e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

		For the quarterly period ended June 30, 2007

or

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

		For the transition period from to

Commission File Number: 0-26524

LOUD TECHNOLOGIES INC.

(Exact name of registrant as specified in its charter)


Washington		91-1432133
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

16220 Wood-Red Road, N.E., Woodinville, Washington		98072
(Address of principal executive offices)		(Zip Code)

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

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

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

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

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

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

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


Common Stock, no par value		4,618,942
Class		Number of Shares Outstanding
		(as of July 31, 2007)

LOUD TECHNOLOGIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)


	June 30,			December 31,
	2007			2006
ASSETS
Current assets:
Cash and cash equivalents	$	6,688		$	311
Accounts receivable, net of allowances of $1,973 and $2,258, respectively		28,792			26,230
Inventories		49,017			54,844
Prepaid expenses and other current assets		2,320			1,521

Total current assets		86,817			82,906

Property, plant and equipment, net		6,301			6,543
Goodwill		19,477			2,248
Other intangible assets, net		28,757			11,367
Deferred financing costs		2,821			2,692

Total assets	$	144,173		$	105,756


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	—		$	14,210
Accounts payable		21,585			23,023
Accrued liabilities		11,271			11,193
Taxes payable		2,123			1,559
Current deferred tax liabilities		419			—
Current portion of long-term debt		3,000			1,500
Current portion of payable to former Italian subsidiary		—			700
Other current liabilities		—			3,162

Total current liabilities		38,398			55,347

Long-term debt, excluding current portion		98,642			40,105
Deferred tax liabilities		5,153			99

Total liabilities		142,193			95,551

Commitments and contingencies

Shareholders’ equity:
Preferred stock, no par value. Authorized 5,000,000 shares, no shares issued and outstanding		—			—
Common stock, no par value. Authorized 40,000,000 shares, issued and outstanding 4,618,942 and 4,575,022 at June 30, 2007 and December 31, 2006, respectively		41,669			41,281
Accumulated deficit		(39,776	)		(31,076	)
Accumulated other comprehensive income		87			—

Total shareholders’ equity		1,980			10,205

Total liabilities and shareholders’ equity	$	144,173		$	105,756

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

LOUD TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except for per share data)


	Three months ended						Six months ended
	June 30,						June 30,
	2007			2006			2007			2006
Net sales	$	50,583		$	53,547		$	101,536		$	112,111
Cost of sales		36,049			35,771			73,397			74,706

Gross profit		14,534			17,776			28,139			37,405

Operating expenses:
Selling, general and administrative		11,032			11,986			22,533			26,746
Research and development		2,830			3,230			5,631			6,486
Restructuring costs		536			495			1,554			645

Total operating expenses		14,398			15,711			29,718			33,877


Operating income (loss)		136			2,065			(1,579	)		3,528


Other income (expense):
Interest income		22			38			22			124
Interest expense		(2,758	)		(1,656	)		(4,608	)		(3,300	)
Management fee		(324	)		(269	)		(485	)		(531	)
Other		150			156			(2,055	)		(22	)

Total other expense		(2,910	)		(1,731	)		(7,126	)		(3,729	)


Income (loss) before income taxes		(2,774	)		334			(8,705	)		(201	)

Provision for income taxes		(39	)		14			(5	)		74


Net income (loss)	$	(2,735	)	$	320		$	(8,700	)	$	(275	)


Net income (loss) per share:
Basic	$	(0.56	)	$	0.07		$	(1.80	)	$	(0.06	)
Diluted	$	(0.56	)	$	0.06		$	(1.80	)	$	(0.06	)

Shares used in computing basic and diluted net income (loss) per share:
Basic		4,855			4,806			4,841			4,806
Diluted		4,855			4,932			4,841			4,806

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

LOUD TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)


	Six months ended
	June 30,
	2007			2006
Operating activities
Net loss	$	(8,700	)	$	(275	)
Adjustments to reconcile the net loss to net cash provided by operating activities:
Depreciation and amortization		2,259			2,216
Amortization and write-offs of deferred financing costs		2,817			344
Stock based compensation		164			257
Gain on asset dispositions		(526	)		—
Non-cash interest expense		106			—
Changes in operating assets and liabilities:
Accounts receivable		1,962			(630	)
Inventories		11,798			(2,287	)
Prepaid expenses and other current assets		(22	)		38
Accounts payable, accrued liabilities and payable to former Italian subsidiary		(7,804	)		1,869
Taxes payable		(523	)		(54	)
Other liabilities		19			103

Net cash provided by operating activities		1,550			1,581


Investing activities
Purchases of property, plant and equipment		(1,323	)		(1,235	)
Proceeds from the sale of property, plant and equipment		1,239			—
Acquisition of St. Louis Music, Inc., including transaction fees paid		(3,181	)		—
Acquisition of Martin Audio, Ltd., net of cash acquired of $3,696		(31,964	)		—

