |       |                         |       |
| Common stock                                                                                                              |       | 14                             |       | 12                           |       |
| Additional paid-in capital                                                                                                |       | 152,760                        |       | 125,192                      |       |
| Retained earnings                                                                                                         |       | 128,109                        |       | 126,415                      |       |
| Accumulated other comprehensive loss                                                                                      |       | (11,841                        | )          | (7,851                       | )          |
| Treasury stock, at cost                                                                                                   |       | (46,719                        | )          | (47,272                      | )          |
| Total stockholders’ equity                                                                                           |       | 222,323                        |       | 196,496                      |       |
|                                                                                                                      |       |                           |       |                         |       |
| Total liabilities and stockholders’ equity                                                                           |       | $                              | 473,780    |                         | $          | 449,790 |   |

 

See notes to condensedconsolidated financial statements.

 

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

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**Unaudited**

**(In Thousands)**

 
| ** **                                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                    | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Cash flows from operating  activities:                                        |       |                                   |       |   |   |
| Net income                                                                    |       | $                                      | 1,800      |   | $ | 1,005 |   |
| Adjustments  to reconcile net income to cash flows from operating activities: |       |                                   |       |   |   |
| Depreciation and amortization                                                 |       | 2,686                                  |       | 2,684 |   |
| Amortization of bond discount                                                 |       | 37                                     |       | 39 |   |
| Net gain on extinguishment of debt                                            |       | —                                 |       | (3,434 | ) |
| Stock-based compensation expense                                              |       | 366                                    |       | 269 |   |
| Excess tax benefits from  stock-based awards                                  |       | 64                                     |       | — |   |
| Tax benefit from stock option  exercises                                      |       | 4                                      |       | — |   |
| Deferred tax benefit                                                          |       | (121                                   | )          | (679 | ) |
| Other                                                                         |       | 260                                    |       | 638 |   |
| Changes in operating assets and  liabilities:                                 |       |                                   |       |   |   |
| Accounts, notes and other  receivables                                        |       | (935                                   | )          | 6,047 |   |
| Inventories                                                                   |       | (3,287                                 | )          | (7,517 | ) |
| Prepaid expenses and other assets                                             |       | (1,122                                 | )          | 77 |   |
| Accounts payable                                                              |       | 1,435                                  |       | (2,868 | ) |
| Other liabilities                                                             |       | (1,480                                 | )          | (5,361 | ) |
| Cash flows from operating  activities                                         |       | (293                                   | )          | (9,100 | ) |
|                                                                          |       |                                   |       |   |   |
| Cash flows from investing  activities:                                        |       |                                   |       |   |   |
| Capital expenditures                                                          |       | (519                                   | )          | (1,099 | ) |
| Proceeds from disposals of  property, plant and equipment                     |       | 5                                      |       | 3 |   |
| Cash flows from investing  activities                                         |       | (514                                   | )          | (1,096 | ) |
|                                                                          |       |                                   |       |   |   |
| Cash flows from financing  activities:                                        |       |                                   |       |   |   |
| Borrowings under lines of credit                                              |       | 218                                    |       | 34,568 |   |
| Repayments under lines of credit                                              |       | (218                                   | )          | (33,779 | ) |
| Repayments of long-term debt, net  of discount                                |       | —                                 |       | (7,280 | ) |
| Proceeds from issuance of common  stock                                       |       | 27,647                                 |       | — |   |
| Excess tax benefits from  stock-based awards                                  |       | (64                                    | )          | — |   |
| Cash flows from financing  activities                                         |       | 27,583                                 |       | (6,491 | ) |
|                                                                          |       |                                   |       |   |   |
| Effect of foreign exchange rate  changes on cash                              |       | (1,363                                 | )          | (940 | ) |
|                                                                          |       |                                   |       |   |   |
| Change in cash                                                                |       | 25,413                                 |       | (17,627 | ) |
| Cash, beginning of period                                                     |       | 65,873                                 |       | 44,380 |   |
| Cash, end of period                                                           |       | $                                      | 91,286     |   | $ | 26,753 |   |
|                                                                          |       |                                   |       |   |   |
| Supplemental Cash Flow Information                                            |       |                                   |       |   |   |
| Interest paid                                                                 |       | $                                      | 6,132      |   | $ | 7,098 |   |
| Income taxes paid                                                             |       | $                                      | 3,838      |   | $ | 1,735 |   |

 

See notes to condensedconsolidated financial statements.

 

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**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’EQUITY**

**Unaudited**

**(InThousands 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                                             |       |                    |       |                                         |       | 1,800                        |       |                                                          |       |                      |       | 1,800                                             |       |
| Foreign currency translation  adjustments              |       |                    |       |                                         |       |                         |       | (3,990                                                        | )          |                      |       | (3,990                                            | )          |
| Total comprehensive loss                               |       |                    |       |                                         |       |                         |       |                                                          |       |                      |       | (2,190                                            | )          |
| Exercise  of 23,700 options for shares of common stock |       | —                  |       |                                         |       | (106                         | )          |                                                          |       | 553                       |       | 447                                               |       |
| Tax benefit of options exercised                       |       |                    |       | 4                                            |       |                         |       |                                                          |       |                      |       | 4                                                 |       |
| Stock-based compensation                               |       |                    |       | 366                                          |       |                         |       |                                                          |       |                      |       | 366                                               |       |
| Issuance of 1,700,000 shares of  common stock          |       | 2                       |       | 27,198                                       |       |                         |       |                                                          |       |                      |       | 27,200                                            |       |
| Balance, March 31, 2010                           |       | $                       | 14         |                                         | $          | 152,760                      |       | $                                                             | 128,109    |                      | $          | (11,841                                           | )          | $ | (46,719 | ) | $ | 222,323 |   |

 

See notes to condensedconsolidated financial statements.

 

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**STEINWAY MUSICAL INSTRUMENTS, INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED**

**FINANCIALSTATEMENTS**

**MARCH 31,2010**

**Unaudited**

 

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

 

**(1)           Basis of Presentation**

 

Theaccompanying condensed consolidated financial statements of Steinway MusicalInstruments, Inc. and subsidiaries (the “Company”) for the three monthsended March 31, 2010 and 2009 are unaudited. In the opinion of management,these statements have been prepared on the same basis as the auditedconsolidated financial statements as of and for the year ended December 31,2009, and include all adjustments which are of a normal and recurring nature,necessary for the fair presentation of financial position, results ofoperations and cash flows for the interim periods. We encourage you to read thecondensed consolidated financial statements in conjunction with the riskfactors, consolidated financial statements and notes thereto contained in theCompany’s Annual Report on Form 10-K for the year ended December 31,2009 filed with the Securities and Exchange Commission (“SEC”). The results ofoperations for the three months ended March 31, 2010 are not necessarilyindicative of the results that may be expected for the entire year.

