UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2005

OR

For the transition period from       to       

LOUD TECHNOLOGIES INC.

(Exact name of registrant as specified in its charter)

(Address of Principal Executive Offices)

Registrant’s telephone number, including area code: (425) 487-4333

Securities registered pursuant to Section 12(b) of the Act:

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  ý

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  ý

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  ý   No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o

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

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

The aggregate market value of common stock held by non-affiliates of registrant at June 30, 2005 was approximately $16,389,607 based upon the closing price of the registrant’s common stock as quoted on the Nasdaq OTC Bulletin Board System on June 30, 2005 of $15.55. Per-share data contained in this report reflect the 1-for-5 reverse split effected on November 17, 2005.

On March 31, 2006, 4,566,202 shares of common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

LOUD TECHNOLOGIES INC.

For the Year Ended December 31, 2005

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PART I

Certain statements set forth in or incorporated by reference into this Annual Report on Form 10-K for the year ended December 31, 2005, particularly including but not limited to the section entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations, contain “forward-looking statements” within the meaning of Section 21D of the Securities Exchange Act of 1934, as amended. Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Such forward-looking statements include among others, those statements including the words “expect,” “anticipate,” “intend,” “believe” and similar expressions. Actual results could differ materially and adversely from those discussed in this report. Factors that could cause or contribute to such differences include but are not limited to the risks discussed in the “Risk Factors” section in Item 1A. Readers are cautioned not to place undue reliance on these forward-looking statements, and should recognize that these statements are accurate only as of the date of this report and will not be updated to reflect future developments.

Item 1. Business

LOUD Technologies Inc. was founded in 1988 and incorporated in Washington under the name Mackie Designs Inc., and changed its name to Loud Technologies Inc. September 13, 2003. 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®, SIA® and TAPCO®, LOUD engineers, manufactures, 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, violins and other stringed instruments, and digital mixers. 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 tours.

On March 4, 2005, we acquired all of the shares of St. Louis Music, Inc., a Missouri-based manufacturer, distributor and importer of branded musical instruments and professional audio products. This transaction is explained in more detail in Note 18 of the accompanying financial statements.

On August 29, 2005 we completed a refinancing of our credit facilities with our U.S. lenders that were to mature in the first half of 2006. This transaction is explained in more detail in Note 10 of the accompanying financial statements.

On November 3, 2005 we announced a 1-for-5 reverse split of the Company’s outstanding common stock. The 1-for-5 reverse stock split was effective after the close of business on November 17, 2005. In lieu of fractional shares, shareholders received cash at a rate of $2.95 per whole post-split share. Mellon Investor Services LLC, the Company’s transfer agent, acted as the exchange agent.

At December 31, 2005, 3,370,127 shares, representing 73.8% of our outstanding common stock, were owned by affiliates of Sun Capital Partners, Inc., a private investment firm. Accordingly, we are a controlled company within the meaning of the NASD rules governing companies listed on the Nasdaq Capital Market and, as discussed in greater detail below and in our proxy statement for our 2006 annual shareholder meeting, we are therefore exempt from application of certain of the corporate governance

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rules, particularly including those relating to independent board composition and compensation and nominating committee requirements.

The Company voluntarily delisted from the Nasdaq Small Cap Market™ on February 7, 2003 because of ongoing difficulties in satisfying certain of the Nasdaq continuing listing requirements. The Company’s stock began trading on the OTC Bulletin Board on February 11, 2003. We applied for reinstatement to the Nasdaq Capital Market™ on November 23, 2005. Our stock began trading on the Nasdaq Capital Market™ under the symbol “LTEC” on March 1, 2006.

“MACKIE,” the running man figure, “TAPCO,” “EAW,” and “SIA” are registered trademarks or “common law” trademarks of LOUD Technologies Inc. “Alvarez”, “Ampeg”, “Crate”, and “Knilling” are registered trademarks of our wholly owned subsidiary, St. Louis Music, Inc. 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.

Innovative marketing is the hallmark of each LOUD brand. As a result, each brand holds an enviable, unique position in its respective marketplace. Each brand is supported by a dedicated team of brand-specific product, business and communication resources backed by an in-house marketing and design team that handles all media planning, buying, print literature and advertising design, web design, public relations, product documentation, product training, as well as end-user and dealer trade shows and special events.

Our Major Brands

Alvarez is an acoustic guitar line geared to players of all types – from entry-level to professional.

Ampeg is the industry standard in bass amplification for more than 50 years.

Crate is an entry-level brand of musical instrument amplification products.

EAW is precision engineered, technologically superior loudspeakers and digital mixers. EAW systems are found in public spaces including sporting arenas, churches, nightclubs, and on major musical tours.

Mackie is innovative professional audio systems for both recording and sound reinforcement applications.

Sales to customers in the United States represent 63%, 58% and 63% of total net sales in 2005, 2004 and 2003 respectively. In the United States, for Mackie, EAW, SIA and TAPCO products, we use a network of independent representatives to sell to over 2,500 retail dealers. These products are sold in musical instrument stores, professional audio outlets and several mail order outlets. For the acquired brands of St. Louis Music (Alvarez, Ampeg, Crate, SLM Marketplace, and Knilling), we use a dedicated, domestic employee sales force (there were approximately 25 as of December 31, 2005) who sell to musical instrument stores and retail locations. Beginning in 2006, this employee sales force will begin selling Mackie and TAPCO products as well, while our existing base of independent representatives will continue to sell EAW and SIA products. Sales to our top 10 U.S. dealers represented approximately 27%,

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22% and 27% of net sales made in 2005, 2004 and 2003, respectively. One dealer, Guitar Center Inc., accounted for approximately 16%, 12% and 12% of net sales in 2005, 2004 and 2003, respectively. No other dealer accounted for more than 10% of net sales in this period.

Internationally, our products are offered direct to dealers in the United Kingdom, Canada, France, Germany, Belgium, Netherlands and Luxembourg primarily through our subsidiaries in the United Kingdom and Canada. We also sell direct to dealers in Japan. Our products are also distributed through local distributors in countries where we do not have direct operations. No single international distributor accounted for more than 10% of international net sales in this period.