Net cash used in investing activities		(35,229	)		(1,235	)


Financing activities
Payments on previous credit facility		(41,605	)		(1,984	)
Payments on long-term debt		(464	)		—
Issuance of long-term debt		102,000			—
Net proceeds (payments) on bank line of credit and short-term borrowings		(14,210	)		1,526
Net payment on debt and credit facility acquired in acquisition of Martin Audio, Ltd.		(3,030	)		—
Financing costs associated with debt issuance		(2,946	)
Net proceeds from stock sales through exercise of stock options		224			—

Net cash provided by (used in) financing activities		39,969			(458	)


Effect of exchange rate changes in cash and cash equivalents		87			—


Increase (decrease) in cash and cash equivalents		6,377			(112	)

Cash and cash equivalents at beginning of period		311			468

Cash and cash equivalents at end of period	$	6,688		$	356


Supplemental disclosures
Accrued acquisition related expenses	$	1,397		$	—
Cash paid for acquisition related expenses	$	659		$	—

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

LOUD TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)

1. Description of Business

LOUD Technologies Inc. (“LOUD” or the “Company”) was founded in 1988. The Company was incorporated in Washington under the name Mackie Designs Inc., and subsequently changed its name to LOUD Technologies Inc. on 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 ®, Martin Audio ®, SIA® and TAPCO®, LOUD engineers, manufactures, markets and distributes a wide range of professional audio and musical instrument products worldwide. Additionally, LOUD is a distributor of branded professional audio and music accessories through its St. Louis Music catalog.

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

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

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by LOUD in accordance with U.S. generally accepted accounting principles for interim financial statements and include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. They do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. In management’s opinion, all adjustments, consisting of normal recurring adjustments necessary for the fair presentation of the results of the interim periods are reflected herein. Operating results for the three and six-month periods ended June 30, 2007, are not necessarily indicative of future financial results.

Stock Based Compensation

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


	Three months ended		Six months ended
	June 30, 2007		June 30, 2007
Cost of sales	$	2	$	4
Selling, general and administrative		69		153
Research and development		3		7

Total stock based compensation	$	74	$	164

The expected life for each award granted is calculated using the simplified method as described in SAB No. 107. Expected volatility is based on the historical volatility of LOUD common stock. The risk free interest rate is based on the constant maturity U.S. Treasury rate with a remaining term equal to the expected life. Compensation expense recorded includes estimates of the ultimate number of options that are expected to vest. No options were granted during the three and six-month periods ended June 30, 2007.

Use of Estimates

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

Revenue Recognition

Revenues from sales of products, net of sales discounts, returns and allowances, are recognized upon shipment under an agreement with a customer when risk of loss has passed to the customer, all significant contractual obligations have been satisfied, the fee is fixed or determinable and collection of the resulting receivable is considered probable. Products are generally shipped “FOB shipping point” with no right of return. The Company does have some dealers who finance their purchases through finance companies. The Company has a manufacturer’s repurchase agreement with the finance companies and defers the revenue and related cost of goods sold of these sales at the time of the sale. The Company then recognizes 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. The Company generally warrants its products against defects in materials and workmanship for periods of between one and six years, with the exception of Alvarez Yairi guitars, which have a limited lifetime warranty. The estimated cost of warranty obligations, sales returns and other allowances are recognized at the time of revenue recognition based on contract terms and prior claims experience.

Foreign Currency

The financial statements of one of our non-U.S. subsidiaries, Martin Audio, have been translated into U.S. Dollars. The functional currency of this subsidiary is the British Pound. All assets and liabilities in the balance sheets of this subsidiary, whose functional currency is not the U.S. Dollar, are translated at period end exchange rates. Net sales, costs and expenses are translated at average rates of exchange prevailing during the period. Translation gains and losses are accumulated in a separate component of shareholders’ equity.

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

Income Taxes

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

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

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

Concentration of Credit and Supply Risk

The Company sells products on a worldwide basis and a significant portion of its accounts receivable is due from customers outside of the U.S. Where the Company is exposed to material credit risk, it generally requires letters of credit or advance payments. No individual country outside of the U.S. accounted for more than 10% of net sales from continuing operations in any of the periods presented. Sales to U.S. customers are generally on open credit terms. In the U.S., the Company primarily sells its products through third-party resellers and experiences individually significant annual sales volumes with major resellers. For the three-month periods ended June 30, 2007 and 2006, the Company had sales to one customer of $9.0 million and $9.1 million, or 17.7% and 17.0%, respectively of consolidated net sales. For the six-month periods ended June 30, 2007 and 2006, the Company had sales to the same customer of $18.3 million and $18.7 million, or 18.1% and 16.7%, respectively of consolidated net sales.

