###### **UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 
| **ý**                                                                                                                                                                                                                      | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                            |                                                                                                     |
| **For  the quarterly period ended June 30, 2005**                                                                                                                                                                          |
|                                                                                                                                                                                                                            |                                                                                                     |
| **Or**                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                            |
| **o**                                                                                                                                                                                                                           | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                                                                                                                            |
| **For  the transition period from                   to                 ** |
|                                                                                                                                                                                                                            |
| **Commission  File Number:  0-26524**                                                                                                                                                                                      |

 

**LOUDTECHNOLOGIES INC.**

(Exact name ofregistrant as specified in its charter)

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes  ý   No  o

 

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

Yes  o   No  ý

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 
| **Common  Stock, no par value** | ** ** | **22,573,316**                                            |
|---------------------------------|------------|-----------------------------------------------------------|
| Class                           |       | Number of Shares  Outstanding  (as of July 29, 2005) |

 

 

----

 

**LOUDTECHNOLOGIES INC.**

 

**FORM 10-Q**

**Forthe quarter ended June 30, 2005**

 

**INDEX**

 
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                                     |   |
|-------------------|--------------------------------------------------------------------------------------------------------------------------------|--------|
|              |                                                                                                                           |   |
| Item 1.           | Financial Statements  (Unaudited)                                                                                              |   |
|              |                                                                                                                           |   |
|              | Condensed Consolidated  Balance Sheets as of June 30, 2005 and December 31, 2004                                     |   |
|              |                                                                                                                           |   |
|              | Condensed Consolidated  Statements of Operations for the three and six months ended June 30,  2005 and June 30, 2004 |   |
|              |                                                                                                                           |   |
|              | Condensed Consolidated  Statements of Cash Flows for the six months ended June 30, 2005 and  June 30, 2004           |   |
|              |                                                                                                                           |   |
|              | Condensed Consolidated  Statements of Shareholders’ Equity for the six months ended June 30,  2005                   |   |
|              |                                                                                                                           |   |
|              | Notes to Condensed Consolidated  Financial Statements                                                                          |   |
|              |                                                                                                                           |   |
| Item 2.           | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                    |   |
|              |                                                                                                                           |   |
| Item 3.           | Quantitative and Qualitative  Disclosures About Market Risk                                                                    |   |
|              |                                                                                                                           |   |
| Item 4.           | Controls and Procedures                                                                                                        |   |
|              |                                                                                                                           |   |
| **PART II.** | **OTHER INFORMATION**                                                                                                          |   |
|              |                                                                                                                           |   |
| Item 1.           | Legal Proceedings                                                                                                              |   |
|              |                                                                                                                           |   |
| Item 2.           | Unregistered Sales of Equity  Securities and Use of Proceeds                                                                   |   |
|              |                                                                                                                           |   |
| Item 3.           | Defaults Upon Senior  Securities                                                                                               |   |
|              |                                                                                                                           |   |
| Item 4.           | Submission of Matters to a  Vote of Security Holders                                                                           |   |
|              |                                                                                                                           |   |
| Item 5.           | Other Information                                                                                                              |   |
|              |                                                                                                                           |   |
| Item 6.           | Exhibits                                                                                                                       |   |
|              |                                                                                                                           |   |
| **SIGNATURES**    |                                                                                                                           |

 

2

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**LOUDTECHNOLOGIES INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 

*(Inthousands, except share amounts)*

 
| ** **                                                                                                                                                   | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                   |       |                    |       |                        |       |
| Current assets:                                                                                                                                              |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                   |       | $                       | 930        |                        | $          | 450 |   |
| Accounts  receivable, net of allowances of $1,975 and $1,671, respectively                                                                                   |       | 30,002                  |       | 16,800                      |       |
| Income taxes  receivable                                                                                                                                     |       | —                  |       | 30                          |       |
| Inventories                                                                                                                                                  |       | 38,979                  |       | 27,959                      |       |
| Prepaid expenses  and other current assets                                                                                                                   |       | 2,174                   |       | 2,861                       |       |
| Total current  assets                                                                                                                                        |       | 72,085                  |       | 48,100                      |       |
|                                                                                                                                                         |       |                    |       |                        |       |
| Property, plant  and equipment, net                                                                                                                          |       | 9,630                   |       | 7,381                       |       |
| Goodwill                                                                                                                                                     |       | 866                     |       | —                      |       |
| Other intangible  assets, net                                                                                                                                |       | 12,654                  |       | 5,128                       |       |
| Other assets                                                                                                                                                 |       | 47                      |       | 186                         |       |
| Total assets                                                                                                                                                 |       | $                       | 95,282     |                        | $          | 60,795 |   |
|                                                                                                                                                         |       |                    |       |                        |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                               |       |                    |       |                        |       |
| Current  liabilities:                                                                                                                                        |       |                    |       |                        |       |
| Short-term  borrowings                                                                                                                                       |       | $                       | 48,020     |                        | $          | 11,826 |   |
| Accounts payable                                                                                                                                             |       | 13,097                  |       | 17,679                      |       |
| Accrued  liabilities                                                                                                                                         |       | 8,772                   |       | 6,972                       |       |
| Taxes payable                                                                                                                                                |       | 1,355                   |       | 1,466                       |       |
| Current portion  of long-term debt                                                                                                                           |       | 11,819                  |       | 300                         |       |
| Current portion  of payable to former Italian subsidiary                                                                                                     |       | 2,000                   |       | 7,587                       |       |
| Total current  liabilities                                                                                                                                   |       | 85,063                  |       | 45,830                      |       |
|                                                                                                                                                         |       |                    |       |                        |       |
| Long-term debt,  excluding current portion                                                                                                                   |       | —                  |       | 11,612                      |       |
| Long term  portion of payable to former Italian subsidiary                                                                                                   |       | 1,200                   |       | —                      |       |
| Other  liabilities                                                                                                                                           |       | 2,835                   |       | 33                          |       |
| Total  liabilities                                                                                                                                           |       | 89,098                  |       | 57,475                      |       |
|                                                                                                                                                         |       |                    |       |                        |       |
| Commitments and  contingencies                                                                                                                               |       |                    |       |                        |       |
|                                                                                                                                                         |       |                    |       |                        |       |
| Shareholders’  equity:                                                                                                                                  |       |                    |       |                        |       |
| Preferred stock,  no par value. Authorized 5,000,000 shares, no shares issued and outstanding                                                                |       | —                  |       | —                      |       |
| Common stock, no  par value. Authorized 40,000,000 shares, issued and outstanding 22,573,316 at  June 30, 2005 and 22,138,191 at December 31, 2004 |       | 40,009                  |       | 38,778                      |       |
| Accumulated  deficit                                                                                                                                         |       | (33,825                 | )          | (35,458                     | )          |
| Total  shareholders’ equity                                                                                                                             |       | 6,184                   |       | 3,320                       |       |
| Total  liabilities and shareholders’ equity                                                                                                             |       | $                       | 95,282     |                        | $          | 60,795 |   |

 

*Seeaccompanying Notes to Condensed Consolidated Financial Statements.*

 

3

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**LOUDTECHNOLOGIES INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 

