**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe quarterly period ended September 30, 2006**

**Or**

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

**Forthe transition period from                to               **

**CommissionFile Number:  0-26524**

**LOUD TECHNOLOGIES INC.**

(Exact name of registrantas specified in its charter)

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

 

**(425) 487-4333**

(Registrant’s telephonenumber, including area code)

**N/A**

(Former name or formeraddress, if changed since last report)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x   No 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 acceleratedfiler** **o      Acceleratedfiler o      Non-acceleratedfiler x

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

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.

| **Common Stock, no par value** |   | **4,569,142**                 |
|--------------------------------|--------|-------------------------------|
|                           |   | Number of Shares  Outstanding |
| Class                          |   | (as of October  31, 2006)     |

 

 

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**LOUD TECHNOLOGIESINC.**

**FORM 10-QFor the quarter ended September 30, 2006**

**INDEX**
| **PART I.**    | ** ** | **FINANCIAL INFORMATION**                                                                                                                 |
|----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|
|           |       |                                                                                                                                      |
| Item 1.        |       | Financial Statements (Unaudited)                                                                                                          |
|           |       |                                                                                                                                      |
|           |       | Condensed Consolidated Balance Sheets as of September 30,  2006 and December 31, 2005                                           |
|           |       |                                                                                                                                      |
|           |       | Condensed Consolidated Statements of Operations for  the three and nine months ended September 30, 2006 and September 30,  2005 |
|           |       |                                                                                                                                      |
|           |       | Condensed Consolidated Statements of Cash Flows for  the nine months ended September 30, 2006 and September 30, 2005            |
|           |       |                                                                                                                                      |
|           |       | Condensed Consolidated Statements of Shareholders’  Equity for the nine months ended September 30, 2006                         |
|           |       |                                                                                                                                      |
|           |       | Notes to Condensed Consolidated Financial Statements                                                                                      |
|           |       |                                                                                                                                      |
| Item 2.        |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                               |
|           |       |                                                                                                                                      |
| Item 3.        |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                               |
|           |       |                                                                                                                                      |
| Item 4.        |       | Controls and Procedures                                                                                                                   |
|           |       |                                                                                                                                      |
| **PART  II.**  | ** ** | **OTHER  INFORMATION**                                                                                                                    |
|           |       |                                                                                                                                      |
| Item  1.       |       | Legal  Proceedings                                                                                                                        |
|           |       |                                                                                                                                      |
| Item 1A.       |       | Risk Factors                                                                                                                              |
|           |       |                                                                                                                                      |
| Item 2.        |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                              |
|           |       |                                                                                                                                      |
| Item 3.        |       | Defaults Upon Senior Securities                                                                                                           |
|           |       |                                                                                                                                      |
| Item 4.        |       | Submission of Matters to a Vote of Security Holders                                                                                       |
|           |       |                                                                                                                                      |
| Item  5.       |       | Other  Information                                                                                                                        |
|           |       |                                                                                                                                      |
| Item 6.        |       | Exhibits                                                                                                                                  |
|           |       |                                                                                                                                      |
| **SIGNATURES** |

 

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** **

**LOUD TECHNOLOGIES INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS(Unaudited)**

*(Inthousands, except share amounts)*
| ** **                                                                                                                               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                               | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                               |       |                   |       |                  |       |
| Current assets:                                                                                                                          |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                               |       | $                      | 596        |                  | $          | 468 |   |
| Accounts  receivable, net of allowances of $2,005 and $2,224, respectively                                                               |       | 28,901                 |       | 28,224                |       |
| Inventories                                                                                                                              |       | 43,966                 |       | 39,290                |       |
| Prepaid expenses  and other current assets                                                                                               |       | 2,165                  |       | 1,859                 |       |
| Total current  assets                                                                                                                    |       | 75,628                 |       | 69,841                |       |
|                                                                                                                                     |       |                   |       |                  |       |
| Property, plant and  equipment, net                                                                                                      |       | 7,104                  |       | 7,863                 |       |
| Goodwill                                                                                                                                 |       | 2,248                  |       | 2,248                 |       |
| Other intangible  assets, net                                                                                                            |       | 11,570                 |       | 12,198                |       |
| Deferred financing  costs                                                                                                                |       | 2,863                  |       | 3,378                 |       |
| Other assets                                                                                                                             |       | 17                     |       | 17                    |       |
| Total assets                                                                                                                             |       | $                      | 99,430     |                  | $          | 95,545 |   |
|                                                                                                                                     |       |                   |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                           |       |                   |       |                  |       |
| Current liabilities:                                                                                                                     |       |                   |       |                  |       |
| Short-term  borrowings                                                                                                                   |       | $                      | 12,503     |                  | $          | 9,595 |   |
| Accounts payable                                                                                                                         |       | 18,298                 |       | 16,133                |       |
| Accrued  liabilities                                                                                                                     |       | 9,955                  |       | 10,009                |       |
| Taxes payable                                                                                                                            |       | 1,416                  |       | 1,293                 |       |
| Current portion  of long-term debt                                                                                                       |       | 3,306                  |       | 3,306                 |       |
| Current portion  of payable to former Italian subsidiary                                                                                 |       | 1,200                  |       | 2,200                 |       |
| Other current  liabilities                                                                                                               |       | 3,093                  |       | —                |       |
| Total current  liabilities                                                                                                               |       | 49,771                 |       | 42,536                |       |
|                                                                                                                                     |       |                   |       |                  |       |
| Long-term debt,  excluding current portion                                                                                               |       | 38,960                 |       | 40,944                |       |
| Deferred tax  liabilities                                                                                                                |       | 81                     |       | 40                    |       |
| Other liabilities                                                                                                                        |       | 5                      |       | 2,938                 |       |
| Total  liabilities                                                                                                                       |       | 88,817                 |       | 86,458                |       |
|                                                                                                                                     |       |                   |       |                  |       |
| Commitments and  contingencies                                                                                                           |       |                   |       |                  |       |
|                                                                                                                                     |       |                   |       |                  |       |
| Shareholders’ equity:                                                                                                               |       |                   |       |                  |       |
| Preferred stock, no par  value. Authorized 5,000,000 shares, no shares issued and outstanding                                            |       | —                 |       | —                |       |
| Common stock, no par  value. Authorized 40,000,000 shares, issued and outstanding 4,566,202 at  September 30, 2006 and December 31, 2005 |       | 41,141                 |       | 40,788                |       |
| Accumulated deficit                                                                                                                      |       | (30,528                | )          | (31,701               | )          |
| Total  shareholders’ equity                                                                                                         |       | 10,613                 |       | 9,087                 |       |
| Total liabilities and  shareholders’ equity                                                                                         |       | $                      | 99,430     |                  | $          | 95,545 |   |

 