Sales to customers in the United States were $128.7 million, $71.6 million, and $82.0 million for 2005, 2004 and 2003 respectively, while international sales were $75.7 million, $51.7 million and $48.7 million, for the comparable periods.

Customer support programs are designed to enhance brand loyalty by building customer understanding of product use and capabilities. The customer service and support operation also provides us with a means of understanding customer requirements for future product enhancements. This understanding comes through direct customer contact, as well as through close analysis of responses to various product registration surveys.

Product support specialists are located in Woodinville, Washington, Whitinsville, Massachusetts, and St. Louis, Missouri to provide direct technical service and support. Technical support is provided either through a toll-free number or web-based support during scheduled business hours, and via the website after business hours, as well. Service and repairs on our speaker products sold in the United States are performed at our Whitinsville site. Service and repairs on our electronic products sold in the United States are performed at approximately 100 authorized service centers located throughout the United States. Internationally, our subsidiary in the United Kingdom, as well as our independent distributors, are utilized to provide product support and are also responsible for warranty repairs for products sold into their markets. Additionally, certain products returned to stock are processed through a contract repair facility in Shanghai, China.

We pride ourselves on employing the top engineering and product design talent in the professional-audio and musical instrument industries. Research and development teams are located in Woodinville, Washington; Whitinsville, Massachusetts; St. Louis, Missouri; Shenzhen, China; and Victoria, B.C., Canada. We also utilize third-party engineering service groups to supplement our in-house personnel. Research and development investment was approximately $10.3 million, $7.8 million, and $7.7 million in 2005, 2004 and 2003, respectively.

The professional audio and musical instrument industries are fragmented and highly competitive. There are many manufacturers, large and small, domestic and international, which offer products that vary widely in price and quality and are distributed through a variety of channels. We compete primarily on the basis of product quality and reliability, price, ease of use, brand name recognition and reputation, ability to meet customers’ changing requirements and customer service and support. We compete with a number of professional audio and musical instrument manufacturers, several of whom have significantly greater development, sales and financial resources. Our major competitors are subsidiaries of Harman

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International Industries; Yamaha Corporation; Peavey Electronics Corporation; and Fender Musical Instruments Corporation.

We have a strong interest in protecting the intellectual property assets that reflect original research, creative development and product development. As such, we have sought protection through patents, copyrights, trademarks and trade secrets and have applied and filed for various design and utility patents, both domestically and internationally. We have actively used certain trademarks, and have applied for and registered specific trademarks in the United States and in foreign countries. While the registration of patents and trademarks, and the use of copyrights, trade secrets and other intellectual property protections provides us with certain legal rights, there can be no assurance that any such registration will prevent others from infringing upon these trademarks.

In 2005, we continued to streamline our manufacturing operations to focus on our core competency of building loudspeaker systems at third party contract manufacturers. The majority of our products are manufactured in Asia. We continue to operate our Whitinsville, Massachusetts manufacturing facility, which focuses primarily on the EAW brand, and our Yellville, Arkansas manufacturing facility, which focuses primarily on guitar amplifiers. We have established a team in China who manages and facilitates the transition of products from design to manufacturing at our Asian contract manufacturers.

At December 31, 2005, we had 704 full-time equivalent employees, including 172 in marketing, sales and customer support; 113 in research and development; 346 in manufacturing, manufacturing support and manufacturing engineering; and 73 in administration and finance. Of our employees, 34 were members of an organized labor union as of December 31, 2005.

Our website address is www.loudtechinc.com. The contents of our website are not incorporated into this report or into any of our filings with the Securities and Exchange Commission. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, the Forms 3, 4 and 5 filed by our executive officers, directors and certain shareholders pursuant to Section 16(a) of the Exchange Act, and any amendments to those reports are available free of charge on our website, as soon as is reasonably practicable, after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. The SEC also maintains a website, http://www.sec.gov, at which you may access all of our filings of other persons who are required to file reports with respect to the ownership, disposition, and voting of our equity securities.

Item 1A.  Risk Factors

Dependence on Key Customer. In 2005, 2004, and 2003 one customer, Guitar Center Inc., accounted for approximately 16%, 12% and 12%, respectively, of our net sales revenues. We anticipate that this customer will continue to represent a significant portion of our sales however, the customer is not obligated to continue purchasing products from us. Were our relationship with this customer to deteriorate for any reason we could lose a significant portion of our net sales revenues, which would have a material adverse impact on our results of operations, liquidity and financial condition.

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Liquidity and Debt Obligations. Under the terms of our U.S. credit agreements, we must maintain certain financial covenants and ratios and must maintain adequate levels of eligible collateral to support our borrowing level. The agreements also provide, among other matters, restrictions on additional financing, dividends, mergers, acquisitions, and an annual capital expenditure limit. The covenants in these credit agreements may restrict our operations. If we are unable to generate adequate levels of sales and operating profit, our lenders could declare us to be in default of our obligations. If we are in default, there is no assurance that the lenders would grant waivers or agree to restructure our debt or that we would be able to attain other financing. 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. Moreover, our debt obligations are largely cross-defaulted, which means that a default under one of the agreements causes a default against each other credit agreement. In such instances, if we cannot obtain alternate financing in a very short period of time, we may have to suspend or discontinue our operations, liquidate our assets or take other measures that would result in a material adverse effect upon our financial condition and results of operations.

Our line of credit accrues 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.

Competition. Our industry is highly competitive, and we face competition from a number of well-known brands including Yamaha, Harman-Kardon, Peavey and Fender. Many of our competitors are substantially better capitalized and have substantially stronger market presence than we have. We also expect increasing competition from both established and emerging companies. Competition may have the effects of reducing the prices we can charge for our products, increasing our marketing costs associated with developing and maintaining our market niche, or reducing the demand for our products. If we fail to compete successfully against current and future sources of competition, our profitability and financial performance will be adversely affected, and those effects may be material.