*(In thousands, except forper share data)*

 
| ** **                                                                    | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                    | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Net sales                                                                     |       | $                                     | 54,290     |                                | $          | 30,531 |   | $ | 94,235 |   | $ | 56,212 |   |
| Cost of sales                                                                 |       | 38,642                                |       | 20,236                              |       | 65,252 |   | 39,005 |   |
| Gross profit                                                                  |       | 15,648                                |       | 10,295                              |       | 28,983 |   | 17,207 |   |
|                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Operating  expenses:                                                          |       |                                  |       |                                |       |   |   |   |   |
| Selling, general  and administrative                                          |       | 12,865                                |       | 8,492                               |       | 22,410 |   | 16,784 |   |
| Research and  development                                                     |       | 2,703                                 |       | 1,832                               |       | 4,658 |   | 3,804 |   |
| Total operating  expenses                                                     |       | 15,568                                |       | 10,324                              |       | 27,068 |   | 20,588 |   |
|                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Operating income  (loss)                                                      |       | 80                                    |       | (29                                 | )          | 1,915 |   | (3,381 | ) |
|                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Other income  (expense):                                                      |       |                                  |       |                                |       |   |   |   |   |
| Interest income                                                               |       | 104                                   |       | 11                                  |       | 133 |   | 11 |   |
| Interest expense                                                              |       | (1,442                                | )          | (882                                | )          | (2,304 | ) | (1,643 | ) |
| Management fee                                                                |       | (238                                  | )          | (100                                | )          | (566 | ) | (200 | ) |
| Other                                                                         |       | (177                                  | )          | 48                                  |       | (329 | ) | 312 |   |
| Total other  (expense)                                                        |       | (1,753                                | )          | (923                                | )          | (3,066 | ) | (1,520 | ) |
|                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Loss before  income taxes and discontinued operations                         |       | (1,673                                | )          | (952                                | )          | (1,151 | ) | (4,901 | ) |
|                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Provision for  income taxes                                                   |       | 17                                    |       | 5                                   |       | 43 |   | 10 |   |
|                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Loss from  continuing operations                                              |       | (1,690                                | )          | (957                                | )          | (1,194 | ) | (4,911 | ) |
|                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Recognized gain  on discontinued operations, net of income tax expense of $58 |       | —                                |       | —                              |       | 2,827 |   | — |   |
|                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Net income  (loss)                                                            |       | $                                     | (1,690     | )                                   | $          | (957 | ) | $ | 1,633 |   | $ | (4,911 | ) |
|                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Basic and  diluted net income (loss) per share:                               |       |                                  |       |                                |       |   |   |   |   |
| Basic and  diluted net loss from continuing operations                        |       | $                                     | (0.07      | )                                   | $          | (0.05 | ) | $ | (0.05 | ) | $ | (0.24 | ) |
| Basic and  diluted net income from discontinued operations                    |       | —                                |       | —                              |       | 0.12 |   | — |   |
|                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Basic and  diluted net income (loss) per share:                               |       | $                                     | (0.07      | )                                   | $          | (0.05 | ) | $ | 0.07 |   | $ | (0.24 | ) |
|                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Shares used in  computing basic and diluted net income (loss) per share:      |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                                         |       | 23,771                                |       | 20,891                              |       | 23,634 |   | 20,891 |   |
| Diluted                                                                       |       | 23,771                                |       | 20,891                              |       | 24,667 |   | 20,891 |   |

 

*Seeaccompanying Notes to Condensed Consolidated Financial Statements.*

 

4

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**LOUDTECHNOLOGIES INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| ** **                                                                                |       | **(In  thousands)**                 |       |
| **Operating  activities**                                                                 | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Net income  (loss)                                                                        |       | $                                   | 1,633      |   | $ | (4,911 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                                |       |   |   |
| Depreciation and  amortization                                                            |       | 2,301                               |       | 1,562 |   |
| Non-cash  interest expense                                                                |       | 57                                  |       | 75 |   |
| Gain on asset  dispositions                                                               |       | —                              |       | (187 | ) |
| Deferred stock  compensation                                                              |       | 29                                  |       | 29 |   |
| Recognized gain  on discontinued operations                                               |       | (2,885                              | )          | — |   |
| Changes in  operating assets and liabilities, net of business acquired:                   |       |                                |       |   |   |
| Accounts  receivable                                                                      |       | (1,114                              | )          | (164 | ) |
| Inventories                                                                               |       | 7,676                               |       | 2,444 |   |
| Prepaid expenses  and other current assets                                                |       | 1,004                               |       | (745 | ) |
| Other assets                                                                              |       | 156                                 |       | 232 |   |
| Accounts payable  and accrued liabilities                                                 |       | (8,400                              | )          | 3,327 |   |
| Taxes payable                                                                             |       | (111                                | )          | 67 |   |
| Other  liabilities                                                                        |       | (4                                  | )          | (20 | ) |
| Net cash  provided by operating activities                                                |       | 342                                 |       | 1,709 |   |
|                                                                                      |       |                                |       |   |   |
| **Investing  activities**                                                                 | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Purchases of  property, plant and equipment                                               |       | (750                                | )          | (1,405 | ) |
| Proceeds from  sales of property, plant and equipment                                     |       | —                              |       | 826 |   |
| Acquisition of  St. Louis Music, Inc., including transaction fees paid               |       | (35,168                             | )          | — |   |
| Net cash used in  investing activities                                                    |       | (35,918                             | )          | (579 | ) |
|                                                                                      |       |                                |       |   |   |
| **Financing  activities**                                                                 | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Payments on  long-term debt                                                               |       | (150                                | )          | (1,515 | ) |
| Net borrowings  under bank line of credit and short-term borrowings                       |       | 36,194                              |       | — |   |
| Net proceeds  from stock sales and exercise of stock options                              |       | 12                                  |       | — |   |
| Net borrowings  on short-term borrowings                                                  |       | —                              |       | 62 |   |
| Net cash  provided by (used in) financing activities                                      |       | 36,056                              |       | (1,453 | ) |
|                                                                                      |       |                                |       |   |   |
| Increase  (decrease) in cash and cash equivalents                                         |       | 480                                 |       | (323 | ) |
|                                                                                      |       |                                |       |   |   |
| Cash and cash  equivalents at beginning of period                                         |       | 450                                 |       | 757 |   |
| Cash and cash  equivalents at end of period                                               |       | $                                   | 930        |   | $ | 434 |   |

 

*Seeaccompanying Notes to Condensed Consolidated Financial Statements.*

 

5

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**LOUDTECHNOLOGIES INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

**Sixmonths ended June 30, 2005**

 

*(Inthousands)*

 
| ** **                                                | ** ** | **Common Stock** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|-----------------------------------------------------------|------------|------------------|------------|-----------------|------------|-------------|------------|
| ** **                                                | ** ** | **Shares**       | ** ** | **Amount**      | ** ** | **Deficit** | ** ** | **Total** | ** ** |
|                                                      |       |             |       |            |       |        |       |   |   |
| Balance at  December 31, 2004                        |       | 22,138           |       | $               | 38,778     |        | $          | (35,458 | ) | $ | 3,320 |   |
| Stock options  exercised                                  |       | 38               |       | 12              |       | —      |       | 12 |   |
| Deferred stock  compensation                              |       | —           |       | 29              |       | —      |       | 29 |   |
| Shares issued-  acquisition of St. Louis Music, Inc. |       | 397              |       | 1,190           |       | —      |       | 1,190 |   |
| Net income                                                |       | —           |       | —          |       | 1,633       |       | 1,633 |   |
| Balance at  June 30, 2005                            |       | 22,573           |       | $               | 40,009     |        | $          | (33,825 | ) | $ | 6,184 |   |

 

*Seeaccompanying Notes to Condensed Consolidated Financial Statements.*

 

6

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**LOUDTECHNOLOGIES INC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**June 30,2005**

**(Unaudited)**

 

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

 

We develop, manufactureand sell high-quality, affordable digital and analog audio mixers, speakers,guitar and bass amplifiers, branded musical instruments and relatedaccessories, and other professional audio equipment on a worldwide basis. Ourproducts are used by professional musicians, sound installation contractors andbroadcast professionals both in sound recordings, live presentations systemsand installed sound systems. We distribute our products primarily throughretail dealers, mail order outlets and installed sound contractors.  We have our primary operations in the UnitedStates with smaller operations in the United Kingdom, Canada, China and Japan.

 

On March 4, 2005, weacquired all of the shares of St. Louis Music, Inc., (“St. Louis Music”),a Missouri based manufacturer, distributor and importer of branded musicalinstruments and professional audio products. This transaction is explained in more detail in Note 10 to thesefinancial statements.

 

**2.****             Summary of Significant Accounting Policies**

 

**Basis ofPresentation**

 

The accompanyingunaudited condensed consolidated financial statements have been prepared byLOUD Technologies Inc. (“LOUD” or the “Company”) in accordance with U.S.generally accepted accounting principles for interim financial statements andincludes the accounts of the Company and its subsidiaries. They do not includeall of the information and disclosures required by generally acceptedaccounting principles for complete financial statements and should be read inconjunction with the financial statements included in our Annual Report on Form 10-Kfor the year ended December 31, 2004. In our opinion, all adjustments, consisting of normal recurringadjustments necessary for the fair presentation of the results of the interimperiods are reflected herein.

 

##### **Revenue Recognition**

 

Revenues from sales ofproducts, net of sales discounts, returns and allowances, are generallyrecognized upon shipment under an agreement with a customer when risk of losshas passed to the customer, all significant contractual obligations have beensatisfied, the fee is fixed or determinable and collection of the resultingreceivable is considered probable. Products are generally shipped “FOB shippingpoint” with no right of return. We do have some dealers who finance theirpurchases through finance companies.  Wehave manufacturer’s repurchase agreements with the finance companies and deferthe revenue and related cost of goods sold of these sales at the time of thesale.  We then recognize the revenue andrelated cost of goods sold from these sales when the repurchase obligation nolonger exists.  Sales with contingencies,such as rights of return, rotation rights, conditional acceptance provisionsand price protection, are deferred until the contingencies have been satisfiedor the 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.

