###### **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 September 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)  487-4333**                                             |
| (Registrant’s  telephone number, including area code)      |

 

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 by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange 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** | ** ** | **22,831,048**                 |
|---------------------------------|------------|--------------------------------|
| Class                           |       | Number of Shares  Outstanding  |
|                            |       | (as of October 31,  2005) |

 

 

----

 

**LOUDTECHNOLOGIES INC.**

 

**FORM 10-Q**

**Forthe quarter ended September 30, 2005**

 

**INDEX**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                                 |   |
|-------------------|-------------------------------------------------------------------------------------------------------------------------------------------|--------|
|              |                                                                                                                                      |   |
| Item 1.           | Financial Statements  (Unaudited)                                                                                                         |   |
|              |                                                                                                                                      |   |
|              | Condensed Consolidated  Balance Sheets as of September 30, 2005 and December 31, 2004                                           |   |
|              |                                                                                                                                      |   |
|              | Condensed Consolidated  Statements of Operations for the three and nine months ended September 30,  2005 and September 30, 2004 |   |
|              |                                                                                                                                      |   |
|              | Condensed Consolidated  Statements of Cash Flows for the nine months ended September 30, 2005  and September 30, 2004           |   |
|              |                                                                                                                                      |   |
|              | Condensed Consolidated  Statements of Shareholders’ Equity for the nine months ended September 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

----

 

**LOUDTECHNOLOGIES INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 

*(Inthousands, except share amounts)*

 
| ** **                                                                                                                                                        | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                        | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                   |       |                         |       |                        |       |
| Cash  and cash equivalents                                                                                                                                        |       | $                            | 409        |                        | $          | 450 |   |
| Accounts  receivable, net of allowances of $2,155 and $1,671, respectively                                                                                        |       | 30,253                       |       | 16,800                      |       |
| Income  taxes receivable                                                                                                                                          |       | —                       |       | 30                          |       |
| Inventories                                                                                                                                                       |       | 41,195                       |       | 27,959                      |       |
| Prepaid  expenses and other current assets                                                                                                                        |       | 2,510                        |       | 2,861                       |       |
| Total  current assets                                                                                                                                             |       | 74,367                       |       | 48,100                      |       |
|                                                                                                                                                              |       |                         |       |                        |       |
| Property, plant and  equipment, net                                                                                                                               |       | 8,764                        |       | 7,381                       |       |
| Goodwill                                                                                                                                                          |       | 862                          |       | —                      |       |
| Other intangible  assets, net                                                                                                                                     |       | 12,426                       |       | 5,128                       |       |
| Deferred financing  costs paid to related party                                                                                                                   |       | 835                          |       | —                      |       |
| Other assets                                                                                                                                                      |       | 2,234                        |       | 186                         |       |
| Total  assets                                                                                                                                                     |       | $                            | 99,488     |                        | $          | 60,795 |   |
|                                                                                                                                                              |       |                         |       |                        |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                     |       |                         |       |                        |       |
| Current liabilities:                                                                                                                                              |       |                         |       |                        |       |
| Short-term  borrowings                                                                                                                                            |       | $                            | 17,433     |                        | $          | 11,826 |   |
| Accounts  payable                                                                                                                                                 |       | 13,307                       |       | 17,679                      |       |
| Accrued  liabilities                                                                                                                                              |       | 10,225                       |       | 6,972                       |       |
| Taxes  payable                                                                                                                                                    |       | 1,335                        |       | 1,466                       |       |
| Current  portion of long-term debt                                                                                                                                |       | 2,645                        |       | 300                         |       |
| Current  portion of payable to former Italian subsidiary                                                                                                          |       | 2,000                        |       | 7,587                       |       |
| Total  current liabilities                                                                                                                                        |       | 46,945                       |       | 45,830                      |       |
|                                                                                                                                                              |       |                         |       |                        |       |
| Long-term debt,  excluding current portion                                                                                                                        |       | 41,605                       |       | 11,612                      |       |
| Long term portion of  payable to former Italian subsidiary                                                                                                        |       | 700                          |       | —                      |       |
| Other liabilities                                                                                                                                                 |       | 2,910                        |       | 33                          |       |
| Total  liabilities                                                                                                                                                |       | 92,160                       |       | 57,475                      |       |
|                                                                                                                                                              |       |                         |       |                        |       |
| 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 22,831,048  at September 30, 2005 and 22,138,191 at December 31, 2004 |       | 40,774                       |       | 38,778                      |       |
| Accumulated  deficit                                                                                                                                              |       | (33,446                      | )          | (35,458                     | )          |
| Total  shareholders’ equity                                                                                                                                  |       | 7,328                        |       | 3,320                       |       |
| Total  liabilities and shareholders’ equity                                                                                                                  |       | $                            | 99,488     |                        | $          | 60,795 |   |

 

*Seeaccompanying Notes to Condensed Consolidated Financial Statements.*

 

3

----

 