Acquisitions and Business Combinations. We have acquired businesses in the past, and we may do so in the future. We may pursue additional acquisitions of complementary technologies or product lines. Further acquisitions may include risks of entering markets where we have no or limited prior experience, the potential loss of key employees of the acquired company, and impairment of relationships with existing employees, customers and business partners. Further acquisitions may also impact our financial position. For example, we may use significant cash or incur additional debt, which would weaken our financial position. We cannot guarantee that future acquisitions will improve our business or operating results.

Variability in Quarterly Operating Results. Our operating results tend to vary from quarter to quarter. Revenue in each quarter is substantially dependent on orders received within that quarter as well as product availability. Conversely, our expenditures are based on investment plans and estimates of future revenues. We may, therefore, be unable to quickly reduce spending if revenues decline in a given quarter. As a result, operating results for such quarters would be adversely impaired. Results of operations for any one quarter is not necessarily indicative of results for any future period.

Other factors which may cause quarterly results to fluctuate include:

•      increased competition in niche markets;

•      timing of new product announcements;

•      product releases and pricing changes by us or our competitors;

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•      market acceptance or delays in the introduction of new products;

•      production constraints;

•      the timing of significant orders;

•      customers’ budgets; and

•      foreign currency exchange rates.

It is likely in some quarters our operating results will be adversely affected by these factors.

Rapid Technological Change. Product technology evolves rapidly, making timely product innovation essential to success in the marketplace. The introduction of products with improved technologies or features may render our existing products obsolete and unmarketable. If we cannot develop products in a timely manner in response to industry changes, or if our products do not perform well, our business and financial condition will be adversely affected. Also, new products may contain defects or errors which could cause the products to fail to gain market acceptance.

Product Liability. Some of our products, such as amplifiers, speakers and sound mixers, are electronically powered and carry a risk of electrical shock or fire. These and other products create a risk that our customers or third parties may bring claims that our products have caused property damage, physical injury or death. In extreme cases these claims may be asserted as class actions, contending that such products brought harm to large numbers of people. These types of litigation, if threatened or brought, may be costly and may distract management’s attention from operating our business, whether or not we ultimately are adjudged to be liable and whether or not we settle such an action.

Dependence on Suppliers. Certain parts used in our products are currently available from either a single supplier or from a limited number of suppliers. If we cannot develop alternative sources of these components, or if we experience deterioration in our relationship with these suppliers, there may be delays or reductions in product introductions or shipments, which may materially adversely affect our operating results.

Because we rely on a small number of suppliers for certain parts, we are subject to possible price increases by these suppliers. Also, we may be unable to accurately forecast our production schedule. If we underestimate our production schedule, suppliers may be unable to meet our demand for components. This delay in the supply of key components may materially adversely affect our business.

Use of Third Party Distribution Centers. We store and ship the majority of our products from our Woodinville, Washington and St. Louis, Missouri locations. In addition, we utilize third party distribution centers in Europe and Asia. These distribution centers may encounter personnel issues, business disruptions, information systems outages or other disruptions, which may not be remedied quickly, resulting in delays in shipments of our products. Failure to maintain adequate systems and internal controls at these facilities could result in customer shipments being delayed or otherwise improperly transacted, potentially resulting in lost revenue, products or customers.

Use of Contract Manufacturers. The majority of our products are manufactured by third-party contract manufacturers. Third-party manufacturing creates additional risks including:

•      reduction in control of the manufacturing process;

•      longer lead times for transitions of newly released products from engineering to full release;

•      lead times for transitions of existing products to new third party manufacturers;

•      reduced flexibility in reacting to demand changes;

•      increased transportation cost and delivery times;

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•      fluctuations in currency exchange rates (specifically the “floating” currency rate in China);

•      delays or inability to source parts on reasonable payment terms; and

•      concentration of production by certain key manufacturers.

Manufacturing in China. Our ability to import products from China at current tariff levels could be materially and adversely affected if the “normal trade relations” (“NTR”, formerly “most favored nation”) status the United States government has granted to China for trade and tariff purposes is terminated. As a result of its NTR status, China receives the same favorable tariff treatment that the United States extends to its other “normal” trading partners. China’s NTR status, coupled with its membership in the World Trade Organization, could eventually reduce barriers to manufacturing products in and exporting products from China. However, we cannot provide any assurance that China’s WTO membership or NTR status will not change.

International Operations. We have significant net sales to customers outside the United States and believe that international sales will continue to represent a significant portion of our revenue. International sales may fluctuate due to various factors, including:

•      changes in regulatory requirements;

•      tariffs and taxes;

•      increases in freight costs, or damage or loss in shipment;

•      difficulties in staffing and managing foreign operations;

•      longer average payment cycles and difficulty in collecting accounts receivable;

•      fluctuations in foreign currency exchange rates;

•      product safety and other certification requirements; and

•      political and economic instability, wars and terrorist activity.

Sales Regulations. In the United States, our products must comply with various regulations and standards defined by the Federal Communications Commission, the Consumer Products Safety Commission and Underwriters’ Laboratories. Internationally, our products may be required to comply with regulations or standards established by telecommunications authorities in the countries into which we sell our products, as well as various multinational or extranational bodies. Recent environmental legislation in the European Union may increase our costs of doing business internationally as we comply with and implement these new requirements. The European Union, or EU, has issued a directive on the restriction of certain hazardous substances in electronic and electrical equipment, known as RoHs, and has enacted the Waste Electrical and Electronic Equipment, or WEEE, directive applicable to persons who import electrical or electronic equipment into Europe. Although neither of these directives is applicable to our products as of the date of this report, both are expected to become effective in 2006. We are currently implementing measures to comply with each of these directives as individual EU nations adopt their implementation guidelines. Although we believe our products are currently in compliance with domestic and international standards and regulations in countries to which we export, we can offer no assurances that our existing and future product offerings will remain compliant with evolving standards and regulations. If we fail to obtain timely domestic or foreign regulatory approvals or certification, we may be unable to sell our products into jurisdictions to which these standards apply, which may prevent us from sustaining our revenues or maintaining profitability.

