** **

**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

**FORM10-K**

 

**(Mark One)**
| **ý** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------|-------------------------------------------------------------------------------------------|

 

**For thefiscal year ended December 31, 2005**

 

**OR**

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

 

**For thetransition periodfrom       to       **

 

**CommissionFile 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)

 

Registrant’s telephone number, including area code: **(425) 487-4333**

 

Securities registered pursuant 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: CommonStock, no par value**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.   Yes**  **o   No  ý

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act.   Yes ** **o   No  ý

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter 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 ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.   o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act (Check one): 

 
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer ý |
|--------------------------------|--------|--------------------------|--------|-----------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act.):   Yes ** **o   No  ý

 

The aggregate market valueof common stock held by non-affiliates of registrant at June 30, 2005 wasapproximately $16,389,607 based upon the closing price of the registrant’scommon stock as quoted on the Nasdaq OTC Bulletin Board System on June 30, 2005of $15.55. Per-share data contained in this report reflect the 1-for-5 reversesplit effected on November 17, 2005.

 

On March 31, 2006, 4,566,202 shares of commonstock were outstanding. 

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

**Portions of the definitive ProxyStatement for the 2006 annual meeting of stockholders (including amendmentsthereto) are incorporated by reference into Part III of this Form 10-K**

 

 

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**LOUD TECHNOLOGIES INC.**

**FORM 10-K**

For the Year EndedDecember 31, 2005

 
|   | **INDEX** |   |   |
|--------|-----------|--------|--------|

 
| Part I     |     | ** **                                                                                                         |
|------------|----------|--------------------------------------------------------------------------------------------------------------------|
|       |     | ** **                                                                                                         |
|       | Item 1.  | Business                                                                                                           |   |
|       | Item 1A. | Risk Factors                                                                                                       |   |
|       | 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, Related Stockholder Matters and Issuer Purchases of Equity Securities |   |
|       | Item 6.  | Selected Financial Data                                                                                            |   |
|       | Item 7.  | Management's Discussion and  Analysis of Financial Condition and Results of Operation                              |   |
|       |     |                                                                                                               |   |
|       | Item 7A. | Quantitative  and Qualitative Disclosures About Market Risk                                                        |   |
|       |     |                                                                                                               |   |
|       | Item 8.  | Financial  Statements and Supplementary Data                                                                       |   |
|       | Item 9.  | Changes in  and Disagreements With Accountants on Accounting and Financial Disclosure                              |   |
|       | Item 9A. | Controls and  Procedures                                                                                           |   |
|       | Item 9B. | Other Information                                                                                                  |   |
|       |     |                                                                                                               |   |
| 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 and Related Stockholder Matters                    |   |
|       |     |                                                                                                               |   |
|       | 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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**PARTI**

** **

*Certainstatements set forth in or incorporated by reference into this Annual Report onForm 10-K for the year ended December 31, 2005, particularly including but notlimited to the section entitled Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, contain “forward-lookingstatements” within the meaning of Section 21D of the Securities Exchange Act of1934, as amended. Such statements are based on currently available operating,financial and competitive information and are subject to various risks anduncertainties. Such forward-looking statements include among others, thosestatements including the words “expect,” “anticipate,” “intend,” “believe” andsimilar expressions. Actual results could differ materially and adversely fromthose discussed in this report. Factors that could cause or contribute to suchdifferences include but are not limited to the risks discussed in the “RiskFactors” section in Item 1A. Readers are cautioned not to place undue relianceon these forward-looking statements, and should recognize that these statementsare accurate only as of the date of this report and will not be updated toreflect future developments.*

* *

# **Item 1. Business**

# ** **

**Overview**

** **

LOUD Technologies Inc. was founded in 1988 andincorporated in Washington under the name Mackie Designs Inc., and changed itsname to Loud Technologies Inc. September 13, 2003. LOUD is one of the world’slargest dedicated professional audio and music products companies. As thecorporate parent for world-recognized brands Alvarez®, Ampeg®, Crate®, EAW®,Knilling®, Mackie®, SIA® and TAPCO®, LOUD engineers, manufactures, markets anddistributes a wide range of professional audio and musical instrument productsworldwide. Additionally, LOUD is one of the largest distributors of brandedprofessional audio and music accessories through its SLM Marketplace catalog. 

 

Our product lines include sound reinforcementspeakers, analog mixers, guitar and bass amplifiers, professional loudspeakersystems, violins and other stringed instruments, and digital mixers. Theseproducts can be found in professional and project recording studios, video andbroadcast suites, post-production facilities, sound reinforcement applicationsincluding churches and nightclubs, retail locations, and on major musicaltours.

 

On March 4, 2005, weacquired all of the shares of St. Louis Music, Inc., a Missouri-basedmanufacturer, distributor and importer of branded musical instruments andprofessional audio products. This transaction is explained in more detail inNote 18 of the accompanying financial statements.

 

On August 29, 2005 wecompleted a refinancing of our credit facilities with our U.S. lenders thatwere to mature in the first half of 2006. This transaction is explained in moredetail in Note 10 of the accompanying financial statements.

 

On November 3, 2005 weannounced a 1-for-5 reverse split of the Company’s outstanding common stock.The 1-for-5 reverse stock split was effective after the close of business onNovember 17, 2005. In lieu of fractional shares, shareholders received cash ata rate of $2.95 per whole post-split share. Mellon Investor Services LLC, theCompany’s transfer agent, acted as the exchange agent.

 

At December 31, 2005,3,370,127 shares, representing 73.8% of our outstanding common stock, wereowned by affiliates of Sun Capital Partners, Inc., a private investment firm.Accordingly, we are a controlled company within the meaning of the NASD rulesgoverning companies listed on the Nasdaq Capital Market and, as discussed ingreater detail below and in our proxy statement for our 2006 annual shareholdermeeting, we are therefore exempt from application of certain of the corporategovernance

 

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rules, particularly including those relating to independent boardcomposition and compensation and nominating committee requirements.

 

The Company voluntarilydelisted from the Nasdaq Small Cap MarketTM on February 7, 2003 because ofongoing difficulties in satisfying certain of the Nasdaq continuing listingrequirements. The Company’s stock began trading on the OTC Bulletin Board onFebruary 11, 2003. We applied for reinstatement to the Nasdaq Capital MarketTMon November 23, 2005. Our stock began trading on the Nasdaq Capital MarketTMunder the symbol “LTEC” on March 1, 2006.

 

“MACKIE,” the running manfigure, “TAPCO,” “EAW,” and “SIA” are registered trademarks or “common law”trademarks of LOUD Technologies Inc. “Alvarez”, “Ampeg”, “Crate”, and“Knilling” are registered trademarks of our wholly owned subsidiary, St. LouisMusic, Inc. To the extent our trademarks are unregistered, we are unaware ofany conflicts with trademarks owned by third parties. This document alsocontains names and marks of other companies, and we claim no rights in thetrademarks, service marks and trade names of entities other than those in whichwe have a financial interest or licensing right.

 

**Marketing**

 

Innovative marketing is the hallmark of each LOUDbrand. As a result, each brand holds an enviable, unique position in itsrespective marketplace. Each brand is supported by a dedicated team ofbrand-specific product, business and communication resources backed by anin-house marketing and design team that handles all media planning, buying,print literature and advertising design, web design, public relations, productdocumentation, product training, as well as end-user and dealer trade shows andspecial events.

 

*OurMajor Brands*

 

#### **Alvarezis an acoustic guitar line geared to players of all types – from entry-level toprofessional.**

#### ** **

#### **Ampeg isthe industry standard in bass amplification for more than 50 years.**

#### ** **

#### **Crate isan entry-level brand of musical instrument amplification products.**

#### ** **

EAW is precisionengineered, technologically superior loudspeakers and digital mixers. EAWsystems are found in public spaces including sporting arenas, churches,nightclubs, and on major musical tours.

 

Mackie is innovativeprofessional audio systems for both recording and sound reinforcementapplications.

 

**Distributionand Sales**

 

Sales to customers in theUnited States represent 63%, 58% and 63% of total net sales in 2005, 2004 and2003 respectively. In the United States, for Mackie, EAW, SIA and TAPCOproducts, we use a network of independent representatives to sell to over 2,500retail dealers. These products are sold in musical instrument stores,professional audio outlets and several mail order outlets. For the acquiredbrands of St. Louis Music (Alvarez, Ampeg, Crate, SLM Marketplace, andKnilling), we use a dedicated, domestic employee sales force (there wereapproximately 25 as of December 31, 2005) who sell to musical instrument storesand retail locations. Beginning in 2006, this employee sales force will beginselling Mackie and TAPCO products as well, while our existing base ofindependent representatives will continue to sell EAW and SIA products. Salesto our top 10 U.S. dealers represented approximately 27%,

 

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22% and 27% of net sales made in 2005, 2004 and 2003, respectively. Onedealer, Guitar Center Inc., accounted for approximately 16%, 12% and 12% of netsales in 2005, 2004 and 2003, respectively. No other dealer accounted for morethan 10% of net sales in this period.

 

Internationally, our productsare offered direct to dealers in the United Kingdom, Canada, France, Germany,Belgium, Netherlands and Luxembourg primarily through our subsidiaries in theUnited Kingdom and Canada. We also sell direct to dealers in Japan. Ourproducts are also distributed through local distributors in countries where wedo not have direct operations. No single international distributor accountedfor more than 10% of international net sales in this period.

 

Sales to customers in theUnited States were $128.7 million, $71.6 million, and $82.0 million for 2005,2004 and 2003 respectively, while international sales were $75.7 million, $51.7million and $48.7 million, for the comparable periods.

 

**CustomerSupport**

 

Customer support programsare designed to enhance brand loyalty by building customer understanding ofproduct use and capabilities. The customer service and support operation alsoprovides us with a means of understanding customer requirements for futureproduct enhancements. This understanding comes through direct customer contact,as well as through close analysis of responses to various product registrationsurveys.

 

Product supportspecialists are located in Woodinville, Washington, Whitinsville,Massachusetts, and St. Louis, Missouri to provide direct technical service andsupport. Technical support is provided either through a toll-free number orweb-based support during scheduled business hours, and via the website afterbusiness hours, as well. Service and repairs on our speaker products sold inthe United States are performed at our Whitinsville site. Service and repairson our electronic products sold in the United States are performed atapproximately 100 authorized service centers located throughout the UnitedStates. Internationally, our subsidiary in the United Kingdom, as well as ourindependent distributors, are utilized to provide product support and are alsoresponsible for warranty repairs for products sold into their markets.Additionally, certain products returned to stock are processed through acontract repair facility in Shanghai, China.

 

**Researchand Development**

 

We pride ourselves onemploying the top engineering and product design talent in theprofessional-audio and musical instrument industries. Research and developmentteams are located in Woodinville, Washington; Whitinsville, Massachusetts; St.Louis, Missouri; Shenzhen, China; and Victoria, B.C., Canada. We also utilizethird-party engineering service groups to supplement our in-house personnel.Research and development investment was approximately $10.3 million, $7.8million, and $7.7 million in 2005, 2004 and 2003, respectively.

 

**Competition**

 

The professional audioand musical instrument industries are fragmented and highly competitive. Thereare many manufacturers, large and small, domestic and international, whichoffer 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 and reputation,ability to meet customers’ changing requirements and customer service andsupport. We compete with a number of professional audio and musical instrumentmanufacturers, several of whom have significantly greater development, salesand financial resources. Our major competitors are subsidiaries of Harman

 

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International Industries; Yamaha Corporation; Peavey ElectronicsCorporation; and Fender Musical Instruments Corporation.

 

**ProprietaryTechnologies**

 

We have a strong interestin protecting the intellectual property assets that reflect original research,creative development and product development. As such, we have soughtprotection through patents, copyrights, trademarks and trade secrets and haveapplied and filed for various design and utility patents, both domestically andinternationally. We have actively used certain trademarks, and have applied forand registered specific trademarks in the United States and in foreigncountries. While the registration of patents and trademarks, and the use ofcopyrights, trade secrets and other intellectual property protections providesus with certain legal rights, there can be no assurance that any suchregistration will prevent others from infringing upon these trademarks.

 

**Manufacturing**

 

In 2005, we continued tostreamline our manufacturing operations to focus on our core competency ofbuilding loudspeaker systems at third party contract manufacturers. Themajority of our products are manufactured in Asia. We continue to operate ourWhitinsville, Massachusetts manufacturing facility, which focuses primarily onthe EAW brand, and our Yellville, Arkansas manufacturing facility, whichfocuses primarily on guitar amplifiers. We have established a team in China whomanages and facilitates the transition of products from design to manufacturingat our Asian contract manufacturers. 

 

**Employees**

 

At December 31, 2005, wehad 704 full-time equivalent employees, including 172 in marketing, sales andcustomer support; 113 in research and development; 346 in manufacturing,manufacturing support and manufacturing engineering; and 73 in administrationand finance. Of our employees, 34 were members of an organized labor union asof December 31, 2005.

 

**WebsiteAccess to Reports**

 

Our website address iswww.loudtechinc.com. The contents of our website are not incorporated into thisreport or into any of our filings with the Securities and Exchange Commission.Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reportson Form 8-K, the Forms 3, 4 and 5 filed by our executive officers, directorsand certain shareholders pursuant to Section 16(a) of the Exchange Act, and anyamendments to those reports are available free of charge on our website, assoon as is reasonably practicable, after such material is electronically filedwith, or furnished to, the Securities and Exchange Commission. The SEC alsomaintains a website, http://www.sec.gov, at which you may access all of ourfilings of other persons who are required to file reports with respect to theownership, disposition, and voting of our equity securities.

 

**Item 1A.  RiskFactors**

 

***Dependence on Key Customer***. In 2005,2004, and 2003 one customer, Guitar Center Inc., accounted for approximately16%, 12% and 12%, respectively, of our net sales revenues. We anticipate thatthis customer will continue to represent a significant portion of our saleshowever, the customer is not obligated to continue purchasing products from us.Were our relationship with this customer to deteriorate for any reason we couldlose a significant portion of our net sales revenues, which would have amaterial adverse impact on our results of operations, liquidity and financialcondition.

 

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***Liquidity and Debt Obligations***. Underthe terms 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 thatwe would be able to attain other financing. If we default on our debt, ourlenders have a variety of remedies against us including accelerating allamounts so that they come due immediately and foreclosing on their securityinterests, which would allow the creditors to take possession of all of our assets.Moreover, our debt obligations are largely cross-defaulted, which means that adefault under one of the agreements causes a default against each other creditagreement. In such instances, if we cannot obtain alternate financing in a veryshort period of time, we may have to suspend or discontinue our operations,liquidate our assets or take other measures that would result in a materialadverse effect upon our financial condition and results of operations.

 

Our line of creditaccrues interest based on variable short-term interest rates. Increases in theprime rate or LIBOR would increase our interest expense, which would adverselyaffect our profitability and cash flows.

 

***Competition***. Our industry is highlycompetitive, and we face competition from a number of well-known brandsincluding Yamaha, Harman-Kardon, Peavey and Fender. Many of our competitors aresubstantially better capitalized and have substantially stronger marketpresence than we have. We also expect increasing competition from both establishedand emerging companies. Competition may have the effects of reducing the priceswe can charge for our products, increasing our marketing costs associated withdeveloping and maintaining our market niche, or reducing the demand for ourproducts. If we fail to compete successfully against current and future sourcesof competition, our profitability and financial performance will be adverselyaffected, and those effects may be material.

 

***Acquisitionsand Business Combinations.***We have acquired businesses in the past, andwe may do so in the future. We may pursue additional acquisitions ofcomplementary technologies or product lines. Further acquisitions may includerisks of entering markets where we have no or limited prior experience, thepotential loss of key employees of the acquired company, and impairment ofrelationships with existing employees, customers and business partners. Furtheracquisitions may also impact our financial position. For example, we may usesignificant cash or incur additional debt, which would weaken our financialposition. We cannot guarantee that future acquisitions will improve ourbusiness or operating results. 

 

***Variabilityin Quarterly Operating Results.***Our operating resultstend to vary from quarter to quarter. Revenue in each quarter is substantiallydependent on orders received within that quarter as well as productavailability. Conversely, our expenditures are based on investment plans andestimates of future revenues. We may, therefore, be unable to quickly reducespending if revenues decline in a given quarter. As a result, operating resultsfor such quarters would be adversely impaired. Results of operations for anyone quarter is not necessarily indicative of results for any future period.

 

Other factors which maycause quarterly results to fluctuate include:

 

•      increasedcompetition in niche markets;

•      timingof new product announcements;

•      productreleases and pricing changes by us or our competitors;

 

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•      marketacceptance or delays in the introduction of new products;

•      productionconstraints;

•      thetiming of significant orders;

•      customers’budgets; and

•      foreigncurrency exchange rates.

 

It islikely in some quarters our operating results will be adversely affected bythese factors.

 

***RapidTechnological Change.***Product technology evolves rapidly,making timely product innovation essential to success in the marketplace. Theintroduction of products with improved technologies or features may render ourexisting products obsolete and unmarketable. If we cannot develop products in atimely manner in response to industry changes, or if our products do notperform well, our business and financial condition will be adversely affected.Also, new products may contain defects or errors which could cause the productsto fail to gain market acceptance.

 

***ProductLiability.***Some of our products, such as amplifiers, speakersand sound mixers, are electronically powered and carry a risk of electricalshock or fire. These and other products create a risk that our customers orthird parties may bring claims that our products have caused property damage,physical injury or death. In extreme cases these claims may be asserted asclass actions, contending that such products brought harm to large numbers ofpeople. These types of litigation, if threatened or brought, may be costly andmay distract management’s attention from operating our business, whether or notwe ultimately are adjudged to be liable and whether or not we settle such an action.

*** ***

***Dependenceon Suppliers.***Certain parts used in our products arecurrently available from either a single supplier or from a limited number ofsuppliers. If we cannot develop alternative sources of these components, or ifwe experience deterioration in our relationship with these suppliers, there maybe delays or reductions in product introductions or shipments, which maymaterially adversely affect our operating results.

