**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-Q**

 

**(MarkOne)**

 

| **ý**                                                                                                                                                                                                                     | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                           |
| **For the quarterly period ended March 31,  2004**                                                                                                                                                                             |
|                                                                                                                                                                                                                           |
| **or**                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                           |
| **o**                                                                                                                                                                                                                          | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                           |
| **For the transition period from                   to                 ** |
|                                                                                                                                                                                                                           |
| **Commission File Number:  0-26524**                                                                                                                                                                                      |

 

**LOUDTECHNOLOGIES INC.**

(Exact name of registrant as specified in its charter)

 

| **Washington**                                                 |   | **91-1432133**                       |
|----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization) |   | (I.R.S. Employer Identification No.) |
|                                                           |   |                                 |
| **16220 Wood-Red Road, N.E., Woodinville,  Washington**        |   | **98072**                            |
| (Address of principal executive offices)                       |   | (Zip Code)                           |
|                                                           |   |                                 |
| **(425) 892-6500**                                             |
| (Registrant’s telephone number, including area code)      |
|                                                           |
| **N/A**                                                        |
| (Former name or former address, if  changed since last report) |

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes   ý   No  o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).Yes   o No  ý

 

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

 

| **Common Stock, no par value** |   | **19,624,703**                                       |
|--------------------------------|--------|------------------------------------------------------|
| Class                          |   | Number of Shares Outstanding  (as of April 30, 2004) |

 

 

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**LOUD TECHNOLOGIES INC.**

 

**FORM 10-Q**

**For the quarter ended March 31, 2004**

 

**INDEX**

 
| **PART  I.**   | **FINANCIAL  INFORMATION**                                                                  |   |
|----------------|---------------------------------------------------------------------------------------------|--------|
|           |                                                                                        |   |
| Item 1.        | Financial  Statements (Unaudited)                                                           |   |
|           |                                                                                        |   |
|           | Condensed Consolidated Balance Sheets                                                       |   |
|           |                                                                                        |   |
|           | Condensed Consolidated Statements of  Operations                                            |   |
|           |                                                                                        |   |
|           | Condensed Consolidated Statements of Cash  Flows                                            |   |
|           |                                                                                        |   |
|           | Condensed Consolidated Statements of  Shareholders’ Equity (Deficit)                   |   |
|           |                                                                                        |   |
|           | 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 2.        | Changes in 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 and Reports on Form 8-K                                                            |   |
|           |                                                                                        |   |
| **SIGNATURES** |                                                                                        |

 

2

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**LOUD TECHNOLOGIES INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 

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

 
|                                                                                                                                         |   | **March 31,  2004** |   | **December  31,  2003** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
| **ASSETS**                                                                                                                                   |   |                |   |                    |   |
| Current assets:                                                                                                                              |   |                |   |                    |   |
| Cash and cash equivalents                                                                                                                    |   | $                   | 231    |                    | $      | 757 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $1,649 and $2,163, respectively                                              |   | 12,047              |   | 13,683                  |   |
| Income taxes receivable                                                                                                                      |   | 193                 |   | 188                     |   |
| Inventories, net                                                                                                                             |   | 16,896              |   | 18,930                  |   |
| Prepaid expenses and other current assets                                                                                                    |   | 3,659               |   | 2,280                   |   |
| Total current assets                                                                                                                         |   | 33,026              |   | 35,838                  |   |
|                                                                                                                                         |   |                |   |                    |   |
| Property, plant and equipment, net                                                                                                           |   | 8,351               |   | 8,381                   |   |
| Intangible assets, net                                                                                                                       |   | 5,446               |   | 5,552                   |   |
| Other assets, net                                                                                                                            |   | 529                 |   | 651                     |   |
| Total assets                                                                                                                                 |   | $                   | 47,352 |                    | $      | 50,422 |   |
|                                                                                                                                         |   |                |   |                    |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY  (DEFICIT)**                                                                                     |   |                |   |                    |   |
| Current liabilities:                                                                                                                         |   |                |   |                    |   |
| Short-term borrowings                                                                                                                        |   | $                   | 6,332  |                    | $      | 7,868 |   |
| Accounts payable                                                                                                                             |   | 9,008               |   | 5,285                   |   |
| Accrued liabilities                                                                                                                          |   | 7,811               |   | 9,142                   |   |
| Income taxes payable                                                                                                                         |   | 1,346               |   | 1,288                   |   |
| Current portion of long-term debt                                                                                                            |   | 500                 |   | 500                     |   |
| Payable to former Italian subsidiary                                                                                                         |   | 9,173               |   | 9,173                   |   |
| Total current liabilities                                                                                                                    |   | 34,170              |   | 33,256                  |   |
|                                                                                                                                         |   |                |   |                    |   |
| Long-term debt, excluding current portion                                                                                                    |   | 16,343              |   | 16,262                  |   |
| Other liabilities                                                                                                                            |   | 62                  |   | 72                      |   |
| Total liabilities                                                                                                                            |   | 50,575              |   | 49,590                  |   |
|                                                                                                                                         |   |                |   |                    |   |
| Commitments and contingencies                                                                                                                |   |                |   |                    |   |
|                                                                                                                                         |   |                |   |                    |   |
| Shareholders’ equity:                                                                                                                   |   |                |   |                    |   |
| Preferred stock, no par value. Authorized  5,000,000 shares, no shares issued and outstanding                                                |   | —              |   | —                  |   |
| Common stock, no par value. Authorized  40,000,000 shares, issued and outstanding 19,608,036 shares at March 31, 2004  and December 31, 2003 |   | 33,898              |   | 33,999                  |   |
| Accumulated deficit                                                                                                                          |   | (37,121             | )      | (33,167                 | )      |
| Total shareholders’ equity (deficit)                                                                                                    |   | (3,223              | )      | 832                     |   |
| Total liabilities and shareholders’ equity  (deficit)                                                                                   |   | $                   | 47,352 |                    | $      | 50,422 |   |

 

*See accompanying notes to condensed consolidated financial statements.*

 

3

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**LOUD TECHNOLOGIES INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(Unaudited)**

 