Protection of Intellectual Property. We have a strong interest in protecting the intellectual property assets that reflect original research, creative development, and product development. As such, we have sought protection through patents, copyrights, trademarks, and trade secrets. Along with extensive trademark and patent registration and filings, we have claimed copyright protection for works of original authorship, including product brochures, literature, advertisement, and web pages. While certain legal

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rights of enforceability are available to us, there can be no assurance as to the ability to successfully prevent others from infringing upon our intellectual property.

We have never conducted a comprehensive patent search relating to the technology used in our products, however, we believe that our products do not infringe upon the proprietary rights of others. There can be no assurance, however, that others will not assert infringement claims against us in the future or that those claims, if brought, will not be successful.

While we pursue patent, trademark and copyright protection for products and various marks, we also rely on the use of confidentiality agreements with our employees, consultants, development partners and contract manufacturers to protect our trade secrets, proprietary information and other intellectual property. There can be no assurance, however, that these confidentiality agreements will be honored or will be effective in protecting our trade secrets, proprietary information and other intellectual property. Moreover, there can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets.

Dependence on Key Personnel. Our future success will depend in a large part on the continued service of many of our technical, marketing, sales and management personnel and on our ability to attract, train, motivate and retain highly qualified employees. Our employees may voluntarily terminate their employment at any time. The loss of the services of key personnel or the inability to attract new personnel could have a material adverse effect upon our results of operations.

Restructured Sales Force. In early 2006, we decided to eliminate our relationship with independent representatives in the United States and Canada who sell Mackie and TAPCO brands, and instead use an existing domestic employee sales force that had, and will continue to, sell existing St. Louis Music brands. Our independent representatives have had strong relationships with our distributors and retailers, and if our new sales force is unable to continue and grow these relationships, sales could be negatively affected.

Item 2.  Properties

We own one building, a 63,250 square foot building located on 7.66 acres in Yellville, Arkansas, the remainder of our properties are leased. The building we own is primarily used for manufacturing. We lease facilities in Woodinville, Washington totaling approximately 170,000 sq. ft. to house our corporate headquarters as well as a distribution center. The lease on the approximately 80,000 sq. ft. of distribution and warehouse space was renewed in January of 2006 and expires July 31, 2011. The lease on the approximately 90,000 sq. ft. of corporate headquarters and distribution center was renewed in May of 2005 and expires December 31, 2011. We lease a series of connected buildings in a manufacturing complex in Whitinsville, Massachusetts, totaling 220,285 sq. ft. This lease continues through April 2008. We lease a warehouse (approximately 78,000 sq. ft), a research and development center (approximately 26,000 sq. ft), and a warehouse with office space (approximately 67,000 sq. ft) all located in St. Louis, Missouri. All three of these leases were renewed and extended with the acquisition of St. Louis Music, Inc. The warehouse was renewed again in February of 2006 and now expires June 30, 2009, the R&D center and the main office/warehouse expire March 5, 2008. The lessors for two of the St. Louis, Missouri leases are immediate family members of Edward Kornblum, our Senior Vice President of Entertainment and Artist Relations. We lease additional smaller facilities in the United States, Canada, Europe and Asia for our regional sales and support offices. We believe our properties are adequate for our anticipated needs.

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Item 3.  Legal Proceedings

On or about November 29, 2005, LOUD Technologies Inc. and its subsidiary, St. Louis Music Company, were named as party-defendants in a lawsuit in the United States District Court, Southern District of Florida. The lawsuit, filed by Ace Pro Sound and Recordings and served upon the Company, alleges individual and class action claims against LOUD, as well as other, unrelated defendants. The claims include civil conspiracy, tortuous interference, violation of Florida’s state and the Federal Racketeering Influenced and Corrupt Organization Act as well as Section 1 and Section 2 Sherman Act antitrust claims. Management believes these claims are completely without merit, and LOUD has filed a motion to dismiss this case and intends to vigorously defend these claims.

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

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

No matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year ended December 31, 2005.

PART II

Item 5.  Market for Registrant’s Common Equity and Related Shareholder Matters

The Company voluntarily delisted from the Nasdaq Small Cap Market™ on February 7, 2003 because of ongoing difficulties in satisfying certain of the Nasdaq continuing listing requirements. The Company’s stock began trading on the OTC Bulletin Board on February 11, 2003. We applied for reinstatement to the Nasdaq Capital Market™ on November 23, 2005. Our stock began trading on the Nasdaq Capital Market™ under the symbol “LTEC” on March 1, 2006.

As of December 31, 2005, there were 4,566,202 common stock shares of LOUD Technologies Inc. issued and outstanding and approximately 105 shareholders of record. The following table shows the high and low sales prices for our common stock for the periods indicated. Prices reported in this table are adjusted to reflect the 1-for-5 reverse split announced on November 3, 2005 and effected November 17, 2005.

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We have not paid dividends on our common stock in the past, and it is not anticipated that cash dividends will be paid on shares of our common stock in the foreseeable future. Any future dividends will be dependent upon our financial condition, results of operations, current and anticipated cash requirements, acquisition plans and plans for expansion, and any other factors that our Board of Directors deems relevant. Under our current loan and security agreement, we are prohibited from paying any dividends.

In connection with the acquisition of St. Louis Music and pursuant to the Acquisition Agreement dated March 4, 2005 by and among Loud Technologies, Inc., SLM Holding Corp., SLM Merger Corp. and St. Louis Music, we issued 79,358 shares of common stock to Edward Kornblum, one of the shareholders of St. Louis Music. The shares were issued in an unregistered private placement in reliance upon an exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended.

On August 29, 2005 we issued 51,547 shares of common stock, par value $14.55 per share, to certain institutional and accredited investors in accordance with Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended. The consideration for these shares was cash in the amount of $750,000 and the proceeds of such sale are to be used for debt retirement and working capital.

Equity Compensation Plan Information

The Company has a shareholder-approved equity plan that enables the Compensation Committee of the Board of Directors to make stock option awards.

The table below provides information, as of December 31, 2005, concerning securities under current and former equity compensation plans.

