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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

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

 

**COMMISSIONFILE NUMBER 001-11911**

 

**STEINWAYMUSICAL INSTRUMENTS, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Number of sharesof Common Stock issued and outstanding as of August 4, 2009**:**

 
|   | Class A |   | 477,952   |
|--------|--------------|--------|-----------|
|   | Ordinary     |   | 8,117,816 |
|   | Total        |   | 8,595,768 |

 

 

 

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**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES**

**FORM 10-Q**

**INDEX**

 
| **PART I.**  | ** ** | **FINANCIAL INFORMATION**                                                                               |   |   |
|-------------------|------------|---------------------------------------------------------------------------------------------------------|--------|--------|
| ** **        | ** ** |                                                                                                    |   |   |
| **Item 1.**       | ** ** | **Condensed Consolidated Financial  Statements:**                                                       |   |   |
|              |       |                                                                                                    |   |   |
|              |       | Condensed Consolidated Statements of Operations Three  and six months ended June 30, 2009 and 2008 |   | 3      |
|              |       |                                                                                                    |   |   |
|              |       | Condensed Consolidated Balance Sheets June 30,  2009 and December 31, 2008                    |   | 4      |
|              |       |                                                                                                    |   |   |
|              |       | Condensed Consolidated Statements of Cash Flows Six  months ended June 30, 2009 and 2008           |   | 5      |
|              |       |                                                                                                    |   |   |
|              |       | Condensed Consolidated Statement of Stockholders’  Equity Six months ended June 30, 2009      |   | 6      |
|              |       |                                                                                                    |   |   |
|              |       | Notes to Condensed Consolidated Financial Statements                                                    |   | 7      |
| ** **        | ** ** |                                                                                                    |   |   |
| **Item 2.**       | ** ** | **Management’s Discussion and Analysis of  Financial Conditionand Results of  Operations**         |   | 23     |
| ** **        | ** ** |                                                                                                    |   |   |
| **Item 3.**       | ** ** | **Quantitative and Qualitative  Disclosures about Market Risk**                                         |   | 33     |
| ** **        | ** ** |                                                                                                    |   |   |
| **Item 4.**       | ** ** | **Controls and Procedures**                                                                             |   | 34     |
| ** **        | ** ** | ** **                                                                                              |   |   |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                   |   |   |
| ** **        | ** ** | ** **                                                                                              |   |   |
| **Item 4.**       | ** ** | **Submission of Matters to a Vote of  Security Holders**                                                |   | 34     |
| ** **        | ** ** | ** **                                                                                              |   |   |
| **Item 6.**       | ** ** | **Exhibits**                                                                                            |   | 35     |
| ** **        | ** ** | ** **                                                                                              |   |   |
|              | ** ** | **Signatures**                                                                                          |   | 36     |

 

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**PART I****                 ****FINANCIAL INFORMATION**

 

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

 

**STEINWAY MUSICAL INSTRUMENTS, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**Unaudited**

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

 
| ** **                          | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                          | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  sales                          |       | $                                     | 72,113     |                                | $          | 98,521 |   | $ | 142,104 |   | $ | 192,707 |   |
| Cost  of sales                      |       | 53,215                                |       | 69,476                              |       | 104,597 |   | 136,270 |   |
|                                |       |                                  |       |                                |       |   |   |   |   |
| Gross  profit                       |       | 18,898                                |       | 29,045                              |       | 37,507 |   | 56,437 |   |
|                                |       |                                  |       |                                |       |   |   |   |   |
| Operating  expenses:                |       |                                  |       |                                |       |   |   |   |   |
| Sales  and marketing                |       | 9,860                                 |       | 11,937                              |       | 20,480 |   | 25,341 |   |
| General  and administrative         |       | 7,248                                 |       | 8,892                               |       | 14,702 |   | 17,475 |   |
| Other  operating expense            |       | 283                                   |       | 327                                 |       | 869 |   | 928 |   |
| Facility  rationalization charges   |       | —                                |       | 1,062                               |       | — |   | 1,062 |   |
| Total  operating expenses           |       | 17,391                                |       | 22,218                              |       | 36,051 |   | 44,806 |   |
|                                |       |                                  |       |                                |       |   |   |   |   |
| Income  from operations             |       | 1,507                                 |       | 6,827                               |       | 1,456 |   | 11,631 |   |
|                                |       |                                  |       |                                |       |   |   |   |   |
| Other  (income) expense, net        |       | (253                                  | )          | 54                                  |       | (811 | ) | 17 |   |
| Net  gain on extinguishment of debt |       | —                                |       | —                              |       | (3,434 | ) | (636 | ) |
| Interest  income                    |       | (420                                  | )          | (789                                | )          | (982 | ) | (1,741 | ) |
| Interest  expense                   |       | 2,936                                 |       | 3,065                               |       | 6,020 |   | 6,174 |   |
| Total  non-operating expenses       |       | 2,263                                 |       | 2,330                               |       | 793 |   | 3,814 |   |
|                                |       |                                  |       |                                |       |   |   |   |   |
| (Loss)  income before income taxes  |       | (756                                  | )          | 4,497                               |       | 663 |   | 7,817 |   |
|                                |       |                                  |       |                                |       |   |   |   |   |
| Income  tax (benefit) provision     |       | (136                                  | )          | 1,452                               |       | 278 |   | 2,797 |   |
|                                |       |                                  |       |                                |       |   |   |   |   |
| Net  (loss) income                  |       | $                                     | (620       | )                                   | $          | 3,045 |   | $ | 385 |   | $ | 5,020 |   |
|                                |       |                                  |       |                                |       |   |   |   |   |
| (Loss)  earnings per share:         |       |                                  |       |                                |       |   |   |   |   |
| Basic                               |       | $                                     | (0.07      | )                                   | $          | 0.35 |   | $ | 0.05 |   | $ | 0.59 |   |
| Diluted                             |       | $                                     | (0.07      | )                                   | $          | 0.35 |   | $ | 0.05 |   | $ | 0.58 |   |
|                                |       |                                  |       |                                |       |   |   |   |   |
| Weighted  average shares:           |       |                                  |       |                                |       |   |   |   |   |
| Basic                               |       | 8,533,259                             |       | 8,580,318                           |       | 8,533,259 |   | 8,579,761 |   |
| Diluted                             |       | 8,533,259                             |       | 8,670,687                           |       | 8,537,619 |   | 8,663,569 |   |

 

See notes tocondensed consolidated financial statements.

 

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**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**Unaudited**

**(InThousands)**

 
| ** **                                                                                                              | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Assets                                                                                                                  |       |                    |       |                        |       |
| Current assets:                                                                                                         |       |                    |       |                        |       |
| Cash                                                                                                                    |       | $                       | 45,700     |                        | $          | 44,380 |   |
| Accounts,  notes and other receivables, net of allowances of $16,039 and $15,895 in 2009  and 2008, respectively        |       | 56,066                  |       | 60,581                      |       |
| Inventories, net                                                                                                        |       | 172,475                 |       | 166,508                     |       |
| Prepaid expenses and  other current assets                                                                              |       | 12,528                  |       | 14,156                      |       |
| Deferred tax assets                                                                                                     |       | 12,343                  |       | 11,642                      |       |
| Total current assets                                                                                                    |       | 299,112                 |       | 297,267                     |       |
|                                                                                                                    |       |                    |       |                        |       |
| Property,  plant and equipment, net of accumulated depreciation of $103,495 and $99,140  in 2009 and 2008, respectively |       | 89,623                  |       | 88,708                      |       |
| Trademarks                                                                                                              |       | 16,167                  |       | 16,148                      |       |
| Goodwill                                                                                                                |       | 23,769                  |       | 23,708                      |       |
| Other intangibles, net                                                                                                  |       | 4,800                   |       | 5,568                       |       |
| Other assets                                                                                                            |       | 12,233                  |       | 12,380                      |       |
| Long-term deferred tax  assets                                                                                          |       | 9,685                   |       | 9,539                       |       |
|                                                                                                                    |       |                    |       |                        |       |
| Total assets                                                                                                            |       | $                       | 455,389    |                        | $          | 453,318 |   |
|                                                                                                                    |       |                    |       |                        |       |
| Liabilities and  stockholders’ equity                                                                              |       |                    |       |                        |       |
| Current liabilities:                                                                                                    |       |                    |       |                        |       |
| Debt                                                                                                                    |       | $                       | 960        |                        | $          | 3,325 |   |
| Accounts payable                                                                                                        |       | 13,579                  |       | 16,947                      |       |
| Other current  liabilities                                                                                              |       | 37,745                  |       | 42,282                      |       |
| Total current  liabilities                                                                                              |       | 52,284                  |       | 62,554                      |       |
|                                                                                                                    |       |                    |       |                        |       |
| Long-term debt                                                                                                          |       | 192,528                 |       | 183,425                     |       |
| Deferred tax  liabilities                                                                                               |       | 6,206                   |       | 6,263                       |       |
| Pension and other  postretirement benefit liabilities                                                                   |       | 39,180                  |       | 37,543                      |       |
| Other non-current  liabilities                                                                                          |       | 6,049                   |       | 6,452                       |       |
| Total liabilities                                                                                                       |       | 296,247                 |       | 296,237                     |       |
|                                                                                                                    |       |                    |       |                        |       |
| Commitments and  contingent liabilities                                                                                 |       |                    |       |                        |       |
|                                                                                                                    |       |                    |       |                        |       |
| Stockholders’ equity:                                                                                              |       |                    |       |                        |       |
| Common stock                                                                                                            |       | 11                      |       | 11                          |       |
| Additional paid-in  capital                                                                                             |       | 96,742                  |       | 96,180                      |       |
| Retained earnings                                                                                                       |       | 121,464                 |       | 121,079                     |       |
| Accumulated other  comprehensive loss                                                                                   |       | (11,803                 | )          | (12,917                     | )          |
| Treasury stock, at cost                                                                                                 |       | (47,272                 | )          | (47,272                     | )          |
| Total stockholders’  equity                                                                                        |       | 159,142                 |       | 157,081                     |       |
|                                                                                                                    |       |                    |       |                        |       |
| Total liabilities and  stockholders’ equity                                                                        |       | $                       | 455,389    |                        | $          | 453,318 |   |

 

See notes to condensedconsolidated financial statements.

