** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 
| **(Mark One)** |   |
|----------------|--------|

 
| **ý** | **ANNUAL REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|-------------------------------------------------------------------------------------------|

 
|   | **For the fiscal year ended December 31, 2001** |
|--------|-------------------------------------------------|

 

**or**

 
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  *[No Fee Required]*** |
|-------|------------------------------------------------------------------------------------------------------------------------------|

 
|   | **For the transition period from                       to                     ** |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Commission File Number:  0-26524**

 

**MACKIE DESIGNS 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)                           |
|                                                                         |   |                                 |
| **(Registrant’s telephone number, including area code: (425) 487-4333** |
|                                                                         |
| **Securities registered pursuant to Section 12(b) of the Act:**              |

 

| **Title of each class**                                         |   | **Name of each exchange on which registered** |
|-----------------------------------------------------------------|--------|-----------------------------------------------|
| None                                                            |   | None                                          |
|                                                            |   |                                          |
| **Securities registered pursuant to Section 12(g) of the Act:** |

 

|                  | **Common Stock - no par value** |   |
|-----------------------|---------------------------------|--------|
| (Title of each class) |

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes   ý    No  o   

 

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

 

As of March 1,2002, the aggregate market value of the Registrant’s Common Stock held bynonaffiliates of the Registrant was $11,117,647 based on the closing salesprice of the Registrant’s Common Stock on the Nasdaq National Market.  On that date, there were 12,427,356 sharesof Common Stock outstanding.

 

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

 

 

 

**MACKIE DESIGNS INC.**

** **

**FORM 10-K**

**For the Year Ended December 31, 2001**

** **

 
| **INDEX**  |
|------------|
|       |
| Part  I    |
|       |   |   |
|       | Item 1. | Business |
|       |   |   |
|       | Item 2. | Properties |
|       |   |   |
|       | Item 3. | Legal Proceedings |
|       |   |   |
|       | Item 4. | Submission of Matters to a Vote of  Securities Holders |
|       |   |   |
| Part  II   |
|       |   |   |
|       | Item 5. | Market for Registrant’s Common Equity and  Related Shareholder Matters |
|       |   |   |
|       | Item 6. | Selected Financial Data |
|       |   |   |
|       | Item 7. | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|       |   |   |
|       | Item 8. | Consolidated Financial Statements and  Supplementary Data |
|       |   |   |
|       | Item 9. | Changes in and Disagreements With  Accountants on Accounting and Financial Disclosure |
|       |   |   |
| Part  III  |
|       |   |   |
|       | Item 10. | Directors  and Executive Officers of the Registrant |
|       |   |   |
|       | Item 11. | Executive  Compensation |
|       |   |   |
|       | Item 12. | Security  Ownership of Certain Beneficial Owners and Management |
|       |   |   |
|       | Item 13. | Certain  Relationships and Related Transactions |
|       |   |   |
| Part  IV   |
|       |   |   |
|       | Item 14. | Exhibits, Financial Statement Schedules and  Reports on Form 8-K |
|       |   |   |
| Signatures |   |

 

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**PART I**

 

**Item 1****.  Business**

 

*Certain statements set forth in orincorporated by reference into this report on Form 10-K contain“forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995. Such statements are based on currently availableoperating, financial and competitive information and are subject to variousrisks and uncertainties. Such forward-looking statements include among others,those statements including the words “expect,” “anticipate,” “intend,”“believe” and similar expressions. Our actual results could differ materiallyfrom those discussed in this report. Factors that could cause or contribute tosuch differences include but are not limited to the risks discussed in the“Risk Factors” section. Readers are cautioned not to place undue reliance onthese forward-looking statements, which speak only as of the date hereof.*

 

**Introduction**

 

Mackie DesignsInc., a Washington corporation formed in 1988, is a leading developer andmanufacturer of high-quality professional audio equipment.

 

Our primaryproducts are analog and digital mixers, mixer-related products, recorders,amplifiers, loudspeakers and loudspeaker components. These products are used ina wide variety of sound applications including home and commercial recordingstudios, live performances, and public address systems.

 

Our productsare distributed in the U.S. through a network of independent representatives toover 1,500 retail dealers of professional audio equipment as well as over 500installed sound contractors. Internationally, products are offered through subsidiaries in Italy,France, Germany, the United Kingdom and China and through local distributors in70 other countries where we do not have direct operations.

 

Our businessesare organized by the end-user markets they serve as well as by product linesmanufactured. The company serves the following three broadly defined markets:Live Sound/Sound Reinforcement, Recording, and Contractor/Fixed Installation.

 

We have madestrategic investments to gain entry to and to enhance our position in thesemarkets.  These investments included thepurchase of Mackie Designs (Italy) S.p.A., formerly known as Radio CineForniture S.p.A., in June 1998 and Eastern Acoustic Works, Inc. in April 2000.Mackie Italy is an Italian corporation with principal offices in Reggio Emilia,Italy, and manufacturing facilities located in northern Italy. Its principalactivity is the manufacture of loudspeakers and speaker components. Under theEAW brand name, we design and manufacture loudspeaker systems, includingintegrated signal processing targeted at the mid to high-end of the installedand touring sound markets.

 

In April 2001,we acquired Mackie Engineering Services (Belgium) BVBA, formerly known asSydec, in a move to accelerate our penetration of the digital recording anddigital audio workstation subsets of the recording market.  Mackie Engineering Services is principally aresearch and development facility with a focus on digital recording. Digitalbroadcast workstations marketed under the “Soundscape” name are also developedat the Belgium facility.

 

Our productsare manufactured in our Woodinville, Washington, Whitinsville, Massachusetts,and Reggio Emilia, Italy facilities. During 2001, we established a relationshipwith a third party contract manufacturer in China, Amoisonic Electronics. Weare transitioning the manufacture of certain of our product families to theirfacilities.

 

“MACKIE,” therunning man figure, “RCF,” “Artesuono,” “EAW” and all of the names of our U.S.–producedproducts are registered trademarks or common law trademarks.  To the extent trademarks are unregistered,we are unaware of any conflicts with trademarks owned by third parties.  This document also contains names and marksof other companies.

 

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**Markets**

 

Our productsare well represented in most professional audio markets, which include liveperformance, broadcast and recording and fixed installation.  The live performance market includes musicinstrument support and systems used by touring performers.  The broadcast and recording market includesall facets of recording, from home and project studios to professional studiosand broadcast facilities.  The fixedinstallation market includes sporting venues, houses of worship and users ofbusiness music systems.

 

**Products**

 

We design,manufacture and market products in most professional audio markets.  Loudspeakers under the EAW brand name arerecognized as some of the best quality loudspeakers available for both largefixed installation projects and touring sound systems.  Loudspeakers under the Mackie brand name areleaders in the sound reinforcement market being used both for live and fixedinstallation markets.  The company alsohas RCF and Mackie Industrial loudspeakers, which are marketed to the fixedinstallation market.

 

Mixingproducts under the Mackie brand name are leaders in most professional audiomarkets.  We have numerous recordingmixers in both analogue and digital formats, additionally mixes are marketed toboth the live and fixed installation markets.

 

Hard diskrecorders are marketed to both the recording and live markets.  These products are used for the digitalrecording of live events and the recording and editing of audio in numerousformats.

 

**Distributionand Sales**

 

In the U.S.,we use a network of independent representatives to sell to over 1,500 retaildealers and 500 installed sound contractors, some of which have severaloutlets.  Our products are sold inmusical instrument stores, pro audio outlets and several mail orderoutlets.  Sales to our top 10 U.S.dealers represented approximately 37%, 32%, and 37% of net sales made to U.S.customers in 2001, 2000 and 1999, respectively.  Guitar Center accounted for approximately 17%, 13%, and 13% ofU.S. net sales in 2001, 2000 and 1999, respectively.  No other dealer accounted for more than 10% of sales made to U.S.customers in this period.

 

Internationally,products are offered through subsidiaries in the United Kingdom, Germany,France, Italy and China and through local distributors in countries where we donot have direct operations.  Our top 10international dealers and distributors represented approximately 22%, 18%, and16% of international net sales in 2001, 2000 and 1999, respectively.  No single international distributoraccounted for more than 10% of international net sales in this period.  Sales to customers outside of the U.S. accountedfor approximately 49%, 44%, and 49%, of total net sales in 2001, 2000, and1999, respectively.

 

**Marketing**

 

Our marketingstrategy is designed to strengthen our brands and to educate end-users aboutour products.  All advertising,brochures, video, multimedia and trade show materials are created by ourin-house marketing and design department. Additionally, our websites are developed and maintained in-house toprovide timely, accurate and compelling product and support information.  Materials are provided by the marketingdepartment to representatives, distributors and dealers worldwide, as part ofthe overall sales strategy.  Owner’smanuals and sales literature are currently produced in several different languages.  These materials are provided as a complementto direct advertising and customer support follow-up programs.  To further enhance customer awareness andunderstanding of our products, we advertise in leading trade publications,provide ongoing technical training and education for representatives anddistributors, and participate in the primary industry trade shows for ourmarkets.  We have won several nationaladvertising awards as a result of this commitment to detail and excellence.

 

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**CustomerSupport**

 

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

 

Productsupport specialists are located in Woodinville, Washington and Whitinsville,Massachusetts to provide direct technical service and support.  Technical support through a toll-free numberis provided during scheduled business hours, and via the website after businesshours. Service and repairs on products sold in the U.S. are performed at ourWoodinville and Whitinsville sites, and for certain specialized products, atapproximately 100 authorized warranty service centers located throughout theU.S.  Internationally, our subsidiariesas well as our independent distributors are utilized to provide productsupport. These subsidiaries and distributors are responsible for warrantyrepairs for products sold into their markets and for the costs of carryinginventory required to meet customer needs.

 

**Researchand Development**

 

Our researchand development strategy is to develop affordable, high-quality products andrelated accessories for targeted markets. On December 31, 2001, there were 103 individuals involved in researchand development activities.  Researchand development operations are located at the three manufacturing facilitieslocated in Woodinville, Whitinsville and Reggio Emilia, Italy.  Additionally, there are research anddevelopment groups located in Belgium, Canada and the Czech Republic.  Research and development expenses wereapproximately $11.9 million in 2001, $9.4 million in 2000, and $7.1 million in1999.

 

**Competition**

 

Theprofessional audio industry is fragmented and highly competitive.  There are many manufacturers, large andsmall, domestic and international, which offer audio products that vary widelyin price and quality and are distributed through a variety of channels.  We compete primarily on the basis of productquality and reliability, price, ease of use, brand name recognition andreputation, ability to meet customers’ changing requirements and customerservice and support.  We compete with anumber of professional audio manufacturers, several of whom have significantlygreater development, sales, and financial resources.  Our major competitors in the mixer category are subsidiaries ofHarman International Industries, Inc., Yamaha Corporation, TOA Corporation,Philips Electronics Corporation, Peavey Electronics Corporation, Teac America,Inc. (Tascam) and  SoundTracs PLC.  Competitors in the power amplifier categoryinclude Peavey Electronics Corporation (including Crest Audio, Inc.), CrownAudio Inc. (a Harman subsidiary), and QSC Audio Products, Inc.  Competing studio monitor loudspeakermanufacturers include Genelec, Inc., Event Electronics LLC, Renkus-Heinz,Alesis Corporation and JBL (a Harman subsidiary).  Competing stage loudspeaker system manufacturers include JBL,Peavey Electronics Corporation and Electro-Voice.  Competitors in the component speaker market include JBL, EminenceSpeaker Corporation, Acustica Beyma S.A. and B&C Speakers S.p.A.  Competitors in the commercial sound productscategory include JBL, Bose Corporation and TOA Corporation.  Competing installed sound loudspeaker systemmanufacturers include JBL, Tannoy, Electro-Voice, Community ProfessionalLoudspeakers and Renkus-Heinz. Competitors in the touring sound loudspeaker system category includeJBL, L-Acoustics, Meyer Sound Laboratories and Nexo.  Competitors in the hard disk recorder/editor market includeAlesis, Alai, HHB, Tascam, RADAR, AMS Audiofile and Fairlight.

 

**ProprietaryTechnology**

 

We have astrong interest in protecting the intellectual property assets that reflectoriginal research, creative development, and product development.  As such, we have sought protection throughpatents, copyrights, trademarks, and trade secrets and have applied and filedfor various design and utility patents, both domestically andinternationally.  We have actively usedcertain trademarks, and have applied for and registered specific trademarks inthe U.S. and in foreign countries. While the registration of trademarks provide us with certain legal

 

5

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rights, there can be noassurance that any such registration will successfully prevent others frominfringing upon these trademarks.

 

Along withextensive trademark and patent registration and filings, we have claimedcopyright protection for works of original authorship, including productbrochures, literature, advertisement, and web pages.  In certain cases, we have filed and will continue to file forcopyright registration in the U.S. While copyrights provide certain legal rights of enforceability, therecan be no assurance as to the ability to successfully prevent others frominfringing upon these copyrights.

 

We have neverconducted a comprehensive patent search relating to the technology used in ourproducts.  We believe that our productsdo not infringe upon the proprietary rights of others.  There can be no assurance, however, thatothers will not assert infringement claims against us in the future or thatclaims will not be successful.

 

While Mackiepursues patent, trademark and copyright protection for products and variousmarks, we also rely on trade secrets, know-how and continuing technologyadvancement, manufacturing capabilities, affordable, high-quality products,brand name recognition, new product introduction and direct marketing effortsto develop and maintain our competitive position.  Our policy is to have each employee enter into an agreement thatcontains provisions prohibiting the disclosure of confidential information toanyone outside the Company and to recognize the Company’s ownership ofintellectual property developed by employees. Consulting contracts generally provide for the protection ofintellectual property and the requirement of confidentiality.  There can be no assurance, however, thatthese confidentiality agreements will be honored or that we can effectivelyprotect our rights to unpatented trade secrets.  Moreover, there can be no assurance that others will notindependently develop substantially equivalent proprietary information andtechniques or otherwise gain access to our trade secrets.  We have traditionally not sought patentprotection for Mackie Italy products and have not pursued trademark orcopyright protection except for the name “RCF.”

 

**Manufacturing**

 

Our productsare manufactured in facilities in Woodinville, Whitinsville, and ReggioEmilia.  These facilities are focused onthe core manufacturing technologies of electronics, loudspeakers andloudspeaker systems, and transducers, respectively. In addition, the facilitieswork together as part of the supply chain to provide integrated products to themarket.  Many products share components,which allows for integrated manufacturing of several distinct products and incertain cases significant purchase volume discounts.

 

During 2001,we established a relationship with Amoisonic Electronics, a third partycontract manufacturer in China. Certain product families are being transitionedto Amoisonic’s facilities to reduce costs and create additional manufacturingcapacity at our owned facilities.

 

We rely almostexclusively on one vendor for our potentiometers and certain of our integratedcircuits but are in contact with other manufacturers of these items regularly.These items are critical components in certain products. Interruption in, orcessation of, the supply of these components from these suppliers couldadversely affect production capability, as the qualification process foranother manufacturer, from sample submission to production quality and quantitydelivery, could take several months. We attempt to maintain a three monthsupply of potentiometers and a one month supply of the specific integratedcircuits on hand at any given time to reduce the effect of any disruption.

 

**Backlog**

 

Typically,orders are shipped within two weeks after receipt; backlog is not generallytracked. In the case of new product introductions or periods where productdemand exceeds production capacity, products are allocated to customers on amonthly basis until demand is met.

 

**Employees**

 

At December31, 2001, we had 1,386 full-time equivalent employees, including 169 inmarketing, sales and customer support, 103 in research and development, 1,021in manufacturing and manufacturing support, which includes manufacturingengineering, and 93 in administration and finance.  Approximately 120 of the manufacturing employees in Italy arerepresented by a labor union.  Weconsider our relations with all employees, union and non-union, to be good.

