** **

 

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

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

 

**For the quarterly period ended March 31, 2002**

** **

**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)      |

 

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Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.       Yes ý    No o

 

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

 
| Common Stock, no  par value |   | 12,439,022                    |
|-----------------------------|--------|-------------------------------|
| Class                       |   | Number of Shares  Outstanding |
|                        |   | (as of March 31,  2002)       |

 

 

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**MACKIE DESIGNS INC.**

 

**FORM 10-Q**

**For the quarter ended March 31, 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 Changes in 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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**PARTI.  FINANCIAL INFORMATION**

** **

**Item 1.  FinancialStatements**

 

**MACKIE DESIGNS INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

*In thousands*
|                                                                                           |   | **March 31,  2002** |    | **December  31,  2001** |   |
|------------------------------------------------------------------------------------------------|--------|---------------------|---------|-------------------------|--------|
| **ASSETS**                                                                                     |   |                |    |                    |   |
| Current assets:                                                                                |   |                |    |                    |   |
| Cash and cash  equivalents                                                                     |   | $                   | 1,198   |                    | $      | 2,095 |   |
| Accounts  receivable, less allowance for doubtful accounts of $1,428 and $1,349,  respectively |   | 37,989              |    | 35,092                  |   |
| Income taxes  receivable                                                                       |   | 90                  |    | 1,305                   |   |
| Inventories                                                                                    |   | 52,227              |    | 51,507                  |   |
| Prepaid expenses  and other current assets                                                     |   | 2,280               |    | 2,157                   |   |
| Deferred income  taxes                                                                         |   | 5,461               |    | 5,315                   |   |
| Total current  assets                                                                          |   | 99,245              |    | 97,471                  |   |
|                                                                                           |   |                |    |                    |   |
| Property, plant  and equipment, net                                                            |   | 24,603              |    | 25,671                  |   |
| Goodwill, net                                                                                  |   | 18,820              |    | 19,360                  |   |
| Intangible  assets, net                                                                        |   | 6,706               |    | 6,854                   |   |
| Investment in  bonds                                                                           |   | 3,844               |    | 3,852                   |   |
| Other assets,  net                                                                             |   | 793                 |    | 756                     |   |
|                                                                                           |   |                |    |                    |   |
| Total assets                                                                                   |   | $                   | 154,011 |                    | $      | 153,964 |   |
|                                                                                           |   |                |    |                    |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                 |   |                |    |                    |   |
| Current  liabilities:                                                                          |   |                |    |                    |   |
| Short-term  borrowings                                                                         |   | $                   | 32,631  |                    | $      | 35,395 |   |
| Accounts payable                                                                               |   | 27,029              |    | 22,859                  |   |
| Accrued  liabilities                                                                           |   | 11,653              |    | 11,009                  |   |
| Income taxes  payable                                                                          |   | 949                 |    | 968                     |   |
| Current portion  of long-term debt                                                             |   | 3,133               |    | 3,874                   |   |
| Total current  liabilities                                                                     |   | 75,395              |    | 74,105                  |   |
|                                                                                           |   |                |    |                    |   |
| Long-term debt,  excluding current portion                                                     |   | 18,677              |    | 19,401                  |   |
| Employee and  other liabilities                                                                |   | 3,742               |    | 3,768                   |   |
| Deferred income  taxes                                                                         |   | 3,593               |    | 3,880                   |   |
| Total  liabilities                                                                             |   | 101,407             |    | 101,154                 |   |
|                                                                                           |   |                |    |                    |   |
| Commitments and  contingencies                                                                 |   | —              |    | —                  |   |
|                                                                                           |   |                |    |                    |   |
| Shareholders’  equity:                                                                    |   |                |    |                    |   |
| Common stock                                                                                   |   | 28,951              |    | 28,691                  |   |
| Retained  earnings                                                                             |   | 26,310              |    | 26,556                  |   |
| Accumulated  other comprehensive loss                                                          |   | (2,657              | )       | (2,437                  | )      |
| Total  shareholders’ equity                                                               |   | 52,604              |    | 52,810                  |   |
|                                                                                           |   |                |    |                    |   |
| Total  liabilities and shareholders’ equity                                               |   | $                   | 154,011 |                    | $      | 153,964 |   |

 

