Goodwill, Trademarks, and Other Intangible Assets

9 Months Ended

Sep. 30, 2011

Goodwill, Trademarks, and Other Intangible Assets

Goodwill, Trademarks, and Other Intangible Assets

(6)           Goodwill, Trademarks, and Other Intangible Assets

Intangible assets other than goodwill and indefinite-lived trademarks are amortized on a straight-line basis over their estimated useful lives. Deferred financing costs are amortized over the repayment periods of the underlying debt. Goodwill and indefinite-lived trademarks are not amortized but are subject to impairment testing. We conduct our annual impairment test on July 31st each year, and also when events and circumstances indicate that the fair value of any of our reporting units may be below the unit’s carrying value. We consider our band division, music education business, piano division, and our online music business to be separate reporting units.

Our assessment is based on a comparison of net book value to estimated fair values primarily using an income approach. For purposes of the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We make assumptions about the amount and timing of future expected cash flows, terminal value growth rates and appropriate discount rates. The amount and timing of future cash flows within our discounted cash flow analysis is based on our most recent operational budgets, long range strategic plans and other estimates. The terminal value growth rate is used to calculate the value of cash flows beyond the last projected period in our analysis and reflects our best estimates for stable, perpetual growth of our reporting units. We use estimates of market participant weighted-average costs of capital as a basis for determining the discount rates to apply to our reporting units future expected cash flows, adjusted for the risks and uncertainty inherent in our industry generally and in our internally developed forecasts. We also use a market approach against which we benchmark the results of our income approach to ensure that the results are appropriate.

Our annual impairment testing date of July 31st was selected to coincide with the timing of our fall budgeting and planning process, which provides multi-year cash flows that are used to conduct our annual impairment testing. This date also enables us to have insight into the back-to-school selling season results for our band and music education businesses. The multi-year cash flow projections for our band and music education businesses resulted in reductions in revenue growth assumptions and lower profit margins, both of which have a significant impact on our discounted cash flow models. Our revenue and gross profit assumptions were impacted in part by recent changes made to certain product lines, including the redesign of certain student woodwind instruments and the discontinuation of sourcing some components and reversion to in-house manufacturing in order to ensure supply and quality. These changes have resulted in increased costs, which we expect to cause lower margins despite price increases which we implemented on July 1, 2011. As a result, we recorded a $0.9 million charge to trademarks and wrote off $0.2 million of goodwill associated with the band division’s music education business. In connection with completing the impairment analysis for the band division’s reporting units, we also evaluated the recoverability of its long-lived assets. The results of this analysis are discussed in Note 9.

The multi-year cash flow forecast associated with our online music business also showed deterioration in revenue and growth assumptions due to recent decreases in order volume and declining market trends in the compact disc industry. Music consumers are increasingly using other delivery methods such as digital downloading and streaming as preferred methods of obtaining music, both of which require additional investment. As a result, our future anticipated cash flows for this business were reduced and our associated goodwill and trademarks were determined to be impaired. Accordingly, we recorded a $2.7 million charge to goodwill and a $0.3 million charge to trademarks associated with to our online music business during the period.

All impairment charges were taken as a component of operating expenses. Analyses of other intangible assets, including the remaining piano division trademarks and piano division goodwill indicated no impairment. No other events or circumstances occurred subsequent to our annual impairment test which would have indicated that these assets may be impaired.

The changes in carrying amounts of goodwill and trademarks are as follows:

	Piano			Band			Total
Goodwill:
Balance, January 1, 2011	$	25,823		$	200		$	26,023
Impairment charge	(2,727		)	(200		)	(2,927		)
Foreign currency translation impact	16			—			16
Balance, September 30, 2011	$	23,112		$	—		$	23,112
Trademarks:
Balance, January 1, 2011	$	9,157		$	5,824		$	14,981
Impairment charge	(255		)	(850		)	(1,105		)
Foreign currency translation impact	4			—			4
Balance, September 30, 2011	$	8,906		$	4,974		$	13,880

Our cumulative impairment losses are $8.8 million associated with band division goodwill, $0.9 million related to band division trademarks, $2.7 million attributable to online music business goodwill, and $1.2 million associated with online music business trademarks.

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

	September 30, 2011			December 31, 2010
Gross deferred financing costs	$	3,932		$	6,170
Accumulated amortization	(2,623		)	(3,542		)
Deferred financing costs, net	$	1,309		$	2,628
Gross non-compete agreements	$	250		$	250
Accumulated amortization	(169		)	(131		)
Non-compete agreements, net	$	81		$	119
Gross customer relationships	$	748		$	524
Accumulated amortization	(312		)	(283		)
Customer relationships, net	$	436		$	241
Gross website and developed technology	$	2,176		$	2,176
Accumulated amortization	(1,462		)	(1,136		)
Website and developed technology, net	$	714		$	1,040
Total gross other intangibles	$	7,106		$	9,120
Accumulated amortization	(4,566		)	(5,092		)
Total other intangibles, net	$	2,540		$	4,028

We wrote off $1.0 million of deferred financing costs during the nine months ended September 30, 2011, primarily due to the redemption of $85.0 million of our 7.00% Senior Notes, which is discussed more fully in Note 8. The weighted-average amortization period for deferred financing costs is six years, and the weighted-average amortization period for all other amortizable intangibles is approximately five years. The remaining weighted-average amortization period for deferred financing costs is approximately three years and the remaining weighted-average amortization period for all other amortizable intangibles is approximately two years. Total amortization expense, which includes amortization of deferred financing costs, is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Amortization expense	$	263	$	300	$	840	$	911

The following table shows the total estimated amortization expense for the remainder of 2011 and beyond:

Remainder of 2011	$	261
2012	1,038
2013	691
2014	302
2015	217
Thereafter	31
Total	$	2,540