*Seeaccompanying Notes to Condensed Consolidated Financial Statements.*

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** **

**LOUD TECHNOLOGIES INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**

*(Inthousands, except for per share data)*
| ** **                                                                    | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                    | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                    | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                          |       |                             |       |                            |       |   |   |   |   |
| Net sales                                                                     |       | $                                | 53,445     |                            | $          | 53,987 |   | $ | 165,556 |   | $ | 148,222 |   |
| Cost of sales                                                                 |       | 35,242                           |       | 35,781                          |       | 109,948 |   | 101,033 |   |
| Gross profit                                                                  |       | 18,203                           |       | 18,206                          |       | 55,608 |   | 47,189 |   |
|                                                                          |       |                             |       |                            |       |   |   |   |   |
| Operating  expenses:                                                          |       |                             |       |                            |       |   |   |   |   |
| Selling, general and administrative                                           |       | 11,624                           |       | 12,669                          |       | 38,370 |   | 35,079 |   |
| Research and development                                                      |       | 2,778                            |       | 2,744                           |       | 9,264 |   | 7,402 |   |
| Restructuring costs                                                           |       | 173                              |       | —                          |       | 818 |   | — |   |
| Total operating expenses                                                      |       | 14,575                           |       | 15,413                          |       | 48,452 |   | 42,481 |   |
|                                                                          |       |                             |       |                            |       |   |   |   |   |
| Operating income                                                              |       | 3,628                            |       | 2,793                           |       | 7,156 |   | 4,708 |   |
|                                                                          |       |                             |       |                            |       |   |   |   |   |
| Other income  (expense):                                                      |       |                             |       |                            |       |   |   |   |   |
| Interest income                                                               |       | 27                               |       | 82                              |       | 151 |   | 215 |   |
| Interest expense                                                              |       | (1,641                           | )          | (1,525                          | )          | (4,941 | ) | (3,829 | ) |
| Management fee                                                                |       | (241                             | )          | (349                            | )          | (772 | ) | (915 | ) |
| Other                                                                         |       | (198                             | )          | (621                            | )          | (220 | ) | (950 | ) |
| Total other expense                                                           |       | (2,053                           | )          | (2,413                          | )          | (5,782 | ) | (5,479 | ) |
|                                                                          |       |                             |       |                            |       |   |   |   |   |
| Income (loss)  before income taxes and discontinued operations                |       | 1,575                            |       | 380                             |       | 1,374 |   | (771 | ) |
|                                                                          |       |                             |       |                            |       |   |   |   |   |
| Provision for  income taxes                                                   |       | 127                              |       | 1                               |       | 201 |   | 44 |   |
|                                                                          |       |                             |       |                            |       |   |   |   |   |
| Income (loss)  from continuing operations                                     |       | 1,448                            |       | 379                             |       | 1,173 |   | (815 | ) |
|                                                                          |       |                             |       |                            |       |   |   |   |   |
| Recognized gain  on discontinued operations, net of income tax expense of $58 |       | —                           |       | —                          |       | — |   | 2,827 |   |
|                                                                          |       |                             |       |                            |       |   |   |   |   |
| Net income                                                                    |       | $                                | 1,448      |                            | $          | 379 |   | $ | 1,173 |   | $ | 2,012 |   |
|                                                                          |       |                             |       |                            |       |   |   |   |   |
| Basic net income  (loss) per share:                                           |       |                             |       |                            |       |   |   |   |   |
| Net income (loss) from continuing operations                                  |       | $                                | 0.30       |                            | $          | 0.08 |   | $ | 0.24 |   | $ | (0.18 | ) |
| Net income from discontinued operations                                       |       | —                           |       | —                          |       | — |   | 0.60 |   |
| Net income per share                                                          |       | $                                | 0.30       |                            | $          | 0.08 |   | $ | 0.24 |   | $ | 0.42 |   |
|                                                                          |       |                             |       |                            |       |   |   |   |   |
| Diluted net  income (loss) per share:                                         |       |                             |       |                            |       |   |   |   |   |
| Net income (loss) from continuing operations                                  |       | $                                | 0.29       |                            | $          | 0.08 |   | $ | 0.24 |   | $ | (0.18 | ) |
| Net income from discontinued operations                                       |       | —                           |       | —                          |       | — |   | 0.60 |   |
| Net income per share                                                          |       | $                                | 0.29       |                            | $          | 0.08 |   | $ | 0.24 |   | $ | 0.42 |   |
|                                                                          |       |                             |       |                            |       |   |   |   |   |
| Shares used in  computing basic and diluted net income per share:             |       |                             |       |                            |       |   |   |   |   |
| Basic                                                                         |       | 4,806                            |       | 4,773                           |       | 4,806 |   | 4,742 |   |
| Diluted                                                                       |       | 4,995                            |       | 4,977                           |       | 4,983 |   | 4,742 |   |

 

*Seeaccompanying Notes to Condensed Consolidated Financial Statements.*

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** **

**LOUD TECHNOLOGIES INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**
| ** **                                                                                               | ** ** | **Nine months ended** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                               | ** ** | **September 30,**          | ** ** |
| ** **                                                                                               | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| ** **                                                                                               | ** ** | **(In thousands)**         | ** ** |
| **Operating  activities**                                                                                | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net income                                                                                               |       | $                               | 1,173      |   | $ | 2,012 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                       |       |                            |       |   |   |
| Depreciation and amortization                                                                            |       | 3,341                           |       | 3,639 |   |
| Amortization of deferred financing costs                                                                 |       | 515                             |       | — |   |
| Stock based compensation                                                                                 |       | 353                             |       | 44 |   |
| Gain on discontinued operations                                                                          |       | —                          |       | (2,885 | ) |
| Non-cash interest expense                                                                                |       | —                          |       | 57 |   |
| Changes in operating assets and liabilities:                                                             |       |                            |       |   |   |
| Accounts receivable                                                                                      |       | (677                            | )          | (1,365 | ) |
| Inventories                                                                                              |       | (4,676                          | )          | 5,460 |   |
| Prepaid expenses and other current assets                                                                |       | (306                            | )          | 1,185 |   |
| Other assets                                                                                             |       | —                          |       | 233 |   |
| Accounts payable, accrued liabilities and payable to  former Italian subsidiary                          |       | 1,111                           |       | (7,062 | ) |
| Taxes payable                                                                                            |       | 164                             |       | (131 | ) |
| Other liabilities                                                                                        |       | 160                             |       | 71 |   |
| Net cash provided by operating activities                                                                |       | 1,158                           |       | 1,258 |   |
|                                                                                                     |       |                            |       |   |   |
| **Investing  activities**                                                                                | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Purchases of  property, plant and equipment                                                              |       | (1,954                          | )          | (994 | ) |
| Acquisition of  St. Louis Music, Inc., including transaction fees paid                                   |       | —                          |       | (35,339 | ) |
| Net cash used in investing activities                                                                    |       | (1,954                          | )          | (36,333 | ) |
|                                                                                                     |       |                            |       |   |   |
| **Financing  activities**                                                                                | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Payments on  long-term debt                                                                              |       | (1,984                          | )          | (11,969 | ) |
| Issuance of  long-term debt                                                                              |       | —                          |       | 44,250 |   |
| Net proceeds on  bank line of credit and short-term borrowings                                           |       | 2,908                           |       | 5,607 |   |
| Financing costs  associated with debt issuance                                                           |       | —                          |       | (3,616 | ) |
| Net proceeds  from stock sales and exercise of stock options                                             |       | —                          |       | 762 |   |
| Net cash provided by financing activities                                                                |       | 924                             |       | 35,034 |   |
|                                                                                                     |       |                            |       |   |   |
| Increase  (decrease) in cash and cash equivalents                                                        |       | 128                             |       | (41 | ) |
|                                                                                                     |       |                            |       |   |   |
| Cash and cash  equivalents at beginning of period                                                        |       | 468                             |       | 450 |   |
| Cash and cash  equivalents at end of period                                                              |       | $                               | 596        |   | $ | 409 |   |
| **Supplemental  schedule of noncash financing and investing activities**                                 |       |                            |       |   |   |
| 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 |   |

 

*Seeaccompanying Notes to Condensed Consolidated Financial Statements.*

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** **

**LOUD TECHNOLOGIES INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYNine months ended September 30, 2006(Unaudited)**

*(Inthousands)*
| ** **                     | ** ** | **Common Stock** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|--------------------------------|------------|-----------------------|------------|-----------------|------------|-------------|------------|
| ** **                     | ** ** | **Shares**            | ** ** | **Amount**      | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| Balance at  December 31, 2005  |       | 4,566                 |       | $               | 40,788     |        | $          | (31,701 | ) | $ | 9,087 |   |
| Stock based  compensation      |       | —                |       | 353             |       | —      |       | 353 |   |
| Net Income                     |       | —                |       | —          |       | 1,173       |       | 1,173 |   |
| Balance at September  30, 2006 |       | 4,566                 |       | $               | 41,141     |        | $          | (30,528 | ) | $ | 10,613 |   |

 

*See accompanying Notes toCondensed Consolidated Financial Statements.*

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**LOUD TECHNOLOGIES INC.**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTSSeptember 30, 2006(Unaudited)**

**1. Description ofBusiness**

We develop, manufacture and sell high-quality,affordable digital and analog audio mixers, speakers, guitar and bass amplifiers,branded musical instruments and related accessories, and other professionalaudio equipment on a worldwide basis. Our products are used by professional andamateur musicians; school music programs; sound installation contractors andbroadcast professionals both in sound recordings, live presentations systemsand installed sound systems. We distribute our products primarily throughretail dealers, mail order outlets and installed sound contractors. We have ourprimary operations in the United States with smaller operations in the UnitedKingdom, Canada, China and Japan.