*See accompanying Notes to CondensedConsolidated Financial Statements.*

* *

3

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**MACKIE DESIGNS INC.**

###### **CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 

*In thousands, except pershare data*
|                                           |   | **Three  months ended  March 31,** |
|------------------------------------------------|--------|------------------------------------|
|                                           |   | **2002**                           |   | **2001** |   |
|                                           |   |                               |   |   |   |
| Net sales                                      |   | $                                  | 49,119 |   | $ | 57,208 |   |
| Cost of sales                                  |   | 33,192                             |   | 37,436 |   |
| Gross profit                                   |   | 15,927                             |   | 19,772 |   |
|                                           |   |                               |   |   |   |
| Operating  expenses:                           |   |                               |   |   |   |
| Selling, general  and administrative           |   | 12,519                             |   | 13,804 |   |
| Research and  development                      |   | 2,635                              |   | 2,949 |   |
|                                           |   | 15,154                             |   | 16,753 |   |
| Operating income                               |   | 773                                |   | 3,019 |   |
|                                           |   |                               |   |   |   |
| Other income  (expense):                       |   |                               |   |   |   |
| Interest income                                |   | 106                                |   | 102 |   |
| Interest expense                               |   | (1,085                             | ) | (1,458 | ) |
| Other                                          |   | (146                               | ) | (103 | ) |
|                                           |   | (1,125                             | ) | (1,459 | ) |
|                                           |   |                               |   |   |   |
| Income (loss)  before income taxes             |   | (352                               | ) | 1,560 |   |
|                                           |   |                               |   |   |   |
| Income tax  expense (benefit)                  |   | (106                               | ) | 598 |   |
|                                           |   |                               |   |   |   |
| Net income  (loss)                             |   | $                                  | (246 | ) | $ | 962 |   |
|                                           |   |                               |   |   |   |
| Basic and  diluted net income (loss) per share |   | $                                  | (0.02 | ) | $ | 0.08 |   |

 

*See accompanying Notes to CondensedConsolidated Financial Statements.*

* *

4

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**MACKIE DESIGNS INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

*Inthousands*
|                                                                                      |   | **Three  months ended  March 31,** |   |
|-------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                      |   | **2002**                           |   | **2001** |   |
|                                                                                      |   |                               |   |   |   |
| **Operating activities**                                                                  |   |                               |   |   |   |
| Net income  (loss)                                                                        |   | $                                  | (246   | ) | $ | 962 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |   |                               |   |   |   |
| Depreciation and  amortization                                                            |   | 1,840                              |   | 2,051 |   |
| Deferred stock  compensation                                                              |   | 260                                |   | 177 |   |
| Deferred income  taxes                                                                    |   | (60                                | )      | (144 | ) |
| Changes in  operating assets and liabilities:                                             |   |                               |   |   |   |
| Accounts  receivable                                                                      |   | (3,044                             | )      | (4,594 | ) |
| Inventories                                                                               |   | (1,090                             | )      | 2,237 |   |
| Prepaid expenses  and other current assets                                                |   | (129                               | )      | (226 | ) |
| Other assets                                                                              |   | (105                               | )      | 693 |   |
| Accounts payable  and accrued expenses                                                    |   | 5,117                              |   | 450 |   |
| Income taxes  receivable and  payable                                                |   | 1,214                              |   | 740 |   |
| Other long term  liabilities                                                              |   | 37                                 |   | (82 | ) |
| Cash provided by  operating activities                                                    |   | 3,794                              |   | 2,264 |   |
|                                                                                      |   |                               |   |   |   |
| **Investing activities**                                                                  |   |                               |   |   |   |
| Proceeds from  sales of available-for-sale securities                                     |   | —                             |   | 515 |   |
| Purchases of  property, plant and equipment                                               |   | (817                               | )      | (2,736 | ) |
| Cash used in  investing activities                                                        |   | (817                               | )      | (2,221 | ) |
|                                                                                      |   |                               |   |   |   |
| **Financing activities**                                                                  |   |                               |   |   |   |
| Payments on  long-term debt                                                               |   | (1,337                             | )      | (164 | ) |
| Net proceeds  (payments) of short-term borrowings                                         |   | (2,519                             | )      | 980 |   |
| Proceeds from  the exercise of stock options                                              |   | —                             |   | — |   |
| Cash provided by  (used in) financing activities                                          |   | (3,856                             | )      | 816 |   |
|                                                                                      |   |                               |   |   |   |
| Effect of exchange  rate changes on cash                                                  |   | (18                                | )      | (1,107 | ) |
|                                                                                      |   |                               |   |   |   |
| Decrease in cash  and cash equivalents                                                    |   | (897                               | )      | (248 | ) |
|                                                                                      |   |                               |   |   |   |
| Cash and cash  equivalents at beginning of period                                         |   | 2,095                              |   | 3,838 |   |
|                                                                                      |   |                               |   |   |   |
| Cash and cash  equivalents at end of period                                               |   | $                                  | 1,198  |   | $ | 3,590 |   |