**LOUDTECHNOLOGIES INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 

*(In thousands, except forper share data)*

 
| ** **                                                               | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                               | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                     |       |                                       |       |                                      |       |   |   |   |   |
| Net sales                                                                |       | $                                          | 53,987     |                                      | $          | 31,041 |   | $ | 148,222 |   | $ | 87,253 |   |
| Cost of sales                                                            |       | 35,781                                     |       | 20,693                                    |       | 101,033 |   | 59,698 |   |
| Gross  profit                                                            |       | 18,206                                     |       | 10,348                                    |       | 47,189 |   | 27,555 |   |
|                                                                     |       |                                       |       |                                      |       |   |   |   |   |
| Operating expenses:                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Selling,  general and administrative                                     |       | 12,669                                     |       | 7,841                                     |       | 35,079 |   | 24,625 |   |
| Research  and development                                                |       | 2,744                                      |       | 1,716                                     |       | 7,402 |   | 5,520 |   |
| Total  operating expenses                                                |       | 15,413                                     |       | 9,557                                     |       | 42,481 |   | 30,145 |   |
|                                                                     |       |                                       |       |                                      |       |   |   |   |   |
| Operating  income (loss)                                                 |       | 2,793                                      |       | 791                                       |       | 4,708 |   | (2,590 | ) |
|                                                                     |       |                                       |       |                                      |       |   |   |   |   |
| Other income (expense):                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Interest  income                                                         |       | 82                                         |       | 1                                         |       | 215 |   | 12 |   |
| Interest  expense                                                        |       | (1,525                                     | )          | (625                                      | )          | (3,829 | ) | (2,268 | ) |
| Management  fee                                                          |       | (349                                       | )          | (100                                      | )          | (915 | ) | (300 | ) |
| Other                                                                    |       | (621                                       | )          | (669                                      | )          | (950 | ) | (357 | ) |
| Total  other (expense)                                                   |       | (2,413                                     | )          | (1,393                                    | )          | (5,479 | ) | (2,913 | ) |
|                                                                     |       |                                       |       |                                      |       |   |   |   |   |
| Income  (loss) before income taxes and discontinued operations           |       | 380                                        |       | (602                                      | )          | (771 | ) | (5,503 | ) |
|                                                                     |       |                                       |       |                                      |       |   |   |   |   |
| Provision for income  taxes                                              |       | 1                                          |       | 1                                         |       | 44 |   | 11 |   |
|                                                                     |       |                                       |       |                                      |       |   |   |   |   |
| Income  (loss) from continuing operations                                |       | 379                                        |       | (603                                      | )          | (815 | ) | (5,514 | ) |
|                                                                     |       |                                       |       |                                      |       |   |   |   |   |
| Gain  on discontinued operations, net of income tax expense of $58       |       | —                                     |       | —                                    |       | 2,827 |   | — |   |
|                                                                     |       |                                       |       |                                      |       |   |   |   |   |
| Net  income (loss)                                                       |       | $                                          | 379        |                                      | $          | (603 | ) | $ | 2,012 |   | $ | (5,514 | ) |
|                                                                     |       |                                       |       |                                      |       |   |   |   |   |
| Basic  and diluted net income (loss) per share:                          |       |                                       |       |                                      |       |   |   |   |   |
| Basic  and diluted net income (loss) from continuing operations          |       | $                                          | 0.02       |                                      | $          | (0.03 | ) | $ | (0.03 | ) | $ | (0.26 | ) |
| Basic  and diluted net income from discontinued operations               |       | —                                     |       | —                                    |       | 0.12 |   | — |   |
|                                                                     |       |                                       |       |                                      |       |   |   |   |   |
| Basic  and diluted net income (loss) per share:                          |       | $                                          | 0.02       |                                      | $          | (0.03 | ) | $ | 0.09 |   | $ | (0.26 | ) |
|                                                                     |       |                                       |       |                                      |       |   |   |   |   |
| Shares  used in computing basic and diluted net income (loss) per share: |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                                                    |       | 23,866                                     |       | 22,482                                    |       | 23,712 |   | 21,425 |   |
| Diluted                                                                  |       | 24,886                                     |       | 22,482                                    |       | 23,712 |   | 21,425 |   |

 

*Seeaccompanying Notes to Condensed Consolidated Financial Statements.*

 

4

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**LOUDTECHNOLOGIES INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                                    | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                                                                                                    | ** ** | **(In thousands)**                        | ** ** |
| **Operating activities**                                                                                      | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Net income (loss)                                                                                             |       | $                                         | 2,012      |   | $ | (5,514 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities:                     |       |                                      |       |   |   |
| Depreciation  and amortization                                                                                |       | 3,639                                     |       | 2,374 |   |
| Non-cash  interest expense                                                                                    |       | 57                                        |       | 88 |   |
| Gain  on asset dispositions                                                                                   |       | —                                    |       | (225 | ) |
| Deferred  stock compensation                                                                                  |       | 44                                        |       | 44 |   |
| Loss  on conversion of debt to equity                                                                         |       | —                                    |       | 558 |   |
| Gain  on discontinued operations                                                                              |       | (2,885                                    | )          | — |   |
| Changes  in operating assets and liabilities, net of business acquired:                                       |       |                                      |       |   |   |
| Accounts  receivable                                                                                          |       | (1,365                                    | )          | (963 | ) |
| Inventories                                                                                                   |       | 5,460                                     |       | 2,680 |   |
| Prepaid  expenses and other current assets                                                                    |       | 1,185                                     |       | (1,060 | ) |
| Other  assets                                                                                                 |       | 233                                       |       | 346 |   |
| Accounts  payable and accrued liabilities                                                                     |       | (7,062                                    | )          | 4,309 |   |
| Taxes  payable                                                                                                |       | (131                                      | )          | (48 | ) |
| Other  liabilities                                                                                            |       | 71                                        |       | (30 | ) |
| Net  cash provided by operating activities                                                                    |       | 1,258                                     |       | 2,559 |   |
|                                                                                                          |       |                                      |       |   |   |
| **Investing activities**                                                                                      | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Purchases of property,  plant and equipment                                                                   |       | (994                                      | )          | (1,826 | ) |
| Proceeds from sales of  property, plant and equipment                                                         |       | —                                    |       | 823 |   |
| Acquisition of St.  Louis Music, Inc., including transaction fees paid                                   |       | (35,339                                   | )          | — |   |
| Net  cash used in investing activities                                                                        |       | (36,333                                   | )          | (1,003 | ) |
|                                                                                                          |       |                                      |       |   |   |
| **Financing activities**                                                                                      | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Payments on existing  long-term debt                                                                          |       | (11,969                                   | )          | (1,640 | ) |
| Issuance of long-term  debt                                                                                   |       | 44,250                                    |       | — |   |
| Net borrowings on line  of credit                                                                             |       | 17,433                                    |       | — |   |
| Net payment on existing  credit facility                                                                      |       | (11,826                                   | )          | — |   |
| Financing costs  associated with debt issuance                                                                |       | (3,616                                    | )          |   |   |
| Net proceeds from stock  sales and exercise of stock options                                                  |       | 762                                       |       | — |   |
| Payments on debt  conversion costs                                                                            |       | —                                    |       | (50 | ) |
| Net payments on  short-term borrowings                                                                        |       | —                                    |       | (310 | ) |
| Net  cash provided by (used in) financing activities                                                          |       | 35,034                                    |       | (2,000 | ) |
|                                                                                                          |       |                                      |       |   |   |
| Decrease in cash and  cash equivalents                                                                        |       | (41                                       | )          | (444 | ) |
|                                                                                                          |       |                                      |       |   |   |
| Cash and cash  equivalents at beginning of period                                                             |       | 450                                       |       | 757 |   |
| Cash and cash  equivalents at end of period                                                                   |       | $                                         | 409        |   | $ | 313 |   |
|                                                                                                          |       |                                      |       |   |   |
| **Supplemental schedule of noncash financing and  investing activities**                                 |       |                                      |       |   |   |
| Conversion of note  payable and accrued interest to equity                                                    |       | $                                         | —     |   | $ | 4,436 |   |
| Accrued interest  converted to note payable                                                                   |       | $                                         | —     |   | $ | 912 |   |
|                                                                                                          |       |                                      |       |   |   |
| **Other supplemental disclosures**                                                                            |       |                                      |       |   |   |
| Payoff  of existing line of credit relating to St. Louis Music, Inc. by  borrowings under line of credit |       | $                                         | 39,313     |   | $ | — |   |

