##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 Or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                      to
 Commission File Number: 0-26524
 LOUD TECHNOLOGIES INC.
  Washington
    
    91-1432133(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)16220 Wood-Red Road, N.E., Woodinville, Washington
    
    98072(Address of principal executive offices)
    
    (Zip Code)
 (425) 487-4333
 N/A
 þ o
  o o þ
 o þ
  Common Stock, no par value
    
    4,618,942Class
    
    Number of Shares Outstanding(as of October 31, 2007)




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##### 



LOUD TECHNOLOGIES INC.
 FORM 10-Q
For the quarter ended September 30, 2007
 INDEX
 PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006
    
    
    3Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and September 30, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and September 30, 2006
    
    
    5Condensed Consolidated Statements of Shareholders Equity and Comprehensive Income Statements for the nine months ended September 30, 2007
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4.
    
    Controls and Procedures
    
    
    21PART II.
    
    OTHER INFORMATION
    
    
    22Item 1.
    
    Legal Proceedings
    
    
    22Item 2.
    
    Risk Factors
    
    
    22Item 6.
    
    Exhibits
    
    
    22SIGNATURES
    
    
    23EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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##### Table of Contents



LOUD TECHNOLOGIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)  (In thousands, except share amounts)
 September 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,170
    
    
    $
    311Accounts receivable, net of allowances of $1,975 and $2,258, respectively
    
    
    27,435
    
    
    
    26,230Inventories
    
    
    50,615
    
    
    
    54,844Prepaid expenses and other current assets
    
    
    2,428
    
    
    
    1,521Total current assets
    
    
    84,648
    
    
    
    82,906Property, plant and equipment, net
    
    
    5,898
    
    
    
    6,543Goodwill
    
    
    20,170
    
    
    
    2,248Other intangible assets, net
    
    
    28,934
    
    
    
    11,367Deferred financing costs
    
    
    2,692
    
    
    
    2,692Total assets
    
    $
    142,342
    
    
    $
    105,756LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term borrowings
    
    $
    
    
    
    $
    14,210Accounts payable
    
    
    22,197
    
    
    
    23,023Accrued liabilities
    
    
    10,802
    
    
    
    11,193Taxes payable
    
    
    2,019
    
    
    
    1,559Current deferred tax liabilities
    
    
    419
    
    
    
    Current portion of long-term debt
    
    
    3,000
    
    
    
    1,500Current portion of payable to former Italian subsidiary
    
    
    
    
    
    
    700Other current liabilities
    
    
    
    
    
    
    3,162Total current liabilities
    
    
    38,437
    
    
    
    55,347Long-term debt, excluding current portion
    
    
    98,000
    
    
    
    40,105Deferred tax liabilities
    
    
    4,852
    
    
    
    99Total liabilities
    
    
    141,289
    
    
    
    95,551Commitments and contingenciesShareholders 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
4,618,942 and 4,575,022 at September 30, 2007 and December 31, 2006, respectively
    
    
    41,734
    
    
    
    41,281Accumulated deficit
    
    
    (41,687
    )
    
    
    (31,076
    )Accumulated other comprehensive income
    
    
    1,006
    
    
    
    Total shareholders equity
    
    
    1,053
    
    
    
    10,205Total liabilities and shareholders equity
    
    $
    142,342
    
    
    $
    105,756
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 3




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##### Table of Contents



LOUD TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)  (In thousands, except for per share data)
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    53,094
    
    
    $
    53,445
    
    
    $
    154,630
    
    
    $
    165,556Cost of sales
    
    
    37,954
    
    
    
    35,242
    
    
    
    111,351
    
    
    
    109,948Gross profit
    
    
    15,140
    
    
    
    18,203
    
    
    
    43,279
    
    
    
    55,608Operating expenses:Selling, general and administrative
    
    
    11,442
    
    
    
    11,624
    
    
    
    33,975
    
    
    
    38,370Research and development
    
    
    2,826
    
    
    
    2,778
    
    
    
    8,457
    
    
    
    9,264Restructuring costs
    
    
    158
    
    
    
    173
    
    
    
    1,712
    
    
    
    818Total operating expenses
    
    
    14,426
    
    
    
    14,575
    
    
    
    44,144
    
    
    
    48,452Operating income (loss)
    
    
    714
    
    
    
    3,628
    
    
    
    (865
    )
    
    
    7,156Other income (expense):Interest income
    
    
    
    
    
    
    27
    
    
    
    22
    
    
    
    151Interest expense
    
    
    (3,052
    )
    
    
    (1,641
    )
    
    
    (7,660
    )
    
    
    (4,941
    )Management fee
    
    
    (192
    )
    
    
    (241
    )
    
    
    (677
    )
    
