**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark One)**                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **ý**                                                                                                                                                                                                                                                                                                                                                                                                                                        | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **For the quarterly period ended June 30,  2003**                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **or**                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **o**                                                                                                                                                                                                                                                                                                                                                                                                                                             | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **For the transition period  from                                 to                                 ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **Commission File Number:  0-26524**                                                                                                                                                                                                                                                                                                                                                                                                         |

 

| **MACKIE DESIGNS INC.**                                         |
|-----------------------------------------------------------------|
| (Exact name of registrant as specified in  its charter)         |
|                                                            |
| **Washington**                                                  |   | **91-1432133** |
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification No.) |
|                                                            |   |   |
| **16220 Wood-Red Road, N.E., Woodinville,  Washington**         |   | **98072** |
| (Address of principal executive offices)                        |   | (Zip Code) |
|                                                            |   |   |
| **(425) 487-4333**                                              |
| (Registrant’s telephone number, including  area code)      |

 

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

 

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

 

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

 

| **Common Stock, no par value** |   | **19,608,036**                                      |   |
|--------------------------------|--------|-----------------------------------------------------|--------|
| Class                          |   | Number of Shares Outstanding  (as of June 30, 2003) |   |

 

 

----

 

**MACKIE DESIGNS INC.**

 

**FORM 10-Q**

**For the quarter ended June 30, 2003**

 

**INDEX**

 
| **PART I.  FINANCIAL INFORMATION** |
|-----------------------------------------|
|                                    |
|                                    | Item 1. | Financial Statements (Unaudited) |
|                                    |
|                                    |   | Condensed Consolidated Balance Sheets |
|                                    |
|                                    |   | Condensed Consolidated Statements of  Operations |
|                                    |
|                                    |   | Condensed Consolidated Statements of Cash  Flows |
|                                    |
|                                    |   | Condensed  Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive  Loss |
|                                    |
|                                    |   | Notes to Condensed Consolidated Financial  Statements |
|                                    |
|                                    | Item 2. | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|                                    |
|                                    | Item 3. | Quantitative and Qualitative Disclosures  About Market Risk |
|                                    |
|                                    | Item 4. | Controls and Procedures |
|                                    |
| **PART II.   OTHER INFORMATION**   |
|                                    |
|                                    | Item 1. | Legal Proceedings |
|                                    |
|                                    | Item 2. | Changes in Securities and Use of Proceeds |
|                                    |
|                                    | Item 3. | Defaults Upon Senior Securities |
|                                    |
|                                    | Item 4. | Submission of Matters to a Vote of Security  Holders |
|                                    |
|                                    | Item 5. | Other Information |
|                                    |
|                                    | Item 6. | Exhibits and Reports on Form 8-K |
|                                    |
| **SIGNATURES**                          |

 

2

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**PARTI.  FINANCIAL INFORMATION**

**Item1.  Financial Statements**

 

**MACKIE DESIGNS INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
|                                                                                          |   | **June 30,  2003**  |       | **December  31,  2002** |       |
|-----------------------------------------------------------------------------------------------|--------|---------------------|------------|-------------------------|------------|
|                                                                                          |   | **(In  thousands)** |       |
| **ASSETS**                                                                                    |   |                | ** ** |                    | ** ** |
| Current assets:                                                                               |   |                | ** ** |                    | ** ** |
| Cash                                                                                          |   | $                   | 814        |                    | $          | 3,062 |   |
| Accounts receivable, less allowance for  doubtful accounts of $3,762 and $2,684, respectively |   | 30,444              |       | 31,225                  |       |
| Income taxes receivable                                                                       |   | 2,524               |       | 2,437                   |       |
| Inventories                                                                                   |   | 41,479              |       | 50,165                  |       |
| Prepaid expenses and other current assets                                                     |   | 2,628               |       | 6,269                   |       |
| Deferred income taxes                                                                         |   | 1,649               |       | 1,875                   |       |
| Total current assets                                                                          |   | 79,538              |       | 95,033                  |       |
|                                                                                          |   |                |       |                    |       |
| Property, plant and equipment, net                                                            |   | 19,491              |       | 22,043                  |       |
| Intangible assets, net                                                                        |   | 5,764               |       | 5,675                   |       |
| Other assets, net                                                                             |   | 1,094               |       | 1,204                   |       |
| Total assets                                                                                  |   | $                   | 105,887    |                    | $          | 123,955 |   |
|                                                                                          |   |                |       |                    |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                 |   |                |       |                    |       |
| Current liabilities:                                                                          |   |                | ** ** |                    | ** ** |
| Short-term borrowings                                                                         |   | $                   | 30,977     |                    | $          | 39,152 |   |
| Accounts payable                                                                              |   | 21,625              |       | 22,235                  |       |
| Accrued liabilities                                                                           |   | 11,254              |       | 10,670                  |       |
| Income taxes payable                                                                          |   | 871                 |       | 140                     |       |
| Liabilities of unconsolidated affiliate                                                       |   | 1,205               |       | —                  |       |
| Current portion of long-term debt and  long-term debt callable under covenant provisions      |   | 14,112              |       | 7,946                   |       |
| Total current liabilities                                                                     |   | 80,044              |       | 80,143                  |       |
|                                                                                          |   |                |       |                    |       |
| Long-term debt, excluding current portion                                                     |   | 10,570              |       | 20,266                  |       |
| Employee and other liabilities                                                                |   | 4,802               |       | 4,435                   |       |
| Deferred income taxes                                                                         |   | 1,649               |       | 1,875                   |       |
| Total liabilities                                                                             |   | 97,065              |       | 106,719                 |       |
|                                                                                          |   |                |       |                    |       |
| Commitments and contingencies                                                                 |   |                |       |                    |       |
|                                                                                          |   |                |       |                    |       |
| Shareholders’ equity:                                                                    |   |                |       |                    |       |
| Common stock                                                                                  |   | 33,866              |       | 29,345                  |       |
| Accumulated deficit                                                                           |   | (24,018             | )          | (11,372                 | )          |
| Accumulated other comprehensive loss                                                          |   | (1,026              | )          | (737                    | )          |
| Total shareholders’ equity                                                               |   | 8,822               |       | 17,236                  |       |
| Total liabilities and shareholders’ equity                                               |   | $                   | 105,887    |                    | $          | 123,955 |   |

