Tableof Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**x****         ****QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIODENDED MARCH 31, 2009**

 

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

 

**COMMISSION FILE NUMBER 001-11911**

 

**STEINWAY MUSICAL INSTRUMENTS,INC.**

(Exact name of registrantas 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 telephone number including area code:     **(781) 894-9770**

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements during the past 90 days.     Yes x    No o

 

Indicate by check mark whether the registrant has submitted electronicallyand posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files).     Yes o    No o

 

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

 

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

 

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

 

Number of shares of Common Stock issued and outstanding as of May 4,2009**:**

 
|   | Class A | 477,952   |
|--------|--------------|-----------|
|   | Ordinary     | 8,055,307 |
|   | Total        | 8,533,259 |

 

 

 

----

Tableof Contents

 

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

**FORM 10-Q**

**INDEX**

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

 

2

----

Tableof Contents

 

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

 

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

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**Unaudited**

**(In Thousands Except Share andPer Share Amounts)**

 
| ** **                             | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                             | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Net sales                              |       | $                                                    | 69,991     |   | $ | 94,186 |   |
| Cost of sales                          |       | 51,382                                               |       | 66,794 |   |
|                                   |       |                                                 |       |   |   |
| Gross profit                           |       | 18,609                                               |       | 27,392 |   |
|                                   |       |                                                 |       |   |   |
| Operating  expenses:                   |       |                                                 |       |   |   |
| Sales and  marketing                   |       | 10,620                                               |       | 13,404 |   |
| General and  administrative            |       | 7,789                                                |       | 8,781 |   |
| Other operating  expenses              |       | 251                                                  |       | 403 |   |
| Total operating  expenses              |       | 18,660                                               |       | 22,588 |   |
|                                   |       |                                                 |       |   |   |
| (Loss) income  from operations         |       | (51                                                  | )          | 4,804 |   |
|                                   |       |                                                 |       |   |   |
| Other income,  net                     |       | (558                                                 | )          | (37 | ) |
| Net gain on  extinguishment of debt    |       | (3,434                                               | )          | (636 | ) |
| Interest income                        |       | (562                                                 | )          | (952 | ) |
| Interest expense                       |       | 3,084                                                |       | 3,109 |   |
| Total non-operating  (income) expenses |       | (1,470                                               | )          | 1,484 |   |
|                                   |       |                                                 |       |   |   |
| Income before  income taxes            |       | 1,419                                                |       | 3,320 |   |
|                                   |       |                                                 |       |   |   |
| Income tax  provision                  |       | 414                                                  |       | 1,345 |   |
|                                   |       |                                                 |       |   |   |
| Net income                             |       | $                                                    | 1,005      |   | $ | 1,975 |   |
|                                   |       |                                                 |       |   |   |
| Earnings per  share                    |       |                                                 |       |   |   |
| Basic                                  |       | $                                                    | 0.12       |   | $ | 0.23 |   |
| Diluted                                |       | $                                                    | 0.12       |   | $ | 0.23 |   |
|                                   |       |                                                 |       |   |   |
| Weighted average  shares:              |       |                                                 |       |   |   |
| Basic                                  |       | 8,533,259                                            |       | 8,579,203 |   |
| Diluted                                |       | 8,535,278                                            |       | 8,654,843 |   |

 

See notes to condensed consolidated financial statements.

 

3

----

Tableof Contents

 

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

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**Unaudited**

**(In Thousands)**

 
| ** **                                                                                                              | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Assets                                                                                                                  |       |                     |       |                        |       |
| Current assets:                                                                                                         |       |                     |       |                        |       |
| Cash                                                                                                                    |       | $                        | 26,753     |                        | $          | 44,380 |   |
| Accounts, notes  and other receivables, net of allowances of $15,860 and $15,895 in 2009 and  2008, respectively        |       | 53,147                   |       | 60,581                      |       |
| Inventories, net                                                                                                        |       | 170,155                  |       | 166,508                     |       |
| Prepaid expenses  and other current assets                                                                              |       | 14,145                   |       | 14,156                      |       |
| Deferred tax  assets                                                                                                    |       | 12,378                   |       | 11,642                      |       |
| Total current  assets                                                                                                   |       | 276,578                  |       | 297,267                     |       |
|                                                                                                                    |       |                     |       |                        |       |
| Property, plant  and equipment, net of accumulated depreciation of $100,221 and $99,140 in  2009 and 2008, respectively |       | 88,774                   |       | 88,708                      |       |
| Trademarks                                                                                                              |       | 15,929                   |       | 16,148                      |       |
| Goodwill                                                                                                                |       | 23,009                   |       | 23,708                      |       |
| Other  intangibles, net                                                                                                 |       | 5,129                    |       | 5,568                       |       |
| Other assets                                                                                                            |       | 12,439                   |       | 12,380                      |       |
| Long-term  deferred tax assets                                                                                          |       | 9,898                    |       | 9,539                       |       |
|                                                                                                                    |       |                     |       |                        |       |
| Total assets                                                                                                            |       | $                        | 431,756    |                        | $          | 453,318 |   |
|                                                                                                                    |       |                     |       |                        |       |
| Liabilities and  stockholders’ equity                                                                              |       |                     |       |                        |       |
| Current  liabilities:                                                                                                   |       |                     |       |                        |       |
| Debt                                                                                                                    |       | $                        | 2,021      |                        | $          | 3,325 |   |
| Accounts payable                                                                                                        |       | 13,967                   |       | 16,947                      |       |
| Other current  liabilities                                                                                              |       | 36,320                   |       | 42,282                      |       |
| Total current  liabilities                                                                                              |       | 52,308                   |       | 62,554                      |       |
|                                                                                                                    |       |                     |       |                        |       |
| Long-term debt                                                                                                          |       | 174,490                  |       | 183,425                     |       |
| Deferred tax  liabilities                                                                                               |       | 6,232                    |       | 6,263                       |       |
| Pension and  other postretirement benefit liabilities                                                                   |       | 37,241                   |       | 37,543                      |       |
| Other  non-current liabilities                                                                                          |       | 6,418                    |       | 6,452                       |       |
| Total  liabilities                                                                                                      |       | 276,689                  |       | 296,237                     |       |
|                                                                                                                    |       |                     |       |                        |       |
| Commitments and  contingent liabilities                                                                                 |       |                     |       |                        |       |
|                                                                                                                    |       |                     |       |                        |       |
| Stockholders’  equity:                                                                                             |       |                     |       |                        |       |
| Common stock                                                                                                            |       | 11                       |       | 11                          |       |
| Additional  paid-in capital                                                                                             |       | 96,449                   |       | 96,180                      |       |
| Retained  earnings                                                                                                      |       | 122,084                  |       | 121,079                     |       |
| Accumulated  other comprehensive loss                                                                                   |       | (16,205                  | )          | (12,917                     | )          |
| Treasury stock,  at cost                                                                                                |       | (47,272                  | )          | (47,272                     | )          |
| Total  stockholders’ equity                                                                                        |       | 155,067                  |       | 157,081                     |       |
|                                                                                                                    |       |                     |       |                        |       |
| Total  liabilities and stockholders’ equity                                                                        |       | $                        | 431,756    |                        | $          | 453,318 |   |

 

See notes to condensed consolidated financial statements.