During July 2003, our board of directors adopted the 2003 Stock Option Plan (the 2003 Plan), authorizing options to purchase 345,600 shares of common stock. The 2003 Plan calls for options to be non-qualified stock options with exercise prices equal to the fair market value of the stock on the date granted. Options generally vest over a five-year period and expire on the earlier of ten years from grant date or three months from termination. If an option holder is terminated for Cause, as defined in the 2003 Plan, the options would terminate a day prior to termination. At December 31, 2005, 61,000 shares of common stock were available for future grants under the 2003 Plan.

The Company also has a 1995 Stock Option Plan (the 1995 Plan), which authorized 1.3 million shares of common stock for grants. The exercise price of incentive stock options granted under the 1995 Plan may not be less than the fair market value of the common stock on the date of grant. The exercise price of nonqualified stock options granted under the plan may be greater or less than the fair market value of the common stock on the date of grant, as determined by the stock option committee of the board of directors at its discretion. Options generally vest over a four to five-year period and expire no later than ten years after the date of grant. At December 31, 2005, 809,000 shares of common stock were available for future grants under the 1995 Plan.

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Item 6.  Selected Consolidated Financial Data

The following selected Consolidated Statements of Operations data for each of the three years in the period ended December 31, 2005 and the Consolidated Balance Sheet data as of December 31, 2005 and 2004 are derived from our audited Consolidated Financial Statements included elsewhere herein. The selected Statements of Operations data for the years ended December 31, 2002 and 2001 and the Balance Sheet data as of December 31, 2003, 2002, and 2001 were derived from our audited Financial Statements, as restated for discontinued operations, which are not included in this Form 10-K. The following data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements of the Company, including the notes thereto, included elsewhere in this Form 10-K.

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(a)   The consolidated statements of operations data for years ended 2003, 2002 and 2001 have been restated for discontinued operations.

(b)   Included in operating expenses for the year ended December 31, 2002, is a $15,829 non-cash charge relating to the impairment of goodwill and other long-lived assets.

(c)   Long-term debt excludes current portion.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with “Selected Consolidated Financial Data” and the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report. This discussion contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Actual results could differ materially from those discussed here. The cautionary statements made in this Annual Report should be read as being applicable to all forward-looking statements wherever they appear. Factors that could cause or contribute to such differences include those discussed in “Risk Factors,” as well as those discussed elsewhere herein. We undertake no obligation to publicly release the result of 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.

General

We develop, manufacture, and sell high-quality, affordable sound reinforcement speakers, analog mixers, guitar and bass amplifiers, professional loudspeaker systems, violins and other stringed instruments, and digital mixers on a worldwide basis. Our products are used by both professional and amateur musicians; school music programs; sound installation contractors and broadcast professionals in sound recordings, live presentations systems and installed sound systems. 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.

We had a significant improvement in our operating results in 2005, owing in part to our acquisition of St. Louis Music, Inc., on March 4, 2005 and in part to improved margins due to the continued transition of manufacturing to Asia. For the twelve months ended December 31, 2005, revenue increased 65.7% to $204.3 million from $123.3 million for 2004. Revenue for 2005 included $67.2 million attributable to St. Louis Music, Inc., without which our year-over-year improvements in revenues

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would have been $13.8 million, or 11.2%. Operating income for 2005 increased by 553.8% to $8.5 million, or 4.2% of sales, compared to $1.3 million, or 1.1% of sales, for 2004. Income from continuing operation rose to $0.9 million, or $0.19 per diluted share, compared to a loss from continuing operations of $2.3 million, or $0.52 per share, for 2004. Net income for 2005 was $3.8 million, or $0.76 per diluted share, which included a gain on sale of the Company’s discontinued operations in Italy of $2.8 million (net of tax), or $0.57 per diluted share. This compares to a net loss for 2004 of $2.3 million, or $0.52 per share. All per-share amounts in this report are adjusted to reflect the 1-for-5 reverse stock split that was effected on November 17, 2005.

Our discussion and analysis of our financial condition and results of operations following are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities.

We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Certain of these critical accounting policies affect working capital account balances, including the policies for revenue recognition, allowance for doubtful accounts, inventory valuation and income taxes. These policies require that we make estimates in the preparation of our financial statements as of a given date. However, since our business cycle is relatively short, actual results related to these estimates are generally known within the six-month period following the financial statement date. Thus, these policies generally affect only the timing of reported amounts.

Inventory Valuation. LOUD inventories are stated at the lower of standard cost, which approximates actual cost on a first-in, first-out method, or market for Mackie, EAW, SIA and TAPCO brands. For the Crate, Alvarez, Knilling, and Ampeg brands, the inventory is valued at the lower of average cost or market. Included in our inventories balance are demonstration products used by our sales representatives and marketing department including finished goods that have been shipped to customers for evaluation. Market value adjustments are recorded for excess and obsolete material, slow-moving product, service and demonstration products. We make judgments regarding the carrying value of our inventory based upon current market conditions. These conditions may change depending upon competitive product introductions, customer demand and other factors. If the market for our previously released products changes, we may be required to write down the cost of our inventory.

Allowance for Doubtful Accounts. We make ongoing estimates relating to the collectibility of our accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to meet their financial obligations to us. In determining the amount of the allowance, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Since we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger allowance may be required. In the event we determine a smaller or larger allowance appropriate, we would record a credit or a charge to selling, general, and administrative expense in the period in which we made such a determination.

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Long-lived Assets. We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Significant judgment is used in assessing factors which might trigger impairment including significant underperformance relative to expected operating results, significant changes in our use of the assets or the strategy for our overall business, and significant negative industry or economic trends. As we continue to review our distribution methods and transition our manufacturing to third parties, this may result in circumstances where the carrying value of certain long-lived assets may not be recoverable.

Goodwill and Other Intangible Assets. We adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002. In accordance with SFAS No. 142, we no longer amortize goodwill and intangible assets with indefinite lives, but instead we measure these assets for impairment at least annually, or when events indicate that impairment exists. At December 31, 2005, we had goodwill of $2.2 million. We will continue to amortize intangible assets that have definite lives over their useful lives.