 

6

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**RISK FACTORS**

 

*This report contains forward-lookingstatements. There are many factors that could cause actual results to differmaterially from those projected by the forward-looking statements made in thisreport. Factors that might cause such a difference include, but are not limitedto, the risk factors described below. We do not undertake any obligation topublicly release the result of any revisions to the forward-looking statementscontained in this report that may be made to reflect events or circumstancesafter the date hereof or to reflect the occurrence of unanticipated events.*

 

***Liquidity.***Under the terms of our U.S. creditagreement, we must maintain certain financial ratios and tangible networth.  The agreement also provides,among other matters, restrictions on additional financing, dividends, mergers,acquisitions, and an annual capital expenditure limit. At December 31, 2001, wewere out of compliance with one of our financial covenants. We were also out ofcompliance earlier during 2001 but negotiated a restructuring of the covenantsand received a waiver from the lender. This restructuring resulted in slightlyhigher interest rates in addition to certain loan amendment fees. In April 2002we received a waiver for the December 31, 2001 non-compliance and negotiated anew credit agreement, including a restructuring of the covenants. Under the newcredit agreement, the renewal date for the line of credit is April 2003, therenewal date for the term loan is September 2003.

 

Both the line of credit and the term loan are secured by all U.S. basedassets including, but not limited to, accounts receivable, inventory, fixedassets, intangibles and patents. As a result of restructuring the line ofcredit and term loan, we have reclassified amounts related to the term loanpreviously shown as long-term debt callable under covenant provisions ininterim condensed consolidated financial statements.

 

The term loan may become callable under covenant provisions if we donot meet our new covenants. Although there can be no assurance, we believe thatwe will be able to meet our financial covenants in 2002 under the revisedcredit agreement.

 

We have taken variousactions to improve results of operations and ensure our ongoing ability tocover scheduled debt servicing payments, including headcount reductions andother cost containment measures. During the third and fourth quarters of 2001,these measures included layoffs, salary reductions, office closures andreduction of capital expenditures. We will continue to focus on increasedmanagement controls over expenditures and attempt to reduce costs of sales byimproving our methods of product sourcing. Finally, we are evaluating a varietyof alternative financing sources, including possible divestiture of certainoperating assets.

 

***Development,Introduction and Shipment of New Products****. *We are currently developing newanalog and digital mixers, recording devices, amplifiers, loudspeakers andloudspeaker components.  Significantresource, technological, supplier, manufacturing or other problems may delaythe development, introduction or manufacture of these products. In the past,when sales have been affected by delays in developing and releasing newproducts, some customers waited for new products, while others purchasedproducts from our competitors.  Delaysin the completion and shipment of new products, or failure of customers toaccept new products, may affect future results.

 

***Variabilityin Quarterly Operating Results****.* Our operating results tend to vary from quarter to quarter.  Revenue in each quarter is substantiallydependent on orders received within that quarter.  Conversely, our 

 

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expenditures are based oninvestment plans and estimates of future revenues.  We may, therefore, be unable to quickly reduce spending ifrevenues decline in a given quarter.  Asa result, operating results for that quarter will suffer.  Results of operations for any one quarterare not necessarily indicative of results for any future period.

 

Other factorswhich may cause quarterly results to fluctuate include:

 

•        increasedcompetition in niche markets

•        timing ofnew product announcements

•        productreleases and pricing changes by us or our competitors

•        marketacceptance or delays in the introduction of new products

•        productionconstraints

•        the timingof significant orders

•        customers’budgets

•        foreigncurrency exchange rates

 

Due to all ofthe foregoing factors, it is possible that in some future quarters ouroperating results will be below the expectations of analysts and investors.

 

***RapidTechnological Change****.*  Product technology evolves rapidly, making timely productinnovation essential to success in the marketplace. The introduction ofproducts with improved technologies or features may render our existingproducts obsolete and unmarketable. If we cannot develop products in a timelymanner 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 orerrors which give rise to product liability claims or cause the products tofail to gain market acceptance.

 

***Economicand Market Conditions****.*  Our business is affected by domestic and global economic andpolitical conditions and by the health of the professional audio market in theworld. Our operations may in the future reflect substantial fluctuations fromperiod to period as a consequence of such general economic and marketconditions including the uncertain economic and political environment arisingfrom the terrorist acts of September 11th and subsequent terroristactivities. These factors could have a material adverse effect on our businessand financial condition.

 

***Competition****.*  We expect competition to increase from bothestablished and emerging companies. If we fail to compete successfully againstcurrent and future sources of competition, our profitability and financialperformance may be adversely affected.

 

***Dependenceon Suppliers****.* Certain parts used in our products are currently available from either asingle supplier or from a limited number of suppliers. If we cannot developalternative sources of these components, or if we experience deterioration inour relationship with these suppliers, there may be delays or reductions inproduct introductions or shipments, which may materially adversely affect ouroperating results.

 

Because werely on a small number of suppliers for certain parts, we are subject topossible 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 meetour demand for components. This delay in the supply of key components maymaterially adversely affect our business.

 

During 2001,we entered into a contract manufacturing arrangement with a third partymanufacturer in China whereby we expect substantial volumes of product to bemanufactured on our behalf. The transition from in-house manufacturing tothird-party manufacturing creates additional risks including increasedtransportation cost and delivery times which could impair our ability to meetour customer demands.

 

8

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***InternationalOperations****.* We have significant net sales to customers outside the United States andbelieve that international sales will continue to represent a significantportion of our revenue. International sales may fluctuate due to variousfactors, including:

 

**•**        unexpected changes in regulatoryrequirements

•        tariffs andtaxes

•        increasesin freight costs, or damage or loss in shipment

•        difficultiesin staffing and managing foreign operations

•        longeraverage payment cycles and difficulty in collecting accounts receivable

•        fluctuationsin foreign currency exchange rates

•        productsafety and other certification requirements

•        politicaland economic instability

 

The EuropeanCommunity and European Free Trade Association have established certainelectronic emission and product safety requirements (“CE”).  All of our new products meet theserequirements. Failure to obtain either a CE certification or a waiver for anyproduct may prevent us from marketing that product in Europe.

 

We operatesubsidiaries in Italy, the United Kingdom, Germany, France, the Netherlands andChina. Our business and financial condition is, therefore, sensitive tocurrency exchange rates or any other restrictions imposed on these currencies.

 

***Protectionof Intellectual Property****.*  We have a strong interest in protecting the intellectual propertyassets that reflect original research, creative development, and productdevelopment. As such, we have sought protection through patents, copyrights,trademarks, and trade secrets.  Alongwith extensive trademark and patent registration and filings, we have claimedcopyright protection for works of original authorship, including productbrochures, literature, advertisement, and web pages. While certain legal rightsof enforceability are available to us, there can be no assurance as to theability to successfully prevent others from infringing upon our intellectualproperty.

 

We have neverconducted a comprehensive patent search relating to the technology used in ourproducts, however; we believe that our products do not infringe upon theproprietary rights of others. There can be no assurance, however, that otherswill not assert infringement claims against us in the future or that claimswill not be successful.

 

While wepursue patent, trademark and copyright protection for products and variousmarks, we also rely on the use of confidentiality agreements with our employeesand consultants to protect our trade secrets, proprietary information and otherintellectual property. There can be no assurance, however, that theseconfidentiality agreements will be honored or will be effective in protectingour trade secrets, proprietary information and other intellectual property.Moreover, there can be no assurance that others will not independently developsubstantially equivalent proprietary information and techniques or otherwisegain access to our trade secrets.

 

***Acquisitionsand Business Combinations****.*  We have in the past acquired businesses, and we may do so in thefuture. We may pursue additional acquisitions of complementary technologies orproduct lines. Further acquisitions may include risks of entering markets wherewe have no or limited prior experience, the potential loss of key employees ofthe acquired company, and impairment of relationships with existing employees,customers and business partners. Further acquisitions may also impact our financial position. Forexample, we may use significant cash or incur additional debt, which wouldweaken our financial position. We cannot guarantee that future acquisitionswill improve our business or operating results.

 

***Dependenceon Key Personnel****.*  Our future success will depend in a large part on the continuedservice of many of our technical, marketing, sales and management personnel andon our ability to attract, train, motivate and retain highly qualifiedemployees. Our employees may voluntarily terminate their employment at anytime.

 

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Competition for highlyqualified employees is intense, and the process of locating technical,marketing, sales and management personnel with the combination of skills andattributes required to execute our strategy is often lengthy. We believe thatwe will need to hire additional technical personnel in order to enhance ourexisting products and to develop new products. If we are unable to hireadditional technical personnel, the development of new products andenhancements could likely be delayed. The loss of the services of key personnelor the inability to attract new personnel could have a material adverse effectupon our results of operations.

 

***InformationSystems****.*During 2001 we replaced our localizedinformation systems with a worldwide Enterprise Resource Planning system commonto all of our owned manufacturing locations. While this investment is expectedto provide a significant improvement in all aspects of our information systemin the longer term, it presents additional risk to the organization in the nearterm. This risk is created because of the learning curve required of the entireorganization and of its suppliers and because of the complexity of thesoftware.

 

***Adoptionof the Euro****.* On January 1, 1999, certain member states of the European EconomicCommunity fixed their respective currencies to a new currency, commonly knownas the Euro. Beginning January 1, 2002, all transactions must be recorded inEuros. We have very recently upgraded our financial and other software systemsso that they are capable of processing Euro transactions, and so that thefinancial statements of our European subsidiaries are recorded in Euros. Todate, we have not experienced any problems with the conversion to theEuro-based accounting system and do not expect this transition or the use ofthe Euro for transactions to materially affect our business. If we encounterunexpected difficulties, our business could be harmed.

 

**Item 2****.  Properties**

 

We leasefacilities in Woodinville, Washington totaling approximately 170,000 squarefeet to house our corporate headquarters as well as certain manufacturing,administrative, sales and marketing, research and development and customersupport operations.  Mackie leases oneof its Woodinville facilities from Mackie Holdings, LLC, an entity owned bythree significant shareholders and directors, on terms we believe are at leastas favorable as might have been obtained from unaffiliated parties. Theremaining Woodinville facilities are leased from third parties. Additionally,we own facilities totaling 132,000 square feet in Reggio Emilia, Italy used formanufacturing and administrative purposes. Our manufacturing facility in Italysits on approximately 7 acres of land. We also lease a series of connectedbuildings, in a manufacturing complex, totaling 245,000 square feet inWhitinsville, Massachusetts. We lease additional facilities throughout Europefor our regional sales offices.

 

**Item 3****.  Legal Proceedings**

 

We havesubrogated claims asserted against us from insurance companies who paid claimsmade by EAW’s landlord and other tenants in the building who were affected by afire started by a loaned employee in a portion of the building occupied by EAWin 1996.  The range of potential lossranges from $2.1 million to $2.9 million. We expect the Massachusetts Superior Court to set a date in the latterhalf of 2002 for a jury trial.  Webelieve that these losses are not attributable to us under Massachusetts’s lawand are vigorously defending the litigation. The claims of the other tenants have been covered by EAW’s insurancecarrier.  The ultimate resolution ofthis matter is not known at this time. No provision has been made in our consolidated financial statementsrelated to these claims.

 

We are alsoinvolved in various legal proceedings and claims that arise in the ordinarycourse of business.  We currentlybelieve that these matters will not have a material adverse impact on ourfinancial position, liquidity or results of operations.

 

**Item 4****.  Submission of Matters to a Vote of SecuritiesHolders**

 

None.

 

10

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**PART II**

 

**Item 5.****  Market for Common Stock and RelatedShareholder Matters**

 

Our commonstock is traded on the Nasdaq National Market under the symbol “MKIE.”  As of March 18, 2002, there wereapproximately 94 shareholders of record. The following table shows the high andlow sales prices for our common stock for the periods indicated, as reported bythe Nasdaq National Market. These prices do not include retail markups,markdowns or commissions.

 
|                          |   | **Common  Stock** |   |
|-------------------------------|--------|-------------------|--------|
|                          |   | **HIGH**          |   | **LOW** |   |
| Year Ended December 31, 2001: |   |              |   |   |   |
| First Quarter                 |   | $                 | 7.00   |   | $ | 5.00 |   |
| Second Quarter                |   | $                 | 5.88   |   | $ | 5.00 |   |
| Third Quarter                 |   | $                 | 5.63   |   | $ | 4.50 |   |
| Fourth Quarter                |   | $                 | 5.10   |   | $ | 3.30 |   |
|                          |   |              |   |   |   |   |   |
| Year Ended December 31, 2000: |   |              |   |   |   |
| First Quarter                 |   | $                 | 7.31   |   | $ | 5.00 |   |
| Second Quarter                |   | $                 | 7.06   |   | $ | 5.50 |   |
| Third Quarter                 |   | $                 | 8.50   |   | $ | 6.50 |   |
| Fourth Quarter                |   | $                 | 7.81   |   | $ | 5.00 |   |

 

We have notpaid dividends on our common stock in the past, and it is not anticipated thatcash dividends will be paid on shares of our common stock in the foreseeablefuture. Our present policy is to retain earnings to finance our business.  Any future dividends will be dependent uponour financial condition, results of operations, current and anticipated cashrequirements, acquisition plans and plans for expansion, and any other factorsthat our Board of Directors deems relevant. Under our bank credit agreement, weare prohibited from paying any dividends without prior approval from the bank.

 

11

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**Item 6.****  Selected Consolidated Financial Data**

 
|                                       |   | **Years  ended December 31,**             |    |
|--------------------------------------------|--------|-------------------------------------------|---------|
|                                       |   | **2001  (a)**                             |    | **2000  (a)** |   | **1999  (a)** |   | **1998  (a)** |   | **1997** |   |
|                                       |   | **(in thousands, except per share data)** |    |
| **Consolidated Statements of Operations:** |   |                                      |    |
| Net sales                                  |   | $                                         | 206,539 |   | $ | 207,476 |   | $ | 156,340 |   | $ | 104,154 |   | $ | 76,582 |   |
| Gross profit                               |   | $                                         | 61,570  |   | $ | 72,827 |   | $ | 54,202 |   | $ | 38,271 |   | $ | 29,642 |   |
| Operating expenses                         |   | $                                         | 62,970  |   | $ | 57,856 |   | $ | 46,026 |   | $ | 29,856 |   | $ | 20,671 |   |
| Net income (loss)                          |   | $                                         | (5,329  | ) | $ | 6,226 |   | $ | 3,257 |   | $ | 5,581 |   | $ | 5,537 |   |
| Basic net income (loss) per share          |   | $                                         | (0.43   | ) | $ | 0.51 |   | $ | 0.27 |   | $ | 0.44 |   | $ | 0.43 |   |
| Diluted net income (loss) per share        |   | $                                         | (0.43   | ) | $ | 0.49 |   | $ | 0.27 |   | $ | 0.43 |   | $ | 0.41 |   |

 
|                             |   | **December 31,** |    |
|----------------------------------|--------|------------------|---------|
|                             |   | **2001**         |    | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
| **Consolidated Balance Sheets:** |   |             |    |   |   |   |   |   |   |   |   |
| Working capital                  |   | $                | 23,367  |   | $ | 42,138 |   | $ | 37,258 |   | $ | 35,784 |   | $ | 35,956 |   |
| Total assets                     |   | $                | 153,964 |   | $ | 165,198 |   | $ | 120,854 |   | $ | 118,890 |   | $ | 53,372 |   |
| Long-term debt(b)                |   | $                | 19,401  |   | $ | 29,970 |   | $ | 15,665 |   | $ | 18,984 |   | $ | 0 |   |
| Shareholders’ equity        |   | $                | 52,810  |   | $ | 57,770 |   | $ | 50,307 |   | $ | 49,569 |   | $ | 46,478 |   |

 

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(a)               The consolidated statements ofoperations data for the period ending after April 2001 reflects the acquisitionof Mackie Engineering Services on that date. The consolidated statements ofoperations data for the periods ending after April 2000 reflect the acquisitionof EAW on that date. The consolidated statement of operations data for theperiods ending after June1998 reflect the acquisition of Mackie Italy on thatdate.

 

(b)              Long-term debt excludes current portions.

 

**Item 7****.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*The following discussion and analysis shouldbe read in conjunction with “Selected Consolidated Financial Data” and theConsolidated Financial Statements and Notes thereto included elsewhere in thisAnnual Report. This discussion contains certain “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995 thatinvolve risks and uncertainties, such as statements of our plans, objectives,expectations and intentions. Our actual results could differ materially fromthose discussed here. The cautionary statements made in this Annual Reportshould be read as being applicable to all forward-looking statements whereverthey appear. Factors that could cause or contribute to such differences includethose discussed in “Risk Factors,” as well as those discussed elsewhere herein.We undertake no obligation to publicly release the result of any revisions tothese forward-looking statements that may be required to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events.*

 

**General**

 

We develop,manufacture and sell high-quality, affordable digital and analog audio mixers,speakers, amplifiers and other professional audio equipment on a worldwidebasis. Our products are used by professional musicians, sound installationcontractors and broadcast professionals both in sound recordings, livepresentations systems and installed sound systems. We distribute our productsprimarily through retail dealers, mail order outlets and installed soundcontractors.

