** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

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

 

**For the quarterly period ended June 30, 2002**

 

**or**

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

 

**For the transition periodfrom                              to                              **

 

**CommissionFile Number:  0-26524**

 

**MACKIEDESIGNS INC.**

(Exact name ofregistrant 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 reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.    Yes ý    No o

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate.

 

| **Common Stock, no par value** |   | **12,443,022**                                      |
|--------------------------------|--------|-----------------------------------------------------|
| Class                          |   | Number of Shares Outstanding (as of June  30, 2002) |

 

 

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**MACKIE DESIGNS INC.**

 

**FORM 10-Q**

**For the quarter ended June 30, 2002**

 

**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  Shareholders’ Equity and Comprehensive Income (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 Management |
|                                        |   |   |
| **PART II****.  OTHER INFORMATION**    |
|                                        |   |   |
|                                        | Item 1. | Legal  Proceedings |
|                                        |   |   |
|                                        | Item 2. | Changes in Securities |
|                                        |   |   |
|                                        | Item 3. | Defaults Upon Senior Securities |
|                                        |   |   |
|                                        | Item 4. | Submission of Matters to a Vote of Security  Holders |
|                                        |   |   |
|                                        | Item 5. | Other Information |
|                                        |   |   |
|                                        | Item 6. | Exhibits and Reports on Form 8-K |
|                                        |   |   |
| **SIGNATURES**                              |
|                                             |  |  |  |

 

2

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**PART I****.  FINANCIAL INFORMATION**

 

**Item 1****.  Financial Statements**

 

**MACKIE DESIGNS INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

*In thousands*
|                                                                                          |   | **June 30,  2002** |       | **December 31,  2001** |       |
|-----------------------------------------------------------------------------------------------|--------|--------------------|------------|------------------------|------------|
| **ASSETS**                                                                                    |   |               |       |                   |       |
| Current assets:                                                                               |   |               | ** ** |                   | ** ** |
| Cash and cash equivalents                                                                     |   | $                  | 3,193      |                   | $          | 2,095 |   |
| Accounts receivable, less allowance for  doubtful accounts of $1,652 and $1,349, respectively |   | 37,755             |       | 35,092                 |       |
| Income taxes receivable                                                                       |   | —             |       | 1,305                  |       |
| Inventories                                                                                   |   | 61,338             |       | 51,507                 |       |
| Prepaid expenses and other current assets                                                     |   | 5,915              |       | 2,157                  |       |
| Deferred income taxes                                                                         |   | 5,461              |       | 5,315                  |       |
| Total current assets                                                                          |   | 113,662            |       | 97,471                 |       |
|                                                                                          |   |               |       |                   |       |
| Property, plant and equipment, net                                                            |   | 24,905             |       | 25,671                 |       |
| Goodwill, net                                                                                 |   | 20,525             |       | 19,360                 |       |
| Intangible assets, net                                                                        |   | 6,676              |       | 6,854                  |       |
| Other assets, net                                                                             |   | 1,262              |       | 4,608                  |       |
|                                                                                          |   |               |       |                   |       |
| Total assets                                                                                  |   | $                  | 167,030    |                   | $          | 153,964 |   |
|                                                                                          |   |               |       |                   |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                 |   |               |       |                   |       |
| Current liabilities:                                                                          |   |               | ** ** |                   | ** ** |
| Short-term borrowings                                                                         |   | $                  | 41,638     |                   | $          | 35,395 |   |
| Accounts payable                                                                              |   | 28,726             |       | 22,859                 |       |
| Accrued liabilities                                                                           |   | 11,088             |       | 11,009                 |       |
| Income taxes payable                                                                          |   | 1,575              |       | 968                    |       |
| Current portion of long-term debt                                                             |   | 7,173              |       | 3,874                  |       |
| Total current liabilities                                                                     |   | 90,200             |       | 74,105                 |       |
|                                                                                          |   |               |       |                   |       |
| Long-term debt, excluding current portion                                                     |   | 15,377             |       | 19,401                 |       |
| Employee and other liabilities                                                                |   | 4,240              |       | 3,768                  |       |
| Deferred income taxes                                                                         |   | 3,519              |       | 3,880                  |       |
| Total liabilities                                                                             |   | 113,336            |       | 101,154                |       |
|                                                                                          |   |               |       |                   |       |
| Commitments and contingencies                                                                 |   | —             |       | —                 |       |
|                                                                                          |   |               |       |                   |       |
| Shareholders’ equity:                                                                    |   |               |       |                   |       |
| Common stock                                                                                  |   | 29,180             |       | 28,691                 |       |
| Retained earnings                                                                             |   | 24,958             |       | 26,556                 |       |
| Accumulated other comprehensive loss                                                          |   | (444               | )          | (2,437                 | )          |
| Total shareholders’ equity                                                               |   | 53,694             |       | 52,810                 |       |
|                                                                                          |   |               |       |                   |       |
| Total liabilities and shareholders’ equity                                               |   | $                  | 167,030    |                   | $          | 153,964 |   |

 

*See accompanying Notes to Condensed Consolidated Financial Statements.*

 

3

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**MACKIE DESIGNS INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 

