**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM10-Q**

 

**(Mark One)**

 
| **ý**                                                                                                                                                                                                                      | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                            |
| **For  the quarterly period ended March 31, 2005**                                                                                                                                                                              |
|                                                                                                                                                                                                                            |
| **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 registrantas specified in its charter)

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

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes o   No   ý

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

Yes  o No  ý

 

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

 
| **Common  Stock, no par value** | ** ** | **22,568,316**                                        |
|---------------------------------|------------|-------------------------------------------------------|
| Class                           |       | Number of Shares  Outstanding  (as of April 29, 2005) |

 

 

----

 

**LOUDTECHNOLOGIES INC.**

 

**FORM10-Q**

**For thequarter ended March 31, 2005**

 

**INDEX**

 
| **PART I.**    | **FINANCIAL INFORMATION**                                                                                      |   |
|----------------|----------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                           |   |
| Item 1.        | Financial Statements (Unaudited)                                                                               |   |
|           |                                                                                                           |   |
|           | Condensed  Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004                              |   |
|           |                                                                                                           |   |
|           | Condensed  Consolidated Statements of Operations for the three months ended March 31,  2005 and March 31, 2004 |   |
|           |                                                                                                           |   |
|           | Condensed  Consolidated Statements of Cash Flows for the three months ended March 31,  2005 and March 31, 2004 |   |
|           |                                                                                                           |   |
|           | Condensed  Consolidated Statement of Shareholders’ Equity for the three months ended  March 31, 2005      |   |
|           |                                                                                                           |   |
|           | 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.       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                   |   |
|           |                                                                                                           |   |
| Item 3.        | Defaults  Upon Senior Securities                                                                               |   |
|           |                                                                                                           |   |
| Item  4.       | Submission  of Matters to a Vote of Security Holders                                                           |   |
|           |                                                                                                           |   |
| Item 5.        | Other Information                                                                                              |   |
|           |                                                                                                           |   |
| Item 6.        | Exhibits                                                                                                       |   |
|           |                                                                                                           |   |
| **SIGNATURES** |                                                                                                           |

 

2

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**LOUDTECHNOLOGIES INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(unaudited)**

 

*(Inthousands, except share amounts)*

 
| ** **                                                                                                                                                  | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                                                  |       |                |       |                   |       |
| Current assets:                                                                                                                                             |       |                |       |                   |       |
| Cash and cash  equivalents                                                                                                                                  |       | $                   | 772        |                   | $          | 450 |   |
| Accounts  receivable, net                                                                                                                                   |       | 29,420              |       | 16,800                 |       |
| Income taxes  receivable                                                                                                                                    |       | —              |       | 30                     |       |
| Inventories, net                                                                                                                                            |       | 42,696              |       | 27,959                 |       |
| Prepaid expenses  and other current assets                                                                                                                  |       | 2,443               |       | 2,861                  |       |
| Total current  assets                                                                                                                                       |       | 75,331              |       | 48,100                 |       |
|                                                                                                                                                        |       |                |       |                   |       |
| Property, plant  and equipment, net                                                                                                                         |       | 10,284              |       | 7,381                  |       |
| Goodwill                                                                                                                                                    |       | 5,075               |       | —                 |       |
| Other intangible  assets, net                                                                                                                               |       | 12,882              |       | 5,128                  |       |
| Other assets,  net                                                                                                                                          |       | 62                  |       | 186                    |       |
| Total assets                                                                                                                                                |       | $                   | 103,634    |                   | $          | 60,795 |   |
|                                                                                                                                                        |       |                |       |                   |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                              |       |                |       |                   |       |
| Current  liabilities:                                                                                                                                       |       |                |       |                   |       |
| Short-term  borrowings                                                                                                                                      |       | $                   | 49,152     |                   | $          | 11,826 |   |
| Accounts payable                                                                                                                                            |       | 14,768              |       | 17,679                 |       |
| Accrued  liabilities                                                                                                                                        |       | 10,751              |       | 6,972                  |       |
| Income taxes  payable                                                                                                                                       |       | 1,521               |       | 1,466                  |       |
| Current portion  of long-term debt                                                                                                                          |       | 477                 |       | 300                    |       |
| Current portion  of payable to former Italian subsidiary                                                                                                    |       | 3,000               |       | 7,587                  |       |
| Total current  liabilities                                                                                                                                  |       | 79,669              |       | 45,830                 |       |
|                                                                                                                                                        |       |                |       |                   |       |
| Long-term debt,  excluding current portion                                                                                                                  |       | 11,417              |       | 11,612                 |       |
| Other  liabilities                                                                                                                                          |       | 4,700               |       | 33                     |       |
| Total  liabilities                                                                                                                                          |       | 95,786              |       | 57,475                 |       |
|                                                                                                                                                        |       |                |       |                   |       |
| 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 22,568,316 and  22,138,191 shares at March 31, 2005 and December 31, 2004 |       | 39,983              |       | 38,778                 |       |
| Accumulated  deficit                                                                                                                                        |       | (32,135             | )          | (35,458                | )          |
| Total  shareholders’ equity                                                                                                                            |       | 7,848               |       | 3,320                  |       |
| Total  liabilities and shareholders’ equity                                                                                                            |       | $                   | 103,634    |                   | $          | 60,795 |   |

 

*See accompanying notes to condensedconsolidated financial statements.*

 

3

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**LOUDTECHNOLOGIES INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 

