** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-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 September  30, 2003**                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                     |
| **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 asspecified 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)      |
|                                                            |
| **Mackie  Designs Inc.**                                        |
| (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  ý    No o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).Yes  oNo  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** |   | **19,608,036**                                            |
|---------------------------------|--------|-----------------------------------------------------------|
| Class                           |   | Number of  Shares Outstanding  (as of September 30, 2003) |

 

 

----

 

**LOUDTECHNOLOGIES INC.**

 

**FORM10-Q**

**Forthe quarter ended September 30, 2003**

 

**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  Changes in Shareholders’ Equity and Comprehensive Loss |
|           |                      |   |
|           |                      | 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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**PART I. FINANCIAL INFORMATION**

**Item 1****.  Financial Statements**

 

**LOUDTECHNOLOGIES INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 

*In thousands*

 
|                                                                                          |   | **September 30,  2003** |   | **December 31,  2002** |   |
|-----------------------------------------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
| **ASSETS**                                                                                    |   |                    |   |                   |   |
| Current assets:                                                                               |   |                    |   |                   |   |
| Cash                                                                                          |   | $                       | 425    |                   | $      | 3,062 |   |
| Accounts receivable, less allowance for doubtful  accounts of $3,639 and $2,684, respectively |   | 29,229                  |   | 31,225                 |   |
| Income taxes receivable                                                                       |   | 176                     |   | 2,437                  |   |
| Inventories                                                                                   |   | 36,534                  |   | 50,165                 |   |
| Prepaid expenses and other current assets                                                     |   | 2,998                   |   | 6,269                  |   |
| Deferred income taxes                                                                         |   | 1,376                   |   | 1,875                  |   |
| Total current assets                                                                          |   | 70,738                  |   | 95,033                 |   |
|                                                                                          |   |                    |   |                   |   |
| Property, plant and equipment, net                                                            |   | 18,073                  |   | 22,043                 |   |
| Intangible assets, net                                                                        |   | 5,658                   |   | 5,675                  |   |
| Other assets, net                                                                             |   | 1,066                   |   | 1,204                  |   |
|                                                                                          |   |                    |   |                   |   |
| Total assets                                                                                  |   | $                       | 95,535 |                   | $      | 123,955 |   |
|                                                                                          |   |                    |   |                   |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                |   |                    |   |                   |   |
| Current liabilities:                                                                          |   |                    |   |                   |   |
| Short-term borrowings                                                                         |   | $                       | 26,670 |                   | $      | 39,152 |   |
| Accounts payable                                                                              |   | 17,948                  |   | 22,235                 |   |
| Accrued liabilities                                                                           |   | 13,735                  |   | 10,810                 |   |
| Liabilities of unconsolidated affiliate                                                       |   | 435                     |   | —                 |   |
| Current portion of long-term debt and long-term  debt callable under covenant provisions      |   | 14,052                  |   | 7,946                  |   |
| Total current liabilities                                                                     |   | 72,840                  |   | 80,143                 |   |
|                                                                                          |   |                    |   |                   |   |
| Long-term debt, excluding current portion                                                     |   | 10,705                  |   | 20,266                 |   |
| Employee and other liabilities                                                                |   | 4,871                   |   | 4,435                  |   |
| Deferred income taxes                                                                         |   | 1,464                   |   | 1,875                  |   |
| Total liabilities                                                                             |   | 89,880                  |   | 106,719                |   |
|                                                                                          |   |                    |   |                   |   |
| Commitments and contingencies                                                                 |   |                    |   |                   |   |
|                                                                                          |   |                    |   |                   |   |
| Shareholders’ equity:                                                                    |   |                    |   |                   |   |
| Common stock                                                                                  |   | 33,985                  |   | 29,345                 |   |
| Accumulated deficit                                                                           |   | (27,322                 | )      | (11,372                | )      |
| Accumulated other comprehensive loss                                                          |   | (1,008                  | )      | (737                   | )      |
| Total shareholders’ equity                                                               |   | 5,655                   |   | 17,236                 |   |
|                                                                                          |   |                    |   |                   |   |
| Total liabilities and shareholders’ equity                                               |   | $                       | 95,535 |                   | $      | 123,955 |   |

 

*See accompanyingNotes to Condensed Consolidated Financial Statements.*

 

3

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**LOUDTECHNOLOGIES INC.**

###### **CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

** **

*In thousands, except per sharedata*

** **
|                                                                                |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                                |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
|                                                                                |   |                                  |   |                                 |   |   |   |   |   |
| Net sales                                                                           |   | $                                     | 40,457 |                                 | $      | 46,404 |   | $ | 124,405 |   | $ | 144,321 |   |
| Cost of sales                                                                       |   | 31,275                                |   | 32,987                               |   | 97,777 |   | 99,720 |   |
| Gross profit                                                                        |   | 9,182                                 |   | 13,417                               |   | 26,628 |   | 44,601 |   |
|                                                                                |   |                                  |   |                                 |   |   |   |   |   |
| Operating expenses:                                                                 |   |                                  |   |                                 |   |   |   |   |   |
| Selling, general and administrative                                                 |   | 9,733                                 |   | 13,776                               |   | 32,804 |   | 39,176 |   |
| Research and development                                                            |   | 1,843                                 |   | 2,665                                |   | 6,336 |   | 8,166 |   |
| Restructuring costs                                                                 |   | 908                                   |   | —                               |   | 1,610 |   | — |   |
| Total operating expenses                                                            |   | 12,484                                |   | 16,441                               |   | 40,750 |   | 47,342 |   |
|                                                                                |   |                                  |   |                                 |   |   |   |   |   |
| Operating loss                                                                      |   | (3,302                                | )      | (3,024                               | )      | (14,122 | ) | (2,741 | ) |
|                                                                                |   |                                  |   |                                 |   |   |   |   |   |
| Other income (expense):                                                             |   |                                  |   |                                 |   |   |   |   |   |
| Interest income                                                                     |   | 20                                    |   | 90                                   |   | 186 |   | 280 |   |
| Interest expense                                                                    |   | (906                                  | )      | (891                                 | )      | (3,129 | ) | (3,041 | ) |
| Other                                                                               |   | 954                                   |   | 8                                    |   | 1,275 |   | 286 |   |
| Total other income (expense)                                                        |   | 68                                    |   | (793                                 | )      | (1,668 | ) | (2,475 | ) |
|                                                                                |   |                                  |   |                                 |   |   |   |   |   |
| Loss before income taxes and cumulative effect of  a change in accounting principle |   | (3,234                                | )      | (3,817                               | )      | (15,790 | ) | (5,216 | ) |
|                                                                                |   |                                  |   |                                 |   |   |   |   |   |
| Provision (benefit) for income taxes                                                |   | 70                                    |   | (2,883                               | )      | 160 |   | (2,684 | ) |
|                                                                                |   |                                  |   |                                 |   |   |   |   |   |
| Loss before cumulative effect of a change in  accounting principle                  |   | (3,304                                | )      | (934                                 | )      | (15,950 | ) | (2,532 | ) |
|                                                                                |   |                                  |   |                                 |   |   |   |   |   |
| Cumulative effect of a change in accounting  principle                              |   | —                                |   | —                               |   | — |   | (5,940 | ) |
|                                                                                |   |                                  |   |                                 |   |   |   |   |   |
| Net loss                                                                            |   | $                                     | (3,304 | )                                    | $      | (934 | ) | $ | (15,950 | ) | $ | (8,472 | ) |
|                                                                                |   |                                  |   |                                 |   |   |   |   |   |
| Basic and diluted net loss per share:                                               |   |                                  |   |                                 |   |   |   |   |   |
|                                                                                |   |                                  |   |                                 |   |   |   |   |   |
| Loss before cumulative effect of a change in  accounting principle                  |   | $                                     | (0.16  | )                                    | $      | (0.07 | ) | $ | (0.82 | ) | $ | (0.20 | ) |
|                                                                                |   |                                  |   |                                 |   |   |   |   |   |
| Cumulative effect of a change in accounting  principle                              |   | —                                |   | —                               |   | — |   | (0.48 | ) |
|                                                                                |   |                                  |   |                                 |   |   |   |   |   |
| Basic and diluted net loss per share                                                |   | $                                     | (0.16  | )                                    | $      | (0.07 | ) | $ | (0.82 | ) | $ | (0.68 | ) |