 

**Stock-BasedCompensation**

 

Stock-based employeecompensation plans are accounted for using the intrinsic-value methodprescribed in Accounting Principles Board Opinion No. 25,*Accounting for Stock Issued to Employees*,and related interpretations including SFAS Interpretation No. 44,*Accounting for Certain Transactions Involving StockCompensation, an Interpretation of APB Opinion No. 25*. Underthis method, compensation expense is recorded on the date of grant only if thecurrent market price of the underlying stock exceeds the exercise price or ifoptions were issued to non-employees.

 

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

 

7

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SFAS No.123, as amended,permits companies to recognize, as expense over the vesting period, the fairvalue of all stock-based awards on the date of grant. The Black-Scholes optionvaluation model was developed for use in estimating the fair value of tradedoptions, which have no vesting restrictions and are fully transferable. Becauseour stock-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, ascurrently permitted, we apply the existing accounting rules under APB No. 25and provide pro forma net income (loss) and pro forma income (loss) per sharedisclosures for stock-based awards made as if the fair value method defined inSFAS No. 123 have been applied.

 

The following tablesummarizes relevant information as to the reported amounts under the Company’sintrinsic value method of accounting for stock awards, with pro formainformation as if the fair value recognition provisions of SFAS No. 123have been applied:

 
| ** **                                                                        | ** ** | **Three months ended  June 30,**     | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                                  | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                        | ** ** | **(in thousands, except per share data)** | ** ** |
|                                                                              |       |                                      |       |                                |       |   |   |   |   |
| Net income  (loss):                                                               |       |                                      |       |                                |       |   |   |   |   |
| As reported                                                                       |       | $                                         | (1,690     | )                                   | $          | (957 | ) | $ | 1,633 |   | $ | (4,911 | ) |
| Less:  Stock-based employee compensation determined under fair-value based method |       | (135                                      | )          | (189                                | )          | (261 | ) | (403 | ) |
| Pro forma                                                                         |       | $                                         | (1,825     | )                                   | $          | (1,146 | ) | $ | 1,372 |   | $ | (5,314 | ) |
|                                                                              |       |                                      |       |                                |       |   |   |   |   |
| Basic net income  (loss) per share:                                               |       |                                      |       |                                |       |   |   |   |   |
| As reported                                                                       |       | $                                         | (0.07      | )                                   | $          | (0.05 | ) | $ | 0.07 |   | $ | (0.24 | ) |
| Pro forma                                                                         |       | $                                         | (0.08      | )                                   | $          | (0.05 | ) | $ | 0.06 |   | $ | (0.25 | ) |
|                                                                              |       |                                      |       |                                |       |   |   |   |   |
| Diluted net income  (loss) per share:                                             |       |                                      |       |                                |       |   |   |   |   |
| As reported                                                                       |       | $                                         | (0.07      | )                                   | $          | (0.05 | ) | $ | 0.07 |   | $ | (0.24 | ) |
| Pro forma                                                                         |       | $                                         | (0.08      | )                                   | $          | (0.05 | ) | $ | 0.06 |   | $ | (0.25 | ) |

 

**Concentrationof Credit and Supply Risk**

 

We sell products on aworldwide basis and a significant portion of our accounts receivable are duefrom customers outside of the U.S.  Wherewe are exposed to material credit risk, we generally require letters of credit,advance payments, or carry foreign credit insurance.  No individual country outside of the U.S.accounted for more than 10% of net sales from continuing operations in any ofthe periods presented.  Sales to U.S.customers are generally on open credit terms. In the U.S., we primarily sell our products through third-partyresellers and experience individually significant annual sales volumes withmajor resellers.  For the three-monthperiods ended June 30, 2005 and 2004, we had sales to one customer of $8.4million and $3.5 million, or 15.5% and 11.5%, respectively of consolidated netsales from continuing operations.  Forthe six-month periods ended June 30, 2005 and 2004, we had sales to thesame customer of $13.0 million and $6.1 million, or 13.8% and 10.9%,respectively, of consolidated net sales from continuing operations.

 

Many of our products arecurrently being manufactured exclusively by contract manufacturers on ourbehalf.  For the three-month periodsended June 30, 2005 and 2004, net sales of products manufactured by onemanufacturer were $14.4 million and $7.9 million, or 26.5% and 25.9%,respectively of consolidated net sales from continuing operations, while netsales of products manufactured by another manufacturer were $5.3 million and$3.3 million, or 9.8% and 10.8%, respectively of consolidated net sales fromcontinuing operations.  For the six-monthperiods ended June 30, 2005 and 2004, net sales of products manufacturedby one manufacturer were $28.8 million and $14.7 million, or 30.6% and 26.2%,respectively of consolidated net sales from continuing operations, while netsales of products manufactured by another manufacturer were $10.9 million and$3.9 million, or 11.6% and 6.9%, respectively of consolidated net sales fromcontinuing operations.

 

8

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##### **Recent Accounting Pronouncements**

 

In December 2004,the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payments” (SFAS123R), which requires the measurement of all share-based payments to employees,including grants of employee stock options, using a fair-value-based method andthe recording of such expense in an entity’s statement of income.  The accounting provisions of SFAS 123R areeffective for annual reporting periods beginning after June 15, 2005.  The Company is required to adopt SFAS 123R inthe quarter ending March 31, 2006. The pro forma disclosures previously permitted under SFAS 123 no longerwill be an alternative to financial statement recognition.  See “Stock-Based Compensation” above for thepro forma net income (loss) and net income (loss) per share amounts for the sixmonths ended June 30, 2005 and 2004, as if the Company had applied thefair value recognition provisions of SFAS 123 to measure compensation expensefor employee stock incentive awards.  TheCompany has completed a preliminary evaluation of the impact of adopting SFAS123R and estimates that it will have a material impact on income from operationsfor the year ended December 31, 2006. This estimate is based on preliminary information available to theCompany and could materially change based on actual facts and circumstancesarising during the year ended December 31, 2006.

 

##### **Accounting for Acquisitions**

 

Significant judgment isrequired to estimate the fair value of purchased assets and liabilities at thedate of acquisition, including estimating future cash flows from the acquiredbusiness, determining appropriate discount rates, asset lives and otherassumptions. Our process to determine the fair value of trademarks, customerrelationships, developed technology includes the use of estimates including:the potential impact on operating results if the revenue estimates forcustomers acquired through the acquisition based on an assumed customerattrition rate; estimated costs to be incurred to purchase the capabilitiesgained through the developed technology and appropriate discount rates based onthe particular business’s weighted average cost of capital. Our process todetermine the fair value of inventories acquired was to estimate the sellingprice of the inventories less the sum of costs to sell and a reasonable sellingprofit allowance. We expect to complete the process of assessing if St. LouisMusic represents a separate reporting unit for purposes of measuring potentialimpairment of goodwill in 2005.

 

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

 

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

 

In February 2005, wemade an offer to Mackie Italy to settle any outstanding amounts owed by theCompany to Mackie Italy for $4.7 million. This proposal was accepted by the Italian court appointed trustee onbehalf of Mackie Italy in May 2005. Under the terms of the settlement agreement, we issued a stand-by letterof credit to Mackie Italy for $1.0 million, and we committed to make furtherpayments of $1.5 million during the remainder of 2005 and $2.2 million during2006.  We recognized a gain ondiscontinued operations of $2.9 million in the first quarter of 2005.  During the second quarter of 2005, a paymentof $1.0 million was made by the letter of credit, along with an additionalpayment of $0.5 million.

