** **

**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 March 31, 2003**                                                                                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                        |   |   |
| **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)      |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes  ý   No  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  ý

 

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

 
| **Common Stock, no par value** |   | **19,499,969**                                       |
|--------------------------------|--------|------------------------------------------------------|
| Class                          |   | Number of Shares Outstanding  (as of March 31, 2003) |

 

 

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**MACKIE DESIGNS INC.**

 

**FORM 10-QFor the quarter ended March 31, 2003**

 

**INDEX**

 
| **PART I.  FINANCIAL INFORMATION** |
|-----------------------------------------|
|                                    |   |   |
| Item 1.                                 |   | Financial Statements (Unaudited) |
|                                    |   |   |
|                                    |   | Condensed Consolidated Balance Sheets |
|                                    |   |   |
|                                    |   | Condensed Consolidated Statements of  Operations |
|                                    |   |   |
|                                    |   | Condensed Consolidated Statements of Cash Flows |
|                                    |   |   |
|                                    |   | Condensed Consolidated Statements of  Changes in Shareholders’ Equity and Comprehensive Loss |
|                                    |   |   |
|                                    |   | Notes to Condensed Consolidated Financial  Statements |
|                                    |   |   |
| Item 2.                                 |   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|                                    |   |   |
| Item 3.                                 |   | Quantitative and Qualitative Disclosures  About Market Risk |
|                                    |   |   |
| Item 4.                                 |   | Controls and Procedures |
|                                    |   |   |
| **PART II.  OTHER INFORMATION**    |
|                                    |   |   |
| Item 1.                                 |   | Legal Proceedings |
|                                    |   |   |
| Item 2.                                 |   | Changes in Securities and Use of Proceeds |
|                                    |   |   |
| 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**                          |
|                                    |   |   |
| **CERTIFICATIONS**                      |

 

2

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**PART I. FINANCIAL INFORMATION****Item 1. Financial Statements**

 

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

 
|                                                                                          |   | **March 31,  2003**                         |       | **December  31,  2002** |       |
|-----------------------------------------------------------------------------------------------|--------|---------------------------------------------|------------|-------------------------|------------|
|                                                                                          |   | **(In  thousands,  except for share data)** |       |
| **ASSETS**                                                                                    |   |                                        | ** ** |                    | ** ** |
| Current assets:                                                                               |   |                                        | ** ** |                    | ** ** |
| Cash                                                                                          |   | $                                           | 1,714      |                    | $          | 3,062 |   |
| Accounts receivable, less allowance for  doubtful accounts of $3,019 and $2,684, respectively |   | 29,691                                      |       | 31,225                  |       |
| Income taxes receivable                                                                       |   | 2,216                                       |       | 2,437                   |       |
| Inventories                                                                                   |   | 45,074                                      |       | 50,165                  |       |
| Prepaid expenses and other current assets                                                     |   | 7,670                                       |       | 6,269                   |       |
| Deferred income taxes                                                                         |   | 1,938                                       |       | 1,875                   |       |
| Total current assets                                                                          |   | 88,303                                      |       | 95,033                  |       |
|                                                                                          |   |                                        |       |                    |       |
| Property, plant and equipment, net                                                            |   | 20,470                                      |       | 22,043                  |       |
| Intangible assets, net                                                                        |   | 5,870                                       |       | 5,675                   |       |
| Other assets, net                                                                             |   | 1,199                                       |       | 1,204                   |       |
|                                                                                          |   |                                        |       |                    |       |
| Total assets                                                                                  |   | $                                           | 115,842    |                    | $          | 123,955 |   |
|                                                                                          |   |                                        |       |                    |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                 |   |                                        |       |                    |       |
| Current liabilities:                                                                          |   |                                        | ** ** |                    | ** ** |
| Short-term borrowings                                                                         |   | $                                           | 33,882     |                    | $          | 39,152 |   |
| Accounts payable                                                                              |   | 20,867                                      |       | 22,235                  |       |
| Accrued liabilities                                                                           |   | 10,613                                      |       | 10,670                  |       |
| Income taxes payable                                                                          |   | 1,059                                       |       | 140                     |       |
| Current portion of long-term debt                                                             |   | 6,108                                       |       | 7,946                   |       |
| Total current liabilities                                                                     |   | 72,529                                      |       | 80,143                  |       |
|                                                                                          |   |                                        |       |                    |       |
| Long-term debt, excluding current portion                                                     |   | 23,469                                      |       | 20,266                  |       |
| Employee and other liabilities                                                                |   | 4,585                                       |       | 4,435                   |       |
| Deferred income taxes                                                                         |   | 1,938                                       |       | 1,875                   |       |
| Total liabilities                                                                             |   | 102,521                                     |       | 106,719                 |       |
|                                                                                          |   |                                        |       |                    |       |
| Commitments and contingencies                                                                 |   |                                        |       |                    |       |
|                                                                                          |   |                                        |       |                    |       |
| Shareholders’ equity:                                                                    |   |                                        |       |                    |       |
| Common stock                                                                                  |   | 33,919                                      |       | 29,345                  |       |
| Accumulated deficit                                                                           |   | (19,766                                     | )          | (11,372                 | )          |
| Accumulated other comprehensive loss                                                          |   | (832                                        | )          | (737                    | )          |
| Total shareholders’ equity                                                               |   | 13,321                                      |       | 17,236                  |       |
|                                                                                          |   |                                        |       |                    |       |
| Total liabilities and shareholders’ equity                                               |   | $                                           | 115,842    |                    | $          | 123,955 |   |

 

*See accompanying Notes to CondensedConsolidated Financial Statements.*

 

3

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**MACKIE DESIGNS INC.CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS****(Unaudited)**

 
|                                                                                |   | **Three  months ended  March 31,**             |        |
|-------------------------------------------------------------------------------------|--------|------------------------------------------------|-------------|
|                                                                                |   | **2003**                                       |        | **2002** |   |
|                                                                                |   | **(In  thousands, except for per share data)** |        |
|                                                                                |   |                                           |        |
| Net sales                                                                           |   | $                                              | 40,539      |   | $ | 49,119 |   |
| Cost of sales                                                                       |   | 32,902                                         |        | 33,192 |   |
| Gross profit                                                                        |   | 7,637                                          |        | 15,927 |   |
|                                                                                |   |                                           |        |   |   |
| Operating expenses:                                                                 |   |                                           |        |   |   |
| Selling, general and administrative                                                 |   | 12,149                                         |        | 12,519 |   |
| Research and development                                                            |   | 2,649                                          |        | 2,635 |   |
|                                                                                |   | 14,798                                         |        | 15,154 |   |
| Operating income (loss)                                                             |   | (7,161                                         | )           | 773 |   |
|                                                                                |   |                                           |        |   |   |
| Other income (expense):                                                             |   |                                           |        |   |   |
| Interest income                                                                     |   | 104                                            |        | 106 |   |
| Interest expense                                                                    |   | (900                                           | )           | (1,085 | ) |
| Other                                                                               |   | 188                                            |        | (146 | ) |
|                                                                                |   | (608                                           | )           | (1,125 | ) |
|                                                                                |   |                                           |        |   |   |
| Loss before income taxes and cumulative  effect of a change in accounting principle |   | (7,769                                         | )           | (352 | ) |
|                                                                                |   |                                           |        |   |   |
| Provision (benefit) for income taxes                                                |   | 625                                            |        | (106 | ) |
|                                                                                |   |                                           |        |   |   |
| Loss before cumulative effect of a change  in accounting principle                  |   | (8,394                                         | )           | (246 | ) |
| Cumulative effect of a change in accounting  principle                              |   | —                                         |        | (5,940 | ) |
| Net loss                                                                            |   | $                                              | (8,394      | ) | $ | (6,186 | ) |
|                                                                                |   |                                           |        |   |   |
| Basic and diluted net loss per share:                                               |   |                                           |        |   |   |
|                                                                                |   |                                           |        |   |   |
| Loss before cumulative effect of a change  in accounting principle                  |   | $                                              | (0.54  | ) | $ | (0.02 | ) |
| Cumulative effect of a change in accounting  principle                              |   | —                                         |        | (0.48 | ) |
| Basic and diluted net loss per share                                                |   | $                                              | (0.54       | ) | $ | (0.50 | ) |