 

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

 

**(2)           Summary of Significant AccountingPolicies**

 

**Principlesof Consolidation**- Our condensed consolidated financial statements include the accounts of alldirect and indirect subsidiaries, all of which are wholly owned, including thepiano (“Steinway”), band (“Conn-Selmer”), and online music (“Arkiv”) divisions.Intercompany balances have been eliminated in consolidation.

 

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

 

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

 

We provide reserves for potential payments of tax to various taxauthorities related to uncertain tax positions and other issues. Reservesrelated to uncertain tax positions are based on a determination of whether andhow much of a tax benefit taken in our tax filings or positions is more likely thannot to be realized, assuming that the matter in question will be raised by thetax 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.

 

Income tax-related interestand penalties is reported as a component of income tax expense. We file income tax returns at theU.S. federal, state, and local levels, as well as in several foreignjurisdictions. With few exceptions, our returns are no longer subject toexaminations for years before 2006.

 

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Therewere no material changes to the liability for uncertain tax positions in thefirst three months of 2010. Although we believe our tax estimates areappropriate, the final determination of tax audits and any related litigationcould result in changes in our estimates.

 

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

 

**Earnings per Common Share** - We compute earnings per share usingthe weighted-average number of common shares outstanding during each period.Diluted earnings per common share reflects the dilutive impact of sharessubscribed under the Employee Stock Purchase Plan (“Purchase Plan”) and effectof our outstanding options using the treasury stock method, except when suchoptions would be antidilutive.

 

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

 
| ** **                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                         | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Weighted-average shares:                           |       |                                   |       |   |   |
| For basic earnings per share                       |       | 10,433,830                             |       | 8,533,259 |   |
| Dilutive effect of stock-based  compensation plans |       | 48,874                                 |       | 2,019 |   |
| For diluted earnings per share                     |       | 10,482,704                             |       | 8,535,278 |   |

 

We did not include 735,876 or any of the 799,776outstanding options to purchase shares of common stock in the computation ofdiluted earnings per share for the three months ended March 31, 2010 and2009, respectively, because generally their exercise prices were more than theaverage market price of our common shares and, therefore, antidilutive.

 

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

 
| ** **                                 | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Accumulated other comprehensive  loss:     |       |                     |       |                        |       |
| Foreign currency translation  adjustments  |       | $                        | 3,290      |                        | $          | 7,280 |   |
| Pension and post-retirement  benefits, net |       | (15,131                  | )          | (15,131                     | )          |
| Accumulated other comprehensive  loss      |       | $                        | (11,841    | )                           | $          | (7,851 | ) |

 

Thecomponents of comprehensive loss are as follows:

 
| ** **                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| Comprehensive loss:                       |       |                                                 |       |   |   |
| Net income                                |       | $                                                    | 1,800      |   | $ | 1,005 |   |
| Foreign currency translation  adjustments |       | (3,990                                               | )          | (3,288 | ) |
| Total comprehensive loss                  |       | $                                                    | (2,190     | ) | $ | (2,283 | ) |

 

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**RecentAccounting Pronouncements**— In January 2010, the Financial Accounting Standards Board(“FASB”) issued guidance which amends the existing fair value measurements anddisclosures guidance. These amendments require a greater level of disaggregatedinformation as well as more disclosure around valuation techniques and inputsto fair value measurements. The amendments also provide guidance on employers’ disclosuresabout postretirement benefit plan assets to require that disclosures beprovided by classes of assets instead of by major categories of assets. We wererequired to comply with this new standard on January 1, 2010. The adoptiondid not have a material impact on our consolidated financial statements.

 

In March 2010 the FASB issued new guidance which clarifies thescope exception for embedded credit related derivatives. We will be required tocomply with this new standard on July 1, 2010. We do not expect a materialimpact on our financial statements from the adoption of this guidance.

 

**(3)           Inventories**

 
| ** **      | ** ** | **March 31,********2010** | ** ** | **December 31,********2009** | ** ** |
|-----------------|------------|--------------------------------|------------|-----------------------------------|------------|
| Raw materials   |       | $                              | 16,699     |                              | $          | 18,413 |   |
| Work-in-process |       | 39,490                         |       | 42,121                            |       |
| Finished goods  |       | 102,498                        |       | 97,496                            |       |
|            |       | $                              | 158,687    |                              | $          | 158,030 |   |

 

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

 

Intangible assets other than goodwill and indefinite-lived trademarksare amortized on a straight-line basis over their estimated useful lives.Deferred financing costs are amortized over the repayment periods of theunderlying debt. We performed our annual goodwill and intangible assetimpairment test as of July 31, 2009. Based on our analysis, it wasdetermined that a portion of the trademarks associated with the online musicbusiness of the piano division was impaired. Accordingly, we wrote down thetrademarks by $1.0 million in 2009. Our analysis of the other piano and banddivision trademarks did not indicate an impairment; therefore, no charge wastaken against those assets or any other intangible assets attributable to thosedivisions. No other events or circumstances occurred subsequent to our annualimpairment test which would have indicated that these assets may be impaired.

 

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

 
| ** **                           | ** ** | **Piano** | ** ** | **Band** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|-----------|------------|----------|------------|-----------|------------|
| Goodwill:                            |       |      |       |     |       |      |       |
| Balance, January 1, 2010        |       | $         | 24,063     |     | $          | —    |       | $ | 24,063 |   |
| Foreign currency translation  impact |       | (824      | )          | —   |       | (824      | )          |
| Balance, March 31, 2010         |       | $         | 23,239     |     | $          | —    |       | $ | 23,239 |   |
|                                 |       |      |       |     |       |      |       |
| Trademarks:                          |       |      |       |     |       |      |       |
| Balance, January 1, 2010        |       | $         | 9,460      |     | $          | 5,824     |       | $ | 15,284 |   |
| Foreign currency translation  impact |       | (259      | )          | —   |       | (259      | )          |
| Balance, March 31, 2010         |       | $         | 9,201      |     | $          | 5,824     |       | $ | 15,025 |   |

 