Many of LOUD’s products are currently being manufactured exclusively by contract manufacturers on its behalf. For the three-month periods ended June 30, 2007 and 2006, net sales of products manufactured by one manufacturer were $16.5 million and $18.1 million, or 32.6% and 33.8%, respectively of net sales, while net sales of products manufactured by another manufacturer were $6.6 million and $6.3 million, or 13.1% and 11.8%, respectively of consolidated net sales. For the six-month periods ended June 30, 2007 and 2006, net sales of products manufactured by one manufacturer were $34.1 million and $37.1 million, or 33.6% and 33.1%, respectively of net sales, while net sales of products manufactured by another manufacturer were $12.7 million and $12.8 million, or 12.5% and 11.4%, respectively of consolidated net sales.

At June 30, 2007, the Company had approximately 528 employees of which approximately 34 were members of an organized labor union.

Recently Adopted Accounting Principles

In June 2006, the FASB issued Financial Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of tax positions taken or expected to be taken in tax returns. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. On January 1, 2007, date of adoption of FIN No. 48, the Company had $2.3 million of unrecognized tax benefits, of which $1.4 million would affect the effective tax rate if recognized. During the three months ended June 30, 2007, the Company recorded an additional $0.2 million of unrecognized tax benefit. As of June 30, 2007, the Company had $2.5 million of unrecognized tax benefits, of which $1.6 million would affect the effective tax rate if recognized.

In accordance with FIN No. 48, the Company has elected to recognize potential accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of June 30, 2007, the Company is still assessing the amount of accrued interest and penalties related to uncertain tax positions, which is included as a component of the $1.6 million of unrecognized tax benefit noted above.

In June 2006, the FASB ratified Emerging Issues Task Force (EITF) Issue 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation). EITF 06-3 requires a company to disclose its accounting policy (i.e., gross or net presentation) regarding the presentation of taxes within the scope of EITF 06-3. If taxes are significant, a company should disclose the amount of such taxes for each period for which an income statement is presented. The guidance is effective for periods beginning after December 15, 2006. The adoption of EITF 06-3 did not result in a change to the Company’s accounting policy or have an effect on the Company’s consolidated financial statements.

New Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a

framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently assessing the impact of SFAS No. 157 on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS No. 159 is to reduce both the complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 159 on its consolidated financial statements.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current year presentation.

3. Net Income (Loss) Per Share

Basic net income (loss) per common share is computed on the basis of the weighted average number of common shares outstanding for the period including warrants and options to purchase shares exercisable for little cash consideration. Diluted earnings per common share is computed on the basis of the weighted average number of common shares plus dilutive potential common shares outstanding. Dilutive potential common shares are calculated under the treasury stock method. Securities that could potentially dilute basic income per share consist of outstanding stock options.

Stock options to purchase 461,000 and 214,000 shares for the three-month periods ended June 30, 2007 and 2006, respectively, were excluded from the calculation of diluted per share amounts because they are antidilutive in 2007 and were out of the money in 2006. Stock options to purchase 461,000 and 606,000 shares for the six-month periods ended June 30, 2007 and 2006, respectively, were excluded from the calculation of diluted per share amounts because they are antidilutive.

4. Restructuring Costs

During 2006, management approved and implemented a restructuring plan. Actions primarily consisted of costs related to the consolidation of the St. Louis Music and service operations. The Company incurred approximately $1.6 million in restructuring costs during 2006, primarily representing employee severance and related costs for approximately 94 terminated employees. During 2006, the Company began implementing a plan to shift its domestic manufacturing to overseas contract manufacturers. The Company incurred approximately $0.5 million and $1.6 million in restructuring costs during the three and six-month periods ended June 30, 2007, respectively, primarily representing employee severance and related costs for approximately 186 terminated employees. The restructuring liability is summarized as follows (in thousands):


Balance at December 31, 2006	$	880
New charges		1,554
Cash payments		(1,535	)
Other adjustments		(5	)

Balance at June 30, 2007	$	894

5. Inventories

Inventories consist of the following (in thousands):


	June 30,		December 31,
	2007		2006
Raw materials	$	2,260	$	4,413
Work in process		219		1,428
Finished goods		46,538		49,003

	$	49,017	$	54,844

6. Other Intangible Assets

Intangible assets consist of the following (in thousands):


	June 30,			December 31,
	2007			2006
Developed technology	$	6,139		$	5,470
Customer and distributor relationships		13,713			3,080
Trademark		12,625			5,930
Non compete agreement		334			—

		32,811			14,480
Less accumulated amortization		(4,054	)		(3,113	)

	$	28,757		$	11,367

The Company acquired Martin Audio on April 11, 2007. Certain identifiable intangible assets were recorded as a result of this acquisition. See Note 10 for further explanation of these intangible assets. Amortization for the three months ended June 30, 2007 for these additional intangible assets was approximately $249,000.

