**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-K**

 

**(Mark One)**

 

| **ý** | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                                                                                                                        |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                   |
|       |       | **For the  fiscal year ended December 31, 2004**                                                                                                                                                                                                                                  |
|       |       |                                                                                                                                                                                                                                                                                   |
|       |       | **or**                                                                                                                                                                                                                                                                                 |
|       |       |                                                                                                                                                                                                                                                                                   |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934 [No Fee Required]**                                                                                                                                                                  |
|       |       |                                                                                                                                                                                                                                                                                   |
|       |       | **For the  transition period  from                    to                    ** |

 

**Commission File Number:  0-26524**

 

**LOUD Technologies Inc.**

(Exact name of registrant as specified in its charter)

 
| **Washington**                                                  | ** ** | **91-1432133**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or  organization) |       | (I.R.S. Employer Identification No.) |
|                                                            |       |                                 |
| **16220 Wood-Red Road, N.E.,  Woodinville, Washington**         | ** ** | **98072**                            |
| (Address of principal executive offices)                        |       | (Zip Code)                           |

 

(Registrant’s telephone number, including area code: **(425) 892-6500**

 

Securities registeredpursuant to Section 12(b) of the Act:

 
| **Title of each class** | ** ** | **Name of each exchange on which  registered** |
|-------------------------|------------|------------------------------------------------|
| None                    |       | None                                           |

 

Securities registered pursuant to Section 12(g) of the Act:

 
| ** ** | **Common Stock - no par value** | ** ** |
|------------|---------------------------------|------------|
|       | (Title of each class)           |       |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90days.  Yes   ý     No   o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Exchange Act Rule 12b-2)  Yes  o    No  ý

 

On June 30, 2004, 19,624,703 shares of commonstock were outstanding, and the aggregate market value of those shares (basedupon the closing price as reported by OTCBB) held by non-affiliates wasapproximately $11,776,000.

 

On March 31, 2005, 22,568,396 shares of commonstock were outstanding.

 

Portionsof the definitive Proxy Statement for the Annual Meeting of Shareholders havebeen incorporated by reference into Part III of the Annual Report on Form 10-K.

 

 

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**LOUDTECHNOLOGIES INC.**

 

**FORM 10-K**

**For the Year EndedDecember 31, 2004**

 

| **INDEX**  | ** ** | ** **                                                                                  |
|------------|------------|---------------------------------------------------------------------------------------------|
| Part I     |       |                                                                                        |
|       |       |                                                                                        |   |
|       | Item 1.    | Business                                                                                    |   |
|       |       |                                                                                        |   |
|       | Item 2.    | Properties                                                                                  |   |
|       |       |                                                                                        |   |
|       | Item 3.    | Legal Proceedings                                                                           |   |
|       |       |                                                                                        |   |
|       | Item 4.    | Submission of Matters to a  Vote of Securities Holders                                      |   |
|       |       |                                                                                        |   |
| Part II    |       |                                                                                        |
|       |       |                                                                                        |   |
|       | Item 5.    | Market for Registrant’s  Common Equity and Related Stockholder Matters                 |   |
|       |       |                                                                                        |   |
|       | Item 6.    | Selected  Consolidated Financial Data                                                       |   |
|       |       |                                                                                        |   |
|       | Item  7.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|       |       |                                                                                        |   |
|       | Item  7A.  | Qualitative  and Quantitative Disclosures About Market Risk                                 |   |
|       |       |                                                                                        |   |
|       | Item  8.   | Consolidated  Financial Statements and Supplementary Data                                   |   |
|       |       |                                                                                        |   |
|       | Item 9.    | Changes in  and Disagreements With Accountants on Accounting and Financial Disclosure       |   |
|       |       |                                                                                        |   |
|       | Item 9A.   | Controls and  Procedures                                                                    |   |
|       |       |                                                                                        |   |
| Part  III  |       |                                                                                        |
|       |       |                                                                                        |   |
|       | Item 10.   | Directors and  Executive Officers of the Registrant                                         |   |
|       |       |                                                                                        |   |
|       | Item 11.   | Executive  Compensation                                                                     |   |
|       |       |                                                                                        |   |
|       | Item 12.   | Security  Ownership of Certain Beneficial Owners and Management                             |   |
|       |       |                                                                                        |   |
|       | Item 13.   | Certain  Relationships and Related Transactions                                             |   |
|       |       |                                                                                        |   |
|       | Item 14.   | Principal  Accountant Fees and Services                                                     |   |
|       |       |                                                                                        |   |
| Part IV    |       |                                                                                        |
|       |       |                                                                                        |   |
|       | Item  15.  | Exhibits,  Financial Statement Schedules                                                    |   |
|       |       |                                                                                        |   |
| Signatures |       |                                                                                        |
|            |            |                                                                                             |  |  |

 

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**PART I**

 

*Certain statements set forth in or incorporated by referenceinto this Annual Report on Form 10-K for the year ended December 31, 2004contain “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Such statements are based oncurrently available operating, financial and competitive information and aresubject to various risks and uncertainties. Such forward-looking statementsinclude among others, those statements including the words “expect,” “anticipate,”“intend,” “believe” and similar expressions. Actual results could differmaterially from those discussed in this report. Factors that could cause orcontribute to such differences include but are not limited to the risksdiscussed in the “Risk Factors” section. Readers are cautioned not to placeundue reliance on these forward-looking statements, which speak only as of thedate hereof.*

 

**Item 1****. Business**

 

**Introduction**

 

LOUD TechnologiesInc., a Washington corporation incorporated on November 16, 1988 under thename Mackie Designs Inc.; engineers, manufactures and markets professionalaudio reproduction and recording equipment and software under the brand namesMackie, TAPCO, SIA, EAW and EAW Commercial. We changed our name to LOUDTechnologies Inc. on September 15, 2003.

 

Ourprimary products include analog mixers, sound reinforcement speakers, professionalloudspeaker systems, installed paging and music distribution systems,preamplifiers, power amplifiers, digital audio workstations (DAW) and A/Vsoftware control surfaces, digital mixers, i/o devices and acoustic test andmeasurement software. These products are used in a variety of applications,including home and commercial recording studios, live performances and fixedinstallations of all sizes.

 

On February 21,2003, we finalized an agreement with Sun Mackie, an affiliate of Sun CapitalPartners, Inc., a private investment firm, whereby Sun Mackie, purchasedapproximately 14.4 million shares of our common stock for $10.0 million. SunMackie acquired approximately 7.4 million of these shares from certain sellingshareholders. It acquired approximately 7.0 million newly issued sharesdirectly from the Company for approximately $6.3 million. Net proceeds aftertransaction related costs were approximately $3.6 million. In March 2003,Sun Mackie provided $4.0 million for a note payable and warrants to purchase1.2 million shares of common stock at $0.01 per share. In August 2004, weexecuted an Exchange Agreement whereby we exchanged our entire debt to SunMackie for 2,480,155 shares of common stock valued at $1.95 per share. At December 31,2004, 16,850,635 shares, representing 76.1% of our outstanding common stock,was owned by affiliates of Sun Capital.

 

On March 31,2003, we finalized a new Loan and Security Agreement that provides for arevolving line of credit of up to $26.0 million and a term loan of $2.5 millionwith a new lender. We executed Loan Amendment and Waiver Agreements in April, August andOctober 2004, which eased our financial covenants and reduced the grossamount of the line from $26.0 million to $25.0 million. In addition, on March 31,2003, we finalized a three-year subordinated loan of $11.0 million with ourformer principal U.S. lender.

 

On March 4,2005, we acquired 100% of the shares of St. Louis Music, Inc. (SLM), aMissouri-based manufacturer, distributor and importer of branded musicalinstruments and professional audio products for cash and 396,792 shares ofcommon stock totaling $38.4 million plus estimated transaction costs ofapproximately $1.5 million for a total purchase price of approximately $39.9million. We and Sun Capital Partners III QP, LP, an affiliate of Sun CapitalPartners, provided a guaranty of the payment of certain post-closing cashconsideration to the shareholders of St. Louis Music (SLM). In addition,

 

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Sun Capital Partners IIIQP, LP has guaranteed a $40 million revolving short-term demand credit facilityprovided to SLM Merger Corp., an indirect wholly owned subsidiary formed forthis acquisition, to finance the acquisition of SLM and for future workingcapital. Additional information regarding this transaction can be found in ourCurrent Report on Form 8-K dated March 7, 2005 which is incorporated bythis reference.

 

SLMwas a family owned, 82 year old, manufacturer, distributor and importer ofbranded musical instruments, accessories and equipment. SLM is headquartered inSt. Louis, MO with a manufacturing location in Yellville, AR. SLM had 306employees at December 31, 2004. SLM’s products include: Crate Amplifiers(mid-to high-end lead, bass, acoustic and keyboard amplifiers made in Asia andU.S.); Ampeg Amplifiers (professional grade bass amplifiers); SLM Marketplace(division which sells proprietary and competitive accessory products); AlvarezGuitars (mid-to high-end acoustic guitars with the Alvarez and Alvarez-Yairilines); Knilling Instruments (orchestral string instruments including violins,violas and cellos); and Crate Audio (low-end sound equipment).

 

Unlessspecifically referenced, the information included in this Annual Report on Form10-K does not include St. Louis Music.

 

“MACKIE,”the running man figure, “TAPCO,” “EAW,” “SIA,” and “EAW Commercial,” areregistered trademarks or common law trademarks of LOUD Technologies Inc. To theextent our trademarks are unregistered, we are unaware of any conflicts withtrademarks owned by third parties. This document also contains names and marksof other companies.

 

Ourwebsite address is www.loudtechinc.com. Our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendmentsto those reports are available free of charge on our website as soon asreasonably practicable after such material is electronically filed with orfurnished to the Securities and Exchange Commission.

 

**Marketing**

 

Innovativemarketing is the hallmark of each LOUD Technologies brand. As a result, eachbrand holds an enviable, unique position in its respective marketplace. Allbrands are supported by a dedicated, in-house marketing and design team thathandles all media planning/buying, print literature and advertising design, webdesign, public relations, product documentation, product training, as well asend-user and dealer trade shows and special events.          In 2004, we successfully launched the EAWCommercial line of commercial and industrial products, solidified positioningfor the TAPCO brand, increased the impact of Mackie-branded products at theretail level through in-field training events and seminars and expanded dealerco-op marketing activities, and further positioned EAW as a technologicalleader through the launch of category-creating new products. We also addeddimension to our marketing efforts by focusing a greater share of resources ondirect-to-customer communications, video-based product tutorials, as well asthe creation of a team of product experts who conduct sales channel, dealer andend-user product training and application-specific clinics worldwide. We alsoadded to, and refocused, our public relations and artist relations team to putmore products in the hands of influential end users and reviewers.

 

*OurBrands*

 

*Mackie*

Ourprimary retail brand, Mackie consistently delivers an outstanding combinationof features and performance for the price. Although the brand was founded inthe compact mixer market segment, it now encompasses a full range of pro-audioproducts – from digital and analog mixers, to active and passive loudspeakersand cutting-edge recording software.

 

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*EAW*

Our high-end soundreinforcement brand, EAW delivers the ultimate in performance, regardless ofprice. EAW loudspeakers are found in the most prestigious performance venues,and highest-profile concert tours, worldwide.

 

*SIA*

SIAdelivers a suite of measurement, analysis and system alignment tools for the proaudio, acoustical consulting, engineering and performing arts communities.

 

*TAPCO*

Ourentry-level retail brand, TAPCO delivers different products, andMackie-inspired quality, for entry-level musicians who don’t want to sacrificequality for price. The brand includes studio monitors, amplifiers and mixers.

 

*EAW Commercial*

EAWCommercial is our commercial and industrial brand. EAW Commercial sets a newstandard in commercial audio by leveraging the acoustical expertise of EAW tobring both cutting-edge, as well as better-than-expected staple products, tothe commercial and industrial market.

 

**Distributionand Sales**

 

Salesto customers in the U.S. represent 58%, 63% and 62% of total net sales in 2004,2003 and 2002 respectively. In the U.S., we use a network of independentrepresentatives to sell to over 1,500 retail dealers and 500 installed soundcontractors, some of which have several outlets. Our products are sold inmusical instrument stores, pro audio outlets and several mail order outlets.Sales to our top 10 U.S. dealers represented approximately 36%, 36% and 33% ofnet sales made to U.S. customers in 2004, 2003 and 2002, respectively. Onedealer accounted for approximately 20%, 19% and 22% of U.S. net sales in 2004,2003 and 2002, respectively. No other dealer accounted for more than 10% ofsales made to U.S. customers in this period.

 

Internationally,our products are offered direct to dealers in the United Kingdom, France,Germany, Belgium, Netherlands and Luxembourg primarily through our subsidiary inthe United Kingdom. We also sell direct to dealers in Japan. Our products arealso distributed through local distributors in countries where we do not havedirect operations. No single international distributor accounted for more than10% of international net sales in this period.

 

**CustomerSupport**

 

Customersupport programs are designed to enhance brand loyalty by building customerunderstanding of product use and capabilities. The customer service and supportoperation also provides us with a means of understanding customer requirementsfor future product enhancements. This understanding comes through directcustomer contact, as well as through close analysis of responses to variousproduct registration surveys.

 

Productsupport specialists are located in Woodinville, Washington and Whitinsville,Massachusetts to provide direct technical service and support. Technicalsupport through a toll-free number is provided during scheduled business hours,and via the website after business hours. Service and repairs on our speakerproducts sold in the U.S. are performed at our Whitinsville site. Service andrepairs on our electronic products sold in the U.S. are performed atapproximately 100 authorized service centers located throughout the U.S.Internationally, our subsidiary in the United Kingdom, as well as our

 

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independent distributors,are utilized to provide product support and are also responsible for warrantyrepairs for products sold into their markets. Additionally, certain productsreturned to stock are processed through a contract repair facility in Shanghai,China.

 

**Researchand Development**

 

Wepride ourselves in employing the top engineering and product design talent inthe pro-audio industry. Research and development teams are located inWoodinville, Washington; Whitinsville, Massachusetts; and Victoria, B.C.,Canada. We also utilize third-party engineering service groups to supplementour in-house personnel. Research and development investment was approximately$7.8 million, $7.7 million, and $10.3 million in 2004, 2003 and 2002,respectively.

 

**Competition**

 

Theprofessional audio industry is fragmented and highly competitive. There aremany manufacturers, large and small, domestic and international, which offeraudio products that vary widely in price and quality and are distributedthrough a variety of channels. We compete primarily on the basis of productquality and reliability, price, ease of use, brand name recognition andreputation, ability to meet customers’ changing requirements and customerservice and support. We compete with a number of professional audiomanufacturers, several of whom have significantly greater development, salesand financial resources. Our major competitors are subsidiaries of HarmanInternational Industries, Inc.; Allen & Heath; Yamaha Corporation;Behringer; Avid Corporation; TOA Corporation; Philips Electronics Corporation;Peavey Electronics Corporation; Teac America, Inc. (Tascam); SoundTracs PLC;Genelec, Inc.; Renkus-Heinz; Electro-Voice; Bose Corporation and Meyer SoundLaboratories.

 

**ProprietaryTechnologies**

 

Wehave a strong interest in protecting the intellectual property assets thatreflect original research, creative development and product development. Assuch, we have sought protection through patents, copyrights, trademarks andtrade secrets and have applied and filed for various design and utilitypatents, both domestically and internationally. We have actively used certaintrademarks, and have applied for and registered specific trademarks in the U.S.and in foreign countries. While the registration of trademarks provides us withcertain legal rights, there can be no assurance that any such registration willsuccessfully prevent others from infringing upon these trademarks.

 

**Manufacturing**

 

In2004, we continued to streamline our manufacturing operations to focus on ourcore competency of building loudspeaker systems and completed the transition ofa majority of our products to third party manufacturers, primarily in Asia. Wecontinued to operate our Whitinsville, Massachusetts manufacturing facilitywhich focuses primarily on large custom speaker products. Additionally, we havehired a team in China who manages the quality and productivity of our Asiancontract manufacturers.

 

**Employees**

 

At December 31,2004, we had 408 full-time equivalent employees, including 122 in marketing,sales and customer support; 63 in research and development; 182 inmanufacturing, manufacturing support and manufacturing engineering; and 41 inadministration and finance.

 

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# **RISK FACTORS**

 

*This report contains forward-looking statements. There aremany factors that could cause actual results to differ materially from thoseprojected by the forward-looking statements made in this report. Factors thatmight cause such a difference include, but are not limited to, the risk factorsdescribed below. We do not undertake any obligation to publicly release theresult of any revisions to the forward-looking statements contained in thisreports that may be made to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events.*

 

***Acquisitions and Business Combinations.*** We haveacquired businesses in the past, and we may do so in the future. We may pursueadditional acquisitions of complementary technologies or product lines. Furtheracquisitions may include risks of entering markets where we have no or limitedprior experience, the potential loss of key employees of the acquired company,and impairment of relationships with existing employees, customers and businesspartners. Further acquisitions may also impact our financial position. Forexample, we may use significant cash or incur additional debt, which wouldweaken our financial position. We cannot guarantee that future acquisitionswill improve our business or operating results.

 

***General Economic Conditions.***Ifgeneral economic conditions in the U.S. and throughout the world economy areadversely affected due to terrorist activity and armed conflict or otherfactors, we may experience material adverse impact on our revenues, operatingresults and financial condition. In the past, our operating losses have causedus to reevaluate our operating strategy and plan certain actions to reduce ourcost of sales and operating expense in future periods. If we are required totake these actions in the future, they could result in special charges oradversely affect our long-term competitive position. Further, we may be unableto reduce the cost of sales and operating expenses at a rate and levelconsistent with such future adverse sales environment, which would have anadverse effect on our results of operations and financial condition.

 

***Dependence on significant customers***.Our relationships with our largest customers are critical to our salesperformance. Failure to maintain those relationships would have a materialadverse effect upon our results of operations and financial condition. Salesfrom continuing operations to one customer accounted for 12% of ourconsolidated net sales for each of the fiscal years ended December 31,2004 and 2003. We anticipate that this customer will continue to account for asignificant portion of our sales for the foreseeable future; however, it is notobligated to any long-term purchase of our products.

 

***Liquidity***. Under theterms of our U.S. credit agreements, we must maintain certain financialcovenants and ratios and must maintain adequate levels of eligible collateralto support our borrowing level. The agreements also provide, among othermatters, restrictions on additional financing, dividends, mergers,acquisitions, and an annual capital expenditure limit. The covenants in thesecredit agreements may restrict our operations. If we are unable to generateadequate levels of sales and operating profit, our lenders could declare us tobe in default of our obligations. If we are in default, there is no assurancethat the lenders would grant waivers or agree to restructure our debt or that wewould be able to attain other financing. If any of the debt is called, and weare unable to obtain alternate financing, we may have to continue to modify ouroperations, liquidate assets or take other measures to continue operations.

 

Ourline of credit accrues interest based on variable short-term interest rates.Changes in the Prime rate or LIBOR would increase or decrease our interestexpense.

 

Weliquidated our investment in our Italian subsidiary during 2003, after placingthe entity in an Italian form of court-supervised bankruptcy. As of December 31,2004, we have recorded a payable to this entity for approximately $7.6 million.We are currently negotiating the repayment terms of this debt. If we

 

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are unable to negotiatereasonable long term payment schedules for this debt, and the trustee were totake action in the United States, requiring repayment of this debt, we could beplaced in default of our U.S. credit facilities.

 

***Development, Introduction and Shipment of New Products.******            ***We arecurrently developing new analog and digital mixers, amplifiers andloudspeakers. If we encounter significant resource, technological, supplier,manufacturing or other problems there may be a delay in the development, introductionor manufacture of these products. In the past, when sales have been affected bydelays in developing and releasing new products, some customers waited for newproducts, while others purchased products from our competitors. Delays in thecompletion and shipment of new products, or failure of customers to accept newproducts, may affect future operating results.

