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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File Number: 0-26524

LOUD Technologies Inc.
(Exact name of registrant as specified in its charter)

(Registrant's telephone number, including area code: (425) 892-6500

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

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

        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

        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 an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes     o No    ý

        On June 30, 2003, 19,608,036 shares of common stock were outstanding, and the aggregate market value of those shares (based upon the closing price as reported by OTCBB) held by non-affiliates was approximately $3,242,000.

        On March 31, 2004, 19,608,036 shares of common stock were outstanding.

        Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders have been incorporated by reference into Part III of the Annual Report on Form 10-K.

LOUD TECHNOLOGIES INC.

FORM 10-K
For the Year Ended December 31, 2003

INDEX

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, 2003 contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. 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 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. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

Item 1. Business

Introduction

        LOUD Technologies Inc., a Washington corporation formed in 1988, engineers, manufactures and markets professional audio and video reproduction and recording equipment and software under the brand names Mackie, TAPCO, SIA, EAW and EAW Commercial.

        Our primary products include analog mixers, sound reinforcement speakers, professional loudspeaker systems, installed paging and music distribution systems, preamplifiers, power amplifiers, digital audio workstations (DAW) and A/V software control surfaces, desktop PCI cards, digital mixers, i/o devices and acoustic test and measurement software. These products are used in a variety of applications, including home and commercial recording studios, live performances and fixed installations of all sizes.

        On February 7, 2003, we voluntarily delisted our stock from the Nasdaq Stock Market. On February 12, 2003, we began to trade our stock on the Over-the-Counter Bulletin Board.

        On February 21, 2003, we finalized an agreement with Sun Mackie LLC, an affiliate of Sun Capital Partners, Inc., a private investment firm, whereby Sun Mackie, purchased approximately 14.4 million shares of our common stock for $10.0 million. Sun Mackie acquired approximately 7.4 million of these shares from certain selling shareholders. It acquired approximately 7.0 million newly issued shares directly from the Company for approximately $6.3 million. Net proceeds after transaction related costs were approximately $3.6 million. Following this transaction, Sun Mackie owned approximately 74% of our outstanding shares.

        On March 31, 2003, we finalized a new Loan and Security Agreement that provides for a revolving line of credit of up to $26.0 million and a term loan of $2.5 million with a new lender. In addition, we finalized a three-year subordinated loan of $11.0 million with our former principal U.S. lender and a $4.0 million four-year subordinated note with Sun Mackie. In connection with the loan from Sun Mackie, we issued warrants to purchase an additional 1.2 million common shares at an exercise price of $.01 per share. The proceeds from these new borrowing arrangements were primarily used to replace the existing U.S. line of credit and satisfy other existing debt of approximately $13.9 million.

        On September 15, 2003, we changed the company name from Mackie Designs, Inc. to LOUD Technologies Inc. This change was designed to eliminate the confusion between the company name and the brand, Mackie. As a result of this change, our ticker symbol changed from MKIE to LTEC.

        On December 10, 2003, Mackie Designs (Netherlands) B.V. ("Mackie Netherlands"), a wholly-owned subsidiary of LOUD Technologies Inc. ("LOUD" or the "Company"), sold all of the shares of Mackie Designs (Italy) S.p.A. ("Mackie Italy"), a wholly-owned subsidiary of Mackie Netherlands, to Knight Italia S.p.A. ("Knight Italia") for a nominal amount, pursuant to an agreement by and among the Company, Mackie Netherlands and Knight Italia.

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        Prior to the sale, Mackie Netherlands filed to place Mackie Italy into a Concordato Preventivo, an Italian form of court-supervised liquidation (the "Concordato"). Knight Italia has made an irrevocable offer to the Italian court to lease or purchase the former Mackie Italy factory in Reggio Emilia, Italy, the RCF brand name and significant other Italian-based assets. In December 2003, the Company fulfilled its obligation under the Concordato filing to purchase approximately $620,000 of finished goods inventory. The Concordato filing is subject to approval by a majority of the creditors, which is expected to be received in 2004. In the event the court denies the bankruptcy, Italian law may permit actions to be taken against the Company including demanding a refund of any payments made to the Company in the prior two years.

        None of the Company, its subsidiaries, the Company's directors or officers, or any associates of its directors or officers has any material relationship with Knight Italia.

        At December 31, 2003, we were not in compliance with certain financial covenants of our debt agreements. In April 2004, we executed Loan Amendment and Waiver agreements waiving penalties for prior noncompliance and amending the future financial covenants.

        "MACKIE," the running man figure, "TAPCO," "EAW," "SIA," and "EAW Commercial," are registered trademarks or common law trademarks of LOUD Technologies, 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.