 

*See accompanying Notes to CondensedConsolidated Financial Statements.*

 

4

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**MACKIE DESIGNS INC.CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS(Unaudited)**

 
|                                                                                 |   | **Three months ended  March 31,** |       |
|--------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                 |   | **2003**                          |       | **2002** |   |
|                                                                                 |   | **(In thousands)**                |       |
| **Operating activities**                                                             |   |                              | ** ** |   | ** ** |
| Net loss                                                                             |   | $                                 | (8,394     | ) | $ | (6,186 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities:     |   |                              |       |   |   |
| Cumulative effect of a change in accounting  principle                               |   | —                            |       | 5,940 |   |
| Depreciation and amortization                                                        |   | 2,183                             |       | 1,840 |   |
| Loss on asset dispositions                                                           |   | 106                               |       | — |   |
| Deferred stock compensation                                                          |   | 101                               |       | 260 |   |
| Deferred income taxes                                                                |   | —                            |       | (60 | ) |
| Changes in operating assets and  liabilities:                                        |   |                              |       |   |   |
| Accounts receivable                                                                  |   | 1,909                             |       | (3,044 | ) |
| Inventories                                                                          |   | 5,822                             |       | (1,090 | ) |
| Prepaid expenses and other current assets                                            |   | 325                               |       | (129 | ) |
| Other assets                                                                         |   | 143                               |       | (105 | ) |
| Accounts payable and accrued expenses                                                |   | (1,975                            | )          | 5,117 |   |
| Income taxes                                                                         |   | 1,127                             |       | 1,214 |   |
| Other long term liabilities                                                          |   | (9                                | )          | 37 |   |
| Cash provided by operating activities                                                |   | 1,338                             |       | 3,794 |   |
|                                                                                 |   |                              |       |   |   |
| **Investing activities**                                                             |   |                              | ** ** |   | ** ** |
| Cash used in investing activities –  purchases of property, plant and equipment |   | (276                              | )          | (817 | ) |
|                                                                                 |   |                              |       |   |   |
| **Financing activities**                                                             |   |                              | ** ** |   | ** ** |
| Proceeds from sale of stock                                                          |   | 3,583                             |       | — |   |
| Proceeds from long-term debt and warrants                                            |   | 17,500                            |       | — |   |
| Payments on long-term debt                                                           |   | (16,044                           | )          | (1,337 | ) |
| Proceeds from new short-term borrowing                                               |   | 9,172                             |       | — |   |
| Net payments on short-term borrowings                                                |   | (16,726                           | )          | (2,519 | ) |
| Cash used in financing activities                                                    |   | (2,515                            | )          | (3,856 | ) |
|                                                                                 |   |                              |       |   |   |
| Effect of exchange rate changes on cash                                              |   | 105                               |       | (18 | ) |
|                                                                                 |   |                              |       |   |   |
| Decrease in cash                                                                     |   | (1,348                            | )          | (897 | ) |
|                                                                                 |   |                              |       |   |   |
| Cash at beginning of period                                                          |   | 3,062                             |       | 2,095 |   |
|                                                                                 |   |                              |       |   |   |
| Cash at end of period                                                                |   | $                                 | 1,714      |   | $ | 1,198 |   |

 

*See accompanying Notes to CondensedConsolidated Financial Statements.*

 

5

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**MACKIE DESIGNS INC.CONDENSED CONSOLIDATED STATEMENTSOF SHAREHOLDERS’ EQUITY ANDCOMPREHENSIVE LOSSThree months ended March 31, 2003**

 
|                                                                            |   |               |   |   |   | **Accumulated  Deficit** |   | **Accumulated  Other  Comprehensive  Loss** |   | **Total** |   |
|---------------------------------------------------------------------------------|--------|--------------------|--------|--------|--------|--------------------------|--------|---------------------------------------------|--------|-----------|--------|
| **Common Stock**                                                                |
| **Shares**                                                                      |   | **Amount**         |
|                                                                            |   | **(In thousands)** |   |
| Balance at December 31, 2002                                                    |   | 12,556             |   | $      | 29,345 |                     | $      | (11,372                                     | )      | $         | (737   | ) | $ | 17,236 |   |
| Shares issued in private transaction, net  of transaction costs of $2.7 million |   | 6,936              |   | 3,583  |   | —                   |   | —                                      |   | 3,583     |   |
| Warrants issued                                                                 |   | —             |   | 600    |   | —                   |   | —                                      |   | 600       |   |
| Options issued for covenant not to compete                                      |   | —             |   | 290    |   | —                   |   | —                                      |   | 290       |   |
| Exercise of stock options                                                       |   | 8                  |   | — |   | —                   |   | —                                      |   | —    |   |
| Amortization of deferred stock compensation                                     |   | —             |   | 101    |   | —                   |   | —                                      |   | 101       |   |
| Net loss                                                                        |   | —             |   | — |   | (8,394                   | )      | —                                      |   | —    |   |
| Foreign currency translation adjustment                                         |   | —             |   | — |   | —                   |   | (95                                         | )      | —    |   |
| Comprehensive loss                                                              |   | —             |   | — |   | —                   |   | —                                      |   | (8,489    | )      |
|                                                                            |   |               |   |   |   |                     |   |                                        |   |      |   |
| Balance at March 31, 2003                                                       |   | 19,500             |   | $      | 33,919 |                     | $      | (19,766                                     | )      | $         | (832   | ) | $ | 13,321 |   |

 

*See accompanying Notes to CondensedConsolidated Financial Statements.*

 

6

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**MACKIE DESIGNS INC.NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTSMarch 31, 2003(Unaudited)**

 

**1.****                       Basisof Presentation**

 

The accompanyingunaudited condensed consolidated financial statements have been prepared byMackie Designs Inc. in accordance with accounting principles generally acceptedin the United States of America for interim financial statements and includethe accounts of Mackie Designs Inc. and its subsidiaries. They do not includeall of the information and disclosures required by generally acceptedaccounting principles for complete financial statements and should be read inconjunction with the financial statements included in our Annual Report on Form10-K for the year ended December 31, 2002. In our opinion, all normal recurringadjustments necessary for the fair presentation of the results of the interimperiods are reflected herein. Operating results for the three-month periodended March 31, 2003, are not necessarily indicative of future financialresults.

 

On February 21,2003, we finalized an agreement with Sun Mackie, LLC, an affiliate of SunCapital Partners, Inc., a private investment firm, whereby Sun Mackie purchasedapproximately 14.4 million shares of our common stock for $10.0 million. SunMackie acquired approximately 7.4 million of these shares from certain sellingshareholders. It acquired approximately 6.9 million newly issued sharesdirectly from the Company for approximately $6.3 million. Net proceeds aftertransaction related costs were approximately $3.6 million. As a result of thistransaction, Sun Mackie owns approximately 74% of our outstanding shares.