 

4

----

Tableof Contents

 

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

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**Unaudited**

**(In Thousands)**

 
| ** **                                                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Cash flows from  operating activities:                                        |       |                                                 |       |   |   |
| Net income                                                                    |       | $                                                    | 1,005      |   | $ | 1,975 |   |
| Adjustments to  reconcile net income to cash flows from operating activities: |       |                                                 |       |   |   |
| Depreciation and  amortization                                                |       | 2,684                                                |       | 2,685 |   |
| Amortization of  bond discount                                                |       | 39                                                   |       | 42 |   |
| Net gain on extinguishment  of debt                                           |       | (3,434                                               | )          | (636 | ) |
| Stock-based  compensation expense                                             |       | 269                                                  |       | 245 |   |
| Excess tax  benefits from stock-based awards                                  |       | —                                               |       | (2 | ) |
| Tax benefit from  stock option exercises                                      |       | —                                               |       | 2 |   |
| Deferred tax  benefit                                                         |       | (679                                                 | )          | (1,297 | ) |
| Other                                                                         |       | 638                                                  |       | 590 |   |
| Changes in  operating assets and liabilities:                                 |       |                                                 |       |   |   |
| Accounts, notes  and other receivables                                        |       | 6,047                                                |       | 3,170 |   |
| Inventories                                                                   |       | (7,517                                               | )          | (7,079 | ) |
| Prepaid expenses  and other assets                                            |       | 77                                                   |       | (207 | ) |
| Accounts payable                                                              |       | (2,868                                               | )          | 3,412 |   |
| Other  liabilities                                                            |       | (5,361                                               | )          | (5,179 | ) |
| Cash flows from  operating activities                                         |       | (9,100                                               | )          | (2,279 | ) |
|                                                                          |       |                                                 |       |   |   |
| Cash flows from  investing activities:                                        |       |                                                 |       |   |   |
| Capital  expenditures                                                         |       | (1,099                                               | )          | (1,071 | ) |
| Proceeds from  disposals of property, plant and equipment                     |       | 3                                                    |       | 311 |   |
| Cash flows from  investing activities                                         |       | (1,096                                               | )          | (760 | ) |
|                                                                          |       |                                                 |       |   |   |
| Cash flows from  financing activities:                                        |       |                                                 |       |   |   |
| Borrowings under  lines of credit                                             |       | 34,568                                               |       | 1,657 |   |
| Repayments under  lines of credit                                             |       | (33,779                                              | )          | (1,739 | ) |
| Repayments of  long-term debt, net of discount                                |       | (7,280                                               | )          | (4,981 | ) |
| Proceeds from  issuance of common stock                                       |       | —                                               |       | 62 |   |
| Excess tax  benefits from stock-based awards                                  |       | —                                               |       | 2 |   |
| Cash flows from  financing activities                                         |       | (6,491                                               | )          | (4,999 | ) |
|                                                                          |       |                                                 |       |   |   |
| Effect of  foreign exchange rate changes on cash                              |       | (940                                                 | )          | 1,484 |   |
|                                                                          |       |                                                 |       |   |   |
| Decrease in cash                                                              |       | (17,627                                              | )          | (6,554 | ) |
| Cash, beginning  of period                                                    |       | 44,380                                               |       | 37,304 |   |
| Cash, end of  period                                                          |       | $                                                    | 26,753     |   | $ | 30,750 |   |
|                                                                          |       |                                                 |       |   |   |
| Supplemental  Cash Flow Information                                           |       |                                                 |       |   |   |
| Interest paid                                                                 |       | $                                                    | 7,098      |   | $ | 6,142 |   |
| Income taxes  paid                                                            |       | $                                                    | 1,735      |   | $ | 3,334 |   |

 

See notes to condensed consolidated financial statements.

 

5

----

Tableof Contents

 

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

**CONDENSEDCONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

**Unaudited**

**(In Thousands Except Share Data)**

** **
| ** **                                | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Treasury  Stock** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|-------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|---------------------|------------|---------------------------------------|------------|
|                                      |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Balance,  January 1, 2009            |       | $                 | 11         |                             | $          | 96,180                 |       | $                                           | 121,079    |                | $          | (12,917                               | )          | $ | (47,272 | ) | $ | 157,081 |   |
| Comprehensive  loss:                      |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Net income                                |       |              |       |                             |       | 1,005                  |       |                                        |       |                |       | 1,005                                 |       |
| Foreign currency  translation adjustments |       |              |       |                             |       |                   |       | (3,288                                      | )          |                |       | (3,288                                | )          |
| Total  comprehensive loss                 |       |              |       |                             |       |                   |       |                                        |       |                |       | (2,283                                | )          |
| Stock-based  compensation                 |       |              |       | 269                              |       |                   |       |                                        |       |                |       | 269                                   |       |
| Balance,  March 31, 2009             |       | $                 | 11         |                             | $          | 96,449                 |       | $                                           | 122,084    |                | $          | (16,205                               | )          | $ | (47,272 | ) | $ | 155,067 |   |

 

See notes to condensed consolidated financial statements.

 

6

----

Tableof Contents

 

**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**MARCH 31,2009**

**Unaudited**

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

 

**(1)           Basis of Presentation**

 

Theaccompanying condensed consolidated financial statements of Steinway MusicalInstruments, Inc. and subsidiaries (the “Company”) for the three monthsended March 31, 2009 and 2008 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 31,2008, and include all adjustments which are of a normal and recurring nature,necessary for the fair presentation of financial position, results ofoperations and cash flows for the interim periods. We encourage you to read thecondensed consolidated financial statements in conjunction with the riskfactors, consolidated financial statements and notes thereto contained in theCompany’s Annual Report on Form 10-K for the year ended December 31,2008 filed with the Securities and Exchange Commission (“SEC”). The results ofoperations for the three ended March 31, 2009 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 Accounting Policies**

 

**Principlesof Consolidation** - Our consolidated financial statementsinclude the accounts of all direct and indirect subsidiaries, all of which arewholly owned, including the piano (“Steinway”), band (“Conn-Selmer”), andonline music (“Arkiv”) divisions. We have included results for Arkiv within thepiano segment elsewhere in this report. We also acquired a retail store inDusseldorf, Germany in February 2009. Results for this entity, which arenot material, have been included within the piano segment since the date ofacquisition. Intercompany balances have been eliminated in consolidation.

 

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

 

**IncomeTaxes** - We provide for income taxes using an asset andliability approach. We compute deferred income tax assets and liabilities fordifferences between the financial statement and tax bases of assets andliabilities that will result in taxable or deductible amounts in the futurebased on enacted tax laws and rates applicable to the periods in which thedifferences are expected to affect taxable income. We establish valuationallowances when necessary to reduce deferred tax assets to the amount that morelikely than not will be realized.

 

We provide reserves for potential payments of tax to various taxauthorities related to uncertain tax positions and other issues. Prior to 2007,these reserves were recorded when management determined that it was probablethat a loss would be incurred related to these matters and the amount of theloss was reasonably determinable. In 2007, we adopted Financial AccountingStandards Board (“FASB”) Interpretation No. 48, “Accounting for

 

7

----

Tableof Contents

 

Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”(“FIN 48”). As a result, reserves recorded subsequent to adoption are based ona determination of whether and how much of a tax benefit taken in our taxfilings or positions is more likely than not to be realized, assuming that thematter in question will be raised by the tax authorities. Potential interestand penalties associated with such uncertain tax positions are recorded as acomponent of income tax expense. At adoption date, we made a comprehensivereview of our uncertain tax positions. We believe appropriate provisions foroutstanding issues have been made.

 

In conjunction with theadoption of FIN 48, we began reporting income tax-related interest andpenalties as a component of income tax expense. Prior to adoption, suchinterest was reported in interest expense. We file income tax returns at the U.S. federal, state, and locallevels, as well as in several foreign jurisdictions. With few exceptions, ourreturns are no longer subject to examinations for years before 2005.

 

Theliability for uncertain tax positions decreased $0.8 million in 2009 as aresult of settlements with state taxing authorities. Although we believe ourtax estimates are appropriate, the final determination of tax audits and anyrelated litigation could result in changes in our estimates.

 

**Stock-basedCompensation** - We record compensation cost on a straight-linebasis over the award’s requisite service period for all share-based awardsgranted. We estimate the fair value of our stock option awards (less estimatedforfeitures) and employee stock purchase plan rights on the date of grant usingthe Black-Scholes option valuation model.

 

**Earningsper Common Share**- We compute earnings per share using the weighted-average number of commonshares outstanding during each period. Diluted earnings per common sharereflects the dilutive impact of shares subscribed under the Employee StockPurchase plan and the effect of our outstanding options using the treasurystock method, except when such options would be antidilutive.

