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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington,D.C. 20549**

**FORM 10-Q**

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

**For the quarterly period ended June 30, 2001**

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

**For the transition period from ______________ to______________**

**Commission File Number:  0-26524**
| **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) |
|                                                                                |   |
| **(425)  487-4333**                                                                 |
|                                                                                |
| (Registrant's  telephone number, including area code)                               |
|                                                                                |
| (Former name, former  address and former fiscal year, if changed since last report) |

             Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.   Yes ý    No  o

APPLICABLE ONLY TOCORPORATE ISSUERS:

             Indicate the number of sharesoutstanding of each of the issuer's classes of common stock, as of the latestpracticable date.

| **Common  Stock, no par value** | **12,381,858**                |
|---------------------------------|-------------------------------|
|                            |                          |
| Class                           | Number of Shares  Outstanding |
|                            | (as of August 7, 2001)        |

 

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**MACKIE DESIGNS INC.**

**FORM 10-QFor the quarter ended June 30, 2001**

**INDEX**

| **PART I.  FINANCIAL INFORMATION** |
|-----------------------------------------|
|                                    |
|                                    | Item 1. | Financial Statements  (Unaudited) |
|                                    |   |   |
|                                    | Condensed  consolidated balance sheets – June 30, 2001 and December 31, 2000 |
|                                    |   |
|                                    | Condensed  consolidated statements of operations – Three and Six months ended June 30,  2001 and 2000 |
|                                    |   |
|                                    | Condensed  consolidated statements of cash flows – Six months ended June 30, 2001 and  2000 |
|                                    |   |
|                                    | Notes  to condensed consolidated financial statements |
|                                    |   |
|                                    | Item  2. | Management's  Discussion and Analysis of Financial Condition and Results of Operations |
|                                    |   |   |
|                                    | Item  3. | Quantitative  and Qualitative Disclosures About Market Risk |
|                                    |   |
| **PART II.  OTHER INFORMATION**    |
|                                    |
|                                    | Item 1. | Legal Proceedings |
|                                    |   |   |
|                                    | Item 2. | Changes in Securities |
|                                    |   |   |
|                                    | Item 3. | Defaults Upon  Senior Securities |
|                                    |   |   |
|                                    | Item  4. | Submission  of Matters to a Vote of Security Holders |
|                                    |   |   |
|                                    | Item 5. | Other Information |
|                                    |   |   |
|                                    | Item 6. | Exhibits and  Reports on Form 8-K |
|                                    |   |
| **SIGNATURES**                          |
|                                    |
| **EXHIBITS**                            |

 

**PARTI.  FINANCIAL INFORMATION**

**Item1.  Financial Statements**

**MACKIE DESIGNS INC.CONDENSED CONSOLIDATED BALANCESHEETS(Unaudited)**

*Inthousands, except per share data*

|                                        | June 30,  2001                                     |       | December  31,  2000 |       |
|---------------------------------------------|----------------------------------------------------|------------|---------------------|------------|
|                                        |                                               |       |                |       |
| **ASSETS**                                  |                                               |       |                |       |
|                                        | Current assets:                                    |       | ** **          |       | ** ** |
|                                        | Cash and cash  equivalents                         | $          | 2,787               |       | $ | 3,838 |   |
|                                        | Available-for-sale  securities                     | —     |                | 509        |   |
|                                        | Accounts receivable,  net                          | 41,005     |                | 39,085     |   |
|                                        | Inventories                                        | 55,615     |                | 63,471     |   |
|                                        | Prepaid expenses and  other current assets         | 1,673      |                | 1,514      |   |
|                                        | Income taxes  receivable                           | 651        |                | —     |   |
|                                        | Deferred income taxes                              | 3,015      |                | 3,148      |   |
|                                        |                                               |       |                |       |   |
|                                        | Total current assets                               | 104,746    |                | 111,565    |   |
|                                        |                                               |       |                |       |
| Property, plant and  equipment, net         | 25,028                                             |       | 23,568              |       |
| Intangible assets, net                      | 27,416                                             |       | 24,419              |       |
| Bonds                                       | 3,646                                              |       | 3,891               |       |
| Other assets, net                           | 1,228                                              |       | 1,755               |       |
|                                        |                                               |       |                |       |
| Total assets                                | $                                                  | 162,064    |                | $          | 165,198 |   |
|                                        |                                               |       |                |       |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**    |                                               |       |                |       |
| Current liabilities:                        |                                               | ** ** |                | ** ** |
|                                        | Short-term borrowings                              | $          | 32,164              |       | $ | 31,281 |   |
|                                        | Accounts payable                                   | 20,515     |                | 21,912     |   |
|                                        | Accrued expenses                                   | 10,506     |                | 10,503     |   |
|                                        | Income taxes payable                               | —     |                | 706        |   |
|                                        | Long-term debt  callable under covenant provisions | 28,819     |                | —     |   |
|                                        | Current portion of  long-term debt                 | 746        |                | 5,025      |   |
|                                        |                                               |       |                |       |   |
|                                        | Total current  liabilities                         | 92,750     |                | 69,427     |   |
|                                        |                                               |       |                |       |
| Long-term debt,  excluding current portion  | 5,728                                              |       | 29,971              |       |
| Other long-term liabilities                 | 3,521                                              |       | 3,932               |       |
| Deferred income taxes                       | 4,143                                              |       | 4,098               |       |
|                                        |                                               |       |                |       |
| Total liabilities                           | $                                                  | 106,142    |                | $          | 107,428 |   |
|                                        |                                               |       |                |       |
| Shareholders' equity:                       |                                               |       |                |       |
|                                        | Common stock                                       | 28,173     |                | 27,720     |   |
|                                        | Retained earnings                                  | 31,050     |                | 31,885     |   |
|                                        | Accumulated other  comprehensive loss              | (3,301     | )                   | (1,835     | ) |
|                                        |                                               |       |                |       |   |
|                                        | Total shareholders'  equity                        | 55,922     |                | 57,770     |   |
|                                        |                                               |       |                |       |
| Total liabilities and  shareholders' equity | $                                                  | 162,064    |                | $          | 165,198 |   |
|                                        |                                               |       |                |       |
|                                             |                                                    |            |                     |            |  |  |  |  |