 

***Variability in Quarterly Operating Results.***Ouroperating results tend to vary from quarter to quarter. Revenue in each quarteris substantially dependent on orders received within that quarter as well asproduct availability. Conversely, our expenditures are based on investmentplans and estimates of future revenues. We may, therefore, be unable to quicklyreduce spending if revenues decline in a given quarter. As a result, operatingresults for such quarters would be adversely impaired. Results of operationsfor any one quarter is not necessarily indicative of results for any futureperiod.

 

Otherfactors which may cause quarterly results to fluctuate include:

 

•                  increased competition in nichemarkets;

•                  timing of new product announcements;

•                  product releases and pricing changesby us or our competitors;

•                  market acceptance or delays in theintroduction of new products;

•                  production constraints;

•                  the timing of significant orders;

•                  customers’ budgets; and

•                  foreign currency exchange rates.

 

It is likely in some quarters our operating resultswill be adversely affected by these factors.

 

***Rapid Technological Change.*** Product technologyevolves rapidly, making timely product innovation essential to success in themarketplace. The introduction of products with improved technologies orfeatures may render our existing products obsolete and unmarketable. If wecannot develop products in a timely manner in response to industry changes, orif our products do not perform well, our business and financial condition willbe adversely affected. Also, new products may contain defects or errors whichgive rise to product liability claims or cause the products to fail to gainmarket acceptance.

 

***Competition.*** We expect competition to increasefrom both established and emerging companies. If we fail to competesuccessfully against current and future sources of competition, ourprofitability and financial performance may be adversely affected.

 

***Dependence on Suppliers.*** Certain parts used inour products are currently available from either a single supplier or from alimited number of suppliers. If we cannot develop alternative sources of thesecomponents, or if we experience deterioration in our relationship with thesesuppliers, there may be delays or reductions in product introductions orshipments, which may materially adversely affect our operating results.

 

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Becausewe rely on a small number of suppliers for certain parts, we are subject topossible price increases by these suppliers. Also, we may be unable toaccurately forecast our production schedule. If we underestimate our productionschedule, suppliers may be unable to meet our demand for components. This delayin the supply of key components may materially adversely affect our business.

 

***Use of Third Party Distribution Centers.***We store and shipthe majority of our products from third party distribution centers in the U.S.,Europe and Asia. These distribution centers may encounter personnel issues,business disruptions, information systems outages or other disruptions, whichmay not be remedied quickly, resulting in delays in shipments of our products. Failureto maintain adequate systems and internal controls at these facilities couldresult in customer shipments being delayed or otherwise improperly transacted,potentially resulting in lost revenue, products or customers.

 

***Use of Contract Manufacturers.*** We havetransitioned the manufacture of many of our products previously built in ourWoodinville, Washington facility and former Italian subsidiary to third-partycontract manufacturers located throughout the world, primarily in Asia. Thetransition from in-house manufacturing to third-party manufacturing createsadditional risks including:

 

•                  reduction in control of themanufacturing process;

•                  longer lead times for transitions ofnewly released products from engineering to full release;

•                  lead times for transitions ofexisting products to new third party manufacturers;

•                  reduced flexibility in reacting todemand changes;

•                  increased transportation cost anddelivery times;

•                  fluctuations in currency exchangerates;

•                  delays or inability to source partson reasonable payment terms; and

•                  concentration of production bycertain key manufacturers.

 

***Manufacturingin China.*** Our ability to import products from China atcurrent tariff levels could be materially and adversely affected if the “normaltrade relations” (“NTR”, formerly “most favored nation”) status the U.S.government has granted to China for trade and tariff purposes is terminated. Asa result of its NTR status, China receives the same favorable tariff treatmentthat the United States extends to its other “normal” trading partners. China’sNTR status, coupled with its membership in the World Trade Organization, couldeventually reduce barriers to manufacturing products in and exporting productsfrom China. However, we cannot provide any assurance that China’s WTOmembership or NTR status will not change.

 

***International Operations.***   We have significant net sales to customers outsidethe U.S. and believe that international sales will continue to represent asignificant portion of our revenue. International sales may fluctuate due tovarious factors, including:

 

•                  unexpected changes in regulatoryrequirements;

•                  tariffs and taxes;

•                  increases in freight costs, or damageor loss in shipment;

•                  difficulties in staffing and managingforeign operations;

•                  longer average payment cycles anddifficulty in collecting accounts receivable;

•                  fluctuations in foreign currencyexchange rates;

•                  product safety and othercertification requirements; and

•                  political and economic instability,wars and terrorist activity.

 

The EuropeanCommunity (“EC”) and European Free Trade Association have established certainelectronic emission and product safety requirements (“CE”). We intend toreceive CE certification for all

 

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products sold in the EC,however, there may be delays in obtaining such certifications. Failure toobtain either a CE certification or a waiver for any product may prevent usfrom marketing that product in Europe.

 

***Protection of Intellectual Property.*** We have astrong interest in protecting the intellectual property assets that reflectoriginal research, creative development, and product development. As such, wehave sought protection through patents, copyrights, trademarks, and tradesecrets. Along with extensive trademark and patent registration and filings, wehave claimed copyright protection for works of original authorship, includingproduct brochures, literature, advertisement, and web pages. While certainlegal rights of enforceability are available to us, there can be no assuranceas to the ability to successfully prevent others from infringing upon ourintellectual property.

 

Wehave never conducted a comprehensive patent search relating to the technologyused in our products, however, we believe that our products do not infringeupon the proprietary rights of others. There can be no assurance, however, thatothers will not assert infringement claims against us in the future or thatthose claims, if brought, will not be successful.

 

Whilewe pursue patent, trademark and copyright protection for products and variousmarks, we also rely on the use of confidentiality agreements with ouremployees, consultants, development partners and contract manufacturers toprotect our trade secrets, proprietary information and other intellectualproperty. There can be no assurance, however, that these confidentialityagreements will be honored or will be effective in protecting our tradesecrets, proprietary information and other intellectual property. Moreover,there can be no assurance that others will not independently developsubstantially equivalent proprietary information and techniques or otherwisegain access to our trade secrets.

 

***Dependence on Key Personnel.*** Our future successwill depend in a large part on the continued service of many of our technical,marketing, sales and management personnel and on our ability to attract, train,motivate and retain highly qualified employees. Our employees may voluntarilyterminate their employment at any time. The loss of the services of keypersonnel or the inability to attract new personnel could have a materialadverse effect upon our results of operations.

 

**Item 2****. Properties**

 

We lease facilities in Woodinville,Washington totaling approximately 170,000 sq. ft. to house our corporateheadquarters as well as a distribution center. The lease on 80,000 sq. ft. ofspace expires November 30, 2005. The lease on our 90,000 sq. ft. corporateheadquarters and distribution center expires December 31, 2006. We lease aseries of connected buildings in a manufacturing complex in Whitinsville,Massachusetts, totaling 220,285 sq. ft. This lease continues through April 2008.We lease additional facilities in the United States, Canada, Europe and Asiafor our regional sales and support offices.

 

# **Item3**. LegalProceedings

 

We are alsoinvolved in various legal proceedings and claims that arise in the ordinarycourse of business. We currently believe that these matters will not have amaterial adverse impact on our financial position, liquidity or results ofoperations.

 

# **Item4**. Submissionof Matters to a Vote of Securities Holders

 

Nomatters were submitted to a vote of our security holders during the fourthquarter of the fiscal year ended December 31, 2004.

 

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**PART II**

 

# **Item5**.  Market for Registrant’s Common Equity andRelated Shareholder Matters

 

Ourcommon stock is traded on the OTC Bulletin Board under the symbol LTEC.OB.  As of March 31, 2005, there wereapproximately 105 shareholders of record. The following table shows the highand low sales prices for our common stock for the periods indicated. Theseprices do not include retail markups, markdowns or commissions.

 
| ** **                         | ** ** | **Common Stock** | ** ** |
|------------------------------------|------------|------------------|------------|
| ** **                         | ** ** | **HIGH**         | ** ** | **LOW** | ** ** |
| Year Ended December 31, 2004: |       |             |       |   |   |
| Fourth Quarter                     |       | $                | 2.20       |   | $ | 1.30 |   |
| Third Quarter                      |       | $                | 2.20       |   | $ | 1.70 |   |
| Second Quarter                     |       | $                | 2.55       |   | $ | 1.85 |   |
| First Quarter                      |       | $                | 2.70       |   | $ | 1.90 |   |
|                               |       |             |       |   |   |
| Year Ended December 31, 2003: |       |             |       |   |   |
| Fourth Quarter                     |       | $                | 3.55       |   | $ | 1.80 |   |
| Third Quarter                      |       | $                | 2.50       |   | $ | 1.04 |   |
| Second Quarter                     |       | $                | 1.80       |   | $ | 0.57 |   |
| First Quarter                      |       | $                | 1.50       |   | $ | 0.75 |   |

 

OnAugust 3, 2004 we entered into an Exchange Agreement, whereby our entiresubordinated debt with Sun Mackie was converted into 2,480,155 shares of commonstock valued at $1.95 per share.

 

We have not paid dividends on our common stock in thepast, and it is not anticipated that cash dividends will be paid on shares ofour common stock in the foreseeable future. Any future dividends will bedependent upon our financial condition, results of operations, current andanticipated cash requirements, acquisition plans and plans for expansion, andany other factors that our Board of Directors deems relevant. Under our currentloan and security agreement, we are prohibited from paying any dividends.

 

10

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#### ** **

#### **Item 6.  Selected Consolidated Financial Data**

 

Thefollowing selected Consolidated Statements of Operations data for each of thethree years in the period ended December 31, 2004 and the ConsolidatedBalance Sheet data as of December 31, 2004 and 2003 are derived from ouraudited Consolidated Financial Statements included elsewhere herein. Theselected Statements of Operations data for the two years in the period ended December 31,2001 and the Balance Sheet data as of December 31, 2002, 2001 and 2000were derived from our audited Financial Statements, as restated fordiscontinued operations, which are not included in this Form 10-K. Thefollowing data should be read in conjunction with “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and the consolidatedfinancial statements of the Company, including the notes thereto, includedelsewhere in this Form 10-K.

 
| ** **                                          | ** ** | **Years ended December 31,**          | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                          | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                          | ** ** | **(In thousands, except per share  data)** | ** ** |
| ** **                                          | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Consolidated Statements of Operations Data (a):** | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                           |       | $                                          | 123,276    |   | $ | 130,766 |   | $ | 159,362 |   | $ | 171,967 |   | $ | 150,418 |   |
| Gross profit                                        |       | 41,349                                     |       | 29,310 |   | 37,860 |   | 51,865 |   | 58,218 |   |
| Operating expenses (b)                              |       | 40,043                                     |       | 44,974 |   | 69,512 |   | 52,622 |   | 47,774 |   |
| Net income (loss) from continuing operations        |       | (2,291                                     | )          | (15,412 | ) | (30,050 | ) | (3,159 | ) | 5,075 |   |
| Net income (loss) from discontinued operations      |       | —                                     |       | (6,383 | ) | (7,878 | ) | (2,170 | ) | 1,151 |   |
| Net income (loss)                                   |       | (2,291                                     | )          | (21,795 | ) | (37,928 | ) | (5,329 | ) | 6,226 |   |
|                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| Basic net income (loss) per share:                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Net income (loss) from continuing operations        |       | $                                          | (0.10      | ) | $ | (0.79 | ) | $ | (2.41 | ) | $ | (0.25 | ) | $ | 0.42 |   |
| Net income (loss) from discontinued operations      |       | $                                          | 0.00       |   | $ | (0.32 | ) | $ | (0.63 | ) | $ | (0.18 | ) | $ | 0.09 |   |
| Basic net income (loss) per share                   |       | $                                          | (0.10      | ) | $ | (1.11 | ) | $ | (3.04 | ) | $ | (0.43 | ) | $ | 0.51 |   |
|                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| Diluted net income (loss) per share:                |       |                                       |       |   |   |   |   |   |   |   |   |
| Net income (loss) from continuing operations        |       | $                                          | (0.10      | ) | $ | (0.79 | ) | $ | (2.41 | ) | $ | (0.25 | ) | $ | 0.40 |   |
| Net income (loss) from discontinued operations      |       | $                                          | 0.00       |   | $ | (0.32 | ) | $ | (0.63 | ) | $ | (0.18 | ) | $ | 0.09 |   |
| Diluted net income (loss) per share                 |       | $                                          | (0.10      | ) | $ | (1.11 | ) | $ | (3.04 | ) | $ | (0.43 | ) | $ | 0.49 |   |

 

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| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                            | ** ** | **(In thousands)**    | ** ** |
| **Consolidated Balance Sheets Data:** |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Working capital                       |       | $                     | 2,270      |   | $ | 2,582 |   | $ | 14,890 |   | $ | 23,366 |   | $ | 42,138 |   |
| Total assets                          |       | $                     | 60,795     |   | $ | 50,422 |   | $ | 123,955 |   | $ | 153,964 |   | $ | 165,198 |   |
| Long-term debt (c)                    |       | $                     | 11,612     |   | $ | 16,262 |   | $ | 20,266 |   | $ | 19,401 |   | $ | 29,970 |   |
| Shareholders’ equity             |       | $                     | 3,320      |   | $ | 832 |   | $ | 17,236 |   | $ | 52,810 |   | $ | 57,770 |   |

 

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(a)          Theconsolidated statements of operations data for all prior years have beenrestated for discontinued operations.

 

(b)         Includedin operating expenses for the year ended December 31, 2002,is a $15,829 non-cash charge relating to theimpairment of goodwill andother long-lived assets.

 

(c)          Long-termdebt excludes current portion.

 

**Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*Thefollowing discussion and analysis should be read in conjunction with “SelectedConsolidated Financial Data” and the Consolidated Financial Statements andNotes thereto included elsewhere in this Annual Report. This discussioncontains certain “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995 that involve risks and uncertainties,such as statements of our plans, objectives, expectations and intentions.Actual results could differ materially from those discussed here. Thecautionary statements made in this Annual Report should be read as beingapplicable to all forward-looking statements wherever they appear. Factors thatcould cause or contribute to such differences include those discussed in “RiskFactors,” as well as those discussed elsewhere herein. We undertake noobligation to publicly release the result of any revisions to theseforward-looking statements that may be required to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events.*

 

#### **General**

 

Wedevelop, manufacture, distribute and sell high-quality, affordable digital andanalog audio mixers, speakers, amplifiers and other professional audioequipment on a worldwide basis.  Ourproducts are used by professional musicians, sound installation contractors andbroadcast professionals in sound recordings, live presentations systems andinstalled sound systems.  We have ourprimary operations in the United States with smaller operations in the UnitedKingdom, Canada, China and Japan.

 

On February 21,2003, we finalized an agreement with Sun Mackie, an affiliate of Sun CapitalPartners, Inc., a private investment firm, whereby Sun Mackie, purchasedapproximately 14.4 million shares of our common stock for $10.0 million.  Sun Mackie acquired approximately 7.4 millionof these shares from certain selling shareholders.  It acquired approximately 7.0 million newlyissued shares directly from the Company for approximately $6.3 million.  Net proceeds after transaction related costswere approximately $3.6 million.  In March 2003,Sun Mackie provided $4.0 million for a note payable and warrants to purchase1.2 million shares of common stock at $0.01 per share.  In August 2004, we executed an ExchangeAgreement whereby we exchanged our entire debt to Sun Mackie for 2,480,155 

 

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shares of common stockvalued at $1.95 per share.  At December 31,2004, 16,850,635 shares, representing 76.1% of our outstanding common stock,was owned by affiliates of Sun Capital.

 

On March 31,2003, we finalized a new Loan and Security Agreement that provides for arevolving line of credit of up to $26.0 million and a term loan of $2.5 millionwith a new lender. We executed Loan Amendment and Waiver Agreements in April, August andOctober 2004, which eased our financial covenants and reduced the grossamount of the line from $26.0 million to $25.0 million.  In addition, on March 31, 2003, wefinalized a three-year subordinated loan of $11.0 million with our formerprincipal U.S. lender.

 

Wehave taken various actions to improve results of operations and ensure ourongoing ability to cover scheduled debt servicing payments, including headcountreductions and other cost containment measures. During the second half of 2003,we closed our manufacturing facility in Woodinville, Washington, and outsourceda majority of our products to offshore contract manufacturers.  This closure and other restructuringactivities resulted in net reductions to our headcount of approximately 210,not including 358 people that were employed by our former Italian subsidiary, disposedof in December 2003. We have finalized the closure of certaininternational sales offices and centralized our international salesorganization, the financial impact of which we do not anticipate beingsignificant.

 

In December 2003,we sold all of the shares of our wholly owned Italian subsidiary, MackieDesigns (Italy) S.p.A. (“Mackie Italy”) and placed it into an Italian form ofcourt-supervised liquidation.  MackieItaly was a manufacturer of many of our speaker products, which were purchasedby the Company for subsequent sale outside of Italy.  At the time of sale, the Company owed MackieItaly approximately $9.2 million related to the purchase of goods in the normalcourse of business.  During 2004, we madepayments to Mackie Italy of approximately $1.6 million, lowering our liabilityto $7.6 million at December 31, 2004. Additionally, Mackie Italy has a payable to a separate wholly ownedsubsidiary of the Company for approximately $2.7 million, which was fullyreserved at the date of sale in 2003.

 

In February 2005,we made a settlement offer to Mackie Italy to settle any net outstandingamounts owed in the amount of $4.7 million; this agreement is subject tocreditor approval and is valid through May 31, 2005.  Under the proposal, we have issued a stand-byletter of credit to Mackie Italy for $1.0 million, payable upon their signedagreement, and have committed to make further payments of $1.5 million duringthe remainder of 2005 and $2.2 million during 2006.  If and when this proposal is accepted, wewill recognize a gain on extinguishment of debt of approximately $2.9 million.

 

During2004, we realized improvements in the efficiency, quality and volume of ourproduct manufacturing at our third party contract manufacturers.  These improvements improved significantly inthe latter part of 2004, allowing us to substantially reduce our productbacklog in the fourth quarter.  Thisreduction in backlog was a significant factor in our revenues increasing froman average of $29.1 million in each of the first three quarters of 2004 to$36.0 million in the fourth quarter of 2004.

 

**CriticalAccounting Policies and Estimates**

 

Ourdiscussion and analysis of our financial condition and results of operationsfollowing are based upon our consolidated financial statements, which have beenprepared in accordance with U.S. generally accepted accounting principles. The preparation ofthese financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, sales and expenses, andrelated disclosure of contingent assets and liabilities.

 

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Webelieve that the estimates, assumptions and judgments involved in theaccounting policies described below have the greatest potential impact on ourfinancial statements, so we consider these to be our critical accountingpolicies. Because of the uncertainty inherent in these matters, actual resultscould differ from the estimates we use in applying the critical accountingpolicies. Certain of these critical accounting policies affect working capitalaccount balances, including the policies for revenue recognition, allowance fordoubtful accounts, inventory valuation and income taxes. These policies requirethat we make estimates in the preparation of our financial statements as of agiven date. However, since our business cycle is relatively short, actualresults related to these estimates are generally known within the six-monthperiod following the financial statement date. Thus, these policies generallyaffect only the timing of reported amounts.

 

***Inventory Valuation***. Inventories are stated at the lower of standard cost, which approximatesactual cost on a first-in, first-out method, or market. Included in ourinventories balance are demonstration products used by our salesrepresentatives and marketing department including finished goods that havebeen shipped to customers for evaluation. Market value adjustments are recordedfor excess and obsolete material, slow-moving product, service anddemonstration products. We make judgments regarding the carrying value of ourinventory based upon current market conditions. These conditions may changedepending upon competitive product introductions, customer demand and otherfactors. If the market for our previously released products changes, we may berequired to write down the cost of our inventory.