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

 
| ** **                               | ** ** | **March 31,********2010** | ** ** | **December 31,********2009** | ** ** |
|------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
|                                     |       |                           |       |                              |       |
| Gross deferred financing costs:          |       | $                              | 5,225      |                              | $          | 5,333 |   |
| Accumulated amortization                 |       | (3,183                         | )          | (3,135                            | )          |
| Deferred financing costs, net            |       | $                              | 2,042      |                              | $          | 2,198 |   |
|                                     |       |                           |       |                              |       |
| Gross non-compete agreements:            |       | $                              | 250        |                              | $          | 250 |   |
| Accumulated amortization                 |       | (94                            | )          | (81                               | )          |
| Non-compete agreements, net              |       | $                              | 156        |                              | $          | 169 |   |
|                                     |       |                           |       |                              |       |
| Gross customer relationships:            |       | $                              | 503        |                              | $          | 506 |   |
| Accumulated amortization                 |       | (193                           | )          | (166                              | )          |
| Customer relationships, net              |       | $                              | 310        |                              | $          | 340 |   |
|                                     |       |                           |       |                              |       |
| Gross website and developed  technology: |       | $                              | 2,176      |                              | $          | 2,176 |   |
| Accumulated amortization                 |       | (809                           | )          | (700                              | )          |
| Website and developed technology,  net   |       | $                              | 1,367      |                              | $          | 1,476 |   |
|                                     |       |                           |       |                              |       |
| Total gross other intangibles:           |       | $                              | 8,154      |                              | $          | 8,265 |   |
| Accumulated amortization                 |       | (4,279                         | )          | (4,082                            | )          |
| Other intangibles, net                   |       | $                              | 3,875      |                              | $          | 4,183 |   |

 

The weighted-averageamortization period for deferred financing costs is seven years, and theweighted-average amortization period for all other amortizable intangibles isapproximately five years. Total amortization expense is as follows:

 
| ** **           | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------|------------|----------------------------------------|------------|
| ** **           | ** ** | **2010**                               | ** ** | **2009** | ** ** |
|                 |       |                                   |       |   |   |
| Amortization expense |       | $                                      | 306        |   | $ | 335 |   |
|                      |            |                                        |            |  |  |  |  |

 

The following table showsthe total estimated amortization expense for the remainder of 2010 and beyond:

 
| Remainder of 2010 |   | $     | 912    |   |
|-------------------|--------|-------|--------|--------|
| 2011              |   | 1,150 |   |
| 2012              |   | 1,035 |   |
| 2013              |   | 684   |   |
| 2014              |   | 78    |   |
| 2015              |   | 16    |   |
| Total             |   | $     | 3,875  |   |

 

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| **(5)** | **Other  Current Liabilities** |
|---------|--------------------------------|

 
| ** **                                                               | ** ** | **March 31,  2010** | ** ** | **December 31,******** 2009** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------------------|------------|
| Accrued payroll and related  benefits                                    |       | $                        | 11,782     |                                    | $          | 9,326 |   |
| Current portion of pension and other  postretirement benefit liabilities |       | 1,359                    |       | 1,456                                   |       |
| Accrued warranty expense                                                 |       | 1,411                    |       | 1,553                                   |       |
| Accrued interest                                                         |       | 908                      |       | 3,675                                   |       |
| Deferred income                                                          |       | 8,103                    |       | 7,210                                   |       |
| Environmental liabilities                                                |       | 2,326                    |       | 2,377                                   |       |
| Income and other taxes payable                                           |       | 2,213                    |       | 3,383                                   |       |
| Other accrued expenses                                                   |       | 5,985                    |       | 7,415                                   |       |
| Total                                                                    |       | $                        | 34,087     |                                    | $          | 36,395 |   |

 

Accrued warranty expense isrecorded at the time of sale for instruments that have a warranty periodranging from one to ten years. The accrued expense recorded is generallycalculated on a ratio of warranty costs to sales based on our warranty historyand is adjusted periodically following an analysis of actual warranty claims.The accrued warranty expense activity for the three months ended March 31,2010 and 2009, and the year ended December 31, 2009 is as follows:

 
| ** **                           | ** ** | **March 31,********2010** | ** ** | **March 31,********2009** | ** ** | **December 31,********2009** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| Beginning balance                    |       | $                              | 1,553      |                           | $          | 1,451                             |       | $ | 1,451 |   |
| Additions                            |       | 140                            |       | 246                            |       | 945                               |       |
| Claims and reversals                 |       | (241                           | )          | (306                           | )          | (865                              | )          |
| Foreign currency translation  impact |       | (41                            | )          | (17                            | )          | 22                                |       |
| Ending balance                       |       | $                              | 1,411      |                           | $          | 1,374                             |       | $ | 1,553 |   |

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

 

Our long-term debtconsists of the following:

 
| ** **                | ** ** | **March 31,********2010** | ** ** | **December 31,******** 2009** | ** ** |
|---------------------------|------------|--------------------------------|------------|-----------------------------------------|------------|
| 7.00% Senior Notes        |       | $                              | 158,326    |                                    | $          | 158,326 |   |
| Unamortized bond discount |       | (586                           | )          | (623                                    | )          |
| Overseas lines of credit  |       | 535                            |       | 537                                     |       |
| Total                     |       | 158,275                        |       | 158,240                                 |       |
| Less: current portion     |       | 535                            |       | 537                                     |       |
| Long-term debt            |       | $                              | 157,740    |                                    | $          | 157,703 |   |

 

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Scheduled payments ofdebt are as follows:

 
| ** **        | ** ** | **March 31,********2010** | ** ** |
|-------------------|------------|--------------------------------|------------|
| Remainder of 2010 |       | $                              | 535        |   |
| 2011              |       | —                         |       |
| 2012              |       | —                         |       |
| 2013              |       | —                         |       |
| 2014              |       | 158,326                        |       |
| Total             |       | 158,861                        |       |
|                   |            |                                |            |  |

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

 

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

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

 

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

 

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Thefollowing table presents information about our assets and liabilities measuredat fair value on a recurring basis as of March 31, 2010 and December 31,2009 and the fair value hierarchy of the valuation techniques we utilized.

 
| ** **                                    | ** ** | **March 31,******** 2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| Financial assets:                             |       |                                 |       |                        |       |
| Trading securities(1) - Level  1         |       | $                                    | 1,742      |                        | $          | 1,623 |   |
| Foreign currency  contracts(2) - Level 2 |       | 372                                  |       | 82                          |       |
|                                          |       | $                                    | 2,114      |                        | $          | 1,705 |   |
|                                          |       |                                 |       |                        |       |
| Financial liabilities:                        |       |                                 |       |                        |       |
| Foreign currency  contracts(2) - Level 2 |       | $                                    | —     |                        | $          | 3 |   |

 

----

| (1)    | Our  trading securities pertain to the Supplemental Executive Retirement Plan  (“SERP”) and are held in a Rabbi Trust. We record a corresponding liability  for the same amount in our financial statements, which represents our  obligation to SERP participants. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                          |
| (2)    | Our foreign currency  contracts pertain to obligations or potential obligations to purchase or sell  euros, pounds, U.S. dollars, and yen under various forward contracts.                                                                                                    |

 