 

**2.****                       NetLoss Per Share**

 

The following table setsforth the computation of basic and diluted net loss per share for the threemonths ended March 31, 2003 and 2002. Stockoptions representing 3,666,000 and 4,961,000 shares in 2003 and 2002,respectively, were excluded from the calculation of diluted per share amountsbecause they are antidilutive. The 1.2 million warrants issued inconnection with the debt to Sun Mackie (see note 7) and vested stock options atan exercise price of $.01 are considered outstanding common shares and areincluded in the denominator for computation of basic and diluted net loss pershare.

 
|                                                                                 |   | **2003**                                       |   | **2002** |   |
|--------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|----------|--------|
|                                                                                 |   | **(in thousands, except for per share  data)** |   |
| Numerator:                                                                           |   |                                           |   |     |   |
| Net loss before cumulative effect of a  change in accounting principle               |   | $                                              | (8,394 | )        | $      | (246 | ) |
| Cumulative effect of a change in accounting  principle                               |   | —                                         |   | (5,940   | )      |
| Numerator for basic and diluted net loss  per share                                  |   | $                                              | (8,394 | )        | $      | (6,186 | ) |
|                                                                                 |   |                                           |   |     |   |
| Denominator for basic and diluted net loss  per share – weighted average shares |   | 15,665                                         |   | 12,429   |   |
|                                                                                 |   |                                           |   |     |   |
| Basic and diluted net loss per share:                                                |   |                                           |   |     |   |
| Net loss before cumulative effect of a  change in accounting principle               |   | $                                              | (0.54  | )        | $      | (0.02 | ) |
| Cumulative effect of a change in accounting  principle                               |   | —                                         |   | (0.48    | )      |
| Basic and diluted net loss per share                                                 |   | $                                              | (0.54  | )        | $      | (0.50 | ) |

 

7

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**3.****                       ComprehensiveLoss**

 

Comprehensiveloss for the three-month periods ended March 31, 2003 and 2002, is detailedbelow.

 
|                                     |   | **2003**            |   | **2002** |   |
|------------------------------------------|--------|---------------------|--------|----------|--------|
|                                     |   | **(in  thousands)** |   |
|                                     |   |                |   |     |   |
| Net loss                                 |   | $                   | (8,394 | )        | $      | (6,186 | ) |
| Other comprehensive loss:                |   |                |   |     |   |
| Foreign currency translation adjustments |   | (95                 | )      | (220     | )      |
| Comprehensive loss                       |   | $                   | (8,489 | )        | $      | (6,406 | ) |

 

**4.****                       Stock-BasedCompensation**

 

Stock-based employee compensation plans are accountedfor using the intrinsic-value method prescribed in Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations. We have adopted the disclosure-only provisions of FAS No. 123,“Accounting for Stock-Based Compensation” as amended by FAS No. 148,“Accounting for Stock-Based Compensation – Transition and Disclosure, anamendment of FAS No. 123.”

 

FAS No. 123, as amended by FAS No. 148, permitscompanies to recognize, as expense over the vesting period, the fair value ofall stock-based awards on the date of grant. The Black-Scholes option valuationmodel was developed for use in estimating the fair value of traded options,which have no vesting restrictions and are fully transferable. Because ourstock-based compensation plans have characteristics significantly differentfrom those of traded options and because changes in the subjective inputassumptions can materially affect the fair value estimate, management believesthat the existing option valuation models do not necessarily provide a reliablesingle measure of the fair value of awards from the plan. Therefore, aspermitted, we apply the existing accounting rules under APB No. 25 andprovide pro forma net loss and pro forma net loss per share disclosures forstock-based awards made during the year as if the fair value method defined inFAS No. 123, as amended, had been applied. Net loss and net loss per sharefor the three-month periods ended March 31, 2003 and 2002 changed as follows:

 
|                                                                              |   | **2003**                                       |   | **2002** |   |
|-----------------------------------------------------------------------------------|--------|------------------------------------------------|--------|----------|--------|
|                                                                              |   | **(in thousands, except for per share  data)** |   |
| Net income loss:                                                                  |   |                                           |   |     |   |
| As reported                                                                       |   | $                                              | (8,394 | )        | $      | (6,186 | ) |
| Add: Stock-based employee compensation  included in reported net loss             |   | 67                                             |   | 170      |   |
| Less: Stock-based employee compensation  determined under fair-value based method |   | (352                                           | )      | (433     | )      |
| Pro forma                                                                         |   | $                                              | (8,679 | )        | $      | (6,449 | ) |
| Basic and diluted net loss per share:                                             |   |                                           |   |     |   |
| As reported                                                                       |   | $                                              | (0.54  | )        | $      | (0.50 | ) |
| Pro forma                                                                         |   | $                                              | (0.55  | )        | $      | (0.52 | ) |

 

8

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**5.****                       Inventories**

 

Inventoriesconsist of the following:

 
|            |   | **March 31,  2003** |   | **December  31,  2002** |   |
|-----------------|--------|---------------------|--------|-------------------------|--------|
|            |   | **(in  thousands)** |   |
| Raw materials   |   | $                   | 15,813 |                    | $      | 22,246 |   |
| Work in process |   | 3,831               |   | 3,346                   |   |
| Finished goods  |   | 25,430              |   | 24,573                  |   |
|            |   | $                   | 45,074 |                    | $      | 50,165 |   |

 

**6.****                    IntangibleAssets**

 

Intangible assetsconsist of the following:

 
|                           |   | **March 31,  2003** |   | **December  31,  2002** |   |
|--------------------------------|--------|---------------------|--------|-------------------------|--------|
|                           |   | **(in  thousands)** |   |
| Developed  technology          |   | $                   | 5,200  |                    | $      | 5,200 |   |
| Trademark                      |   | 1,380               |   | 1,380                   |   |
| Covenant  not to compete       |   | 285                 |   | —                  |   |
|                           |   | 6,865               |   | 6,580                   |   |
| Less  accumulated amortization |   | 995                 |   | 905                     |   |
|                           |   | $                   | 5,870  |                    | $      | 5,675 |   |

 

In connection with the equity investment by SunCapital Partners in February 2003, Gregory C. Mackie resigned as a director ofthe Company, and entered into a consulting agreement whereby he will provideservices, upon our request, for a period of three years. There is a noncompeteprovision in this agreement for a period of five years from the date of theagreement. In exchange for this noncompete provision, Mr. Mackie was granted170,000 stock options at an exercise price of $1.02 per share and an additional330,000 of existing options were modified to comparable terms. The fair valueof the vested options is $285,000 which has been recorded as an increase tocommon stock and a covenant not to compete. The covenant will be amortized overthree years. The 170,000 unvested options will be marked to market at the endof each reporting period and the related expense will be recognized over thevesting period of the options. 