 

***Allowance for Doubtful Accounts****.*  Wemake ongoing estimates relating to the collectibility of our accountsreceivable and maintain an allowance for estimated losses resulting from theinability of our customers to meet their financial obligations to us. Indetermining the amount of the allowance, we consider our historical level ofcredit losses and make judgments about the creditworthiness of significantcustomers based on ongoing credit evaluations. Since we cannot predict futurechanges in the financial stability of our customers, actual future losses fromuncollectible accounts may differ from our estimates. If the financialcondition of our customers were to deteriorate, resulting in their inability tomake payments, a larger allowance may be required. In the event we determine asmaller or larger allowance appropriate, we would record a credit or a chargeto selling and administrative expense in the period in which we made such adetermination.

 

 ***Long-lived Assets******.*** Weassess the impairment of long-lived assets whenever events or changes incircumstances indicate that the carrying value may not be recoverable.Significant judgment is used in assessing factors which might triggerimpairment including significant underperformance relative to expectedoperating results, significant changes in our use of the assets or the strategyfor our overall business, and significant negative industry or economic trends.As we continue to review our distribution methods and transition ourmanufacturing to third parties, this may result in circumstances where thecarrying value of certain long-lived assets may not be recoverable.

 

***Goodwill and Other IntangibleAssets.***  We adopted SFAS No. 142, “Goodwill andOther Intangible Assets,” effective January 1, 2002. In accordance withSFAS No. 142, we no longer amortize goodwill and intangible assets withindefinite lives, but instead we measure these assets for impairment at leastannually, or when events indicate that impairment exists. At December 31,2004, we did not have any remaining goodwill or other intangibles withindefinite lives. We will continue to amortize intangible assets that havedefinite lives over their useful lives.

 

***Revenue Recognition****.*  Revenues from sales of products, net of salesdiscounts, returns and allowances, are generally recognized upon shipment underan agreement with a customer when risk of loss has passed to the customer, allsignificant contractual obligations have been satisfied, the fee is fixed ordeterminable and collection of the resulting receivable is considered probable.Products are generally shipped “FOB shipping point” with no right of return. Wedo have some dealers who finance their 

 

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purchases through financecompanies.  We have a manufacturer’srepurchase agreement with the finance companies.  We defer the revenue and related cost ofgoods sold of these sales at the time of the sale. We then recognize therevenue and related cost of goods sold from these sales when the right ofreturn no longer exists.  Sales withcontingencies, such as rights of return, rotation rights, conditionalacceptance provisions and price protection, are rare and insignificant. Wegenerally warrant our products against defects in materials and workmanship forperiods of between one and six years. The estimated cost of warrantyobligations, sales returns and other allowances are recognized at the time ofrevenue recognition based on contract terms and prior claims experience.

 

***Income Taxes.*** As part of the process of preparing ourfinancial statements, we are required to estimate our income taxes in each ofthe jurisdictions in which we operate. This process involves estimating ouractual current tax exposure together with assessing temporary differencesresulting from differing treatment of items for tax and accounting purposes.These differences result in deferred tax assets and liabilities, which areincluded in our consolidated balance sheet. We must then assess the likelihoodthat our deferred tax assets will be recovered from future taxable income andto the extent we believe that recovery is not likely, we must establish avaluation allowance. To the extent we establish a valuation allowance or changethis allowance in a period, it may materially impact the tax provision in theStatement of Operations.

 

##### ***Year Ended December 31,2004 Compared to Year Ended December 31, 2003***

 

# **Net Sales**

 

Our net sales from continuing operations in 2004were $123.3 million compared to $130.8 million in 2003, a decrease of $7.5million, or 5.7%.  Sales were negativelyimpacted during the majority of 2004 due to our being out of stock on certainproducts.  These product outages were dueto the migration of certain product manufacturing from Woodinville, Washingtonto contract manufacturers, as well as the closure of our Italianoperations.  We began to receivesubstantial volumes of product from our third party contract manufacturers inthe fourth quarter of 2004, which will allow us to begin relieving ourbacklog.  Additionally, at December 31,2004, production and inventory levels of our products were high enough where webelieve sales will increase in 2005 compared to 2004.  We have one significant customer whorepresented approximately 12% of our total revenues in each of the years 2004and 2003.  U.S. sales representedapproximately 58% of our total sales in 2004, compared to approximately 63% in2003. In 2005, we anticipate introducing and shipping new products, resultingin increased revenues in 2005 over 2004. We also anticipate a significantincrease in sales as a result of the St. Louis Music acquisition.

 

#### **Gross Profit**

 

Our gross margins increased in 2004 to $41.3million, or 33.5% of net sales, from $29.3 million, or 22.4% of net sales in2003.  The improvement to our grossmargins is due primarily to increased use of off-shore third party contract manufacturers to produce our products aswell as lower levels of write downs of excess and obsolete inventory.  Specifically, we took charges against cost ofsales of approximately $0.4 million in 2004 related to excess or obsoleteproducts compared to $5.7 million in 2003.

 

# **Selling, General andAdministrative**

 

Selling, general and administrative expenses were$32.3 million in 2004, a decrease of $3.4 million, or 9.6%, over 2003 expensesof $35.7 million.  The primary causes ofthis reduction are the full year benefits of the cost reduction initiativescompleted in 2003 as well as lower third party commissions in 2004 caused bylower sales revenue.  We anticipateselling general and administrative costs to be higher 

 

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in2005 as compared to 2004, primarily due to increased third party commissionsdue to higher sales revenue and generally higher administrative costs tosupport our planned sales growth including the anticipated revenue associatedwith the St. Louis Music brands.

 

# **Research and Development**

 

Our research and developments expenses were $7.8million in 2004, an increase of $0.1 million, or 0.9%, compared to 2003expenses of $7.7 million.  We have andwill continue to invest in new products and improvements to existingproducts.  Accordingly, we anticipate ourresearch and development costs will be slightly higher in 2005 than in 2004.

 

# **Restructuring Costs**

 

During 2003, we incurred $1.6 million inrestructuring expenses, primarily representing employee severance and relatedcosts for displaced employees associated with our closing down themanufacturing facility in Woodinville, Washington, after production of goodshad terminated.  We began to fully recognizethe benefits of this restructuring in 2004, in the form of higher productmargins on the goods previously manufactured in the U.S.

 

#### **Other Income (Expense)**

 

Net other expense during2004 was $3.6 million compared to $0.9 million in 2003.  Interest expense was $2.9 million in eachyear while other expense was $0.7 million compared to other income of $1.8million in 2003.  The primary componentof other expense in 2004 was a $0.5 million loss on the conversion of SunMackie debt to equity while the primary component of other income in 2003 was a$1.6 million gain related to favorable settlements on liabilities of MackieDesigns Engineering Services BVBA (“Mackie Belgium”), which was closed in2003.  Interest expense will fluctuateprimarily with the balance of our line of credit and may also fluctuate basedon increases or decreases in the Prime Rate or LIBOR, the base rates on ourline of credit.

 

# **Income Tax Benefit**

 

We had income tax expense of $12,000 in 2004 compared to anincome tax benefit of $1.2 million in 2003. During 2003, we received $5.0 million in income tax refunds related tocarrying back our taxable losses from 2002 to prior years returns where we hadpaid income taxes.  The $1.2 millionincome tax benefit in 2003 represents primarily the difference between incometax refunds received during 2003 in excess of the estimated income taxreceivable recorded at December 31, 2002.

 

At December 31,2004, we had net operating loss carryforwards for federal income tax purposesof approximately $31.8 million, which if not utilized will begin to expire in2024.  Approximately $30.3 million ofthese loss carryforwards relate to the U.S. and U.K.  Approximately $1.5 million of these losscarryforwards relate to our discontinued operation in France, which we believewe will not be able to recapture.  Wehave total net deferred tax assets, including our net operating losscarryforwards, of approximately $17.3 million as of December 31,2004.  We have recorded a valuationallowance for the entire net deferred tax assets as a result of uncertaintiesof future taxable income necessary for the realization of these net assets.

 

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##### ***Year Ended December 31,2003 Compared to Year Ended December 31, 2002***

##### *** ***

# **Net Sales**

 

Ournet sales from continuing operations in 2003 were $130.8 million compared to$159.4 million in 2002, a decrease of 17.9%. This decline is due to lower unit volumes, discounted pricing on certainmodels and reduction in the number of models we sell.  We experienced a two-year volume decline dueto reductions in our product offerings and an aging lifecycle of certainproducts resulting in lower sales. Additionally, sales were negatively impacted during the latter part of2003 due to our being out of stock on certain products.  These product outages were due to themigration of certain product manufacturing from Woodinville, Washington tocontract manufacturers, as well as the closure of our Italian operations.  We have one significant customer whorepresented approximately 12% of our total revenues in 2003 and 14% in2002.  U.S. sales representedapproximately 63% of our total sales in 2003, compared to approximately 62% in2002.

 

#### **Gross Profit**

 

Our gross margins decreased in 2003 to $29.3million, or 22.6% of net sales, from $37.9 million, or 23.8% of net sales in2002.  The deterioration in gross marginsis due to many factors primarily surrounding the migration of a majority of ourmanufacturing from the U.S. to third party contract manufacturers as well asthe write down of excess and obsolete inventory.  Specifically, we took charges against cost ofsales of approximately $5.7 million related to excess or obsolete productscompared to $7.1 million in 2002.  In2003, we were continually producing fewer goods in the U.S. and migrating amajority of these goods to Asia, however, our costs of manufacturing in theU.S. were not reducing at the same level as the output.  Accordingly, the excess of costs incurred atour facilities over what we capitalized into inventory reduced ourmargins.  We also had higher depreciationexpenses in 2003 over 2002, due to a change in estimate of useful lives ofcertain manufacturing equipment from the planned closure of our U.S.manufacturing facility.  Additionally, wehad a higher percentage of our sales coming from lower margin products in 2003than we did in 2002.

# ** **

# **Selling, General andAdministrative**

 

Selling, general and administrative expenses were$35.7 million in 2003, a decrease of $7.7 million over 2002 expenses of $43.4million.  During 2003, we actively tookmeasures to reduce costs including reductions in the number of employeesthrough layoffs or attrition and significantly lower spending on marketingtradeshows.  Additionally, included inselling costs are commissions paid to third parties, which were lower due tolower revenues in 2003 compared to 2002.

 

# **Research and Development**

 

Our research and developments expenses were $7.7million in 2003, a reduction of $2.6 million compared to 2002 expenses of $10.3million.  The reduction in these expensesis due to both headcount reductions as well as the closure of a researchfacility we had in Belgium during the first half of 2003

 

**Impairmentof Goodwill and Other Long-Lived Assets and Cumulative Effect of a Change inAccounting Principle**

 

Weadopted SFAS No.142 on January 1, 2002. As a consequence, we no longer amortize goodwilland intangibles with indefinite lives, but instead measure goodwill andintangibles for impairment at least annually, or when events indicate thatimpairment exists. As required by SFASNo. 142, we performed the transitional impairment test on goodwill and otherintangibles, which consisted of an assembled 

 

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workforce. As a result ofthe transitional impairment test, we recorded a $5.9 million cumulative effectof a change in accounting principle in 2002. The total impairment of $5.9 million has been included in discontinuedoperations for the year ended December 31, 2002, as the goodwill wasrelated to our acquisition of Mackie Italy, whose results are shown asdiscontinued operations in all periods presented. In addition to thetransitional impairment test, we reviewed our remaining goodwill and otherintangibles as required annually pursuant to SFASNo. 142. As a result of the annual review in the fourth quarter of 2002, wefurther reduced the carrying amount of goodwill by recording an impairmentcharge of $14.5 million, the remaining net book value.

 

Additionally,at December 31, 2002, we reviewedour other long-lived assets for potential impairment and determined that thecarrying value of the developed technology recorded in connection with ouracquisition of Mackie Belgium would not be recoverable. We also determined thatthe carrying value of property, plant and equipment at certain of our Europeanfacilities would not be recoverable. Accordingly, we recorded an impairmentcharge for these items totaling approximately $1.3 million.

 

# **Restructuring Costs**

 

During 2003, we incurred $1.6 million inrestructuring expenses, primarily representing employee severance and relatedcosts for displaced employees associated with our closing down themanufacturing facility in Woodinville, Washington, after production of goodshad terminated.

 

#### **Other Income (Expense)**

 

Net other expense during2003 was $0.9 million compared to $1.1 million in 2002.  In 2003, this amount comprised of $0.2million of interest income and $1.8 million of non-operating gains, offset by$2.9 million of interest expense.  Thenon-operating gains include approximately $1.6 million of gains related tofavorable settlements on liabilities of Mackie Belgium, closed during the firsthalf of 2003.

 

# **Income Tax Benefit**

 

Werecognized tax benefits in 2003 of $1.2 million, compared to $2.7 million in2002.  During 2003, we received $5.0million in income tax refunds related to carrying back our taxable losses from2002 to prior years returns where we had paid income taxes.  The $1.2 million income tax benefit in 2003represents primarily the difference between income tax refunds received during2003 in excess of the estimated income tax receivable recorded at December 31,2002.

 

# **Discontinued Operations**

 

Discontinued operations relate to the operations of ourformer subsidiary, Mackie Italy.  Weincurred a loss on discontinued operations of $6.4 million in 2003 compared toa loss of $7.9 million in 2002.  During2003, the loss consisted of a $1.7 million loss on the disposition of MackieItaly, losses from operations of $2.9 million, $1.1 million net interestexpense, $0.5 million of income tax expense and $0.2 million of othernon-operating losses.  In 2002, the lossrepresented operating income of $0.4 million offset by a $5.9 million chargefor a cumulative effect of a change in accounting principle, $1.0 million netinterest expense, $0.9 million of income tax expense and $0.5 million of othernon-operating expenses.

#### ** **

# **Liquidity and CapitalResources**

 

Wehave a Loan and Security Agreement with a lender, which provides for a $25.0million revolving line of credit through March 2006, limited to apercentage of eligible accounts receivable and 

 

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inventory.  We executed Loan Amendment and WaiverAgreements in April, August and October 2004, which eased ourfinancial covenants and reduced the gross amount of the line from $26.0 millionto $25.0 million.  This lender alsoprovided a $2.5 million term loan in March 2003.  Both the line of credit and term loan aresecured by substantially all U.S. assets and the accounts receivable of LOUDTechnologies (Europe) Plc.  At December 31,2004, we had excess borrowing capacity based on eligible assets of $7.9 millionand were in compliance with all our debt covenants.

 

In March 2003,we obtained a loan for $11.0 million, which is subordinate to the line ofcredit with another lender. Interest accrues at a rate of 10% of which 8% ispaid monthly and the remaining 2% is paid monthly if there is specific excessavailability on our line of credit, otherwise, the 2% interest is added toprincipal.  The principal and interest isdue May 2006.  At December 31, 2004,we had added a total of $360,000 in accrued interest to the note payable.

 

On August 3,2004 we entered into an Exchange Agreement, to convert our $4.4 million ofsubordinated debt and accrued interest to Sun Mackie into 2,480,155 shares ofcommon stock.  This transaction willreduce our interest expenses by approximately $0.8 million per year.

 

As of December 31,2004, we had cash and cash equivalents of $0.5 million and total debt andshort-term borrowings of $23.7 million.

 

*Net Cash Provided by (Used in) Operating Activities*

 

Cashused in operations was $1.2 million in 2004 while cash provided by operationswas $12.2 million in 2003 and $3.3 million in 2002.  Our net loss in 2004 was $2.3 million thatincluded $3.3 million in depreciation and amortization and a $0.5 million losson the conversion of debt to equity.  In2004 we increased our receivables and inventory levels by $12.8 million.  Mainly as a result of the increase to ourinventory levels, our accounts payable and accrued expenses increased by $9.8million.

 

In2005, we anticipate reducing our inventory levels as revenues increase.  We expect this increase in revenues toincrease our receivables.  Additionallyaccounts payable is expected to decrease in 2005 due primarily to theforecasted reduction in inventory.

 

In February 2005, we made a settlement offer to MackieItaly to settle any net outstanding amounts owed for $4.7 million; thisagreement is subject to creditor approval and is valid through May 31,2005.  Under the proposal, we had ourlender issue a stand-by letter of credit to Mackie Italy for $1.0 million,payable upon their signed agreement, and have committed to make furtherpayments of $1.5 million during the remainder of 2005 and $2.2 million during2006.  If and when this proposal isaccepted, we will recognize a gain on extinguishment of debt of approximately$2.9 million.

 

*NetCash Used in Investing Activities*

 

Cash used ininvesting activities was $1.2 million in 2004, a decrease from $1.8 million in2003 and $4.5 million in 2002.  For thepast three years, investing activities have primarily related to capitalexpenditures for equipment used in manufacturing, office equipment and a newcorporate financial system and additional technology.

 

As part of ourthird party manufacturing agreements, most of our contract manufacturersrequire that we invest in tooling equipment prior to the start ofmanufacture.  Accordingly, in 2005 weanticipate spending between $2.0 and $2.5 million in new tooling devicesrequired to build our products and other equipment used in the manufacturingprocess.

 

19

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*NetCash Provided by (Used in) Financing Activities*

 

Our cash providedby financing activities was $2.1 million in 2004, cash used in financingactivities was $12.9 million in 2003 and cash provided by financing activitieswas $2.0 million in 2002.  The cashprovided in 2004 is primarily proceeds of $4.0 million from our line of creditoffset by $1.7 million of payments on long term debt.

 

*Paymentsand Proceeds from Long-term Debt, Line of Credit and Other Short-termBorrowings*

 

Inaddition to its equity investment, Sun Mackie provided $4.0 million in debtfinancing in March 2003.  Interest accrued at an annual rate of15%.  In addition to the loan from Sun Mackie, we issued warrants topurchase an additional 1.2 million common shares at an exercise price of $0.01per share. On August 3, 2004, we entered into an Exchange Agreement,whereby Sun Mackie converted its debt and interest totaling $4.4 million into2,480,155 shares of common stock.

 

Inconnection with the March 2003 agreement with Sun Mackie LLC, werefinanced all of our debt obligations, paying down a net of $4.3million.  We entered into a $2.5 million term loan and a line of creditproviding up to $26.0 million, (reduced to $25.0 million in 2004) with a newU.S. lender.  Availability under this line of credit is limited toeligible collateral; initial funding was $11.6 million. Principal payments onthe term loan are due in equal monthly payments over five years, beginning in July 2003.A portion of the term loan is backed by U.S. basedfixed assets.  Due to the sale of theWoodinville, Washington manufacturing equipment, an additional $1.3 million waspaid on the term loan in 2004. Additionally, a Loan Amendment Agreement was executed in August 2004,which reduced the monthly principal payment to $25,000.   Interest is alsodue monthly calculated at the bank’s prime rate plus 0.75% or Eurodollar Rateplus 3.5%. Both the revolving line of credit and term loan are secured by allU.S. based assets including, but not limited to, accounts receivable,inventory, fixed assets, intangible assets and patents. Additionally, a portionof the revolving line of credit is provided in the U.K. and is secured byaccounts receivable of LOUD Technologies (Europe) Plc.

 

In March 2003,we obtained a loan for $11.0 million, which is subordinate to the line ofcredit with another lender.  Interestaccrues at a rate of 10%, of which 8% is paid monthly while the remaining 2% ispaid monthly if there is specific excess availability on our line of credit;otherwise the 2% is added to principal. Principal and interest is due May 2006. At December 31, 2004, we had added a total of $360,000 in accruedinterest to the note payable.

 

Under the terms of the line of credit and subordinated loanagreements, we are required to maintain certain financial ratios, such as acumulative EBITDA calculation. The agreement also provides, among othermatters, restrictions on additional financing, dividends, mergers,acquisitions, and an annual capital expenditure limit.