*(In thousands, except per share data)*

 
|                                                                                       |   | **Three  Months Ended  March 31,** |   |
|--------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                       |   | **2004**                           |   | **2003** |   |
|                                                                                       |   |                               |   |   |   |
| Net sales                                                                                  |   | $                                  | 25,681 |   | $ | 32,746 |   |
| Cost of sales                                                                              |   | 18,769                             |   | 26,005 |   |
| Gross profit                                                                               |   | 6,912                              |   | 6,741 |   |
|                                                                                       |   |                               |   |   |   |
| Operating expenses:                                                                        |   |                               |   |   |   |
| Selling, general and administrative                                                        |   | 8,292                              |   | 9,811 |   |
| Research and development                                                                   |   | 1,972                              |   | 2,322 |   |
| Restructuring costs                                                                        |   | —                             |   | 696 |   |
| Total operating expenses                                                                   |   | 10,264                             |   | 12,829 |   |
|                                                                                       |   |                               |   |   |   |
| Operating loss                                                                             |   | (3,352                             | )      | (6,088 | ) |
|                                                                                       |   |                               |   |   |   |
| Other income (expense):                                                                    |   |                               |   |   |   |
| Interest income                                                                            |   | —                             |   | 15 |   |
| Interest expense                                                                           |   | (761                               | )      | (518 | ) |
| Other                                                                                      |   | 164                                |   | 201 |   |
| Total other income (expense)                                                               |   | (597                               | )      | (302 | ) |
|                                                                                       |   |                               |   |   |   |
| Loss before income taxes and discontinued  operations                                      |   | (3,949                             | )      | (6,390 | ) |
|                                                                                       |   |                               |   |   |   |
| Provision for income taxes                                                                 |   | 5                                  |   | 12 |   |
|                                                                                       |   |                               |   |   |   |
| Loss from continuing operations                                                            |   | (3,954                             | )      | (6,402 | ) |
|                                                                                       |   |                               |   |   |   |
| Loss from discontinued operations, net of  income tax expense of $0 and $613, respectively |   | —                             |   | (1,992 | ) |
|                                                                                       |   |                               |   |   |   |
| Net loss                                                                                   |   | $                                  | (3,954 | ) | $ | (8,394 | ) |
|                                                                                       |   |                               |   |   |   |
| Basic and diluted net loss per share:                                                      |   |                               |   |   |   |
|                                                                                       |   |                               |   |   |   |
| Net loss from continuing operations                                                        |   | $                                  | (0.19  | ) | $ | (0.41 | ) |
|                                                                                       |   |                               |   |   |   |
| Net loss from discontinued operations                                                      |   | —                             |   | (0.13 | ) |
|                                                                                       |   |                               |   |   |   |
| Basic and diluted net loss per share                                                       |   | $                                  | (0.19  | ) | $ | (0.54 | ) |

 

*See accompanying notes to condensed consolidated financial statements.*

 

4

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**LOUD TECHNOLOGIES INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Unaudited)**

 

*(In thousands)*
|                                                                             |   | **Three  Months Ended  March 31,** |   |
|----------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                             |   | **2004**                           |   | **2003** |   |
| **Operating activities**                                                         |   |                               |   |   |   |
| Net loss                                                                         |   | $                                  | (3,954 | ) | $ | (8,394 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |   |                               |   |   |   |
| Depreciation and amortization                                                    |   | 768                                |   | 2,183 |   |
| Loss (gain) on asset dispositions                                                |   | (111                               | )      | 106 |   |
| Deferred stock compensation                                                      |   | 14                                 |   | 101 |   |
| Non-cash interest expense                                                        |   | 245                                |   | — |   |
| Changes in operating assets and  liabilities:                                    |   |                               |   |   |   |
| Accounts receivable                                                              |   | 1,689                              |   | 1,909 |   |
| Inventories                                                                      |   | 2,040                              |   | 5,822 |   |
| Prepaid expenses and other current assets                                        |   | (1,810                             | )      | 325 |   |
| Other assets                                                                     |   | 121                                |   | 143 |   |
| Accounts payable and accrued expenses                                            |   | 2,827                              |   | (1,975 | ) |
| Income taxes                                                                     |   | 61                                 |   | 1,127 |   |
| Other long term-liabilities                                                      |   | (10                                | )      | (9 | ) |
| Net cash provided by operating activities                                        |   | 1,880                              |   | 1,338 |   |
|                                                                             |   |                               |   |   |   |
| **Investing activities**                                                         |   |                               |   |   |   |
| Purchases of property, plant and equipment                                       |   | (839                               | )      | (276 | ) |
| Proceeds from sales of property, plant and  equipment                            |   | 752                                |   | — |   |
| Net cash used in investing activities                                            |   | (87                                | )      | (276 | ) |
|                                                                             |   |                               |   |   |   |
| **Financing activities**                                                         |   |                               |   |   |   |
| Proceeds from sale of stock and exercise of  stock options                       |   | —                             |   | 3,583 |   |
| Proceeds from long-term debt and warrants                                        |   | —                             |   | 17,500 |   |
| Payments on long-term debt                                                       |   | (764                               | )      | (16,044 | ) |
| Net payments on bank line of credit and  short-term borrowings                   |   | (1,555                             | )      | (7,554 | ) |
| Net cash used in financing activities                                            |   | (2,319                             | )      | (2,515 | ) |
|                                                                             |   |                               |   |   |   |
| Effect of exchange rate changes on cash                                          |   | —                             |   | 105 |   |
|                                                                             |   |                               |   |   |   |
| Decrease (increase) in cash and cash  equivalents                                |   | (526                               | )      | (1,348 | ) |
|                                                                             |   |                               |   |   |   |
| Cash and cash equivalents at beginning of  period                                |   | 757                                |   | 3,062 |   |
| Cash and cash equivalents at end of period                                       |   | $                                  | 231    |   | $ | 1,714 |   |

 

*See accompanying notes to condensed consolidated financial statements.*

 

5

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**LOUD TECHNOLOGIES INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ EQUITY (DEFICIT)**

**Three months ended March 31, 2004**

 

*(In thousands)*

 
|                                                    |   | **Common  Stock** |   | **Accumulated  Deficit** |   | **Total** |   |
|---------------------------------------------------------|--------|-------------------|--------|--------------------------|--------|-----------|--------|
|                                                    |   | **Shares**        |   | **Amount**               |   |      |   |
|                                                    |   |              |   |                     |   |      |   |   |   |
| Balance at December 31, 2003                            |   | 19,608            |   | $                        | 33,999 |      | $      | (33,167 | ) | $ | 832 |   |
| Offering costs related to February 2003  stock offering |   | —            |   | (115                     | )      | —    |   | (115 | ) |
| Amortization of deferred stock compensation             |   | —            |   | 14                       |   | —    |   | 14 |   |
| Net loss                                                |   | —            |   | —                   |   | (3,954    | )      | (3,954 | ) |
| Balance at March 31, 2004                               |   | 19,608            |   | $                        | 33,898 |      | $      | (37,121 | ) | $ | (3,223 | ) |

 

*See accompanying notes to condensed consolidated financial statements.*

 

6

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**LOUD TECHNOLOGIES INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**March 31, 2004**

**(Unaudited)**

 

**1.****              Description ofBusiness**

 

We develop, manufacture and sell high-quality, affordable digital andanalog audio mixers, speakers, amplifiers and other professional audioequipment on a worldwide basis. Our products are used by professionalmusicians, sound installation contractors and broadcast professionals in soundrecordings, live presentations systems and installed sound contractors. We haveour primary operations in the United States and the U.K.