**2. Summary ofSignificant Accounting Policies**

**Basis ofPresentation**

The accompanying unaudited condensed consolidatedfinancial statements have been prepared by LOUD Technologies Inc. (“LOUD” orthe “Company”) in accordance with U.S. generally accepted accounting principlesfor interim financial statements and includes the accounts of the Company andits subsidiaries. They do not include all of the information and disclosuresrequired by generally accepted accounting principles for complete financialstatements and should be read in conjunction with the financial statementsincluded in our Annual Report on Form 10-K for the year ended December 31,2005. In our opinion, all adjustments, consisting of normal recurringadjustments necessary for the fair presentation of the results of the interimperiods are reflected herein. Operating results for the three and nine-monthperiods ended September 30, 2006, are not necessarily indicative of futurefinancial results.

**BusinessCombinations**

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 $43.7 million,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,assumed liabilities of $4.4 million and transaction costs of $1.6 million.The $3.0 million future commitment plus accrued interest is secured by astandby letter of credit issued in September 2005. The St. Louis Musicacquisition was conducted through SLM Merger Corp., an indirect wholly ownedsubsidiary of the Company. Included in the Company’s results of operations arethe operations of St. Louis Music for the period January 1 through September 30,2006 and March 5 through September 30, 2005.

**Use of Estimates**

The preparation of financial statements in conformity withgenerally 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 costs 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.

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** **

**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 withcontingencies, such as rights of return, rotation rights, conditionalacceptance provisions and price protection, are deferred until thecontingencies have been satisfied or the contingent period has lapsed. Wegenerally warrant our products against defects in materials and workmanship forperiods of between one and six years, with the exception of our Alvarez andAlvarez Yairi guitars, which have a limited lifetime warranty. The estimatedcost of warranty obligations, sales returns and other allowances are recognizedat the time of revenue recognition based on contract terms and prior claimsexperience.

**Income Taxes**

Income taxes are accounted for under the asset andliability method in accordance with SFAS 109, “Accounting for Income Taxes”. Deferredtax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases and operatingloss and tax credit carryforwards. Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled. The effect on deferred tax assets and liabilities of a change in taxrates is recognized in income in the period that includes the enactment date. TheCompany has recorded a valuation allowance due to the uncertainty surroundingthe ultimate realization of such assets. Management evaluates, on a periodicbasis, the recoverability of the net deferred tax assets and the amount of thevaluation allowance. At such time as it is determined that it is more likelythan not the deferred tax assets are realizable, the valuation allowance willbe reduced.

The Company has recorded a deferred tax liabilityrelated to goodwill associated with the St. Louis Music acquisition, which isbeing amortized for tax purposes, but not for book purposes. As goodwill has anindeterminable life, the Company cannot reasonably estimate the amount, if any,of deferred tax liabilities related to goodwill which will reverse during thenet operating loss carry forward period. Accordingly, the Company increases thevaluation allowance with a corresponding deferred tax provision as the deferredtax liability related to goodwill increases due to continued amortization ofgoodwill for tax purposes.

**Stock-BasedCompensation**

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 non-qualifiedstock options with exercise prices equal to the fair market value of the stockon the date granted. Options generally vest over a five-year period and expirethe earlier of ten years from grant date or three months from termination. Ifan option holder is terminated for Cause, as defined in the 2003 Plan, theoptions would terminate a day prior to termination. At September 30, 2006,76,000 shares of common stock were available for future grants under the 2003Plan.

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 the earlier of ten years from grant date or three months fromtermination. At September 30, 2006, 827,000 shares of common stock were availablefor future grants under the 1995 Plan.

The Company’s policy is to issue new shares for stockoption exercises. Shares issued under the 2003 Plan are also subject to aShareholder’s Agreement governing restrictions on transfer and voting rightsfor shares issued under the plan. No significant share repurchases are plannedin 2006.

8

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The Company adopted SFAS 123R, “Share Based Payment:An Amendment of SFAS No. 123”, on January 1, 2006, using the ModifiedProspective Application Method whereby previously awarded but unvested equityawards are accounted for in accordance with SFAS No. 123R and prospectiveamounts are recognized in the income statement instead of simply beingdisclosed. Prior to the adoption of SFAS No. 123R, the Company followed the intrinsic-valuemethod prescribed 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*to account forits stock options granted under its employee option plans. Under this method,deferred compensation expense was recorded on the date of grant only to theextent if the current market price of the underlying stock exceeded theexercise price and recognized over the vesting period. The adoption of SFAS No.123R primarily resulted in a change in the Company’s method of recognizing thefair value of share-based compensation for all unvested awards. Specifically,the adoption of SFAS No. 123R resulted in the Company recording compensationexpense during the three and nine-month periods ended September 30, 2006of approximately $96,000 and $343,000, respectively. The amounts are classifiedin the Company’s unaudited condensed consolidated statements of operations asfollows (in thousands):

|                                      | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|--------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **September 30, 2006** | ** ** | **September 30, 2006** | ** ** |
|                                 |       |                             |       |                             |       |
| Cost of sales                        |       | $                                | 3          |                             | $          | 25 |   |
| Selling, general  and administrative |       | 89                               |       | 302                              |       |
| Research and  development            |       | 4                                |       | 16                               |       |
| Total stock based  compensation      |       | $                                | 96         |                             | $          | 343 |   |

 

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 value ofthe unvested portion of these options was amortized over a three year period. Approximately$10,000 related to this was expensed in 2006.

No stock-based compensation was capitalized as part ofan asset as of September 30, 2006.

The following table shows the effects of adopting SFASNo. 123R on selected reported items (“As Reported”) and what those items wouldhave been under previous guidance under APB No. 25 (in thousands except pershare data):

|                                                         | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **September 30, 2006** | ** ** | **September 30, 2006** | ** ** |
| ** **                                              | ** ** | **As**                           | ** ** | **Under APB**               | ** ** | **As** | ** ** | **Under APB** | ** ** |
| ** **                                              | ** ** | **Reported**                     | ** ** | **No. 25**                  | ** ** | **Reported** | ** ** | **No. 25** | ** ** |
| Income before income  taxes and discontinued operations |       | $                                | 1,575      |                             | $          | 1,671 |   | $ | 1,374 |   | $ | 1,717 |   |
| Net income                                              |       | $                                | 1,448      |                             | $          | 1,544 |   | $ | 1,173 |   | $ | 1,516 |   |
| Basic net income  per share                             |       | $                                | 0.30       |                             | $          | 0.32 |   | $ | 0.24 |   | $ | 0.32 |   |
| Diluted net income per  share                           |       | $                                | 0.29       |                             | $          | 0.31 |   | $ | 0.24 |   | $ | 0.30 |   |

 

9

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Results for the three and nine-month periods ended September 30,2005 have not been restated. Had compensation expense for employee stockoptions granted under the Company’s stock incentive plans been determined basedon SFAS No. 123R’s Modified Prospective Application Method, the Company’sIncome from continuing operations, net income, and basic and diluted per shareamounts would have been reduced to the pro forma amounts as indicated below (inthousands except per share data):

|                                               | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **September 30, 2005** | ** ** | **September 30, 2005** | ** ** |
| ** **                                    | ** ** | **As Reported**             | ** ** | **Pro Forma**               | ** ** | **As Reported** | ** ** | **Pro Forma** | ** ** |
| Net income  (loss) from continuing operations |       | $                                | 379        |                             | $          | 264 |   | $ | (815 | ) | $ | (1,156 | ) |
| Net income                                    |       | $                                | 379        |                             | $          | 264 |   | $ | 2,012 |   | $ | 1,671 |   |
|                                          |       |                             |       |                             |       |   |   |   |   |
| Basic net income  (loss) per share:           |       |                             |       |                             |       |   |   |   |   |
| Income (loss) from continuing operations      |       | $                                | 0.08       |                             | $          | 0.06 |   | $ | (0.18 | ) | $ | (0.24 | ) |
| Net income                                    |       | $                                | 0.08       |                             | $          | 0.06 |   | $ | 0.42 |   | $ | 0.35 |   |
|                                          |       |                             |       |                             |       |   |   |   |   |
| Diluted net  income (loss) per share:         |       |                             |       |                             |       |   |   |   |   |
| Income (loss) from continuing operations      |       | $                                | 0.08       |                             | $          | 0.05 |   | $ | (0.18 | ) | $ | (0.24 | ) |
| Net income                                    |       | $                                | 0.08       |                             | $          | 0.05 |   | $ | 0.42 |   | $ | 0.35 |   |