 

*See accompanying Notes to CondensedConsolidated Financial Statements.*

 

3

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**MACKIE DESIGNS INC.**

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

**(Unaudited)**

 

*In thousands, except for per share data*

 
|                                                                                |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|-------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                                |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                                                                |   |                              |   |                            |   |   |   |   |   |
| Net sales                                                                           |   | $                                 | 43,409 |                            | $      | 48,798 |   | $ | 83,948 |   | $ | 97,917 |   |
| Cost of sales                                                                       |   | 33,837                            |   | 33,541                          |   | 66,739 |   | 66,733 |   |
| Gross profit                                                                        |   | 9,572                             |   | 15,257                          |   | 17,209 |   | 31,184 |   |
|                                                                                |   |                              |   |                            |   |   |   |   |   |
| Operating expenses:                                                                 |   |                              |   |                            |   |   |   |   |   |
| Selling, general and administrative                                                 |   | 11,342                            |   | 12,881                          |   | 23,491 |   | 25,400 |   |
| Research and development                                                            |   | 1,889                             |   | 2,866                           |   | 4,538 |   | 5,501 |   |
|                                                                                |   | 13,231                            |   | 15,747                          |   | 28,029 |   | 30,901 |   |
| Operating income (loss)                                                             |   | (3,659                            | )      | (490                            | )      | (10,820 | ) | 283 |   |
|                                                                                |   |                              |   |                            |   |   |   |   |   |
| Other income (expense):                                                             |   |                              |   |                            |   |   |   |   |   |
| Interest income                                                                     |   | 62                                |   | 84                              |   | 166 |   | 190 |   |
| Interest expense                                                                    |   | (1,323                            | )      | (1,065                          | )      | (2,223 | ) | (2,150 | ) |
| Other                                                                               |   | 133                               |   | 424                             |   | 321 |   | 278 |   |
|                                                                                |   | (1,128                            | )      | (557                            | )      | (1,736 | ) | (1,682 | ) |
|                                                                                |   |                              |   |                            |   |   |   |   |   |
| Loss before income taxes and cumulative  effect of a change in accounting principle |   | (4,787                            | )      | (1,047                          | )      | (12,556 | ) | (1,399 | ) |
|                                                                                |   |                              |   |                            |   |   |   |   |   |
| Provision (benefit) for income taxes                                                |   | (535                              | )      | 305                             |   | 90 |   | 199 |   |
|                                                                                |   |                              |   |                            |   |   |   |   |   |
| Loss before cumulative effect of a change  in accounting principle                  |   | (4,252                            | )      | (1,352                          | )      | (12,646 | ) | (1,598 | ) |
|                                                                                |   |                              |   |                            |   |   |   |   |   |
| Cumulative effect of a change in accounting  principle                              |   | —                            |   | —                          |   | — |   | (5,940 | ) |
|                                                                                |   |                              |   |                            |   |   |   |   |   |
| Net loss                                                                            |   | $                                 | (4,252 | )                               | $      | (1,352 | ) | $ | (12,646 | ) | $ | (7,538 | ) |
|                                                                                |   |                              |   |                            |   |   |   |   |   |
| Basic and diluted net loss per share:                                               |   |                              |   |                            |   |   |   |   |   |
|                                                                                |   |                              |   |                            |   |   |   |   |   |
| Loss before cumulative effect of a change  in accounting principle                  |   | $                                 | (0.21  | )                               | $      | (0.11 | ) | $ | (0.69 | ) | $ | (0.13 | ) |
| Cumulative effect of change in accounting  principle                                |   | —                            |   | —                          |   | — |   | (0.48 | ) |
|                                                                                |   |                              |   |                            |   |   |   |   |   |
| Basic and diluted net loss per share                                                |   | $                                 | (0.21  | )                               | $      | (0.11 | ) | $ | (0.69 | ) | $ | (0.61 | ) |

 

*See accompanying Notes to CondensedConsolidated Financial Statements.*

 