        Our website address is www.loudtechinc.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports are available free of charge on our website as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

Marketing

        Innovative marketing is the hallmark of each LOUD Technologies brand. As a result, each brand holds an enviable, unique position in its respective marketplace. Each brand is supported by a dedicated, in-house marketing and design team that handles all media planning/buying, print literature and advertising design, web design, public relations, product documentation, training and trade show support. In 2003, we completed the consolidation of worldwide marketing planning and implementation for all brands to this U.S.-based team. We also made significant progress in building a vibrant position for the new TAPCO brand, increased the impact of Mackie-branded products at the retail level through the use of new four-color packaging and a new-format product line brochure, and further positioned EAW as a technological leader through the launch of category-creating new products. We also adjusted our marketing mix by shifting spending from broad-brush print advertising to more interactive electronic promotions and communications, as well as higher-impact point-of-sale materials. We also streamlined our public relations processes to ensure more timely new product reviews in key trade publications.

Our Brands

Mackie

        Our primary retail brand, Mackie consistently delivers an outstanding combination of features for the price. Although the brand was founded in the compact mixer market segment, it now encompasses a full range of pro-audio products—from digital and analog mixers, to active and passive loudspeakers and cutting-edge recording software.

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EAW

        Our high-end sound reinforcement brand, EAW delivers the ultimate in performance, regardless of price. EAW loudspeakers are found in the most prestigious performance venues, and highest-profile concert tours, worldwide.

SIA

        SIA delivers a suite of measurement, analysis and system alignment tools for the pro audio, acoustical consulting, engineering and performing arts communities.

TAPCO

        Our entry-level retail brand, TAPCO delivers different products, and Mackie-inspired quality, for entry-level musicians who don't want to sacrifice quality for price. The brand was re-launched in 2003 and is rapidly expanding to include a full range of loudspeakers, studio monitors, amplifiers and mixers.

EAW Commercial

        Launched in late 2003, EAW Commercial is our commercial and industrial brand. EAW Commercial sets a new standard in commercial audio by leveraging the acoustical expertise of EAW to bring both cutting-edge, as well as better-than-expected staple products, to the commercial and industrial market.

Distribution and Sales

        In the U.S., we use a network of independent representatives to sell to over 1,500 retail dealers and 500 installed sound contractors, some of which have several outlets. Our products are sold in musical instrument stores, pro audio outlets and several mail order outlets. Sales to our top 10 U.S. dealers represented approximately 36%, 33% and 37% of net sales made to U.S. customers in 2003, 2002 and 2001, respectively. One dealer accounted for approximately 19%, 22% and 15% of U.S. net sales in 2003, 2002 and 2001, respectively. No other dealer accounted for more than 10% of sales made to U.S. customers in this period.

        Internationally, products are offered through a subsidiary in the United Kingdom, and also through subsidiaries in Germany and France for most of 2003 and 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 outside of the U.S. accounted for approximately 37%, 38% and 38% of total net sales in 2003, 2002 and 2001, respectively.

Customer Support

        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 and Whitinsville, Massachusetts to provide direct technical service and support. Technical support through a toll-free number is provided during scheduled business hours, and via the website after business hours. Service and repairs on products sold in the U.S. are performed at our Woodinville and Whitinsville sites, and for certain specialized products, at approximately 100 authorized service centers located throughout the U.S. Internationally, our subsidiary in the United Kingdom, as well as our independent distributors, are utilized to provide product support. These subsidiaries and distributors are responsible for warranty

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repairs for products sold into their markets and for the costs of carrying inventory required to meet customer needs.

Research and Development

        We pride ourselves in employing the top engineering and product design talent in the pro-audio industry. Research and development teams are located in Woodinville, Washington; Whitinsville, Massachusetts; 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 $7.7 million, $10.3 million, and $10.9 million in 2003, 2002 and 2001, respectively.

Competition

        The professional audio industry is fragmented and highly competitive. There are many manufacturers, large and small, domestic and international, which offer audio 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 manufacturers, several of whom have significantly greater development, sales and financial resources. Our major competitors are subsidiaries of Harman International Industries, Inc.; Allen & Heath; Yamaha Corporation; TOA Corporation; Philips Electronics Corporation; Peavey Electronics Corporation; Teac America, Inc. (Tascam); SoundTracs PLC; Genelec, Inc.; Renkus-Heinz; Electro-Voice; Bose Corporation and Meyer Sound Laboratories.

Proprietary Technologies

        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 U.S. and in foreign countries. While the registration of trademarks provide us with certain legal rights, there can be no assurance that any such registration will successfully prevent others from infringing upon these trademarks.

        We have never conducted a comprehensive patent search relating to the technology used in our products. 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 claims will not be successful.