Revenue Recognition. Revenues from sales of products, net of sales discounts, returns and allowances, are generally 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 a manufacturer’s repurchase agreement with the finance companies. We 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 rare and insignificant. 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.

Income Taxes. As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or change this allowance in a period, it may materially impact the tax provision in the Statement of Operations.

Accounting for Acquisitions. Significant judgment is required to estimate the fair value of purchased assets and liabilities at the date of acquisition, including estimating future cash flows from the acquired business, determining appropriate discount rates, asset lives and other assumptions. Our process to determine the fair value of trademarks, customer relationships, and developed technology includes the use of estimates including: the potential impact on operating results of the revenue estimates for customers acquired through the acquisition based on an assumed customer attrition rate; estimated costs to be incurred to purchase the capabilities gained through the developed technology and appropriate discount rates based on the particular business’s weighted average cost of capital. Our process to determine the fair value of inventories acquired was to estimate the selling price of the inventories less the sum of costs to sell and a reasonable selling profit allowance.

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Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Net sales from continuing operations increased by 65.7% to $204.3 million in 2005, from $123.3 million in 2004. Sales were positively impacted due to the acquisition of St. Louis Music, Inc. Net sales of the St. Louis brands for the ten months ended December 31, 2005 were $67.2 million, or 83.0% of the total increase. The remaining increase in sales primarily related to increased product availability from our contract manufacturers and the introduction of new products. We have one significant customer who represented approximately 16% and 12% of our total revenues in 2005 and 2004, respectively. U.S. sales represented approximately 63% of our total sales in 2005, compared to approximately 58% in 2004. In 2006, we anticipate introducing and shipping new products, resulting in increased revenues in 2006 over 2005. We will also have twelve months of sales for the acquired brands of St. Louis Music, Inc., which we anticipate will increase revenues in 2006.

Gross Profit

Gross profit increased by 58.1% to $65.3 million, or 32.0% of net sales, in 2005 from $41.3 million, or 33.5% of net sales, in 2004. $14.5 million of this increase related to the acquisition of St. Louis Music, Inc. $2.4 million, or 1.2% of net sales, of the decline in gross profit percentage is a result of the impact of recording St. Louis Music’s inventories at fair value as a result of the purchase price allocation of St. Louis Music.

The remaining increase is due to higher sales in 2005 for Mackie, TAPCO and EAW brands. The reduction in gross profit percentage from 2004 to 2005 is primarily attributable to the addition of St. Louis Music brands, which are typically sold at lower margin percentages. In 2006, we anticipate our margins to remain in the 32%-35% range.

Selling, general and administrative expenses increased by 44.3% to $46.6 million in 2005, from $32.3 million in 2004. The primary cause of this increase was due to the acquisition of St. Louis Music, Inc. Selling, general and administrative expenses for St. Louis Music were $11.8 million for period from acquisition through December 31, 2005. The remaining increase was primarily due to higher marketing expenses and higher commission expense and personnel expense as a result of higher revenues, partially offset by decreases in rent and telephone expenses, and lower allowances for doubtful accounts due to an improved accounts receivable aging. We expect selling, general and administrative expenses to increase in 2006 when we will have a full year of expenses of St. Louis Music, Inc.

Research and development expenses increased by 31.7% to $10.3 million in 2005, from $7.8 million in 2004, of which $1.9 million relates to the acquisition of St. Louis Music, Inc. We anticipate our research and development costs will be higher in 2006 compared to 2005, due to investing in new products and improvements in existing products, in addition to a full year of expenses of St. Louis Music, Inc.

Other Income (Expense)

Net other expense increased $3.9 million, or 110.1% from $3.6 million in 2004 to $7.5 million in 2005. The causes of this increase were an increase of interest expense of $2.7 million, an increase in management fee of $0.7 million, an increase to other expense of $0.8 million, partially offset by an increase to interest income of $0.3 million.

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The increase to interest expense was primarily caused by the increase in debt related to the acquisition of St. Louis Music, Inc., along with a rise in variable interest rates during 2005.

The increase in management fees of $0.7 million was principally due to higher EBITDA. Management fees are paid to Sun Capital Partners Management, LLC quarterly and are calculated as the greater of $400,000 annually or 6% of EBITDA, not to exceed $1,000,000 per year. Of the $1.2 million of management fees expensed during 2005, $1.0 million relates to the 2005 EBITDA calculation, $0.1 million is a result of a correction to the management fee owed for the 2004 EBITDA calculation, and the remaining amount is miscellaneous expenses incurred by Sun Capital Partners Management, LLC, for which Sun Capital is entitled to reimbursement pursuant to our Management Services Agreement dated February 21, 2003.

Other expense in 2005 was primarily due to the expensing of unamortized fees related to the prior debt facility as a result of the refinancing of our debt facilities and foreign exchange transaction losses. Other expense in 2004 was primarily a loss on conversion of Sun Capital debt to equity, partially offset by income from the sale of fixed assets.

Income tax expense from continuing operations was $47,000 and $58,000 from discontinued operations for a total expense of $105,000 in 2005 compared to $12,000 in 2004. The tax expense primarily consists of alternative minimum tax because the regular tax is offset by the utilization of net operating carryforwards and by a corresponding decrease in the deferred tax asset valuation allowance. For 2004, the entire tax expense related to our non-U.S. subsidiaries.

At December 31, 2005, we had net operating loss carryforwards for federal income tax purposes of approximately $28.8 million, which if not utilized would begin to expire in 2024. Approximately $27.5 million of these loss carryforwards relate to the United States and U.K. Approximately $1.3 million of these loss carryforwards relate to our discontinued operation in France, which we believe we will not be able to recapture. We have total net deferred tax assets, including our net operating loss carryforwards, of approximately $16.0 million as of December 31, 2005. We have recorded a valuation allowance for all of the net deferred tax assets as a result of uncertainties of future taxable income necessary for the realization of these net assets.