 

9

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

 

The following table setsforth the computation of basic and diluted net income (loss) per share for thethree and six months ended June 30, 2005 and 2004. Stock options topurchase 1,158,000 and 3,796,000 shares in 2005 and 2004, respectively, wereexcluded from the calculation of diluted per share amounts because they areantidilutive.  Included in thedenominator for the computation of basic and diluted net income (loss) pershare are 1,200,000 warrants and 5,709 vested stock options with an exerciseprice of $0.01, which are considered outstanding common shares.

 
| ** **                                                                        | ** ** | **Three months ended  June 30,**     | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                                  | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                        | ** ** | **(in thousands, except per share data)** | ** ** |
| Numerator:                                                                        |       |                                      |       |                                |       |   |   |   |   |
| Net loss from  continuing operations                                              |       | $                                         | (1,690     | )                                   | $          | (957 | ) | $ | (1,194 | ) | $ | (4,911 | ) |
| Net income from  discontinued operations                                          |       | —                                    |       | —                              |       | 2,827 |   | — |   |
| Numerator for  basic and diluted net income (loss) per share                      |       | $                                         | (1,690     | )                                   | $          | (957 | ) | $ | 1,633 |   | $ | (4,911 | ) |
|                                                                              |       |                                      |       |                                |       |   |   |   |   |
| Denominator:                                                                      |       |                                      |       |                                |       |   |   |   |   |
| Weighted average  shares outstanding                                              |       | 22,571                                    |       | 19,622                              |       | 22,428 |   | 19,615 |   |
| Dilutive  potential common shares from outstanding stock options and warrants     |       | 1,200                                     |       | 1,269                               |       | 1,206 |   | 1,276 |   |
| Denominator for  basic net income (loss) per share – weighted average shares |       | 23,771                                    |       | 20,891                              |       | 23,634 |   | 20,891 |   |
|                                                                              |       |                                      |       |                                |       |   |   |   |   |
| Basic weighted  average shares outstanding                                        |       | 23,771                                    |       | 20,891                              |       | 23,634 |   | 20,891 |   |
| Dilutive  potential common shares from options and warrants                       |       | —                                    |       | —                              |       | 1,033 |   | — |   |
| Denominator for  diluted net income (loss) per share- weighted average shares     |       | 23,771                                    |       | 20,891                              |       | 24,667 |   | 20,891 |   |
|                                                                              |       |                                      |       |                                |       |   |   |   |   |
| Basic and  diluted net income (loss) per share:                                   |       |                                      |       |                                |       |   |   |   |   |
| Continuing  operations                                                            |       | $                                         | (0.07      | )                                   | $          | (0.05 | ) | $ | (0.05 | ) | $ | (0.24 | ) |
| Discontinued  operations                                                          |       | —                                    |       | —                              |       | 0.12 |   | — |   |
| Basic and  diluted net income (loss) per share                                    |       | $                                         | (0.07      | )                                   | $          | (0.05 | ) | $ | 0.07 |   | $ | (0.24 | ) |

 

**5.****             Inventories**

 

Inventories consist ofthe following:

 
| ** **      | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **      | ** ** | **(in thousands)**      | ** ** |
| * *        | * *   | * *                | * *   | * *                    | * *   |
| Raw materials   |       | $                       | 3,915      |                        | $          | 3,951 |   |
| Work in process |       | 1,211                   |       | 657                         |       |
| Finished goods  |       | 33,853                  |       | 23,351                      |       |
|            |       | $                       | 38,979     |                        | $          | 27,959 |   |

 

10

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

 

Intangible assets consistof the following:

 
| ** **                     | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                     | ** ** | **(in thousands)**      | ** ** |
| Trademarks                     |       | $                       | 5,930      |                        | $          | 1,380 |   |
| Developed technology           |       | 5,470                   |       | 5,200                       |       |
| Customer  relationships        |       | 3,080                   |       | —                      |       |
| Covenant not to  compete       |       | 285                     |       | 285                         |       |
|                           |       | 14,765                  |       | 6,865                       |       |
| Less accumulated  amortization |       | (2,111                  | )          | (1,737                      | )          |
|                           |       | $                       | 12,654     |                        | $          | 5,128 |   |

 

Amortization expense forintangible assets was $227,000 and $106,000 for the three month periods ended June 30,2005 and 2004, respectively. Amortization expense for intangible assets was $374,000 and $212,000 forthe six month periods ended June 30, 2005 and 2004, respectively.

 

Expected futureamortization expense related to identifiable intangible assets for the nextfive years is as follows (in thousands):

 
| **Year ending June 30:** | ** ** | ** ** | ** ** |
|-------------------------------|------------|------------|------------|
| 2006                          |       | $          | 903        |   |
| 2007                          |       | 816        |       |
| 2008                          |       | 816        |       |
| 2009                          |       | 816        |       |
| 2010                          |       | 811        |       |
|                               |            |            |            |  |

 

**7.****             Financing**

 

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

 

We have a revolving lineof credit to borrow up to $25.0 million, limited to a percentage of eligiblecollateral, through March 2006.  Interest is due monthly and is basedon the banks prime rate or LIBOR plus a specified margin.  At June 30,2005, the average interest rate was 6.75%.  This revolving line of creditis secured by substantially all U.S. assets (excluding St. Louis Music) andaccounts receivable of our U.K. subsidiary.  At June 30, 2005, we hadan outstanding balance on this line of credit of $11.3 million and availableborrowing capacity of $4.7 million.

 

A $40.0 million revolvingshort-term demand credit facility was obtained to finance the acquisition ofSt. Louis Music and for future working capital. Sun Capital Partners III QP, LP has guaranteed $29.0 million of thiscredit facility and the remaining $11.0 million is limited to a percentage ofeligible accounts receivable and inventories of St. Louis Music, Inc.Interest is due monthly and is based on the banks prime rate or LIBOR plus aspecified margin.  At June 30, 2005,the average interest rate was 6.5%.  At June 30,2005, we had an outstanding balance on this line of credit of $36.7 million andavailable borrowing capacity of $2.9 million.

 

The Company intends torefinance all of its existing credit facilities and to extinguish Sun CapitalPartners III QP, LP’s guarantee in the near term.

 

11

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

 

At June 30, 2005 andDecember 31, 2004, our long-term debt consisted of the following:

 
| ** **                      | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **(in thousands)**      | ** ** |
|                            |       |                    |       |                        |       |
| U.S. term loan                  |       | $                       | 402        |                        | $          | 552 |   |
| U.S.  subordinated note payable |       | 11,417                  |       | 11,360                      |       |
|                            |       | 11,819                  |       | 11,912                      |       |
| Less: current  portion          |       | (11,819                 | )          | (300                        | )          |
| Long-term  portion of debt      |       | $                       | —     |                        | $          | 11,612 |   |

 

Our U.S. term loan ispayable in monthly payments of $25,000.  This loan and the $25.0 millionline of credit held by the same financial institution are both secured bysubstantially all of the assets of the Company (excluding St. Louis Music, Inc.),and are both senior to other long-term debt.  The term loan bears interestat the bank’s prime rate plus a specified margin.  This rate was 7.0% at June 30,2005.  The principal is due March 2006.

 

In March 2003, weobtained a note payable for $11.0 million with another lender, which issubordinate to the $25.0 million line of credit.  Interest accrues at a rate of 10%.  Prior to March 2005, 8% was paid monthlywhile the remaining 2% was paid monthly if there was a specific availability onour line of credit.  At June 30,2005 we have added a total of $417,000 in accrued interest to the notepayable.  In March 2005, we signed aloan amendment that now requires us to pay the 10% interest monthly.  The principal is due in May 2006.

 

Under the terms of theline of credit and subordinated loan agreements, we are required to maintaincertain financial ratios, such as a cumulative EBITDA calculation. Theagreements also provide, among other matters, restrictions on additionalfinancing, dividends, mergers, acquisitions, a daily minimum excessavailability amount and an annual capital expenditure limit.

 

Our subordinated debtrequires us to meet a daily minimum excess availability target of $2.0 millionon our revolving line of credit.  Wefailed to meet this target on April 27, 2005.  By not meeting this target, we were notrequired to make the April interest payment on our subordinated debt and thesubordinated debt holder could charge us a default interest rate of 13%.  We requested and our senior debt holder grantedus permission to make the April interest payment.

 

**8.****             Guarantees**

 

In the ordinary course ofbusiness, we are not subject to any significant obligations under guaranteesthat fall within the scope of FIN No. 45,*Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others*except for standardindemnification and warranty provisions and give rise only to the disclosurerequirements prescribed by FIN No. 45.

 

Indemnification andwarranty provisions contained within our sales agreements are generallyconsistent with those prevalent in our industry. The duration of productwarranties is generally one to six years following delivery of products, withthe exception of our Alvarez and Alvarez Yairi guitars, which have a limitedlifetime warranty.

 

12

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The warranty liability issummarized as follows (in thousands):

 
| ** **                    | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                    | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                    | ** ** | **(in thousands)**                   | ** ** |
| Balance,  beginning of period |       | $                                    | 1,230      |                               | $          | 1,067 |   | $ | 978 |   | $ | 1,081 |   |
| Charged to cost  of sales     |       | 673                                  |       | 641                                |       | 1,241 |   | 1,323 |   |
| Applied to  liability         |       | (663                                 | )          | (730                               | )          | (979 | ) | (1,426 | ) |
| Balance, end of  period       |       | $                                    | 1,240      |                               | $          | 978 |   | $ | 1,240 |   | $ | 978 |   |

 

**9.****             Commitments and Contingencies**

 

We are involved invarious legal proceedings and claims that arise in the ordinary course ofbusiness. We currently believe that these matters will not have a materialadverse impact on our financial position, liquidity or results of operations.