 

*See accompanying Notes to CondensedConsolidated Financial Statements.*

* *

5

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**MACKIE DESIGNS INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND**

**COMPREHENSIVE INCOME (LOSS)**

###### **Three months ended March 31, 2002**

*Inthousands*
|                                                 |   | **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                           |   | 15                |       | —                 |       | —                                               |       | —    |       | — |   |
| Amortization of  deferred stock compensation         |   | —            |       | 260                    |       | —                                               |       | —    |       | 260 |   |
| Net loss                                             |   | —            |       | —                 |       | (246                                                 | )     | —    |       | — |   |
| Foreign currency  translation adjustment, net of tax |   | —            |       | —                 |       | —                                               |       | (220      | )     | — |   |
| Comprehensive  loss                                  |   | —            |       | —                 |       | —                                               |       | —    |       | (466 | ) |
|                                                 |   |              |       |                   |       |                                                 |       |      |       |   |   |
| Balance at March  31, 2002                           |   | 12,439            |       | $                      | 28,951     |                                                 | $          | 26,310    |       | $ | (2,657 | )  | $ | 52,604 |   |

 

*See accompanying Notes to CondensedConsolidated Financial Statements.*

* *

6

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**MACKIE DESIGNS INC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**March 31, 2002**

**(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 accepted accountingprinciples for complete financial statements and should be read in conjunctionwith the financial statements included in our Annual Report on Form 10-K forthe year ended December 31, 2001. 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, 2002, are not necessarily indicative of future financialresults.

**2.  Net Income (Loss) Per Share**

 

                The following tablesets forth the computation of basic and diluted net income (loss) per share forthe three months ended March 31, 2002 and 2001. Stock options representing4,961,000 and 1,706,000 shares in 2002 and 2001, respectively, were excludedfrom the calculation of diluted per share amounts because they areantidilutive.

 

 
|                                                                              |   | **2002**                                    |   | **2001** |   |
|-----------------------------------------------------------------------------------|--------|---------------------------------------------|--------|----------|--------|
|                                                                              |   | *(in thousands, except for per share data)* |   |
| Numerator:                                                                        |   |                                        |   |     |   |
| Net income  (loss)                                                                |   | $                                           | (246   | )        | $      | 962 |   |
| Denominator:                                                                      |   |                                        |   |     |   |
| Denominator for  basic net income (loss) per share — weighted-average shares |   | 12,429                                      |   | 12,372   |   |
| Dilutive  potential common shares from stock options                              |   | —                                      |   | 423      |   |
| Denominator for  diluted net income (loss) per share                              |   | 12,429                                      |   | 12,795   |   |
|                                                                              |   |                                        |   |     |   |
| Basic and  diluted net income (loss) per share                                    |   | $                                           | (0.02  | )        | $      | 0.08 |   |

 

 

7

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**3.       Comprehensive Income (Loss)**

 

Comprehensiveincome (loss) for the three-month periods ended March 31, 2002 and 2001, isdetailed below.