 

12

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In April 2000,we acquired Eastern Acoustic Works, Inc. for approximately $19.6 million incash. EAW designs, manufactures and sells loudspeaker systems, includingintegrated signal processing for the installed and touring sound markets. Thetransaction was accounted for as a purchase business combination. Operations inthe periods after April 2000 include the results of operations for EAW. InApril 2001, we acquired Mackie Engineering Services (Belgium) BVBA, formerlyknown as Sydec for approximately $4.4 million – of this, $2.5 million was paidin 2001 and $1.9 million is payable in 2002. Mackie Engineering is a developerof products and services in the area of embedded electronic and software,networking, digital signal processing and Windows TM driver applications. Thetransaction was accounted for as a purchase business combination.

 

**CriticalAccounting Policies and Estimates**

 

We believe our policy on valuing inventory, including market valueadjustments, is our primary critical accounting policy. Inventories are statedat the lower of standard cost, which approximates actual cost on a first-in,first-out method, or market. Included in our inventories balance aredemonstration productsused by our sales representatives and marketing department including finishedgoods that have been shipped to customers for evaluation. Market valueadjustments are recorded for obsolete material, slow-moving product, serviceand demonstration products. We make judgments regarding the carrying value ofour inventory based upon current market conditions. These conditions may changedepending upon competitive product introductions, customer demand and otherfactors. If the market for our previously released products changes, we may berequired to write down the cost of our inventory.

 

We assess theimpairment of long-lived assets and enterprise goodwill whenever events orchanges in circumstances indicate that the carrying value may not berecoverable. Significant judgment is used in assessing factors which mighttrigger impairment including significant underperformance relative to expectedoperating results, significant changes in our use of the assets or the strategyfor our overall business, and significant negative industry or economic trends.

 

***Year Ended December 31, 2001 Compared to YearEnded December 31, 2000***

 

**NetSales**

 

Our net salesof $206.5 million in 2001 decreased by $937,000 or less than one-half percentfrom 2000. Our lack of sales growth was attributable to lower volumesparticularly in the U.S. as a result of the economic slowdown. Sales were lowerin the latter half of 2001 as the effect of the economic slowdown and theimpact of the events of September 11 was felt. Sales of certain of our analogand digital mixer families declined when compared to 2000 while digitalrecorder sales and loudspeaker sales have increased. In addition, while netsales for 2001 included a full year of EAW sales versus nine months in 2000,sales in the installed sound market traditionally served by EAW brandedproducts have declined. Sales in the U.S. accounted for 51% of our sales in2001 and 56% of our sales in 2000. Sales of our international subsidiaries are primarily made in currenciesfixed to the Euro. The change in the Euro against the U.S. Dollar caused thesesales to be recorded at approximately $1.6 million lower than these sales wouldhave been if using the 2000 exchange rate. Additionally, our implementation ofa fully-integrated worldwide Enterprise Resource Planning information system in2001 temporarily impaired our ability to ship product from Italy in the fourthquarter of 2001 and contributed to the decrease in net sales. We expect to showgrowth in sales in the coming year and anticipate that a significant portion of2002 sales will come from new products which have been or will be introduced in2002. If the new products are not introduced in a timely manner or are not wellreceived by the market, sales from these new products may not be realized.

 

**GrossProfit**

 

Gross profitwas $61.6 million or 30% of net sales for 2001 compared to $72.8 million or 35%of net sales for 2000. This decline was primarily due to a shift in product mixfrom higher margin compact mixer and digital products to lower margin speakerproducts along with a general increase in material and labor costs acrossmultiple product lines. Gross margin was also reduced by increased freightaccommodations and sales discounts.

 

13

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In 2001, we began to transitionthe manufacture of certain of our product lines to offshore facilities and willcontinue this transfer in 2002. Additionally, we expect to achieve improvedproduction efficiencies in our U.S. and Italian manufacturing operations. As aresult of these improvements, we expect to see reductions of cost of sales andincreases in gross profit in 2002. However, if these efficiencies are notrealized, we may not achieve the expected improvement in gross profit.

 

**Selling,General and Administrative**

 

Selling,general and administrative expense increased to $51.1million or 25% of netsales in 2001 from $48.5 million or 23% of net sales in 2000. The inclusion ofthe fixed component of EAW expenses for a full twelve months of 2001 versusnine months of 2000 resulted in an increase of approximately $1.0 million. Inaddition, costs associated with the implementation of our ERP system contributedto this increase, as did increases in personnel early in the year. In thelatter half of the year, steps were taken to reduce expenses including closingthe Amsterdam office, reducing headcount, reducing salaries and initiatingother cost cutting programs.

 

**Researchand Development**

 

Research anddevelopment expenses increased to $11.9 million or 5.8% of net sales in 2001from $9.4 million or 4.5% of net sales in 2000. The increase both in absolutedollars and percent is related to additional spending for new products andmaintaining investment in ongoing product development. The inclusion of EAWresearch and developments costs for twelve months of 2001 as compared to ninemonths in 2000 resulted in an increase of $700,000. Additionally, our acquisitionof Sydec in April 2001 resulted in an increase of $1.1 million of research anddevelopment expense.

 

**Other Income (Expense)**

 

Net otherexpense was $5.5 million for 2001 compared to net other expense of $4.5 millionfor 2000. Interest expenseincreased to $4.9 million in 2001 from $4.6 million in 2000 primarily due toborrowings related to the acquisition of EAW and to higher levels of short-termborrowing under our bank credit facility. Other expense, comprised primarily offoreign exchange gains and losses, was $1.0 million in 2001 compared with$538,000 in 2000.  This increase wasprimarily due to the foreign exchange losses in 2001 as a result of theweakening of the Italian Lire against the U.S. Dollar.

 

**Provision(Benefit) for Income Taxes**

 

We had abenefit for income taxes of $1.6 million in 2001 compared to income tax expenseof $4.2 million in 2000. This represents an overall effective tax rate in 2001of 23.2% which includes taxes paid in various federal, state and internationaljurisdictions. We did not get the full tax rate benefit relating to our lossbefore benefit for income taxes in 2001 due to the non-deductibility of certainamortization costs, and the rate and method of determination of taxation onnon-U.S. subsidiaries.

 

***Year Ended December 31, 2000 Compared to YearEnded December 31, 1999***

 

**NetSales**

 

Net salesincreased 33% to $207.5 million in 2000 from $156.3 million in 1999.  $30.6 million of the increase wasattributable to the addition of EAW.  Wealso saw significant revenue contribution worldwide from products introduced in1999 and 2000 in the product categories of powered and CFX mixers, speakers,and digital products of approximately $20.9 million. These increases werepartially offset by an unfavorable foreign currency exchange effect of $6.1million and by declines in sales of M-1400 series amps and SR series live musicapplication mixers of approximately $2.6 million. Sales outside the U.S.decreased to 44% of our total net sales in

 

14

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2000 from 49% in 1999. Thisdecrease was due mainly to the inclusion of sales by EAW whose sales outside ofthe U.S. comprised only 31% of its total net sales for 2000.

 

**GrossProfit**

 

Gross profitwas $72.8 million in 2000 compared with $54.2 million in 1999.  Of the $18.6 million increase, $11.6 millionwas attributable to the addition of EAW. Gross profit was also up as a result of the new products introducedduring 1999 and 2000 as noted above. The increase was partially offset by an unfavorable foreign currencyexchange effect on gross profit of approximately $2.4 million.  Gross profit percentage stayed constant at35% in 2000 and 1999.

 

**Selling,General and Administrative**

 

Selling,general and administrative expense increased to $48.5 million in 2000 from$38.9 million in 1999.  Of the $9.6million increase, $9.3 million was attributable to the addition of EAW, $0.8million of which represents amortization charges on intangible assets.  Higher sales volumes causing correspondingincreases in variable expenses, such as commissions, along with incrementalcosts associated with an increased headcount also contributed to theincrease.  These increases in expenseswere partially offset by a $2.1 million favorable impact of foreign currencyexchange.  As a percentage of net sales,selling, general, and administrative expenses decreased to 23% in 2000 from 25%in 1999.  The decline in the percentageis primarily attributable to higher sales.

 

**Researchand Development**

 

Research anddevelopment expenses increased to $9.4 million in 2000 from $7.1 million in1999.  The increase was primarilyattributable to the inclusion of EAW’s research and development expenses of$2.3 million.  As a percentage of netsales, these expenses stayed constant at 5% in 2000 and 1999.

 

**Other Income (Expense)**

 

Other expensewas $4.5 million for 2000 compared to $2.1 million in 1999. Interest incomedecreased to $600,000 in 2000 compared with $700,000 in 1999.  Interest expense increased to $4.6 millionin 2000 from $2.8 million in 1999 primarily due to borrowings related to theacquisition of EAW and to significantly higher levels of short-term borrowing.  Otherexpense for 2000 was $0.5 million compared with $0.1 million in 1999.  This increase was primarily due to theforeign exchange losses in 2000 as a result of the weakening of the ItalianLire against the U.S. Dollar.

 

**Provisionfor Income Taxes**

 

Income taxexpense for 2000 was $4.2 million representing an overall effective tax rate of40.5% compared to $2.8 million and 46.3% for 1999. The decrease in theeffective tax rate was primarily attributable to foreign operations.

 

**Liquidityand Capital Resources**

 

Cash providedby operating activities was $16.1 million in 2001 and $5.6 million in 1999. In2000, cash used by operations was $5.3 million.  Net cash provided by operating activities in 2001 was primarilyattributable to decreases in inventory and accounts receivable offset partiallyby a net loss, deferred taxes, a decrease in accounts payable and accruedexpenses and a decrease in income taxes payable.  The downward trend in inventory is due to the continued effortsto reduce our inventory levels. Net cash used by operating activities in 2000was primarily attributable to increases in inventories, accounts receivable anda decline in income taxes payable offset partially by net income, increases inaccounts payable and accrued expenses and a decline in prepaid expenses andother

 

15

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current assets.  The large increase in inventories for 2000over 1999 is attributable to higher levels of required inventory resulting fromthe expansion of product lines, certain product release delays and anticipatedsales volume increases that did not materialize.

 

Cash used ininvesting activities was $10.7 million for 2001. $2.3 million was used for theacquisition of Sydec and $9.0 million for the acquisition of property, plantand equipment.  The property, plant andequipment acquisitions in 2001 relate primarily to the costs of hardware andsoftware associated with the worldwide implementation of a fully-integratedEnterprise Resource Planning information system and improvements to ourcomputer and communications infrastructure. Net cash used in investing activities increased to $20.6 million in 2000from $3.1 million in 1999, due principally to the acquisition of EAW, net ofcash acquired of $19.9 million and purchases of property, plant and equipmentof $6.6 million.

 

Net cash usedin financing activities during 2001 was $6.7 million due to net payments onlong-term and short-term debt. Net cash provided by financing activitiesincreased to $25.3 million in 2000 from $2.2 million in 1999, due principallyto proceeds from bank credit facilities used for the acquisition of EAW of$19.0 million and net proceeds on bank line of credit and other short-termborrowings of $11.9 million.  Theseinflows were partially offset by repayments of long-term debt related to theMackie Italy acquisition, EAW long-term debt and Italian based long-term debttotaling $9.2 million.

 

At December 31, 2001, we had a bank line of credit in the U.S. thatprovided up to $15.0 million of short-term borrowing subject to certainlimitations. Additionally, the line of credit provided a $1.5 million guaranteeon our debt in Italy. This guarantee reduced the maximum allowable borrowing to$13.5 million as of December 31, 2001. At December 31, 2001 and 2000, there was$11.0 million and $11.5 million outstanding on the line of credit,respectively. At December 31, 2001 the available line was $2.5 million.Borrowings under this line of credit bear interest at the bank’s prime rateplus a specified margin. In April 2002, we entered into an agreement to revisethe terms of both our bank line of credit and the term loan described below,which will result in the bank line of credit and the borrowings under the lineincreasing by approximately $10.0 million and an equal reduction of $10.0million to the term loan. The result is a bank line of credit that provides upto $25.0 million of short-term borrowing subject to certain limitations.

 

Under the terms of our U.S. credit agreement, we must maintain certainfinancial ratios and tangible net worth. The agreement also provides, among other matters, restrictions onadditional financing, dividends, mergers, acquisitions, and an annual capitalexpenditure limit. At December 31, 2001, we were out of compliance with one ofour financial covenants. We were also out of compliance earlier during 2001 butnegotiated a restructuring of the covenants and received a waiver from thelender. This restructuring resulted in slightly higher interest rates inaddition to certain loan amendment fees. In April 2002 we received a waiver forthe December 31, 2001 non-compliance and negotiated a new credit agreement,including a restructuring of the covenants. Under the new credit agreement, the renewal date for the line of creditis April 2003, the renewal date for the term loan is September 2003.

 

Both the line of credit and the term loan are secured by all U.S. basedassets including, but not limited to, accounts receivable, inventory, fixedassets, intangibles and patents. As a result of restructuring the line ofcredit and term loan, we have reclassified amounts related to the term loanpreviously shown as long-term debt callable under covenant provisions ininterim condensed consolidated financial statements.

 

We have taken various actions to improve results of operations andensure our ongoing ability to cover scheduled debt servicing payments, includingheadcount reductions and other cost containment measures. During the third andfourth quarters of 2001, these measures included layoffs, salary reductions,office closures and reduction of capital expenditures. We will continue tofocus on increased management controls over expenditures and attempt to reducecosts of sales by improving our methods of product sourcing. Finally, we areevaluating a variety of alternative financing sources, including possibledivestiture of certain operating assets.

 

16

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Additionally, we have entered into agreements with several banks inItaly that provide short-term credit facilities totaling approximately $25.7million. The amount available to us is limited by the amount of our Italianaccounts receivable and was approximately $2.4 million at December 31, 2001. AtDecember 31, 2001 and 2000 there was approximately $14.4 million and $19.8million, respectively outstanding under these facilities. The majority of thesecredit facilities are secured by receivables of Mackie Italy. Interest rates onthese credit facilities range from 3.3% to 11.5%.

 

The term loan may become callable under covenant provisions if we donot meet our new covenants. Although there can be no assurance, we believe thatwe will be able to meet our financial covenants in 2002 under the revisedcredit agreement. We believe that our existing cash and credit facilities,along with cash generated from operations will be sufficient to provideadequate working capital to fund operations over the next twelve months.

 

We had thefollowing contractual commitments and obligations at December 31, 2001:

 
|   |   | **Operating  Leases** |   | **Short-term  and  Long-term Debt** |   | **Total** |   |
|--------|--------|-----------------------|--------|-------------------------------------|--------|-----------|--------|
|   |   |                  |   | **(in  thousands)**                 |   |      |   |
| 2002   |   | $                     | 2,679  |                                | $      | 39,269    |   | $ | 41,948 |   |
| 2003   |   | 1,992                 |   | 17,656                              |   | 19,648    |   |
| 2004   |   | 1,613                 |   | 364                                 |   | 1,977     |   |
| 2005   |   | 1,124                 |   | 296                                 |   | 1,420     |   |
| 2006   |   | 853                   |   | 184                                 |   | 1,037     |   |
|        |        |                       |        |                                     |        |           |        |  |  |  |

 

**NewAccounting Pronouncements**

 

In June 2001,the Financial Accounting Standards Board issued FAS No. 141, “BusinessCombinations” and FAS No. 142, “Goodwill and Other Intangible Assets,” whichsupercede Accounting Principles Board Opinion No. 17, “Intangible Assets.”  FAS No. 141 requires that all businesscombinations be accounted for under the purchase method.  The statement further requires separaterecognition of intangible assets that meet one of two criteria, as defined inthe statement.  This statement appliesto all business combinations initiated after June 30, 2001.  Under FAS 142, goodwill and intangibleassets with indefinite lives are no longer amortized but are tested at leastannually for impairment.  Separableintangible assets with defined lives will continue to be amortized over theiruseful lives.  The provisions of FAS No.142 will apply to goodwill and intangible assets acquired before and after thestatement’s effective date.  Aspermitted by FAS No. 142, we plan to adopt the new standard in the firstquarter of 2002.  We are currently evaluatingthe effect that adoption of the provisions of FAS No. 142 will have on ourresults of operations and financial position. Refer to Note 5 of the consolidated financial statements.