4

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**MACKIE DESIGNS INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Unaudited)**

 
|                                                                                       |   | **Six months  ended  June 30,** |       |
|--------------------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                                       |   | **2003**                        |       | **2002** |   |
|                                                                                       |   | **(In  thousands)**             |       |
| **Operating  activities**                                                                  |   |                            | ** ** |   | ** ** |
| Net loss                                                                                   |   | $                               | (12,646    | ) | $ | (7,538 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |   |                            |       |   |   |
| Cumulative effect of a change in accounting  principle                                     |   | —                          |       | 5,940 |   |
| Depreciation and amortization                                                              |   | 4,463                           |       | 3,727 |   |
| Loss on asset dispositions                                                                 |   | 114                             |       | — |   |
| Deferred stock compensation                                                                |   | 120                             |       | 489 |   |
| Deferred income taxes                                                                      |   | —                          |       | (84 | ) |
| Changes in operating assets and  liabilities:                                              |   |                            |       |   |   |
| Accounts receivable                                                                        |   | 2,302                           |       | (1,019 | ) |
| Inventories                                                                                |   | 10,528                          |       | (7,041 | ) |
| Prepaid expenses and other current assets                                                  |   | 153                             |       | (82 | ) |
| Other assets                                                                               |   | 766                             |       | (258 | ) |
| Accounts payable and accrued liabilities                                                   |   | (1,147                          | )          | 3,959 |   |
| Income taxes                                                                               |   | 600                             |       | 1,752 |   |
| Other long term liabilities                                                                |   | (56                             | )          | 40 |   |
| Cash provided by (used in) operating  activities                                           |   | 5,197                           |       | (115 | ) |
|                                                                                       |   |                            |       |   |   |
| **Investing  activities**                                                                  |   |                            | ** ** |   | ** ** |
| Cash used in investing activities –  purchases of property, plant and equipment       |   | (789                            | )          | (1,602 | ) |
|                                                                                       |   |                            |       |   |   |
| **Financing  activities**                                                                  |   |                            | ** ** |   | ** ** |
| Proceeds from sale of stock and stock  options                                             |   | 3,515                           |       | — |   |
| Proceeds from long-term debt and warrants                                                  |   | 17,500                          |       | — |   |
| Payments on long-term debt                                                                 |   | (16,524                         | )          | (1,563 | ) |
| Proceeds from new short-term borrowing                                                     |   | 12,040                          |       | 4,104 |   |
| Net payments on short-term borrowings                                                      |   | (23,392                         | )          | — |   |
| Cash (used in) provided by financing  activities                                           |   | (6,861                          | )          | 2,541 |   |
|                                                                                       |   |                            |       |   |   |
| Effect of exchange rate changes on cash                                                    |   | 205                             |       | 274 |   |
| Increase (decrease) in cash                                                                |   | (2,248                          | )          | 1,098 |   |
|                                                                                       |   |                            |       |   |   |
| Cash at beginning of period                                                                |   | 3,062                           |       | 2,095 |   |
| Cash at end of period                                                                      |   | $                               | 814        |   | $ | 3,193 |   |

 

*See accompanying Notes to CondensedConsolidated Financial Statements.*

 

5

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**MACKIE DESIGNS INC.**

**CONDENSED****CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY ANDCOMPREHENSIVE LOSS**

###### **Six months ended June 30, 2003**

 
|                                                                            |   |               |   |   |   | **Accumulated  Deficit** |   | **Accumulated  Other  Comprehensive  Loss** |   | **Total** |   |
|---------------------------------------------------------------------------------|--------|--------------------|--------|--------|--------|--------------------------|--------|---------------------------------------------|--------|-----------|--------|
| **Common  Stock**                                                               |
| **Shares**                                                                      |   | **Amount**         |
|                                                                            |   | **(In thousands)** |   |
| Balance at December 31, 2002                                                    |   | 12,556             |   | $      | 29,345 |                     | $      | (11,372                                     | )      | $         | (737   | ) | $ | 17,236 |   |
| Shares issued in private transaction, net  of transaction costs of $2.7 million |   | 6,936              |   | 3,515  |   | —                   |   | —                                      |   | 3,515     |   |
| Warrants issued                                                                 |   | —             |   | 600    |   | —                   |   | —                                      |   | 600       |   |
| Options issued for covenant not to compete                                      |   | —             |   | 285    |   | —                   |   | —                                      |   | 285       |   |
| Exercise of stock options                                                       |   | 116                |   | 1      |   | —                   |   | —                                      |   | 1         |   |
| Amortization of deferred stock compensation                                     |   | —             |   | 120    |   | —                   |   | —                                      |   | 120       |   |
| Net loss                                                                        |   | —             |   | — |   | (12,646                  | )      | —                                      |   | —    |   |
| Foreign currency translation adjustment                                         |   | —             |   | — |   | —                   |   | (289                                        | )      | —    |   |
| Comprehensive loss                                                              |   | —             |   | — |   | —                   |   | —                                      |   | (12,935   | )      |
| Balance at June 30, 2003                                                        |   | 19,608             |   | $      | 33,866 |                     | $      | (24,018                                     | )      | $         | (1,026 | ) | $ | 8,822 |   |

 

*See accompanying Notes to CondensedConsolidated Financial Statements.*

 

6

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**MACKIE DESIGNS INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**June 30, 2003**

**(Unaudited)**

* *

**1.  General**

 

#### **Basisof Presentation**

 

The accompanying unaudited condensed consolidated financial statementshave been prepared by Mackie Designs Inc. in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial statements 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 31,2002. 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, 2003, are notnecessarily indicative of future financial results.