 

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

 
| ** **                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                         | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Weighted-average  shares:                          |       |                                                 |       |   |   |
| For basic  earnings per share                      |       | 8,533,259                                            |       | 8,579,203 |   |
| Dilutive effect  of stock-based compensation plans |       | 2,019                                                |       | 75,640 |   |
| For diluted  earnings per share                    |       | 8,535,278                                            |       | 8,654,843 |   |

 

We did not includeany of the 799,776 outstanding options to purchase shares of common stock inthe computation of diluted earnings per share for the three months ended March 31,2009 because the impact would have been antidilutive. We did not include214,400 options to purchase shares of common stock in the computation ofdiluted earnings per share for the three months ended March 31, 2008,because their exercise prices were more than the average market price of ourcommon shares, and therefore antidilutive.

 

8

----

Table of Contents

 

**AccumulatedOther Comprehensive Loss** - Accumulated other comprehensive loss is comprised of foreigncurrency translation adjustments and pension and other post-retirementbenefits. The components of accumulated other comprehensive loss are asfollows:

 
| ** **                    | ** ** | **Foreign Currency  Translation  Adjustments** | ** ** | **Pension & Other  Post-Retirement  Benefits** | ** ** | **Tax Impact of  Pension & Other  Post-Retirement  Benefits** | ** ** | **Accumulated Other  Comprehensive Loss** | ** ** |
|-------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
|                          |       |                                                |       |                                                         |       |                                                                                  |       |                                                |       |
| Balance  January 1, 2009 |       | $                                                   | 5,050      |                                                         | $          | (29,985                                                                               | )          | $                                                   | 12,018     |   | $ | (12,917 | ) |
| Activity                      |       | (3,288                                              | )          | —                                                       |       | —                                                                                |       | (3,288                                              | )          |
| Balance  March 31, 2009  |       | $                                                   | 1,762      |                                                         | $          | (29,985                                                                               | )          | $                                                   | 12,018     |   | $ | (16,205 | ) |

 

**RecentAccounting Pronouncements** - In December 2007, the FASB issued Statement of FinancialAccounting Standards (“SFAS”) No. 141R, “Business Combinations,” arevision to SFAS No. 141, “Business Combinations” (“SFAS 141R”), whichprovides revised guidance for recognition and measurement of identifiableassets and goodwill acquired, liabilities assumed, and any noncontrollinginterest in the acquiree at fair value. SFAS 141R also establishes disclosurerequirements to enable the evaluation of the nature and financial effects of abusiness combination. We applied SFAS 141R to our acquisition of a retail storein Dusseldorf, Germany.

 

In December 2007, theFASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements — an amendment of ARB No. 51” (“SFAS 160”). SFAS160 establishes accounting and reporting standards for ownership interests insubsidiaries held by parties other than the parent. Specifically, SFAS 160requires the presentation of noncontrolling interests as equity in theConsolidated Statement of Financial Position, and separate identification andpresentation in the Consolidated Statement of Operations of net incomeattributable to the entity and the noncontrolling interest. It also establishesaccounting and reporting standards regarding deconsolidation and changes in aparent’s ownership interest. The provisions of SFAS 160 are generally requiredto be applied prospectively, except for the presentation and disclosurerequirements, which must be applied retrospectively. We adopted SFAS 160 on January 1,2009. The adoption of SFAS 160 did not have a material impact on ourconsolidated financial statements

 

In March 2008, the FASBissued SFAS No. 161, “Disclosures about Derivative Instruments and HedgingActivities — an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS161 amends and expands the disclosure requirements for derivative instrumentsand hedging activities, with the intent to provide users of financialstatements with an enhanced understanding of how and why an entity usesderivative instruments, how derivative instruments and related hedged items areaccounted for, and how derivative instruments and related hedged items affectan entity’s financial statements. We adopted SFAS 161 on January 1, 2009.Its adoption did not have any impact on our consolidated financial statements.

 

InApril 2009, the FASB adopted Staff Position (“FSP”) SFAS 107-b and AccountingPrinciples Board (APB) Opinion No. 28-a, “Interim Disclosures about FairValue of Financial Instruments” (SFAS 107-b and APB 28-a). This FSP amendsFASB Statement No. 107, “Disclosures about Fair Values of FinancialInstruments,” to require disclosures about fair value of financial instrumentsin interim financial statements as well as in annual financialstatements. The proposal also amends APB Opinion No. 28, “InterimFinancial Reporting,” to require those disclosures in all interim financial statements. ThisFSP is effective for interim periods ending after June 15, 2009, but earlyadoption is permitted for interim periods ending after March 15, 

 

9

----

Tableof Contents

 

2009. We will adopt SFAS 107-b and APB28 and provide the additional disclosure requirements in our Quarterly Reporton Form 10-Q for the period ended June 30, 2009.

 

**(3)           Inventories**

 
| ** **      | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                        | 17,588     |                        | $          | 17,930 |   |
| Work-in-process |       | 47,311                   |       | 51,057                      |       |
| Finished goods  |       | 105,256                  |       | 97,521                      |       |
|            |       | $                        | 170,155    |                        | $          | 166,508 |   |

 

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

 

Intangible assets other thangoodwill and indefinite-lived trademarks are amortized on a straight-line basisover their estimated useful lives. Deferred financing costs are amortized overthe repayment periods of the underlying debt. We 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 hasdecreased below its carrying value. We performed our annual goodwill andintangible asset impairment test as of July 31, 2008 and wrote off all ofthe $8.6 million in band division goodwill. Our analysis of band divisiontrademarks did not indicate an impairment, therefore no charge was takenagainst that asset, or any other intangible assets attributable to otherdivisions. We performed an update of our analysis as of March 31, 2009 dueto current economic conditions. No other impairments were noted.

 

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

 
| ** **                           | ** ** | **Piano** | ** ** | **Band** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|-----------|------------|----------|------------|-----------|------------|
| Goodwill:                            |       |      |       |     |       |      |       |
| Balance,  January 1, 2009       |       | $         | 23,708     |     | $          | —    |       | $ | 23,708 |   |
| Foreign currency  translation impact |       | (699      | )          | —   |       | (699      | )          |
| Balance,  March 31, 2009        |       | $         | 23,009     |     | $          | —    |       | $ | 23,009 |   |
|                                 |       |      |       |     |       |      |       |
| Trademarks:                          |       |      |       |     |       |      |       |
| Balance,  January 1, 2009       |       | $         | 10,324     |     | $          | 5,824     |       | $ | 16,148 |   |
| Foreign currency  translation impact |       | (219      | )          | —   |       | (219      | )          |
| Balance,  March 31, 2009        |       | $         | 10,105     |     | $          | 5,824     |       | $ | 15,929 |   |

 

10

----

Table of Contents

 

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

 
| ** **                               | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                     |       |                     |       |                        |       |
| Gross deferred  financing costs:         |       | $                        | 5,372      |                        | $          | 5,640 |   |
| Accumulated  amortization                |       | (2,696                   | )          | (2,636                      | )          |
| Deferred  financing costs, net           |       | $                        | 2,676      |                        | $          | 3,004 |   |
|                                     |       |                     |       |                        |       |
| Gross  non-compete agreements:           |       | $                        | 750        |                        | $          | 750 |   |
| Accumulated  amortization                |       | (507                     | )          | (469                        | )          |
| Non-compete  agreements, net             |       | $                        | 243        |                        | $          | 281 |   |
|                                     |       |                     |       |                        |       |
| Gross customer  relationships:           |       | $                        | 482        |                        | $          | 425 |   |
| Accumulated  amortization                |       | (75                      | )          | (53                         | )          |
| Customer  relationships, net:            |       | $                        | 407        |                        | $          | 372 |   |
|                                     |       |                     |       |                        |       |
| Gross website  and developed technology: |       | $                        | 2,176      |                        | $          | 2,176 |   |
| Accumulated  amortization                |       | (373                     | )          | (265                        | )          |
| Website and  developed technology, net   |       | $                        | 1,803      |                        | $          | 1,911 |   |
|                                     |       |                     |       |                        |       |
| Total other  intangibles                 |       | $                        | 8,780      |                        | $          | 8,991 |   |
| Accumulated  amortization                |       | (3,651                   | )          | (3,423                      | )          |
| Other  intangibles, net                  |       | $                        | 5,129      |                        | $          | 5,568 |   |

 

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

 
| ** **            | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------|------------|------------------------------------------------------|------------|
| ** **            | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
|                  |       |                                                 |       |   |   |
| Amortization  expense |       | $                                                    | 335        |   | $ | 198 |   |
|                       |            |                                                      |            |  |  |  |  |

