**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**x****     ****QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIODENDED SEPTEMBER 30, 2010**

 

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

 

**COMMISSION FILE NUMBER 001-11911**

 

**STEINWAY MUSICAL INSTRUMENTS, INC.**

(Exact name of registrant asspecified in its charter)

 

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

 

Registrant’s telephone numberincluding area code: **(781) 894-9770**

 

Indicate by check mark whether theregistrant (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

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o  No o

 

Indicate by check mark whether theregistrant 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 mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).  Yes o  No x

 

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

** **
|   | Class A | 477,952    |
|--------|--------------|------------|
|   | Ordinary     | 11,576,660 |
|   | Total        | 12,054,612 |

 

 

 

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**STEINWAY MUSICAL INSTRUMENTS, INC. ANDSUBSIDIARIES**

**FORM 10-Q**

**INDEX**

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

 

2

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**PART I                  FINANCIALSTATEMENTS**

 

**ITEM 1                CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

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

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**Unaudited**

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

 
| ** **                          | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                          | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  sales                          |       | $                                                        | 83,261     |                                                    | $          | 82,634 |   | $ | 230,052 |   | $ | 224,738 |   |
| Cost  of sales                      |       | 60,066                                                   |       | 59,229                                                  |       | 163,370 |   | 163,826 |   |
|                                |       |                                                     |       |                                                    |       |   |   |   |   |
| Gross  profit                       |       | 23,195                                                   |       | 23,405                                                  |       | 66,682 |   | 60,912 |   |
|                                |       |                                                     |       |                                                    |       |   |   |   |   |
| Operating  expenses:                |       |                                                     |       |                                                    |       |   |   |   |   |
| Sales  and marketing                |       | 9,587                                                    |       | 9,638                                                   |       | 29,756 |   | 30,118 |   |
| General  and administrative         |       | 7,768                                                    |       | 7,491                                                   |       | 22,096 |   | 22,860 |   |
| Other                               |       | 46                                                       |       | 145                                                     |       | 172 |   | 347 |   |
| Impairment  charges                 |       | —                                                   |       | 976                                                     |       | — |   | 976 |   |
| Total  operating expenses           |       | 17,401                                                   |       | 18,250                                                  |       | 52,024 |   | 54,301 |   |
|                                |       |                                                     |       |                                                    |       |   |   |   |   |
| Income  from operations             |       | 5,794                                                    |       | 5,155                                                   |       | 14,658 |   | 6,611 |   |
|                                |       |                                                     |       |                                                    |       |   |   |   |   |
| Other  expense (income), net        |       | 110                                                      |       | (223                                                    | )          | (699 | ) | (1,034 | ) |
| Net  gain on extinguishment of debt |       | —                                                   |       | —                                                  |       | (104 | ) | (3,434 | ) |
| Interest  income                    |       | (241                                                     | )          | (320                                                    | )          | (985 | ) | (1,302 | ) |
| Interest  expense                   |       | 2,705                                                    |       | 2,954                                                   |       | 8,303 |   | 8,974 |   |
| Total  non-operating expenses       |       | 2,574                                                    |       | 2,411                                                   |       | 6,515 |   | 3,204 |   |
|                                |       |                                                     |       |                                                    |       |   |   |   |   |
| Income  before income taxes         |       | 3,220                                                    |       | 2,744                                                   |       | 8,143 |   | 3,407 |   |
|                                |       |                                                     |       |                                                    |       |   |   |   |   |
| Income  tax provision               |       | 1,655                                                    |       | 2,107                                                   |       | 3,598 |   | 2,385 |   |
|                                |       |                                                     |       |                                                    |       |   |   |   |   |
| Net  income                         |       | $                                                        | 1,565      |                                                    | $          | 637 |   | $ | 4,545 |   | $ | 1,022 |   |
|                                |       |                                                     |       |                                                    |       |   |   |   |   |
| Earnings  per share:                |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                               |       | $                                                        | 0.13       |                                                    | $          | 0.07 |   | $ | 0.40 |   | $ | 0.12 |   |
| Diluted                             |       | $                                                        | 0.13       |                                                    | $          | 0.07 |   | $ | 0.39 |   | $ | 0.12 |   |
|                                |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted  average shares:           |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                               |       | 12,055,741                                               |       | 8,581,343                                               |       | 11,503,013 |   | 8,549,287 |   |
| Diluted                             |       | 12,098,871                                               |       | 8,583,320                                               |       | 11,559,335 |   | 8,551,885 |   |

 

Seenotes to condensed consolidated financial statements.

 

3

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

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**Unaudited**

**(In Thousands)**

 
| ** **                                                                                                                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Assets                                                                                                                    |       |                   |       |                  |       |
| Current  assets:                                                                                                          |       |                   |       |                  |       |
| Cash                                                                                                                      |       | $                      | 96,214     |                  | $          | 65,873 |   |
| Accounts,  notes, and other receivables, net of allowances of   $13,554 and $13,643 in 2010 and 2009, respectively        |       | 52,383                 |       | 45,073                |       |
| Inventories                                                                                                               |       | 149,300                |       | 158,030               |       |
| Prepaid  expenses and other current assets                                                                                |       | 13,504                 |       | 13,499                |       |
| Deferred  tax assets                                                                                                      |       | 11,582                 |       | 11,431                |       |
| Total  current assets                                                                                                     |       | $                      | 322,983    |                  | $          | 293,906 |   |
|                                                                                                                      |       |                   |       |                  |       |
| Property,  plant and equipment, net of accumulated depreciation of   $110,161 and $105,744 in 2010 and 2009, respectively |       | 85,850                 |       | 89,538                |       |
| Trademarks                                                                                                                |       | 15,064                 |       | 15,284                |       |
| Goodwill                                                                                                                  |       | 23,365                 |       | 24,063                |       |
| Other  intangibles, net                                                                                                   |       | 3,427                  |       | 4,183                 |       |
| Other  assets                                                                                                             |       | 14,102                 |       | 12,663                |       |
| Long-term  deferred tax assets                                                                                            |       | 11,485                 |       | 10,153                |       |
|                                                                                                                      |       |                   |       |                  |       |
| Total  assets                                                                                                             |       | $                      | 476,276    |                  | $          | 449,790 |   |
|                                                                                                                      |       |                   |       |                  |       |
| Liabilities  and stockholders’ equity                                                                                |       |                   |       |                  |       |
| Current  liabilities:                                                                                                     |       |                   |       |                  |       |
| Debt                                                                                                                      |       | $                      | 1,198      |                  | $          | 537 |   |
| Accounts  payable                                                                                                         |       | 12,908                 |       | 9,764                 |       |
| Other  current liabilities                                                                                                |       | 34,322                 |       | 36,395                |       |
| Total  current liabilities                                                                                                |       | 48,428                 |       | 46,696                |       |
|                                                                                                                      |       |                   |       |                  |       |
| Long-term  debt                                                                                                           |       | 152,012                |       | 157,703               |       |
| Deferred  tax liabilities                                                                                                 |       | 7,088                  |       | 7,124                 |       |
| Pension  and other postretirement benefit liabilities                                                                     |       | 36,022                 |       | 35,766                |       |
| Other  non-current liabilities                                                                                            |       | 5,558                  |       | 6,005                 |       |
| Total  liabilities                                                                                                        |       | 249,108                |       | 253,294               |       |
|                                                                                                                      |       |                   |       |                  |       |
| Commitments  and contingent liabilities                                                                                   |       |                   |       |                  |       |
|                                                                                                                      |       |                   |       |                  |       |
| Stockholders’  equity:                                                                                               |       |                   |       |                  |       |
| Common  stock                                                                                                             |       | 14                     |       | 12                    |       |
| Additional  paid-in capital                                                                                               |       | 154,053                |       | 125,192               |       |
| Retained  earnings                                                                                                        |       | 130,854                |       | 126,415               |       |
| Accumulated  other comprehensive loss                                                                                     |       | (10,685                | )          | (7,851                | )          |
| Treasury  stock, at cost                                                                                                  |       | (47,068                | )          | (47,272               | )          |
| Total  stockholders’ equity                                                                                          |       | 227,168                |       | 196,496               |       |
|                                                                                                                      |       |                   |       |                  |       |
| Total  liabilities and stockholders’ equity                                                                          |       | $                      | 476,276    |                  | $          | 449,790 |   |

 

Seenotes to condensed consolidated financial statements.

 