 

On February 21, 2003, we finalized an agreement with Sun Mackie, LLC,an affiliate of Sun Capital Partners, Inc., a private investment firm, wherebySun Mackie purchased approximately 14.4 million shares of our common stock for$10.0 million. Sun Mackie acquired approximately 7.4 million of these sharesfrom certain selling shareholders. It acquired approximately 6.9 million newlyissued shares directly from the Company for approximately $6.3 million. Netproceeds after transaction related costs were approximately $3.5 million. As aresult of this transaction, Sun Mackie acquired approximately 74% of ouroutstanding shares.

 

**Stock-Based Compensation**

 

Stock-based employee compensation plans are accounted for using theintrinsic-value method prescribed in Accounting Principles Board Opinion No.25, “Accounting for Stock Issued to Employees,” and related interpretations. Wehave adopted the disclosure-only provisions of FAS No. 123, “Accounting forStock-Based Compensation” as amended by FAS No. 148, “Accounting forStock-Based Compensation - Transition and Disclosure, an amendment of FAS No.123.”

 

FAS No. 123, as amended by FAS No. 148, permits companies torecognize, as expense over the vesting period, the fair value of allstock-based awards on the date of grant. The Black-Scholes option valuationmodel was developed for use in estimating the fair value of traded options,which have no vesting restrictions and are fully transferable. Because ourstock-based compensation plans have characteristics significantly differentfrom those of traded options and because changes in the subjective inputassumptions can materially affect the fair value estimate, management believesthat the existing option valuation models do not necessarily provide a reliablesingle measure of the fair value of awards from the plan. Therefore, aspermitted, we apply the existing accounting rules under APB No. 25 andprovide pro forma net loss and pro forma net loss per share disclosures forstock-based awards made during the year as if the fair value method defined inFAS No. 123, as amended, had been applied. Net loss and net loss per sharefor the three-month and six-month periods ended June 30, 2003 and 2002 changedas follows:

 

7

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|                                                                              |   | **Three  months ended  June 30,**          |   | **Six months  ended  June 30,** |   |
|-----------------------------------------------------------------------------------|--------|--------------------------------------------|--------|---------------------------------|--------|
|                                                                              |   | **2003**                                   |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                                                              |   | **(in  thousands, except per share data)** |   |
|                                                                              |   |                                       |   |                            |   |   |   |   |   |
| Net loss:                                                                         |   |                                       |   |                            |   |   |   |   |   |
| As reported                                                                       |   | $                                          | (4,252 | )                               | $      | (1,352 | ) | $ | (12,646 | ) | $ | (7,538 | ) |
| Add: Stock-based employee compensation  included in reported net loss             |   | —                                     |   | 87                              |   | 67 |   | 257 |   |
| Less: Stock-based employee compensation  determined under fair-value based method |   | (281                                       | )      | (385                            | )      | (633 | ) | (818 | ) |
| Pro forma                                                                         |   | $                                          | (4,533 | )                               | $      | (1,650 | ) | $ | (13,212 | ) | $ | (8,099 | ) |
|                                                                              |   |                                       |   |                            |   |   |   |   |   |
| Basic and diluted net loss per share:                                             |   |                                       |   |                            |   |   |   |   |   |
| As reported                                                                       |   | $                                          | (0.21  | )                               | $      | (0.11 | ) | $ | (0.69 | ) | $ | (0.61 | ) |
| Pro forma                                                                         |   | $                                          | (0.22  | )                               | $      | (0.13 | ) | $ | (0.72 | ) | $ | (0.65 | ) |

 

**2.  Net Loss Per Share**

 

The following table sets forth the computation of basic and diluted netloss per share for the three-month and six-month periods ended June 30, 2003and 2002. Stock options representing3,666,000 and 4,852,000 shares in 2003 and 2002, respectively, were excludedfrom the calculation of diluted per share amounts because they areantidilutive. The 1.2 million warrants issued in connection with thedebt to Sun Mackie (see Note 6) and vested stock options at an exercise priceof $.01 are considered outstanding common shares and are included in the denominatorfor computation of basic and diluted net loss per share.

 
|                                                                                 |   | **Three  months ended  June 30,**          |   | **Six months  ended  June 30,** |   |
|--------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|---------------------------------|--------|
|                                                                                 |   | **2003**                                   |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                                                                 |   | **(in  thousands, except per share data)** |   |
| Numerator:                                                                           |   |                                       |   |                            |   |   |   |   |   |
| Net loss before cumulative effect of a  change in accounting principle               |   | $                                          | (4,252 | )                               | $      | (1,352 | ) | $ | (12,646 | ) | $ | (1,598 | ) |
| Cumulative effect of a change in accounting  principle                               |   | —                                     |   | —                          |   | — |   | (5,940 | ) |
| Numerator for basic and diluted net loss  per share                                  |   | $                                          | (4,252 | )                               | $      | (1,352 | ) | $ | (12,646 | ) | $ | (7,538 | ) |
|                                                                                 |   |                                       |   |                            |   |   |   |   |   |
| Denominator for basic and diluted net loss  per share – weighted average shares |   | 20,280                                     |   | 12,441                          |   | 18,276 |   | 12,435 |   |
|                                                                                 |   |                                       |   |                            |   |   |   |   |   |
| Basic and diluted net loss per share:                                                |   |                                       |   |                            |   |   |   |   |   |
| Net loss before cumulative effect of a  change in accounting principle               |   | $                                          | (0.21  | )                               | $      | (0.11 | ) | $ | (0.69 | ) | $ | (0.13 | ) |
| Cumulative effect of a change in accounting  principle                               |   | —                                     |   | —                          |   | — |   | $ | (0.48 | ) |
| Basic and diluted net loss per share                                                 |   | $                                          | (0.21  | )                               | $      | (0.11 | ) | $ | (0.69 | ) | $ | (0.61 | ) |