*(Inthousands, except per share data)*

 
| ** **                                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                    | ** ** | **2005**                          | ** ** | **2004** | ** ** |
|                                                                          |       |                              |       |   |   |
| Net sales                                                                     |       | $                                 | 39,945     |   | $ | 25,681 |   |
| Cost of sales                                                                 |       | 26,610                            |       | 18,769 |   |
| Gross profit                                                                  |       | 13,335                            |       | 6,912 |   |
|                                                                          |       |                              |       |   |   |
| Operating  expenses:                                                          |       |                              |       |   |   |
| Selling, general  and administrative                                          |       | 9,545                             |       | 8,292 |   |
| Research and  development                                                     |       | 1,955                             |       | 1,972 |   |
| Total operating  expenses                                                     |       | 11,500                            |       | 10,264 |   |
|                                                                          |       |                              |       |   |   |
| Operating income  (loss)                                                      |       | 1,835                             |       | (3,352 | ) |
|                                                                          |       |                              |       |   |   |
| Other income  (expense):                                                      |       |                              |       |   |   |
| Interest income                                                               |       | 29                                |       | — |   |
| Interest expense                                                              |       | (862                              | )          | (761 | ) |
| Management fee                                                                |       | (328                              | )          | (100 | ) |
| Other                                                                         |       | (152                              | )          | 264 |   |
| Total other  (expense)                                                        |       | (1,313                            | )          | (597 | ) |
|                                                                          |       |                              |       |   |   |
| Income (loss)  before income taxes and discontinued operations                |       | 522                               |       | (3,949 | ) |
|                                                                          |       |                              |       |   |   |
| Provision for  income taxes                                                   |       | 26                                |       | 5 |   |
|                                                                          |       |                              |       |   |   |
| Income (loss)  from continuing operations                                     |       | 496                               |       | (3,954 | ) |
|                                                                          |       |                              |       |   |   |
| Recognized gain  on discontinued operations, net of income tax expense of $58 |       | 2,827                             |       | — |   |
|                                                                          |       |                              |       |   |   |
| Net income  (loss)                                                            |       | $                                 | 3,323      |   | $ | (3,954 | ) |
|                                                                          |       |                              |       |   |   |
| Basic and  diluted net income (loss) per share:                               |       |                              |       |   |   |
|                                                                          |       |                              |       |   |   |
| Basic and  diluted net income (loss) from continuing operations               |       | $                                 | 0.02       |   | $ | (0.19 | ) |
| Basic and  diluted net income from discontinued operations                    |       | 0.12                              |       | — |   |
| Basic and  diluted net income (loss) per share                                |       | $                                 | 0.14       |   | $ | (0.19 | ) |
|                                                                          |       |                              |       |   |   |
| Shares used in  computing basic and diluted net income (loss) per share:      |       |                              |       |   |   |
| Basic                                                                         |       | 23,495                            |       | 20,891 |   |
| Diluted                                                                       |       | 24,264                            |       | 20,891 |   |

 

*See accompanying notes to condensedconsolidated financial statements.*

 

4

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**LOUDTECHNOLOGIES INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 

*(Inthousands)*

 
| ** **                                                                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| **Operating  activities**                                                                 |       |                              |       |   |   |
| Net income  (loss)                                                                        |       | $                                 | 3,323      |   | $ | (3,954 | ) |
| Adjustments to reconcile  net income (loss) to net cash provided by operating activities: |       |                              |       |   |   |
| Depreciation and  amortization                                                            |       | 883                               |       | 768 |   |
| Gain on asset  dispositions                                                               |       | —                            |       | (111 | ) |
| Deferred stock  compensation                                                              |       | 15                                |       | 14 |   |
| Recognized gain  on discontinued operations                                               |       | (2,887                            | )          | — |   |
| Non-cash  interest expense                                                                |       | 57                                |       | 245 |   |
| Changes in  operating assets and liabilities:                                             |       |                              |       |   |   |
| Accounts  receivable                                                                      |       | (667                              | )          | 1,689 |   |
| Inventories                                                                               |       | 1,516                             |       | 2,040 |   |
| Prepaid expenses  and other current assets                                                |       | 735                               |       | (1,810 | ) |
| Other assets                                                                              |       | 141                               |       | 121 |   |
| Accounts payable  and accrued expenses                                                    |       | (8,039                            | )          | 2,827 |   |
| Income taxes  payable                                                                     |       | 55                                |       | 61 |   |
| Other long  term-liabilities                                                              |       | 2,967                             |       | (10 | ) |
| Net cash  provided by (used in) operating activities                                      |       | (1,901                            | )          | 1,880 |   |
|                                                                                      |       |                              |       |   |   |
| **Investing  activities**                                                                 |       |                              |       |   |   |
| Purchases of  property, plant and equipment                                               |       | (463                              | )          | (839 | ) |
| Proceeds from  sales of property, plant and equipment                                     |       | —                            |       | 752 |   |
| Acquisition of  St. Louis Music, Inc.                                                     |       | (34,565                           | )          | — |   |
| Net cash used in  investing activities                                                    |       | (35,028                           | )          | (87 | ) |
|                                                                                      |       |                              |       |   |   |
| **Financing  activities**                                                                 |       |                              |       |   |   |
| Payments on  long-term debt                                                               |       | (75                               | )          | (764 | ) |
| Net proceeds  (payments) on bank line of credit and short-term borrowings                 |       | 37,326                            |       | (1,555 | ) |
| Net cash  provided by (used in) financing activities                                      |       | 37,251                            |       | (2,319 | ) |
|                                                                                      |       |                              |       |   |   |
| Increase  (decrease) in cash and cash equivalents                                         |       | 322                               |       | (526 | ) |
|                                                                                      |       |                              |       |   |   |
| Cash and cash  equivalents at beginning of period                                         |       | 450                               |       | 757 |   |
| Cash and cash  equivalents at end of period                                               |       | $                                 | 772        |   | $ | 231 |   |

 

*See accompanying notes to condensedconsolidated financial statements.*

 

5

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**LOUDTECHNOLOGIES INC.**

**CONDENSEDCONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY**

**Threemonths ended March 31, 2005**

(unaudited)

 

*(Inthousands)*

 
| ** **                                            | ** ** | **Common Stock** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|-------------------------------------------------------|------------|------------------|------------|-----------------|------------|-------------|------------|
| ** **                                            | ** ** | **Shares**       | ** ** | **Amount**      | ** ** | **Deficit** | ** ** | **Total** | ** ** |
|                                                  |       |             |       |            |       |        |       |   |   |
| Balance at  December 31, 2004                         |       | 22,138           |       | $               | 38,778     |        | $          | (35,458 | ) | $ | 3,320 |   |
| Stock options  exercised                              |       | 33               |       | —          |       | —      |       | — |   |
| Shares issued -  acquisition of St. Louis Music, Inc. |       | 397              |       | 1,190           |       | —      |       | 1,190 |   |
| Amortization of  deferred stock compensation          |       | —           |       | 15              |       | —      |       | 15 |   |
| Net income                                            |       | —           |       | —          |       | 3,323       |       | 3,323 |   |
| Balance at March  31, 2005                            |       | 22,568           |       | $               | 39,983     |        | $          | (32,135 | ) | $ | 7,848 |   |

 

*See accompanying notes to condensedconsolidated financial statements.*

 

6

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**LOUDTECHNOLOGIES INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**March31, 2005**

**(Unaudited)**

 

**1.****              Description of Business**

 

We develop, manufacture and sell high-quality, affordable digital andanalog audio mixers, speakers, guitar and bass amplifiers, branded musicalinstruments and related accessories, and other professional audio equipment ona worldwide basis. Our products are used by professional musicians, soundinstallation contractors and broadcast professionals both in sound recordings,live presentations systems and installed sound contractors. We distribute ourproducts primarily through retail dealers, mail order outlets and installedsound contractors.  We have our primaryoperations in the United States with smaller operations in the United Kingdom,Canada, China and Japan.