 

Because we rely on asmall number of suppliers for certain parts, we are subject to possible priceincreases by these suppliers. Also, we may be unable to accurately forecast ourproduction schedule. If we underestimate our production schedule, suppliers maybe unable to meet our demand for components. This delay in the supply of key componentsmay materially adversely affect our business.

 

***Useof Third Party Distribution Centers.***We store and shipthe majority of our products from our Woodinville, Washington and St. Louis,Missouri locations. In addition, we utilize third party distribution centers inEurope 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.Failure to maintain adequate systems and internal controls at these facilitiescould result in customer shipments being delayed or otherwise improperlytransacted, potentially resulting in lost revenue, products or customers.

 

***Useof Contract Manufacturers.***The majority of our productsare manufactured by third-party contract manufacturers. Third-partymanufacturing creates additional risks including:

 

•      reductionin control of the manufacturing process;

•      longerlead times for transitions of newly released products from engineering to fullrelease;

•      leadtimes for transitions of existing products to new third party manufacturers;

•      reducedflexibility in reacting to demand changes;

•      increasedtransportation cost and delivery times;

 

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•      fluctuationsin currency exchange rates (specifically the “floating” currency rate inChina); 

•      delaysor inability to source parts on reasonable payment terms; and

•      concentrationof production by certain key manufacturers.

 

***Manufacturing in China.***Ourability to import products from China at current tariff levels could bematerially and adversely affected if the “normal trade relations” (“NTR”,formerly “most favored nation”) status the United States government has grantedto China for trade and tariff purposes is terminated. As a result of its NTRstatus, China receives the same favorable tariff treatment that the UnitedStates extends to its other “normal” trading partners. China’s NTR status,coupled with its membership in the World Trade Organization, could eventuallyreduce barriers to manufacturing products in and exporting products from China.However, we cannot provide any assurance that China’s WTO membership or NTRstatus will not change.

 

***InternationalOperations.***We have significant net sales to customersoutside the United States and believe that international sales will continue torepresent a significant portion of our revenue. International sales mayfluctuate due to various factors, including:

 

•      changesin regulatory requirements;

•      tariffsand taxes;

•      increasesin freight costs, or damage or loss in shipment;

•      difficultiesin staffing and managing foreign operations;

•      longeraverage payment cycles and difficulty in collecting accounts receivable;

•      fluctuationsin foreign currency exchange rates;

•      productsafety and other certification requirements; and

•      politicaland economic instability, wars and terrorist activity.

 

***Sales Regulations***. In the UnitedStates, our products must comply with various regulations and standards definedby the Federal Communications Commission, the Consumer Products SafetyCommission and Underwriters’ Laboratories. Internationally, our products may berequired to comply with regulations or standards established bytelecommunications authorities in the countries into which we sell ourproducts, as well as various multinational or extranational bodies. Recentenvironmental legislation in the European Union may increase our costs of doingbusiness internationally as we comply with and implement these newrequirements. The European Union, or EU, has issued a directive on therestriction of certain hazardous substances in electronic and electricalequipment, known as RoHs, and has enacted the Waste Electrical and ElectronicEquipment, or WEEE, directive applicable to persons who import electrical orelectronic equipment into Europe. Although neither of these directives isapplicable to our products as of the date of this report, both are expected tobecome effective in 2006. We are currently implementing measures to comply witheach of these directives as individual EU nations adopt their implementationguidelines. Although we believe our products are currently in compliance withdomestic and international standards and regulations in countries to which weexport, we can offer no assurances that our existing and future productofferings will remain compliant with evolving standards and regulations. If wefail to obtain timely domestic or foreign regulatory approvals orcertification, we may be unable to sell our products into jurisdictions towhich these standards apply, which may prevent us from sustaining our revenuesor maintaining profitability. 

 

***Protectionof Intellectual Property.***We have a strong interest inprotecting the intellectual property assets that reflect original research,creative development, and product development. As such, we have soughtprotection through patents, copyrights, trademarks, and trade secrets. Alongwith extensive trademark and patent registration and filings, we have claimedcopyright protection for works of original authorship, including productbrochures, literature, advertisement, and web pages. While certain legal

 

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rights of enforceability are available to us, there can be no assuranceas to the ability to successfully prevent others from infringing upon ourintellectual property.

 

We have never conducted acomprehensive patent search relating to the technology used in our products,however, we believe that our products do not infringe upon the proprietaryrights of others. There can be no assurance, however, that others will notassert infringement claims against us in the future or that those claims, ifbrought, will not be successful.

 

While we pursue patent,trademark and copyright protection for products and various marks, we also relyon the use of confidentiality agreements with our employees, consultants,development partners and contract manufacturers to protect our trade secrets,proprietary information and other intellectual property. There can be noassurance, however, that these confidentiality agreements will be honored orwill be effective in protecting our trade secrets, proprietary information andother intellectual property. Moreover, there can be no assurance that otherswill not independently develop substantially equivalent proprietary informationand techniques or otherwise gain access to our trade secrets.

 

***Dependenceon Key Personnel.***Our future success will depend in alarge part on the continued service of many of our technical, marketing, salesand management personnel and on our ability to attract, train, motivate andretain highly qualified employees. Our employees may voluntarily terminatetheir employment at any time. The loss of the services of key personnel or theinability to attract new personnel could have a material adverse effect uponour results of operations.

 

***Restructured Sales Force****.*In early 2006, we decided to eliminateour relationship with independent representatives in the United States andCanada who sell Mackie and TAPCO brands, and instead use an existing domesticemployee sales force that had, and will continue to, sell existing St. LouisMusic brands. Our independent representatives have had strong relationships withour distributors and retailers, and if our new sales force is unable tocontinue and grow these relationships, sales could be negatively affected. 

 

**Item 2.  Properties**

** **

Weown one building, a 63,250 square foot building located on 7.66 acres inYellville, Arkansas, the remainder of our properties are leased. The buildingwe own is primarily used for manufacturing. We lease facilities in Woodinville, Washington totalingapproximately 170,000 sq. ft. to house our corporate headquarters as well as adistribution center. The lease on the approximately 80,000 sq. ft. ofdistribution and warehouse space was renewed in January of 2006 and expiresJuly 31, 2011. The lease on the approximately 90,000 sq. ft. of corporateheadquarters and distribution center was renewed in May of 2005 and expiresDecember 31, 2011. We lease a series of connected buildings in a manufacturingcomplex in Whitinsville, Massachusetts, totaling 220,285 sq. ft. This leasecontinues through April 2008. We lease a warehouse (approximately 78,000 sq.ft), a research and development center (approximately 26,000 sq. ft), and awarehouse with office space (approximately 67,000 sq. ft) all located in St.Louis, Missouri. All three of these leases were renewed and extended with theacquisition of St. Louis Music, Inc. The warehouse was renewed again inFebruary of 2006 and now expires June 30, 2009, the R&D center and the mainoffice/warehouse expire March 5, 2008. The lessors for two of the St. Louis,Missouri leases are immediate family members of Edward Kornblum, our SeniorVice President of Entertainment and Artist Relations. We lease additionalsmaller facilities in the United States, Canada, Europe and Asia for ourregional sales and support offices. We believe our properties are adequate forour anticipated needs.

 

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# **Item3.  Legal Proceedings**

 

On or about November 29, 2005, LOUD Technologies Inc.and its subsidiary, St. Louis Music Company, were named as party-defendants ina lawsuit in the United States District Court, Southern District of Florida.The lawsuit, filed by Ace Pro Sound and Recordings and served upon the Company,alleges individual and class action claims against LOUD, as well as other,unrelated defendants. The claims include civil conspiracy, tortuousinterference, violation of Florida’s state and the Federal RacketeeringInfluenced and Corrupt Organization Act as well as Section 1 and Section 2Sherman Act antitrust claims. Management believes these claims are completelywithout merit, and LOUD has filed a motion to dismiss this case and intends tovigorously defend these claims.

 

In addition to the casenoted above, we are also involved in various legal proceedings and claims thatarise in the ordinary course of business. We currently believe that thesematters will not have a material adverse impact on our financial position,liquidity or results of operations.

** **

# **Item 4.  Submissionof Matters to a Vote of Securities Holders**

# ** **

No matters were submittedto a vote of our security holders during the fourth quarter of the fiscal yearended December 31, 2005.

 

**PARTII**

** **

# **Item 5.  Marketfor Registrant’s Common Equity and Related Shareholder Matters**

# ** **

The Company voluntarilydelisted from the Nasdaq Small Cap MarketTM on February 7, 2003 because ofongoing difficulties in satisfying certain of the Nasdaq continuing listingrequirements. The Company’s stock began trading on the OTC Bulletin Board onFebruary 11, 2003. We applied for reinstatement to the Nasdaq Capital MarketTMon November 23, 2005. Our stock began trading on the Nasdaq Capital MarketTMunder the symbol “LTEC” on March 1, 2006.

 

As of December 31, 2005,there were 4,566,202 common stock shares of LOUD Technologies Inc. issued andoutstanding and approximately 105 shareholders of record. The following tableshows the high and low sales prices for our common stock for the periodsindicated. Prices reported in this table are adjusted to reflect the 1-for-5reverse split announced on November 3, 2005 and effected November 17, 2005. 

 
| ** **                    | ** ** | **Common Stock** | ** ** |
|-------------------------------|------------|------------------|------------|
| ** **                    | ** ** | **HIGH**         | ** ** | **LOW** | ** ** |
| Year Ended December 31, 2005: |       |             |       |   |   |
| Fourth Quarter                |       | $                | 16.00      |   | $ | 10.00 |   |
| Third Quarter                 |       | $                | 15.75      |   | $ | 13.25 |   |
| Second Quarter                |       | $                | 18.25      |   | $ | 13.75 |   |
| First Quarter                 |       | $                | 17.00      |   | $ | 9.00 |   |
|                          |       |             |       |   |   |
| Year Ended December 31, 2004: |       |             |       |   |   |
| Fourth Quarter                |       | $                | 11.00      |   | $ | 6.50 |   |
| Third Quarter                 |       | $                | 11.00      |   | $ | 8.50 |   |
| Second Quarter                |       | $                | 12.75      |   | $ | 9.25 |   |
| First Quarter                 |       | $                | 13.50      |   | $ | 9.50 |   |

 

10

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We have not paiddividends on our common stock in the past, and it is not anticipated that cashdividends will be paid on shares of our common stock in the foreseeable future.Any future dividends will be dependent upon our financial condition, results ofoperations, current and anticipated cash requirements, acquisition plans andplans for expansion, and any other factors that our Board of Directors deemsrelevant. Under our current loan and security agreement, we are prohibited frompaying any dividends.

 

**Sales ofUnregistered Securities**

 

In connection with theacquisition of St. Louis Music and pursuant to the Acquisition Agreement datedMarch 4, 2005 by and among Loud Technologies, Inc., SLM Holding Corp., SLMMerger Corp. and St. Louis Music, we issued 79,358 shares of common stock toEdward Kornblum, one of the shareholders of St. Louis Music. The shares wereissued in an unregistered private placement in reliance upon an exemption fromregistration set forth in Section 4(2) of the Securities Act of 1933, asamended.

 

On August 29, 2005 weissued 51,547 shares of common stock, par value $14.55 per share, to certaininstitutional and accredited investors in accordance with Rule 506 ofRegulation D promulgated under the Securities Act of 1933, as amended. Theconsideration for these shares was cash in the amount of $750,000 and theproceeds of such sale are to be used for debt retirement and working capital.

 

#### **EquityCompensation Plan Information**

 

The Company has ashareholder-approved equity plan that enables the Compensation Committee of theBoard of Directors to make stock option awards.

 

The table below providesinformation, as of December 31, 2005, concerning securities under current andformer equity compensation plans.

 
| **Plan Category**                                       | ** ** | **(a)  Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **(b)  Weighted-average  exercise price of  outstanding  options, warrants**

**and rights** | ** ** | **(c) Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in Column (a))** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders |       | 628,712                                                                                                  |       | 15.27                                                                                        |       | 869,579                                                                                                                                                  |       |
| Total                                                   |       | 628,712                                                                                                  |       | 15.27                                                                                        |       | 869,579                                                                                                                                                  |       |

 

During July 2003, ourboard of directors adopted the 2003 Stock Option Plan (the 2003 Plan),authorizing options to purchase 345,600 shares of common stock. The 2003 Plancalls for options to be non-qualified stock options with exercise prices equalto the fair market value of the stock on the date granted. Options generallyvest over a five-year period and expire on the earlier of ten years from grantdate or three months from termination. If an option holder is terminated forCause, as defined in the 2003 Plan, the options would terminate a day prior totermination. At December 31, 2005, 61,000 shares of common stock wereavailable for future grants under the 2003 Plan.

 

The Company also has a1995 Stock Option Plan (the 1995 Plan), which authorized 1.3 millionshares of common stock for grants. The exercise price of incentive stockoptions granted under the 1995 Plan may not be less than the fair market valueof the common stock on the date of grant. The exercise price of 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. Optionsgenerally vest over a four to five-year period and expire no later than tenyears after the date of grant. At December 31, 2005, 809,000 shares ofcommon stock were available for future grants under the 1995 Plan.

 

11

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#### **Item6.  Selected Consolidated Financial Data**

#### ** **

The followingselected Consolidated Statements of Operations data for each of the three yearsin the period ended December 31, 2005 and the Consolidated Balance Sheetdata as of December 31, 2005 and 2004 are derived from our auditedConsolidated Financial Statements included elsewhere herein. The selectedStatements of Operations data for the years ended December 31, 2002 and2001 and the Balance Sheet data as of December 31, 2003, 2002, and 2001were 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,**              | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                          | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                          | ** ** | **(In thousands, except per share data)** | ** ** |
| **Consolidated Statements of Operations Data (a):** | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                           |       | $                                         | 204,328    |   | $ | 123,276 |   | $ | 130,766 |   | $ | 159,362 |   | $ | 171,967 |   |
| Gross profit                                        |       | 65,324                                    |       | 41,349 |   | 29,310 |   | 37,860 |   | 51,865 |   |
| Operating expenses (b)                              |       | 56,816                                    |       | 40,043 |   | 44,974 |   | 69,512 |   | 52,622 |   |
| Net income (loss) from continuing operations        |       | 930                                       |       | (2,291 | ) | (15,412 | ) | (30,050 | ) | (3,159 | ) |
| Net income (loss) from discontinued operations      |       | 2,827                                     |       | — |   | (6,383 | ) | (7,878 | ) | (2,170 | ) |
| Net income (loss)                                   |       | 3,757                                     |       | (2,291 | ) | (21,795 | ) | (37,928 | ) | (5,329 | ) |
|                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic net income (loss) per share:                  |       |                                      |       |   |   |   |   |   |   |   |   |
| Net income  (loss) from continuing operations       |       | $                                         | 0.20       |   | $ | (0.52 | ) | $ | (3.94 | ) | $ | (12.03 | ) | $ | (1.27 | ) |
| Net income (loss)  from discontinued operations     |       | 0.59                                      |       | — |   | (1.63 | ) | (3.15 | ) | (0.88 | ) |
| Basic net income (loss) per share                   |       | $                                         | 0.79       |   | $ | (0.52 | ) | $ | (5.57 | ) | $ | (15.18 | ) | $ | (2.15 | ) |
|                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Diluted net income (loss) per share:                |       |                                      |       |   |   |   |   |   |   |   |   |
| Net income  (loss) from continuing operations       |       | $                                         | 0.19       |   | $ | (0.52 | ) | $ | (3.94 | ) | $ | (12.03 | ) | $ | (1.27 | ) |
| Net income  (loss) from discontinued operations     |       | 0.57                                      |       | — |   | (1.63 | ) | (3.15 | ) | (0.88 | ) |
| Diluted net income (loss) per share                 |       | $                                         | 0.76       |   | $ | (0.52 | ) | $ | (5.57 | ) | $ | (15.18 | ) | $ | (2.15 | ) |

 

12

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| ** **                            | ** ** | **December 31,**   | ** ** |
|---------------------------------------|------------|--------------------|------------|
| ** **                            | ** ** | **2005**           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                            | ** ** | **(In thousands)** | ** ** |
| **Consolidated Balance Sheets Data:** | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Working capital                       |       | $                  | 27,305     |   | $ | 1,764 |   | $ | 2,582 |   | $ | 14,890 |   | $ | 23,366 |   |
| Total assets                          |       | $                  | 95,545     |   | $ | 60,795 |   | $ | 50,422 |   | $ | 123,955 |   | $ | 153,964 |   |
| Long-term debt (c)                    |       | $                  | 40,944     |   | $ | 11,612 |   | $ | 16,262 |   | $ | 20,266 |   | $ | 19,401 |   |
| Shareholders’ equity             |       | $                  | 9,087      |   | $ | 3,320 |   | $ | 832 |   | $ | 17,236 |   | $ | 52,810 |   |

 

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(a)   Theconsolidated statements of operations data for years ended 2003, 2002 and 2001have been restated for discontinued operations.

 

(b)   Includedin operating expenses for the year ended December 31, 2002, is a $15,829non-cash charge relating to the impairment of goodwill and other long-livedassets.

 

(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**

 

We develop, manufacture, and sell high-quality,affordable sound reinforcement speakers, analog mixers, guitar and bassamplifiers, professional loudspeaker systems, violins and other stringedinstruments, and digital mixers on a worldwide basis. Our products are used byboth professional and amateur musicians; school music programs; soundinstallation contractors and broadcast professionals in sound recordings, livepresentations systems and installed sound systems. We distribute our productsprimarily through retail dealers, mail order outlets and installed soundcontractors. We have our primary operations in the United States with smalleroperations in the United Kingdom, Canada, China and Japan.