 

9

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**7.****                       Debt**

 

On March 31, 2003,a Loan and Security Agreement with a new lender was finalized which providesfor a $26.0 million revolving line of credit. This lender has also provided a$2.5 million term loan. Principal payments on the term loan are due in equalmonthly payments over five years, beginning in July 2003. Interest is duemonthly and is calculated at the bank’s prime rate plus a specified margin.Both the revolving line of credit and term loan are secured by all U.S. basedassets including, but not limited to, accounts receivable, inventory, fixedassets, intangible assets and patents. Additionally, a portion of the revolvingline of credit is provided in the U.K. and is secured by accounts receivable ofMackie Designs UK Plc. Under the terms of this Loan and Security Agreement, wemust meet certain operating covenants and maintain certain availability levels.Our previous U.S. lender has provided a loan totaling $11.0 million which issubordinate to the Loan and Security Agreement with our new lender. Thissubordinated loan and the $2.5 million term loan satisfied the existing U.S.term loans. Principal on the subordinated loan is due beginning in May 2004based upon our 2003 earnings before interest, taxes, depreciation andamortization, less cash taxes paid, certain capital expenditures and certaindebt repayments. Interest accrues at a rate of 10% and is paid on a regularbasis as we have availability under the Loan and Security Agreement. Inaddition to its equity investment, Sun Mackie has provided $4.0 million ofsubordinated debt financing which also funded on March 31, 2003. Interestaccrues at 15% and is paid annually beginning March 2004. The principal is duein a lump sum payment in 2007. In connection with the loan from Sun Mackie, wehave issued warrants to purchase an additional 1.2 million common shares at anexercise price of $.01 per share.  The$4.0 million of proceeds from the issuance of the debt and warrants wasallocated based on the estimated relative value of each of the securities. Thevalue assigned to the debt was $3.4 million; the value assigned to the warrantswas $600,000. The resulting effective interest rate on the debt is 18.75%.

 

**8.****                       Guarantees**

 

In the ordinary course of business, we are not subjectto potential obligations under guarantees that fall within the scope of FIN No.45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others” except for standardindemnification and warranty provisions. Indemnification and warrantyprovisions contained within our sales agreements are generally consistent withthose prevalent in our industry. The duration of product warranties isgenerally one to six years following delivery of products.

 

The warranty liability issummarized as follows (in thousands):

 
|                              |   | **Balance at  December 31,  2002****** |   | **Charged to  cost of sales****** |   | **Applied  to  liability****** |   | **Balance at  March 31,  2003****** |   |
|-----------------------------------|--------|----------------------------------------|--------|-----------------------------------|--------|--------------------------------|--------|-------------------------------------|--------|
| Three months ended March 31, 2003 |   | $                                      | 1,525  |                              | $      | 1,010                          |   | $                                   | 1,017  |   | $ | 1,518 |   |
|                                   |        |                                        |        |                                   |        |                                |        |                                     |        |  |  |  |  |

 

**9.****                       Contingencies**

 

Subrogatedclaims have been asserted against us from insurance companies who prior to ouracquisition of Eastern Acoustic Works, Inc. (EAW), paid claims made by EAW’slandlord and other tenants of the Whitinsville building who were affected by afire started by a loaned employee in a portion of the building in 1996. Thepotential loss from this claim may exceed $4 million inclusive of interest;some portion of which we anticipate would be covered by insurance. We expectthe matter to come to trial in July 2003. We believe that these losses are notattributable to us under Massachusetts’ law and are vigorously defending thelitigation. The claims of the other tenants have been covered by EAW’s

 

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insurance carrier. The ultimateresolution of this matter is not known at this time. No provision has been madein our consolidated financial statements related to these claims.

 

We are alsoinvolved in various legal proceedings and claims that arise in the ordinarycourse of business. We currently believe that these matters will not have amaterial adverse impact on our financial position, liquidity or results ofoperations.

 

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

 

*The following discussion andanalysis should be read in conjunction with our financial statements includedin our Annual Report on Form 10-K for the year ended December 31, 2002. Thisdiscussion contains certain “forward-looking statements” within the meaning ofthe Private Securities Litigation Reform Act of 1995 that involve risks anduncertainties, such as statements of our plans, objectives, expectations andintentions. Actual results could differ materially from those discussed herein.The cautionary statements made in this Quarterly Report on Form 10-Q and theAnnual Report on Form 10-K should be read as being applicable to allforward-looking statements wherever they appear. We undertake no obligation topublicly release any revisions to these forward-looking statements that may berequired to reflect events or circumstances after the date hereof or to reflectthe occurrence of unanticipated events. Forward-looking statements include,without limitation, any statement that may predict, forecast, indicate, orimply future results, performance, or achievements, and may contain the words“believe,” “anticipate,” “expect,” “estimate,” “project,” “will be,” “willcontinue,” “will likely result,” or words or phrases of similar meaning.*

 

**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.

 

On February21, 2003, we finalized an agreement with Sun Mackie, LLC, an affiliate of SunCapital Partners, Inc., a private investment firm, whereby Sun Mackie purchasedapproximately 14.4 million shares of our common stock for $10.0 million. SunMackie acquired approximately 7.4 million of these shares from certain sellingshareholders. It acquired approximately 6.9 million newly issued sharesdirectly from the Company for approximately $6.3 million. Net proceeds after transactionrelated costs were approximately $3.6 million. As a result of this transaction,Sun Mackie owns approximately 74% of our outstanding shares.

 

On March 31,2003 we finalized a new Loan and Security Agreement that provides for arevolving line of credit of up to $26.0 million and a term loan of $2.5 millionwith a new lender. In addition, we finalized a three year subordinated loan of$11.0 million with our former principal U.S. lender and a $4.0 million fouryear subordinated note with Sun Mackie. In connection with the loan from SunMackie, we issued warrants to purchase an additional 1.2 million common sharesat an exercise price of $.01 per share. The proceeds from these new borrowingswere primarily used to replace the existing U.S. line of credit and satisfyother existing debt of approximately $13.6 million.

 

**CriticalAccounting Policies and Estimates**

 

Our discussionand analysis of our financial condition and results of operations following arebased upon our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America. The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets, liabilities,sales and expenses, and related disclosure of contingent assets andliabilities.

 

Webelieve that the estimates, assumptions and judgments involved in theaccounting policies described below have the greatest potential impact on ourfinancial statements, so we consider these to be our critical accountingpolicies. Because of the uncertainty inherent in these matters, actual resultscould

 

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differ from the estimates weuse in applying the critical accounting policies. Certain of these criticalaccounting policies affect working capital account balances, including thepolicies for revenue recognition, allowance for doubtful accounts, inventoryvaluation and income taxes. These policies require that we make estimates inthe preparation of our financial statements as of a given date. However, sinceour business cycle is relatively short, actual results related to theseestimates are generally known within the six-month period following thefinancial statement date. Thus, these policies generally affect only the timingof reported amounts across two to three quarters.

 

***InventoryValuation***.  We believe our policy on valuing inventory,including market value adjustments, is our primary critical accounting policy.Inventories are stated at the lower of standard cost, which approximates actualcost on a first-in, first-out method, or market. Included in our inventoriesbalance are demonstration products used by our sales representatives andmarketing department including finished goods that have been shipped tocustomers for evaluation. Market value adjustments are recorded for obsoletematerial, slow-moving product, service and demonstration products. We makejudgments regarding the carrying value of our inventory based upon currentmarket conditions. These conditions may change depending upon competitiveproduct introductions, customer demand and other factors. If the market for ourpreviously released products changes, we may be required to write down the costof our inventory.

 

***Allowancefor Doubtful Accounts****.*  We make ongoing estimates relating to thecollectibility of our accounts receivable and maintain an allowance forestimated losses resulting from the inability of our customers to meet theirfinancial obligations to us. In determining the amount of the allowance, weconsider our historical level of credit losses and make judgments about thecreditworthiness of significant customers based on ongoing credit evaluations.Since we cannot predict future changes in the financial stability of ourcustomers, actual future losses from uncollectible accounts may differ from ourestimates. If the financial condition of our customers were to deteriorate,resulting in their inability to make payments, a larger allowance may berequired. In the event we determined that a smaller or larger allowance wasappropriate, we would record a credit or a charge to selling and administrativeexpense in the period in which we made such a determination.