 

On March 4, 2005, we acquired 100% of the shares of St. Louis Music,Inc., a Missouri based manufacturer, distributor and importer of brandedmusical instruments and professional audio products.  This transaction is explained in more detailin Note 10 to these financial statements.

 

**2.****              Summary of Significant AccountingPolicies**

 

**Basis of Presentation**

 

The accompanying unaudited condensed consolidated financial statementshave been prepared by LOUD Technologies Inc. (“LOUD” or the “Company”) in accordancewith U.S. generally accepted accounting principles for interim financialstatements and includes the accounts of the Company and its subsidiaries. Theydo not include all of the information and disclosures required by generallyaccepted accounting principles for complete financial statements and should beread in conjunction with the financial statements included in our Annual Reporton Form 10-K for the year ended December 31, 2004.  In our opinion, all adjustments, consistingof normal recurring adjustments necessary for the fair presentation of theresults of the interim periods are reflected herein. Operating results for thethree-month period ended March 31, 2005, are not necessarily indicative offuture financial results.

 

***Revenue Recognition***

 

Revenues from sales of products, net of sales discounts, returns andallowances, are generally recognized upon shipment under an agreement with acustomer when risk of loss has passed to the customer, all significantcontractual obligations have been satisfied, the fee is fixed or determinableand collection of the resulting receivable is considered probable. Products aregenerally shipped “FOB shipping point” with no right of return. We do have somedealers who finance their purchases through finance companies.  We have manufacturer’s repurchase agreementswith the finance companies and defer the revenue and related cost of goods soldof these sales at the time of the sale. We then recognize the revenue and related cost of goods sold from thesesales when the right of return no longer exists.  Sales with contingencies, such as rights ofreturn, rotation rights, conditional acceptance provisions and priceprotection, are rare and insignificant and are deferred until the contigencieshave been satisfied or the contigent 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.

 

**Stock-Based Compensation**

 

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 SFAS 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 exceeds the exercise priceor if options were issued to non-employees.

 

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

 

7

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SFAS No.123, as amended, permits companies to recognize, as expenseover the vesting period, the fair value of all stock-based awards on the dateof grant. The Black-Scholes option valuation model was developed for use inestimating the fair value of traded options, which have no vesting restrictionsand are fully transferable. Because our stock-based compensation plans havecharacteristics significantly different from those of traded options andbecause changes in the subjective input assumptions can materially affect thefair value estimate, management believes that the existing option valuationmodels do not necessarily provide a reliable single measure of the fair valueof awards from the plan. Therefore, as permitted, we apply the existingaccounting rules under APB No. 25 and provide pro forma net loss and proforma loss per share disclosures for stock-based awards made as if the fairvalue method defined in SFAS No. 123 have been applied.

 

The following table summarizes relevant information as to the reportedamounts under the Company’s intrinsic value method of accounting for stockawards, with supplemental information as if the fair value recognitionprovisions of SFAS No. 123 have been applied:

 
| ** **                                                                        | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| ** **                                                                        | ** ** | **(in thousands)**                | ** ** |
|                                                                              |       |                              |       |   |   |
| Net income  (loss):                                                               |       |                              |       |   |   |
| As reported                                                                       |       | $                                 | 3,323      |   | $ | (3,954 | ) |
| Less:  Stock-based employee compensation determined under fair-value based method |       | (126                              | )          | (214 | ) |
| Pro forma                                                                         |       | $                                 | 3,197      |   | $ | (4,168 | ) |
|                                                                              |       |                              |       |   |   |
| Basic net income  (loss) per share:                                               |       |                              |       |   |   |
| As reported                                                                       |       | $                                 | 0.14       |   | $ | (0.19 | ) |
| Pro forma                                                                         |       | $                                 | 0.14       |   | $ | (0.20 | ) |
|                                                                              |       |                              |       |   |   |
| Diluted net income (loss) per share:                                              |       |                              |       |   |   |
| As reported                                                                       |       | $                                 | 0.14       |   | $ | (0.19 | ) |
| Pro forma                                                                         |       | $                                 | 0.13       |   | $ | (0.20 | ) |

 

**Concentration of Credit and SupplyRisk**

 

We sell products on a worldwide basis and a significant portion of ouraccounts receivable are due from customers outside of the U.S.  Where we are exposed to material credit risk,we generally require letters of credit, advance payments, or carry foreigncredit insurance.  No individual countryoutside of the U.S. accounted for more than 10% of net sales from continuingoperations in any of the periods presented. Sales to U.S. customers are generally on open credit terms.  In the U.S., we primarily sell our productsthrough third-party resellers and experience individually significant annualsales volumes with major resellers.  Forthe three months ended March 31, 2005 and 2004, we had sales to one customer of$5.4 million and $2.6 million, or 13.4% and 10.0%, respectively of consolidatednet sales.

 

Many of our products are currently being manufactured exclusively bycontract manufacturers on our behalf. For the three months ended March 31, 2005 and 2004, net sales ofproducts manufactured by one manufacturer were $14.4 million, or 36.1%, ofconsolidated net sales, and net sales from another manufacturer were $5.6million, or 14.0%, of consolidated net sales. Net sales for the three monthsended March 31, 2004 for the same manufacturers were $6.8 million, or 26.5%,and $0.6 million, or 2.3%, respectively.

 

**Recent Accounting Pronouncements**

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-BasedPayments” (SFAS 123R), which requires the measurement of all share-basedpayments to employees, including grants of employee stock options, using afair-value-based method and the recording of such expense in an entity'sstatement of income. The accounting provisions of SFAS 123R are effective forannual reporting periods beginning after June 15, 2005. The Company isrequired to adopt SFAS 123R in the quarter ending March 31, 2006. The proforma disclosures previously permitted under SFAS 123 no longer will be analternative to financial statement recognition. See “Stock-Based Compensation”above for the pro forma net income and net income per share amounts for thethree months ended March 31, 2005 and 2004, as if the Company had appliedthe fair value recognition provisions of SFAS 123 to measure compensationexpense for employee stock incentive awards. The Company has completed apreliminary evaluation of the impact of adopting SFAS 123R and estimatesthat it will have a material impact on income from operations for the yearended December 31, 2006. This estimate is based on preliminary informationavailable to the Company and could materially change based on actual facts andcircumstances arising during the year ended December 31, 2006.