 

We had a significant improvement in our operatingresults in 2005, owing in part to our acquisition of St. Louis Music, Inc., onMarch 4, 2005 and in part to improved margins due to the continued transitionof manufacturing to Asia. For the twelve months ended December 31, 2005,revenue increased 65.7% to $204.3 million from $123.3 million for 2004. Revenuefor 2005 included $67.2 million attributable to St. Louis Music, Inc., withoutwhich our year-over-year improvements in revenues

 

13

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would have been $13.8 million, or 11.2%. Operating income for 2005increased by 553.8% to $8.5 million, or 4.2% of sales, compared to $1.3million, or 1.1% of sales, for 2004. Income from continuing operation rose to$0.9 million, or $0.19 per diluted share, compared to a loss from continuingoperations of $2.3 million, or $0.52 per share, for 2004. Net income for 2005was $3.8 million, or $0.76 per diluted share, which included a gain on sale ofthe Company’s discontinued operations in Italy of $2.8 million (net of tax), or$0.57 per diluted share. This compares to a net loss for 2004 of $2.3 million,or $0.52 per share. All per-share amounts in this report are adjusted toreflect the 1-for-5 reverse stock split that was effected on November 17, 2005.

 

**Critical Accounting Policies andEstimates**

** **

Our discussion andanalysis of our financial condition and results of operations following arebased upon our consolidated financial statements, which have been prepared inaccordance with U.S. generally accepted accounting principles. The preparationof these 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.

 

We believe that theestimates, assumptions and judgments involved in the accounting policiesdescribed below have the greatest potential impact on our financial statements,so we consider these to be our critical accounting policies. Because of theuncertainty inherent in these matters, actual results could differ from theestimates we use in applying the critical accounting policies. Certain of thesecritical accounting policies affect working capital account balances, includingthe policies for revenue recognition, allowance for doubtful accounts,inventory valuation and income taxes. These policies require that we makeestimates in the preparation of our financial statements as of a given date.However, since our business cycle is relatively short, actual results relatedto these estimates are generally known within the six-month period followingthe financial statement date. Thus, these policies generally affect only thetiming of reported amounts.

 

***Inventory Valuation***. LOUD inventories are stated at the lower ofstandard cost, which approximates actual cost on a first-in, first-out method,or market for Mackie, EAW, SIA and TAPCO brands. For the Crate, Alvarez,Knilling, and Ampeg brands, the inventory is valued at the lower of averagecost or market. Included in our inventories balance are demonstration productsused by our sales representatives and marketing department including finishedgoods that have been shipped to customers for evaluation. Market valueadjustments are recorded for excess and obsolete material, slow-moving product,service and demonstration products. We make judgments regarding the carrying valueof our inventory based upon current market conditions. These conditions maychange depending upon competitive product introductions, customer demand andother factors. If the market for our previously released products changes, wemay be required to write down the cost of our inventory.

 

***Allowance for Doubtful Accounts****.*We make ongoing estimates relating to thecollectibility of our accounts receivable and maintain an allowance forestimated losses resulting from the inability of our customers to meet theirfinancial obligations to us. In determining the amount of the allowance, weconsider our historical level of credit losses and make judgments about thecreditworthiness of significant customers based on ongoing credit evaluations.Since we cannot predict future changes in the financial stability of ourcustomers, actual future losses from uncollectible accounts may differ from ourestimates. If the financial condition of our customers were to deteriorate,resulting in their inability to make payments, a larger allowance may berequired. In the event we determine a smaller or larger allowance appropriate,we would record a credit or a charge to selling, general, and administrativeexpense in the period in which we made such a determination.

 

14

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***Long-lived Assets******.***We assess the impairment of long-livedassets whenever events or changes in circumstances indicate that the carryingvalue may not be recoverable. Significant judgment is used in assessing factorswhich might trigger impairment including significant underperformance relativeto expected operating results, significant changes in our use of the assets orthe strategy for our overall business, and significant negative industry oreconomic trends. As we continue to review our distribution methods andtransition our manufacturing to third parties, this may result in circumstanceswhere the carrying value of certain long-lived assets may not be recoverable.

 

***Goodwill and Other Intangible Assets.***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, 2005,we had goodwill of $2.2 million. We will continue to amortize intangible assetsthat have definite lives over their useful lives. 

 

***RevenueRecognition****.*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 or determinableand collection of the resulting receivable is considered probable. Products aregenerally shipped “FOB shipping point” with no right of return. We do have somedealers who finance their purchases through finance companies. We have amanufacturer’s repurchase agreement with the finance companies. We defer therevenue and related cost of goods sold of these sales at the time of the sale.We then recognize the revenue and related cost of goods sold of these saleswhen the right of return no longer exists. Sales with contingencies, such asrights of return, rotation rights, conditional acceptance provisions and priceprotection, are rare and insignificant. We generally warrant our productsagainst defects in materials and workmanship for periods of between one and sixyears, with the exception of Alvarez Yairi guitars which have a limitedlifetime warranty. The estimated cost of warranty obligations, sales returnsand other allowances are recognized at the time of revenue recognition based oncontract terms and prior claims experience.

 

***Income Taxes.*** As part of the process of preparing our financial statements, we arerequired to estimate our income taxes in each of the jurisdictions in which weoperate. This process involves estimating our actual current tax exposuretogether with assessing temporary differences resulting from differingtreatment of items for tax and accounting purposes. These differences result indeferred tax assets and liabilities, which are included in our consolidatedbalance sheet. We must then assess the likelihood that our deferred tax assetswill be recovered from future taxable income and to the extent we believe thatrecovery is not likely, we must establish a valuation allowance. To the extentwe establish a valuation allowance or change this allowance in a period, it maymaterially impact the tax provision in the Statement of Operations. 

 

##### ***Accounting forAcquisitions.***Significant judgment is required to estimate the fair value ofpurchased assets and liabilities at the date of acquisition, includingestimating future cash flows from the acquired business, determiningappropriate discount rates, asset lives and other assumptions. Our process todetermine the fair value of trademarks, customer relationships, and developedtechnology includes the use of estimates including: the potential impact onoperating results of the revenue estimates for customers acquired through theacquisition based on an assumed customer attrition rate; estimated costs to beincurred to purchase the capabilities gained through the developed technologyand appropriate discount rates based on the particular business’s weightedaverage cost of capital. Our process to determine the fair value of inventoriesacquired was to estimate the selling price of the inventories less the sum ofcosts to sell and a reasonable selling profit allowance.

 

15

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##### ***Year Ended December 31, 2005 Compared to Year EndedDecember 31, 2004***

 

# **Net Sales**

 

Netsales from continuing operations increased by 65.7% to $204.3 million in 2005,from $123.3 million in 2004. Sales were positively impacted due to theacquisition of St. Louis Music, Inc. Net sales of the St. Louis brands for theten months ended December 31, 2005 were $67.2 million, or 83.0% of the totalincrease. The remaining increase in sales primarily related to increasedproduct availability from our contract manufacturers and the introduction ofnew products. We have one significant customer who represented approximately16% and 12% of our total revenues in 2005 and 2004, respectively. U.S. salesrepresented approximately 63% of our total sales in 2005, compared toapproximately 58% in 2004. In 2006, we anticipate introducing and shipping newproducts, resulting in increased revenues in 2006 over 2005. We will also havetwelve months of sales for the acquired brands of St. Louis Music, Inc., whichwe anticipate will increase revenues in 2006.

 

#### **GrossProfit**

#### ** **

Gross profit increased by58.1% to $65.3 million, or 32.0% of net sales, in 2005 from $41.3 million, or33.5% of net sales, in 2004. $14.5 million of this increase related to theacquisition of St. Louis Music, Inc. $2.4 million, or 1.2% of net sales, of thedecline in gross profit percentage is a result of the impact of recording St.Louis Music’s inventories at fair value as a result of the purchase priceallocation of St. Louis Music. 

 

The remaining increase is due to higher sales in 2005for Mackie, TAPCO and EAW brands. The reduction in gross profit percentage from2004 to 2005 is primarily attributable to the addition of St. Louis Musicbrands, which are typically sold at lower margin percentages. In 2006, weanticipate our margins to remain in the 32%-35% range.

 

# **Selling, General and Administrative**

 

Selling, general andadministrative expenses increased by 44.3% to $46.6 million in 2005, from $32.3million in 2004. The primary cause of this increase was due to the acquisitionof St. Louis Music, Inc. Selling, general and administrative expenses for St.Louis Music were $11.8 million for period from acquisition through December 31,2005. The remaining increase was primarily due to higher marketing expenses andhigher commission expense and personnel expense as a result of higher revenues,partially offset by decreases in rent and telephone expenses, and lowerallowances for doubtful accounts due to an improved accounts receivable aging.We expect selling, general and administrative expenses to increase in 2006 whenwe will have a full year of expenses of St. Louis Music, Inc.

 

# **Research and Development**

 

Research and developmentexpenses increased by 31.7% to $10.3 million in 2005, from $7.8 million in2004, of which $1.9 million relates to the acquisition of St. Louis Music, Inc.We anticipate our research and development costs will be higher in 2006compared to 2005, due to investing in new products and improvements in existingproducts, in addition to a full year ofexpenses of St. Louis Music, Inc.

 

#### **OtherIncome (Expense)**

 

Net other expenseincreased $3.9 million, or 110.1% from $3.6 million in 2004 to $7.5 million in2005. The causes of this increase were an increase of interest expense of $2.7million, an increase in management fee of $0.7 million, an increase to otherexpense of $0.8 million, partially offset by an increase to interest income of$0.3 million.

 

16

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The increase to interestexpense was primarily caused by the increase in debt related to the acquisitionof St. Louis Music, Inc., along with a rise in variable interest rates during2005.

 

The increase inmanagement fees of $0.7 million was principally due to higher EBITDA.Management fees are paid to Sun Capital Partners Management, LLC quarterly andare calculated as the greater of $400,000 annually or 6% of EBITDA, not toexceed $1,000,000 per year. Of the $1.2 million of management fees expensedduring 2005, $1.0 million relates to the 2005 EBITDA calculation, $0.1 millionis a result of a correction to the management fee owed for the 2004 EBITDAcalculation, and the remaining amount is miscellaneous expenses incurred by SunCapital Partners Management, LLC, for which Sun Capital is entitled toreimbursement pursuant to our Management Services Agreement dated February 21,2003.

 

Other expense in 2005 wasprimarily due to the expensing of unamortized fees related to the prior debtfacility as a result of the refinancing of our debt facilities and foreignexchange transaction losses. Other expense in 2004 was primarily a loss onconversion of Sun Capital debt to equity, partially offset by income from thesale of fixed assets.

 

# **Income Tax Expense (Benefit)**

 

Income tax expense fromcontinuing operations was $47,000 and $58,000 from discontinued operations fora total expense of $105,000 in 2005 compared to $12,000 in 2004. The taxexpense primarily consists of alternative minimum tax because the regular taxis offset by the utilization of net operating carryforwards and by acorresponding decrease in the deferred tax asset valuation allowance. For 2004,the entire tax expense related to our non-U.S. subsidiaries. 

 

At December 31, 2005, wehad net operating loss carryforwards for federal income tax purposes ofapproximately $28.8 million, which if not utilized would begin to expire in2024. Approximately $27.5 million of these loss carryforwards relate to theUnited States and U.K. Approximately $1.3 million of these loss carryforwardsrelate to our discontinued operation in France, which we believe we will not beable to recapture. We have total net deferred tax assets, including our netoperating loss carryforwards, of approximately $16.0 million as of December 31,2005. We have recorded a valuation allowance for all of the net deferred taxassets as a result of uncertainties of future taxable income necessary for therealization of these net assets.

 

# **Gain on Discontinued Operations**

 

In March 2005, werecognized a $2.8 million gain from the discontinued operations of our formerItalian subsidiary, net of tax of $58,000. This gain was a result of anagreement with Mackie Italy to settle the net outstanding amounts owed by theCompany.

 

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

 

# **Net Sales**

 

Ournet sales from continuing operations in 2004 were $123.3 million compared to$130.8 million in 2003, a decrease of $7.5 million, or 5.7%. Sales werenegatively impacted during the majority of 2004 due to shortages on certainproducts. These product shortages were due to the migration of certain productmanufacturing from Woodinville, Washington to contract manufacturers, as wellas the closure of our Italian operations. We have one significant customer whorepresented approximately 12% of our total

 

17

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revenues in each of the years 2004 and 2003. U.S. sales representedapproximately 58% of our total sales in 2004, compared to approximately 63% in2003. 

 

#### **GrossProfit**

#### ** **

Ourgross profit increased in 2004 to $41.3 million, or 33.5% of net sales, from$29.3 million, or 22.4% of net sales in 2003. The improvement to our grossprofit in 2004 was due primarily to increased use of off-shore third partycontract manufacturers to produce our products as well as lower levels of writedowns of excess and obsolete inventory. Specifically, we took charges againstcost of sales of approximately $0.4 million in 2004 related to excess orobsolete products compared to $5.7 million in 2003. 

 

# **Selling, General and Administrative**

# ** **

Selling,general and administrative expenses were $32.3 million in 2004, a decrease of$3.4 million, or 9.6%, over 2003 expenses of $35.7 million. The primary causesof this reduction were the full year benefits of the cost reduction initiativescompleted in 2003 as well as lower third party commissions in 2004 caused bylower sales revenue.

 

# **Research and Development**

# ** **

Ourresearch and developments expenses were $7.8 million in 2004, an increase of$0.1 million, or 0.9%, compared to 2003 expenses of $7.7 million.

 

# **Restructuring Costs**

# ** **

During2003, we incurred $1.6 million in restructuring expenses, primarily representingemployee severance and related costs for displaced employees associated withour closing down the manufacturing facility in Woodinville, Washington, afterproduction of goods had terminated.

 

#### **OtherIncome (Expense)**

#### ** **

Net other expense during 2004 was $3.6 millioncompared to $0.9 million in 2003. Interest expense was $2.9 million in eachyear while other expense was $0.7 million in 2004 compared to other income of$1.8 million in 2003. The primary component of other expense in 2004 was a $0.4million loss on the conversion of Sun Mackie debt to equity while the primarycomponent of other income in 2003 was a $1.6 million gain related to favorablesettlements on liabilities of Mackie Designs Engineering Services BVBA (“MackieBelgium”), which was closed in 2003.

 

# **Income Tax Benefit (Expense)**

# ** **

We had income tax expenseof $12,000 in 2004 compared to an income tax benefit of $1.2 million in 2003.During 2003, we received $5.0 million in income tax refunds related to carryingback our taxable losses from 2002 to prior year’s returns where we had paidincome taxes. The $1.2 million income tax benefit in 2003 represents primarilythe difference between income tax refunds received during 2003 in excess of theestimated income tax receivable recorded at December 31, 2002.

 

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# **Discontinued Operations**

# ** **

Discontinued operations related to the operations ofour former subsidiary, Mackie Italy. We incurred a loss on discontinuedoperations of $6.4 million in 2003. During 2003, the loss consisted of a $1.7million loss on the disposition of Mackie Italy, losses from operations of $2.9million, $1.1 million net interest expense, $0.5 million of income tax expenseand $0.2 million of other non-operating losses.

 

# **Liquidity and Capital Resources**

# ** **

OnAugust 29, 2005, a new credit facility was completed providing a $69.5 millionsenior secured loan facility and a $14.8 million senior subordinated note. Thesenior secured loan facility consists of a $40.0 million revolving loan (ofwhich $9.6 million was outstanding as of December 31, 2005), a $15.0 millionTerm Loan A, and a $14.5 million Term Loan B. In connection with the seniorsubordinated note, the Company issued 51,547 shares of common stock to thesubordinated lender at a per share price of $14.55.

 

The$29.5 million term loans under the Credit Agreement have quarterly principalpayments.  The term loans bear interest at the Bloomberg's prime rate orLIBOR, both plus a specified margin.  This rate for Term Loan A was 7.88%and Term Loan B was 8.38% at December 31, 2005.  Interest is due monthlyon each term loan. The final Term Loan A principal payment is due August 29,2010. The final Term Loan B principal payment is due August 29, 2011. Under therevolving line of credit, the Company can borrow up to $40.0 million, subjectto certain restrictions, including available borrowing capacity. Interest isdue monthly or at the end of a LIBOR period (but in such case no greater than 3months) and is based on Bloomberg's prime rate or LIBOR, both plus a specifiedmargin.  The term loans and the line of credit are both secured bysubstantially all of the assets of the Company and its subsidiaries, and areboth senior to other long-term debt.  The $14.8 million in seniorsubordinated notes issued is subordinate to all amounts due under the Credit Agreementand to any refinancing thereof.  Interest accrues on the seniorsubordinated notes at a rate of 14% and is due quarterly. Of the 14% interestrate, up to two percent may be added to principal on each interest paymentdate. The principal under the Senior Subordinated Note Agreements is dueFebruary 29, 2012.

 

In February 2005, we made an offer to Mackie Italy tosettle any outstanding amounts owed by the Company to Mackie Italy for $4.7million. This proposal was accepted by the Italian court appointed trustee onbehalf of Mackie Italy in May 2005. Under the terms of the settlementagreement, we made additional payments of $2.5 million during 2005. We alsocommitted to pay $2.2 million during 2006. We recognized a gain on discontinuedoperations of $2.9 million in 2005 related to this settlement.

 

OnMarch 4, 2005, we acquired all of the shares of St. Louis Music, Inc., aMissouri-based manufacturer, distributor and importer of branded musicalinstruments and professional audio products for total cash considerationincluding transaction costs of $35.3 million and the assumption of certainliabilities of $7.2 million. The Company believes the acquisition will furtherdiversify the Company’s product offerings and to help acquire, retain andextend relationships with customers.

 

Asof December 31, 2005, we had cash and cash equivalents of $0.5 million andtotal debt and short-term borrowings of $56.0 million, including $2.2 millionpayable to our former Italian subsidiary.  At December 31, 2005 we hadavailability of $23.3 million on our revolving line of credit, net of a $3.2million standby letter of credit issued for the commitment to pay the formershareholders of St. Louis Music, Inc.

