UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from      to

LOUD TECHNOLOGIES INC.

(Exact name of registrant 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)

N/A
(Former name or former address, if
changed since last report)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o     No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o     No þ

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer   þ (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes o      No þ

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

Common Stock, no par value		4,858,941
Class		Number of Shares Outstanding
		(as of August 12, 2008)

 

 

LOUD TECHNOLOGIES INC.

FORM 10-Q
For the quarter ended June 30, 2008

INDEX

PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007		3
		Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the six months ended June 30, 2008 and June 30, 2007		4
		Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and June 30, 2007		5
		Condensed Consolidated Statements of Shareholders' Equity (Deficit) for the six months ended June 30, 2008		6
		Notes to Condensed Consolidated Financial Statements		7
Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		19
Item 4.		Controls and Procedures		19
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings		21
Item 1A.		Risk Factors		21
Item 6.		Exhibits		22
SIGNATURES				23
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

LOUD TECHNOLOGIES INC.
AND SUBSIDIARIES

		June 30,				December 31,
		2008				2007
Assets
Current assets:
Cash		$	4,670			$	3,589
Accounts receivable, net of allowances of $4,246 and $3,537, respectively			28,639				25,204
Inventories			46,631				56,804
Prepaid expenses and other current assets			3,741				1,915
Total current assets			83,681				87,512
Property, plant and equipment, net			4,895				5,744
Goodwill			19,709				19,726
Other intangible assets, net			26,942				27,975
Deferred financing costs, net			2,669				2,621
Total assets		$	137,896			$	143,578
Liabilities and Shareholders’ Equity (Deficit)
Current liabilities:
Short-term borrowings		$	3,748			$	1,318
Accounts payable			20,216				25,830
Accrued liabilities			10,278				11,020
Current deferred tax liabilities			418				299
Taxes payable			1,773				1,834
Current portion of long-term debt			3,000				8,000
Total current liabilities			39,433				48,301
Long-term debt, excluding current portion			91,078				92,358
Convertible debt, net of discount			1,490				—
Deferred tax liabilities			4,377				4,636
Total liabilities			136,378				145,295
Commitments and contingencies			—				—
Shareholders’ equity (deficit):
Preferred stock, no par value. Authorized 5,000,000 shares, no shares issued and outstanding			—				—
Common stock, no par value. Authorized 40,000,000 shares, issued and outstanding 4,858,941 and 4,618,942 shares at June 30, 2008 and December 31, 2007, respectively			41,951				41,810
Additional paid in capital			6,693				—
Accumulated deficit			(47,224	)			(43,662	)
Accumulated other comprehensive income			98				135
Total shareholders’ equity (deficit)			1,518				(1,717	)
Total liabilities and shareholders’ equity (deficit)		$	137,896			$	143,578

See accompanying notes to consolidated financial statements.

LOUD TECHNOLOGIES INC.
AND SUBSIDIARIES

		Three Months ended								Six Months ended
		June 30,								June 30,
		2008				2007				2008				2007
Net sales		$	54,981			$	50,583			$	109,130			$	101,536
Cost of sales			37,870				36,049				76,203				73,397
Gross profit			17,111				14,534				32,927				28,139
Operating expenses:
Selling, general, and administrative			11,533				11,032				23,523				22,533
Research and development			2,583				2,830				5,615				5,631
Restructuring costs			262				536				296				1,554
Total operating expenses			14,378				14,398				29,434				29,718
Operating income (loss)			2,733				136				3,493				(1,579	)
Other income (expense):
Interest income			(10	)			22				29				22
Interest expense			(3,336	)			(2,758	)			(6,240	)			(4,608	)
Management fee			(370	)			(324	)			(523	)			(485	)
Other			89				150				(92	)			(2,055	)
Total other expense			(3,627	)			(2,910	)			(6,826	)			(7,126	)
Loss before income taxes			(894	)			(2,774	)			(3,333	)			(8,705	)
Income tax expense (benefit)			156				(39	)			229				(5	)
Net loss		$	(1,050	)		$	(2,735	)		$	(3,562	)		$	(8,700	)
Per share data
Basic and diluted net loss per share		$	(0.22	)		$	(0.56	)		$	(0.73	)		$	(1.80	)
Shares used in computing basic and diluted net loss per share			4,859				4,855				4,859				4,841
Comprehensive loss:
Net loss		$	(1,050	)		$	(2,735	)		$	(3,562	)		$	(8,700	)
Foreign currency translation loss (gain)			4				—				(37	)			—
Comprehensive loss		$	(1,046	)		$	(2,735	)		$	(3,599	)		$	(8,700	)

See accompanying notes to consolidated financial statements.

LOUD TECHNOLOGIES INC.
AND SUBSIDIARIES

		Six Months ended
		June 30,
		2008				2007
Operating activities:
Net loss		$	(3,562	)		$	(8,700	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			2,619				2,259
Amortization and write-offs of deferred financing costs			283				2,817
Gain on asset dispositions			—				(526	)
Stock based compensation			140				164
Non-cash interest expense			902				106
Changes in operating assets and liabilities:
Accounts receivable			(3,443	)			1,962
Inventories			10,171				11,798
Prepaid expenses and other current assets			(1,829	)			(22	)
Accounts payable, accrued liabilities and payable to former Italian subsidiary			(6,349	)			(7,804	)
Taxes payable			(198	)			(523	)
Other liabilities			—				19
Net cash (used)/provided by operating activities			(1,266	)			1,550
Investing activities:
Proceeds from sales of property, plant and equipment			—				1,239
Purchases of property, plant and equipment			(758	)			(1,323	)
Acquisition of St. Louis Music, Inc., including transaction fees paid			—				(3,181	)
Acquisition of Martin Audio, Ltd., net of cash acquired of $3,696			—				(31,964	)
Net cash used in investing activities			(758	)			(35,229	)
Financing activities:
Payments on long-term debt			(6,500	)			(42,069	)
Issuance of long-term debt			—				102,000
Proceeds from issuance of convertible debt			7,500				—
Net proceeds (payments) on line of credit and short term borrowings			2,430				(14,210	)
Net payment on debt and credit facility acquired in acquition of Martin Audio, Ltd.			—				(3,030	)
Financing costs associated with debt issuance			(331	)			(2,946	)
Net proceeds from stock sales and exercise of stock options			2				224
Cash provided by financing activities			3,101				39,969
Effect of exchange rate changes on cash			4				87
Increase (decrease) in cash and cash equivalents			1,081				6,377
Cash at beginning of period			3,589				311
Cash at end of period		$	4,670			$	6,688
Supplemental disclosure of cash flow information
Cash paid for interest		$	4,886			$	3,422
Cash paid for income taxes		$	441			$	536
Accrued acquition related expenses		$	—			$	1,397
Cash paid for acquisition related expenses		$	—			$	659

See accompanying notes to consolidated financial statements.