 

In May 2005, we enteredinto a new operating lease for our corporate headquarters and warehouse thatexpires in December 2011. The total future lease payments are $4.4 million.

 

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

 

On March 4, 2005, inaccordance with an acquisition agreement, we acquired all of the shares of St.Louis Music, Inc. (“St. Louis”), a Missouri-based manufacturer,distributor and importer of branded musical instruments and professional audioproducts.  The Company believes theacquisition of St. Louis Music will further diversify the Company’s productofferings to help acquire, retain and extend relationships with customers.  Our total purchase consideration wasapproximately $43.3 million, consisting of $33.7 million in cash, a commitmentto pay $3.0 million plus interest in two years which the present value as ofthe acquisition date is $2.8 million, $1.2 million in shares of LOUD commonstock valued using the February 18, 2005 closing price, liabilitiesassumed of $3.9 million and estimated transaction costs of $1.7 million.  The $3.0 million future commitment isguaranteed by Sun Capital Partners III QP, LP, an affiliate of Sun Mackie, LLC,the Company’s principal shareholder. The St. Louis Music acquisition wasconducted through SLM Merger Corp., an indirect wholly owned subsidiary of theCompany.  Included in the Company’sresults of operations are the operations of St. Louis Music for the period March 5through June 30, 2005.

 

In connection with theacquisition, the purchase price has been allocated as follows (in thousands):

 
| Accounts  receivable                                                                            |   | $      | 12,088 |   |
|-------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Inventories                                                                                     |   | 18,696 |   |
| Prepaid expenses  and other current assets                                                      |   | 287    |   |
| Property, plant  and equipment                                                                  |   | 3,426  |   |
| Goodwill                                                                                        |   | 866    |   |
| Trademarks  (estimated life of 20 years)                                                        |   | 4,550  |   |
| Developed technology  (estimated life of 5 years)                                               |   | 270    |   |
| Customer  relationships (estimated life of 15 years)                                            |   | 3,080  |   |
| Other assets                                                                                    |   | 17     |   |
|                                                                                            |   |   |   |
| Total assets                                                                                    |   | $      | 43,280 |   |
|                                                                                            |   |   |   |
| Accounts payable                                                                                |   | $      | 2,610  |   |
| Accrued  liabilities (including remaining amount due to sellers and accrued  transaction costs) |   | 4,312  |   |
|                                                                                            |   |   |   |
| Total  liabilities                                                                              |   | 6,922  |   |
|                                                                                            |   |   |   |
| Common stock  issued                                                                            |   | 1,190  |   |
|                                                                                            |   |   |   |
| Cash  consideration paid, net of $88 cash acquired and including $1,475 of  transaction costs   |   | $      | 35,168 |   |

 

13

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Changes to the purchaseprice allocation from those reported in our Quarterly Report on Form 10-Qfor the period ended March 31, 2005 are as follows (in thousands):  an increase to accounts receivable of $135 asa result of a change to the estimate of collectibility of accounts receivable,an increase to inventories of $2,443 as a result of adjusting them to fairvalue, an increase to property, plant and equipment of $249 as a result ofadjusting them to fair value, a decrease to accrued liabilities of $1,060 as aresult of adjusting the deferred revenue to fair value a decrease to othernon-current liabilities of $194 to reflect the present value of our liabilityto the seller, and a decrease to the cash consideration paid of $128. This decreaseis the net result of a decrease of $471 relating to the final working capitalcalculation of St. Louis Music as of the acquisition date and an increase intransaction costs of $343.  The effectsof all the above items was a reduction in goodwill of $4,209.

 

The total amount of theseadjustments to fair value recorded in the second quarter of 2005 that affectthe statement of operations but relate to the first quarter of 2005 was $956.

 

Goodwill of $0.9 million,representing the excess of the purchase consideration over the fair value oftangible and identifiable intangible assets acquired, will not be amortized,consistent with the guidance of SFAS 142. Amortization of the entire $0.9 million is expected to be deductible fortax purposes.

 

The following unauditedpro forma information represents the results of operations for LOUD and St.Louis Music, Inc. for the three and six months ended June 30, 2005and 2004, as if the acquisition had been consummated as of the beginning ofeach period presented.  Included in St.Louis Music’s net loss for the three and six months ended June 30, 2005 are$2.1 million of St. Louis Music’s transaction expenses that relate to the saleof the business that are nonrecurring in nature.  This pro forma information does not purportto be indicative of what may occur in the future:

 

**UNAUDITEDPRO FORMA CONDENSED COMBINEDStatement of Operations(In thousands, except per share data)**

 
| ** **                         | ** ** | **For the three months ended June 30, 2005** | ** ** | **For the three months ended June 30, 2004** | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                         | ** ** | **LOUD**                                     | ** ** | **St. Louis  Music**                         | ** ** | **Pro Forma  Adjustments** | ** ** | **Pro Forma  Combined** | ** ** | **LOUD** | ** ** | **St. Louis  Music** | ** ** | **Pro Forma  Adjustments** | ** ** | **Pro Forma  Combined** | ** ** |
| Net sales                          |       | $                                            | 35,271     |                                         | $          | 19,019 |   |   |   | $ | 54,290 |   | $ | 30,531 |   | $ | 20,341 |   | $ | 0 |   | $ | 50,872 |   |
| Gross profit                       |       | 13,248                                       |       | 2,400                                        |       |   |   | 15,648 |   | 10,295 |   | 5,267 |   | (2,593 | ) | 12,969 |   |
| Net income (loss)                  |       | 1,049                                        |       | (2,739                                       | )          |   |   | (1,690 | ) | (957 | ) | 1,108 |   | (3,198 | ) | (3,047 | ) |
|                               |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic net income  (loss) per share |       |                                         |       |                                         |       |   |   |   | $ | (0.07 | ) |   |   |   |   |   |   |   | $ | (0.15 | ) |
|                                    |            |                                              |            |                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                         | ** ** | **For the six months ended June 30, 2005** | ** ** | **For the six months ended June 30, 2004** | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                         | ** ** | **LOUD**                                   | ** ** | **St. Louis  Music**                       | ** ** | **Pro Forma  Adjustments** | ** ** | **Pro Forma  Combined** | ** ** | **LOUD** | ** ** | **St. Louis  Music** | ** ** | **Pro Forma  Adjustments** | ** ** | **Pro Forma  Combined** | ** ** |
| Net sales                          |       | $                                          | 69,152     |                                       | $          | 41,616 |   |   |   | $ | 110,768 |   | $ | 56,212 |   | $ | 41,462 |   | $ | 0 |   | $ | 97,674 |   |
| Gross profit                       |       | 25,221                                     |       | 7,866                                      |       |   |   | 33,087 |   | 17,207 |   | 10,326 |   | (2,593 | ) | 24,940 |   |
| Net income  (loss)                 |       | 4,467                                      |       | (4,613                                     | )          | (340 | ) | (486 | ) | (4,911 | ) | 1,741 |   | (3,619 | ) | (6,789 | ) |
|                               |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic net income  (loss) per share |       |                                       |       |                                       |       |   |   |   | $ | (0.02 | ) |   |   |   |   |   |   |   | $ | (0.32 | ) |
|                                    |            |                                            |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Included in the pro formaadjustments are fair value adjustments that relate to inventories and property,plant, and equipment; reversal of interest expense on St. Louis Music, Inc.debt that was in existence prior to the acquisition; recording of interestexpense on the demand credit facility obtained as a result of the acquisition;and amortization of the intangible assets reocrded as a result of theacquisition.

 

14

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

 

*Thefollowing discussion and analysis should be read in conjunction with ourfinancial statements included in our Annual Report on Form 10-K for theyear ended December 31, 2004. 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 readas being applicable to all forward-looking statements wherever they appear. Weundertake no obligation to publicly release any revisions to theseforward-looking statements that may be required to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events. Forward-looking statements include, without limitation,any statement that may predict, forecast, indicate, or imply future results,performance, or achievements, and may contain the words “believe,” “anticipate,”“expect,” “estimate,” “project,” “will be,” “will continue,” “will likelyresult,” or words or phrases of similar meaning.*

 

**Overview**

 

LOUD Technologies Inc., aWashington corporation incorporated on November 16, 1988 under the nameMackie Designs Inc., engineers, manufactures and markets professional audioreproduction and recording equipment and software under the brand names Mackie,TAPCO, SIA, EAW and EAW Commercial.  Wechanged our name to LOUD Technologies, Inc. on September 15, 2003.