 

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**STEINWAY MUSICAL INSTRUMENTS, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**Unaudited**

**(In Thousands)**

 
| ** **                                                                    | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                    | ** ** | **2009**                      | ** ** | **2008** | ** ** |
| Cash flows from operating activities:                                         |       |                          |       |   |   |
| Net income                                                                    |       | $                             | 385        |   | $ | 5,020 |   |
| Adjustments to reconcile net income to cash flows from operating  activities: |       |                          |       |   |   |
| Depreciation and amortization                                                 |       | 5,362                         |       | 5,465 |   |
| Amortization of bond discount                                                 |       | 77                            |       | 82 |   |
| Net gain on extinguishment of debt                                            |       | (3,434                        | )          | (636 | ) |
| Facility rationalization charges                                              |       | —                        |       | 1,062 |   |
| Stock-based compensation expense                                              |       | 562                           |       | 511 |   |
| Excess tax benefits from stock-based awards                                   |       | —                        |       | (4 | ) |
| Tax benefit from stock option exercises                                       |       | —                        |       | 5 |   |
| Deferred tax benefit                                                          |       | (679                          | )          | (1,349 | ) |
| Other                                                                         |       | 703                           |       | 724 |   |
| Changes in operating assets and liabilities:                                  |       |                          |       |   |   |
| Accounts, notes and other receivables                                         |       | 3,744                         |       | 1,389 |   |
| Inventories                                                                   |       | (7,357                        | )          | (13,111 | ) |
| Prepaid expenses and other assets                                             |       | 1,997                         |       | 483 |   |
| Accounts payable                                                              |       | (3,395                        | )          | 4,639 |   |
| Other liabilities                                                             |       | (3,946                        | )          | (2,849 | ) |
| Cash flows from operating activities                                          |       | (5,981                        | )          | 1,431 |   |
|                                                                          |       |                          |       |   |   |
| Cash flows from investing activities:                                         |       |                          |       |   |   |
| Capital expenditures                                                          |       | (2,212                        | )          | (2,426 | ) |
| Proceeds from disposals of property, plant and equipment                      |       | 24                            |       | 315 |   |
| Acquisition of businesses, net of cash acquired                               |       | (820                          | )          | (2,986 | ) |
| Cash flows from investing activities                                          |       | (3,008                        | )          | (5,097 | ) |
|                                                                          |       |                          |       |   |   |
| Cash flows from financing activities:                                         |       |                          |       |   |   |
| Borrowings under lines of credit                                              |       | 126,693                       |       | 2,066 |   |
| Repayments under lines of credit                                              |       | (109,006                      | )          | (2,162 | ) |
| Repayments of long-term debt, net of discount                                 |       | (7,280                        | )          | (4,981 | ) |
| Proceeds from issuance of common stock                                        |       | —                        |       | 108 |   |
| Purchase of treasury stock                                                    |       | —                        |       | (690 | ) |
| Excess tax benefits from stock-based awards                                   |       | —                        |       | 4 |   |
| Cash flows from financing activities                                          |       | 10,407                        |       | (5,655 | ) |
|                                                                          |       |                          |       |   |   |
| Effect of foreign exchange rate changes on cash                               |       | (98                           | )          | 1,433 |   |
|                                                                          |       |                          |       |   |   |
| Change in cash                                                                |       | 1,320                         |       | (7,888 | ) |
| Cash, beginning of period                                                     |       | 44,380                        |       | 37,304 |   |
| Cash, end of period                                                           |       | $                             | 45,700     |   | $ | 29,416 |   |
|                                                                          |       |                          |       |   |   |
| Supplemental Cash Flow Information                                            |       |                          |       |   |   |
| Interest paid                                                                 |       | $                             | 7,208      |   | $ | 6,245 |   |
| Income taxes paid                                                             |       | $                             | 2,882      |   | $ | 7,110 |   |

 

See notes to condensedconsolidated financial statements.

 

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**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’EQUITY**

**Unaudited**

**(InThousands Except Share Data)**

** **
| ** **                               | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Treasury  Stock** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|---------------------|------------|---------------------------------------|------------|
|                                     |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Balance, January 1, 2009            |       | $                 | 11         |                             | $          | 96,180                 |       | $                                           | 121,079    |                | $          | (12,917                               | )          | $ | (47,272 | ) | $ | 157,081 |   |
| Comprehensive income:                    |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Net income                               |       |              |       |                             |       | 385                    |       |                                        |       |                |       | 385                                   |       |
| Foreign currency translation adjustments |       |              |       |                             |       |                   |       | 1,114                                       |       |                |       | 1,114                                 |       |
| Total comprehensive income               |       |              |       |                             |       |                   |       |                                        |       |                |       | 1,499                                 |       |
| Stock-based compensation                 |       |              |       | 562                              |       |                   |       |                                        |       |                |       | 562                                   |       |
| Balance, June 30, 2009              |       | $                 | 11         |                             | $          | 96,742                 |       | $                                           | 121,464    |                | $          | (11,803                               | )          | $ | (47,272 | ) | $ | 159,142 |   |

 

See notes to condensedconsolidated financial statements.

 

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**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED**

**FINANCIALSTATEMENTS**

**JUNE 30,2009**

**Unaudited**

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

 

**(1)           Basis of Presentation**

 

Theaccompanying condensed consolidated financial statements of Steinway MusicalInstruments, Inc. and subsidiaries (the “Company”) for the three and sixmonths ended June 30, 2009 and 2008 are unaudited. In the opinion ofmanagement, these statements have been prepared on the same basis as theaudited consolidated financial statements as of and for the year ended December 31,2008, and include all adjustments which are of a normal and recurring nature,necessary for the fair presentation of financial position, results ofoperations and cash flows for the interim periods. We encourage you to read thecondensed consolidated financial statements in conjunction with the risk factors,consolidated financial statements and notes thereto contained in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2008 filedwith the Securities and Exchange Commission (“SEC”). The results of operationsfor the three and six months ended June 30, 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 AccountingPolicies**

 

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

 

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

 

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

 

We provide reserves for potential payments of tax to various taxauthorities related to uncertain tax positions and other issues. 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

 

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Uncertainty in Income Taxes — an interpretationof FASB Statement No. 109” (“FIN 48”). As a result, reserves recordedsubsequent to adoption are based on a determination of whether and how much ofa tax benefit taken in our tax filings or positions is more likely than not tobe realized, assuming that the matter in question will be raised by the taxauthorities. Potential interest and penalties associated with such uncertaintax positions are recorded as a component of income tax expense. At adoptiondate, we made a comprehensive review of our uncertain tax positions. We believeappropriate provisions for outstanding 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 the first halfof 2009 as a result of settlements with state and local taxing authorities.Although we believe our tax estimates are appropriate, the final determinationof tax audits and any related litigation could result in changes in ourestimates.

 

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

 

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

 

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

 
| ** **                                         | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                         | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Weighted-average  shares:                          |       |                                  |       |                                |       |   |   |   |   |
| For  basic (loss) earnings per share               |       | 8,533,259                             |       | 8,580,318                           |       | 8,533,259 |   | 8,579,761 |   |
| Dilutive  effect of stock-based compensation plans |       | —                                |       | 90,369                              |       | 4,360 |   | 83,808 |   |
| For  diluted (loss) earnings per share             |       | 8,533,259                             |       | 8,670,687                           |       | 8,537,619 |   | 8,663,569 |   |

 

We did not include any of the 797,716 outstandingoptions to purchase shares of common stock in the computation of diluted (loss)earnings per share for the three and six months ended June 30, 2009because their exercise prices were more than the average market price of ourcommon shares, and therefore antidilutive. Accordingly, the dilution is solelyattributable to the impact of shares subscribed under the Purchase Plan. We didnot include 158,440 and 461,240 options to purchase shares of common stock inthe computation of diluted earnings per share for the three and six monthsended June 30, 2008, respectively, because their impact would have beenantidilutive.