*In thousands, except per share data*
|                                |   | **Three months ended   June 30,** |   | **Six months ended   June 30,** |   |
|-------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** |   |
|                                |   |                              |   |                            |   |   |   |   |   |
| Net sales                           |   | $                                 | 48,798 |                            | $      | 54,046 |   | $ | 97,917 |   | $ | 111,253 |   |
| Cost of goods sold                  |   | 33,541                            |   | 37,915                          |   | 66,733 |   | 75,351 |   |
| Gross profit                        |   | 15,257                            |   | 16,131                          |   | 31,184 |   | 35,902 |   |
|                                |   |                              |   |                            |   |   |   |   |   |
| Operating expenses:                 |   |                              |   |                            |   |   |   |   |   |
| Selling, general and administrative |   | 12,881                            |   | 13,309                          |   | 25,400 |   | 27,113 |   |
| Research and development            |   | 2,866                             |   | 3,300                           |   | 5,501 |   | 6,249 |   |
| Total operating expenses            |   | 15,747                            |   | 16,609                          |   | 30,901 |   | 33,362 |   |
| Operating income (loss)             |   | (490                              | )      | (478                            | )      | 283 |   | 2,540 |   |
|                                |   |                              |   |                            |   |   |   |   |   |
| Other income (expense):             |   |                              |   |                            |   |   |   |   |   |
| Interest income                     |   | 84                                |   | 100                             |   | 190 |   | 202 |   |
| Interest expense                    |   | (1,065                            | )      | (1,393                          | )      | (2,150 | ) | (2,850 | ) |
| Other                               |   | 424                               |   | (790                            | )      | 278 |   | (893 | ) |
|                                |   | (557                              | )      | (2,083                          | )      | (1,682 | ) | (3,541 | ) |
|                                |   |                              |   |                            |   |   |   |   |   |
| Loss before income taxes            |   | (1,047                            | )      | (2,561                          | )      | (1,399 | ) | (1,001 | ) |
|                                |   |                              |   |                            |   |   |   |   |   |
| Income tax expense (benefit)        |   | 305                               |   | (764                            | )      | 199 |   | (166 | ) |
|                                |   |                              |   |                            |   |   |   |   |   |
| Net loss                            |   | $                                 | (1,352 | )                               | $      | (1,797 | ) | $ | (1,598 | ) | $ | (835 | ) |
|                                |   |                              |   |                            |   |   |   |   |   |
| Net loss per share                  |   | $                                 | (0.11  | )                               | $      | (0.15 | ) | $ | (0.13 | ) | $ | (0.07 | ) |

 

*See accompanying Notes to CondensedConsolidated Financial Statements.*

 

4

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**MACKIE DESIGNS INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ***In thousands***                                                                         |   | **Six months ended  June 30,** |       |
|--------------------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                                       |   | **2002**                       |       | **2001** |   |
| **Operating activities**                                                                   |   |                           | ** ** |   | ** ** |
| Net loss                                                                                   |   | $                              | (1,598     | ) | $ | (835 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |   |                           |       |   |   |
| Depreciation and amortization                                                              |   | 3,727                          |       | 3,967 |   |
| Deferred stock compensation                                                                |   | 489                            |       | 453 |   |
| Deferred income taxes                                                                      |   | (84                            | )          | (128 | ) |
| Changes in operating assets and  liabilities:                                              |   |                           |       |   |   |
| Accounts receivable                                                                        |   | (1,019                         | )          | (3,788 | ) |
| Inventories                                                                                |   | (7,041                         | )          | 5,750 |   |
| Prepaid expenses and other current assets                                                  |   | (82                            | )          | (137 | ) |
| Other assets                                                                               |   | (258                           | )          | (454 | ) |
| Accounts payable and accrued expenses                                                      |   | 3,959                          |       | (1,747 | ) |
| Income taxes receivable and payable                                                        |   | 1,752                          |       | (1,287 | ) |
| Other long term liabilities                                                                |   | 40                             |       | (241 | ) |
| Cash provided by (used in) operating  activities                                           |   | (115                           | )          | 1,553 |   |
|                                                                                       |   |                           |       |   |   |
| **Investing activities**                                                                   |   |                           | ** ** |   | ** ** |
| Acquisition of business, net of cash  acquired                                             |   | —                         |       | (1,417 | ) |
| Proceeds from sales of available-for-sale  securities                                      |   | —                         |       | 515 |   |
| Purchases of property, plant and equipment                                                 |   | (1,602                         | )          | (5,333 | ) |
| Cash used in investing activities                                                          |   | (1,602                         | )          | (6,235 | ) |
|                                                                                       |   |                           |       |   |   |
| **Financing activities**                                                                   |   |                           |       |   |   |
| Proceeds from long-term debt                                                               |   | —                         |       | 2,035 |   |
| Payments on long-term debt                                                                 |   | (1,563                         | )          | (1,332 | ) |
| Net proceeds of short-term borrowings                                                      |   | 4,104                          |       | 1,997 |   |
| Cash provided by financing activities                                                      |   | 2,541                          |       | 2,700 |   |
|                                                                                       |   |                           |       |   |   |
| Effect of exchange rate changes on cash                                                    |   | 274                            |       | 931 |   |
|                                                                                       |   |                           |       |   |   |
| Increase (decrease) in cash and cash  equivalents                                          |   | 1,098                          |       | (1,051 | ) |
|                                                                                       |   |                           |       |   |   |
| Cash and cash equivalents at beginning of  period                                          |   | 2,095                          |       | 3,838 |   |
|                                                                                       |   |                           |       |   |   |
| Cash and cash equivalents at end of period                                                 |   | $                              | 3,193      |   | 2,787 |   |
|                                                                                            |        |                                |            |  |  |  |  |

 

*See accompanying Notes to Condensed Consolidated Financial Statements.*

 

5

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**MACKIE DESIGNS INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND**