 

**2.****              Summary ofSignificant Accounting Policies**

### ** **

**Basisof Presentation**

 

### **Theaccompanying unaudited condensed consolidated financial statements have beenprepared by LOUD Technologies Inc. (“LOUD” or the “Company”) in accordance withaccounting principles generally accepted in the United States of America forinterim financial statements and include the accounts of the Company and itssubsidiaries. 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 31,2003. In our opinion, all normal recurring adjustments necessary for the fairpresentation of the results of the interim periods are reflected herein.Operating results for the three-month period ended March 31, 2004, are notnecessarily indicative of future financial results.**

 

***Revenue Recognition***

 

### **Revenuesfrom sales of products, net of sales discounts, returns and allowances, aregenerally recognized upon shipment under an agreement with a customer when riskof loss has passed to the customer, all significant contractual obligationshave been satisfied, the fee is fixed or determinable and collection of theresulting receivable is considered probable. Products are generally shipped“FOB shipping point” with no right of return. Sales with contingencies, such asrights of return, rotation rights, conditional acceptance provisions and priceprotection, are rare and insignificant and are deferred until the contingencieshave been satisfied or the contingent period has lapsed. We generally warrantour products against defects in materials and workmanship for periods ofbetween one and six years. The estimated cost of warranty obligations, salesreturns and other allowances are recognized at the time of revenue recognitionbased on contract terms and prior claims experience. A provision for futurewarranty costs is recorded at the time of sale of products.**

### ** **

**Stock-BasedCompensation**

 

Stock-based employee compensation plans are accounted for using theintrinsic-value method prescribed in Accounting Principles Board OpinionNo. 25, *Accounting for Stock Issued toEmployees*, and related interpretations including FAS InterpretationNo. 44, *Accounting for Certain TransactionsInvolving Stock Compensation, an Interpretation of APB Opinion No. 25*.Under this method, compensation expense is recorded on the date of grant onlyif the current market price of the underlying stock exceeded the exercise priceor if options were issued to non-employees.

 

7

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We have elected to apply the disclosure-only provisions of FASNo. 123, *Accounting for Stock-BasedCompensation* as amended by FAS No. 148, *Accounting for Stock-Based Compensation –Transition and Disclosure*, *anamendment of FAS No. 123.*

 

FAS No. 123, as amended, permits companies torecognize, as expense over the vesting period, the fair value of allstock-based awards on the date of grant. The Black-Scholes option valuationmodel was developed for use in estimating the fair value of traded options,which have no vesting restrictions and are fully transferable. Because ourstock-based compensation plans have characteristics significantly differentfrom those of traded options and because changes in the subjective inputassumptions can materially affect the fair value estimate, management believesthat the existing option valuation models do not necessarily provide a reliablesingle measure of the fair value of awards from the plan. Therefore, aspermitted, we apply the existing accounting rules under APB No. 25 andprovide pro forma net loss and pro forma loss per share disclosures forstock-based awards made as if the fair value method defined in FASNo. 123, as amended, had been applied.

 

The following table summarizes relevant information asto the reported amounts under the Company’s intrinsic value method ofaccounting for stock awards, with supplemental information as if the fair valuerecognition provisions of FAS No. 123, as amended, had been applied:

 
|                                                                            |   | **Three  months ended  March 31,** |   |
|---------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                            |   | **2004**                           |   | **2003** |   |
|                                                                            |   | **(in  thousands)**                |   |
|                                                                            |   |                               |   |   |   |
| Net loss:                                                                       |   |                               |   |   |   |
| As reported                                                                     |   | $                                  | (3,954 | ) | $ | (8,394 | ) |
| Add: Stock-based employee compensation  included in reported net loss           |   | —                             |   | 67 |   |
| Less: Stock-based employee compensation determined under fair-valuebased method |   | (214                               | )      | (352 | ) |
| Pro forma                                                                       |   | $                                  | (4,168 | ) | $ | (8,679 | ) |
|                                                                            |   |                               |   |   |   |
| Basic and diluted net loss per share:                                           |   |                               |   |   |   |
| As reported                                                                     |   | $                                  | (0.19  | ) | $ | (0.54 | ) |
| Pro forma                                                                       |   | $                                  | (0.20  | ) | $ | (0.55 | ) |

 

### **Reclassifications**

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

 

**3.****              DiscontinuedOperations**

 

On December 10, 2003, Mackie Designs (Netherlands) B.V. (“MackieNetherlands”), a wholly-owned subsidiary of the Company, sold all of the sharesof Mackie Designs (Italy) S.p.A. (“Mackie Italy”), a wholly-owned subsidiary ofMackie Netherlands, to Knight Italia S.p.A. (“Knight Italia”) for a nominalamount, pursuant to an Agreement by and among the Company, Mackie Netherlandsand Knight Italia.

 

Prior to the sale, Mackie Netherlands filed to place Mackie Italy intoa Concordato Preventivo, an Italian form of court-supervised liquidation (the“Concordato”).  Knight Italia has madean irrevocable offer to the court to lease or purchase the former Mackie Italyfactory in Reggio Emilia, Italy, the RCF brand name and significant otherItalian-based assets.  In December 2003,the Company fulfilled its obligation under the Concordato filing to purchaseapproximately $620,000 of finished inventory. The Concordato 

 

8

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filing is subject to approval by a majority of the creditors and thenby an Italian court which approval is expected in 2004.  In the event the court denies thebankruptcy, Italian law may permit actions to be taken against the Companyincluding demanding a refund of any payments made to the Company in the priortwo years.

 

The Company, its subsidiaries, the Company’s directors or officers, orany associates of its directors or officers do not have any materialrelationship with Knight Italia, other than as a new supplier of components andequipment.

 

The disposition ofthese operations is accounted for as a discontinued operation.  At March 31, 2004 and December 31, 2003, wedo not show any assets or liabilities of this entity on our consolidatedbalance sheet.  We have reclassified andcondensed the results of discontinued operations on our consolidated statementsof operations for thre three months ended March 31, 2003.  Cash flows from these operations areincluded in our consolidated statements of cash flows for the three monthsended March 31, 2003.  Summarized operatingresults of the discontinued operations for the three months ended March 31,2003 (in thousands):**         **

 
| Revenues                          |   | $      | 7,793  |   |
|-----------------------------------|--------|--------|--------|--------|
| Gross profit                      |   | 1,126  |   |
| Operating loss                    |   | (1,073 | )      |
| Loss before income taxes          |   | (1,379 | )      |
| Income tax expense                |   | 613    |   |
| Loss from discontinued operations |   | (1,992 | )      |

 

Interest was allocated todiscontinued operations based on actual debt held by Mackie Italy.

 

**4.****              Net Loss Per Share**

 

The following table sets forththe computation of basic and diluted net loss per share for the three months  ended March 31, 2004 and 2003. Stock optionsto purchase 3,978,000 and 3,666,000 shares in 2004 and 2003, respectively, wereexcluded from the calculation of diluted per share amounts because they areantidilutive. The 1.2 million warrants issued in connection with the debt toSun Mackie LLC, an affiliate of Sun Capital Partners Inc., a private investmentfirm, (see Note 8) and 83,333 vested stock options at an exercise price of $.01are considered outstanding common shares and are included in the denominatorfor computation of basic and diluted net loss per share.