 

In June 2001,the FASB issued FAS 143, “Accounting for Obligations Associated with theRetirement of Long-Lived Assets.” The provisions of FAS 143 apply to allentities that incur obligations associated with the retirement of tangiblelong-lived assets. This statement is effective for financial statementsissued for fiscal years beginning after June 15, 2002 and will become effectivefor Mackie commencing in 2003. This accounting pronouncement is not expected tohave a significant impact on our financial position or results of operations.

 

In August2001, the FASB issued FAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets,” which supersedes FAS No. 121, “Accounting forthe Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of.”FAS No. 144 retains many of the fundamental provisions of FAS No. 121 andprovides a single method of accounting for long-lived assets to be disposed of.We are required and plan to adopt the provisions of FAS No. 144 for the yearbeginning January 1, 2002. The adoption of the statement for long-lived assetsheld for use is not expected to have a material impact on our consolidatedfinancial statements. The provisions of the statement for assets held for saleor other disposal generally are required to be applied prospectively after theadoption date to newly initiated disposal activities. Therefore, we cannotdetermine the potential future effects that the adoption of the statement forassets held for sale or other disposal will have on our financial statements.

 

17

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**Qualitativeand Quantitative Disclosures About Market Risk**

 

We are exposedto various market risks, including changes in foreign currency rates andinterest rates. We may enter into various derivative transactions to managecertain of these exposures; however we did not have any material derivativefinancial instruments as of December 31, 2001.

 

At December31, 2001, we had variable rate debt of approximately $56.0 million provided byU.S. and Italian banks. As such, changes in U.S. and European interest ratesaffect interest paid on debt and we are exposed to interest rate risk. Anincrease in the average interest rate of 10% would result in an approximately$392,000 increase to the loss before benefit for income taxes for the yearended December 31, 2001. A similar increase for the year ended December 31,2000 would not have had a material effect on our earnings for that year. Thefair value of such debt approximates the carrying amount on the consolidatedbalance sheet at December 31, 2001.

 

Our non-U.S.subsidiaries have functional currencies other than the U.S. Dollar, and are translatedinto U.S. Dollars at exchange rates in effect at the balance sheet date. Incomeand expense items are translated at the average exchange rates prevailingduring the period. Additionally, a portion of sales from our U.S. entities isdenominated in other than the U.S. Dollar. A 10% increase in the value of theU.S. Dollar, throughout the year ended December 31, 2001, would have had theeffect of increasing the loss before benefit for income taxes by approximately$385,000. A 10% increase in the value of he U.S. Dollar in the year endedDecember 31, 2000, would have had the effect of reducing net income byapproximately $200,000.

 

**Impactof European Monetary Conversion**

 

Europeanbusiness systems were required to handle currencies in a new way with theintroduction of the Euro. Implementation procedures related to our EnterpriseResource Planning information system began during the third quarter of 2000 andwere substantially complete as of December 31, 2001. This system is Eurocompliant and was implemented in Italy during the fourth quarter of 2001.  To date, we have not experienced anyproblems with the conversion to the Euro-based accounting system and do notexpect this transition or the use of the Euro for transactions to materiallyaffect our business. If we encounter unexpected difficulties, our businesscould be harmed.

 

**Item 8****.  Consolidated Financial Statements andSupplementary Data**

 

See pages 20to 40.

 

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**INDEPENDENTAUDITORS REPORT**

 

The Board of Directors andShareholdersMackie Designs Inc.

 

We haveaudited the accompanying consolidated balance sheets of Mackie Designs Inc. andsubsidiaries as of December 31, 2001 and 2000, and the related consolidatedstatements of operations, cash flows and shareholders’ equity and comprehensiveincome (loss) for each of the years in the three-year period ended December 31,2001. These consolidated financial statements are the responsibility of MackieDesigns Inc.’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

 

We conductedour audits in accordance with auditing standards generally accepted in theUnited States of America. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Mackie DesignsInc., and subsidiaries as of December 31, 2001 and 2000, and the resultsof their operations and their cash flows for each of the years in thethree-year period ended December 31, 2001, in conformity with accountingprinciples generally accepted in the United States of America.

 

/s/ KPMG LLP

 

Seattle, Washington

February 28, 2002 except as toNote 8 which is as of April 18, 2002

 

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**MACKIE DESIGNS INC.**

**CONSOLIDATEDBALANCE SHEETS**

 
|                                                                                                                                        |   | **December  31,** |        |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-------------|
|                                                                                                                                        |   | **2001**          |        | **2000** |   |
| **ASSETS**                                                                                                                                  |   |              |        |   |   |
| Current assets:                                                                                                                             |   |              |        |   |   |
| Cash and cash equivalents                                                                                                                   |   | $                 | 2,095,122   |   | $ | 3,837,892 |   |
| Available-for-sale securities                                                                                                               |   | —            |        | 509,333 |   |
| Accounts receivable, less allowance for  doubtful accounts of  $1,349,110 and $1,079,000, respectively                                      |   | 35,092,247        |        | 39,085,103 |   |
| Income taxes receivable                                                                                                                     |   | 1,304,718         |        | — |   |
| Inventories                                                                                                                                 |   | 51,506,683        |        | 63,470,535 |   |
| Prepaid expenses and other current assets                                                                                                   |   | 2,157,439         |        | 1,514,093 |   |
| Deferred income taxes                                                                                                                       |   | 5,315,186         |        | 3,148,057 |   |
| Total current assets                                                                                                                        |   | 97,471,395        |        | 111,565,013 |   |
|                                                                                                                                        |   |              |        |   |   |
| Property, plant and equipment, net                                                                                                          |   | 25,670,959        |        | 23,567,445 |   |
| Intangible assets, net                                                                                                                      |   | 26,435,990        |        | 24,418,784 |   |
| Investment in bonds                                                                                                                         |   | 3,851,425         |        | 3,891,279 |   |
| Other assets, net                                                                                                                           |   | 533,763           |        | 1,755,123 |   |
|                                                                                                                                        |   |              |        |   |   |
| Total assets                                                                                                                                |   | $                 | 153,963,532 |   | $ | 165,197,644 |   |
|                                                                                                                                        |   |              |        |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                               |   |              |        |   |   |
| Current liabilities:                                                                                                                        |   |              |        |   |   |
| Short-term borrowings                                                                                                                       |   | $                 | 35,395,176  |   | $ | 31,280,882 |   |
| Accounts payable                                                                                                                            |   | 22,859,291        |        | 21,912,383 |   |
| Accrued liabilities                                                                                                                         |   | 11,009,147        |        | 10,502,723 |   |
| Income taxes payable                                                                                                                        |   | 967,402           |        | 706,143 |   |
| Current portion of long-term debt                                                                                                           |   | 3,873,700         |        | 5,024,473 |   |
| Total current liabilities                                                                                                                   |   | 74,104,716        |        | 69,426,604 |   |
|                                                                                                                                        |   |              |        |   |   |
| Long-term debt, excluding current portion                                                                                                   |   | 19,401,239        |        | 29,970,403 |   |
| Employee and other liabilities                                                                                                              |   | 3,767,685         |        | 3,932,350 |   |
| Deferred income taxes                                                                                                                       |   | 3,879,596         |        | 4,098,067 |   |
| Total liabilities                                                                                                                           |   | 101,153,236       |        | 107,427,424 |   |
|                                                                                                                                        |   |              |        |   |   |
| Commitments and contingencies                                                                                                               |   |              |        |   |   |
|                                                                                                                                        |   |              |        |   |   |
| Shareholders’ equity:                                                                                                                  |   |              |        |   |   |
| Preferred stock, no par value; 5,000,000  shares authorized, none  issued and outstanding                                                   |   | —            |        | — |   |
| Common stock, no par value; 40,000,000  shares authorized,  12,423,890 and 12,372,358 issued and outstanding at December  31, 2001 and 2000 |   | 28,691,068        |        | 27,720,181 |   |
| Retained earnings                                                                                                                           |   | 26,556,251        |        | 31,885,054 |   |
| Accumulated other comprehensive loss                                                                                                        |   | (2,437,023        | )           | (1,835,015 | ) |
| Total shareholders’ equity                                                                                                             |   | 52,810,296        |        | 57,770,220 |   |
|                                                                                                                                        |   |              |        |   |   |
| Total liabilities and shareholders’ equity                                                                                             |   | $                 | 153,963,532 |   | $ | 165,197,644 |   |

 

*See accompanying Notes to ConsolidatedFinancial Statements.*

 

20

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**MACKIE DESIGNS INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
|                                                       |   | **Years  Ended December 31,** |        |
|------------------------------------------------------------|--------|-------------------------------|-------------|
|                                                       |   | **2001**                      |        | **2000** |   | **1999** |   |
| Net sales                                                  |   | $                             | 206,539,059 |   | $ | 207,476,130 |   | $ | 156,339,988 |   |
| Cost of sales                                              |   | 144,968,935                   |        | 134,648,908 |   | 102,138,192 |   |
| Gross profit                                               |   | 61,570,124                    |        | 72,827,222 |   | 54,201,796 |   |
|                                                       |   |                          |        |   |   |   |   |
| Operating expenses:                                        |   |                          |        |   |   |   |   |
| Selling, general, and administrative                       |   | 51,092,176                    |        | 48,486,522 |   | 38,879,323 |   |
| Research and development                                   |   | 11,877,830                    |        | 9,369,709 |   | 7,146,954 |   |
|                                                       |   | 62,970,006                    |        | 57,856,231 |   | 46,026,277 |   |
| Operating income (loss)                                    |   | (1,399,882                    | )           | 14,970,991 |   | 8,175,519 |   |
|                                                       |   |                          |        |   |   |   |   |
| Other income (expense):                                    |   |                          |        |   |   |   |   |
| Interest income                                            |   | 371,378                       |        | 615,649 |   | 740,962 |   |
| Interest expense                                           |   | (4,878,998                    | )           | (4,580,955 | ) | (2,772,243 | ) |
| Other                                                      |   | (1,027,027                    | )           | (538,055 | ) | (76,190 | ) |
|                                                       |   | (5,534,647                    | )           | (4,503,361 | ) | (2,107,471 | )  |
| Income (loss) before provision (benefit)  for income taxes |   | (6,934,529                    | )           | 10,467,630 |   | 6,068,048 |   |
|                                                       |   |                          |        |   |   |   |   |
| Provision (benefit) for income taxes                       |   | (1,605,726                    | )           | 4,241,428 |   | 2,810,781 |   |
|                                                       |   |                          |        |   |   |   |   |
| Net income (loss)                                          |   | $                             | (5,328,803  | ) | $ | 6,226,202 |   | $ | 3,257,267 |   |
|                                                       |   |                          |        |   |   |   |   |
| Basic net income (loss) per share                          |   | $                             | (0.43       | ) | $ | 0.51 |   | $ | 0.27 |   |
|                                                       |   |                          |        |   |   |   |   |
| Diluted net income (loss) per share                        |   | $                             | (0.43       | ) | $ | 0.49 |   | $ | 0.27 |   |

 

*See accompanying Notes to ConsolidatedFinancial Statements.*

 

21

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**MACKIE DESIGNS INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                                           |   | **Years  Ended December 31,** |       |
|------------------------------------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                                           |   | **2001**                      |       | **2000** |   | **1999** |   |
| **Operating activities**                                                                       |   |                          |       |   |   |   |   |
| Net income (loss)                                                                              |   | $                             | (5,328,803 | ) | $ | 6,226,202 |   | $ | 3,257,267 |   |
| Adjustments to reconcile net income to net  cash provided by   (used in) operating activities: |   |                          |       |   |   |   |   |
| Depreciation and amortization                                                                  |   | 8,519,740                     |       | 7,375,627 |   | 6,399,855 |   |
| Loss on asset dispositions                                                                     |   | —                        |       | 83,496 |   | — |   |
| Deferred stock compensation                                                                    |   | 970,372                       |       | 449,250 |   | — |   |
| Deferred income taxes                                                                          |   | (2,385,600                    | )          | (816,727 | ) | (1,311,115 | ) |
| Changes in operating assets and  liabilities, net of  acquisition:                             |   |                          |       |   |   |   |   |
| Accounts receivable                                                                            |   | 3,643,556                     |       | (3,538,996 | ) | (3,888,511 | ) |
| Inventories                                                                                    |   | 11,563,993                    |       | (17,889,095 | ) | (2,749,123 | ) |
| Prepaid expenses and other current assets                                                      |   | (631,990                      | )          | 1,316,249 |   | (78,184 | ) |
| Other assets                                                                                   |   | 845,500                       |       | 562,224 |   | (1,064,760 | ) |
| Accounts payable and accrued expenses                                                          |   | (226,610                      | )     | 1,871,954 |   | 4,854,571 |   |
| Income taxes payable                                                                           |   | (983,830                      | )          | (1,209,991 | ) | 402,601 |   |
| Other long term liabilities                                                                    |   | 90,472                        |       | 280,554 |   | (174,250 | ) |
| Cash provided by (used in) operating  activities                                               |   | 16,076,800                    |       | (5,289,253 | ) | 5,648,351 |   |
|                                                                                           |   |                          |       |   |   |   |   |
| **Investing activities**                                                                       |   |                          |       |   |   |   |   |
| Acquisition of businesses, net of cash  acquired                                               |   | (2,266,843                    | )          | (19,894,937 | ) | — |   |
| Purchases of available-for-sale securities                                                     |   | —                        |       | (2,358,160 | ) | (8,951,129 | ) |
| Proceeds from sales of available-for-sale  securities                                          |   | 515,182                       |       | 5,947,121 |   | — |   |
| Proceeds from maturities of  available-for-sale securities                                     |   | —                        |       | 2,358,160 |   | 8,985,000 |   |
| Purchases of property, plant and equipment                                                     |   | (8,974,428                    | )          | (6,609,324 | ) | (3,115,942 | ) |
| Cash used in investing activities                                                              |   | (10,726,089                   | )          | (20,557,140 | ) | (3,082,071 | ) |
|                                                                                           |   |                          |       |   |   |   |   |
| **Financing activities**                                                                       |   |                          |       |   |   |   |   |
| Proceeds from long-term debt                                                                   |   | 3,613,088                     |       | 21,130,263 |   | 396,385 |   |
| Payments on long-term debt                                                                     |   | (5,218,586                    | )          | (9,200,886 | ) | (2,890,132 | ) |
| Net proceeds (payments) on bank line of  credit and  short-term borrowings                     |   | (5,074,533                    | )          | 11,877,004 |   | 5,974,760 |   |
| Repurchase and retirement of common stock                                                      |   | —                        |       | — |   | (1,308,259 | ) |
| Net proceeds from exercise of stock options                                                    |   | 515                           |       | 1,468,530 |   | 8,325 |   |
| Cash provided by (used in) financing  activities                                               |   | (6,679,516                    | )          | 25,274,911 |   | 2,181,079 |   |
|                                                                                           |   |                          |       |   |   |   |   |
| Effect of exchange rate changes on cash                                                        |   | (413,965                      | )          | (219,860 | ) | (241,736 | ) |
|                                                                                           |   |                          |       |   |   |   |   |
| Increase   (decrease) in cash and cash equivalents                                        |   | (1,742,770                    | )          | (791,342 | ) | 4,505,623 |   |
|                                                                                           |   |                          |       |   |   |   |   |
| Cash and cash equivalents at beginning of  year                                                |   | 3,837,892                     |       | 4,629,234 |   | 123,611 |   |
|                                                                                           |   |                          |       |   |   |   |   |
| Cash and cash equivalents at end of year                                                       |   | $                             | 2,095,122  |   | $ | 3,837,892 |   | $ | 4,629,234 |   |
|                                                                                           |   |                          |       |   |   |   |   |
| **Supplemental disclosures**                                                                   |   |                          |       |   |   |   |   |
| Cash paid for interest, net of capitalized  amounts   of $258,000 in 2001                      |   | $                             | 4,387,000  |   | $ | 3,911,000 |   | $ | 2,409,000 |   |
| Cash paid for income taxes                                                                     |   | $                             | 1,526,000  |   | $ | 5,591,000 |   | $ | 3,468,000 |   |
| Amounts payable in connection with  acquistion of business                                     |   | $                             | 1,920,250  |   | $ | — |   | $ | — |   |