 

 
|                                                  |   | **2002**                                     |   | **2001** |   |
|-------------------------------------------------------|--------|----------------------------------------------|--------|----------|--------|
|                                                  |   | *(in  thousands, except for per share data)* |   |
|                                                  |   |                                         |   |     |   |
| Net income  (loss)                                    |   | $                                            | (246   | )        | $      | 962 |   |
| Other  comprehensive loss:                            |   |                                         |   |     |   |
| Foreign currency  translation adjustments, net of tax |   | (220                                         | )      | (1,178   | )      |
| Comprehensive  income (loss)                          |   | $                                            | (466   | )        | $      | (216 | ) |

 

 

**4.       Inventories**

 

Inventories consisted ofthe following:

 
|            |   | **March 31,  2002** |     | **December  31,  2001** |   |
|-----------------|--------|---------------------|----------|-------------------------|--------|
|            |   | *(in  thousands)*   | * * |
| Raw materials   |   | $                   | 21,988   |                    | $      | 17,506 |   |
| Work in process |   | 4,192               |     | 4,073                   |   |
| Finished goods  |   | 26,047              |     | 29,928                  |   |
|            |   | $                   | 52,227   |                    | $      | 51,507 |   |

**5.       Goodwilland Intangible Assets**

 

Intangibleassets consist of the following:

 
|                           |   | **March 31,  2002** |   | **December  31,  2001** |   |
|--------------------------------|--------|---------------------|--------|-------------------------|--------|
|                           |   | *(in  thousands)*   |   |
| Developed  technology          |   | $                   | 6,180  |                    | $      | 6,200 |   |
| Trademark                      |   | 1,380               |   | 1,380                   |   |
|                           |   | 7,560               |   | 7,580                   |   |
| Less  accumulated amortization |   | 854                 |   | 726                     |   |
|                           |   | $                   | 6,706  |                    | $      | 6,854 |   |

 

In June 2001, the Financial Accounting Standards Board issued FAS No.141, “Business Combinations” and FAS No. 142, “Goodwill and Other IntangibleAssets,” which supercede Accounting Principles Board Opinion No. 17,“Intangible Assets.” FAS No.141 requires that all business combinations beaccounted for under the purchase method. The statement also specifies criteriafor recognizing and reporting intangible assets apart from goodwill; however,assembled workforce must be recognized and reported in goodwill. FAS 142requires the use of a non-amortization approach to account for purchasedgoodwill and certain intangibles. Under a non-amortization approach, goodwilland certain intangible assets are no longer amortized into results ofoperations, but instead are reviewed for

 

8

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impairment and written down and charged to results of operations onlyin the periods in which the recorded value of goodwill and certain intangiblesis more than fair value.

 

We adopted FAS 142 on January 1, 2002. Accordingly, we reclassified anassembled workforce intangible asset with an unamortized balance of $1.1million and a related deferred tax liability of $383,000 to goodwill on January1, 2002. We have also reviewed the useful lives of our identifiable intangiblesassets and determined that the original estimated lives remain appropriate. FAS142 prescribes a two-phase process for impairment testing of goodwill and thetiming of transitional impairment steps. The first phase, required to becompleted by June 30, 2002, identifies indications of impairment; while thesecond phase (if necessary), required to be completed by December 31, 2002,measures the impairment. We have not yet completed step one of the transitionalimpairment test, including the determination of whether any transitionalimpairment losses will be required to be recognized as the cumulative effect ofa change in accounting principle as of January 1, 2002. Effective January 1,2002, we ceased amortization of goodwill. Prior to 2002, we amortized goodwillassociated with our acquisitions over 10 - 20 years using the straight-linemethod. Identifiable intangibles are currently amortized, using thestraight-line method, over 5 years for Mackie Belgium and 20 years for otheracquisitions.

 

                Expected futureamortization expense related to identifiable intangible assets is as follows:

 

 
|                           |   | *(in  thousands)* | * * |
|--------------------------------|--------|-------------------|----------|
| April 1 to  December 31, 2002  |   | $                 | 394      |   |
| Year ending  December 31, 2003 |   | 525               |     |
| Year ending  December 31, 2004 |   | 525               |     |
| Year ending  December 31, 2005 |   | 525               |     |
| Year ending  December 31, 2006 |   | 378               |     |
|                                |        |                   |          |  |

 

 

Summarizedbelow are the effects on net income (loss) and net income (loss) per sharedata, if we had followed the amortization provisions of FAS 142 for thethree-month periods ended March 31, 2002 and 2001.