 

***Long-lived Assets******.*** Weassess the impairment of long-lived assets whenever events or changes incircumstances indicate that the carrying value may not be recoverable.Significant judgment is used in assessing factors which might triggerimpairment 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.As we continue to review our distribution methods and transition our manufacturingto third parties, this may result in circumstances where the carrying value ofcertain long-lived assets may not be recoverable.

 

***Revenue Recognition****.*  Revenues from sales of products, net of salesdiscounts, returns and allowances, are generally recognized upon shipment underan agreement with a customer when risk of loss has passed to the customer, allsignificant contractual obligations have been satisfied, the fee is fixed ordeterminable and collection of the resulting receivable is considered probable.Products are generally shipped “FOB shipping point” with no right of return.Sales with contingencies, such as rights of return, rotation rights,conditional acceptance provisions and price protection, are rare andinsignificant and are deferred until the contingencies have been satisfied orthe contingent period has lapsed. We generally warrant our products againstdefects in materials and workmanship for periods of between one and six years.The estimated cost of warranty obligations, sales returns and other allowancesare recognized at the time of revenue recognition based on contract terms andprior claims experience.

 

***IncomeTaxes.*** Aspart of the process of preparing our financial statements, we are required toestimate our income taxes in each of the jurisdictions in which we operate.This process involves estimating our actual current tax exposure together withassessing temporary differences resulting from differing treatment of items fortax and accounting purposes. These differences result in deferred tax assetsand liabilities, which are included in our balance sheet. We must then assessthe likelihood that our deferred tax assets will be recovered from futuretaxable income and to the extent we believe that

 

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recovery is not likely, we mustestablish a valuation allowance. To the extent we establish a valuationallowance or increase this allowance in a period, we must include an expensewithin the tax provision in the Statement of Operations. Conversely, if theallowance is decreased the tax provision will be credited. Significant management judgment is requiredin determining our provision for income taxes, deferred tax assets andliabilities and any valuation allowance recorded against our net deferred taxassets.

 

# **Results of Operations**

 

Net sales decreased 17% to $40.5 million in the firstquarter of 2003 from $49.1 million in the first quarter of 2002. The decreaserelated to lower volumes in both the U.S. and Europe. Additionally, we havereduced prices or offered discounts on certain products and have made decisionsto streamline our product offerings to limit lower margin and lower volumeproducts.

 

Gross profit decreased to 18.8% in the first quarterof 2003 from 32.4% in the first quarter of 2002. The lower gross marginprimarily reflects the excess capacity in our factories created as we continuethe transition and manufacture of products to contract manufacturers and scaleour business to reduced volumes. Costs in the first quarter of 2003 includeadditional depreciation charges for manufacturing assets which will no longerbe utilized after the transition is complete. Additionally, we have madecertain inventory adjustments for material we believe will be excess in thefuture. We believe that our gross profit percentage will increase incrementallythroughout 2003 as the transition efforts progress.

 

Selling, general and administrative expenses were $12.1 million or 30%of sales in the first quarter of 2003 as compared to $12.5 million or 26% ofsales in the first quarter of 2002. Expenses in the first quarter of 2003included certain one-time items related to the equity investment by Sun Mackie,LLC including run-off policies for directors’ and officers’ liability insurancetotaling approximately $500,000. Severance costs incurred in connection with areduction in headcount also affected the first quarter of 2003. Certain costs,such as commissions, which fluctuate with sales, were lower in the firstquarter of 2003 than in the first quarter of 2002. Additionally, costcontainment measures including reductions in marketing and tradeshow costs alsocontributed to the lower costs.

 

Research and development expenses were $2.6 million in the firstquarter of 2003 and in the corresponding period of 2002. The first quarter 2003amount represents 7% of sales in the first quarter of 2003 as compared to 5% ofnet sales in the first quarter of 2002 based upon the decrease in net sales.

 

Net other expense was $608,000 for the first quarterof 2003 as compared to $1.1 million in the first quarter of 2002. Included inthis amount is interest expense which decreased to $900,000 in the firstquarter of 2003 from $1.1 million in the corresponding period of 2002. Thedecrease relates to both lower debt balances and lower interest rates in thefirst quarter of 2003 versus the first quarter of 2002. Other income, comprisedprimarily of foreign exchange transaction gains and losses, was income of$188,000 in the first quarter of 2003 compared with an expense of $146,000 inthe first quarter of 2002. These gains and losses are primarily the result ofchanges between the Euro and the U.S. Dollar.

 

Income tax expense for the first quarter of 2003 was $625,000representing a tax expense on losses before income taxes of 8%. The taxprimarily relates to our non-U.S. subsidiaries. No tax benefit is recognized inconnection with our taxable losses as recognition of such benefit depends onfuture profits, which is not assured. Taxes for the first quarter of 2002 werea benefit of $106,000 representing an expected tax rate of 30.1%. We calculatethe current tax rate based upon our estimate of the tax rate to be achieved forthe full year.

 

**Cumulative Effect of a Change in AccountingPrinciple**

 

We adopted FASNo. 142 on January 1, 2002. As required by FAS No. 142, we performed thetransitional impairment test on goodwill and other intangibles, which consistedof assembled workforce, and recorded a $5.9 million cumulative effect of achange in accounting principle in the first quarter of 2002.

 

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# **Liquidity and Capital Resources**

 

In February 2003, SunMackie, LLC, an affiliate of Sun Capital Partners, Inc., a private investmentfirm, made a strategic equity investment in Mackie Designs totaling $6.3million. Certain transaction related fees reduced funds received by us toapproximately $3.6 million.

 

A Loan andSecurity Agreement with a new lender was finalized on March 31, 2003 andprovides for a $26.0 million revolving line of credit. Availability under thisline of credit is limited to eligible collateral which totaled $15.2 million atMarch 31, 2003. Total funds drawn at March 31, 2003 were $10.8 million andavailability under the line was $4.4 million. Interest is due monthlycalculated at the bank’s prime rate plus 0.75% or Eurodollar Rate plus 3.5%.This lender has also provided a $2.5 million term loan. Principal payments onthe term loan are due in equal monthly payments over five years, beginning inJuly 2003. Interest is due monthly and is calculated at the bank’s prime rateplus a specified margin. Both the revolving line of credit and term loan aresecured by all U.S. based assets including, but not limited to, accountsreceivable, inventory, fixed assets, intangible assets and patents.Additionally, a portion of the revolving line of credit is provided in the U.K.and is secured by accounts receivable of Mackie Designs UK Plc. Under the termsof this Loan and Security Agreement, we must meet certain operating covenantsand maintain certain availability levels. The term of the agreement is threeyears.

 

Our previous U.S.lender has provided a loan totaling $11.0 million which is subordinate to theLoan and Security Agreement with our new lender. Principal is due beginning inMay 2004 based upon our 2003 earnings before interest, taxes, depreciation andamortization, less cash taxes paid, certain capital expenditures and certaindebt repayments. Interest accrues at a rate of 10% and is paid on a regularbasis as we have availability under the Loan and Security Agreement. Inaddition to its equity investment, Sun Mackie has provided $4.0 million of debtfinancing which also funded in March 2003. Interest accrues at 15% and is paidannually beginning March 2004. The principal is due in a lump sum payment in2007. In connection with the loan from Sun Mackie, we have issued warrants topurchase an additional 1.2 million common shares at an exercise price of $.01per share. The $4.0 million of proceeds from the issuance of the debt andwarrants was allocated based on the estimated relative value of each of thesecurities. The value assigned to the debt was $3.4 million; the value assignedto the warrants was $600,000. The resulting effective interest rate on the debtis 18.75%.