Manufacturing

        In 2003, we continued to streamline our manufacturing operations to focus on our core competency of building high-end electronics and loudspeaker systems. To that end, we focused on improving the efficiency of our Whitinsville, Massachusetts manufacturing facility. We also completed the transition of production from our Woodinville, Washington facility to third-party contract manufacturers throughout the world.

        As a result of the Italian bankruptcy filing and subsequent sale of our subsidiary, Mackie Italy, in December 2003, we no longer have manufacturing facilities in Italy.

Backlog

        Typically, orders are shipped within two weeks after receipt. In the case of new product introductions or periods where product demand exceeds production capacity, products are allocated to

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customers on a monthly basis until demand is met. We began tracking backlog on orders during 2003. We typically have a backlog of two weeks sales or less, except during periods where product is not in stock, in which case our backlogs are larger.

Employees

        At December 31, 2003, we had 468 full-time equivalent employees, including 126 in marketing, sales and customer support, 61 in research and development, 239 in manufacturing and manufacturing support, which includes manufacturing engineering, and 42 in administration and finance.

RISK FACTORS

        This report contains forward-looking statements. There are many factors that could cause actual results to differ materially from those projected by the forward-looking statements made in this report. Factors that might cause such a difference include, but are not limited to, the risk factors described below. We do not undertake any obligation to publicly release the result of any revisions to the forward-looking statements contained in this reports that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

        Decline of General Economic Conditions.    The adverse economic conditions in the U.S. and throughout the world economy have adversely affected our sales levels in recent periods and if these adverse conditions continue or worsen, we may experience continued material adverse impact on our revenues, operating results and financial condition. Our operating losses have caused us to reevaluate our operating strategy and plan certain actions to reduce our cost of sales and operating expense in future periods. These future actions could result in special charges or adversely affect our long-term competitive position. Further, we may be unable to reduce the cost of sales and operating expenses at a rate and level consistent with such future adverse sales environment, which would have an adverse effect on our results of operations and financial condition.

        Dependence on significant customers.    Our relationships with our largest customers are critical to our sales performance. Failure to maintain those relationships would have a material adverse effect upon our results of operations and financial condition. Sales from continuing operations to one customer accounted for 12% and 14% of our consolidated net sales for the fiscal year ended December 31, 2003 and 2002, respectively. We anticipate that this customer will continue to account for a significant portion of our sales for the foreseeable future; however, it is not obligated to any long-term purchase of our products.

        Liquidity.    Under the terms of our U.S. credit agreements, we must maintain certain financial 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 any of the debt is called, and we are unable to obtain alternate financing, we may have to continue to modify our operations, liquidate assets or take other measures to continue operations.

        Our line of credit contains certain financial covenants, which we were not in compliance with at December 31, 2003. In April 2004, we executed a Loan Amendment and Waiver agreement with our U.S. lenders waiving any penalties for prior noncompliance and amending the future financial covenants.

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        Our line of credit accrues interest based on variable short-term interest rates. Changes in the Prime rate or LIBOR would increase or decrease our interest expense.

        We liquidated our investment in our Italian subsidiary during 2003, after placing the entity in an Italian form of court-supervised bankruptcy. We owe this entity approximately $9.3 million. We are currently negotiating the repayment terms of this debt. If we are unable to negotiate reasonable long term payment schedules for this debt, and the trustee were to take action in the United States, requiring repayment of this debt, we could be placed in default of our other debt discussed above.

        Development, Introduction and Shipment of New Products.    We are currently developing new analog and digital mixers, amplifiers and loudspeakers. If we encounter significant resource, technological, supplier, manufacturing or other problems there may be a delay in the development, introduction or manufacture of these products. In the past, when sales have been affected by delays in developing and releasing new products, some customers waited for new products, while others purchased products from our competitors. We have and will continue to increase the use of third-party contractors in our product development process. The use of third parties in the product development process may reduce our control over the product development process or its outcome and may ultimately result in higher costs and longer time to market. Delays in the completion and shipment of new products, or failure of customers to accept new products, may affect future 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. 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 that quarter will be adversely impaired. Results of operations for any one quarter are 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;



•

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 possible that 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 give rise to product liability claims or cause the products to fail to gain market acceptance.

        Competition.    We expect competition to increase from both established and emerging companies. If we fail to compete successfully against current and future sources of competition, our profitability and financial performance may be adversely affected.

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        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 our products primarily from third party distribution centers in the United States, 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.    We have transitioned the manufacture of many of our products previously built in our Woodinville, Washington facility and former Italian subsidiary to third-party contract manufacturers located throughout the world. We expect this transition to third-party contract manufacturers and reduction in internal capacity to continue during 2004. The transition from in-house manufacturing to 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;



•

fluctuations in currency exchange rates; and



•

delays or inability to source parts on reasonable payment terms.