 

We have takenvarious actions to improve results of operations and ensure our ongoing abilityto cover scheduled debt servicing payments, including headcount reductions andother cost containment measures. Over the last three years, these measuresincluded the following items:

 

•                  sale of Mackie Designs Italy;

•                  closing the manufacturing facility in Woodinville, Washington, in orderto outsource the manufacturing of the majority of our products offshore;

•                  bankruptcy and closure of Mackie Belgium;

•                  closure of certain international sales offices;

•                  layoffs across all areas, primarily manufacturing related;

•                  replacement of debt instruments with debt instruments with longer termto maturity;

•                  conversion of notes payable to equity;

•                  reorganization of our management team.

 

20

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Our ability tocontinue as a going concern is dependent upon the following key factors:

 

*Abilityto stay in compliance with debt covenants*

 

Wehave entered into amendments to our line of credit and term loans in April, August andOctober of 2004, which have revised debt covenants.  The keyfinancial covenants are achievement of certain EBITDA targets for the term ofthe agreement or, during the period until December 31, 2004, maintenanceof a 60-day average of $2.5 million in excess borrowing availability.  The average excess borrowing availability at December 31,2004, for this measurement was $7.4 million. Additionally we are required tomaintain $0.5 million availability at all times. The October agreementrequires us to meet the EBITDA target for the previous twelve months measuredquarterly beginning March 31, 2005. We believe we will meet this target on March 31 and each quarterthereafter in 2005.

 

*Commitments*

 

At December 31,2004, we had the following material contractual commitments related tooperating leases for equipment, facilities and material obligations related toshort-term and long-term debt arrangements, excluding our line of credit of$11.8 million:

 
| ** **       | ** ** | **Payments due by period** | ** ** |
|------------------|------------|----------------------------|------------|
| ** **       | ** ** | **Total**                  | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** |
| ** **       | ** ** | **(In thousands)**         | ** ** |
|             |       |                       |       |   |   |   |   |   |   |
| Operating Leases |       | $                          | 4,634      |   | $ | 2,179 |   | $ | 2,233 |   | $ | 222 |   |
| Long-term Debt   |       | 11,912                     |       | 300 |   | 11,612 |   | — |   |
| Total            |       | $                          | 16,546     |   | $ | 2,479 |   | $ | 13,845 |   | $ | 222 |   |

 

We believe we have adequate resources to continue asa going concern through December 31, 2005.

 

*New Accounting Pronouncements*

 

InDecember 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-BasedPayments” (SFAS 123R), which requires the measurement of all share-basedpayments to employees, including grants of employee stock options, using afair-value-based method and the recording of such expense in an entity’sstatement of income.  The accountingprovisions of SFAS 123R are effective for reporting periods beginning after June 15,2005.  The Company is required to adopt SFAS123R in the quarter ending September 30, 2005.  The pro forma disclosures previouslypermitted under SFAS 123 no longer will be an alternative to financialstatement recognition.  See “Stock-BasedCompensation” in Note 2 of  Notes toConsolidated Financial Statements for the pro forma net income and net incomeper share amounts for 2004, 2003 and 2003, as if the Company had applied thefair value recognition provisions of SFAS 123 to measure compensation expensefor employee stock incentive awards.  TheCompany has completed a preliminary evaluation of the impact of adopting SFAS123R and estimates it will have a material impact on income from operations forthe six months ending December 31, 2005. This estimate is based on preliminary information available to theCompany and could materially change based on actual facts and circumstancesarising during the six months ending December 31, 2005.

 

21

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InDecember 2004, the FASB issued SFAS 151, “Inventory Costs” (“SFAS No. 151”).  SFAS No. 151 requires abnormal amounts ofinventory costs related to idle facility, freight handling and wasted materialexpenses to be recognized as current period charges.  Additionally, SFAS No. 151 requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities.  The standard is effective for fiscal yearsbeginning after June 15, 2005.  Webelieve the adoption of SFAS No. 151 will not have a material impact on ourconsolidated financial statements.

 

# **7A.  Qualitativeand Quantitative Disclosures About Market Risk**

 

We areexposed to various market risks, including changes in foreign currency ratesand interest rates.  We may enter intovarious derivative transactions to manage certain of these exposures; howeverwe did not have any derivative financial instruments as of December 31,2004.

 

At December 31,2004, we had a variable rate line of credit with an outstanding balance of$11.8 million. As such, changes in U.S. interest rates affect interest paid ondebt and we are exposed to interest rate risk. For the year ended December 31,2004, an increase in the average interest rate of 10%, i.e. from 5.08% to5.59%, would have resulted in an approximately $39,000 increase in net lossbefore income taxes and discontinued operations. The fair value of such debtapproximates the carrying amount on the consolidated balance sheet at December 31,2004.

 

Our non-U.S. subsidiaries have functional currenciesof the U.S. Dollar and consequently we translate non-monetary assets andliabilities at historical rates and remeasure monetary assets and liabilitiesat exchange rates in effect at the balance sheet date. These subsidiaries arelocated in the U.K. and Canada.  Income and expense items are translated at theaverage exchange rates prevailing during the period. A 10% decrease in thevalue of the U.S. Dollar compared to the local currencies of our non-U.S.subsidiaries, throughout the year ended December 31, 2004, would haveresulted in an approximately $93,000 increase to the net loss before incometaxes.

 

**Item 8.  Consolidated Financial Statements andSupplementary Data**

 

Thefollowing consolidated financial statements and supplementary data are includedbeginning on page 23 of this report.

 

22

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**Reportof Independent Registered Public Accounting Firm**

 

The Board of Directorsand Shareholders

LOUD Technologies Inc.:

 

We have audited theaccompanying consolidated balance sheets of LOUD Technologies Inc. andsubsidiaries as of December 31, 2004 and 2003, and the relatedconsolidated statements of operations, shareholders’ equity and comprehensive loss and cash flows for each ofthe years in the three-year period ended December 31, 2004. Theseconsolidated financial statements are the responsibility of LOUD TechnologiesInc.’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the consolidated financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of LOUD Technologies Inc., andsubsidiaries as of December 31, 2004 and 2003, and the results of theiroperations and their cash flows for each of the years in the three-year periodended December 31, 2004, in conformity with U.S.generally accepted accounting principles.

 

As discussedin Note 2 to the consolidated financial statements, the Company adoptedStatement of Financial Accounting Standards No. 142, *Goodwill andOther Intangible Assets*, as of January 1, 2002.

 

 
| /s/ KPMG LLP        |
|---------------------|
|                |
| Seattle, Washington |
| March 4, 2005  |

 

23

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**LOUDTECHNOLOGIES INC.**

**ANDSUBSIDIARIES**

**ConsolidatedBalance Sheets**

**December 31,2004 and 2003**

**(Inthousands, except for share data)**

 
| ** **                                                                                                                                                          | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Assets**                                                                                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                     |       |       |       |       |       |
| Cash and cash equivalents                                                                                                                                           |       | $          | 450        |       | $          | 757 |   |
| Accounts receivable, net                                                                                                                                            |       | 16,800     |       | 13,039     |       |
| Income taxes receivable                                                                                                                                             |       | 30         |       | 188        |       |
| Inventories                                                                                                                                                         |       | 27,959     |       | 18,930     |       |
| Prepaid expenses and other current assets                                                                                                                           |       | 2,861      |       | 2,924      |       |
| Total current assets                                                                                                                                                |       | 48,100     |       | 35,838     |       |
| Property, plant and equipment, net                                                                                                                                  |       | 7,381      |       | 8,381      |       |
| Intangible assets, net                                                                                                                                              |       | 5,128      |       | 5,552      |       |
| Other assets, net                                                                                                                                                   |       | 186        |       | 651        |       |
| Total assets                                                                                                                                                        |       | $          | 60,795     |       | $          | 50,422 |   |
|                                                                                                                                                                |       |       |       |       |       |
| **Liabilities and Shareholders’ Equity**                                                                                                                       |       |       |       |       |       |
|                                                                                                                                                                |       |       |       |       |       |
| Current liabilities:                                                                                                                                                |       |       |       |       |       |
| Short-term borrowings                                                                                                                                               |       | $          | 11,826     |       | $          | 7,868 |   |
| Accounts payable                                                                                                                                                    |       | 17,679     |       | 6,454      |       |
| Accrued liabilities                                                                                                                                                 |       | 6,972      |       | 7,973      |       |
| Taxes  payable                                                                                                                                                      |       | 1,466      |       | 1,288      |       |
| Current portion of long-term debt                                                                                                                                   |       | 300        |       | 500        |       |
| Payable to former Italian subsidiary                                                                                                                                |       | 7,587      |       | 9,173      |       |
| Total current liabilities                                                                                                                                           |       | 45,830     |       | 33,256     |       |
|                                                                                                                                                                |       |       |       |       |       |
| Long-term debt, excluding current portion                                                                                                                           |       | 11,612     |       | 16,262     |       |
| Other liabilities                                                                                                                                                   |       | 33         |       | 72         |       |
| Total liabilities                                                                                                                                                   |       | 57,475     |       | 49,590     |       |
|                                                                                                                                                                |       |       |       |       |       |
| Commitments and contingencies                                                                                                                                       |       |       |       |       |       |
|                                                                                                                                                                |       |       |       |       |       |
| Shareholders’ equity:                                                                                                                                          |       |       |       |       |       |
| Preferred stock, no par value. Authorized 5,000,000  shares, no shares issued and outstanding                                                                       |       | —     |       | —     |       |
| Common stock, no par value. Authorized 40,000,000  shares, issued and outstanding 22,138,191 and 19,608,036 shares at December 31,  2004 and 2003,respectively |       | 38,778     |       | 33,999     |       |
| Accumulated deficit                                                                                                                                                 |       | (35,458    | )          | (33,167    | )          |
| Total shareholders’ equity                                                                                                                                     |       | 3,320      |       | 832        |       |
| Total liabilities and shareholder’s equity                                                                                                                     |       | $          | 60,795     |       | $          | 50,422 |   |

 

See accompanyingnotes to consolidated financial statements.

 

24

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**LOUDTECHNOLOGIES INC.**

**ANDSUBSIDIARIES**

**ConsolidatedStatements of Operations**

**Yearsended December 31, 2004, 2003, and 2002**

**(Inthousands, except per share data)**

 
| ** **                                                                                       | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                                                                                        |       | $        | 123,276    |     | $          | 130,766  |       | $ | 159,362 |   |
| Cost of sales                                                                                    |       | 81,927   |       | 101,456  |       | 121,502  |       |
| Gross profit                                                                                     |       | 41,349   |       | 29,310   |       | 37,860   |       |
| Operating expenses:                                                                              |       |     |       |     |       |     |       |
| Selling, general, and administrative                                                             |       | 32,259   |       | 35,678   |       | 43,367   |       |
| Research and development                                                                         |       | 7,784    |       | 7,711    |       | 10,316   |       |
| Impairment of goodwill and other long-lived assets                                               |       | —   |       | —   |       | 15,829   |       |
| Restructuring costs                                                                              |       | —   |       | 1,585    |       | —   |       |
| Total operating expenses                                                                         |       | 40,043   |       | 44,974   |       | 69,512   |       |
| Operating income (loss)                                                                          |       | 1,306    |       | (15,664  | )          | (31,652  | )          |
| Other income (expense):                                                                          |       |     |       |     |       |     |       |
| Interest income                                                                                  |       | 13       |       | 141      |       | 19       |       |
| Interest expense                                                                                 |       | (2,947   | )          | (2,851   | )          | (2,443   | )          |
| Other                                                                                            |       | (651     | )          | 1,801    |       | 1,332    |       |
| Total other income (expense)                                                                     |       | (3,585   | )          | (909     | )          | (1,092   | )          |
| Loss before income taxes and discontinued operations                                             |       | (2,279   | )          | (16,573  | )          | (32,744  | )          |
| Income tax expense (benefit)                                                                     |       | 12       |       | (1,161   | )          | (2,694   | )          |
| Loss from continuing operations                                                                  |       | (2,291   | )          | (15,412  | )          | (30,050  | )          |
| Loss from discontinued operations, net of income tax  expense of $0, $539 and $860, respectively |       | —   |       | (6,383   | )          | (7,878   | )          |
| Net loss                                                                                         |       | $        | (2,291     | )        | $          | (21,795  | )          | $ | (37,928 | ) |
| Basic and diluted loss per share:                                                                |       |     |       |     |       |     |       |
| Net loss from continuing operations                                                              |       | $        | (0.10      | )        | $          | (0.79    | )          | $ | (2.41 | ) |
| Net loss from discontinued operations                                                            |       | —   |       | (0.32    | )          | (0.63    | )          |
| Basic and diluted loss per share                                                                 |       | $        | (0.10      | )        | $          | (1.11    | )          | $ | (3.04 | ) |
|                                                                                             |       |     |       |     |       |     |       |
| Shares used in computing basic and diluted net loss  per share                                   |       | 21,915   |       | 19,556   |       | 12,489   |       |

 

See accompanyingnotes to consolidated financial statements.

 

25

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**LOUDTECHNOLOGIES INC.**

**ANDSUBSIDIARIES**

**ConsolidatedStatements of Shareholders’ Equity and Comprehensive Loss**

**Yearsended December 31, 2004, 2003, and 2002**

**(Inthousands)**

 
| ** **                                                          | ** ** | ** **       | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  other  comprehensive  income (loss)** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|------------------|------------|--------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                                                          | ** ** | ** **       | ** ** | ** **               | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **Common stock** | ** ** | ** **               | ** ** | ** **                                           | ** ** |
| ** **                                                          | ** ** | **Shares**       | ** ** | **Amount**               | ** ** | ** **                                           | ** ** | **Total**  | ** ** |
| Balance at December 31, 2001                                   |       | 12,424           |       | $                        | 28,691     |                                                 | $          | 26,556     |       | $ | (2,437 | ) | $ | 52,810 |   |
| Exercise of stock options                                           |       | 132              |       | 1                        |       | —                                               |       | —     |       | 1 |   |
| Amortization of deferred stock compensation                         |       | —           |       | 653                      |       | —                                               |       | —     |       | 653 |   |
| Comprehensive loss:                                                 |       |             |       |                     |       |                                                 |       |       |       |   |   |
| Net loss                                                            |       | —           |       | —                   |       | (37,928                                              | )          | —     |       | (37,928 | ) |
| Foreign currency translation adjustment                             |       | —           |       | —                   |       | —                                               |       | 1,700      |       | 1,700 |   |
| Total comprehensive loss                                            |       |             |       |                     |       |                                                 |       |       |       | (36,228 | ) |
| Balance at December 31, 2002                                   |       | 12,556           |       | 29,345                   |       | (11,372                                              | )          | (737       | )          | 17,236 |   |
| Shares issued in private transaction, net                           |       | 6,936            |       | 3,619                    |       | —                                               |       | —     |       | 3,619 |   |
| Warrants issued in connection with debt agreement                   |       | —           |       | 600                      |       | —                                               |       | —     |       | 600 |   |
| Options issued for covenant not to compete                          |       | —           |       | 285                      |       | —                                               |       | —     |       | 285 |   |
| Exercise of stock options                                           |       | 116              |       | 1                        |       | —                                               |       | —     |       | 1 |   |
| Amortization of deferred stock compensation                         |       | —           |       | 149                      |       | —                                               |       | —     |       | 149 |   |
| Comprehensive loss:                                                 |       |             |       |                     |       |                                                 |       |       |       |   |   |
| Net Loss                                                            |       | —           |       | —                   |       | (21,795                                              | )          | —     |       | (21,795 | ) |
| Foreign currency translation adjustment                             |       | —           |       | —                   |       | —                                               |       | (228       | )          | (228 | ) |
| Realization of loss on currency translation  adjustment             |       | —           |       | —                   |       | —                                               |       | 965        |       | 965 |   |
| Total comprehensive loss                                            |       |             |       |                     |       |                                                 |       |       |       | (21,058 | ) |
| Balance at December 31, 2003                                   |       | 19,608           |       | 33,999                   |       | (33,167                                              | )          | —     |       | 832 |   |
| Conversion of debt to equity                                        |       | 2,480            |       | 4,837                    |       | —                                               |       | —     |       | 4,837 |   |
| Exercise of stock options                                           |       | 50               |       | 1                        |       | —                                               |       | —     |       | 1 |   |
| Additional offering costs for shares issued in  private transaction |       | —           |       | (115                     | )          | —                                               |       | —     |       | (115 | ) |
| Amortization of deferred stock compensation                         |       | —           |       | 56                       |       | —                                               |       | —     |       | 56 |   |
| Comprehensive loss:                                                 |       |             |       |                     |       |                                                 |       |       |       |   |   |
| Net Loss                                                            |       | —           |       | —                   |       | (2,291                                               | )          | —     |       | (2,291 | ) |
| Total comprehensive loss                                            |       |             |       |                     |       |                                                 |       |       |       | (2,291 | ) |
| Balance at December 31, 2004                                   |       | 22,138           |       | $                        | 38,778     |                                                 | $          | (35,458    | )          | $ | — |   | $ | 3,320 |   |

 

See accompanyingnotes to consolidated financial statements.

 

26

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**LOUDTECHNOLOGIES INC.**

**ANDSUBSIDIARIES**

**ConsolidatedStatements of Cash Flows**

**Yearsended December 31, 2004, 2003, and 2002**

**(Inthousands)**

 
| ** **                                                                                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Operating activities:                                                                     |       |     |       |     |       |     |       |
| Net loss                                                                                  |       | $        | (2,291     | )        | $          | (21,795  | )          | $ | (37,928 | ) |
| Adjustments to reconcile net income to net cash  provided (used) by operating activities: |       |     |       |     |       |     |       |
| Loss from discontinued operations                                                         |       | —   |       | 1,694    |       | —   |       |
| Gain on disposal of business                                                              |       | —   |       | (1,577   | )          | —   |       |
| Cumulative effect of a change in accounting  principle                                    |       | —   |       | —   |       | 5,940    |       |
| Depreciation and amortization                                                             |       | 3,307    |       | 6,982    |       | 9,217    |       |
| Impairment of goodwill and other long-lived assets                                        |       | —   |       | —   |       | 15,829   |       |
| (Gain) Loss on asset dispositions                                                         |       | (232     | )          | 113      |       | 305      |       |
| Deferred stock compensation                                                               |       | 56       |       | 149      |       | 653      |       |
| Non-cash loss on conversion of debt to equity                                             |       | 400      |       | —   |       | —   |       |
| Deferred income taxes                                                                     |       | —   |       | —   |       | 2,196    |       |
| Non-cash interest expense                                                                 |       | 88       |       | 113      |       | —   |       |
| Changes in operating assets and liabilities, net of  acquisition and disposition:         |       |     |       |     |       |     |       |
| Accounts receivable                                                                       |       | (3,761   | )          | 8,992    |       | 6,477    |       |
| Inventories                                                                               |       | (9,029   | )          | 18,746   |       | 4,803    |       |
| Prepaid expenses and other current assets                                                 |       | (207     | )          | (1,634   | )          | 405      |       |
| Other assets                                                                              |       | 465      |       | 455      |       | 73       |       |
| Accounts payable and accrued expenses                                                     |       | 9,836    |       | (4,166   | )          | (2,694   | )          |
| Taxes payable                                                                             |       | 178      |       | 4,090    |       | (2,014   | )          |
| Other long term liabilities                                                               |       | (39      | )          | —   |       | —   |       |
| Net cash provided by (used in) operating activities                                       |       | (1,229   | )          | 12,162   |       | 3,262    |       |
| Investing activities:                                                                     |       |     |       |     |       |     |       |
| Proceeds from sales of property, plant and equipment                                      |       | 830      |       | 221      |       | —   |       |
| Purchases of property, plant and equipment                                                |       | (2,053   | )          | (1,982   | )          | (4,544   | )          |
| Cash used in investing activities                                                         |       | (1,223   | )          | (1,761   | )          | (4,544   | )          |
| Financing activities:                                                                     |       |     |       |     |       |     |       |
| Proceeds from long-term debt and warrants                                                 |       | —   |       | 17,500   |       | 4,730    |       |
| Payments on long-term debt                                                                |       | (1,698   | )          | (16,791  | )          | (2,505   | )          |
| Net proceeds (payments) on bank line of credit and  short-term borrowings                 |       | 3,958    |       | (17,254  | )          | 920      |       |
| Offering costs related to shares issued in private  transactions, net                     |       | (115     | )          | —   |       | —   |       |
| Payment in connection with acquisition of business                                        |       | —   |       | —   |       | (1,193   | )          |
| Net proceeds from stock sales and exercise of stock  options                              |       | —   |       | 3,620    |       | 1        |       |
| Cash provided by (used in) financing activities                                           |       | 2,145    |       | (12,925  | )          | 1,953    |       |
| Effect of exchange rate changes on cash                                                   |       | —   |       | 219      |       | 296      |       |
| Increase (decrease) in cash and cash equivalents                                          |       | (307     | )          | (2,305   | )          | 967      |       |
| Cash and cash equivalents at beginning of year                                            |       | 757      |       | 3,062    |       | 2,095    |       |
| Cash and cash equivalents at end of year                                                  |       | $        | 450        |     | $          | 757      |       | $ | 3,062 |   |
|                                                                                      |       |     |       |     |       |     |       |
| Supplemental disclosures                                                                  |       |     |       |     |       |     |       |
| Cash paid for interest                                                                    |       | $        | 1,655      |     | $          | 3,060    |       | $ | 4,003 |   |
| Cash paid (refunded) for income taxes                                                     |       | $        | (329       | )        | $          | (4,628   | )          | $ | (1,472 | ) |
| Conversion of note payable and accrued interest to  equity                                |       | $        | 4,437      |     | $          | —   |       | $ | — |   |
| Accrued interest converted to note payable                                                |       | $        | 960        |     | $          | —   |       | $ | — |   |

 

See accompanying notes toconsolidated financial statements.