 

8

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**3.  Comprehensive Income (Loss)**

 

Comprehensive income (loss) for the three-month and six-month periodsended June 30, 2003 and 2002, is detailed below.

 
|                                     |   | **Three  months ended  June 30,** |       | **Six months  ended  June 30,** |   |
|------------------------------------------|--------|-----------------------------------|------------|---------------------------------|--------|
|                                     |   | **2003**                          |       | **2002**                        |   | **2003** |   | **2002** |   |
|                                     |   | **(in  thousands)**               | ** ** |
|                                     |   |                              |       |                            |   |   |   |   |   |
| Net loss                                 |   | $                                 | (4,252     | )                               | $      | (1,352 | ) | $ | (12,646 | ) | $ | (7,538 | ) |
| Other comprehensive income (loss):       |   |                              |       |                            |   |   |   |   |   |
| Foreign currency translation adjustments |   | (194                              | )          | 2,213                           |   | (289 | ) | 1,993 |   |
| Comprehensive income (loss)              |   | $                                 | (4,446     | )                               | $      | 861 |   | $ | (12,935 | ) | $ | (5,545 | ) |

 

**4.  Inventories**

 

Inventories consist of the following:

 
|            |   | **June 30,  2003**  |   | **December  31,  2002** |   |
|-----------------|--------|---------------------|--------|-------------------------|--------|
|            |   | **(in  thousands)** |   |
| Raw materials   |   | $                   | 12,340 |                    | $      | 22,246 |   |
| Work in process |   | 3,513               |   | 3,346                   |   |
| Finished goods  |   | 25,626              |   | 24,573                  |   |
|            |   | $                   | 41,479 |                    | $      | 50,165 |   |

 

**5.  Intangible Assets**

 

Intangible assets consist of the following:

 
|                          |   | **June 30,  2003**  |   | **December  31,  2002** |   |
|-------------------------------|--------|---------------------|--------|-------------------------|--------|
|                          |   | **(in  thousands)** |   |
| Developed technology          |   | $                   | 5,200  |                    | $      | 5,200 |   |
| Trademark                     |   | 1,380               |   | 1,380                   |   |
| Covenant not to compete       |   | 285                 |   | —                  |   |
|                          |   | 6,865               |   | 6,580                   |   |
| Less accumulated amortization |   | 1,101               |   | 905                     |   |
|                          |   | $                   | 5,764  |                    | $      | 5,675 |   |

 

In connection with the equity investment by Sun Mackie in February2003, Gregory C. Mackie resigned as a director of the Company, and entered intoa Consulting Agreement whereby he will provide services, upon our request, fora period of three years. There is a noncompete provision in this agreement fora period of five years from the date of the agreement. In exchange for thisnoncompete provision, Mr. Mackie was granted 170,000 stock options at anexercise price of $1.02 per share and an additional 330,000 of existing optionswere modified to comparable terms. The fair value of the vested options is$285,000 which has been recorded as an increase to common stock and a covenantnot to compete. The options vest over a period of three years, the covenantwill be amortized over this period. The 170,000 unvested options will be markedto market at the end of each reporting period and the related expense is beingrecognized over the vesting period of the options.

 

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**6.  Financing**

 

On March 31, 2003, a Loan and Security Agreement with a new lender wasfinalized which provides for a $26.0 million revolving line of credit. Thislender has also provided a $2.5 million term loan. Principal payments on theterm loan are due in equal monthly payments over five years, beginning in July2003. Interest is due monthly and is calculated at the bank’s prime rate plus aspecified margin. Both the revolving line of credit and term loan are securedby all U.S. based assets including, but not limited to, accounts receivable,inventory, fixed assets, intangible assets and patents. Additionally, a portionof the revolving line of credit is provided in the U.K. and is secured byaccounts receivable of Mackie Designs UK Plc. Under the terms of this Loan andSecurity Agreement, we must meet certain operating covenants and maintaincertain availability levels. Our previous U.S. lender has provided a loantotaling $11.0 million which is subordinate to the Loan and Security Agreementwith our new lender. This subordinated loan and the $2.5 million term loansatisfied the previously existing U.S. term loans. Principal on thesubordinated loan is due beginning in May 2004 based upon our 2003 earningsbefore interest, taxes, depreciation and amortization, less cash taxes paid,certain capital expenditures and certain debt repayments. Interest accrues at arate of 10% and is paid on a regular basis as we have availability under the Loanand Security Agreement. In addition to its equity investment, Sun Mackie hasprovided $4.0 million of subordinated debt financing which also funded on March31, 2003. Interest accrues at 15% and is paid annually beginning March 2004.The principal is due in a lump sum payment in 2007. In connection with the loanfrom Sun Mackie, we have issued warrants to purchase an additional 1.2 millioncommon shares at an exercise price of $.01 per share.  The $4.0 million of proceeds from the issuance of the debt andwarrants was allocated based on the estimated relative value of each of thesecurities. The value assigned to the debt was $3.4 million; the value assignedto the warrants was $600,000. The resulting effective interest rate on the debtis 18.75%.