4

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

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Unaudited**

**(In Thousands)**

 
| ** **                                                                    | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| Cash  flows from operating activities:                                        |       |                                                    |       |   |   |
| Net  income                                                                   |       | $                                                       | 4,545      |   | $ | 1,022 |   |
| Adjustments  to reconcile net income to cash flows from operating activities: |       |                                                    |       |   |   |
| Depreciation  and amortization                                                |       | 7,302                                                   |       | 7,845 |   |
| Net  gain on extinguishment of debt                                           |       | (104                                                    | )          | (3,434 | ) |
| Intangible  asset impairment                                                  |       | —                                                  |       | 976 |   |
| Stock-based  compensation expense                                             |       | 1,109                                                   |       | 890 |   |
| Excess  tax benefits from stock-based awards                                  |       | 64                                                      |       | — |   |
| Tax  benefit from stock option exercises                                      |       | 4                                                       |       | — |   |
| Deferred  tax (benefit) expense                                               |       | (1,257                                                  | )          | 169 |   |
| Provision  for (recovery of) doubtful accounts                                |       | (63                                                     | )          | 1,302 |   |
| Other                                                                         |       | 66                                                      |       | (181 | ) |
| Changes  in operating assets and liabilities:                                 |       |                                                    |       |   |   |
| Accounts,  notes and other receivables                                        |       | (8,296                                                  | )          | 674 |   |
| Inventories                                                                   |       | 6,353                                                   |       | (1,244 | ) |
| Prepaid  expenses and other assets                                            |       | (324                                                    | )          | 2,026 |   |
| Accounts  payable                                                             |       | 2,990                                                   |       | (3,724 | ) |
| Other  liabilities                                                            |       | (1,275                                                  | )          | (7,790 | ) |
| Cash  flows from operating activities:                                        |       | 11,114                                                  |       | (1,469 | ) |
|                                                                          |       |                                                    |       |   |   |
| Cash  flows from investing activities:                                        |       |                                                    |       |   |   |
| Capital  expenditures                                                         |       | (1,841                                                  | )          | (2,996 | ) |
| Other                                                                         |       | 108                                                     |       | 24 |   |
| Acquisition  of businesses, net of cash acquired                              |       | (353                                                    | )          | (820 | ) |
| Cash  flows from investing activities                                         |       | (2,086                                                  | )          | (3,792 | ) |
|                                                                          |       |                                                    |       |   |   |
| Cash  flows from financing activities:                                        |       |                                                    |       |   |   |
| Borrowings  under lines of credit                                             |       | 870                                                     |       | 231,793 |   |
| Repayments  under lines of credit                                             |       | (335                                                    | )          | (214,552 | ) |
| Repayments  of long-term debt, net of discount                                |       | (5,633                                                  | )          | (7,280 | ) |
| Proceeds  from issuance of common stock                                       |       | 28,197                                                  |       | 605 |   |
| Purchase  of treasury stock                                                   |       | (349                                                    | )          | — |   |
| Excess  tax benefits from stock-based awards                                  |       | (64                                                     | )          | — |   |
| Cash  flows from financing activities                                         |       | 22,686                                                  |       | 10,566 |   |
|                                                                          |       |                                                    |       |   |   |
| Effect  of foreign exchange rate changes on cash                              |       | (1,373                                                  | )          | 569 |   |
|                                                                          |       |                                                    |       |   |   |
| Change  in cash                                                               |       | 30,341                                                  |       | 5,874 |   |
| Cash,  beginning of period                                                    |       | 65,873                                                  |       | 44,380 |   |
| Cash,  end of period                                                          |       | $                                                       | 96,214     |   | $ | 50,254 |   |
|                                                                          |       |                                                    |       |   |   |
| Supplemental  Cash Flow Information:                                          |       |                                                    |       |   |   |
| Interest  paid                                                                |       | $                                                       | 12,268     |   | $ | 13,482 |   |
| Income  taxes paid                                                            |       | $                                                       | 6,395      |   | $ | 4,139 |   |

 

Seenotes to condensed consolidated financial statements.

 

5

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

**CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

**Unaudited**

**(In Thousands Except Share Data)**

 
| ** **                                                 | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Treasury  Stock** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|---------------------|------------|---------------------------------------|------------|
| Balance,  January 1, 2010                             |       | $                 | 12         |                             | $          | 125,192                |       | $                                           | 126,415    |                | $          | (7,851                                | )          | $ | (47,272 | ) | $ | 196,496 |   |
|                                                       |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Comprehensive  income:                                     |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Net  income                                                |       |              |       |                             |       | 4,545                  |       |                                        |       |                |       | 4,545                                 |       |
| Foreign  currency translation adjustments                  |       |              |       |                             |       |                   |       | (2,894                                      | )          |                |       | (2,894                                | )          |
| Changes  in pension and other postretirement benefits, net |       |              |       |                             |       |                   |       | 60                                          |       |                |       | 60                                    |       |
| Total  comprehensive income                                |       |              |       |                             |       |                   |       |                                        |       |                |       | 1,711                                 |       |
| Exercise  of 23,850 options for shares of common stock     |       | —            |       | 2                                |       | (106                   | )          |                                        |       | 553                 |       | 449                                   |       |
| Tax  benefit of options exercised                          |       |              |       | 4                                |       |                   |       |                                        |       |                |       | 4                                     |       |
| Stock-based  compensation                                  |       |              |       | 1,109                            |       |                   |       |                                        |       |                |       | 1,109                                 |       |
| Issuance  of 1,756,821 shares of common stock              |       | 2                 |       | 27,746                           |       |                   |       |                                        |       |                |       | 27,748                                |       |
| Purchase  of 21,827 shares of common stock                 |       |              |       |                             |       |                   |       |                                        |       | (349                | )          | (349                                  | )          |
| Balance,  September 30, 2010                          |       | $                 | 14         |                             | $          | 154,053                |       | $                                           | 130,854    |                | $          | (10,685                               | )          | $ | (47,068 | ) | $ | 227,168 |   |

 

Seenotes to condensed consolidated financial statements.

 

6

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

**NOTES TO CONDENSED CONSOLIDATED**

**FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2010**

**Unaudited**

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

 

**(1)           Basisof Presentation**

 

The accompanying condensedconsolidated financial statements of Steinway Musical Instruments, Inc.and subsidiaries (the “Company”) for the three and nine months ended September 30,2010 and 2009 are unaudited. In the opinion of management, these statementshave been prepared on the same basis as the audited consolidated financialstatements as of and for the year ended December 31, 2009, and include alladjustments which are of a normal and recurring nature, necessary for the fairpresentation of financial position, results of operations and cash flows forthe interim periods. We encourage you to read the condensed consolidatedfinancial statements in conjunction with the risk factors, consolidatedfinancial statements and notes thereto contained in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2009 filed with theSecurities and Exchange Commission (“SEC”). The results of operations for thethree and nine months ended September 30, 2010 are not necessarilyindicative of the results that may be expected for the entire year.

 

Throughout this report “we,” “us,”and “our” refer to Steinway Musical Instruments, Inc. and subsidiariestaken as a whole.

 

**(2)           Summaryof Significant Accounting Policies**

 

**Principles of Consolidation** - Our condensed consolidated financial statements includethe accounts of all direct and indirect subsidiaries, all of which are whollyowned, including the piano (“Steinway”), band (“Conn-Selmer”), and online music(“Arkiv”) divisions. Intercompany balances have been eliminated inconsolidation.

 

**Use of Estimates****-The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America necessarilyrequires us to make estimates and assumptions that affect the reported amountsof assets and liabilities, the disclosure of contingent assets and liabilitiesat the date of the financial statements, and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates.

 

**Income Taxes** - We provide for income taxes using an asset and liabilityapproach. We compute deferred income tax assets and liabilities for differencesbetween the financial statement and tax bases of assets and liabilities thatwill result in taxable or deductible amounts in the future based on enacted taxlaws and rates applicable to the periods in which the differences are expectedto affect taxable income. We establish valuation allowances when necessary toreduce deferred tax assets to the amount that more likely than not will berealized.

 

We provide reserves for potentialpayments of tax to various tax authorities related to uncertain tax positionsand other issues. Reserves related to uncertain tax positions are based on adetermination of whether and how much of a tax benefit taken in our tax filingsor positions is more likely than not to be realized, assuming that the matterin question will be raised by the tax authorities. Potential interest andpenalties associated with such uncertain tax positions are recorded as acomponent of income tax expense. We believe appropriate provisions foroutstanding issues have been made.

 

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

 

There were no material changes tothe liability for uncertain tax positions in the first nine months of 2010.Although we believe our tax estimates are appropriate, the final determinationof tax audits and any related litigation could result in changes in ourestimates.

 

7

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**Stock-based Compensation** - We record compensation cost on a straight-line basis overthe award’s requisite service period for all share-based awards granted. Weestimate the fair value of our stock option awards (less estimated forfeitures)and employee stock purchase plan rights on the date of grant using theBlack-Scholes option valuation model.

 

**Earnings per Common Share** - We compute earnings per share using the weighted-averagenumber of common shares outstanding during each period. Diluted earnings per commonshare reflects the dilutive impact of shares subscribed under the EmployeeStock Purchase Plan (“Purchase Plan”) and effect of our outstanding optionsusing the treasury stock method, except when such options would beantidilutive.

 

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

 
| ** **                                         | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                         | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Weighted-average  shares:                          |       |                                                     |       |                                                    |       |   |   |   |   |
| For  basic earnings per share                      |       | 12,055,741                                               |       | 8,581,343                                               |       | 11,503,013 |   | 8,549,287 |   |
| Dilutive  effect of stock-based compensation plans |       | 43,130                                                   |       | 1,977                                                   |       | 56,322 |   | 2,598 |   |
| For  diluted earnings per share                    |       | 12,098,871                                               |       | 8,583,320                                               |       | 11,559,335 |   | 8,551,885 |   |

 

We did notinclude any of the 1,141,016 outstanding options to purchase shares of commonstock in the computation of diluted earnings per share for the three and ninemonths ended September 30, 2009 because generally their exercise priceswere more than the average market price of our common shares, and thereforeantidilutive. We did not include 745,176 outstanding options to purchase sharesof common stock in the computation of diluted earnings per share for the threeand nine months ended September 30, 2010 because they were antidilutive.

 

**Accumulated Other ComprehensiveLoss** - Accumulated othercomprehensive loss is comprised of foreign currency translation adjustments andpension and other postretirement benefits. The components of accumulated othercomprehensive loss are as follows:

 
| ** **                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Accumulated  other comprehensive loss:      |       |                   |       |                  |       |
| Foreign  currency translation adjustment    |       | $                      | 4,386      |                  | $          | 7,280 |   |
| Pension  and other postretirement benefits  |       | (15,071                | )          | (15,131               | )          |
| Total  accumulated other comprehensive loss |       | $                      | (10,685    | )                     | $          | (7,851 | ) |

 

The components ofcomprehensive income are as follows:

 
| ** **                                         | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                         | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Comprehensive  income:                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Net  income                                        |       | $                                                        | 1,565      |                                                    | $          | 637 |   | $ | 4,545 |   | $ | 1,022 |   |
| Foreign  currency translation adjustment           |       | 6,319                                                    |       | 2,576                                                   |       | (2,894 | ) | 3,690 |   |
| Pension  and other postretirement benefits         |       | —                                                   |       | 3,655                                                   |       | 83 |   | 3,655 |   |
| Tax  impact of pension and postretirement benefits |       | —                                                   |       | (1,462                                                  | )          | (23 | ) | (1,462 | ) |
| Total  comprehensive income                        |       | $                                                        | 7,884      |                                                    | $          | 5,406 |   | $ | 1,711 |   | $ | 6,905 |   |

 

8

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**Recent Accounting Pronouncements****-** InMarch 2010, the Financial Accounting Standards Board issued new guidancewhich clarifies the scope exception for embedded credit related derivatives. Wewere required to comply with this new standard as of July 1, 2010 and itdid not have a material impact on our financial statements.