 

*Seeaccompanying Notes to Condensed Consolidated Financial Statements.*

 

5

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**LOUDTECHNOLOGIES INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

**Ninemonths ended September 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                              |       | —           |       | 44              |       | —      |       | 44 |   |
| Shares issued-  acquisition of St. Louis Music, Inc. |       | 397              |       | 1,190           |       | —      |       | 1,190 |   |
| Issuance in connection  with debt refinance               |       | 258              |       | 750             |       | —      |       | 750 |   |
| Net income                                                |       | —           |       | —          |       | 2,012       |       | 2,012 |   |
| Balance at September 30,  2005                       |       | 22,831           |       | $               | 40,774     |        | $          | (33,446 | ) | $ | 7,328 |   |

 

*Seeaccompanying Notes to Condensed Consolidated Financial Statements.*

 

6

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**LOUDTECHNOLOGIES INC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**September 30,2005**

**(Unaudited)**

 

**1.****      Descriptionof Business**

 

We develop, manufactureand sell high-quality, affordable digital and analog audio mixers, speakers,guitar and bass amplifiers, branded musical instruments and related accessories,and other professional audio equipment on a worldwide basis. Our products areused by both professional and amateur musicians; school music programs; soundinstallation contractors and broadcast professionals in sound recordings, livepresentation systems and installed sound systems. We distribute our productsprimarily through retail dealers, mail order outlets and installed soundcontractors.  We have our primaryoperations in the United States with smaller operations in the United Kingdom,Canada, China and Japan.

 

On August 29, 2005we completed a refinancing of our credit facilities with our U.S. lenders thatwere to mature in the first half of 2006. This transaction is explained in more detail in Note 7 to thesefinancial statements.

 

On March 4, 2005, weacquired all of the shares of St. Louis Music, Inc. (“St. Louis”), aMissouri 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**

 

** Basisof Presentation**

 

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 andinclude the accounts of the Company and its subsidiaries. They do not includeall of the information and disclosures required by generally accepted accountingprinciples for complete financial statements and should be read in conjunctionwith 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.

 

7

----

 

**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.*

 

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. 123 havebeen applied:

 
| ** **                                                                        | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                        | ** ** | **(in thousands, except per share data)**  | ** ** |
|                                                                              |       |                                       |       |                                      |       |   |   |   |   |
| Net  income (loss):                                                               |       |                                       |       |                                      |       |   |   |   |   |
| As  reported                                                                      |       | $                                          | 379        |                                      | $          | (603 | ) | $ | 2,012 |   | $ | (5,514 | ) |
| Less:  Stock-based employee compensation determined under fair-value based method |       | (117                                       | )          | (220                                      | )          | (346 | ) | (623 | ) |
| Pro  forma                                                                        |       | $                                          | 262        |                                      | $          | (823 | ) | $ | 1,666 |   | $ | (6,137 | ) |
|                                                                              |       |                                       |       |                                      |       |   |   |   |   |
| Basic  net income (loss) per share:                                               |       |                                       |       |                                      |       |   |   |   |   |
| As  reported                                                                      |       | $                                          | 0.02       |                                      | $          | (0.03 | ) | $ | 0.09 |   | $ | (0.26 | ) |
| Pro  forma                                                                        |       | $                                          | 0.01       |                                      | $          | (0.04 | ) | $ | 0.07 |   | $ | (0.29 | ) |
|                                                                              |       |                                       |       |                                      |       |   |   |   |   |
| Diluted  net income (loss) per share:                                             |       |                                       |       |                                      |       |   |   |   |   |
| As  reported                                                                      |       | $                                          | 0.02       |                                      | $          | (0.03 | ) | $ | 0.09 |   | $ | (0.26 | ) |
| Pro  forma                                                                        |       | $                                          | 0.01       |                                      | $          | (0.04 | ) | $ | 0.07 |   | $ | (0.29 | ) |

 

8

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**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. customersare generally on open credit terms.  Inthe U.S., we primarily sell our products through third-party resellers andexperience individually significant annual sales volumes with major resellers.   For the three-month periods ended September 30,2005 and 2004, we had sales to one customer of $8.3 million and $4.5 million,or 15.4% and 14.5%, respectively of consolidated net sales from continuingoperations.  For the nine-month periodsended September 30, 2005 and 2004, we had sales to the same customer of$25.1 million and $10.6 million, or 16.9% and 12.1%, respectively, ofconsolidated net sales from continuing operations.

 

Many of our products arecurrently being manufactured exclusively by contract manufacturers on ourbehalf.  For the three-month periodsended September 30, 2005 and 2004, net sales of products manufactured byone manufacturer were $15.6 million and $10.1 million, or 28.9% and 32.6%,respectively of consolidated net sales from continuing operations, while netsales of products manufactured by another manufacturer were $5.3 million and$5.6 million, or 9.8% and 18.1%, respectively of consolidated net sales fromcontinuing operations.  For thenine-month periods ended September 30, 2005 and 2004, net sales ofproducts manufactured by one manufacturer were $45.1 million and $24.7 million,or 30.4% and 28.3%, respectively of consolidated net sales from continuingoperations, while net sales of products manufactured by another manufacturerwere $16.2 million and $9.5 million, or 10.9% of consolidated net sales fromcontinuing operations.

 

##### **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 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 thenine months ended September 30, 2005 and 2004, as if the Company hadapplied the fair value recognition provisions of SFAS 123 to measurecompensation expense for employee stock incentive awards.  The Company has completed a preliminaryevaluation of the impact of adopting SFAS 123R and estimates that it will havea material impact on income from operations for the year ended December 31,2006.  This estimate is based onpreliminary information available to the Company and could materially changebased on actual facts and circumstances arising 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 of 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 will assess ifthere is goodwill impairment in the fourth quarter of 2005.

 

9

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**3.****      DiscontinuedOperations**

 

 In December 2003,we placed 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 on discontinuedoperations of $2.9 million in the nine months ended September 30,2005.  During the second quarter of 2005,a payment of $1.0 million was made by the letter of credit, along with anadditional payment of $0.5 million.  Afurther payment of $0.5 million was also made in the third quarter of 2005.