 

27

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**LOUD TECHNOLOGIES INC.**

 

**1)**                         Description ofBusiness

 

We develop, manufacture,distribute and sell high-quality, affordable digital and analog audio mixers,speakers, amplifiers and other professional audio equipment on a worldwidebasis. Our products are used by professional musicians, sound installationcontractors and broadcast professionals both in sound recordings, livepresentations systems and installed sound systems. We distribute our productsprimarily through retail dealers, mail order outlets and installed soundcontractors. As of December 31, 2004, our primary operations are in theUnited States and the United Kingdom. During 2002 and part of 2003 we also had operations in Italy, France andGermany.

 

On February 21,2003, we finalized an agreement with Sun Mackie, LLC, an affiliate of SunCapital Partners, Inc., a private investment firm, whereby Sun Mackie purchasedapproximately 14.4 million shares of our common stock for$10.0 million. Sun Mackie acquired approximately 7.4 million of theseshares from certain selling shareholders. It acquired approximately7.0 million newly issued shares directly from the Company forapproximately $6.3 million. Net proceeds after transaction related costswere approximately $3.6 million. As a result of this transaction, SunMackie owned approximately 74% of our outstanding shares on that date.

 

In addition to its equityinvestment, Sun Mackie provided $4.0 million of debt financing, whichfunded in March 2003. In connection with this loan, we issued warrants topurchase an additional 1.2 million common shares at an exercise price of$0.01 per share. In addition to the transactions with Sun Mackie, a Loan andSecurity Agreement with a new lender was finalized in March 2003. Thisagreement provides for a $26.0 million revolving line of credit and a$2.5 million term loan. Our previous lender provided a loan totaling$11.0 million, which is subordinate to the Loan and Security Agreementwith our new lender. This subordinated loan and the $2.5 million new termloan satisfied the previously existing Term Loans.

 

In April, August andOctober of 2004 we executed Loan Amendment and Waiver Agreements whicheased the financial covenants we are required to meet and reduced the grossamount of the line of credit from $26.0 million to $25.0 million.  Management believes the Company will remainin compliance with the new covenants through December 31, 2005.

 

In August 2004, weexecuted an Exchange Agreement whereby we exchanged our entire debt to SunMackie for 2,480,155 shares of common stock valued at $1.95 per share.  At December 31, 2004, Sun Mackie ownsapproximately 76% of our outstanding shares. We recognized a loss on early extinguishment of debt with thistransaction of $0.5 million representing the difference in the carrying valueof the debt and accrued interest and the fair value of the common stock issued.

 

On March 4, 2005, weacquired 100% of the shares of St. Louis Music, Inc., a Missouri basedmanufacturer, distributor and importer of branded musical instruments andprofessional audio products for cash and stock totaling $38.4 million plusestimated transaction costs of approximately $1.5 million for a total purchaseprice of approximately $39.9 million. This transaction is explained in moredetail in Note 18 to these financial statements.

 

28

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**(2)****                    ****Summary of SignificantAccounting Policies**

** **

***(a)******                    ******Basis ofPresentation***

*** ***

The financial statementsconsolidate the accounts of LOUD Technologies Inc. and our wholly ownedsubsidiaries. The companies are collectively hereinafter referred to as “theCompany,” “LOUD”, “we,” “our” and “us.” All significant intercompany accountsand transactions have been eliminated.

 

**(b)****                     *****Use ofEstimates***

 

The preparation of financialstatements in conformity with generally accepted accounting principles requiresus to make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosures of contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Significant items subject to suchestimates and assumptions include the carrying amount of property and equipmentand intangibles; valuation allowances for receivables, inventories, anddeferred income tax assets and liabilities; and contingencies and obligationsrelated to Mackie Italy.  Actual resultsmay differ from those estimates.

 

**(c)****                     *****RevenueRecognition***

*** ***

Revenues from sales ofproducts, net of sales discounts, returns and allowances, are generallyrecognized upon shipment under an agreement with a customer when risk of losshas passed to the customer, all significant contractual obligations have beensatisfied, the fee is fixed or determinable and collection of the resultingreceivable is considered probable. Products are generally shipped “FOB shippingpoint” with no right of return. We do have some dealers who finance theirpurchases through finance companies. We have manufacturer’s repurchaseagreements with the finance companies and defer the revenue and related cost ofgoods sold of these sales at the time of the sale.  We then recognize the revenue and relatedcost of goods sold from these sales when the right of return no longer exists.The amount of receivables we had repurchase agreements with at December 31,2004, was approximately $0.4 million. Sales with contingencies, such as rights of return, rotation rights,conditional acceptance provisions and price protection, are rare andinsignificant and are deferred until the contingencies have been satisfied orthe contingent period has lapsed. We generally warrant our products againstdefects in materials and workmanship for periods of between one and six years.The estimated cost of warranty obligations, sales returns and other allowancesare recognized at the time of revenue recognition based on contract terms andprior claims experience.

 

**(d)****                     *****AdvertisingExpense***

*** ***

The cost of advertisingincluded in selling, general and administrative expense is expensed asincurred. For 2004, 2003, and 2002 these expenses totaled $4.2 million,$2.4 million, and $3.1 million, respectively.

 

**(e)****                     *****Researchand Development Costs***

*** ***

Expenditures relating to thedevelopment of new products and processes, including significant improvementsand refinements to existing products, are expensed as incurred.  Under our current practice of developing newproducts and enhancements, the technological feasibility of the underlyingproducts is not established until the completion of a working model at whichtime all product development is substantially complete.  Accordingly no such costs have beencapitalized because the impact would not be material.

 

**(f)****                       *****ForeignCurrency Translation***

*** ***

The financial statements ofour non-U.S. subsidiaries have been translated into U. S. Dollars in accordancewith Statement of Financial Accounting Standards No. 52, *Foreign Currency*

 

29

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*Translation*. In 2003, due to the restructuring of our operations in Europesubsequent to the sale of Mackie Italy, we determined the functional currencyof our remaining non-U.S. subsidiaries to be the U.S. dollar. Prior to the saleof our Italian operations in December 2003, we had entities whose functionalcurrency was the local currency of the country in which they operate. As aresult, all monetary assetsand liabilities in the balance sheets of these subsidiaries, whose functionalcurrency is now the U.S. Dollar, are translated at year-end exchange rates. Netsales, costs and expenses are translated at average rates of exchangeprevailing during the period. Translation gains and losses are included inother income (expense), net. Realized and unrealized gains and losses onforeign currency transactions are included in other income (expense), net. In2002, unrealized foreign currency translation gainsand losses of these subsidiaries accumulated in a separate component ofshareholders equity, when the functional currency was not the U.S. dollar.

 

**(g)****                    *****CashEquivalents***

*** ***

We consider all demanddeposits and all highly liquid debt instruments with maturity at purchase ofthree months or less to be cash equivalents. At December 31, 2004, restrictedcash of $0.1 million is included in prepaid expenses and other current assets.

 

**(h)****                    *****AccountsReceivable***

*** ***

Accounts receivable are recorded at the invoice amount and do not bearinterest.  The allowance for doubtfulaccounts is our best estimate of the amount of probable credit losses in ourexisting accounts receivable.  Wedetermine the allowance for doubtful accounts based upon our historicalwrite-off experience, the current aging of accounts receivable, and customerspecific credit risk factors. Accounts receivable balances are written off whenwe determine that it is unlikely we will receive future remittances.  We do not have any off-balance-sheet creditexposures related to our customers.

 

Allowances deducted from accounts receivable for the years endedDecember 31, 2004, 2003, and 2002 are as follows (in thousands):

 
| ** ** | ** ** | **Balance at  beginning of  year** | ** ** | **Additions** | ** ** | **Deductions*** | ** ** | **Balance at  end of  year** | ** ** |
|------------|------------|------------------------------------|------------|---------------|------------|-----------------|------------|------------------------------|------------|
|       |       |                               |       |          |       |            |       |                         |       |
| 2004       |       | $                                  | 2,163      |          | $          | 609             |       | $                            | (1,101     | ) | $ | 1,671 |   |
|       |       |                               |       |          |       |            |       |                         |       |
| 2003       |       | $                                  | 2,684      |          | $          | 1,359           |       | $                            | (1,880     | ) | $ | 2,163 |   |
|       |       |                               |       |          |       |            |       |                         |       |
| 2002       |       | $                                  | 1,349      |          | $          | 2,476           |       | $                            | (1,141     | ) | $ | 2,684 |   |

 

----

*           Deductions represent uncollectible accountswritten off against the allowance, net of recoveries.  For 2003, deductions include $1,159 relatedto amounts included in beginning balance of discontinued operations sold in2003.

 

**(i)****                       *****Inventories***

*** ***

Inventories are valued atthe lower of standard cost, which approximates actual cost on a first-in, first-outmethod, or market. Market value adjustments are recorded for excess andobsolete material, slow-moving product, service and demonstration products. Wemake judgments regarding the carrying value of our inventory based upon currentmarket conditions. In 2004, 2003 and 2002, we made adjustments, included incost of sales, associated with products that are no longer marketable due to acombination of product obsolescence and poor field performance. Inventoryadjustments recorded in cost of sales associated with these products amountedto approximately $0.4 million, $5.7 million and $7.1 million in 2004, 2003and 2002, respectively.

 

30

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**(j)****                       *****Property,Plant and Equipment***

*** ***

Property, plant andequipment are stated at cost, less accumulated depreciation and amortization.Depreciation and amortization are computed using the straight-line method overthe estimated useful lives of the assets as follows: buildings, 33 years;machinery and equipment, 5 to 7 years; and furniture and fixtures, 3 to5 years. Leasehold improvements are amortized over the shorter of theiruseful lives or the term of the lease. Direct internal and external costs ofcomputer software developed for internal use are capitalized in accordance withSOP 98-1, Accounting for the Costs of Computer Software Developed orObtained for Internal Use. Capitalized costs are amortized using thestraight-line method over the estimated useful lives beginning when each moduleis complete and ready for its intended use. Maintenance and repairs areexpensed as incurred.

*** ***

**(k)****                   *****Goodwilland Other Intangible Assets***

*** ***

Goodwill represents theexcess of costs over fair value of assets of businesses acquired.  We adopted SFASNo. 142, *Goodwill and Other IntangibleAssets*, as of January 1, 2002. In accordance with SFAS No. 142, goodwill andintangible assets with indefinite lives are no longer amortized, but insteadtested for impairment at least annually, or when events indicate thatimpairment exists (see Note 3). Intangible assets that are determined tohave definite lives will continue to be amortized on the straight-line methodover their estimated useful lives. Developed technology and trademark of EAWare amortized over 20 years. For 2002 and 2001, developed technology ofMackie Designs Engineering Services BVBA was amortized presuming a five-yearlife. In 2002, an impairment charge related to this technology was recorded(see Note 7).

 

**(l)****                       *****Impairmentof Long-Lived Assets***

*** ***

The recoverability oflong-lived assets including property, plant and equipment and intangible assetssubject to amortization are reviewed for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to estimated future undiscountedcash flows expected to be generated by the asset. If such assets are consideredto be impaired, the impairment to be recognized is measured as the amount bywhich the carrying amount of the assets exceeds the fair value of the assets.Assets to be disposed of are reported at the lower of the carrying amount orthe fair value less cost to sell. Factors which might trigger impairmentinclude significant underperformance relative to expected operating results,significant changes in our use of the assets or the strategy for our overallbusiness, and significant negative industry or economic trends (seeNotes 7 and 8).

 

**(m)****                 *****Fair Valueof Financial Instruments***

*** ***

The carrying amounts ofcash, accounts receivable, short-term borrowings, accounts payable, accruedliabilities and long-term debt are carried at cost which approximates theirfair value because they are of a short-term nature or have interest rates thatapproximate market rates.

 

**(n)****                    *****Stock-BasedCompensation***

*** ***

Stock-based employeecompensation plans are accounted for using the intrinsic-value methodprescribed in Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*,and related interpretations including FAS Interpretation No. 44, *Accounting for Certain Transactions Involving StockCompensation, an Interpretation of APB Opinion No. 25*. Under thismethod, compensation expense is recorded on the date of grant only if the currentmarket price of the underlying stock exceeded the exercise price or if optionswere issued to non-employees.

 

We have elected to apply thedisclosure-only provisions of SFAS No. 123, Accounting for Stock-BasedCompensation, an amendment of SFAS No. 148, Accounting for Stock-BasedCompensation – Transition and Disclosure, an amendment of SFASNo. 123.

 

31

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SFAS No. 123, asamended, permits companies to recognize, as expense over the vesting period,the fair value of all stock-based awards on the date of grant. TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded options, which have no vesting restrictions and are fullytransferable. Because our stock-based compensation plans have characteristicssignificantly different from those of traded options and because changes in thesubjective input assumptions can materially affect the fair value estimate,management believes that the existing option valuation models do notnecessarily provide a reliable single measure of the fair value of awards fromthe plan. Therefore, as permitted, we apply the existing accounting rules underAPB No. 25 and provide pro forma net loss and pro forma loss per sharedisclosures for stock-based awards made as if the fair value method defined inSFAS No. 123, as amended, had been applied.

 

The following tablesummarizes relevant information as to the reported amounts under the Company’sintrinsic value method of accounting for stock awards, with supplementalinformation as if the fair value recognition provisions of SFAS No. 123, asamended, had been applied:

 
| ** **                                                                               | ** ** | **2004**                                       | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                               | ** ** | **(In thousands, except for per share  data)** | ** ** |
|                                                                                     |       |                                           |       |     |       |     |       |
| Net loss:                                                                                |       |                                           |       |     |       |     |       |
| As reported                                                                              |       | $                                              | (2,291     | )        | $          | (21,795  | )          | $ | (37,928 | ) |
| Add stock-based employee  compensation expense included in reported net loss             |       | —                                         |       | 101      |       | 653      |       |
| Less stock-based employee  compensation expense determined under fair value based method |       | (840                                           | )          | (1,307   | )          | (1,565   | )          |
| Pro forma                                                                                |       | $                                              | (3,131     | )        | $          | (23,001  | )          | $ | (38,840 | ) |
| Basic and diluted net loss  per share:                                                   |       |                                           |       |     |       |     |       |
| As reported                                                                              |       | $                                              | (0.10      | )        | $          | (1.11    | )          | $ | (3.04 | ) |
| Pro forma                                                                                |       | (0.14                                          | )          | (1.18    | )          | (3.11    | )          |

 

The fair value of each option granted was estimated on the date ofgrant using the Black-Scholes option-pricing model, assuming no expecteddividends and the following weighted average assumptions:
| ** **                                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                      |       |     |       |     |       |     |       |
| Weighted average risk-free  interest rate |       | 3.1      | %          | 3.5      | %          | 4.0      | %          |
| Expected volatility                       |       | 90.0     | %          | 95.0     | %          | 73.0     | %          |
| Expected lives (in years)                 |       | 5        |       | 7        |       | 7        |       |

 

For options granted with anexercise price equal to the market price at the time of issuance, the weightedaverage fair value of options granted during the years 2004, 2003 and 2002 was$1.60, $0.87, and $2.43, respectively. There were no options granted in 2004,2003 and 2002 for which the exercise price was less than the market price.

 

32

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**(o)****                     *****Guarantees***

*** ***

In the ordinary course ofbusiness, we are not subject to potential obligations under guarantees thatfall within the scope of FIN No. 45 *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others* except for standardindemnification and warranty provisions and give rise only to the disclosurerequirements prescribed by FIN No. 45.

 

Indemnification and warrantyprovisions contained within our sales agreements are generally consistent withthose prevalent in our industry. The duration of product warranties isgenerally one to six years following delivery of products.

 

The warranty liability is summarized as follows (in thousands):

 
| ** ** | ** ** | **Balance at  beginning  of year** | ** ** | **Charged to  cost of  revenue** | ** ** | **Applied  to  liability** | ** ** | **Balance at  end  of year** | ** ** |
|------------|------------|------------------------------------|------------|----------------------------------|------------|----------------------------|------------|------------------------------|------------|
|       |       |                               |       |                             |       |                       |       |                         |       |
| 2004       |       | $                                  | 1,081      |                             | $          | 2,379                      |       | $                            | (2,482     | ) | $ | 978 |   |
| 2003       |       | $                                  | 1,525      |                             | $          | 2,788                      |       | $                            | (3,232     | ) | $ | 1,081 |   |

 

**(p)****                     *****IncomeTaxes***

 

In accordance with SFAS 109,“Accounting for Income Taxes”, we recognize deferred tax assets and liabilitiesfor the future tax consequences attributed to temporary differences between thefinancial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and tax credits and operating loss carryforwards.Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences and carryforwards are expected to be recovered or settled. Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date. TheCompany performs periodic evaluations of recorded tax assets and liabilitiesand maintains a valuation allowance if deemed necessary.  The determination of taxes payable for thecurrent year  includes estimates.  In the event that actual results differmaterially from management’s expectations, the estimated taxes payable couldmaterially change, directly impacting the Company’s financial position orresults of operations.

 

**(q)****                     *****Computationof Basic and Diluted Net Loss per Share***

*** ***

Netloss per share has been calculated under SFAS No. 128, *Earnings per Share. *Basic net loss per share is computed using the weightedaverage number of common stock outstanding for the year including warrants andoptions to purchase shares exercisable for little cash consideration.  Diluted earnings per share is computed on thebasis of the weighted average number of common shares outstanding during theyear increased by the weighted average number of potential common sharesoutstanding during the period, using the treasury stock method.  During the years ended December 31, 2004,2003 and 2002, potential common shares related to stock options of 3,656,000,3,999,000, and 3,750,000, respectively, are excluded from the calculation ofdiluted net loss per share, as their effect is anti-dilutive.

 

**(r)****                     *****Concentrationof Credit and Supply Risk***

*** ***

We sell products on aworldwide basis and a significant portion of our accounts receivable are duefrom customers outside of the U.S. Where we are exposed to material creditrisk, we generally require letters of credit, advance payments, or carryforeign credit insurance. No individual country 

 

33

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outside of the U.S.accounted for more than 10% of net sales in any of the periods presented. Salesto U.S. customers are generally on open credit terms. In the U.S., we primarilysell our products through third-party resellers and experience individuallysignificant annual sales volumes with major resellers. In 2004, 2003 and 2002,we had sales to one customer of $14.4 million, $15.6 million and $22.2million or 12%, 12% and 14%, respectively, of consolidated net sales fromcontinuing operations.