 

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

 
| ** **                    | ** ** | **Foreign  Currency********Translation  Adjustments** | ** ** | **Pension &  Other  Post-Retirement  Benefits** | ** ** | **Tax  Impact of  Pension & Other  Post-Retirement  Benefits** | ** ** | **Accumulated  Other********Comprehensive Loss** | ** ** |
|-------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
|                          |       |                                                  |       |                                                     |       |                                                                    |       |                                             |       |
| Balance  January 1, 2009 |       | $                                                     | 5,050      |                                                     | $          | (29,985                                                                 | )          | $                                                | 12,018     |   | $ | (12,917 | ) |
| Activity                      |       | 1,114                                                 |       | —                                                   |       | —                                                                  |       | 1,114                                            |       |
| Balance  June 30, 2009   |       | $                                                     | 6,164      |                                                     | $          | (29,985                                                                 | )          | $                                                | 12,018     |   | $ | (11,803 | ) |

 

**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 andAccounting Principles Board (APB) Opinion No. 28-a, “Interim Disclosuresabout Fair Value of Financial Instruments” (SFAS 107-b and APB 28-a). This FSPamends FASB 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. It also amends APB Opinion No. 28, “Interim FinancialReporting,” to require those disclosures in all interim financialstatements. We adopted this FSP on April 1, 2009 and have reportedthe additional required disclosures in Note 7.

 

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InMay 2009, the FASB issued Statement No. 165, “Subsequent Events”**(“SFAS165”). The provisions of FAS 165 set forth the period after the balance sheetdate during which management of a reporting entity should evaluate events ortransactions that may have occurred for potential recognition or disclosure inthe financial statements, the circumstances under which an entity shouldrecognize events or transactions occurring after the balance sheet date in itsfinancial statements, and the disclosures that an entity should make aboutevents or transactions that occurred after the balance sheet date. We adoptedSFAS 165 effective June 30, 2009 and evaluated any subsequent eventsthrough the date of this filing. We concluded there were no material subsequentevents requiring disclosure.

 

InJune 2009, the FASB issued Statement No. 167, “Amendments to FASB Interpretation No. 46(R)”(“SFAS 167”). This Statement amends FIN 46(R) to require ongoingreassessments of whether an enterprise is the primary beneficiary of a variableinterest entity. It also requires additional disclosures for any enterprisethat holds an interest in a variable interest entity. The provisions of SFAS167 are effective January 1, 2010. We are currently evaluating whatimpact, if any, its adoption will have on our consolidated financialstatements.

 

**(3)           Inventories**

 
| ** **      | ** ** | **June 30,********2009** | ** ** | **December 31,********2008** | ** ** |
|-----------------|------------|-------------------------------|------------|-----------------------------------|------------|
| ** **      | ** ** | ** **                    | ** ** | ** **                        | ** ** |
| Raw  materials  |       | $                             | 18,503     |                              | $          | 17,930 |   |
| Work-in-process |       | 45,174                        |       | 51,057                            |       |
| Finished  goods |       | 108,798                       |       | 97,521                            |       |
|            |       | $                             | 172,475    |                              | $          | 166,508 |   |

 

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

 

Intangible assets other than goodwill and indefinite-lived trademarksare amortized on a straight-line basis over their estimated useful lives.Deferred financing costs are amortized over the repayment periods of theunderlying debt. We test our goodwill and indefinite-lived trademark assets forimpairment annually, or on an interim basis if events or circumstances indicatethat the fair value of an asset has decreased below its carrying value. Weperformed our annual goodwill and intangible asset impairment test as of July 31,2008 and wrote off all of the $8.6 million in band division goodwill. Ouranalysis of band division trademarks did not indicate an impairment, thereforeno charge was taken against that asset, or any other intangible assetsattributable to other divisions. We performed an update of our analysis as of June 30,2009 due to current economic conditions. No other impairments were noted.

 

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

 
| ** **                           | ** ** | **Piano** | ** ** | **Band** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|-----------|------------|----------|------------|-----------|------------|
| Goodwill:                            |       |      |       |     |       |      |       |
| Balance,  January 1, 2009       |       | $         | 23,708     |     | $          | —    |       | $ | 23,708 |   |
| Foreign  currency translation impact |       | 61        |       | —   |       | 61        |       |
| Balance,  June 30, 2009         |       | $         | 23,769     |     | $          | —    |       | $ | 23,769 |   |
|                                 |       |      |       |     |       |      |       |
| Trademarks:                          |       |      |       |     |       |      |       |
| Balance,  January 1, 2009       |       | $         | 10,324     |     | $          | 5,824     |       | $ | 16,148 |   |
| Foreign  currency translation impact |       | 19        |       | —   |       | 19        |       |
| Balance,  June 30, 2009         |       | $         | 10,343     |     | $          | 5,824     |       | $ | 16,167 |   |

 

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:

 
| ** **                               | ** ** | **June 30,********2009** | ** ** | **December 31,********2008** | ** ** |
|------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
|                                     |       |                          |       |                              |       |
| Gross  deferred financing costs:         |       | $                             | 5,329      |                              | $          | 5,640 |   |
| Accumulated  amortization                |       | (2,813                        | )          | (2,636                            | )          |
| Deferred  financing costs, net           |       | $                             | 2,516      |                              | $          | 3,004 |   |
|                                     |       |                          |       |                              |       |
| Gross  non-compete agreements:           |       | $                             | 750        |                              | $          | 750 |   |
| Accumulated  amortization                |       | (544                          | )          | (469                              | )          |
| Non-compete  agreements, net             |       | $                             | 206        |                              | $          | 281 |   |
|                                     |       |                          |       |                              |       |
| Gross  customer relationships:           |       | $                             | 488        |                              | $          | 425 |   |
| Accumulated  amortization                |       | (103                          | )          | (53                               | )          |
| Customer  relationships, net             |       | $                             | 385        |                              | $          | 372 |   |
|                                     |       |                          |       |                              |       |
| Gross  website and developed technology: |       | $                             | 2,176      |                              | $          | 2,176 |   |
| Accumulated  amortization                |       | (483                          | )          | (265                              | )          |
| Website  and developed technology, net   |       | $                             | 1,693      |                              | $          | 1,911 |   |
|                                     |       |                          |       |                              |       |
| Total  gross other intangibles           |       | $                             | 8,743      |                              | $          | 8,991 |   |
| Accumulated  amortization                |       | (3,943                        | )          | (3,423                            | )          |
| Other  intangibles, net                  |       | $                             | 4,800      |                              | $          | 5,568 |   |

 

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Deferred financing costswere impacted by our purchase of $10.9 million of our Senior Notes in March 2009.This repurchase is described more fully in Note 6. Customer relationships wasimpacted by the 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 for all other amortizableintangibles is five years. Total amortization expense, which includesamortization of deferred financing costs, is as follows:

 
| ** **            | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|-----------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **            | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|                  |       |                                  |       |                                |       |   |   |   |   |
| Amortization  expense |       | $                                     | 332        |                                | $          | 261 |   | $ | 667 |   | $ | 459 |   |
|                       |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |

 

The following table shows thetotal estimated amortization expense for the remainder of 2009 and beyond:

 
| Remainder  of 2009 |   | $     | 638    |   |
|--------------------|--------|-------|--------|--------|
| 2010               |   | 1,217 |   |
| 2011               |   | 1,148 |   |
| 2012               |   | 1,035 |   |
| 2013               |   | 683   |   |
| 2014               |   | 79    |   |
| Total              |   | $     | 4,800  |   |

 

**(5)           Other Current Liabilities**

 
| ** **                                                               | ** ** | **June 30,********2009** | ** ** | **December 31,********2008** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| Accrued  payroll and related benefits                                    |       | $                             | 13,013     |                              | $          | 14,100 |   |
| Current  portion of pension and other postretirement benefit liabilities |       | 1,373                         |       | 1,357                             |       |
| Accrued  warranty expense                                                |       | 1,410                         |       | 1,451                             |       |
| Accrued  interest                                                        |       | 3,722                         |       | 4,022                             |       |
| Deferred  income                                                         |       | 6,947                         |       | 7,531                             |       |
| Environmental  liabilities                                               |       | 2,395                         |       | 2,577                             |       |
| Income  and other taxes payable                                          |       | 1,276                         |       | 2,557                             |       |
| Other  accrued expenses                                                  |       | 7,609                         |       | 8,687                             |       |
| Total                                                                    |       | $                             | 37,745     |                              | $          | 42,282 |   |

 

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

 

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

 
| ** **                           | ** ** | **June 30,********2009** | ** ** | **June 30,********2008** | ** ** | **December 31,********2008** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| Beginning  balance                   |       | $                             | 1,451      |                          | $          | 1,541                             |       | $ | 1,541 |   |
| Additions                            |       | 432                           |       | 596                           |       | 1,044                             |       |
| Claims  and reversals                |       | (494                          | )          | (604                          | )          | (1,075                            | )          |
| Foreign  currency translation impact |       | 21                            |       | 35                            |       | (59                               | )          |
| Ending  balance                      |       | $                             | 1,410      |                          | $          | 1,568                             |       | $ | 1,451 |   |

 

**(6)           Long-Term Debt**

 