 

9

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|                                                                                 |   | **Three  months ended  March 31,**          |   |
|--------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                                                 |   | **2004**                                    |   | **2003** |   |
|                                                                                 |   | **(in  thousands, except  per share data)** |   |
| Numerator:                                                                           |   |                                        |   |   |   |
| Net loss from continuing operations                                                  |   | $                                           | (3,954 | ) | $ | (6,402 | ) |
| Net loss from discontinued operations                                                |   | —                                      |   | (1,992 | ) |
| Numerator for basic and diluted net loss  per share                                  |   | $                                           | (3,954 | ) | $ | (8,394 | ) |
|                                                                                 |   |                                        |   |   |   |
| Denominator:                                                                         |   |                                        |   |   |   |
| Weighted average shares outstanding                                                  |   | 19,608                                      |   | 15,665 |   |
| Dilutive potential common shares from  outstanding stock options and warrants        |   | 1,283                                       |   | — |   |
| Denominator for basic and diluted net loss  per share – weighted average shares |   | 20,891                                      |   | 15,665 |   |
|                                                                                 |   |                                        |   |   |   |
| Basic and diluted net loss per share:                                                |   |                                        |   |   |   |
| Continuing operations                                                                |   | $                                           | (0.19  | ) | $ | (0.41 | ) |
| Discontinued operations                                                              |   | —                                      |   | (0.13 | ) |
|                                                                                 |   |                                        |   |   |   |
| Basic and diluted net loss per share                                                 |   | $                                           | (0.19  | ) | $ | (0.54 | ) |

 

**5.****              Inventories**

 

Inventories consist of thefollowing:

 
|            |   | **March 31,  2004** |     | **December  31,  2003** |     |
|-----------------|--------|---------------------|----------|-------------------------|----------|
|            |   | **(in  thousands)** |     |
|            |   |                | * * |                    | * * |
| Raw materials   |   | $                   | 3,840    |                    | $        | 4,383 |   |
| Work in process |   | 624                 |     | 543                     |     |
| Finished goods  |   | 12,432              |     | 14,004                  |     |
|            |   | $                   | 16,896   |                    | $        | 18,930 |   |

 

10

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**6.****              Intangible Assets**

 

Intangible assets consist ofthe following:

 
|                          |   | **March 31,  2004** |   | **December  31,  2003** |   |
|-------------------------------|--------|---------------------|--------|-------------------------|--------|
|                          |   | **(in  thousands)** |   |
| Developed technology          |   | $5,200              |   | $5,200                  |   |
| Trademark                     |   | 1,380               |   | 1,380                   |   |
| Covenant not to compete       |   | 285                 |   | 285                     |   |
|                          |   | 6,865               |   | 6,865                   |   |
| Less accumulated amortization |   | (1,419              | )      | (1,313                  | )      |
|                          |   | $5,446              |   | $5,552                  |   |

 

**7.****              Restructuring costs**

 

During 2003, management approved and implemented arestructuring plan in order to adjust operations.  Major actions primarily involved the reduction of workforce dueto our decision to close certain manufacturing facilities. We incurred $1.6million in restructuring expenses, of which $696,000 relates to the threemonths ended March 31, 2003, primarily representing employee severance andrelated costs for approximately 210 displaced employees.  The restructuring accrual is summarized asfollows:

 
| **Restructuring  Accrual atDecember 31, 2003** |    | **Amount Paid** |   | **Restructuring  Accrual at  March 31, 2004** |   |
|------------------------------------------------|---------|-----------------|--------|-----------------------------------------------|--------|
|                                           |    |            |   |                                          |   |
| $                                              | 304,000 |            | $      | (124,000                                      | )      | $ | 180,000 |   |
|                                                |         |                 |        |                                               |        |  |  |  |

 

We expect to pay the remainingliability by December 31, 2004.

 

**8.****              Financing**

 

In April 2004, we executed LoanAmendment and Waiver agreements on our line of credit, U.S. term loan and U.S.subordinated note payable, waiving penalties for prior noncompliance andamending the financial covenants. Management believes the Company will remain in compliance with the newcovenants through December 31, 2004.

 

In April 2004, we received acommitment letter from Sun Capital Partners III QP, LP, an affiliate of SunCapital Partners, Inc., to provide up to $2 million, in the aggregate, in debtor equity financing to the Company through December 31, 2004, if necessary toenable the Company to meet it’s obligations as they become due.  If the financing is in the form of debtfinancing, it is expected that the terms will be generally similar to the termsof the existing subordinated or senior debt arrangements, adjusted as necessaryfor market conditions.  If the financingis in the form of equity financing, it is expected the terms will be at fairvalue based on the current market conditions.

 

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**(a)****          Short-term borrowings**

 

We have a revolving line ofcredit to borrow up to $26.0 million limited to a percentage of eligiblecollateral.  Interest is due monthly andis based on the banks prime rate or LIBOR plus a specified margin.  At March 31, 2004, the average interest ratewas 4.70%.  This revolving line ofcredit is secured by substantially all U.S. assets and accounts receivable ofour U.K. subsidiary.  At March 31, 2004,we had an outstanding balance on our line of credit of $6.3 million andavailable excess borrowing capacity of $2.9 million.

 

**(b)****          Long-term debt**

 

At March 31, 2004 and December31, 2003, our long-term debt consisted of the following, in thousands:

 
|                                                     |   | **March 31,  2004** |   | **December  31,  2003** |   |
|----------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
|                                                     |   | **(In  thousands)** |   |
|                                                     |   |                |   |                    |   |
| U.S. term loans                                          |   | $                   | 1,486  |                    | $      | 2,250 |   |
| U.S. subordinated note payable                           |   | 11,207              |   | 11,000                  |   |
| Note payable to related party (face value  $4.0 million) |   | 4,150               |   | 3,512                   |   |
|                                                     |   | 16,843              |   | 16,762                  |   |
| Less: current portion                                    |   | (500                | )      | (500                    | )      |
| Long-term portion of debt                                |   | $                   | 16,343 |                    | $      | 16,262 |   |

 

*U.S. term loans*

 

Our U.S. term loan is payablein monthly payments of $42,000, until paid in full.  In the first quarter of 2004, we paid $639,000 on this loan fromsales of equipment secured by the loan due to our closure of manufacturingfacilities in Woodinville, Washington. This loan and the line of credit held by the same financial institution,are both secured by substantially all of the assets of the Company, and areboth senior to other long-term debt. The term loan bears interest at the bank’s prime rate plus a specifiedmargin.  This rate was 5.0% at March 31,2004.