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

 
| ** **             | ** ** | **March 31, 2010**       | ** ** | **December 31, 2009**      | ** ** |
|------------------------|------------|-------------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **Net Carrying********Value** | ** ** | **Estimated********Fair Value** | ** ** | **Net Carrying********Value** | ** ** | **Estimated********Fair Value** | ** ** |
| Financial liabilities: |       |                          |       |                            |       |   |   |   |   |
| Debt                   |       | $                             | 158,861    |                            | $          | 157,871 |   | $ | 158,863 |   | $ | 144,218 |   |
|                        |            |                               |            |                                 |            |  |  |  |  |  |  |  |  |

 

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

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

 

Our common stock iscomprised of two classes: Class A and Ordinary. With the exception ofdisparate voting power, both classes are substantially identical. Each share ofClass A common stock entitles the holder to 98 votes. Holders of Ordinarycommon stock are entitled to one vote per share. Each share of Class Acommon stock shall automatically convert to Ordinary common stock if, at anytime, that share of Class A common stock is not owned by an original Class Aholder. In March 2010 Samick Musical Instruments Co., Ltd. (“Samick”)exercised its right to purchase 1,700,000 shares of our ordinary common stockat a price of $16.00 per share, which resulted in a cash payment to us of $27.2million. As of March 31, 2010 our Chairman and our Chief Executive Officercollectively owned 100% of the Class A common shares, representingapproximately 80% of the combined voting power of the Class A common stockand Ordinary common stock.

 

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

 

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

 

Our 1996 Stock Plan has expired but still hasvested and unvested options outstanding. We reached our registered sharelimitation in early 2007, and had previously reserved 721,750 treasury stockshares to issue under this plan. We have since issued 122,674 shares oftreasury stock to cover options exercised, with 338,276 remaining optionsoutstanding. Since in most instances the average cost of the treasury stockexceeded 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 threemonths ended March 31, 2010. There were no stock option exercises duringthe three months ended March 31, 2009.

 

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

 
| ** **                                                        | ** ** | **Three Months Ended********March 31,** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                        | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| Compensation  cost included in basic and diluted income per share |       | $                                            | 0.03       |   | $ | 0.03 |   |
| Stock-based compensation expense                                  |       | 366                                          |       | 269 |   |
| Income tax benefit                                                |       | 67                                           |       | 41 |   |
|                                                                   |            |                                              |            |  |  |  |  |

 

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

 

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There were no options granted during the three months ended March 31,2010 or 2009. The following table sets forth information regarding the StockPlans:

 
| ** **                           | ** ** | **Number of  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Remaining  Contractual  Life********(in years)** | ** ** | **Aggregate********Intrinsic********Value********(not in 000s)** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------------------------|------------|----------------------------------------------------|------------|------------------------------------------------------------------|------------|
| Outstanding at January 1,  2010 |       | 1,129,276              |       | $                                       | 20.61      |                                               |       |                                                             |       |   |
| Granted                              |       | —                 |       | —                                  |       |                                               |       |                                                             |       |
| Exercised                            |       | (23,700                | )          | 18.84                                   |       |                                               |       |                                                             |       |
| Forfeited                            |       | (15,200                | )          | 24.52                                   |       |                                               |       |                                                             |       |
| Outstanding at March 31, 2010   |       | 1,090,376              |       | $                                       | 20.59      |                                               | 6.9        |                                                             | $          | 2,776,624 |   |
|                                 |       |                   |       |                                    |       |                                               |       |                                                             |       |
| Exercisable at March 31, 2010   |       | 457,616                |       | $                                       | 23.30      |                                               | 4.3        |                                                             | $          | 20,074 |   |

 

The total intrinsic value of the options exercised during the threemonths ended March 31, 2010 was nominal. There were no options exercisedduring the three months ended March 31, 2009. As of March 31, 2010,there was $3.7 million of unrecognized compensation cost related to nonvestedshare-based compensation arrangements granted under the Stock Plan. Thiscompensation cost is expected to be recognized over a period of 3.6 years. Cashreceived from option exercises under the Stock Plans for the period ended March 31,2010 was $0.4 million.

 

The followingtables set forth information regarding the Purchase Plan:

 
| ** **                                                   | ** ** | **Three Months Ended********March 31,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                   | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| Risk-free interest rate                                      |       | 0.5%                                         |       | 2.2% |   |
| Weighted-average  expected life of option feature (in years) |       | 1.0                                          |       | 1.0 |   |
| Expected volatility of underlying  stock                     |       | 27.9%                                        |       | 25.3% |   |
| Expected dividends                                           |       | n/a                                          |       | n/a |   |
| Weighted-average fair value of  option feature               |       | $2.79                                        |       | $6.71 |   |

 
| ** **                           | ** ** | **Number of  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Remaining  Contractual  Life********(in years)** | ** ** | **Aggregate********Intrinsic********Value********(not in 000s)** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------------------------|------------|----------------------------------------------------|------------|------------------------------------------------------------------|------------|
| Outstanding at January 1,  2010 |       | 24,382                 |       | $                                       | 9.65       |                                               |       |                                                             |       |   |
| Shares subscribed                    |       | 13,682                 |       | 9.65                                    |       |                                               |       |                                                             |       |
| Exercised                            |       | —                 |       | —                                  |       |                                               |       |                                                             |       |
| Canceled                             |       | (107                   | )          | 9.65                                    |       |                                               |       |                                                             |       |
| Outstanding at March 31, 2010   |       | 37,957                 |       | $                                       | 9.65       |                                               | 0.3        |                                                             | $          | 355,657 |   |
|                                      |            |                        |            |                                         |            |                                                    |            |                                                                  |            |  |  |

 

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

 
| ** **                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|
| ** **                        | ** ** | **2010**                               | ** ** | **2009** | ** ** |
|                              |       |                                   |       |   |   |
| West 57th Street building income  |       | $                                      | (2,432     | ) | $ | (1,505 | ) |
| West 57th Street building expense |       | 1,772                                  |       | 1,215 |   |
| Foreign exchange gain, net        |       | (496                                   | )          | (286 | ) |
| Miscellaneous                     |       | (311                                   | )          | 18 |   |
| Other income, net                 |       | $                                      | (1,467     | ) | $ | (558 | ) |

 

Our building on West 57th Street in NewYork City is managed by an outside company. West 57th Streetbuilding income includes all rent and other income attributable to theproperty; and West 57th Street building expense includes the landlease, real estate taxes, depreciation, and other building costs. Since we utilizea portion of the leasable space for our own retail store, we have allocated aratable portion of the building cost to sales and marketing expenses.

 
| **(10)** | **Commitments and Contingent Liabilities** |
|----------|--------------------------------------------|

 

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

 

Certain environmental laws, such as the Comprehensive Environmental Response,Compensation, and Liability Act, as amended (“CERCLA”), impose strict,retroactive, joint and several liability upon persons responsible for releasesof hazardous substances, which liability is broadly construed. Under CERCLA andother laws, we may have liability for investigation and cleanup costs and otherdamages relating to our current or former properties, or third-party sites towhich we sent wastes for disposal. Our potential liability at any of thesesites is affected by many factors including, but not limited to, the method ofremediation, our portion of the hazardous substances at the site relative tothat of other parties, the number of responsible parties, the financialcapabilities of other parties, and contractual rights and obligations.