Our long-term debtconsists of the following:

 
| ** **                 | ** ** | **June 30,********2009** | ** ** | **December 31,********2008** | ** ** |
|----------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| 7.00%  Senior Notes        |       | $                             | 158,326    |                              | $          | 169,250 |   |
| Unamortized  bond discount |       | (698                          | )          | (825                              | )          |
| Domestic  line of credit   |       | 34,900                        |       | 15,000                            |       |
| Overseas  lines of credit  |       | 960                           |       | 3,325                             |       |
| Total                      |       | 193,488                       |       | 186,750                           |       |
| Less:  current portion     |       | 960                           |       | 3,325                             |       |
| Long-term  debt            |       | $                             | 192,528    |                              | $          | 183,425 |   |

 

Scheduled payments ofdebt are as follows:

 
| ** **         | ** ** | **June 30,********2009** | ** ** |
|--------------------|------------|-------------------------------|------------|
| Remainder  of 2009 |       | $                             | 960        |   |
| 2010               |       | —                        |       |
| 2011               |       | 34,900                        |       |
| 2012               |       | —                        |       |
| 2013               |       | —                        |       |
| Thereafter         |       | 158,326                       |       |
| Total              |       | $                             | 194,186    |   |

 

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

transactions is asfollows:

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

 

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

 

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

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

 

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

 

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

 
| ** **                                    | ** ** | **June 30,********2009** | ** ** | **December 31,********2008** | ** ** |
|-----------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| Financial  assets:                            |       |                          |       |                              |       |
| Trading  securities(1) - Level 1         |       | $                             | 1,448      |                              | $          | 1,242 |   |
| Foreign  currency contracts(2) - Level 2 |       | 380                           |       | 584                               |       |
|                                          |       | $                             | 1,828      |                              | $          | 1,826 |   |
|                                          |       |                          |       |                              |       |
| Financial  liabilities:                       |       |                          |       |                              |       |
| Foreign  currency contracts(2) - Level 2 |       | $                             | 63         |                              | $          | 55 |   |

 

----

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

 

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

 

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

 
| ** **              | ** ** | **June 30,  2009**        | ** ** | **December 31,  2008**     | ** ** |
|-------------------------|------------|--------------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **Net  Carrying********Value** | ** ** | **Estimated********Fair Value** | ** ** | **Net  Carrying********Value** | ** ** | **Estimated********Fair Value** | ** ** |
| Financial  liabilities: |       |                           |       |                            |       |   |   |   |   |
| Debt                    |       | $                              | 194,186    |                            | $          | 159,750 |   | $ | 187,575 |   | $ | 135,954 |   |
|                         |            |                                |            |                                 |            |  |  |  |  |  |  |  |  |

 

The carrying value of accounts, notes and other receivables, marketableequity securities, and accounts payable approximate fair value.

 

**(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 June 30, 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.

 

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

 

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

 

Our 1996 Stock Plan has expired but still hasvested and unvested options outstanding. We reached our registered sharelimitation in early 2007, and had previously reserved 721,750 treasury stockshares to issue under this plan. We have since issued 98,974 shares of treasurystock to cover options exercised, with 383,376 remaining options outstanding.Since in most instances the average cost of the treasury stock exceeded theprice of the options exercised, the difference between the proceeds receivedand the average cost of the treasury stock issued resulted in a reduction ofretained earnings. This reduction was less than $0.1 million for the three andsix months ended June 30, 2008. There were no stock option exercisesduring the three and six months ended June 30, 2009.

 

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

 
| ** **                                                                 | ** ** | **Three  Months Ended********June 30,** | ** ** | **Six  Months Ended********June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                 | ** ** | **2009**                                     | ** ** | **2008**                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| Compensation cost included in basic and diluted (loss)  earnings per share |       | $                                            | 0.03       |                                       | $          | 0.02 |   | $ | 0.06 |   | $ | 0.05 |   |
| Stock-based  compensation expense                                          |       | 293                                          |       | 266                                        |       | 562 |   | 511 |   |
| Income  tax benefit                                                        |       | 43                                           |       | 58                                         |       | 85 |   | 85 |   |
|                                                                            |            |                                              |            |                                            |            |  |  |  |  |  |  |  |  |

 

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

 

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

 
| ** **                                 | ** ** | **Three  Months Ended********June 30,** | ** ** | **Six  Months Ended********June 30,** | ** ** |
|--------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **2008**                                     | ** ** | **2008**                                   | ** ** |
| Risk  free interest rate                   |       | 3.5%                                         |       | 3.4%                                       |       |
| Weighted  average expected life (in years) |       | 7.2                                          |       | 7.2                                        |       |
| Expected  volatility of underlying stock   |       | 25.9%                                        |       | 25.9%                                      |       |
| Expected  dividends                        |       | n/a                                          |       | n/a                                        |       |
| Weighted  average fair value               |       | $9.93                                        |       | $9.94                                      |       |

 

There were no options granted during the three or six months ended June 30,2009. The following table sets forth information regarding the Stock Plans:

 
| ** **                           | ** ** | **Number  of  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Remaining  Contractual  Life********(in years)** | ** ** | **Aggregate********Intrinsic********Value********(not in 000s)** | ** ** |
|--------------------------------------|------------|-------------------------|------------|-----------------------------------------|------------|----------------------------------------------------|------------|------------------------------------------------------------------|------------|
| Outstanding  at January 1, 2009 |       | 807,216                 |       | $                                       | 24.92      |                                               |       |                                                             |       |   |
| Granted                              |       | —                  |       | —                                  |       |                                               |       |                                                             |       |
| Exercised                            |       | —                  |       | —                                  |       |                                               |       |                                                             |       |
| Forfeited                            |       | (9,500                  | )          | 27.27                                   |       |                                               |       |                                                             |       |
| Outstanding  at June 30, 2009   |       | 797,716                 |       | $                                       | 24.89      |                                               | 6.1        |                                                             | $          | — |   |
|                                 |       |                    |       |                                    |       |                                               |       |                                                             |       |
| Exercisable  at June 30, 2009   |       | 471,236                 |       | $                                       | 22.48      |                                               | 4.5        |                                                             | $          | — |   |

 

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

 

As of June 30, 2009, there was $3.1 million of unrecognizedcompensation cost related to nonvested share-based compensation arrangementsgranted under the Stock Plan. This compensation cost is expected to berecognized over a period of 3.6 years.

 

As reported in the condensed consolidated statements of cash flows,cash received from option exercises under the Stock Plans for the period ended June 30,2008 was $0.1 million. Cash flows from tax benefits resulting from taxdeductions in excess of the compensation cost recognized for stock-based awardsunder a fair value basis (excess tax benefits) are required to be classified asa cash flow from financing activities. Accordingly, for the period ended June 30,2008, less than $0.1 million of excess tax benefits has been classified as anoutflow from operating activities and an inflow from financing activities inthe statement of cash flows. For the period ended June 30, 2008, less than$0.1 million of tax benefit from stock option exercises is presented as a cashinflow from operating activities.

 

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The followingtables set forth information regarding the Purchase Plan:

 
| ** **                                                   | ** ** | **Three  Months Ended********June 30,** | ** ** | **Six  Months Ended********June 30,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                   | ** ** | **2009**                                     | ** ** | **2008**                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| Risk-free  interest rate                                     |       | 2.2%                                         |       | 4.8%                                       |       | 2.2% |   | 4.8% |   |
| Weighted-average expected life of option feature  (in years) |       | 1.0                                          |       | 1.0                                        |       | 1.0 |   | 1.0 |   |
| Expected  volatility of underlying stock                     |       | 25.3%                                        |       | 25.9%                                      |       | 25.3% |   | 25.9% |   |
| Expected  dividends                                          |       | n/a                                          |       | n/a                                        |       | n/a |   | n/a |   |
| Weighted-average  fair value of option feature               |       | $6.71                                        |       | $8.69                                      |       | $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                   |       | 13,091                  |       | 23.36                                   |       |                                               |       |                                                             |       |
| Exercised                            |       | —                  |       | —                                  |       |                                               |       |                                                             |       |
| Canceled                             |       | (1,457                  | )          | 23.36                                   |       |                                               |       |                                                             |       |
| Outstanding  at June 30, 2009   |       | 23,462                  |       | $                                       | 23.36      |                                               | 0.1        |                                                             | $          | 38,123 |   |
|                                      |            |                         |            |                                         |            |                                                    |            |                                                                  |            |  |  |

 

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

 
| ** **                         | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                         | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|                               |       |                                  |       |                                |       |   |   |   |   |
| West  57th Street building income  |       | $                                     | (1,553     | )                                   | $          | (1,164 | ) | $ | (3,058 | ) | $ | (2,327 | ) |
| West  57th Street building expense |       | 971                                   |       | 820                                 |       | 2,186 |   | 1,641 |   |
| Foreign  exchange loss, net        |       | 635                                   |       | 405                                 |       | 349 |   | 358 |   |
| Miscellaneous                      |       | (306                                  | )          | (7                                  | )          | (288 | ) | 345 |   |
| Other  (income) expense, net       |       | $                                     | (253       | )                                   | $          | 54 |   | $ | (811 | ) | $ | 17 |   |

 

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

 

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**(10)         Commitmentsand Contingent Liabilities**

 

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

 

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

 