 

*NetCash Provided by (Used in) Operating Activities*

* *

Cash provided byoperations was $10.0 million in 2005 while cash used in operations was $1.2million in 2004. In 2003, $122 million was provided by operations. Net incomefor 2005 was $3.8

 

19

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million, that included $4.5 million in depreciation and amortization,$1.1 million in amortization of deferred financing fees and a $2.9 million gainon discontinued operations. In 2005, a decrease of our receivables andinventory levels provided cash of  $8.0million, while a decrease of our accounts payable and accrued expenses used$5.4 million of cash.

 

In 2006, we anticipateincreasing our inventory levels to meet increased demand. We expect increasesin revenues to increase our receivables. Additionally, accounts payable is expectedto increase in 2006 due primarily to the forecasted increase in inventory.

 

*NetCash Used in Investing Activities*

* *

Cash used in investingactivities was $37.0 million in 2005, an increase from $1.2 million used in2004 and $1.8 million used in 2003. $35.3 million of this investing activitywas the acquisition of St. Louis Music, Inc. The remaining increase is due tocapital expenditures for equipment primarily used in manufacturing.

 

As part of our thirdparty manufacturing agreements, most of our contract manufacturers require thatwe invest in tooling equipment prior to the start of manufacture. Accordingly,in 2006 we anticipate increasing spending on new tooling devices required tobuild our products and other equipment used in the manufacturing process.

 

*NetCash Provided by (Used in) Financing Activities*

* *

Our cash provided byfinancing activities was $27.0 million in 2005 and $2.1 million in 2004. Cashused in financing activities was $12.9 million in 2003. Financing activities in2005 related primarily to a new credit facility of $69.5 million consisting ofa revolving loan facility under which $9.6 million was outstanding at December31, 2005, a Term Loan A of $15.0 million, a Term Loan B of $14.5 million, andsubordinated debt of $14.8 million. Along with this refinancing, we paid offour existing note payable of $11.4 million, a term loan of $0.6 million, acredit facility of $11.8 million, and incurred $3.8 million in deferredfinancing costs. In 2004, financing activities related primarily to proceeds onour existing line of credit, as well as payments on our long-term debt.

 

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

* *

Under the terms of theline of credit and subordinated loan agreements, we are required to maintaincertain financial ratios, such as measuring our EBITDA to our total debt andsenior debt, and maintaining a certain fixed charge coverage ratio. Theagreement also provides, among other matters, restrictions on additionalfinancing, dividends, mergers, acquisitions, and an annual capital expenditurelimit.

 

Our continued liquidityis dependent upon the following key factors:

 

*Abilityto stay in compliance with debt covenants*

 

Our new senior securedand senior subordinated loan agreements require us to meet certain financialcovenants such as capital expenditures limits and measuring EBITDA to seniorand total debt, as well as a fixed charge coverage ratio. The first measurementdate for these covenants was December 31, 2005, and as of that date we had metall of our covenant requirements. We believe we will continue to meet theserequirements in each quarter of 2006.

 

20

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*Commitments*

 

We had the followingmaterial contractual commitments related to operating leases for equipmentfacilities at December 31, 2005. In addition, we had material obligationsrelated to short-term and long-term debt arrangements, excluding our accountspayable, accrued liabilities and taxes payable of $27.3 million at December 31,2005:

 
| ** **                                                                                  | ** ** | **Payments due by period (dollars in thousands)** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **Total**                                         | ** ** | **Less  than 1  year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **5-7 years** | ** ** |
| Operating Leases                                                                            |       | $                                                 | 9,701      |   | $ | 2,359 |   | $ | 3,901 |   | $ | 2,486 |   | $ | 955 |   |
| Line of Credit                                                                              |       | 9,595                                             |       | 9,595 |   |   |   |   |   |   |   |
| Payable to former  Italian subsidiary                                                       |       | 2,200                                             |       | 2,200 |   |   |   |   |   |   |   |
| Future  commitment to pay former shareholders of St. Louis Music, Inc., including  interest |       | 3,188                                             |       |   |   | 3,188 |   |   |   |   |   |
| Short-term and  long-term debt                                                              |       | 44,250                                            |       | 3,306 |   | 5,540 |   | 10,323 |   | 25,081 |   |
| Total                                                                                       |       | $                                                 | 68,934     |   | $ | 17,460 |   | $ | 12,629 |   | $ | 12,809 |   | $ | 26,036 |   |
|                                                                                             |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Withthe refinancing of our existing debt and cash flows from existing operations,we believe we will have adequate resources to meet our obligations as they comedue through December 31, 2006.

 

*Recent Accounting Pronouncements*

* *

During the fourth quarter of2004, the Financial Accounting Standards Board (FASB) issued SFAS 123R, “ShareBased Payment: An Amendment of SFAS Nos. 123 and 95.” The new standard requiresthe measurement of all share-based payments to employees, including grants ofemployee stock options, using a fair-value-based method and the recording ofsuch expense in an entity’s statement of income. Our options are typicallygranted with vesting periods of 4-5 years, and we intend to amortize compensationcost over this vesting period using the straight-line method. We will adoptSFAS 123R, effective January 1, 2006, using the Modified ProspectiveApplication Method whereby previously awarded but unvested equity awards areaccounted for in accordance with SFAS 123R and prospective amounts arerecognized in the income statement instead of simply being disclosed. Onceadopted, we expect SFAS 123R will impact our financial results by significantlyreducing our net income. We expect the implementation of SFAS123R will have asignificant impact on our future results of operations. For the year endedDecember 31, 2006 we expect our stock option expense to be between $0.3 millionand $0.6 million.

 

In November 2004, theFASB issued SFAS No. 151, “Inventory Costs—An Amendment of AccountingResearch Bulletin (ARB) No. 43, Chapter 4”. SFAS 151 clarifies thatabnormal amounts of idle facility expense, freight, handling costs and spoilageshould be expensed as incurred and not included in overhead. Further, SFAS 151requires that allocation of fixed and production facilities overheads toconversion costs should be based on normal capacity of the productionfacilities. The provisions in this statement are effective for inventory costsincurred during fiscal years beginning after June 15, 2005. We do notbelieve that the adoption of SFAS 151 will have a material effect on ourfinancial position, results of operations or cash flows. 

 

21

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In March 2005, the FASBissued Interpretation (“FIN”) 47, “Accounting for Conditional Asset RetirementObligations”. This statement, effective for the period ending December 31,2005,  provides guidance to ensureconsistency in recording legal obligations associated with long-lived tangibleasset retirements. FIN 47 did not have a material effect on our financialposition, results of operations or cash flows. 

 

In June 2005, theEmerging Issues Task Force (“EITF”) reached a consensus on EITF IssueNo. 05-6, “Determining the Amortization Period for Leasehold ImprovementsPurchased after Lease Inception or Acquired in a Business Combination” (“EITF05-6”). EITF 05-6 requires that leasehold improvements that are placed inservice significantly after and not contemplated at or near the beginning ofthe lease term be amortized over the shorter of the useful life of the assetsor a term that includes required lease periods and renewals that are deemed tobe reasonably assured at the date the leasehold improvements are purchased.EITF 05-6 was adopted in the fourth quarter of 2005. EITF 05-6 did not have asignificant impact on our financial position, results of operations or cashflows. 

 

** 7A. Qualitative andQuantitative Disclosures About Market Risk**

** **

We are exposed to variousmarket risks, including fluctuations in foreign currency rates and interestrates. We may enter into various derivative transactions to manage certain ofthese exposures; however we did not have any derivative financial instrumentsas of December 31, 2005.

 

At December 31, 2005, wehad variable rate lines of credit with outstanding balances of $9.6 million. In addition, our $29.5 million term loansalso had variable interest rates. As such, changes in U.S. interest ratesaffect interest paid on debt and we are exposed to interest rate risk. For theyear ended December 31, 2005, an increase in the average interest rate of 10%,i.e. from 8.08% to 8.89%, would have resulted in an approximately $346,000decrease in net income before income taxes. The fair value of such debt approximatesthe carrying amount on the consolidated balance sheet at December 31, 2005.

 

Asubstantial majority of our revenues are denominated in U.S. Dollars, andduring the fiscal year ended December 31, 2005 approximately 13% of ourrevenues were denominated in foreign currencies. We ordinarily do not engage inhedging, rate swaps, or other derivatives as a means to minimize our foreigncurrency risk and, instead, mitigate that exposure by limiting the portion ofour sales that are denominated in other than U.S. Dollars. Assuming the samelevel of foreign currency denominated sales as in 2005, a 10% decline in theaverage exchange rates for all these currencies would have caused a decline ofapproximately $2.4 million, or 1%, of our revenues.

 

**Item 8. Consolidated FinancialStatements and Supplementary Data**

** **

The followingconsolidated financial statements and supplementary data are included beginningon page 23 of this report. 

 

22

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**Reportof Independent Registered Public Accounting Firm**

** **

The Board of Directors and ShareholdersLOUD Technologies Inc.:

 

We have audited theaccompanying consolidated balance sheets of LOUD Technologies Inc. andsubsidiaries as of December 31, 2005 and 2004, and the related consolidatedstatements of operations,  shareholders’equity and comprehensive income and cash flows for each of the years in thethree-year period ended December 31, 2005. These consolidated financialstatements are the responsibility of LOUD Technologies Inc.’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the consolidated financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor 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, 2005 and 2004, and the results of theiroperations and their cash flows for each of the years in the three-year periodended December 31, 2005, in conformity with U.S. generally acceptedaccounting principles.

 
| /s/ KPMG LLP        |   |
|---------------------|--------|
|                |   |
|                |   |
| Seattle, Washington |   |
| March 27, 2006      |   |
|                     |        |  |

 

23

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**LOUDTECHNOLOGIES INC.**

**ANDSUBSIDIARIES**

**ConsolidatedBalance Sheets**

**December31, 2005 and 2004**

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

 
| ** **                                                                                                                                                   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Assets**                                                                                                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                              |       |       |       |       |       |
| Cash and cash  equivalents                                                                                                                                   |       | $          | 468        |       | $          | 450 |   |
| Accounts  receivable, net of allowances of $2,224 and $1,671 respectively                                                                                    |       | 28,224     |       | 16,800     |       |
| Inventories                                                                                                                                                  |       | 39,290     |       | 27,959     |       |
| Prepaid expenses  and other current assets                                                                                                                   |       | 1,859      |       | 2,385      |       |
| Total current  assets                                                                                                                                        |       | 69,841     |       | 47,594     |       |
| Property, plant and equipment, net                                                                                                                           |       | 7,863      |       | 7,381      |       |
| Goodwill                                                                                                                                                     |       | 2,248      |       | —     |       |
| Other intangible assets, net                                                                                                                                 |       | 12,198     |       | 5,128      |       |
| Deferred financing costs, net                                                                                                                                |       | 3,378      |       | 632        |       |
| Other assets                                                                                                                                                 |       | 17         |       | 60         |       |
| Total assets                                                                                                                                                 |       | $          | 95,545     |       | $          | 60,795 |   |
|                                                                                                                                                         |       |       |       |       |       |
| **Liabilities  and Shareholders’ Equity**                                                                                                               |       |       |       |       |       |
|                                                                                                                                                         |       |       |       |       |       |
| Current liabilities:                                                                                                                                         |       |       |       |       |       |
| Short-term  borrowings                                                                                                                                       |       | $          | 9,595      |       | $          | 11,826 |   |
| Accounts payable                                                                                                                                             |       | 16,133     |       | 17,679     |       |
| Accrued  liabilities                                                                                                                                         |       | 10,009     |       | 6,972      |       |
| Taxes payable                                                                                                                                                |       | 1,293      |       | 1,466      |       |
| Current portion  of long-term debt                                                                                                                           |       | 3,306      |       | 300        |       |
| Current portion  of payable to former Italian subsidiary                                                                                                     |       | 2,200      |       | 7,587      |       |
| Total current  liabilities                                                                                                                                   |       | 42,536     |       | 45,830     |       |
|                                                                                                                                                         |       |       |       |       |       |
| Long-term debt, excluding current portion                                                                                                                    |       | 40,944     |       | 11,612     |       |
| Deferred tax liabilities                                                                                                                                     |       | 40         |       | —     |       |
| Future commitment to pay                                                                                                                                     |       | 2,938      |       | —     |       |
| Other liabilities                                                                                                                                            |       | —     |       | 33         |       |
| Total  liabilities                                                                                                                                           |       | 86,458     |       | 57,475     |       |
|                                                                                                                                                         |       |       |       |       |       |
| Commitments and contingencies (Note 15)                                                                                                                      |       | —     |       | —     |       |
| 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 4,566,202 and  4,427,638 shares at December 31, 2005 and 2004,respectively |       | 40,788     |       | 38,778     |       |
| Accumulated deficit                                                                                                                                          |       | (31,701    | )          | (35,458    | )          |
| Total  shareholders’ equity                                                                                                                             |       | 9,087      |       | 3,320      |       |
| Total  liabilities and shareholders’ equity                                                                                                             |       | $          | 95,545     |       | $          | 60,795 |   |
|                                                                                                                                                              |            |            |            |            |            |  |  |  |  |  |  |

 

See accompanyingnotes to consolidated financial statements.

 

24

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**LOUDTECHNOLOGIES INC.**

**ANDSUBSIDIARIES**

**ConsolidatedStatements of Operations**

**Yearsended December 31, 2005, 2004, and 2003**

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

 
| ** **                                                                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                                                                                             |       | $        | 204,328    |     | $          | 123,276  |       | $ | 130,766 |   |
| Cost of sales                                                                                         |       | 139,004  |       | 81,927   |       | 101,456  |       |
| Gross profit                                                                                          |       | 65,324   |       | 41,349   |       | 29,310   |       |
| Operating expenses:                                                                                   |       |     |       |     |       |     |       |
| Selling,  general, and administrative                                                                 |       | 46,561   |       | 32,259   |       | 35,678   |       |
| Research and  development                                                                             |       | 10,255   |       | 7,784    |       | 7,711    |       |
| Restructuring  costs                                                                                  |       | —   |       | —   |       | 1,585    |       |
| Total operating  expenses                                                                             |       | 56,816   |       | 40,043   |       | 44,974   |       |
| Operating income  (loss)                                                                              |       | 8,508    |       | 1,306    |       | (15,664  | )          |
| Other income (expense):                                                                               |       |     |       |     |       |     |       |
| Interest income                                                                                       |       | 322      |       | 13       |       | 141      |       |
| Interest expense                                                                                      |       | (5,635   | )          | (2,947   | )          | (2,851   | )          |
| Management fee                                                                                        |       | (1,161   | )          | (400     | )          | (400     | )          |
| Other                                                                                                 |       | (1,057   | )          | (251     | )          | 2,201    |       |
| Total other  income (expense)                                                                         |       | (7,531   | )          | (3,585   | )          | (909     | )          |
| Income (loss)  before income taxes and discontinued operations                                        |       | 977      |       | (2,279   | )          | (16,573  | )          |
| Income tax expense (benefit)                                                                          |       | 47       |       | 12       |       | (1,161   | )          |
| Income (loss)  from continuing operations                                                             |       | 930      |       | (2,291   | )          | (15,412  | )          |
|                                                                                                  |       |     |       |     |       |     |       |
| Gain (loss) on  discontinued operations, net of income tax expense of $58, $0 and $539,  respectively |       | 2,827    |       | —   |       | (6,383   | )          |
| Net income  (loss)                                                                                    |       | $        | 3,757      |     | $          | (2,291   | )          | $ | (21,795 | ) |
|                                                                                                  |       |     |       |     |       |     |       |
| Per share data                                                                                        |       |     |       |     |       |     |       |
| Basic net income (loss) per share:                                                                    |       |     |       |     |       |     |       |
| Net income (loss)  from continuing operations                                                         |       | $        | 0.20       |     | $          | (0.52    | )          | $ | (3.94 | ) |
| Net income  (loss) from discontinued operations                                                       |       | 0.59     |       | —   |       | (1.63    | )          |
| Basic net income  (loss) per share                                                                    |       | $        | 0.79       |     | $          | (0.52    | )          | $ | (5.57 | ) |
| Diluted net income (loss) per share:                                                                  |       |     |       |     |       |     |       |
| Net income  (loss) from continuing operations                                                         |       | $        | 0.19       |     | $          | (0.52    | )          | $ | (3.94 | ) |
| Net income  (loss) from discontinued operations                                                       |       | 0.57     |       | —   |       | (1.63    | )          |
| Diluted net  income (loss) per share                                                                  |       | $        | 0.76       |     | $          | (0.52    | )          | $ | (5.57 | ) |
|                                                                                                  |       |     |       |     |       |     |       |
| Shares outstanding                                                                                    |       |     |       |     |       |     |       |
| Shares used in computing basic net income (loss) per  share                                           |       | 4,758    |       | 4,383    |       | 3,911    |       |
| Shares used in computing diluted net income (loss)  per share                                         |       | 4,957    |       | 4,383    |       | 3,911    |       |
|                                                                                                       |            |          |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

25

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**LOUDTECHNOLOGIES INC.**

**ANDSUBSIDIARIES**

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

**Yearsended December 31, 2005, 2004, and 2003**

**(Inthousands)**

 
| ** **                                                          | ** ** | ** **       | ** ** | ** **      | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|------------------|------------|-----------------|------------|-------------------|------------|-------------------|------------|------------|------------|
| ** **                                                          | ** ** | ** **       | ** ** | ** **      | ** ** | ** **        | ** ** | **other**         | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **Common stock** | ** ** | **Accumulated** | ** ** | **comprehensive** | ** ** | ** **        | ** ** |
| ** **                                                          | ** ** | **Shares**       | ** ** | **Amount**      | ** ** | **Deficit**       | ** ** | **income (loss)** | ** ** | **Total**  | ** ** |
| Balance at December 31, 2002                                        |       | 2,511            |       | $               | 29,345     |              | $          | (11,372           | )          | $          | (737       | ) | $ | 17,236 |   |
| Shares issued in  private transaction, net                          |       | 1,387            |       | 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                                          |       | 23               |       | 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                                        |       | 3,921            |       | 33,999          |       | (33,167           | )          | —            |       | 832        |       |
| Conversion of  debt to equity                                       |       | 496              |       | 4,837           |       | —            |       | —            |       | 4,837      |       |
| Exercise of  stock options                                          |       | 10               |       | 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                                        |       | 4,427            |       | 38,778          |       | (35,458           | )          | —            |       | 3,320      |       |
| Shares issued-  acquisition of St. Louis Music, Inc.                |       | 79               |       | 1,190           |       | —            |       | —            |       | 1,190      |       |
| Exercise of  stock options                                          |       | 8                |       | 11              |       | —            |       | —            |       | 11         |       |
| Issuance in  connection with debt refinance                         |       | 52               |       | 750             |       | —            |       | —            |       | 750        |       |
| Amortization of  deferred stock compensation                        |       | —           |       | 59              |       | —            |       | —            |       | 59         |       |
| Comprehensive  income:                                              |       |             |       |            |       |              |       |              |       |       |       |
| Net income                                                          |       | —           |       | —          |       | 3,757             |       | —            |       | 3,757      |       |
| Total  comprehensive income                                         |       |             |       |            |       |              |       |              |       | 3,757      |       |
| Balance at December 31, 2005                                        |       | 4,566            |       | $               | 40,788     |              | $          | (31,701           | )          | $          | —     |   | $ | 9,087 |   |
|                                                                     |            |                  |            |                 |            |                   |            |                   |            |            |            |  |  |  |  |  |  |  |  |

 

See accompanyingnotes to consolidated financial statements.