 

*See accompanyingNotes to Condensed Consolidated Financial Statements.*

 

4

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**LOUDTECHNOLOGIES INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

** **

*In thousands*

** **
|                                                                                       |   | **Nine  Months Ended  September 30,** |    |
|--------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                                                       |   | **2003**                              |    | **2002** |   |
|                                                                                       |   |                                  |    |   |   |
| **Operating activities**                                                                   |   |                                  |    |   |   |
| Net loss                                                                                   |   | $                                     | (15,950 | ) | $ | (8,472 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities: |   |                                  |    |   |   |
| Cumulative effect of a change in accounting  principle                                     |   | —                                |    | 5,940 |   |
| Depreciation and amortization                                                              |   | 6,064                                 |    | 5,506 |   |
| Loss on asset dispositions                                                                 |   | 117                                   |    | — |   |
| Deferred stock compensation                                                                |   | 135                                   |    | 641 |   |
| Deferred income taxes                                                                      |   | 85                                    |    | (315 | ) |
| Gain on settlement of liabilities of  unconsolidated affiliate                             |   | (1,268)                               |    | — |   |
| Changes in operating assets and liabilities:                                               |   |                                  |    |   |   |
| Accounts receivable                                                                        |   | 3,820                                 |    | 997 |   |
| Inventories                                                                                |   | 15,358                                |    | (6,644 | ) |
| Prepaid expenses and other current assets                                                  |   | 399                                   |    | 12 |   |
| Other assets                                                                               |   | 811                                   |    | (247 | ) |
| Accounts payable, accrued liabilities and income  taxes                                    |   | 405                                   |    | 1,049 |   |
| Other long term-liabilities                                                                |   | (54                                   | )       | 52 |   |
| Cash provided by (used in) operating activities                                            |   | 9,922                                 |    | (1,481 | ) |
|                                                                                       |   |                                  |    |   |   |
| **Investing activities**                                                                   |   |                                  |    |   |   |
| Cash used in investing activities - purchases of  property, plant and equipment            |   | (1,357                                | )       | (2,317 | ) |
|                                                                                       |   |                                  |    |   |   |
| **Financing activities**                                                                   |   |                                  |    |   |   |
| Proceeds from sale of stock and stock options                                              |   | 3,619                                 |    | — |   |
| Proceeds from long-term debt and warrants                                                  |   | 17,500                                |    | — |   |
| Payments on long-term debt                                                                 |   | (16,665                               | )       | (1,918 | ) |
| Proceeds from new short-term borrowing                                                     |   | 9,152                                 |    | 8,074 |   |
| Net payments on short-term borrowings                                                      |   | (25,022                               | )       | — |   |
| Payments on debt from acquisition of business                                              |   | —                                |    | (1,193 | ) |
| Net proceeds from exercise of stock options                                                |   | 1                                     |    | 1 |   |
| Cash provided by (used in) financing activities                                            |   | (11,415                               | )       | 4,964 |   |
|                                                                                       |   |                                  |    |   |   |
| Effect of exchange rate changes on cash                                                    |   | 213                                   |    | 234 |   |
|                                                                                       |   |                                  |    |   |   |
| Increase (decrease) in cash                                                                |   | (2,637                                | )       | 1,400 |   |
|                                                                                       |   |                                  |    |   |   |
| Cash at beginning of period                                                                |   | 3,062                                 |    | 2,095 |   |
| Cash at end of period                                                                      |   | $                                     | 425     |   | $ | 3,495 |   |

 

*See accompanyingNotes to Condensed Consolidated Financial Statements.*

 

5

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**LOUDTECHNOLOGIES INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND**

**COMPREHENSIVELOSS**

**Ninemonths ended September 30, 2003**

** **

*In thousands*

** **
|                                                                            |   |       |   | **Accumulated  Deficit** |   | **Accumulated  Other  Comprenhensive  Loss** |   | **Total** |   |
|---------------------------------------------------------------------------------|--------|------------|--------|--------------------------|--------|----------------------------------------------|--------|-----------|--------|
|                                                                            |
| **Common  Stock**                                                               |
| **Shares**                                                                      |   | **Amount** |
|                                                                            |   |       |   |                     |   |                                         |   |      |   |   |   |
| Balance at December 31, 2002                                                    |   | 12,556     |   | $                        | 29,345 |                                         | $      | (11,372   | )      | $ | (737 | ) | $ | 17,236 |   |
| Shares issued in private transaction, net of  transaction costs of $2.7 million |   | 6,936      |   | 3,619                    |   | —                                       |   | —    |   | 3,619 |   |
| Warrants issued                                                                 |   | —     |   | 600                      |   | —                                       |   | —    |   | 600 |   |
| Options issued for covenant not to compete                                      |   | —     |   | 285                      |   | —                                       |   | —    |   | 285 |   |
| Exercise of stock options                                                       |   | 116        |   | 1                        |   | —                                       |   | —    |   | 1 |   |
| Amortization of deferred stock compensation                                     |   | —     |   | 135                      |   | —                                       |   | —    |   | 135 |   |
| Net loss                                                                        |   | —     |   | —                   |   | (15,950                                      | )      | —    |   | — |   |
| Foreign currency translation adjustment                                         |   | —     |   | —                   |   | —                                       |   | (271      | )      | — |   |
| Comprehensive loss                                                              |   | —     |   | —                   |   | —                                       |   | —    |   | (16,221 | ) |
| Balance at September 30, 2003                                                   |   | 19,608     |   | $                        | 33,985 |                                         | $      | (27,322   | )      | $ | (1,008 | ) | $ | 5,655 |   |

 

*See accompanyingNotes to Condensed Consolidated Financial Statements.*

 

6

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**LOUDTECHNOLOGIES INC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**September30, 2003**

**(Unaudited)**

 

**1.     General**

 

**Basis of Presentation**

 

The accompanying unaudited condensed consolidated financial statementshave been prepared by LOUD Technologies Inc. in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial statements and include the accounts of LOUD Technologies Inc. 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 31,2002. 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 nine-month period ended September 30, 2003, are notnecessarily indicative of future financial results.

 

In September 2003, we changed our corporate name from Mackie DesignsInc. to LOUD Technologies Inc. The name change is intended to eliminateconfusion between the brand “Mackie” and the parent corporation. Mackie, ourprimary retail brand, along with EAW, RCF, SIA and Tapco make up the family ofbrands.