 

The Loan and Security Agreement and Subordinated Credit Agreementprovide, among other matters, restrictions on additional financing, dividends,mergers, acquisitions, an annual capital expenditure limit and minimum EBITDAlevels. At June 30, 2003, we were out of compliance with our EBITDA covenants.The senior lender can declare an event of default, which would allow them toaccelerate payment of all amounts due under the agreements. Although there isno assurance that it will be received, we are in discussions with the seniorlender and expect to receive an amendment and/or waiver to the Loan andSecurity Agreement. Additionally, the non-compliance may result in higherinterest costs and/or other fees. We are highly leveraged and would be unableto pay the accelerated amounts that would become immediately due and payable ifa default is declared under any of the loans. The total of the subordinateddebt and term loan is $13.5 million, and as a result of this non-compliance,this amount is classified as a current liability under the caption, “Currentportion of long-term debt and long-term debt callable under covenantprovisions.”

 

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. Thesemeasures included layoffs and reduction of capital expenditures in 2002 andfurther layoffs in 2003. In addition, we are in the process of closing certainmanufacturing and engineering facilities and will continue to outsource productmanufacturing to contract manufacturers. We have also outsourced certainengineering activities. Additionally, we plan to close certain internationalsales offices. Finally, there will continue to be intensive focus on controlsover expenditures. If these planned cost reductions are not realized andcontinued or there is a significant decline in net sales, our operating resultswill be adversely affected. There may be significant restructuring costs andcash outlays associated with these activities over the next two to threequarters. There is no certainty that we will have sufficient funds fromoperations to cover these expenses. Although there is no assurance, additionalcredit facilities may be available from our existing lender, majority owner orfrom other sources.

 

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**7.**  **Liabilities of Unconsolidated Affiliate**

 

In March 2003, we determined that we would no longer fund theengineering activities of Mackie Designs Engineering Services, a Belgiumsubsidiary. This entity filed for bankruptcy in April 2003. Due to thebankruptcy proceedings, we no longer have control of this entity; consequently,the financial statements of Mackie Designs Engineering Services are no longerincluded in our consolidated accounts. Instead, our potential remainingcommitment related to Mackie Designs Engineering Services is included in thecaption “Liabilities of unconsolidated affiliate.” The $1.2 million creditbalance reflects the potential liability of Mackie Designs associated with thefinalization of the bankruptcy proceedings and our obligation under a guaranteeof a portion of the debt of Mackie Designs Engineering Services.

 

**8.  Guarantees**

 

Except as mentioned in Note 7, we are not subject to potentialobligations under guarantees that fall within the scope of FIN No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” except for standard indemnificationand warranty provisions. Indemnification and warranty provisions containedwithin our sales agreements are generally consistent with those prevalent inour industry. The duration of product warranties is generally one to six yearsfollowing delivery of products.

 

Thewarranty liability is summarized as follows (in thousands):

 
|                           |   | **Balance at  December 31,  2002** |   | **Charged to  cost of sales****** |   | **Applied  to  liability****** |   | **Balance at  June 30,  2003** |   |
|--------------------------------|--------|------------------------------------|--------|-----------------------------------|--------|--------------------------------|--------|--------------------------------|--------|
|                           |   |                               |   |                              |   |                           |   |                           |   |
| Six months ended June 30, 2003 |   | $                                  | 1,525  |                              | $      | 1,969                          |   | $                              | 1,991  |   | $ | 1,503 |   |
|                                |        |                                    |        |                                   |        |                                |        |                                |        |  |  |  |  |

 

**9.  Contingencies**

 

Subrogated claims have been asserted against us from insurancecompanies who prior to our acquisition of Eastern Acoustic Works, Inc. (EAW),paid claims made by EAW’s landlord and other tenants of the Whitinsville buildingwho were affected by a fire started by a loaned employee in a portion of thebuilding in 1996. The potential loss from this claim may exceed $4 millioninclusive of interest, some portion of which we anticipate would be covered byinsurance. We expect the matter to come to trial in March 2004. We believe thatthese losses are not attributable to us under Massachusetts’ law and arevigorously defending the litigation. The claims of the other tenants have beencovered by EAW’s insurance carrier. The ultimate resolution of this matter isnot known at this time. No provision has been made in our consolidatedfinancial statements related to these claims.

 

We are also involved in various legal proceedings and claims that arisein the ordinary course of business. We currently believe that these matterswill not have a material adverse impact on our financial position, liquidity orresults of operations.

 

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**Item2.  Management’s Discussion and Analysis of Financial Condition andResults 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, 2002. This discussioncontains certain “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995 that involve risks and uncertainties,such as statements of our plans, objectives, expectations and intentions.Actual results could differ materially from those discussed herein. Thecautionary statements made in this Quarterly Report on Form 10-Q and the AnnualReport on Form 10-K should be read as being applicable to all forward-lookingstatements wherever they appear. We undertake no obligation to publicly releaseany revisions to these forward-looking statements that may be required toreflect events or circumstances after the date hereof or to reflect theoccurrence of unanticipated events. 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.*

 

**General**

 

We develop, manufacture and sell high-quality, affordable digital andanalog audio mixers, speakers, amplifiers and other professional audioequipment on a worldwide basis. Our products are used by professionalmusicians, sound installation contractors and broadcast professionals in soundrecordings, live presentations systems and installed sound systems. Wedistribute our products primarily through retail dealers, mail order outletsand installed sound contractors.

