##### Table of Contents



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




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##### 



LOUD TECHNOLOGIES INC.
 FORM 10-Q
For the quarter ended June 30, 2007
 INDEX
 PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2007 and June 30, 2006Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and June 30, 2006Condensed Consolidated Statements of Shareholders Equity and Comprehensive Income Statements for the six months ended June 30, 2007Notes to Condensed Consolidated Financial StatementsItem 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Quantitative and Qualitative Disclosures About Market RiskItem 4.
    
    Controls and ProceduresPART II.
    
    OTHER INFORMATIONItem 4.
    
    Submission of Matters to a Vote of Security HoldersItem 6.
    
    ExhibitsSIGNATURESEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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##### Table of Contents



LOUD
TECHNOLOGIES INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)  (In thousands, except share amounts)
 June 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,688
    
    
    $
    311Accounts receivable, net of allowances of $1,973 and $2,258, respectively
    
    
    28,792
    
    
    
    26,230Inventories
    
    
    49,017
    
    
    
    54,844Prepaid expenses and other current assets
    
    
    2,320
    
    
    
    1,521Total current assets
    
    
    86,817
    
    
    
    82,906Property, plant and equipment, net
    
    
    6,301
    
    
    
    6,543Goodwill
    
    
    19,477
    
    
    
    2,248Other intangible assets, net
    
    
    28,757
    
    
    
    11,367Deferred financing costs
    
    
    2,821
    
    
    
    2,692Total assets
    
    $
    144,173
    
    
    $
    105,756LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term borrowings
    
    $
    
    
    
    $
    14,210Accounts payable
    
    
    21,585
    
    
    
    23,023Accrued liabilities
    
    
    11,271
    
    
    
    11,193Taxes payable
    
    
    2,123
    
    
    
    1,559Current deferred tax liabilities
    
    
    419
    
    
    
    Current portion of long-term debt
    
    
    3,000
    
    
    
    1,500Current portion of payable to former Italian subsidiary
    
    
    
    
    
    
    700Other current liabilities
    
    
    
    
    
    
    3,162Total current liabilities
    
    
    38,398
    
    
    
    55,347Long-term debt, excluding current portion
    
    
    98,642
    
    
    
    40,105Deferred tax liabilities
    
    
    5,153
    
    
    
    99Total liabilities
    
    
    142,193
    
    
    
    95,551Commitments and contingenciesShareholders equity:Preferred stock, no par value. Authorized 5,000,000 shares, no shares issued and outstanding
    
    
    
    
    
    
    Common stock, no par value. Authorized 40,000,000 shares, issued and outstanding
4,618,942 and 4,575,022 at June 30, 2007 and December 31,
2006, respectively
    
    
    41,669
    
    
    
    41,281Accumulated deficit
    
    
    (39,776
    )
    
    
    (31,076
    )Accumulated other comprehensive income
    
    
    87
    
    
    
    Total shareholders equity
    
    
    1,980
    
    
    
    10,205Total liabilities and shareholders equity
    
    $
    144,173
    
    
    $
    105,756
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 3




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LOUD TECHNOLOGIES INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)  (In thousands, except for per share data)
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    50,583
    
    
    $
    53,547
    
    
    $
    101,536
    
    
    $
    112,111Cost of sales
    
    
    36,049
    
    
    
    35,771
    
    
    
    73,397
    
    
    
    74,706Gross profit
    
    
    14,534
    
    
    
    17,776
    
    
    
    28,139
    
    
    
    37,405Operating expenses:Selling, general and administrative
    
    
    11,032
    
    
    
    11,986
    
    
    
    22,533
    
    
    
    26,746Research and development
    
    
    2,830
    
    
    
    3,230
    
    
    
    5,631
    
    
    
    6,486Restructuring costs
    
    
    536
    
    
    
    495
    
    
    
    1,554
    
    
    
    645Total operating expenses
    
    
    14,398
    
    
    
    15,711
    
    
    
    29,718
    
    
    
    33,877Operating income (loss)
    
    
    136
    
    
    
    2,065
    
    
    
    (1,579
    )
    
    
    3,528Other income (expense):Interest income
    
    
    22
    
    
    
    38
    
    
    
    22
    
    
    
    124Interest expense
    
    
    (2,758
    )
    
    
    (1,656
    )
    
    
    (4,608
    )
    
    
    (3,300
    )Management fee
    
    
    (324
    )
    
    
    (269
    )
    
    
    (485
    )
    
    
    (531
    )Other
    
    
    150
    
    
    
    156
    
    
    
    (2,055
    )
    
    
    (22
    )Total other expense
    
    
    (2,910
    )
    
    
    (1,731
    )
    
    
    (7,126
    )
    
    
    (3,729
    )Income (loss) before income taxes
    
    
    (2,774
    )
    