    
    (772
    )Other
    
    
    173
    
    
    
    (198
    )
    
    
    (1,882
    )
    
    
    (220
    )Total other expense
    
    
    (3,071
    )
    
    
    (2,053
    )
    
    
    (10,197
    )
    
    
    (5,782
    )Income (loss) before income taxes
    
    
    (2,357
    )
    
    
    1,575
    
    
    
    (11,062
    )
    
    
    1,374Provision for income taxes
    
    
    (446
    )
    
    
    127
    
    
    
    (451
    )
    
    
    201Net income (loss)
    
    $
    (1,911
    )
    
    $
    1,448
    
    
    $
    (10,611
    )
    
    $
    1,173Net income (loss) per share:Basic
    
    $
    (0.39
    )
    
    $
    0.30
    
    
    $
    (2.19
    )
    
    $
    0.24Diluted
    
    $
    (0.39
    )
    
    $
    0.29
    
    
    $
    (2.19
    )
    
    $
    0.24Shares used in computing basic and
diluted net income (loss) per share:Basic
    
    
    4,859
    
    
    
    4,806
    
    
    
    4,847
    
    
    
    4,806Diluted
    
    
    4,859
    
    
    
    4,995
    
    
    
    4,847
    
    
    
    4,983
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 4




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##### Table of Contents



LOUD TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Nine months endedSeptember 30,2007
    
    
    2006Operating activitiesNet income (loss)
    
    $
    (10,611
    )
    
    $
    1,173Adjustments to reconcile the net income (loss) to net cash provided by operating
activities:Depreciation and amortization
    
    
    3,632
    
    
    
    3,341Amortization and write-offs of deferred financing costs
    
    
    2,946
    
    
    
    515Stock based compensation
    
    
    229
    
    
    
    353Gain on asset dispositions
    
    
    (526
    )
    
    
    Non-cash interest expense
    
    
    214
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    3,319
    
    
    
    (677
    )Inventories
    
    
    10,223
    
    
    
    (4,676
    )Prepaid expenses and other current assets
    
    
    (130
    )
    
    
    (306
    )Accounts payable, accrued liabilities and payable to former Italian subsidiary
    
    
    (7,660
    )
    
    
    1,111Taxes payable
    
    
    (1,141
    )
    
    
    164Other liabilities
    
    
    19
    
    
    
    160Net cash provided by operating activities
    
    
    514
    
    
    
    1,158Investing activitiesPurchases of property, plant and equipment
    
    
    (1,757
    )
    
    
    (1,954
    )Proceeds from the sale of property, plant and equipment
    
    
    1,239
    
    
    
    Acquisition of St. Louis Music, Inc., including transaction fees paid
    
    
    (3,181
    )
    
    
    Acquisition of Martin Audio, Ltd., net of cash acquired of $3,696
    
    
    (31,977
    )
    
    
    Net cash used in investing activities
    
    
    (35,676
    )
    
    
    (1,954
    )Financing activitiesPayments on previous credit facility
    
    
    (41,605
    )
    
    
    (1,984
    )Payments on long-term debt
    
    
    (1,214
    )
    
    
    Issuance of long-term debt
    
    
    102,000
    
    
    
    Net proceeds (payments) on bank line of credit and short-term borrowings
    
    
    (14,210
    )
    
    
    2,908Net payment on debt and credit facility acquired in acquisition of Martin Audio, Ltd.
    
    
    (3,030
    )
    
    
    Financing costs associated with debt issuance
    
    
    (2,946
    )Net proceeds from stock sales through exercise of stock options
    
    
    224
    
    
    
    Net cash provided by financing activities
    
    
    39,219
    
    
    
    924Effect of exchange rate changes in cash and cash equivalents
    
    
    (198
    )
    
    
    Increase in cash and cash equivalents
    
    
    3,859
    
    
    
    128Cash and cash equivalents at beginning of period
    
    
    311
    
    
    
    468Cash and cash equivalents at end of period
    
    $
    4,170
    
    
    $
    596Supplemental disclosuresCash paid for interest
    
    $
    6,008
    
    
    $
    2,622Cash paid for income taxes
    
    $
    817
    
    
    $
    102Accrued acquisition related expenses
    
    $
    551
    
    
    $
    Cash paid for acquisition related expenses
    
    $
    1,518
    
    
    $
    
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 5




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LOUD TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE
INCOME STATEMENTS
Nine months ended September 30, 2007
(Unaudited)  (In thousands)
 AccumulatedotherCommon stock
    
    
    Accumulated
    
    
    comprehensiveShares
    
    
    Amount
    
    
    Deficit
    
    
    income
    
    
    TotalBalance at December 31, 2006
    
    
    4,575
    
    
    $
    41,281
    
    
    $
    (31,076
    )
    