 

The following table summarizes the stock optionactivity for the nine-month period ended September 30, 2006:

|                                                 | ** ** | ** **              | ** ** | **Weighted** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|--------------|------------|
|                                                 | ** ** | **Shares**              | ** ** | **average**  | ** ** |
| ** **                                      | ** ** | **subject to**     | ** ** | **exercise** | ** ** |
| ** **                                      | ** ** | **exercise**            | ** ** | **price**    | ** ** |
| ** **                                      | ** ** | **(in thousands)** | ** ** | ** **   | ** ** |
| Options  outstanding at December 31, 2005  |       | 629                     |       | $            | 15.27      |   |
| Granted                                         |       | —                  |       | —       |       |
| Exercised                                       |       | —                  |       | —       |       |
| Forfeited                                       |       | —                  |       | —       |       |
| Expired                                         |       | (13                     | )          | 43.75        |       |
| Options outstanding  at March 31, 2006          |       | 616                     |       | $            | 14.67      |   |
| Granted                                         |       | 3                       |       | 15.00        |       |
| Exercised                                       |       | —                  |       | —       |       |
| Forfeited                                       |       | (13                     | )          | 15.08        |       |
| Expired                                         |       | —                  |       | —       |       |
| Options  outstanding at June 30, 2006           |       | 606                     |       | $            | 14.66      |   |
| Granted                                         |       | —                  |       | —       |       |
| Exercised                                       |       | —                  |       | —       |       |
| Forfeited                                       |       | (10                     | )          | 15.08        |       |
| Expired                                         |       | —                  |       | —       |       |
| Options  outstanding at September 30, 2006 |       | 596                     |       | 14.58        |       |
|                                            |       |                    |       |         |       |
| Options exercisable at  September 30, 2006 |       | 461                     |       | $            | 17.38      |   |

 

The aggregate intrinsic value of options outstandingand exercisable at September 30, 2006 was $1.7 million and $0.1 million,respectively. The aggregate intrinsic value represents the difference betweenthe Company’s closing stock price on the last day of trading during thequarter, which was $17.50 per share as of September 30, 2006, and theexercise price multiplied by the number of applicable options. The totalintrinsic value of options exercised during the nine-month period ended September 30,2005 was $0.1 million. There were no options exercised during thenine-month period ended September 30, 2006.

10

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The following table summarizes information aboutoptions outstanding and exercisable at September 30, 2006:
| ** **                                 | ** ** | **Options outstanding** | ** **   | **Options exercisable** | ** **   |
|--------------------------------------------|------------|-------------------------|--------------|-------------------------|--------------|
| ** **                                 | ** ** | ** **              | ** **   | **Weighted**            | ** **   | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | ** **              | ** **   | **average**             | ** **   | ** ** | ** ** | ** ** | ** ** | **average** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | ** **              | ** **   | **remaining**           | ** **   | **Weighted** | ** ** | ** ** | ** ** | **remaining** | ** ** | **Weighted** | ** ** |
| ** **                                 | ** ** | **Number**              | ** **   | **contractual**         | ** **   | **average** | ** ** | **Number** | ** ** | **contractual** | ** ** | **average** | ** ** |
| **Range of exercise price** | ** ** | **outstanding**         | ** **   | **life (years)**   | ** **   | **exercise price** | ** ** | **exercisable** | ** ** | **life (years)** | ** ** | **exercise price** | ** ** |
| ** **                                 | ** ** | **(in thousands)** | *** *** | *** ***            | *** *** | *** *** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $5.10—8.85                            |       | 304                     |         | 5.7                     |         | $ | 5.26 |   | 225 |   | 5.2 |   | $ | 5.23 |   |
| $11.30—23.75                          |       | 115                     |         | 7.0                     |         | 16.37 |   | 59 |   | 5.6 |   | 18.24 |   |
| $25.30—32.50                          |       | 153                     |         | 2.2                     |         | 28.64 |   | 153 |   | 2.2 |   | 28.64 |   |
| $33.44—43.75                          |       | 24                      |         | 2.4                     |         | 34.06 |   | 24 |   | 2.4 |   | 34.06 |   |
|                                       |       | 596                     |         | 5.5                     |         | $ | 14.66 |   | 461 |   | 4.3 |   | $ | 17.38 |   |

 

The weighted average fair value of options grantedduring the three-month periods ended September 30, 2006 and 2005 was $0and $9.50, respectively. The fair value of options granted during thenine-month period ended September 30, 2006 was $11.09, while the weightedaverage fair value of options granted during the nine-month period ended September 30,2005 was $10.27.

The fair value of each option grant is estimated onthe date of grant using the Black-Scholes option pricing model with thefollowing weighted average assumptions:

|                           | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Expected life  (in years) |       | N/A                              |       | 5.0                             |       | 6.5 |   | 5.0 |   |
| Risk-free  interest rate  |       | N/A                              |       | 3.98                            | %          | 4.98 | % | 4.03 | % |
| Expected  volatility      |       | N/A                              |       | 85                              | %          | 80 | % | 85 | % |
| Expected dividend yield   |       | N/A                              |       | 0                               | %          | 0 | % | 0 | % |

 

The expected life for each award granted wascalculated using the simple method as described in SAB No. 107. Expectedvolatility is based on the historical volatility of LOUD common stock. The riskfree interest rate is based on the constant maturity U.S. Treasury rate with aremaining term equal to the expected life. Compensation expense recordedincludes estimates of the ultimate number of options that are expected to vest.

The Company has total compensation cost related tononvested awards not yet recognized of approximately $1.0 million with theweighted average period over which it is expected to be recognized of 1.5years.

**Concentration ofCredit and Supply Risk**

We sell products on a worldwide basis and asignificant portion of our accounts receivable are due from customers outsideof the U.S. Where we are exposed to material credit risk, we generally requireletters of credit or advance payments. No individual country outside of theU.S. accounted for more than 10% of net sales from continuing operations in anyof the periods presented. Sales to U.S. customers are generally on open creditterms. In the U.S., we primarily sell our products through third-partyresellers and experience individually significant annual sales volumes withmajor resellers. For the three-month periods ended September 30, 2006 and2005, we had sales to one customer of $9.6 million and $8.3 million,or 18.0% and 15.4%, respectively of consolidated net sales from continuingoperations. For the nine-month periods ended September 30, 2006 and 2005,we had sales to the same customer of $28.3 million and $25.1 million,or 17.1% and 16.9%, respectively, of consolidated net sales from continuingoperations.

11

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Many of our products are currently being manufacturedexclusively by contract manufacturers on our behalf. For the three-monthperiods ended September 30, 2006 and 2005, net sales of productsmanufactured by one manufacturer were $14.8 million and $15.6 million,or 27.8% and 28.9%, respectively of consolidated net sales from continuingoperations, while net sales of products manufactured by another manufacturerwere $6.5 million and $5.3 million, or 12.2% and 9.8%, respectivelyof consolidated net sales from continuing operations. For the nine-monthperiods ended September 30, 2006 and 2005, net sales of productsmanufactured by one manufacturer were $51.9 million and $45.1 million,or 31.4% and 30.4%, respectively of consolidated net sales from continuing operations,while net sales of products manufactured by another manufacturer were $19.4 millionand $16.2 million, or 11.7% and 10.9%, respectively of consolidated netsales from continuing operations.

At September 30, 2006, we had approximately 639employees of which approximately 33 were members of an organized labor union.

**Recent AccountingPronouncements**

In June 2006, the Financial Accounting Standards Board(FASB) issued FASB Interpretation No. (FIN) 48,*Accounting for Uncertainty in Income Taxes—An Interpretation of FASB StatementNo. 109,* which prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. FIN 48 will beeffective beginning Q1 2007. We have not yet evaluated the impact ofimplementation on our consolidated financial statements.