We are continuing an existing environmentalremediation plan at a facility we acquired in 2000 and subsequently sold. Weestimate our costs, which approximate $0.7 million, over a 12-year period. Wehave accrued approximately $0.6 million for the estimated remaining cost ofthis remediation program, which represents the present value total cost using adiscount rate of 4.54%. A summary of expected payments associated with thisproject is as follows:

 
| ** **        | ** ** | **Environmental********Payments** | ** ** |
|-------------------|------------|-----------------------------------|------------|
| Remainder of 2009 |       | $                                 | 33         |   |
| 2010              |       | 61                                |       |
| 2011              |       | 61                                |       |
| 2012              |       | 61                                |       |
| 2013              |       | 61                                |       |
| Thereafter        |       | 423                               |       |
| Total             |       | $                                 | 700        |   |

 

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

 

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

 

**(11)         Retirement Plans**

 

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

** **
| ** **                           | ** ** | **Domestic  Plan**                           | ** ** | **Foreign  Plans**                           | ** ** |
|--------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                           | ** ** | **Three  Months Ended********June 30,** | ** ** | **Three  Months Ended********June 30,** | ** ** |
| ** **                           | ** ** | **2009**                                     | ** ** | **2008**                                     | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service  cost                        |       | $                                            | 89         |                                         | $          | 60 |   | $ | 141 |   | $ | 209 |   |
| Interest  cost                       |       | 858                                          |       | 851                                          |       | 432 |   | 497 |   |
| Expected  return on plan assets      |       | (871                                         | )          | (1,272                                       | )          | (73 | ) | (101 | ) |
| Amortization  of prior service cost  |       | 52                                           |       | 62                                           |       | — |   | — |   |
| Amortization  of net loss            |       | 647                                          |       | 12                                           |       | 2 |   | 24 |   |
| Net  periodic pension cost (benefit) |       | $                                            | 775        |                                         | $          | (287 | ) | $ | 502 |   | $ | 629 |   |

 
| ** **                           | ** ** | **Domestic  Plan**                         | ** ** | **Foreign  Plans**                         | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **Six  Months Ended********June 30,** | ** ** | **Six  Months Ended********June 30,** | ** ** |
| ** **                           | ** ** | **2009**                                   | ** ** | **2008**                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service  cost                        |       | $                                          | 193        |                                       | $          | 207 |   | $ | 274 |   | $ | 412 |   |
| Interest  cost                       |       | 1,722                                      |       | 1,705                                      |       | 838 |   | 979 |   |
| Expected  return on plan assets      |       | (1,746                                     | )          | (2,567                                     | )          | (140 | ) | (202 | ) |
| Amortization  of prior service cost  |       | 103                                        |       | 102                                        |       | — |   | — |   |
| Amortization  of net loss            |       | 1,255                                      |       | 24                                         |       | 4 |   | 48 |   |
| Net  periodic pension cost (benefit) |       | $                                          | 1,527      |                                       | $          | (529 | ) | $ | 976 |   | $ | 1,237 |   |

 

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

 
| ** **                                | ** ** | **Three  Months Ended********June 30,** | ** ** | **Six  Months Ended********June 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                     | ** ** | **2008**                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service  cost                             |       | $                                            | 2          |                                       | $          | 2 |   | $ | 3 |   | $ | 4 |   |
| Interest  cost                            |       | 19                                           |       | 26                                         |       | 36 |   | 52 |   |
| Amortization  of prior service costs      |       | (13                                          | )          | (13                                        | )          | (26 | ) | (26 | ) |
| Recognized  loss                          |       | —                                       |       | 8                                          |       | — |   | 16 |   |
| Net  periodic postretirement benefit cost |       | $                                            | 8          |                                       | $          | 23 |   | $ | 13 |   | $ | 46 |   |

 

Based on federal laws and regulations, we are not required to make acontribution to our domestic pension plan in 2009. We are currently evaluatingwhat amount, if any, we intend to contribute to this plan in 2009. Our anticipated contributions to thepension plan of our U.K. subsidiary approximate $0.8 million for the currentyear. As of June 30, 2009, we have made contributions of $0.4 million tothis plan. The pension plans of our German entities do not hold any assets anduse operating cash to pay participant benefits as they become due. Expected2009 benefit payments under these plans are $1.3 million, of which $0.6 millionwas paid through June 2009.

 

**(12)         Segment Information**

 

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

 

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The following tablespresent information about our operating segments for the three and six monthsended June 30, 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 |       | $                 | 17,779     |             | $          | 13,076    |       | $          | 11,545     |   | $ | 42,400 |   | $ | 28,755 |   | $ | 958 |   | $ | 29,713 |   | $ | — |   | $ | 72,113 |   |
| Income  (loss) from operations  |       | (1,005            | )          | 1,791            |       | 1,085     |       | 1,871      |       | 556 |   | 85 |   | 641 |   | (1,005 | ) | 1,507 |   |
|                                 |            |                   |            |                  |            |           |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**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 |       | $                 | 25,233     |             | $          | 20,125    |       | $          | 12,145     |   | $ | 57,503 |   | $ | 39,263 |   | $ | 1,755 |   | $ | 41,018 |   | $ | — |   | $ | 98,521 |   |
| Income  (loss) from operations  |       | 563               |       | 5,269            |       | 1,355     |       | 7,187      |       | 1,685 |   | (1,277 | ) | 408 |   | (768 | ) | 6,827 |   |
|                                 |            |                   |            |                  |            |           |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Six monthsended 2009**

 
| ** **                      | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Other** | ** ** | **Consol** | ** ** |
|---------------------------------|------------|-------------------|------------|------------------|------------|-----------|------------|------------|------------|
| ** **                      | ** ** | **U.S.**          | ** ** | **Germany**      | ** ** | **Other** | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Europe** | ** ** | **Total** | ** ** | **& Elim** | ** ** | **Total** | ** ** |
| Net sales to external customers |       | $                 | 36,616     |             | $          | 23,828    |       | $          | 19,235     |   | $ | 79,679 |   | $ | 60,310 |   | $ | 2,115 |   | $ | 62,425 |   | $ | — |   | $  | 142,104 |   |
| Income  (loss) from operations  |       | (2,642            | )          | 3,704            |       | 1,258     |       | 2,320      |       | 939 |   | 196 |   | 1,135 |   | (1,999 | ) | 1,456 |   |
|                                 |            |                   |            |                  |            |           |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Six monthsended 2008**

 
| ** **                      | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Other** | ** ** | **Consol** | ** ** |
|---------------------------------|------------|-------------------|------------|------------------|------------|-----------|------------|------------|------------|
| ** **                      | ** ** | **U.S.**          | ** ** | **Germany**      | ** ** | **Other** | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Europe** | ** ** | **Total** | ** ** | **& Elim** | ** ** | **Total** | ** ** |
| Net sales to external customers |       | $                 | 52,527     |             | $          | 35,056    |       | $          | 24,606     |   | $  | 112,189 |   | $ | 76,643 |   | $ | 3,875 |   | $ | 80,518 |   | $ | — |   | $  | 192,707 |   |
| Income  (loss) from operations  |       | 1,851             |       | 8,917            |       | 2,211     |       | 12,979     |       | 1,674 |   | (1,515 | ) | 159 |   | (1,507 | ) | 11,631 |   |
|                                 |            |                   |            |                  |            |           |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

**Introduction**

 

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

 

**CriticalAccounting Policies**

 

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

 

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

 

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

** **

**AccountsReceivable**

 

Weestablish reserves for accounts receivable and notes receivable. We reviewoverall collectibility trends and customer characteristics such as debtleverage, solvency, and outstanding balances in order to develop our reserveestimates. Historically, a large portion of our sales at both our piano andband divisions has been generated by our top 15 customers. As a result, weexperience some inherent concentration of credit risk in our accountsreceivable due to its composition and the relative proportion of large customerreceivables to the total. This is especially true at our band division, whichcharacteristically has a majority of our consolidated accounts receivablebalance. We consider the credit health and solvency of our customers whendeveloping our receivable reserve estimates.

 

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** **

**Inventory**

 

Weestablish inventory reserves for items such as lower-of-cost-or-market andobsolescence. We review inventory levels on a detailed basis, concentrating onthe age and amounts of raw materials, work-in-process, and finished goods, aswell as recent usage and sales dates and quantities to help develop ourestimates. Ongoing changes in our business strategy, including a shift frombatch processing to single piece production flow, coupled with increasedoffshore sourcing, could affect our ability to realize the current cost of 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 interim basisif events or circumstances indicate that the fair value of an asset may havedecreased below its carrying value. Our assessment is based on severalanalyses, including a comparison of net book value to estimated fair values,market capitalization, and multi-year cash flows.