 

**(3)           Inventories**

 
| ** **       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------|------------|------------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Raw  materials   |       | $                      | 17,213     |                  | $          | 18,413 |   |
| Work-in-process  |       | 35,960                 |       | 42,121                |       |
| Finished  goods  |       | 96,127                 |       | 97,496                |       |
| Total  inventory |       | $                      | 149,300    |                  | $          | 158,030 |   |

 

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

 

Intangible assets other thangoodwill and indefinite-lived trademarks are amortized on a straight-line basisover their estimated useful lives. Deferred financing costs are amortized overthe repayment periods of the underlying debt. We performed our annual goodwilland intangible asset impairment test as of July 31, 2010 given the timing ofour fall budgeting and planning process, which provides multi-year cash flowsused to conduct our annual impairment testing of intangible assets. Ouranalyses of band division trademarks and piano division goodwill and trademarksdid not indicate any impairment; therefore, no charge was taken against thoseassets. No other events or circumstances occurred subsequent to our annualimpairment test which would have indicated that these assets may be impaired.

 

The changes in carrying amounts ofgoodwill and trademarks are as follows:

 
| ** **                           | ** ** | **Piano** | ** ** | **Band** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|-----------|------------|----------|------------|-----------|------------|
| Goodwill:                            |       |      |       |     |       |      |       |
| Balance,  January 1, 2010       |       | $         | 24,063     |     | $          | —    |       | $ | 24,063 |   |
| Foreign  currency translation impact |       | (698      | )          | —   |       | (698      | )          |
| Balance,  September 30, 2010    |       | $         | 23,365     |     | $          | —    |       | $ | 23,365 |   |
|                                 |       |      |       |     |       |      |       |
| Trademarks:                          |       |      |       |     |       |      |       |
| Balance,  January 1, 2010       |       | $         | 9,460      |     | $          | 5,824     |       | $ | 15,284 |   |
| Foreign  currency translation impact |       | (220      | )          | —   |       | (220      | )          |
| Balance,  September 30, 2010    |       | $         | 9,240      |     | $          | 5,824     |       | $ | 15,064 |   |

 

We have previously recordedcumulative impairment losses of $8.6 million associated with band divisiongoodwill and $1.0 million associated with online music business trademarks.

 

9

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

 
| ** **                              | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Gross  deferred financing costs         |       | $                            | 5,286      |                        | $          | 5,333 |   |
| Accumulated  amortization               |       | (3,411                       | )          | (3,135                      | )          |
| Deferred  financing costs, net          |       | $                            | 1,875      |                        | $          | 2,198 |   |
|                                    |       |                         |       |                        |       |
| Gross  non-compete agreements           |       | $                            | 250        |                        | $          | 250 |   |
| Accumulated  amortization               |       | (119                         | )          | (81                         | )          |
| Non-compete  agreements, net            |       | $                            | 131        |                        | $          | 169 |   |
|                                    |       |                         |       |                        |       |
| Gross  customer relationships           |       | $                            | 525        |                        | $          | 506 |   |
| Accumulated  amortization               |       | (254                         | )          | (166                        | )          |
| Customer  relationships, net            |       | $                            | 271        |                        | $          | 340 |   |
|                                    |       |                         |       |                        |       |
| Gross  website and developed technology |       | $                            | 2,176      |                        | $          | 2,176 |   |
| Accumulated  amortization               |       | (1,026                       | )          | (700                        | )          |
| Website  and developed technology, net  |       | $                            | 1,150      |                        | $          | 1,476 |   |
|                                    |       |                         |       |                        |       |
| Total  gross other intangibles          |       | $                            | 8,237      |                        | $          | 8,265 |   |
| Accumulated  amortization               |       | (4,810                       | )          | (4,082                      | )          |
| Other  intangibles, net                 |       | $                            | 3,427      |                        | $          | 4,183 |   |

 

Our band division purchased amusic education business in August 2010. We are in the process ofconducting the valuation assessment of acquired assets but do not expect theresult to be material to our intangible assets.

 

Deferred financing costs increased$0.2 million due to the renegotiation of our domestic credit agreement, whichwas in process as of September 30, 2010. Deferred financing costs werealso affected by the purchase of $5.8 million of our Senior Notes in May andJune 2010. These repurchases are described more fully in Note 6. Theweighted-average amortization period for deferred financing costs is sevenyears, and the weighted-average amortization period for all other amortizableintangibles is approximately five years. Total amortization expense, whichincludes amortization of deferred financing costs, is as follows:

 
| ** **            | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **            | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Amortization  expense |       | $                                                        | 300        |                                                    | $          | 328 |   | $ | 911 |   | $ | 995 |   |
|                       |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |

 

10

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The following table shows the totalestimated amortization expense for the remainder of 2010 and beyond:

 
| Remainder  of 2010 |   | $     | 307    |   |
|--------------------|--------|-------|--------|--------|
| 2011               |   | 1,182 |   |
| 2012               |   | 1,066 |   |
| 2013               |   | 717   |   |
| 2014               |   | 121   |   |
| Thereafter         |   | 34    |   |
| Total              |   | $     | 3,427  |   |

 

**(5)           OtherCurrent Liabilities**

 

Ourother current liabilities consist of the following:

 
| ** **                                                               | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Accrued  payroll and related benefits                                    |       | $                            | 11,320     |                        | $          | 9,326 |   |
| Current  portion of pension and other postretirement benefit liabilities |       | 1,235                        |       | 1,456                       |       |
| Accrued  warranty expense                                                |       | 1,449                        |       | 1,553                       |       |
| Accrued  interest                                                        |       | 876                          |       | 3,675                       |       |
| Deferred  income                                                         |       | 8,041                        |       | 7,210                       |       |
| Environmental  liabilities                                               |       | 2,233                        |       | 2,377                       |       |
| Income  and other taxes payable                                          |       | 2,038                        |       | 3,383                       |       |
| Other  accrued expenses                                                  |       | 7,130                        |       | 7,415                       |       |
| Total                                                                    |       | $                            | 34,322     |                        | $          | 36,395 |   |

 

Accrued warranty expense is recordedat the time of sale for instruments that have a warranty period ranging fromone to ten years. The accrued expense recorded is generally calculated on aratio of warranty costs to sales based on our warranty history and is adjustedperiodically following an analysis of actual warranty claims. The accruedwarranty expense activity for the nine months ended September 30, 2010 and2009, and the year ended December 31, 2009 is as follows:

 
| ** **                           | ** ** | **September 30,  2010** | ** ** | **September 30,  2009** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------|------------|------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Beginning  balance                   |       | $                            | 1,553      |                         | $          | 1,451                       |       | $ | 1,451 |   |
| Additions                            |       | 587                          |       | 570                          |       | 945                         |       |
| Claims  and reversals                |       | (665                         | )          | (610                         | )          | (865                        | )          |
| Foreign  currency translation impact |       | (26                          | )          | 35                           |       | 22                          |       |
| Ending  balance                      |       | $                            | 1,449      |                         | $          | 1,446                       |       | $ | 1,553 |   |

 

11

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**(6)           Long-TermDebt**

 

Ourlong-term debt consists of the following:

 
| ** **                 | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Senior  Notes              |       | $                            | 152,506    |                        | $          | 158,326 |   |
| Unamortized  bond discount |       | (494                         | )          | (623                        | )          |
| Overseas  lines of credit  |       | 1,198                        |       | 537                         |       |
| Total                      |       | 153,210                      |       | 158,240                     |       |
| Less:  current portion     |       | 1,198                        |       | 537                         |       |
| Long-term  debt            |       | $                            | 152,012    |                        | $          | 157,703 |   |

 

Scheduled repayments of long-termdebt as of September 30, 2010 are as follows:

 
| Remainder  of 2010 |   | $       | 1,198   |   |
|--------------------|--------|---------|---------|--------|
| 2011               |   | —  |    |
| 2012               |   | —  |    |
| 2013               |   | —  |    |
| 2014               |   | 152,506 |    |
| Total              |   | $       | 153,704 |   |

 

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

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

 

**(7)           FairValues of Financial Instruments**

 

Our financial instruments, which arerecorded at fair value, consist primarily of foreign currency contracts andmarketable equity securities. We assess the inputs used to measure fair valueusing the following three-tier hierarchy, which indicates the extent to whichinputs 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 |

 

12

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|   |   | 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.) |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

We value our foreign currencycontracts using internal models with observable inputs, including currencyforward and spot prices. Estimated fair value has been determined as thedifference between the current forward rate and the contract rate, multipliedby the notional amount of the contract, or upon the estimated fair value ofpurchased option contracts.

 

Thefollowing table presents information about our assets and liabilities measuredat fair value on a recurring basis as of September 30, 2010 and December 31,2009 and the fair value hierarchy of the valuation techniques we utilized.

 
| ** **                                    | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Financial  assets:                            |       |                         |       |                        |       |
| Trading  securities(1) - Level 1         |       | $                            | 1,661      |                        | $          | 1,623 |   |
| Foreign  currency contracts(2) - Level 2 |       | 87                           |       | 82                          |       |
|                                          |       | $                            | 1,748      |                        | $          | 1,705 |   |
|                                          |       |                         |       |                        |       |
| Financial  liabilities:                       |       |                         |       |                        |       |
| Foreign  currency contracts(2) - Level 2 |       | $                            | 112        |                        | $          | 3 |   |

 

----

(1)   Our trading securities pertain to the Supplemental ExecutiveRetirement Plan (“SERP”) and are held in a Rabbi Trust. We record acorresponding liability for the same amount in our financial statements, whichrepresents our obligation to SERP participants.