 

**Accounting for Acquisitions**

 

Significant judgment is required to estimate the fair value ofpurchased assets and liabilities at the date of acquisition, includingestimating future cash flows from the acquired business, determiningappropriate discount rates, asset lives and other assumptions.  Our process to determine the fair value oftrademarks, customer relationships, developed technology includes the use of estimatesincluding: the potential impact on operating results if the revenue estimatesfor customers acquired through the acquisition based on an assumed customerattrition rate; estimated costs willing to be incurred to purchase thecapabilities gained through the developed technology and appropriate discountrates based on the particular business's weighted average cost of capital.  We are still in the process of finalizing theestimated fair value of the purchased assets and liabilities related to the acquisitionof St. Louis Music.  We expect tocomplete this process, including assessing if St. Louis Music represents aseparate reporting unit for purposes of measuring potential impairment ofgoodwill in the second quarter of 2005.

 

**3.****              Discontinued Operations**

 

In December 2003, we placed our wholly owned Italian subsidiary, MackieDesigns (Italy) S.p.A. (“Mackie Italy”), into an Italian form ofcourt-supervised liquidation and sold all of the shares of Mackie Italy.  Mackie Italy was a manufacturer of many ofour speaker products, which were purchased by the Company for subsequent saleoutside of Italy.  At the time of thesale, the Company owed Mackie Italy approximately $9.2 million related to thepurchase of goods in the normal course of business.  During 2004, we made payments to Mackie Italyof approximately $1.6 million, lowering our liability to $7.6 million atDecember 31, 2004.  Additionally, MackieItaly has a payable to a separate wholly owned subsidiary of the Company forapproximately $2.7 million, which was fully reserved at the date of sale in2003.

 

In February 2005, we made an offer to Mackie Italy to settle anyoutstanding amounts owed by the Company to Mackie Italy for $4.7 million.  This proposal was accepted in May 2005.  Under the terms of the settlement agreement,we issued a stand-by letter of credit to Mackie Italy for $1.0 million, and wecommitted to make further payments of $1.5 million during the remainder of 2005and $2.2 million during 2006.  Werecognized a gain on discontinued operations of $2.9 million in the firstquarter of 2005.

 

8

----

 

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

 

The following table sets forth the computation of basic and diluted netloss per share for the three months ended March 31, 2005 and 2004. Stockoptions to purchase 2,511,000 and 3,902,000 shares in 2005 and 2004,respectively, were excluded from the calculation of diluted per share amountsbecause they are antidilutive. Included in the denominator for computation ofbasic and diluted net income (loss) per share are 1.2 million warrants and11,481 vested stock options with an exercise price of $.01 which are consideredoutstanding common shares.

 
| ** **                                                                          | ** ** | **Three months ended  March 31,**          | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                          | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **                                                                          | ** ** | **(in thousands, except  per share data)** | ** ** |
| Numerator:                                                                          |       |                                       |       |   |   |
| Net income  (loss) from continuing operations                                       |       | $                                          | 496        |   | $ | (3,954 | ) |
| Net income from  discontinued operations                                            |       | 2,827                                      |       | — |   |
| Numerator for  basic and diluted net income (loss) per share                        |       | $                                          | 3,323      |   | $ | (3,954 | ) |
|                                                                                |       |                                       |       |   |   |
| Denominator:                                                                        |       |                                       |       |   |   |
| Weighted average  shares outstanding                                                |       | 22,283                                     |       | 19,608 |   |
| Dilutive  potential common shares from outstanding stock options and warrants       |       | 1,212                                      |       | 1,283 |   |
| Denominator for  basic net income (loss) per share – weighted average shares   |       | 23,495                                     |       | 20,891 |   |
|                                                                                |       |                                       |       |   |   |
| Basic weighted  average shares outstanding                                          |       | 23,495                                     |       | 20,891 |   |
| Dilutive shares                                                                     |       | 769                                        |       | — |   |
| Denominator for  diluted net income (loss) per share – weighted average shares |       | 24,264                                     |       | 20,891 |   |
|                                                                                |       |                                       |       |   |   |
| Basic and  diluted net income (loss) per share:                                     |       |                                       |       |   |   |
| Continuing  Operations                                                              |       | $                                          | 0.02       |   | $ | (0.19 | ) |
| Discontinued  Operations                                                            |       | 0.12                                       |       | — |   |
| Basic and  diluted net income (loss) per share                                      |       | $                                          | 0.14       |   | $ | (0.19 | ) |

 

**5.****              Inventories**

 

Inventories consist of the following:

 
| ** **      | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------|------------|---------------------|------------|------------------------|------------|
| ** **      | ** ** | **(in thousands)**  | ** ** |
| * *        | * *   | * *            | * *   | * *               | * *   |
| Raw materials   |       | $                   | 4,542      |                   | $          | 3,951 |   |
| Work in process |       | 1,206               |       | 657                    |       |
| Finished goods  |       | 36,948              |       | 23,351                 |       |
|            |       | $                   | 42,696     |                   | $          | 27,959 |   |

 

9

----

 

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

 

Intangible assets consist of the following:

 
| ** **                     | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                     | ** ** | **(in thousands)**  | ** ** |
| Trademarks                     |       | $                   | 5,930      |                   | $          | 1,380 |   |
| Developed  technology          |       | 5,470               |       | 5,200                  |       |
| Customer  relationships        |       | 3,080               |       | —                 |       |
| Covenant not to  compete       |       | 285                 |       | 285                    |       |
|                           |       | 14,765              |       | 6,865                  |       |
| Less accumulated  amortization |       | (1,883              | )          | (1,737                 | )          |
|                           |       | $                   | 12,882     |                   | $          | 5,128 |   |

 

Amortization expense for intangible assets was $147,000 and $106,000for the three month periods ended March 31, 2005 and 2004, respectively.

 

Expected future amortization expense related to intangible assets forthe next five years is as follows (in thousands):

 

| **Year  Ending March 31:** |   |   |   |
|----------------------------|--------|--------|--------|
| 2006                       |   | $      | 903    |   |
| 2007                       |   | 816    |   |
| 2008                       |   | 816    |   |
| 2009                       |   | 816    |   |
| 2010                       |   | 811    |   |
|                            |        |        |        |  |

 

**7.****              Financing**

 

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

 

We have a revolving line of credit to borrow up to $25.0 millionlimited to a percentage of eligible collateral through March 2006. Interest is due monthly and is based on the banks prime rate or LIBOR plus aspecified margin.  At March 31, 2005, the average interest rate was6.25%.  This revolving line of credit is secured by substantially all U.S.assets (excluding St. Louis Music, Inc.) and accounts receivable of our U.K.subsidiary.  At March 31, 2005, we had an outstanding balance on this lineof credit of $16.0 million and available borrowing capacity of $3.2 million.