 

*U.S. subordinated notepayable*

 

The U.S. subordinated notepayable accrues interest at 10% per annum. Minimum interest payments are made monthly at 8%, with the remaining 2%paid if certain available cash flows are met, otherwise, the 2% is added backto principal.  Principal payments onthis note begin in May 2005, based on our 2004 earnings before interest, taxes,depreciation and amortization, less cash taxes paid, certain capitalexpenditures and certain debt repayments (adjusted EBITDA).  If the 2004 adjusted EBITDA ispositive,  we would make payments duringthe twelve months beginning May 2005 of 50% of adjusted EBITDA up to $1.7million; no payments would be made if adjusted EBITDA and line of creditavailability amounts fail to meet a certain threshold.  The principal is due May 2006.

 

*Note payable to relatedparty*

 

In March 2003, our primaryshareholder, Sun Mackie provided $4.0 million for a note payable and warrantsto purchase 1.2 million shares of common stock at $0.01 per share.  We valued the warrants issued in thistransaction at $0.6 million and the note payable at $3.4 million.  We are increasing the value 

 

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of the loan to its face valueof $4.0 million over its 4-year life through additional non-cash interestexpense.  Interest accrues at 15% of theface value, payable annually on March 31 if a specified adjusted EBITDA of theprior year is achieved. As this threshold was not met, at March 31, 2004, theaccrued interest of $0.6 million was added to the principal balance.  The note is payable in full in March 2007.

 

**9.****              Guarantees**

 

In November 2002, the FASBissued FIN No. 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others*. FIN No. 45 provides expandedaccounting guidance surrounding liability recognition and disclosurerequirements related to guarantees, as defined by this Interpretation. Weadopted the disclosure provision requirements of FIN No. 45 during theyear ended December 31, 2002. In the ordinary course of business, we arenot subject to potential obligations under guarantees that fall within thescope of FIN No. 45 except for standard indemnification and warrantyprovisions and give rise only to the disclosure requirements prescribed by FINNo. 45.

 

Indemnification and warrantyprovisions contained within our sales agreements are generally consistent withthose prevalent in our industry. The duration of product warranties isgenerally one to six years following delivery of products. We provide standardwarranties with the sale of our products. The estimated cost of providing theproduct warranty is recorded at the time revenue is recognized.  Warranty costs represent those associatedwith the repair or replacement of product that fails to meet our standardwarranty against defects in material and workmanship. Should actual productfailure rates differ from our estimates, revisions to our estimated accrualswould be required.

 

The warranty liability issummarized as follows (in thousands):

 
|                         |   | **Three  months ended March 31,** |   |
|------------------------------|--------|-----------------------------------|--------|
|                         |   | **2004**                          |   | **2003** |   |
|                         |   |                              |   |   |   |
| Balance, beginning of period |   | 1,081                             |   | 1,525 |   |
| Charged to cost of sales     |   | 682                               |   | 904 |   |
| Applied to liability         |   | (696                              | )      | (910 | ) |
| Balance, end of period       |   | 1,067                             |   | 1,519 |   |

 

 

**10.****       Contingencies**

 

We have effectively eliminated our liability related to the subrogatedclaims which have been asserted against us from insurance companies who priorto our acquisition of Eastern Acoustic Works, Inc. (EAW), paid claims made byEAW’s landlord and other tenants of the Whitinsville building who were affectedby a fire started by a loaned employee in a portion of the building in 1996.  In May 2004, the Company entered into anagreement with the landlord’s carrier regarding the matter whereby the carrierwill not collect from the Company in excess of any funds received from theCompany’s carrier.  The Company has acontinuing obligation to proceed against its carrier for a declaratory judgmentshould the lawsuit against the Company result in a judgment favorable to thelandlord’s carrier, but all legal fees associated with such an action will bepaid by the landlord’s carrier.

 

We are also involved in various legal proceedings and claims that arisein the ordinary course of business. We currently believe that these matterswill not have a material adverse impact on our financial position, liquidity orresults of operations.

 

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We sold our investment in our Italian subsidiary during 2003, which hasalso been placed in an Italian form of court-supervised liquidation.  In the event the court denies theliquidation plan, Italian law may permit actions to be taken against the Companyincluding demanding a refund of any payments made to the Company in the priortwo years.  We believe this possibilityto be remote.

 

**11.****                           ****Quarterly Financial Data** (revised from amounts shown in 10-K) (Inthousands, except per share data)

 
|                              |   | **2003**  |   |
|-----------------------------------|--------|-----------|--------|
|                              |   | **First** |   | **Second** |   | **Third** |   | **Fourth(a)** |   |
| Net Sales                         |   | $         | 32,746 |   | $ | 35,653 |   | $ | 33,457 |   | $ | 28,910 |   |
| Gross profit                      |   | 6,511     |   | 8,728 |   | 6,087 |   | 7,984 |   |
| Loss from continuing operations   |   | (6,402    | )      | (2,997 | ) | (2,797 | ) | (3,216 | ) |
| Loss from discontinued operations |   | (1,992    | )      | (1,255 | ) | (507 | ) | (2,629 | ) |
| Net loss                          |   | (8,394    | )      | (4,252 | ) | (3,304 | ) | (5,845 | ) |
| Basic and diluted loss per share  |   | (0.54     | )      | (0.20 | ) | (0.16 | ) | (0.28 | ) |
|                                   |        |           |        |  |  |  |  |  |  |  |  |  |  |

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(a)           Inventoryadjustments of approximately $0.9 million related to products no longermarketable and excess material were                 recordedin the fourth quarter of 2003.

 

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**Item2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

*The following discussion and analysis should be read in conjunctionwith our financial statements included in our Annual Report on Form 10-K forthe year ended December 31, 2003. This discussion contains certain“forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995 that involve risks and uncertainties, such asstatements of our plans, objectives, expectations and intentions. Actualresults could differ materially from those discussed herein. The cautionarystatements made in this Quarterly Report on Form 10-Q and the Annual Report onForm 10-K should be read as being applicable to all forward-looking statementswherever they appear. We undertake no obligation to publicly release anyrevisions to these forward-looking statements that may be required to reflectevents or circumstances 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 likely result,” or words or phrases of similar meaning.*

 

**Overview**

 

LOUD Technologies Inc., a Washington corporationformed in 1988, engineers, manufactures and markets professional audioreproduction and recording equipment and software under the brand names Mackie,TAPCO, SIA, EAW and EAW Commercial.

 

Our primary products includeanalog mixers, sound reinforcement speakers, professional loudspeaker systems,installed paging and music distribution systems, preamplifiers, poweramplifiers, and A/V software control surfaces, digital mixers, i/o devices andacoustic test and measurement software. These products are used in a variety of applications, including home andcommercial recording studios, live performances and fixed installations of allsizes.