 

(2)   Our foreign currency contracts pertain to obligations orpotential obligations to purchase or sell euros, pounds, U.S. dollars, and yenunder various forward contracts.

 

We base the estimated fair value ofour debt on institutional quotes currently available to us. The historicalcost, net carrying value, and estimated fair value are as follows:

 
| ** **              | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **Net Carrying  Value**     | ** ** | **Estimated  Fair Value**  | ** ** | **Net Carrying  Value** | ** ** | **Estimated  Fair Value** | ** ** |
| Financial  liabilities: |       |                             |       |                            |       |   |   |   |   |
| Debt                    |       | $                                | 153,210    |                            | $          | 155,229 |   | $ | 158,240 |   | $ | 144,218 |   |
|                         |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

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

 

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

 

Our common stock is comprisedof two classes: Class A and Ordinary. With the exception of disparatevoting power, both classes are substantially identical. Each share of Class Acommon stock entitles the holder to 98 votes. Holders of Ordinary common stockare entitled to one vote per share. Each share of Class A common stockshall automatically convert to Ordinary common stock if, at any time, thatshare of Class A common stock is not owned by an original Class A holder.In March 2010 Samick Musical Instruments Co., Ltd. (“Samick”)exercised its right to purchase 1,700,000 shares of our ordinary common stockat a price of $16.00 per share, which resulted in a cash payment to us of $27.2million. As of September 30, 2010 our Chairman and our Chief ExecutiveOfficer collectively owned 100% of the Class A common shares, representingapproximately 80% of the combined voting power of the Class A common stockand Ordinary common stock.

 

**Employee Stock Purchase Plan** - We have an employee stock purchase plan under whichsubstantially all employees may purchase Ordinary common stock through payrolldeductions at a purchase price equal to 85% of the lower of the fair marketvalues as of the beginning or end of each twelve-month offering period. Stockpurchases under the Purchase Plan are 

 

13

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limited to 5% of an employee’sannual base earnings. We have reserved 400,000 shares of common stock forissuance 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 1996Stock Plan has expired but still has vested and unvested options outstanding.We reached our registered share limitation in early 2007, and had previouslyreserved 721,750 treasury stock shares to issue under this plan. We have sinceissued 122,674 shares of treasury stock to cover options exercised, with337,876 remaining options outstanding. Since in most instances the average costof the treasury stock exceeded the price of the options exercised, thedifference between the proceeds received and the average cost of the treasurystock issued resulted in a reduction of retained earnings. This reduction was$0.1 million for the nine months ended September 30, 2010. There were nostock option exercises during the three and nine months ended September 30,2009.

 

The compensation cost and the incometax benefit recognized for these plans is as follows:

 
| ** **                        | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                        | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Compensation  cost included in:   |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic  income per share           |       | $                                                        | 0.03       |                                                    | $          | 0.03 |   | $ | 0.08 |   | $ | 0.09 |   |
| Diluted  income per share         |       | $                                                        | 0.02       |                                                    | $          | 0.03 |   | $ | 0.08 |   | $ | 0.09 |   |
| Stock-based  compensation expense |       | 368                                                      |       | 328                                                     |       | 1,109 |   | 890 |   |
| Income tax  benefit               |       | 66                                                       |       | 51                                                      |       | 201 |   | 136 |   |

 

Wemeasured the fair value of options on their grant date, including the valuationof the option 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.

 

Key assumptions used to apply thispricing model to the Stock Plan are as follows:

 
| ** **                                                   | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Risk-free  interest rate                                     |       | 2.3%                                                     |       | 3.1%                                                    |       | 2.3% |   | 3.1% |   |
| Weighted-average  expected life of option feature (in years) |       | 7.2                                                      |       | 7.4                                                     |       | 7.2 |   | 7.4 |   |
| Expected  volatility of underlying stock                     |       | 33.8%                                                    |       | 32.6%                                                   |       | 33.8% |   | 32.6% |   |
| Expected  dividends                                          |       | n/a                                                      |       | n/a                                                     |       | n/a |   | n/a |   |
| Weighted-average  fair value                                 |       | $7.93                                                    |       | $4.70                                                   |       | $7.93 |   | $4.70 |   |

 

14

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The following table sets forthinformation regarding the Stock Plans:

 
| ** **                            | ** ** | **Number of  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contract  Life  (in years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding,  January 1, 2010    |       | 1,129,276                   |       | $                                       | 20.61      |                                                               |       |                            |       |   |
| Granted                               |       | 10,000                      |       | 19.62                                   |       |                                                               |       |                            |       |
| Exercised                             |       | (23,850                     | )          | 18.79                                   |       |                                                               |       |                            |       |
| Forfeited                             |       | (18,400                     | )          | 22.71                                   |       |                                                               |       |                            |       |
| Outstanding,  September 30, 2010 |       | 1,097,026                   |       | $                                       | 20.60      |                                                               | 6.4        |                            | $          | 2,157 |   |
|                                  |       |                        |       |                                    |       |                                                               |       |                            |       |
| Exercisable,  September 30, 2010 |       | 588,846                     |       | $                                       | 22.27      |                                                               | 4.8        |                            | $          | 435 |   |

 

The total intrinsic value ofthe options exercised during the three and nine month periods ended September 30,2010 was nominal. There were no options exercised during the three and ninemonths ended September 30, 2009. As of September 30, 2010, there was$3.2 million of unrecognized compensation cost related to nonvested share-basedcompensation arrangements granted under the Stock Plan. This compensation costis expected to be recognized over a period of 3.2 years. Cash received fromoption exercises under the Stock Plans for the nine month period ended September 30,2010 was $0.4 million.

 

The following tables set forthinformation regarding the Purchase Plan:

 
| ** **                                                   | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Risk-free  interest rate                                     |       | 0.4%                                                     |       | 1.9%                                                    |       | 0.4% |   | 2.0% |   |
| Weighted-average  expected life of option feature (in years) |       | 1.0                                                      |       | 1.0                                                     |       | 1.0 |   | 1.0 |   |
| Expected  volatility of underlying stock                     |       | 28.1%                                                    |       | 25.8%                                                   |       | 28.0% |   | 25.7% |   |
| Expected  dividends                                          |       | n/a                                                      |       | n/a                                                     |       | n/a |   | n/a |   |
| Weighted-average  fair value of option feature               |       | $3.77                                                    |       | $5.97                                                   |       | $3.09 |   | $6.12 |   |

 
| ** **                            | ** ** | **Number of  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Remaining  Contract  Life  (in years)** | ** ** | **Aggregate  Intrinsic  Value  (in whole $)** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|------------------------------------------------|------------|---------------------------------------------------------|------------|
| Outstanding,  January 1, 2010    |       | 24,382                      |       | $                                       | 9.65       |                                           |       |                                                    |       |   |
| Granted                               |       | 39,509                      |       | 10.66                                   |       |                                           |       |                                                    |       |
| Exercised                             |       | (56,821                     | )          | 9.65                                    |       |                                           |       |                                                    |       |
| Forfeited                             |       | (1,285                      | )          | 9.65                                    |       |                                           |       |                                                    |       |
| Outstanding,  September 30, 2010 |       | 5,785                       |       | $                                       | 16.58      |                                           | 0.8        |                                                    | $          | 4,512 |   |
|                                       |            |                             |            |                                         |            |                                                |            |                                                         |            |  |  |

 

15

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

** **
| ** **                              | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                              | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| West 57th Street building  income  |       | $                                                        | (915       | )                                                       | $          | (1,552 | ) | $ | (4,308 | ) | $ | (4,610 | ) |
| West 57th Street building  expense |       | 1,687                                                    |       | 1,214                                                   |       | 5,148 |   | 3,400 |   |
| Foreign  exchange (gain) loss, net      |       | (403                                                     | )          | 541                                                     |       | (1,116 | ) | 890 |   |
| Miscellaneous,  net                     |       | (259                                                     | )          | (426                                                    | )          | (423 | ) | (714 | ) |
| Other  expense (income), net            |       | $                                                        | 110        |                                                    | $          | (223 | ) | $ | (699 | ) | $ | (1,034 | ) |

 

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

 

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

 

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

 

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

 

We are continuing an existingenvironmental remediation plan at a facility we acquired in 2000 andsubsequently sold. We expect to pay these costs, which approximate $0.6million, over an 11-year period. We have accrued approximately $0.5 million forthe remaining cost of this remediation program, which represents the presentvalue total cost using a discount rate of 4.54%. A summary of expected paymentsassociated with this project is as follows:

 
| ** **        | ** ** | **Environmental  Payments** | ** ** |
|-------------------|------------|-----------------------------|------------|
| Remainder of 2010 |       | $                           | 31         |   |
| 2011              |       | 61                          |       |
| 2012              |       | 61                          |       |
| 2013              |       | 61                          |       |
| 2014              |       | 61                          |       |
| Thereafter        |       | 362                         |       |
| Total             |       | $                           | 637        |   |

 

In 2004, we acquired twomanufacturing facilities from G. Leblanc Corporation, now Grenadilla, Inc.(“Grenadilla”), for which environmental remediation plans had already beenestablished. In connection with the acquisition, we assumed the existingaccrued liability of approximately $0.8 million for the cost of theseremediation activities. Based on a review of past and ongoing investigatory andremedial work by our environmental consultants, and discussions with stateregulatory

 

16

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officials, as well as periodicsampling, we estimate the remaining costs of such remedial plans to be $1.7million. Pursuant to the purchase and sale agreement, we sought indemnificationfrom Grenadilla for anticipated costs above the original estimate. We filed aclaim against the escrow and recorded a corresponding receivable for thisamount in prepaid expenses and other current assets in our consolidated balancesheet. Based on the current estimated costs of remediation, this receivabletotaled $2.1 million as of September 30, 2010. We have reached anagreement with Grenadilla whereby related environmental costs are paid directlyout of the escrow. Currently, the escrow balance exceeds our receivablebalance. Should the escrow be reduced to zero, we would seek furtherindemnification from Grenadilla for these additional costs. However, we cannotbe assured that we will be able to recover such costs.