LOUD TECHNOLOGIES INC.
AND SUBSIDIARIES

										Additional								Accumulated
		Common stock								Paid in				Accumulated				Comprehensive
		Shares				Amount				Capital				Deficit				Income (Loss)				Total
Balance at December 31, 2007			4,619				41,810				—				(43,662	)			135				(1,717	)
Stock based compensation							140				—				—				—				140
Exercise of warrants			240				1				—				—				—				1
Convertible debt beneficial conversion			—				—				6,693				—				—				6,693
Net loss			—				—				—				(3,562	)			—				(3,562	)
Foreign currency translation			—				—				—				—				—
adjustment			—				—				—				—				(37	)			(37	)
Balance at June 30, 2008			4,859				41,951				6,693				(47,224	)			98				1,518

See accompanying notes to consolidated financial statements.

LOUD TECHNOLOGIES INC.

1. Description of Business

LOUD Technologies Inc. (“LOUD” or the “Company”) was founded in 1988. The Company was incorporated in Washington under the name Mackie Designs Inc., and subsequently changed its name to LOUD Technologies Inc. LOUD is one of the world’s largest dedicated professional audio and music products companies. As the corporate parent for world-recognized brands Alvarez^®, Ampeg^®, Crate^®, EAW^®, Knilling^®, Mackie^®, Martin Audio^®, SIA^® and TAPCO^®, LOUD engineers, manufactures, markets and distributes a wide range of professional audio and musical instrument products worldwide. Additionally, LOUD is a distributor of branded professional audio and music accessories through its SLM Marketplace catalog.

Our product lines include sound reinforcement speakers, analog mixers, guitar and bass amplifiers, professional loudspeaker systems, and branded musical instruments. These products can be found in professional and project recording studios, video and broadcast suites, post-production facilities, sound reinforcement applications including churches and nightclubs, retail locations, and on major musical concert tours. The Company distributes its products primarily through retail dealers, mail order outlets and installed sound contractors. The Company has its primary operations in the United States with smaller operations in the United Kingdom, Canada, China and Japan.

On April 11, 2007, the company acquired all of the outstanding capital stock of Martin Audio, Ltd. (“Martin Audio”), a UK-based manufacturer of loudspeakers and related equipment. The purchase price was $33.6 million, plus fees of $2.1 million, for a total consideration amount of $35.7 million. Management believes that the acquisition of Martin Audio adds another well-known brand to the Company’s growing portfolio of brands and provides the Company with additional geographic and channel diversification.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by LOUD in accordance with U.S. generally accepted accounting principles for interim financial statements and include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. They do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. In management’s opinion, all adjustments, consisting of normal recurring adjustments necessary for the fair presentation of the results of the interim periods are reflected herein. Operating results for the six-month period ended June 30, 2008 are not necessarily indicative of future financial results.

The financial statements herein have been prepared assuming the Company continues as a going concern, and do not include any adjustments that might be required were the Company to be unable to continue as a going concern. While we were in compliance with applicable loan covenants as of June 30, 2008, we have not offered assurances that we will remain in compliance in future periods. Were we to fall out of compliance and fail to negotiate waivers or obtain additional sources of liquidity, our lenders could foreclose on our assets or take other steps that may impede our ability to continue as a going concern.

The Company is highly leveraged and maintains a number of credit arrangements that are critical to our growth and to our ongoing operations. These credit agreements include certain financial covenants and ratios and require that we maintain adequate levels of eligible collateral to support our borrowing level, among other restrictions. In previous quarters, we have been in breach of certain financial covenants in our senior credit facility, and we have received forbearances from the lender and entered into waiver agreements with respect to the defaults and amended our credit agreement.

Under the terms of the senior secured credit facility, we are required to maintain certain financial ratios, such as a fixed charge coverage ratio and a consolidated leverage ratio. We are also required to meet certain EBITDA targets and adhere to certain capital expenditure limits. The agreement also provides, among other matters, restrictions on additional financing, dividends, mergers, and acquisitions. As of June 30, 2008, we met all of our covenant requirements. The Company is uncertain whether it will meet these covenants in third and fourth quarter 2008 and can offer no assurances that it will remain in compliance with the terms of the credit agreement.

If breaches of the covenants of our senior secured credit facility occur, there is no assurance that the lender would grant waivers or agree to restructure our debt or that we would be able to obtain other financing. If we default on our debt, the lender has a variety of remedies against us including accelerating all amounts so that they come due immediately and foreclosing on their security interests, which would allow the creditor to take possession of all of our assets. The accompanying financial statements do not reflect any adjustments that might be required should the Company default on debt agreements.

Stock Based Compensation

The Company recorded stock based compensation expense for the relevant period as follows (in thousands):

		Three months				Six months ended
		ended June 30,				June 30,
		2008				2008
Selling, general and administrative		$	67			$	135
Research and development			3				5
Total stock based compensation		$	70			$	140

The expected life for each award granted is calculated using the simplified method as described in SAB No. 107. Expected volatility is based on the historical volatility of LOUD common stock. The risk free interest rate is based on the constant maturity U.S. Treasury rate with a remaining term equal to the expected life. Compensation expense recorded includes estimates of the ultimate number of options that are expected to vest. No options were granted during the three and six-month periods ended June 30, 2008.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the allocation of purchase costs to the estimated fair value of assets acquired and liabilities assumed, the carrying amount of property and equipment and intangibles; valuation allowances for receivables, inventories, and deferred income tax assets and liabilities. Actual results may differ from those estimates.