 

On February 21, 2003, we finalized an agreement with Sun Mackie, LLC,an affiliate of Sun Capital Partners, Inc., a private investment firm, wherebySun Mackie purchased approximately 14.4 million shares of our common stock for$10.0 million. Sun Mackie acquired approximately 7.4 million of these sharesfrom certain selling shareholders. It acquired approximately 6.9 million newlyissued shares directly from the Company for approximately $6.3 million. Netproceeds after transaction related costs were approximately $3.6 million. As aresult of this transaction, Sun Mackie acquired approximately 74% of ouroutstanding shares.

 

**Stock-Based Compensation**

 

Stock-based employeecompensation plans are accounted for using the intrinsic-value methodprescribed in Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations. We have adopted thedisclosure-only provisions of FAS No. 123, “Accounting for Stock-BasedCompensation” as amended by FAS No. 148, “Accounting for Stock-BasedCompensation – Transition and Disclosure, an amendment of FAS No. 123.”

 

FAS No. 123, as amended by FAS No. 148, 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 net loss per share disclosures forstock-based awards made during the year as if the fair value method defined inFAS No. 123, as amended, had been applied. Net loss and net loss per sharefor the three-month and nine-month periods ended September 30, 2003 and 2002changed as follows:

 

7

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|                                                                              |   | **Three  months ended  September 30,**     |       | **Nine months  ended  September 30,** |   |
|-----------------------------------------------------------------------------------|--------|--------------------------------------------|------------|---------------------------------------|--------|
|                                                                              |   | **2003**                                   |       | **2002**                              |   | **2003** |   | **2002** |   |
|                                                                              |   | **(in  thousands, except per share data)** | ** ** |
|                                                                              |   |                                       |       |                                  |   |   |   |   |   |
| Net loss:                                                                         |   |                                       |       |                                  |   |   |   |   |   |
| As reported                                                                       |   | $                                          | (3,304     | )                                     | $      | (934 | ) | $ | (15,950 | ) | $ | (8,472 | ) |
| Add: Stock-based employee compensation  included in reported net loss             |   | —                                     |       | 87                                    |   | 67 |   | 344 |   |
| Less: Stock-based employee compensation  determined under fair-value based method |   | (304                                       | )          | (321                                  | )      | (937 | ) | (1,139 | ) |
| Pro forma                                                                         |   | $                                          | (3,608     | )                                     | $      | (1,168 | ) | $ | (16,820 | ) | $ | (9,267 | ) |
|                                                                              |   |                                       |       |                                  |   |   |   |   |   |
| Basic and diluted net loss per share:                                             |   |                                       |       |                                  |   |   |   |   |   |
| As reported                                                                       |   | $                                          | (0.16      | )                                     | $      | (0.07 | ) | $ | (0.82 | ) | $ | (0.68 | ) |
| Pro forma                                                                         |   | $                                          | (0.17      | )                                     | $      | (0.09 | ) | $ | (0.86 | ) | $ | (0.74 | ) |

 

**2.     NetLoss Per Share**

 

The following table setsforth the computation of basic and diluted net loss per share for thethree-month and nine-month periods ended September 30, 2003 and 2002. Stock options representing 4,171,000 and4,143,000 shares in 2003 and 2002, respectively, were excluded from thecalculation of diluted per share amounts because they are antidilutive.The 1.2 million warrants issued in connection with the debt to Sun Mackie (seeNote 7) and 83,333 vested stock options at an exercise price of $.01 areconsidered outstanding common shares and are included in the denominator forcomputation of basic and diluted net loss per share.

 
|                                                                                 |   | **Three  months ended  September 30,**     |   | **Nine  months ended  September 30,** |   |
|--------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|---------------------------------------|--------|
|                                                                                 |   | **2003**                                   |   | **2002**                              |   | **2003** |   | **2002** |   |
|                                                                                 |   | **(in  thousands, except per share data)** |
| Numerator:                                                                           |   |                                       |   |                                  |   |   |   |   |   |
| Net loss before cumulative effect of a  change in accounting principle               |   | $                                          | (3,304 | )                                     | $      | (934 | ) | $ | (15,950 | ) | $ | (2,532 | ) |
| Cumulative effect of a change in accounting  principle                               |   | —                                     |   | —                                |   | — |   | (5,940 | ) |
| Numerator for basic and diluted net loss  per share                                  |   | $                                          | (3,304 | )                                     | $      | (934 | ) | $ | (15,950 | ) | $ | (8,472 | ) |
|                                                                                 |   |                                       |   |                                  |   |   |   |   |   |
| Denominator for basic and diluted net loss  per share – weighted average shares |   | 20,891                                     |   | 12,528                                |   | 19,555 |   | 12,466 |   |
|                                                                                 |   |                                       |   |                                  |   |   |   |   |   |
| Basic and diluted net loss per share:                                                |   |                                       |   |                                  |   |   |   |   |   |
| Net loss before cumulative effect of a  change in accounting principle               |   | $                                          | (0.16  | )                                     | $      | (0.07 | ) | $ | (0.82 | ) | $ | (0.20 | ) |
| Cumulative effect of a change in accounting  principle                               |   | —                                     |   | —                                |   | — |   | $ | (0.48 | ) |
|                                                                                 |   |                                       |   |                                  |   |   |   |   |   |   |
| Basic and diluted net loss per share                                                 |   | $                                          | (0.16  | )                                     | $      | (0.07 | ) | $ | (0.82 | ) | $ | (0.68 | ) |

 

8

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**3.     ComprehensiveLoss**

 

Comprehensive loss for the three-month and nine-monthperiods ended September 30, 2003 and 2002, is detailed below.

 
|                                     |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                     |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
|                                     |   | **(in  thousands)**                    |
|                                     |   |                                   |   |                                  |   |   |   |   |   |
| Net loss                                 |   | $                                      | (3,304 | )                                     | $      | (934 | ) | $ | (15,950 | ) | $ | (8,472 | ) |
| Other comprehensive income (loss):       |   |                                   |   |                                  |   |   |   |   |   |
| Foreign currency translation adjustments |   | 18                                     |   | (185                                  | )      | (271 | ) | 1,808 |   |
| Comprehensive loss                       |   | $                                      | (3,286 | )                                     | $      | (1,119 | ) | $ | (16,221 | ) | $ | (6,664 | ) |

 

**4.     Inventories**

 

Inventories consist of the following:

 
|            |   | **September  30,  2003** |     | **December  31,  2002** |     |
|-----------------|--------|--------------------------|----------|-------------------------|----------|
|            |   | **(in thousands)**       |     |
|            |   |                     | * * |                    | * * |
| Raw materials   |   | $                        | 10,597   |                    | $        | 22,246 |   |
| Work in process |   | 2,320                    |     | 3,346                   |     |
| Finished goods  |   | 23,617                   |     | 24,573                  |     |
|            |   | $                        | 36,534   |                    | $        | 50,165 |   |

 

**5.     Intangible Assets**

 

Intangible assets consistof the following:

 
|                           |   | **September  30, 2003** |   | **December  31,  2002** |   |
|--------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                           |   | **(in  thousands)**     |   |
| Developed  technology          |   | $                       | 5,200  |                    | $      | 5,200 |   |
| Trademark                      |   | 1,380                   |   | 1,380                   |   |
| Covenant  not to compete       |   | 285                     |   | —                  |   |
|                           |   | 6,865                   |   | 6,580                   |   |
| Less  accumulated amortization |   | 1,207                   |   | 905                     |   |
|                           |   | $                       | 5,658  |                    | $      | 5,675 |   |

 

In connection with the equity investment by Sun Mackie in February2003, Gregory C. Mackie resigned as a director of the Company, and entered intoa Consulting Agreement whereby he will provide services, upon our request, fora period of three years. There is a noncompete provision in this agreement fora period of five years from the date of the agreement. In exchange for thisnoncompete provision, Mr. Mackie was granted 170,000 stock options at anexercise price of $1.02 per share and an additional 330,000 of existing optionswere modified to comparable terms. The fair value of the vested options was$285,000 which has been recorded as an increase to common stock and a covenantnot to compete. The options vest over a period of three years; the covenantwill be amortized over this period. The 170,000

 

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unvested options will be marked to market at the end of each reportingperiod and the related expense is being recognized over the vesting period ofthe options.