 

**4.****      NetIncome (Loss) Per Share**

 

The following table setsforth the computation of basic and diluted net income (loss) per share for thethree and nine months ended September 30, 2005 and 2004. Stock optionsto purchase 1,158,000 and 3,680,000 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 3,785 vested stock options with an exerciseprice of $0.01, which are considered outstanding common shares.

 
| ** **                                                                        | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                        | ** ** | **(in thousands, except per share data)**  | ** ** |
| Numerator:                                                                        |       |                                       |       |                                      |       |   |   |   |   |
| Net  income (loss) from continuing operations                                     |       | $                                          | 379        |                                      | $          | (603 | ) | $ | (815 | ) | $ | (5,514 | ) |
| Net  income from discontinued operations                                          |       | —                                     |       | —                                    |       | 2,827 |   | — |   |
| Numerator for basic and  diluted net income (loss) per share                      |       | $                                          | 379        |                                      | $          | (603 | ) | $ | 2,012 |   | $ | (5,514 | ) |
|                                                                              |       |                                       |       |                                      |       |   |   |   |   |
| Denominator:                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Weighted  average shares outstanding                                              |       | 22,666                                     |       | 21,215                                    |       | 22,508 |   | 20,152 |   |
| Dilutive  potential common shares from outstanding stock options and warrants     |       | 1,200                                      |       | 1,267                                     |       | 1,204 |   | 1,273 |   |
| Denominator  for basic net income (loss) per share – weighted average shares |       | 23,866                                     |       | 22,482                                    |       | 23,712 |   | 21,425 |   |
|                                                                              |       |                                       |       |                                      |       |   |   |   |   |
| Basic weighted average  shares outstanding                                        |       | 23,866                                     |       | 22,482                                    |       | 23,712 |   | 21,425 |   |
| Dilutive potential  common shares from options and warrants                       |       | 1,020                                      |       | —                                    |       | — |   | — |   |
| Denominator  for diluted net income (loss) per share - weighted average shares    |       | 24,886                                     |       | 22,482                                    |       | 23,712 |   | 21,425 |   |
|                                                                              |       |                                       |       |                                      |       |   |   |   |   |
| Basic and diluted net  income (loss) per share:                                   |       |                                       |       |                                      |       |   |   |   |   |
| Continuing  operations                                                            |       | $                                          | 0.02       |                                      | $          | (0.03 | ) | $ | (0.03 | ) | $ | (0.26 | ) |
| Discontinued  operations                                                          |       | —                                     |       | —                                    |       | 0.12 |   | — |   |
| Basic and diluted net  income (loss) per share                                    |       | $                                          | 0.02       |                                      | $          | (0.03 | ) | $ | 0.09 |   | $ | (0.26 | ) |

 

10

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**5.****                                      Inventories**

 

Inventories consist ofthe following:

 
| ** **      | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **      | ** ** | **(in thousands)**           | ** ** |
| * *        | * *   | * *                     | * *   | * *                    | * *   |
| Raw materials   |       | $                            | 4,277      |                        | $          | 3,951 |   |
| Work in process |       | 1,146                        |       | 657                         |       |
| Finished goods  |       | 35,772                       |       | 23,351                      |       |
|            |       | $                            | 41,195     |                        | $          | 27,959 |   |

 

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

 

Intangible assets consistof the following:

 
| ** **                     | ** ** | **September 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 |       | (2,339                       | )          | (1,737                      | )          |
|                           |       | $                            | 12,426     |                        | $          | 5,128 |   |

 

Amortization expense forintangible assets was $228,000 and $106,000 for the three month periods ended September 30,2005 and 2004, respectively.   Amortizationexpense for intangible assets was $602,000 and $318,000 for the nine monthperiods ended September 30, 2005 and 2004, respectively.

 

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

 
| **Year  ending September 30:** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|
| 2006                                |       | $          | 832        |   |
| 2007                                |       | 816        |       |
| 2008                                |       | 816        |       |
| 2009                                |       | 816        |       |
| 2010                                |       | 771        |       |
|                                     |            |            |            |  |

 

11

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**7.****                                      Financing**

 

**(a)****                                  Short-termborrowings**

 

On August 29, 2005,a new credit facility was completed providing a $69.5 million senior securedloan facility and a $14.8 million senior subordinated note payable.  The senior secured loan facility consists ofa $40.0 million revolving loan, a $15.0 million Term Loan A, and a $14.5million Term Loan B.  In connection withthe senior subordinated note, the Company issued 257,732 shares of common stockto the subordinated lender at a per share price of $2.91.  The Company deferred $3.6 million offinancing fees associated with this debt issuance, $3.5 million of whichremained to be amortized at September 30, 2005.  Of the deferred financing fees, $0.9 millionwas paid to an affiliate of Sun Capital, a related party, as part of thistransaction.

 

Principal payments on the$29.5 million term loans under the Credit Agreement are paid quarterly. The term loans bear interest at the Bloomberg’s prime rate or LIBOR, both plusa specified margin.  This rate for TermLoan A was 7.35% and Term Loan B was 7.85% at September 30, 2005. Interest is due monthly on each term loan. The final Term Loan A principal payment is due August 29,2010.  The final Term Loan B principal isdue August 29, 2011.  Under therevolving line of credit, the Company can borrow up to $40.0 million, subjectto certain restrictions, that take effect December 31, 2005, includingavailable borrowing capacity.  Interestis due monthly or at the end of a LIBOR period (but in such case no greaterthan 3 months) and is based on Bloomberg’s prime rate or LIBOR, both plus aspecified margin.  The term loans and the line of credit are both securedby substantially all of the assets of the Company and its subsidiaries, and areboth senior to other long-term debt.  The $14.8 million in seniorsubordinated notes issued is subordinate to all amounts due under the CreditAgreement and to any refinancing thereof.  Interest accrues on the seniorsubordinated notes at a rate of 14% and is due quarterly of the 14% interestrate, up to two percent may be capitalized on each interest payment date.  The principal under the Senior SubordinatedNote Agreements is due February 29, 2012.

 

The Company’s obligationsunder the Credit Agreement and the Subordinated Note Agreements areautomatically accelerated upon certain bankruptcy or insolvency events, and maybe accelerated upon the occurrence of other events of default under the CreditAgreement and the Subordinated Note Agreement, such as non-payment ofprincipal, interest or fees when due, or failure to comply with affirmative andnegative covenants, subject to any applicable grace periods.

 

At September 30,2005, the average interest rate on the revolving line of credit was 7.6%.  At September 30, 2005, the Company hadan outstanding balance on this line of credit of $17.4 million and availableborrowing capacity of $13.0 million.