        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 U.S. 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:

•

unexpected changes in regulatory requirements;



•

tariffs and taxes;



•

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



•

difficulties in staffing and managing foreign operations;

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•

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.

        The European Community ("EC") and European Free Trade Association have established certain electronic emission and product safety requirements ("CE"). We intend to receive CE certification for all products sold in the EC, however, there may be delays in obtaining such certifications. Failure to obtain either a CE certification or a waiver for any product may prevent us from marketing that product in Europe.

        We liquidated our investment in our Italian subsidiary during 2003, after placing the entity in an Italian form of court-supervised bankruptcy. In the event the court denies the bankruptcy, Italian law may permit actions to be taken against the Company including demanding a refund of any payments made to the Company in the prior two years.

        Restructuring.    As part of an ongoing effort to reduce the cost structure of the organization and to improve profitability we have completed significant restructuring of our company and plan to continue to do so. We expect to incur significant costs, including severance and other transition costs as we proceed with our restructuring. Restructuring also creates additional risks for us because of potential disruption to the organization including employee morale issues, turnover, and general distraction to the organization.

        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 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.

        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

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would weaken our financial position. We cannot guarantee that future acquisitions will improve our business or operating results.

        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.

Item 2. Properties

        We lease facilities in Woodinville, Washington totaling approximately 170,000 square feet to house our corporate headquarters as well as our former manufacturing plant and distribution center. The majority of the space in our Woodinville buildings is currently underutilized. The lease on our 80,000 sq. ft. underutilized former distribution center expires in December 2005. The lease on our 90,000 sq. ft. corporate headquarters and former manufacturing facility expires in December 2006. Our current space needs in Woodinville totals approximately 40,000 sq. ft. We are attempting to sublease the underutilized facilities. The market demand for the space is substantially below our current carrying costs. We expect to take a one-time charge related to excess facilities in the event we fully exit the space. We lease a series of connected buildings in a manufacturing complex in Whitinsville, Massachusetts, totaling 220,285 sq. ft. This lease continues through April 2006. We lease additional facilities in the United States, Europe and Asia for our regional sales and support offices.

Item 3. Legal Proceedings

        Subrogated claims have been asserted against us from insurance companies who prior to our acquisition of Eastern Acoustic Works, Inc. (EAW), paid claims made by EAW's landlord and other tenants of the Whitinsville building who were affected by a fire started by a loaned employee in a portion of the building in 1996. The potential loss from this claim may exceed $4 million inclusive of interest; some portion of which we anticipate would be covered by insurance. The trial date has been scheduled for June 2004. We believe that these losses are not attributable to us under Massachusetts' law and are vigorously defending the litigation. The claims of the other tenants have been covered by EAW's insurance carrier. The ultimate resolution of this matter is not known at this time. No provision has been made in our consolidated financial statements related to these claims.

        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, 2003.

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PART II

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

        Until February 7, 2003 our common stock was traded on the Nasdaq National Market under the symbol "MKIE." From February 12, 2003, until September 15, 2003, our common stock was traded on the OTC Bulletin Board under the same symbol. In September 15, 2003, we changed the Company's name to LOUD Technologies Inc. and our ticker symbol to LTEC. As of March 31, 2004, there were approximately 108 shareholders of record. The following table shows the high and low sales prices for our common stock for the periods indicated. These prices do not include retail markups, markdowns or commissions.

        On February 21, 2003, Sun Mackie, LLC, an affiliate of Sun Capital Partners, Inc., a private investment firm, purchased 6,935,680 newly issued shares of the Company for approximately $6.3 million in cash. Net proceeds after transaction related costs were approximately $3.6 million. Sun Mackie also purchased 7.4 million outstanding shares from certain selling shareholders for approximately $3.7 million in cash. After completion of this transaction, Sun Mackie owned approximately 74% of our outstanding shares. We issued these shares to Sun Mackie in reliance on the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended.

        On March 31, 2003, Sun Mackie provided a $4.0 million four-year subordinated note in connection with the refinancing of our U.S. debt. In consideration of the loan from Sun Mackie, we have issued warrants to purchase an additional 1.2 million shares of common stock at an exercise price of $.01 per share.

        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.

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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, 2003 and the Consolidated Balance Sheet data as of December 31, 2003 and 2002 are derived from our audited Consolidated Financial Statements included elsewhere herein. The selected Statements of Operations data for the two years in the period ended December 31, 2000 and the Balance Sheet data as of December 31, 2001, 2000 and 1999 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.

(a)

The consolidated statements of operations data for all prior years are restated for discontinued operations.

(b)

Long-term debt excludes current portion.