 
|                                                              |   | **2002**                                    |   | **2001** |   |
|-------------------------------------------------------------------|--------|---------------------------------------------|--------|----------|--------|
|                                                              |   | *(in thousands, except for per share data)* |   |
| Net income (loss):                                                |   |                                        |   |     |   |
| As reported                                                       |   | $                                           | (246   | )        | $      | 962 |   |
| Add: goodwill  and assembled workforce amortization, net of taxes |   | —                                      |   | 292      |   |
| Adjusted net  income (loss)                                       |   | $                                           | (246   | )        | $      | 1,254 |   |
|                                                              |   |                                        |   |     |   |
| Basic and diluted net income (loss) per share:                    |   |                                        |   |     |   |
| As reported                                                       |   | $                                           | (0.02  | )        | $      | 0.08 |   |
| Add: goodwill  and assembled workforce amortization, net of taxes |   | —                                      |   | 0.02     |   |
| Adjusted basic  and diluted net income (loss) per share           |   | $                                           | (0.02  | )        | $      | 0.10 |   |

 

 

 

 

 

 

 

9

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**6.             Debt**

 

                Under the terms ofour U.S. credit agreement, we must maintain certain financial ratios andtangible net worth.  The agreement alsoprovides, among other matters, restrictions on additional financing, dividends,mergers, acquisitions, and an annual capital expenditure limit. At March 31,2002, we were out of compliance with one of our financial covenants and inApril 2002 received a waiver from the lender. In April 2002, we entered into anagreement to revise the terms of both our bank line of credit and term loan inthe U.S., which will result in the bank line of credit and the borrowings underthe line increasing by approximately $10.0 million and an equal reduction of$10.0 million to the term loan. The result is a bank line of credit thatprovides up to $25.0 million of short-term borrowing subject to certainlimitations. Additionally, the revised credit agreement includes arestructuring of the covenants. Both the line of credit and the term loan aresecured by all U.S. based assets including, but not limited to, accountsreceivable, inventory, fixed assets, intangibles and patents.

 

The remaining term loan is divided into two components. The principalamount of the first component, Term Loan A is approximately $6.0 million. Thiswill be payable at $100,000 per month plus interest at the bank’s prime rate orat LIBOR plus a specified margin. The principal amount of Term Loan B isapproximately $8.6 million at March 31, 2002. Interest on this component ispayable monthly and is calculated at the bank’s prime rate or at LIBOR plus aspecified margin. A principal repayment in 2003 is calculated based upon our2002 earnings before interest, taxes, depreciation and amortization, less cashtaxes paid, certain capital expenditures and debt repayments. This amount isdue in two equal payments in February and July 2003.  The renewal date for both components of the term loan isSeptember 2003. Due to the uncertainty of the amount due in 2003, if any, forTerm Loan B, the entire loan is considered long-term debt at March 31, 2002.

 

As a result of restructuring the line of credit and term loan, we haveclassified amounts related to these borrowings to reflect the new agreement.

 

**7.             SegmentInformation**

 

Business segments areidentified using primarily geographic factors. The two reportable segments areU.S. operations and operations of Mackie Italy and other European subsidiaries.Both segments offer audio mixers, loudspeakers and other professional audioequipment. Sales between segments are made at pricesconsistent with rules and regulations of governing tax authorities. Operatingincome (loss) not assigned to a segment relates to profit recognized by thesegments on intercompany sales that have not been resold to a non-affiliatedcustomer. We have restated segment information for 2001 to reflect the currentbusiness segment structure. A summary of key financial data by segment isas follows:

 

 
|                                   |   | **United States** |   | **Europe** |   | **Elimination  of  intercompany  amounts** |   | **Total** |   |
|----------------------------------------|--------|-------------------|--------|------------|--------|--------------------------------------------|--------|-----------|--------|
|                                   |   | *(in thousands)*  |   |
| **Three months ended March 31, 2002:** |   |              |   |       |   |                                       |   |      |   |
| Net sales, to  external customers      |   | $                 | 35,406 |       | $      | 13,713                                     |   |      |   | $ | 49,119 |   |
| Net sales,  intersegment               |   | 3,963             |   | 7,795      |   | (11,758                                    | )      | —    |   |
| Operating income  (loss)               |   | 1,127             |   | (74        | )      | (280                                       | )      | 773       |   |
| Total assets                           |   | 83,663            |   | 70,348     |   |                                       |   | 154,011   |   |
|                                   |   |              |   |       |   |                                       |   |      |   |
| **Three months ended March 31, 2001:** |   |              |   |       |   |                                       |   |      |   |
| Net sales, to  external customers      |   | $                 | 39,147 |       | $      | 18,061                                     |   |      |   | $ | 57,208 |   |
| Net sales,  intersegment               |   | 7,093             |   | 7,413      |   | (14,506                                    | )      | —    |   |
| Operating income                       |   | 2,381             |   | 488        |   | 150                                        |   | 3,019     |   |
| Total assets                           |   | 90,362            |   | 72,218     |   |                                       |   | 162,580   |   |

 

Netassets of our foreign operations were approximately $10.4 million at March 31,2002.