 

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

 

In May 2008 we acquired100% of the membership interest in ArkivMusic, LLC, an online retailer ofclassical music. Under the purchase agreement, we are obligated to pay an amount equal to 5% of the net operating profitsof Arkiv, if any, in 2010, the sum of which is not to exceed $2.5 million.The final purchase price is dependent upon a calculation derived from the 2010net operating profits which, when finalized, is expected to result in anadditional payment between $1.0 and $1.9 million. Since the final netoperating profits for 2010 cannot be calculated until year end, we have notrecorded any liability or additional purchase price associated with thisacquisition but expect to do so in the fourth quarter of 2010.

 

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

 

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

 
| ** **                                   | ** ** | **Domestic Plan**                                   | ** ** | **Foreign Plans**                                   | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                   | ** ** | **Three Months Ended September 30,** | ** ** | **Three Months Ended September 30,** | ** ** |
| ** **                                   | ** ** | **2010**                                                 | ** ** | **2009**                                                 | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service  cost                                |       | $                                                        | 87         |                                                     | $          | 83 |   | $ | 133 |   | $ | 144 |   |
| Interest  cost                               |       | 864                                                      |       | 852                                                      |       | 424 |   | 438 |   |
| Expected  return on plan assets              |       | (1,048                                                   | )          | (921                                                     | )          | (89 | ) | (67 | ) |
| Amortization  of prior service cost (credit) |       | 28                                                       |       | 36                                                       |       | (13 | ) | — |   |
| Amortization  of net loss                    |       | 489                                                      |       | 575                                                      |       | 48 |   | 2 |   |
| Curtailment  loss                            |       | —                                                   |       | 241                                                      |       | — |   | — |   |
| Net  periodic pension cost                   |       | $                                                        | 420        |                                                     | $          | 866 |   | $ | 503 |   | $ | 517 |   |

 
| ** **                                   | ** ** | **Domestic Plan**                                  | ** ** | **Foreign Plans**                                  | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                   | ** ** | **Nine Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
| ** **                                   | ** ** | **2010**                                                | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service  cost                                |       | $                                                       | 262        |                                                    | $          | 276 |   | $ | 452 |   | $ | 418 |   |
| Interest  cost                               |       | 2,592                                                   |       | 2,574                                                   |       | 1,285 |   | 1,276 |   |
| Expected  return on plan assets              |       | (3,145                                                  | )          | (2,667                                                  | )          | (256 | ) | (207 | ) |
| Amortization  of prior service cost (credit) |       | 84                                                      |       | 139                                                     |       | (26 | ) | — |   |
| Amortization  of net loss                    |       | 1,467                                                   |       | 1,830                                                   |       | 128 |   | 6 |   |
| Curtailment  loss                            |       | —                                                  |       | 241                                                     |       | — |   | — |   |
| Net  periodic pension cost                   |       | $                                                       | 1,260      |                                                    | $          | 2,393 |   | $ | 1,583 |   | $ | 1,493 |   |

 

17

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On April 1, 2010, we amendedour U.K. pension plan prospectively to both limit active participants’ annualincreases in pensionable salary and reduce the rate at which participantsaccrue final benefits. We remeasured the plan’s benefit obligation, plan assetsand net periodic pension cost as a result of the plan amendment. Assumptionsutilized are as follows:

 
| ** **                     | ** ** | **Benefit Obligation** | ** ** | **Net Periodic Pension Cost** | ** ** |
|--------------------------------|------------|-----------------------------|------------|----------------------------------------------|------------|
| ** **                     | ** ** | **April 1,**           | ** ** | **January 1,**                          | ** ** | **April 1,** | ** ** | **January 1,** | ** ** | **Weighted-** | ** ** |
| ** **                     | ** ** | **2010**                    | ** ** | **2010**                                     | ** ** | **2010** | ** ** | **2010** | ** ** | **Average** | ** ** |
| Discount  rate                 |       | 5.50%                       |       | 5.80%                                        |       | 5.50% |   | 5.80% |   | 5.62% |   |
| Expected  return on assets     |       | n/a                         |       | n/a                                          |       | 5.30% |   | 5.30% |   | 5.30% |   |
| Rate of  compensation increase |       | 3.80%                       |       | 4.80%                                        |       | 3.80% |   | 4.80% |   | 4.20% |   |

 

The decrease in our long-termpension benefit obligation was more than offset by an increase in our actuarialloss due to the change in valuation assumptions when the plan was remeasured.The plan amendment resulted in a gross decrease in our pension benefitobligation of $0.6 million through recognition of a prior service credit, whichwill be amortized over a period of 12 years. On a net basis, our long termpension benefit obligation increased by less than $0.1 million and ouraccumulated other comprehensive loss decreased by $0.1 million, net of tax.

 

We provide postretirementhealth care and life insurance benefits to a limited number of certain eligiblehourly retirees and their dependents. As a result of terminating one of ourcollective bargaining agreements in 2009, we have a limited number ofparticipants receiving health care benefits under this plan. Once theseparticipants reach age sixty-five and are eligible for Medicare, nopostretirement health care benefits will be provided. We will continue toprovide life insurance benefits for eligible retirees. During 2010, we made asettlement payment of $0.1 million associated with this plan. This payment hadno material impact on the plan. The components of net periodic postretirementbenefit cost for these benefits are as follows:

 
| ** **                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                          | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service  cost                                       |       | $                                                    | 3          |                                                | $          | 1 |   | $ | 8 |   | $ | 4 |   |
| Interest  cost                                      |       | 10                                                   |       | 13                                                  |       | 31 |   | 49 |   |
| Amortization  of prior service credit               |       | (29                                                  | )          | (23                                                 | )          | (86 | ) | (49 | ) |
| Recognized  loss                                    |       | —                                               |       | —                                              |       | 6 |   | — |   |
| Net  periodic postretirement benefit cost (benefit) |       | $                                                    | (16        | )                                                   | $          | (9 | ) | $ | (41 | ) | $ | 4 |   |

 

Based on federal laws andregulations, we are not required to make a contribution to our domestic pensionplan in 2010. We made a payment of less than $0.1 million to this plan duringthe period and are currently evaluating what additional amount, if any, we willcontribute to this plan in 2010. Our anticipated contributions to the pensionplan of our U.K. subsidiary approximate $0.8 million for the current year. Asof September 30, 2010, we have made contributions of $0.6 million to thisplan. The pension plans of our German entities do not hold any assets and useoperating cash to pay participant benefits as they become due. Expected 2010benefit payments under these plans are $1.2 million, of which $0.9 million waspaid through September 2010.

 

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

 

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

 

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Thefollowing tables present information about our operating segments for the threeand nine months ended September 30, 2010 and 2009:

 
| ** **                                 | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Other &** | ** ** | **Consol** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|----------------------|------------|------------|------------|
| **Three Months Ended 2010** | ** ** | **U.S.**               | ** ** | **Germany**           | ** ** | **Other**            | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Europe** | ** ** | **Total** | ** ** | **Elim** | ** ** | **Total** | ** ** |
| Net  sales to external customers           |       | $                      | 22,064     |                  | $          | 11,792               |       | $          | 11,144     |   | $ | 45,000 |   | $ | 36,978 |   | $ | 1,283 |   | $ | 38,261 |   | $ | — |   | $ | 83,261 |   |
| Income  (loss) from operations             |       | 1,311                  |       | 1,001                 |       | 1,152                |       | 3,464      |       | 3,263 |   | 129 |   | 3,392 |   | (1,062 | ) | 5,794 |   |
|                                            |            |                        |            |                       |            |                      |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                 | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Other &** | ** ** | **Consol** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|-----------------|------------|------------|------------|
| **Three Months Ended 2009** | ** ** | **U.S.**               | ** ** | **Germany**           | ** ** | **Other**       | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Europe** | ** ** | **Total** | ** ** | **Elim** | ** ** | **Total** | ** ** |
| Net  sales to external customers           |       | $                      | 21,123     |                  | $          | 12,535          |       | $          | 11,275     |   | $ | 44,933 |   | $ | 36,173 |   | $ | 1,528 |   | $ | 37,701 |   | $ | — |   | $ | 82,634 |   |
| Income  (loss) from operations             |       | (1,314                 | )          | 1,639                 |       | 1,675           |       | 2,000      |       | 3,858 |   | 210 |   | 4,068 |   | (913 | ) | 5,155 |   |
|                                            |            |                        |            |                       |            |                 |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Other &** | ** ** | **Consol** | ** ** |
|-------------------------------------------|------------|------------------------|------------|-----------------------|------------|-----------------|------------|------------|------------|
| **Nine Months Ended 2010** | ** ** | **U.S.**               | ** ** | **Germany**           | ** ** | **Other**       | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Europe** | ** ** | **Total** | ** ** | **Elim** | ** ** | **Total** | ** ** |
| Net  sales to external customers          |       | $                      | 62,270     |                  | $          | 34,457          |       | $          | 32,571     |   | $ | 129,298 |   | $ | 97,402 |   | $ | 3,352 |   | $ | 100,754 |   | $ | — |   | $ | 230,052 |   |
| Income  (loss) from operations            |       | 1,890                  |       | 4,086                 |       | 3,125           |       | 9,101      |       | 7,805 |   | 286 |   | 8,091 |   | (2,534 | ) | 14,658 |   |
|                                           |            |                        |            |                       |            |                 |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Other &** | ** ** | **Consol** | ** ** |
|-------------------------------------------|------------|------------------------|------------|-----------------------|------------|-----------------|------------|------------|------------|
| **Nine Months Ended 2009** | ** ** | **U.S.**               | ** ** | **Germany**           | ** ** | **Other**       | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Europe** | ** ** | **Total** | ** ** | **Elim** | ** ** | **Total** | ** ** |
| Net sales  to external customers          |       | $                      | 57,739     |                  | $          | 36,363          |       | $          | 30,510     |   | $ | 124,612 |   | $ | 96,483 |   | $ | 3,643 |   | $ | 100,126 |   | $ | — |   | $ | 224,738 |   |
| Income  (loss) from operations            |       | (3,956                 | )          | 5,380                 |       | 2,896           |       | 4,320      |       | 4,797 |   | 406 |   | 5,203 |   | (2,912 | ) | 6,611 |   |
|                                           |            |                        |            |                       |            |                 |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**ITEM 2****               ****MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**(Tabular Amounts in ThousandsExcept Percentages, Share and Per Share Data)**