7. Financing

On March 30, 2007, the Company closed on a new $112 million senior secured credit facility. The $112 million senior secured credit facility consists of a $10.0 million revolving loan, a $20.0 million Term Loan A, a $40.0 million US Term Loan B, a $30.0 million UK Term Loan B, and a $12.0 million Term Loan C. The Company’s obligations under the senior secured credit facility are automatically accelerated upon certain bankruptcy or insolvency events, and may be accelerated upon the occurrence of other events of default under the security agreement, such as non-payment of principal, interest or fees when due, or failure to comply with affirmative and negative covenants, subject to any applicable grace periods.

Under the terms of the senior secured credit facility, the Company is required to maintain certain financial ratios, such as a fixed charge coverage ratio and a consolidated leverage ratio. The Company is also required to meet certain EBITDA targets and adhere to certain capital expenditure limits. As of June 30, 2007, the Company met all of its covenant requirements. The agreement also provides, among other matters, restrictions on additional financing, dividends, mergers, and acquisitions.

(a) Short-term borrowings

The Company has a line of credit where it can borrow up to $10.0 million, subject to certain restrictions, including available borrowing capacity. At June 30, 2007, the line of credit was unused, and the Company had the ability to borrow up to $10.0 million. Interest is due quarterly and is based on Chase Manhattan Bank’s prime rate plus 0.5% or LIBOR plus 3.0%.

(b) Long-term debt

Long-term debt consisted of the following (in thousands):


	June 30,			December 31,
	2007			2006
Merrill Term Loan A	$	—		$	12,500
Merrill Term Loan B		—			14,355
Oaktree Subordinated note payable		—			14,750
Ableco Term Loan A		19,536			—
Ableco US Term Loan B		40,000			—
Ableco UK Term Loan B		30,000			—
Ableco Term Loan C		12,106			—

		101,642			41,605
Less: current portion		(3,000	)		(1,500	)

Long-term portion of debt	$	98,642		$	40,105

The $102.0 million term loans under the $112 million senior secured credit facility have quarterly principal payments. Term Loan A bears interest at the Chase Manhattan Bank’s prime rate plus 0.5% or LIBOR plus 3.0%. Term Loans B bear interest at the Chase Manhattan Bank’s prime rate plus 2.6% or LIBOR plus 4.85%. Term Loan C bears interest at the Chase Manhattan Bank’s prime rate plus 4.5% or LIBOR plus 7.0%. In addition, Term Loan C bears additional paid in kind interest of 3.5%, added to the principal balance of Term Loan C on a monthly basis. Interest is due quarterly on each term loan. On April 10, 2007, in connection with the Martin Audio, Ltd. (“Martin Audio”) acquisition, the UK Term Loan B was funded. The $112 million senior secured credit facility is secured by substantially all of the assets of the Company and its subsidiaries.

8. Guarantees

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

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

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


Balance at December 31, 2006	$	1,160
Charged to cost of sales		1,516
Applied to liability		(1,766	)

Balance at June 30, 2007	$	910

9. Commitments and Contingencies

In November 2005, the Company, its subsidiary, St. Louis Music, Inc., and other companies were named as defendants in a lawsuit in the United States District Court, Southern District of Florida. The plaintiff, Ace Pro Sound and Recordings, claims that a leading US retailer of musical products gave notice to the Company and six other defendants that it would no longer trade with plaintiff and that the seven defendants then refused to trade with plaintiff in violation of federal antitrust laws. Other claims are also made against the Company and St. Louis Music based upon the same assertions. The Company believes that the plaintiff misunderstands certain actions taken by the Company and that its actions were proper and lawful. The case is in an early stage, and the Company will defend the action to a satisfactory resolution.

The Company is also involved in various legal proceedings and claims that arise in the ordinary course of business.

10. Business Combinations

On April 11, 2007 the Company acquired all of the outstanding capital stock of Martin Audio, a UK based manufacturer of loudspeakers and related equipment. The purchase price was $33.6 million, plus fees of $2.1 million, for a total consideration of $35.7 million. For the year ended December 31, 2006, Martin Audio had $28.2 million in net sales. The acquisition of Martin Audio adds another premiere brand to the Company’s growing portfolio of brands. In addition, Martin Audio provides the Company with additional geographic and channel diversification.

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


Cash	$	3,696
Accounts receivable		4,524
Inventories		5,971
Prepaid expenses and other current assets		777
Property, plant and equipment		749
Goodwill		17,229
Trademarks (estimated life of 20 years)		6,695
Technology (estimated life of 13 years)		669
Customer relationships (estimated life of 15 years)		1,182
Distributor relationships (estimated life of 15 years)		9,452
Non compete agreement (estimated life of 2 years)		49


Total assets	$	50,993


Accounts payable	$	3,653
Accrued liabilities		2,090
Income taxes payable		632
Deferred income taxes		5,928
Debt		3,030


Total liabilities		15,333


Cash consideration paid, inclusive of $2,056 of transaction costs	$	35,660

Amortization of the $17.2 million of goodwill is not expected to be deductible for tax purposes.