 

**(b)****                                  Long-termdebt**

 

At September 30,2005 and December 31, 2004, long-term debt consisted of the following:

 
| ** **                      | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **(in thousands)**           | ** ** |
|                            |       |                         |       |                        |       |
| U.S. term loan                  |       | $                            | —     |                        | $          | 552 |   |
| U.S. subordinated note  payable |       | —                       |       | 11,360                      |       |
| Term Loan A                     |       | 15,000                       |       | —                      |       |
| Term Loan B                     |       | 14,500                       |       | —                      |       |
| Subordinated note  payable      |       | 14,750                       |       | —                      |       |
|                            |       | 44,250                       |       | 11,912                      |       |
| Less: current portion           |       | (2,645                       | )          | (300                        | )          |
| Long-term portion of  debt      |       | $                            | 41,605     |                        | $          | 11,612 |   |

 

12

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**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.

 

The warranty liability issummarized as follows (in thousands):

 
| ** **                     | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **(in thousands)**                        | ** ** |
| Balance, beginning of  period  |       | $                                         | 1,240      |                                     | $          | 978 |   | $ | 978 |   | $ | 1,081 |   |
| Charged to cost of  sales      |       | 654                                       |       | 585                                      |       | 1,605 |   | 1,908 |   |
| Increase from sum  acquisition |       | —                                    |       | —                                   |       | 290 |   | — |   |
| Applied to liability           |       | (669                                      | )          | (585                                     | )          | (1,648 | ) | (2,011 | ) |
| Balance, end of period         |       | $                                         | 1,225      |                                     | $          | 978 |   | $ | 1,225 |   | $ | 978 |   |

 

**9.****                                      Commitments andContingencies**

 

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, weentered into a new operating lease for our corporate headquarters and warehousethat expires in December 2011.  Thetotal future lease payments are $4.2 million.

 

13

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

 

On March 4, 2005, weacquired all of the shares of St. Louis Music, Inc. (“St. Louis”), aMissouri-based manufacturer, distributor and importer of branded musicalinstruments and professional audio products. The Company believes the acquisition of St. Louis Music will furtherdiversify the Company’s product offerings to help acquire, retain and extendrelationships with customers.  Our totalpurchase consideration was approximately $43.3 million, consisting of $33.7million in cash, a commitment to pay $3.0 million, plus interest in two yearsthe present value of which as of the acquisition date was $2.8 million, 396,792shares of the Company’s common stock, assumed liabilities of $3.9 million andestimated transaction costs of $1.7 million. The $3.0 million future commitment plus accrued interest is guaranteedby a standby letter of credit issued in September 2005. The St. LouisMusic acquisition was conducted through SLM Merger Corp., an indirect whollyowned subsidiary of the Company. Included in the Company’s results of operations are the operations ofSt. Louis Music for the period March 5through September 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                                                                                       |   | 862    |   |
| 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                                                                                   |   | $      | 43,276 |   |
|                                                                                           |   |   |   |
| Accounts payable                                                                               |   | $      | 2,610  |   |
| Accrued liabilities  (including remaining amount due to sellers and accrued transaction costs) |   | 4,137  |   |
|                                                                                           |   |   |   |
| Total liabilities                                                                              |   | 6,747  |   |
|                                                                                           |   |   |   |
| Common stock issued                                                                            |   | 1,190  |   |
|                                                                                           |   |   |   |
| Cash consideration  paid, net of $88 cash acquired and including $1,633 of transaction costs   |   | $      | 35,339 |   |

 

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.

 

14

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The following unauditedpro forma information represents the results of operations for LOUD and St.Louis Music, Inc. for the three and nine months ended September 30,2005 and 2004, as if the acquisition had been consummated as of the beginningof each period presented.  Included inthe St. Louis Music net loss for the three and nine months ended September 30,2005 are $2.1 million of St. Louis Music’s transaction expenses that relate tothe sale of 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 COMBINED**

**Statementof Operations Data**

**(Inthousands, except per share data)**

 
| ** **                         | ** ** | **For the three months ended September 30, 2005** | ** ** | **For the three months ended September 30, 2004** | ** ** |
|------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                         | ** ** | **LOUD**                                               | ** ** | **St. Louis  Music**                                   | ** ** | **Pro Forma  Adjustments** | ** ** | **Pro Forma  Combined** | ** ** | **LOUD** | ** ** | **St. Louis  Music** | ** ** | **Pro Forma  Adjustments** | ** ** | **Pro Forma  Combined** | ** ** |
| Net sales                          |       | $                                                      | 34,659     |                                                   | $          | 19,328 |   | $ | — |   | $ | 53,987 |   | $ | 31,041 |   | $ | 21,191 |   | $ | — |   | $ | 52,232 |   |
| Gross profit                       |       | 13,436                                                 |       | 4,770                                                  |       | — |   | 18,206 |   | 10,348 |   | 5,756 |   | (2,566 | ) | 13,538 |   |
| Net income (loss)                  |       | 425                                                    |       | (46                                                    | )          | — |   | 379 |   | (603 | ) | 1,313 |   | (3,126 | ) | (2,416 | ) |
|                               |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic  net income (loss) per share |       |                                                   |       |                                                   |       |   |   | $ | 0.02 |   |   |   |   |   |   |   | $ | (0.11 | ) |
|                                    |            |                                                        |            |                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                | ** ** | **For the nine months ended September 30, 2005** | ** ** | **For the nine months ended September 30, 2004** | ** ** |
|---------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                | ** ** | **LOUD**                                              | ** ** | **St. Louis  Music**                                  | ** ** | **Pro Forma  Adjustments** | ** ** | **Pro Forma  Combined** | ** ** | **LOUD** | ** ** | **St. Louis  Music** | ** ** | **Pro Forma  Adjustments** | ** ** | **Pro Forma  Combined** | ** ** |
| Net sales                 |       | $                                                     | 103,811    |                                                  | $          | 60,944 |   | $ | — |   | $ | 164,755 |   | $ | 87,253 |   | $ | 62,653 |   | $ | — |   | $ | 149,906 |   |
| Gross profit              |       | 38,657                                                |       | 12,636                                                |       | — |   | 51,293 |   | 27,555 |   | 16,082 |   | (2,808 | ) | 40,829 |   |
| Net income (loss)         |       | 4,893                                                 |       | (4,660                                                | )          | (340 | ) | (107 | ) | (5,514 | ) | 3,054 |   | (4,412 | ) | (6,872 | ) |
|                      |       |                                                  |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic  net loss per share |       |                                                  |       |                                                  |       |   |   | $ | 0.00 |   |   |   |   |   |   |   | $ | (0.31 | ) |
|                           |            |                                                       |            |                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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 recorded as a result of theacquisition.