 

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

 
| Remainder of  2009 |   | $     | 952    |   |
|--------------------|--------|-------|--------|--------|
| 2010               |   | 1,197 |   |
| 2011               |   | 1,157 |   |
| 2012               |   | 1,048 |   |
| 2013               |   | 696   |   |
| 2014               |   | 79    |   |
| Total              |   | $     | 5,129  |   |

 

11

----

Table of Contents

 

**(5)           Other Current Liabilities**

 
| ** **                                                               | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Accrued payroll  and related benefits                                    |       | $                        | 13,248     |                        | $          | 14,100 |   |
| Current portion  of pension and other postretirement benefit liabilities |       | 1,300                    |       | 1,357                       |       |
| Accrued warranty  expense                                                |       | 1,374                    |       | 1,451                       |       |
| Accrued interest                                                         |       | 938                      |       | 4,022                       |       |
| Deferred income                                                          |       | 8,546                    |       | 7,531                       |       |
| Environmental  liabilities                                               |       | 2,506                    |       | 2,577                       |       |
| Income and other  taxes payable                                          |       | 1,410                    |       | 2,557                       |       |
| Other accrued  expenses                                                  |       | 6,998                    |       | 8,687                       |       |
| Total                                                                    |       | $                        | 36,320     |                        | $          | 42,282 |   |

 

Accrued warranty expense is recorded at the time of sale forinstruments that have a warranty period ranging from one to ten years. Theaccrued expense recorded is generally calculated on a ratio of warranty coststo sales based on our warranty history and is adjusted periodically followingan analysis of actual warranty claims.

 

The accruedwarranty expense activity for the three months ended March 31, 2009 and2008, and the year ended December 31, 2008 is as follows:

 
| ** **                           | ** ** | **March 31,  2009** | ** ** | **March 31,  2008** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------|------------|--------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Beginning  balance                   |       | $                        | 1,451      |                     | $          | 1,541                       |       | $ | 1,541 |   |
| Additions                            |       | 246                      |       | 262                      |       | 1,044                       |       |
| Claims and  reversals                |       | (306                     | )          | (307                     | )          | (1,075                      | )          |
| Foreign currency  translation impact |       | (17                      | )          | 36                       |       | (59                         | )          |
| Ending balance                       |       | $                        | 1,374      |                     | $          | 1,532                       |       | $ | 1,451 |   |

 

**(6)           Long-Term Debt**

 

Our long-term debtconsists of the following:

 
| ** **                 | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------|------------|--------------------------|------------|-----------------------------|------------|
| 7.00% Senior  Notes        |       | $                        | 158,326    |                        | $          | 169,250 |   |
| Unamortized bond  discount |       | (736                     | )          | (825                        | )          |
| Domestic line of  credit   |       | 16,900                   |       | 15,000                      |       |
| Overseas lines  of credit  |       | 2,021                    |       | 3,325                       |       |
| Total                      |       | 176,511                  |       | 186,750                     |       |
| Less: current  portion     |       | (2,021                   | )          | (3,325                      | )          |
| Long-term debt             |       | $                        | 174,490    |                        | $          | 183,425 |   |

 

12

----

Table of Contents

 

Scheduled payments ofdebt are as follows:

 
| ** **         | ** ** | **March 31,  2009** | ** ** |
|--------------------|------------|--------------------------|------------|
| Remainder of  2009 |       | $                        | 2,021      |   |
| 2010               |       | —                   |       |
| 2011               |       | 16,900                   |       |
| 2012               |       | —                   |       |
| 2013               |       | —                   |       |
| Thereafter         |       | 158,326                  |       |
| Total              |       | $                        | 177,247    |   |

 

In March 2009, werepurchased $10.9 million of our Senior Notes at prices ranging from 65.5% to68.0% plus interest. As a result, we recorded a net gain on extinguishment ofdebt of $3.4 million. A summary of the transactions is as follows:

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

 

**(7)           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.) |

 

Wefair value 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 

 

13

----

Tableof Contents

 

current forward rate and the contract rate,multiplied by the notional amount of the contract, or upon the estimated fairvalue of purchased option contracts.

 

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

 
| ** **                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|---------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2009**      | ** ** | **2008**              | ** ** |
| Financial  assets:                       |       |          |       |                  |       |
| Trading  securities(1) - Level 1         |       | $             | 1,194      |                  | $          | 1,242 |   |
| Foreign currency  contracts(2) - Level 2 |       | 1,053         |       | 584                   |       |
|                                     |       | $             | 2,247      |                  | $          | 1,826 |   |
|                                     |       |          |       |                  |       |
| Financial  liabilities:                  |       |          |       |                  |       |
| Foreign currency  contracts(2) - Level 2 |       | $             | 62         |                  | $          | 55 |   |

 

----

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

 

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

 

**(8)           Stockholders’ Equity and Stock-based CompensationArrangements**

 

Our common stock iscomprised of two classes: Class A and Ordinary. With the exception ofdisparate voting power, both classes are substantially identical. Each share ofClass A common stock entitles the holder to 98 votes. Holders of Ordinarycommon stock are entitled to one vote per share. Each share of Class Acommon stock shall automatically convert to Ordinary common stock if, at anytime, that share of Class A common stock is not owned by an original Class Aholder. As of March 31, 2009 our Chairman and our Chief Executive Officercollectively owned 100% of the Class A common shares, representingapproximately 85% of the combined voting power of the Class A common stockand Ordinary common stock.

 

**EmployeeStock Purchase Plan**- We have an employee stock purchase plan (“Purchase Plan”) under whichsubstantially all employees may purchase Ordinary common stock through payrolldeductions at a purchase price equal to 85% of the lower of the fair marketvalues as of the beginning or end of each twelve-month offering period. Stockpurchases under the Purchase Plan are limited to 5% of an employee’s annualbase earnings. We have reserved 400,000 shares of common stock for issuanceunder this plan.

 

**StockPlans** - The 2006 Stock Plan provides for the granting of 1,000,000 stockoptions (including incentivestock options and non-qualified stock options), stock appreciation rights andother stock awards to certain key employees, consultants and advisors. Ourstock options generally have five-year vesting terms and ten-year option terms.

 

Our 1996 Stock Plan has expired but still has vested and unvestedoptions outstanding. We reached our registered share limitation in early 2007,and had previously reserved 721,750 treasury stock shares to issue under thisplan. We have since issued 98,974 shares of treasury stock to cover optionsexercised, with 384,376 remaining options outstanding. Since in most instancesthe average cost of the treasury stock exceeded the price of the optionsexercised, the difference between the proceeds received and the average cost ofthe treasury stock issued resulted in a reduction of retained earnings. Thisreduction was less than $0.1 million for the three months ended March 31,2008. There were no stock option exercises during the three months ended March 31,2009.

 

14

----

Tableof Contents

 

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

 
| ** **                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                        | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Compensation  cost included in basic and diluted income per share |       | $                                                | 0.03       |   | $ | 0.03 |   |
| Stock-based  compensation expense                                 |       | 269                                              |       | 245 |   |
| Income tax  benefit                                               |       | 41                                               |       | 27 |   |
|                                                                   |            |                                                  |            |  |  |  |  |

 

We measured the fairvalue of options on their grant date, including the valuation of the optionfeature implicit in our Purchase Plan, using the Black-Scholes option-pricingmodel. The risk-free interest rate is based on the weighted-average of U.S.Treasury rates over the expected life of the stock option or the contractuallife of the option feature in the Purchase Plan. The expected life of a stockoption is based on historical data of similar option holders. We havesegregated our employees into two groups based on historical exercise andtermination behavior. The expected life of the option feature in the PurchasePlan is the same as its contractual life. Expected volatility is based onhistorical volatility of our stock over the expected life of the option, as ouroptions are not readily tradable.