 

 

**6.     Restructuring costs**

 

Throughout 2003 we haveendeavored to reduce costs and streamline our operations. To this end, we arein the process of seeking to increase the efficiency of our internationaloperations by closing certain international sales offices, eliminatingredundant warehouse space and centralizing sales administrative functions. Wehave also closed or are closing certain manufacturing and engineeringfacilities. The cessation of manufacturing operations in our Woodinville,Washington factory was substantially complete as of September 2003, withproduct previously built in this facility being produced currently by contractmanufacturers. As a result of these changes we have incurred restructuringcharges related to workforce reductions in the three months and nine monthsended September 30, 2003 totaling $908,000 and $1.6 million, respectively.Approximately $400,000 of these costs remains accrued as of September 30, 2003;these will be paid over the next six months. These actions are expected torealign the business based on current and near-term growth rates. In the fourthquarter of 2003 we plan to cease to use a significant portion of our leasedfacilities in Woodinville, Washington and relocate our remaining inventory. Atthat time, we expect to record a liability for the fair value of the remaininglease payments that can not be recovered through a sublease, plus incur coststo vacate the premises, totaling approximately $3.0 million. Continuedseverance, shut-down and lease costs from the downsizing or closure of otherfacilities may be incurred over the next several quarters.

 

**7.     Financing**

 

On March 31, 2003, a Loan and Security Agreement was finalized with aU.S. lender which provides for a $26.0 million revolving line of credit and a$2.5 million term loan. Principal payments on the term loan are due in equalmonthly payments over five years, which began in July 2003. Interest is duemonthly and is calculated at the bank’s prime rate or Eurodollar rate plus a specifiedmargin. Both the revolving line of credit and term loan are secured by all U.S.based assets including, but not limited to, accounts receivable, inventory,fixed assets, intangible assets and patents. Additionally, a portion of therevolving line of credit is provided in the U.K. and is secured by accountsreceivable of LOUD Technologies Europe Plc., (formerly “Mackie Designs UKPlc.”) Under the terms of this Loan and Security Agreement, we must meetcertain operating covenants and maintain certain availability levels. Asecondary U.S. lender has provided a loan totaling $11.0 million which issubordinate to the Loan and Security Agreement. This subordinated loan and the$2.5 million term loan satisfied the previously existing U.S. term loans. Principalon the subordinated loan 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% and is paid on a regular basis as we have availabilityunder the Loan and Security Agreement. In addition to its equity investment,Sun Mackie has provided $4.0 million of subordinated debt financing which alsofunded on March 31, 2003. Interest accrues at 15% and is paid annuallybeginning March 2004. The principal is due in a lump sum payment in 2007. Inconnection with the loan from Sun Mackie, we have issued warrants to purchasean additional 1.2 million common shares at an exercise price of $.01 per share.  The $4.0 million of proceeds from theissuance of the debt and warrants was allocated based on the estimated relativevalue of each of the securities. The value assigned to the debt was $3.4million; the value assigned to the warrants was $600,000. The resultingeffective interest rate on the debt is 18.75%.

 

The Loan and Security Agreement and Subordinated Credit Agreementprovide, among other matters, restrictions on additional financing, dividends,mergers, acquisitions, an annual capital expenditure limit and minimum EBITDAlevels. At June 30, 2003 and September 30, 2003, we were out of compliance withour EBITDA covenants, consequently the senior lender declared an event ofdefault. This event of default allows both the senior and secondary lenders toaccelerate payment of all amounts due under the agreements and additionallyallows them the right to increase the interest rate on the amounts outstanding.The lenders have not taken these steps, though they retain the right to do soat any time. We are highly leveraged and would be unable to pay suchaccelerated amounts if demanded by the

 

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lenders. Although there is no assurance that it willbe received, we are in discussions with the senior lender and expect to receivean amendment and/or waiver to the Loan and Security Agreement. This amendmentor waiver may result in higher interest costs and/or other fees. The total ofthe subordinated debt and term loan is $13.5 million, and as a result of thisnon-compliance, is classified as a current liability under the caption,“Current portion of long-term debt and long-term debt callable under covenantprovisions.”

 

We have taken various actions intended to improve results of operationsand ensure our ongoing ability to cover scheduled debt servicing payments,including headcount reductions and other cost containment measures. Thesemeasures included layoffs and reduction of capital expenditures in 2002 andfurther layoffs in 2003. In addition, we have closed, or are in the process ofclosing certain domestic and international manufacturing facilities andinternational engineering facilities and intend to continue to outsourceproduct manufacturing to contract manufacturers. We have also outsourcedcertain engineering activities. Additionally, we are in the process ofstreamlining  certain internationalsales operations. Finally, there will continue to be intensive focus oncontrols over expenditures. If sufficient cost reductions are not realized orthere is a significant decline in net sales, our operating results will beadversely affected. We recognized significant restructuring costs in thequarter and nine months ended September 30, 2003 and believe there will beadditional restructuring costs and cash outlays associated with theseactivities over the next two to three quarters. There is no certainty that wewill have sufficient funds from operations to cover these expenses. Althoughthere is no assurance, additional credit facilities may be available from ourexisting lender, majority owner or from other sources.

 

**8.     Liabilitiesof Unconsolidated Affiliate and Other Income**

 

In March 2003, we determined that we would no longer fund theengineering activities of Mackie Designs Engineering Services, a Belgiumsubsidiary. This entity filed for bankruptcy in April 2003. Due to thebankruptcy proceedings, we no longer have control of this entity; consequently,the financial statements of Mackie Designs Engineering Services are no longerincluded in our consolidated accounts. Instead, our potential remainingcommitment related to Mackie Designs Engineering Services is included in thecaption “Liabilities of unconsolidated affiliate.” At June 2003, our recordsreflected a balance of $1.2 million associated with the potential liabilitiesof finalizing the bankruptcy proceedings and our obligation under a guaranteefor a portion of the debt of Mackie Designs Engineering Services. We believethat our maximum liability associated with the finalization of the bankruptcy proceedingsand our settlement with the bank is approximately $435,000. Consequently wehave reduced our liability to this amount and recorded $770,000 of otherincome.