 

We develop, manufactureand sell high-quality, affordable digital and analog audio mixers, speakers, guitarand bass amplifiers, branded musical instruments and related accessories, andother professional audio equipment on a worldwide basis. Our products are usedby professional musicians, sound installation contractors and broadcastprofessionals both in sound recordings, live presentations systems andinstalled sound systems. We distribute our products primarily through retaildealers, mail order outlets and installed sound contractors.  We have our primary operations in the UnitedStates with smaller operations in the United Kingdom, Canada, China and Japan.

 

On March 4, 2005, inaccordance with an acquisition agreement, we acquired all of the shares of St.Louis Music, Inc. (“St. Louis Music”), a Missouri-based manufacturer,distributor and importer of branded musical instruments and professional audioproducts.  The Company believes theacquisition of St. Louis Music will further diversify the Company’s productofferings to help acquire, retain and extend relationships with customers.  Our total purchase consideration wasapproximately $43.3 million consisting of $33.7 million in cash, a commitmentto pay $3.0 million plus interest in two years of which the present value as ofthe acquisition date is $2.8 million, $1.2 million in shares of LOUD common stockvalued using the February 18, 2005 closing price, liabilities assumed of$3.9 million and estimated transaction costs of $1.7 million.  The $3.0 million future commitment isguaranteed by Sun Capital Partners III QP, LP, an affiliate of Sun Mackie, LLC,the Company’s principal shareholder. The St. Louis Music acquisition wasconducted through SLM Merger Corp., an indirect wholly owned subsidiary of theCompany.

 

In December 2003, weplaced our wholly owned Italian subsidiary, Mackie Designs (Italy) S.p.A. (“MackieItaly”) into an Italian form of court-supervised liquidation and sold all ofthe shares of Mackie Italy.  Mackie Italywas a manufacturer of many of our speaker products, which were purchased by theCompany for subsequent sale outside of Italy. At the time of the sale, the Company owed Mackie Italy approximately$9.2 million related to the purchase of goods in the normal course ofbusiness.  During 2004, we made paymentsto Mackie Italy of approximately $1.6 million, lowering our liability to $7.6million at December 31, 2004. Additionally, Mackie Italy has a payable to a separate wholly ownedsubsidiary of the Company for approximately $2.7 million, which was fullyreserved at the date of sale in 2003.

 

In February 2005, wemade an offer to Mackie Italy to settle any outstanding amounts owed by theCompany to Mackie Italy for $4.7 million. This proposal was accepted by the Italian court appointed trustee onbehalf of Mackie Italy in May 2005. Under the terms of the settlement agreement, we issued a stand-by letterof credit to Mackie Italy for $1.0 million, and we committed to make furtherpayments of $1.5 million during the remainder of 2005 and $2.2 million during2006.  We recognized a gain on discontinuedoperations of $2.9 million in the first quarter of 2005.  During the second quarter of 2005, payment of$1.0 million was made by the letter of credit, along with an additional paymentof $0.5 million.

 

15

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**CriticalAccounting Policies and Judgments**

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe amounts reported in the financial statements and accompanying notes.  Actual results could differ from theseestimates.

 

Significant judgment isrequired to estimate the fair value of purchased assets and liabilities at thedate of acquisition, including estimating future cash flows from the acquiredbusiness, determining appropriate discount rates, asset lives and otherassumptions. Our process to determine the fair value of trademarks, customerrelationships, developed technology includes the use of estimates including:the potential impact on operating results if the revenue estimates forcustomers acquired through the acquisition based on an assumed customerattrition rate; estimated costs to be incurred to purchase the capabilitiesgained through the developed technology and appropriate discount rates based onthe particular business’s weighted average cost of capital. Our process todetermine the fair value of inventories acquired was to estimate the sellingprice of the inventories less the sum of costs to sell and a reasonable sellingprofit allowance. We expect to complete the process of assessing if St. LouisMusic represents a separate reporting unit for purposes of measuring potentialimpairment of goodwill in 2005.

 

We believe there havebeen no additional significant changes in our critical accounting policiesduring the six months ended June 30, 2005 as compared to what waspreviously disclosed in our Form 10-K for the year ended December 31,2004.

 

**Estimatesand Assumptions Related to Financial Statements**

 

The discussion andanalysis of our financial condition and results of operations is based upon ourunaudited condensed consolidated financial statements, which have been preparedin accordance with U.S. generally accepted accounting principles for interimfinancial statements. The preparation of these condensed consolidated financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenue and expenses, and related disclosure ofcontingent assets and liabilities. On an on-going basis, we evaluate our estimates,including those affecting revenue recognition, the allowance for doubtfulaccounts, inventory valuation, intangible assets, income taxes and generalbusiness contingencies. We base our estimates on historical experience and onvarious other assumptions that we believe to be reasonable under thecircumstances, the results of which form our basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions.

 

**Resultsof Operations**

 
| ** **                                  | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                  | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                   |       | $                                     | 54,290     |                                | $          | 30,531 |   | $ | 94,235 |   | $ | 56,212 |   |
| Gross profit                                |       | 15,648                                |       | 10,295                              |       | 28,983 |   | 17,207 |   |
|                                        |       |                                  |       |                                |       |   |   |   |   |
| Selling, general  and administrative        |       | 12,865                                |       | 8,492                               |       | 22,410 |   | 16,784 |   |
| Research and  development                   |       | 2,703                                 |       | 1,832                               |       | 4,658 |   | 3,804 |   |
| Total operating  expenses                   |       | 15,568                                |       | 10,324                              |       | 27,068 |   | 20,588 |   |
|                                        |       |                                  |       |                                |       |   |   |   |   |
| Other expense                               |       | (1,753                                | )          | (923                                | )          | (3,066 | ) | (1,520 | ) |
| Provision for  income taxes                 |       | 17                                    |       | 5                                   |       | 43 |   | 10 |   |
| Loss from  continuing operations            |       | (1,690                                | )          | (957                                | )          | (1,194 | ) | (4,911 | ) |
| Recognized gain  on discontinued operations |       | —                                |       | —                              |       | 2,827 |   | — |   |
| Net income  (loss)                          |       | $                                     | (1,690     | )                                   | $          | (957 | ) | $ | 1,633 |   | $ | (4,911 | ) |

 

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Three Months Ended June 30,2005 vs. Three Months Ended June 30, 2004

 

*NetSales*

 

Net sales from continuingoperations increased by 78.0% to $54.3 million during the three months ended June 30,2005 from $30.5 million in the comparable period in 2004.  $19.0 million of this increase related to theacquisition of St. Louis Music.  Theremaining increase primarily related to increased product availability from ourcontract manufacturers and the introduction of new products.

 

Sales for the threemonths ended June 30, 2005 are indicative of what is projected for futureperiods as it includes a complete quarter of sales from St. Louis Music.

 

*GrossProfit*

 

Gross profit increased to$15.6 million, or 28.7% of net sales, in the three months ended June 30,2005 from $10.3 million, or 33.8% of net sales, in the three months ended June 30,2004.   $2.4 million, or 4.4% of net sales, of the decline in grossmargin percentage is a result of the impact of recording St. Louis Music’sinventories at fair value as a result of the purchase price allocation of St.Louis Music.

 

We expect gross marginpercentages to increase to the 31% to 35% range in future periods as we havenow sold the St. Louis Music inventory that was recorded at estimated sellingprices less costs to sell and a reasonable selling profit allowance as of thedate of acquisition.

 

*Selling,General and Administrative*

 

Selling, general andadministrative expenses increased by $4.4 million, or 51.8%, to $12.9 millionin the three months ended June 30, 2005 from $8.5 million in thecomparable period in 2004, of which $3.7 million was due to the acquisition ofSt. Louis Music.  The remaining increasewas primarily due to higher marketing and tradeshow expenses, as well as highercommissions due to increased sales. These higher expenses were partially offsetby a reduction in telephone, utility and insurance expense, as well as theelimination of our foreign subsidiaries.

 

Selling, general and administrativeexpenses for the three months ended June 30, 2005 are indicative of whatis projected for future periods as it includes a complete quarter of expensesfrom St. Louis Music.

 

*Researchand Development*

 

Research and developmentexpenses increased by $0.9 million, or 50.0%, to $2.7 million in the threemonths ended June 30, 2005 from $1.8 million in the three months ended June 30,2004, of which $0.6 million was due to the acquisition of St. Louis Music.  We have and will continue to invest in new productsand improvements to existing products. Therefore, we anticipate our research and development costs will behigher the remainder of 2005 compared to 2004.