*Seeaccompanying Notes to Condensed Consolidated Financial Statements*****MACKIE DESIGNS INC.CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS(Unaudited)**

*Inthousands, except per share data*
 Three  months ended  June 30, Six  months ended  June 30,       2001 2000 2001 2000          Net sales$56,503 $56,857 $115,128 $102,048 Cost of goods sold40,372 35,579 79,226 64,579          Gross profit16,131 21,278 35,902 37,469          Operating expenses:         Selling, general and  administrative13,309 13,628 27,113 23,466  Research and  development3,300 2,774 6,249 4,713            Total operating  expenses16,609 16,402 33,362 28,179           Operating income  (loss)(478)4,876 2,540 9,290          Interest income100 147 202 343 Interest expense(1,393)(1,106)(2,850)(1,752)Other expense, net(790)(56)(893)(37)         Income (loss) before  income taxes(2,561)3,861 (1,001)7,844          Income tax expense  (benefit)(764)1,615 (166)3,179          Net income (loss)$(1,797)$2,246 $(835)$4,665                   Net income (loss) per  share:         Basic$(0.15)$0.19 $(0.07)$0.38  Diluted$(0.15)$0.17 $(0.07)$0.37          Weighted average  common and potential common shares used in computing net income (loss) per  share:         Basic12,373 12,131 12,373 12,120  Diluted12,373 12,901 12,373 12,619 
*Seeaccompanying Notes to Condensed Consolidated Financial Statements.
**MACKIE DESIGNS INC.CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS(Unaudited)**

*Inthousands, except per share data*
 Six  months ended  June 30,     2001 2000      **Operating activities** ** ** ** ** Net income (loss)$(835)$4,665  Adjustments to  reconcile net income (loss) to net cash provided by operating activities:     Depreciation and  amortization3,967 3,891  Deferred stock  compensation453 150  Deferred income taxes(128)1,057  Changes in operating  assets and liabilities:     Accounts receivable(3,788)(4,326) Inventory5,750 (7,603) Prepaid expenses and  other current assets(137)813  Other assets(454)(709) Accounts payable and  accrued expenses1,023 3,438  Income taxes payable(1,287)(417) Other long term  liabilities(241)(237)       Cash provided by  operating activities4,323 722      **Investing activities** ** ** ** ** Acquisition of  business, net of cash acquired(4,187)(19,646) Purchases of  available-for-sale securities— (2,066) Proceeds from sales of  available-for-sale securities515 —  Proceeds from  maturities of available-for-sale securities— 5,240  Purchases of property,  plant and equipment(5,333)(2,590)       Cash used by investing  activities(9,005)(19,062)     **Financing activities** ** ** ** ** Proceeds from  long-term debt2,035 18,200  Payments on long-term  debt(1,332)(4,931) Net short-term  borrowings1,997 4,282  Proceeds from the  exercise of stock options— 211       Cash provided by  financing activities2,700 17,762      Effect of exchange  rate changes on cash931 (380)     Decrease in cash and  cash equivalents(1,051)(958)     Cash and cash  equivalents at beginning of period3,838 4,629      Cash and cash  equivalents at end of period$2,787 $3,671      **Supplemental disclosures**    Cash paid for income  taxes$1,116 $3,020      Cash paid for interest$2,037 $1,765      
*Seeaccompanying Notes to Condensed Consolidated Financial Statements.
**MACKIE DESIGNS INC.NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTSJune 30, 2001(Unaudited)**