 

On February 21, 2003, we finalized an agreement with Sun Mackie, LLC,an affiliate of Sun Capital Partners, Inc., a private investment firm, wherebySun Mackie purchased approximately 14.4 million shares of our common stock for$10.0 million. Sun Mackie acquired approximately 7.4 million of these sharesfrom certain selling shareholders. It acquired approximately 6.9 million newlyissued shares directly from the Company for approximately $6.3 million. Netproceeds after transaction related costs were approximately $3.5 million. As aresult of this transaction, Sun Mackie acquired approximately 74% of ouroutstanding shares.

 

On March 31, 2003, we finalized a new Loan and Security Agreement thatprovides for a revolving line of credit of up to $26.0 million and a term loanof $2.5 million with a new lender. In addition, we finalized a three yearsubordinated loan of $11.0 million with our former principal U.S. lender and a$4.0 million four year subordinated note with Sun Mackie. In connection withthe loan from Sun Mackie, we issued warrants to purchase an additional 1.2million common shares at an exercise price of $.01 per share. The proceeds fromthese new borrowings were primarily used to replace the previously existingU.S. line of credit and satisfy other existing debt of approximately $13.6million.

 

**Critical Accounting Policies and Estimates**

 

Our discussion and analysis of our financial condition and results ofoperations following are based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States of America. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, sales and expenses, and related disclosure ofcontingent assets and liabilities.

 

We believe that the estimates, assumptions and judgments involved inthe accounting policies described below have the greatest potential impact onour financial statements, so we consider these to be our critical accountingpolicies. Because of the uncertainty inherent in these matters, actual resultscould

 

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differ from the estimates we use in applying the critical accountingpolicies. Certain of these critical accounting policies affect working capitalaccount balances, including the policies for revenue recognition, allowance fordoubtful accounts, inventory valuation and income taxes. These policies requirethat we make estimates in the preparation of our financial statements as of agiven date. However, since our business cycle is relatively short, actualresults related to these estimates are generally known within the six-monthperiod following the financial statement date. Thus, these policies generallyaffect only the timing of reported amounts across two to three quarters.

 

***Inventory Valuation***.  Webelieve our policy on valuing inventory, including market value adjustments, isour primary critical accounting policy. Inventories are stated at the lower ofstandard cost, which approximates actual cost on a first-in, first-out method,or market. Included in our inventories balance are demonstration products usedby our sales representatives and marketing department including finished goodsthat have been shipped to customers for evaluation. Market value adjustmentsare recorded for obsolete material, slow-moving product, service anddemonstration products. We make judgments regarding the carrying value of ourinventory based upon current market conditions. These conditions may changedepending upon competitive product introductions, customer demand and otherfactors. If the market for our previously released products changes, we may berequired to write down the cost of our inventory.

 

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

 

***Long-lived Assets.*** We assess the impairment of long-lived assetswhenever events or changes in circumstances indicate that the carrying valuemay not be recoverable. Significant judgment is used in assessing factors whichmight trigger impairment including significant underperformance relative toexpected operating results, significant changes in our use of the assets or thestrategy for our overall business, and significant negative industry oreconomic trends. As we continue to review our distribution methods andtransition our manufacturing to third parties, this may result in circumstanceswhere the carrying value of certain long-lived assets may not be recoverable.

 

***Revenue Recognition****.*  Revenuesfrom sales of products, net of sales discounts, returns and allowances, aregenerally recognized upon shipment under an agreement with a customer when riskof loss has passed to the customer, all significant contractual obligationshave been satisfied, the fee is fixed or determinable and collection of theresulting receivable is considered probable. Products are generally shipped“FOB shipping point” with no right of return. Sales with contingencies, such asrights of return, rotation rights, conditional acceptance provisions and priceprotection, are rare and insignificant and are deferred until the contingencieshave been satisfied or the contingent period has lapsed. We generally warrantour products against defects in materials and workmanship for periods ofbetween one and six years. The estimated cost of warranty obligations, salesreturns and other allowances are recognized at the time of revenue recognitionbased on contract terms and prior claims experience.

 

***Income Taxes.*** As part of the process of preparing ourfinancial statements, we are required to estimate our income taxes in each ofthe jurisdictions in which we operate. This process involves estimating ouractual current tax exposure together with assessing temporary differencesresulting from differing treatment of items for tax and accounting purposes.These differences result in deferred tax assets and liabilities, which areincluded in our balance sheet. We must then assess the likelihood that ourdeferred tax assets will be recovered from future taxable income and to theextent we believe that

 

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recovery is not likely, we must establish avaluation allowance. To the extent we establish a valuation allowance orincrease this allowance in a period, we must include an expense within the taxprovision in the Statement of Operations. Conversely, if the allowance isdecreased the tax provision will be credited. Significant management judgment is requiredin determining our provision for income taxes, deferred tax assets andliabilities and any valuation allowance recorded against our net deferred taxassets.

 

# **Results of Operations**

 

Net sales decreased during the second quarter of 2003 to $43.4 million,a decrease of 11% from $48.8 million in the comparable quarter of 2002. Netsales for the six months ended June 30, 2003 were $83.9 million, a decrease of14% from $97.9 million during the six months ended June 30, 2002. The decreaserelated to lower volumes in both the U.S. and Europe. The sales volume isfurther affected as we have reduced prices or offered discounts on certainproducts and have made decisions to streamline our product offerings to limitlower margin and lower volume products.