The following unaudited pro forma information represents the results of operations for LOUD and Martin Audio for the six months ended June 30, 2007 and 2006, as if the acquisition had been consummated on January 1, 2007 and 2006, respectively. This pro forma information does not purport to be indicative of what may occur in the future:

UNAUDITED PRO FORMA CONDENSED COMBINED
Statement of Operations Data
(In thousands, except per share data)


	2007			2006
	Pro Forma			Pro Forma
Net sales	$	109,862		$	124,648
Net loss		(4,550	)		(1,527	)
Basic net loss per share	$	(0.94	)	$	(0.32	)

Included in the pro forma adjustments are fair value adjustments that relate to inventories and property, plant, and equipment; reversal of interest expense on Martin Audio’s debt that was in existence prior to the acquisition; reversal of interest expense and deferred financing fees on LOUD’s previous credit facility; recording of interest expense and deferred financing fees on the $102 million senior secured credit facility obtained as a result of the acquisition; and amortization of the intangible assets recorded as a result of the acquisition.

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

The following discussion and analysis should be read in conjunction with our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2006. This discussion contains certain “forward-looking statements” within the meaning of Section 21D of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Actual results may differ materially from those discussed herein. The cautionary statements made in this Quarterly Report on Form 10-Q and the Annual Report on Form 10-K may apply to all forward-looking statements wherever they appear. We undertake no obligation to publicly release any revisions to these forward-looking statements that may be required to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “will be,” “will continue,” “will likely result,” or words or phrases of similar meaning.

Overview

LOUD Technologies Inc. was founded in 1988 and incorporated in Washington under the name Mackie Designs Inc., and changed its name to LOUD Technologies Inc. on September 13, 2003. LOUD is one of the world’s largest dedicated pro audio and music products companies. As the corporate parent for world-recognized brands Alvarez®, Ampeg®, Crate®, EAW®, Knilling®, Mackie®, Martin Audio®, SIA® and Tapco®, LOUD engineers, markets and distributes a wide range of professional audio and musical instrument products worldwide. Additionally, LOUD is one of the largest distributors of branded professional audio and music accessories through its SLM Marketplace catalog.

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

On April 11, 2007 we acquired all of the outstanding capital stock of Martin Audio, Ltd. (“Martin Audio”), a UK based manufacturer of loudspeakers and related equipment. The purchase price was $33.6 million, plus fees of $2.1 million, for a total consideration of $35.7 million. The acquisition of Martin Audio adds another premiere brand to our growing portfolio of brands. In addition, Martin Audio provides us with additional geographic and channel diversification.

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

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

Critical Accounting Policies and Judgments

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

We believe there have been no additional significant changes in our critical accounting policies during the six months ended June 30, 2007 as compared to what was previously disclosed in our Form 10-K for the year ended December 31, 2006.

Estimates and Assumptions Related to Financial Statements

The discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed

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

Results of Operations


	Three months ended						Six months ended
	June 30,						June 30,
	2007			2006			2007			2006
Net sales	$	50,583		$	53,547		$	101,536		$	112,111
Gross profit		14,534			17,776			28,139			37,405

Selling, general and administrative		11,032			11,986			22,533			26,746
Research and development		2,830			3,230			5,631			6,486
Restructuring costs		536			495			1,554			645

Total operating expenses		14,398			15,711			29,718			33,877

Operating income (loss)		136			2,065			(1,579	)		3,528
Other expense		(2,910	)		(1,731	)		(7,126	)		(3,729	)
Provision for income taxes		(39	)		14			(5	)		74

Net income (loss)	$	(2,735	)	$	320		$	(8,700	)	$	(275	)

Three Months Ended June 30, 2007 vs. Three Months Ended June 30, 2006

Net Income (Loss)

For the three months ended June 30, 2007, we showed a net loss of $2.7 million, a decrease of $3.0 million from net income of $0.3 million for the comparable period in 2006. Operating income for the three months ended June 30, 2007 was $0.1 million compared to $2.1 million in the comparable period in 2006. The decrease is primarily the result from the decrease in net sales and lower gross profit on the 2007 sales. Operating expenses for the three months ended June 30, 2007 were $1.3 million lower than the comparable period in 2006, due to the effect of cost-cutting programs implemented in 2006.

Net Sales

Net sales decreased by 5.5% to $50.6 million during the three months ended June 30, 2007 from $53.5 million in the comparable period in 2006. We have experienced general softening in the demand for most of our product lines over the last twelve months. These trends are reflective of challenges facing our major customers and the industry as a whole. These trends were partially offset by the inclusion of sales of Martin Audio products from April 11, 2007 through June 30, 2007 of $6.4 million.