*Inthousands, except per share data***1.     Basis of Presentation**

The accompanying unaudited condensedconsolidated financial statements have been prepared by Mackie Designs Inc.(the "Company") in accordance with generally accepted accountingprinciples for interim financial statements and with the instructions to Form10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosuresrequired by generally accepted accounting principles for complete financialstatements.  In the opinion of theCompany's management, all adjustments, consisting of normal recurring items,necessary for a fair presentation have been included.  The results of operations for interim periods are not necessarilyindicative of future financial results. For further information, refer to the consolidated financial statementsand footnotes thereto for the year ended December 31, 2000 included in theCompany's Form 10-K filed with the Securities and Exchange Commission.  Certain amounts reported in previous periodshave been reclassified to conform to the 2001 presentation.

In June 1998, the Financial AccountingStandards Board issued SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities.”  SFAS No. 133, as amended, requires that allderivative 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 forthe Company on January 1, 2001.  The adoption of SFAS No. 133 did not havean impact on the Company’s consolidated financial position or results of operations.

On July 20, 2001, the FASB issuedStatement No. 141, Business Combinations, and Statement No. 142, Goodwill andOther Intangible Assets.  Statement 141requires that all business combinations be accounted for under a single method– the purchase method.  Use of thepooling-of-interests method is no longer permitted.  Statement 141 requires that the purchase method be used forbusiness combinations initiated after June 30, 2001.  Statement 142 requires that goodwill no longer be amortized toearnings, but instead be reviewed for impairment.  The amortization of goodwill ceases upon adoption of theStatement, which will be adopted by the Company on January 1, 2002.  Because of the extensive effort needed tocomply with adopting statements 141 and 142, it is not practicable toreasonably estimate the impact of adopting these Statements on the Company’sfinancial statements at the date of this report, including whether anytransitional impairment losses will be required to be recognized as thecumulative effect of a change in accounting principle.  As of June 30, 2001 the Company had $27.4million in goodwill and intangible assets and related amortization for thesix-month period then ended of $0.9 million.

**2.    Acquisition**

In April 2001, the Company acquired 100%of the capital stock of Sydec N.V. (“Sydec”). Based in Belgium, Sydec is a developer of products and services in thearea of embedded electronics & software, networking, digital signalprocessing and Windowsä95/98/NT/2000 driver applications.  Theacquisition was accounted for under the purchase method of accounting.  The aggregate purchase price, plus relatedacquisition costs, was approximately $4.4 million.  The excess of the purchase price over the fair value of nettangible assets acquired approximating $4.6 million, is included in intangibleassets.  A total of $1.0 million of thepurchase consideration was specifically allocated to developed technology.  The remaining $3.6 million is goodwill.  Goodwill is being amortized on thestraight-line method over 10 years, while the developed technology is beingamortized on the straight-line method over 5 years.  The Company is still refining its purchase price allocation andthere could be some adjustments in the future. The results of Sydec have been included in the Company’s consolidatedresults of operations from the date of acquisition.
The following table presents unauditedpro forma consolidated financial information for the six-month periods endedJune 30, 2001 and 2000 as if the acquisition of Sydec had occurred on January 1of those years:
*In thousands, except per share data*Six  months ended June 30,  2001 2000      Revenue$115,611 $103,014 Net income (loss)$(1,214)$3,907 Diluted income (loss)  per share$(0.10)$0.30 
The unaudited pro forma financialinformation is presented for informational purposes only and is not necessarilyindicative of the operating results that would have occurred had theacquisition taken place on the basis assumed above.  In addition, the pro forma results are not intended to be aprojection of the future results and do not reflect any synergies that mighthave been achieved from the combined operations.

**3.**          **Inventories**

Inventories consisted of the following:
 June  30,  2001 December  31,  2000      Raw materials$23,195 $31,579 Work in process4,827 4,831 Finished goods27,593 27,061       $55,615 $63,471      
**4.**          **Intangibleassets**

             Intangibleassets consist of the following:
 June  30,  2001 December  31,  2000      Goodwill$20,827 $17,974 Developed technology6,158 5,200 Assembled workforce1,660 1,660 Trademark1,380 1,380       30,025 26,214 Less accumulated  amortization2,609 1,795       $27,416 $24,419      
 

**5.**          **Financing**

The Company has a U.S. based revolvingnote related to the acquisitions of Mackie Designs (Italy) S.p.A. (“Mackie Italy”) andEastern Acoustic Works, Inc. (“EAW”). At June 30, 2001 there was $28.8 million outstanding on this note.  Of this balance, $6.0 million is scheduledfor payment within twelve months of the balance sheet date.  This credit agreement requires the Companyto maintain certain financial ratios and tangible net worth.  The agreement also provides, among othermatters, restrictions on additional financing, dividends, mergers,acquisitions, and an annual capital expenditure limit of $10.0 million.