 

26

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**LOUDTECHNOLOGIES INC.**

**ANDSUBSIDIARIES**

**ConsolidatedStatements of Cash Flows**

**Yearsended December 31, 2005, 2004, and 2003**

**(Inthousands)**

 
| ** **                                                                                               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Operating activities:                                                                                    |       |     |       |     |       |     |       |
| Net income  (loss)                                                                                       |       | $        | 3,757      |     | $          | (2,291   | )          | $ | (21,795 | ) |
| Adjustments to reconcile  net income (loss) to net cash provided by (used in) operating activities:      |       |     |       |     |       |     |       |
| Gain on disposal  of business                                                                            |       | —   |       | —   |       | (1,577   | )          |
| Depreciation and  amortization                                                                           |       | 4,513    |       | 3,307    |       | 6,982    |       |
| Amortization of  deferred financing costs                                                                |       | 1,064    |       | 506      |       | 379      |       |
| (Gain) loss on  asset dispositions                                                                       |       | —   |       | (232     | )          | 113      |       |
| (Gain) loss on  discontinued operations                                                                  |       | (2,885   | )          | —   |       | 1,694    |       |
| Deferred stock  compensation                                                                             |       | 59       |       | 56       |       | 149      |       |
| Loss on  conversion of debt to equity                                                                    |       |     |       | 400      |       | —   |       |
| Non-cash  interest expense                                                                               |       | 57       |       | 88       |       | 113      |       |
| Changes in operating  assets and liabilities, net of acquisition and disposition:                        |       |     |       |     |       |     |       |
| Accounts  receivable                                                                                     |       | 664      |       | (3,761   | )          | 8,992    |       |
| Inventories                                                                                              |       | 7,365    |       | (9,029   | )          | 18,746   |       |
| Prepaid expenses  and other current assets                                                               |       | 813      |       | (713     | )          | (1,634   | )          |
| Other assets                                                                                             |       | 60       |       | 465      |       | 76       |       |
| Accounts payable  and accrued expenses                                                                   |       | (5,402   | )          | 9,836    |       | (4,166   | )          |
| Taxes payable                                                                                            |       | (173     | )          | 178      |       | 4,090    |       |
| Other  liabilities                                                                                       |       | 139      |       | (39      | )          | —   |       |
| Net cash  provided by (used in) operating activities                                                     |       | 10,031   |       | (1,229   | )          | 12,162   |       |
| Investing activities:                                                                                    |       |     |       |     |       |     |       |
| Proceeds from  sales of property, plant and equipment                                                    |       | —   |       | 830      |       | 221      |       |
| Purchases of  property, plant and equipment                                                              |       | (1,726   | )          | (2,053   | )          | (1,982   | )          |
| Acquisition of  St. Louis Music, Inc., including transaction fees paid                                   |       | (35,288  | )          | —   |       | —   |       |
| Net cash used in  investing activities                                                                   |       | (37,014  | )          | (1,223   | )          | (1,761   | )          |
| Financing activities:                                                                                    |       |     |       |     |       |     |       |
| Proceeds from  long-term debt and warrants                                                               |       | —   |       | —   |       | 17,500   |       |
| Payments on  long-term debt                                                                              |       | (11,969  | )          | (1,698   | )          | (16,791  | )          |
| Issuance of  long-term debt                                                                              |       | 44,250   |       | —   |       | —   |       |
| Net proceeds  (payments) on line of credit and short term borrowings                                     |       | 9,595    |       | 3,958    |       | (17,254  | )          |
| Net payment of  existing credit facility                                                                 |       | (11,826  | )          | —   |       | —   |       |
| Payments on debt  conversion costs                                                                       |       | —   |       | (115     | )          | —   |       |
| Financing costs  associated with debt issuance                                                           |       | (3,810   | )          | —   |       | —   |       |
| Net proceeds  from stock sales and exercise of stock options                                             |       | 761      |       | —   |       | 3,620    |       |
| Cash provided by  (used in) financing activities                                                         |       | 27,001   |       | 2,145    |       | (12,925  | )          |
| Effect of exchange rate changes on cash                                                                  |       | —   |       | —   |       | 219      |       |
| Increase  (decrease) in cash and cash equivalents                                                        |       | 18       |       | (307     | )          | (2,305   | )          |
| Cash and cash equivalents at beginning of year                                                           |       | 450      |       | 757      |       | 3,062    |       |
| Cash and cash equivalents at end of year                                                                 |       | $        | 468        |     | $          | 450      |       | $ | 757 |   |
| **Supplemental  schedule of noncash financing and investing activities**                                 |       |     |       |     |       |     |       |
| Cash paid for  interest                                                                                  |       | $        | 4,732      |     | $          | 1,655    |       | $ | 3,060 |   |
| Cash paid  (refunded) for income taxes                                                                   |       | $        | 169        |     | $          | (329     | )          | $ | (4,628 | ) |
| Conversion of  note payable and accrued interest to equity                                               |       | $        | —     |     | $          | 4,437    |       | $ | — |   |
| Accrued interest  converted to note payable                                                              |       | $        | —     |     | $          | 960      |       | $ | — |   |
| Issuance of  shares related to the acquisition of St. Louis Music                                        |       | $        | 1,190      |     | $          | —   |       | $ | — |   |
| **Other supplemental disclosures**                                                                       |       |     |       |     |       |     |       |
| Payoff on  existing line of credit relating to St. Louis Music, Inc. by borrowings under  line of credit |       | $        | 39,313     |     | $          | —   |       | $ | — |   |
|                                                                                                          |            |          |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

See accompanying notes toconsolidated financial statements.

 

27

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**LOUD TECHNOLOGIES INC.**

** **

**(1)           Descriptionof Business**

** **

We develop, manufacture, and sell high-quality,affordable digital and analog audio mixers, speakers, guitar and bassamplifiers, branded musical instruments and related accessories, and otherprofessional audio equipment on a worldwide basis. Our products are used byprofessional and amateur musicians; school music programs; sound installationcontractors and broadcast professionals in sound recordings, live presentationssystems and installed sound systems. We distribute our products primarilythrough retail dealers, mail order outlets and installed sound contractors. Wehave our primary operations in the United States with smaller operations in theUnited Kingdom, Canada, China and Japan.

 

**(2)           Summary of Significant AccountingPolicies**

** **

***a)***                                     Basis of Presentation

*** ***

The financial statements consolidate the accounts ofLOUD Technologies Inc. and our wholly owned subsidiaries. The companies arecollectively hereinafter referred to as “the Company,” “LOUD”, “we,” “our” and“us.” All significant intercompany accounts and transactions have beeneliminated. Financial information includes St. Louis Music, Inc. for the periodMarch 5, 2005 through December 31, 2005. All common stock shares informationand share prices have been adjusted for the 1-for-5 reverse stock split thatoccurred on November 17, 2005.

 

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

*** ***

The preparation of financial statements in conformitywith generally accepted accounting principles requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Significant items subject to such estimates and assumptionsinclude the allocation of purchase cost to assets acquired and liabilitiesassumed, the carrying amount of property and equipment and intangibles;valuation allowances for receivables, inventories, and deferred income taxassets and liabilities. Actual results may differ from those estimates.

 

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

*** ***

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 purchases through finance companies. Wehave manufacturer’s repurchase agreements with the finance companies and deferthe revenue and related cost of goods sold of these sales at the time of thesale. We then recognize the revenue and related cost of goods sold from thesesales when the repurchase obligation no longer exists. Sales with contingencies,such as rights of return, rotation rights, conditional acceptance provisionsand price protection, are deferred until the contingencies have been satisfiedor the contingent period has lapsed. We generally warrant our products againstdefects in materials and workmanship for periods of between one and six years,with the exception of Alvarez Yairi guitars, which have a limited

 

28

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lifetime warranty. 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. 

 

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

*** ***

The cost of advertising included in selling, generaland administrative expense is expensed as incurred. For 2005, 2004, and 2003these expenses totaled $7.1 million, $4.2 million, and $2.4 million,respectively.

 

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

*** ***

Expenditures relating to the development of newproducts and processes, including significant improvements and refinements toexisting products, are expensed as incurred. Under our current practice ofdeveloping new products and enhancements, the technological feasibility of theunderlying products is not established until the completion of a working modelat which time all product development is substantially complete. Accordingly nosuch costs have been capitalized because the impact would not be material.

 

***f)******                                       ******ForeignCurrency***

*** ***

The financial statements of our non-U.S. subsidiaries arein United States Dollars in accordance with Statement of Financial AccountingStandards No. 52, *Foreign CurrencyTranslation*. In 2003, due to the restructuring of our operations inEurope subsequent to the sale of Mackie Italy, we determined the functionalcurrency of our remaining non-U.S. subsidiaries to be the United States Dollar.Prior to the sale of our Italian operations in December 2003, we had entitieswhose functional currency was the local currency of the country in which theyoperate. As a result, all monetary assets and liabilities in the balance sheetsof these subsidiaries are stated in the United States Dollar. Foreign currencytransaction gains and losses are included in other income (expense). Realizedand unrealized gains and losses on foreign currency transactions are includedin other income (expense). For the year ended December 31, 2005 the amountrelated to transaction losses was $466,000, whereas for the years 2004 and2003, the amount related to transaction gains was $8,000 and $615,000,respectively.

 

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

*** ***

We consider all demand deposits and all highly liquiddebt instruments with maturity at purchase of three months or less to be cashequivalents. 

 

29

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

*** ***

Accounts receivable arerecorded at the invoice amount and do not bear interest. The allowance fordoubtful accounts is our best estimate of the amount of probable credit lossesin our existing accounts receivable. We determine the allowance for doubtfulaccounts based upon our historical write-off experience, the current aging ofaccounts receivable, and customer specific credit risk factors. Accountsreceivable balances are written off when we determine that it is unlikely wewill receive future remittances. We do not have any off-balance-sheet creditexposures related to our customers.

 

Allowances deducted fromaccounts receivable for the years ended December 31, 2005, 2004, and 2003are as follows (in thousands):

 
| ** ** | ** ** | **Balance at  beginning of  year** | ** ** | **Additions** | ** ** | **Increase  from  Acquisition** | ** ** | **Deductions*** | ** ** | **Balance at  end of  year** | ** ** |
|------------|------------|------------------------------------|------------|---------------|------------|---------------------------------|------------|-----------------|------------|------------------------------|------------|
|       |       |                               |       |          |       |                            |       |            |       |                         |       |
| 2005       |       | $                                  | 1,671      |          | $          | 401                             |       | $               | 775        |                         | $          | (623 | ) | $ | 2,224 |   |
|       |       |                               |       |          |       |                            |       |            |       |                         |       |
| 2004       |       | $                                  | 2,163      |          | $          | 609                             |       | $               | —     |                         | $          | (1,101 | ) | $ | 1,671 |   |
|       |       |                               |       |          |       |                            |       |            |       |                         |       |
| 2003       |       | $                                  | 2,684      |          | $          | 1,359                           |       | $               | —     |                         | $          | (1,880 | ) | $ | 2,163 |   |
|            |            |                                    |            |               |            |                                 |            |                 |            |                              |            |  |  |  |  |  |  |  |  |

 

----

*              Deductionsrepresent uncollectible accounts written off against the allowance, net ofrecoveries. For 2003, deductions include $1,159 related to amounts included  in beginning balance of discontinuedoperations sold in 2003.

 

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

*** ***

LOUD inventories are stated at the lower of standardcost, which approximates actual cost on a first-in, first-out method, or marketfor Mackie, EAW, SIA and TAPCO brands. For the Crate, Alvarez, Knilling, andAmpeg brands, the inventory is valued at the lower of average cost or market.Market value adjustments are recorded for excess and obsolete material,slow-moving product, service and demonstration products. We make judgmentsregarding the carrying value of our inventory based upon current marketconditions. In 2005, 2004 and 2003, we made adjustments, included in cost ofsales, 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, $0.4 million and $5.7 million in 2005, 2004and 2003, respectively. 

 

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

*** ***

Property,plant and equipment are stated at cost, (fair value as of the acquisition date inthe case of St. Louis Music, Inc. acquired property, plant and equipment), lessaccumulated depreciation and amortization. Depreciation and amortization arecomputed using the straight-line method over the estimated useful lives of theassets as follows: buildings, 20 years; machinery and equipment, 5 to7 years; and furniture and fixtures, 3 to 5 years. Leaseholdimprovements are amortized over the shorter of their useful lives or the termof the lease. Maintenance and repairs are expensed as incurred.

 

***k)******                                    ******DeferredFinancing Costs***

*** ***

Financingcosts associated with debt financing are capitalized and amortized over theterm of the debt. The amortization periods are five years for our revolvingloan and Term Loan A, six years for our Term Loan B and six and a half yearsfor our senior subordinated note. The amortization method for the revolvingloan is straight line, whereas the Term Loans and senior subordinated note areamortized using the effective interest rate method. As of December 31, 2005accumulated amortization was approximately $232,000.

 

30

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Expected futureamortization expense related to deferred financing costs is as follows (inthousands):

 
| **Year ending December 31:** | ** ** | ** ** | ** ** |
|------------------------------|------------|------------|------------|
| 2006                         |       | $          |  686  |   |
| 2007                         |       | 678        |       |
| 2008                         |       | 670        |       |
| 2009                         |       | 650        |       |
| 2010                         |       | 495        |       |
| 2011                         |       | 176        |       |
| 2012                         |       | 23         |       |
|                              |            |            |            |  |

 

***l)***                                        Goodwill and Other Intangible Assets

*** ***

Goodwill represents the excess of costs over fairvalue of assets of businesses acquired. We adopted SFAS No. 142, Goodwilland Other Intangible Assets, as of January 1, 2002. In accordance withSFAS No. 142, goodwill and intangible assets with indefinite lives are nolonger amortized, but instead tested for impairment at least annually, or whenevents indicate that impairment exists (see Note 3). Intangible assetsthat are determined to have definite lives will continue to be amortized on thestraight-line method over their estimated useful lives. Developed technologyand the trademark of EAW are amortized over 20 years. Trademarks, customerrelationships and developed technology due to the acquisition of St. LouisMusic are amortized over 20, 15, and 5 years respectively. 

 

***m)******                                 ******Impairmentof Long-Lived Assets***

*** ***

The recoverability of long-lived assets includingproperty, plant and equipment and intangible assets subject to amortization arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. Recoverability ofassets to be held and used is measured by a comparison of the carrying amountof an asset to estimated future undiscounted cash flows expected to begenerated by the asset. If such assets are considered to be impaired, theimpairment to be recognized is measured as the amount by which the carryingamount of the assets exceeds the fair value of the assets. Assets to bedisposed of are reported at the lower of the carrying amount or the fair valueless cost to sell. Factors which may trigger impairment include significantunderperformance relative to expected operating results, significant changes inour use of the assets or the strategy for our overall business, and significantnegative industry or economic trends.

 

***n)******                                    ******FairValue of Financial Instruments***

*** ***

The carrying amounts of cash, accounts receivable,short-term borrowings, accounts payable, accrued liabilities and long-term debtapproximates their fair value because they are of a short-term nature or haveinterest rates that approximate market rates.

 

***o)******                                    ******Stock-BasedCompensation***

*** ***

Stock-basedemployee compensation 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 SFAS Interpretation No. 44,*Accounting for Certain Transactions Involving StockCompensation, an Interpretation of APB Opinion No. 25*. Under thismethod, compensation expense is recorded only if the current market price ofthe underlying stock exceeds the exercise price or if options were issued tonon-employees.

 

We haveelected to apply the disclosure-only provisions of SFAS No. 123,*Accounting for Stock-Based Compensation,*as amended by SFAS No. 148,*Accountingfor Stock-Based Compensation – Transition and Disclosure*,*an amendment of SFAS No. 123.*

 

31

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SFASNo.123, as amended, permits companies to recognize, as expense over the vestingperiod, 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 currently permitted, we apply the existing accountingrules under APB No. 25 and provide pro forma net income (loss) and proforma income (loss) per share disclosures for stock-based awards made as if thefair value method defined in SFAS No. 123 have been applied.