 

**Pensions and Other PostretirementBenefit Costs**

 

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

 

**Income Taxes**

 

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

 

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

 

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

 

**Stock-Based Compensation**

 

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

 

**Environmental Liabilities**

 

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

 

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

 

**Forward-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 subjectto risks and uncertainties which could cause actual results to differmaterially from those indicated in this report. These risk factors include, butare not limited to, the following: changes in general economicconditions; reductions in school budgets; increased competition; work stoppages andslowdowns; ability to successfully consolidate band manufacturing; impact ofdealer consolidations on orders; ability of dealers to obtain financing;exchange rate fluctuations; variations in the mix of products sold; marketacceptance of new products, ability of suppliers to meet demand; concentrationof credit risk; fluctuations in effective tax rates resulting from shifts insources of income; and the ability to successfully operate acquired businesses. Further information on these riskfactors is included in Item 1A of our Annual Report on Form 10-K for theyear ended December 31, 2008. We encourage you to read those descriptionscarefully. We caution investors not to place undue reliance on theforward-looking statements

 

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

 

**Results of Operations**

 

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

 
|                              |   | **Three Months Ended June 30,** |       |       |       | **Change** |   |
|-----------------------------------|--------|--------------------------------------|------------|------------|------------|------------|--------|
|                              |   | **2009**                             | ** ** | ** ** | ** ** | **2008**   |   |   |   | **$** | ** ** | **%** |   |
|                              |   |                                 |       |       |       |       |   |   |   |   |   |   |   |
| Net sales                         |   |                                 |       |       |       |       |   |   |   |   |   |   |   |
| Band                              |   | $                                    | 29,713     |       |       |       | $      | 41,018 |   |   |   | (11,305 | ) | (27.6 | ) |
| Piano                             |   | 42,400                               |       |       |       | 57,503     |   |   |   | (15,103 | ) | (26.3 | ) |
| Total sales                       |   | 72,113                               |       |       |       | 98,521     |   |   |   | (26,408 | ) | (26.8 | ) |
|                              |   |                                 |       |       |       |       |   |   |   |   |   |   |   |
| Cost of sales                     |   |                                 |       |       |       |       |   |   |   |   |   |   |   |
| Band                              |   | 23,484                               |       |       |       | 32,065     |   |   |   | (8,581 | ) | (26.8 | ) |
| Piano                             |   | 29,731                               |       |       |       | 37,411     |   |   |   | (7,680 | ) | (20.5 | ) |
| Total cost of sales               |   | 53,215                               |       |       |       | 69,476     |   |   |   | (16,261 | ) | (23.4 | ) |
|                              |   |                                 |       |       |       |       |   |   |   |   |   |   |   |
| Gross profit                      |   |                                 |       |       |       |       |   |   |   |   |   |   |   |
| Band                              |   | 6,229                                |       | 21.0%      |       | 8,953      |   | 21.8% |   | (2,724 | ) | (30.4 | ) |
| Piano                             |   | 12,669                               |       | 29.9%      |       | 20,092     |   | 34.9% |   | (7,423 | ) | (36.9 | ) |
| Total gross profit                |   | 18,898                               |       |       |       | 29,045     |   |   |   | (10,147 | ) | (34.9 | ) |
|                              |   | 26.2%                                |       |       |       | 29.5%      |   |   |   |   |   |   |   |
|                              |   |                                 |       |       |       |       |   |   |   |   |   |   |   |
| Operating expenses                |   | 17,391                               |       |       |       | 21,156     |   |   |   | (3,765 | ) | (17.8 | ) |
| Facility rationalization charges  |   | —                               |       |       |       | 1,062      |   |   |   | (1,062 | ) | (100.0 | ) |
| Total operating expenses          |   | 17,391                               |       |       |       | 22,218     |   |   |   | (4,827 | ) | (21.7 | ) |
|                              |   |                                 |       |       |       |       |   |   |   |   |   |   |   |
| Income from operations            |   | 1,507                                |       |       |       | 6,827      |   |   |   | (5,320 | ) | (77.9 | ) |
|                              |   |                                 |       |       |       |       |   |   |   |   |   |   |   |
| Other (income) expense, net       |   | (253                                 | )          |       |       | 54         |   |   |   | (307 | ) | (568.5 | ) |
| Net interest expense              |   | 2,516                                |       |       |       | 2,276      |   |   |   | 240 |   | 10.5 |   |
| Non-operating expenses            |   | 2,263                                |       |       |       | 2,330      |   |   |   | (67 | ) | (2.9 | ) |
|                              |   |                                 |       |       |       |       |   |   |   |   |   |   |   |
| (Loss) income before income taxes |   | (756                                 | )          |       |       | 4,497      |   |   |   | (5,253 | ) | (116.8 | ) |
|                              |   |                                 |       |       |       |       |   |   |   |   |   |   |   |
| Income tax (benefit) provision    |   | (136                                 | )          | 18.0%      |       | 1,452      |   | 32.3% |   | (1,588 | ) | (109.4 | ) |
|                              |   |                                 |       |       |       |       |   |   |   |   |   |   |   |
| Net (loss) income                 |   | $                                    | (620       | )          |       |       | $      | 3,045 |   |   |   | (3,665 | ) | (120.4 | ) |

 

**Overview***-*Piano division revenue was adverselyaffected by the current economic crisis as well as our dealers’ access toavailable financing. Piano margins continued to be negatively impacted by lowerproduction volume at both of our manufacturing facilities. Band division salesdecreased as a result of similar credit restrictions and dealers’ tendency toonly order products that can be resold quickly. Band margins were adverselyimpacted by increased pension and postretirement benefit costs, which largelyresulted from pension asset portfolio deterioration.

 

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Piano divisionresults include the operations of our online music division.

 

**Net Sales** - Net sales deteriorated 27% in thecurrent period. Many of our piano dealers continue to experience difficultyobtaining financing and, consequently, are utilizing cash to pay down existingcredit lines rather than replenishing inventories. Band dealers are prolongingthe usefulness of existing inventory by refurbishing and reutilizing rentalpool instruments instead of purchasing new ones, which enables them to generateand preserve cash. This has resulted in decreased orders and shipments at both thepiano and band divisions.

 

Domestically, $1.0million in incremental online music sales helped offset lower piano divisionrevenues, which dropped $7.5 million. Domestic Steinway grand unit shipmentsdecreased 46% while overall unit shipments decreased 27%, as our mid-pricedpiano lines fared better during the period. Both domestic wholesale and retailsales deteriorated, although the retail sales decline was mitigated by animprovement in institutional sales. Overseas, piano division revenues decreased$7.6 million, of which $2.5 million is attributable to foreign currencytranslation. Overseas Steinway grand unit shipments decreased 29%, whilemid-priced piano line shipments decreased only 4%, due to improved availabilityof various Essex models as well as institutional sales.

 

Band divisionrevenues were $11.3 million lower, correlating to the 37% decrease in unitshipments. Sales of intermediate and professional level instrumentsdeteriorated less than student instruments. Unlike prior years, dealers are notstocking instruments in advance of the back to school season, but instead areordering only those products for which there is an immediate need.

 

**GrossProfit***-* Gross profit declined due to lower salesand gross margins at both divisions. Domestically, piano margins dropped from27.8%% to 25.0% largely due to the reduced production, which was implemented inan effort to control inventory levels. Overseas margins dropped from 40.5% to33.4% as production was also reduced at our factory in Germany. The shift inmix, mostly towards the mid-priced piano lines, was also a factor in the margindecrease.

 

The band division’sgross margin fell from 21.8% to 21.0% during the period. Pension costsincreased $0.9 million but were partially offset by the absence of severancecosts associated with our facility rationalization project, which were $0.6million in the year-ago period. Production was lower, resulting in unabsorbedoverhead, but this was mitigated by a shift in mix to higher margin brassinstruments.

 

**OperatingExpenses** -Operating expenses decreased $4.8 million, or 22%, due to several factors.Sales and marketing expenses decreased $2.1 million due to lower salaries,commissions, and bonuses, as well as decreased spending for trade shows andadvertising. General and administrative costs were lowered $1.6 million throughreductions in headcount, wages, benefits, and outside services. Lastly, therewere no fixed asset impairment charges associated with our facilityrationalization project, whereas these charges totaled $1.1 million a year ago.

 

**Non-operatingExpenses** — On anet basis, non-operating expenses were consistent with the prior period. Highernet interest expense, which resulted from lower interest income on banddivision financed receivables, was partially offset by an increase in incomefrom our West 57th Street property of $0.2 million. The increasein foreign exchange losses of $0.2 million was offset by gains on ourSupplemental Executive Retirement Plan (“SERP”) assets.

 

**IncomeTaxes** —**Due to the current period loss, we recorded an income taxbenefit of $0.2 million, reflecting our anticipated rate of 22% associated withcurrent year income, which is discussed further below. Offsetting this areexpenses of $0.1 million relating primarily to assessments from taxingauthorities and uncertain tax positions. The combination of these itemsresulted in an effective tax rate of 18% for the period.