At June 30, 2001, the Company was out ofcompliance with certain of its financial covenants.  The Company is currently in negotiations with its U.S. lender toobtain a waiver for this non-compliance and/or a restructuring of thecovenants.  If the lender does not waivethis failure to comply and/or restructure the covenants, it could declare anevent of default, which would allow the lender to accelerate payment of allamounts due under the U.S. based revolving note and line of credit.  The balances outstanding on the revolvingnote and the line of credit at June 30, 2001 were $28.8 million and $11.3million, respectively.  Thisnoncompliance may also result in higher interest costs.  The Company is highly leveraged and would beunable to pay the accelerated amounts that would become immediately payable ifa default is declared.  As a result ofthis non-compliance, the entire U.S. based revolving note as of June 30, 2001($28.8 million) that is potentially due within one year, has been classified asa current liability in the balance sheet under the caption, “Long-term debtcallable under covenant provisions”.

**6.**          **NetIncome (Loss) per Share**

Basic net income (loss) per share isbased on the weighted-average number of common shares outstanding for theperiod. Diluted net income (loss) per share includes the effect of potentialdilutive common shares outstanding, consisting of stock options using thetreasury stock method.  The denominatorsof the diluted net income (loss) per share calculations exclude the effect ofunexercised stock options representing the potential rights to 4,541,305 and300,000 shares for the second quarters of 2001 and 2000, respectively, as wellas 4,541,305 and 975,175 shares for the first six months of 2001 and 2000,respectively, as including the effect would be antidilutive.  The following schedule represents areconciliation of the numerators and denominators of basic and diluted netincome (loss) per share calculations.
 Three  months ended  June 30, Six  months ended  June 30,       2001 2000 2001 2000          Numerator:         Numerator for basic  and diluted net income (loss) per share - net income (loss)$(1,797)$2,246 $(835)$4,665                   Denominator:         Denominator for basic  net income (loss) per share – weighted average common shares12,373 12,131 12,373 12,120           Effect of dilutive  stock options— 770 — 499           Denominator for  diluted net income (loss) per share12,373 12,901 12,373 12,619          Basic net income  (loss) per share$(0.15)$0.19 $(0.07)$0.38          Diluted net income  (loss) per share$(0.15)$0.17 $(0.07)$0.37          
 

**7.    Comprehensive Income (Loss)**

Comprehensive income (loss) for the threeand six month periods ended June 30, 2001 and 2000, is detailed below:
 Three  months ended  June 30, Six  months ended  June 30,       2001 2000 2001 2000          Net  income (loss)$(1,797)$2,246 $(835)$4,665 Other comprehensive  income (loss):         Foreign currency  translation adjustments(288)(169)(1,466)(818)          Comprehensive income  (loss)$(2,085)$2,077 $(2,301)$3,847           
**8.   Segment Information**

The Company identifies its businesssegments based on management responsibility using a combination of products andgeographic factors.  The Company hasthree reportable segments:  MackieDesigns Inc. (“Mackie”), its Italian subsidiary, Mackie Italy, and its U.S.subsidiary, EAW.  The Mackie segmentoffers audio mixers and other professional audio equipment.  The Mackie Italy segment offersloudspeakers, loudspeaker components and Mackie product offerings.  The EAW segment offers loudspeakers targetedat the mid to high-end of the installed and touring sound markets.  A summary of key financial data by segmentis as follows:
 Mackie MackieItaly EAW Elimination  of  intercompany  amounts Total    **Three months ended June 30, 2001:**                     Net sales, to external  customers$26,739 $18,753 $11,011 $— $56,503 Net sales,  intersegment4,016 4,974 133 (9,123)— Operating income  (loss)(612)(548)314 368 (478)Total assets122,202 77,619 36,055 (74,463)161,413                       **Three months ended June 30, 2000:**                     Net sales, to external  customers$27,813 $17,741 $11,303 $— $56,857 Net sales,  intersegment3,344 7,306 567 (11,217)— Operating income  (loss)3,723 1,737 (136)(448)4,876 Total assets106,768 74,359 27,605 (49,459)159,273 
 
**Six months ended June 30, 2001:**                     Net sales, to external  customers$57,117 $36,814 $21,197 $— $115,128 Net sales,  intersegment9,026 12,387 798 (22,211)— Operating income  (loss)1,730 (60)352 518 2,540                       **Six months ended June 30, 2000:**                     Net sales, to external  customers$55,275 $35,470 $11,303 $— $102,048 Net sales,  intersegment7,067 9,186 567 (16,820)— Operating income  (loss)7,418 3,093 (136)(1,085)9,290 
The net assets of foreign operations ofthe Company were approximately $12.5 million at June 30, 2001.