 

*See accompanying Notes to ConsolidatedFinancial Statements.*

 

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**MACKIE DESIGNS INC.**

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’EQUITY AND COMPREHENSIVE**

**INCOME (LOSS)**

 
|                                                                                          |   |              |   |         |       | **Accumulated  Other**           |   |       |      |
|-----------------------------------------------------------------------------------------------|--------|-------------------|--------|--------------|------------|----------------------------------|--------|------------|-----------|
|                                                                                          |   | **Common  Stock** |   | **Retained** |       | **Comprehensive  Income (Loss)** |   |       |      |
|                                                                                          |   | **Shares**        |   | **Amount**   |       | **Earnings**                     |   |       | **Total** |   |
| Balance at December 31, 1998                                                                  |   | 12,356,486        |   | $            | 27,102,335 |                             | $      | 22,401,585 |      | $ | 65,137 |   | $ | 49,569,057 |   |
| Exercise of stock options                                                                     |   | 1,500             |   | 8,325        |       | —                           |   | —     |      | 8,325 |   |
| Repurchase of common shares                                                                   |   | (250,228          | )      | (1,308,259   | )          | —                           |   | —     |      | (1,308,259 | ) |
| Net income                                                                                    |   | —            |   | —       |       | 3,257,267                        |   | —     |      | — |   |
| Foreign currency translation adjustment,  net of tax                                          |   | —            |   | —       |       | —                           |   | (1,211,927 | )         | — |   |
| Unrealized loss on available-for-sale  securities                                             |   | —            |   | —       |       | —                           |   | (7,481     | )         | — |   |
| Comprehensive income                                                                          |   | —            |   | —       |       | —                           |   | —     |      | 2,037,859 |   |
|                                                                                          |   |              |   |         |       |                             |   |       |      |   |   |
| Balance at December 31, 1999                                                                  |   | 12,107,758        |   | 25,802,401   |       | 25,658,852                       |   | (1,154,271 | )         | 50,306,982 |   |
| Exercise of stock options                                                                     |   | 264,600           |   | 1,468,530    |       | —                           |   | —     |      | 1,468,530 |   |
| Amortization of deferred stock compensation                                                   |   | —            |   | 449,250      |       | —                           |   | —     |      | 449,250 |   |
| Net income                                                                                    |   | —            |   | —       |       | 6,226,202                        |   | —     |      | — |   |
| Foreign currency translation adjustment,  net of tax                                          |   | —            |   | —       |       | —                           |   | (688,225   | )         | — |   |
| Reclassification adjustment for loss  included in net income on available-for-sale securities |   | —            |   | —       |       | —                           |   | 7,481      |      | — |   |
| Comprehensive income                                                                          |   | —            |   | —       |       |                             |   | —     |      | 5,545,458 |   |
|                                                                                          |   |              |   |         |       |                             |   |       |      |   |   |
| Balance at December 31, 2000                                                                  |   | 12,372,358        |   | 27,720,181   |       | 31,885,054                       |   | (1,835,015 | )         | 57,770,220 |   |
| Exercise of stock options                                                                     |   | 51,532            |   | 515          |       | —                           |   | —     |      | 515 |   |
| Amortization of deferred stock compensation                                                   |   | —            |   | 970,372      |       | —                           |   | —     |      | 970,372 |   |
| Net loss                                                                                      |   | —            |   | —       |       | (5,328,803                       | )      | —     |      | — |   |
| Foreign currency translation adjustment,  net of tax                                          |   | —            |   | —       |       | —                           |   | (602,008   | )         | — |   |
| Comprehensive loss                                                                            |   | —            |   | —       |       | —                           |   | —     |      | (5,930,811 | ) |
|                                                                                          |   |              |   |         |       |                             |   |       |      |   |   |
| Balance at December 31, 2001                                                                  |   | 12,423,890        |   | $            | 28,691,068 |                             | $      | 26,556,251 |      | $ | (2,437,023 | ) | $ | 52,810,296 |   |

 

*See accompanying Notes to ConsolidatedFinancial Statements.*

 

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**MACKIE DESIGNS INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basisof presentation**

 

The financialstatements consolidate the accounts of Mackie Designs Inc. and our wholly-ownedsubsidiaries. The companies are collectively hereinafter referred to as“Mackie,” “we, “our” and “us.” All intercompany accounts and transactions havebeen eliminated.

 

**Operations**

 

We develop,manufacture, sell and support high-quality, professional audio equipment toretailers, distributors and contractors throughout the world.

 

**Useof estimates**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires us to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults may differ from those estimates.

 

Estimates thatare particularly susceptible to significant change are the adequacy of theallowances for doubtful accounts, warranty costs, valuation of intangibleassets and valuation allowance on deferred tax assets.

 

**Revenuerecognition**

 

Revenues fromsales of products are generally recognized upon shipment under an agreementwith a customer when risk of loss has passed to the customer and collection ofany resulting receivable is reasonably assured.  We have certain software related products within our digitalproduct line.  Mackie follows theprinciples of AICPA Statement of Position 97-2, “Software Revenue Recognition”in recognizing revenues for these products, which occurs when we have customeracceptance and when collection of any resulting receivable is reasonablyassured.

 

**Warrantycosts**

 

We cover ourproducts under warranty for defects in materials and workmanship for periods ofbetween one and six years. A provision for future warranty costs is recorded atthe time of sale of products.

 

**Advertisingexpense**

 

The cost ofadvertising included in selling, general and administrative expense is expensedas incurred.  For 2001, 2000, and 1999,these expenses totaled $4.0 million, $3.9 million, and $4.2 million,respectively.

 

**Researchand development costs**

 

Expenditures relating to the development of new products and processes,including significant improvements and refinements to existing products, areexpensed as incurred.

 

24

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**Foreigncurrency translation**

 

The financialstatements of our non-U.S. subsidiaries have been translated into U. S. Dollarsin accordance with Statement of Financial Accounting Standards No. 52, “ForeignCurrency Translation.” Under the provisions of this statement, all assets andliabilities in the balance sheets of these subsidiaries, whose functionalcurrency is not the U.S. Dollar, are translated at year-end exchange rates. Netsales, costs and expenses are translated at average rates of exchangeprevailing during the period. Translation gains and losses are accumulated in aseparate component of shareholders’ equity. Realized and unrealized gains andlosses on foreign currency transactions are included in other income (expense),net.

 

**Cashand cash equivalents**

 

We considerall liquid investments purchased with a maturity at purchase of three months orless to be cash equivalents.

 

**Marketablesecurities**

 

In accordancewith Statement of Financial Accounting Standards No. 115, “Accounting forCertain Investments in Debt and Equity Securities,” investments in marketablesecurities are classified as available-for-sale or held-to-maturity when wepurchase the security.  Debt securitiesare treated as held-to-maturity when we have the positive intent and ability tohold the securities to maturity. Held-to-maturity securities are stated at amortized cost.  Zero coupon bonds held by Mackie Italy arethe only securities we treat as held-to-maturity.

 

**Inventories**

 

Inventoriesare valued at the lower of cost, as determined by the first-in, first-outmethod, or market.

 

**Property,plant and equipment**

 

Property,plant and equipment is stated at cost, less accumulated depreciation andamortization.  Depreciation andamortization are computed using the straight-line method over the estimateduseful lives of the assets as follows: buildings, 33 years; machinery andequipment, 5 to 7 years; and furniture and fixtures, 3 to 5 years.  Leasehold improvements are amortized overthe shorter of their useful lives or the term of the lease.  Direct internal and external costs ofcomputer software developed for internal use are capitalized in accordance withSOP 98-1, “Accounting for the Costs of Computer Software Developed or Obtainedfor Internal Use.”  Capitalized costsare amortized using the straight-line method over the estimated useful livesbeginning when each module is complete and ready for its intended use.Maintenance and repairs are expensed as incurred. In accordance with Statementof Accounting Standards No. 34 “Capitalization of Interest Cost,” we havecapitalized $258,000 as part of the cost of our Enterprise Resource Planninginformation system in 2001.

 

25

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**Intangibleassets**

 

Intangibleassets from the acquisitions of subsidiaries include developed technology,assembled workforce, trademarks and goodwill which were recorded at their fairvalue at the date of acquisition. Intangible assets are being amortized on thestraight-line method over the estimated useful lives as follows: goodwill, 10to 20 years; developed technology and trademarks, 20 years and assembledworkforce, 5 years.

 

**Impairmentof long-lived assets**

 

Therecoverability of long-lived assets including property, plant and equipment,goodwill and other intangible assets is periodically assessed.  Recoverability of assets to be held and usedis measured by a comparison of the carrying amount of an asset to futureundiscounted net cash flows expected to be generated by the asset.  If such assets are considered to beimpaired, the impairment to be recognized is measured as the amount by whichthe carrying amount of the assets exceeds the fair value of the assets.  Assets to be disposed of are reported at thelower of the carrying amount or the fair value less cost to sell. Factors whichmight trigger impairment include significant underperformance relative toexpected operating results, significant changes in our use of the assets or thestrategy for our overall business, and significant negative industry oreconomic trends.

 

**Fairvalue of financial instruments**

 

The carryingamounts of cash, available-for-sale securities, accounts receivable, bonds,short-term borrowings, accounts payable and long-term debt approximate fairvalue because they are of a short-term nature or have interest rates thatapproximate market rates.

 

**Derivativefinancial instruments**

 

In June 1998,Statement of Financial Accounting Standards No. 133, “Accounting for DerivativeInstruments and Hedging Activities” was issued. FAS 133, as amended, requiresthat all derivative instruments be recorded on the balance sheet at their fairvalue.  Changes in the fair value of derivatives are recorded each periodin current earnings or other comprehensive income, depending on whether aderivative is designated as part of a hedge transaction and, if it is, the typeof hedge transaction.  This statement, as amended, became effective onJanuary 1, 2001.  The adoption of FAS No. 133 did not have an impact onour consolidated financial position or results of operations.

 

**Stock-basedcompensation**

 

Stock-basedemployee compensation plans are accounted for using the intrinsic-value methodprescribed in Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations.  Compensation expense for employee stock options is measured asthe excess, if any, of the fair value of our common stock at the date of grantover the stock option exercise price and is recognized on the straight-linemethod over the vesting period.

 

**Incometaxes**

 

Provision forincome taxes has been recorded in accordance with Statement of FinancialAccounting Standards No. 109, “Accounting for Income Taxes.” Under theliability method of FAS 109, deferred tax assets and liabilities are recognizedfor the future tax consequences attributed to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases and tax credits and loss carryforwards. Deferred taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences andcarryforwards are expected to be recovered or

 

26

----

 

settled. The effect on deferredtax assets and liabilities of a change in tax rates is recognized in income inthe period that includes the enactment date. A valuation allowance is established when necessary to reduce deferredtax assets to amounts expected to be realized.

 

**Earningsper share**

 

Basic earningsper share is computed on the basis of the weighted average number of commonshares outstanding for the year. Diluted earnings per share is computed on the basis of the weightedaverage number of common shares outstanding during the year increased by theweighted average number of common stock equivalents outstanding during theperiod, using the treasury stock method. For 2001, diluted earnings per sharewas calculated based on the same number of shares as basic earnings per sharebecause common stock equivalents would be antidilutive.

 

**Concentrationof credit and supply risk**

 

We sellproducts on a worldwide basis and a significant portion of our accountsreceivable are due from customers outside of the U.S.  Where we are exposed to material credit risk, we generallyrequire letters of credit or advance payments. No individual country outside of the U.S. accounted for more than 10% ofnet sales in any of the periods presented. Sales to U.S. customers aregenerally on open credit terms.

 

We maintain anallowance for doubtful accounts receivable based upon our historical experienceand the expected collectibility of all outstanding accounts receivable.Allowance for doubtful accounts receivable for the years ended December 31,2001, 2000 and 1999 are as follows:

 
| **For the  year ending December 31,** |   | **Balance at  Beginning of   Year** |      | **Additions   Charged to  Expenses** |   | **Deductions*** |   | **Balance at    End of Year** |    |
|---------------------------------------|--------|-------------------------------------|-----------|--------------------------------------|--------|-----------------|--------|-------------------------------|---------|
| 2001                                  |   | $                                   | 1,079,000 |                                 | $      | 794,315         |   | $                             | 524,205 |   | $ | 1,349,110 |   |
|                                  |   |                                |      |                                 |   |            |   |                          |    |
| 2000                                  |   | $                                   | 1,146,000 |                                 | $      | 752,000         |   | $                             | 819,000 |   | $ | 1,079,000 |   |
|                                  |   |                                |      |                                 |   |            |   |                          |    |
| 1999                                  |   | $                                   | 1,421,000 |                                 | $      | 471,000         |   | $                             | 746,000 |   | $ | 1,146,000 |   |

 

----

* Deductions representuncollectible accounts written off against the allowance, net of recoveries.

 

We rely almostexclusively on one vendor for our potentiometers and certain integratedcircuits, but we are in contact with other manufacturers of these itemsregularly.  These items are criticalcomponents in certain of our products. Interruption in, or cessation of, the supply of these components fromthese suppliers could adversely affect our production capability, as thequalification process for another manufacturer, from sample submission toproduction quality and quantity delivery, could take several months.

 

27

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**Recentaccounting pronouncements**

 

In June 2001,the Financial Accounting Standards Board issued FAS No. 141, “BusinessCombinations” and FAS No. 142, “Goodwill and Other Intangible Assets,” which supercedeAccounting Principles Board Opinion No. 17, “Intangible Assets.”  FAS No. 141 requires that all businesscombinations be accounted for under the purchase method. The statement furtherrequires separate recognition of intangible assets that meet one of twocriteria, as defined in the statement. This statement applies to all businesscombinations initiated after June 30, 2001. Under FAS 142, goodwill and intangible assets with indefinite lives areno longer amortized but are tested at least annually for impairment.  Separable intangible assets with definedlives will continue to be amortized over their useful lives. The provisions ofFAS No. 142 will apply to goodwill and intangible assets acquired before and afterthe statement’s effective date. As permitted by FAS No. 142, we plan to adoptthe new standard in the first quarter of 2002. We are currently evaluating the effect that adoption of the provisionsof FAS No. 142 will have on our results of operations and financialposition.  Refer to Note 5.

 

In June 2001,the FASB issued FAS 143, “Accounting for Obligations Associated with theRetirement of Long-Lived Assets.” The provisions of FAS 143 apply to allentities that incur obligations associated with the retirement of tangiblelong-lived assets. This statement is effective for financial statementsissued for fiscal years beginning after June 15, 2002 and will become effectivefor Mackie commencing in 2003. This accounting pronouncement is not expected tohave a significant impact on our financial position or results of operations.

 

In August2001, the FASB issued FAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets,” which supersedes FAS No. 121, “Accounting forthe Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of.”FAS No. 144 retains many of the fundamental provisions of FAS No. 121 andprovides a single method of accounting for long-lived assets to be disposed of.We are required and plan to adopt the provisions of FAS No. 144 for the year beginningJanuary 1, 2002. The adoption of the statement for long-lived assets held foruse is not expected to have a material impact on our consolidated financialstatements. The provisions of the statement for assets held for sale or otherdisposal generally are required to be applied prospectively after the adoptiondate to newly initiated disposal activities. Therefore, we cannot determine thepotential future effects that the adoption of the statement for assets held forsale or other disposal will have on our financial statements.

