##### Table of Contents



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




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##### 



LOUD TECHNOLOGIES INC.
 FORM 10-Q
For the quarter ended March 31, 2007
 INDEX
 PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006Condensed Consolidated Statements of Operations for the three months ended March 31, 2007 and March 31, 2006Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and March 31, 2006Condensed Consolidated Statements of Shareholders Equity for the three months ended March 31, 2007Notes to Condensed Consolidated Financial StatementsItem 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Quantitative and Qualitative Disclosures About Market RiskItem 4.
    
    Controls and ProceduresPART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal ProceedingsItem 1A.
    
    Risk FactorsItem 6.
    
    ExhibitsSIGNATURESEXHIBIT 10.1EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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LOUD TECHNOLOGIES INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 (In thousands, except share amounts)
 March 31,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,538
    
    
    $
    311Accounts receivable, net of allowances of $2,016 and $2,258, respectively
    
    
    26,797
    
    
    
    26,230Inventories
    
    
    46,681
    
    
    
    54,844Prepaid expenses and other current assets
    
    
    2,222
    
    
    
    1,504Total current assets
    
    
    80,238
    
    
    
    82,889Property, plant and equipment, net
    
    
    5,661
    
    
    
    6,543Goodwill
    
    
    2,248
    
    
    
    2,248Other intangible assets, net
    
    
    11,163
    
    
    
    11,367Deferred financing costs
    
    
    2,946
    
    
    
    2,692Other assets
    
    
    1,495
    
    
    
    17Total assets
    
    $
    103,751
    
    
    $
    105,756LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term borrowings
    
    $
    
    
    
    $
    14,210Accounts payable
    
    
    16,061
    
    
    
    23,023Accrued liabilities
    
    
    9,739
    
    
    
    11,193Taxes payable
    
    
    1,387
    
    
    
    1,559Current portion of long-term debt
    
    
    1,964
    
    
    
    1,500Current portion of payable to former Italian subsidiary
    
    
    
    
    
    
    700Other current liabilities
    
    
    
    
    
    
    3,162Total current liabilities
    
    
    29,151
    
    
    
    55,347Long-term debt, excluding current portion
    
    
    70,036
    
    
    
    40,105Deferred tax liabilities
    
    
    112
    
    
    
    99Total liabilities
    
    
    99,299
    
    
    
    95,551Commitments and contingenciesShareholders equity:Preferred stock, no par value. Authorized 5,000,000 shares, no shares issued and outstanding
    
    
    
    
    
    
    Common stock, no par value. Authorized 40,000,000 shares, issued and outstanding
4,598,942 and 4,575,022 at March 31, 2007 and December 31, 2006, respectively
    
    
    41,493
    
    
    
    41,281Accumulated deficit
    
    
    (37,041
    )
    
    
    (31,076
    )Total shareholders equity
    
    
    4,452
    
    
    
    10,205Total liabilities and shareholders equity
    
    $
    103,751
    
    
    $
    105,756
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 3




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LOUD TECHNOLOGIES INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
  Three months endedMarch 31,2007
    
    
    2006Net sales
    
    $
    50,953
    
    
    $
    58,564Cost of sales
    
    
    37,348
    
    
    
    38,935Gross profit
    
    
    13,605
    
    
    
    19,629Operating expenses:Selling, general and administrative
    
    
    11,501
    
    
    
    14,760Research and development
    
    
    2,801
    
    
    
    3,256Restructuring costs
    
    
    1,018
    
    
    
    150Total operating expenses
    
    
    15,320
    
    
    
    18,166Operating income (loss)
    
    
    (1,715
    )
    
    
    1,463Other income (expense):Interest income
    
    
    
    
    
    
    86Interest expense
    
    
    (1,850
    )
    
    
    (1,644
    )Management fee
    
    
    (161
    )
    
    
    (262
    )Other
    
    
    (2,205
    )
    
    
    (178
    )Total other expense
    
    
    (4,216
    )
    
    
    (1,998
    )Net loss before income taxes
    
    
    (5,931
    )
    
    
    (535
    )Provision for income taxes
    
    
    34
    
    
    
    60Net loss
    
    $
    (5,965
    )
    
    $
    (595
    )Basic and diluted net loss per share
    
    $
    (1.24
    )
    
    $
    (0.12
    )Shares used in computing basic and diluted net loss per share
    
    
    4,827
    
    
    
    4,806
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 4




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LOUD TECHNOLOGIES INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (In thousands)
 Three months endedMarch 31,2007
    
    
    2006Operating activitiesNet loss
    
    $
    (5,965
    )
    
    $
    (595
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    1,016
    
    
    
    1,126Amortization and write-offs of deferred financing costs
    
    
    2,692
    
    
    
    172Gain on asset dispositions
    
    
    (464
    )
    
    
    Stock based compensation
    
    
    90
    
    
    
    134Changes in operating assets and liabilities:Accounts receivable
    
    
    (567
    )
    