Gross Profit

Gross profit decreased to $14.5 million, or 28.7% of net sales, in the three months ended June 30, 2007 from $17.8 million, or 33.2% of net sales, in the three months ended June 30, 2006. Gross profit for 2007 was affected by $1.4 million due to recording Martin Audio’s inventories at fair value as a result of the purchase price allocation of Martin Audio. Gross profit was also reduced by the costs associated with the factory shutdowns and additional sales discounting done in 2007 to reduce the carrying balances of our inventories during the three months ended June 30, 2007. Excluding the $1.4 million fair value adjustment for Martin Audio’s inventory, gross profit for the three months ended June 30, 2007 was 31.5%.

Selling, General and Administrative

Selling, general and administrative expenses decreased by $1.0 million to $11.0 million in the three months ended June 30, 2007 from $12.0 million in the comparable period in 2006. The decrease was primarily attributable to the effect of cost-cutting programs implemented in 2006.

Research and Development

Research and development expenses decreased by $0.4 million to $2.8 million in the three months ended June 30, 2007 from $3.2 million in the comparable period in 2006. The decrease is primarily attributable to the reduction in prototype costs and salaries associated with the effect of cost-cutting programs implemented in 2006 and 2007.

Restructuring Costs

Restructuring costs were $0.5 million in both the three months ended June 30, 2007 and 2006. The 2007 costs were primarily severance accruals related to the closure and overseas transfer of our domestic manufacturing plants and the closure of our St. Louis Music engineering functions. The 2006 costs were primarily severance accruals related to reductions in work force from the consolidation of the St. Louis Music and service operations.

Other Expense

Net other expense was $2.9 million for the three months ended June 30, 2007 as compared to $1.7 million for the three months ended June 30, 2006. The primary cause of this increase was an increase in interest expense of $1.1 million. The increase in interest expense is primarily attributable to increasing variable interest rates and increased debt as a result of the $112 million senior secured credit facility.

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

Income Taxes

Income tax benefit for the three months ended June 30, 2007 was $39,000 compared to income tax expense of $14,000 for the comparable period in 2006. The primary components of the 2007 benefit are current taxes due from our foreign subsidiaries and an increase to our income tax reserve offset by the deferred tax benefit recorded as a result of the partial amortization of the deferred tax liability recorded as a result of the acquisition of Martin Audio. The primary component of the 2006 tax is the deferred tax expense recorded as a result of the goodwill that is amortized for tax purposes only from the St. Louis Music, Inc. acquisition. The resulting deferred tax liability is not able to be offset against other deferred tax assets.

Six Months Ended June 30, 2007 vs. Six Months Ended June 30, 2006

Net Sales

Net sales from continuing operations decreased by 9.4% to $101.5 million during the six months ended June 30, 2007 from $112.1 million in the comparable period in 2006. We have experienced general softening in the demand for most of our product lines over the last twelve months. These trends are reflective of challenges facing our major customers and the industry as a whole. These trends were partially offset by the inclusion of sales of Martin Audio products from April 11, 2007 through June 30, 2007 of $6.4 million.

Gross Profit

Gross profit decreased to $28.1 million, or 27.7% of net sales, in the six months ended June 30, 2007 from $37.4 million, or 33.4% of net sales, in the six months ended June 30, 2006. Gross profit for 2007 was affected by $1.4 million due to recording Martin Audio’s inventories at fair value as a result of the purchase price allocation of Martin Audio. Gross profit was also reduced by the costs associated with the factory shutdowns and additional sales discounting done in 2007 to reduce the carrying balances of our inventories during the six months ended June 30, 2007. Excluding the $1.4 million fair value adjustment for Martin Audio’s inventory, gross profit of the six months ended June 30, 2007 was 29.1%.

Selling, General and Administrative

Selling, general and administrative expenses decreased by $4.2 million to $22.5 million in the six months ended June 30, 2007 from $26.7 million in the comparable period in 2006. The decrease was primarily attributable to the effect of cost-cutting programs implemented in 2006.

Research and Development

Research and development expenses decreased by $0.9 million to $5.6 million in the six months ended June 30, 2007 from $6.5 million in the comparable period in 2006. The decrease was primarily attributable to the effect of cost-cutting programs implemented in 2006 and 2007.

Restructuring Costs

Restructuring costs were $1.6 million in the six months ended June 30, 2007, primarily representing employee severance and related costs for approximately 186 employees. Restructuring costs were $0.6 million in the six months ended June 30, 2006. The 2007 costs were primarily severance accruals related to the closure and overseas transfer of our domestic manufacturing plants and the closure of our St. Louis Music engineering functions. The 2006 costs were primarily severance accruals related to reductions in work force from the consolidation of the St. Louis Music and service operations.