 

Other income in the third quarter of 2003 also includes $493,000related to a settlement with the previous owner of Mackie Designs EngineeringServices whereby we paid $200,000 in cash and transferred certain inventory andintellectual property owned by LOUD Technologies Inc. in exchange for relief of$1.0 million of previously existing debt.

 

**9.     Guarantees**

 

Except as mentioned inNote 8, we are not subject to potential obligations under guarantees that fallwithin the scope of FIN No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers” except for standard indemnification and warranty provisions.Indemnification and warranty provisions contained within our sales agreementsare generally consistent with those prevalent in our industry. The duration ofproduct warranties is generally one to six years following delivery ofproducts.

 

The warranty liability issummarized as follows (in thousands):

 
|                                 |   | **Balance at  December 31,  2002** |   | **Charged to  cost of sales** |   | **Applied  to  liability** |   | **Balance at  September 30,  2003** |   |
|--------------------------------------|--------|------------------------------------|--------|-------------------------------|--------|----------------------------|--------|-------------------------------------|--------|
| Nine months ended September 30, 2003 |   | $                                  | 1,525  |                          | $      | 2,743                      |   | $                                   | 2,808  |   | $ | 1,460 |   |
|                                      |        |                                    |        |                               |        |                            |        |                                     |        |  |  |  |  |

 

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**10.  Contingencies**

 

Subrogated claims have been asserted against us from insurancecompanies who prior to our acquisition of Eastern Acoustic Works, Inc. (EAW),paid claims made by EAW’s landlord and other tenants of the Whitinsville,Massachusetts building who were affected by a fire started by a loaned employeein a portion of the building in 1996. The potential loss from this claim mayexceed $4.0 million inclusive of interest, some portion of which we anticipatewould be covered by insurance. We expect the matter to come to trial in March2004. We believe that these losses are not attributable to us underMassachusetts’ law and are vigorously defending the litigation. The claims ofthe other tenants have been covered by EAW’s insurance carrier. The ultimateresolution of this matter is not known at this time. No provision has been madein our consolidated financial statements related to these claims.

 

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.

 

**Item 2****.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*Thefollowing discussion and analysis should be read in conjunction with ourfinancial statements included in our Annual Report on Form 10-K for the yearended December 31, 2002. This discussion contains certain “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995 that involve risks and uncertainties, such as statements of our plans,objectives, expectations and intentions. Actual results could differ materiallyfrom those discussed herein. The cautionary statements made in this QuarterlyReport on Form 10-Q and the Annual Report on Form 10-K should be read as beingapplicable to all forward-looking statements wherever they appear. We undertakeno obligation to publicly release any revisions to these forward-lookingstatements that may be required to reflect events or circumstances after thedate hereof or to reflect the occurrence of unanticipated events.Forward-looking statements include, without limitation, any statement that maypredict, forecast, indicate, or imply future results, performance, orachievements, and may contain the words “believe,” “anticipate,” “expect,”“estimate,” “project,” “will be,” “will continue,” “will likely result,” orwords or phrases of similar meaning.*

 

**General**

 

 We develop, manufacture andsell high-quality, affordable digital and analog audio mixers, speakers,amplifiers and other professional audio equipment on a worldwide basis. Ourproducts are used by professional musicians, sound installation contractors andbroadcast professionals in sound recordings, live presentations systems andinstalled sound systems. We distribute our products primarily through retail dealersand installed sound contractors.

 

In September 2003, we changed our corporate name from Mackie DesignsInc. to LOUD Technologies Inc. The name change is intended to eliminateconfusion between the brand “Mackie” and the parent corporation. Currently thereare seven brands in the LOUD Technologies portfolio: Mackie, the primary musicindustry retail brand; TAPCO, the entry-level retail brand; EAW, the high-endsound reinforcement and professional touring brand; RCF, thecommercial/industrial sound brand; RCF Precision, the OEM loudspeakercomponents brand; and SIA Software, the sound system measurement softwarebrand. As of September 16, 2003, our new ticker symbol on the OTC BulletinBoard is LTEC.

 

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On February 21, 2003, we finalized an agreement with Sun Mackie, LLC,an affiliate of Sun Capital Partners, Inc., a private investment firm, wherebySun Mackie purchased approximately 14.4 million shares of our common stock for$10.0 million. Sun Mackie acquired approximately 7.4 million of these sharesfrom certain selling shareholders. It acquired approximately 6.9 million newlyissued shares directly from the Company for approximately $6.3 million. Netproceeds after transaction related costs were approximately $3.6 million. As aresult of this transaction, Sun Mackie acquired approximately 74% of ouroutstanding shares.

 

On March 31, 2003, we finalized a new Loan and Security Agreement thatprovides for a revolving line of credit of up to $26.0 million and a term loanof $2.5 million with a new lender. In addition, we finalized a three yearsubordinated loan of $11.0 million with our former principal U.S. lender and a$4.0 million four year subordinated note with Sun Mackie. In connection withthe loan from Sun Mackie, we issued warrants to purchase an additional 1.2million common shares at an exercise price of $.01 per share. The proceeds fromthese new borrowings were primarily used to replace the previously existingU.S. line of credit and satisfy other existing debt of approximately $13.6million.

 

**Critical AccountingPolicies and Estimates**

 

Our discussion and analysis of our financial condition and results ofoperations following are based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States of America. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, sales and expenses, and related disclosure ofcontingent assets and liabilities.

 

We believe that the estimates, assumptions andjudgments involved in the accounting policies described below have the greatestpotential impact on our financial statements, so we consider these to be ourcritical accounting policies. Because of the uncertainty inherent in thesematters, actual results could differ from the estimates we use in applying thecritical accounting policies. Certain of these critical accounting policiesaffect working capital account balances, including the policies for revenuerecognition, allowance for doubtful accounts, inventory valuation and incometaxes. These policies require that we make estimates in the preparation of ourfinancial statements as of a given date. However, since our business cycle isrelatively short, actual results related to these estimates are generally knownwithin the six-month period following the financial statement date. Thus, thesepolicies generally affect only the timing of reported amounts across two tothree quarters.

*** ***

***Inventory Valuation***.  Webelieve our policy on valuing inventory, including market value adjustments, isour primary critical accounting policy. Inventories are stated at the lower ofstandard cost, which approximates actual cost on a first-in, first-out method,or market. Included in our inventories balance are demonstration products usedby our sales representatives and marketing department including finished goodsthat have been shipped to customers for evaluation. Market value adjustmentsare recorded for obsolete material, slow-moving product, service anddemonstration products. We make judgments regarding the carrying value of ourinventory based upon current market conditions. These conditions may change dependingupon competitive product introductions, customer demand and other factors. Ifthe market for our previously released products changes, we may be required towrite down the cost of our inventory.

 

***Allowance for Doubtful Accounts****.*  Wemake ongoing estimates relating to the collectibility of our accountsreceivable and maintain an allowance for estimated losses resulting from theinability of our customers to meet their financial obligations to us. Indetermining the amount of the allowance, we consider our historical level ofcredit losses and make judgments about the creditworthiness of significantcustomers based on ongoing credit evaluations. Since we cannot predict futurechanges in the financial stability of our customers, actual future losses fromuncollectible accounts may differ from our estimates. If the financialcondition of our customers were to deteriorate, resulting in their inability tomake payments, a larger allowance may be required. In the event we determinedthat a smaller or larger

 

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allowance was appropriate, we would record acredit or a charge to selling and administrative expense in the period in whichwe 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.