 

Additionally, we have agreements with several banks inItaly that provide short-term credit facilities totaling approximately $27.0million, subject to certain limitations. These limitations reduced the actualavailability to approximately $23.1 million. At March 31, 2003, there wasapproximately $22.8 million outstanding under these facilities. The majority ofthese credit facilities are secured by receivables of Mackie Italy. There areother bank term loans and notes in Italy totaling approximately $12.3 millionat March 31, 2003. Specific assets of Mackie Italy, including owned land andbuildings, secure certain of these loans. Of this Italian debt, approximately$5.4 million is due within the next twelve months. The debt is secured by zerocoupon bonds which have a maturity date consistent with the debt payment duedate.

 

Certain of the Italian banks have indicated that theymay be unwilling to provide additional receivables financing, or have indicatedthat they will no longer accept intercompany receivables as acceptablecollateral. These credit agreements are not guaranteed by the U.S. Company. Ifwe are unable to continue to receive adequate receivables financing in Italy,we may be forced to obtain alternate financing at less favorable rates. Thereis no guarantee that such alternate financing will be available. Any reductionin our borrowing ability would have an adverse effect on our results ofoperations and financial condition.

 

Finally, we have aline of credit and long-term loan with a bank in Belgium totaling approximately$500,000. These loans are secured by certain assets of Mackie DesignsEngineering Services, and are guaranteed up to $400,000 by the U.S. Company.The Belgian bank has demanded that this loan be repaid. Consequently, the entireamount is classified as short-term borrowings. In March 2003, we determinedthat we would no longer fund the engineering activities of this entity.Consequently, Mackie Designs Engineering Services BVBA filed for bankruptcy inApril 2003.

 

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We have takenvarious actions to improve results of operations and ensure our ongoing abilityto cover scheduled debt servicing payments, including headcount reductions andother cost containment measures. During 2002, these measures included layoffsand reduction of capital expenditures. In 2003, there have been additionalheadcount reductions. We are also planning to close certain manufacturing andengineering facilities and will continue to outsource product manufacturing tocontract manufacturers. We also plan to outsource certain engineeringactivities. Additionally, we plan to close certain international sales offices.Finally, there will be intensive focus on controls over expenditures. If theseplanned cost reductions are not realized or there is a continued significantdecline in net sales, our operating results will be adversely affected.

 

Cash providedby operating activities was $1.3 million in the first quarter of 2003 and $3.8million in the first quarter of 2002. Net cash provided by operating activitiesin the first quarter of 2003 was primarily attributable to decreases inaccounts receivable and inventories, offset by reductions in accounts payableand accrued expenses. In the first quarter of 2002, cash was provided byincreases in accounts payable and accrued expenses, offset by increases inaccounts receivable and inventories.

 

Cash used ininvesting activities was $276,000 for the first quarter of 2003 and $817,000for the first quarter of 2002. The cash flows used in investing activities inboth years consisted entirely of purchases of property, plant and equipment.

 

Cash used infinancing activities during the first quarter of 2003 was $2.5 million whichrelates to the equity transaction and debt restructuring mentioned elsewhere inthis Quarterly Report on Form 10-Q. Cash used in financing activities in thefirst quarter of 2002 was $3.9 million which reflected repayments of bothlong-term and short-term borrowings.

 

With the Sun Mackie equity investment and debtfinancing and restructuring of our U.S. based debt, along with cash generatedfrom operations, we believe we will have adequate working capital to fundoperations over the next twelve months.

 

**New Accounting Pronouncements**

 

In November 2002,the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangementswith Multiple Deliverables” with respect to determining when and how toallocate revenue from sales with multiple deliverables. The EITF 00-21consensus provides a framework for determining when and how to allocate revenuefrom sales with multiple deliverables based on a determination of whether themultiple deliverables qualify to be accounted for as separate units ofaccounting. The consensus is effective prospectively for arrangements enteredinto in fiscal periods beginning after June 15, 2003. We do not expect that theadoption of this consensus will have a material impact on our financialstatements.

 

In January 2003,the FASB issued Interpretation No. 46, “Consolidation of Variable InterestEntities.” Variable interest entities often are created for a single specifiedpurpose, for example, to facilitate securitization, leasing, hedging, researchand development, or other transactions or arrangements. Formerly “Consolidationof Certain Special Purpose Entities” in its draft form, this interpretation ofAccounting Research Bulletin No. 51, “Consolidated Financial Statements,”defines what these variable interest entities are and provides guidelines onhow to identify them and also on how an enterprise should assess its interestsin a variable interest entity to decide whether to consolidate that entity.Generally, FIN No. 46 applies to variable interest entities created afterJanuary 31, 2003, and to variable interest entities in which an enterpriseobtains an interest after that date. For existing variable interest entities inwhich an enterprise holds a variable interest that it acquired before February1, 2003, the provision of this interpretation will apply no later than the beginningof the first interim or annual reporting period beginning after June 15, 2003.Currently, we do not have any variable interest entities, and we do not expectthe adoption of FIN No. 46 will have a material impact on our financialstatements.

 

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

 

We are exposed tovarious market risks, including changes in foreign currency rates and interestrates. We may enter into various derivative transactions to manage certain ofthese exposures; however we did not have any material derivative financialinstruments as of March 31, 2003.

 

At March 31,2003, we had variable rate debt of approximately $45.8 million provided by U.S.and Italian banks. Throughout the quarter, prior to the debt restructuring onMarch 31, 2003, the average variable debt was approximately $60 million.Changes in U.S. and European interest rates affect interest paid on debt and weare exposed to interest rate risk. In the quarter ended March 31, 2003, anincrease in the average interest rate of 10%, i.e. from 6% to 6.6%, would haveresulted in an approximately $100,000 increase to the net loss before incometaxes. A similar increase during the period ended March 31, 2002 would have hadan insignificant effect on our earnings. The fair value of such debtapproximates the carrying amount on the consolidated balance sheet at March 31,2003.

 

The assets andliabilities of our non-U.S. subsidiaries have functional currencies other thanthe U.S. Dollar, and are translated into U.S. Dollars at exchange rates ineffect at the balance sheet date. These subsidiaries are located in westernEurope and the U.K., the functional currencies of which are the Euro andBritish Pound. Income and expense items are translated at the average exchangerates prevailing during the period. A 10% decrease in the value of the U.S.Dollar compared to the functional currencies of our non-U.S. subsidiaries,throughout the three months ended March 31, 2003, would have resulted in anapproximately $306,000 increase to the net loss before income taxes. A 10%decrease in the value of the U.S. Dollar, throughout the period ended March 31,2002, would have resulted in an approximately $545,000 increase to net loss beforeincome taxes.

 

**Item 4.****          ****Controlsand Procedures**

 

Our Chief Executive Officer and Chief FinancialOfficer have reviewed our disclosure controls and procedures, as of a datewithin 90 days of the date of filing of this Quarterly Report. Based on thatevaluation, they have concluded that, as of the evaluation date, the disclosurecontrols and procedures are effective in alerting them on a timely basis tomaterial information required to be included in this Quarterly Report. Therehave been no significant changes in the internal controls, or in other factorsthat could significantly affect such internal controls subsequent to the dateof their evaluation.