Other Expense

Net other expense was $7.1 million for the six months ended June 30, 2007 as compared to $3.7 million in the six months ended June 30, 2006. This increase was primarily caused by an increase to interest expense of $1.3 million and the write-off of $2.5 million of unamortized fees related to the prior debt facility as a result of the refinancing of our debt facilities in March 2007. The increase in interest expense is primarily attributable to increasing variable interest rates and increased debt as a result of the $112 million senior secured credit facility.

Income Taxes

Income tax benefit for the first six months of 2007 was $5,000 compared to income tax expense of $74,000 for the comparable period in 2006. The primary components of the 2007 benefit are current taxes due from our foreign subsidiaries and an increase to our income tax reserve offset by the deferred tax benefit recorded as a result of the partial amortization of the deferred tax liability recorded as a result of the acquisition of Martin Audio. The primary component of the 2006 tax relate to our Canadian subsidiary and the deferred tax expense recorded as a result of the goodwill that is amortized for tax purposes only from the St. Louis Music, Inc. acquisition. The resulting deferred tax liability is not able to be offset against other deferred tax assets.

Liquidity and Capital Resources

As of June 30, 2007, we had cash and cash equivalents of $6.7 million and total debt and short-term borrowings of $101.6 million. At June 30, 2007 we had availability of $10.0 million on our revolving line of credit.

Net Cash Provided by Operating Activities

Cash provided by operating activities was $1.6 million for the six months ended June 30, 2007 and the comparable period in 2006. The net loss for the first six months of 2007 was $8.7 million that included $2.3 million in depreciation and amortization, $2.8 million in amortization of deferred financing fees, $0.2 million in stock based compensation expense, and a gain on asset dispositions of $0.5 million. In the first six months of 2007, a decrease in accounts payable and accrued liabilities of $7.8 million and increases to inventories and accounts receivable of $11.8 million and $2.0 million, respectively, used cash. The net loss for the first six months of 2006 was $0.3 million that included $2.2 million in depreciation and amortization, $0.3 million in amortization of deferred financing fees and $0.3 million in stock based compensation expense. In the first six months of 2006, an increase in accounts payable, accrued liabilities and payable to our former Italian subsidiary of $1.9 million provided cash, while increases to inventories and accounts receivable of $2.3 million and $0.6 million, respectively, used cash.

Net Cash Used in Investing Activities

Cash used in investing activities was $35.2 million for the first six months of 2007 compared to $1.2 million for the first six months of 2006. The cash used in investing activities for the first six months of 2007 is primarily related to the acquisition of Martin Audio and the payment of the St. Louis Music, Inc. future commitment to pay of $3.2 million. The cash used in investing activities in 2006 related to the purchases of capital expenditures.

Net Cash Provided by (Used in) Financing Activities

Cash provided by financing activities was $40.0 million during the first six months of 2007, compared to cash used of $0.5 million during the first six months of 2006. Cash provided in the first six months of 2007 is primarily attributable to a new credit facility of $102 million consisting of a Term Loan A of $20.0 million, a US Term Loan B of $40.0 million, a UK Term Loan B of $30.0 million and a Term Loan C of $12.0 million. Along with this refinance, we paid off our existing credit facility of $67.2 million as of March 30, 2007, which consisted of a revolving loan facility of $26.2 million, a Term Loan A of $11.9 million, a Term Loan B of $14.3 million and a senior subordinated note for $14.8 million. We also incurred $2.9 million of deferred financing costs relating to this refinance. Cash used in the first six months of 2006 is primarily attributable to payments made on our long-term debt of $2.0 million partially offset by an increase in our borrowings from our bank line of credit of $1.5 million.

Ability to stay in compliance with debt covenants

Under the terms of the senior secured credit facility, we are required to maintain certain financial ratios, such as a fixed charge coverage ratio and a consolidated leverage ratio. We are also required to meet certain EBITDA targets and adhere to certain capital expenditure limits. The agreement also provides, among other matters, restrictions on additional financing, dividends, mergers, acquisitions, and an annual capital expenditure limit. As of June 30, 2007, we met all of our covenant requirements and we believe we will continue to meet these requirements each quarter thereafter in 2007.

Commitments

We had the following material contractual commitments related to operating leases for facilities at June 30, 2007. 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 $35.4 million at June 30, 2007 (in thousands):


	Payments due by Period
			Less than
	Total		1 Year		1-3 Years		3-5 Years		5+ Years
Operating leases	$	9,892	$	2,621	$	4,659	$	2,612	$	—
Short-term and long-term debt		153,735		13,377		26,018		114,340		—

Total	$	163,627	$	15,998	$	30,677	$	116,952	$	—

Included in the debt line above is expected future interest expense relating to our $112 million senior secured credit facility.

We also have purchase commitments that range between $26 million to $31 million that are primarily due to our contract manufacturers.