    
    334
    
    
    
    (8,705
    )
    
    
    (201
    )Provision for income taxes
    
    
    (39
    )
    
    
    14
    
    
    
    (5
    )
    
    
    74Net income (loss)
    
    $
    (2,735
    )
    
    $
    320
    
    
    $
    (8,700
    )
    
    $
    (275
    )Net income (loss) per share:Basic
    
    $
    (0.56
    )
    
    $
    0.07
    
    
    $
    (1.80
    )
    
    $
    (0.06
    )Diluted
    
    $
    (0.56
    )
    
    $
    0.06
    
    
    $
    (1.80
    )
    
    $
    (0.06
    )Shares used in computing basic and diluted
net income (loss) per share:Basic
    
    
    4,855
    
    
    
    4,806
    
    
    
    4,841
    
    
    
    4,806Diluted
    
    
    4,855
    
    
    
    4,932
    
    
    
    4,841
    
    
    
    4,806
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 4




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LOUD TECHNOLOGIES INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Six months endedJune 30,2007
    
    
    2006Operating activitiesNet loss
    
    $
    (8,700
    )
    
    $
    (275
    )Adjustments to reconcile the net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    2,259
    
    
    
    2,216Amortization and write-offs of deferred financing costs
    
    
    2,817
    
    
    
    344Stock based compensation
    
    
    164
    
    
    
    257Gain on asset dispositions
    
    
    (526
    )
    
    
    Non-cash
interest expense
    
    
    106
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    1,962
    
    
    
    (630
    )Inventories
    
    
    11,798
    
    
    
    (2,287
    )Prepaid expenses and other current assets
    
    
    (22
    )
    
    
    38Accounts payable, accrued liabilities and payable to former Italian subsidiary
    
    
    (7,804
    )
    
    
    1,869Taxes payable
    
    
    (523
    )
    
    
    (54
    )Other liabilities
    
    
    19
    
    
    
    103Net cash provided by operating activities
    
    
    1,550
    
    
    
    1,581Investing activitiesPurchases of property, plant and equipment
    
    
    (1,323
    )
    
    
    (1,235
    )Proceeds from the sale of property, plant and equipment
    
    
    1,239
    
    
    
    Acquisition of St. Louis Music, Inc., including transaction fees paid
    
    
    (3,181
    )
    
    
    Acquisition of Martin Audio, Ltd., net of cash acquired of $3,696
    
    
    (31,964
    )
    
    
    Net cash used in investing activities
    
    
    (35,229
    )
    
    
    (1,235
    )Financing activitiesPayments on previous credit facility
    
    
    (41,605
    )
    
    
    (1,984
    )Payments on long-term debt
    
    
    (464
    )
    
    
    Issuance of long-term debt
    
    
    102,000
    
    
    
    Net proceeds (payments) on bank line of credit and short-term borrowings
    
    
    (14,210
    )
    
    
    1,526Net payment on debt and credit facility acquired in acquisition of Martin Audio, Ltd.
    
    
    (3,030
    )
    
    
    Financing costs associated with debt issuance
    
    
    (2,946
    )Net proceeds from stock sales through exercise of stock options
    
    
    224
    
    
    
    Net cash provided by (used in) financing activities
    
    
    39,969
    
    
    
    (458
    )Effect of exchange rate changes in cash and cash equivalents
    
    
    87
    
    
    
    Increase (decrease) in cash and cash equivalents
    
    
    6,377
    
    
    
    (112
    )Cash and cash equivalents at beginning of period
    
    
    311
    
    
    
    468Cash and cash equivalents at end of period
    
    $
    6,688
    
    
    $
    356Supplemental disclosuresAccrued acquisition related expenses
    
    $
    1,397
    
    
    $
    Cash paid for acquisition related expenses
    
    $
    659
    
    
    $
    
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 5




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LOUD TECHNOLOGIES INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME STATEMENTS
Six months ended June 30, 2007
(Unaudited)  (In thousands)
 AccumulatedotherCommon stock
    
    
    Accumulated
    
    
    comprehensiveShares
    
    
    Amount
    
    
    Deficit
    
    
    income
    
    
    TotalBalance at December 31, 2006
    
    
    4,575
    
    
    $
    41,281
    
    
    $
    (31,076
    )
    
    $
    
    
    
    $
    10,205Exercise of stock options
    
    
    44
    
    
    
    224
    
    
    
    
    
    
    
    
    
    
    
    224Stock based compensation
    
    
    
    
    
    
    164
    
    
    
    
    
    
    
    
    
    
    
    164Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    (8,700
    )
    
    
    
    
    
    
    (8,700
    )Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87
    
    
    
    87Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,613
    )Balance at June 30, 2007
    