 

**Introduction**

 

We are a world leader in thedesign, manufacture, marketing, and distribution of high quality musicalinstruments. Our piano division concentrates on the high-end grand piano segmentof the industry, handcrafting Steinway pianos in New York and Germany. We alsooffer upright pianos and two mid-priced lines of pianos under the Boston andEssex brand names. We are also an online retailer of classical music. Throughour band division, we are the largest domestic producer of band and orchestralinstruments and offer a complete line of brass, woodwind, percussion and stringinstruments and related accessories with well-known brand names such as Bach,Selmer, C.G. Conn, Leblanc, King, and Ludwig. We sell our products throughdealers and distributors worldwide. Our piano customer base consists ofprofessional artists, amateur pianists, and institutions such as concert halls,universities, and music schools. Our band and orchestral instrument customerbase consists primarily of middle school and high school students, but alsoincludes adult amateur and professional musicians.

 

**Critical Accounting Policies and Estimates**

 

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

 

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

 

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

 

**Accounts Receivable**

 

Weestablish reserves for accounts receivable and notes receivable. We reviewoverall collectibility trends and customer characteristics such as debt leverage,solvency, and outstanding balances in order to develop our reserve estimates.Historically, a large portion of our sales at both our piano and band divisionshas been generated by our top fifteen customers. As a result, we experiencesome inherent concentration of credit risk in our accounts receivable due toits composition and the relative proportion of large customer receivables tothe 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.

 

**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.

 

20

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

 

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

 

**Warranty**

 

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

 

**Long-lived Assets**

 

Wereview long-lived assets, such as property, plant, and equipment, forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. We measure recoverabilityby comparing the carrying amount of the asset to the estimated future cashflows the asset is expected to generate.

 

Weestablish long-lived intangible assets based on estimated fair values, andamortize finite-lived intangibles over their estimated useful lives. We testour goodwill and indefinite-lived trademark assets for impairment annually or onan interim basis if events or circumstances indicate that the fair value of anasset may have decreased below its carrying value. Our assessment is based onseveral analyses, including a comparison of net book value to estimated fairvalues, market capitalization, and multi-year cash flows.

 

**Pensions and Other PostretirementBenefit Costs**

 

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

 

**Income Taxes**

 

We record valuation allowances for certain deferredtax assets related to foreign tax credit carryforwards and state net operatingloss carryforwards. When assessing the realizability of deferred tax assets, weconsider whether it is more likely than not that the deferred tax assets willbe fully realized. The ultimate realization of these assets is dependent uponmany factors, including the ratio of foreign source income to overall incomeand generation of sufficient future taxable income in the jurisdictions forwhich we have loss carryforwards. When establishing or adjusting valuationallowances, we consider these factors, as well as anticipated trends in foreignsource income and tax planning strategies which may impact future realizabilityof these assets.

 

Whenconsidered not more likely than not to be realized, a liability has beenrecorded for uncertain tax positions. When analyzing these positions, weconsider the probability of various outcomes which could result fromexamination, negotiation, or settlement with various taxing authorities. Thefinal outcome on these positions could differ significantly from our originalestimates due to the following: expiring statutes of limitations; availabilityof detailed historical data; results of audits or examinations conducted bytaxing authorities or agents that vary from management’s anticipated results;identification of new tax contingencies; release of applicable administrativetax guidance; management’s decision to settle or appeal assessments; or therendering of court decisions affecting our estimates of tax liabilities; aswell as other factors.

 

**Stock-Based Compensation**

 

Wegrant stock-based compensation awards which generally vest over a specifiedperiod. When determining the fair value of stock options and subscriptions topurchase shares under the employee stock purchase plan (“Purchase Plan”), weuse the Black-Scholes option valuation model, which requires input of certainmanagement assumptions, including dividend yield, expected volatility,risk-free interest rate, expected life of stock options granted during theperiod, and the life applicable to the Purchase Plan subscriptions. Theestimated fair value of the options and subscriptions to purchase

 

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shares, and the resultantstock-based compensation expense, can fluctuate based on the assumptions usedby 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 assumptionsmade by management provide a reasonable basis for the estimates reflected inour financial statements.

 

**Forward-Looking Statements**

 

Certain statements containedin this document are “forward-looking statements” within the meaning ofSection 21E of the Securities and Exchange Act of 1934, as amended. Theseforward-looking statements represent our present expectations or beliefsconcerning future events. We caution that such statements are necessarily basedon certain assumptions which are subject to risks and uncertainties which couldcause actual results to differ materially from those indicated in this report.These risk factors include, but are not limited to, the following: changes ingeneral economic conditions; reductions in school budgets; increasedcompetition; work stoppages and slowdowns; ability to successfullyconsolidate band manufacturing; impact of dealer consolidations on orders;ability of dealers to obtain financing; exchange rate fluctuations; variationsin the mix of products sold; market acceptance of new products, ability ofsuppliers to meet demand; concentration of credit risk; ability to lease officespace; and fluctuations in effective tax rates resulting from shifts in sourcesof income. Further information on these risk factors is included in Item 1A ofour Annual Report on Form 10-K for the year endedDecember 31, 2009. We encourage you to read those descriptionscarefully. We caution investors not to place undue reliance on theforward-looking statements 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.

 

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**Results of Operations**

 

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

 
| ** **                   | ** ** | **Three Months Ended September 30,** | ** ** | ** ** | ** ** | **Change** | ** ** |
|------------------------------|------------|----------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                   | ** ** | **2010**                                                 | ** ** | ** ** | ** ** | **2009**   | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
| Net  sales                   |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Band                         |       | $                                                        | 38,261     |       |       |       | $          | 37,701 |   |   |   | 560 |   | 1.5 |   |
| Piano                        |       | 45,000                                                   |       |       |       | 44,933     |       |   |   | 67 |   | 0.1 |   |
| Total  sales                 |       | 83,261                                                   |       |       |       | 82,634     |       |   |   | 627 |   | 0.8 |   |
|                         |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Cost of  sales               |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Band                         |       | 29,259                                                   |       |       |       | 28,284     |       |   |   | 975 |   | 3.4 |   |
| Piano                        |       | 30,807                                                   |       |       |       | 30,945     |       |   |   | (138 | ) | (0.4 | ) |
| Total  cost of sales         |       | 60,066                                                   |       |       |       | 59,229     |       |   |   | 837 |   | 1.4 |   |
|                         |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Gross  profit                |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Band                         |       | 9,002                                                    |       | 23.5%      |       | 9,417      |       | 25.0% |   | (415 | ) | (4.4 | ) |
| Piano                        |       | 14,193                                                   |       | 31.5%      |       | 13,988     |       | 31.1% |   | 205 |   | 1.5 |   |
| Total  gross profit          |       | 23,195                                                   |       |       |       | 23,405     |       |   |   | (210 | ) | (0.9 | ) |
|                         |       | 27.9%                                                    |       |       |       | 28.3%      |       |   |   |   |   |   |   |
|                         |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Operating  expenses          |       | 17,401                                                   |       |       |       | 17,274     |       |   |   | 127 |   | 0.7 |   |
| Impairment  charges          |       | —                                                   |       |       |       | 976        |       |   |   | (976 | ) | (100.0 | ) |
| Income  from operations      |       | 5,794                                                    |       |       |       | 5,155      |       |   |   | 639 |   | 12.4 |   |
|                         |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Other  expense (income), net |       | 110                                                      |       |       |       | (223       | )          |   |   | 333 |   | (149.3 | ) |
| Net  interest expense        |       | 2,464                                                    |       |       |       | 2,634      |       |   |   | (170 | ) | (6.5 | ) |
| Non-operating  expenses      |       | 2,574                                                    |       |       |       | 2,411      |       |   |   | 163 |   | 6.8 |   |
|                         |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Income  before income taxes  |       | 3,220                                                    |       |       |       | 2,744      |       |   |   | 476 |   | 17.3 |   |
|                         |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Income  tax provision        |       | 1,655                                                    |       | 51.4%      |       | 2,107      |       | 76.8% |   | (452 | ) | (21.5 | ) |
|                         |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Net  income                  |       | $                                                        | 1,565      |       |       |       | $          | 637 |   |   |   | 928 |   | 145.7 |   |

 

**Overview** —**Piano divisionrevenue and profits remained stable over the year-ago period. Band divisionsales improved due to an 11% increase in overall unit shipments. However, bandmargins declined due to production inefficiencies.

 

**Net Sales** —****Domestic pianodivision revenues increased $0.9 million as a result of an 11% increase inSteinway grand unit shipments, which more than offset the impact of a 3%decrease in mid-priced piano line shipments. Overseas Steinway grand unitshipments decreased 11% compared to the year-ago period. However, mid-pricedpiano line shipments improved 33%, reducing the overseas sales deterioration to$0.9 million.

 

Band division revenues were$0.6 million higher as a result of improved orders and shipments of studentinstruments which were needed by dealers to meet greater back-to-school sellingseason demand. Promotional incentives on select professional brass inventorymodels also contributed to the revenue improvement.

 

23

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**Gross Profit****—****Gross profit decreased slightly ($0.2 million) due toreduced production schedules at the band division, which were altered in aneffort to control inventory levels. The resulting unabsorbed overhead, coupledwith certain cash discount and sales program costs, caused the band margindecrease from 25.0% to 23.5%.