 

**2.  ACQUISITIONS**

 

In April 2001,we acquired all the outstanding shares of Mackie Engineering Services (Belgium)BVBA, formerly known as Sydec N.V.  Mackie Engineering develops productsand services in the area of embedded electronics and software, networking,digital signal processing and WindowsTM 95/98/NT/2000 driver and applicationdevelopment. The acquisition was accounted for under the purchase method ofaccounting and included performance incentives for the prior owners involving 200,000options to purchase Mackie common stock at an exercise price of $0.01 vestingover a two-year period. The aggregate purchase price including relatedacquisition costs, was approximately $4.4 million. $2.5 million of this amountwas paid in 2001, the remaining $1.9 million is scheduled to be paid in 2002.The entire purchase price is in excess of the net tangible assets acquired andis included in intangible assets.  Atotal of $1.0 million of the purchase consideration was specifically allocatedto developed technology.  The remaining$3.4 million is goodwill.  Goodwill isbeing amortized on the straight-line method over 10 years, while the developedtechnology is being amortized on the straight-line method over 5 years.  The results of Sydec have been included inour consolidated results of operations from the date of acquisition.

 

28

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The followingtable presents unaudited pro forma consolidated financial information for theyears ended December 31, 2001 and 2000 as if the acquisition of Sydec hadoccurred on January 1 of those years:

 
|                            |   |                                    |    |     |   |
|---------------------------------|--------|-----------------------------------------|---------|----------|--------|
|                            |   | **2001**                                |    | **2000** |   |
|                            |   | **In thousands, except per share data** |    |
| Net sales                       |   | $                                       | 206,910 |     | $      | 208,868 |   |
| Net income (loss)               |   | $                                       | (5,705  | )        | $      | 5,210 |   |
| Diluted income (loss) per share |   | $                                       | (0.46   | )        | $      | 0.40 |   |

 

The unauditedpro forma financial information is presented for informational purposes onlyand is not necessarily indicative of the operating results that would haveoccurred had the acquisition taken place on the basis assumed above.  In addition, the pro forma results are notintended to be a projection of the future results and do not reflect anysynergies that might have been achieved from the combined operations.

 

In April 2000,we acquired 100% of the capital stock of Eastern Acoustic Works, Inc whichdesigns and manufactures loudspeaker systems, including integrated signalprocessing for the installed and live sound markets.  The acquisition was accounted for under the purchase method ofaccounting.  The aggregate purchase price,plus related acquisition costs, was approximately $19.6 million.  The excess of the purchase price over thefair value of net tangible assets acquired was approximately $18.7 million andis included in intangible assets.  Atotal of $8.2 million of the purchase consideration was specifically allocatedto identifiable intangible assets, including developed technology of $5.2million, assembled workforce of $1.6 million, and trademark of $1.4million.  The remaining $10.5 million isconsidered to be goodwill.  Goodwill,developed technology and trademark are being amortized on the straight-linemethod over 20 years, while the assembled workforce is being amortized on thestraight line method over 5 years.  Theresults of EAW are included in our consolidated results of operations from thedate of acquisition.

 

**3.  INVESTMENTS**

 

The amortizedcost of available-for-sale securities approximated fair market value andconsisted of U.S. Government securities at December 31, 2000.

 

Mackie Italyholds various zero-coupon Italian bank bonds as collateral for two bank termloans. The bonds aggregated $3.9 million at both December 31, 2001 and 2000,and are carried at amortized cost, which approximates market value.  The bank bonds have various maturitiesranging through 2004; however, because reinvestment is required under the collateral agreement, the maturitydate is effectively 2004.  The interestyields on these bonds range from 2.4% to 7.4%, with average rates of 6.9% and6.8% at December 31, 2001 and 2000, respectively. These bonds are treated asheld-to-maturity and are restricted as to their use.

 

**4.  INVENTORIES**

 

Inventoriesconsist of the following:

 
|            |   | **December  31,** |       |
|-----------------|--------|-------------------|------------|
|            |   | **2001**          |       | **2000** |   |
| Raw materials   |   | $                 | 17,505,995 |   | $ | 31,579,234 |   |
| Work in process |   | 4,073,255         |       | 4,830,897 |   |
| Finished goods  |   | 29,927,433        |       | 27,060,404 |   |
|            |   | $                 | 51,506,683 |   | $ | 63,470,535 |   |

 

29

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**5.  INTANGIBLE ASSETS**

 

Intangibleassets consist of the following:

 
|                          |   | **December  31,** |       |
|-------------------------------|--------|-------------------|------------|
|                          |   | **2001**          |       | **2000** |   |
| Goodwill                      |   | $                 | 21,053,996 |   | $ | 17,974,295 |   |
| Developed technology          |   | 6,200,120         |       | 5,200,000 |   |
| Assembled workforce           |   | 1,660,000         |       | 1,660,000 |   |
| Trademark                     |   | 1,380,000         |       | 1,380,000 |   |
|                          |   | 30,294,116        |       | 26,214,295 |   |
| Less accumulated amortization |   | 3,858,126         |       | 1,795,511 |   |
|                          |   | $                 | 26,435,990 |   | $ | 24,418,784 |   |

 

Under FAS 142,goodwill and intangible assets with indefinite lives will no longer beamortized, but will be tested at least annually for impairment. Separableintangible assets will continue to be amortized over their useful lives.

 

Approximately $18.1 million in unamortized goodwill will be subject tovaluation under the new accounting standard. We have notcompleted our evaluation of the effect the adoption of FAS 142 will have on ourresults of operations and financial position. Of the $18.1 million of unamortized goodwill, approximately $9.5 millionis related to our North American acquisitions, primarily EAW, and $8.6 millionresults from our Mackie Italy and Mackie Engineering Servicesacquisitions.  Exclusive of futureimpairment charges in fiscal year 2002, if any, amortization expense will bereduced by approximately $1.6 million annually for the goodwill on the balancesheet at December 31, 2001 as a result of adopting the new accounting standard.

 

**6.  PROPERTY, PLANT AND EQUIPMENT**

 

Property,plant and equipment consist of the following:

 
|                                            |   | **December  31,** |       |
|-------------------------------------------------|--------|-------------------|------------|
|                                            |   | **2001**          |       | **2000** |   |
| Land                                            |   | $                 | 1,736,626  |   | $ | 2,014,365 |   |
| Buildings                                       |   | 3,587,899         |       | 3,298,929 |   |
| Machinery and equipment                         |   | 30,843,919        |       | 21,868,448 |   |
| Furniture and fixtures                          |   | 10,830,274        |       | 12,785,406 |   |
| Leasehold improvements                          |   | 5,190,157         |       | 3,803,423 |   |
|                                            |   | 52,188,875        |       | 43,770,571 |   |
| Less accumulated depreciation and  amortization |   | 26,517,916        |       | 20,203,126 |   |
|                                            |   | $                 | 25,670,959 |   | $ | 23,567,445 |   |

 

30

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**7.  INCOME TAXES**

 

Components ofincome (loss) before income taxes are as follows:

 

|                                                       |   | **2001**   |       | **2000**  |   | **1999**   |   |
|------------------------------------------------------------|--------|------------|------------|-----------|--------|------------|--------|
| U. S.                                                      |   | $          | (2,133,541 | )         | $      | 9,212,206  |   | $ | 6,900,322 |   |
| Foreign                                                    |   | (4,800,988 | )          | 1,255,424 |   | (832,274   | )      |
| Income (loss) before provision (benefit)  for income taxes |   | $          | (6,934,529 | )         | $      | 10,467,630 |   | $ | 6,068,048 |   |

 

The provision(benefit) for income taxes is as follows:

 

|                                       |   | **2001**   |       | **2000**  |   | **1999**   |   |
|--------------------------------------------|--------|------------|------------|-----------|--------|------------|--------|
| Current income taxes:                      |   |       |       |      |   |       |   |
| U. S. federal                              |   | $          | (532,460   | )         | $      | 3,919,127  |   | $ | 2,763,450 |   |
| Foreign                                    |   | 1,312,334  |       | 1,139,028 |   | 1,358,446  |   |
| Total current                              |   | 779,874    |       | 5,058,155 |   | 4,121,896  |   |
| Deferred income taxes:                     |   |       |       |      |   |       |   |
| U. S. federal                              |   | (1,006,214 | )          | (826,296  | )      | (644,963   | )      |
| State and local                            |   | (73,169    | )          | (130,954  | )      | —     |   |
| Foreign                                    |   | (1,306,217 | )          | 140,523   |   | (666,152   | )      |
| Total deferred                             |   | (2,385,600 | )          | (816,727  | )      | (1,311,115 | )      |
| Total provision (benefit) for income taxes |   | $          | (1,605,726 | )         | $      | 4,241,428  |   | $ | 2,810,781 |   |

 

The taxeffects of temporary differences and carryforwards that give rise tosignificant components of deferred tax assets and liabilities are as follows:

 

|                                        |   | **December  31,** |      |
|---------------------------------------------|--------|-------------------|-----------|
|                                        |   | **2001**          |      | **2000** |   |
| Deferred tax assets:                        |   |              |      |   |   |
| Accrued expenses                            |   | $                 | 920,444   |   | $ | 1,241,922 |   |
| Bad debt allowance                          |   | 385,414           |      | 313,534 |   |
| Inventory adjustments                       |   | 3,546,757         |      | 1,320,199 |   |
| Net operating loss carryforwards            |   | 1,290,999         |      | 447,575 |   |
| Tax credit carryforwards                    |   | —            |      | 259,091 |   |
| Other items, net                            |   | 831,948           |      | 563,033 |   |
|                                        |   | 6,975,562         |      | 4,145,354 |   |
|                                        |   |              |      |   |   |
| Less valuation allowance                    |   | (98,974           | )         | (98,974 | ) |
|                                        |   | 6,876,588         |      | 4,046,380 |   |
| Deferred tax liabilities:                   |   |              |      |   |   |
| Property, plant and equipment               |   | 2,241,172         |      | 2,363,345 |   |
| Specifically identifiable intangible assets |   | 2,532,485         |      | 2,633,045 |   |
| Other                                       |   | 667,341           |      | — |   |
| Total deferred tax liabilities              |   | 5,440,998         |      | 4,996,390 |   |
| Net deferred tax assets (liabilities)       |   | $                 | 1,435,590 |   | $ | (950,010 | ) |

 

31

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Deferred taxassets of foreign jurisdictions comprised $3.2 million and $1.5 million atDecember 31, 2001 and 2000, respectively. Deferred tax liabilities of foreignjurisdictions comprised $2.1 million at both December 31, 2001 and 2000.

 

Reconciliationfrom the U.S. statutory income tax rate of 34% to the effective income tax rateis as follows:

 

|                                                              |   | **2001** |       | **2000** |   | **1999**  |   |
|-------------------------------------------------------------------|--------|----------|------------|----------|--------|-----------|--------|
| Tax at the statutory rate                                         |   | $        | (2,357,740 | )        | $      | 3,558,994 |   | $ | 2,063,136 |   |
| Research and development tax credit                               |   | (412,965 | )          | (398,581 | )      | (200,000  | )      |
| Foreign sales corporation tax benefit                             |   | (16,130  | )          | (336,029 | )      | (311,835  | )      |
| Limitation of recognition of benefit of  foreign operating losses |   | —   |       | —   |   | 36,008    |   |
| Nondeductible expenses and other permanent  differences           |   | 248,826  |       | 464,616  |   | 553,739   |   |
| Goodwill amortization                                             |   | 123,987  |       | 253,174  |   | 99,789    |   |
| Foreign tax greater than U.S. statutory  rate                     |   | 897,166  |       | 587,313  |   | 569,944   |   |
| State taxes, net of federal impact                                |   | (88,870  | )          | 111,941  |   | —    |   |
|                                                              |   |     |       |     |   |      |   |
|                                                              |   | $        | (1,605,726 | )        | $      | 4,241,428 |   | $ | 2,810,781 |   |

 

At December31, 2001 we had international net operating loss carryforwards of approximately$3.2 million. These carryforwards generally begin expiring in 2013.

 

The valuationallowance for deferred tax assets did not change in 2001 and increased byapproximately $25,000 in 2000. Although realization of deferred tax assets is not assured, managementbelieves, based on its current expectations and tax planning strategies, thatit is more likely than not that the deferred tax assets will be realized.

 

**8.  DEBT**

 

**Short-term borrowings**

 

Short-term debt consisted of the following at December 31:

 
|                                                 |   | **2001**   |       | **2000**   |       |
|------------------------------------------------------|--------|------------|------------|------------|------------|
|                                                 |   |       | ** ** |       | ** ** |
| U.S. line of credit                                  |   | $          | 10,988,447 |       | $          | 11,453,278 |   |
| Short-term credit  facilities                        |   | 14,406,729 |       | 19,827,604 |       |
|                                                 |   | 25,395,176 |       | 31,280,882 |       |
| Long-term debt reclassified as short-term  borrowing |   | 10,000,000 |       | —     |       |
|                                                 |   | $          | 35,395,176 |       | $          | 31,280,882 |   |

 

At December 31, 2001, we had a bank line of credit in the U.S. thatprovided up to $15.0 million of short-term borrowing subject to certainlimitations. Additionally, the line of credit provided a $1.5 million guaranteeon our debt in Italy. This guarantee reduced the maximum allowable borrowing to$13.5 million as of December 31, 2001. At December 31, 2001 and 2000, there was$11.0 million and $11.5 million outstanding on the line of credit,respectively. At December 31, 2001 the available line was $2.5 million.Borrowings under this line of credit bear interest at the bank’s prime rateplus a specified margin. At December 31, 2001 the interest rate in effect was5.8%. In April 2002, we entered into an agreement to revise the terms of bothour bank line of credit and the term loan described below, which will result inthe bank line of credit and the borrowings under the line increasing byapproximately $10.0 million and an equal reduction of $10.0 million to the termloan. The result is a bank line of credit that provides up to $25.0 million ofshort-term borrowing subject to certain limitations.

 

32

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We have entered into agreements with several banks in Italy thatprovide short-term credit facilities totaling approximately $25.7 million. Theamount available to us is limited by the amount of our Italian accountsreceivable and was approximately $2.4 million at December 31, 2001. At December31, 2001 and 2000 there was approximately $14.4 million and $19.8 million,respectively outstanding under these facilities. The majority of these creditfacilities are secured by receivables of Mackie Italy. Interest rates on thesecredit facilities range from 3.3% to 11.5%. 

 

The weighted-average interest rate on total short-term borrowings was5.3% at December 31, 2001 and 7.0% at December 31, 2000.

 

**Long-term debt**

** **

Long-term debt consisted of the following at December 31:

 
|                                                      |   | **2001**   |       | **2000**   |   |
|-----------------------------------------------------------|--------|------------|------------|------------|--------|
|                                                      |   |       |       |       |   |
| Term loan                                                 |   | $          | 25,562,917 |       | $      | 8,714,557 |   |
| Revolving credit note                                     |   | —     |       | 19,000,000 |   |
| Capital leases                                            |   | 215,510    |       | 431,636    |   |
| Bank term loan #1                                         |   | 3,394,466  |       | 3,626,724  |   |
| Bank term loan #2                                         |   | 390,850    |       | 584,630    |   |
| Other notes                                               |   | 3,711,196  |       | 2,637,329  |   |
|                                                      |   | 33,274,939 |       | 34,994,876 |   |
| Less current portion                                      |   | 3,873,700  |       | 5,024,473  |   |
| Less long-term debt reclassified as  short-term borrowing |   | 10,000,000 |       | —     |   |
|                                                      |   | $          | 19,401,239 |       | $      | 29,970,403 |   |

 

Borrowings under the term loan bear interest at the bank’s prime rate,or at a LIBOR rate plus a specified margin. At December 31, 2001 the interestrate in effect was 7.4%. Per the credit agreement in place at December 31,2001, principal payments of $465,164 plus applicable interest are payablemonthly. The revolving credit note outstanding at December 31, 2000 wascombined into the term loan during 2001. 

 

Under the terms of our U.S. credit agreement, we must maintain certainfinancial ratios and tangible net worth. The agreement also provides, among other matters, restrictions onadditional financing, dividends, mergers, acquisitions, and an annual capitalexpenditure limit. At December 31, 2001, we were out of compliance with one ofour financial covenants. We were also out of compliance earlier during 2001 butnegotiated a restructuring of the covenants and received a waiver from thelender. This restructuring resulted in slightly higher interest rates inaddition to certain loan amendment fees. In April 2002 we received a waiver forthe December 31, 2001 non-compliance and negotiated a new credit agreement,including a restructuring of the covenants.