Revenue Recognition

Revenues from sales of products, net of sales discounts, returns and allowances, are recognized upon shipment under an agreement with a customer when risk of loss has passed to the customer, all significant contractual obligations have been satisfied, the fee is fixed or determinable and collection of the resulting receivable is considered probable. Products are generally shipped “FOB shipping point” with no right of return. We do have some dealers who finance their purchases through finance companies. We have manufacturer’s repurchase agreements with the finance companies and defer the revenue and related cost of goods sold of these sales at the time of the sale. We then recognize the revenue and related cost of goods sold of these sales when the right of return no longer exists. Sales with contingencies, such as rights of return, rotation rights, conditional acceptance provisions and price protection, are deferred until the contingencies have been satisfied or the contingent period has lapsed. We generally warrant our products against defects in materials and workmanship for periods of between one and six years, with the exception of Alvarez Yairi guitars, which have a limited lifetime warranty. The estimated cost of warranty obligations, sales returns and other allowances are recognized at the time of revenue recognition based on contract terms and prior claims experience.

Foreign Currency

The financial statements of our non-U.S. subsidiary, Martin Audio, have been translated into U.S. Dollars. The functional currency of this subsidiary is the British Pound. All assets and liabilities in the balance sheet of this subsidiary are translated at period-end exchange rates. Net sales, costs and expenses are translated at average rates of exchange prevailing during the period. Translation gains and losses are accumulated in a separate component of shareholder’s equity.

The functional currency of the Company’s other international subsidiaries is the U.S. Dollar. Assets and liabilities recorded in foreign currencies are translated into U.S. Dollars at the exchange rate on the balance sheet date. Net sales, costs and expense and cash flows are translated at average rates of exchange prevailing during the period. Foreign currency transaction gains and losses are included in other income (expense).

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company has recorded a valuation allowance due to the uncertainty surrounding the ultimate realization of such assets. Management evaluates, on a periodic basis, the recoverability of the net deferred tax assets and the amount of the valuation allowance. At such time as it is determined that it is more likely than not the deferred tax assets are realizable, the valuation allowance will be reduced.

The Company has recorded a deferred tax liability related to goodwill associated with the St. Louis Music acquisition, which is being amortized for tax purposes, but not for book purposes. As goodwill has an indeterminable life, the Company cannot reasonably estimate the amount, if any, of deferred tax liabilities related to goodwill which will reverse during the net operating loss carry forward period. Accordingly, the Company increases the valuation allowance with a corresponding deferred tax provision as the deferred tax liability related to goodwill increases due to continued amortization of goodwill for tax purposes.

The Company has also recorded a deferred tax liability related to the identifiable intangible assets and fair value adjustments to the assets purchased associated with the acquisition of Martin Audio. The Company recognizes a tax benefit as these assets are amortized for book purposes.

The Company adopted the provision of Financial Standards Accounting Board Interpretation No. 48 Accounting for Uncertainty in Income Taxes (FIN 48) an interpretation of FASB Statement No. 109 on January 1, 2007. As of June 30, 2008 and December 31, 2007, the Company had $1.5 million and $1.5 million of unrecognized tax benefits, respectively. The total amount of unrecognized tax benefits that would affect the Company’s effective tax rate if recognized is $1.5 million as of June 30, 2008 and $1.5 million as of December 31, 2007.

In accordance with FIN 48, the Company elected to recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of June 30, 2008 and December 31, 2007, the Company had approximately $0.4 million of accrued interest and penalties related to uncertain tax positions, respectively. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax position. The Company does not anticipate that total unrecognized tax benefits will significantly change within the next twelve months.

A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits is as follows (in thousands):

Balance, December 31, 2007		$	1,513
Decreases related to prior year tax positions			(50	)
Increases related to current year tax positions			62
Balance, June 30,2008		$	1,525

Concentration of Credit and Supply Risk

We sell products on a worldwide basis and a significant portion of our accounts receivable are due from customers outside of the United States. Where we 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 United States accounted for more than 10% of net sales from continuing operations in any of the periods presented. Sales to United States customers are generally on open credit terms. In the United States, we primarily sell our products through certain resellers and experience individually significant annual sales volumes with major resellers. For the three-month periods ended June 30, 2008 and 2007, the Company had sales to one customer of $5.9 million and $9.0 million, or 10.7% and 17.7%, respectively of consolidated net sales. For the six-month periods ended June 30, 2008 and 2007, the Company had sales to the same customer of $15.4 million and $18.3 million, or 14.1% and 18.1%, respectively.

The majority of our products are being manufactured exclusively by contract manufacturers on our behalf. For the three-month periods ended June 30, 2008 and 2007, net sales of products manufactured by one manufacturer were $26.4 million and $16.5 million, or 47.9% and 32.6%, respectively of net sales while net sales of products manufactured by another manufacturer were $10.3 million and $6.6 million, or 18.7% and 13.1%, respectively of consolidated net sales. For the six-month periods ended June 30, 2008 and 2007, net sales of products manufactured by one manufacturer were $51.0 million and $34.1 million, or 46.7% or 33.6%, respectively of net sales, while net sales of products manufactured by another manufacturer were $19.8 million and $12.7 million, or 18.2% and 12.5%, respectively of consolidated net sales.

At June 30, 2008, the Company had 527 employees of which approximately 30 were members of an organized labor union.

Recently Adopted Accounting Principles

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information.

Effective January 1, 2008 the Company adopted SFAS 157 for our financial assets and liabilities that are re-measured and reported at fair value at each reporting period. In accordance with the provisions of FSP No., FAS 157-2, Effective Date of FASB Statement No. 157, we elected to defer implementation of SFAS 157 related to our non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis until January 1, 2009. We are currently reviewing this provision of SFAS 157 to determine the impact on our non-financial assets and non-financial liabilities that are recognized or disclosed at fair value on a nonrecurring basis.

The adoption of SFAS 157 with respect to financial assets and liabilities that are re-measured and reported at fair value did not have a material impact on our financial results in the first half of 2008. SFAS No. 157 establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques. The levels of the hierarchy are described below:

	•		Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities
	•		Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active
	•		Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions

The following table presents our financial assets that have been measured at fair value as of June 30, 2008 and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value.