 

Key assumptions used toapply this pricing model to the 2006 Stock Plan are as follows:

 
| ** **                                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **2008**                               | ** ** |
| Risk free  interest rate                   |       | 2.9%                                   |       |
| Weighted average  expected life (in years) |       | 7.1                                    |       |
| Expected  volatility of underlying stock   |       | 25.9%                                  |       |
| Expected  dividends                        |       | n/a                                    |       |
| Weighted average  fair value               |       | $10.01                                 |       |

 

There were no optionsgranted during the three months ended March 31, 2009. The following tablesets forth information regarding the Stock Plans:

 

15

----

Tableof Contents

 
| ** **                           | ** ** | **Number of  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Remaining  Contractual  Life  (in years)** | ** ** | **Aggregate  Intrinsic  Value  (not in 000s)** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------|------------|
| Outstanding at  January 1, 2009 |       | 807,216                |       | $                                       | 24.92      |                                         |       |                                           |       |   |
| Granted                              |       | —                 |       | —                                  |       |                                         |       |                                           |       |
| Exercised                            |       | —                 |       | —                                  |       |                                         |       |                                           |       |
| Forfeited                            |       | (7,440                 | )          | 27.70                                   |       |                                         |       |                                           |       |
| Outstanding at  March 31, 2009  |       | 799,776                |       | $                                       | 24.90      |                                         | 6.4        |                                           | $          | — |   |
| Exercisable at  March 31, 2009  |       | 420,576                |       | $                                       | 21.92      |                                         | 4.2        |                                           | $          | — |   |

 

There were no optionsexercised during the three months ended March 31, 2009. The totalintrinsic value of the options exercised during the three months ended March 31,2008 was less than $0.1 million.

 

As of March 31,2009, there was $3.3 million of unrecognized compensation cost related tononvested share-based compensation arrangements granted under the Stock Plan.This compensation cost is expected to be recognized over a period of 3.8 years.

 

As reported in theconsolidated statements of cash flows, cash received from option exercisesunder the Stock Plans for the period ended March 31, 2008 was $0.1million. Cash flows from tax benefits resulting from tax deductions in excessof the compensation cost recognized for stock-based awards under a fair valuebasis (excess tax benefits) are required to be classified as a cash flow fromfinancing activities. Accordingly, for the period ended March 31, 2008,less than $0.1 million of excess tax benefits has been classified as an outflowfrom operating activities and an inflow from financing activities in thestatement of cash flows. For the period ended March 31, 2008, less than$0.1 million of tax benefit from stock option exercises is presented as a cashinflow from operating activities.

 

16

----

Table of Contents

 

The following tables setforth information regarding the Purchase Plan:

 
| ** **                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                   | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| Risk-free  interest rate                                     |       | 2.2%                                   |       | 4.8% |   |
| Weighted-average  expected life of option feature (in years) |       | 1.0                                    |       | 1.0 |   |
| Expected  volatility of underlying stock                     |       | 25.3%                                  |       | 25.8% |   |
| Expected  dividends                                          |       | n/a                                    |       | n/a |   |
| Weighted-average  fair value of option feature               |       | $6.71                                  |       | $8.69 |   |

 
| ** **                           | ** ** | **Number of  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Remaining  Contractual  Life  (in years)** | ** ** | **Aggregate  Intrinsic  Value  (not in 000s)** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------|------------|
| Outstanding at  January 1, 2009 |       | 11,828                 |       | $                                       | 23.36      |                                         |       |                                           |       |   |
| Shares  subscribed                   |       | 7,049                  |       | 23.36                                   |       |                                         |       |                                           |       |
| Exercised                            |       | —                 |       | —                                  |       |                                         |       |                                           |       |
| Canceled                             |       | (612                   | )          | 23.36                                   |       |                                         |       |                                           |       |
| Outstanding at  March 31, 2009  |       | 18,265                 |       | $                                       | 23.36      |                                         | 0.3        |                                           | $          | 33,521 |   |
|                                      |            |                        |            |                                         |            |                                              |            |                                                |            |  |  |

 

17

----

Table of Contents

 

**(9)           OtherIncome, Net**

 
| ** **                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|
| ** **                          | ** ** | **2009**                              | ** ** | **2008** | ** ** |
|                                |       |                                  |       |   |   |
| West 57th Street  building income   |       | $                                     | (1,505     | ) | $ | (1,163 | ) |
| West 57th Street  building expenses |       | 1,215                                 |       | 821 |   |
| Foreign exchange  gain, net         |       | (286                                  | )          | (47 | ) |
| Miscellaneous                       |       | 18                                    |       | 352 |   |
| Other income,  net                  |       | $                                     | (558       | ) | $ | (37 | ) |

 

Priorto January 1, 2009, our building on West 57th Street in New York City was under a masterlease agreement whereby all of our interest was leased back to the owner of theland. Rental expense on the land and rental income associated with the masterlease were included, along with other real estate costs, in Other Income, Net.As of January 1, 2009, this master lease agreement is no longer in effect,and we have engaged an outside company to manage this property. West 57th Street building income includesall rent and other income attributable to the property, and West 57th Street building expenses includeland lease, real estate taxes, depreciation, and other building costs. Since weretain a portion of the leasable space for our own retail store use, we haveincluded a ratable portion of the building expenses within sales and marketingon the Condensed Consolidated Statement of Operations.

 

**(10)         Commitmentsand Contingent Liabilities**

 

Weare involved in certain legal proceedings regarding environmental matters,which are described below. Further, in the ordinary course of business, we areparty to various legal actions that we believe are routine in nature andincidental to the operation of our business. While the outcome of such actionscannot be predicted with certainty, we believe that, based on our experience indealing with these matters, their ultimate resolution will not have a materialadverse impact on our business, financial condition, results of operations orprospects.

 

Certainenvironmental 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.

 

18

----

Tableof Contents

 

We are continuing anexisting environmental remediation plan at a facility we acquired in 2000 andsubsequently sold. We estimate our costs, which approximate $0.7 million, overa 12-year period. We have accrued approximately $0.6 million for the estimatedremaining cost of this remediation program, which represents the present valuetotal cost using a discount rate of 4.54%. A summary of expected payments associatedwith this project is as follows:

 
| ** **        | ** ** | **Environmental  Payments** | ** ** |
|-------------------|------------|-----------------------------|------------|
| Remainder of 2009 |       | $                           | 43         |   |
| 2010              |       | 61                          |       |
| 2011              |       | 61                          |       |
| 2012              |       | 61                          |       |
| 2013              |       | 61                          |       |
| Thereafter        |       | 423                         |       |
| Total             |       | $                           | 710        |   |

 

In2004, we acquired two manufacturing facilities from G. Leblanc Corporation, nowGrenadilla, Inc. (“Grenadilla”), for which environmental remediation planshad already been established. In connection with the acquisition, we assumedthe existing accrued liability of approximately $0.8 million for the cost ofthese remediation activities. Based on a review of past and ongoinginvestigatory and remedial work by our environmental consultants, anddiscussions with state regulatory officials, as well as periodic sampling, weestimate the remaining costs of such remedial plans to be $1.9 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, 2009. We have reached an agreement withGrenadilla whereby environmental costs are paid directly out of the escrow.Should the escrow be reduced to zero, we would seek further indemnificationfrom Grenadilla for these additional costs. However, we cannot be assured thatwe will be able to recover such costs.

 

Basedon our past experience and currently available information, the mattersdescribed above and our other liabilities and compliance costs arising underenvironmental laws are not expected to have a material impact on our capitalexpenditures, earnings or competitive position in an individual year. However,some risk of environmental liability is inherent in the nature of our currentand former business and we may, in the future, incur material costs to meetcurrent or more stringent compliance, cleanup, or other obligations pursuant toenvironmental laws.