 

Piano margins improved from31.1% to 31.5%. Although overseas piano margins dropped from 35.5% to 33.1%,domestic piano margins increased from 26.2% to 29.9%. While the production atour overseas piano factory increased, margins deteriorated due to higher coston certain mid-priced pianos. Domestic piano margins were favorably impacted bysteadier production schedules, which improved factory efficiency.A domestic shift in mix towards retail units also helped improve themargins.

 

**Operating Expenses—**Operating expenses were consistent with the year-ago period.Sales and marketing expenses decreased $0.1 million as the decrease in bad debtexpense of $0.7 million was mostly offset by higher commissions, marketing, andpromotional expenses. General and administrative costs were $0.3 million higherbecause of consulting and professional service fees.

 

**Impairment Charges —**There were no impairment charges in the current period,whereas trademarks associated with our online music division were impaired $1.0million in the year-ago period.

 

**Non-operating Expenses —** Non-operating expenses increased $0.2 million despite a$0.9 million shift from foreign exchange losses to foreign exchange gainsduring the period. This $1.1 million deterioration is primarily attributable toa shift from net income to net expense from our West 57th Street building. Weexpect to incur a temporary loss on this facility until we have leased theremaining available space to new tenants. Net interest expense was $0.2 millionlower as the decrease in interest income associated with customer financedreceivables at the band division was more than offset by lower interest expensedue to lower outstanding borrowings.

 

**Income Taxes****—****We recorded an income tax expense of $1.7 million,reflecting our anticipated annual effective income tax rate of 43.7% associatedwith current year income, as well as uncertain tax positions and discreteitems. The combination of these items resulted in an effective tax rate of51.4% for the period. The rate of 76.8% in the year-ago period reflected ananticipated annual effective income tax rate of 48.0% as well as uncertain taxpositions and discrete items.

 

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Nine Months Ended September 30,2010 Compared to Nine Months Ended September 30, 2009

 
| ** **                          | ** ** | **Nine Months Ended September 30,** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **2010**                                                | ** ** | ** ** | ** ** | **2009**   | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
| Net  sales                          |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| Band                                |       | $                                                       | 100,754    |       |       |       | $          | 100,126 |   |   |   | 628 |   | 0.6 |   |
| Piano                               |       | 129,298                                                 |       |       |       | 124,612    |       |   |   | 4,686 |   | 3.8 |   |
| Total  sales                        |       | 230,052                                                 |       |       |       | 224,738    |       |   |   | 5,314 |   | 2.4 |   |
|                                |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| Cost of  sales                      |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| Band                                |       | 75,993                                                  |       |       |       | 77,635     |       |   |   | (1,642 | ) | (2.1 | ) |
| Piano                               |       | 87,377                                                  |       |       |       | 86,191     |       |   |   | 1,186 |   | 1.4 |   |
| Total  cost of sales                |       | 163,370                                                 |       |       |       | 163,826    |       |   |   | (456 | ) | (0.3 | ) |
|                                |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| Gross  profit                       |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| Band                                |       | 24,761                                                  |       | 24.6%      |       | 22,491     |       | 22.5% |   | 2,270 |   | 10.1 |   |
| Piano                               |       | 41,921                                                  |       | 32.4%      |       | 38,421     |       | 30.8% |   | 3,500 |   | 9.1 |   |
| Total  gross profit                 |       | 66,682                                                  |       |       |       | 60,912     |       |   |   | 5,770 |   | 9.5 |   |
|                                |       | 29.0%                                                   |       |       |       | 27.1%      |       |   |   |   |   |   |   |
|                                |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| Operating  expenses                 |       | 52,024                                                  |       |       |       | 53,325     |       |   |   | (1,301 | ) | (2.4 | ) |
| Impairment  charges                 |       | —                                                  |       |       |       | 976        |       |   |   | (976 | ) | (100.0 | ) |
| Income  from operations             |       | 14,658                                                  |       |       |       | 6,611      |       |   |   | 8,047 |   | 121.7 |   |
|                                |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| Other  income, net                  |       | (699                                                    | )          |       |       | (1,034     | )          |   |   | 335 |   | (32.4 | ) |
| Net gain  on extinguishment of debt |       | (104                                                    | )          |       |       | (3,434     | )          |   |   | 3,330 |   | (97.0 | ) |
| Net  interest expense               |       | 7,318                                                   |       |       |       | 7,672      |       |   |   | (354 | ) | (4.6 | ) |
| Non-operating  expenses             |       | 6,515                                                   |       |       |       | 3,204      |       |   |   | 3,311 |   | 103.3 |   |
|                                |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| Income  before income taxes         |       | 8,143                                                   |       |       |       | 3,407      |       |   |   | 4,736 |   | 139.0 |   |
|                                |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| Income  tax provision               |       | 3,598                                                   |       | 44.2%      |       | 2,385      |       | 70.0% |   | 1,213 |   | 50.9 |   |
|                                |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| Net  income                         |       | $                                                       | 4,545      |       |       |       | $          | 1,022 |   |   |   | 3,523 |   | 344.7 |   |

 

**Overview**—****Pianodivision revenue improved primarily due to increased domestic demand for ourproducts. Piano margins were better due to more efficient production at bothmanufacturing facilities. Band division sales improved, as the reluctance ofdealers to place orders early in the year was offset by improved orders andshipments in the second and third quarter. Band margins improved due to morenormal production schedules and better production efficiencies than in theyear-ago period.

 

**Net Sales****—**Domesticpiano division revenues were $4.5 million (8%) higher due to a combination of a6% increase in Steinway grand units, stronger retail sales, and a shift in mixfrom lower priced upright pianos to higher priced grand pianos. Priceincreases, which were implemented at the beginning of the year, were also afactor. Despite a 6% decrease in Steinway grand unit shipments, overseasrevenues increased slightly ($0.2) million supported by an improvement in salesby our divisions in Asia. Overseas mid-priced piano line shipments rose 35% duein part to improved availability of certain models.

 

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Band division revenuesincreased $0.6 million as a result of improved sales of percussion instrumentunits, which increased 26%. Woodwind and brass instrument unit shipments wereflat, as lower orders and shipment in the first quarter were offset byimprovements in the second and third quarters.

 

**Gross Profit******—**Grossprofit improved significantly due to higher margins at both the piano and banddivisions. Domestically, piano margins increased from 25.6% to 29.8% due tochanges in production schedules, which bolstered factory efficiency, as well asbetter retail sales, which generate higher margins. However, overseas marginswent from 35.3% to 34.8%. Improvements in factory efficiency in the latter partof the period only partially offset a shift in shipments to lower marginterritories in the early part of 2010, as well as the adverse impact of foreignexchange rates and higher mid-priced piano costs.

 

The band division’s grossmargin improved from 22.5% to 24.6% during the period. Higher production levelsin the first half of 2010 resulted in improved overhead absorption and lowerfactory variances.

 

**Operating Expenses****—** Operatingexpenses decreased $1.3 million. Sales and marketing expenses decreased$0.4 million primarily due to lower bad debt expense of $1.4 million,which was partially offset by costs associated with commissions, marketing, andpromotional costs as well as incremental retail sales personnel. General andadministrative costs were $0.8 million lower as a result of cost savingmeasures implemented during 2009 and lower compensation related costs.

 

**Impairment Charges —**There were no impairment charges in the current period,whereas trademarks associated with our online music division were impaired $1.0million in the year-ago period.

 

**Non-operating Expenses****—** Non-operatingexpenses increased $3.3 million due to the reduction in net gains onextinguishment of debt of the same amount. The benefit of a shift from foreignexchange losses to foreign exchange gains of $2.0 million was offset by ashift from net income to net expense of approximately the same amount from ourWest 57th Street building.

 

**Income Taxes****—** We recordedan income tax expense of $3.6 million, reflecting our anticipated annualeffective income tax rate of 43.7% associated with current year income, as wellas 0.5% due to discrete items and uncertain tax positions. The combination ofthese items resulted in an effective tax rate of 44.2% for the period. The rateof 70.0% in the year-ago period reflected an anticipated effective income taxrate of 48.0% related to income for that period, and 22.0% relating touncertain tax positions and discrete items.

 

**Liquidity and Capital Resources**

 

We have relied primarily uponcash provided by operations, supplemented as necessary by seasonal borrowingsunder our working capital line, to finance our operations, repay long-termindebtedness and fund capital expenditures.

 

Our statements of cash flows for thenine months ended September 30, 2010 and 2009 are summarized as follows:

 
| ** **                                                                   | ** ** | **2010** | ** ** | **2009** | ** ** | **Change** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Net  income:                                                                 |       | $        | 4,545      |     | $          | 1,022      |       | $ | 3,523 |   |
| Changes  in operating assets and liabilities                                 |       | (552     | )          | (10,058  | )          | 9,506      |       |
| Other  adjustments to reconcile net income to cash from operating activities |       | 7,121    |       | 7,567    |       | (446       | )          |
| Cash  flows from operating activities                                        |       | 11,114   |       | (1,469   | )          | 12,583     |       |
|                                                                         |       |     |       |     |       |       |       |
| Cash  flows from investing activities                                        |       | (2,086   | )          | (3,792   | )          | 1,706      |       |
|                                                                         |       |     |       |     |       |       |       |
| Cash  flows from financing activities                                        |       | 22,686   |       | 10,566   |       | 12,120     |       |
|                                                                              |            |          |            |          |            |            |            |  |  |  |

 

Cash flows from operatingactivities improved $12.6 million over the year-ago period. Although the salesincrease caused a shift from source to use of cash for accounts receivable of$9.0 million, we also used $7.6 million less for inventory since the salesimprovement helped reduce our finished goods levels. We generated $13.4 millionmore from accounts

 

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payable and accrued expenses in thecurrent period. In 2009, we had implemented cost cutting measures to conservecash and reduce expenditures. In 2010, spending has returned to normal levels.