Balance as of June 30, 2008

Level I

Level II

Level III

Short-term investment

$

2,652

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS No. 159 is to reduce both the complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. The Company adopted Statement No. 159, effective January 1, 2008, and did not elect the fair value option to measure certain financial instruments as it has not had a material impact on the Company’s financial condition and results of operations.

New Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141R, Business Combinations, which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non controlling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. The requirements of SFAS 141R are effective for periods beginning after December 15, 2008. The Company is still assessing the full impact of this standard on its future consolidated financial statements.

3. Net Loss Per Share

Basic net loss per common share is computed on the basis of the weighted average number of common shares outstanding for the period. Diluted net loss per common share is computed on the basis of the weighted average number of common shares plus dilutive potential common shares outstanding. Dilutive potential common shares are calculated under the treasury stock method. Securities that could potentially dilute basic income per share consist of outstanding stock options.

As the Company had a net loss in each of the periods presented, basic and diluted net loss per common share are the same. Stock options to purchase 341,621 and 461,000 shares in 2008 and 2007, respectively, were excluded from the calculation of diluted per share amounts because they are anti dilutive.

4. Restructuring Costs

During 2007, management approved and implemented a restructuring plan primarily consisting of the consolidation of our LOUD UK operations and a shift of our domestic manufacturing to overseas contract manufacturers. During the six-month period ended June, 30 2008 we incurred approximately $296,000 of restructuring costs primarily representing employee severance and related costs for 10 terminated employees. We had $345,000 of these restructuring amounts remaining in accrued liabilities at June 30, 2008. The restructuring liability is summarized as follows (in thousands):

Balance at December 31, 2007		$	462
New charges			296
Cash payments			(413	)
Balance at June 30, 2008		$	345

5. Inventories

Inventories consist of the following (in thousands):

		June 30,				December 31,
		2008				2007
Raw materials		$	5,690			$	7,580
Work in process			101				65
Finished goods			40,840				49,159
		$	46,631			$	56,804

6. Other Intangible Assets

Intangible assets consist of the following (in thousands):

		Gross				Accumulated
		Amount				Amortization				Net
Customer and distributor relationships		$	13,855			$	1,562			$	12,293
Trademark			12,713				1,742				10,971
Developed technology			6,149				2,491				3,658
Non-compete agreement			50				30				20
Total intangible assets, June 30, 2008		$	32,767			$	5,825			$	26,942
Total intangible assets, December 31, 2007		$	32,785			$	4,810			$	27,975

The company acquired Martin Audio on April 11, 2007. Certain identifiable intangible assets were recorded as a result of this acquisition. Amortization for the three month period ended June 30, 2008 was approximately $507,000.

7. Goodwill

Changes in goodwill are as follows (in thousands):

Balance, December 31, 2007		$	19,726
Effects of foreign currency translation			(17	)
Balance, June 30, 2008		$	19,709

8. Financing

On March 6, 2008 we entered into an Amendment related to the Ableco credit facility. The Amendment modified certain definitions used in the Financing Agreement and required us to reduce the balance outstanding under the Financing Agreement by $7.5 million. The Amendment modified the definition of “Consolidated EBITDA” and “Consolidated Funded Indebtedness” to change the calculations pursuant to these terms, as well as other terms used in the Financing Agreement.

Our credit arrangements generally accrue interest based on variable short-term interest rates. Increases in the prime rate or LIBOR would increase our interest expense, which would adversely affect our profitability and cash flows.

(a) Short-term borrowings

The Company has a line of credit where it can borrow up to $10.0 million, subject to certain restrictions, including available borrowing capacity. At June 30, 2008, the line of credit had an outstanding balance of approximately $3.7 million with the ability to borrow up to an additional $6.3 million. Interest is due quarterly and is based on Chase Manhattan Bank’s prime rate plus 0.5% or LIBOR plus 3.0%.

(b) Long-term debt

At June 30, 2008 and December 31, 2007, the Company’s long-term debt consisted of the following (in thousands):

		June 30,				December 31,
		2008				2007
Convertible debt, net of discount			1,490				—
Ableco Term Loan A			17,869				19,203
Ableco US Term Loan B			34,668				39,333
Ableco UK Term Loan B			29,000				29,500
Ableco Term Loan C			12,541				12,322
			95,568				100,358
Less: current portion			(3,000	)			(8,000	)
Long-term portion of debt		$	92,568			$	92,358

The $95.6 million term loans under the $112 million senior secured credit facility require the company to make quarterly principal payments. Term Loan A bears interest at the Chase Manhattan Bank’s prime rate plus 0.85% or LIBOR plus 3.35%. Term Loans B bear interest at the Chase Manhattan Bank’s prime rate plus 2.95% or LIBOR plus 5.20%. Term Loan C bears interest at the Chase Manhattan Bank’s prime rate plus 4.5% or LIBOR plus 7.0%. In addition, Term Loan C bears additional paid in kind interest of 3.5%, added to the principal balance of Term Loan C on a monthly basis. Interest is due quarterly on each term loan. The $112 million senior secured credit facility is secured by substantially all of the assets of the Company and its subsidiaries.

On March 18, 2008, the Company issued to our controlling stockholder, Sun Mackie, a $7.5 million Convertible Senior Subordinated Secured Promissory Note due 2012 (the “Note”) that is secured by all of the assets of the Company now owned and thereafter acquired. The Note bears interest at a rate of 15.25% per annum, payable in kind until maturity, and is convertible into common stock stated at a conversion price of $5.00. We paid Sun Mackie a fee of $150,000 upon issuance of the Note.

The company applied the guidance of Emerging Issue Task Force (EITF) No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingent Adjustable Conversion Ratios and EITF No. 00-27, Application of Issue No. 98-5 Certain Convertible Instruments and concluded that the convertible debt included a beneficial conversion feature, which was valued at $6.7 million using the fair value of the stock at the commitment date and the stated conversion rate. This amount was determined by multiplying the shares to be issued upon conversion times the intrinsic value per share. The number of shares shares to be issued upon conversion was calculated by adding the proceeds of $7.5 million plus the unpaid accrued interest at maturity and dividing this sum by the stated conversion price of $5.00. The intrinsic value per share is the difference between the $7.35 fair value of the stock at commitment date less the stated conversion price. The beneficial conversion feature was recorded as a debt discount, credited to additional paid in capital, and is being amortized to interest expense over the term of the Note using the effective interest method.