**Item 2.  Management'sDiscussion and Analysis of Financial Condition and Results of Operations**

**General**

The following information contains“forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995 (the “Act”). Forward-looking statements include, without limitation, any statementthat may predict, forecast, indicate, or imply future results, performance, orachievements, and may contain the words “believe,” “anticipate,” “expect,”“estimate,” “project,” “will be,” “will continue,” “will likely result,” orwords or phrases of similar meaning. Forward-looking statements involve risks and uncertainties, which maycause actual results to differ materially from the forward-looking statements.

The following discussions, including butnot limited to, the sections entitled "Management's Discussion andAnalysis of Financial Condition and Results of Operations" and“Quantitative and Qualitative Disclosures About Market Risk” describe some, butnot all, of the factors that could cause the actual results to differmaterially from the forward-looking statements.  These factors include, among others, the following:international, national and local general economic and market conditions; thesize and growth of the professional audio equipment market; competition withother marketers, distributors and sellers of professional audio equipment; theCompany's ability to develop and introduce new products; the Company's abilityto sustain, manage or forecast its growth and inventories; the Company's abilityto integrate the operations of companies acquired; the Company's ability tosecure and protect trademarks, patents, and other intellectual property; theperformance and reliability of the Company's products; customer service; theloss of significant customers or suppliers; dependence on distributors;management of increased costs of freight and transportation; the Company'sability to meet delivery deadlines; general risks associated with doingbusiness in foreign countries, including, without limitation, import duties,tariffs, foreign currency fluctuations, and political and economic instability;changes in U.S. and foreign government regulations; the Company’s ability toattract and retain qualified employees; liability and other claims assertedagainst the Company; and other factors referenced or incorporated by referencein this report and other reports filed with the Securities and ExchangeCommission.

The risks included above are notexhaustive. The Company operates in a very competitive environment and new riskfactors may emerge from time to time. Management cannot predict all such riskfactors, nor can it assess the impact of all such risk factors on the Company'sbusiness or the extent to which any factor, or combination of factors, maycause actual results to differ materially from those contained in anyforward-looking statements. Given these risks and uncertainties, investorsshould not place undue reliance on forward-looking statements as a predictionof actual results.
The Company derives its operating revenuefrom worldwide sales of digital and analog audio mixers, speakers, amplifiersand other professional audio equipment. A significant portion of the Company’s total sales is to customersoutside the U.S.  International salesvolumes have historically been affected by foreign currency fluctuationsrelative to the U.S. Dollar.  Whenweaknesses of local currencies have made the Company's products more expensive,sales in those countries have declined.

The Company's gross margins are alsoaffected by its international sales. Typically, gross margins from products exported by Mackie are lower thanthose sold in the U.S. due to discounts offered to its internationaldistributors.  Mackie Italy does notoffer discounts to its distributors. The discounts offered by Mackie are given because the internationaldistributors typically incur certain expenses, including technical support,product service and in-country advertising that the Company normally incurs fordomestic sales.

The Company will continue to introducenew products and product revisions as it has in the past.  Some anticipated new products will requirethe implementation of manufacturing practices for which the Company is notfamiliar.  This could result in lowermargins as the Company becomes more familiar with new manufacturing procedures.

**Resultsof Operations**

***Quarter Ended June 30, 2001 as Compared with Quarter EndedJune 30, 2000***

Net sales decreased slightly to $56.5million in the secondquarterof 2001 from $56.9million in the second quarterof 2000.  The decline was caused bylower sales in the compact mixer and power amplifier markets of $2.9 million,an unfavorable foreign exchange effect of $1.9 million, and increased salesdiscounts of $0.4 million.  Thesedeclines were partially offset by $4.9 million in sales related to new productofferings in the speaker product family. Sales outside the U.S. increased to 45.7% of the Company’s total net sales inthe second quarter of 2001 from 40.0%in the second quarterof 2000.

Gross margin decreased to 28.5% in thesecond quarter of 2001 from 37.4%in the second quarter of 2000. This decline was primarily due to a partialshift in product mix from higher margin compact mixer and digital products tolower margin speaker products along with a general increase in material andlabor costs across multiple product lines. Gross margin was also reduced by increased freight accommodations andsales discounts, as well as an unfavorable foreign currency exchangeeffect.  Gross profit decreased to $16.1million in the second quarter of 2001 from $21.3 million in the correspondingperiod of 2000 for the same reasons affecting net sales and gross margin notedabove.

Selling, general and administrativeexpense decreased slightly to $13.3million in the second quarter of 2001 from $13.6 million in the corresponding period of2000.  As a percentage of net sales,selling, general and administrative expensesdecreased to 23.6% in the second quarter of 2001 from 24.0% inthe corresponding period in 2000.