Gain on Discontinued Operations

In March 2005, we recognized a $2.8 million gain from the discontinued operations of our former Italian subsidiary, net of tax of $58,000. This gain was a result of an agreement with Mackie Italy to settle the net outstanding amounts owed by the Company.

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Our net sales from continuing operations in 2004 were $123.3 million compared to $130.8 million in 2003, a decrease of $7.5 million, or 5.7%. Sales were negatively impacted during the majority of 2004 due to shortages on certain products. These product shortages were due to the migration of certain product manufacturing from Woodinville, Washington to contract manufacturers, as well as the closure of our Italian operations. We have one significant customer who represented approximately 12% of our total

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revenues in each of the years 2004 and 2003. U.S. sales represented approximately 58% of our total sales in 2004, compared to approximately 63% in 2003.

Gross Profit

Our gross profit increased in 2004 to $41.3 million, or 33.5% of net sales, from $29.3 million, or 22.4% of net sales in 2003. The improvement to our gross profit in 2004 was due primarily to increased use of off-shore third party contract manufacturers to produce our products as well as lower levels of write downs of excess and obsolete inventory. Specifically, we took charges against cost of sales of approximately $0.4 million in 2004 related to excess or obsolete products compared to $5.7 million in 2003.

Selling, general and administrative expenses were $32.3 million in 2004, a decrease of $3.4 million, or 9.6%, over 2003 expenses of $35.7 million. The primary causes of this reduction were the full year benefits of the cost reduction initiatives completed in 2003 as well as lower third party commissions in 2004 caused by lower sales revenue.

Our research and developments expenses were $7.8 million in 2004, an increase of $0.1 million, or 0.9%, compared to 2003 expenses of $7.7 million.

During 2003, we incurred $1.6 million in restructuring expenses, primarily representing employee severance and related costs for displaced employees associated with our closing down the manufacturing facility in Woodinville, Washington, after production of goods had terminated.

Other Income (Expense)

Net other expense during 2004 was $3.6 million compared to $0.9 million in 2003. Interest expense was $2.9 million in each year while other expense was $0.7 million in 2004 compared to other income of $1.8 million in 2003. The primary component of other expense in 2004 was a $0.4 million loss on the conversion of Sun Mackie debt to equity while the primary component of other income in 2003 was a $1.6 million gain related to favorable settlements on liabilities of Mackie Designs Engineering Services BVBA (“Mackie Belgium”), which was closed in 2003.

We had income tax expense of $12,000 in 2004 compared to an income tax benefit of $1.2 million in 2003. During 2003, we received $5.0 million in income tax refunds related to carrying back our taxable losses from 2002 to prior year’s returns where we had paid income taxes. The $1.2 million income tax benefit in 2003 represents primarily the difference between income tax refunds received during 2003 in excess of the estimated income tax receivable recorded at December 31, 2002.

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Discontinued Operations

Discontinued operations related to the operations of our former subsidiary, Mackie Italy. We incurred a loss on discontinued operations of $6.4 million in 2003. During 2003, the loss consisted of a $1.7 million loss on the disposition of Mackie Italy, losses from operations of $2.9 million, $1.1 million net interest expense, $0.5 million of income tax expense and $0.2 million of other non-operating losses.

Liquidity and Capital Resources

On August 29, 2005, a new credit facility was completed providing a $69.5 million senior secured loan facility and a $14.8 million senior subordinated note. The senior secured loan facility consists of a $40.0 million revolving loan (of which $9.6 million was outstanding as of December 31, 2005), a $15.0 million Term Loan A, and a $14.5 million Term Loan B. In connection with the senior subordinated note, the Company issued 51,547 shares of common stock to the subordinated lender at a per share price of $14.55.

The $29.5 million term loans under the Credit Agreement have quarterly principal payments.  The term loans bear interest at the Bloomberg's prime rate or LIBOR, both plus a specified margin.  This rate for Term Loan A was 7.88% and Term Loan B was 8.38% at December 31, 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 payment is due August 29, 2011. Under the revolving line of credit, the Company 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 such case 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 are both secured by substantially all of the assets of the Company and its subsidiaries, and are both senior to other long-term debt.  The $14.8 million in senior subordinated notes issued is subordinate to all amounts due under the Credit Agreement and to any refinancing thereof.  Interest accrues on the senior subordinated notes at a rate of 14% and is due quarterly. Of the 14% interest rate, up to two percent may be added to principal on each interest payment date. The principal under the Senior Subordinated Note Agreements is due February 29, 2012.

In February 2005, we made an offer to Mackie Italy to settle any outstanding amounts owed by the Company to Mackie Italy for $4.7 million. This proposal was accepted by the Italian court appointed trustee on behalf of Mackie Italy in May 2005. Under the terms of the settlement agreement, we made additional payments of $2.5 million during 2005. We also committed to pay $2.2 million during 2006. We recognized a gain on discontinued operations of $2.9 million in 2005 related to this settlement.

On March 4, 2005, we acquired all of the shares of St. Louis Music, Inc., a Missouri-based manufacturer, distributor and importer of branded musical instruments and professional audio products for total cash consideration including transaction costs of $35.3 million and the assumption of certain liabilities of $7.2 million. The Company believes the acquisition will further diversify the Company’s product offerings and to help acquire, retain and extend relationships with customers.

As of December 31, 2005, we had cash and cash equivalents of $0.5 million and total debt and short-term borrowings of $56.0 million, including $2.2 million payable to our former Italian subsidiary.  At December 31, 2005 we had availability of $23.3 million on our revolving line of credit, net of a $3.2 million standby letter of credit issued for the commitment to pay the former shareholders of St. Louis Music, Inc.

Cash provided by operations was $10.0 million in 2005 while cash used in operations was $1.2 million in 2004. In 2003, $122 million was provided by operations. Net income for 2005 was $3.8

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million, that included $4.5 million in depreciation and amortization, $1.1 million in amortization of deferred financing fees and a $2.9 million gain on discontinued operations. In 2005, a decrease of our receivables and inventory levels provided cash of  $8.0 million, while a decrease of our accounts payable and accrued expenses used $5.4 million of cash.