In June 2006, the Emerging Issues Task Forceissued EITF 06-3, How Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement (That Is,Gross versus Net Presentation), to clarify diversity in practice on thepresentation of different types of taxes in the financial statements. The TaskForce concluded that, for taxes within the scope of the issue, a company mayadopt a policy of presenting taxes either gross within revenue or net. That is,it may include charges to customers for taxes within revenues and the chargefor the taxes from the taxing authority within cost of sales, or, alternatively,it may net the charge to the customer and the charge from the taxing authority.If taxes subject to this Issue are significant, a company is required todisclose its accounting policy for presenting taxes and the amounts of suchtaxes that are recognized on a gross basis. The guidance in this consensus iseffective for the first interim reporting period beginning after December 15,2006. The Company does not expect the adoption of EITF 06-3 to result in achange to the Company’s accounting policy or have an effect on the Company’scondensed consolidated financial statements.

**Reclassifications**

Certain prior year amounts have been reclassified toconform with our current year.

**3. DiscontinuedOperations**

In December 2003, we placed our wholly ownedItalian subsidiary, Mackie Designs (Italy) S.p.A. (“Mackie Italy”), into anItalian form of court-supervised liquidation and sold all of the shares ofMackie Italy. 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 the 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, loweringour liability to $7.6 million at December 31, 2004. Additionally,Mackie Italy had a payable to a separate wholly owned subsidiary of the Companyfor approximately $2.7 million, which was fully reserved at the date ofsale in 2003.

In February 2005, we made an offer to MackieItaly to settle any outstanding amounts owed by the Company to Mackie Italy for$4.7 million. This proposal was accepted by the Italian court appointedtrustee on behalf of Mackie Italy in May 2005. Under the terms of thesettlement agreement, we made additional payments of $2.5 million during2005. We also committed to pay $2.2 million during 2006, of which $1.0 millionwas paid by September 30, 2006. Our payable balance at September 30,2006 is $1.2 million. We recognized a gain, net of income tax, ondiscontinued operations of $2.8 million in the first quarter of 2005related to this settlement.

12

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**4. Net Income(Loss) Per Share**

The following table sets forth the computation ofbasic and diluted net income (loss) per share for the three and ninemonths ended September 30, 2006 and 2005. Stock options to purchase209,000 and 232,000 shares in 2006 and 2005, respectively, were excluded fromthe calculation of diluted per share amounts because they are antidilutive.
| ** **                                                              | ** ** | **Three months ended**                                   | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                              | ** ** | **September 30,**                                             | ** ** | **September 30,**          | ** ** |
| ** **                                                              | ** ** | **2006**                                                           | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                              | ** ** | **(in thousands, except per share data)** | ** ** |
| Numerator:                                                              |       |                                                               |       |                            |       |   |   |   |   |
| Net income (loss) from continuing operations                            |       | $                                                                  | 1,448      |                            | $          | 379 |   | $ | 1,173 |   | $ | (815 | ) |
| Net income from discontinued operations                                 |       | —                                                             |       | —                          |       | — |   | 2,827 |   |
| Numerator for  basic and diluted net income per share                   |       | $                                                                  | 1,448      |                            | $          | 379 |   | $ | 1,173 |   | $ | 2,012 |   |
|                                                                    |       |                                                               |       |                            |       |   |   |   |   |
| Denominator:                                                            |       |                                                               |       |                            |       |   |   |   |   |
| Denominator for basic net income per share                              |       | 4,806                                                              |       | 4,773                           |       | 4,806 |   | 4,742 |   |
| Dilutive potential common shares from outstanding  options and warrants |       | 189                                                                |       | 204                             |       | 177 |   | — |   |
| Denominator for  diluted net income per share                           |       | 4,995                                                              |       | 4,977                           |       | 4,983 |   | 4,742 |   |
|                                                                    |       |                                                               |       |                            |       |   |   |   |   |
| Basic net income  (loss) per share:                                     |       |                                                               |       |                            |       |   |   |   |   |
| Continuing operations                                                   |       | $                                                                  | 0.30       |                            | $          | 0.08 |   | $ | 0.24 |   | $ | (0.18 | ) |
| Discontinued operations                                                 |       | —                                                             |       | —                          |       | — |   | 0.60 |   |
| Basic net income  per share                                             |       | $                                                                  | 0.30       |                            | $          | 0.08 |   | $ | 0.24 |   | $ | 0.42 |   |
|                                                                    |       |                                                               |       |                            |       |   |   |   |   |
| Diluted net  income (loss) per share:                                   |       |                                                               |       |                            |       |   |   |   |   |
| Continuing operations                                                   |       | $                                                                  | 0.29       |                            | $          | 0.08 |   | $ | 0.24 |   | $ | (0.18 | ) |
| Discontinued operations                                                 |       | —                                                             |       | —                          |       | — |   | 0.60 |   |
| Diluted net income per  share                                           |       | $                                                                  | 0.29       |                            | $          | 0.08 |   | $ | 0.24 |   | $ | 0.42 |   |

 

**5. RestructuringCosts**

During the first nine months of 2006, managementapproved and began implementing a restructuring plan. Actions primarily consistof costs related to the consolidation of the St. Louis Music and serviceoperations. We incurred approximately $0.2 million and $0.8 millionin restructuring costs during the three and nine-month periods ended September 30,2006, respectively, primarily representing employee severance and related costsfor approximately 86 terminated employees. We estimate there to be anadditional $0.1 million of severance related costs to occur during thefourth quarter of 2006 relating to the consolidation of the St. Louis Music andservice operations. We are also implementing a plan to shift our domesticmanufacturing to overseas contract manufacturers. The total restructuring costsassociated with these plant shutdowns could equal or exceed our 2006restructuring costs. We had $304,000 of these restructuring amounts remainingin accrued liabilities at September 30, 2006. We expect to pay themajority of this amount during the remainder of 2006. The restructuringliability is summarized as follows (in thousands):

| Balance at December 31,  2005  |   | $    | — |   |
|-------------------------------------|--------|------|--------|--------|
| New charges                         |   | 818  |   |
| Cash payments                       |   | (503 | )      |
| Other  adjustments                  |   | (11  | )      |
| Balance at September 30,  2006 |   | $    | 304    |   |

 

13

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** **

**6. Inventories**

Inventories consist of the following:

|                 | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **      | ** ** | **(in thousands)** | ** ** |
| Raw materials   |       | $                       | 4,114      |                  | $          | 5,531 |   |
| Work in process |       | 1,070                   |       | 976                   |       |
| Finished goods  |       | 38,782                  |       | 32,783                |       |
|            |       | $                       | 43,966     |                  | $          | 39,290 |   |

 

**7. IntangibleAssets**

Intangible assets consist of the following:

|                                | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **                     | ** ** | **(in thousands)** | ** ** |
| Developed  technology          |       | $                       | 5,470      |                  | $          | 5,470 |   |
| Customer  relationships        |       | 3,080                   |       | 3,080                 |       |
| Trademark                      |       | 5,930                   |       | 5,930                 |       |
| Covenant not to  compete       |       | 285                     |       | 285                   |       |
|                           |       | 14,765                  |       | 14,765                |       |
| Less accumulated  amortization |       | (3,195                  | )          | (2,567                | )          |
|                           |       | $                       | 11,570     |                  | $          | 12,198 |   |

 

The useful lives of the intangible assets are asfollows:

|                          | ** ** | **Useful lives** |
|--------------------------|------------|------------------|
| ** **               | ** ** | **(in years)**   |
| Developed  technology    |       | 5—20        |
| Customer  relationships  |       | 15               |
| Trademark                |       | 20               |
| Covenant not to  compete |       | 3                |

 

Amortization expense for intangible assets was$204,000 and $228,000 for the three-month periods ended September 30, 2006and 2005, respectively. Amortization expense for intangible assets was $628,000and $602,000 for the nine-month periods ended September 30, 2006 and 2005,respectively.

Expected future amortization expense related toidentifiable intangible assets for the next five years is as follows (inthousands):

| Twelve months ending September 30: | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|------------|------------|
| 2007                                                   |       | $          | 816        |   |
| 2008                                                   |       | 816        |       |
| 2009                                                   |       | 816        |       |
| 2010                                                   |       | 784        |       |
| 2011                                                   |       | 762        |       |
|                                                        |            |            |            |  |

 

14

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** **

**8. Financing**

The Company has a $69.5 million secured loanfacility and a $14.8 million senior subordinated note payable. The seniorsecured loan facility consists of a $40.0 million revolving loan, a $15.0 millionTerm Loan A, and a $14.5 million Term Loan B. The Company’sobligations under the Credit Agreement and the Subordinated Note Agreements areautomatically accelerated upon certain bankruptcy or insolvency events, and maybe accelerated upon the occurrence of other events of default under the CreditAgreement and the Subordinated Note Agreement, such as non-payment ofprincipal, interest or fees when due, or failure to comply with affirmative andnegative covenants, subject to any applicable grace periods.