 

19

----

Table of Contents

 

**(11)         Retirement Plans**

 

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

 
| ** **                           | ** ** | **Domestic Plan**                      | ** ** | **Foreign Plans**                      | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** | **Three Months Ended  March 31,** | ** ** |
| ** **                           | ** ** | **2009**                               | ** ** | **2008**                               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service cost                         |       | $                                      | 104        |                                   | $          | 147 |   | $ | 133 |   | $ | 203 |   |
| Interest cost                        |       | 864                                    |       | 854                                    |       | 406 |   | 482 |   |
| Expected return  on plan assets      |       | (875                                   | )          | (1,296                                 | )          | (67 | ) | (101 | ) |
| Amortization of  prior service cost  |       | 51                                     |       | 40                                     |       | — |   | — |   |
| Amortization of  net loss            |       | 608                                    |       | 12                                     |       | 2 |   | 24 |   |
| Net periodic  pension cost (benefit) |       | $                                      | 752        |                                   | $          | (243 | ) | $ | 474 |   | $ | 608 |   |

 

We provide postretirementhealth care and life insurance benefits to certain eligible hourly retirees andtheir dependents. The components of net periodic postretirement benefit costfor these benefits are as follows:

 
| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| Service cost                         |       | $                                      | 1          |   | $ | 2 |   |
| Interest cost                        |       | 17                                     |       | 27 |   |
| Amortization of  prior service costs |       | (13                                    | )          | (13 | ) |
| Recognized loss                      |       | —                                 |       | 8 |   |
| Net periodic  postretirement cost    |       | $                                      | 5          |   | $ | 24 |   |

 

Basedon federal laws and regulations, we are not required to make a contribution toour domestic pension plan in 2009. We are currently evaluating what amount, ifany, we intend to contribute to this plan in 2009. Our anticipatedcontributions to the pension plan of our U.K. subsidiary approximate $0.7million for the current year. As of March 31, 2009, we have madecontributions of $0.2 million to this plan. The pension plans of our Germanentities do not hold any assets and use operating cash to pay participantbenefits as they become due. Expected 2009 benefit payments under these plansare $1.2 million, of which $0.3 million was paid through March 2009.

 

20

----

Table of Contents

 

**(12)         Segment Information**

 

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

 

The following tablespresent information about our operating segments for the three months ended March 31,2009 and 2008:

 

**Three monthsended 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 | ) |
|                                  |            |                   |            |                  |            |           |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Three monthsended 2008**

 
| ** **                       | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Other** | ** ** | **Consol** | ** ** |
|----------------------------------|------------|-------------------|------------|------------------|------------|-----------|------------|------------|------------|
| ** **                       | ** ** | **U.S.**          | ** ** | **Germany**      | ** ** | **Other** | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Europe** | ** ** | **Total** | ** ** | **& Elim** | ** ** | **Total** | ** ** |
| Net sales to  external customers |       | $                 | 27,294     |             | $          | 14,931    |       | $          | 12,461     |   | $ | 54,686 |   | $ | 37,380 |   | $ | 2,120 |   | $ | 39,500 |   | $ | — |   | $ | 94,186 |   |
| Income (loss)  from operations   |       | 1,288             |       | 3,648            |       | 856       |       | 5,792      |       | (11 | ) | (238 | ) | (249 | ) | (739 | ) | 4,804 |   |
|                                  |            |                   |            |                  |            |           |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

21

----

Tableof Contents

 

**ITEM 2****                   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**(TabularAmounts in Thousands Except Percentages, Share and Per Share Data)**

 

**Introduction**

 

We are a world leader inthe design, manufacture, marketing, and distribution of high quality musicalinstruments. Our piano division concentrates on the high-end grand pianosegment of the industry, handcrafting Steinway pianos in New York and Germany.We also offer upright pianos and two mid-priced lines of pianos under theBoston and Essex brand names. We are also an online retailer of classicalmusic. Through our band division, we are the largest domestic producer of bandand orchestral instruments and offer a complete line of brass, woodwind,percussion and string instruments and related accessories with well-known brandnames such as Bach, Selmer, C.G. Conn, Leblanc, King, and Ludwig. We sell ourproducts through dealers and distributors worldwide. Our piano customer 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.

 

**CriticalAccounting Policies**

 

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

 

Management is required tomake certain estimates and assumptions during the preparation of theconsolidated financial statements. These estimates and assumptions impact thereported amount of assets and liabilities and disclosures of contingent assetsand liabilities as of the date of the consolidated financial statements. Estimatesand assumptions are reviewed periodically and the effects of revisions arereflected in the consolidated financial statements in the period they aredetermined to be necessary. Actual results could differ from those estimates.

 

The significant accountingpolicies are described in Note 2 of the Notes to Consolidated FinancialStatements included in the Company’s 2008 Annual Report on Form 10-K. Notall of these significant accounting policies require management to makedifficult, subjective or complex judgments or estimates. However, managementconsiders the following to be critical accounting policies 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 15 customers. As a result, weexperience some inherent concentration of credit risk in our accountsreceivable due to its composition and the relative proportion of large customerreceivables to the total. This is especially true at our band division, which characteristicallyhas a majority of our consolidated accounts receivable balance. We consider thecredit health and solvency of our customers when developing our receivablereserve estimates.

 

22

----

Tableof Contents

 

**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-livedAssets**

 

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

 

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

 

**Pensions and Other PostretirementBenefit Costs**

 

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

 

**Income Taxes**

 

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

 

23

----

Tableof Contents

 

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

 

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

 

**Stock-Based Compensation**

 

Wegrant stock-based compensation awards which generally vest over a specifiedperiod. When determining the fair value of stock options and subscriptions topurchase shares under the Purchase Plan, we use the Black-Scholes optionvaluation model, which requires input of certain management assumptions,including dividend yield, expected volatility, risk-free interest rate,expected life of stock options granted during the period, and the lifeapplicable to the Purchase Plan subscriptions. The estimated fair value of theoptions and subscriptions to purchase shares, and the resultant stock-basedcompensation expense, can fluctuate based on the assumptions used bymanagement.

 

**Environmental Liabilities**

 

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

 

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

 

**Forward-Looking Statements**

 

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

 

24

----

Tableof Contents

 

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

 

**Results of Operations**

 

Three Months Ended March 31,2009 Compared to Three Months Ended March 31, 2008

* *
| ** **                          | ** ** | **Three Months Ended March 31,** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **2009**                              | ** ** | ** ** | ** ** | **2008**   | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
|                                |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Net sales                           |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Band                                |       | $                                     | 32,712     |       |       |       | $          | 39,500 |   |   |   | (6,788 | ) | (17.2 | ) |
| Piano                               |       | 37,279                                |       |       |       | 54,686     |       |   |   | (17,407 | ) | (31.8 | ) |
| Total sales                         |       | 69,991                                |       |       |       | 94,186     |       |   |   | (24,195 | ) | (25.7 | ) |
|                                |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Cost of sales                       |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Band                                |       | 25,867                                |       |       |       | 30,975     |       |   |   | (5,108 | ) | (16.5 | ) |
| Piano                               |       | 25,515                                |       |       |       | 35,819     |       |   |   | (10,304 | ) | (28.8 | ) |
| Total cost of  sales                |       | 51,382                                |       |       |       | 66,794     |       |   |   | (15,412 | ) | (23.1 | ) |
|                                |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Gross profit                        |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Band                                |       | 6,845                                 |       | 20.9%      |       | 8,525      |       | 21.6% |   | (1,680 | ) | (19.7 | ) |
| Piano                               |       | 11,764                                |       | 31.6%      |       | 18,867     |       | 34.5% |   | (7,103 | ) | (37.6 | ) |
| Total gross  profit                 |       | 18,609                                |       |       |       | 27,392     |       |   |   | (8,783 | ) | (32.1 | ) |
|                                |       | 26.6%                                 |       |       |       | 29.1%      |       |   |   |   |   |   |   |
|                                |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Operating  expenses                 |       | 18,660                                |       |       |       | 22,588     |       |   |   | (3,928 | ) | (17.4 | ) |
| (Loss) income  from operations      |       | (51                                   | )          |       |       | 4,804      |       |   |   | (4,855 | ) | (101.1 | ) |
|                                |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Other income,  net                  |       | (558                                  | )          |       |       | (37        | )          |   |   | (521 | ) | 1,408.1 |   |
| Net gain on  extinguishment of debt |       | (3,434                                | )          |       |       | (636       | )          |   |   | (2,798 | ) | 439.9 |   |
| Net interest  expense               |       | 2,522                                 |       |       |       | 2,157      |       |   |   | 365 |   | 16.9 |   |
| Non-operating  (income) expenses    |       | (1,470                                | )          |       |       | 1,484      |       |   |   | (2,954 | ) | (199.1 | ) |
|                                |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Income before  income taxes         |       | 1,419                                 |       |       |       | 3,320      |       |   |   | (1,901 | ) | (57.3 | ) |
|                                |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Income tax  provision               |       | 414                                   |       | 29.2%      |       | 1,345      |       | 40.5% |   | (931 | ) | (69.2 | ) |
|                                |       |                                  |       |       |       |       |       |   |   |   |   |   |   |
| Net income                          |       | $                                     | 1,005      |       |       |       | $          | 1,975 |   |   |   | (970 | ) | (49.1 | ) |

 

**Overview***-*Piano division revenue was adverselyaffected by the current economic crisis as well as dealer credit restrictions.Piano margins were negatively impacted by lower production volume at both ofour manufacturing facilities. Band division sales decreased as a result ofsimilar credit restrictions and dealers’ tendency to only order products thatcan be resold quickly. Band margins were adversely impacted by increasedpension and postretirement benefit costs, which largely resulted from pensionasset portfolio deterioration.