The following table summarizes the activity related to the Company’s convertible debt issued in March 2008:

Face value of convertible debt(s)		$	7,500
Less: unamortized debt discounts			(6,339	)
Add: accreted interest			329
Total carrying value, net of debt discount June 30, 2008		$	1,490

The debt is considered long-term, as principal and interest are not due and payable until 2012.

The debt issuance costs associated with the financing are recorded as a long-term asset and are being amortized over the term of the debt to interest expense using the effective interest method. The debt issuance costs include cash costs of $318,000 for legal and Sun Mackie related fees.

9. Guarantees

In the ordinary course of business, the Company is not subject to any significant obligations under guarantees that fall within the scope of FIN No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others except for standard indemnification and warranty provisions and give rise only to the disclosure requirements prescribed by FIN No. 45.

Indemnification and warranty provisions contained within the Company’s sales agreements are generally consistent with those prevalent in its industry. The duration of product warranties is generally one to six years following delivery of products, with the exception of the Company’s Alvarez Yairi guitars, which have a limited lifetime warranty.

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

		2008				2007
Balance at December 31, 2007		$	1,065			$	1,160
Charged to cost of sales			(941	)			1,516
Applied to liability			951				(1,766	)
Foreign currency adjustment			(1	)			—
Balance at June 30, 2008		$	1,074			$	910

10. Commitments and Contingencies

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

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

The following discussion and analysis should be read in conjunction with our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007. This discussion contains certain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Actual results may differ materially from those discussed herein. The cautionary statements made in this Quarterly Report on Form 10-Q and the Annual Report on Form 10-K may apply to all forward-looking statements wherever they appear. We undertake no obligation to publicly release any revisions to these forward-looking statements that may be required to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “will be,” “will continue,” “will likely result,” or words or phrases of similar meaning.

Overview

LOUD Technologies Inc. was founded in 1988 and incorporated in Washington under the name Mackie Designs Inc., and subsequently changed its name to LOUD Technologies Inc. LOUD is one of the world’s largest dedicated pro audio and music products companies. As the corporate parent for world-recognized brands Alvarez^®, Ampeg^®, Crate^®, EAW^®, Knilling^®, Mackie^®, Martin Audio^®, SIA^® and Tapco^®, LOUD engineers, markets and distributes a wide range of professional audio and musical instrument products worldwide. Additionally, LOUD is one of the largest distributors of branded professional audio and music accessories through its SLM Marketplace catalog.

Our product lines include sound reinforcement speakers, analog mixers, guitar and bass amplifiers, professional loudspeaker systems, and branded musical instruments. These products can be found in professional and project recording studios, video and broadcast suites, post-production facilities, sound reinforcement applications including churches and nightclubs, retail locations, and on major musical concert tours. We distribute our products primarily through retail dealers, mail order outlets and installed sound contractors. We have our primary operations in the United States with smaller operations in the United Kingdom, Canada, China and Japan.

Our stock is listed on the Nasdaq Capital Market™ under the symbol “LTEC”.

“MACKIE,” the running man figure, “TAPCO,” “EAW,” and “SIA” are registered trademarks of LOUD Technologies Inc. “Alvarez”, “Ampeg”, “Crate”, and “Knilling” are registered trademarks of our wholly owned subsidiary, St. Louis Music, Inc. “Martin Audio” is a registered trademark of our wholly owned subsidiary, Martin Audio, Ltd. To the extent our trademarks are unregistered, we are unaware of any conflicts with trademarks owned by third parties. This document also contains names and marks of other companies, and we claim no rights in the trademarks, service marks and trade names of entities other than those in which we have a financial interest or licensing right.

The financial statements herein have been prepared assuming the Company continues as a going concern. While we were in compliance with applicable loan covenants as of June 30, 2008, we have not offered assurances that we will remain in compliance in future periods. Were we to fall out of compliance and fail to negotiate waivers or obtain additional sources of liquidity, our lenders could foreclose on our assets or take other steps that may impede our ability to continue as a going concern.

The Company is highly leveraged and maintains a number of credit arrangements that are critical to our growth and to our ongoing operations. These credit agreements include certain financial covenants and ratios and require that we maintain adequate levels of eligible collateral to support our borrowing level, among other restrictions. In previous quarters, we have been in breach of certain financial covenants in our senior credit facility, and we have received forbearances from the lender and entered into waiver agreements with respect to the defaults and amended our credit agreement. If future breaches of the covenants of our credit arrangements occur, there is no assurance that the lenders would grant waivers or agree to restructure our debt or that we would be able to obtain other financing. We are unable to offer assurances that we can remain in compliance with such covenants in the future. If we default on our debt, our lenders have a variety of remedies against us including accelerating all amounts so that they come due immediately and foreclosing on their security interests, which would allow the creditors to take possession of all of our assets.

Under the terms of the senior secured credit facility, we are required to maintain certain financial ratios, such as a fixed charge coverage ratio and a consolidated leverage ratio. We are also required to meet certain EBITDA targets and adhere to certain capital expenditure limits. The agreement also provides, among other matters, restrictions on additional financing, dividends, mergers, and acquisitions. As of June 30, 2008, we met all of our covenant requirements. The Company is uncertain whether it will meet these covenants in third and fourth quarter 2008 and can offer no assurances that it will remain in compliance with the terms of the credit agreement.

During July 2008 the Company experienced lower than expected sales and margins due to a backlog of orders with a contract manufacturer. This decline, which we believe to be temporary, could negatively impact EBITDA calculations.

In previous quarters, we have been in breach of certain financial covenants in our senior credit facility and we have received forebearances from the lender and entered into waiver agreements with respect to the defaults and amended our credit agreement. If breaches of the covenants of our senior secured credit facility occur, there is no assurance that the lender would grant waivers or agree to restructure our debt or that we would be able to obtain other financing. If we default on our debt, the lender has a variety of remedies against us including accelerating all amounts so that they come due immediately and foreclosing on their security interests, which would allow the creditor to take possession of all of our assets. The accompanying financial statements do not reflect any adjustments that might be required should the Company default on debt agreements.