 

**CriticalAccounting Policies and Judgments**

 

The preparation of these condensed financialstatements in conformity with generally accepted accounting principles in theUnited States requires estimates and assumptions that affect the reportedamounts of assets and liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities in the consolidated financialstatements and accompanying notes. The SEC has defined a company’s mostcritical accounting policies as the ones that are most important to theportrayal of the company’s financial condition and results of operations, andthat require management’s most difficult, subjective, or complex judgments,often as a result of the need to make estimates about the effect of mattersthat are inherently uncertain. Based on this definition, we have identified thecritical accounting policies and judgments addressed below. Although we believethat our estimates and assumptions are reasonable, they are based uponinformation presently available. Actual results may differ significantly fromthese estimates under different assumptions or conditions.

 

***InventoryValuation***.  We believe our policy on valuing inventory,including market value adjustments, is our primary critical accounting policy.Inventories are stated at the lower of standard cost, which approximates actualcost on a first-in, first-out method, or market. Included in our inventoriesbalance are demonstration products used by our sales representatives andmarketing department including finished goods that have been shipped tocustomers for evaluation. Market value adjustments are recorded for obsoletematerial, slow-moving product, service and demonstration products. We makejudgments regarding the carrying value of our inventory based upon currentmarket conditions. These conditions may change depending upon competitiveproduct introductions, customer demand and other factors. If the market for ourpreviously released products changes, we may be required to write down the costof our

 

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inventory.

 

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

 

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

 

***Warranty.* ** We provide standard warranties with the sale of our products. Theestimated cost of providing the product warranty is recorded at the timerevenue is recognized.  Our warrantyterm varies based on product lines and is generally between one to sixyears.  Warranty costs represent thoseassociated with the repair or replacement of product that fails to meet ourstandard warranty against defects in material and workmanship. Should actualproduct failure rates differ from our estimates, revisions to our estimatedaccruals would be required.

 

***Revenue Recognition****.*  Revenues from sales of products, net of salesdiscounts, returns and allowances, are generally recognized upon shipment underan agreement with a customer when risk of loss has passed to the customer, allsignificant contractual obligations have been satisfied, the fee is fixed ordeterminable and collection of the resulting receivable is considered probable.Products are generally shipped “FOB shipping point” with no right of return.Sales with contingencies, such as rights of return, rotation rights,conditional acceptance provisions and price protection, are rare andinsignificant. We generally warrant our products against defects in materialsand workmanship for periods of between one and six years. The estimated cost ofwarranty obligations, sales returns and other allowances are recognized at thetime of revenue recognition based on contract terms and prior claimsexperience.

 

***IncomeTaxes.*** Aspart of the process of preparing our financial statements, we are required toestimate our income taxes in each of the jurisdictions in which we operate.This process involves estimating our actual current tax exposure together withassessing temporary differences resulting from differing treatment of items fortax and accounting purposes. These differences result in deferred tax assetsand liabilities, which are included in our consolidated balance sheet. We mustthen assess the likelihood that our deferred tax assets will be recovered fromfuture taxable income and to the extent we believe that recovery is not likely,we must establish a valuation allowance. To the extent we establish a valuationallowance or change this allowance in a period, it may materially impact thetax provision in the Statement of Operations.

 

**Estimatesand Assumptions Related to Financial Statements**

 

Thediscussion and analysis of our financial condition and results of operations isbased upon our 

 

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unauditedcondensed consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these condensed consolidated financial statements requiresus to make estimates and judgments that affect the reported amounts of assets,liabilities, revenue 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.

 

**Resultsof Operations**

 

*Net Sales*

 

Net sales from continuingoperations decreased by 21% to $25.7 million during the three months endedMarch 31, 2004 from $32.7 million in the comparable period in 2003.  Sales were negatively impacted during thelatter part of 2003 and the beginning of 2004 due to our being out of stock oncertain  products.  These product outages were due to themigration of certain product manufacturing from Woodinville, Washington and ourformer Italian subsidiary to contract manufacturers.

 

We believe we will continue tohave product shortages during the second quarter of 2004.  In 2004, we anticipate introducing andshipping new products, resulting in increased revenues in 2004 over 2003.  These new products will include introductionsof more affordable product lines; entrance into the desktop recording line andfeature-rich additions to our core analog mixer product lines.

 

*Gross Profit*

 

Gross profit increased to $6.9million, or 27% of net sales, in the three months ended March 31, 2004 from$6.7 million, or 21% of net sales, in the three months ended March 31,2003.   The increase in gross margins isprimarily due to the write-down of excess and obsolete inventory ofapproximately $1.6 million in the first quarter of 2003 compared to $0.3million in the first quarter of 2004.

 

We expect our gross margins tocontinue to increase in the second quarter of 2004, with continued advancesthroughout the remainder of 2004. During the first half of 2004, we will be incurring one time transitioncosts with new and existing contract manufacturers or suppliers of materialsfor contract manufacturing, as well as reduced margins related to discounts ondiscontinued models which will keep our margins lower than the second half of2004, when we anticipate the transitions will be complete.

 

*Selling, General andAdministrative*

 

Selling, general andadministrative expenses decreased by $1.5 million to $8.3 million in the threemonths ended March 31, 2004 from $9.8 million in the comparable period in 2003.The decline in these expenses is due to reductions in the number of employees through layoffs or attritionduring 2003.  Additionally, included inselling costs are commissions paid to third parties, which were lower due tolower revenues during the three months ended March 31, 2004, compared to thethree months ended March 31, 2003. Expenses in the first quarter of 2003 included certain one-time itemsrelated to the equity investment by Sun Mackie, LLC including run-off policiesfor directors’ and officers’ liability insurance totaling approximately$500,000.  We anticipate selling,general and administrative costs to be lower during the remainder of 2004 thanin 2003, primarily due to cost reduction initiatives completed in 2003.

 

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*Research and Development*

 

Research and developmentexpenses decreased by $0.3 million to $2.0 million in the three months endedMarch 31, 2004 from $2.3 million in the three months ended March 31, 2003. Thisdecrease relates primarily to headcount reductions made during 2003 and theclosure of a research facility we had in Belgium during the first half of2003.  We will continue to outsourcecertain development products to third parties, which will cause these expensesto be higher in some quarters than others, depending on when these contractsoccur.   We are and will continue toinvest in new products and improvements to existing products and we believethat the restructuring measures taken in 2003 will enable us to be moreefficient in our research and development expenditures.  Accordingly, we anticipate our research anddevelopment costs will be lower during the remainder of 2004 than in 2003.

* *

*Restructuring Costs*

 

*During2003, we incurred $1.6 million in restructuring expenses, of which $696,000related to the first quarter of 2003, primarily representing employee severance and related costs fordisplaced employees associated with our closing down the manufacturing facilityin Woodinville, Washington, after production of goods had terminated.  We believe we will begin to fully recognizethe benefits of this restructuring in the second to third quarters of 2004, inthe form of higher product margins on the goods previously manufactured in theU.S.  Additionally, we may haveadditional restructuring expenses in 2004 related to future minimum leasepayments of under-utilized warehouse space when we fully exit the space.*

* *

*Other Income (Expense)*

 

Net other expense was $597,000for the three months ended March 31, 2004 as compared to net other expense of$302,000 in the three months ended March 31, 2003. Included in these amounts isinterest expense which increased to $761,000 in the first quarter of 2004 from$518,000 in the corresponding period of 2003 due to higher average interestrates.