 

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We are continuing an existing environmentalremediation plan at a facility we acquired in 2000 and subsequently sold. Weestimate our costs, which approximate $0.7 million, over an 11-year period. Wehave accrued approximately $0.5 million for the estimated remaining cost ofthis remediation program, which represents the present value total cost using adiscount rate of 4.54%. A summary of expected payments associated with thisproject is as follows:

 
| ** **         | ** ** | **Environmental********Payments** | ** ** |
|--------------------|------------|-----------------------------------|------------|
| Remainder  of 2010 |       | $                                 | 49         |   |
| 2011               |       | 61                                |       |
| 2012               |       | 61                                |       |
| 2013               |       | 61                                |       |
| 2014               |       | 61                                |       |
| 2015               |       | 61                                |       |
| Thereafter         |       | 302                               |       |
| Total              |       | $                                 | 656        |   |

 

In 2004, we acquired two manufacturing facilities from G. LeblancCorporation, now Grenadilla, Inc. (“Grenadilla”), for which environmentalremediation plans had already been established. In connection with theacquisition, we assumed the existing accrued liability of approximately $0.8million for the cost of these remediation activities. Based on a review of pastand ongoing investigatory and remedial work by our environmental consultants,and discussions with state regulatory officials, as well as periodic sampling,we estimate the remaining costs of such remedial plans to be $1.8 million.Pursuant to the purchase and sale agreement, we sought indemnification fromGrenadilla for anticipated costs above the original estimate.We filed a claimagainst the escrow and recorded a corresponding receivable for this amount inprepaid expenses and other current assets in our consolidated balance sheet.Based on the current estimated costs of remediation, this receivable totaled$2.1 million as of March 31, 2010. We have reached an agreement withGrenadilla whereby environmental costs are paid directly out of the escrow.Should the escrow be reduced to zero, we would seek further indemnificationfrom Grenadilla for these additional costs. However, we cannot be assured thatwe will be able to recover such costs.

 

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

 

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| **(11)** | **Retirement Plans** |
|----------|----------------------|

 

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

** **
| ** **                         | ** ** | **Domestic Plan**                            | ** ** | **Foreign Plans**                            | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                         | ** ** | **Three Months Ended********March 31,** | ** ** | **Three Months Ended********March 31,** | ** ** |
| ** **                         | ** ** | **2010**                                     | ** ** | **2009**                                     | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service cost                       |       | $                                            | 93         |                                         | $          | 104 |   | $ | 171 |   | $ | 133 |   |
| Interest cost                      |       | 844                                          |       | 864                                          |       | 453 |   | 406 |   |
| Expected return on plan assets     |       | (1,050                                       | )          | (875                                         | )          | (95 | ) | (67 | ) |
| Amortization of prior service cost |       | 28                                           |       | 51                                           |       | — |   | — |   |
| Amortization of net loss           |       | 492                                          |       | 608                                          |       | 34 |   | 2 |   |
| Net periodic pension cost          |       | $                                            | 407        |                                         | $          | 752 |   | $ | 563 |   | $ | 474 |   |

 

Weprovide postretirement health care and life insurance benefits to certaineligible hourly retirees and their dependents. As a result of terminating oneof our collective 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. Thecomponents of net periodic postretirement benefit cost for these benefits areas follows:

 
| ** **                                          | ** ** | **Three Months Ended********March 31,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                          | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| Service cost                                        |       | $                                            | 1          |   | $ | 1 |   |
| Interest cost                                       |       | 13                                           |       | 17 |   |
| Amortization of prior service  costs                |       | (29                                          | )          | (13 | ) |
| Net periodic postretirement  benefit cost (benefit) |       | $                                            | (15        | ) | $ | 5 |   |

 

Based on federal laws and regulations, we are not required to make acontribution to our domestic pension plan in 2010. We made a payment of lessthan $0.1 million to this plan during the period and are currently evaluatingwhat additional amount, if any, we intend to contribute to this plan in 2010. Our anticipated contributions to thepension plan of our U.K. subsidiary approximate $0.8 million for the currentyear. As of March 31, 2010, we have made contributions of $0.2 million tothis plan. The pension plans of our German entities do not hold any assets anduse operating cash to pay participant benefits as they become due. Expected2010 benefit payments under these plans are $1.2 million, of which $0.3 millionwas paid through March 2010.

 

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| **(12)** | **Segment Information** |
|----------|-------------------------|

 

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

 

The following tablespresent information about our operating segments for the three months ended March 31,2010 and 2009:

 

**Three monthsended 2010**

 
| ** **                      | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Other** | ** ** | **Consol** | ** ** |
|---------------------------------|------------|-------------------|------------|------------------|------------|-----------|------------|------------|------------|
| ** **                      | ** ** | **U.S.**          | ** ** | **Germany**      | ** ** | **Other** | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Europe** | ** ** | **Total** | ** ** | **& Elim** | ** ** | **Total** | ** ** |
| Net sales to external customers |       | $                 | 18,840     |             | $          | 9,722     |       | $          | 10,614     |   | $ | 39,176 |   | $ | 28,280 |   | $ | 1,087 |   | $ | 29,367 |   | $ | — |   | $ | 68,543 |   |
| Income (loss) from operations   |       | 356               |       | 720              |       | 974       |       | 2,050      |       | 2,511 |   | 90 |   | 2,601 |   | (928 | ) | 3,723 |   |
|                                 |            |                   |            |                  |            |           |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**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 |       | $                 | 18,837     |             | $          | 10,752    |       | $          | 7,690      |   | $ | 37,279 |   | $ | 31,555 |   | $ | 1,157 |   | $ | 32,712 |   | $ | — |   | $ | 69,991 |   |
| Income (loss) from operations   |       | (1,637            | )          | 1,913            |       | 173       |       | 449        |       | 383 |   | 111 |   | 494 |   | (994 | ) | (51 | ) |
|                                 |            |                   |            |                  |            |           |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

**Introduction**

 

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

 

**Critical Accounting Policies**

 

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

 

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

 

The significantaccounting policies are described in Note 2 of the Notes to ConsolidatedFinancial Statements included in the Company’s 2009 Annual Report on Form 10-K.Not all of these significant accounting policies require management to makedifficult, subjective or complex judgments or estimates. However, managementconsiders the following to be critical accounting policies based on thedefinition above.