    
    (2,624
    )Inventories
    
    
    8,163
    
    
    
    (93
    )Prepaid expenses and other current assets
    
    
    (718
    )
    
    
    350Other assets
    
    
    (1,478
    )
    
    
    Accounts payable, accrued liabilities and payable to former Italian subsidiary
    
    
    (9,116
    )
    
    
    1,073Taxes payable
    
    
    (159
    )
    
    
    (6
    )Other liabilities
    
    
    19
    
    
    
    52Net cash used in operating activities
    
    
    (6,487
    )
    
    
    (411
    )Investing activitiesPurchases of property, plant and equipment
    
    
    (604
    )
    
    
    (688
    )Proceeds from the sale of property, plant and equipment
    
    
    1,138
    
    
    
    Acquisition of St. Louis Music, Inc., including transaction fees paid
    
    
    (3,181
    )
    
    
    Net cash used in investing activities
    
    
    (2,647
    )
    
    
    (688
    )Financing activitiesPayments on long-term debt
    
    
    (41,605
    )
    
    
    (1,322
    )Issuance of long-term debt
    
    
    72,000
    
    
    
    Net proceeds (payments) on bank line of credit and short-term borrowings
    
    
    (14,210
    )
    
    
    2,970Financing costs associated with debt issuance
    
    
    (2,946
    )
    
    
    Net proceeds from stock sales through exercise of stock options
    
    
    122
    
    
    
    Net cash provided by financing activities
    
    
    13,361
    
    
    
    1,648Increase in cash and cash equivalents
    
    
    4,227
    
    
    
    549Cash and cash equivalents at beginning of period
    
    
    311
    
    
    
    468Cash and cash equivalents at end of period
    
    $
    4,538
    
    
    $
    1,017
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 5




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LOUD TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Three months ended March 31, 2007
(Unaudited)  (In thousands)
 Common Stock
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Deficit
    
    
    TotalBalance at December 31, 2006
    
    
    4,575
    
    
    $
    41,281
    
    
    $
    (31,076
    )
    
    $
    10,205Stock based compensation
    
    
    
    
    
    
    90
    
    
    
    
    
    
    
    90Exercise of stock options
    
    
    24
    
    
    
    122
    
    
    
    
    
    
    
    122Net loss
    
    
    
    
    
    
    
    
    
    
    (5,965
    )
    
    
    (5,965
    )Balance at March 31, 2007
    
    
    4,599
    
    
    $
    41,493
    
    
    $
    (37,041
    )
    
    $
    4,452
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 6




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LOUD TECHNOLOGIES INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2007
 (Unaudited)
 1. Description of Business
 ® ® ® ® ® ® ® ®
  2. Summary of Significant Accounting Policies
 Basis of Presentation
  Stock Based Compensation
  Three months endedMarch 31, 2007Cost of sales
    
    $
    2Selling, general and administrative
    
    
    84Research and development
    
    
    4Total stock based compensation
    
    $
    90
  Use of Estimates
  7




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Revenue Recognition
  Income Taxes
   Concentration of Credit and Supply Risk
    8




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Recently Adopted Accounting Principles
   How Taxes Collected
from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross versus Net Presentation)
 New Accounting Pronouncements
   Reclassifications
  3. Net Loss Per Share
   4. Restructuring Costs
  9




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Balance at December 31, 2006
    
    $
    880New charges
    
    
    1,018Cash payments
    
    
    (866
    )Balance at March 31, 2007
    
    $
    1,032
 5. Inventories
  March 31,
    
    
    December 31,2007
    
    
    2006Raw materials
    
    $
    2,508
    
    
    $
    4,413Work in process
    
    
    1,021
    
    
    
    1,428Finished goods
    
    
    43,152
    
    
    
    49,003$
    46,681
    
    
    $
    54,844
 6. Intangible Assets
  March 31,
    
    
    December 31,2007
    
    
    2006Developed technology
    
    $
    5,470
    
    
    $
    5,470Customer relationships
    
    
    3,080
    
    
    
    3,080Trademark
    
    
    5,930
    
    
    
    5,93014,480
    
    
    
    14,480Less accumulated amortization
    
    
    (3,317
    )
    
    
    (3,113
    )$
    11,163
    
    
    $
    11,367
 7. Financing
   10




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(a) Short-term borrowings
  (b) Long-term debt
  March 31,
    
    
    December 31,2007
    
    
    2006Merrill Term Loan A
    
    $
    
    
    
    $
    12,500Merrill Term Loan B
    
    
    
    
    
    
    14,355Oaktree Subordinated note payable
    
    
    
    
    
    
    14,750Ableco Term Loan A
    
    
    20,000
    
    
    
    Ableco US Term Loan B
    
    
    40,000
    
    
    
    Ableco Term Loan C
    
    
    12,000
    
    
    
    72,000
    
    
    
    41,605Less: current portion
    
    
    (1,964
    )
    