(c)

We adopted FAS No. 142 on January 1, 2002 (see Note 2 of Notes to Consolidated Financial Statements).

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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, distribute and sell high-quality, affordable digital and analog audio mixers, speakers, amplifiers and other professional audio equipment on a worldwide basis. Our products are used by professional musicians, sound installation contractors and broadcast professionals both in sound recordings, live presentations systems and installed sound contractors. We have our primary operations in the United States and the U.K.

        On December 10, 2003, Mackie Designs (Netherlands) B.V. ("Mackie Netherlands"), a wholly-owned subsidiary of LOUD Technologies Inc. ("LOUD" or the "Company"), sold all of the shares of Mackie Designs (Italy) S.p.A. ("Mackie Italy"), a wholly-owned subsidiary of Mackie Netherlands, to Knight Italia S.p.A. ("Knight Italia") for a nominal amount, pursuant to an Agreement by and among the Company, Mackie Netherlands and Knight Italia.

        Mackie Italy was an Itailian corporation with its principal offices and manufacturing facilities in Reggio Emilia, Italy. Its principal activity was the manufacturer of loudspeaker and speaker components. Mackie Italy marketed its products principally under the RCF brand name.

        Prior to the sale, Mackie Netherlands filed to put Mackie Italy into a Concordato Preventivo, an Italian form of court-supervised liquidation (the "Concordato"). Knight Italia has made an irrevocable offer to the court to lease or purchase the former Mackie Italy factory in Reggio Emilia, Italy, the RCF brand name and significant other Italian-based assets. In December 2003, the Company fulfilled its obligation under the Concordato filing to purchase approximately $620,000 of finished goods inventory. The Concordato filing is subject to approval by a majority of the creditors, which is expected to be received in 2004.

        None of the Company, it's subsidiaries, the Company's directors or officers, or any associates of it's directors or officers has any material relationship with Knight Italia, other than as a new supplier of components and equipment.

        The disposition of the Mackie Italy operations is accounted for as a discontinued operation. At December 31, 2003, we do not show any assets or liabilities of this entity on our consolidated balance sheet. We have reclassified and condensed the results of discontinued operations on our consolidated statements of operations for all years presented. Cash flows from these operations are included in our consolidated statements of cash flows for all periods presented.

        On February 21, 2003, we finalized an agreement with Sun Mackie, an affiliate of Sun Capital Partners, Inc., a private investment firm, whereby Sun Mackie, purchased approximately 14.4 million shares of our common stock for $10.0 million. Sun Mackie acquired approximately 7.4 million of these shares from certain selling shareholders. It acquired approximately 7.0 million newly issued shares directly from the Company for approximately $6.3 million. Net proceeds after transaction related costs

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were approximately $3.6 million. As a result of this transaction, Sun Mackie owned approximately 74% of our outstanding shares on that date.

        In addition to its equity investment, Sun Mackie has provided $4.0 million of debt financing, which funded in March 2003. In connection with this loan, we have issued warrants to purchase an additional 1.2 million common shares at an exercise price of $0.01 per share. In addition to the transactions with Sun Mackie, a Loan and Security Agreement with a new lender was finalized in March 2003. This agreement provides for a $26.0 million revolving line of credit and a $2.5 million term loan. Our previous U.S. lender provided a loan totaling $11.0 million, which is subordinate to the Loan and Security Agreement with our new lender. This subordinated loan and the $2.5 million new term loan satisfied the existing U.S. Term Loans (see Note 11 of Notes to Consolidated Financial Statements).

        We have taken various actions to improve results of operations and ensure our ongoing ability to cover scheduled debt servicing payments, including headcount reductions and other cost containment measures. During the second half of 2003, we closed our manufacturing facility in Woodinville, Washington, and are outsourcing a majority of our products from offshore contract manufacturers. This closure and other restructuring activities resulted in net reductions to our headcount of approximately 210, not including 358 people that were employed by our former Italian subsidiary, disposed of in December 2003. We are finalizing the closure of certain international sales offices and centralizing our international sales organization, the remaining financial impact of which we do not anticipate being significant.

Critical Accounting Policies and Estimates

        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 accounting principles generally accepted in the United States of America. 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.    We believe our policy on valuing inventory, including market value adjustments, is our primary critical accounting policy. Inventories are stated at the lower of standard cost, which approximates actual cost on a first-in, first-out method, 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 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

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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 and administrative expense in the period in which we made such a determination.

        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 FAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. In accordance with FAS 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, 2003, we did not have any remaining goodwill or other intangibles with indefinite lives. 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. 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. 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.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Net Sales

        Our net sales from continuing operations in 2003 were $130.8 million compared to $159.4 million in 2002, a decrease of 17.9%. This decline is due to lower unit volumes, discounted pricing on certain models and reduction in the number of models we sell. We experienced a two-year volume decline due to reductions in our product offerings and an aging lifecycle of certain products resulting in lower sales.