 

Thefollowing table summarizes relevant information as to the reported amountsunder the Company’s intrinsic value method of accounting for stock awards, withpro forma information as if the fair value recognition provisions of SFAS No.123 have been applied:

 
| ** **                                                                               | ** ** | **2005**                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                               | ** ** | **(In thousands, except for per share data)** | ** ** |
| Net income (loss):                                                                       |       |                                          |       |     |       |     |       |
| As reported                                                                              |       | $                                             | 3,757      |     | $          | (2,291   | )          | $ | (21,795 | ) |
| Add stock-based  employee compensation expense included in reported net loss             |       | —                                        |       | —   |       | 101      |       |
| Less stock-based  employee compensation expense determined under fair value based method |       | (458                                          | )          | (840     | )          | (1,307   | )          |
| Pro forma                                                                                |       | $                                             | 3,299      |     | $          | (3,131   | )          | $ | (23,001 | ) |
| Basic net income (loss) per share:                                                       |       |                                          |       |     |       |     |       |
| As reported                                                                              |       | $                                             | 0.79       |     | $          | (0.52    | )          | $ | (5.57 | ) |
| Pro forma                                                                                |       | 0.69                                          |       | (0.71    | )          | (5.88    | )          |
| Diluted net income (loss) per share:                                                     |       |                                          |       |     |       |     |       |
| As reported                                                                              |       | $                                             | 0.76       |     | $          | (0.52    | )          | $ | (5.57 | ) |
| Pro forma                                                                                |       | 0.67                                          |       | (0.71    | )          | (5.88    | )          |
|                                                                                          |            |                                               |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

The fair value of eachoption granted was estimated on the date of grant using the Black-Scholesoption-pricing model, assuming no expected dividends and the following weightedaverage assumptions:

 
| ** **                               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |     |       |
| Weighted average risk-free interest rate |       | 4.0      | %          | 3.1      | %          | 3.5      | %          |
| Expected volatility                      |       | 85.0     | %          | 90.0     | %          | 95.0     | %          |
| Expected lives (in years)                |       | 5        |       | 5        |       | 7        |       |

 

For options granted with an exercise price equal tothe market price at the time of issuance, the weighted average fair value ofoptions granted during the years 2005, 2004 and 2003 was $14.85, $8.00, and$4.35, respectively. There were no options granted in 2005, 2004 and 2003 forwhich the exercise price was less than the market price.

 

32

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***p)******                                    ******Guarantees***

*** ***

In the ordinary course of business, we are not subjectto any significant obligations under guarantees that fall within the scope ofFIN No. 45 *Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others* except for standard indemnification andwarranty provisions and give rise only to the disclosure requirementsprescribed by FIN No. 45.

 

Indemnification and warranty provisions containedwithin our sales agreements are generally consistent with those prevalent inour industry. The duration of product warranties is generally one to six yearsfollowing delivery of products, with the exception of Alvarez Yairi guitars,which have a limited lifetime warranty.

 

The warranty liability issummarized as follows (in thousands):

 
| ** ** | ** ** | **Balance at  beginning  of period** | ** ** | **Charged to  cost of  sales** | ** ** | **Increase  from  Acquisition** | ** ** | **Applied  to  liability** | ** ** | **Balance at  end  of period** | ** ** |
|------------|------------|--------------------------------------|------------|--------------------------------|------------|---------------------------------|------------|----------------------------|------------|--------------------------------|------------|
|       |       |                                 |       |                           |       |                            |       |                       |       |                           |       |
| 2005       |       | $                                    | 978        |                           | $          | 2,456                           |       | $                          | 290        |                           | $          | (2,744 | ) | $ | 980 |   |
| 2004       |       | $                                    | 1,081      |                           | $          | 2,379                           |       | $                          | —     |                           | $          | (2,482 | ) | $ | 978 |   |
| 2003       |       | $                                    | 1,525      |                           | $          | 2,788                           |       | $                          | —     |                           | $          | (3,232 | ) | $ | 1,081 |   |

 

***q)******                                    ******IncomeTaxes***

*** ***

In accordance with SFAS 109, “Accounting for IncomeTaxes”, we recognize deferred tax assets and liabilities for the future taxconsequences attributed to temporary differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases and tax credits and operating loss carryforwards. Deferredtax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences andcarryforwards are expected to be recovered or settled. The effect on deferredtax assets and liabilities of a change in tax rates is recognized in income inthe period that includes the enactment date. The Company performs periodicevaluations of recorded tax assets and liabilities and maintains a valuationallowance 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. 

 

***r)******                                      ******Computationof Basic and Diluted Net Income (Loss) per Share***

*** ***

Net income (loss) per share has been calculated underSFAS No. 128, *Earnings per Share.*Basicnet income (loss) per share is computed using the weighted average number ofcommon stock outstanding for the year including warrants and options topurchase shares exercisable for little cash consideration. Diluted earnings pershare is computed on the basis of the weighted average number of common sharesoutstanding during the year increased by the weighted average number ofpotential common shares outstanding during the period, using the treasury stockmethod. During the years ended December 31, 2005, 2004 and 2003, potentialcommon shares related to stock options of 430,000, 731,000, and 800,000,respectively, wee excluded from the calculation of diluted net income (loss)per share, as their effect wa anti-dilutive in 2004 and 2003, whereas in 2005,they were excluded because they were out of the money.

 

***s)******                                      ******Concentrationof Credit and Supply Risk***

*** ***

We sell products on a worldwide basis and asignificant portion of our accounts receivable are due from customers outsideof the United States. Where we are exposed to material credit risk, wegenerally require letters of credit, advance payments, or carry foreign creditinsurance. No individual

 

33

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country outside of the United States accounted for morethan 10% of net sales in any of the periods presented. Sales to U.S. customersare generally on open credit terms. In the United States, we primarily sell ourproducts through third-party resellers and experience individually significantannual sales volumes with major resellers. In 2005, 2004 and 2003, we had salesto one customer of $32.4 million, $14.4 million and $15.6 million or 16%,12% and 12%, respectively, of consolidated net sales from continuingoperations.

 

Many of our products are currently being manufacturedexclusively by contract manufacturers on our behalf. During 2005, sales ofproducts manufactured by one manufacturer were $56.1 million, or approximately27% of consolidated net sales, while sales of products manufactured by anothermanufacturer were $21.9 million or approximately 11% of consolidated net sales.No other contract manufacturer manufactured more than 10% of our consolidatednet sales in 2005. 

 

***t)******                                       ******RecentAccounting Pronouncements***

*** ***

During the fourth quarter of 2004, the FinancialAccounting Standards Board (FASB) issued SFAS 123R, “Share Based Payment: AnAmendment of SFAS Nos. 123 and 95.” The new standard requires the measurementof all share-based payments to employees, including grants of employee stockoptions, using a fair-value-based method and the recording of such expense inan entity’s statement of income. Our options are typically granted with vestingperiods of 4-5 years, and we intend to amortize compensation cost over thisvesting period using the straight-line method. We will adopt SFAS 123R,effective January 1, 2006, using the Modified Prospective Application Methodwhereby previously awarded but unvested equity awards are accounted for inaccordance with SFAS 123R and prospective amounts are recognized in the incomestatement instead of simply being disclosed. Once adopted, we expect SFAS 123Rwill impact our financial results by significantly reducing our net income. Weexpect the implementation of SFAS123R will have a significant impact on ourfuture results of operations. For the year ended December 31, 2006 we expectour stock option expense to be between $0.3 million and $0.6 million.

 

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs—An Amendment of Accounting Research Bulletin (ARB)No. 43, Chapter 4”. SFAS 151 clarifies that abnormal amounts of idlefacility expense, freight, handling costs and spoilage should be expensed asincurred and not included in overhead. Further, SFAS 151 requires thatallocation of fixed and production facilities overheads to conversion costsshould be based on normal capacity of the production facilities. The provisionsin this statement are effective for inventory costs incurred during fiscalyears beginning after June 15, 2005. We do not believe that the adoption ofSFAS 151 will have a material effect on our financial position, results ofoperations or cash flows. 

 

In March 2005, the FASB issued Interpretation (“FIN”)47, “Accounting for Conditional Asset Retirement Obligations”. This statement,effective for the period ending December 31, 2005, provides guidance to ensureconsistency in recording legal obligations associated with long-lived tangibleasset retirements. FIN 47 did not have a material effect on our financialposition, results of operations or cash flows. 

 

In June 2005, the Emerging Issues Task Force(“EITF”) reached a consensus on EITF Issue No. 05-6, “Determining theAmortization Period for Leasehold Improvements Purchased after Lease Inceptionor Acquired in a Business Combination” (“EITF 05-6”). EITF 05-6 requires thatleasehold improvements that are placed in service significantly after and notcontemplated at or near the beginning of the lease term be amortized over theshorter of the useful life of the assets or a term that includes required leaseperiods and renewals that are deemed to be reasonably assured at the date theleasehold improvements are purchased. EITF 05-6 was adopted in the fourthquarter of 2005. EITF 05-6 did not have a significant impact on our financialposition, results of operations or cash flows. 

 

34

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***u)******                                    ******Reclassifications***

*** ***

Certain prior year amounts have been reclassified toconform with the current year presentation.

 

***v)******                                     ******ReverseStock Split***

*** ***

On November 17, 2005, the Company effected a 1-for-5reverse split of our outstanding common stock. Historical share numbers andprices throughout this Annual Report on Form 10-K are split-adjusted.

 

**(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 for underthe purchase method. The statement also specifies criteria for recognizing andreporting intangible assets apart from goodwill; however, assembled workforcemust be recognized and reported in goodwill. SFAS No. 142 requires the useof a nonamortization approach to account for purchased goodwill and intangibleshaving an indefinite life. Under a nonamortization approach, goodwill andcertain intangible assets are no longer amortized into results of operations,but instead are reviewed for impairment and written down and charged to resultsof operations only in the periods in which the recorded value of goodwill andcertain intangibles is more than fair value.

 

Weadopted SFAS No. 142 on January 1, 2002. SFAS No. 142 prescribesa two-phase process for impairment testing of goodwill and the timing oftransitional impairment steps. The first phase identifies indications ofimpairment; while the second phase (if necessary), measures the impairment. Asrequired by SFAS No. 142, we performed an impairment test on the goodwillacquired related to the acquisition of St. Louis Music, Inc. as of December 31,2005, and determined no impairment was necessary.

 

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

** **

InDecember 2003, we placed our indirect wholly owned Italian subsidiary, MackieDesigns (Italy) S.p.A. (“Mackie Italy”), into an Italian form ofcourt-supervised liquidation and sold all of the shares of Mackie Italy to athird party. Mackie Italy was a manufacturer of many of our speaker products,which were purchased by the Company for subsequent sale outside of Italy. Atthe time of sale, the Company owed Mackie Italy approximately $9.2 millionrelated to the purchase of goods in the normal course of business. During 2004,we made payments to Mackie Italy of approximately $1.6 million, lowering ourliability to $7.6 million at December 31, 2004. Additionally, Mackie Italy hada 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 an offer to Mackie Italy to settle any outstandingamounts owed by the Company to Mackie Italy for $4.7 million. This proposal wasaccepted by the Italian court appointed trustee on behalf of Mackie Italy inMay 2005. Under the terms of the settlement agreement, we made payments of $2.5million in 2005. Additionally, we committed to pay $2.2 million during 2006. Werecognized a gain on discontinued operations of $2.9 million in 2005 related tothis settlement.

 

The disposition of these operations is accounted foras a discontinued operation. At December 31, 2003, we do not show any assets orliabilities of this entity on our consolidated balance sheet. We havereclassified and condensed the results of discontinued operations on our consolidatedstatements of operations for all years presented. Cash flows from theseoperations are included in our consolidated statements of cash flows for allperiods presented. Summarized operating results of the discontinued operationsfor the year ended December 31, 2003, is as follows:

 

35

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| ** **                         | ** ** | **2003**           | ** ** |
|------------------------------------|------------|--------------------|------------|
| ** **                         | ** ** | **(in thousands)** | ** ** |
| Revenues                           |       | $                  | 29,121     | ** ** |
| Gross Profit                       |       | 5,058              |       |
| Operating income (loss)            |       | (3,707             | )          |
| Loss before income taxes           |       | (4,637             | )          |
| Income tax expense                 |       | (539               | )          |
| Loss from discontinued operations* |       | (6,383             | )          |
|                                    |            |                    |            |  |

 

----

***Includes loss on disposition of $1.7 million.**

** **

Interestwas allocated to discontinued operations based on actual debt held by MackieItaly. At December 10, 2003, the assets and liabilities associated with thisdisposition were as follows (in thousands):

 
| 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, management approved and implemented aplan to restructure operations. Major activities primarily involved thereduction 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.**

** **

**(6)           Inventories**

** **

Inventoriesconsist of the following:

 
| ** **      | ** ** | **December 31,**   | ** ** |
|-----------------|------------|--------------------|------------|
| ** **      | ** ** | **2005**           | ** ** | **2004** | ** ** |
|            |       | **(In thousands)** |       |
| Raw materials   |       | $                  | 5,531      |   | $ | 3,951 |   |
| Work in process |       | 976                |       | 657 |   |
| Finished goods  |       | 32,783             |       | 23,351 |   |
|            |       | $                  | 39,290     |   | $ | 27,959 |   |

 

36

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**(7)           Intangible Assets**

** **

Intangible assetswith finite lives consist of the following:

 
| ** **                    | ** ** | **December 31,**   | ** ** |
|-------------------------------|------------|--------------------|------------|
| ** **                    | ** ** | **2005**           | ** ** | **2004** | ** ** |
| ** **                    | ** ** | **(In thousands)** | ** ** |
| Developed technology          |       | $                  | 5,470      |   | $ | 5,200 |   |
| Customer relationships        |       | 3,080              |       | — |   |
| Trademark                     |       | 5,930              |       | 1,380 |   |
| Non-compete agreement         |       | 285                |       | 285 |   |
|                          |       | 14,765             |       | 6,865 |   |
| Less accumulated amortization |       | (2,567             | )          | (1,737 | ) |
|                          |       | $                  | 12,198     |   | $ | 5,128 |   |

 

Amortizationexpense for intangible assets was $830,000, $424,000 and $408,000 in 2005, 2004and 2003, respectively. 

 

Expected futureamortization expense related to identifiable intangible assets for the nextfive years is as follows (in thousands):

 
| Year ending  December 31: |   |   |   |
|---------------------------|--------|--------|--------|
| 2006                      |   | $      | 832    |   |
| 2007                      |   | 816    |   |
| 2008                      |   | 816    |   |
| 2009                      |   | 816    |   |
| 2010                      |   | 771    |   |
|                           |        |        |        |  |

 

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

** **

As of December 31,2005 and 2004, property, plant and equipment consisted of the following:

 
| ** **                                     | ** ** | **December 31,**   | ** ** |
|------------------------------------------------|------------|--------------------|------------|
| ** **                                     | ** ** | **2005**           | ** ** | **2004** | ** ** |
| ** **                                     | ** ** | **(In thousands)** | ** ** |
| Land and buildings                             |       | $                  | 851        |   | $ | — |   |
| Machinery, equipment and software              |       | 15,169             |       | 12,564 |   |
| Furniture and fixtures                         |       | 1,293              |       | 928 |   |
| Leasehold improvements                         |       | 1,739              |       | 1,518 |   |
|                                           |       | 19,052             |       | 15,010 |   |
| Less accumulated depreciation and amortization |       | (11,189            | )          | (7,629 | ) |
|                                           |       | $                  | 7,863      |   | $ | 7,381 |   |

 

37

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**(9)           Income Taxes**

** **

Components ofincome (loss) before income taxes are as follows (in thousands):

 
| ** **                        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |     |       |
| U.S.                              |       | $        | 5,618      |     | $          | (1,229   | )          | $ | (20,786 | ) |
| Foreign                           |       | (1,756   | )          | (1,050   | )          | (1,631   | )          |
|                              |       |     |       |     |       |     |       |
| Income (loss) before income taxes |       | $        | 3,862      |     | $          | (2,279   | )          | $ | (22,417 | ) |

 

The income taxexpense (benefit) is as follows (in thousands):

 
| ** **                          | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                |       |     |       |     |       |     |       |
| Current income taxes:               |       |     |       |     |       |     |       |
| U.S. federal                        |       | $        | —     |     | $          | —   |       | $ | (1,191 | ) |
| Foreign                             |       | 65       |       | 12       |       | 569      |       |
| Total current                       |       | 65       |       | 12       |       | (622     | )          |
| Deferred income taxes:              |       |     |       |     |       |     |       |
| U.S. federal                        |       | 40       |       | —   |       | —   |       |
| State and local                     |       | —   |       | —   |       | —   |       |
| Foreign                             |       | —   |       | —   |       | —   |       |
| Total deferred                      |       | 40       |       | —   |       | —   |       |
|                                |       |     |       |     |       |     |       |
| Total income tax  expense (benefit) |       | $        | 105        |     | $          | 12       |       | $ | (622 | ) |

 

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

 
| ** **                                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Total income tax  expense (benefit) from continuing operations |       | $        | 47         |     | $          | 12       |       | $ | (1,161 | ) |
|                                                           |       |     |       |     |       |     |       |
| Total income tax  expense from discontinued operations         |       | 58       |       | —   |       | 539      |       |
| Total income tax  expense (benefit)                            |       | $        | 105        |     | $          | 12       |       | $ | (622 | ) |

 

38

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The tax effects oftemporary differences and carryforwards that give rise to significantcomponents of deferred tax assets and liabilities are as follows:

 
| ** **                                   | ** ** | **December 31,**   | ** ** |
|----------------------------------------------|------------|--------------------|------------|
| ** **                                   | ** ** | **2005**           | ** ** | **2004** | ** ** |
| ** **                                   | ** ** | **(In thousands)** | ** ** |
| Deferred tax  assets:                        |       |               |       |   |   |
| Accrued expenses                             |       | $                  | 947        |   | $ | 768 |   |
| Bad debt allow  ance                         |       | 494                |       | 517 |   |
| Inventory  adjustments                       |       | 1,311              |       | 1,216 |   |
| Net operating  loss carryforwards            |       | 10,185             |       | 11,287 |   |
| Capital loss  carryforwards                  |       | 5,445              |       | 5,435 |   |
| Tax credit  carryforwards                    |       | 706                |       | 385 |   |
| Other items, net                             |       | —             |       | 9 |   |
|                                         |       | 19,088             |       | 19,617 |   |
| Less valuation  allowance                    |       | (15,962            | )          | (17,324 | ) |
| Total deferred  tax assets                   |       | 3,126              |       | 2,293 |   |
| Deferred tax  liabilities:                   |       |               |       |   |   |
| Property, plant,  and equipment              |       | 1,495              |       | 566 |   |
| Specifically  identifiable intangible assets |       | 1,671              |       | 1,727 |   |
| Total deferred  tax liabilities              |       | 3,166              |       | 2,293 |   |
| Net deferred tax  liabilities                |       | $                  | (40        | ) | $ | — |   |

 

Utilization of net operating loss carryforwards andtax credit carryforwards may be subject to certain limitations under Section382 of the Internal Revenue Code of 1986, as amended. Deferred tax assets offoreign jurisdictions comprised $1.7 million and $1.2 million atDecember 31, 2005 and 2004, respectively. Deferred tax liabilities offoreign jurisdictions were zero at December 31, 2005 and 2004.