 

***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 and are deferred until the contingencies have been satisfied orthe contingent period has lapsed. We generally warrant our products againstdefects in materials and workmanship for periods of between one and six years.The estimated cost of warranty obligations, sales returns and other allowancesare recognized at the time of revenue recognition based on contract terms andprior claims experience.

 

***Income Taxes.*** As part of the process of preparing ourfinancial statements, we are required to estimate our income taxes in each ofthe jurisdictions in which we operate. This process involves estimating ouractual current tax exposure together with assessing temporary differencesresulting from differing treatment of items for tax and accounting purposes.These differences result in deferred tax assets and liabilities, which areincluded in our balance sheet. We must then assess the likelihood that ourdeferred tax assets will be recovered from future taxable income and to theextent we believe that recovery is not likely, we must establish a valuationallowance. To the extent we establish a valuation allowance or increase thisallowance in a period, we must include an expense within the tax provision inthe Statement of Operations. Conversely, if the allowance is decreased the taxprovision will be credited. Significant management judgment is required indetermining our provision for income taxes, deferred tax assets and liabilitiesand any valuation allowance recorded against our net deferred tax assets.

 

**Results of Operations**

 

Net sales decreasedduring the third quarter of 2003 to $40.5 million, a decrease of 13% from $46.4million in the comparable quarter of 2002. Net sales for the nine months endedSeptember 30, 2003 were $124.4 million, a decrease of 14% from $144.3 millionduring the nine months ended September 30, 2002. The decrease relates primarilyto lower volumes in both the U.S. and Europe. The sales volume is furtheraffected as we have reduced prices or offered discounts on certain products andhave made decisions to streamline our product offerings to limit lower marginand lower volume products.

 

Gross profit decreased to23% in the third quarter of 2003 from 29% in the third quarter of 2002. Grossprofit decreased to 21% for the nine months ended September 30, 2003 from 31%for the nine months ended September 30, 2002. The lower gross margin primarilyreflects the excess capacity in our factories created as we continue thetransition of products to contract manufacturers and scale our business toreduced volumes. Costs in 2003 include additional depreciation charges formanufacturing assets which will no longer be utilized after the transition iscomplete. Additionally, we have made certain inventory adjustments totaling$1.7 million and $2.5 million for the three months and nine months endedSeptember 30, 2003, respectively, for material we believe will exceed futuredemand.

 

Selling, general and administrative expenses were $9.7 million or 24%of sales in the third quarter of 2003 as compared to $13.8 million or 30% ofsales in the third quarter of 2002. During the nine months ended September 30,2003, selling, general and administrative expenses were $32.8 million

 

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or 26% of net sales compared to $39.2 million or 27% of net sales forthe same time period in 2002. Expenses in the first nine months of 2003included certain one-time items related to the equity investment by Sun Mackie,LLC, including run-off policies for directors’ and officers’ liabilityinsurance totaling approximately $500,000. Certain costs, such as commissions,which fluctuate with sales, were lower in the three-month and nine-monthperiods ended September 2003 than in the three-month and nine-month periodsended September 2002. Additionally, cost containment measures includingreductions in marketing and tradeshow costs also contributed to the lowercosts.

 

Research and development expenses were $1.8 million or 5% of sales inthe third quarter of 2003 as compared to $2.7 million or 6% of sales in thethird quarter of 2002. During the nine months ended September 30, 2003,research and development expenses were $6.3 million or 5% of net sales comparedto $8.2 million or 6% of net sales for the same time period in 2002. Thisdecrease in the third quarter of 2003 relates primarily to headcount reductionsmade during the first and second quarters of 2003 and the closure andbankruptcy of Mackie Designs Engineering Services, the Belgian facility whichhad previously housed a portion of our research and development group.

 

Throughout 2003 we have endeavored to reduce costs and streamline ouroperations. To this end, we are in the process of seeking to increase theefficiency of our international operations by closing certain internationalsales offices, eliminating redundant warehouse space and centralizing salesadministrative functions. We have also closed or are closing certainmanufacturing and engineering facilities. The cessation of manufacturingoperations in our Woodinville, Washington factory was substantially complete asof September 2003, with product previously built in this facility beingproduced currently by contract manufacturers. As a result of these changes wehave incurred restructuring charges related to workforce reductions in thethree months and nine months ended September 30, 2003 totaling $908,000 and$1.6 million, respectively. Approximately $400,000 of these costs remainsaccrued as of September 30, 2003; these will be paid over the next six months.These actions are expected to realign the business based on current andnear-term growth rates. In the fourth quarter of 2003 we plan to cease to use asignificant portion of our leased facilities in Woodinville, Washington andrelocate our remaining inventory. At that time, we expect to record a liabilityfor the fair value of the remaining lease payments that can not be recoveredthrough a sublease, plus incur costs to vacate the premises, totalingapproximately $3.0 million. Continued severance, shut-down and lease costs fromthe downsizing or closure of other facilities may be incurred over the nextseveral quarters. In September 2003, we retained a consulting firm and a lawfirm in Italy to assist us with the identification of a restructuring plan forMackie Designs Italy. We expect to finalize a plan in the fourth quarter of2003.

 

Net other income was$68,000 for the third quarter of 2003 as compared to net other expense of$793,000 in the third quarter of 2002. Net other expense was $1.7 million forthe nine months ended September 30, 2003 and $2.5 million for the nine monthsended September 30, 2002. Included in these amounts is interest expense whichincreased to $906,000 in the third quarter of 2003 from $891,000 million in thecorresponding period of 2002. Interest expense for the nine months endedSeptember 30, 2003 was $3.1 million and $3.0 million for the nine months endedSeptember 30, 2002.

 

Other income in the thirdquarter of 2003 includes $1.3 million relating to two items associated with theApril 2003 bankruptcy of Mackie Designs Engineering Services (See Note 8). InApril 2001, we acquired all the outstanding shares of Mackie DesignsEngineering Services for approximately $4.4 million. Of this amount, $3.4million was paid in 2001 and 2002; the remaining $1.0 million was included inaccounts payable at June 30, 2003 and December 31, 2002. In December 2002, wedetermined that we would no longer sell and support the products designed bythat company and adjusted the value of the inventory to a minimal amount. InAugust 2003, we concluded negotiations with the previous owner to settle theremaining obligation of $1.0 million, as well as a portion of the otherliabilities associated with Mackie Designs Engineering Services, by the paymentof $200,000 in cash and the transfer of certain inventory and intellectualproperty owned by LOUD Technologies Inc. In September 2003, we transferred thisinventory to the previous owner in exchange for relief of the debt andrecognized a gain of $493,000 in other income. At June 2003, our recordsreflected a balance of $1.2 million associated with the potential liabilitiesof finalizing the bankruptcy proceedings and our

 

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obligation under a guarantee for a portion of the debtof Mackie Designs Engineering Services. We believe that our maximum liabilityrelating to the finalization of the bankruptcy and settlement with the bank isapproximately $435,000. Consequently we have reduced our liability to thisamount and recorded $770,000 of other income. This liability may be furtherreduced in future quarters with the finalization of the bankruptcy proceedingsand the conclusion of other negotiations.