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Additionally, sales were negatively impacted during the latter part of 2003 due to our being out of stock on certain products. These product outages 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 believe we will continue to have product shortages until the second to third quarter of 2004. We have one significant customer who represented approximately 12% of our total revenues from continuing operations in 2003 and 14% in 2002. U.S. sales represented approximately 63% of our total sales in 2003, compared to approximately 62% in 2002. In 2004, we anticipate introducing and shipping new products, resulting in increased revenues in 2004 over 2003. These new products will include introductions of more affordable product lines; entrance into the desktop recording line and feature-rich additions to our core analog mixer product lines.

Gross Profit

        Our gross margins decreased in 2003 to $29.3 million, or 22.5% of net sales, from $37.9 million, or 23.8% of net sales in 2002. The deterioration in gross margins is due to many factors primarily surrounding the migration of a majority of our manufacturing from the U.S. to third party contract manufacturers as well as the write down of excess and obsolete inventory. Specifically, we took charges against cost of sales of approximately $6.3 million related to excessive or obsolete products compared to $7.1 million in 2002. In 2003, we were continually producing fewer goods in the U.S. and migrating a majority of these goods to Asia, however, our costs of manufacturing in the U.S. were not reducing at the same level as the output. Accordingly, the excess of costs incurred at our facilities over what we capitalized into inventory reduced our margins. We also had higher depreciation expenses in 2003 over 2002, due to a change in estimate of useful lives of certain manufacturing equipment from the planned closure of our U.S. manufacturing facility. Additionally, we had a higher percentage of our sales coming from lower margin products in 2003 than we did in 2002.

        We expect our gross margins to begin to increase in the second quarter of 2004, with continued advances throughout the remainder of 2004. During the first half of 2004, we will be incurring one time transition costs with new and existing contract manufacturers or suppliers of materials for contract manufacturing, which will keep our margins lower until the second half of 2004, when we anticipate the transitions will be complete.

Selling, General and Administrative

        Selling, general and administrative expenses were $35.7 million in 2003, a decrease of $7.7 million over 2002 expenses of $43.4 million. During 2003, we actively took measures to reduce costs including reductions in the number of employees through layoffs or attrition and significantly lower spending on marketing tradeshows. Additionally, included in selling costs are commissions paid to third parties, which were lower due to lower revenues in 2003 compared to 2002. We anticipate selling general and administrative costs to be lower in 2004 than in 2003, primarily due to cost reduction initiatives completed during 2003.

Research and Development

        Our research and developments expenses were $7.7 million in 2003, a reduction of $2.6 million compared to 2002 expenses of $10.3 million. The reduction in these expenses is due to both headcount reductions as well as the closure of a research facility we had in Belgium during the first half of 2003. We will continue to outsource certain development products to third parties, which will cause these expenses to be higher in certain quarters than others, depending on when these contracts occur. We are and will continue to invest in new products and improvements to existing products and have taken restructuring measures we believe will enable us to be more efficient at such processes. Accordingly, we anticipate our research and development costs will be lower in 2004 than in 2003.

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Restructuring Costs

        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. We believe we will begin to fully recognize the benefits of this restructuring in the second to third quarters of 2004, in the form of higher product margins on the goods previously manufactured in the U.S. Additionally, we may have additional restructuring expenses in 2004 related to future minimum lease payments of under-utilized warehouse space in the event we fully exit the space. Future minimum rental payments under this lease are approximately $2.4 million through 2006.

Other Income (Expense)

        Net other expense during 2003 was $0.9 million compared to $1.1 million in 2002. In 2003, this amount comprised of $0.2 million of interest income and $1.8 million of non-operating gains, offset by $2.9 million of interest expense. The non-operating gains include approximately $1.6 million of gains related to favorable settlements on liabilities of Mackie Belgium, closed during the first half of 2003. Interest expense will fluctuate primarily with the balance of our line of credit and may also fluctuate based on increases or decreases in the Prime Rate or LIBOR, the base rates on our line of credit.

Income Tax Benefit

        We recognized tax benefits from continuing operations in 2003 of $1.2 million, compared to $2.7 million in 2002. During 2003, we received $5.0 million in income tax refunds related to carrying back of our taxable losses from 2002 to prior years 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 income tax receivable at December 31, 2002.