**COMPREHENSIVE INCOME (LOSS)**

**Six months ended June 30, 2002**

**(Unaudited)**

*In thousands*
|                                                 |   | **Common Stock** |   | **Retained Earnings** |   | **Accumulated   Other   Comprehensive Income (Loss)** |   | **Total** |   |
|------------------------------------------------------|--------|------------------|--------|-----------------------|--------|-------------------------------------------------------|--------|-----------|--------|
| **Shares**                                           |   | **Amount**       |   |
|                                                 |   |             |   |                  |   |                                                  |   |      |   |   |   |
| Balance at December 31, 2001                         |   | 12,424           |   | $                     | 28,691 |                                                  | $      | 26,556    |   | $ | (2,437 | ) | $ | 52,810 |   |
| Exercise of stock options                            |   | 19               |   | —                |   | —                                                |   | —    |   | — |   |
| Amortization of deferred stock compensation          |   | —           |   | 489                   |   | —                                                |   | —    |   | 489 |   |
| Net loss                                             |   | —           |   | —                |   | (1,598                                                | )      | —    |   | — |   |
| Foreign currency translation adjustment,  net of tax |   | —           |   | —                |   | —                                                |   | 1,993     |   | — |   |
| Comprehensive loss                                   |   | —           |   | —                |   | —                                                |   | —    |   | 395 |   |
|                                                 |   |             |   |                  |   |                                                  |   |      |   |   |   |
| Balance at June 30, 2002                             |   | 12,443           |   | $                     | 29,180 |                                                  | $      | 24,958    |   | $ | (444 | ) | $ | 53,694 |   |

 

*See accompanying Notes to Condensed Consolidated Financial Statements.*

 

6

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**MACKIE DESIGNS INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**June 30, 2002**

**(Unaudited)**

 

**1.  Basis of Presentation**

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared by Mackie Designs Inc. in accordance with accounting principlesgenerally accepted in the United States of America for interim financialstatements and include the accounts of Mackie Designs Inc. and itssubsidiaries. They do not include all of the information and disclosuresrequired by generally accepted accounting principles for complete financialstatements and should be read in conjunction with the financial statementsincluded in our Annual Report on Form 10-K for the year ended December 31,2001. In our opinion, all normal recurring adjustments necessary for the fairpresentation of the results of the interim periods are reflected herein.Operating results for the six-month period ended June 30, 2002, are notnecessarily indicative of future financial results.

 

**2.  Net Loss Per Share**

 

The followingtable sets forth the computation of net loss per share for the three-month andsix-month periods ended June 30, 2002 and 2001. Stock options representing 4,852,000 shares in the three months and sixmonths ended June 30, 2002 and 4,541,000 shares in the three months and sixmonths ended June 30, 2001, were excluded from the calculation of diluted pershare amounts because they are antidilutive.

 
|                                                               |   | **Three months ended June 30,**           |     | **Six months ended June 30,** |   |
|--------------------------------------------------------------------|--------|-------------------------------------------|----------|-------------------------------|--------|
|                                                               |   | **2002**                                  |     | **2001**                      |   | **2002** |   | **2001** |   |
|                                                               |   | **(in thousands, except per share data)** | * * |
| Numerator:                                                         |   |                                      |     |                          |   |   |   |   |   |
| Net loss                                                           |   | $                                         | (1,352   | )                             | $      | (1,797 | ) | $ | (1,598 | ) | $ | (835 | ) |
|                                                               |   |                                      |     |                          |   |   |   |   |   |
| Denominator:                                                       |   |                                      |     |                          |   |   |   |   |   |
| Denominator for net loss per share –  weighted average shares |   | 12,441                                    |     | 12,373                        |   | 12,435 |   | 12,373 |   |
|                                                               |   |                                      |     |                          |   |   |   |   |   |
| Net loss per share                                                 |   | $                                         | (0.11    | )                             | $      | (0.15 | ) | $ | (0.13 | ) | $ | (0.07 | ) |

 

7

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**3.  Comprehensive Income (Loss)**

 

Comprehensiveincome (loss) for the three-month and six-month periods ended June 30, 2002 and2001, is detailed below.

 

| ** **

                        |   | **Three months ended June 30,** |   | **Six months ended June 30,** |   |
|------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                     |   | **2002**                        |   | **2001**                      |   | **2002** |   | **2001** |   |
|                                     |   | **(in thousands)**              |   |
|                                     |   |                            |   |                          |   |   |   |   |   |
| Net loss                                 |   | $                               | (1,352 | )                             | $      | (1,797 | ) | $ | (1,598 | ) | $ | (835 | ) |
| Other comprehensive income (loss):       |   |                            |   |                          |   |   |   |   |   |
| Foreign currency translation adjustments |   | 2,213                           |   | (288                          | )      | 1,993 |   | (1,466 | ) |
|                                     |   |                            |   |                          |   |   |   |   |   |
| Comprehensive income (loss)              |   | $                               | 861    |                          | $      | (2,085 | ) | $ | 395 |   | $ | (2,301 | ) |

 

**4. Inventories**

 

Inventoriesconsisted of the following:

 

|            |   | **June 30,  2002** |   | **December 31,  2001** |   |
|-----------------|--------|--------------------|--------|------------------------|--------|
|            |   | **(in thousands)** |   |
| Raw materials   |   | $                  | 24,147 |                   | $      | 17,506 |   |
| Work in process |   | 4,768              |   | 4,073                  |   |
| Finished goods  |   | 32,423             |   | 29,928                 |   |
|            |   | $                  | 61,338 |                   | $      | 51,507 |   |

** **

**5.  Goodwill and Intangible Assets**

 

Goodwill totals $20.5million at June 30, 2002 of which approximately $6.2 million results from ouracquisition of Mackie Designs (Italy) S.p.A. (Mackie Italy) in 1998, $3.4million from the 2001 acquisition of Mackie Designs Engineering Services BVBAin Belgium (Mackie Belgium) and $10.9 from our North American acquisitions,primarily Eastern Acoustic Works (EAW), in 2000.