 

The revised credit agreement involves a reclassification of $10.0million from the term loan to the line of credit. The remaining term loan isdivided into two components. The principal amount of the first component,Tranche A, is approximately $6.0 million. This will be payable at $100,000 permonth plus interest at the bank’s prime rate or at a LIBOR rate plus aspecified margin. The principal amount of Tranche B is approximately $9.6million at December 31, 2001. Interest on this component is payable monthly andis calculated at the bank’s prime rate or at a LIBOR rate plus a specifiedmargin. Principal repayments in 2003 are calculated based upon our 2002earnings before interest, taxes, depreciation and amortization, less cash taxespaid, certain capital expenditures and debt repayments. These amounts are dueupon completion of 2002 preliminary financial statements and in July 2003.  The renewal date for both components of theterm loan is September 2003.

 

Both the line of credit and the term loan are secured by all U.S. basedassets including, but not limited to, accounts receivable, inventory, fixedassets, intangibles and patents. As a result of restructuring the line ofcredit and term loan, we have reclassified amounts related to the term loanpreviously shown as long-term debt callable under covenant provisions ininterim condensed consolidated financial statements.

 

 

33

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We have taken various actions to improve results of operations andensure our ongoing ability to cover scheduled debt servicing payments,including headcount reductions and other cost containment measures. During thethird and fourth quarters of 2001, these measures included layoffs, salaryreductions, office closures and reduction of capital expenditures. We willcontinue to focus on increased management controls over expenditures andattempt to reduce costs of sales by improving our methods of product sourcing.Finally, we are evaluating a variety of alternative financing sources,including possible divestiture of certain operating assets.

 

The bank term loans and other notes are denominated in Italian Lire.The bank term loan #1 bears interest at the six-month LIBOR rate plus 2.0%,5.9% at December 31, 2001. Interest-only payments are made semi-annually andthe principal is due in 2003.  This loanis secured by a bank bond held by Mackie Italy, which will be used to repay theprincipal amount of the loan at the time of maturity in 2003. The bank termloan #2 bears a fixed interest rate of 7.1%. Interest-only payments are made semi-annually. In addition, semi-annualprincipal payments of approximately $80,000 are payable with the finalprincipal payment due in 2004.  A bankbond held by Mackie Italy secures this loan. The other notes bear interest atrates from 6.3% to 8.9%.  Principalpayments on these loans are made in varying amounts until 2013.  Specific assets of Mackie Italy securecertain of these loans.

 

Certain equipment is leased under capital lease agreements.  Interest has been imputed at rates rangingfrom 7.0% to 15.0%.  Completion dates ofthe leases range through 2003.

 

Based on the newcredit agreement, aggregate principal payments of long-term debt are expectedto be as follows:

 
| 2002       |   | $          | 3,873,700  |   |
|------------|--------|------------|------------|--------|
| 2003       |   | 17,656,249 |       |
| 2004       |   | 364,329    |       |
| 2005       |   | 296,171    |       |
| 2006       |   | 183,929    |       |
| Thereafter |   | 900,561    |       |
|       |   | $          | 23,274,939 |   |

 

 

**9.  EMPLOYEE AND OTHER LIABILITIES**

 

Under Italianlaw, employees of our subsidiaries in Italy are entitled to severance benefitscalculated primarily based upon compensation and length of service.  These severance benefits vest immediatelyand are payable upon the employee’s separation from the Company.  This liability aggregated approximately $2.9million and $3.2 million at December 31, 2001 and 2000, respectively.  In addition, commissioned sales agents ofMackie Italy are entitled to similar severance benefits based upon commissionsearned and length of service.  Thisliability aggregated approximately $550,000 and $520,000 at December 31, 2001and 2000, respectively.  Under theseseverance programs, expense of approximately $680,000, $720,000 and $650,000was recognized in 2001, 2000 and 1999, respectively.

 

Thetermination indemnity liability is calculated in accordance with local civiland labor laws based on each employee’s length of service, employment categoryand remuneration.  There is no vestingperiod or funding requirement associated with the liability.  The liability recorded on the balance sheetis the amount that the employees would be entitled to if the employeesterminated at that date.

 

**10.  RELATED-PARTY TRANSACTIONS**

 

We have anagreement to receive marketing and sales services from a company in which oneof our directors and shareholders is a partner.  This agreement is substantially similar to agreements we havewith our other independent representatives. Expenses under this agreement amounted to $456,000 in 2001, $399,000 in2000 and $360,000 in 1999.

 

We made anon-interest bearing loan to James T. Engen, Chief Executive Officer anddirector, in November 1999 for relocation expenses.  The principal amount of the loan, $250,000, is due and payable infull upon the earlier of October 31, 2004 or Mr. Engen’s termination.  As of December 31, 2001, the unpaidprincipal amount of this loan was $250,000.

 

 

34

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We also have afacility lease with a related party as disclosed in Note 14.

 

**11.  EMPLOYEE BENEFIT PLANS**

 

We currentlyhave qualified profit-sharing plans under the provisions of Internal RevenueCode Section 401(k) for all U.S. based employees meeting the eligibilityrequirements.  Contributions are basedon a matching formula as defined in each of the plans.  Additional contributions may be made at thediscretion of the Board of Directors. Contributions to the respective plans vest ratably over a 5-yearperiod.  Contributions to the plan were$560,000, $500,000, and $100,000 in 2001, 2000, and 1999, respectively.

 

**12.  NET INCOME (LOSS) PER SHARE**

 

The followingtable sets forth the computation of basic and diluted net income (loss) pershare. Stock options totaling4,746,000, 1,707,000 and 3,086,000 shares in 2001, 2000 and 1999, respectively,were excluded from the calculation of diluted net income per share because theyare antidilutive.

 
|                                                                              |   | **2001**   |       | **2000**   |   | **1999**   |   |
|-----------------------------------------------------------------------------------|--------|------------|------------|------------|--------|------------|--------|
| Numerator:                                                                        |   |       |       |       |   |       |   |
| Net income (loss)                                                                 |   | $          | (5,328,803 | )          | $      | 6,226,202  |   | $ | 3,257,267 |   |
| Denominator:                                                                      |   |       |       |       |   |       |   |
| Denominator for basic net income (loss) per  share — weighted-average shares |   | 12,391,311 |       | 12,211,230 |   | 12,214,982 |   |
| Dilutive potential common shares from stock  options                              |   | —     |       | 570,951    |   | 49,697     |   |
| Denominator for diluted net income (loss)  per share                              |   | 12,391,311 |       | 12,782,181 |   | 12,264,679 |   |
|                                                                              |   |       |       |       |   |       |   |
| Basic net income (loss) per share                                                 |   | $          | (0.43      | )          | $      | 0.51       |   | $ | 0.27 |   |
|                                                                              |   |       |       |       |   |       |   |
| Diluted net income (loss) per share                                               |   | $          | (0.43      | )          | $      | 0.49       |   | $ | 0.27 |   |

 

**13.  SHAREHOLDERS’ EQUITY**

 

A stock optionplan for the granting of incentive and non-qualified stock options is in placeunder which 6.5 million shares are reserved for grants.  The exercise price of incentive stockoptions granted under the plan may not be less than the fair market value ofthe common stock on the date of grant. The exercise price of non-qualified stock options granted under the planmay be greater or less than the fair market value of the common stock on thedate of grant, as determined by the stock option committee of the Board ofDirectors at its discretion. Options generally vest over a four-year period andexpire no later than ten years after the date of grant.

 

In connectionwith the acquisitions of Sydec and EAW, certain key employees of these entitieswere granted a total of 399,998 non-qualified stock options with an exerciseprice of $0.01.  These options arelinked to continued employment and vest ratably over a two-year period from therespective grant date.  We recognizecompensation expense related to these options on a straight-line basis over thetwo-year vesting period.

 

At December31, 2001, 1,359,638 shares of common stock were available for future grants.

 

35

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We follow theguidelines of APB 25 and related interpretations using the intrinsic valuemethod in accounting for stock options. Had compensation costs been determinedconsistent with FAS No. 123, our net income (loss) and basic and diluted netincome (loss) per share would have been reduced to the pro forma amounts asindicated below.

 
|                                 |   | **2001** |       | **2000** |   | **1999**  |   |
|--------------------------------------|--------|----------|------------|----------|--------|-----------|--------|
| Net income (loss):                   |   |     |       |     |   |      |   |
| As reported                          |   | $        | (5,328,803 | )        | $      | 6,226,202 |   | $ | 3,257,267 |   |
| Pro forma                            |   | $        | (6,426,461 | )        | $      | 4,691,382 |   | $ | 2,063,092 |   |
| Basic net income (loss) per share:   |   |     |       |     |   |      |   |
| As reported                          |   | $        | (0.43      | )        | $      | 0.51      |   | $ | 0.27 |   |
| Pro forma                            |   | $        | (0.52      | )        | $      | 0.38      |   | $ | 0.17 |   |
| Diluted net income (loss) per share: |   |     |       |     |   |      |   |
| As reported                          |   | $        | (0.43      | )        | $      | 0.49      |   | $ | 0.27 |   |
| Pro forma                            |   | $        | (0.52      | )        | $      | 0.37      |   | $ | 0.17 |   |

 

The fair valueof each option grant was estimated on the date of grant using the Black-Scholesoption-pricing model. For options granted with an exercise price equal to themarket price at the time of issuance, the following assumptions were used:

 
|                                      |   | **2001** |   | **2000** |   | **1999** |   |
|-------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Weighted average risk free interest rates |   | 4.87     | %      | 6.20     | %      | 5.79     | %      |
| Expected dividend yield                   |   | 0        | %      | 0        | %      | 0        | %      |
| Expected volatility                       |   | 62.9     | %      | 62.7     | %      | 61.6     | %      |
| Expected lives (in years)                 |   | 7        |   | 7        |   | 7        |   |

 

For optionswith an exercise price less than the market price at the time of issuance, thefollowing assumptions were used:

 
|                                      |   | **2001** |   | **2000** |   |
|-------------------------------------------|--------|----------|--------|----------|--------|
| Weighted average risk free interest rates |   | 4.87     | %      | 6.22     | %      |
| Expected dividend yield                   |   | 0        | %      | 0        | %      |
| Expected volatility                       |   | 62.9     | %      | 62.7     | %      |
| Expected lives (in years)                 |   | 3        |   | 3        |   |

 

TheBlack-Scholes option pricing model requires the input of highly subjectiveassumptions and does not necessarily provide a reliable measure of fair value.For options granted with an exercise price equal to the market price at thetime of issuance, the weighted-average fair value of options granted during theyears 2001, 2000 and 1999 was $4.04, $3.18, and $4.30, respectively. Foroptions with an exercise price less than the market price at the time ofissuance, the weighted-average fair value of options granted during the years2001 and 2000 was $5.49 and $6.12, respectively. In both 2001 and 2000, theexercise price of all such options was $.01.

 

36

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The followingtable summarizes the stock option activity for the three-year period endedDecember 31, 2001:

 
|                                     |   | **Shares  subject to  option** |   | **Weighted  average  exercise price** |   |
|------------------------------------------|--------|--------------------------------|--------|---------------------------------------|--------|
| Options outstanding at December 31, 1998 |   | 3,417,900                      |   | $                                     | 6.11   |   |
| Granted                                  |   | 355,500                        |   | $                                     | 4.79   |   |
| Forfeited                                |   | (360,900                       | )      | $                                     | 6.42   |   |
| Exercised                                |   | (1,500                         | )      | $                                     | 5.55   |   |
| Options outstanding at December 31, 1999 |   | 3,411,000                      |   | $                                     | 5.94   |   |
| Granted                                  |   | 1,087,197                      |   | $                                     | 4.88   |   |
| Forfeited                                |   | (105,600                       | )      | $                                     | 6.21   |   |
| Exercised                                |   | (264,600                       | )      | $                                     | 5.55   |   |
| Options outstanding at December 31, 2000 |   | 4,127,997                      |   | $                                     | 5.68   |   |
| Granted                                  |   | 851,591                        |   | $                                     | 5.12   |   |
| Forfeited                                |   | (181,576                       | )      | $                                     | 5.24   |   |
| Exercised                                |   | (51,532                        | )      | $                                     | 0.01   |   |
| Options outstanding at December 31, 2001 |   | 4,746,480                      |   | $                                     | 5.66   |   |

 

At December31, 2001, 2000 and 1999 a total of 3,041,281, 2,403,775 and 2,415,025 optionswere exercisable, respectively. The weighted average exercise price of theseoptions was $5.95, $6.01 and $5.92, respectively.

 

The followingtable summarizes information about options outstanding and exercisable atDecember 31, 2001:

 
| **Options  Outstanding**      |         | **Options  Exercisable** |      |
|-------------------------------|--------------|--------------------------|-----------|
| **Range of  exercise  price** |         | **Number  Outstanding**  |      | **Weighted average  remaining  contractual life  (years)** |   | **Weighted  average  exercise  price** |   | **Number exercisable** |   | **Weighted average  exercise price** |   |
| $                             | 0.01         |                     | 331,799   |   | 9.79 |   | $ | 0.01 |   | 32,950 |   | $ | 0.01 |   |
| $                             | 4.25 - 8.00  |                     | 4,334,681 |   | 6.87 |   | $ | 5.81 |   | 2,913,331 |   | $ | 5.91 |   |
| $                             | 8.01 - 13.88 |                     | 80,000    |   | 4.06 |   | $ | 8.70 |   | 95,000 |   | $ | 9.29 |   |
|                          |         |                     | 4,746,480 |   | 7.03 |   | $ | 5.66 |   | 3,041,281 |   | $ | 5.95 |   |
|                               |              |                          |           |  |  |  |  |  |  |  |  |  |  |  |  |

 

**14.  COMMITMENTS AND CONTINGENCIES**

 

**Commitments**

 

Our primaryfacility in Woodinville, Washington is owned by three significant shareholdersand directors.  The monthly rent statedin the lease is $56,613, adjusted annually for changes in the Consumer PriceIndex. Monthly rent expense as of December 31, 2001 was $65,495, the leaseexpires December 31, 2006. Annual rent expense under this lease wasapproximately $798,000, $786,000 and $753,000 in 2001, 2000 and 1999, respectively.  We do not expect significant increases inrent expense during the remaining years of the lease term in relation toConsumer Price Index adjustments. Taxes, insurance, utilities, and maintenance are our responsibility.

 

37

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Future minimumrental payments under the equipment and facility leases at December 31, 2001are as follows:

 
| 2002 |   | $         | 2,679,000 |   |
|------|--------|-----------|-----------|--------|
| 2003 |   | 1,992,000 |      |
| 2004 |   | 1,613,000 |      |
| 2005 |   | 1,124,000 |      |
| 2006 |   | 853,000   |      |

 

Total rentexpense for 2001, 2000, and 1999 was $2.4 million, $2.2 million, and $1.6million, respectively.

 

**Contingencies**

 

We havesubrogated claims asserted against us from insurance companies who paid claimsmade by EAW’s landlord and other tenants in the building occupied by EAW in1996. The landlord and other tenants were affected by a fire started by aloaned employee in a portion of the building. The insurance company for thelandlord alleges that EAW is liable for a range of $2.1 to $2.9 million fordamages to the building.  We believethat these losses are not attributable to us under Massachusetts law, and arevigorously defending these claims.  Theclaims of the other tenants have been covered by EAW’s insurance carrier.  The ultimate resolution of this matter isnot known at this time. No provision has been made in the consolidatedfinancial statements related to these claims.

 

We are alsoinvolved in various legal proceedings and claims that arise in the ordinarycourse of business.  We believe thatthese matters will not have a material adverse impact on our financialposition, liquidity or results of operations.

 

38

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**15.  SEGMENT AND GEOGRAPHIC INFORMATION**

 

Major operations outside theU.S. include manufacturing facilities in Italy, and sales and support officesin Germany, the United Kingdom, France and China.  Certain geographic information for the three years ended December31, 2001 is presented in the table that follows. Sales between affiliatedentities are excluded from these numbers. Net sales, as shown in the table below, are based upon the geographicarea into which the products were sold and delivered. The profit on transfersbetween geographic areas is not recognized until sales are made tonon-affiliated customers.  Long-livedassets exclude goodwill, bonds and deferred income taxes and are those assetsthat can be directly associated with a particular geographic area.