 

*Income Tax Benefit*

 

Income tax expense for the first quarter of 2004 was$5,000 compared to $12,000 for the comparable period in 2003. Tax expenseprimarily relates to our non-U.S. subsidiaries. No tax benefit is recognized inconnection with our tax losses as recognition of such benefit depends on futureprofits, which is not assured. We calculate the current tax rate based upon ourestimate of the tax rate to be achieved for the full year.

 

*Discontinued Operations*

 

Discontinued operations relatesto our former subsidiary, Mackie Italy, which was sold in December 2003.  We incurred a loss on discontinuedoperations of $2.0 million during the three months ended March 31, 2003.  During this period, the loss consisted of a$1.1 million loss from operations, $0.3 million net interest expense and $0.6million in tax expense.

 

**Liquidityand Capital Resources**

 

In April 2004, we received acommitment letter from Sun Capital Partners III QP, LP, an affiliate of SunCapital Partners, Inc., to provide up to $2 million, in the aggregate, in debtor equity financing to the Company through December 31, 2004, if necessary toenable the Company to meet it’s obligations as they become due.  If the financing is in the form of debtfinancing, it is expected that the terms will be generally similar to the termsof the existing subordinated or senior debt arrangements, adjusted as 

 

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necessary for marketconditions.  If the financing is in theform of equity financing, it is expected the terms will be at fair value basedon the current market conditions.

 

In April 2004, we executed Loan Amendment and Waiveragreements on our line of credit, U.S. term loan and U.S. subordinated notepayable, waiving penalties for prior noncompliance and amending the futurefinancial covenants.  Managementbelieves the Company will remain in compliance with the new covenants throughDecember 31, 2004.

 

As of March 31, 2004, we hadcash and cash equivalents of $231,000 and total debt and short-term borrowingsof $23.2 million.  We had excessavailability on our line of credit of $2.9 million at March 31, 2004.

 

*Net Cash from OperatingActivities*

 

Cash provided by operatingactivities was $1.9 million in the three months ended March 31, 2004 and $1.3million for the comparable period in 2003. Net cash provided by operatingactivities in the first three months of 2004 was primarily attributable todecreases in inventories, accounts receivable and other assets offset by anincrease in prepaid expenses and other current assets. In the first threemonths of 2003, cash provided by operating activities was primarilyattributable to a decrease in inventories and accounts receivable offset bydecreases in accounts payable and accrued expenses.  During the remainder of 2004, we anticipate growing our inventorylevels and accounts receivable as revenues and product availabilityincrease.  Accounts payable are expectedto continue to grow in 2004 due primarily to forecasted increases in inventory.

 

* Net Cash Used in Investing Activities*

 

Cash used in investing activities was $0.1 million forthe first three months of 2004 and $0.3 million for the first three months of2003. The cash flows used in investing activities in 2004 consisted primarilyof purchases of capital expenditures for tooling used in manufacturing by ourcontract manufacturers.  Cash used ininvesting activities in the first quarter of 2003 primarily consisted ofpurchases of manufacturing equipment and office equipment.

 

As part of our third party manufacturing agreements,many of our contract manufacturers require that we invest in tooling equipmentprior to the start of manufacture. Accordingly, we anticipate capital spending at the same level or higherin each of the remaining quarters of 2004.

 

*Net Cash Used inFinancing Activities*

 

Cash used in financing activities was $2.3 millionduring the first three months of 2004 and $2.5 million during the first threemonths of 2003.  Financing activitiesduring the first quarter of 2004 relates primarily to payments on our term loanof $0.8 million and net repayments on our line of credit of $1.6 million.  Financing activities in the first quarter of2003 included $3.6 million in net proceeds from the sale of stock to Sun MackieLLC, an affiliate of Sun Capital Partners, Inc., a private investment firm,$17.5 million of borrowings on new term loans and notes payable, offset by$16.0 million in repayments of debt and $7.6 million in net repayments on linesof credit.

 

*Payments and Proceeds fromLong-term Debt, Line of Credit and Other Short-term Borrowings*

 

In addition to its equity investment, Sun Mackieprovided $4.0 million in debt financing in March 2003.  Interest accrues at 15% and is scheduled tobe paid annually beginning in March 2004, if excess available cash exists, asdefined by the senior credit agreement. The principal is due in a lump sum payment in 

 

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2007.  Inaddition to the loan from Sun Mackie, we issued warrants to purchase anadditional 1.2 million common shares at an exercise price of $0.01 per share.

 

In connection with this agreement with Sun Mackie inMarch 2003, we refinanced all of our debt obligations, paying down a net of$4.3 million.  We entered into a $2.5million term loan and a line of credit providing up to $26.0 million with a newU.S. lender.  Availability under thisline of credit is limited to eligible collateral; initial funding was $11.6million. Principal payments on the term loan are due in equal monthly paymentsover five years, beginning in July 2003. Interest is due monthly calculated atthe bank’s prime rate plus 0.75% or Eurodollar Rate plus 3.5%. Both therevolving line of credit and term loan are secured by all U.S. based assetsincluding, but not limited to, accounts receivable, inventory, fixed assets,intangible assets and patents. Additionally, a portion of the revolving line ofcredit is provided in the U.K. and is secured by accounts receivable of LOUDTechnologies (Europe) Plc.

 

Our previous U.S. lender has provided a loan totaling$11.0 million, which is subordinate to the Loan and Security Agreement with ournew U.S. lender. Principal is due beginning in May 2004 based upon our 2003earnings before interest, taxes, depreciation and amortization, less cash taxespaid, certain capital expenditures and certain debt repayments. Interestaccrues at a rate of 10% per annum and is paid subject to certain availabilitytests as we have availability under the Loan and Security Agreement.

 

Under the terms of the line of credit and subordinatedloan agreements, we are required to maintain certain financial ratios, such asa cumulative EBITDA calculation. The agreement also provides, among othermatters, restrictions on additional financing, dividends, mergers,acquisitions, and an annual capital expenditure limit. At December 31, 2003,and during all measurement periods during 2003, we were out of compliance withcertain of our financial covenants. As part of our loan amendments in April2004, we have set new financial covenants and the lender has waived anypenalties for past periods of non-compliance.

 

We have taken various actions to improve results ofoperations and ensure our ongoing ability to cover scheduled debt servicingpayments, including headcount reductions and other cost containment measures.Over the last two years, these measures included the following items:

 

•                  closing the manufacturing facility in Woodinville,Washington, in order to outsource the manufacturing of the majority of our productsoffshore;

•                  sale and liquidation of Mackie Italy;

•                  bankruptcy and closure of Mackie Belgium;

•                  closure of certain international sales offices;

•                  layoffs across all areas, primarily manufacturingrelated;

•                  reduction of capital expenditures;

•                  replacement of debt instruments with instruments withlonger lives;

•                  reorganization of our management team.