 

Intangibleassets consist of the following:

 

|                           |   | **June 30,  2002** |     | **December 31,  2001** |   |
|--------------------------------|--------|--------------------|----------|------------------------|--------|
|                           |   | **(in thousands)** | * * |
| Developed  technology          |   | $                  | 6,315    |                   | $      | 6,200 |   |
| Trademark                      |   | 1,380              |     | 1,380                  |   |
|                           |   | 7,695              |     | 7,580                  |   |
| Less  accumulated amortization |   | 1,019              |     | 726                    |   |
|                           |   | $                  | 6,676    |                   | $      | 6,854 |   |

 

In June 2001,the Financial Accounting Standards Board issued FAS No. 141, “BusinessCombinations” and FAS No. 142, “Goodwill and Other Intangible Assets,” whichsupercede Accounting Principles Board Opinion No. 17, “Intangible Assets.” FASNo.141 requires that all business combinations be accounted for under thepurchase method. The statement also specifies criteria for

 

8

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recognizing and reportingintangible assets apart from goodwill; however, assembled workforce must berecognized and reported in goodwill. FAS 142 requires the use of anon-amortization approach to account for purchased goodwill and intangibleshaving an indefinite life. Under a non-amortization approach, goodwill andcertain intangible assets are no longer amortized into results of operations,but instead are reviewed for impairment and written down and charged to resultsof operations only in the periods in which the recorded value of goodwill andcertain intangibles is more than fair value.

 

We adopted FAS142 on January 1, 2002. Accordingly, we reclassified an assembled workforceintangible asset with an unamortized balance of $1.1 million and a relateddeferred tax liability of $383,000 to goodwill on January 1, 2002. We have alsoreviewed the useful lives of our identifiable intangibles assets and determinedthat the original estimated lives remain appropriate. FAS 142 prescribes atwo-phase process for impairment testing of goodwill and the timing oftransitional impairment steps. The first phase identifies indications ofimpairment; while the second phase (if necessary), measures the impairment. Wehave completed step one of the transitional impairment test, and believe that atransitional impairment loss will be required to be recognized as thecumulative effect of a change in accounting principle as of January 1, 2002.The second phase is required to be completed by December 31, 2002 and willmeasure the impairment. Effective January 1, 2002, we ceased amortization ofgoodwill. Prior to 2002, we amortized goodwill associated with our acquisitionsover 10 - 20 years using the straight-line method. Identifiable intangibles arecurrently amortized, using the straight-line method, over 5 years for MackieBelgium and 20 years for other acquisitions.

 

Expectedfuture amortization expense related to identifiable intangible assets for thenext five fiscal years is as follows:

 

|                          |   | **(in thousands)** |   |
|-------------------------------|--------|--------------------|--------|
| July 1 to December 31, 2002   |   | $                  | 266    |   |
| Year ending December 31, 2003 |   | 532                |   |
| Year ending December 31, 2004 |   | 532                |   |
| Year ending December 31, 2005 |   | 532                |   |
| Year ending December 31, 2006 |   | 381                |   |
|                               |        |                    |        |  |

 

Summarizedbelow are the effects on net loss and net loss per share, if we had followedthe amortization provisions of FAS 142 for the three-month and six-monthperiods ended June 30, 2001.

 

|                                                              |   | **Three months   ended   June 30, 2001**  |   | **Six months   ended   June 30, 2001** |   |
|-------------------------------------------------------------------|--------|-------------------------------------------|--------|----------------------------------------|--------|
|                                                              |   | **(in thousands, except per share data)** |   |
| Net loss:                                                         |   |                                      |   |                                   |   |
| As reported                                                       |   | $                                         | (1,797 | )                                      | $      | (835 | ) |
| Add: goodwill and assembled workforce  amortization, net of taxes |   | 378                                       |   | 669                                    |   |
| Adjusted net loss                                                 |   | $                                         | (1,419 | )                                      | $      | (166 | ) |
|                                                              |   |                                      |   |                                   |   |
| Net loss per  share:                                              |   |                                      |   |                                   |   |
| As reported                                                       |   | $                                         | (0.15  | )                                      | $      | (0.07 | ) |
| Add: goodwill and assembled workforce  amortization, net of taxes |   | 0.04                                      |   | 0.06                                   |   |
| Adjusted net loss per share                                       |   | $                                         | (0.11  | )                                      | $      | (0.01 | ) |

 

9

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Net income (loss) and income (loss) per share for the years endedDecember 31, 2001, 2000 and 1999 adjusted to exclude goodwill amortizationexpense are as follows:

 

|                                                              |   | **2001**                                  |   | **2000** |   | **1999** |   |
|-------------------------------------------------------------------|--------|-------------------------------------------|--------|----------|--------|----------|--------|
|                                                              |   | **(in thousands, except per share data)** |   |
| Net income  (loss):                                               |   |                                      |   |     |   |     |   |
| As reported                                                       |   | $                                         | (5,329 | )        | $      | 6,226    |   | $ | 3,257 |   |
| Add: goodwill and assembled workforce  amortization, net of taxes |   | 1,431                                     |   | 966      |   | 442      |   |
| Adjusted net income (loss)                                        |   | $                                         | (3,898 | )        | $      | 7,192    |   | $ | 3,699 |   |
|                                                              |   |                                      |   |     |   |     |   |
| Basic net income (loss) per share:                                |   |                                      |   |     |   |     |   |
| As reported                                                       |   | $                                         | (0.43  | )        | $      | 0.51     |   | $ | 0.27 |   |
| Add: goodwill and assembled workforce  amortization, net of taxes |   | 0.12                                      |   | 0.08     |   | 0.03     |   |
| Adjusted basic net income (loss) per share                        |   | $                                         | (0.31  | )        | $      | 0.59     |   | $ | 0.30 |   |
|                                                              |   |                                      |   |     |   |     |   |
| Diluted net income (loss) per share:                              |   |                                      |   |     |   |     |   |
| As reported                                                       |   | $                                         | (0.43  | )        | $      | 0.49     |   | $ | 0.27 |   |
| Add: goodwill and assembled workforce  amortization, net of taxes |   | 0.12                                      |   | 0.07     |   | 0.03     |   |
| Adjusted diluted net income (loss) per  share                     |   | $                                         | (0.31  | )        | $      | 0.56     |   | $ | 0.30 |   |

 

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**6.  Debt**

In April 2002,we entered into an agreement with a U.S. bank to revise the terms of both ourbank line of credit and term loan in the U.S. Under the terms of thisagreement, we must maintain certain financial ratios and tangible net worth.The agreement also provides, among other matters, restrictions on additionalfinancing, dividends, mergers, acquisitions, and an annual capital expenditurelimit. The line of credit and term loans are secured by all U.S. based assetsincluding, but not limited to, accounts receivable, inventory, fixed assets,intangibles and patents.

 

Our bank lineof credit provides up to $25.0 million of short-term borrowing subject tocertain limitations. There are two term loans. The original principal amount ofTerm Loan A was $6.0 million. This is payable at $100,000 per month beginningJune 2002 plus interest at the bank’s prime rate or at LIBOR plus a specifiedmargin. The principal amount of Term Loan B is $8.6 million at June 30, 2002.Interest on this loan is payable monthly and is calculated at the bank’s primerate or at LIBOR plus a specified margin. A principal repayment due in 2003 iscalculated based upon our 2002 earnings before interest, taxes, depreciationand amortization, less cash taxes paid, certain capital expenditures and debtrepayments. This amount is due in two equal payments in February and July 2003.The renewal date for the term loans is September 2003. Due to the uncertaintyof the amount due in 2003, if any, for Term Loan B, the entire loan isconsidered long-term debt at June 30, 2002.

 

**7. Segments and Geographic Information**

 

Businesssegments were previously identified using primarily geographic factors. Therehave been continuing changes within the structure of our internal reportingthat have caused the composition of these segments to change. As a result, wenow have one segment. Major operations outside the U.S. include manufacturingfacilities in Italy, and sales and support offices in Germany, Italy, theUnited Kingdom and France. The factory in Italy as well as third-partyfacilities in China produce certain products that are comparable to thoseproduced in U.S. factories. Other functional operations are consolidated acrossthe organization.

 

**8.  Contingencies**

 

In April 2000,we acquired 100% of the capital stock of EAW. We have subrogated claimsasserted against us from insurance companies who paid claims made by EAW’slandlord and other tenants in the building who were affected by a fire startedby a loaned employee in a portion of the building occupied by EAW in 1996. Therange of potential loss ranges from $2.1 million to $2.9 million. We expect theMassachusetts Superior Court to set a date in the latter half of 2002 for ajury trial. We believe that these losses are not attributable to us underMassachusetts’s law and are vigorously defending the litigation. The claims ofthe other tenants have been covered by EAW’s insurance carrier. The ultimateresolution of this matter is not known at this time.  No provision has been made in our consolidated financialstatements 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’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*The following discussion and analysis shouldbe read in conjunction with our financial statements included in our AnnualReport on Form 10-K for the year ended December 31, 2001. This discussioncontains certain “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995 that involve risks and uncertaintieswhich may cause actual results to differ materially from the forward-lookingstatements. Forward-looking statements include, without limitation, anystatement that may predict, forecast, indicate, or imply future results,performance, or achievements, and may contain the words “believe,”“anticipate,” “expect,” “estimate,” “project,” “will be,” “will continue,”“will likely result,” or words or phrases of similar meaning.*

 

*Our actual results could differ materiallyfrom those discussed here. We undertake no obligation to publicly release anyrevisions to these forward-looking statements that may be required to reflectevents or circumstances after the date hereof or to reflect the occurrence ofunanticipated events.*

 

**General**

 

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

 

In April 2001,we acquired Mackie Designs Engineering Services BVBA in Belgium (MackieBelgium), formerly known as Sydec, for approximately $4.4 million. MackieBelgium is a developer of products and services in the area of embeddedelectronics and software, networking, digital signal processing and Windows TMdriver applications. The transaction was accounted for as a purchase businesscombination. Operations after April 2001 include the results of operations forMackie Belgium.

 

**Critical Accounting Policies and Estimates**

 

We believe our policy on valuinginventory, including market value adjustments, is our most critical accountingpolicy. Inventories are stated at the lower of standard cost, whichapproximates actual cost on a first-in, first-out method, or market. Includedin our inventories balance are demonstration products used by our salesrepresentatives and marketing department including finished goods that havebeen shipped to customers for evaluation. Market value adjustments are recordedfor obsolete material, slow-moving product, service and demonstration products.We make judgments regarding the carrying value of our inventory based uponcurrent market conditions. These conditions may change depending uponcompetitive product introductions, customer demand and other factors. If themarket for our previously released products changes, we may be required towrite down the cost of our inventory.