 

Reconciliation from theUnited States statutory income tax rate of 34% to the effective income tax rateis as follows:

 
| ** **                                              | ** ** | **2005**           | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                              | ** ** | **(In thousands)** | ** ** |
| Tax at the statutory rate                               |       | $                  | 1,313      |     | $          | (775     | )          | $ | (7,621 | ) |
| US tax loss on discontinued operations                  |       | —             |       | —   |       | (6,255   | )          |
| Research and development tax credit                     |       | (192               | )          | (100     | )          | (26      | )          |
| Change in income tax reserve                            |       | (125               | )          | —   |       | —   |       |
| Nondeductible expenses and other permanent  differences |       | 259                |       | 123      |       | 90       |       |
| Foreign tax greater (less) than U.S. statutory rate     |       | 27                 |       | (5       | )          | 2,555    |       |
| Increase(decrease in valuation allowance)               |       | (1,362             | )          | 1,085    |       | 10,786   |       |
| State taxes, net of federal impact                      |       | 86                 |       | (186     | )          | (151     | )          |
| Other                                                   |       | 99                 |       | (130     | )          | —   |       |
| Income tax expense (benefit)                            |       | $                  | 105        |     | $          | 12       |       | $ | (622 | ) |

 

39

----

 

At December 31, 2005 we had U.S. andinternational net operating loss carryforwards of approximately$28.8 million. Approximately $23.9 million of these loss carryforwardsrelate to the United States, and approximately $3.6 million relate to the U.K. Approximately$1.3 million of these loss carryforwards relate to our discontinued operationin France, which we believe we will not be able to realize. These carryforwardsgenerally begin expiring in 2024.

 

We have provided a valuation allowance on the netdeferred tax assets. Due to our history of operating losses, we have determinedit is more likely than not that they will not be fully realized since theutilization of our deferred tax assets depends on future profits, which are notassured.

 

**(10)        Debtand Liquidity**

** **

On August 29, 2005, a new credit facility wascompleted providing a $69.5 million secured loan facility and a $14.8 millionsenior subordinated note payable. The senior secured loan facility consists ofa $40.0 million revolving loan, a $15.0 million Term Loan A, and a $14.5million Term Loan B. In connection with the senior subordinated note, theCompany issued 51,547 shares of common stock to the subordinated lender at aper share price of $14.55. The Company deferred $3.6 million of financing feesassociated with this debt issuance, $3.4 million of which remained on thebalance sheet at December 31, 2005. Of the deferred financing fees, $0.9million was paid to an affiliate of Sun Capital, a related party, as part ofthis transaction.

 

The Company's obligations under the Credit Agreementand the Subordinated Note Agreements are automatically accelerated upon certainbankruptcy or insolvency events, and may be accelerated upon the occurrence ofother events of default under the Credit Agreement and the Subordinated NoteAgreement, such as non-payment of principal, interest or fees when due, orfailure to comply with affirmative and negative covenants, subject to anyapplicable grace periods.

 

As of December 31, 2005, the Company was in compliancewith all financial covenants.

 

***(a)****)                               **Short-Term Borrowings*

*** ***

At December 31, 2005 and 2004, the outstanding balance on our line ofcredit was $9.6 million (current credit agreement) and $11.8 million (previouscredit agreement), respectively. At December 31, 2005, we had the ability toborrow an additional $23.3 million on this current line of credit. Under therevolving line of credit, the Company can borrow up to $40.0 million, subjectto certain restrictions that take effect December 31, 2005, including availableborrowing capacity. Interest is due monthly or at the end of a LIBOR period(but in such case no greater than 3 months) and is based on Bloomberg's primerate or LIBOR, both plus a specified margin. Under the terms of the line ofcredit and subordinated loan agreements, we are required to maintain certainfinancial ratios, such as measuring our EBITDA to our total debt and seniordebt, and maintaining a certain fixed charge coverage ratio. The agreement alsoprovides, among other matters, restrictions on additional financing, dividends,mergers, acquisitions, and an annual capital expenditure limit.

 

The weighted average interest rate on total short-termborrowings was 8.77% and 5.75% at December 31, 2005 and 2004,respectively.

 

40

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***(b)****                                **Long-Term Debt*

*** ***

Long-termdebt consisted of the following at December 31:

 
| ** **                     | ** ** | **2005**           | ** ** | **2004** | ** ** |
|--------------------------------|------------|--------------------|------------|----------|------------|
| ** **                     | ** ** | **(In thousands)** | ** ** |
| U.S. term loans                |       | $                  | —     |     | $          | 552 |   |
| U.S. subordinated note payable |       | —             |       | 11,360   |       |
| Term Loan A                    |       | 15,000             |       | —   |       |
| Term Loan B                    |       | 14,500             |       | —   |       |
| Subordinated note payable      |       | 14,750             |       | —   |       |
|                           |       | 44,250             |       | 11,912   |       |
| Less current portion           |       | (3,306             | )          | (300     | )          |
|                           |       | $                  | 40,944     |     | $          | 11,612 |   |

 

Principal payments on the$29.5 million Term Loan A and Term Loan B, under the Credit Agreement, are paidquarterly.  The term loans bear interest at the Bloomberg's prime rate orLIBOR, both plus a specified margin. This rate for Term Loan A was 7.88% andTerm Loan B was 8.38% at December 31, 2005.  Interest is due monthly oneach term loan. The final Term Loan A principal payment is due August 29, 2010.The final Term Loan B principal payment is due August 29, 2011.   The termloans and the line of credit are both secured by substantially all of theassets of the Company and its subsidiaries, and are both senior to otherlong-term debt.  The $14.8 million in senior subordinated notes issued issubordinate to all amounts due under the Credit Agreement and to anyrefinancing thereof.  Interest accrues on the senior subordinated notes ata rate of 14% and is due quarterly. Of the 14% interest rate, up to two percentmay be added to principal on each interest payment date. The principal underthe Senior Subordinated Note Agreements is due February 29, 2012.

 

In addition, we have a future commitment to pay theformer owners of St. Louis Music $3.0 million plus interest of 3%. Thiscommitment is due two years after the date of acquisition and was secured by astandby letter of credit in September 2005.

 

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

 

In March 2003, we obtained a note payable for$11.0 million, which was subordinate to the previous line of credit withanother lender. Interest accrued at a rate of 10%, of which 8% was paid monthlywhile the remaining 2% was paid monthly if there was specific excessavailability on our line of credit; otherwise, the 2% interest was added toprincipal. Principal and interest were originally due May 2006. During 2004, wehad added a total of $360,000 in accrued interest to the note payable.

 

In August 2004, we executed an Exchange Agreementwhereby we exchanged our entire debt to Sun Mackie, an affiliate of Sun CapitalPartners, Inc., for 496,031 shares of common stock valued at $9.75 per share. Werecognized a loss on early extinguishment of debt with this transaction of $0.5million representing the difference in the carrying value of the debt and thefair value of the common stock issued.

 

 

41

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

 

| 2006                 |   | $      | 3,306  |   |
|----------------------|--------|--------|--------|--------|
| 2007                 |   | 2,645  |   |
| 2008                 |   | 2,895  |   |
| 2009                 |   | 3,770  |   |
| 2010                 |   | 6,553  |   |
| 2011                 |   | 10,331 |   |
| 2012                 |   | 14,750 |   |
| Total long-term debt |   | $      | 44,250 |   |

 

**(11)        Related-PartyTransactions**

** **

At December 31, 2003, we had a $4.0 million notepayable to Sun Mackie. This note was exchanged for common stock as discussed inNote 10. 

 

We have a management agreement with Sun Mackie to paythe greater of $0.4 million or 6% of EBITDA, as defined, up to $1.0 million,per year to an affiliate of Sun Mackie. During 2005 and 2004, we recordedexpenses of approximately $1.2 million and $0.4 million, respectively, underthis agreement. Of the $1.2 million of management fees expensed during 2005,$1.0 million relates to the 2005 EBITDA calculation, $0.1 million is a resultof a correction to the management fee owed for the 2004 EBITDA calculation, andthe remaining amount is miscellaneous expenses incurred by Sun Capital PartnersManagement, LLC

 

Edward Kornblum is the Senior Vice President ofEntertainment and Artist Relations for LOUD. Two entities owned by Edward’sdirect relations are the landlords of two buildings leased by the Company. Underone lease, we pay approximately $11,000 per month, and under the second leasewe pay approximately $8,000 per month. Edward’s parents are 100% owners of theentity that receives approximately $8,000 per month and 50% owners of theentity that receives approximately $11,000 per month.

 

**(12)        EmployeeBenefit Plans**

** **

We currently have qualified profit-sharing plans underthe provisions of Internal Revenue Code Section 401(k) for all U.S. basedemployees meeting the eligibility requirements. Contributions are based on amatching formula as defined in each of the plans. Additional contributions maybe made at the discretion of the board of directors. Contributions to therespective plans vest ratably over a 5-year period. Contributions to the planwere $0.4 million in 2005, and $0.2 million in 2003. The Company made nocontribution to the plan in 2004. 

** **

**(13)        Net Income (Loss) PerShare**

 

The following table sets forth the computation ofbasic and diluted net income (loss) per share. Stock options representing430,000, 731,000, and 800,000 shares in 2005, 2004 and 2003, respectively, wereexcluded from the calculation of diluted net income (loss) per share becausethey were antidilutive in 2004 and 2003, whereas in 2005, they were excludedbecause they were out of the money.

 

42

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| ** **                                                              | ** ** | **2005**           | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|------------|------------|
| ** **                                                              | ** ** | **(In thousands)** | ** ** |
| Numerator:                                                              | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                              | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss) from continuing operations                           |       | $                  | 930        |       | $          | (2,291     | )          | $ | (15,412 | ) |
| Net income (loss) from  discontinued operations                    |       | 2,827              |       | —     |       | (6,383     | )          |
|                                                                    |       |               |       |       |       |       |       |
| Numerator for  basic and diluted net income (loss) per share            |       | $                  | 3,757      |       | $          | (2,291     | )          | $ | (21,795 | ) |
|                                                                    |       |               |       |       |       |       |       |
| Denominator:                                                            |       |               |       |       |       |       |       |
| Weighted average  shares outstanding                                    |       | 4,758              |       | 4,129      |       | 3,718      |       |
|                                                                    |       |               |       |       |       |       |       |
| Dilutive  potential common shares from outstanding warrants and options |       | 192                |       | 254        |       | 193        |       |
| Denominator for  diluted net income (loss) per share                    |       | 4,950              |       | 4,383      |       | 3,911      |       |

 
| ** **                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Basic net income  (loss) per share:   |       |     |       |     |       |     |       |
| Continuing  operations                |       | $        | 0.20       |     | $          | (0.52    | )          | $ | (3.94 | ) |
|                                  |       |     |       |     |       |     |       |
| Discontinued  operations              |       | 0.59     |       | —   |       | (1.63    | )          |
|                                  |       |     |       |     |       |     |       |
| Basic net income  (loss) per share    |       | $        | 0.79       |     | $          | (0.52    | )          | $ | (5.57 | ) |
|                                  |       |     |       |     |       |     |       |
| Diluted net  income (loss) per share: |       |     |       |     |       |     |       |
| Continuing  operations                |       | $        | 0.19       |     | $          | (0.52    | )          | $ | (3.94 | ) |
|                                  |       |     |       |     |       |     |       |
| Discontinued  operations              |       | 0.57     |       | —   |       | (1.63    | )          |
|                                  |       |     |       |     |       |     |       |
| Diluted net  income (loss) per share  |       | $        | 0.76       |     | $          | (0.52    | )          | $ | (5.57 | ) |

 

**(14)        Shareholders’Equity**

** **

In February 2003, we finalized an agreement with SunMackie, an affiliate of Sun Capital Partners, Inc., a private investment firm,whereby Sun Mackie, purchased approximately 2.9 million shares of our commonstock for $10.0 million. Sun Mackie acquired approximately 1.5 million of theseshares from certain selling shareholders. It acquired approximately 1.4 millionnewly issued shares directly from the Company for approximately $3.6 million. InMarch 2003, Sun Mackie provided $4.0 million for a note payable and warrants topurchase 240,000 shares of common stock at $0.05 per share. In August 2004, weexecuted an Exchange Agreement whereby we exchanged our entire debt to SunMackie for 496,031 shares of common stock valued at $9.75 per share. Werecognized a loss on early extinguishment of debt with this transaction of $0.5million representing the difference in the carrying value of the debt and thefair value of the common stock issued. The warrants to purchase 240,000 sharesof common stock were still outstanding after this transaction.

 

During July 2003, our board of directors adopted the2003 Stock Option Plan (the 2003 Plan), authorizing options to purchase 345,600shares of common stock. The 2003 Plan calls for options to be

 

43

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non-qualified stockoptions with exercise prices equal to the fair market value of the stock on thedate granted. Options generally vest over a five-year period and expire on theearlier of ten years from grant date or three months from termination. If anoption holder is terminated for Cause, as defined in the 2003 Plan, the optionswould terminate a day prior to termination. At December 31, 2005, 61,000shares of common stock were available for future grants under the 2003 Plan.

 

The Company also has a 1995 Stock Option Plan (the1995 Plan), which authorized 1.3 million shares of common stock forgrants. The exercise price of incentive stock options granted under the 1995Plan may not be less than the fair market value of the common stock on the dateof grant. The exercise price of nonqualified stock options granted under theplan may be greater or less than the fair market value of the common stock onthe date of grant, as determined by the stock option committee of the board ofdirectors at its discretion. Options generally vest over a four to five-yearperiod and expire no later than ten years after the date of grant. AtDecember 31, 2005, 809,000 shares of common stock were available forfuture grants under the 1995 Plan.

 

In February 2003, as part of a separation agreementwith a former founder and director, we repriced options to purchase 66,000shares with an average exercise price of $31.35 to a new exercise price of$5.10 in exchange for a non-compete agreement valued at $285,000. 

 

The followingtable summarizes the stock option activity for the three-year period endedDecember 31, 2005:

 
| ** **                               | ** ** | **Shares  subject  to exercise** | ** ** | **Weighted  average  exercise price** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|---------------------------------------|------------|
| ** **                               | ** ** | **(In thousands)**               | ** ** |
| Options outstanding at December 31, 2002 |       | 790                              |       | $                                     | 26.30      |   |
| Granted                                  |       | 250                              |       | 5.25                                  |       |
| Forfeited                                |       | (200                             | )          | 26.85                                 |       |
| Exercised                                |       | (23                              | )          | 0.05                                  |       |
|                                     |       |                             |       |                                  |       |
| Options outstanding at December 31, 2003 |       | 817                              |       | 18.35                                 |       |
| Granted                                  |       | 25                               |       | 11.00                                 |       |
| Forfeited                                |       | (94                              | )          | 20.80                                 |       |
| Exercised                                |       | (10                              | )          | 0.05                                  |       |
|                                     |       |                             |       |                                  |       |
| Options outstanding at December 31, 2004 |       | 738                              |       | 18.05                                 |       |
| Granted                                  |       | 79                               |       | 14.85                                 |       |
| Forfeited                                |       | (180                             | )          | 27.00                                 |       |
| Exercised                                |       | (8                               | )          | 1.52                                  |       |
|                                     |       |                             |       |                                  |       |
| Options outstanding at December 31, 2005 |       | 629                              |       | $                                     | 15.27      |   |

 

At December 31, 2005, 2004, and 2003 a total of406,000, 512,000 and 492,000 options were exercisable, respectively. Theweighted average exercise price of these options was $18.65, $22.75, and $24.85respectively.