Critical Accounting Policies and Judgments

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

We believe there have been no additional significant changes in our critical accounting policies during the six months ended June 30, 2008 from that disclosed in our Form 10-K for the year ended December 31, 2007.

Estimates and Assumptions Related to Financial Statements

Our discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles for interim financial statements. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates including revenue recognition, the allowance for doubtful accounts, inventory valuation, intangible assets, income taxes and general business contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Results of Operations (in thousands)

		Three months ended								Six months ended
		June 30,								June 30,
		2008				2007				2008				2007
Net sales		$	54,981			$	50,583			$	109,130			$	101,536
Gross profit			17,111				14,534				32,927				28,139
Selling, general and administrative			11,533				11,032				23,523				22,533
Research and development			2,583				2,830				5,615				5,631
Restructuring costs			262				536				296				1,554
Total operating expenses			14,378				14,398				29,434				29,718
Operating income (loss)			2,733				136				3,493				(1,579	)
Other expense			(3,627	)			(2,910	)			(6,826	)			(7,126	)
Provision for income taxes			156				(39	)			229				(5	)
Net income (loss)		$	(1,050	)		$	(2,735	)		$	(3,562	)		$	(8,700	)

Three Months Ended June 30, 2008 vs. Three Months Ended June 30, 2007

Net Loss

Results of operations for the three months ended June, 2008, showed a net loss of approximately $1.1 million, a decrease of $1.7 million from a net loss of $2.7 million for the comparable period in 2007. Operating income for the three months ended June 30, 2008 was $2.7 million compared to operating income of $0.1 million in the comparable period in 2007. The increase is a result primarily from new Mackie products of $4.4 million which carry a higher gross profit on the 2008 sales.

Net Sales

Net sales increased by 8.7% to $55.0 million during the three months ended June 30, 2008 from $50.6 million in the comparable period in 2007. The increase in sales compared to the prior year is related to strength in the core brands of Mackie, Ampeg, and EAW, as well as, strong international sales.

Gross Profit

Gross profit was $17.1 million, or 31.1% of net sales, in the three months ended June 30, 2008 compared to $14.5 million, or 28.7% of net sales, in the three months ended June 30, 2007. Excluding the Martin Audio acquisition and the write down of inventory associated with the factory shutdowns in 2007, gross profit was comparable to prior year results.

Selling, General and Administrative

Selling, general and administrative expenses increased by $0.5 million to $11.5 million in the three months ended June 30, 2008 from $11.0 million in the comparable period in 2007. The increase is primarily attributable to increased commissions and bonuses on higher sales volumes.

Research and Development

Research and development expenses decreased by $0.2 million to $2.6 million in the three months ended June 30, 2008 from $2.8 million in the comparable period in 2007. The $0.2 million decrease is due to a reduction in engineering projects and prototype costs.

Restructuring Costs

We incurred approximately $262,000 in restructuring costs during the three-month period ended June 30, 2008, primarily attributed to employee severance and related costs for 3 terminated employees. In the comparable period in 2007, approximately $536,000 in restructuring costs were incurred, primarily representing severance accruals related to the closure and overseas transfer of our domestic manufacturing plants and closure of our St. Louis Music engineering functions.

Other Expense

Other expense was $3.6 million for the three months ended June 30, 2008 as compared to $2.9 million in the comparable period last year. The increase in other expense of $0.7 million is primarily due to the cost associated with the Sun Mackie $7.5 million Convertible Senior Subordinated Secured Promissory Note due 2012 issued on March 18, 2008.

The majority of our debt has variable interest rates, and the interest expense component of other income (expense) in future quarters will be affected by changing interest rates.

Income Taxes

Income tax expense for the three months ended June 30, 2008 was $156,000 compared to a benefit of ($39,000) for the comparable period in 2007. The primary components of the 2008 income tax include income tax expense of $0.3 million related to Martin Audio, $0.3 million associated with the deferred tax benefit recorded as a result of the partial amortization of the deferred tax liability recorded as a result of the acquisition of Martin Audio, and $0.1 million related to federal tax expense. The primary components of the 2007 benefit are current taxes due from our foreign subsidiaries and an increase to our income tax reserve offset by the deferred tax benefit recorded as a result of the partial amortization of the deferred tax liability as a result of the acquisition of Martin Audio.

Six Months Ended June 30, 2008 vs. Six Months Ended June 30, 2007

Net Sales

Net sales from continuing operations increased by 7.5% to $109.1 million during the six months ended June 30, 2008 from $101.5 million in the comparable period in 2007. The majority of the increase in sales was related to new Mackie products of $6.6 million along with increased sales in our core brands, including Ampeg and EAW.

Gross Profit

Gross profit increased to $32.9 million, or 30.2% of net sales, in the six months ended June 30, 2008 from $28.1 million, or 27.7% of net sales, in the six months ended June 30, 2007. Excluding the Martin Audio acquisition and the write down of inventory associated with the factory shutdowns in 2007 gross profit, was comparable to prior year results.

Selling, General and Administrative

Selling, general and administrative expenses increased by $1.0 million to $23.5 million in the six months ended June 30, 2008 from $22.5 million in the comparable period in 2007. The increase was primarily attributable to the increased commissions and bonuses on higher sales volumes.

Research and Development

Research and development expenses in the six months ended June 30, 2008 were $6.5 million, comparable to the same period in 2007.

Restructuring Costs

Restructuring costs were $0.3 million in the six months ended June 30, 2008, primarily attributed to employee severance and related costs for 10 employees. Restructuring costs were $1.6 million in the six months ended June 30, 2007. The 2007 costs were primarily severance accruals related to the closure and overseas transfer of our domestic manufacturing plants and the closure of our St. Louis Music engineering functions.

Other Expense

Net other expense was $6.8 million for the six months ended June 30, 2008 as compared to $7.1 million in the six months ended June 30, 2007. The decrease in other expense of $0.3 million is primarily due to the cost associated with the write-off of $2.5 million of unamortized fees related to the prior debt facility as a result of the refinancing of the debt facility in 2007, which was offset by an increase of approximately $1.6 million in interest expense incurred for the Ableco and Sun Capital financing arrangements and a $0.1 million increase in management fees.