 

Many of our products arecurrently being manufactured exclusively by contract manufacturers on ourbehalf.  During the year ended December31, 2004, net sales of products manufactured by one manufacturer were $39.7million, or 32% of consolidated net sales, net sales from another manufacturerwere $14.8 million, or 12% of consolidated net sales and net sales from yetanother manufacturer were $12.2 million, or 10% of consolidated net sales.

 

**(s)****                     *****RecentAccounting Pronouncements***

*** ***

In December 2004, the FASBissued SFAS No. 123 (revised 2004), “Share-Based Payments” (SFAS 123R), whichrequires the measurement of all share-based payments to employees, includinggrants of employee stock options, using a fair-value-based method and therecording of such expense in an entity’s statement of income.  The accounting provisions of SFAS 123R areeffective for reporting periods beginning after June 15, 2005.  The Company is required to adopt SFAS 123R inthe quarter ending September 30, 2005. The pro forma disclosures previously permitted under SFAS 123 no longerwill be an alternative to financial statement recognition.  See “Stock-Based Compensation” above for thepro forma net income and net income per share amounts for 2004, 2003 and 2003,as if the Company had applied the fair value recognition provisions of SFAS 123to measure compensation expense for employee stock incentive awards.  The Company has completed a preliminaryevaluation of the impact of adopting SFAS 123R and estimates that it will havea material impact on income from operations for the six months ending December31, 2005.  This estimate is based onpreliminary information available to the Company and could materially changebased on actual facts and circumstances arising during the six months endingDecember 31, 2005.

 

In December 2004, the FASBissued SFAS No. 151, “Inventory Costs” (“SFAS No. 151”).  SFAS No. 151 requires abnormal amounts ofinventory costs related to idle facility, freight handling and wasted materialexpenses to be recognized as current period charges.  Additionally, SFAS No. 151 requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities.  The standard is effective for fiscal yearsbeginning after June 15, 2005.  We believethe adoption of SFAS No. 151 will not have a material impact on our consolidatedfinancial statements.

 

**(t)****                       *****Reclassifications***

*** ***

Certain prior year amountshave been reclassified to conform with the current year presentation.

 

** (3)****                 ****Goodwill and Other Intangible Assets**

** **

InJune 2001, the Financial Accounting Standards Board issued SFASNo. 141, *Business Combinations*and SFAS No. 142, *Goodwill and OtherIntangible Assets*, which supercede Accounting Principles BoardOpinion No. 17, *Intangible Assets*.SFAS No. 141 requires that all business combinations be accounted forunder the purchase method. The statement also specifies criteria forrecognizing and reporting intangible assets apart from goodwill; however,assembled workforce must be recognized and reported in goodwill. SFASNo. 142 requires the use of a nonamortization approach to account forpurchased goodwill and intangibles having an indefinite life. Under anonamortization approach, goodwill and certain intangible assets are no longeramortized into results of operations, but instead are reviewed for impairmentand written down and charged to results of operations only in the periods inwhich the recorded value of goodwill and certain intangibles is more than fairvalue.

 

34

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Weadopted SFAS No. 142 on January 1, 2002. Accordingly, we reclassifiedan assembled workforce intangible asset with an unamortized balance of$1.1 million and a related deferred tax liability of $383,000 to goodwillon January 1, 2002. SFAS No. 142 prescribes a two-phase process forimpairment testing of goodwill and the timing of transitional impairment steps.The first phase identifies indications of impairment; while the second phase(if necessary), measures the impairment. As required by SFAS No. 142, weperformed a transitional impairment test on goodwill as of January 1,2002. As a result of the impairment test, we recorded a $5.9 millioncumulative effect of an accounting change associated with our foreign reportingunit, which included the goodwill generated from the acquisition of MackieItaly. As a result, the impairment of $5.9 million has been included indiscontinued operations for the year ended December 31, 2002.

 

Duringthe fourth quarter of 2002, we reviewed our remaining goodwill as required bySFAS No. 142. This impairment testing is in addition to the transitionalimpairment testing and is to be done on an annual basis. In connection withthis test, we recorded an impairment charge of $14.5 million and reducedthe carrying value of our goodwill generated from the acquisitions of EAW andMackie Designs Engineering Services BVBA to zero. In both the transitional andannual impairment tests, we estimated the fair value of our reporting unitsusing a discounted cash flow analyses.

 

**(4)****                    ****Discontinued Operations**

 

InDecember 2003, we sold all of the shares of our wholly-owned Italiansubsidiary, Mackie Designs (Italy) S.p.A. (“Mackie Italy”) and placed it intoan Italian form of court-supervised liquidation.  Mackie Italy was a manufacturer of many ofour speaker products, which were purchased by the Company for subsequent saleoutside of Italy.  At the time of sale,the Company owed Mackie Italy approximately $9.2 million related to thepurchase of goods in the normal course of business.  During 2004, we made payments to Mackie Italyof approximately $1.6 million, lowering our liability to $7.6 million atDecember 31, 2004.  Additionally, MackieItaly has a payable to a separate wholly-owned subsidiary of the Company forapproximately $2.7 million, which was fully reserved at the date of sale in2003.

 

InFebruary 2005, we made a settlement offer to Mackie Italy to settle any netoutstanding amounts owed for $4.7 million; this agreement is subject tocreditor approval and is valid through May 31, 2005.  Under the proposal, we had our lender issue astand-by letter of credit to Mackie Italy for $1.0 million, payable upon theirsigned agreement, and have committed to make further payments of $1.5 millionduring the remainder of 2005 and $2.2 million during 2006.  If and when this proposal is accepted, wewill recognize a gain on extinguishment of debt of approximately $2.9 million.

 

Thedisposition of these operations is accounted for as a discontinuedoperation.  At December 31, 2003, we donot show any assets or liabilities of this entity on our consolidated balancesheet.  We have reclassified andcondensed the results of discontinued operations on our consolidated statementsof operations for all years presented. Cash flows from these operations are included in our consolidatedstatements of cash flows for all periods presented.  Summarized operating results of thediscontinued operations for the years ended December 31, 2003 and 2002, are asfollows:

** **
| ** **                                                                          | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Revenues                                                                            |       | $        | 29,121     |     | $          | 28,640 |   |
| Gross profit                                                                        |       | 5,058    |       | 8,821    |       |
| Operating income (loss)                                                             |       | (3,707   | )          | 414      |       |
| Loss before income taxes  and cumulative effect of a change in accounting principle |       | (4,637   | )          | (1,078   | )          |
| Income tax expense                                                                  |       | (539     | )          | (860     | )          |
| Cumulative effect of a  change in accounting principle                              |       | —   |       | (5,940   | )          |
| Loss from discontinued  operations*                                                 |       | (6,383   | )          | (7,878   | )          |
|                                                                                     |            |          |            |          |            |  |  |

 

----

*Includes loss ondisposition of $1.7 million in 2003.

 

35

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Interestwas allocated to discontinued operations based on actual debt held by MackieItaly.  At December 10, 2003, the assetsand liabilities associated with this disposition were as follows (inthousands):

 
| Accounts receivable, net                  |   | $      | 12,099 |   |
|-------------------------------------------|--------|--------|--------|--------|
| Intercompany receivables,  net            |   | 5,028  |   |
| Inventory, net                            |   | 15,590 |   |
| Property, plant and  equipment, net       |   | 8,815  |   |
| Other assets                              |   | 1,424  |   |
| Accounts payable and  accrued liabilities |   | 18,231 |   |
| Line of credit and long  term debt        |   | 22,953 |   |

 

**(5)****                    ****Restructuring Costs**

** **

During 2003, managementapproved and implemented a restructuring plan in order to adjustoperations.  Major actions primarily involvedthe reduction of workforce due to our decision to close certain manufacturingfacilities. We incurred $1.6 million in restructuring expenses, primarilyrepresenting employee severance and related costs for approximately 210displaced employees.  We had $15,000 ofthese restructuring amounts remaining in accounts payable at December 31, 2004,of which all was paid in January 2005.

 

**(6)****                    ****Inventories**

** **

Inventories consist of the following:

 
| ** **      | ** ** | **December 31,**   | ** ** |
|-----------------|------------|--------------------|------------|
| ** **      | ** ** | **2004**           | ** ** | **2003** | ** ** |
| ** **      | ** ** | **(In thousands)** | ** ** |
|            |       |               |       |   |   |
| Raw materials   |       | $                  | 3,951      |   | $ | 4,383 |   |
| Work in process |       | 657                |       | 543 |   |
| Finished goods  |       | 23,351             |       | 14,004 |   |
|            |       | $                  | 27,959     |   | $ | 18,930 |   |

 

**(7)****                    ****Intangible Assets**

** **

Intangible assets with finite lives consist of the following:

 
| ** **                     | ** ** | **December 31,**   | ** ** |
|--------------------------------|------------|--------------------|------------|
| ** **                     | ** ** | **2004**           | ** ** | **2003** | ** ** |
| ** **                     | ** ** | **(In thousands)** | ** ** |
|                           |       |               |       |   |   |
| Developed technology           |       | $                  | 5,200      |   | $ | 5,200 |   |
| Trademark                      |       | 1,380              |       | 1,380 |   |
| Non-compete agreement          |       | 285                |       | 285 |   |
|                           |       | 6,865              |       | 6,865 |   |
| Less accumulated  amortization |       | (1,737             | )          | (1,313 | ) |
|                           |       | $                  | 5,128      |   | $ | 5,552 |   |

 

36

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Amortization expense for intangible assets was $424,000, $408,000 and$541,000 in 2004, 2003 and 2002, respectively. At December 31, 2002, wereviewed our intangible assets for potential impairment and determined that thecarrying value of the developed technology recorded in connection with ouracquisition of Mackie Designs Engineering Services BVBA would not berecoverable. Accordingly, we recorded an impairment charge of $763,000 due tothe unsatisfactory results of this entity. We performed a similar impairmentanalysis at December 31, 2004 and 2003, noting no impairment charge for theremaining intangible assets was required.

 

Expected future amortization expense related to identifiable intangibleassets for the next five years is as follows (in thousands):

 
| Year ending December 31: |   |   |   |
|--------------------------|--------|--------|--------|
| 2005                     |   | $      | 424    |   |
| 2006                     |   | 345    |   |
| 2007                     |   | 329    |   |
| 2008                     |   | 329    |   |
| 2009                     |   | 329    |   |
|                          |        |        |        |  |

 

**(8)****                    ****Property, Plant andEquipment**

** **

As of December 31, 2004 and 2003, property, plant and equipmentconsisted of the following:

 
| ** **                                      | ** ** | **December 31,**   | ** ** |
|-------------------------------------------------|------------|--------------------|------------|
| ** **                                      | ** ** | **2004**           | ** ** | **2003** | ** ** |
| ** **                                      | ** ** | **(In thousands)** | ** ** |
| Machinery, equipment and  software              |       | $                  | 12,564     |   | $ | 21,727 |   |
| Furniture and fixtures                          |       | 928                |       | 5,342 |   |
| Leasehold improvements                          |       | 1,518              |       | 5,239 |   |
|                                            |       | 15,010             |       | 32,308 |   |
|                                            |       |               |       |   |   |
| Less accumulated  depreciation and amortization |       | (7,629             | )          | (23,927 | ) |
|                                            |       | $                  | 7,381      |   | $ | 8,381 |   |

 

**(9)****                    ****Income Taxes**

** **

Components of loss from continuing operations before income taxes areas follows (in thousands):

 
| ** **               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
|                     |       |     |       |     |       |     |       |
| U.S.                     |       | $        | (1,229     | )        | $          | (14,942  | )          | $ | (25,614 | ) |
| Foreign                  |       | (1,050   | )          | (1,631   | )          | (7,130   | )          |
| Loss before income taxes |       | $        | (2,279     | )        | $          | (16,573  | )          | $ | (32,744 | ) |
|                          |            |          |            |          |            |          |            |  |  |  |  |

 

37

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The income tax expense (benefit) is as follows (in thousands):

 
| ** **                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                |       |     |       |     |       |     |       |
| Current income taxes:               |       |     |       |     |       |     |       |
| U.S. federal                        |       | $        | —     |     | $          | (1,191   | )          | $ | (4,062 | ) |
| Foreign                             |       | 12       |       | 569      |       | 32       |       |
| Total current                       |       | 12       |       | (622     | )          | (4,030   | )          |
|                                |       |     |       |     |       |     |       |
| Deferred income taxes:              |       |     |       |     |       |     |       |
| U.S. federal                        |       | —   |       | —   |       | 1,256    |       |
| State and local                     |       | —   |       | —   |       | —   |       |
| Foreign                             |       | —   |       | —   |       | 940      |       |
| Total deferred                      |       | —   |       | —   |       | 2,196    |       |
|                                |       |     |       |     |       |     |       |
| Total income tax expense  (benefit) |       | $        | 12         |     | $          | (622     | )          | $ | (1,834 | ) |
|                                     |            |          |            |          |            |          |            |  |  |  |  |

 

The allocation of income tax expense (benefit) is as follows (inthousands):

 
| ** **                                                       | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Total income tax expense  (benefit) from continuing operations   |       | $        | 12         |     | $          | (1,161   | )          | $ | (2,694 | ) |
|                                                             |       |     |       |     |       |     |       |
| Total income tax expense  (benefit) from discontinued operations |       | —   |       | 539      |       | 860      |       |
|                                                             |       |     |       |     |       |     |       |
| Total income tax expense  (benefit)                              |       | $        | 12         |     | $          | (622     | )          | $ | (1,834 | ) |
|                                                                  |            |          |            |          |            |          |            |  |  |  |  |

 

38

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The tax effects of temporary differences and carryforwards that giverise to significant components of deferred tax assets and liabilities are asfollows:

 
| ** **                                   | ** ** | **December 31,**   | ** ** |
|----------------------------------------------|------------|--------------------|------------|
| ** **                                   | ** ** | **2004**           | ** ** | **2003** | ** ** |
| ** **                                   | ** ** | **(In thousands)** | ** ** |
| Deferred tax assets:                         |       |               |       |   |   |
| Accrued expenses                             |       | $                  | 768        |   | $ | 988 |   |
| Bad debt allowance                           |       | 517                |       | 659 |   |
| Inventory adjustments                        |       | 1,216              |       | 2,109 |   |
| Net operating loss  carryforwards            |       | 11,287             |       | 9,406 |   |
| Capital loss carryforwards                   |       | 5,435              |       | 4,837 |   |
| Tax credit carryforwards                     |       | 385                |       | 418 |   |
| Other items, net                             |       | 9                  |       | 25 |   |
|                                         |       | 19,617             |       | 18,442 |   |
|                                         |       |               |       |   |   |
| Less valuation allowance                     |       | (17,324            | )          | (16,239 | ) |
| Total deferred tax assets                    |       | 2,293              |       | 2,203 |   |
|                                         |       |               |       |   |   |
| Deferred tax liabilities:                    |       |               |       |   |   |
| Property, plant, and  equipment              |       | 566                |       | 388 |   |
| Specifically identifiable  intangible assets |       | 1,727              |       | 1,815 |   |
| Total deferred tax  liabilities              |       | 2,293              |       | 2,203 |   |
| Net deferred tax assets                      |       | $                  | —     |   | $ | — |   |

 

Utilizationof net operating loss carryforwards and tax credit carryforwards may be subjectto certain limitations under Section 382 of the Internal Revenue Code of 1986,as amended.  Deferred tax assets offoreign jurisdictions comprised $1.2 million and $0.8 million atDecember 31, 2004 and 2003, respectively. Deferred tax liabilities offoreign jurisdictions were zero at December 31, 2004 and 2003.

 

Reconciliation from the U.S. statutory income tax rate of 34% to theeffective income tax rate is as follows:

 
| ** **                                                 | ** ** | **2004**           | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                                 | ** ** | **(In thousands)** | ** ** |
|                                                       |       |               |       |     |       |     |       |
| Tax at the statutory rate                                  |       | $                  | (775       | )        | $          | (7,621   | )          | $ | (11,499 | ) |
|                                                       |       |               |       |     |       |     |       |
| US tax loss on  discontinued operations                    |       | —             |       | (6,255   | )          | —   |       |
| Research and development  tax credit                       |       | (100               | )          | (26      | )          | (100     | )          |
| Foreign sales  corporation/extraterritorial income benefit |       | —             |       | —   |       | (459     | )          |
| Nondeductible expenses and  other permanent differences    |       | 123                |       | 90       |       | 450      |       |
| Goodwill impairment and  amortization                      |       | —             |       | —   |       | 3,831    |       |
| Foreign tax greater (less)  than U.S. statutory rate       |       | (5                 | )          | 2,555    |       | 589      |       |
| Increase in valuation  allowance                           |       | 1,085              |       | 10,786   |       | 5,354    |       |
| State taxes, net of  federal impact                        |       | (186               | )          | (151     | )          | —   |       |
| Other                                                      |       | (130               | )          | —   |       | —   |       |
| Income tax expense  (benefit)                              |       | $                  | 12         |     | $          | (622     | )          | $ | (1,834 | ) |
|                                                            |            |                    |            |          |            |          |            |  |  |  |  |

 

39

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AtDecember 31, 2004 we had U.S. and international net operating losscarryforwards of approximately $31.8 million. Approximately $30.3 millionof these loss carryforwards relate to the U.S. and U.K.  Approximately $1.5 million of these losscarryforwards relate to our discontinued operation in France, which we believewe will not be able to recapture.  These carryforwardsgenerally begin expiring in 2024.

 

Wehave provided a valuation allowance on the net deferred tax assets. Due to ourhistory of operating losses, we have determined it is more likely than not thatthey will not be fully realized since the utilization of our deferred taxassets depends on future profits, which are not assured.

 

**(10)****             ****Debt and Liquidity**

** **

Wehave a Loan and Security Agreement with a lender, which provides for a$25.0 million revolving line of credit through March 2006, limited to apercentage of eligible accounts receivable and inventory.  We executed Loan Amendment and WaiverAgreements in April, August and October 2004, which eased our financialcovenants and reduced the gross amount of the line from $26.0 million to $25.0million.  This lender also provided a$2.5 million term loan in March 2003. Both the line of credit and termloan are secured by substantially all U.S. assets and the accounts receivableof LOUD Technologies (Europe) Plc.  As ofDecember 31, 2004 we were in compliance with all debt covenants.

 

*** (a)******                 ******Short-TermBorrowings***

*** ***

At December 31, 2004 and2003, the outstanding balance on our line of credit was $11.8 million and $7.9million, respectively. At December 31, 2004, we had the ability to borrow anadditional $7.9 million on this line. This line of credit contains certain financial covenants, includingminimum EBITDA measurements on calendar quarter ends and limits on total annualcapital expenditures. We believe we will be in compliance with these covenantsthroughout 2005.

 

The weighted averageinterest rate on total short-term borrowings was 5.75% and 4.82% atDecember 31, 2004 and 2003, respectively.

 

***(b)******                     ******Long-TermDebt***

*** ***

Long-term debt consisted of the following at December 31:

 
| ** **                                             | ** ** | **2004**           | ** ** | **2003**   | ** ** |
|--------------------------------------------------------|------------|--------------------|------------|------------|------------|
| ** **                                             | ** ** | **(In thousands)** | ** ** |
| ** **                                             | ** ** | ** **         | ** ** | ** ** | ** ** |
| U.S. term loans                                        |       | $                  | 552        |       | $          | 2,250 |   |
| U.S. subordinated note  payable                        |       | 11,360             |       | 11,000     |       |
| Note payable to related  party (face value $4 million) |       | —             |       | 3,512      |       |
|                                                   |       | 11,912             |       | 16,762     |       |
| Less current portion                                   |       | (300               | )          | (500       | )          |
|                                                   |       | $                  | 11,612     |       | $          | 16,262 |   |

 

Principalpayments on the term loan are due in equal monthly payments over five years,beginning in July 2003.  A portion of the term loan is backed by U.S.based fixed assets.  Due to the sale ofthe Woodinville, Washington manufacturing equipment, an additional $1.3 million was paid on the termloan in 2004.  Additionally, in August2004, we executed a Loan Amendment Agreement which reduced the monthlyprincipal payment due on the term loan to $25,000.   Interest is also duemonthly and is calculated at the bank’s prime rate plus a specified margin.This rate was 6.00% at December 31, 2004.