    
    4,619
    
    
    $
    41,669
    
    
    $
    (39,776
    )
    
    $
    87
    
    
    $
    1,980
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 6




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##### Table of Contents



LOUD TECHNOLOGIES INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
 1. Description of Business
    2. Summary of Significant Accounting Policies
 Basis of Presentation
  Stock Based Compensation
  Three months ended
    
    
    Six months endedJune 30, 2007
    
    
    June 30, 2007Cost of sales
    
    $
    2
    
    
    $
    4Selling, general and administrative
    
    
    69
    
    
    
    153Research and development
    
    
    3
    
    
    
    7Total stock based compensation
    
    $
    74
    
    
    $
    164
  7




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Use of Estimates
  Revenue Recognition
  Foreign Currency
   Income Taxes
   8




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##### Table of Contents



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




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##### Table of Contents



The Fair Value Option for Financial Assets and
Financial Liabilities
 Reclassifications
  3. Net
Income (Loss) Per Share
   4. Restructuring Costs
  Balance at December 31, 2006
    
    $
    880New charges
    
    
    1,554Cash payments
    
    
    (1,535
    )Other adjustments
    
    
    (5
    )Balance at June 30, 2007
    
    $
    894
 5. Inventories
  June 30,
    
    
    December 31,2007
    
    
    2006Raw materials
    
    $
    2,260
    
    
    $
    4,413Work in process
    
    
    219
    
    
    
    1,428Finished goods
    
    
    46,538
    
    
    
    49,003$
    49,017
    
    
    $
    54,844
 10




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##### Table of Contents



6. Other Intangible Assets
  June 30,
    
    
    December 31,2007
    
    
    2006Developed technology
    
    $
    6,139
    
    
    $
    5,470Customer and distributor relationships
    
    
    13,713
    
    
    
    3,080Trademark
    
    
    12,625
    
    
    
    5,930Non compete agreement
    
    
    334
    
    
    
    32,811
    
    
    
    14,480Less accumulated amortization
    
    
    (4,054
    )
    
    
    (3,113
    )$
    28,757
    
    
    $
    11,367
  7. Financing
   (a) Short-term borrowings
  (b) Long-term debt
  June 30,
    
    
    December 31,2007
    
    
    2006Merrill Term Loan A
    
    $
    
    
    
    $
    12,500Merrill Term Loan B
    
    
    
    
    
    
    14,355Oaktree Subordinated note payable
    
    
    
    
    
    
    14,750Ableco Term Loan A
    
    
    19,536
    
    
    
    Ableco US Term Loan B
    
    
    40,000
    
    
    
    Ableco UK Term Loan B
    
    
    30,000
    
    
    
    Ableco Term Loan C
    
    
    12,106
    
    
    
    101,642
    
    
    
    41,605Less: current portion
    
    
    (3,000
    )
    
    
    (1,500
    )Long-term portion of debt
    
    $
    98,642
    
    
    $
    40,105
 11




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##### Table of Contents



8. Guarantees
 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
   Balance at December 31, 2006
    
    $
    1,160Charged to cost of sales
    
    
    1,516Applied to liability
    
    
    (1,766
    )Balance at June 30, 2007
    
    $
    910
 9. Commitments and Contingencies
   12




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10. Business Combinations
   Cash
    
    $
    3,696Accounts receivable
    
    
    4,524Inventories
    
    
    5,971Prepaid expenses and other current assets
    
    
    777Property, plant and equipment
    
    
    749Goodwill
    
    
    17,229Trademarks (estimated life of 20 years)
    
    
    6,695Technology (estimated life of 13 years)
    
    
    669Customer relationships (estimated life of 15 years)
    
    
    1,182Distributor relationships (estimated life of 15 years)
    
    
    9,452Non compete agreement (estimated life of 2 years)
    
    
    49Total assets
    
    $
    50,993Accounts payable
    
    $
    3,653Accrued liabilities
    
    
    2,090Income taxes payable
    
    
    632Deferred income taxes
    
    
    5,928Debt
    
    
    3,030Total liabilities
    
    
    15,333Cash
consideration paid, inclusive of $2,056 of transaction costs
    
    $
    35,660
   UNAUDITED PRO FORMA CONDENSED COMBINED
Statement of Operations Data
 2007
    
    
    2006Pro Forma
    
    
    Pro FormaNet sales
    
    $
    109,862
    
    
    $
    124,648Net loss
    
    
    (4,550
    )
    
    
    (1,527
    )Basic net loss per share
    
    $
    (0.94
    )
    