We believe we will have adequate resources to meet our material obligations as they come due through December 31, 2007.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our $102.0 million term loans have variable interest rates. As such, changes in U.S. interest rates affect interest paid on debt, and we are exposed to interest rate risk. For the quarter ended June 30, 2007, an increase in the average interest rate of 10%, i.e. from 10.54% to 11.59%, would have resulted in an approximately $272,000 decrease in net income before income taxes. The fair value of such debt approximates the carrying amount on the consolidated balance sheet at June 30, 2007.

Foreign Currency Risk

A majority of our sales are denominated in U.S. Dollars, and during the three months ended June 30, 2007 approximately 25% of our sales were denominated in foreign currencies. We ordinarily do not engage in hedging, rate swaps, or other derivatives as a means to minimize our foreign currency risk and, instead, mitigate that exposure by limiting the portion of our sales that are denominated in other than U.S. Dollars. Assuming the same level of foreign currency denominated sales as in the three months ended June 30, 2007, a 10% decline in the average exchange rates for all these currencies would have caused a decline of approximately $1.2 million, or 2%, of our sales.

The majority of our products are manufactured by foreign third-party contract manufacturers with the majority of the contracts denominated in U.S. Dollars. The exchange rate for these contracts is adjusted quarterly based on the Chinese Yuan Renminbi. Foreign third-party manufacturing creates risks that include fluctuations in currency exchange rates that could affect the price we pay for our product. Our two largest foreign contract manufacturers’ products represented 45.6% of our net sales for the three months ended June 30, 2007. A 10% increase to the cost of the product sold that was manufactured by these two manufacturers would have resulted in an increase to cost of sales for the three months ended June 30, 2007 of approximately $1.0 million.

Item 4. Controls and Procedures

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

As noted in the Company’s Quarterly Report on Form 10-Q filed on May 25, 2007, during management’s preparation of the financial statements as of and for the three month period ended March 31, 2007, and management’s related review of the Company’s disclosure controls and procedures for such period, management discovered an ambiguity relating to the method for computing gross margin for certain of the Company’s product lines. The determination of the appropriate allocations of expense items to the relevant products resulted in a delay in the Company’s filing of that report and, if left unaddressed, may have been considered a material weakness in the Company’s internal control over financial reporting because it would result in more than a remote likelihood that a material misstatement of the annual or interim financial statements would not be prevented or detected. Following a review of the Company’s disclosure controls and procedures relating to the computation of gross margin, management modified its disclosure controls and procedures relating to such methodology. Those modified disclosure controls and procedures were deemed to be operating effectively for the three months ended June 30, 2007.

As such, there has been no change in the Company’s internal control over financial reporting (as defined in Rules 13(a)-15(f) and 15(d)-15(f) under the Exchange Act) during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

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

(a)		Our annual meeting of shareholders was held on May 23, 2007.

(b)		At the annual meeting, C. Daryl Hollis, George R. Rea and Clarence E. Terry were elected to serve as Class 3 directors for a three-year term. James T. Engen, Jon W. Gacek and R. Lynn Skillen continue to serve as Class 1 directors and will be up for re-election at the 2008 annual meeting. Thomas V. Taylor, Jason H. Neimark, Kevin J. Calhoun and Mark E. Kuchenrither continue to serve as Class 2 directors and will be up for re-election at the 2009 annual meeting.

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


Nominee	For		Withheld
C. Daryl Hollis		4,269,302		236,410
George R. Rea		4,288,546		217,166
Clarence E. Terry		4,277,219		228,493

Item 6. Exhibits

Exhibits

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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


PART I.		FINANCIAL INFORMATION

Item 1.		Financial Statements (Unaudited)

		Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006

		Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2007 and June 30, 2006

		Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and June 30, 2006

		Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Income Statements for the six months ended June 30, 2007

		Notes to Condensed Consolidated Financial Statements

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

Item 3.		Quantitative and Qualitative Disclosures About Market Risk

Item 4.		Controls and Procedures

PART II.		OTHER INFORMATION

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

Item 6.		Exhibits

SIGNATURES
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1


		LOUD Technologies Inc.
		(Registrant)

Dated: August 14, 2007	By:	/s/ James T. Engen
		James T. Engen
		Chairman, President and Chief Executive Officer


Dated: August 14, 2007	By:	/s/ Gerald Y. Ng
		Gerald Y. Ng
		Chief Financial Officer

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								Accumulated
								other
	Common stock				Accumulated			comprehensive
	Shares		Amount		Deficit			income		Total
Balance at December 31, 2006		4,575	$	41,281	$	(31,076	)	$	—	$	10,205
Exercise of stock options		44		224		—			—		224
Stock based compensation		—		164		—			—		164
Comprehensive loss:
Net loss		—		—		(8,700	)		—		(8,700	)
Foreign currency translation adjustment		—		—		—			87		87

Total comprehensive loss											(8,613	)

Balance at June 30, 2007		4,619	$	41,669	$	(39,776	)	$	87	$	1,980


Exhibit
Number		Document Description
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.