 

InMarch 2003, we obtained a note payable for $11.0 million, which issubordinate to the line of credit with another lender. Interest accrues at arate of 10%, of which 8% is paid monthly while the remaining 2% is paid monthlyif there is specific excess availability on our line of credit; otherwise, the2% interest is added to principal. Principal and interest is due May 2006. At December 31, 2004, we had added a total of $360,000 in accruedinterest to the note payable.

 

40

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Inaddition to its equity investment, Sun Mackie provided $4.0 million ofdebt financing which also funded in March 2003. In August 2004, weexecuted an Exchange Agreement whereby we exchanged our entire debt to SunMackie for 2,480,155 shares of common stock valued at $1.95 per share.  We recognized a loss on early extinguishmentof debt with this transaction of $0.5 million representing the difference inthe carrying value of the debt and the fair value of the common stock issued.

 

Aggregate annual principal payments of long-term debt are stated below(in thousands):

 
| 2005                 |   | $      | 300    |   |
|----------------------|--------|--------|--------|--------|
| 2006                 |   | 11,612 |   |
| Total long-term debt |   | $      | 11,912 |   |

 

**(11)****             ****Related-Party Transactions**

** **

AtDecember 31, 2003, we had a $4.0 million note payable to Sun Mackie. This notewas exchanged for common stock as discussed in Note 10.

 

Wehave a management agreement with Sun Mackie to pay the greater of $0.4 millionor 6% of EBITDA, as defined, up to $1.0 million, per year to an affiliate ofSun Mackie.  During 2004 and 2003, werecorded expenses of approximately $0.4 million and $0.4 million, respectively,under this agreement.

 

Wehave a lease with former related parties as discussed in Note 15.

 

Wemade a non-interest bearing loan to James T. Engen, Chief Executive Officerand director, in November 1999 for relocation expenses, in the amount of$250,000. Payments to reduce this amount began in December 2002 and thenote was fully paid in October 2004.

 

** (12)****          ****Employee Benefit Plans**

** **

Wecurrently have qualified profit-sharing plans under the provisions of InternalRevenue Code Section 401(k) for all U.S. based employees meeting theeligibility requirements. Contributions are based on a matching formula asdefined in each of the plans. Additional contributions may be made at thediscretion of the board of directors. Contributions to the respective plansvest ratably over a 5-year period. Contributions to the plan were $0, $196,000and $497,000 in 2004, 2003, and 2002, respectively.

 

**(13)****             ****Net Income (Loss) Per Share**

 

Thefollowing table sets forth the computation of basic and diluted net loss pershare. Stock options representing 3,656,000, 3,999,000, and 3,750,000 shares in2004, 2003 and 2002, respectively, were excluded from the calculation ofdiluted net loss per share because they are antidilutive.

 

41

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| ** **                                                  | ** ** | **2004**           | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                                  | ** ** | **(In thousands)** | ** ** |
| Numerator:                                                  |       |               |       |     |       |     |       |
|                                                        |       |               |       |     |       |     |       |
| Net loss from continuing  operations                        |       | $                  | (2,291     | )        | $          | (15,412  | )          | $ | (30,050 | ) |
| Net loss from discontinued  operations                      |       | —             |       | (6,383   | )          | (7,878   | )          |
|                                                        |       |               |       |     |       |     |       |
| Numerator for basic and  diluted net income loss per share  |       | $                  | (2,291     | )        | $          | (21,795  | )          | $ | (37,928 | ) |
|                                                        |       |               |       |     |       |     |       |
| Denominator:                                                |       |               |       |     |       |     |       |
| Weighted average shares  outstanding                        |       | 20,644             |       | 18,589   |       | 12,489   |       |
|                                                        |       |               |       |     |       |     |       |
| Dilutive potential common  shares from outstanding warrants |       | 1,271              |       | 967      |       | —   |       |
|                                                        |       |               |       |     |       |     |       |
| Denominator for basic and  diluted net loss per share       |       | 21,915             |       | 19,556   |       | 12,489   |       |
|                                                             |            |                    |            |          |            |          |            |  |  |  |  |

 
| ** **                             | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |     |       |
| Basic and diluted net loss  per share: |       |     |       |     |       |     |       |
| Continuing operations                  |       | $        | (0.10      | )        | $          | (0.79    | )          | $ | (2.41 | ) |
|                                   |       |     |       |     |       |     |       |
| Discontinued operations                |       | —   |       | (0.32    | )          | (0.63    | )          |
|                                   |       |     |       |     |       |     |       |
| Basic and diluted net loss  per share  |       | $        | (0.10      | )        | $          | (1.11    | )          | $ | (3.04 | ) |
|                                        |            |          |            |          |            |          |            |  |  |  |  |

 

**(14)****          ****Shareholders’ Equity**

** **

InFebruary 2003, we finalized an agreement with Sun Mackie, an affiliate of SunCapital Partners, Inc., a private investment firm, whereby Sun Mackie,purchased approximately 14.4 million shares of our common stock for $10.0million.  Sun Mackie acquired approximately7.4 million of these shares from certain selling shareholders.  It acquired approximately 7.0 million newlyissued shares directly from the Company for approximately $3.6 million.  In March 2003, Sun Mackie provided $4.0million for a note payable and warrants to purchase 1.2 million shares ofcommon stock at $0.01 per share.  InAugust 2004, we executed an Exchange Agreement whereby we exchanged our entiredebt to Sun Mackie for 2,480,155 shares of common stock valued at $1.95 pershare.  We recognized a loss on earlyextinguishment of debt with this transaction of $0.5 million representing thedifference in the carrying value of the debt and the fair value of the commonstock issued.  The warrants to purchase1.2 million shares of common stock were still outstanding after this transaction.

 

DuringJuly 2003, our board of directors adopted the 2003 Stock Option Plan (the 2003Plan), authorizing options to purchase 1,728,000 shares of common stock.  The 2003 Plan calls for options to benon-qualified stock options with exercise prices equal to the fair market valueof the stock on the date granted. Options generally vest over a five-year period and expire on the earlierof ten years from grant date or three months from termination. If an option holderis terminated for Cause, as defined, the options would terminate a day prior totermination. At December 31, 2004, 653,000 shares of common stock wereavailable for future grants under the 2003 Plan.

 

TheCompany also has a 1995 Stock Option Plan (the 1995 Plan), which authorized6.5 million shares of common stock for grants. The exercise price of incentivestock options granted under the 1995 Plan may not be less than the fair marketvalue of the common stock on the date of grant. The exercise price of

 

42

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nonqualifiedstock options granted under the plan may be greater or less than the fairmarket value of the common stock on the date of grant, as determined by thestock option committee of the board of directors at its discretion. Options generallyvest over a four to five-year period and expire no later than ten years afterthe date of grant. At December 31, 2004, 3,188,000 shares of common stockwere available for future grants under the 1995 Plan.

 

InFebruary 2003, as part of a separation agreement with a former founder anddirector, we repriced options to purchase 330,000 shares with an averageexercise price of $6.27 to a new exercise price of $1.02 in exchange for anon-compete agreement valued at $285,000.

 

Inconnection with the acquisitions of Mackie Belgium and EAW during 2001 and2000, respectively, certain key employees of these entities were granted atotal of 399,998 non-qualified stock options with an exercise price of $0.01.These options were linked to continued employment and vested ratably over atwo-year period from the respective grant date. We recognized compensationexpense related to these options on a straight-line basis over the two-yearvesting period.

 

The following table summarizes the stock option activity for thethree-year period ended December 31, 2004:

 
| ** **                                | ** ** | **Shares  subject  to option** | ** ** | **Weighted  average  exercise price** | ** ** |
|-------------------------------------------|------------|--------------------------------|------------|---------------------------------------|------------|
| ** **                                | ** ** | **(In thousands)**             | ** ** | ** **                            | ** ** |
|                                      |       |                           |       |                                  |       |
| Options outstanding at  December 31, 2001 |       | 4,746                          |       | $                                     | 5.66       |   |
| Granted                                   |       | 522                            |       | 3.56                                  |       |
| Forfeited                                 |       | (1,185                         | )          | 5.84                                  |       |
| Exercised                                 |       | (132                           | )          | 0.01                                  |       |
| Options outstanding at  December 31, 2002 |       | 3,951                          |       | 5.26                                  |       |
| Granted                                   |       | 1,250                          |       | 1.05                                  |       |
| Forfeited                                 |       | (1,001                         | )          | 5.37                                  |       |
| Exercised                                 |       | (116                           | )          | 0.01                                  |       |
| Options outstanding at  December 31, 2003 |       | 4,084                          |       | 3.67                                  |       |
| Granted                                   |       | 125                            |       | 2.20                                  |       |
| Forfeited                                 |       | (469                           | )          | 4.16                                  |       |
| Exercised                                 |       | (50                            | )          | 0.01                                  |       |
| Options outstanding at  December 31, 2004 |       | 3,690                          |       | $                                     | 3.61       |   |

 

AtDecember 31, 2004, 2003, and 2002 a total of 2,561,000, 2,459,000 and2,685,000 options were exercisable, respectively. The weighted average exerciseprice of these options was $4.55, $4.97, and $5.73 respectively.

 

43

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The following table summarizes information about options outstandingand exercisable at December 31, 2004:

 
| ** **                   | ** ** | **Options outstanding**                | ** ** | ** **                                                   | ** ** |
|------------------------------|------------|----------------------------------------|------------|--------------------------------------------------------------|------------|
| **Range  of exercise price** | ** ** | **Number  outstanding**                | ** ** | **Weighted  average  remaining  contractual  life  (years)** | ** ** | **Weighted  average  exercise  price** | ** ** | **Options exercisable** | ** ** |
| **Number  exercisable**      | ** ** | **Weighted  average  exercise  price** |
| ** **                   | ** ** | **(In thousands)**                     | ** ** | ** **                                                   | ** ** | ** ** | ** ** | **(In thousands)** | ** ** | ** ** | ** ** |
| $  0.01            |       | 33                                     |       | 5.3                                                          |       | $ | 0.01 |   | 33 |   | $ | 0.01 |   |
| $  1.02-1.77       |       | 1,525                                  |       | 7.4                                                          |       | 1.05 |   | 603 |   | 1.04 |   |
| $  2.26-4.75       |       | 312                                    |       | 7.1                                                          |       | 3.52 |   | 152 |   | 4.39 |   |
| $  5.06-6.50       |       | 1,618                                  |       | 2.1                                                          |       | 5.63 |   | 1,571 |   | 5.64 |   |
| $  6.69-8.75       |       | 202                                    |       | 3.1                                                          |       | 7.43 |   | 202 |   | 7.43 |   |
|                         |       | 3,690                                  |       | 4.8                                                          |       | $ | 3.61 |   | 2,561 |   | $ | 4.55 |   |

 

**(15)****             ****Commitments andContingencies**

** **

***(a)******                     ******Commitments***

*** ***

Our primary facility inWoodinville, Washington is owned by a company whose owners include threeindividuals each of whom was a significant shareholder and director in 2002 andpart of 2003. Monthly rent expense on this facility as of December 31,2004 was $69,000; the lease expires December 31, 2006. Annual rent expenseunder this lease was $832,000, $817,000 and $800,000 in 2004, 2003, and 2002.Taxes, insurance, utilities, and maintenance are our responsibility.Additionally, we lease other facilities in Woodinville, Washington as well asWhitinsville, Massachusetts and other sales and service offices at varioussites in the United States, Canada, Europe, and Asia.

 

Future minimum rental payments under the equipment and facility leasesat December 31, 2004, are as follows (in thousands):

 
| 2005 |   | $      | 2,179  |   |
|------|--------|--------|--------|--------|
| 2006 |   | 1,567  |   |
| 2007 |   | 666    |   |
| 2008 |   | 222    |   |
| 2009 |   | — |   |

 

Total rent expense for 2004,2003, and 2002 was $2.1 million, $2.2 million, and $3.0 million,respectively.

 

***(b)******                     ******Contingencies***

*** ***

We are also involved invarious legal proceedings and claims that arise in the ordinary course ofbusiness. We currently believe that these matters will not have a materialadverse impact on our financial position, liquidity or results of operations.

 

We liquidated our investmentin our Italian subsidiary during 2003, after placing the entity in an Italianform of court-supervised bankruptcy.  Inthe event the court denies the bankruptcy, Italian law may permit actions to betaken against the Company including demanding a refund of any payments made tothe Company in the prior two years.  Webelieve this possibility to be remote.

 

44

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**(16)****             ****Segment and GeographicInformation**

** **

Asof December 31, 2004, our major operations outside the U.S. include a sales andsupport office in the United Kingdom. Certain geographic information for continuing operations for the threeyears ended December 31, 2004 is presented in the table that follows.Sales between affiliated entities are excluded from these amounts. Net sales,as shown in the table below, are based upon the geographic area into which theproducts were sold and delivered. The profit on transfers between geographicareas is not recognized until sales are made to nonaffiliated customers.

 

Sales to customers outside of the U.S. approximated 42%, 37%, and 38%of net sales in 2004, 2003, and 2002, respectively.

 
| ** ** | ** ** | **2004**           | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** ** | ** ** | **(In thousands)** | ** ** |
| Net sales: |       |               |       |     |       |     |       |
| U.S.       |       | $                  | 71,590     |     | $          | 82,046   |       | $ | 99,444 |   |
| Non-U.S.   |       | 51,686             |       | 48,720   |       | 59,918   |       |
|       |       | $                  | 123,276    |     | $          | 130,766  |       | $ | 159,362 |   |
|            |            |                    |            |          |            |          |            |  |  |  |  |

 

**(17)****                   ****Quarterly Financial Data(Unaudited)**(In thousands,except per share data)

 
| ** **                       | ** ** | **2004**  | ** ** |
|----------------------------------|------------|-----------|------------|
| ** **                       | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| Net Sales                        |       | $         | 25,681     |   | $ | 30,531 |   | $ | 31,041 |   | $ | 36,023 |   |
| Gross Profit                     |       | 6,912     |       | 10,295 |   | 10,348 |   | 13,794 |   |
| Net Income (Loss)                |       | (3,954    | )          | (957 | ) | (603 | ) | 3,223 |   |
| Basic Income (Loss) per  share   |       | (0.19     | )          | (0.05 | ) | (0.03 | ) | 0.13 |   |
| Diluted Income (Loss) per  share |       | (0.19     | )          | (0.05 | ) | (0.03 | ) | 0.13 |   |
|                                  |            |           |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                        | ** ** | **2003**  | ** ** |
|-----------------------------------|------------|-----------|------------|
| ** **                        | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth (a)** | ** ** |
| Net Sales                         |       | $         | 32,746     |   | $ | 35,653 |   | $ | 33,457 |   | $ | 28,910 |   |
| Gross Profit                      |       | 6,741     |       | 8,734 |   | 6,665 |   | 7,170 |   |
| Loss from continuing  operations  |       | (6,402    | )          | (2,417 | ) | (2,797 | ) | (3,796 | ) |
| Loss from discontinued operations |       | (1,992    | )          | (1,835 | ) | (507 | ) | (2,049 | ) |
| Net loss                          |       | (8,394    | )          | (4,252 | ) | (3,304 | ) | (5,845 | ) |
| Basic and diluted loss per  share |       | (0.54     | )          | (0.21 | ) | (0.16 | ) | (0.28 | ) |
|                                   |            |           |            |  |  |  |  |  |  |  |  |  |  |

 

----

(a)                Inventory adjustment of approximately $0.9million related to products no longer marketable and excess material wasrecorded in the fourth quarter of 2003.

 

45

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**(18)****             ****Subsequent Events(unaudited)**

 

OnMarch 4, 2005, in accordance with an Acquisition Agreement, we acquired 100% ofthe shares of St. Louis Music, Inc., a Missouri-based manufacturer, distributorand importer of branded musical instruments and professional audio products.The Company believes the acquisition will further diversify the Company’sproduct offerings to help acquire, retain and extend relationships withcustomers.  Our total purchase price wasapproximately $39.9 million consisting of $34.2 million in cash; a commitmentto pay $3.0 million in two years; $1.2 million in LOUD stock; and estimatedtransaction costs of $1.5 million.  The$3.0 million future commitment is subject to adjustments to St. Louis Music’sworking capital as of the transaction date. This commitment is guaranteed by the Company and Sun Capital PartnersIII QP, LP, an affiliate of Sun Capital Partners and LOUD’s principalshareholder. St. Louis Music, Inc. is a wholly owned subsidiary of SLM HoldingCorp., a wholly owned subsidiary of LOUD Technologies Inc.

 

Tofinance this transaction, an interim holding company of St. Louis Music, Inc.obtained a $40.0 million revolving short-term demand credit facility from abank. Sun Capital Partners III QP, LP and SLM Holding Corp. have guaranteedthis bridge loan which is payable upon demand. The loan bears interest at primeplus 0.5%, payable monthly, and is secured by substantially all of the assetsof St. Louis Music and SLM Holding Corp. LOUD intends to refinance its existingcredit facilities (including the holding company facility) and to extinguishSun Capital Partners III QP’s guarantee in the near term.

 

Thetotal purchase price has been allocated to the assets acquired and liabilitiesassumed, based on our estimate of their respective fair values at acquisitiondate.  The accounting for the purchaseprice allocation is preliminary and is subject to possible adjustments based onobtaining audited statements of St. Louis Music as of the acquisition date andcompletion of an appraisal of the assets and liabilities as of the acquisitiondate.

 

Thefollowing unaudited condensed balance sheet data presents the preliminaryassessment of the fair value of the assets acquired and liabilities assumed:

 
| Accounts receivable             |   | 12,500 |   |
|---------------------------------|--------|--------|--------|
| Inventory                       |   | 16,400 |   |
| Property & equipment        |   | 3,200  |   |
| Other assets                    |   | 400    |   |
| Goodwill and intangible  assets |   | 10,100 |   |
| Current liabilities  assumed    |   | (2,700 | )      |
| Total consideration             |   | $      | 39,900 |   |
|                                 |        |        |        |  |

 

46

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# ** **

# **Item 9****.    Changes in and Disagreements With Accountants on Accounting andFinancial Disclosure**

# ** **

None.

 

**Item 9A.   Controls andProcedures**

 

The Company maintains disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) underthe Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) that aredesigned to ensure that information required to be disclosed in the Company’sreports under the Exchange Act, is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms, and that suchinformation is accumulated and communicated to the Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure.

 

The Company carried out anevaluation, under the supervision and with the participation of the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the Company’s “disclosure controls andprocedures” as of the end ofthe period covered by this report, pursuant to Rules 13a-15(b) and 15d-15(b)under the Exchange Act.  Based on thatevaluation, the Company’s Chief Executive Officer and Chief Financial Officerhave concluded that the Company’s disclosure controls and procedures, as of theend of the period covered by this report, were effective in timely alertingthem to material information relating to the Company required to be included inthe Company’s periodic SEC filings.

 

There has been no change inthe Company’s internal control over financial reporting (as defined in Rules13(a)-15(f) and 15(d)-15(f) under the Exchange Act) during the period coveredby this report that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

**PART III**

** **

The information required byPart III (Items 10 - 14) will be included in our definitive Proxy Statement forour 2005 Annual Meeting of Shareholders and is incorporated herein byreference.