 

We also have a revolving short-term demand credit facility of $40.0million guaranteed by Sun Capital Partners III QP, LP, to finance theacquisition of St. Louis Music, Inc. and for future working capitalrequirements.  Interest is due monthlyand is based on the banks prime rate or LIBOR plus a specified margin.  At March 31, 2005, the average interest ratewas 4.5%.  At March 31, 2005, we had anoutstanding balance on this line of credit of $33.1 million and availableborrowing capacity of $6.9 million.

 

The Company intends to refinance all of its existing credit facilitiesand to extinguish Sun Capital Partners III, QP’s guarantee in the near term.

 

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

 

At March 31, 2005 and December 31, 2004, our long-term debt consistedof the following, in thousands:

 
| ** **                      | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                      | ** ** | **(In thousands)**  | ** ** |
|                            |       |                |       |                   |       |
| U.S. term loan                  |       | $                   | 477        |                   | $          | 552 |   |
| U.S.  subordinated note payable |       | 11,417              |       | 11,360                 |       |
|                            |       | 11,894              |       | 11,912                 |       |
| Less: current  portion          |       | (477                | )          | (300                   | )          |
| Long-term  portion of debt      |       | $                   | 11,417     |                   | $          | 11,612 |   |

 

Our U.S. term loan is payable in monthly payments of $25,000. This loan and the $25.0 million line of credit held by the same financialinstitution are both secured by substantially all of the assets of the Company(excluding St. Louis Music, Inc.), and are both senior to other long-termdebt.  The term loan bears interest at the bank’s prime rate plus aspecified margin.  This rate was 6.5% at March 31, 2005.  The principal is due March 2006.

 

In March 2003, we obtained a note payable for $11.0 million withanother lender, which is subordinate to the $25.0 million line of credit.  Interest accrues at a rate of 10%.  Prior to March 2005, 8% was paid monthlywhile the remaining 2% was paid monthly if there was a specific availability onour line of credit.  At March 31, 2005 wehave added a total of $417,000 in accrued interest to the note payable.  In March 2005, we signed a loan amendmentthat now requires us to pay the 10% interest monthly.  The principal is due in May 2006.

 

 

10

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**8.****              Guarantees**

 

In the ordinary course of business, we are not subject to potentialobligations under guarantees that fall within the scope of FIN No. 45,*Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*exceptfor standard indemnification and warranty provisions and give rise only to thedisclosure requirements prescribed by FIN No. 45.

 

Indemnification and warranty provisions contained within our salesagreements are generally consistent with those prevalent in our industry. Theduration of product warranties is generally one to six years following deliveryof products.

 

The warranty liability is summarized as follows (in thousands):

 
| ** **                    | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **2005**                         | ** ** | **2004** | ** ** |
|                          |       |                             |       |   |   |
| Balance,  beginning of period |       | 978                              |       | 1,081 |   |
| Charged to cost  of sales     |       | 568                              |       | 682 |   |
| Applied to  liability         |       | (316                             | )          | (696 | ) |
| Balance, end of  period       |       | 1,230                            |       | 1,067 |   |

 

**9.****              Contingencies**

 

We are involved in various legal proceedings and claims that arise inthe ordinary course of business. We currently believe that these matters willnot have a material adverse impact on our financial position, liquidity orresults of operations.

 

**10.****       Business Combinations**

 

On March 4, 2005, in accordance with an acquisition agreement, weacquired 100% of the shares of St. Louis Music, Inc. (“St. Louis”), aMissouri-based manufacturer, distributor and importer of branded musicalinstruments and professional audio products. The Company believes the acquisition of St. Louis Music will furtherdiversify the Company’s product offerings to help acquire, retain and extendrelationships with customers.  Our totalpurchase consideration was approximately $44.7 million, consisting of $34.2million in cash, a commitment to pay $3.0 million in two years, $1.2 million inshares of LOUD common stock valued using the February 18, 2005 closing price,liabilities assumed of $5.0 million and estimated transaction costs of $1.3million (including approximately $0.4 million to Sun Capital Partners, Inc.).  The $3.0 million future commitment isguaranteed by the Company and Sun Capital Partners III QP, LP, an affiliate ofSun Capital Partners Inc. and Sun Mackie, LLC, the Company’s principalshareholder. The St. Louis Music acquisition was conducted through SLM HoldingCorp., a wholly owned subsidiary of the Company. Included in the Company'sresults of operations for the three months ended March 31, 2005, are theearnings of St. Louis Music, Inc. for the period March 5 through March 31,2005.

 

In connection with the acquisition, the purchase price was preliminarilyallocated as follows (this allocation has not been finalized, as we have notdetermined the fair value of all assets purchased from the acquisition and wehave estimated our transaction costs ):

 
| Accounts  receivable                                                                                     |   | $      | 11,953 |   |
|----------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Inventories                                                                                              |   | 16,253 |   |
| Prepaid expenses  and other current assets                                                               |   | 287    |   |
| Property, plant  and equipment                                                                           |   | 3,177  |   |
| Goodwill                                                                                                 |   | 5,075  |   |
| Trademarks  (estimated life of 20 years)                                                                 |   | 4,550  |   |
| Developed technology  (estimated life of 5 years)                                                        |   | 270    |   |
| Customer relationships  (estimated life of 15 years)                                                     |   | 3,080  |   |
| Other assets                                                                                             |   | 17     |   |
|                                                                                                     |   |   |   |
| Total assets                                                                                             |   | $      | 44,662 |   |
|                                                                                                     |   |   |   |
| Accounts payable                                                                                         |   | $      | 2,610  |   |
| Accrued  liabilities (including unpaid estimated transaction costs and remaining  amount due to sellers) |   | 6,297  |   |
|                                                                                                     |   |   |   |
| Total  liabilities                                                                                       |   |   | 8,907  |   |
|                                                                                                     |   |   |   |
| Common stock  issued                                                                                     |   | 1,190  |   |
|                                                                                                     |   |   |   |
| Cash  consideration paid, net of $88 cash acquired                                                       |   | $      | 34,565 |   |
|                                                                                                          |        |        |        |        |  |

 

Goodwill of $5.1 million, representing the excess of the purchaseconsideration over the fair value of tangible and identifiable intangibleassets acquired, will not be amortized, consistent with the guidance in SFAS142. Amortization of the entire $5.1 million is expected to be deductible fortax purposes.