 

 

 

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**8. Contingencies**

 

In April 2000, weacquired 100% of the capital stock of Eastern Acoustic Works, Inc. (EAW). Wehave subrogated claims asserted against us from insurance companies who paidclaims made by EAW’s landlord and other tenants in the building who wereaffected by a fire started by a loaned employee in a portion of the buildingoccupied by EAW in 1996. The range of potential loss ranges from $2.1 millionto $2.9 million. We expect the Massachusetts Superior Court to set a date inthe latter half of 2002 for a jury trial. We believe that these losses are notattributable to us under Massachusetts’s 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 ourconsolidated financial statements related to these claims.

 

We are also involved in various legal proceedings andclaims that arise in the ordinary course of business. We currently believe thatthese matters will not have a material adverse impact on our financialposition, liquidity or results of operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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**Item2.  Management’s Discussion and Analysisof 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, 2001. Thisdiscussion contains certain “forward-looking statements” within the meaning ofthe Private Securities Litigation Reform Act of 1995 that involve risks anduncertainties which may cause actual results to differ materially from theforward-looking statements. Forward-looking statements include, withoutlimitation, any statement that may predict, forecast, indicate, or imply futureresults, 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 differmaterially from those discussed here. We undertake no obligation to publiclyrelease any revisions to these forward-looking statements that may be requiredto reflect events or circumstances after the date hereof or to reflect theoccurrence of unanticipated 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 Design Engineering Services BVBA inBelgium (Mackie Belgium), formerly known as Sydec, for approximately $4.4million. Mackie Belgium is a developer of products and services in the area ofembedded electronics and software, networking, digital signal processing andWindows TM driver applications. The transaction was accounted for as a purchasebusiness combination. Operations in 2002 include the results of operations forMackie Belgium.

 

**Critical Accounting Policies andEstimates**

 

We believe our policy on valuing inventory, including market valueadjustments, is our primary critical accounting policy. Inventories are statedat the lower of standard cost, which approximates actual cost on a first-in,first-out method, or market. Included in our inventories balance aredemonstration products used by our sales representatives and marketingdepartment including finished goods that have been shipped to customers forevaluation. Market value adjustments are recorded for obsolete material, slow-movingproduct, service and demonstration products. We make judgments regarding thecarrying value of our inventory based upon current market conditions. Theseconditions may change depending upon competitive product introductions,customer demand and other factors. If the market for our previously releasedproducts changes, we may be required to write down the cost of our inventory.

 

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

 

# **Results of Operations**

 

Net sales decreased 14% to $49.1 million in the first quarter of 2002from $57.2 million in the first quarter of 2001. The decrease related to lowervolumes in both the U.S. and Europe resulting from the continuing economicslowdown. A price increase implemented for certain products during the firstquarter slightly offset the decrease.

 

 

 

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Gross margin decreased to 32.4% in the first quarter of 2002 from 34.6%in the first quarter of 2001. This decline was primarily due to the mix ofproducts sold which included higher volumes of lower margin speaker products ascompared to our higher margin compact mixer and digital products. In 2001, webegan to transition the manufacture of certain of our product lines to offshorefacilities and are continuing this transfer in 2002. Gross margin for theproducts manufactured offshore are greater than the gross margin for theseproducts as they were previously built in the U.S. in 2001.

 

Selling, generaland administrative expense decreased to $12.5 million or 25% of sales in thefirst quarter of 2002 from $13.8 million or 24% of sales in the first quarterof 2001. The decrease in absolute dollars reflects the cost cutting measuresthat were taken in the last half of 2001. Additionally, the first quarter of2001 included amortization of goodwill and other intangible assets withindefinite lives totaling $320,000. FAS 142, which requires that assets withindefinite lives are no longer amortized but are tested at least annually forimpairment, was adopted January 1, 2002.