 

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**PARTII.  OTHER INFORMATION**

 

**Item 1.**  **Legal Proceedings**

 

Subrogatedclaims have been asserted against us from insurance companies who prior to ouracquisition of Eastern Acoustic Works, Inc. (EAW), paid claims made by EAW’slandlord and other tenants of the Whitinsville building who were affected by afire started by a loaned employee in a portion of the building in 1996. Thepotential loss from this claim may exceed $4 million inclusive of interest;some portion of which we anticipate would be covered by insurance. We expectthe matter to come to trial in July 2003. We believe that these losses are notattributable to us under Massachusetts’ law and are vigorously defending thelitigation. The claims of the other tenants have been covered by EAW’sinsurance carrier. The ultimate resolution of this matter is not known at thistime. 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 currently believe that these matters will not have amaterial adverse impact on our financial position, liquidity or results ofoperations.

 

**Item 2.****           Changesin Securities and Use of Proceeds**

 

OnFebruary 21, 2003, Sun Mackie, LLC, an affiliate of Sun CapitalPartners, Inc., a private investment firm, purchased 6,935,680 shares ofthe Company for approximately $6.3 million in cash. Net proceeds aftertransaction related costs were approximately $3.6 million. Sun Mackie alsopurchased 7,434,800 outstanding shares from certain selling shareholders forapproximately $3.7 million in cash. After completion of this transaction,Sun Mackie owned approximately 74% of our outstanding shares. We issued theseshares to Sun Mackie in reliance on the exemption from registration containedin Section 4(2) of the Securities Act of 1933, as amended.

 

**Item 3.****           Defaultsupon Senior Securities**

 

None.

 

**Item 4.****           Submissionof Matters to a Vote of Security Holders**

 

None.

 

**Item5.****           OtherInformation**

 

None.

# ** **

# **Item 6.**           Exhibits and Reports on Form 8-K

 

(a)          Exhibits

 

See Index to Exhibits on page 23.

 

(b)         Reports on Form 8-K

 

The Company filed two reports on Form 8-K during the first quarter of2003. The report dated January 16, 2003, announced the Company had agreed to anequity investment by Sun Mackie, LLC, an affiliate of Sun Capital Partners,Inc., a private investment firm. The report dated February 21, 2003,announced that the Company had closed the previously announced equityinvestment by Sun Mackie,

 

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LLC, and that an affiliateof Sun Capital Partners had agreed to provide $4 million of debt financing inconnection with the anticipated refinancing of the Company’s bank lines ofcredit. It also announced that in connection with the transaction, theCompany had named three new directors to fill the vacancies created by theresignations of Paul Gallo, Raymond B. Ferguson, Kenneth A. Williams andGregory C. Mackie. The new directors are Marc J. Leder, Rodger R. Krouseand Clarence E. Terry.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                      |   |   | **Mackie Designs Inc.**                                                                                                                        |   |
|---------------------------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                      |   |   | (Registrant)                                                                                                                                   |   |
|                      |   |   |                                                                                                                                           |   |
|                      |   |   |                                                                                                                                           |   |
| Dated:  May 15, 2003 |   | By:    | /s/ James T.  Engen                                                                                                                            |   |
|                      |   |   | James T.  Engen*President,  Chief Executive Officer and  Director*                                                                             |
|                      |   |   |                                                                                                                                           |   |
| Dated:  May 15, 2003 |   | By:    | /s/ William  A. Garrard                                                                                                                        |   |
|                      |   |   | William A.  Garrard*Chief  Financial Officer, Vice President  Finance, Secretary and Treasurer  (Principal Financial and Accounting  Officer)* |

 

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**CERTIFICATION****OF PRINCIPAL EXECUTIVE OFFICER**

 

I, James T.Engen, certify that:

 

(1)          Ihave reviewed this quarterly report on Form 10-Q of Mackie Designs Inc;

 

(2)          Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

(3)          Based on my knowledge,the financial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

(4)          The registrant’s othercertifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a.               designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b.              evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of a datewithin 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c.               presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

(5)          The registrant’s othercertifying officer and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a.               all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.              any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

(6)          The registrant’s othercertifying officer and I have indicated in this quarterly report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Dated: May  15, 2003 | By:    |  /s/  James T. Engen                     |   |
|---------------------------|--------|-----------------------------------------------|--------|
|                      |   |  James  T. Engen                         |
|                      |   | * President and Chief Executive Officer* |

 

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**CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER**

 

I, William A.Garrard, certify that:

 

(1)          I have reviewed thisquarterly report on Form 10-Q of Mackie Designs Inc;

 

(2)          Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

(3)          Based on my knowledge,the financial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

(4)          The registrant’s othercertifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a.               designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b.              evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c.               presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

(5)          The registrant’s othercertifying officer and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a.               all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.              any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

(6)          The registrant’s othercertifying officer and I have indicated in this quarterly report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Dated: May  15, 2003 | By:    | /s/ William A. Garrard                                                                                                     |   |
|---------------------------|--------|----------------------------------------------------------------------------------------------------------------------------|--------|
|                      |   | William A. Garrard                                                                                                         |
|                      |   | *Chief Financial  Officer, Vice President Finance,  Secretary and Treasurer (Principal Financial  and Accounting Officer)* |

 

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**INDEX TO EXHIBITS**
| **Exhibits** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1          |   | Stock  Purchase Agreement, dated as of January 16, 2003, by and among Sun Mackie,  LLC, Mackie Designs Inc., Gregory Mackie, on behalf of himself and as the  sole trustee of the Clair Mackie Irrevocable Trust, the Nathalia Mackie  Irrevocable Trust, the Kathleen Staples Irrevocable Trust and the Christine  Radke Irrevocable Trust, and C. Marcus Sorenson and Judith B. Sorenson, as  co-trustees of the Children of Matthew Adam Sorenson Irrevocable Trust, the  Children of Karen Marie Lopez Irrevocable Trust, the Children of Kimberly  Kaye Parker Irrevocable Trust, the Matthew Adam Sorenson Irrevocable Trust,  the Karen Marie Lopez Irrevocable Trust, the Kimberly Kaye Parker Irrevocable  Trust and the Sorenson Family Trust. Incorporated by reference to Exhibit 2.1  to Current Report on Form 8-K dated January 16, 2003.                  |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.2          |   | First Amendment  to Stock Purchase Agreement, dated as of February 7, 2003, by and among Sun  Mackie, LLC, Mackie Designs Inc., Gregory Mackie, on behalf of himself and as  the sole trustee of the Clair Mackie Irrevocable Trust, the Nathalia Mackie  Irrevocable Trust, the Kathleen Staples Irrevocable Trust and the Christine  Radke Irrevocable Trust, and C. Marcus Sorenson and Judith B. Sorenson, as  co-trustees of the Children of Matthew Adam Sorenson Irrevocable Trust, the  Children of Karen Marie Lopez Irrevocable Trust, the Children of Kimberly  Kaye Parker Irrevocable Trust, the Matthew Adam Sorenson Irrevocable Trust,  the Karen Marie Lopez Irrevocable Trust, the Kimberly Kaye Parker Irrevocable  Trust and the Sorenson Family Trust. Incorporated by reference to Exhibit 2.1  to Current Report on Form 8-K dated February 21, 2003.   |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.3          |   | Second  Amendment to Stock Purchase Agreement, dated as of February 13, 2003, by and  among Sun Mackie, LLC, Mackie Designs Inc., Gregory Mackie, on behalf of  himself and as the sole trustee of the Clair Mackie Irrevocable Trust, the  Nathalia Mackie Irrevocable Trust, the Kathleen Staples Irrevocable Trust and  the Christine Radke Irrevocable Trust, and C. Marcus Sorenson and Judith B.  Sorenson, as co-trustees of the Children of Matthew Adam Sorenson Irrevocable  Trust, the Children of Karen Marie Lopez Irrevocable Trust, the Children of  Kimberly Kaye Parker Irrevocable Trust, the Matthew Adam Sorenson Irrevocable  Trust, the Karen Marie Lopez Irrevocable Trust, the Kimberly Kaye Parker  Irrevocable Trust and the Sorenson Family Trust. Incorporated by reference to  Exhibit 2.2 to Current Report on Form 8-K dated February 21, 2003. |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.4          |   | Third  Amendment to Stock Purchase Agreement, dated as of February 21, 2003, by and  among Sun Mackie, LLC, Mackie Designs Inc., Gregory Mackie, on behalf of  himself and as the sole trustee of the Clair Mackie Irrevocable Trust, the  Nathalia Mackie Irrevocable Trust, the Kathleen Staples Irrevocable Trust and  the Christine Radke Irrevocable Trust, and C. Marcus Sorenson and Judith B.  Sorenson, as co-trustees of the Children of Matthew Adam Sorenson Irrevocable  Trust, the Children of Karen Marie Lopez Irrevocable Trust, the Children of  Kimberly Kaye Parker Irrevocable Trust, the Matthew Adam Sorenson Irrevocable  Trust, the Karen Marie Lopez Irrevocable Trust, the Kimberly Kaye Parker  Irrevocable Trust and the Sorenson Family Trust. Incorporated by reference to  Exhibit 2.3 to Current Report on Form 8-K dated February 21, 2003.  |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.5          |   | Management  Services Agreement, dated as of February 21, 2003 by and between Mackie  Designs Inc. and Sun Capital Partners Management, LLC. Incorporated by  reference to Exhibit 2.4 to Current Report on Form 8-K dated  February 21, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