 

**Accounts Receivable**

 

Weestablish reserves for accounts receivable and notes receivable. We reviewoverall collectibility trends and customer characteristics such as debtleverage, solvency, and outstanding balances in order to develop our reserveestimates. Historically, a large portion of our sales at both our piano andband divisions has been generated by our top fifteen customers. As a result, weexperience some inherent concentration of credit risk in our accountsreceivable due to its composition and the relative proportion of large customerreceivables to the total. This is especially true at our band division, whichcharacteristically has a majority of our consolidated accounts receivablebalance. We consider the credit health and solvency of our customers whendeveloping our receivable reserve estimates.

 

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**Inventory**

 

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

 

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

 

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

 

**Warranty**

 

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

 

**Long-lived Assets**

 

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

 

We establish long-livedintangible assets based on estimated fair values, and amortize finite-livedintangibles over their estimated useful lives. We test our goodwill andindefinite-lived trademark assets for impairment annually or on an interimbasis if events or circumstances indicate that the fair value of an asset mayhave decreased below its carrying value. Our assessment is based on severalanalyses, including a comparison of net book value to estimated fair values,market capitalization, and multi-year cash flows.

 

**Pensions and OtherPostretirement Benefit Costs**

 

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

 

**Income Taxes**

 

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

 

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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 or appealassessments; or the rendering of court decisions affecting our estimates of taxliabilities; as well as other factors.

 

**Stock-Based Compensation**

 

We grant stock-based compensation awards which generally vest over aspecified period. When determining the fair value of stock options andsubscriptions to purchase shares under the employee stock purchase plan (“PurchasePlan”), we use the Black-Scholes option valuation model, which requires inputof certain management assumptions, including dividend yield, expectedvolatility, risk-free interest rate, expected life of stock options grantedduring the period, and the life applicable to the Purchase Plan subscriptions.The estimated fair value of the options and subscriptions to purchase shares,and the resultant stock-based compensation expense, can fluctuate based on theassumptions used by management.

 

**Environmental Liabilities**

 

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

 

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

 

**Forward-LookingStatements**

 

Certain statements contained in this document are “forward-lookingstatements” within the meaning of Section 21E of the Securities andExchange Act of 1934, as amended. These forward-looking statements representour present expectations or beliefs concerning future events. We caution thatsuch statements are necessarily based on certain assumptions which are subjectto risks and uncertainties which could cause actual results to differmaterially from those indicated in this report. These risk factors include, butare not limited to, the following: changes in general economicconditions; reductions in school budgets; increased competition; work stoppages andslowdowns; ability to successfully consolidate band manufacturing; impact ofdealer consolidations on orders; ability of dealers to obtain financing;exchange rate fluctuations; variations in the mix of products sold; marketacceptance of new products, ability of suppliers to meet demand; concentrationof credit risk; ability to lease office space; and fluctuations in effectivetax rates resulting from shifts in sources of income. Further information on these riskfactors is included in Item 1A of our Annual Report on Form 10-K for theyear ended December 31, 2009. We encourage you to read those descriptionscarefully. We caution investors not to place undue reliance on the forward-lookingstatements contained in this report. These statements, like all statementscontained in this report, speak only as of the date of this report (unlessanother date is indicated) and we undertake no obligation to update or revisethe statements except as required by law.

 

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**Results of Operations**

 

Three Months Ended March 31,2010 Compared to Three Months Ended March 31, 2009

* *
| ** **                        | ** ** | **Three Months Ended  March 31,** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|------------|------------|------------|------------|
| ** **                        | ** ** | **2010**                               | ** ** | ** ** | ** ** | **2009**   | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
|                              |       |                                   |       |       |       |       |       |   |   |   |   |   |   |
| Net sales                         |       |                                   |       |       |       |       |       |   |   |   |   |   |   |
| Band                              |       | $                                      | 29,367     |       |       |       | $          | 32,712 |   |   |   | (3,345 | ) | (10.2 | ) |
| Piano                             |       | 39,176                                 |       |       |       | 37,279     |       |   |   | 1,897 |   | 5.1 |   |
| Total sales                       |       | 68,543                                 |       |       |       | 69,991     |       |   |   | (1,448 | ) | (2.1 | ) |
|                              |       |                                   |       |       |       |       |       |   |   |   |   |   |   |
| Cost of sales                     |       |                                   |       |       |       |       |       |   |   |   |   |   |   |
| Band                              |       | 20,912                                 |       |       |       | 25,867     |       |   |   | (4,955 | ) | (19.2 | ) |
| Piano                             |       | 26,307                                 |       |       |       | 25,515     |       |   |   | 792 |   | 3.1 |   |
| Total cost of sales               |       | 47,219                                 |       |       |       | 51,382     |       |   |   | (4,163 | ) | (8.1 | ) |
|                              |       |                                   |       |       |       |       |       |   |   |   |   |   |   |
| Gross profit                      |       |                                   |       |       |       |       |       |   |   |   |   |   |   |
| Band                              |       | 8,455                                  |       | 28.8%      |       | 6,845      |       | 20.9% |   | 1,610 |   | 23.5 |   |
| Piano                             |       | 12,869                                 |       | 32.8%      |       | 11,764     |       | 31.6% |   | 1,105 |   | 9.4 |   |
| Total gross profit                |       | 21,324                                 |       |       |       | 18,609     |       |   |   | 2,715 |   | 14.6 |   |
|                              |       | 31.1%                                  |       |       |       | 26.6%      |       |   |   |   |   |   |   |
|                              |       |                                   |       |       |       |       |       |   |   |   |   |   |   |
| Operating expenses                |       | 17,601                                 |       |       |       | 18,660     |       |   |   | (1,059 | ) | (5.7 | ) |
| Income (loss) from operations     |       | 3,723                                  |       |       |       | (51        | )          |   |   | 3,774 |   | (7,400.0 | ) |
|                              |       |                                   |       |       |       |       |       |   |   |   |   |   |   |
| Other income, net                 |       | (1,467                                 | )          |       |       | (558       | )          |   |   | (909 | ) | 162.9 |   |
| Net gain on extingishment of debt |       | —                                 |       |       |       | (3,434     | )          |   |   | 3,434 |   | (100.0 | ) |
| Net interest expense              |       | 2,359                                  |       |       |       | 2,522      |       |   |   | (163 | ) | (6.5 | ) |
| Non-operating expenses (income)   |       | 892                                    |       |       |       | (1,470     | )          |   |   | 2,362 |   | (160.7 | ) |
|                              |       |                                   |       |       |       |       |       |   |   |   |   |   |   |
| Income before income taxes        |       | 2,831                                  |       |       |       | 1,419      |       |   |   | 1,412 |   | 99.5 |   |
|                              |       |                                   |       |       |       |       |       |   |   |   |   |   |   |
| Income tax provision              |       | 1,031                                  |       | 36.4%      |       | 414        |       | 29.2% |   | 617 |   | 149.0 |   |
|                              |       |                                   |       |       |       |       |       |   |   |   |   |   |   |
| Net income                        |       | $                                      | 1,800      |       |       |       | $          | 1,005 |   |   |   | 795 |   | 79.1 |   |

 

**Overview*-*****Pianodivision revenue improved primarily due to increased demand for our products inAsia. Piano margins were better due to more efficient production at ourdomestic manufacturing facility. Band division sales decreased as a result ofcontinued reluctance on the part of dealers to place forward orders in thecurrent economic environment. Nevertheless, band margins improved due to morenormal production schedules and improved production efficiencies than in theyear-ago period.