 

**11.****      Subsequent Event**

 

On November 2, 2005the Company announced a 1-for-5 reverse split on the Company’s common stock.The 1-for-5 reverse stock split will be effective after the close of the marketon November 17, 2005.  Fractionalshares will not be issued.  Shareholderswho would otherwise receive a fractional share of common stock will be entitledto receive cash in lieu of fractional shares. Mellon Investor Services LLC, the Company’s transfer agent, will act asthe exchange agent.  Currently, there areapproximately 22.8 million shares of the Company’s common stock outstanding.Following the reverse stock split, the Company intends to list its common stockon the NASDAQ Capital Market.

 

15

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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 which was incorporated on November 16, 1988 underthe name Mackie Designs Inc., engineers, manufactures and markets professionalaudio reproduction and recording equipment and software under the brand namesMackie, TAPCO, SIA, EAW and EAW Commercial. We changed our name to LOUD Technologies, Inc. on September 15,2003.

 

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 August 29, 2005,a new credit facility was completed providing a $69.5 million senior securedloan facility and a $14.8 million senior subordinated note.  The senior secured loan facility consists ofa $40.0 million revolving loan, a $15.0 Term Loan A, and a $14.5 million TermLoan B.  In connection with the seniorsubordinated note, the Company issued 257,732 shares of common stock to thesubordinated lender at a per share price of $2.91.

 

On March 4, 2005, weacquired all of the shares of St. Louis Music, Inc. (“St. Louis”), aMissouri-based manufacturer, distributor and importer of branded musicalinstruments and professional audio products. The Company believes the acquisition of St. Louis Music will furtherdiversify the Company’s product offerings to help acquire, retain and extendrelationships with customers.  Our totalpurchase consideration was approximately $43.3 million consisting of $33.7 millionin cash, a commitment to pay $3.0 million, plus interest in two years thepresent value of which as of the acquisition date was $2.8 million, 396,792shares of the Company’s common stock, assumed liabilities of $3.9 million andestimated transaction costs of $1.7 million. The $3.0 million future commitment plus accrued interest is guaranteedby a standby letter of credit issued in September 2005. The St. LouisMusic acquisition was conducted through SLM Merger Corp., an indirect whollyowned subsidiary of the Company.

 

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 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.

 

16

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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 nine months ended September 30,2005.  During the second quarter of 2005,payment of $1.0 million was made by the letter of credit, along with anadditional payment of $0.5 million.  Apayment of $0.5 million was also made in the third quarter of 2005.

 

**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, and developed technology includes the use of estimatesincluding: the potential impact on operating results of the revenue estimatesfor customers 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 will assess ifthere is goodwill impairment in the fourth quarter of 2005.

 

We believe there havebeen no additional significant changes in our critical accounting policies andjudgments during the nine months ended September 30, 2005 as compared towhat was previously 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 ourestimates, including those affecting revenue recognition, the allowance fordoubtful accounts, inventory valuation, intangible assets, income taxes andgeneral business contingencies. We base our estimates on historical experienceand on various other assumptions that we believe to be reasonable under thecircumstances, the results of which form our basis for making judgments about thecarrying values of assets and liabilities that are not readily apparent fromother sources. Actual results may differ from these estimates under differentassumptions or conditions.

 

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**Resultsof Operations**

 
| ** **                                 | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                  |       | $                                          | 53,987     |                                      | $          | 31,041 |   | $ | 148,222 |   | $ | 87,253 |   |
| Gross profit                               |       | 18,206                                     |       | 10,348                                    |       | 47,189 |   | 27,555 |   |
|                                       |       |                                       |       |                                      |       |   |   |   |   |
| Selling, general and administrative        |       | 12,669                                     |       | 7,841                                     |       | 35,079 |   | 24,625 |   |
| Research and development                   |       | 2,744                                      |       | 1,716                                     |       | 7,402 |   | 5,520 |   |
| Total operating  expenses                  |       | 15,413                                     |       | 9,557                                     |       | 42,481 |   | 30,145 |   |
|                                       |       |                                       |       |                                      |       |   |   |   |   |
| Other expense                              |       | (2,413                                     | )          | (1,393                                    | )          | (5,479 | ) | (2,913 | ) |
| Provision for income taxes                 |       | 1                                          |       | 1                                         |       | 44 |   | 11 |   |
| Income (loss) from continuing operations   |       | 379                                        |       | (603                                      | )          | (815 | ) | (5,514 | ) |
| Recognized gain on discontinued operations |       | —                                     |       | —                                    |       | 2,827 |   | — |   |
| Net income (loss)                          |       | $                                          | 379        |                                      | $          | (603 | ) | $ | 2,012 |   | $ | (5,514 | ) |

 

##### **Three Months Ended September 30, 2005 vs. ThreeMonths Ended September 30, 2004**

##### ** **

*NetSales*

 

Net sales from continuingoperations increased by 74.2% to $54.0 million during the three months ended September 30,2005 from $31.0 million in the comparable period of 2004.  $19.3 million of this increase related to theacquisition of St. Louis Music, Inc. The remaining $3.7 million increase in net sales primarily related toincreased product availability from our contract manufacturers and theintroduction of new products.

 

Sales for the threemonths ended September 30, 2005 are indicative of what is projected forfuture periods.

 

*GrossProfit*

 

Gross profit increased by76.7% to $18.2 million, or 33.7% of net sales, in the three months ended September 30,2005 from $10.3 million, or 33.2% of net sales, in the three months ended September 30,2004.

 

We expect gross marginpercentages to remain in the 31% to 35% range.

 

 *Selling, General and Administrative*

 

Selling, general andadministrative expenses increased by 62.8% to $12.7 million during the three monthsended September 30, 2005 from $7.8 million in the comparable period of2004, of which $3.5 million was due to the acquisition of St. Louis Music, Inc.  The remaining increase was primarily due tohigher marketing and tradeshow expenses, as well as higher commissions andbonus accruals due to increased sales.

 

Selling, general andadministrative expenses for the three months ended September 30, 2005 areindicative of what is projected for future periods.

 

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*Researchand Development*

 

Research and developmentexpenses increased by 58.8% to $2.7 million in the three months ended September 30,2005 from $1.7 million in the comparable period of 2004, of which $0.6 millionwas due to the acquisition of St. Louis Music, Inc.  We have and will continue to invest in newproducts and improvements to existing products. Therefore, we anticipate our research and development costs will behigher for the remainder of 2005 compared to 2004.