 

Research anddevelopment expense decreased to $2.6 million in the first quarter of 2002 from$2.9 million in the corresponding period of 2001. As a percentage of sales,research and development expense remained constant at 5%. 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 $441,000 in 2002.

 

Net other expense was $1.1 million for 2002 as compared to $1.5 millionin 2001. Included in this amount is interest expense which decreased to $1.1million in the first quarter of 2002 from $1.5 million in the correspondingperiod of 2001. The decrease relates to both lower debt balances and lowerinterest rates in 2002 versus 2001.

 

Income tax benefitfor the first quarter of 2002 was $106,000 representing an overall effectiverate of 30.1% compared to $598,000 and 38.3% for the same period of 2001,respectively. We calculate the current tax rate based upon our estimate of thetax rate to be achieved for the full year.

 

# **Liquidity and Capital Resources**

 

Cash provided byoperating activities was $3.8 million in the first quarter of 2002 and $2.3million in the first quarter of 2001. Net cash provided by operating activitiesin 2002 was primarily attributable to increases in short-term liabilities otherthan interest-bearing debt, offset by increases in accounts receivable andinventories. In 2001, cash was provided by net income and a decrease ininventories, offset by an increase in accounts receivable.

 

Cash used ininvesting activities was $817,000 for the first quarter of 2002 and $2.2million for the first quarter 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 $2.7million.

 

Cash used infinancing activities during the first quarter of 2002 was $3.9 million whichreflects repayments of both long-term and short-term borrowings. In the firstquarter of 2001, cash flows provided by financing activities primarilyrepresents net proceeds from short-term borrowings.

 

 

 

 

 

 

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                At March 31, 2002, we had a bankline of credit in the U.S. that provided up to $15.0 million of short-termborrowing subject to certain limitations. Additionally, the line of creditprovided a $1.5 million guarantee on our debt in Italy. At March 31, 2002,there was $9.4 million outstanding on the line of credit and approximately $4.1million available. Additionally, we had agreements with several banks in Italythat provide short-term credit facilities totaling approximately $25.7 million,subject to certain limitations. These limitations reduced the actualavailability to approximately $16.6 million. At March 31, 2002, there was $13.2million outstanding on these facilities and approximately $3.4 millionavailable. Our U.S. credit agreement identifies certain financial covenants. AtMarch 31, 2002, we were out of compliance with one of these covenants and inApril 2002 received a waiver from the lender. Additionally, in April 2002, weentered into an agreement to revise the terms of both our bank line of creditand term loan which will result in the bank line of credit and the borrowings underthe line increasing by approximately $10.0 million and an equal reduction of$10.0 million to the term loan. The result is a bank line of credit thatprovides up to $25.0 million of short-term borrowing subject to certainlimitations. Under the terms of this U.S. credit agreement, we must maintaincertain financial ratios and tangible net worth. The agreement also provides,among other matters, restrictions on additional financing, dividends, mergers,acquisitions, and an annual capital expenditure limit. Additionally, therevised credit agreement includes a restructuring of the covenants. The renewaldate for the line of credit is April 2003. Both the line of credit and the termloan are secured by all U.S. based assets including, but not limited to, accountsreceivable, inventory, fixed assets, intangibles and patents.

 

The remaining term loanis divided into two components. The principal amount of the first component,Term Loan A is approximately $6.0 million. This will be payable at $100,000 permonth plus interest at the bank’s prime rate or at LIBOR plus a specifiedmargin. The principal amount of Term Loan B is approximately $8.6 million atMarch 31, 2002. Interest on this component is payable monthly and is calculatedat the bank’s prime rate or at LIBOR plus a specified margin. A principalrepayment in 2003 is calculated based upon our 2002 earnings before interest,taxes, depreciation and amortization, less cash taxes paid, certain capitalexpenditures and debt repayments. This amount is due in two equal payments inFebruary and July 2003.  The renewaldate for both components of the term loan is September 2003. Due to theuncertainty of the amount due in 2003, if any, for Term Loan B, the entire loanis considered long-term debt at March 31, 2002.

 

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

 

If we are less profitable than anticipated, we may not meet our newcovenants. The term loan and line of credit may be callable under covenantprovisions if we do not meet these covenants. Although there can be noassurance, we believe that we will be able to meet our financial covenants inthe remainder of 2002 under the revised credit agreement. We believe that our existingcash and credit facilities, along with cash generated from operations will besufficient to provide working capital to fund operations over the next twelvemonths.