****

****

****

 

47

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**PART IV**

** **

**Item 15. Exhibits, Financial Statement Schedules**

 

(a)           Documents filed as part of thisreport:

 
| 1.*Consolidated Financial Statements:* |                                                                                                                                                 |
|----------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                   |                                                                                                                                                 |
|                                   | Report  of Independent Registered Public Accounting Firm on Consolidated Financial  Statements                                                       |   |
|                                   |                                                                                                                                                 |   |
|                                   | Consolidated Balance  Sheets at December 31, 2004 and 2003                                                                                           |   |
|                                   |                                                                                                                                                 |   |
|                                   | Consolidated  Statements of Operations for each of the years in the three-year period ended  December 31, 2004                                       |   |
|                                   |                                                                                                                                                 |   |
|                                   | Consolidated  Statements of Shareholders’ Equity and Comprehensive Loss for each of the  years in the three-year period ended December 31, 2004 |   |
|                                   |                                                                                                                                                 |   |
|                                   | Consolidated  Statement of Cash Flows for each of the years in the three-year period ended  December 31, 2004                                        |   |
|                                   |                                                                                                                                                 |   |
|                                   | Notes to  Consolidated Financial Statements                                                                                                          |   |

 

All financial statementschedules are omitted since the required information is not applicable, notrequired, or the required information is included in the consolidated financialstatements or notes thereto.

 

(b)                                 Exhibits: See Index to Exhibits on Page 50.

 

48

----

 

**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
| ** ** | **LOUD  TECHNOLOGIES INC.** |
|------------|-----------------------------|
|       |                        |   |   |
|       | By:                         | /s/ James T. Engen |   |
|       |                        | James T. Engen*President, Chief Executive Officer  and Director* |   |
|       | * *                    | * * |
|       | Date:                       | March 31, 2005 |

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacitiesindicated on April 14, 2003.

 

 
| **Signature**                          | ** ** | **Title**                                               |
|----------------------------------------|------------|---------------------------------------------------------|
|                                   |       |                                                    |
|   /s/ James T. Engen         |       | President, Chief Executive  Officer and Director        |
| James T. Engen                         |       |                                                    |
|                                   |       |                                                    |
|   /s/ Timothy P. O’Neil |       | Chief Financial Officer,  Vice President, Secretary and |
| Timothy P. O’Neil                 |       | Treasurer (Principal Financial and Accounting Officer)  |
|                                   |       |                                                    |
|   /s/ Marc J. Leder          |       | Director, Chairman of the  Board and Vice President     |
| Marc J. Leder                          |       |                                                    |
|                                   |       |                                                    |
|   /s/ Clarence E. Terry      |       | Director and Vice  President                            |
| Clarence E. Terry                      |       |                                                    |
|                                   |       |                                                    |
|   /s/ R. Lynn Skillen        |       | Director and Vice  President                            |
| R. Lynn Skillen                        |       |                                                    |
|                                   |       |                                                    |
|   /s/ Rodger Krouse          |       | Director and Vice  President                            |
| Rodger Krouse                          |       |                                                    |
|                                   |       |                                                    |
|   /s/ C. Deryl Couch         |       | Director, Vice President  and Assistant Secretary       |
| C. Deryl Couch                         |       |                                                    |
|                                   |       |                                                    |
|   /s/ T. Scott King          |       | Director and Vice  President                            |
| T. Scott King                          |       |                                                    |
|                                   |       |                                                    |
|   /s/ Jon W. Gacek           |       | Director                                                |
| Jon W. Gacek                           |       |                                                    |
|                                   |       |                                                    |
|   /s/ George Rea             |       | Director                                                |
| George Rea                             |       |                                                    |
|                                   |       |                                                    |
|   /s/ C. Daryl Hollis        |       | Director                                                |
| C. Daryl Hollis                        |       |                                                    |

 

49

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**INDEX TO EXHIBITS**

** **
| **Exhibits** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1          |       | Stock  Purchase Agreement, dated as of January 16, 2003, by and among Sun  Mackie, LLC, Mackie Designs Inc., Gregory Mackie, on behalf of himself  and as the sole trustee of the Clair Mackie Irrevocable Trust, the Nathalia  Mackie Irrevocable Trust, the Kathleen Staples Irrevocable Trust and the  Christine Radke Irrevocable Trust, and C. Marcus Sorenson and Judith B.  Sorenson, as co-trustees of the Children of Matthew Adam Sorenson Irrevocable  Trust, the Children of Karen Marie Lopez Irrevocable Trust, the Children of  Kimberly Kaye Parker Irrevocable Trust, the Matthew Adam Sorenson Irrevocable  Trust, the Karen Marie Lopez Irrevocable Trust, the Kimberly Kaye Parker  Irrevocable Trust and the Sorenson Family Trust. Incorporated by reference to  Exhibit 2.1 to Current Report on Form 8-K dated January 16, 2003.                                |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.2          |       | First  Amendment to Stock Purchase Agreement, dated as of February 7, 2003, by  and among Sun Mackie, LLC, Mackie Designs Inc., Gregory Mackie, on  behalf of himself and as the sole trustee of the Clair Mackie Irrevocable  Trust, the Nathalia Mackie Irrevocable Trust, the Kathleen Staples  Irrevocable Trust and the Christine Radke Irrevocable Trust, and  C. Marcus Sorenson and Judith B. Sorenson, as co-trustees of the  Children of Matthew Adam Sorenson Irrevocable Trust, the Children of Karen  Marie Lopez Irrevocable Trust, the Children of Kimberly Kaye Parker  Irrevocable Trust, the Matthew Adam Sorenson Irrevocable Trust, the Karen  Marie Lopez Irrevocable Trust, the Kimberly Kaye Parker Irrevocable Trust and  the Sorenson Family Trust. Incorporated by reference to Exhibit 2.1 to  Current Report on Form 8-K dated February 21, 2003. |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.3          |       | Second  Amendment to Stock Purchase Agreement, dated as of February 13, 2003, by  and among Sun Mackie, LLC, Mackie Designs Inc., Gregory Mackie, on  behalf of himself and as the sole trustee of the Clair Mackie Irrevocable  Trust, the Nathalia Mackie Irrevocable Trust, the Kathleen Staples  Irrevocable Trust and the Christine Radke Irrevocable Trust, and C. Marcus  Sorenson and Judith B. Sorenson, as co-trustees of the Children of  Matthew Adam Sorenson Irrevocable Trust, the Children of Karen Marie Lopez  Irrevocable Trust, the Children of Kimberly Kaye Parker Irrevocable Trust,  the Matthew Adam Sorenson Irrevocable Trust, the Karen Marie Lopez  Irrevocable Trust, the Kimberly Kaye Parker Irrevocable Trust and the  Sorenson Family Trust. Incorporated by reference to Exhibit 2.2 to Current  Report on Form 8-K dated February 21, 2003.    |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.4          |       | Third  Amendment to Stock Purchase Agreement, dated as of February 21, 2003, by  and among Sun Mackie, LLC, Mackie Designs Inc., Gregory Mackie, on  behalf of himself and as the sole trustee of the Clair Mackie Irrevocable  Trust, the Nathalia Mackie Irrevocable Trust, the Kathleen Staples  Irrevocable Trust and the Christine Radke Irrevocable Trust, and C. Marcus  Sorenson and Judith B. Sorenson, as co-trustees of the Children of Matthew  Adam Sorenson Irrevocable Trust, the Children of Karen Marie Lopez  Irrevocable Trust, the Children of Kimberly Kaye Parker Irrevocable Trust,  the Matthew Adam Sorenson Irrevocable Trust, the Karen Marie Lopez  Irrevocable Trust, the Kimberly Kaye Parker Irrevocable Trust and the  Sorenson Family Trust. Incorporated by reference to Exhibit 2.3 to Current  Report on Form 8-K dated February 21, 2003.          |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.5          |       | Management  Services Agreement, dated as of February 21, 2003 by and between Mackie  Designs Inc. and Sun Capital Partners Management, LLC. Incorporated by  reference to Exhibit 2.4 to Current Report on Form 8-K dated February 21,  2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

50

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| 2.6    |   | Post-Closing  Funding Agreement, dated as of February 21, 2003, by and between Mackie  Designs Inc. and Sun Mackie, LLC. Incorporated by reference to Exhibit  2.5 to Current Report on Form 8-K dated February 21, 2003.                                                              |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                             |
| 2.7    |   | Agreement  by and among LOUD Technologies Inc., Mackie Designs (Netherlands) B.V. and  Knight Italia S.p.A. Incorporated by reference to Exhibit 2.8 to Current  Report on Form 8-K dated December 10, 2003.                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                             |
| 2.8    |   | Irrevocable  Offer Letter from Knight Italia S.p.A. Incorporated by reference to Exhibit  2.9 to Current Report on Form 8-K dated December 10, 2003.                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                             |
| 2.9    |   | Irrevocable  Offer Letter from LOUD Technologies Inc. Incorporated by reference to Exhibit  2.10 to Current Report on Form 8-K dated December 10, 2003.                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                             |
| 2.10   |   | Concordato  Preventivo Petition dated as of December 6, 2003, by Mackie Designs (Italy)  S.p.A. Incorporated by reference to Exhibit 2.11 to Current Report on Form  8-K dated December 10, 2003.                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                             |
| 2.11   |   | Acquisition  Agreement dated March 4, 2005 by and among SLM Merger Corp., SLM Holding  Corp., LOUD Technologies Inc. and St. Louis Music, Inc. Incorporated by  reference to Exhibit 2.1 to Current Report on Form 8-K dated March 7, 2005.                                                      |
|   |   |                                                                                                                                                                                                                                                                                             |
| 3.1    |   | Restated  Articles of Incorporation. Incorporated by reference to Exhibit 3.1 to  Registration Statement filed under the Securities Act of 1933 on Form S-1,  as amended, Registration No. 33-93514.                                                                              |
|   |   |                                                                                                                                                                                                                                                                                             |
| 3.1.1  |   | Articles  of Amendment to Article of Incorporation. Incorporated by reference to  Exhibit 3.1.1 to Annual Report on Form 10-K for the fiscal year ended  December 31, 2003.                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                             |
| 3.2    |   | Second  Amended and Restated Bylaws. Incorporated by reference to Exhibit 3.2 to  Annual Report as Form 10-K for the fiscal year ended December 31, 2002.                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                             |
| 4.1    |   | See  Articles II, III, IV, IX, X and XI of Exhibit 3.1 and Articles I,  V, VI and VII of Exhibit 3.2 confirming the rights of the holders of  Common Stock.                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                             |
| 10.1   |   | Mackie  Designs Inc. Third Amended and Restated 1995 Stock Option Plan. Incorporated  by reference to Exhibit 10.1 to Annual Report on Form 10-K for the fiscal  year ended December 31, 2001.                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                             |
| 10.1.1 |   | Mackie  Designs Inc. 2003 Stock Option Plan. Incorporated by reference to Exhibit  10.1.1 to Registration Statement filed under the Securities Act of 1933 on  Form S-8 dated July 15, 2003.                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                             |
| 10.2   |   | Industrial  Lease, dated December 15, 1994, by and between Mackie Holdings, L.L.C.  and Mackie Designs Inc. Incorporated by reference to Exhibit 10.3 to  Registration Statement filed under the Securities Act of 1933 on Form S-1,  as amended, Registration No. 33-93514. |
|   |   |                                                                                                                                                                                                                                                                                             |
| 10.2.1 |   | Amendment  to Industrial Lease dated December 12, 2001 by and between Mackie Holdings,  L.L.C. and Mackie Designs Inc. Incorporated by reference to Exhibit 10.2.1 to  Annual Report on Form 10-K for the fiscal year ended December 31, 2001.                                                   |

 

51

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| 10.3   |   | Industrial  Real Estate Lease dated April 28, 1995, by and between Woodinville II  LLC, successor in interest to Intrawest Properties Partnership U.S. and  Mackie Designs Inc. Incorporated by reference to Exhibit 10.4 to  Registration Statement filed under the Securities Act of 1933 on Form S-1,  as amended, Registration No. 33-93514.                                                                                                                                                                                                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.4   |   | Mackie  Designs Inc. 401(k) Profit Sharing Plan dated December 20, 1993.  Incorporated by reference to Exhibit 10.15 to Registration Statement  filed under the Securities Act of 1933 on Form S-1, as amended,  Registration No. 33-93514.                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.5   |   | Loan  and Security Agreement, dated March 31, 2003, by and among Mackie Designs  Inc. and Mackie Designs UK Plc, as borrowers, Mackie Designs Manufacturing,  Inc., SIA Software Company, Inc. and Mackie Investment Co., as guarantors,  and Congress Financial Corporation, as agent for and on behalf of the  financial institutions which are parties thereto as lenders, and the  financial institutions named from time to time as parties thereto as lenders.  Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated  March 31, 2003.          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.5.1 |   | Amendment  No. 2 and Waiver to Loan and Security Agreement, dated April X, 2004, by and  among LOUD Technologies Inc. and LOUD Technologies (Europe) Plc, as  borrowers; Mackie Designs Inc., SIA Software Company, and Mackie Investment  Co. as guarantors; and Congress Financial Corporation, as agent for and on  behalf of the financial institutions which are parties thereto and the  parties to the Loan Agreement as lenders. Incorporated by reference to  Exhibit 10.5.1 to Annual Report on Form 10-K for fiscal year ended December  31, 2003.                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.5.2 |   | Amendment  No. 3 and Waiver to Loan and Security Agreement, dated August 3, 2004, by and  among LOUD Technologies Inc. and LOUD Technologies (Europe) Plc, as  borrowers; Mackie Designs Inc., SIA Software Company, and Mackie Investment  Co. as guarantors; and Congress Financial Corporation, as agent for and on  behalf of the financial institutions which are parties thereto and the  parties to the Loan Agreement as lenders. Incorporated by reference to  Exhibit 10.5.2 to Quarterly Report on Form 10-Q for the quarterly period  ended September 30, 2004.   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.5.3 |   | Amendment  No. 4 and Waiver to Loan and Security Agreement, dated October 25, 2004, by  and among LOUD Technologies Inc. and LOUD Technologies (Europe) Plc, as  borrowers; Mackie Designs Inc., SIA Software Company, and Mackie Investment  Co. as guarantors; and Congress Financial Corporation, as agent for and on  behalf of the financial institutions which are parties thereto and the  parties to the Loan Agreement as lenders. Incorporated by reference to  Exhibit 10.5.3 to Quarterly Report on Form 10-Q for the quarterly period  ended September 30, 2004. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.6   |   | Term  Promissory Note, dated March 31, 2003, made by Mackie Designs Inc. to the  order of Congress Financial Corporation in the principal amount of  $2,500,000. Incorporated by reference to Exhibit 10.2 to Current Report on  Form 8-K dated March 31, 2003.                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.7   |   | Pledge  and Security Agreement, dated March 31, 2003, made by Mackie Designs Inc. to  and in favor of Congress Financial Corporation, in its capacity as agent  pursuant to the Loan Agreement acting for and on behalf of the financial  institutions which are parties thereto as lenders. Incorporated by reference  to Exhibit 10.3 to Current Report on Form 8-K dated March 31, 2003.                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.8   |   | Patent Collateral Assignment  and Security Agreement, dated March 31, 2003, by and between Mackie Designs  Inc. and Congress Financial Corporation, in its capacity as agent pursuant to  the Loan Agreement acting for and on behalf of the financial institutions  which are parties thereto as lenders. Incorporated by reference to Exhibit  10.4 to Current Report on Form 8-K dated March 31, 2003.                                                                                                                                                                     |

 

52

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| 10.9   |   | Copyright Collateral  Assignment and Security Agreement, dated March 31, 2003, by and between  Mackie Designs Inc. and Congress Financial Corporation, in its capacity as  agent pursuant to the Loan Agreement acting for and on behalf of the  financial institutions, which are parties thereto as lenders. Incorporated by  reference to Exhibit 10.5 to Current Report on Form 8-K dated March 31, 2003.                                                                                                                                                                               |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.10  |   | Trademark Collateral  Assignment and Security Agreement, dated March 31, 2003, by and between  Mackie Designs Inc. and Congress Financial Corporation, in its capacity as  agent pursuant to the Loan Agreement acting for and on behalf of the  financial institutions, which are parties thereto as lenders. Incorporated by  reference to Exhibit 10.6 to Current Report on Form 8-K dated March 31, 2003.                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.11  |   | Guarantee, dated March 31,  2003, made by Mackie Designs Manufacturing, Inc., SIA Software Company, Inc.  and Mackie Investment Co. for and on behalf of Mackie Designs Inc. in favor  of Congress Financial Corporation, in its capacity as agent pursuant to the  Loan Agreement acting for and on behalf of the financial institutions which  are parties thereto as lenders, and the financial institutions which are  parties to the Loan Agreement as lenders. Incorporated by reference to  Exhibit 10.7 to Current Report on Form 8-K dated March 31, 2003.                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.12  |   | Guarantee, dated March 31,  2003, made by Mackie Designs Inc., Mackie Designs Manufacturing, Inc., SIA  Software Company, Inc. and Mackie Investment Co. for and on behalf of Mackie  Designs UK Plc in favor of Congress Financial Corporation, in its capacity as  agent pursuant to the Loan Agreement acting for and on behalf of the  financial institutions which are parties thereto as lenders, and the  financial institutions which are parties to the Loan Agreement as lenders.  Incorporated by reference to Exhibit 10.8 to Current Report on Form 8-K dated  March 31, 2003. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.13  |   | Second Amended and  Restated Subordination Credit Agreement, dated March 31, 2003, between and  among U.S. Bank National Association, as lender, Mackie Designs Inc., as  borrower, and Mackie Designs Manufacturing, Inc., SIA Software Company, Inc.,  and Mackie Investment Co., as guarantors. Incorporated by reference to  Exhibit 10.9 to Current Report on Form 8-K dated March 31, 2003.                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.14  |   | Intercreditor and  Subordination Agreement, dated March 31, 2003, by and among Congress  Financial Corporation, in its capacity as agent pursuant to the Loan  Agreement acting for and on behalf of the financial institutions which are  parties thereto as lenders, and the financial institutions from time to time  party to the Senior Loan Agreement as lenders, and U.S. Bank National  Association. Incorporated by reference to Exhibit 10.10 to Current Report on  Form 8-K dated March 31, 2003.                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.15  |   | Stock Purchase Warrant,  dated March 31, 2003, issued by Mackie Designs Inc. to Sun Mackie, LLC for  the right to purchase 1,179,429 shares of common stock. Incorporated by  reference to Exhibit 10.11 to Current Report on Form 8-K dated March 31,  2003.                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.16  |   | Subordinated Promissory  Note, dated March 31, 2003, made by Mackie Designs Inc. to the order of Sun  Mackie, LLC in the principal amount of $3,931,429. Incorporated by reference  to Exhibit 10.12 to Current Report on Form 8-K dated March 31, 2003.                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.17  |   | Loan Agreement dated  October 21, 1999 between James T. Engen and Mackie Designs, Inc. in the  amount of $250,000. Incorporated by reference to Exhibit 10.20 to Annual  Report on Form 10-K for the fiscal year ended December 31, 1999.                                                                                                                                                                                                                                                                                                                                                   |

 

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| 10.18  |   | Exchange Agreement dated August  3, 2004, among LOUD Technologies Inc., Sun Mackie, LLC, Randolph Street  Partners V, and H.I.G. Partners, Inc. Incorporated by reference to Exhibit  10.19 to current Report on Form 8-K dated August 3, 2004.                              |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                         |
| *21.1  |   | Subsidiaries  of LOUD Technologies Inc.                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                         |
| *23.1  |   | Consent  of KPMG LLP,-Independent Registered Public Accounting Firm.                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                         |
| *31.1  |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                         |
| *31.2  |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                         |
| *32.1  |   | Certification pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                         |
| 99.1   |   | Press release, dated  January 20, 2005, issued by LOUD Technologies Inc. announcing its anticipated  financial performance for the fourth quarter ended December 31, 2004.  Incorporated by reference to Exhibit 99.1 to Current Report of Form 8-K dated  January 20, 2005. |

 

* Filed herewith

 

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