 

44

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The followingtable summarizes information about options outstanding and exercisable atDecember 31, 2005:

 
| ** **                  | ** ** | **Options outstanding** | ** ** | **Options exercisable**                                      | ** ** |
|-----------------------------|------------|-------------------------|------------|--------------------------------------------------------------|------------|
| **Range of exercise price** | ** ** | **Number  outstanding** | ** ** | **Weighted  average  remaining  contractual  life  (years)** | ** ** | **Weighted  average  exercise  price** | ** ** | **Number  exercisable** | ** ** | **Weighted  average  exercise  price** | ** ** |
| ** **                  | ** ** | **(In thousands)**      | ** ** | ** **                                                   | ** ** | ** ** | ** ** | **(In thousands)** | ** ** | ** ** | ** ** |
| $ 5.10-8.85            |       | 305                     |       | 6.4                                                          |       | 5.22 |   | 174 |   | 5.27 |   |
| $ 11.30-23.75          |       | 130                     |       | 7.9                                                          |       | 20.54 |   | 38 |   | 16.22 |   |
| $ 25.30-32.50          |       | 155                     |       | 3.0                                                          |       | 28.61 |   | 155 |   | 28.61 |   |
| $ 33.44-43.75          |       | 39                      |       | 2.0                                                          |       | 37.30 |   | 39 |   | 37.30 |   |
|                        |       | 629                     |       | 5.6                                                          |       | $15.27 |   | 406 |   | $18.65 |   |

 

**(15)        Commitmentsand Contingencies**

** **

***(a)           Commitments***

*** ***

We have leases on two buildings in St. Louis, Missourithat are owned by former owners, their relatives, and shareholders of St. LouisMusic, Inc. One building, a research and development center, has monthly rentexpense of approximately $8,000. The other building, a warehouse with officespace, has monthly rent expense of approximately $11,000. Both leases wererenewed at the date of acquisition and were extended through March 5, 2008. Inaddition to these buildings, we lease another warehouse in St. Louis, Missouri.This lease was renewed in February of 2006 and extended until June 30, 2009. 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 the approximately80,000 sq. ft. of distribution and warehouse space was renewed in January of2006 and expires July 31, 2011. The lease on our approximately 90,000 sq. ft.corporate headquarters and distribution center was renewed in March of 2006 andexpires December 31, 2011. We lease a series of connected buildings in amanufacturing complex in Whitinsville, Massachusetts, totaling 220,285 sq. ft. Thislease continues through April 2008. We lease additional smaller facilities inthe United States, Canada, Europe and Asia for our regional sales and supportoffices.

 

Future minimum rentalpayments under facility leases at December 31, 2005, are as follows (inthousands):

 
| 2006 |   | $     | 2,359  |   |
|------|--------|-------|--------|--------|
| 2007 |   | 2,252 |   |
| 2008 |   | 1,648 |   |
| 2009 |   | 1,298 |   |
| 2010 |   | 1,189 |   |
| 2011 |   | 955   |   |

 

Total rent expense for 2005, 2004, and 2003 was$2.4 million, $2.1 million, and $2.2 million, respectively.

 

***(b)           Contingencies***

*** ***

On or about November 29, 2005, LOUD Technologies Inc.and its subsidiary, St. Louis Music Company, were named as party-defendants ina lawsuit in the United States District Court, Southern

 

45

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District of Florida. The lawsuit, filed by Ace ProSound and Recordings and served upon the Company, alleges individual and classaction claims against LOUD, as well as other, unrelated defendants. The claimsinclude civil conspiracy, tortuous interference, violation of Florida’s stateand the Federal Racketeering Influenced and Corrupt Organization Act as well asSection 1 and Section 2 Sherman Act antitrust claims. LOUD has filed a motionto dismiss this case. 

 

We are also involved in various legal proceedings andclaims that arise in the ordinary course of business. We currently believe thatthese matters will not have a material adverse impact on our financialposition, liquidity or results of operations.

 

**(16)        GeographicInformation**

** **

As of December 31, 2005, our major operations outsidethe United States include a sales and support office in the United Kingdom. Certaingeographic information for continuing operations for the three years endedDecember 31, 2005 is presented in the table that follows. Sales betweenaffiliated entities are excluded from these amounts. Net sales, as shown in thetable below, are based upon the geographic area into which the products weresold and delivered. The profit on transfers between geographic areas is notrecognized until sales are made to nonaffiliated customers.

 

Sales to customersoutside of the United States approximated 37%, 42%, and 37% of net sales in2005, 2004, and 2003, respectively.

 
| ** ** | ** ** | **2005**           | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** ** | ** ** | **(In thousands)** | ** ** |
| Net sales: |       |               |       |     |       |     |       |
| U.S.       |       | $                  | 128,681    |     | $          | 71,590   |       | $ | 82,046 |   |
| Non-U.S.   |       | 75,647             |       | 51,686   |       | 48,720   |       |
|       |       | $                  | 204,328    |     | $          | 123,276  |       | $ | 130,766 |   |

 

As of December 31, 2005 we had inventory (net) andreceivables (gross) in foreign locations as shown in the table below.

 
| ** **        | ** ** | **2005**           | ** ** | **2004** | ** ** |
|-------------------|------------|--------------------|------------|----------|------------|
| ** **        | ** ** | **(In thousands)** | ** ** |
| Gross Receivables |       |               |       |     |       |
| U.S.              |       | $                  | 18,897     |     | $          | 8,871 |   |
| Non-U.S.          |       | 11,551             |       | 9,600    |       |
|              |       | $                  | 30,448     |     | $          | 18,471 |   |
|              |       |               |       |     |       |
| Net Inventory     |       |               |       |     |       |
| U.S.              |       | $                  | 33,795     |     | $          | 21,304 |   |
| Non-U.S.          |       | 5,495              |       | 6,655    |       |
|              |       | $                  | 39,290     |     | $          | 27,959 |   |

 

46

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**(17)        Quarterly Financial Data (Unaudited)**(In thousands, except per share data, prior periods adjusted for 1-for-5reverse stock split)

 
| ** **                          | ** ** | **2005**  | ** ** |
|-------------------------------------|------------|-----------|------------|
| ** **                          | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| Net sales                           |       | $         | 39,945     |   | $ | 54,290 |   | $ | 53,987 |   | $ | 56,106 |   |
| Gross profit                        |       | 13,335    |       | 15,648 |   | 18,206 |   | 18,135 |   |
| Net income (loss)                   |       | 3,323     |       | (1,690 | ) | 379 |   | 1,745 |   |
| Basic net income (loss) per share   |       | 0.71      |       | (0.36 | ) | 0.08 |   | 0.36 |   |
| Diluted net income (loss) per share |       | 0.68      |       | (0.36 | ) | 0.08 |   | 0.35 |   |
|                                     |            |           |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                          | ** ** | **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 net income (loss) per share   |       | (0.95     | )          | (0.23 | ) | (0.13 | ) | 0.69 |   |
| Diluted net income (loss) per share |       | (0.95     | )          | (0.23 | ) | (0.13 | ) | 0.67 |   |
|                                     |            |           |            |  |  |  |  |  |  |  |  |  |  |

 

**(18)        Business Combinations**

** **

On March 4, 2005, we acquired all of the shares of St.Louis Music, Inc. (“St. Louis”), a Missouri-based manufacturer, distributor andimporter of branded musical instruments and professional audio products. TheCompany believes the acquisition of St. Louis Music, Inc. will furtherdiversify the Company’s product offerings to help acquire, retain and extendrelationships with customers. Our total purchase price was approximately $43.7million, consisting of $33.7 million in cash; a commitment to pay $3.0 millionplus interest in two years, the present value of which as of the acquisitiondate was $2.8 million, 79,358 shares of the Company’s common stock, assumedliabilities of $4.4 million and transaction costs of $1.6 million. The $3.0 million future commitmentplus accrued interest is secured by a standby letter of credit issued inSeptember 2005. The St. Louis Music acquisition was conducted through SLMMerger Corp., an indirect wholly owned subsidiary of the Company. Included inthe Company’s results of operations are the operations of St. Louis Music forthe period March 5 through December 31, 2005.

 

47

----

 

In connection with theacquisition, the purchase price has been allocated as follows (in thousands):

 
| **Allocation of purchase price**                                                                | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------|------------|
| Accounts receivable                                                                             |       | 12,088     |       |
| Inventories                                                                                     |       | 18,696     |       |
| Prepaid expenses and other current assets                                                       |       | 287        |       |
| Property, plant and equipment                                                                   |       | 2,440      |       |
| Goodwill                                                                                        |       | 2,248      |       |
| Trademarks (estimated life of 20 years)                                                         |       | 4,550      |       |
| Developed Technology (estimated life of 5 years)                                                |       | 270        |       |
| Customer Relationships (estimated life of 15 years)                                             |       | 3,080      |       |
| Other assets                                                                                    |       | 17         |       |
| Total assets                                                                                    |       | $          | 43,676     |   |
|                                                                                            |       |       |       |
| Accounts payable                                                                                |       | 2,610      |       |
|                                                                                            |       |       |       |
| Accrued liabilities (including remaining amount due  to sellers)                                |       | 4,588      |       |
| Total  liabilities                                                                              |       | $          | 7,198      |   |
|                                                                                            |       |       |       |
| Common stock issued                                                                             |       | 1,190      |       |
|                                                                                            |       |       |       |
| Cash  consideration paid, (net of $88 cash acquired and including $1,633 of  transaction costs) |       | $          | 35,288     |   |

 

Changesto the purchase price allocation from those reported in our Quarterly Report onForm 10-Q for the period ended September 30, 2005 are as follows (inthousands):  a decrease to property,plant and equipment of $986 due to receipt of a final appraisal of the fairvalue of the assets and an increase to accrued liabilities of $451, of which$230 is due to a correction to the accrued vacation accrual and $221 is due toa tax indemnification due to the sellers of St. Louis Music. The effects of theabove items less minor adjustments totaling approximately $51 caused a netincrease to goodwill of  $1,386.

 

# **Goodwill of $2.2 million,representing the excess of the purchase consideration over the fair value oftangible and identifiable intangible assets acquired, will not be amortized,consistent with the guidance of SFAS 142. Amortization of the entire $2.2million is expected to be deductible for tax purposes.**

 

48

----

 

Thefollowing unaudited pro forma information represents the results of operationsfor LOUD and St. Louis Music, Inc. for the year ended December 31, 2005 and2004, as if the acquisition had been consummated as of the beginning of eachperiod presented. Included in the St. Louis Music net loss for the year endedDecember 31, 2005 are $2.1 million of St. Louis Music’s transaction expensesthat relate to the sale of the business that are nonrecurring in nature. Thispro forma information does not purport to be indicative of what may occur inthe future (in thousands, except per share data):

 
| ** **                        | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|-----------------------------------|------------|---------------|------------|---------------|------------|
| ** **                        | ** ** | **Pro Forma** | ** ** | **Pro Forma** | ** ** |
| Net sales                         |       | $             | 220,916    |          | $          | 206,781 |   |
| Gross profit                      |       | 69,677        |       | 59,820        |       |
| Net income (loss)                 |       | 2,277         |       | (3,710        | )          |
|                              |       |          |       |          |       |
| Basic net income(loss)  per share |       | $             | 0.50       |          | $          | (0.84 | ) |

# ** **

Includedin the pro forma adjustments are fair value adjustments that relate toinventories and property, plant, and equipment; reversal of interest expense onSt. Louis Music, Inc. debt that was in existence prior to the acquisition;recording of interest expense on the demand credit facility obtained as aresult of the acquisition; and amortization of the intangible assets recordedas a result of the acquisition.

 

**Item9.  Changes in and Disagreements WithAccountants on Accounting and Financial Disclosure**

# ** **

None.

 

**Item 9A.  Controls and Procedures**

 

The Company maintainsdisclosure controls and procedures (as defined in Rules 13a-15(e) and15(d)-15(e) under the Securities Exchange Act of 1934, as amended, (the “ExchangeAct”)) that are designed to ensure that information required to be disclosed inthe Company’s reports under the Exchange Act, is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms, and that such information is accumulated and communicated to theCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

The Company carried outan evaluation, under the supervision and with the participation of theCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the Company’s “disclosure controlsand procedures” as of December 31, 2005, pursuant to Rules 13a-15(b) and15d-15(b) under the Exchange Act. Based on that evaluation, the Company’s ChiefExecutive Officer and Chief Financial Officer have concluded that the Company’sdisclosure controls and procedures, as of December 31, 2005, were effective intimely alerting them to material information relating to the Company requiredto be included in the Company’s periodic SEC filings.

 

49

----

 

There has been no changein the 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 fourth quarterof 2005 that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

#### **Item 9B. Other Information**

#### ** **

None.

 

**PARTIII**

** **

The information requiredby Part III (Items 10 - 14) will be included in our definitive Proxy Statementfor our 2006 Annual Meeting of Shareholders and is incorporated herein byreference. 

 

50

----

 

**PARTIV**

** **

**Item15. Exhibits, Financial StatementSchedules**

** **

(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, 2005 and 2004                                                                                        |     |         |
|                                                                                                                                              |     |         |
| Consolidated  Statements of Operations for each of the years in the three-year period ended  December 31, 2005                                    |     |         |
|                                                                                                                                              |     |         |
| Consolidated  Statements of Shareholders' Equity and Comprehensive Income for each of the  years in the three-year period ended December 31, 2005 |     |         |
|                                                                                                                                              |     |         |
| Consolidated  Statements of Cash Flows for each of the years in the three-year period ended  December 31, 2005                                    |     |         |
|                                                                                                                                              |     |         |
| Notes to  Consolidated Financial Statements                                                                                                       |     |         |

* *

All financial statement schedulesare omitted since the required information is not applicable, not required, orthe required information is included in the consolidated financial statementsor notes thereto.

 

(b)                                 Exhibits:  See Index to Exhibits on Page 53.

 

51

----

 

**SIGNATURES**

** **

Pursuant tothe requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| ** ** | **LOUD  TECHNOLOGIES INC.** |
|------------|-----------------------------|
|       |                        |
|       |                        |
|       | By:                         | /s/ James T. Engen |   |
|       | * *                    | James T. Engen*Chairman, President, Chief  Executive Officer and Director* |
|       |                        |   |
|       | Date:                       | March 31, 2006 |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities indicatedon April 14, 2003.

 
| **Signature**               | ** ** | **Title**                                               |
|-----------------------------|------------|---------------------------------------------------------|
|                        |       |                                                    |
| /s/ James T. Engen          |       |                                                    | Chairman, President, Chief  Executive Officer and Director |
| James T. Engen              |       |                                                    |
|                        |       |                                                    |
| /s/ Timothy  P. O’Neil |       |                                                    | Chief Financial Officer, Senior Vice President, Secretary  and |
| Timothy P. O’Neil      |       | Treasurer (Principal Financial  and Accounting Officer) |
|                        |       |                                                    |
| /s/ Marc J. Leder           |       |                                                    | Director 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/ Jason H. Neimark        |       |                                                    | Director and Vice President |
| Jason H. Neimark            |       |                                                    |
|                        |       |                                                    |
| /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             |       |                                                    |
|                             |            |                                                         |  |  |

 

52

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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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

53

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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.                                                                              |
|   |   |                                                                                                                                                                                                                                                                                             |
| 3.2    |   | 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.                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                             |
| 3.3    |   | 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.                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                             |
| 10.2   |   | 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.                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                             |
| 10.3   |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                             |
| 10.4   |   | 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.                                                   |

 

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| 10.5   |   | 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.                                                                                                                                                                                                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.6   |   | 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.                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.7   |   | 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.          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.8   |   | Amendment No. 2 and Waiver  to Loan and Security Agreement, dated April 16, 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.                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.9   |   | 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.   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.10  |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.11  |   | 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.                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.12  |   | 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.                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.13  |   | 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.                                                                                                                                                                     |

 

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| 10.14  |   | 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.                                                                                                                                                                              |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.15  |   | 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.                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.16  |   | 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.                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.17  |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.18  |   | 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.                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.19  |   | 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.                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.20  |   | 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.                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.21  |   | 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.                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.22  |   | 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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| 10.23  |   | 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.                                                                                                                                                                                                                                                                                                                                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.24  |   | Credit Agreement, dated  August 29, 2005, among Loud Technologies, Inc., St. Louis Music, Inc., the  financial institutions of other entities from time to time parties thereto,  each as a Lender, Merrill Lynch Capital, a division of Merrill Lynch Business  Financial Services Inc., individually as a Lender, as Administrative Agent,  Sole Bookrunner and Sole Lead Arranger, and ING CAPITAL LLC, as Syndication  Agent. Incorporated by reference to Exhibit 10.1 to Current Report on Form  8-K dated August 29, 2005.                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.25  |   | Securities Purchase  Agreement, dated August 29, 2005, among Loud Technologies, Inc., St. Louis  Music, Inc., the other guarantors from time to time party thereto, and OCM  Mezzanine Fund, L.P. Incorporated by reference to Exhibit 10.2 to Current  Report on Form 8-K dated August 29, 2005.                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.26  |   | Subordination  Agreement, dated August 29, 2005, among Loud Technologies, Inc., St. Louis  Music, Inc., and certain of their subsidiaries, and Merrill Lynch Capital, a  division of Merrill Lynch Business Financial Services Inc., as Administrative  Agent, and OCM Mezzanine Fund, L.P. Incorporated by reference to Exhibit 10.3  to Current Report on Form 8-K dated August 29, 2005.                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.27  |   | 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.                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| *10.28 |   | Lease Agreement dated  September 12, 1990, as amended to date, by and between Eugene M. Kornblum and  Helen H. Kornblum, as landlord, and St. Louis Music, Inc., as tenant.                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| *10.29 |   | Commercial Lease dated  December 20, 2001, by and between Eugene M. Kornblum, Trustee of The Eugene  M. Kornblum Trust Agreement Dated July 18, 1997, as to an undivided 25%  interest as tenants in common; Helen H. Kornblum, Trustee of The Helen H.  Kornblum Trust Agreement Dated July 11, 1997, as to an undivided 25% interest  as tenants in common; and Carole A. Simon and Robert S. Simon, Trustees of  The Carole A. Simon and Robert S. Simon Revocable Trust U/T/A dated November  27, 1991, as to an undivided 50% interest as tenants in common, as landlord,  and St. Louis Music, Inc. as tenant. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| *10.30 |   | Lease dated November 8,  2000, as amended to date, by and between Cornerstone Industrial Fund I,  L.L.C., as landlord, and Loud Technologies Inc., as tenant.                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| *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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

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| 99.1 |   | Press release, dated  March 17, 2006, issued by LOUD Technologies Inc. announcing its anticipated  financial performance for the twelve months and three months ended December  31, 2005. Incorporated by reference to Exhibit 99.1 to Current Report of Form  8-K dated March 29, 2006. |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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*** Filed herewith**

 

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