 

Income tax expense for the third quarter of 2003 was $70,000 comparedto a tax benefit of $2.9 million for the comparable period in 2002.  Income tax expense for the nine months endedSeptember 30, 2003, was $160,000 compared to income tax benefit of $2.7 millionfor the comparable period in 2002. The tax expense in 2003 primarily relates toour non-U.S. subsidiaries. No tax benefit is recognized in connection with ourtax losses as recognition of such benefit depends on future profits, which isnot assured. We calculate the current tax rate based upon our estimate of thetax rate to be achieved for the full year.

 

**Cumulative Effect ofa Change in Accounting Principle**

 

We adopted FAS No. 142 on January 1, 2002. As required by FAS No. 142,we performed the transitional impairment test on goodwill and otherintangibles, which consisted of assembled workforce, and recorded a $5.9million cumulative effect of a change in accounting principle at the adoptiondate.

 

**Liquidity and Capital Resources**

 

In February 2003, Sun Mackie, LLC, an affiliate of Sun CapitalPartners, Inc., a private investment firm, made a strategic equity investmentin LOUD Technologies totaling $6.3 million. Net proceeds after transactionrelated costs were approximately $3.6 million.

 

On March 31, 2003, a Loan and Security Agreement was finalized with aU.S. lender which provides for a $26.0 million revolving line of credit.Availability under this line of credit is limited to eligible collateral whichtotaled $15.9 million at September 30, 2003. Total funds drawn at September 30,2003 were $10.8 million and availability under the line was $5.1 million. Interestis due monthly calculated at the bank’s prime rate plus 0.75% or EurodollarRate plus 3.5%. This lender has also provided a $2.5 million term loan.Principal payments on the term loan are due in equal monthly payments over fiveyears, which began in July 2003. Interest is due monthly and is calculated atthe bank’s prime rate plus a specified margin. Both the revolving line ofcredit and term loan are secured by all U.S. based assets including, but notlimited to, accounts receivable, inventory, fixed assets, intangible assets andpatents. Additionally, a portion of the revolving line of credit is provided inthe U.K. and is secured by accounts receivable of LOUD Technologies EuropePlc., (formerly “Mackie Designs UK Plc.”) Under the terms of the Loan andSecurity Agreement, we must meet certain operating covenants and maintaincertain availability levels. The term of the agreement is three years.

 

A secondary U.S. lender has provided a loan totaling $11.0 millionwhich is subordinate to the Loan and Security Agreement. Principal is duebeginning in May 2004 based upon our 2003 earnings before interest, taxes,depreciation and amortization, less cash taxes paid, certain capitalexpenditures and certain debt repayments. Interest accrues at a rate of 10% andis paid on a regular basis as we have availability under the Loan and SecurityAgreement. In addition to its equity investment, Sun Mackie has provided $4.0million of debt financing which also funded in March 2003. Interest accrues at15% and is paid annually beginning March 2004. The principal is due in a lumpsum payment in 2007. In connection with the loan from Sun Mackie, we haveissued warrants to purchase an additional 1.2 million common shares at anexercise price of $.01 per share. The $4.0 million of proceeds from theissuance of the debt and warrants was allocated based on the estimated relativevalue of each of the securities. The value assigned to the debt was $3.4million; the value assigned to the warrants was $600,000. The resulting effectiveinterest rate on the debt is 18.75%.

 

The Loan and Security Agreement and Subordinated Credit Agreementprovide, among other matters, restrictions on additional financing, dividends,mergers, acquisitions, an annual capital

 

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expenditure limit and minimum EBITDA levels. At June30, 2003 and September 30, 2003, we were out of compliance with our EBITDAcovenants, consequently the senior lender declared an event of default. Thisevent of default allows both the senior and secondary lenders to acceleratepayment of all amounts due under the agreements and additionally allows themthe right to increase the interest rate on the amounts outstanding. The lendershave not taken these steps, though they retain the right to do so at any time.We are highly leveraged and would be unable to pay such accelerated amounts ifdemanded by the lenders. Although there is no assurance that it will bereceived, we are in discussions with the senior lender and expect to receive anamendment and/or waiver to the Loan and Security Agreement. This amendment orwaiver may result in higher interest costs and/or other fees. The total of thesubordinated debt and term loan is $13.5 million, and as a result of thisnon-compliance, is classified as a current liability under the caption,“Current portion of long-term debt and long-term debt callable under covenantprovisions.”

 

Additionally, we haveagreements with several banks in Italy that provide short-term creditfacilities totaling approximately $20.8 million, subject to certainlimitations. These limitations reduced the actual availability to approximately$16.7 million. At September 30, 2003, there was approximately $15.8 millionoutstanding under these facilities. The majority of these credit facilities aresecured by receivables of Mackie Italy. There are other bank term loans andnotes in Italy totaling approximately $7.8 million at September 30, 2003.Specific assets of Mackie Italy, including owned land and buildings, secure certainof these loans. Approximately $5.4 million of Italian debt was paid off in Maywith the maturity of zero coupon bonds which had secured the debt.

 

Certain of the Italianbanks have indicated that they may be unwilling to provide additionalreceivables financing, or have indicated that they will no longer acceptintercompany receivables as acceptable collateral. These credit agreements arenot guaranteed by LOUD Technologies Inc. If we are unable to continue toreceive adequate receivables financing in Italy, we may be forced to obtainalternate financing at less favorable rates. There is no guarantee that suchalternate financing will be available. Any reduction in our borrowing abilitywould have an adverse effect on our results of operations and financialcondition.

 

We are working withcontract manufacturers and other new suppliers to establish acceptable creditterms. If we are unable to establish acceptable credit terms, it would have anadverse affect on our liquidity and financial condition.

 

Finally, Mackie Designs Engineering Services had a line of credit andlong-term loan with a bank in Belgium totaling approximately $500,000. Theseloans were secured by certain assets of Mackie Designs Engineering Services,and a portion of this amount is guaranteed by LOUD Technologies Inc. In March2003, we determined that we would no longer fund the engineering activities ofthis entity and Mackie Designs Engineering Services filed for bankruptcy inApril 2003. In June 2003, the Belgian bank demanded repayment from LOUDTechnologies Inc. for a portion of this amount. This potential liability isincluded as a current liability under the caption “Liabilities ofunconsolidated affiliate.”

 

We have taken various actions intended to improve results of operationsand ensure our ongoing ability to cover scheduled debt servicing payments,including headcount reductions and other cost containment measures. Thesemeasures included layoffs and reduction of capital expenditures in 2002 andfurther layoffs in 2003. In addition, we have closed, or are in the process ofclosing certain domestic and international manufacturing facilities andinternational engineering facilities and intend to continue to outsourceproduct manufacturing to contract manufacturers. We have also outsourcedcertain engineering activities. Additionally, we are in the process ofstreamlining certain international sales operations. Finally, there willcontinue to be intensive focus on controls over expenditures. If sufficientcost reductions are not realized or there is a significant decline in netsales, our operating results will be adversely affected. We recognizedsignificant restructuring costs in the quarter and nine months ended September30, 2003 and believe there will be additional restructuring costs and cashoutlays associated with these activities over the next two to three quarters.There is no certainty that we will have sufficient 

 

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funds from operations to cover these expenses.Although there is no assurance, additional credit or facilities may beavailable from our existing lender, majority owner or from other sources.