 

11

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The following unaudited pro forma information represents the results ofoperations for LOUD and St. Louis Music, Inc. for the quarters ended March 31,2005 and 2004, as if the acquisition had been consummated as of January 1, 2005and January 1, 2004, respectively. Included in the 2005 numbers are $2.1 million of transaction expensesthat relate to the purchase of St. Louis Music, Inc. that are nonrecurring innature.  This pro forma information doesnot purport to be indicative of what may occur in the future:

 
| ** **                         | ** ** | **Three months ended  March 31,**          | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|
| ** **                         | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **                         | ** ** | **(in thousands, except  per share data)** | ** ** |
|                               |       |                                       |       |   |   |
| Net sales                          |       | $                                          | 56,533     |   | $ | 46,810 |   |
| Gross profit                       |       | 17,591                                     |       | 11,989 |   |
| Net income  (loss)                 |       | 1,976                                      |       | (3,786 | ) |
| Basic net income  (loss) per share |       | $                                          | 0.08       |   | $ | (0.18 | ) |

 

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

 

*The following discussion andanalysis should be read in conjunction with our financial statements includedin our Annual Report on Form 10-K for the year ended December 31, 2004. Thisdiscussion contains certain “forward-looking statements” within the meaning ofthe Private Securities Litigation Reform Act of 1995 that involve risks anduncertainties, such as statements of our plans, objectives, expectations andintentions. Actual results could differ materially from those discussed herein.The cautionary statements made in this Quarterly Report on Form 10-Q and theAnnual Report on Form 10-K should be read as being applicable to allforward-looking statements wherever they appear. We undertake no obligation topublicly release any revisions to these forward-looking statements that may berequired to reflect events or circumstances after the date hereof or to reflectthe occurrence of unanticipated events. Forward-looking statements include,without limitation, any statement that may predict, forecast, indicate, orimply future results, performance, or achievements, and may contain the words “believe,”“anticipate,” “expect,” “estimate,” “project,” “will be,” “will continue,” “willlikely result,” or words or phrases of similar meaning.*

 

**Overview**

 

LOUD Technologies Inc., a Washington corporation incorporated onNovember 16, 1988 under the name Mackie Designs Inc., engineers, manufacturesand markets professional audio reproduction and recording equipment andsoftware under the brand names Mackie, TAPCO, SIA, EAW and EAW Commercial.  We changed our name to LOUD Technologies,Inc. on September 15, 2003.

 

Our primary products include analog mixers, sound reinforcementspeakers, professional loudspeaker systems, installed paging and musicdistribution systems, preamplifiers, power amplifiers, digital audioworkstations (DAW) and A/V software control surfaces, digital mixers, i/o devicesand acoustic test and measurement software.  These products are used in avariety of applications, including home and commercial recording studios, liveperformances and fixed installations of all sizes.

 

On March 4, 2005, in accordance with an acquisition agreement, weacquired 100% of the shares of St. Louis Music, Inc. (“St Louis”), aMissouri-based manufacturer, distributor and importer of branded musicalinstruments and professional audio products. The Company believes the acquisition of St. Louis Music will furtherdiversify the Company’s product offerings to help acquire, retain and extendrelationships with customers.  Our totalpurchase consideration was approximately $44.7 million, consisting of $34.2million in cash; a commitment to pay $3.0 million in two years; $1.2 millionshares of LOUD common stock valued using the February 18, 2005 closing price,liabilities assumed of $5.0 million and estimated transaction costs of $1.3million.  The $3.0 million futurecommitment is guaranteed by the Company and Sun Capital Partners III QP, LP, anaffiliate of Sun Capital Partners Inc. and Sun Mackie, LLC, the Company’sprincipal shareholder.  The St. LouisMusic acquisition was conducted through SLM Holding Corp., a wholly ownedsubsidiary of the Company.

 

In December 2003, we placed our wholly owned Italian subsidiary, MackieDesigns (Italy) S.p.A. (“Mackie Italy”) into an Italian form ofcourt-supervised liquidation and sold all of the shares of Mackie Italy.  Mackie Italy was a manufacturer of many ofour speaker products, which were purchased by the Company for subsequent saleoutside of Italy.  At the time of thesale, the Company owed Mackie Italy approximately $9.2 million related to thepurchase of goods in the normal course of business.  During 2004, we made payments to Mackie Italyof approximately $1.6 million, lowering our liability to $7.6 million atDecember 31, 2004.  Additionally, MackieItaly has a payable to a separate wholly owned subsidiary of the Company forapproximately $2.7 million, which was fully reserved at the date of sale in2003.

 

In February 2005, we made an offer to Mackie Italy to settle anyoutstanding amounts owed by the Company to Mackie Italy for $4.7

 

12

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million.  This proposal wasaccepted in May 2005.  Under the terms ofthe settlement agreement, we issued a stand-by letter of credit to Mackie Italyfor $1.0 million, and we committed to make further payments of $1.5 million duringthe remainder of 2005 and $2.2 million during 2006.  We recognized a gain on discontinuedoperations of $2.9 million in the first quarter of 2005.

 

**Critical Accounting Policies andJudgments**

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes.  Actual results coulddiffer from these estimates.

 

Significant judgment is required to estimate the fair value of purchasedassets and liabilities at the date of acquisition, including estimating futurecash flows from the acquired business, determining appropriate discount rates,asset lives and other assumptions.  Ourprocess to determine the fair value of trademarks, customer relationships,developed technology includes the use of estimates including: the potentialimpact on operating results if the revenue estimates for customers acquiredthrough the acquisition based on an assumed customer attrition rate; estimated costswilling to be incurred to purchase the capabilities gained through thedeveloped technology and appropriate discount rates based on the particularbusiness's weighted average cost of capital. We are still in the process of finalizing the estimated fair value ofthe purchased assets and liabilities related to the acquisition of St. LouisMusic.  We expect to complete thisprocess, including assessing if St. Louis Music represents a separate reportingunit for purposes of measuring potential impairment of goodwill in the secondquarter of 2005.

 

We believe there have been no additional significant changes in ourcritical accounting policies during the three months ended March 31, 2005 ascompared to what was previously disclosed in our Form 10-K for the year endedDecember 31, 2004.

 

**Estimates and Assumptions Related toFinancial Statements**

 

The discussion and analysis of our financial condition and results ofoperations is based upon our unaudited condensed consolidated financialstatements, which have been prepared in accordance with U.S. generally acceptedaccounting principles for interim financial statements. The preparation ofthese condensed consolidated financial statements requires us to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenueand expenses, and related disclosure of contingent assets and liabilities. Onan on-going basis, we evaluate our estimates, including those affecting revenuerecognition, the allowance for doubtful accounts, inventory valuation,intangible assets, income taxes and general business contingencies. We base ourestimates on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances, the results of which form ourbasis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differfrom these estimates under different assumptions or conditions.