 

Sales to customers outsideof the U.S. approximated 49%, 44%, and 49% of net sales in 2001, 2000, and1999, respectively.

 
|               |   | **Years  Ended December 31,** |    |
|--------------------|--------|-------------------------------|---------|
|               |   | **2001**                      |    | **2000** |   | **1999** |   |
|               |   | **(in thousands)**            |    |
| Net sales:         |   |                          |    |   |   |   |   |
| U.S.               |   | $                             | 105,930 |   | $ | 115,466 |   | $ | 80,039 |   |
| Europe             |   | 61,304                        |    | 59,378 |   | 55,018 |   |
| Other              |   | 39,305                        |    | 32,632 |   | 21,283 |   |
|               |   | $                             | 206,539 |   | $ | 207,476 |   | $ | 156,340 |   |
| Long-lived assets: |   |                          |    |   |   |   |   |
| U.S.               |   | $                             | 15,940  |   | $ | 13,345 |   | $ | 8,697 |   |
| Europe             |   | 10,265                        |    | 11,978 |   | 14,296 |   |
|               |   | $                             | 26,205  |   | $ | 25,323 |   | $ | 22,993 |   |

 

Businesssegments are identified using primarily geographic factors.  The two reportable segments are U.S.operations and operations of Mackie Italy and other European subsidiaries.  The U.S. segment offers audio mixers andother professional audio equipment.  TheMackie Italy segment offers loudspeakers, loudspeaker components and Mackieproduct offerings through its subsidiaries. Sales between segments are made at pricesconsistent with rules and regulations of governing tax authorities. Operatingincome (loss) not assigned to a segment relates to profit recognized by thesegments on intercompany sales that have not been resold to a non-affiliatedcustomer. We have restated segment information for 2000 and 1999 to reflect thecurrent business segment structure. A summary of key financial data bysegment is as follows:

 
|                                       |   | **United  States**  |    | **Europe** |   | **Elimination  of  intercompany  amounts** |   | **Total** |   |
|--------------------------------------------|--------|---------------------|---------|------------|--------|--------------------------------------------|--------|-----------|--------|
|                                       |   | **(in  thousands)** |    |
| **Year ended December 31, 2001:**          |   |                |    |       |   |                                       |   |      |   |
| Net sales, to external customers           |   | $                   | 141,949 |       | $      | 64,590                                     |   |      |   | $ | 206,539 |   |
| Net sales, intersegment                    |   | 20,838              |    | 24,077     |   | (44,915                                    | )      | —    |   |
| Operating income (loss)                    |   | 691                 |    | (1,931     | )      | (160                                       | )      | (1,400    | )      |
| Interest expense                           |   | 2,268               |    | 2,611      |   |                                       |   | 4,879     |   |
| Depreciation and amortization              |   | 6,140               |    | 2,380      |   |                                       |   | 8,520     |   |
| Total assets                               |   | 83,051              |    | 70,913     |   |                                       |   | 153,964   |   |
| Purchases of property, plant and equipment |   | 7,317               |    | 1,657      |   |                                       |   | 8,974     |   |
|                                       |   |                |    |       |   |                                       |   |      |   |
| **Year ended December 31, 2000:**          |   |                |    |       |   |                                       |   |      |   |
| Net sales, to external customers           |   | $                   | 140,637 |       | $      | 66,839                                     |   |      |   | $ | 207,476 |   |
| Net sales, intersegment                    |   | 14,559              |    | 26,298     |   | (40,857                                    | )      | —    |   |
| Operating income                           |   | 11,831              |    | 4,490      |   | (1,350                                     | )      | 14,971    |   |
| Interest expense                           |   | 2,045               |    | 2,536      |   |                                       |   | 4,581     |   |
| Depreciation and amortization              |   | 5,485               |    | 1,891      |   |                                       |   | 7,376     |   |
| Total assets                               |   | 89,824              |    | 75,374     |   |                                       |   | 165,198   |   |
| Purchases of property, plant and equipment |   | 5,597               |    | 1,012      |   |                                       |   | 6,609     |   |
|                                       |   |                |    |       |   |                                       |   |      |   |
| **Year ended December 31, 1999:**          |   |                |    |       |   |                                       |   |      |   |
| Net sales to external customers            |   | $                   | 96,134  |       | $      | 60,206                                     |   |      |   | $ | 156,340 |   |
| Net sales, intersegment                    |   | 8,542               |    | 4,733      |   | (13,275                                    | )      | —    |   |
| Operating income                           |   | 6,755               |    | 1,957      |   | (536                                       | )      | 8,176     |   |
| Interest expense                           |   | 999                 |    | 1,773      |   |                                       |   | 2,772     |   |
| Depreciation and amortization              |   | 4,386               |    | 2,014      |   |                                       |   | 6,400     |   |
| Total assets                               |   | 63,725              |    | 57,129     |   |                                       |   | 120,854   |   |
| Purchases of property, plant and equipment |   | 1,499               |    | 1,617      |   |                                       |   | 3,116     |   |

 

Net assets ofour foreign operations were approximately $10.7 million and $13.6 million atDecember 31, 2001 and 2000, respectively.

39

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**16.  QUARTERLY FINANCIAL DATA (UNAUDITED) (Inthousands, except per share data)**

 

| **2001**                            |   | **First** |   | **Second** |   | **Third** |   | **Fourth** |   |
|-------------------------------------|--------|-----------|--------|------------|--------|-----------|--------|------------|--------|
| Net sales                           |   | $         | 57,207 |       | $      | 54,046    |   | $          | 48,431 |   | $ | 46,855 |   |
| Gross profit                        |   | $         | 19,771 |       | $      | 16,131    |   | $          | 11,513 |   | $ | 14,155 |   |
| Net income (loss)                   |   | $         | 962    |       | $      | (1,797    | )      | $          | (3,835 | ) | $ | (659 | ) |
| Basic net income (loss) per share   |   | $         | 0.08   |       | $      | (0.15     | )      | $          | (0.31  | ) | $ | (0.05 | ) |
| Diluted net income (loss) per share |   | $         | 0.08   |       | $      | (0.15     | )      | $          | (0.31  | ) | $ | (0.05 | ) |

 

| **2000**                     |   | **First** |   | **Second** |   | **Third** |   | **Fourth** |   |
|------------------------------|--------|-----------|--------|------------|--------|-----------|--------|------------|--------|
| Net sales                    |   | $         | 45,191 |       | $      | 56,857    |   | $          | 51,434 |   | $ | 53,994 |   |
| Gross profit                 |   | $         | 16,191 |       | $      | 21,278    |   | $          | 17,550 |   | $ | 17,808 |   |
| Net income                   |   | $         | 2,419  |       | $      | 2,246     |   | $          | 925    |   | $ | 636 |   |
| Basic net income per share   |   | $         | 0.20   |       | $      | 0.19      |   | $          | 0.08   |   | $ | 0.05 |   |
| Diluted net income per share |   | $         | 0.20   |       | $      | 0.17      |   | $          | 0.07   |   | $ | 0.05 |   |

 

40

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**Item 9.****  Changes in and Disagreements WithAccountants on Accounting and Financial Disclosure**

 

None.

 

**PART III**

 

Theinformation required by Part III (Items 10, 11, 12 and 13) will be included inour definitive Proxy Statement for our 2002 Annual Meeting of Shareholders andis incorporated herein by reference.

 

**PART IV**

 

**Item 14. ****Exhibits,Financial Statement Schedules and Reports on Form 8-K**

 
|   | (a)    | Documents  filed as part of this report :     |
|--------|--------|-----------------------------------------------|
|   |   | 1.*  Consolidated Financial Statements:* |
|   |   |                                          | Independent Auditors’ Report on Consolidated Financial Statements |
|   |   |                                          |   |
|   |   |                                          | Consolidated Balance Sheets at December 31, 2001 and 2000 |
|   |   |                                          |   |
|   |   |                                          | Consolidated Statements of Operations for  each of the years in the three-year period ended December 31, 2001 |
|   |   |                                          |   |
|   |   |                                          | Consolidated Statements of Cash Flows for  each of the years in the three-year period ended December 31, 2001 |
|   |   |                                          |   |
|   |   |                                          | Consolidated Statements of Shareholders’  Equity and Comprehensive Income (Loss) for each of the years in the three-year  period ended December 31, 2001 |
|   |   |                                          |   |
|   |   |                                          | Notes to Consolidated Financial Statements |

 

All financialstatement schedules are omitted since the required information is notapplicable, not required, or the required information is included in theconsolidated financial statements or notes thereto.

 

(b)       Reports on Form 8-K:

 

None.

 

(c)       *Exhibits:*  See Index to Exhibits on page 43.

 

41

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|   | **MACKIE DESIGNS INC.** |
|--------|-------------------------|
|   |                    |   |
|   | By:                     |     /s/ Greg C. Mackie |
|   |                    |     Greg C. Mackie |
|   |                    | *     Chairman of the Board* |
|   |                    |   |
|   | Date:                   |     April 22, 2002 |

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities indicated on April 22, 2002.

 
| **Signature**                 |   | **Title**                                              |
|-------------------------------|--------|--------------------------------------------------------|
|                          |   |                                                   |
|  /s/ Greg C. Mackie      |   | Chairman of  the Board                                 |
| Greg C. Mackie                |   |                                                   |
|                          |   |                                                   |
|  /s/ James T. Engen      |   | Chief  Executive Officer and Director                  |
| James T. Engen                |   |                                                   |
|                          |   |                                                   |
|  /s/ William A. Garrard  |   | Vice  President, Chief Financial Officer and Treasurer |
| William A. Garrard            |   | (Principal  Financial and Accounting Officer)          |
|                          |   |                                                   |
|  /s/ David M. Tully      |   | Director                                               |
| David M. Tully                |   |                                                   |
|                          |   |                                                   |
|  /s/ Raymond B. Ferguson |   | Director                                               |
| Raymond B. Ferguson           |   |                                                   |
|                          |   |                                                   |
|  /s/ Gregory Riker       |   | Director                                               |
| Gregory Riker                 |   |                                                   |
|                          |   |                                                   |
|  /s/ C. Marcus Sorenson  |   | Director                                               |
| C. Marcus Sorenson            |   |                                                   |

 

42

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**INDEX TO EXHIBITS**

**(Item 14c)**

 
| **Exhibits** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                         |
|--------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| *2.1         |   | Plan of  Merger of Mackie Designs Inc and Eastern Acoustic Works, Inc. dated October  2001.                                                                                                                                                                                                                                                                                             |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.1          |   | Restated  Articles of Incorporation.   Incorporated by reference to Exhibit 3.1 or Registration  Statement filed under the Securities Act of 1933 on Form S–1, as  amended, Registration No. 33–93514.                                                                                                                                                    |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.2          |   | Restated  Bylaws.  Incorporated by reference to  Exhibit 3.2 to Registration Statement filed under the Securities Act of  1933 on Form S–1, as amended, Registration No. 33–93514.                                                                                                                                                                        |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.1          |   | See Articles  II, III and IV of Exhibit 3.1 and Sections 1, 5 and 9 of  Exhibit 3.2 confirming the rights of the holders of Common Stock.                                                                                                                                                                                                                                |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| *10.1        |   | Mackie  Designs Inc. Third Amended and Restated 1995 Stock Option Plan.                                                                                                                                                                                                                                                                                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.2         |   | Industrial  Lease, dated December 15, 1994, by and between Mackie Holdings, L.L.C.  and Mackie Designs Inc.  Incorporated  by reference to Exhibit 10.3 to Registration Statement filed under the  Securities Act of 1933 on Form S–1, as amended, Registration  No. 33–93514.                                                                       |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| *10.2.1      |   | Amendment to  Industrial Lease dated December 12, 2001 by and between Mackie Holdings,  L.L.C. and Mackie Designs Inc.                                                                                                                                                                                                                                                                  |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.3         |   | Industrial  Real Estate Lease dated April 28, 1995, by and between Intrawest  Properties Partnership U.S. and Mackie Designs Inc.  Incorporated by reference to Exhibit 10.4 to Registration  Statement filed under the Securities Act of 1933 on Form S–1, as amended,  Registration No. 33–93514.                                                  |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.4         |   | Mackie Sales  Representative Agreement dated January 24, 1994, by and between Mackie  Designs Inc. and C.M. Sorenson Co. dba Calwest Marketing So.  Incorporated by reference to  Exhibit 10.5 to Registration Statement filed under the Securities Act of  1933 on Form S–1, as amended, Registration No. 33–93514.                       |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.4.1       |   | Exhibit C  to Mackie Sales Representative Agreement, dated January 24, 1994, by and  between Mackie Designs Inc. and C. M. Sorenson Co. dba Calwest Marketing  So.  Incorporated by reference to  Exhibit 10.5A to Registration Statement filed under the Securities Act  of 1933 on Form S–1, as amended, Registration No. 33–93514. |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.5         |   | Mackie  Designs Inc. 401(k) Profit Sharing Plan dated December 20, 1993.  Incorporated by reference to  Exhibit 10.15 to Registration Statement filed under the Securities Act  of 1933 on Form S–1, as amended, Registration No. 33–93514.                                                                                                          |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.6         |   | Credit  Agreement dated June 18, 1998 between U.S. Bank National Association and Mackie  Designs Inc. in the principal amount of $14,000,000.  Incorporated by reference to Exhibit 10.1  to Quarterly Report on Form 10-Q for the period ended June 30, 1998.                                                                                                                     |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                    |

 

43

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| 10.7    |   | Acquisition  Note dated June 18, 1998 made by Mackie Designs Inc. to the order of U.S.  Bank National Association in the principal amount of $13,000,000.  Incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q  for the period ended June 30, 1998.                            |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                  |
| 10.8    |   | Revolving  Note dated June 18, 1998 made by Mackie Designs Inc. to the order of U.S.  Bank National Association in the amount of $5,000,000. Incorporated by  reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the period  ended June 30, 1998.                                         |
|    |   |                                                                                                                                                                                                                                                                                                  |
| 10.9    |   | Loan  Agreement dated October 21, 1999 between James T. Engen and Mackie Designs,  Inc. in the amount of $250,000.   Incorporated by reference to Exhibit 10.20 to Annual Report on Form  10-K for the year ended December 31, 1999.                                                             |
|    |   |                                                                                                                                                                                                                                                                                                  |
| 10.10   |   | Stock  Purchase and Sale Agreement between Mackie Designs Inc and Radio Cine  Forniture (R.C.F.) S.p.A. consisting of letters dated November 9, 1997, April  30, 1998, June 25, 1998, and June 29, 1998. Incorporated by reference to  Exhibit 2.1 to Current Report on Form 8-K dated June 29, 1998. |
|    |   |                                                                                                                                                                                                                                                                                                  |
| 10.11   |   | Stock  Purchase and Sale Agreement dated April 6, 2000 between the Company and  Eastern Acoustic Works, Inc.   Incorporated by reference to Exhibit 2.2 to Current Report on Form 8-K  dated April 6, 2000.                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                  |
| 10.12   |   | Eighth  Amendment dated August 31, 2001 to Credit Agreement dated June 29, 1998  between Mackie Designs Inc. and U.S. Bank National Association. Incorporated  by reference to Exhibit 10.23 of Current Report on Form 8-K dated September  11, 2001.                                                 |
|    |   |                                                                                                                                                                                                                                                                                                  |
| 10.13   |   | Employment  Agreement dated May 19, 1997 between William A. Garrard and Mackie Designs  Inc. Incorporated by reference to Exhibit 10.3 of Quarterly Report on Form  10-Q for the period ended June 30, 1997.                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                  |
| 10.13.1 |   | Second  Amendment to Employment Agreement between William A. Garrard and Mackie  Designs Inc dated September 28, 1999. Incorporated by reference to Exhibit  10.21 to Annual Report on Form 10-K for the year ended December 31, 1999.                                                                |
|    |   |                                                                                                                                                                                                                                                                                                  |
| 11.1    |   | Computation  of net income per share.  Incorporated  by reference to the Notes to Consolidated Financial Statements in the Annual  Report to Shareholders of Mackie Designs Inc. for the year ended December 31,  2001.                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                  |
| 13.1    |   | Annual  Report to Shareholders of Mackie Designs Inc. for the year ended December 31,  2001.                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                  |
| *21.1   |   | Subsidiaries  of Mackie Designs Inc.                                                                                                                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                  |
| *23.1   |   | Consent of  KPMG LLP, Independent Auditors.                                                                                                                                                                                                                                                           |

 

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* Filed herewith

 

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