Research and development (R&D)expense increased to $3.3million in the second quarter of 2001 from $2.8 million in the corresponding period of2000.  This $0.5 million increase wasprimarily due to the inclusion of Sydec with R&D expense of $0.7 in thesecond quarter of 2001.  As a percentageof net sales, these expenses increasedto 5.8% in the second quarter of 2001 from 4.9% in thecorresponding period of 2000 due to the inclusion of Sydec, which isprincipally an R&D operation.

Interest income was unchanged in thesecond quarter of 2001 compared to the second quarter of 2000 at $0.1million.  Interest expense increased to $1.4 million in thesecond quarter of 2001 from $1.1million in the corresponding period of 2000. The increase was primarily attributable to borrowings for theacquisition of Sydec and to higher levels of short-term borrowing.
Income tax benefit for the second quarterof 2001 was $0.8 millionrepresenting an overall effective tax benefit of 29.8% comparedto income tax of $1.6 million andan effective tax rate of 41.8% for the same period of 2000,respectively.  Fluctuations in the rateare primarily attributable to foreign operations.

***Six Months Ended June 30, 2001 as Compared with Six MonthsEnded June 30, 2000***

Net sales increased 12.8% to $115.1million in the first six months of 2001 from $102.0 million in the first six months of 2000.  Of the $13.1 million increase, $10.2 millionwas due to the inclusion of a full six months of EAW in 2001 compared to threemonths for 2000.  New product offeringsin the digital and speaker product families accounted for an additional $9.2million of the growth.  These increaseswere partially offset by lower sales in the compact mixer and power amplifiermarkets of $5.3 million and an unfavorable foreign exchange effect of $2.2million.  Sales outside the U.S.decreased to 42.4% ofthe Company’s total net sales in the first six months of 2001 from 43.4% in the first six monthsof 2000.  The decrease was due mainly tothe inclusion of sales by EAW whose sales outside of the U.S. comprised only29.6% of its total net sales for the first six months of 2001.

Gross margin decreased to 31.2% in thefirst six months of 2001 from 36.7%in the first six months of 2000. This decline was primarily due to a partial shiftin product mix from higher margin compact mixer and digital products to lowermargin speaker products along with a general increase in material and laborcosts across multiple product lines. Gross margin was also reduced by increased freight accommodations andsales discounts, as well as an unfavorable foreign currency exchangeeffect.  These declines were partiallyoffset by increased sales in the high-margin digital product market.  Gross profit decreased to $35.9 million inthe first six months of 2001 from $37.5 million in the corresponding period of2000 for the same reasons affecting net sales and gross margin noted above.

Selling, general and administrativeexpense increased to $27.1million in the first six months of 2001 from $23.5 million in the corresponding period of2000.  Of the $3.6 million increase,$2.7 million was due to the inclusion of six months of EAW costs in 2001compared to three months in 2000.  Costsrelated to increased headcount and the non-capitalized portion of the Oracle implementationmade up the remainder of the increase. These costs were partially offset by a $0.7 million favorable impact offoreign exchange. As a percentage of net sales, selling, general andadministrative expenses decreasedslightly to 23.6% in the first six months of 2001 from 23.0% inthe corresponding period in 2000.

Research and development (R&D)expense increased to $6.2million in the first six months of 2001 from $4.7 million in the corresponding period of2000.  Of this $1.5 million increase, $0.8million was due to the inclusion of six months of EAW costs in 2001 compared tothree months in 2000.  The inclusion ofSydec in the second quarter of 2001 caused the remainder of the $0.7 millionincrease.  As a percentage of net sales,these expenses increased to 5.4% inthe first six months of 2001 from 4.6% in the correspondingperiod of 2000 due to the inclusion of Sydec, which is principally an R&Doperation.

Interest income decreased slightly to $0.2 million in the firstsix months of 2001 compared with $0.3million in the first six months of 2000. Interest expense increased to$2.9 million in the first six months of 2001 from $1.8 million in the corresponding periodof 2000.  The increase was primarilyattributable to the increase in borrowings due to the acquisitions of EAW andSydec and to higher levels of short-term borrowing.