    $
    
    
    
    $
    10,205Exercise of stock options
    
    
    44
    
    
    
    224
    
    
    
    
    
    
    
    
    
    
    
    224Stock based compensation
    
    
    
    
    
    
    229
    
    
    
    
    
    
    
    
    
    
    
    229Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    (10,611
    )
    
    
    
    
    
    
    (10,611
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,006
    
    
    
    1,006Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,605
    )Balance at September 30, 2007
    
    
    4,619
    
    
    $
    41,734
    
    
    $
    (41,687
    )
    
    $
    1,006
    
    
    $
    1,053
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 6




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##### Table of Contents



LOUD TECHNOLOGIES INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2007
 (Unaudited)
 1. Description of Business
    2. Summary of Significant Accounting Policies
 Basis of Presentation
  Stock Based Compensation
  Three months ended
    
    
    Nine months endedSeptember 30, 2007
    
    
    September 30, 2007Cost of sales
    
    $
    1
    
    
    $
    5Selling, general and administrative
    
    
    61
    
    
    
    214Research and development
    
    
    3
    
    
    
    10Total stock based compensation
    
    $
    65
    
    
    $
    229
  7




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##### Table of Contents



Use of Estimates
  Revenue Recognition
  Foreign Currency
   Income Taxes
   8




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##### Table of Contents



Concentration of Credit and Supply Risk
    Recently Adopted Accounting Principles
   How Taxes Collected
from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross versus Net Presentation)
 New Accounting Pronouncements
 Fair Value Measurements
 9




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##### Table of Contents



The Fair Value Option for Financial Assets and
Financial Liabilities
 3. Net Income (Loss) Per Share
   4. Restructuring Costs
  Balance at December 31, 2006
    
    $
    880New charges
    
    
    1,712Cash payments
    
    
    (2,135
    )Other adjustments
    
    
    (5
    )Balance at September 30, 2007
    
    $
    452
 5. Inventories
  September 30,
    
    
    December 31,2007
    
    
    2006Raw materials
    
    $
    3,290
    
    
    $
    4,413Work in process
    
    
    303
    
    
    
    1,428Finished goods
    
    
    47,022
    
    
    
    49,003$
    50,615
    
    
    $
    54,844
 10




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##### Table of Contents



6. Other Intangible Assets
  September 30,
    
    
    December 31,2007
    
    
    2006Developed technology
    
    $
    6,165
    
    
    $
    5,470Customer and distributor relationships
    
    
    14,131
    
    
    
    3,080Trademark
    
    
    12,889
    
    
    
    5,930Non compete agreement
    
    
    51
    
    
    
    33,236
    
    
    
    14,480Less accumulated amortization
    
    
    (4,302
    )
    
    
    (3,113
    )$
    28,934
    
    
    $
    11,367
  7. Goodwill
  Balance, December 31, 2006
    
    $
    2,248Increase related to acquisition of Martin Audio
    
    
    17,242Effects of foreign currency translation
    
    
    680Balance, September 30, 2007
    
    $
    20,170
 8. Financing
    11




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##### Table of Contents



(a) Short-term borrowings
  (b) Long-term debt
  September 30,
    
    
    December 31,2007
    
    
    2006Merrill Term Loan A
    
    $
    
    
    
    $
    12,500Merrill Term Loan B
    
    
    
    
    
    
    14,355Oaktree Subordinated note payable
    
    
    
    
    
    
    14,750Ableco Term Loan A
    
    
    19,369
    
    
    
    Ableco US Term Loan B
    
    
    39,667
    
    
    
    Ableco UK Term Loan B
    
    
    29,750
    
    
    
    Ableco Term Loan C
    
    
    12,214
    
    
    
    101,000
    
    
    
    41,605Less: current portion
    
    
    (3,000
    )
    
    
    (1,500
    )Long-term portion of debt
    
    $
    98,000
    
    
    $
    40,105
  9. Guarantees
 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
   Balance at December 31, 2006
    
    $
    1,160Charged to cost of sales
    
    
    2,348Applied to liability
    
    
    (2,508
    )Balance at September 30, 2007
    
    $
    1,000
 12




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##### Table of Contents



10. Commitments and Contingencies
   11. Business Combinations
   Cash
    
    $
    3,696Accounts receivable
    
    
    4,524Inventories
    
    
    5,971Prepaid expenses and other current assets
    
    
    777Property, plant and equipment
    
    
    749Goodwill
    
    
    17,242Trademarks (estimated life of 20 years)
    
    
    6,695Developed technology (estimated life of 5 years)
    
    
    669Customer relationships (estimated life of 15 years)
    
    
    1,182Distributor relationships (estimated life of 15 years)
    
    
    9,452Non compete agreement (estimated life of 2 years)
    