 

*OtherIncome (Expense)*

 

Net other expense was$1.8 million for the three months ended June 30, 2005 as compared to $0.9million in the three months ended June 30, 2004, an increase of $0.9million or 100.0%.  The primary cause ofthis fluctuation was due to the acquisition of St Louis Music.  Net interest expense and management fees forthe quarter for St. Louis Music were $0.6 million and $0.1 millionrespectively.  Management fees are paidto Sun Capital Partners Management, LLC quarterly and are calculated as thegreater of $400,000 annually or 6% of EBITDA, not to exceed $1,000,000 peryear.

 

*IncomeTaxes*

 

Income tax expense forthe second quarter of 2005 was $17,000 compared to $5,000 for the comparableperiod in 2004.  The primary componentsof the 2005 tax are from our Canadian subsidiary and also from the deferred taxexpense recorded as a result of the goodwill that we are able to amortize fortax purposes only from the St. Louis Music, Inc. acquisition.  The 2004 taxes primarily relate to ournon-U.S. subsidiaries.  No benefit wasrecognized in connection with our 2004 losses as recognition of such benefitsdepended on future profits, which were not assumed.

 

17

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***Six Months Ended June 30, 2005 vs. Six Months Ended June 30,2004***

 

*NetSales*

 

Net sales from continuingoperations increased by 67.6% to $94.2 million during the six months ended June 30,2005 from $56.2 million in the comparable period in 2004.  $25.1 millionof this increase related to the acquisition of St. Louis Music.  The remaining increase in sales primarilyrelated to increased product availability from our contract manufacturers andthe introduction of new products.

 

*GrossProfit*

 

Gross profit increased to$29.0 million, or 30.8% of net sales, in the six months ended June 30,2005 from $17.2 million, or 30.6% of net sales, in the six months ended June 30,2004.  $3.9 million of this increaserelated to the acquisition of St. Louis Music. This $3.9 million increase was net of $2.4 million, or 2.6% of netsales, for the impact of recording St. Louis Music inventories at estimated sellingprices less costs to sell and a reasonable selling profit allowance as of thedate of acquisition. Before this St. Louis Music inventory adjustment, thegross margin percentage was 33.3%.  Thisimprovement is primarily a result of lower costs in outsourcing our productionoverseas.

 

*Selling,General and Administrative*

 

Selling, general andadministrative expenses increased by $5.6 million, or 33.3%, to $22.4 millionin the six months ended June 30, 2004 from $16.8 million in the comparableperiod in 2004, of which $4.9 million was due to the acquisition of St. LouisMusic.  The remaining increase wasprimarily due to higher marketing expenses and higher commission expense as aresult of higher revenues, partially offset by decreases in telephone and utilityexpenses, lower professional fees and lower allowances due to an improvedaccounts receivable aging.

 

*Researchand Development*

 

Research and developmentexpenses increased by $0.9 million, or 23.7%, to $4.7 million in the six monthsended June 30, 2005 from $3.8 million in the six months ended June 30,2004, of which $0.7 million relates to the acquisition of St. Louis Music.

 

*OtherIncome (Expense)*

 

Net other expense was$3.1 million for the six months ended June 30, 2005 as compared to netother expense of $1.5 million in the six months ended June 30, 2004, anincrease of $1.6 million or 106.7%.  $0.9million of this increase relates to the acquisition of St. Louis Music, Inc.  Excluding St. Louis Music, the remainingincrease is due to increases in management fees of $0.4 million (due to higherEBITDA), foreign exchange transaction loss of $0.3 million (compared to foreignexchange transaction gain of $13,000 in the six months ended June 30,2004) and a decrease in other income of $0.3 million ($0.2 million related tothe sale of fixed assets in the 2004 period). This was partially offset by a decrease in interest expense of $0.2million (due to the conversion of Sun Mackie, LLC debt to equity).

 

*IncomeTaxes*

 

Income tax expense forthe first six months of 2005 was $43,000 compared to $10,000 for the comparableperiod in 2004.  The primary componentsof the 2005 tax are applying the Alternative Minimum Tax rate to the taxableincome we are unable to apply towards our NOL’s for our U.S. entities, deferredtax expense recorded as a result of the goodwill that we are able to amortizefor tax purposes only from the St. Louis Music, Inc. acquisition and taxexpense related to our Canadian subsidiary. The 2004 taxes primarily relate to our non-U.S. subsidiaries.  No benefit was recognized in connection withour 2004 losses as recognition of such benefits depended on future profits,which were not assumed.

 

*RecognizedGain on Discontinued Operations*

 

In March 2005, werecognized a $2.8 million gain from the discontinued operations of our formerItalian subsidiary, net of tax of $0.1 million. This gain was a result of a settlement agreement with Mackie Italy tosettle the net outstanding amounts owed by the Company.

 

18

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**Liquidityand Capital Resources**

 

On March 4, 2005, inaccordance with the acquisition agreement, we acquired all of the shares of St.Louis Music, Inc., a Missouri-based manufacturer, distributor and importerof branded musical instruments and professional audio products.  The Company believes the acquisition willfurther diversify the Company’s product offerings and to help acquire, retainand extend relationships with customers.

 

In February 2005, wemade an offer to Mackie Italy to settle any outstanding amounts owed by theCompany for $4.7 million.  This proposalwas accepted by the Italian court appointed trustee on behalf of Mackie Italy inMay 2005.  Under the terms of thesettlement agreement, we issued a stand-by letter of credit to Mackie Italy for$1.0 million, and we committed to make further payments of $1.5 million duringthe remainder of 2005 and $2.2 million during 2006.  We recognized a gain on discontinuedoperations of $2.9 million in the first quarter of 2005.  During the second quarter of 2005, payment of$1.0 million was made by the letter of credit, along with an additional paymentof $0.5 million.

 

As of June 30, 2005,we had cash and cash equivalents of $930,000 and total debt and short-termborrowings of $59.8 million.  At June 30, 2005 we had availability of$4.7 million on our revolving line of credit, and $2.9 million on our demandline of credit.

 

*NetCash from Operating Activities*

 

Cash provided inoperating activities was $0.3 million in the six months ended June 30, 2005,compared to $1.7 million for the comparable period in 2004.  The reduction in cash provided by operatingactivities in the first six months of 2005 was primarily attributable to adecrease of $8.4 million in accounts payable and other accrued expenses, andthe $2.9 million recognized gain on discontinued operations of Mackie Italy,partially offset by a $8.7 million decrease in inventories and prepaid andother current assets, $1.6 million in net income, net of $2.3 million ofdepreciation and amortization.  Net cashprovided by operating activities in the first six months of 2004 was primarilyattributable to decreases in inventories and other assets along with anincrease to accounts payable and accrued liabilities offset by $4.9 million innet loss, net of $1.6 million in depreciation and amortization and an increasein accounts receivable and prepaid expenses and other current assets.

 

* NetCash Used in Investing Activities*

 

Cash used in investingactivities was $35.9 million for the first six months of 2005 compared to $0.6million for the first six months of 2004. $35.2 million of the cash used ininvesting activities in 2005 related to the acquisition of St. LouisMusic.  Additionally in 2005 and 2004,$0.7 million and $1.4 million respectively, consisted of purchases of capitalexpenditures for tooling used in manufacturing by our contractmanufacturers.  In 2004, this amount wasoffset by cash received of $0.8 million from the sale of manufacturingequipment in our Woodinville location.

 

As part of our thirdparty manufacturing agreements, many of our contract manufacturers require thatwe invest in tooling equipment prior to the start of manufacture. Accordingly, we anticipate capital spending at the same level or higher in eachof the remaining quarters of 2005.

 

*NetCash Provided by (Used in) Financing Activities*

 

Cash provided byfinancing activities was $36.1 million during the first six months of 2005,compared to cash used of $1.5 million during the first six months of2004.  Financing activities in 2005 related primarily to a new $40 milliondemand credit facility of which $36.2 million was used to finance theacquisition of and provide working capital for St. Louis Music.  This increase was offset by payments on ourdebt of $0.1 million.  Financingactivities during the six months ended June 30, 2004 relate primarily topayments on our term loan.

 

19

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*Paymentsand Proceeds from Long-term Debt, Line of Credit and Other Short-termBorrowings*

 

We have outstandingborrowings of $36.7 million on a revolving short-term demand credit facility asof June 30, 2005, guaranteed by Sun Capital Partners III QP, LP, tofinance the acquisition of and provide working capital for St. Louis Music.