Income tax benefit for the first sixmonths of 2001 was $0.2 millionrepresenting an overall effective tax benefit of 16.6% comparedto income tax of $3.2 million and aneffective tax rate of 40.5% for the same period of 2000,respectively.  Fluctuations in the rateare primarily attributable to foreign operations.
**Liquidityand Capital Resources**

During thefirst six months of 2001, the Company's operating activities provided $4.3million in cash.  Net cash provided byoperating activities was primarily attributable toa decrease in inventory and an increase in accounts payable and accruedexpenses offset partially by a net loss, an increase in accounts receivable anda decrease in income taxes.  The declinein inventory is due to a concerted effort by the Company to reduce itsinventory levels.  Net cash used byinvesting activities totaled $9.0million in the first six months of 2001, due to the purchase of Sydec and the acquisition ofproperty, plant and equipment offset partially by sales of available-for-salesecurities.  The large increase in property, plant andequipment acquisitions over the corresponding period in 2000 relates primarilyto the capitalization of elements of the Company’s Oracle softwareimplementation and improvements to its computer and communicationsinfrastructure.  Net cashprovided by financing activities in the first six months of 2001 was $2.7 million due to netproceeds from short-term and long-term borrowings offset partially by paymentson long-term debt.

The Company’s line of credit agreementprovides up to $15.0 million of short-term borrowing subject to certainlimitations.  This line of credit issecured by all of the Company's U.S. based assets.  At June 30, 2001 there was $11.3 million outstanding on the lineof credit, as well as a $1.4 million guarantee on debt of Mackie Italy, leavingan available balance on the line of $2.3 million.  This credit facility expires April 30, 2002.  While management expects renewal of thisfacility in the due course of business, it to is subject to the covenant issuesdescribed below.

The Company also has a U.S. basedrevolving note related to the acquisitions of Mackie Italy and EAW.  This note, which is secured by all of theCompany’s U.S. based assets, bears interest at the bank’s prime rate, or at aspecified LIBOR rate plus a specified margin, whichever the Companychooses.  At June 30, 2001 there was$28.8 million outstanding on this note. Of this balance, $6.0 million is scheduled for payment within twelvemonths of the balance sheet date.

Under the terms of the U.S. creditagreements, the Company must maintain certain financial ratios and tangible networth.  The agreements also provide, among other matters,restrictions on additional financing, dividends, mergers, acquisitions, and anannual capital expenditure limit of $10.0 million.  At June 30, 2001, the Company was out of compliance with certainof its financial covenants.  The Companyis currently in negotiations with its U.S. lender to obtain a waiver for thisnon-compliance and/or a restructuring of the covenants.  If the lender does not waive this failure tocomply and/or restructure the covenants, it could declare an event of default,which would allow the lender to accelerate payment of all amounts due under theU.S. based revolving note and line of credit. The balances outstanding on the revolving note and the line of credit atJune 30, 2001 were $28.8 million and $11.3 million, respectively.  This noncompliance may also result in higherinterest costs.  The Company is highlyleveraged and would be unable to pay the accelerated amounts that would becomeimmediately payable if a default is declared. As a result of this non-compliance, the entire U.S. based revolving noteas of June 30, 2001 ($28.8 million) that is potentially due within one year,has been classified as a current liability in the balance sheet under thecaption, “Long-term debt callable under covenant provisions”.

The Company is taking various costcontrol measures including layoffs, office closures, reducing capitalexpenditures and increasing management controls over expenditures in order tobring the Company into compliance with the covenants in the future.  As part of the waiver negotiations, theCompany is pursuing a restructuring of the existing credit agreements.  The Company is also evaluating a variety ofalternative capital sources as part of an ongoing plan to enhance its capitalstructure.

Mackie Italy also has agreements withseveral banks in Italy that provide short-term credit facilities totalingapproximately $25.2 million.  At June30, 2001, there was approximately $18.8million outstanding under these facilities. The majority of these credit facilities are secured by Mackie Italy’sreceivables.  Interest rates on thesecredit facilities range from 4.8% to 13.5%.

Provided the Company restructures and/orobtains a waiver with respect to its U.S. based debt, it believes that itsexisting cash, cash equivalents and credit facilities will be sufficient toprovide adequate working capital to fund operations over the next twelvemonths. However, there can be no assurance that the Company will receive awaiver, restructure its debt or not be required to seek other financing or thatsuch financing, if required, will be available on terms satisfactory to theCompany.  It is the Company’s beliefthat a waiver and/or restructuring of the covenants will occur; however, if thedebt is called and the Company is unable to obtain alternate financing, it mayhave to modify its current operations, liquidate assets or take other measuresto continue normal operations.
**EuroConversion**

European business systems are beingforced to handle currencies in a new way with the introduction of theEuro.  Mackie Italy’s computer systemdoes not support the Euro, and reprogramming the system is not an economicallyviable option.  Although the date formandatory Euro compliance is January 1, 2002, it is believed that the existingsystem can be utilized until early in the fourth quarter 2001 after which timethe transition to the new system would need to begin.  The Company has acquired an Oracle based software system and therelated computer hardware to run a single system for all worldwide operations.  Implementation procedures related to thesystem began during the third quarter of 2000. This system will be Euro compliant and is scheduled to be in place inItaly during the second half of 2001. The cost of this system is preliminarily estimated to be in the range of$7.0 to $9.0 million dollars.