As of September 30, 2006, the Company was incompliance with all financial covenants.

**(a) Short-termborrowings**

The Company has a line of credit where we can borrowup to $40.0 million, subject to certain restrictions, including availableborrowing capacity. At September 30, 2006, the outstanding balance on ourline of credit was $12.5 million. At September 30, 2006, we had theability to borrow an additional $14.1 million on this line of credit. Interestis due monthly or at the end of a LIBOR period (but in such case no greaterthan 3 months) and is based on Bloomberg’s prime rate or LIBOR, both plus aspecified margin. Under the terms of the line of credit and relatedsubordinated loan agreements, we are required to maintain certain financialratios, such as measuring our EBITDA to our total debt and senior debt, andmaintaining a certain fixed charge coverage ratio. The agreement also provides,among other matters, restrictions on additional financing, dividends, mergers,acquisitions, and an annual capital expenditure limit. The weighted averageinterest rate on our line of credit was 8.98% at September 30, 2006.

**(b) Long-term debt**

At September 30, 2006 and December 31, 2005,our long-term debt consisted of the following:

|                            | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **                 | ** ** | **(In thousands)** | ** ** |
| Term Loan A                |       | $                       | 13,125     |                  | $          | 15,000 |   |
| Term Loan B                |       | 14,391                  |       | 14,500                |       |
| Subordinated  note payable |       | 14,750                  |       | 14,750                |       |
|                       |       | 42,266                  |       | 44,250                |       |
| Less: current  portion     |       | (3,306                  | )          | (3,306                | )          |
| Long-term portion of  debt |       | $                       | 38,960     |                  | $          | 40,944 |   |

 

Principal payments on the $29.5 million Term LoanA and Term Loan B, under the Credit Agreement, are paid quarterly. The termloans bear interest at the Bloomberg’s prime rate or LIBOR, both plus aspecified margin. This rate for Term Loan A was 8.83% and Term Loan B was 9.33%at September 30, 2006. Interest is due monthly on each term loan. Thefinal Term Loan A principal payment is due August 29, 2010. The final TermLoan B principal payment is due August 29, 2011. The term loans and theline of credit are both secured by substantially all of the assets of theCompany and its subsidiaries, and are both senior to other long-term debt. The$14.8 million in senior subordinated notes issued is subordinate to allamounts due under the Credit Agreement and to any refinancing thereof. Interestaccrues on the senior subordinated notes at a rate of 14% and is due quarterly.Of the 14% interest rate, up to two percent may be capitalized on each interestpayment date. The principal under the Senior Subordinated Note Agreements isdue 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 March 2007 and was secured by a standby letter of credit in September 2005.

15

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**9. 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 our Alvarez and AlvarezYairi guitars, which have a limited lifetime warranty.

The warranty liability is summarized as follows (inthousands):

|                               | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                    | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **(in thousands)**          | ** ** |
| Balance,  beginning of period |       | $                                | 1,045      |                            | $          | 1,240 |   | $ | 980 |   | $ | 978 |   |
| Charged to cost  of sales     |       | 671                              |       | 654                             |       | 2,333 |   | 1,605 |   |
| Increase from  acquisition    |       | —                           |       | —                          |       | — |   | 290 |   |
| Applied to  liability         |       | (601                             | )          | (669                            | )          | (2,198 | ) | (1,648 | ) |
| Balance, end of period        |       | $                                | 1,115      |                            | $          | 1,225 |   | $ | 1,115 |   | $ | 1,225 |   |

 

**10. Commitmentsand Contingencies**

We are a defendant in a lawsuit filed in the SouthernDistrict of Florida on November 29, 2005 by Ace Pro Sound and Recording,L.L.C. The lawsuit alleges various federal and state antitrust violations, aswell as common-law (misrepresentation) claims. We believe the claims arewithout merit and we intend to vigorously defend the lawsuit.

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

16

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**Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

*The following discussion and analysis should beread in conjunction with our financial statements included in our Annual Reporton Form 10-K for the year ended December 31, 2005. This discussioncontains certain “forward-looking statements” within the meaning of Section 21Dof the Securities Exchange Act of 1934, as amended, which involve risks anduncertainties, such as statements of our plans, objectives, expectations andintentions. Actual results may differ materially from those discussed herein.The cautionary statements made in this Quarterly Report on Form 10-Q and theAnnual Report on Form 10-K may apply to all forward-looking statements whereverthey appear. We undertake no obligation to publicly release any revisions tothese forward-looking statements that may be required to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated 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 likelyresult,” or words or phrases of similar meaning.*

**Overview**

LOUD Technologies Inc., was founded in 1988 andincorporated in Washington under the name Mackie Designs Inc., and changed itsname to LOUD Technologies Inc., on September 13, 2003. LOUD is one of theworld’s largest dedicated pro 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.

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.

Our stock is listed on the Nasdaq Capital MarketTMunder the symbol “LTEC”.

“MACKIE,” the running man figure, “TAPCO,” “EAW,” and “SIA”are registered trademarks of LOUD Technologies Inc. “Alvarez”, “Ampeg”, “Crate”,and “Knilling” are registered trademarks of our wholly owned subsidiary, St.Louis Music, Inc. To the extent our trademarks are unregistered, we are unawareof any 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.

**CriticalAccounting Policies and Judgments**

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Actual results could differ from theseestimates.

We believe there have been no additional significantchanges in our critical accounting policies during the nine months ended September 30,2006 as compared to what was previously disclosed in our Form 10-K for the yearended December 31, 2005.

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**Estimates andAssumptions Related to Financial Statements**

The discussion and analysis of our financial conditionand results of operations is based upon our unaudited condensed consolidatedfinancial statements, which have been prepared in accordance with U.S.generally accepted accounting principles for interim financial statements. Thepreparation of these condensed consolidated financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. On an on-going basis, we evaluate our estimates, includingthose affecting revenue recognition, the allowance for doubtful accounts,inventory valuation, intangible assets, income taxes and general businesscontingencies. We base our estimates on historical experience and on variousother assumptions that we believe to be reasonable under the circumstances, theresults of which form our basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions.

**Results ofOperations (in thousands)**

|                                             | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                  | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net sales                                   |       | $                                | 53,445     |                            | $          | 53,987 |   | $ | 165,556 |   | $ | 148,222 |   |
| Gross profit                                |       | 18,203                           |       | 18,206                          |       | 55,608 |   | 47,189 |   |
|                                        |       |                             |       |                            |       |   |   |   |   |
| Selling, general  and administrative        |       | 11,624                           |       | 12,669                          |       | 38,370 |   | 35,079 |   |
| Research and  development                   |       | 2,778                            |       | 2,744                           |       | 9,264 |   | 7,402 |   |
| Restructuring  costs                        |       | 173                              |       | —                          |       | 818 |   | — |   |
| Total operating expenses                    |       | 14,575                           |       | 15,413                          |       | 48,452 |   | 42,481 |   |
|                                        |       |                             |       |                            |       |   |   |   |   |
| Operating income                            |       | 3,628                            |       | 2,793                           |       | 7,156 |   | 4,708 |   |
| Other expense                               |       | (2,053                           | )          | (2,413                          | )          | (5,782 | ) | (5,479 | ) |
| Provision for  income taxes                 |       | 127                              |       | 1                               |       | 201 |   | 44 |   |
| Income (loss)  from continuing operations   |       | 1,448                            |       | 379                             |       | 1,173 |   | (815 | ) |
| Recognized gain  on discontinued operations |       | —                           |       | —                          |       | — |   | 2,827 |   |
| Net income                                  |       | $                                | 1,448      |                            | $          | 379 |   | $ | 1,173 |   | $ | 2,012 |   |

 

**Three Months EndedSeptember 30, 2006 vs. Three Months Ended September 30, 2005**

*Net Income*

Results of operations for the three months ended September 30,2006, showed net income of approximately $1.5 million, an increase of $1.1 millionfrom net income of $0.4 million for the comparable period in 2005. Operatingincome for the three months ended September 30, 2006 was $3.6 millioncompared to $2.8 million in the comparable period in 2005. The increaseresults primarily from a decrease of $0.8 million in operating expenses. Thedecrease in operating expenses was primarily the result of our restructuringactivities in June 2006.