Income Taxes

Income tax expense for the first six months of 2008 was $229,000 compared to income tax benefit of $5,000 for the comparable period in 2007. The primary components of the 2008 expense are current taxes due from our foreign subsidiaries and an increase to our income tax reserve partially offset by the deferred tax benefit recorded as a result of the partial amortization of the deferred tax liability recorded as a result of the acquisition of Martin Audio. The primary component of the 2007 benefit are current taxes due from our foreign subsidiaries and an increase to our income tax reserve offset by the deferred tax benefit recorded as a result of the partial amortization of the deferred tax liability recorded as a result of the acquisition of Martin Audio.

Liquidity and Capital Resources

As of June 30, 2008, we had cash and cash equivalents of $4.7 million and short-term borrowings of $3.7 million. At June 30, 2008 we had $6.3 million available on our revolving line of credit.

Net Cash Used in and Provided by Operating Activities

Cash used in operating activities was $1.3 million in the six months ended June 30, 2008, compared to cash provided by operating activities of $1.6 million for the comparable period in 2007. The net loss for the first six months of 2008 was $3.6 million including $2.6 million in depreciation and amortization, $0.3 million in amortization of deferred financing fees, $0.9 million in interest expense capitalized, and $0.1 million in stock based compensation expense. In the first six months of 2008, an increase in accounts receivable of $3.4 million and an increase prepaid other current assets of $1.8 million accompanied by a decrease in accounts payable and accrued liabilities of $6.3 million used cash, while a decrease to inventories of $10.2 million, provided cash. The net loss for the first six months of 2007 was $8.7 million including $2.3 million in depreciation and amortization, $2.8 million in amortization and write-off of deferred financing fees, $0.2 million in stock based compensation expense, and a gain on asset dispositions of $0.5 million. In the first six months of 2007, a decrease in accounts payable and accrued liabilities of $7.8 million and increases to inventories and accounts receivable of $11.8 million and $2.0 million, respectively, used cash.

Net Cash Used in Investing Activities

Cash used in investing activities was $0.8 million for the first six months of 2008, compared to $35.2 million for the first six months of 2007. The cash used in investing activities for the first six months of 2008 primarily related to purchases of new product tooling. The cash used in investing activities for the first six months of 2007 primarily related to the acquisition of Martin Audio and the payment of the St. Louis Music, Inc. future commitment to pay of $3.2 million.

Net Cash Provided by Financing Activities

Cash provided by financing activities was $3.1 million during the first six months of 2008, compared to $40.0 million during the first six months of 2007. Cash provided in the first three months of 2008 is primarily attributable to the Sun Mackie Convertible Debt of $7.5 million which was used to partially pay down the existing debt and line of credit. Cash provided in the first six months of 2007 is primarily attributable to a new credit facility of $102.0 million consisting of a Term Loan A of $20.0 million, a US Term Loan B of $40.0 million, a UK Term Loan B of $30.0 million and a Term Loan C of $12.1 million. Along with this refinance, we paid off our existing credit facility of $67.2 million as of March 30, 2007, which consisted of a revolving loan facility of $26.2 million, a Term Loan A of $11.9 million, a Term Loan B of $14.3 million and a senior subordinated note for $14.8 million. We also incurred $2.9 million in deferred financing costs.

Ability to Stay in Compliance With Debt Covenants

Under the terms of the senior secured credit facility, we are required to maintain certain financial ratios, such as a fixed charge coverage ratio and a consolidated leverage ratio. We are also required to meet certain EBITDA targets and adhere to certain capital expenditure limits. The agreement also provides, among other matters, restrictions on additional financing, dividends, mergers, and acquisitions. As of June 30, 2008, we met all of our covenant requirements. The Company is uncertain whether it will meet these covenants in third and fourth quarter 2008 and can offer no assurances that it will remain in compliance with the terms of the credit agreement.

During July 2008 the Company experienced lower than expected sales and margins due to a backlog of orders with a contract manufacturer. This decline, while we believe to be temporary, could negatively impact EBITDA calculations.

In previous quarters, we have been in breach of certain financial covenants in our senior credit facility and we have received forebearances from the lender and entered into waiver agreements with respect to the defaults and amended our credit agreement. If breaches of the covenants of our senior secured credit facility occur, there is no assurance that the lender would grant waivers or agree to restructure our debt or that we would be able to obtain other financing. If we default on our debt, the lender has a variety of remedies against us including accelerating all amounts so that they come due immediately and foreclosing on their security interests, which would allow the creditor to take possession of all of our assets. The accompanying financial statements do not reflect any adjustments that might be required should the Company default on debt agreements.

Commitments

We had the following significant contractual commitments related to operating leases for equipment facilities at June 30, 2008. In addition, we had significant obligations related to short-term and long-term debt arrangements, excluding our accounts payable, accrued liabilities and taxes payable of $32.3 million at June 30, 2008 (in thousands):

		Payments due by Period
						Less than
		Total				1 Year				1-3 Years				3-5 Years				5+ Years
Operating leases		$	6,708			$	2,455			$	3,756			$	497			$	—
Convertible debt, including interest			14,240				—				—				—				14,240
Short-term and long-term debt, including interest			130,087				12,242				23,782				94,063				—
Total		$	151,035			$	14,697			$	27,538			$	94,560			$	14,240

We also have purchase commitments that range between $20 million to $35 million that are primarily due to our contract manufacturers.

We believe we will have adequate resources to meet our material obligations as they come due through December 31, 2008.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to various market risks, including changes in foreign currency rates and interest rates.

Our $112.0 million term loans have variable interest rates. As such, changes in U.S. interest rates affect interest paid on debt and we are exposed to interest rate risk. For the quarter ended June 30, 2008, an increase in the average interest rate of 10%, i.e. from 9.8% to 10.8%, would have resulted in an approximately $521,000 increase in net loss before income taxes.

A majority of our sales are denominated in U.S. Dollars, and during the three months ended June 30, 2008 approximately 39.5% of our sales were denominated in foreign currencies. We ordinarily do not engage in hedging, rate swaps, or other derivatives as a means to minimize our foreign currency risk and, instead, mitigate that exposure by limiting the portion of our sales that are denominated in other than U.S. Dollars. Assuming the same level of foreign currency denominated sales as in the three months ended June, 2008, a 10% decline in the average exchange rates for all these currencies would have caused a decline of approximately $2.0 million, or 3.6%, of our sales.