 

We assess theimpairment of long-lived assets and enterprise goodwill whenever events orchanges in circumstances indicate that the carrying value may not berecoverable. Significant judgment is used in assessing factors which mighttrigger impairment including significant underperformance relative to expected operatingresults, significant changes in our use of the assets or the strategy for ouroverall business, and significant negative industry or economic trends. Inaddition, we assess the useful lives of our long-lived assets and intangibleassets which also requires judgment to determine what factors are present thatwould indicate a change in those useful lives.

 

**Resultsof Operations**

 

Net salesdecreased during the second quarter of 2002 to $48.8 million, a decrease of 10%from $54.0 million in the comparable quarter of 2001. Net sales for the sixmonths ended June 30, 2002 were $97.9 million, a decrease of 12% from $111.3million during the six months ended June 30, 2001. The decrease in both periodsis primarily due to lower sales volumes in both the U.S. and Europe resulting

 

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from the continuing generaleconomic slowdown. A price increase implemented for certain products during thefirst quarter slightly offset the decrease.

 

Gross marginwas $15.3 million or 31% of net sales for the quarter ended June 30, 2002compared to $16.1 million or 30% of net sales for the same period in 2001. Forthe six months ended June 30, 2002, gross profit was $31.2 million or 32% ofnet sales compared to $35.9 million or 32% of net sales for the same period in2001. The increase in gross margin percentage for the quarter relates primarilyto greater sales of certain products that are manufactured in a third-party,offshore facility. In 2001, we began to transition the manufacture of certainof our product lines to offshore facilities and are continuing this transfer in2002. Gross margin for the products manufactured offshore are greater than thegross margin for the same products previously built in the U.S. in 2001.

 

Selling,general and administrative expenses were $12.9 million or 26% of net sales forthe second quarter of 2002 compared to $13.3 million or 25% for the secondquarter of 2001. During the six months ended June 30, 2002, selling general andadministrative expenses were $25.4 million or 26% of net sales compared to$27.1 million or 24% of net sales for the same period of 2001. For bothperiods, selling, general and administrative expenses decreased in absolutedollars, but increased as a percentage of net sales. The decrease in absolutedollars reflects in part the cost cutting measures that were taken in the lasthalf of 2001 as well as lower costs, such as commissions that vary with sales.More significantly, the three months and six months ended June 30, 2001 includedamortization of goodwill that totaled $378,000 and $669,000, respectively. FAS142, which requires that assets with indefinite lives are no longer amortizedbut are tested at least annually for impairment, was adopted January 1, 2002.

 

Research anddevelopment expenses were $2.9 million for the second quarter of 2002 comparedto $3.3 million for the second quarter of 2001. During the six months endedJune 30, 2002, we incurred research and development expenses of $5.5 millioncompared to $6.2 million for the same period in 2001. As a percentage of sales,research and development expense has remained constant at 6%. The decrease inabsolute dollars resulted from certain headcount reductions in the U.S. in thelast half of 2001 offset in part by the operations of Mackie Belgium which wasacquired in April 2001. Research and development expenses from Mackie Belgiumwere $594,000 and $1,035,000 for the three months and six months ended June 30,2002.

 

Net otherexpense was $557,000 for the second quarter of 2002 as compared to $2.1 millionin the second quarter of 2001. For the six months ended June 30, 2002 otherexpense was $1.7 million compared to $3.5 million for the comparable period of2001. Included in this amount is interest expense which decreased to $1.1million in the second quarter of 2002 from $1.4 million in the correspondingperiod of 2001. Interest expense for the six months ended June 30, 2002decreased to $2.2 million from $2.9 million in the comparable period of2001.The decrease relates to both lower debt balances and lower interest ratesin 2002 versus 2001. Additionally, we have other income in the three-month andsix-month periods ended June 30, 2002 relating to foreign exchange transactiongains and other expense in the three-month and six-month periods ended June 30,2001 also relating to foreign exchange transactions.  The 2002 gains are due to the increase in the value of the Euroas compared to the U.S. dollar in the quarter ended June 30, 2002.

 

Income taxexpense for the second quarter of 2002 was $305,000 compared to a benefit of$764,000 for the same period of 2001. Income tax expense for the six monthsended June 30, 2002 was $199,000 compared to a benefit of $166,000 for the sixmonths ended June 30, 2001. We are recording tax expense in 2002 on lossesbefore income taxes for two reasons. First, we have incurred losses in certaincountries where we are not able to record a tax benefit due to uncertaintyabout our ability to offset these losses with future earnings. Additionally,our operations in Italy are subject to two types of taxes. The first isassessed on earnings in Italy before provision for taxes at a statutory rate of36%. The second is based on profits without allowances for personnel costs,interest expense and other items, and is assessed at a statutory rate of 4.25%.We are currently engaged in studies to determine tax savings opportunities withrespect to foreign sales and may see a benefit from this in the third quarterof 2002. Irrespective of any savings, we expect that we will continue to showhigh income tax expenses throughout the remainder of 2002.

 

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**Liquidityand Capital Resources**

 

Cash used inoperating activities was $115,000 for the six months ended June 30, 2002. Inthe comparable period of 2001, cash provided by operations was $1.6 million.Net cash used in operating activities in 2002 was primarily attributable toincreases in inventories and accounts receivable, offset by increases inaccounts payable and accrued expenses and a decrease in income tax receivable.The primary reason for the growth in inventories was lower than anticipatedsales. In 2001, cash was provided by a decrease in inventories, offset by anincrease in accounts receivable and decreases in accounts payable and accruedexpenses and income taxes payable.