    
    (1,500
    )Long-term portion of debt
    
    $
    70,036
    
    
    $
    40,105
  8. Guarantees
 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
   Three months ended March 31,2007
    
    
    2006Balance, beginning of period
    
    $
    1,160
    
    
    $
    980Charged to cost of sales
    
    
    660
    
    
    
    713Applied to liability
    
    
    (930
    )
    
    
    (703
    )Balance, end of period
    
    $
    890
    
    
    $
    990
 11




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9. Commitments and Contingencies
   10. Subsequent Events
  Note 7.
  12




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis should be read in conjunction with our financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2006. This discussion
contains certain forward-looking statements within the meaning of Section 21D of the Securities
Exchange Act of 1934, as amended, which involve risks and uncertainties, such as statements of our
plans, objectives, expectations and intentions. Actual results may differ materially from those
discussed herein. The cautionary statements made in this Quarterly Report on Form 10-Q and the
Annual Report on Form 10-K may apply to all forward-looking statements wherever they appear. We
undertake no obligation to publicly release any revisions to these forward-looking statements that
may be required to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. Forward-looking statements include, without limitation, any
statement that may predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain the words believe, anticipate, expect, estimate, project,
will be, will continue, will likely result, or words or phrases of similar meaning.
 Overview
 ® ® ® ® ® ® ® ®
    Critical Accounting Policies and Judgments
    Estimates and Assumptions Related to Financial Statements
  13




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Results of Operations (in thousands)
 Three months endedMarch 31,2007
    
    
    2006Net sales
    
    $
    50,953
    
    
    $
    58,564Gross profit
    
    
    13,605
    
    
    
    19,629Selling, general and administrative
    
    
    11,501
    
    
    
    14,760Research and development
    
    
    2,801
    
    
    
    3,256Restructuring costs
    
    
    1,018
    
    
    
    150Total operating expenses
    
    
    15,320
    
    
    
    18,166Operating income (loss)
    
    
    (1,715
    )
    
    
    1,463Other expense
    
    
    (4,216
    )
    
    
    (1,998
    )Provision for income taxes
    
    
    34
    
    
    
    60Net loss
    
    $
    (5,965
    )
    
    $
    (595
    )
 Three Months Ended March 31, 2007 vs. Three Months Ended March 31, 2006
 Net Income
  Net Sales
  Gross Profit
  Selling, General and Administrative
  14




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Research and Development
  Restructuring Costs
  Other Expense
   Income Taxes
  Liquidity and Capital Resources
  Net Cash Used in Operating Activities
  Net Cash Used in Investing Activities
  Net Cash Provided by Financing Activities
  15




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Ability to Stay in Compliance With Debt Covenants
  Commitments
  Payments due by PeriodLess thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5+ YearsOperating leases
    
    $
    6,355
    
    
    $
    1,847
    
    
    $
    2,665
    
    
    $
    1,843
    
    
    $
    Short-term and long-term
debt, including interest
    
    
    108,748
    
    
    
    7,349
    
    
    
    17,982
    
    
    
    17,446
    
    
    
    65,971Total
    
    $
    115,103
    
    
    $
    9,196
    
    
    $
    20,647
    
    
    $
    19,289
    
    
    $
    65,971
    16




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
     
 Item 4. Controls and Procedures
   17




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  Liquidity and Debt Obligations.
 
    
    the Company will be required to use a substantial portion of its cash flow from
operations to pay interest on its debt, thereby reducing cash available to fund working
capital, capital expenditures, strategic acquisitions, investments and alliances, and other
general corporate requirements;
    
    the Companys leverage may increase its vulnerability to general economic downturns and
adverse competitive and industry conditions and may place it at a competitive disadvantage
compared to those of its competitors that are less leveraged;
    
    the Companys debt service obligations may limit its flexibility to plan for, or react
to, changes in its business and in the industry in which it operates; and
    
    the Companys level of debt may make it difficult for it to raise additional financing
on satisfactory terms, if at all.
   18




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Item 6. Exhibits
  10.1
    
    Ableco Waiver and Extension Letter as of May 3, 200710.2
    
    Ableco Waiver and Extension Letter as of May 21, 200710.3
    
    Ableco Amendment No. 1 to Financing Agreement31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
200232.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 19




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SIGNATURES
  LOUD Technologies Inc. 
(Registrant)Dated:  May 25, 2007
    By:
    /s/ James T. EngenJames T. EngenChairman, President and Chief Executive
OfficerDated:  May 25, 2007
    By:
    /s/ Timothy P. ONeilTimothy P. ONeilChief Financial Officer, Senior Vice
President, Secretary and
Treasurer (Principal Financial and
Accounting Officer) 20




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EXHIBIT INDEX
 ExhibitNumber
    
    Document Description10.1
    
    Ableco Waiver and Extension Letter as of May 3, 200710.2
    
    Ableco Waiver and Extension Letter as of May 21, 200710.3
    
    Ableco Amendment No. 1 to Financing Agreement31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 21