        At December 31, 2003, we had net operating loss carryforwards for federal income tax purposes of approximately $26.9 million, which if not utilized will begin to expire in 2023. We have total net deferred tax assets, including our net operating loss carryforwards, of approximately $16.2 million as of December 31, 2003. We have recorded a valuation allowance for the entire net deferred tax assets as a result of uncertainties regarding the realization of these net assets.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Net Sales

        Net sales from continuing operations were $159.4 million in 2002 compared to $172.0 million in 2001, reflecting a decrease of $12.6 million or 7.3% from 2001. This decrease resulted primarily from lower volume of sales, due in part to the continuing economic slowdown throughout the world. Our sales trended down in the latter half of 2002. Other factors which influenced sales included the decline in sales of certain older product families without the mitigating effect of new product introductions. Additionally, granting higher levels of sales discounts was necessary to maintain market share. We also introduced prompt payment discounts in the U.S. to increase cash flow.

Gross Profit

        Gross profit was $37.9 million or 23.8% of net sales for 2002 compared to $51.9 million or 30.2% of net sales for 2001. This decline was primarily due to inventory adjustments associated with products that are no longer marketable due to product obsolescence and poor field performance. Inventory adjustments associated with these products amounted to $7.1 million. Other inventory adjustments were necessary in 2002 to provide for excess material on hand as demand for certain products declined or those products failed to meet initial sales expectations. These inventory adjustments were identified and

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recorded primarily in the fourth quarter. In 2002, we continued the transition and manufacture of certain product lines to offshore facilities that we began in 2001. While the goal of higher gross margins was achieved for those products, the transfer created inefficiencies and excess capacity in our factories resulting in poor leverage of overhead, which lowered gross profit. We reduced the headcount at our manufacturing factories to compensate for the transfer of production, however the incremental cost of the transition in the form of severance reduced gross profit in the period affected. Finally, gross profit was reduced by sales discounts and prompt payment discount programs initiated in 2002.

Selling, General and Administrative

        Selling, general and administrative expense increased to $43.4 million in 2002 from $41.7 million in 2001, and increased as a percent of net sales in 2002 to 27.2% from 24.3% in 2001. Costs were recognized in 2002 associated with severance payments related to a reduction in force. Certain non-salary expenses were also higher in some areas in 2002 than in 2001. The majority of savings related to the 2002 reductions in headcount was not recognized in 2002, as the reductions happened in the third and fourth quarter of 2002. Additionally, we recorded bad debt expense of approximately $2.3 million in 2002 as compared to $0.8 million in 2001. The largest portion of this related to the bankruptcy filing of one of our largest U.S. customers.

Research and Development

        Research and development expenses decreased to $10.3 million in 2002 from $10.9 million in 2001. As a percent of sales, research and development stayed constant at 6% of net sales. The decrease in dollars relates primarily to an emphasis on cost cutting as well as a reduction in workforce that occurred in the third and fourth quarters of 2002.

Impairment of Goodwill and Other Long-Lived Assets and Cumulative Effect of a Change in Accounting Principle

        We adopted FAS No. 142 on January 1, 2002. As a consequence, we no longer amortize goodwill and intangibles with indefinite lives, but instead measure goodwill and intangibles for impairment at least annually, or when events indicate that impairment exists. As required by FAS No. 142, we performed the transitional impairment test on goodwill and other intangibles, which consisted of an assembled workforce. As a result of the transitional impairment test, we recorded a $5.9 million cumulative effect of a change in accounting principle in 2002. The total impairment of $5.9 million has been included in discontinued operations for the year ended December 31, 2002, as the goodwill was related to our acquisition of Mackie Italy, whose results are shown as discontinued operations in all period presented. In addition to the transitional impairment test, we reviewed our remaining goodwill and other intangibles as required annually pursuant to FAS No. 142. As a result of the annual review in the fourth quarter of 2002, we further reduced the carrying amount of goodwill by recording an impairment charge of $14.5 million, the remaining net book value.

        Additionally, at December 31, 2002, we reviewed our other long-lived assets for potential impairment and determined that the carrying value of the developed technology recorded in connection with our acquisition of Mackie Designs Engineering Services BVBA would not be recoverable. We also determined that the carrying value of property, plant and equipment at certain of our European facilities would not be recoverable. Accordingly, we recorded an impairment charge for these items totaling approximately $1.3 million.

Other Income (Expense)

        Net other expense was $1.1 million for 2002 compared to $3.4 million for 2001. Included in this amount is interest expense which decreased to $2.4 million in 2002 from $2.6 million in 2001. Other

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income, comprised primarily of foreign exchange transaction gains and losses, was income of $1.3 million in 2002 compared with an expense of $0.8 million in 2001. These gains and losses are primarily the result of changes between the value of the Euro and the U.S. dollar.