**NewAccounting Pronouncements**

In June 1998, the Financial AccountingStandards Board issued SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities.”  SFAS No. 133, as amended, requires that allderivative 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 forthe Company on January 1, 2001.  The adoption of SFAS No. 133 did not havean impact on the Company’s consolidated financial position or results ofoperations.

On July 20, 2001, the FASB issuedStatement No. 141, Business Combinations, and Statement No. 142, Goodwill andOther Intangible Assets.  Statement 141requires that all business combinations be accounted for under a single method– the purchase method.  Use of thepooling-of-interests method is no longer permitted.  Statement 141 requires that the purchase method be used forbusiness combinations initiated after June 30, 2001.  Statement 142 requires that goodwill no longer be amortized toearnings, but instead be reviewed for impairment.  The amortization of goodwill ceases upon adoption of theStatement, which will be adopted by the Company on January 1, 2002.  Because of the extensive effort needed tocomply with adopting statements 141 and 142, it is not practicable toreasonably estimate the impact of adopting these Statements on the Company’sfinancial statements at the date of this report, including whether anytransitional impairment losses will be required to be recognized as thecumulative effect of a change in accounting principle.  As of June 30, 2001 the Company had $27.4million in goodwill and intangible assets and related amortization for thesix-month period then ended of $0.9 million.

**Item 3.  Quantitativeand Qualitative Disclosures About Market Risk**

***Interest Rate Risk***

The Company is exposed to interest raterisk. The Company’s interest income and expense are most sensitive to changesin the general level of U.S. and European interest rates.  In this regard, changes in U.S. and Europeaninterest rates affect the interest earned on the Company’s cash equivalents aswell as interest paid on debt.
At June 30, 2001, the Company had cashand cash equivalents, and bonds of $6.4million and short-term borrowings of $61.7million, all subject to variable short-term interest rates.  A hypothetical change in the interest rateof 10% (for example from 8% to 8.8%) for the six month period ended June 30,2001 would have increased interest expense by $0.5 million.

***Foreign Currency Risk***

The Company operates foreign subsidiariesin Canada, Italy, theUnited Kingdom, Germany, France, the Netherlands, China and the CzechRepublic.  The Company’s business andfinancial condition are, therefore, sensitive to currency exchange rates or anyother restrictions imposed on foreign currencies.  Sales and expenses incurred by foreign subsidiaries aredenominated in the subsidiary’s local currency and translated into U.S. Dollaramounts at average rates during the period. The Company has a significant natural hedge in the form of Italian basedmanufacturing and European based operating, interest and tax expenses.

Foreign exchange rate sensitivityanalysis can be quantified by estimating the impact on the Company's earningsas a result of hypothetical changes in the value of the U.S. Dollar, theCompany's functional currency, relative to the other currencies in which theCompany transacts business.  All otherthings being equal, an average 10% increase in the value of the U.S. Dollar,throughout the six month period ended June 30, 2001, would not have had amaterial effect on the Company’s loss for the six month period.

 

**PART II.  OTHERINFORMATION**

**Item 1.**  **LegalProceedings**

TheCompany is involved in various legal proceedings and claims that arise in theordinary course of business.  Managementcurrently believes that these matters will not have a material adverse impacton the Company’s financial position, liquidity or results of operations.

**Item2.  Changes in Securities**

None.

**Item3.  Defaults upon Senior Securities**

None.

**Item 4.  Submission ofMatters to a Vote of Security Holders**

Atthe Annual Meeting of Shareholders held on May 16, 2001, the following proposalwas adopted by the votes indicated:
 1.To  elect Gregory C. Mackie and Gregory W. Riker to serve as Class 3 directors of  the Company for a three-year term and to elect James T. Engen to serve as a  Class 1 director of the Company for the remaining one year of a three-year  term:    Number  of Shares ForNumber  of Shares Withheld    Gregory  C. Mackie10,346,857104,373 Gregory  W. Riker10,450,0801,150 James  T. Engen10,346,857104,373 
 

**Item 5.  OtherInformation**

Ata Special Meeting of the Board of Directors held on May 16, 2001, the Companyaccepted the resignation of Roy D. Wemyss as a member of the Board of Directorseffective May 15, 2001, the resignation of David M. Tully as Secretary andTreasurer effective May 16, 2001, and elected William A. Garrard as Secretaryand Treasurer effective May 16, 2001 to serve as such until his resignation,removal from office or until his successor is duly elected and qualified.

**Item 6.  Exhibits andReports on Form 8-K**

None.
**SIGNATURES**

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.
  **Mackie Designs Inc.**  ****   (Registrant)    Dated:  August 13, 2001By:/s/  William A. Garrard     William  A. Garrard*Vice President, Finance and Chief  Financial Officer*  (Principal  Financial and Accounting Officer)
 ****