 

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**Net Sales** -****Net salesdeteriorated $1.4 million in the current period due to lower band divisionrevenues.

 

Despite the 6%decrease in domestic Steinway grand unit shipments, domestic piano divisionrevenues were flat at $18.8 million. Shipments of our mid-priced piano linesdecreased 20%, but a shift from lower priced upright pianos to higher pricedgrand pianos offset much of the revenue impact. Price increases, which wereimplemented at the beginning of the year, also helped stabilize revenues. Overseasrevenues increased $1.9 million supported by an improvement in sales by ourdivisions in Asia, which mitigated the impact of an 8% decrease in Steinwaygrand unit shipments. Overseas mid-priced piano line shipments rose 44% due inpart to improved availability of certain models.

 

Band divisionrevenues decreased $3.3 million as a result of the 16% reduction in woodwind andbrass instrument unit shipments. However, improved sales of percussioninstruments and a shift in mix towards certain intermediate woodwinds helpedlessen the revenue shortfall. While we had sufficient inventory to supply ourdealers, we did not offer pricing incentives or rebates to entice dealers toorder early. Accordingly, we expect orders and shipments to shift to later inthe year when dealers have an immediate need for inventory.

 

**GrossProfit*****—*******Grossprofit improved significantly despite lower sales as a result of higher marginsat both the piano and band divisions. Domestically, piano margins increasedfrom 25.6% to 30.9% due to changes in production schedules, which bolsteredfactory efficiency. Overseas margins dropped from 37.6% to 34.6% largely due toa shift in shipments to lower margin territories.

 

The band division’sgross margin improved from 20.9% to 28.8% during the period. Productionschedules have stabilized, resulting in improved overhead absorption and lowerfactory variances.

 

**OperatingExpenses** - Operatingexpenses decreased $1.1 million. Sales and marketing expenses decreased $0.5primarily due to lower bad debt expense. General and administrative costs were$0.4 million lower as a result of cost saving measures implemented during 2009.

 

**Non-operatingExpenses (Income)**— We experienced a shift of $2.4 million from non-operating income tonon-operating expenses due to the absence of $3.4 million in net gains onextinguishment of debt. Excluding that, non-operating expenses decreased $1.1million. This improvement is largely attributable to higher rental income ($0.3million) at our West 57th Street building, lower net interest expense($0.2 million) due to lower borrowings, and higher foreign exchange gains ($0.2million).

 

**IncomeTaxes** -**We recorded an income tax expense of $1.0 million,reflecting our anticipated rate of 37% associated with current year income,offset by a nominal benefit associated with uncertain tax positions. Thecombination of these items resulted in an effective tax rate of 36% for theperiod. The rate of 29% in the year-ago period was abnormally low primarily dueto no anticipated U.S. federal tax liability. The rate reflected an anticipatedrate of 21% related to income for that period and 8% relating to uncertain taxpositions.

 

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**Liquidity and Capital Resources**

 

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

 

Our statements ofcash flows for the three months ended March 31, 2010 and 2009 aresummarized as follows:

 
| ** **                                                                   | ** ** | **2010** | ** ** | **2009** | ** ** | **Change** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Net income:                                                                  |       | $        | 1,800      |     | $          | 1,005      |       | $ | 795 |   |
| Changes in operating assets and  liabilities                                 |       | (5,389   | )          | (9,622   | )          | 4,233      |       |
| Other  adjustments to reconcile net income to cash from operating activities |       | 3,296    |       | (483     | )          | 3,779      |       |
| Cash flows from operating  activities                                        |       | (293     | )          | (9,100   | )          | 8,807      |       |
|                                                                         |       |     |       |     |       |       |       |
| Cash flows from investing  activities                                        |       | (514     | )          | (1,096   | )          | 582        |       |
|                                                                         |       |     |       |     |       |       |       |
| Cash flows from financing  activities                                        |       | 27,583   |       | (6,491   | )          | 34,074     |       |
|                                                                              |            |          |            |          |            |            |            |  |  |  |

 

Cash flows fromoperating activities improved $8.8 million over the year-ago period. A shift inorder patterns of our band customers and improved sales at our piano divisionresulted in a $7.0 million shift from source of cash to use of cash foraccounts receivable. We used $4.2 million less for inventory due to betteralignment of purchasing and production with demand by our piano division. Cashused for liabilities decreased $8.2 million due largely to timing of paymentsas well as increased spending due to more normalized production schedules.

 

Cash flows usedfor investing activities decreased $0.6 million due to lower capitalexpenditures. We expect capital expenditures for the full year to be in therange of $3.0 to $4.0 million for normal capital projects, and an additional$1.0 to $2.0 million for improvements and renovations at our building in NewYork City.

 

Cash flowsprovided by financing activities increased $34.1 million as we generated $27.6million through stock sales in 2010. Also, we did not use $7.3 million toextinguish debt, as in the year-ago period.

 

**BorrowingActivities and Availability**-****We have a domesticcredit facility with a syndicate of domestic lenders (the “Credit Facility”)with a potential borrowing capacity of $110.0 million in revolving creditloans, which expires on September 29, 2011. It provides for periodicborrowings at either London Interbank Offering Rate (“LIBOR”) plus a range from1.25% to 1.75%, or as-needed borrowings at an alternate base rate, plus a rangefrom 0.00% to 0.25%; both ranges depend upon borrowing availability at the timeof borrowing. The Credit Facility is collateralized by our domestic accountsreceivable, inventory, and property, plant and equipment. As of March 31,2010, there was nothing outstanding on our Credit Facility, and borrowingavailability was approximately $99.7 million.