 

Cash provided by operating activities was $9.9 million in the ninemonths ended September 30, 2003, and cash used in operating activities was $1.5million for the comparable period in 2002. Net cash provided by operatingactivities in the first nine months of 2003 was primarily attributable todecreases in inventories and accounts receivable. Additionally, in August 2003 wereceived approximately $4.4 million of tax refunds related to our year endedDecember 31, 2002. In the first nine months of 2002, cash used was primarilyattributable to an increase in inventories offset by increases in accountspayable and accrued expenses.

 

Cash used in investing activities was $1.4 million for the first ninemonths of 2003 and $2.3 million for the first nine months of 2002. The cashflows used in investing activities in both years consisted entirely ofpurchases of property, plant and equipment.

 

Cash used in financing activities during the first nine months of 2003was $11.4 million which relates primarily to the equity transaction and debtrestructuring mentioned elsewhere in this Quarterly Report on Form 10-Q. Cashprovided by financing activities in the first nine months of 2002 was $5.0million which reflected repayments of long-term debt and net proceeds fromshort-term borrowings.

 

**New Accounting Pronouncements**

 

In May2003, the FASB issued Statement of Financial Accounting Standards No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity.” FAS 150 requires that certain financial instrumentsthat, under previous guidance, could be accounted for as equity, now beclassified as liabilities. These financial instruments include mandatorilyredeemable shares, instruments that do or may require the issuer to buy backsome of its shares in exchange for cash or other assets and certain obligationsthat can be settled with shares. FAS 150 also requires additional disclosuresabout alternative ways of settling these types of instruments and the capitalstructure of entities. Most of the provisions of FAS 150 are effective for allfinancial instruments entered into or modified after May 31, 2003, andotherwise are effective at the beginning of the first interim period beginningafter June 15, 2003. This accounting pronouncement is not expected to havea material impact on our financial position or results of operations.

 

**Item 3****.  Quantitative and Qualitative DisclosuresAbout 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 anymaterial derivative financial instruments as of September 30, 2003.

 

At September30, 2003, we had variable rate debt of approximately $34.8 million provided byU.S. and Italian banks. Changes in U.S. and European interestrates affect interest paid on debt and we are exposed to interest rate risk. Inthe nine months ended September 30, 2003, an increase in the average interestrate of 10%, i.e. from 6% to 6.6%, would have resulted in an approximately$162,000 increase to the net loss before income taxes. A similar increaseduring the nine months ended September 30, 2002 would have resulted in anapproximately $288,000 increase to the net loss before income taxes. The fairvalue of such debt approximates the carrying amount on the consolidated balancesheet at September 30, 2003.

 

The assets and liabilities of our non-U.S. subsidiaries have functionalcurrencies other than the U.S. Dollar, and are translated into U.S. Dollars atexchange rates in effect at the balance sheet date. These subsidiaries arelocated in western Europe and the U.K., the functional currencies of which arethe Euro and British Pound. Income and expense items are translated at theaverage exchange rates prevailing during the period. A 10% decrease in thevalue of the U.S. Dollar compared to the functional currencies of our non-U.S.subsidiaries, throughout the nine months ended September 30, 2003, would

 

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have resulted in an approximately $1.1 millionincrease to the net loss before income taxes. A 10% decrease in the value ofthe U.S. Dollar compared to the functional currencies of our non-U.S.subsidiaries, throughout the nine months ended September 30, 2002, would haveresulted in an approximately $976,000 increase to net loss before income taxes.

 

**Item 4****.  Controls and Procedures**

 

Our ChiefExecutive Officer and Chief Financial Officer conducted an evaluation as of theend of the period covered by this Quarterly Report of the effectiveness of ourdisclosure controls and procedures. Based on that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that, as of theevaluation date, our disclosure controls and procedures are effective inalerting them on a timely basis to material information required to be includedin this Quarterly Report. Our Chief Executive Officer and Chief FinancialOfficer also conducted an evaluation of our internal control over financialreporting to determine whether any changes occurred during the period coveredby this Quarterly Report that have materially affected, or are reasonablylikely to materially affect our internal control over financial reporting.Based on that evaluation, they have determined that there has been no suchchange during the period covered by this Quarterly Report.

 

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**PART II.****  OTHER INFORMATION**

 

**Item 1.**  **LegalProceedings**

 

Subrogated claims have been asserted against us from insurancecompanies who prior to our acquisition of Eastern Acoustic Works, Inc. (EAW),paid claims made by EAW’s landlord and other tenants of the Whitinsville,Massachusetts building who were affected by a fire started by a loaned employeein a portion of the building in 1996. The potential loss from this claim mayexceed $4.0 million inclusive of interest; some portion of which we anticipatewould be covered by insurance. We expect the matter to come to trial in March2004. We believe that these losses are not attributable to us underMassachusetts’ law and are vigorously defending the litigation. The claims ofthe other tenants have been covered by EAW’s insurance carrier. The ultimateresolution of this matter is not known at this time. No provision has been madein our consolidated financial statements related to these claims.

 

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.

 

**Item2.  Changesin Securities and Use of Proceeds**

 

None.

 

**Item3.  Defaultsupon Senior Securities**

 

The Loan and Security Agreement with our senior U.S. lender provides,among other matters, restrictions on additional financing, dividends, mergers,acquisitions, an annual capital expenditure limit and minimum EBITDA levels. AtJune 30, 2003 and September 30, 2003, we were out of compliance with our EBITDAcovenants, consequently the senior lender declared an event of default. Thisevent of default allows both the senior and secondary lenders to acceleratepayment of all amounts due under the agreements and additionally allows themthe right to increase the interest rate on the amounts outstanding. The lendershave not taken steps to accelerate payment, though they retain the right to doso at any time. Although there is no assurance that it will be received, we arein discussions with the senior lender and expect to receive an amendment and/orwaiver to the Loan and Security Agreement. The total of the subordinated debtand term loan is $13.5 million, and as a result of this non-compliance, isclassified as a current liability under the caption, “Current portion oflong-term debt and long-term debt callable under covenant provisions.”

 

**Item 4. Submission of Matters to aVote of Security Holders**

 

None.

 

**Item5.  OtherInformation**

 

None.

 

**Item 6. Exhibits and Reports on Form 8-K**

 

(a)          Exhibits

 

31.1 Certification of Principal Executive Officer Pursuant to Section302 of the Sarbanes-Oxley Act of 2002.

 

31.2 Certification of Principal Financial Officer Pursuant to Section302 of the Sarbanes-Oxley Act of 2002.

 

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

 

(b)         Reportson Form 8-K

 

The Company filed a report on Form 8-K onSeptember 15, 2003 to announce it had changed its name to LOUD TechnologiesInc.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                          |   | **LOUD Technologies Inc.**                                                                                                 |   |
|-------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------|--------|
|                          |   | (Registrant)                                                                                                               |
|                          |   |                                                                                                                       |
| Dated:  November 6, 2003 | By:    | /s/ James T. Engen                                                                                                         |   |
|                          |   | James T. Engen                                                                                                             |
|                          |   | *President, Chief Executive Officer and  Director*                                                                         |
|                          |   |                                                                                                                       |
| Dated:  November 6, 2003 | By:    | /s/ Tim O’Neil                                                                                                        |   |
|                          |   | Tim O’Neil                                                                                                            |
|                          |   | *Chief Financial Officer, Vice  President Finance, Secretary and  Treasurer (Principal Financial and  Accounting Officer)* |

 

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