 

**New Accounting Pronouncements**

In June 2001, the Financial Accounting Standards Board issued FAS No.141, “Business Combinations” and FAS No. 142, “Goodwill and Other IntangibleAssets,” which supercede Accounting Principles Board Opinion No. 17,“Intangible Assets.” FAS No.141 requires that all business combinations beaccounted for under the purchase method. The statement further requiresseparate recognition of intangible assets that meet one of two criteria, asdefined in the statement. This statement applies to all business combinationsinitiated after June 30, 2001. Under FAS 142, goodwill and 

 

 

 

 

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intangible assets with indefinite lives are no longer amortized but aretested at least annually for impairment. Separable intangible assets withdefined lives will continue to be amortized over their useful lives. Theprovisions of FAS No. 142 apply to goodwill and intangible assets acquiredbefore and after the statement’s effective date. We adopted the new standard asof January 1, 2002.  FAS 142 prescribesa two-phase process for impairment testing of goodwill and the timing oftransitional impairment steps. The first phase, required to be completed byJune 30, 2002, identifies indications of impairment; while the second phase (ifnecessary), required to be completed by December 31, 2002, measures theimpairment. We have not yet completed step one of the transitional impairmenttest, including the determination of whether any transitional impairment losseswill be required to be recognized as the cumulative effect of a change in accountingprinciple as of January 1, 2002.

In June 2001, the FASBissued FAS 143, “Accounting for Obligations Associated with the Retirement ofLong-Lived Assets.” The provisions of FAS 143 apply to all entities that incurobligations associated with the retirement of tangible long-lived assets. This statement is effective forfinancial statements issued for fiscal years beginning after June 15, 2002 andwill become effective for Mackie commencing in 2003. This accountingpronouncement is not expected to have a significant impact on our financialposition or results of operations.

In August 2001, the FASBissued FAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” which supersedes FAS No. 121, “Accounting for theImpairment of Long-Lived Assets and Long-Lived Assets to be Disposed of.” FASNo. 144 retains many of the fundamental provisions of FAS No. 121 andprovides a single method of accounting for long-lived assets to be disposed of.We adopted the provisions of FAS No. 144 for the year beginning January 1,2002. The adoption of the statement for long-lived assets held for use did nothave a material impact on our financials statements.

 

**Item3.  Quantitative and QualitativeDisclosures 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, 2002.

 

At March 31, 2002,we had variable rate debt of approximately $52.3 million provided by U.S. andItalian 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 quarterended March 31, 2002, an increase in the average interest rate of 10% wouldresult in an insignificant effect on our earnings. An increase in the averageinterest rate of 10% during the period ended March 31, 2001 also would resultin an insignificant effect on our earnings for that period. The fair value ofthe variable rate debt approximates the carrying amount on the consolidatedbalance sheet at March 31, 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 threemonths ended March 31, 2002, would result in an approximately $545,000 decreasein loss before income taxes. A 10% decrease in the value of the U.S. Dollar,throughout the period ended March 31, 2001, would not have had a materialeffect on our earnings for that period.

 

 

 

 

 

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**PARTII.  OTHER INFORMATION**

 

**Item1.**  **LegalProceedings**

 

                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 also involved in variouslegal proceedings and claims that arise in the ordinary course of business. Wecurrently believe that these matters will not have a material adverse impact onour financial position, liquidity or results of operations.

 

**Item2.  Changes in Securities**

 

None.

 

**Item3.  Defaults upon Senior Securities**

 

None.

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders**

 

None.

 

**Item5.  Other Information**

 

None.

# ** **

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

 

None.

 

 

 

 

 

 

 

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**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:  May  15, 2002 | By:    | /s/ James T. Engen                                                                                   |
|                       |   | James T. Engen                                                                                       |
|                       |   | *President,  Chief Executive Officer and Director*                                                   |
|                       |   |                                                                                                 |
| Dated:  May  15, 2002 | By:    | /s/ William A. Garrard                                                                               |
|                       |   | William A. Garrard                                                                                   |
|                       |   | *Vice  President, Finance and Chief Financial Officer (Principal Financia land  Accounting Officer)* |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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