The majority of our products are manufactured by foreign third-party contract manufacturers with the majority of the contracts denominated in U.S. Dollars. Foreign third-party manufacturing creates risks that include fluctuations in currency exchange rates that could affect the price we pay for our product. Our two largest foreign contract manufacturers’ products represented 64.9% of our net sales for the six months ended June 30, 2008. A 10% increase to the cost of the product sold that was manufactured by these two manufacturers would have resulted in an increase to cost of sales for the six months ended June 30, 2008 of approximately $1.8 million.

Item 4 and Item 4T. Controls and Procedures

The Company’s management maintains an adequate system of internal controls to promote the timely identification and reporting of material, relevant information. Additionally the Company’s senior management team meets regularly to discuss significant transactions and events affecting the Company’s operations. The Company’s executive officers lead these meetings and consider whether topics discussed represent information that should be disclosed under generally accepted accounting principles and the rules of the SEC. The board of directors includes an Audit Committee that is comprised solely of independent directors who meet the financial literacy requirements imposed by the Securities Exchange Act and the Nasdaq Stock Market. At least one member of our Audit Committee, Jon W. Gacek, is a “financial expert” within the meaning of applicable Nasdaq rules. The Audit Committee reviews quarterly earnings releases and all reports on Form 10-Q and Form 10-K prior to their filing. The Audit Committee is responsible for hiring and overseeing the Company’s external auditors and meets with those auditors at least four times each year.

The Company’s executive officers are responsible for establishing and maintaining disclosure controls and procedures. They have designed such controls to ensure that others make known to them all material information within the organization. Management regularly evaluates ways to improve internal controls. As of the end of the period covered by this report on Form 10-Q our executive officers completed an evaluation of the disclosure controls and procedures and have determined them to be functioning effectively.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, is a process designed by, or under the supervision of, the Company’s chief executive officer and chief financial officer, or persons performing similar functions, and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, has established and maintained policies and procedures designed to maintain the adequacy of the Company’s internal control over financial reporting, and includes those policies and procedures that:

	1)		Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
	2)		Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management of the Company; and
	3)		Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Management has evaluated the effectiveness of the Company’s internal control over financial reporting as of June 30, 2008 based on the control criteria established in a report entitled Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment and those criteria, the Company’s management has concluded that the Company’s internal control over financial reporting is effective as of June 30, 2008.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect all errors or misstatements and all fraud. Therefore, even those systems determined to be effective can provide only reasonable, not absolute, assurance that the objectives of the policies and procedures are met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

This report does not include an attestation report of the Company’s registered public accounting firm, KPMG LLP, regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this report.

Changes in Internal Controls

There were no changes in the Company’s internal controls over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is involved in various legal proceedings and claims that arise in the ordinary course of business which could, individually or in the aggregate, be material to the Company’s business, operations or financial condition.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in the Report on Form 10-K for the fiscal year ended December 31, 2007.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

(a)		Our annual meeting of shareholders was held on June 30, 2008 (the “Annual Meeting”).
(b)		At the Annual Meeting, James T. Engen, Jon W. Gacek and R. Lynn Skillen were elected to serve as Class 1 directors for a three-year term. Thomas V. Taylor, Jason H. Neimark, Kevin J. Calhoun and Mark E. Kuchenrither continue to serve as Class 2 directors and will be up for re-election at the 2009 annual meeting. C. Daryl Hollis, George R. Rea, and Clarence E. Terry continue to serve as Class 3 directors and will be up for re-election at the 2010 annual meeting.
(c)		Following are descriptions of and results of votes cast on matters voted upon by the shareholders at the Annual Meeting.

•

The results of the shareholder vote on the election of directors were as follows:

Nominee		For				Withheld
James T. Engen			4,535,846				95,717
Jon W. Gacek			4,529,806				101,757
R. Lynn Skillen			4,529,606				101,957

•

The results of the shareholder vote on the proposal to amend the Company’s Restated Articles of Incorporation to provide that the Company’s Restated Articles of Incorporation may be amended by the Board of Directors without shareholder action to the extent permitted by Section 23B.10.020 of the Washington Business Corporation Act were as follows:

						Percentage
						of
		Votes				Outstanding
For			4,434,411				91.26
Against			196,932				4.05
Abstain			220				.00
Broker Non-Votes			0				—

•

The results of the shareholder vote on the proposal to amend the Company’s Restated Articles of Incorporation to provide that the name of the Company is LOUD Technologies, Inc. were as follows:

						Percentage
						of
		Votes				Outstanding
For			4,628,040				95.25
Against			3,443				.07
Abstain			80				.00
Broker Non-Votes			0				—

•

The results of the shareholder vote on the proposal to amend the Company’s Restated Articles of Incorporation to give effect to the adjustment of the Company’s issued and authorized common stock related to the Company’s 2005 reverse split were as follows:

						Percentage
						of
		Votes				Outstanding
For			4,619,781				95.08
Against			10,022				.21
Abstain			1,760				.04
Broker Non-Votes			0				—

•

The results of the shareholder vote on the proposal to amend the Company’s Restated Articles of Incorporation to increase the number of the Company’s authorized common shares from 8 million to 12 million so as to provide additional authorized common shares to be issued upon conversion of the Convertible Senior Subordinated Secured Promissory Note issued to Sun Mackie, LLC on March 18, 2008, were as follows:

						Percentage
						of
		Votes				Outstanding
For			4,592,385				94.51
Against			38,298				.79
Abstain			880				.02
Broker Non-Votes			0				—

•

The results of the shareholder vote on the proposal to approve the Convertible Senior Subordinated Secured Promissory Note issued to Sun Mackie, LLC on March 18, 2008, the Security Agreement, and the transactions contemplated therein, including but not limited to issuance of shares of the Company’s common stock upon conversion of the Note, were as follows:

						Percentage
						of
		Votes				Outstanding
For			4,574,160				98.81
Against			55,203				1.19
Abstain			2,200				—
Broker Non-Votes			0				—

Item 5. Other Information

None

Item 6. Exhibits

Exhibits

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

SIGNATURES

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

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.