*Net Sales*

Net sales from continuing operations decreased by 1.0%to $53.4 million during the three months ended September 30, 2006from $54.0 million in the comparable period in 2005.

We expect sales to remain in the same range in futurequarters.

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*Gross Profit*

Gross profit was $18.2 million, or 34.1% of netsales, in the three months ended September 30, 2006 compared to $18.2 million,or 33.7% of net sales, in the three months ended September 30, 2005.

We expect gross margin percentages to remain in the33% to 35% range in future quarters.

*Selling, Generaland Administrative*

Selling, general and administrative expenses decreasedby $1.1 million to $11.6 million in the three months ended September 30,2006 from $12.7 million in the comparable period in 2005. The decrease wasprimarily attributable to consolidating the St. Louis Music operations, to theongoing cost benefits of our direct sales program, and to cost-cutting programsimplemented in June 2006.

We expect comparable run rate selling, general andadministrative expenses in future quarters, with the exception of seasonallyhigher marketing costs in the first half of the year primarily relating to thetiming of industry tradeshows.

*Research andDevelopment*

Research and development expenses increased by $0.1 millionto $2.8 million in the three months ended September 30, 2006 from$2.7 million in the comparable period in 2005.

We have and will continue to invest in new productsand improvements to existing products. We anticipate our future research anddevelopment costs will be comparable to recent quarters.

*RestructuringCosts*

Restructuring costs were $0.2 million in thethree months ended September 30, 2006. These costs were primarilyseverance costs related to reductions in work force from the consolidation ofthe St. Louis Music and service operations. We anticipate there to be anincrease to restructuring costs in future quarters, due to the ongoing programto shift manufacturing to overseas contract manufacturers. As we finalize theplans for the shift to overseas contract manufacturers, we may incur impairmentcharges in future quarters related to the building and equipment of ourdomestic manufacturing plants.

*Other Income(Expense)*

Net other expense was $2.1 million for the threemonths ended September 30, 2006 as compared to $2.4 million in thethree months ended September 30, 2005. The primary cause of this decreasewas a decrease in other expense of $0.4 million partially offset by anincrease of $0.1 million to interest expense. The decrease to otherexpense of $0.7 million is primarily due to the refinancing of our creditfacilities during August 2005. Included in the 2005 other expense was $0.5 millionof unamortized fees related to the prior debt facility as a result of therefinancing of our debt facilities.

The majority of our debt has variable interest rates,and the interest expense component of other income (expense) in future quarterswill be affected by changing interest rates.

*Income Taxes*

Income tax expense for the three months ended September 30,2006 was $127,000 compared to $1,000 for the comparable period in 2005. Theprimary components of the 2006 tax are the Alternative Minimum Tax, thedeferred tax expense recorded as a result of the goodwill that is amortized fortax purposes only from the St. Louis Music, Inc. acquisition, and foreignsubsidiary tax expense.

19

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***Nine Months Ended September 30, 2006 vs. NineMonths Ended September 30, 2005***

*Net Sales*

Net sales from continuing operations increased by11.7% to $165.6 million during the nine months ended September 30,2006 from $148.2 million in the comparable period in 2005. The nine monthperiod ended September 30, 2006 includes a full nine months of sales fromthe historical St. Louis Music brands as opposed to the comparable period in2005 which includes sales from the historical St. Louis Music brands from theacquisition date of March 5 through September 30.

*Gross Profit*

Gross profit increased to $55.6 million, or 33.6%of net sales, in the nine months ended September 30, 2006 from $47.2 million,or 31.8% of net sales, in the nine months ended September 30, 2005. Theincrease in gross profit is primarily attributable to the increase in salesvolume. The gross profit for 2005 was reduced by $2.4 million, or 1.6% ofnet sales, by the impact of recording St. Louis Music inventories at estimatedselling prices less costs to sell and a reasonable selling profit allowance asof the date of acquisition.

*Selling, Generaland Administrative*

Selling, general and administrative expenses increasedby $3.3 million to $38.4 million in the nine months ended September 30,2006 from $35.1 million in the comparable period in 2005. This increase isprimarily attributable to having a full nine months of St. Louis Musicexpenses.

*Research andDevelopment*

Research and development expenses increased by $1.9 millionto $9.3 million in the nine months ended September 30, 2006 from $7.4 millionin the comparable period in 2005. The increase was primarily attributable to afull nine months of St. Louis Music costs with the primary increase in personnelcosts.

*RestructuringCosts*

Restructuring costs were $0.8 million in the ninemonths ended September 30, 2006. These costs were primarily severancecosts related to reductions in work force from the consolidation of the St.Louis Music and service operations.

*Other Income(Expense)*

Net other expense was $5.8 million for the ninemonths ended September 30, 2006 as compared to $5.5 million in thenine months ended September 30, 2005. This increase was primarily causedby an increase to interest expense of $1.1 million which was primarilycaused by increased debt related to the acquisition of St. Louis Music and anincrease to our variable interest rates. This increase to interest expense waspartially offset by a decrease to other expense of $0.7 million. Thedecrease to other expense of $0.7 million is primarily due to therefinancing of our credit facilities during August 2005. Included in the 2005other expense was $0.5 million of unamortized fees related to the priordebt facility as a result of the refinancing of our debt facilities.

*Income Taxes*

Income tax expense for the first nine months of 2006was $201,000 compared to $44,000 for the comparable period in 2005. The primarycomponents of the 2006 and the 2005 taxes are the Alternative Minimum Tax, thedeferred tax expense recorded as a result of the goodwill that is amortized fortax purposes only from the St. Louis Music, Inc. acquisition, and foreignsubsidiary tax expense.

*Recognized Gain onDiscontinued Operations*

In March 2005, we recognized a $2.8 million gainfrom the discontinued operations of our former Italian subsidiary, net of taxof $0.1 million. This gain was a result of a settlement agreement withMackie Italy to settle the net outstanding amounts owed by the Company.

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** **

**Liquidity andCapital Resources**

In February 2005, we made an offer to Mackie Italy tosettle any outstanding amounts owed by the Company to Mackie Italy for $4.7 million.This proposal was accepted by the Italian court appointed trustee on behalf ofMackie Italy in May 2005. Under the terms of the settlement agreement, we madeadditional payments of $2.5 million during 2005. We also committed to pay$2.2 million during 2006, of which $1.0 million was paid bySeptember 30, 2006. Our payable balance at September 30, 2006 is$1.2 million. We recognized a pre-tax gain on discontinued operations of$2.9 million in the first quarter of 2005 related to this settlement.

As of September 30, 2006, we had cash and cashequivalents of $0.6 million and total debt and short-term borrowings of$56.0 million, including a $1.2 million payable to our former Italiansubsidiary. At September 30, 2006 we had availability of $14.1 millionon our revolving line of credit, net of a $3.2 million standby letter ofcredit issued to secure the commitment to pay the former shareholders of St.Louis Music, Inc.

*Net Cash Providedby Operating Activities*

Cash provided in operating activities was $1.2 millionin the nine months ended September 30, 2006, compared to $1.3 millionfor the comparable period in 2005. Net income for the first nine months of 2006was $1.2 million that included $3.3 million in depreciation andamortization, $0.5 million in amortization of deferred financing fees and$0.4 million in stock based compensation expense. In the first nine monthsof 2006, an increase in accounts payable, accrued liabilities and payable toour former Italian subsidiary of $1.1 million provided cash, whileincreases to inventories and accounts receivable of $4.7 million and $0.7 million,respectively, used cash. Net income in the first nine months of 2005 was $2.0 millionthat included $3.6 million in depreciation and amortization. In the firstnine months of 2005, a decrease to inventories and prepaid expenses and othercurrent assets of $5.5 million and $1.2 million, respectively,provided cash. Net cash used by operating activities in the first nine monthsof 2005 was primarily attributable to a decrease of accounts payable, accruedliabilities and payable to our former Italian subsidiary of $7.1 million,an increase to accounts receivable of $1.4 million and the recognized gainon discontinued operations of Mackie Italy of $2.9 million.