In 2006, we anticipate increasing our inventory levels to meet increased demand. We expect increases in revenues to increase our receivables. Additionally, accounts payable is expected to increase in 2006 due primarily to the forecasted increase in inventory.

Cash used in investing activities was $37.0 million in 2005, an increase from $1.2 million used in 2004 and $1.8 million used in 2003. $35.3 million of this investing activity was the acquisition of St. Louis Music, Inc. The remaining increase is due to capital expenditures for equipment primarily used in manufacturing.

As part of our third party manufacturing agreements, most of our contract manufacturers require that we invest in tooling equipment prior to the start of manufacture. Accordingly, in 2006 we anticipate increasing spending on new tooling devices required to build our products and other equipment used in the manufacturing process.

Our cash provided by financing activities was $27.0 million in 2005 and $2.1 million in 2004. Cash used in financing activities was $12.9 million in 2003. Financing activities in 2005 related primarily to a new credit facility of $69.5 million consisting of a revolving loan facility under which $9.6 million was outstanding at December 31, 2005, a Term Loan A of $15.0 million, a Term Loan B of $14.5 million, and subordinated debt of $14.8 million. Along with this refinancing, 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 $3.8 million in deferred financing costs. In 2004, financing activities related primarily to proceeds on our existing line of credit, as well as payments on our long-term debt.

Under the terms of the line of credit and subordinated loan agreements, we are required to maintain certain financial ratios, such as measuring our EBITDA to our total debt and senior debt, and maintaining a certain fixed charge coverage ratio. The agreement also provides, among other matters, restrictions on additional financing, dividends, mergers, acquisitions, and an annual capital expenditure limit.

Our continued liquidity is dependent upon the following key factors:

Our new senior secured and senior subordinated loan agreements require us to meet certain financial covenants such as capital expenditures limits and measuring EBITDA to senior and total debt, as well as a fixed charge coverage ratio. The first measurement date for these covenants was December 31, 2005, and as of that date we had met all of our covenant requirements. We believe we will continue to meet these requirements in each quarter of 2006.

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We had the following material contractual commitments related to operating leases for equipment facilities at December 31, 2005. In addition, we had material obligations related to short-term and long-term debt arrangements, excluding our accounts payable, accrued liabilities and taxes payable of $27.3 million at December 31, 2005:

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

During the fourth quarter of 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123R, “Share Based Payment: An Amendment of SFAS Nos. 123 and 95.” The new standard requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in an entity’s statement of income. Our options are typically granted with vesting periods of 4-5 years, and we intend to amortize compensation cost over this vesting period using the straight-line method. We will adopt SFAS 123R, effective January 1, 2006, using the Modified Prospective Application Method whereby previously awarded but unvested equity awards are accounted for in accordance with SFAS 123R and prospective amounts are recognized in the income statement instead of simply being disclosed. Once adopted, we expect SFAS 123R will impact our financial results by significantly reducing our net income. We expect the implementation of SFAS123R will have a significant impact on our future results of operations. For the year ended December 31, 2006 we expect our stock option expense to be between $0.3 million and $0.6 million.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs—An Amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4”. SFAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead. Further, SFAS 151 requires that allocation of fixed and production facilities overheads to conversion costs should be based on normal capacity of the production facilities. The provisions in this statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe that the adoption of SFAS 151 will have a material effect on our financial position, results of operations or cash flows.

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In March 2005, the FASB issued Interpretation (“FIN”) 47, “Accounting for Conditional Asset Retirement Obligations”. This statement, effective for the period ending December 31, 2005,  provides guidance to ensure consistency in recording legal obligations associated with long-lived tangible asset retirements. FIN 47 did not have a material effect on our financial position, results of operations or cash flows.

In June 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 05-6, “Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination” (“EITF 05-6”). EITF 05-6 requires that leasehold improvements that are placed in service significantly after and not contemplated at or near the beginning of the lease term be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured at the date the leasehold improvements are purchased. EITF 05-6 was adopted in the fourth quarter of 2005. EITF 05-6 did not have a significant impact on our financial position, results of operations or cash flows.

 7A. Qualitative and Quantitative Disclosures About Market Risk

We are exposed to various market risks, including fluctuations in foreign currency rates and interest rates. We may enter into various derivative transactions to manage certain of these exposures; however we did not have any derivative financial instruments as of December 31, 2005.

At December 31, 2005, we had variable rate lines of credit with outstanding balances of $9.6 million. In addition, our $29.5 million term loans also had 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 year ended December 31, 2005, an increase in the average interest rate of 10%, i.e. from 8.08% to 8.89%, would have resulted in an approximately $346,000 decrease in net income before income taxes. The fair value of such debt approximates the carrying amount on the consolidated balance sheet at December 31, 2005.

A substantial majority of our revenues are denominated in U.S. Dollars, and during the fiscal year ended December 31, 2005 approximately 13% of our revenues 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 2005, a 10% decline in the average exchange rates for all these currencies would have caused a decline of approximately $2.4 million, or 1%, of our revenues.

Item 8. Consolidated Financial Statements and Supplementary Data

The following consolidated financial statements and supplementary data are included beginning on page 23 of this report.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
LOUD Technologies Inc.:

We have audited the accompanying consolidated balance sheets of LOUD Technologies Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations,  shareholders’ equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of LOUD Technologies Inc.’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LOUD Technologies Inc., and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

23

LOUD TECHNOLOGIES INC.

AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2005 and 2004

(In thousands, except for share amounts)

See accompanying notes to consolidated financial statements.

24

LOUD TECHNOLOGIES INC.

AND SUBSIDIARIES

Consolidated Statements of Operations

Years ended December 31, 2005, 2004, and 2003

(In thousands, except per share data)

25

LOUD TECHNOLOGIES INC.

AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity and Comprehensive Income

Years ended December 31, 2005, 2004, and 2003

(In thousands)

See accompanying notes to consolidated financial statements.

26

LOUD TECHNOLOGIES INC.

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2005, 2004, and 2003

(In thousands)