 

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Six Months Ended June 30,2009 Compared to Six Months Ended June 30, 2008

 
|                               |   | **Six  Months Ended June 30,** |   |   |   | **Change** |   |
|------------------------------------|--------|-------------------------------------|--------|--------|--------|------------|--------|
|                               |   | **2009**                            |   |   |   | **2008**   |   |   |   | **$** |   | **%** |   |
|                               |   |                                |   |   |   |       |   |   |   |   |   |   |   |
| Net sales                          |   |                                |   |   |   |       |   |   |   |   |   |   |   |
| Band                               |   | $                                   | 62,425 |   |   |       | $      | 80,518 |   |   |   | (18,093 | ) | (22.5 | ) |
| Piano                              |   | 79,679                              |   |   |   | 112,189    |   |   |   | (32,510 | ) | (29.0 | ) |
| Total sales                        |   | 142,104                             |   |   |   | 192,707    |   |   |   | (50,603 | ) | (26.3 | ) |
|                               |   |                                |   |   |   |       |   |   |   |   |   |   |   |
| Cost of sales                      |   |                                |   |   |   |       |   |   |   |   |   |   |   |
| Band                               |   | 49,351                              |   |   |   | 63,040     |   |   |   | (13,689 | ) | (21.7 | ) |
| Piano                              |   | 55,246                              |   |   |   | 73,230     |   |   |   | (17,984 | ) | (24.6 | ) |
| Total cost of sales                |   | 104,597                             |   |   |   | 136,270    |   |   |   | (31,673 | ) | (23.2 | ) |
|                               |   |                                |   |   |   |       |   |   |   |   |   |   |   |
| Gross profit                       |   |                                |   |   |   |       |   |   |   |   |   |   |   |
| Band                               |   | 13,074                              |   | 20.9%  |   | 17,478     |   | 21.7% |   | (4,404 | ) | (25.2 | ) |
| Piano                              |   | 24,433                              |   | 30.7%  |   | 38,959     |   | 34.7% |   | (14,526 | ) | (37.3 | ) |
| Total gross profit                 |   | 37,507                              |   |   |   | 56,437     |   |   |   | (18,930 | ) | (33.5 | ) |
|                               |   | 26.4%                               |   |   |   | 29.3%      |   |   |   |   |   |   |   |
|                               |   |                                |   |   |   |       |   |   |   |   |   |   |   |
| Operating expenses                 |   | 36,051                              |   |   |   | 43,744     |   |   |   | (7,693 | ) | (17.6 | ) |
| Facility rationalization charges   |   | —                              |   |   |   | 1,062      |   |   |   | (1,062 | ) | (100.0 | ) |
| Total operating expenses           |   | 36,051                              |   |   |   | 44,806     |   |   |   | (8,755 | ) | (19.5 | ) |
|                               |   |                                |   |   |   |       |   |   |   |   |   |   |   |
| Income from operations             |   | 1,456                               |   |   |   | 11,631     |   |   |   | (10,175 | ) | (87.5 | ) |
|                               |   |                                |   |   |   |       |   |   |   |   |   |   |   |
| Other (income) expense, net        |   | (811                                | )      |   |   | 17         |   |   |   | (828 | ) | (4,870.6 | ) |
| Net gain on extinguishment of debt |   | (3,434                              | )      |   |   | (636       | )      |   |   | (2,798 | ) | 439.9 |   |
| Net interest expense               |   | 5,038                               |   |   |   | 4,433      |   |   |   | 605 |   | 13.6 |   |
| Non-operating expenses             |   | 793                                 |   |   |   | 3,814      |   |   |   | (3,021 | ) | (79.2 | ) |
|                               |   |                                |   |   |   |       |   |   |   |   |   |   |   |
| Income before income taxes         |   | 663                                 |   |   |   | 7,817      |   |   |   | (7,154 | ) | (91.5 | ) |
|                               |   |                                |   |   |   |       |   |   |   |   |   |   |   |
| Income tax provision               |   | 278                                 |   | 41.9%  |   | 2,797      |   | 35.8% |   | (2,519 | ) | (90.1 | ) |
|                               |   |                                |   |   |   |       |   |   |   |   |   |   |   |
| Net income                         |   | $                                   | 385    |   |   |       | $      | 5,020 |   |   |   | (4,635 | ) | (92.3 | ) |

** **

**Overview***—*The same economic conditions discussedabove, which we expect to continue through the end of 2009, negatively impactedboth the piano and band divisions’ revenue through the first half of the year.Likewise, lower production volumes at our piano and band instrumentmanufacturing facilities adversely impacted margins. However, management hasreduced headcount, lowered salaries, suspended or reduced benefits, and takenother cost saving measures throughout the Company to help offset these factors.

 

Piano divisionresults include the operations of our online music division.

 

**Net Sales** - Net sales deteriorated 26.3% in thecurrent period. Although online music sales were $3.1 million higher than theyear-ago period, domestic piano division revenues dropped $15.9 million.Domestic Steinway grand unit shipments decreased 44% and overall unit shipmentsdecreased 32%. Overseas, piano 

 

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division revenuesdecreased $16.6 million, which includes a $4.6 million reduction attributableto foreign currency translation. Overseas Steinway grand unit shipmentsdecreased 33%, while mid-priced piano line shipments decreased 22%. Overall,our mid-priced piano line shipments have been less affected by the economicdownturn.

 

Band divisionrevenues were $18.1 million lower, correlating to the 28% decrease in unitshipments. Sales of intermediate and professional level instrumentsdeteriorated less than student instruments. Dealers are ordering only thoseinstruments for which there is an immediate need instead of stockinginstruments in anticipation of the back to school season.

 

**GrossProfit***-* Gross profit declined due to lower salesand gross margins at both divisions. Domestically, piano margins dropped from29.9% to 25.3% as the factory has produced 38% fewer Steinway grands than inthe year-ago period in order to manage inventory levels. This resulted inhigher unabsorbed overhead and product costs, which adversely impacted themargin. Overseas margins dropped from 38.9% to 35.2% as our factory in Germanyalso reduced production of Steinway grands by 40% compared to 2008.

 

The band division’sgross margin fell from 21.7% to 20.9% during the period. Pension costsincreased $1.7 million due primarily to pension asset portfolio deterioration.This was partially offset by the absence of severance costs associated with ourfacility rationalization project, which were $1.0 million in the year-agoperiod. Production was lower, resulting in unabsorbed overhead, but this wasmitigated by a shift in mix to certain higher margin student and brassinstruments.

 

**OperatingExpenses** -Operating expenses decreased $8.8 million, or 20%, during the period. Sales andmarketing expenses decreased $4.9 million due to lower salaries, commissions,and bonuses, as well as decreased spending for trade shows and advertising. Dueto reductions in headcount, wages, benefits, and outside services, general andadministrative costs were $2.8 million less than in 2008. Lastly, there were nofixed asset impairment charges associated with our facility rationalizationproject, whereas these charges totaled $1.1 million in the year-ago period.

 

**Non-operatingExpenses** —Non-operating expenses improved $3.0 million due to the extinguishment of $10.9million of our Senior Notes, which resulted in a $3.4 million net gain. Highernet interest expense of $0.6 million, which resulted from lower interest incomeon band division financed receivables, was partially offset by the shift fromlosses to gains on our SERP assets.

 

**IncomeTaxes** -**Our effective tax rate of 41.9% is comprised ofapproximately 22% associated with current year income, and 19.9% relatingprimarily to assessments from taxing authorities and uncertain tax positions.As a result 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 32% on income taxedoverseas, has resulted in an abnormally low estimated tax rate of 22% oncurrent period earnings. This rate could be materially impacted by shifts insources of income during the remainder of 2009.

 

**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.

 

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Our statements ofcash flows for the six months ended June 30, 2009 and 2008 are summarizedas follows:

 
| ** **                                                                   | ** ** | **2009** | ** ** | **2008** | ** ** | **Change** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Net income:                                                                  |       | $        | 385        |     | $          | 5,020      |       | $ | (4,635 | ) |
| Changes in operating assets and liabilities                                  |       | (8,957   | )          | (9,449   | )          | 492        |       |
| Other adjustments to reconcile net income to cash  from operating activities |       | 2,591    |       | 5,860    |       | (3,269     | )          |
| Cash flows from operating activities                                         |       | (5,981   | )          | 1,431    |       | (7,412     | )          |
|                                                                         |       |     |       |     |       |       |       |
| Cash flows from investing activities                                         |       | (3,008   | )          | (5,097   | )          | 2,089      |       |
|                                                                         |       |     |       |     |       |       |       |
| Cash flows from financing activities                                         |       | 10,407   |       | (5,655   | )          | 16,062     |       |
|                                                                              |            |          |            |          |            |            |            |  |  |  |

 

Cash flows fromoperating activities were $7.4 million lower than a year ago. Cash provided byaccounts receivable increased $2.4 million due to lower sales as well asheightened credit restrictions and collection efforts. Cash used forliabilities increased $9.1 million, reflecting payments to vendors, as well aslower payable balances resulting from reduced spending and fewer purchases dueto our lower sales volume. Cash used for inventory was $5.8 million lower dueto reduced production and purchasing. Major non-cash adjustments include $3.4million net gain on extinguishment of debt, which is deducted in adjustments toreconcile net income to cash flows from operating activities.

 

Cash flows usedfor investing activities decreased $2.1 million. In the prior period, werecorded a $3.0 million investment in subsidiary related to the purchase ofArkiv, and only $0.8 million in the current year related to the purchase of ourretail store in Dusseldorf, Germany. Capital expenditures were $2.2 million,which is slightly lower than the year-ago period. We expect capitalexpenditures to be in the range of $3.0 to $4.0 million for normal capitalprojects, and an additional $1.0 for improvements and renovations at ourbuilding in New York City.

 

Cash flowsprovided by financing activities increased $16.1 million due to net borrowingson our credit facilities of $17.7 million. This was partially offset by theextinguishment of $10.9 million of our Senior Notes, as compared to $5.8million in the year-ago period.

 

**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 June 30, 2009, therewas $34.9 million outstanding on our Credit Facility, and borrowingavailability, net of letters of credit, was approximately $73.9 million.