 

Cash used ininvesting activities was $1.6 million for the first six months of 2002 and $6.2million for the first six months of 2001. The cash flows used in investingactivities in 2002 consisted entirely of purchases of property, plant andequipment, while purchases of property, plant and equipment for 2001 were $5.3million. $1.4 million was used in 2001 for the acquisition of Mackie Belgium.

 

Cash providedby financing activities during the six months ended June 30, 2002 was $2.5million which reflects repayments of long-term debt and net proceeds fromshort-term borrowings. In the comparable period of 2001, cash flows provided byfinancing activities included both net proceeds from short-term borrowings aswell as proceeds from long-term debt.

 

At June 30,2002, we had a bank line of credit in the U.S. that provided up to $25.0million of short-term borrowing subject to certain limitations which reduceactual availability to $24.3 million. This line of credit also provides anapproximately $1.7 million guarantee on our debt in Italy. At June 30, 2002,there was $20.6 million outstanding on the line of credit and approximately$2.0 million available. Additionally, we had agreements with several banks inItaly that provide short-term credit facilities totaling approximately $27.9million, subject to certain limitations. These limitations reduced the actualavailability to approximately $22.0 million. At June 30, 2002, there was $20.8 millionoutstanding on these facilities and approximately $1.2 million available.

 

In April 2002,we entered into an agreement with our U.S. bank to revise the terms of both ourbank line of credit and term loan in the U.S. Under the terms of this agreement,we must maintain certain financial ratios and tangible net worth. The agreementalso provides, among other matters, restrictions on additional financing,dividends, mergers, acquisitions, and an annual capital expenditure limit. Theline of credit and the term loans are secured by all U.S. based assetsincluding, but not limited to, accounts receivable, inventory, fixed assets,intangibles and patents. The renewal date for the line of credit is April 2003and the renewal date for the term loans is September 2003.

 

There are twoterm loans in the U.S. The original principal amount of Term Loan A was $6.0million. This is payable at $100,000 per month beginning June 2002 plusinterest at the bank’s prime rate or at LIBOR plus a specified margin. Theprincipal amount of Term Loan B is $8.6 million at June 30, 2002. Interest onthis loan is payable monthly and is calculated at the bank’s prime rate or atLIBOR plus a specified margin. A principal repayment in 2003 is calculatedbased upon our 2002 earnings before interest, taxes, depreciation andamortization, less cash taxes paid, certain capital expenditures and debtrepayments. This amount is due in two equal payments in February and July 2003.Due to the uncertainty of the amount due in 2003, if any, for Term Loan B, theentire loan is considered long-term debt at June 30, 2002. There are other bankterm loans and notes in Italy totaling $7.9 million at June 30, 2002. Specificassets of Mackie Italy secure certain of these loans. Of this Italian debt,approximately $5.9 million is due within the next twelve months, the majorityof which is secured by zero coupon bonds which have a maturity date consistentwith the debt payment due date.

 

We have takenvarious actions to ensure our ongoing ability to cover scheduled debt servicingpayments, including headcount reductions and other cost containment measures.During the third and fourth quarters of 2001, these measures included layoffs,salary reductions, office closures and reduction of capital expenditures. We willcontinue to focus on increased management controls over expenditures andattempt to reduce costs of sales by improving our methods of product sourcing.Finally, we are pursuing a variety of alternative financing sources, includingpossible equity investment and/or divestiture of certain operating assets.

 

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We mustachieve a certain level of profitability to meet our financial covenants andthere is no assurance that we will do so. The term loans and line of credit maybe callable under covenant provisions if we do not meet these covenants. Thismay have a significant adverse effect on liquidity. While there is noassurance, we believe that our existing cash and credit facilities, along withcash generated from operations will be sufficient to provide working capital tofund operations over the next twelve months.

 

**NewAccounting Pronouncements**

 

In July 2002,the Financial Accounting Standards Board issued FAS No. 146, “Accounting forCosts Associated with Exit or Disposal Activities,” which addresses financialaccounting and reporting for costs associated with exit or disposal activities.FAS No. 146 nullifies EITF Issue No. 94-3, “Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring).” The principal difference betweenFAS No. 146 and Issue No. 94-3 relates to the recognition of a liability for acost associated with an exit or disposal activity. FAS No. 146 requires that aliability be recognized for those costs only when the liability is incurred,that is, when it meets the definition of a liability in the FASB’s conceptualframework. In contrast, under Issue No. 94-3, a company recognized a liabilityfor an exit cost when it committed to an exit plan. FAS No. 146 alsoestablishes fair value as the objective for initial measurement of liabilitiesrelated to exit or disposal activities. The Statement is effective for exit ordisposal activities that are initiated after December 31, 2002 although earlierapplication is encouraged.

 

In April 2002,the FASB issued FAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64,Amendment of FASB Statement 13, and Technical Corrections.” FAS 145 rescindsand amends certain previous standards related primarily to debt and leases. Themost substantive amendment requires sales-leaseback accounting for certainlease modifications that have economic effects that are similar tosales-leaseback transactions. The provisions of FAS No. 145 related to therescission of FAS No. 4 are effective for financial statements issued forfiscal years beginning after May 15, 2002 and will become effective for Mackiecommencing in 2003. The provisions of FAS No. 145 related to the rescission ofFAS No. 13 shall be effective for transactions occurring after May 15, 2002.All other provisions of FAS No. 145 are effective for financial statementsissued on or after May 15, 2002. This accounting pronouncement is not expectedto have a significant impact on our financial position or results ofoperations.