 

**Results of Operations**

 
| ** **                                  | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|
| ** **                                  | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Net sales                                   |       | $                                 | 39,945     |   | $ | 25,681 |   |
| Gross profit                                |       | 13,335                            |       | 6,912 |   |
|                                        |       |                              |       |   |   |
| Selling, general  and administrative        |       | 9,545                             |       | 8,292 |   |
| Research and  development                   |       | 1,955                             |       | 1,972 |   |
| Total operating  expenses                   |       | 11,500                            |       | 10,264 |   |
|                                        |       |                              |       |   |   |
| Other expense                               |       | (1,313                            | )          | (597 | ) |
| Provision for  income taxes                 |       | 26                                |       | 5 |   |
| Income (loss)  from continuing operations   |       | 496                               |       | (3,954 | ) |
| Recognized gain  on discontinued operations |       | 2,827                             |       | — |   |
| Net income  (loss)                          |       | 3,323                             |       | (3,954 | ) |
|                                             |            |                                   |            |  |  |  |  |

 

***Three Months Ended March31, 2005 vs. Three Months Ended March 31, 2004***

 

*Net Sales*

 

Net sales from continuing operations increased by 55.5% to $39.9million during the three months ended March 31, 2005 from $25.7 million in thecomparable period in 2004.  $6.1 millionof this increase related to the acquisition of St. Louis Music, Inc., theremaining increase primarily related to increased product availability from ourcontract manufacturers and the introduction of new products.

 

We expect sales in future periods to be higher than sales in the currentquarter primarily caused by the benefit of a complete quarter of sales from St.Louis Music, Inc.

 

*Gross Profit*

 

Gross profit increased to $13.3 million, or 33.4% of net sales, in thethree months ended March 31, 2005 from $6.9 million, or 26.9% of net sales, inthe three months ended March 31, 2004.   The increase in gross profitpercentage is primarily a result of improved margins in the first quarter of2005 as we recognize the benefit of lower costs in outsourcing our productionoversees.  There was also

 

13

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a percentage decrease in costs such as freight, warehousing andwarranty expense in the first quarter 2005 compared to 2004.

 

We expect our gross margin percentage to slightly decrease in future quartersprimarily caused by a complete quarter of sales of St. Louis Music, Inc.’sproducts with lower margin percentages.

 

*Selling, General and Administrative*

 

Selling, general and administrative expenses increased by $1.2 millionto $9.5 million in the three months ended March 31, 2005 from $8.3 million in thecomparable period in 2004, of which $1.1 million was due to theacquisition of St. Louis Music, Inc., the remaining increase was primarily dueto higher commission costs caused by higher revenues offset by decreases intelephone and utility expenses, lower allowances due to an improved accountsreceivable aging and lower professional fees.

 

We expect our selling, general and administrative expenses to increasein future quarters with the addition of a complete quarter of expenses of St.Louis Music, Inc.

 

*Research and Development*

 

Research and development expenses were $2.0 million for both 2005 and2004.  We have and will continue toinvest in new products and improvements to existing products.  Accordingly, we anticipate our research anddevelopment costs will be higher the remainder of 2005 compared to 2004.

 

*Other Income (Expense)*

 

Net other expense was $1.3 million for the three months ended March 31,2005 as compared to net other expense of $0.6 million for the three monthsended March 31, 2004.  The primary causesof this fluctuation were a $0.2 million difference in foreign exchange loss, anincrease in management fees of $0.2 million in the first quarter of 2005 as aresult of higher EBITDA, the acquisition of St. Louis Music, Inc. and adifference in other income (expense) of $0.2 million primarily caused by a gainon sale of fixed assets of $0.1 million in the first quarter of 2004.

 

We expect other expense to increase in future quarters as a result ofhigher interest expense caused by the increase in debt as a result of the St.Louis Music, Inc. acquisition.

 

*Income Taxes*

 

Income tax expense for the first quarter of 2005 was $26,000 comparedto $5,000 for the comparable period in 2004. The primary component of the 2005 tax is from our U.S. entities.  The amount is computed by applying theAlternative Minimum Tax rate to the taxable income we are unable to applytowards our NOLs.  The 2004 taxesprimarily relate to our non-U.S. subsidiaries. No benefit was recognized in connection with our 2004 losses asrecognition of such benefits depended on future profits, which are not assumed.

 

*Recognized Gain on DiscontinuedOperations*

 

In March 2005, we recognized a $2.8 million gain from the discontinuedoperations of our former Italian subsidiary, net of tax of $0.1 million.   This gain was a result of a settlementagreement with Mackie Italy to settle any net outstanding amounts owed by theCompany.

 

**Liquidity and Capital Resources**

 

On March 4, 2005, in accordance with the acquisition agreement, weacquired 100% of the shares of St. Louis Music, Inc., a Missouri-basedmanufacturer, distributor and importer of branded musical instruments andprofessional audio products.  The Companybelieves the acquisition will further diversify the Company’s product offeringsand to help acquire, retain and extend relationships with customers.

 

In February 2005, we made an offer to Mackie Italy to settle anyoutstanding amounts owed by the Company for $4.7 million.  This proposal was accepted in May 2005.  Under the terms of the settlement agreement,we issued a stand-by letter of credit to Mackie Italy for $1.0 million, and wecommitted to make further payments of $1.5 million during the remainder of 2005and $2.2 million during 2006.  Werecognized a gain on discontinued operations of $2.9 million in the firstquarter of 2005.

 

As of March 31, 2005, we had cash and cash equivalents of $772,000 andtotal debt and short-term borrowings of $61.0 million.  At March 31, 2005we had availability of $3.2 million on our revolving line of credit, and $6.9million on our demand line of credit.

 

*Net Cash (Used) Provided byOperating Activities*

 

Cash used by operating activities was $1.9 million in the three monthsended March 31, 2005, compared to cash provided of $1.9

 

14

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million for the comparable period in 2004. Net cash used by operatingactivities in the first three months of 2005 was primarily attributable todecreases in accounts payable and other accrued expenses, and the recognizedgain on discontinued operations of Mackie Italy, partially offset by decreasesin inventories and prepaid and other current assets.  In the first three months of 2004, cashprovided by operating activities was primarily attributable to a decrease ininventories, accounts receivable and other assets, and an increase in accountspayable and other accrued expenses, partially offset by an increase in prepaidexpenses and other current assets.

 

*Net Cash Used in InvestingActivities*

 

Cash used in investing activities was $35.0 million for the first threemonths of 2005 and $0.1 million for the first three months of 2004. The cashused in investing activities in 2005 was primarily related to the acquisitionof St. Louis Music, Inc. of $34.6 million. Additionally, in 2005 and 2004, $0.5 million and $0.8 millionrespectively, consisted of purchases of capital expenditures for tooling usedin manufacturing by our contract manufacturers.  In 2004, this amount wasoffset by cash received of $0.7 million from the sale of manufacturingequipment in our Woodinville location.