 

Piano divisionresults include the operations of our online music division.

 

 

25

----

Table of Contents

 

**Net Sales** - Net sales deteriorated 25.7% in thecurrent period. Currently, many of our piano dealers are experiencingdifficulty obtaining financing and, consequently, are utilizing cash to paydown existing credit lines rather than replenishing inventories. Band dealersare refurbishing and reutilizing rental pool instruments instead of purchasingnew ones in order to generate and preserve cash. This has resulted in decreasedorders and shipments at both the piano and band divisions.

 

Domestically,piano division revenues dropped $8.5 million despite $2.1 million inincremental online music sales. Domestic Steinway grand unit shipmentsdecreased 43% while total unit shipments decreased 36%, reflecting fewershipments at both the wholesale and retail level. However, retail sales wereatypically high in the prior period due to large institutional sales. Overseas,piano division revenues decreased $9.0 million, which includes a $2.0 millionreduction attributable to foreign currency translation. Overseas Steinway grandunit shipments decreased 38% and total unit shipments decreased 36%, thoughretail shipments improved over the year-ago period.

 

Band divisionrevenues were $6.8 million lower, correlating to the 19% decrease in unit shipments.Sales of accessories and student instruments deteriorated less thanintermediate and professional level instruments. Dealers continue to purchaseconservatively, only buying items for which there is an immediate need.

 

**GrossProfit***-* Gross profit declined due to lower salesand gross margins at both divisions. Domestically, piano margins dropped from31.9% to 25.6% largely due to the reduction in production, which wasimplemented in an effort to control inventory levels. The decrease was caused bya lower daily production rate, coupled with $0.3 million in unabsorbed overheadresulting from one week of unplanned factory shutdown. Although production wasalso reduced at our factory in Germany, the resultant adverse impact was offsetby improved retail sales in that country. Accordingly, overseas marginsremained stable.

 

The band division’sgross margin fell from 21.6% to 20.9% during the period. Pension costsincreased $0.8 million but were partially offset by the absence of facilityrationalization costs, which were $0.4 million in the year-ago period.Production was lower, resulting in unabsorbed overhead, but this was mitigatedby a shift in mix to higher margin accessories and certain student instruments.

 

**OperatingExpenses** -Operating expenses decreased $3.9 million, or 17%, largely due to the $2.8million savings in sales and marketing expenses. These savings resulted in partfrom lower commissions and bonuses, which are correlated to sales, as well asdecreased spending for trade shows and advertising. General and administrativecosts were lowered by $1.0 million through reductions in headcount, wages,benefits, and outside services.

 

**Non-operating(Income) Expenses**- Non-operating (income) expenses improved $3.0 million due to the extinguishmentof $10.9 million of our Senior Notes, which resulted in a $3.4 million net gain.Higher net interest expense, which resulted from lower interest income on banddivision financed receivables, was partially offset by an increase in foreignexchange gains of $0.2 million.

 

**IncomeTaxes** -**Our effective tax rate of 29.2% is comprised ofapproximately 8% relating primarily to assessments from taxing authorities anduncertain tax positions and 21% associated with current year income. As aresult of the ratio of income generated overseas to domestic income, wecurrently anticipate no U.S. federal tax liability. This, coupled with nominalanticipated state taxes and an average effective rate of 33% on income taxedoverseas, has resulted in an abnormally low estimated tax rate of 21% oncurrent period earnings. This rate could be materially impacted by shifts insources of income during the remainder of 2009.

 

26

----

Table of Contents

 

**Liquidityand Capital Resources**

 

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

 

Our statements ofcash flows for the three months ended March 31, 2009 and 2008 aresummarized as follows:

 
| ** **                                                                   | ** ** | **2009** | ** ** | **2008** | ** ** | **Change** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Net income:                                                                  |       | $        | 1,005      |     | $          | 1,975      |       | $ | (970 | ) |
| Changes in  operating assets and liabilities                                 |       | (9,622   | )          | (5,883   | )          | (3,739     | )          |
| Other  adjustments to reconcile net income to cash from operating activities |       | (483     | )          | 1,629    |       | (2,112     | )          |
| Cash flows from  operating activities                                        |       | (9,100   | )          | (2,279   | )          | (6,821     | )          |
|                                                                         |       |     |       |     |       |       |       |
| Cash flows from  investing activities                                        |       | (1,096   | )          | (760     | )          | (336       | )          |
|                                                                         |       |     |       |     |       |       |       |
| Cash flows from  financing activities                                        |       | (6,491   | )          | (4,999   | )          | (1,492     | )          |
|                                                                              |            |          |            |          |            |            |            |  |  |  |

 

Cash flows used foroperating activities were $6.8 million more than a year ago. Cash provided byaccounts receivable increased $2.9 million due to lower sales as well as heightenedcredit restrictions and collection efforts. Cash used for accounts payableincreased $6.3 million, reflecting payments to vendors, as well as lowerpayable balances resulting from reduced spending and fewer purchases due to ourlower sales volume. Major non-cash adjustments include $3.4 million net gain onextinguishment of debt, which is deducted in adjustments to reconcile netincome to cash flows from operating activities.

 

Cash flows usedfor investing activities increased $0.3 million despite comparable capitalexpenditures. In the prior period, we recorded a $0.3 million gain on the saleof non-manufacturing assets overseas. We expect capital expenditures to be inthe range of $3.0 to $5.0 million for normal capital projects, and an additional$2.0 to $3.0 million for improvements and renovations at our building in NewYork City.

 

Cash flows usedfor financing activities increased $1.5 million due to the extinguishment of$10.9 million of our Senior Notes, as compared to $5.8 million in the year-agoperiod. This was partially offset by the shift in net borrowings on our creditfacilities of $0.9 million.

 

**BorrowingActivities and Availability -**We have a domestic credit facility with asyndicate of domestic lenders (the “Credit Facility”) with a potentialborrowing capacity of $110.0 million in revolving credit loans, which expireson September 29, 2011. It provides for periodic borrowings at eitherLondon Interbank Offering Rate (“LIBOR”) plus a range from 1.25% to 1.75%, oras-needed borrowings at an alternate base rate, plus a range from 0.00% to0.25%; both ranges depend upon borrowing availability at the time of borrowing.The Credit Facility is collateralized by our domestic accounts receivable,inventory, and property, plant and equipment. As of March 31, 2009, therewas $16.9 million outstanding on our Credit Facility, and borrowingavailability, net of letters of credit, was approximately $86.1 million.

 

We also have certainnon-domestic credit facilities originating from two German banks that providefor borrowings by foreign subsidiaries of up to €20.1 million ($26.7 million atthe March 31, 2009 exchange rate), net of borrowing restrictions of €2.4million ($3.2 million at the March 31, 2009 exchange rate) and are payable on December 31,2010. These borrowings are collateralized by most of the assets of theborrowing subsidiaries. 