*Net Cash Used inInvesting Activities*

Cash used in investing activities was $2.0 millionfor the first nine months of 2006 compared to $36.3 million for the firstnine months of 2005. The cash used in investing activities for the first ninemonths of 2006 related to the purchases of capital expenditures. The cash usedin investing activities in 2005 was primarily related to the acquisition of St.Louis Music, Inc. of $35.3 million.

*Net Cash Providedby Financing Activities*

Cash provided by financing activities was $0.9 millionduring the first nine months of 2006, compared to cash provided by of $35.0 millionduring the first nine months of 2005. Cash provided in the first nine months of2006 is primarily attributable to an increase in our borrowings from our bankline of credit of $2.9 million partially offset by payments made on ourlong-term debt of $2.0 million. Financing activities in 2005 relatedprimarily to a new credit facility of $69.5 million consisting of arevolving loan facility under which $17.4 million was outstanding at September 30,2005, a Term Loan A of $15.0 million, and a Term Loan B of $14.5 million.In addition to this new credit facility, the Company obtained a seniorsubordinated note payable for $14.8 million. Along with this refinance, wepaid off our existing note payable of $11.4 million, a term loan of $0.6 million,a credit facility of $11.8 million, and incurred $3.6 million indeferred financing costs.

*Ability to stay incompliance with debt covenants*

Under the terms of the line of credit and subordinatedloan agreements, we are required to maintain certain financial ratios, such asmeasuring our EBITDA to our total debt and senior debt, and maintaining acertain fixed charge coverage ratio. The agreement also provides, among othermatters, restrictions on additional financing, dividends, mergers,acquisitions, and an annual capital expenditure limit. As of September 30,2006, we met all of our covenant requirements and we believe we will continueto meet these requirements in the fourth quarter of 2006.

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*Commitments*

We had the following material contractual commitmentsrelated to operating leases for equipment facilities at September 30,2006. In addition, we had material obligations related to short-term andlong-term debt arrangements, excluding our accounts payable, accruedliabilities and taxes payable of $29.7 million at September 30, 2006:
| ** **                                                                                  | ** ** | **Payments due by Period** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                  | ** ** | ** **                                | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                  | ** ** | **Total**                                 | ** ** | **1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **5+ Years** | ** ** |
| ** **                                                                                  | ** ** | **(in thousands)**                   | ** ** |
| Operating leases                                                                            |       | $                                         | 7,905      |   | $ | 2,255 |   | $ | 3,205 |   | $ | 2,277 |   | $ | 168 |   |
| Lines of credit                                                                             |       | 12,503                                    |       | 12,503 |   | — |   | — |   | — |   |
| Payable to our  former Italian subsidiary                                                   |       | 1,200                                     |       | 1,200 |   | — |   | — |   | — |   |
| Future  commitment to pay former shareholders of St. Louis Music, Inc., including  interest |       | 3,188                                     |       | 3,188 |   | — |   | — |   | — |   |
| Short-term and  long-term debt, including interest                                          |       | 62,064                                    |       | 7,726 |   | 14,394 |   | 20,320 |   | 19,624 |   |
| Total                                                                                       |       | $                                         | 86,860     |   | $ | 26,872 |   | $ | 17,599 |   | $ | 22,597 |   | $ | 19,792 |   |

 

We also have purchase commitments that range between$42 million to $47 million that are primarily due to our contractmanufacturers.

We believe we will have adequate resources to meet ourmaterial obligations as they come due through December 31, 2006.

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**Item 3. Quantitativeand Qualitative Disclosures About Market Risk**

We are exposed to various market risks, includingchanges in foreign currency rates and interest rates. We may enter into variousderivative transactions to manage certain of these exposures; however, we didnot have any interest rate or currency swaps or any other derivative financialinstruments as of September 30, 2006.

At September 30, 2006, we had variable rate linesof credit with outstanding balances of $12.5 million. In addition, our$27.5 million term loans also had variable interest rates. As such,changes in U.S. interest rates affect interest paid on debt and we are exposedto interest rate risk. For the quarter ended September 30, 2006, anincrease in the average interest rate of 10%, i.e. from 9.09% to 10.00%, wouldhave resulted in an approximately $93,000 decrease in net income before incometaxes. The fair value of such debt approximates the carrying amount on theconsolidated balance sheet at September 30, 2006.

A substantial majority of our revenues are denominatedin U.S. Dollars, and during the three months ended September 30, 2006approximately 11% of our revenues were denominated in foreign currencies. Weordinarily do not engage in hedging, rate swaps, or other derivatives as ameans to minimize our foreign currency risk and, instead, mitigate thatexposure by limiting the portion of our sales that are denominated in otherthan U.S. Dollars. Assuming the same level of foreign currency denominatedsales as in the three months ended September 30, 2006, a 10% decline inthe average exchange rates for all these currencies would have caused a declineof approximately $564,000, or 1%, of our revenues.

The majority of our products are manufactured byforeign third-party contract manufacturers with the majority of the contractsdenominated in U.S. Dollars. Foreign third-party manufacturing creates risksthat include fluctuations in currency exchange rates that could affect theprice we pay for our product. Our two largest foreign contract manufacturers’products represented 40.0% of our consolidated net sales for the three monthsended September 30, 2006. A 10% increase to the cost of the product soldthat was manufactured by these two manufacturers would have resulted in anincrease to cost of sales for the three months ended September 30, 2006 ofapproximately $1.0 million.

**Item 4. Controlsand Procedures**

The Company maintains disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the SecuritiesExchange Act of 1934, as amended, (the “Exchange Act”)) that are designed toensure that information required to be disclosed in the Company’s reports underthe Exchange Act, is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms, and that such informationis accumulated and communicated to the Company’s management, including theCompany’s Chief Executive Officer and Chief Financial Officer, as appropriate,to allow timely decisions regarding required disclosure.

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

There has been no change in the Company’s internalcontrol over financial reporting (as defined in Rules 13(a)-15(f) and15(d)-15(f) under the Exchange Act) during the period covered by this reportthat has materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

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**PART II. OTHERINFORMATION**

**Item 1. LegalProceedings**

We are a defendant in a lawsuit filed in the SouthernDistrict of Florida on November 29, 2005 by Ace Pro Sound and Recording, L.L.C.The lawsuit alleges various federal and state antitrust violations, as well ascommon-law (misrepresentation) claims. We believe the claims are without meritand we intend vigorously to defend the lawsuit.

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

**Item 1A. RiskFactors**

Information regarding risk factors appears in thefirst paragraph in Part I — Item 2 of this Form 10-Q and in Part I — Item 1A ofour Report on Form 10-K for the fiscal year ended December 31, 2005 (the “200510-K”). There have been no material changes from the risk factors previouslydisclosed in the 2005 Form 10-K.

**Item 2. UnregisteredSales of Equity Securities and Use of Proceeds**

None.

**Item 3. Defaultsupon Senior Securities**

None.

**Item 4. Submissionof Matters to a Vote of Security Holders**

None.

**Item 5. OtherInformation**

None.

**Item 6. Exhibits**

Exhibits

31.1 Certification of Chief Executive Officer Pursuantto Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer Pursuantto 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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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                          |   | **LOUD Technologies Inc.**                                                                                               | ** ** |
|--------------------------|--------|--------------------------------------------------------------------------------------------------------------------------|------------|
|                     |   | (Registrant)                                                                                                             |
|                     |   |                                                                                                                     |
| Dated: November 13, 2006 | By:    | /s/ James T. Engen                                                                                                       |       |
|                     |   | James T. Engen                                                                                                           |
|                     |   | *Chairman, President and Chief Executive Officer*                                                                        |
|                     |   |                                                                                                                     |
| Dated: November 13, 2006 | By:    | /s/ Timothy P. O’Neil                                                                                               |       |
|                     |   | Timothy P. O’Neil                                                                                                   |
|                     |   | *Chief Financial Officer, Senior Vice President,  Secretary and Treasurer (Principal Financial  and Accounting Officer)* |

 

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** **

**EXHIBIT INDEX**
| Exhibit    | ** ** | ** **                                                                                                                                       |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number** | ** ** | **Document Description**                                                                                                                         |
| 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 Section 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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