 

Cash flows from investingactivities decreased $1.7 million primarily due to the reduction in capitalexpenditures of $1.2 million. We expect capital expenditures for the full yearto be in the range of $3.0 to $4.0 million.

 

Cash flows from financingactivities increased $12.1 million as we generated $28.2 million through stocksales in 2010. Also, we did not use our domestic line of credit in 2010,so cash provided by borrowings was $16.7 million lower than the year-agoperiod.

 

**Borrowing Activities and Availability**—****As ofSeptember 30, 2010, there was nothing outstanding on our former domestic creditfacility. Shortly after September 30, 2010, we entered into a new domesticcredit facility with a syndicate of lenders (the “Credit Facility”) with apotential borrowing capacity of $100.0 million in revolving credit loans, whichexpires on October 5, 2015. It provides for periodic borrowings at eitherLondon Interbank Offering Rate (“LIBOR”) plus a range from 1.75% to 2.25%, oras-needed borrowings at an alternate base rate, plus a range from 0.75% to1.25%; both ranges depend upon borrowing availability at the time of borrowing.The Credit Facility is collateralized by our domestic accounts receivable,inventory, and certain property, plant and equipment.

 

We also have certain non-domestic creditfacilities originating from two German banks that provide for borrowings byforeign subsidiaries of up to €16.1 million ($22.0 million at the September 30,2010 exchange rate), net of borrowing restrictions of €1.9 million ($2.6million at the September 30, 2010 exchange rate) which are payable in April2012. 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 ($1.4 million at the September 30, 2010 exchange rate) for useby our U.K. branch and ¥300 million ($3.6 million at the September 30, 2010exchange rate) for use by our Japanese subsidiary. Our Chinese subsidiary alsohas the ability to convert the equivalent of up to €2.5 million into U.S.dollars or Chinese yuan ($3.4 million at the September 30, 2010 exchange rate).Euro loans bear interest at rates of Euro Interbank Offered Rate (“EURIBOR”)plus a margin determined at the time of borrowing. Margins fluctuate based onthe loan amount and the borrower’s bank rating. The remaining demand borrowingsbear interest rates of LIBOR plus 0.8% for British pound loans, LIBOR plus 1.0%for U.S. dollar loans of our Chinese subsidiary, and Tokyo Interbank OfferedRate (“TIBOR”) plus 1.4% for Japanese yen loans. We had nothing outstanding asof September 30, 2010 on these credit facilities.

 

Our Japanese subsidiary alsomaintains a separate revolving loan agreement that provides additionalborrowing capacity of up to ¥500 million ($6.0 million at the September 30,2010 exchange rate). The revolving loan agreement bears interest at an average30-day TIBOR rate plus 0.9% (outstanding borrowings at 1.1% at September 30,2010) and expires on January 31, 2011. As of September 30, 2010, we had $1.2million outstanding on this revolving loan agreement.

 

At September 30, 2010, ourtotal outstanding indebtedness amounted to $153.7 million, consisting of $152.5million of our 7.00% Senior Notes due March 1, 2014 and $1.2 million of notespayable to foreign banks. We repurchased $5.8 million of our Senior Notesduring the nine months ended September 30, 2010. We may consider additionalrepurchases or restructuring of our Senior Note debt in the future, contingentupon cash availability and the trading and call prices of our Senior Notes.

 

All of ourdebt agreements contain covenants that place certain restrictions on us,including our ability to incur additional indebtedness, to repurchase SeniorNotes, to make investments in other entities, and limitations on cash dividendpayments. We were in compliance with all such covenants as of September 30,2010 and do not anticipate any compliance issues in the future. Our bondindenture contains limitations, based on net income (among other things), onthe amount of discretionary repurchases we may make of our Ordinary commonstock. Our intent and ability to repurchase additional Ordinary common stockeither directly from shareholders or on the open market is directly affected bythis limitation. In May 2008 we announced a share repurchase program, whichpermits us to make discretionary purchases of up to $25.0 million of ourOrdinary common stock. To date, we have repurchased 102,127 shares andapproximately $22.5 million remains authorized for repurchases under thisprogram. We repurchased 21,827 shares for $0.3 million during the three monthsended September 30, 2010. We did not make any repurchases in 2009.

 

We experience long productionand inventory turnover cycles, which we constantly monitor since fluctuationsin demand can have a significant impact on these cycles. In normal economicconditions, we are able to effectively utilize cash flow from operations tofund our debt and capital requirements and pay off seasonal borrowings on ourdomestic line of credit. While we anticipate the remainder of 2010 to bechallenging, we do not expect any adverse impact in our liquidity as we had 

 

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over $95.0 million in cash as ofSeptember 30, 2010. We intend to manage accounts receivable and credit risk,and control inventory levels by monitoring purchases and production schedules.We have also reduced headcount, minimized non-critical expenditures, andforgone wage increases and discretionary benefit program contributions. Ourintention is to manage cash outflow and maintain sufficient operating cash on handto meet short-term requirements.

 

We do not have any currentplans or intentions that will have a material adverse impact on our liquidityin 2010, although we may consider acquisitions that may require funding fromoperations or from our credit facilities. Other than those described, we arenot aware of any trends, demands, commitments, or costs of resources that areexpected to materially impact our liquidity or capital resources. Accordingly,we believe that cash on hand, together with cash flows anticipated fromoperations and available borrowings under the Credit Facility, will be adequateto meet our debt service requirements, fund regular capital requirements andsatisfy our working capital and general corporate needs for the next twelvemonths.

 

**Contractual Obligations** - The following table provides a summary of our contractualobligations at September 30, 2010.

 
| ** **                      | ** ** | **Payments due by period** | ** ** |
|---------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1 - 3 years** | ** ** | **3 - 5 years** | ** ** | **More than  5 years** | ** ** |
| Contractual Obligations    |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term  debt(1)              |       | $                                         | 190,191    |   | $ | 11,886 |   | $ | 21,351 |   | $ | 156,954 |   | $ | — |   |
| Capital  leases                 |       | 11                                        |       | 10 |   | 1 |   | — |   | — |   |
| Operating  leases(2)            |       | 257,448                                   |       | 5,830 |   | 9,842 |   | 8,239 |   | 233,537 |   |
| Purchase  obligations(3)        |       | 31,045                                    |       | 30,317 |   | 728 |   | — |   | — |   |
| Other  long-term liabilities(4) |       | 40,057                                    |       | 3,687 |   | 4,117 |   | 3,984 |   | 28,269 |   |
| Total                           |       | $                                         | 518,752    |   | $ | 51,730 |   | $ | 36,039 |   | $ | 169,177 |   | $ | 261,806 |   |

 

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Notes to Contractual Obligations:

 

(1)Long-term debt represents long-term debt obligations, thefixed interest on our Notes, and the variable interest on our other loans. Weestimated the future variable interest obligation using the applicableSeptember 30, 2010 rates. The nature of our long-term debt obligations,including changes to our long-term debt structure, is described more fully inthe “Borrowing Availability and Activities” section of “Liquidity and CapitalResources.”

 

(2)Approximately $244.1 million of our operating leaseobligations are attributable to the land lease associated with the purchase ofSteinway Hall, which has eighty seven years remaining. The rest is attributableto the leasing of other facilities and equipment.

 

(3)Purchase obligations consist of firm purchase commitmentsfor raw materials, finished goods, and service agreements.

 

(4)Our other long-term liabilities consist primarily of thelong-term portion of our pension obligations, which are described in Note 11 inthe Notes to Condensed Consolidated Financial Statements included within thisfiling and obligations under employee and consultant agreements. We have notincluded $0.3 million of liabilities relating to uncertain tax positions withinthis schedule due to the uncertainty of the payment date, if any.

 

**Recent Accounting Pronouncements**

 

In March 2010, the FinancialAccounting Standards Board issued new guidance which clarifies the scopeexception for embedded credit related derivatives. We were required to complywith this new standard as of July 1, 2010 and it did not have a material impacton our financial statements.

 

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**ITEM 3****                  ****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

We are exposed to market riskassociated with changes in foreign currency exchange rates and interest rates.We mitigate a portion of our foreign currency exchange rate risk by maintainingforeign currency cash balances and holding option and forward foreign currencycontracts. They are not designated as hedges for accounting purposes. Thesecontracts relate primarily to intercompany transactions and are not used fortrading or speculative purposes. The fair value of the option and forwardforeign currency exchange contracts is sensitive to changes in foreign currencyexchange rates. The impact of an adverse change in foreign currency exchangerates would not be materially different than that disclosed in our AnnualReport on Form 10-K for the year ended December 31, 2009.

 

Our revolving loans bearinterest at rates that fluctuate with changes in the Prime Rate, Federal FundsRate, LIBOR, TIBOR, and EURIBOR. As such, our interest expense on our revolvingloans and the fair value of our fixed long-term debt are sensitive to changesin market interest rates. The effect of an adverse change in market interestrates on our interest expense would not be materially different than thatdisclosed in our Annual Report on Form 10-K for the year ended December 31,2009.

 

The majority of our long-termdebt is at a fixed interest rate. Therefore, the associated interest expense isnot sensitive to fluctuations in market interest rates. However, the fair valueof our fixed interest debt would be sensitive to market rate changes. Such fairvalue changes may affect our decision whether to retain, replace, or retirethis debt.

 

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

 

Our principal executiveofficer and our principal financial officer, after evaluating together withmanagement the design and operation of our disclosure controls and procedures,have concluded that our disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) were effective as of September 30, 2010, theend of the period covered by this report. In designing disclosure controls andprocedures, management recognizes that any controls, no matter how welldesigned and operated, can only provide reasonable, not absolute, assurance ofachieving the desired control objectives.

 

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

 

**PART II****                ****OTHER INFORMATION**

 

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

 

31.1Certification of the Principal Executive Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002

 

31.2Certification of the Principal Financial Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002

 

32.1Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

32.2Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

29

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on their behalf by the undersigned, thereunto duly authorized.

 

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

 

 

Date: November 5, 2010

 

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