 

As part of our third party manufacturing agreements, many of ourcontract manufacturers require that we invest in tooling equipment prior to thestart of manufacture.  Accordingly, we anticipate capital spending at thesame level or higher in each of the remaining quarters of 2005.

 

*Net Cash (Used in) Provided byFinancing Activities*

 

Cash provided by financing activities was $37.3 million during thefirst three months of 2005, compared to cash used of $2.3 million during thefirst three months of 2004.  Financing activities during the first quarterof 2005 related primarily to the acquisition of St. Louis Music, Inc. resultingin a new demand credit facility of $35.1 million.  In addition, this increase was due to netborrowings on our line of credit of $2.2 million.  Financing activities in the first quarter of2004 relate primarily to payments on our long-term debt of $0.8 million and netrepayments on our line of credit of $1.6 million.

 

*Payments and Proceeds from Long-termDebt, Line of Credit and Other Short-term Borrowings*

 

We borrowed $35.1 million on a revolving short-term demand creditfacility, guaranteed by Sun Capital Partners III QP, LP, to finance theacquisition of St. Louis Music, Inc.

 

Under the terms of the line of credit and subordinated loan agreements,we are required to maintain certain financial ratios, such as a cumulativeEBITDA calculation. The agreement also provides, among other matters,restrictions on additional financing, dividends, mergers, acquisitions, and anannual capital expenditure limit.

 

*Ability to stay in compliance withdebt covenants*

 

We have entered into amendments of our line of credit and term loans inApril, August and October of 2004, which have revised debt covenants.  Thekey financial covenants are achievement of certain EBITDA targets for the termof the agreement.  The October agreementrequires us to meet the EBITDA target for the previous twelve months measuredquarterly beginning March 31, 2005.  Wemet this target at March 31, 2005 and believe we will meet this target eachquarter thereafter in 2005.

 

*Commitments*

 

We had the following material contractual commitments related tooperating leases for equipment facilities at March 31, 2005.  Inaddition, we had material obligations related to short-term and long-term debtarrangements, excluding our accounts payable and accrued liabilities of$28.5 million at March 31, 2005:

 
| ** **                            | ** ** | **Total**  | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** |
|---------------------------------------|------------|------------|------------|-----------------------|------------|---------------|------------|
| ** **                            | ** ** | ** ** | ** ** | ** **            | ** ** | ** **    | ** ** |
| Operating leases                      |       | $          | 5,143      |                  | $          | 2,639         |       | $ | 2,504 |   |
| Lines of credit                       |       | 49,152     |       | 49,152                |       | —        |       |
| Payable to  former Italian Subsidiary |       | 4,700      |       | 3,000                 |       | 1,700         |       |
| Other  liabilities                    |       | 3,000      |       | —                |       | 3,000         |       |
| Short-term and  long-term debt        |       | 11,894     |       | 477                   |       | 11,417        |       |
| Total                                 |       | $          | 73,889     |                  | $          | 55,268        |       | $ | 18,621 |   |

 

We believe we have adequate resources to meet our obligations as theycome due through December 31, 2005.

 

**Item3.  Quantitative and Qualitative Disclosures About Market Risk**

 

We are exposed to various market risks, including changes in foreigncurrency rates and interest rates. We may enter into various derivativetransactions to manage certain of these exposures; however, we did not have anyderivative financial instruments as of

 

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March 31, 2005.

 

At March 31, 2005, we had variable rate lines of credit withoutstanding balances of $49.1 million. As such, changes in U.S. interest ratesaffect interest paid on debt and we are exposed to interest rate risk. For thequarter ended March 31, 2005, an increase in the average interest rate of 10%,i.e. from 5.37% to 5.91%, would have resulted in an approximately $37,000decrease in net income before income taxes.  The fair value of such debtapproximates the carrying amount on the consolidated balance sheet at March 31,2005.

 

Our non-U.S. subsidiaries have functional currencies of the U.S. dollarand are translated into U.S. dollars at exchange rates in effect at the balancesheet date. These subsidiaries are located in the U.K. and Canada.  Income and expense items are translated atthe average exchange rates prevailing during the period. A 10% decrease in thevalue of the U.S. dollar compared to the local currencies of our non-U.S.subsidiaries, throughout the quarter ended March 31, 2005, would have resultedin an approximately $50,000 decrease to net income before income taxes.

 

**Item 4.  Controls and Procedures**

 

The Company maintains disclosure controls and procedures (as defined inRules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, asamended, (the “Exchange Act”)) that are designed to ensure that informationrequired to be disclosed in the Company’s reports under the Exchange Act, isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to the Company’s management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure.

 

The Company carried out an evaluation, under the supervision and withthe participation of the Company’s management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of theCompany’s “disclosure controls and procedures” as of the end of the periodcovered by this report, pursuant to Rules 13a-15(b) and 15d-15(e) under theExchange Act.  Based on that evaluation,the Company’s Chief Executive Officer and Chief Financial Officer haveconcluded that the Company’s disclosure controls and procedures, as of the endof the period covered by this report, were effective in timely alerting them tomaterial information relating to the Company required to be included in theCompany’s periodic SEC filings.

 

There has been no change in the Company’s internal control overfinancial reporting (as defined in Rules 13(a)-15(f) and 15(d)-15(f) under theExchange Act) during the period covered by this report that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

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**PART II.  OTHER INFORMATION**

 

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

 

The Company is involved in various legal proceedings and claims thatarise in the ordinary course of business. The outcome of any such matter is currently not determinable.

 

**Item2.  Unregistered Sales of Equity Securities and Use of Proceeds**

 

None.

 

**Item3.  Defaults upon Senior Securities**

 

None.

 

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

 

None.

 

**Item 5.  Other Information**

 

None.

 

**Item6.  Exhibits**

 

Exhibits

 

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

 

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

 

32.1 Certification pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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**SIGNATURES**

 

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

 

 
|                      | ** ** | **LOUD Technologies Inc.**                                                                                         |
|---------------------------|------------|--------------------------------------------------------------------------------------------------------------------|
|                      |       | (Registrant)                                                                                                       |
|                      |       |                                                                                                               |
| Dated:  May 16, 2005 | By:   | /s/ James T. Engen                                                                                                 |
|                      |       | James T. Engen                                                                                                     |
|                      | * *   | *President, Chief Executive Officer  and  Director*                                                                |
|                      |       |                                                                                                               |
| Dated:  May 16, 2005 | 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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**EXHIBITINDEX**

 
| **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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