Provision (Benefit) for Income Taxes

        We had a benefit for income taxes of $2.7 million in 2002 compared to a benefit for income taxes of $1.0 million in 2001. The effective tax rate is lower than the statutory rate due primarily to the non-deductibility of certain expenses, principally goodwill and other impairment charges, and to the increase in the valuation allowance associated with deferred tax assets. The valuation allowance was determined to be necessary since utilization of our tax assets depends on future profits, which are not assured. Certain non-deductible expenses also reduced this benefit from the statutory rate, however these items were smaller in 2001 and thus had less of an effect on the overall rate.

Discontinued Operations

        Discontinued operations relate to the operations of our former subsidiary, Mackie Italy. We incurred a loss on discontinued operations of $6.4 million in 2003 compared to a loss of $7.9 million in 2002 and $2.2 million in 2001. 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. In 2002, the loss represented operating income of $0.4 million offset by a $5.9 million charge for a cumulative effect of a change in accounting principle, $1.0 million net interest expense, $0.9 million of income tax expense and $0.5 million of other non-operating expenses. In 2001, the loss consisted of a $0.6 million loss from operations, $1.9 million of net interest expense, $0.3 million of other non-operating expense offset by an income tax benefit of $0.6 million.

Liquidity and Capital Resources

        As of December 31, 2003, we had cash and cash equivalents of $757,000 and total debt and short-term borrowings of $24.6 million.

Net Cash from Operating Activities

        Cash provided by operations was $12.2 million in 2003, $3.3 million in 2002 and $16.1 million in 2001. Our net loss in 2003 was $21.8 million, including a loss of $1.7 million on disposal of discontinued operations and $7.0 million in depreciation and amortization. In 2003, we significantly reduced our inventory levels, providing $18.7 million in cash, and made significant collections on our receivables, providing $8.3 million in cash. We significantly paid down our accounts payable and accrued expenses during 2003 by $4.2 million, net. In 2004, we anticipate growing our inventory levels and accounts receivable as revenues increases. Accounts payable are expected to grow in 2004 due primarily to forecasted increases in inventory.

Net Cash Used in Investing Activities

        Cash used in investing activities was $1.8 million in 2003, a decrease from $4.5 million in 2002 and $10.7 million in 2001. For the past three years, investing activities have primarily related to capital expenditures for equipment used in manufacturing, office equipment and a new corporate financial system and additional technology.

        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 2004 we anticipate spending approximately $4.0 million in new tooling devices required to build our products and other equipment used in the manufacturing process.

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Net Cash Used in Financing Activities

        Our cash used in financing activities primarily relate to payments and proceeds from long-term debt and our line of credit and other short-term borrowings. Financing activities also primarily include our proceeds from stock sales.

Net Proceeds From Stock Sales

        In February 2003, Sun Mackie, an affiliate of Sun Capital Partners, Inc., a private investment firm, made an equity investment in the Company totaling $6.3 million. Certain deal-related fees reduced funds received by us by approximately $2.7 million.

Payments and Proceeds from Long-term Debt, Line of Credit and Other Short-term Borrowings

        In addition to its equity investment, Sun Mackie provided $4.0 million in debt financing in March 2003. Interest accrues at 15% and is scheduled to be paid annually beginning in March 2004, if excess available cash exists, as defined by the senior credit agreement. The principal is due in a lump sum payment in 2007. In addition to the loan from Sun Mackie, we issued warrants to purchase an additional 1.2 million common shares at an exercise price of $0.01 per share.

        In connection with this agreement with Sun Mackie in March 2003, we refinanced all of our debt obligations, paying down a net of $4.3 million. We entered into a $2.5 million term loan and a line of credit providing up to $26.0 million with a new U.S. Lender. Availability under this line of credit is limited to eligible collateral; initial funding was $11.6 million. Principal payments on the term loan are due in equal monthly payments over five years, beginning in July 2003. Interest is due monthly calculated at the bank's prime rate plus 0.75%. Both the revolving line of credit and term loan are secured by all U.S. based assets including, but not limited to, accounts receivable, inventory, fixed assets, intangible assets and patents. Additionally, a portion of the revolving line of credit is provided in the U.K. and is secured by accounts receivable of LOUD Technologies (Europe) Plc.

        Our previous U.S. lender has provided a loan totaling $11.0 million, which is subordinate to the Loan and Security Agreement with our new lender. Principal is due beginning in May 2005 based upon our 2004 earnings before interest, taxes, depreciation and amortization, less cash taxes paid, certain capital expenditures and certain debt repayments. If the 2004 adjusted EBITDA is greater than $3.3 million, we would make payments during the twelve month period beginning May 2005 of up to of $1.7 million; no payments or lower payments would be made if adjusted EBITDA and line of credit availability amounts fail to meet a certain threshold. The principal is due May 2006. Interest accrues at a rate of 10% and is paid subject to certain availability tests as we have availability under the Loan and Security Agreement.