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| 2.6    |   | Post-Closing  Funding Agreement, dated as of February 21, 2003, by and between Mackie  Designs Inc. and Sun Mackie, LLC. Incorporated by reference to Exhibit 2.5 to  Current Report on Form 8-K dated February 21, 2003.                                                                                                                                                                                                                                                                                                                                                                   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.1   |   | Loan and  Security Agreement, dated March 31, 2003, by and among Mackie Designs Inc.  and Mackie Designs UK Plc, as borrowers, Mackie Designs Manufacturing, Inc.,  SIA Software Company, Inc. and Mackie Investment Co., as guarantors, and  Congress Financial Corporation, as agent for and on behalf of the financial  institutions which are parties thereto as lenders, and the financial  institutions named from time to time as parties thereto as lenders.  Incorporated by reference to Exhibit 10.1 to Current Report  on Form 8-K dated March 31, 2003.              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.2   |   | Term  Promissory Note, dated March 31, 2003, made by Mackie Designs Inc. to the  order of Congress Financial Corporation in the principal amount of  $2,500,000. Incorporated by reference to Exhibit 10.2 to Current Report on  Form 8-K dated March 31, 2003.                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.3   |   | Pledge and  Security Agreement, dated March 31, 2003, made by Mackie Designs Inc. to and  in favor of Congress Financial Corporation, in its capacity as agent pursuant  to the Loan Agreement acting for and on behalf of the financial institutions  which are parties thereto as lenders. Incorporated by reference to Exhibit  10.3 to Current Report on Form 8-K dated March 31, 2003.                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.4   |   | Patent  Collateral Assignment and Security Agreement, dated March 31, 2003, by and  between Mackie Designs Inc. and Congress Financial Corporation, in its  capacity as agent pursuant to the Loan Agreement acting for and on behalf of  the financial institutions which are parties thereto as lenders. Incorporated  by reference to Exhibit 10.4 to Current Report on Form 8-K dated March 31,  2003.                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.5   |   | Copyright  Collateral Assignment and Security Agreement, dated March 31, 2003, by and  between Mackie Designs Inc. and Congress Financial Corporation, in its  capacity as agent pursuant to the Loan Agreement acting for and on behalf of  the financial institutions which are parties thereto as lenders. Incorporated  by reference to Exhibit 10.5 to Current Report on Form 8-K dated March 31,  2003.                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.6   |   | Trademark  Collateral Assignment and Security Agreement, dated March 31, 2003, by and  between Mackie Designs Inc. and Congress Financial Corporation, in its  capacity as agent pursuant to the Loan Agreement acting for and on behalf of  the financial institutions which are parties thereto as lenders. Incorporated  by reference to Exhibit 10.6 to Current Report on Form 8-K dated March 31,  2003.                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.7   |   | Guarantee,  dated March 31, 2003, made by Mackie Designs Manufacturing, Inc., SIA  Software Company, Inc. and Mackie Investment Co. for and on behalf of Mackie  Designs Inc. in favor of Congress Financial Corporation, in its capacity as  agent pursuant to the Loan Agreement acting for and on behalf of the  financial institutions which are parties thereto as lenders, and the  financial institutions which are parties to the Loan Agreement as lenders.  Incorporated by reference to Exhibit 10.7 to Current Report on Form 8-K dated  March 31, 2003.                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.8   |   | Guarantee,  dated March 31, 2003, made by Mackie Designs Inc., Mackie Designs  Manufacturing, Inc., SIA Software Company, Inc. and Mackie Investment Co. for  and on behalf of Mackie Designs UK Plc in favor of Congress Financial  Corporation, in its capacity as agent pursuant to the Loan Agreement acting  for and on behalf of the financial institutions which are parties thereto as  lenders, and the financial institutions which are parties to the Loan  Agreement as lenders. Incorporated by reference to Exhibit 10.8 to Current  Report on Form 8-K dated March 31, 2003. |

 

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| 10.9   |   | Second  Amended and Restated Subordination Credit Agreement, dated March 31, 2003,  between and among U.S. Bank National Association, as lender, Mackie Designs  Inc., as borrower, and Mackie Designs Manufacturing, Inc., SIA Software  Company, Inc., and Mackie Investment Co., as guarantors. Incorporated by  reference to Exhibit 10.9 to Current Report on Form 8-K dated March 31, 2003.                                                                                                            |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.10  |   | Intercreditor  and Subordination Agreement, dated March 31, 2003, by and among Congress  Financial Corporation, in its capacity as agent pursuant to the Loan  Agreement acting for and on behalf of the financial institutions which are  parties thereto as lenders, and the financial institutions from time to time  party to the Senior Loan Agreement as lenders, and U.S. Bank National  Association. Incorporated by reference to Exhibit 10.10 to Current Report on  Form 8-K dated March 31, 2003. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.11  |   | Stock  Purchase Warrant, dated March 31, 2003, issued by Mackie Designs Inc. to Sun  Mackie, LLC for the right to purchase 1,179,429 shares of common stock.  Incorporated by reference to Exhibit 10.11 to Current Report on Form 8-K  dated March 31, 2003.                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.12  |   | Subordinated  Promissory Note, dated March 31, 2003, made by Mackie Designs Inc. to the  order of Sun Mackie, LLC in the principal amount of $3,931,429. Incorporated  by reference to Exhibit 10.12 to Current Report on Form 8-K dated March 31,  2003.                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *99.1  |   | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *99.2  |   | Certification  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                         |

 

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*                                         Filedherewith

 

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