 

Our continued liquidity is dependent upon thefollowing key factors:

 

*Deliveryof new products*

 

We anticipate launching a number of new productsduring 2004, which will increase our revenues. We anticipate sales from new products will become meaningful towards thelatter part of the second quarter to the third quarter. We believe thisincrease in revenues from new products in addition to sales from our continuingcore products will turn around the two prior years of decline of revenues.

 

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*Abilityto stay in compliance with debt covenants*

 

We have entered into an amendment of our line ofcredit and term loans, which have revised debt covenants.  The key financial covenants are achievementof a certain EBITDA targets for the term of the agreement or, during the perioduntil September 30, 2004, maintenance of $2.5 million in excess borrowingavailability.

 

*Improvementin gross margins*

 

In order to achieve our projected results fromoperations, we anticipate realizing increases in our gross margins as both apercentage of net sales and in whole dollar amounts.  Meeting these targets is contingent upon successful transition ofproduct manufacturing to more cost efficient sources offshore.  We believe the bulk of this transition hasoccurred and anticipate seeing these higher margins as soon as the secondquarter of 2004.

 

*Commitments*

 

We had the following material contractual commitmentsrelated to operating leases for equipment facilities  at March 31, 2004.  Inaddition, we had material obligations related to short-term and long-term debtarrangements, excluding our line of credit of $6.3 million at March 31, 2004:

 
|                          |   | **Payments  due by period** |   |
|-------------------------------|--------|-----------------------------|--------|
|                          |   | **Total**                   |   | **Less than  1  year** |   | **1-3 years** |   | **3-5 years** |   |
|                          |   | **(In  thousands)**         |   |
|                          |   |                        |   |   |   |   |   |   |   |
| Operating Leases              |   | $                           | 5,847  |   | $ | 2,084 |   | $ | 3,712 |   | $ | 51 |   |
| Short-term and Long-term Debt |   | 17,293                      |   | 500 |   | 16,793 |   |   |   |
| Total                         |   | $                           | 23,140 |   | $ | 2,584 |   | $ | 20,505 |   | $ | 51 |   |

 

Webelieve we have adequate resources to meet our obligations as they come duethrough December 31, 2004.

 

**Item3.  Quantitative and 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 derivative financial instruments as of March 31, 2004.

 

At March 31, 2004, we had avariable rate line of credit of $6.3 million. As such, changes in U.S. interestrates affect interest paid on debt and we are exposed to interest rate risk.For the quarter ended March 31, 2004, an increase in the average interest rateof 10%, i.e. from 4.75% to 5.23%, would have resulted in an approximately$8,000 increase in net loss before income taxes and discontinuedoperations.  The fair value of such debtapproximates the carrying amount on the consolidated balance sheet at March 31,2004.

 

Our non-U.S. subsidiarieshave functional currencies of the U.S. Dollar and are translated into U.S.dollars at exchange rates in effect at the balance sheet date. Thesesubsidiaries are located in Western Europe and the U.K. Income and expenseitems are translated at the average exchange rates prevailing during theperiod. A 10% decrease in the value of the U.S. Dollar compared to the localcurrencies of our 

 

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non-U.S.subsidiaries, throughout the quarter ended March 31, 2004, would have resultedin an approximately $45,000 increase to the net loss before income taxes.

 

**Item4.  Controls and Procedures**

 

At March 31, 2004, we carried out an evaluation, underthe supervision and with the participation of our management, including ourChief Executive Officer and our Chief Financial Officer, of the effectivenessof our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934).  Based on this evaluation, our Chief Executive Officer and ourChief Financial Officer have concluded that, as of the date of the evaluation,our disclosure controls and procedures were effective.

 

There have been no significant changes in our internalcontrol or in other factors that could significantly affect these controlsduring our last fiscal quarter.

 

**PART II.  OTHER INFORMATION**

 

**Item 1.** **Legal Proceedings**

 

We have effectively eliminated our liability related to the subrogatedclaims which have been asserted against us from insurance companies who priorto our acquisition of Eastern Acoustic Works, Inc. (EAW), paid claims made byEAW’s landlord and other tenants of the Whitinsville building who were affectedby a fire started by a loaned employee in a portion of the building in 1996. InMay 2004, the Company entered into an agreement with the landlord’s carrierregarding the matter whereby the carrier will not collect from the Company inexcess of any funds received from the Company’s carrier.  The Company has a continuing obligation toproceed against its carrier for a declaratory judgment should the lawsuitagainst the Company result in a judgment favorable to the landlord’s carrier,but all legal fees associated with such an action will be paid by thelandlord’s carrier.

We are also involved in various legal proceedings and claims that arisein the ordinary course of business. We currently believe that these matterswill not have a material adverse impact on our financial position, liquidity orresults of operations.

 

We sold our investment in our Italian subsidiary during 2003, which hasalso been placed in an Italian form of court-supervised liquidation.  In the event the court denies theliquidation plan, Italian law may permit actions to be taken against theCompany including demanding a refund of any payments made to the Company in theprior two years.  We believe thispossibility to be remote.

 

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**Item2.  Changes in Securities and Use of Proceeds**

 

None.

 

**Item3.  Defaults upon Senior Securities**

 

At March 31, 2004, we were not in compliance withcertain financial covenants of our debt agreements. In April 2004, we executedLoan Amendment and Waiver agreements on our line of credit, U.S. term loan andU.S. subordinated note payable, waiving penalties for prior noncompliance andamending the future financial covenants. Management believes the Company will remain in compliance with the newcovenants through December 31, 2004.

 

**Item4.  Submission of Matters to a Vote of Security Holders**

 

None.

 

**Item 5.  Other Information**

 

None.

 

**Item6.  Exhibits and Reports on Form 8-K**

 

(a)                                  Exhibits

 

31.1 Certification of ChiefExecutive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2 Certification of ChiefFinancial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1 Certification pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

(b)                                 Reportson Form 8-K

 

On January 8, 2004, a Current Report on Form8-K/A was filed to amend the financial statements and pro forma financialinformation required under Item 7 of the Current Report on Form 8-K filed onDecember 24, 2003.

 

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**SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                       |   | **LOUD Technologies Inc.**                                                                                         |
|----------------------------|--------|--------------------------------------------------------------------------------------------------------------------|
|                       |   | (Registrant)                                                                                                       |
|                       |   |                                                                                                               |
| Dated:   May 14, 2004 | By:    | /s/ James T.  Engen                                                                                                |
|                       |   | James T.  Engen                                                                                                    |
|                       |   | *President, Chief Executive Officer and  Director*                                                                 |
|                       |   |                                                                                                               |
| Dated:   May 14, 2004 | By:    | /s/ Timothy  P. O’Neil                                                                                        |
|                       |   | Timothy P.  O’Neil                                                                                            |
|                       |   | *Chief Financial Officer, 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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