 

We also have certainnon-domestic credit facilities originating from two German banks that providefor borrowings by foreign subsidiaries of up to €16.1 million ($21.8 million atthe March 31, 2010 exchange rate), net of borrowing restrictions of €1.7million ($2.3 million at the March 31, 2010 exchange rate) and are payable on March 1,2011. These borrowings are collateralized by most of the assets of theborrowing subsidiaries. A portion of the loans can be converted into a maximumof £0.8 million ($1.1 million at the March 31, 2010 exchange rate) for use by our U.K. branchand ¥300 million ($3.2 million at the March 31, 2010 exchange rate) for use by our Japanesesubsidiary. Our Chinese subsidiary also has the ability to convert theequivalent of up to €2.5 million into U.S. dollars or Chinese yuan ($3.4million at the March 31, 2010 exchange rate). Euro loans bear interest at rates ofEuro Interbank Offered Rate (“EURIBOR”) plus a margin determined at the time ofborrowing. Margins fluctuate based on the loan amount and the borrower’s bankrating. The remaining demand borrowings bear interest rates of LIBOR plus 0.8%for British pound loans, LIBOR plus 1.0% for U.S. dollar loans of our Chinesesubsidiary, and Tokyo Interbank Offered Rate (“TIBOR”) plus 1.3% for Japaneseyen loans. We had nothing outstanding as of March 31, 2010 on these credit facilities.

 

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Our Japanese subsidiaryalso maintains a separate revolving loan agreement that provides additionalborrowing capacity of up to ¥500 million ($5.3 million at the March 31,2010 exchange rate).The revolving loan agreement bears interest at an average 30-day TIBOR rateplus 0.9% (outstanding borrowings at 1.1% at March 31, 2010) and expires on January 31, 2011.As of March 31, 2010, we had $0.5 million outstanding on this revolving loan agreement.

 

At March 31,2010, our totaloutstanding indebtedness amounted to $158.9 million, consisting of $158.3million of 7.00% Senior Notes and $0.5 million of notes payable to foreignbanks.

 

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 March 31, 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. Wehave 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 fromoperations to fund our debt and capital requirements and pay off seasonalborrowings on our domestic line of credit. However, given the current globaleconomy, we anticipate the remainder of 2010 to be challenging. Despite this,we do not anticipate any adverse impact on our liquidity as we received $27.2million in proceeds from a sale of stock in March 2010. We intend tomanage accounts receivable and credit risk, and control inventory levels bymonitoring purchases and production schedules. We have also reduced headcount,minimized non-critical expenditures, and forgone wage increases anddiscretionary benefit program contributions. Our intention is to manage cashoutflow and maintain sufficient operating cash on hand to meet short-termrequirements.

 

We donot have any current plans or intentions that will have a material adverseimpact on our liquidity in 2010, although we may consider acquisitions that mayrequire funding from operations or from our credit facilities. Other than thosedescribed, we are not aware of any trends, demands, commitments, or costs ofresources that are expected to materially impact our liquidity or capitalresources. Accordingly, we believe that cash on hand, together with cash flowsanticipated from operations and available borrowings under the Credit Facility,will be adequate to meet our debt service requirements, fund regular capitalrequirements and satisfy our working capital and general corporate needsthrough the remainder of 2010.

 

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**ContractualObligations** - Thefollowing table provides a summary of our contractual obligations at March 31,2010.

 
| ** **                      | ** ** | **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)              |       | $                          | 202,275    |   | $ | 11,624 |   | $ | 22,165 |   | $ | 168,486 |   | $ | — |   |
| Capital leases                  |       | 16                         |       | 11 |   | 5 |   | — |   | — |   |
| Operating leases (2)            |       | 260,233                    |       | 5,896 |   | 10,222 |   | 8,460 |   | 235,655 |   |
| Purchase obligations (3)        |       | 27,919                     |       | 27,740 |   | 179 |   | — |   | — |   |
| Other long-term liabilities (4) |       | 40,991                     |       | 5,614 |   | 5,349 |   | 4,632 |   | 25,396 |   |
| Total                           |       | $                          | 531,434    |   | $ | 50,885 |   | $ | 37,920 |   | $ | 181,578 |   | $ | 261,051 |   |

 

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**Notes to Contractual Obligations:**
| (1)    | Long-term debt  represents long-term debt obligations, the fixed interest on our Notes, and  the variable interest on our other loans. We estimated the future variable  interest obligation using the applicable March 31,  2010 rates. The  nature of our long-term debt obligations, including changes to our long-term  debt structure, is described more fully in the “Borrowing Availability and  Activities” section of “Liquidity and Capital Resources.”                                                                      |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (2)    | Approximately $245.5  million of our operating lease obligations are attributable to the land lease  associated with the purchase of Steinway Hall, which has eighty seven years  remaining. The rest is attributable to the leasing of other facilities and  equipment.                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (3)    | Purchase obligations  consist of firm purchase commitments for raw materials, finished goods, and  service agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (4)    | Our other  long-term liabilities consist primarily of the long-term portion of our  pension obligations, which are described in Note 11 in the Notes to Condensed  Consolidated Financial Statements included within this filing, liabilities  relating to uncertain tax positions which are expected to be settled within  one year, and obligations under employee and consultant agreements. We have  not included $0.3 million of liabilities relating to uncertain tax positions  within this schedule due to the uncertainty of the payment date, if any. |

 

**RecentAccounting Pronouncements**

 

In January 2010, the Financial Accounting Standards Board (“FASB”)issued guidance which amends the existing fair value measurements anddisclosures guidance. These amendments require a greater level of disaggregatedinformation as well as more disclosure around valuation techniques and inputsto fair value measurements. The amendments also provide guidance on employers’disclosures about postretirement benefit plan assets to require thatdisclosures be provided by classes of assets instead of by major categories ofassets. We were required to comply with this new standard on January 1,2010. The adoption did not have a material impact on our consolidated financialstatements.

 

In March 2010 the FASB issued new guidance which clarifies thescope exception for embedded credit related derivatives. We will be required tocomply with this new standard on July 1, 2010. We do not expect a materialimpact on our financial statements from the adoption of this guidance.

 

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**ITEM 3           QUANTITATIVE AND QUALITATIVEDISCLOSURES 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           CONTROLS AND PROCEDURES**

 

Our principal executive officer and our principalfinancial officer, after evaluating together with management the design andoperation of our disclosure controls and procedures, have concluded that ourdisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) were effective as of March 31, 2010, the end of the periodcovered by this report. In designing disclosure controls and procedures,management recognizes that any controls, no matter how well designed andoperated, can only provide reasonable, not absolute, assurance of achieving thedesired control objectives.

 

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

 

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

 
| (i)    | Exhibits |
|--------|----------|
|   |     |
|   | 10.1     | Agreement between  Steinway, Inc. d/b/a Steinway & Sons and LOCAL 81102, F.W.  I.U.E.-C.W.A, A.F.L., C.I.O. |
|   |     |   |
|   | 31.1     | Certification of the  Principal Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |
|   |     |   |
|   | 31.2     | Certification of the  Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
|   |     |   |
|   | 32.1     | Certification of the  Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|   |     |   |
|   | 32.2     | Certification of the  Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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**SIGNATURES**

 

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

 

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

 

 

Date: May 10,2010

 

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