 

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

 

In June 2001,the Financial Accounting Standards Board issued FAS No. 141, “BusinessCombinations” and FAS No. 142, “Goodwill and Other Intangible Assets,” whichsupercede Accounting Principles Board Opinion No. 17, “Intangible Assets.” FASNo.141 requires that all business combinations be accounted for under thepurchase method. The statement further requires separate recognition ofintangible assets that meet one of two criteria, as defined in the statement.This statement applies to all business combinations initiated after June 30,2001. Under FAS 142, goodwill and intangible assets with indefinite lives areno longer amortized but are tested at least annually for impairment. Separableintangible assets with defined lives will continue to be amortized over theiruseful lives. The provisions of FAS No. 142 apply to goodwill and intangibleassets acquired before and after the statement’s effective date. We adopted thenew standard as of January 1, 2002.  FAS142 prescribes a two-phase process for impairment testing of goodwill and thetiming of transitional impairment steps. The first phase identifies indicationsof impairment; while the second phase (if necessary), required to be completedby December 31, 2002, measures the impairment. We have completed step one ofthe transitional impairment test, and believe that a transitional impairmentloss will be required to be recognized as the cumulative effect of a change inaccounting principle as of January 1, 2002.

 

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**Item 3.****  Quantitative and QualitativeDisclosures About Market Risk**

 

We are exposedto various market risks, including changes in foreign currency rates andinterest rates. We may enter into various derivative transactions to managecertain of these exposures; however we did not have any material derivativefinancial instruments as of June 30, 2002.

 

At June 30,2002, we had variable rate debt of approximately $62.5 million provided by U.S.and Italian banks. As such, changes in U.S. and European interest rates affectinterest paid on debt and we are exposed to interest rate risk. In the sixmonths ended June 30, 2002, an increase in the average interest rate of 10%would have resulted in an approximately $191,000 increase in net loss beforeincome taxes. The fair value of the variable rate debt approximates thecarrying amount on the consolidated balance sheet at June 30, 2002.

 

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. Income and expense items are translated atthe average exchange rates prevailing during the period. Additionally, aportion of sales from our U.S. entities is denominated in other than the U.S.Dollar. A 10% decrease in the value of the U.S. Dollar, throughout the sixmonths ended June 30, 2002, would have resulted in an approximately $567,000increase in net loss before income taxes.

 

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**PART II.****  OTHER INFORMATION**

 

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

 

We havesubrogated claims asserted against us from insurance companies who paid claimsmade by EAW’s landlord and other tenants in the building who were affected by afire started by a loaned employee in a portion of the building occupied by EAWin 1996. The range of potential loss ranges from $2.1 million to $2.9 million.We expect the Massachusetts Superior Court to set a date in the latter half of2002 for a jury trial. We believe that these losses are not attributable to usunder Massachusetts’s law and are vigorously defending the litigation. Theclaims of the other tenants have been covered by EAW’s insurance carrier. Theultimate resolution of this matter is not known at this time.  No provision has been made in ourconsolidated 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.

 

**Item 2.****  Changes in Securities**

 

None.

 

**Item 3.****  Defaults upon Senior Securities**

 

None.

 

**Item4.****  Submissionof Matters to a Vote of Security Holder**

 

At its annual meeting onMay 15, 2002, duly called and with proxies solicited, 12,297,913 shareswere represented in person or by proxy constituting 98.87 percent of theoutstanding shares. There were 12,439,022 shares of the Company’s common stockoutstanding and entitled to vote at the annual meeting.

 

Two directors were reelectedto the Board of Directors, each to hold office for three-year terms. Thenominees received the following votes (there were no broker non-votes):

 

| **Nominee**    |   | **Number of  Votes For** |   | **Number of  Votes Withheld** |   |
|----------------|--------|--------------------------|--------|-------------------------------|--------|
| James T. Engen |   | 12,223,507               |   | 74,406                        |   |
| David M. Tully |   | 12,275,877               |   | 22,036                        |   |

 

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**Item 5.****  Other Information**

 

None.

 

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

 

(a)   Exhibits

 

10.1 Amendedand Restated Credit Agreement between U.S. Bank National Association and MackieDesigns Inc. dated as of April 30, 2002

 

10.2 RevolvingNote between U.S. Bank National Association and Mackie Designs Inc. dated as ofApril 30, 2002

 

10.3 Term NoteA Note between U.S. Bank National Association and Mackie Designs Inc. dated asof April 30, 2002

 

10.4 Term NoteB Note between U.S. Bank National Association and Mackie Designs Inc. dated asof April 30, 2002

 

99.1Certification of Principal Executive Officer Pursuant to 18 U.S.C Section 1350

 

99.2Certification of Principal Financial Officer Pursuant to 18 U.S.C Section 1350

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|                         |   |   | **Mackie Designs Inc.**                                                                                                    |   |
|------------------------------|--------|--------|----------------------------------------------------------------------------------------------------------------------------|--------|
|                         |   |   | (Registrant)                                                                                                               |
|                         |   |   |                                                                                                                       |
|                         |   |   |                                                                                                                       |
| Dated:  August 14, 2002 |   | By:    | /s/ James T.  Engen                                                                                                        |   |
|                         |   |   | James T.  Engen *President, Chief Executive Officer and   Director*                                                        |
|                         |   |   |                                                                                                                       |
| Dated:  August 14, 2002 |   | By:    | /s/ William  A. Garrard                                                                                                    |   |
|                         |   |   | William A.  Garrard *Vice President, Finance and Chief   Financial Officer (Principal Financial   and Accounting Officer)* |

 

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