    
    49Total assets
    
    $
    51,006Accounts payable
    
    $
    3,653Accrued liabilities
    
    
    2,090Income taxes payable
    
    
    632Deferred income taxes
    
    
    5,928Debt
    
    
    3,030Total liabilities
    
    
    15,333Cash consideration paid, net of $2,069 of transaction costs
    
    $
    35,673
   13




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##### Table of Contents



2007
    
    
    2006Pro Forma
    
    
    Pro FormaNet sales
    
    $
    162,956
    
    
    $
    186,645Net loss
    
    
    (6,480
    )
    
    
    (535
    )Basic net loss per share
    
    $
    (1.34
    )
    
    $
    (0.11
    )
  14




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis should be read in conjunction with our financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2006. This discussion
contains certain forward-looking statements within the meaning of Section 21D of the Securities
Exchange Act of 1934, as amended, which involve risks and uncertainties, such as statements of our
plans, objectives, expectations and intentions. Actual results may differ materially from those
discussed herein. The cautionary statements made in this Quarterly Report on Form 10-Q and the
Annual Report on Form 10-K may apply to all forward-looking statements wherever they appear. We
undertake no obligation to publicly release any revisions to these forward-looking statements that
may be required to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. Forward-looking statements include, without limitation, any
statement that may predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain the words believe, anticipate, expect, estimate, project,
will be, will continue, will likely result, or words or phrases of similar meaning.
 Overview
      Critical Accounting Policies and Judgments
   Estimates and Assumptions Related to Financial Statements
  15




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##### Table of Contents



Results of Operations
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    53,094
    
    
    $
    53,445
    
    
    $
    154,630
    
    
    $
    165,556Gross profit
    
    
    15,140
    
    
    
    18,203
    
    
    
    43,279
    
    
    
    55,608Selling, general and administrative
    
    
    11,442
    
    
    
    11,624
    
    
    
    33,975
    
    
    
    38,370Research and development
    
    
    2,826
    
    
    
    2,778
    
    
    
    8,457
    
    
    
    9,264Restructuring costs
    
    
    158
    
    
    
    173
    
    
    
    1,712
    
    
    
    818Total operating expenses
    
    
    14,426
    
    
    
    14,575
    
    
    
    44,144
    
    
    
    48,452Operating income (loss)
    
    
    714
    
    
    
    3,628
    
    
    
    (865
    )
    
    
    7,156Other expense
    
    
    (3,071
    )
    
    
    (2,053
    )
    
    
    (10,197
    )
    
    
    (5,782
    )Provision for income taxes
    
    
    (446
    )
    
    
    127
    
    
    
    (451
    )
    
    
    201Net income (loss)
    
    $
    (1,911
    )
    
    $
    1,448
    
    
    $
    (10,611
    )
    
    $
    1,173
 Three Months Ended September 30, 2007 vs. Three Months Ended September 30, 2006
 Net Income (Loss)
  Net Sales
  Gross Profit
  16




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##### Table of Contents



Selling, General and Administrative
  Research and Development
  Restructuring Costs
  Other Expense
   Income Taxes
  Nine Months Ended September 30, 2007 vs. Nine Months Ended September 30, 2006
 Net Sales
  Gross Profit
  17




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##### Table of Contents



Selling, General and Administrative
  Research and Development
  Restructuring Costs
  Other Expense
  Income Taxes
  Liquidity and Capital Resources
  Net Cash Provided by Operating Activities
  18




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##### Table of Contents



Net Cash Used in Investing Activities
  Net Cash Provided by Financing Activities
  Ability to Stay in Compliance With Debt Covenants
  19




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##### Table of Contents



Commitments
  Payments due by PeriodTotal
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5+ YearsOperating leases
    
    $
    9,215
    
    
    $
    2,554
    
    
    $
    4,575
    
    
    $
    2,086
    
    
    $
    Short-term and long-term debt
    
    
    149,618
    
    
    
    13,245
    
    
    
    25,761
    
    
    
    110,612
    
    
    
    Total
    
    $
    158,833
    
    
    $
    15,799
    
    
    $
    30,336
    
    
    $
    112,698
    
    
    $
    
    20




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
  Foreign Currency Risk
   
 Item 4. Controls and Procedures
    21




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Risk Factors
   
 Item 6. Exhibits
  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.
 22




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##### Table of Contents



SIGNATURES
  LOUD Technologies Inc.(Registrant)Dated: November 14, 2007
    By:
    /s/ James T. EngenJames T. EngenChairman, President and Chief Executive
OfficerDated:  November 14, 2007
    By:
    /s/ Gerald Y. NgGerald Y. NgChief Financial Officer 23




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Document Description31.1
    
    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 Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 24