    $
    (0.32
    )
  13




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis should be read in conjunction with our financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2006. This discussion
contains certain forward-looking statements within the meaning of Section 21D of the Securities
Exchange Act of 1934, as amended, which involve risks and uncertainties, such as statements of our
plans, objectives, expectations and intentions. Actual results may differ materially from those
discussed herein. The cautionary statements made in this Quarterly Report on Form 10-Q and the
Annual Report on Form 10-K may apply to all forward-looking statements wherever they appear. We
undertake no obligation to publicly release any revisions to these forward-looking statements that
may be required to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. Forward-looking statements include, without limitation, any
statement that may predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain the words believe, anticipate, expect, estimate, project,
will be, will continue, will likely result, or words or phrases of similar meaning.
 Overview
      Critical Accounting Policies and Judgments
   Estimates and Assumptions Related to Financial Statements
  14




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Results of Operations
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    50,583
    
    
    $
    53,547
    
    
    $
    101,536
    
    
    $
    112,111Gross profit
    
    
    14,534
    
    
    
    17,776
    
    
    
    28,139
    
    
    
    37,405Selling, general and administrative
    
    
    11,032
    
    
    
    11,986
    
    
    
    22,533
    
    
    
    26,746Research and development
    
    
    2,830
    
    
    
    3,230
    
    
    
    5,631
    
    
    
    6,486Restructuring costs
    
    
    536
    
    
    
    495
    
    
    
    1,554
    
    
    
    645Total operating expenses
    
    
    14,398
    
    
    
    15,711
    
    
    
    29,718
    
    
    
    33,877Operating income (loss)
    
    
    136
    
    
    
    2,065
    
    
    
    (1,579
    )
    
    
    3,528Other expense
    
    
    (2,910
    )
    
    
    (1,731
    )
    
    
    (7,126
    )
    
    
    (3,729
    )Provision for income taxes
    
    
    (39
    )
    
    
    14
    
    
    
    (5
    )
    
    
    74Net income (loss)
    
    $
    (2,735
    )
    
    $
    320
    
    
    $
    (8,700
    )
    
    $
    (275
    )
 Three Months Ended June 30, 2007 vs. Three Months Ended June 30, 2006
 Net Income (Loss)
  Net Sales
  Gross Profit
  15




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##### Table of Contents



Selling, General and Administrative
  Research and Development
  Restructuring Costs
  Other Expense
   Income Taxes
  Six Months Ended June 30, 2007 vs. Six Months Ended June 30, 2006
 Net Sales
  Gross Profit
  16




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##### Table of Contents



Selling, General and Administrative
  Research and Development
  Restructuring Costs
  Other Expense
  Income Taxes
  Liquidity and Capital Resources
  Net Cash Provided by Operating Activities
  17




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##### Table of Contents



Net Cash Used in Investing Activities
  Net Cash Provided by (Used in) Financing Activities
  Ability to stay in compliance with debt covenants
  Commitments
  Payments due by PeriodLess thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5+ YearsOperating leases
    
    $
    9,892
    
    
    $
    2,621
    
    
    $
    4,659
    
    
    $
    2,612
    
    
    $
    Short-term and long-term debt
    
    
    153,735
    
    
    
    13,377
    
    
    
    26,018
    
    
    
    114,340
    
    
    
    Total
    
    $
    163,627
    
    
    $
    15,998
    
    
    $
    30,677
    
    
    $
    116,952
    
    
    $
    
    
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
  18




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##### Table of Contents



Foreign Currency Risk
   
 Item 4. Controls and Procedures
    19




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PART II. OTHER INFORMATION
 
 Item 4. Submission of Matters to a Vote of Security Holders
 (a)
    
    Our annual meeting of shareholders was held on May 23, 2007.(b)
    
    At the annual meeting, C. Daryl Hollis, George R. Rea and Clarence E. Terry were elected to
serve as Class 3 directors for a three-year term. James T. Engen, Jon W. Gacek and R. Lynn
Skillen continue to serve as Class 1 directors and will be up for re-election at the 2008
annual meeting. Thomas V. Taylor, Jason H. Neimark, Kevin J. Calhoun
and Mark E. Kuchenrither
continue to serve as Class 2 directors and will be up for re-election at the 2009 annual
meeting.(c)
    
    The results of voting for the election of directors at the annual meeting were as follows:
 Nominee
    
    For
    
    WithheldC. Daryl Hollis
    
    
    4,269,302
    
    
    
    236,410George R. Rea
    
    
    4,288,546
    
    
    
    217,166Clarence E. Terry
    
    
    4,277,219
    
    
    
    228,493
 
 Item 6. Exhibits
  31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 20




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##### Table of Contents



SIGNATURES
  LOUD Technologies Inc.(Registrant)Dated:  August 14, 2007
    By:
    /s/ James T. EngenJames T. EngenChairman, President and Chief
Executive OfficerDated:  August 14, 2007
    By:
    /s/ Gerald Y. NgGerald Y. NgChief Financial Officer 21




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Document Description31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 22