 

27

----

Table of Contents

 

A portion of the loans can be converted into a maximum of £0.5 million($0.7 million at the March 31, 2009 exchange rate) for use by our U.K. branch and ¥300million ($3.0 million at the March 31, 2009 exchange rate) for use by our Japanesesubsidiary. Our Chinese subsidiary also has the ability to convert theequivalent of up to €2.5 million into U.S. dollars or Chinese yuan ($3.3million at the March 31, 2009 exchange rate). Euro loans bear interest at rates ofEuro Interbank Offered Rate (“EURIBOR”) plus a margin determined at the time ofborrowing. Margins fluctuate based on the loan amount and the borrower’s bankrating. The remaining demand borrowings bear interest rates of LIBOR plus 0.8%for British pound loans, LIBOR plus 1.0% for U.S. dollar loans of our Chinesesubsidiary, and Tokyo Interbank Offered Rate (“TIBOR”) plus 1.1% for Japaneseyen loans. We had no outstanding borrowings as of March 31, 2009 on these credit facilities.

 

Our Japanese subsidiaryalso maintains a separate revolving loan agreement that provides additionalborrowing capacity of up to ¥460 million ($4.6 million at the March 31,2009 exchange rate)based on eligible inventory balances. The revolving loan agreement bearsinterest at an average 30-day TIBOR rate plus 0.9% (outstanding borrowings at1.3% at March 31, 2009) and expires on January 31, 2010. As of March 31,2009, we had $2.0million outstanding on this revolving loan agreement.

 

At March 31,2009, our totaloutstanding indebtedness amounted to $177.2 million, consisting of $158.3million of 7.00% Senior Notes, $16.9 million on our domestic line of credit,and $2.0 million of notes payable to foreign banks.

 

All of our debt agreementscontain covenants that place certain restrictions on us, including our abilityto incur additional indebtedness, to make investments in other entities, andlimitations on cash dividend payments. We were in compliance with all suchcovenants as of March 31, 2009 and do not anticipate any compliance issuesin the future. Our bond indenture contains limitations, based on net income(among other things), on the amount of discretionary repurchases we may make ofour Ordinary common stock. Our intent and ability to repurchase additionalOrdinary common stock either directly from shareholders or on the open marketis directly affected by this limitation. In May 2008 we announced a sharerepurchase program, which permits us to make discretionary purchases of up to$25.0 million of our Ordinary common stock. We have not made any repurchases in2009.

 

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

 

We donot have any current plans or intentions that will have a material adverseimpact on our liquidity in 2009, although we may consider acquisitions that mayrequire funding from operations or from our credit facilities. 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 2009.

 

28

----

Table of Contents

 

**ContractualObligations** - Thefollowing table provides a summary of our contractual obligations at March 31,2009.

 
| ** **                       | ** ** | **Payments due by period** | ** ** |
|----------------------------------|------------|----------------------------|------------|
| ** **                       | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **1 - 3 years** | ** ** | **3 - 5 years** | ** ** | **More than  5 years** | ** ** |
|                             |       |                       |       |   |   |   |   |   |   |   |   |
| **Contractual  Obligations**     |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt  (1)              |       | $                          | 232,512    |   | $ | 13,427 |   | $ | 39,516 |   | $ | 179,569 |   | $ | — |   |
| Capital leases                   |       | 44                         |       | 26 |   | 18 |   | — |   | — |   |
| Operating leases  (2)            |       | 260,826                    |       | 5,465 |   | 9,181 |   | 7,542 |   | 238,638 |   |
| Purchase  obligations (3)        |       | 19,464                     |       | 19,108 |   | 356 |   | — |   | — |   |
| Other long-term  liabilities (4) |       | 43,525                     |       | 5,459 |   | 6,962 |   | 4,960 |   | 26,144 |   |
| Total                            |       | $                          | 556,371    |   | $ | 43,485 |   | $ | 56,033 |   | $ | 192,071 |   | $ | 264,782 |   |

 

----

**Notes to Contractual Obligations:**
| (1)    |   | Long-term debt  represents long-term debt obligations, the fixed interest on our Senior Notes,  and the variable interest on our other loans. We estimated the future  variable interest obligation using the applicable March 31,  2009 rates. The  nature of our long-term debt obligations, including changes to our long-term  debt structure, is described more fully in the “Borrowing Availability and  Activities” section of “Liquidity and Capital Resources.”                                                               |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (2)    |   | Approximately  $248.3 million of our operating lease obligations are attributable to the  land lease associated with the purchase of Steinway Hall, which has eighty  eight years remaining. The rest is attributable to the leasing of other  facilities and equipment.                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (3)    |   | Purchase  obligations consist of firm purchase commitments for raw materials, finished  goods, and equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (4)    |   | Our other  long-term liabilities consist primarily of the long-term portion of our  pension obligations, which are described in Note 11 in the Notes to Condensed  Consolidated Financial Statements included within this filing, liabilities  relating to uncertain tax positions which are expected to be settled within  one year, and obligations under employee and consultant agreements. We have  not included $0.5 million of liabilities relating to uncertain tax positions  within this schedule due to the uncertainty of the payment date, if any. |

 

**Recent Accounting Pronouncements**

 

In December 2007, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 141R, “Business Combinations,” a revision to SFAS No. 141, “BusinessCombinations” (“SFAS 141R”), which provides revised guidance for recognitionand measurement of identifiable assets and goodwill acquired, liabilitiesassumed, and any noncontrolling interest in the acquiree at fair value. SFAS141R also establishes disclosure requirements to enable the evaluation of thenature and financial effects of a business combination. We applied SFAS 141R toour acquisition of a retail store in Dusseldorf, Germany.

 

In December 2007, theFASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements — an amendment of ARB No. 51” (“SFAS 160”). SFAS160 establishes accounting and reporting standards for ownership interests insubsidiaries held by parties other than the parent. Specifically, SFAS 160requires the presentation of noncontrolling interests as equity in theConsolidated Statement of Financial Position, and separate identification andpresentation in the Consolidated Statement of Operations of net incomeattributable to the entity and the noncontrolling interest. It also establishesaccounting and reporting standards regarding deconsolidation and changes in aparent’s ownership interest. The provisions of SFAS 160 are generally requiredto be applied prospectively, except for the presentation and disclosurerequirements, which must be applied retrospectively. We adopted SFAS 160 on January 1,2009. The adoption of SFAS 160 did not have a material impact on ourconsolidated financial statements.

 

29

----

Table of Contents

 

In March 2008, the FASBissued SFAS No. 161, “Disclosures about Derivative Instruments and HedgingActivities — an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS161 amends and expands the disclosure requirements for derivative instrumentsand hedging activities, with the intent to provide users of financialstatements with an enhanced understanding of how and why an entity usesderivative instruments, how derivative instruments and related hedged items areaccounted for, and how derivative instruments and related hedged items affectan entity’s financial statements. We adopted SFAS 161 on January 1, 2009.Its adoption did not have any impact on our consolidated financial statements.

 

InApril 2009, the FASB adopted Staff Position (“FSP”) SFAS 107-b andAccounting Principles Board (APB) Opinion No. 28-a, “Interim Disclosuresabout Fair Value of Financial Instruments” (SFAS 107-b and APB 28-a). ThisFSP amends FASB Statement No. 107, “Disclosures about Fair Values ofFinancial Instruments,” to require disclosures about fair value of financialinstruments in interim financial statements as well as in annual financialstatements. The proposal also amends APB Opinion No. 28, “InterimFinancial Reporting,” to require those disclosures in all interim financialstatements. This FSP is effective for interim periods ending after June 15,2009, but early adoption is permitted for interim periods ending after March 15,2009. We will adopt SFAS 107-b and APB 28 and provide the additionaldisclosure requirements in our Quarterly Report on Form 10-Q for theperiod ended June 30, 2009.

 

**ITEM 3****          ****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

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

 

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

 

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

 

**ITEM 4****          ****CONTROLS AND PROCEDURES**

 

Our principal executive officer and our principalfinancial officer, after evaluating together with management the design andoperation of our disclosure controls and procedures, have concluded that ourdisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) were effective as of March 31, 2009, the end of the periodcovered by this report. In designing disclosure controls and procedures,management recognizes that any controls, no matter how well designed andoperated, can only provide reasonable, not absolute, assurance of achieving thedesired control objectives.

 

30

----

Tableof Contents

 

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.

 

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

 

(i)    Exhibits

 

31.1 Certification of the Principal Executive Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2 Certification of the Principal Financial Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1 Certification of the Principal Executive Officerpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002

 

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

 

31

----

Table of Contents

 

**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 6, 2009 |                                                         |

 

32

----