 

*OtherIncome (Expense)*

 

Net other expenseincreased by 71.4% to $2.4 million for the three months ended September 30,2005, from $1.4 million in the comparable period of 2004.  The primary cause of this fluctuation was dueto the acquisition of St Louis Music, Inc. Net interest expense and management fees for the quarter for St. LouisMusic, Inc. were $0.5 million and $0.1 million respectively.  The remaining differences were due to anincrease in interest expense of $0.3 million due to the refinancing of ourcredit facilities and an increase in management fees of $0.1 million.  Other expense remained at $0.6 million.  For the third quarter of 2005 these expensesrelated to fees associated with refinancing our existing debt.  For the third quarter of 2004 these expensesrelated to a loss on conversion of debt to equity.

 

*IncomeTaxes*

 

No benefit was recognizedin connection with our 2004 losses as recognition of such benefits depended onfuture profits, which were not assumed.

 

***Nine Months Ended September 30, 2005 vs. Nine MonthsEnded September 30, 2004***

 

*NetSales*

 

Net sales from continuingoperations increased by 69.8% to $148.2 million during the nine months ended September 30,2005 from $87.3 million in the comparable period of 2004.  $44.4 millionof this increase related to the acquisition of St. Louis Music, Inc.  The remaining increase in sales primarilyrelated to increased product availability from our contract manufacturers andthe introduction of new products.

 

*GrossProfit*

 

Gross profit increased by71.0% to $47.2 million, or 31.8% of net sales, in the nine months ended September 30,2005 from $27.6 million, or 31.6% of net sales, in the nine months ended September 30,2004.  $8.5 million of this increaserelated to the acquisition of St. Louis Music, Inc.

 

*Selling,General and Administrative*

 

Selling, general andadministrative expenses increased by 42.7% to $35.1 million in the nine monthsended September 30, 2004 from $24.6 million in the comparable period of2004, of which $8.5 million was due to the acquisition of St. Louis Music, Inc.   The remaining increase was primarily due tohigher marketing expenses and higher commission expense and bonus accruals as aresult of higher revenues, partially offset by decreases in telephone andutility expenses, lower professional fees and lower allowances for doubtfulaccounts due to an improved accounts receivable aging.

 

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*Researchand Development*

 

Research and developmentexpenses increased by 34.5% to $7.4 million in the nine months ended September 30,2005 from $5.5 million in the comparable period of 2004, of which $1.4 millionrelates to the acquisition of St. Louis Music, Inc.  We anticipate our research and developmentcosts will be higher the remainder of 2005 compared to 2004, due to investingin new products and improvements in existing products.

 

*OtherIncome (Expense)*

 

Net other expenseincreased by 89.7% to  $5.5 million forthe nine months ended September 30, 2005 from $2.9 million in thecomparable period of 2004, of which  $1.6million was due to the acquisition of St. Louis Music, Inc.  Excluding St. Louis Music, Inc., theremaining increase is due to an increase in interest expenses and other expenseof $0.6 million due to the refinancing of our credit facilities, an increase inmanagement fees of $0.4 million (due to higher EBITDA), and an increase inforeign exchange transaction loss of $0.3 million.  This was partially offset by a decrease inother expense of $0.3 million ($0.6 million related to the loss on conversionof Sun Capital debt to equity, offset partially by income from the sale offixed assets).   Management fees arepaid to Sun Capital Partners Management, LLC quarterly and are calculated asthe greater of $400,000 annually or 6% of EBITDA, not to exceed $1,000,000 peryear.  Of the $0.9 million of managementfees expensed during the first nine months, $0.8 million relates to the 2005EBITDA calculation and the remaining $0.1 million is a result of a correctionto the management fee owed for the 2004 EBITDA calculation.

 

*IncomeTaxes*

 

Income tax expense forthe first nine months of 2005 was $44,000 compared to $11,000 for thecomparable period in 2004.  The primarycomponents of the 2005 tax are applying the Alternative Minimum Tax rate to thetaxable income we are unable to apply towards our NOL’s for our U.S. entitiesand tax expense related to our Canadian subsidiary.  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.

 

*Gain onDiscontinued 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.

 

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**Liquidityand Capital Resources**

 

On August 29, 2005,a new credit facility was completed providing a $69.5 million senior securedloan facility and a $14.8 million senior subordinated note.  The senior secured loan facility consists ofa $40.0 million revolving loan, a $15.0 million Term Loan A, and a $14.5million Term Loan B.  In connection withthe senior subordinated note, the Company issued 257,732 shares of common stockto the subordinated lender at a per share price of $2.91.

 

The $29.5 million termloans under the Credit Agreement are each amortized quarterly.  The termloans bear interest at the Bloomberg’s prime rate or LIBOR, both plus aspecified margin.  This rate for Term Loan A was 7.35% and Term Loan B was7.85% at September 30, 2005.  Interest is due monthly on each termloan.  The final Term Loan A principalpayment is due August 29, 2010.  Thefinal Term Loan B principal is due August 29, 2011.  Under the revolving line of credit, theCompany can borrow up to $40.0 million, subject to certain restrictions,including available borrowing capacity. Interest is due monthly or at the end of a LIBOR period (but in suchcase no greater than 3 months) and is based on Bloomberg’s prime rate or LIBOR,both plus a specified margin.  The term loans and the line of credit areboth secured by substantially all of the assets of the Company and itssubsidiaries, and are both senior to other long-term debt.  The $14.8million in senior subordinated notes issued is subordinate to all amounts dueunder the Credit Agreement and to any refinancing thereof.  Interestaccrues on the senior subordinated notes at a rate of 14% and is due quarterlyof the 14% interest rate, up to two percent may be added to the principal oneach interest payment date.  Theprincipal under the Senior Subordinated Note Agreements is due February 29,2012.

 

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

 

In February 2005, 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 Italyin May 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, a paymentof $1.0 million was made by the letter of credit, along with an additionalpayment of $0.5 million.  We made anadditional payment of $0.5 million in the third quarter of 2005.

 

As of September 30,2005, we had cash and cash equivalents of $409,000 and total debt andshort-term borrowings of $61.7 million.  At September 30, 2005 we hadavailability of $13.0 million on our revolving line of credit, net of a $3.2million standby letter of credit issued for the commitment to pay St. LouisMusic, Inc.

 

*NetCash Provided by Operating Activities*

 

Cashprovided by operating activities was $1.2 million in the nine months ended September 30,2005, compared to $2.6 million for the comparable period of 2004.  The reduction in cash provided by operatingactivities in the first nine months of 2005 was primarily attributable to adecrease of $7.1 million in accounts payable and other accrued expenses, theincrease in accounts receivable of $1.4 million, and the $2.9 million gain ondiscontinued operations of Mackie Italy, partially offset by a $6.9 milliondecrease in inventories, prepaid and other assets, $2.0 million in net income,and $3.6 million of depreciation and amortization.  Net cash provided by operating activities inthe first nine months of 2004 was primarily attributable to decreases ininventories and other assets of $3.0 million, along with an increase toaccounts payable and accrued liabilities of $4.3 million.  These increases in cash were offset by $5.5million in net loss, which included $2.4 million in depreciation andamortization and an increase in accounts receivable and prepaid expenses andother current assets of $2.0 million.