 

We also have certainnon-domestic credit facilities originating from two German banks that providefor borrowings by foreign subsidiaries of up to €19.1 million ($26.8 million atthe June 30, 2009 exchange rate), net of borrowing restrictions of €1.7million ($2.4 million at the June 30, 2009 exchange rate) and are payable on March 1,2011. These borrowings are collateralized by most of the assets of theborrowing subsidiaries. A portion of the loans can be converted into a maximumof £0.8 million ($1.2 million at the June 30, 2009 exchange rate) for use by our U.K. branchand ¥300 million ($3.1 million at the June 30, 2009 exchange rate) for use by our Japanesesubsidiary. Our Chinese subsidiary also has the ability to convert theequivalent of up to €2.5 million into U.S. dollars or Chinese yuan ($3.5million at the June 30, 2009 exchange rate). Euro loans bear interest at rates ofEuro Interbank Offered Rate (“EURIBOR”) plus a margin determined at the time ofborrowing. Margins fluctuate based on the loan amount and the borrower’s bankrating. The remaining demand borrowings bear interest rates of LIBOR plus 0.8%for British pound loans, LIBOR plus 1.0% for U.S. dollar loans of our Chinesesubsidiary, and Tokyo Interbank Offered Rate (“TIBOR”) plus 1.2% for Japaneseyen loans (outstanding borrowings at 1.6% at June 30, 2009). We had $0.2million outstanding as of June 30, 2009 on these credit facilities.

 

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Our Japanese subsidiaryalso maintains a separate revolving loan agreement that provides additionalborrowing capacity of up to ¥460 million ($4.8 million at the June 30,2009 exchange rate)based on eligible inventory balances. The revolving loan agreement bearsinterest at an average 30-day TIBOR rate plus 0.9% (outstanding borrowings at1.2% at June 30, 2009) and expires on January 31, 2010. As of June 30,2009, we had $0.8million outstanding on this revolving loan agreement.

 

At June 30,2009, our totaloutstanding indebtedness amounted to $194.2 million, consisting of $158.3 millionof 7.00% Senior Notes, $34.9 million on our domestic line of credit, and $1.0million of notes payable to foreign banks.

 

All of our debt agreementscontain covenants that place certain restrictions on us, including our abilityto incur additional indebtedness, to repurchase Senior Notes, to makeinvestments in other entities, and limitations on cash dividend payments. Wewere in compliance with all such covenants as of June 30, 2009 and do notanticipate any compliance issues in the future. Our bond indenture containslimitations, based on net income (among other things), on the amount ofdiscretionary repurchases we may make of our Ordinary common stock. Our intentand ability to repurchase additional Ordinary common stock either directly fromshareholders or on the open market is directly affected by this limitation. In May 2008we announced a share repurchase program, which permits us to make discretionarypurchases of up to $25.0 million of our Ordinary common stock. We have not madeany repurchases in 2009.

 

We experience longproduction and inventory turnover cycles, which we constantly monitor sincefluctuations in demand can have a significant impact on these cycles. In normaleconomic conditions, we are able to effectively utilize cash flow fromoperations to fund our debt and capital requirements and pay off seasonalborrowings on our domestic line of credit. However, given the current globaleconomy, we anticipate the remainder of 2009 to be challenging. Our 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 and maintain sufficient operating cash on hand to meet short-termrequirements.

 

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

 

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

 
| ** **                      | ** ** | **Payments due by period** | ** ** |
|---------------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **1 - 3 years** | ** ** | **3 - 5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                      |       |                       |       |   |   |   |   |   |   |   |   |
| **Contractual Obligations**     |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt (1)              |       | $                          | 247,142    |   | $ | 12,597 |   | $ | 57,747 |   | $ | 176,798 |   | $ | — |   |
| Capital leases                  |       | 38                         |       | 23 |   | 15 |   | — |   | — |   |
| Operating leases (2)            |       | 261,612                    |       | 5,680 |   | 9,874 |   | 8,147 |   | 237,911 |   |
| Purchase obligations (3)        |       | 21,906                     |       | 21,576 |   | 330 |   | — |   | — |   |
| Other long-term liabilities (4) |       | 44,367                     |       | 4,687 |   | 6,261 |   | 4,951 |   | 28,468 |   |
| Total                           |       | $                          | 575,065    |   | $ | 44,563 |   | $ | 74,227 |   | $ | 189,896 |   | $ | 266,379 |   |

 

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**Notes to Contractual Obligations:**
| (1)    |   | Long-term debt  represents long-term debt obligations, the fixed interest on our Notes, and  the variable interest on our other loans. We estimated the future variable  interest obligation using the applicable June 30,  2009 rates. The  nature of our long-term debt obligations, including changes to our long-term  debt structure, is described more fully in the “Borrowing Availability and  Activities” section of “Liquidity and Capital Resources.”                                                                       |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (2)    |   | Approximately $247.6  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 FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 141R, “Business Combinations,”a revision 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.

 

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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). This FSPamends FASB 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. It also amends APB Opinion No. 28, “Interim FinancialReporting,” to require those disclosures in all interim financialstatements. We adopted this FSP on April 1, 2009 and have reportedthe additional required disclosures in Note 7.

 

InMay 2009, the FASB issued Statement No. 165, “Subsequent Events” (“SFAS 165”). The provisions of FAS 165 setforth the period after the balance sheet date during which management of areporting entity should evaluate events or transactions that may have occurredfor potential recognition or disclosure in the financial statements, thecircumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financial statements, and thedisclosures that an entity should make about events or transactions that occurredafter the balance sheet date. We adopted SFAS 165 effective June 30, 2009and evaluated any subsequent events through the date of this filing. Weconcluded there were no material subsequent events requiring disclosure.

 

InJune 2009, the FASB issued Statement No. 167, “Amendments to FASB Interpretation No. 46(R)”(“SFAS 167”). This Statement amends FIN 46(R) to require ongoingreassessments of whether an enterprise is the primary beneficiary of a variableinterest entity. It also requires additional disclosures for any enterprisethat holds an interest in a variable interest entity. The provisions of SFAS167 are effective January 1, 2010. We are currently evaluating whatimpact, if any, its adoption will have on our consolidated financial statements.

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

 

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

 

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

 

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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 June 30, 2009, the end of the periodcovered by this report. In designing disclosure controls and procedures,management recognizes that any controls, no matter how well designed andoperated, can only provide reasonable, not absolute, assurance of achieving thedesired control objectives.

 

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

 
| **PART II** | **OTHER INFORMATION**                                    |
|------------------|----------------------------------------------------------|
| ** **       | ** **                                               |
| **ITEM 4**       | **SUBMISSION OF MATTERS TO A VOTE  OF SECURITY HOLDERS** |

 

At the Company’s Annual Meeting of Shareholders held on May 29,2009, the Board of Directors was re-elected in its entirety. The votes cast foreach nominee were as follows:

 
| ** **               | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|--------------------------|------------|------------|------------|--------------|------------|
|                     |       |       |       |         |       |
| Kyle Kirkland            |       | 51,694,926 |       | 2,996,013    |       |
| Dana D. Messina          |       | 52,582,733 |       | 2,108,206    |       |
| Thomas Kurrer            |       | 52,260,110 |       | 2,430,829    |       |
| John M. Stoner, Jr. |       | 52,260,286 |       | 2,430,653    |       |
| A. Clinton Allen         |       | 53,775,367 |       | 915,572      |       |
| Rudolph K. Kluiber       |       | 54,366,697 |       | 324,242      |       |
| Peter McMillan           |       | 54,140,231 |       | 550,708      |       |
| David Lockwood           |       | 54,550,400 |       | 140,539      |       |

 

Theproposal to ratify UHY LLP to serve as the Company’s independent registeredpublic accounting firm for the fiscal year ending December 31, 2009 wasapproved with 54,133,459 votes cast for, 31,384 against, and 526,096abstentions.

 

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| **ITEM 6** | **EXHIBITS** |
|------------|--------------|
| ** ** | ** **   |

(i)    Exhibits

 

10.1 Second Amendment and Waiver to the Third Amendedand Restated Credit Agreement, dated as of May 9, 2008, to the ExistingCredit Agreement, by and among Conn-Selmer, Inc. and Steinway, Inc.,those signatories identified as guarantors, the lenders, and GMAC CommercialFinance LLC, as Administrative Agent

 

10.2 Third Amendment and Waiver to the Third Amendedand Restated Credit Agreement, dated as of July 10, 2009, to the ExistingCredit Agreement, by and among Conn-Selmer, Inc. and Steinway, Inc.,those signatories identified as guarantors, the lenders, and GMAC CommercialFinance LLC, as Administrative Agent

 

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

 

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**SIGNATURES**

 

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

 

 
|                       | STEINWAY MUSICAL  INSTRUMENTS, INC.                          |
|----------------------------|--------------------------------------------------------------|
|                       |                                                         |
|                       | /s/ Dana D. Messina                                          |
|                       | Dana D. Messina                                              |
|                       | Director, President and  Chief Executive Officer             |
|                       |                                                         |
|                       | /s/ Dennis M. Hanson                                         |
|                       | Dennis M. Hanson                                             |
|                       | Senior Executive Vice  President and Chief Financial Officer |
|                       |                                                         |
| Date: August 7,  2009 |                                                         |

 

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