 

Under the terms of theline of credit and subordinated loan agreements, we are required to maintaincertain financial ratios, such as a cumulative EBITDA calculation. Theagreements also provide, among other matters, restrictions on additionalfinancing, dividends, mergers, acquisitions, a daily minimum excessavailability amount and an annual capital expenditure limit.

 

Our continued liquidityis dependent upon the following key factors:

 

*Abilityto stay in compliance with debt covenants*

 

We entered intoamendments of our line of credit and term loans in April, August and October of2004, to revise our debt covenants.  The key financial covenants areachievement of certain EBITDA targets for the term of the agreement.  The October agreement requires us tomeet the EBITDA target for the previous twelve months measured quarterlybeginning March 31, 2005.  We metthis target at June 30, 2005 and believe we will meet this target eachquarter thereafter in 2005.

 

Our subordinated debtrequires us to meet a daily minimum excess availability target of $2.0 millionon our revolving line of credit.  Wefailed to meet this target on April 27, 2005.  By not meeting this target, we were notrequired to make the April interest payment on our subordinated debt and thesubordinated debt holder could charge us a default interest rate of 13%.  We requested and our senior debt holder grantedus permission to make the April interest payment.

 

*Commitments*

 

We had the followingmaterial contractual commitments related to operating leases for equipmentfacilities at June 30, 2005.  In addition, we had materialobligations related to short-term and long-term debt arrangements, excludingour accounts payable, accrued liabilities and taxes payable of $23.2 million atJune 30, 2005:

 
| ** **                                | ** ** | **Payments due by Period** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|
| ** **                                | ** ** | **Total**                  | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **5+ Years** | ** ** |
| ** **                                | ** ** | **(in thousands)**         | ** ** |
|                                      |       |                       |       |   |   |   |   |   |   |   |   |
| Operating leases                          |       | $                          | 7,540      |   | $ | 2,217 |   | $ | 2,967 |   | $ | 1,348 |   | $ | 1,008 |   |
| Lines of credit                           |       | 48,020                     |       | 48,020 |   | — |   | — |   | — |   |
| Payable to our  former Italian subsidiary |       | 3,200                      |       | 2,000 |   | 1,200 |   | — |   | — |   |
| Other  liabilities                        |       | 3,029                      |       | — |   | 3,029 |   | — |   | — |   |
| Short-term and  long-term debt            |       | 11,819                     |       | 11,819 |   | — |   | — |   | — |   |
| Total                                     |       | $                          | 73,608     |   | 64,056 |   | $ | 7,196 |   | $ | 1,348 |   | $ | 1,008 |   |
|                                           |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We believe we will haveadequate resources to meet our material obligations, subject to ourrefinancing, as they come due through December 31, 2005.

 

20

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

 

We are exposed to variousmarket risks, including changes in foreign currency rates and interest rates.We may enter into various derivative transactions to manage certain of theseexposures; however, we did not have any derivative financial instruments as of June 30,2005.

 

At June 30, 2005, wehad variable rate lines of credit with outstanding balances of $48.0 million.As such, changes in U.S. interest rates affect interest paid on debt and we areexposed to interest rate risk. For the quarter ended June 30, 2005, anincrease in the average interest rate of 10%, i.e. from 6.41% to 7.05%, wouldhave resulted in an approximately $86,000 increase in net loss before incometaxes.  The fair value of such debt approximates the carrying amount onthe consolidated balance sheet at June 30, 2005.

 

Our non-U.S. subsidiarieshave functional currencies of the U.S. dollar and are translated into U.S.dollars at exchange rates in effect at the balance sheet date. Thesesubsidiaries are located in the U.K. and Canada.  Income and expense items are translated atthe average exchange rates prevailing during the period. A 10% decrease in thevalue of the U.S. dollar compared to the local currencies of our non-U.S.subsidiaries, throughout the quarter ended June 30, 2005, would haveresulted in an approximately $70,000 increase to net loss before income taxes.

 

**Item4.  Controls and Procedures**

 

The Company maintainsdisclosure controls and procedures (as defined in Rules 13a-15(e) and15(d)-15(e) under the Securities Exchange Act of 1934, as amended, (the “ExchangeAct”)) that are designed to ensure that information required to be disclosed inthe Company’s reports under the Exchange Act, is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

The Company carried out anevaluation, under the supervision and with the participation of the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the Company’s “disclosure controls andprocedures” as of the end of the period covered by this report, pursuant to Rules 13a-15(b) and15d-15(e) under the Exchange Act. Based on that evaluation, the Company’s Chief Executive Officer andChief Financial Officer have concluded that the Company’s disclosure controlsand procedures, as of the end of the period covered by this report, wereeffective in timely alerting them to material information relating to theCompany required to be included in the Company’s periodic SEC filings.

 

There has been no changein the Company’s internal control over financial reporting (as defined in Rules 13(a)-15(f) and15(d)-15(f) under the Exchange Act) during the period covered by thisreport that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

21

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**PART II.  OTHER INFORMATION**

 

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

 

The Company is involvedin various legal proceedings and claims that arise in the ordinary course ofbusiness.  The outcome of any such matteris currently not determinable.

 

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

 

None.

 

**Item3.  Defaults upon Senior Securities**

 

The Company’ssubordinated debt requires us to meet a daily minimum excess availabilitytarget of $2.0 million on our revolving line of credit.  We failed to meet this target on April 27,2005. By not meeting this target, we were not required to make the Aprilinterest payment on our subordinated debt and the subordinated debt holdercould charge us a default interest rate of 13% we requested and our senior debtholder granted us permission to make the April interest payment and to waivethe default interest rate.

 

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

 

(a) Our annual meeting ofshareholders was held on May 26, 2005.

 

(b) At the annual meeting, James T. Engen, Jon W. Gacek and R. LynnSkillen were elected to serve as Class 1 directors for a three year term andJason H. Neimark was elected to serve as a Class 2 director for a one yearterm.  Marc J. Leder, Rodger R. Krouse,and T. Scott King continue to serve as Class 2 directors and will be up forre-election at the 2006 annual meeting. C. Daryl Hollis, George R. Rea and Clarence E. Terry continue to serveas Class 3 directors and will be up for re-election at the 2007 annual meeting.

 

(c) The results of voting for the election of directors at the annualmeeting were as follows:

 
| **Nominee**      | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|------------------|------------|------------|------------|--------------|------------|
| James T. Engen   |       | 21,091,337 |       | 26,875       |       |
| Jon W. Gacek     |       | 21,085,537 |       | 32,675       |       |
| R. Lynn Skillen  |       | 21,081,437 |       | 36,775       |       |
| Jason H. Neimark |       | 21,085,437 |       | 32,775       |       |

 

**Item 5.  Other Information**

 

None.

 

**Item 6.  Exhibits**

 

Exhibits

 

10.5.4 Consent ofWachovia Capital Finance (senior debt holder) to make April interest payment onour subordinated debt with U.S. Bank National Association after failing to meetthe minimum excess availability requirement as defined in the Second Amendedand Restated Subordinated Credit Agreement between U.S. Bank National Associationand Loud Technologies, Inc.

 

31.1 Certification ofChief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.

 

31.2 Certification ofChief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.

 

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

 

22

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**SIGNATURES**

 

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

 

 
|                               |   | **LOUD  Technologies Inc.**                                                                                         |
|------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|
|                               |   | (Registrant)                                                                                                        |
|                               |   |                                                                                                                |
| Dated:  August 15,  2005 | By:    | /s/ James T. Engen                                                                                                  |
|                               |   | James T. Engen                                                                                                      |
|                               |   | *President,  Chief Executive Officer and  Director*                                                                 |
|                               |   |                                                                                                                |
| Dated:  August 15,  2005 | By:    | /s/ Timothy P. O’Neil                                                                                          |
|                               |   | Timothy P. O’Neil                                                                                              |
|                               |   | *Chief  Financial Officer, Vice  President, Secretary and  Treasurer (Principal Financial and  Accounting Officer)* |

 

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**EXHIBIT INDEX**

 
| **Exhibit   Number** | ** ** | **Document Description**                                                                                                                                                                                                                                                                                                                                                   |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.5.4               |       | Consent of  Wachovia Capital Finance (senior debt holder) to make April interest payment  on our subordinated debt with U.S. Bank National Association after failing to  meet the minimum excess availability requirement as defined in the Second Amended  and Restated Subordinated Credit Agreement between U.S. Bank National Association  and Loud Technologies, Inc. |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 31.1                 |       | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 31.2                 |       | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 32.1                 |       | Certification Pursuant  to Section 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                           |

 

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