 

21

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*NetCash Used in Investing Activities*

 

Cash used in investingactivities was $36.3 million for the first nine months of 2005 compared to $1.0million for the first nine months of 2004. $35.3 million of the cash used ininvesting activities in 2005 related to the acquisition of St. LouisMusic.  Additionally in 2005 and 2004,$1.0 million and $1.8 million respectively, consisted of purchases of capitalexpenditures used in research and development and manufacturing.  In 2004, this amount was offset by cashreceived of $0.8 million from the sale of manufacturing equipment in ourWoodinville 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 theremaining quarter of 2005.

 

*NetCash Provided by (Used in) Financing Activities*

 

Cash provided byfinancing activities was $35.0 million during the first nine months of 2005,compared to cash used of $2.0 million during the first nine months of2004.  Financing activities in 2005 related primarily to a new credit facilityof $69.5 million consisting of a revolving loan facility under which $17.4million was outstanding at September 30, 2005, a Term Loan A of $15.0million, and a Term Loan B of $14.5 million. In addition to this new credit facility, the Company obtained a seniorsubordinated note payable for $14.8 million. Along with this refinance, we paid off our existing note payable of$11.4 million, a term loan of $0.6 million, a credit facility of $11.8 million,and incurred $3.6 million in deferred financing costs.  Financing activities during the nine monthsended September 30, 2004 related primarily to payments on our term loan.

 

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

 

At September 30,2005 we had outstanding borrowings of $17.4 million on a revolving line ofcredit and $29.5 million in term loans.  In addition we had an outstanding subordinated note payable for $14.8million as of September 30, 2005.

 

Under the terms of thecredit agreements, we are required to maintain certain financial ratios, suchas certain Debt to EBITDA calculations. The agreements also provide, amongother matters, restrictions on additional financing, dividends, mergers,acquisitions, and an annual capital expenditure limit.

 

Our continued liquidityis dependent upon the following key factor:

 

*Abilityto stay in compliance with debt covenants*

 

Our new senior securedand senior subordinated loan agreements require us to meet certain financialcovenants such as capital expenditures limits and certain EBITDA targets.  The first measurement date for thesecovenants is December 31, 2005.  Webelieve we will meet these covenants on that date.

 

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*Commitments*

 

We had the followingmaterial contractual commitments related to operating leases for equipmentfacilities at September 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  $24.8 million at September 30, 2005:

 
| ** **                                                                  | ** ** | **Payments due by Period** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                  | ** ** | **Total**                  | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **5+ Years** | ** ** |
| ** **                                                                  | ** ** | **(in thousands)**         | ** ** |
|                                                                        |       |                       |       |   |   |   |   |   |   |   |   |
| Operating leases                                                            |       | $                          | 6,864      |   | $ | 1,943 |   | $ | 2,737 |   | $ | 1,344 |   | $ | 840 |   |
| Line of credit                                                              |       | 17,433                     |       | 17,433 |   | — |   | — |   | — |   |
| Payable to former Italian subsidiary                                        |       | 2,700                      |       | 2,000 |   | 700 |   | — |   | — |   |
| Future  commitment to pay former shareholders of St. Louis Music, Inc. |       | 3,180                      |       | — |   | 3,180 |   | — |   | — |   |
| Short-term and long-term debt                                               |       | 44,250                     |       | 2,645 |   | 5,290 |   | 7,790 |   | 28,525 |   |
| Total                                                                       |       | $                          | 74,427     |   | 24,021 |   | $ | 11,907 |   | $ | 9,134 |   | $ | 29,365 |   |
|                                                                             |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

With the refinancing ofour existing debt and cash flows from existing operations, we believe we willhave adequate resources to meet our obligations as they come due through December 31,2006.

 

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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 September 30,2005.

 

At September 30,2005, we had variable rate lines of credit with outstanding balances of $17.4million and a Term Loan A and Term Loan B totaling $29.5 million. As such,changes in U.S. interest rates affect interest paid on debt and we are exposedto interest rate risk. For the quarter ended September 30, 2005, anincrease in the average interest rate of 10%, i.e. from 7.58% to 8.34%, wouldhave resulted in an approximately $90,000 decrease per quarter in net incomebefore income taxes.  The fair value of such debt approximates thecarrying amount on the consolidated balance sheet at September 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 September 30, 2005, would haveresulted in an approximately $27,000 decrease to net income before incometaxes.

 

**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 outan evaluation, 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.

 

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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 of business.  The outcome of any such matter is currentlynot determinable.

 

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

 

On August 29, 2005,a new credit facility was completed providing a $69.5 million senior securedloan facility and a $14.8 million senior subordinated note payable.  The senior secured loan facility consists ofa $40.0 million revolving loan, a $15.0 million Term Loan A, and a $14.5million Term Loan B.  In connection withthe senior subordinated note, the Company issued 257,732 shares of common stockto the subordinated lender at a per share price of $2.91.

 

**Item3.  Defaults upon Senior Securities**

 

None.

 

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

 

None.

 

**Item 5.  Other Information**

 

On November 2, 2005the Company announced a 1-for-5 reverse split of the Company’s common stock.The 1-for-5 reverse stock split will be effective after the close of the marketon November 17, 2005.  Fractionalshares will not be issued.  Shareholderswho would otherwise receive a fractional share of common stock will be entitledto receive cash in lieu of fractional shares. Mellon Investor Services LLC, the Company’s transfer agent, will act asthe exchange agent. Currently, there are approximately 22.8 million shares ofthe Company’s common stock outstanding. Following the reverse stock split, theCompany intends to list its common stock on the NASDAQ Capital Market.

 

**Item 6.  Exhibits**

 

Exhibits

 

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.

 

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**SIGNATURES**

 

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

 

 
|                                 |   | **LOUD  Technologies Inc.**                                                                                         |
|--------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|
|                                 |   | (Registrant)                                                                                                        |
|                                 |   |                                                                                                                |
| Dated:  November 14,  2005 | By:    | /s/ James T. Engen                                                                                                  |
|                                 |   | James T. Engen                                                                                                      |
|                                 |   | *President,  Chief Executive Officer and  Director*                                                                 |
|                                 |   |                                                                                                                |
| Dated:  November 14,  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**                                                                                                                         |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                             |
| 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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