 

Gross profit decreased to 22% in the second quarter of 2003 from 31% inthe second quarter of 2002. Gross profit decreased to 20% for the six monthsended June 30, 2003 from 32% for the six months ended June 30, 2002. The lowergross margin primarily reflects the excess capacity in our factories created aswe continue the transition of products to contract manufacturers and scale ourbusiness to reduced volumes. Costs in 2003 include additional depreciationcharges for manufacturing assets which will no longer be utilized after thetransition is complete. Additionally, we have made certain inventoryadjustments for material we believe will be excess in the future. Gross profitof 22% in the second quarter of 2003 represents an increase over gross profitof 19% in the first quarter of 2003. We believe that our gross profitpercentage will continue to increase incrementally throughout 2003 as thetransition efforts progress.

 

We expect that the transition of manufacturing operations from ourWoodinville, Washington factory will be substantially complete in September2003. Consequently, we expect to incur significant charges in the third quarterof 2003 in connection with severance and other shut-down costs. Severance andshut-down costs from the downsizing or closure of other facilities will likelybe incurred over the next several quarters.

 

Selling, general and administrative expenses were $11.3 million or 26%of sales in the second quarter of 2003 as compared to $12.9 million or 26% ofsales in the second quarter of 2002. During the six months ended June 30, 2003,selling, general and administrative expenses were $23.5 million or 28% of netsales compared to $25.4 million or 26% of net sales for the same time period in2002. Expenses in the first six months of 2003 included certain one-time itemsrelated to the equity investment by Sun Mackie, LLC including run-off policiesfor directors’ and officers’ liability insurance totaling approximately$500,000. Severance costs incurred in connection with a reduction in headcountand the change of key personnel also affected both the first and secondquarters of 2003. Certain costs, such as commissions, which fluctuate withsales, were lower in the three-month and six-month periods ended June 2003 thanin the three-month and six-month periods ended June 2002. Additionally, costcontainment measures including reductions in marketing and tradeshow costs alsocontributed to the lower costs.

 

Research and development expenses were $1.9 million or 4% of sales inthe second quarter of 2003 as compared to $2.9 million or 6% of sales in thesecond quarter of 2002. During the six months ended June 30, 2003, research anddevelopment expenses were $4.5 million or 5% of net sales compared to $5.5million or 6% of net sales for the same time period in 2002. This decrease inthe second quarter of 2003 relates primarily to headcount reductions madeduring the first quarter of 2003 and the closure and bankruptcy of MackieDesigns Engineering Services, the Belgian facility which had previously houseda portion of our research and development group.

 

Net other expense was $1.1 million for the second quarter of 2003 ascompared to $557,000 in the second quarter of 2002. Net other expense was $1.7million for both the six months ended June 30,

 

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2003 and the six months ended June 30, 2002. Included in this amount isinterest expense which increased to $1.3 million in the second quarter of 2003from $1.1 million in the corresponding period of 2002. Interest expense for thesix months ended June 30, 2003 and 2002 was $2.2 million. The increase in thesecond quarter of 2003 relates to higher interest rates on the portion of ourdebt which was converted to subordinated debt. Other income, comprisedprimarily of foreign exchange transaction gains and losses, was income of$133,000 in the second quarter of 2003 compared with $424,000 in the secondquarter of 2002. For the six months ended June 30, 2003, other income was$321,000 compared to $278,000 for the comparable period in 2002. These gainsare primarily the result of changes in exchange rates between the Euro and theU.S. Dollar.

 

In April 2001, we acquired all the outstanding shares of Mackie DesignsEngineering Services for approximately $4.4 million. $3.4 million of thisamount was paid in 2001 and 2002; the remaining $1.0 million is included inaccounts payable at June 30, 2003 and December 31, 2002. As described in Note 7to the financial statements included in the Quarterly Report on Form 10-Q,Mackie Designs Engineering Services filed for bankruptcy in April 2003. InAugust 2003, we concluded negotiations with the previous owner to settle the obligationof $1.0 million, as well as a portion of the other liabilities associated withMackie Designs Engineering Services, by the payment of $200,000 in cash and thetransfer of certain inventory and intellectual property owned by MackieDesigns. There is no value assigned to the inventory and intellectual propertyat June 30, 2003, consequently we expect to record a minimum of approximately$800,000 of other income from this transaction in the third quarter of 2003.Additionally, we believe that the potential liabilities included in the caption“Liabilities of unconsolidated affiliate” may be settled for a lesser amountwith the finalization of the bankruptcy proceedings and the conclusion of othernegotiations. This difference in the settlement amount will be included inother income.

 

Income tax benefit for the second quarter of 2003 was $535,000 comparedto a tax expense of $305,000 for the comparable period in 2002.  Income tax expense for the six months endedJune 30, 2003, was $90,000 compared to income tax expense of $199,000 for thecomparable period in 2002. The tax primarily relates to our non-U.S.subsidiaries. No tax benefit is recognized in connection with our tax losses asrecognition of such benefit depends on future profits, which is not assured. Wecalculate the current tax rate based upon our estimate of the tax rate to beachieved for the full year.

 

**Cumulative Effect of a Change in AccountingPrinciple**

 

We adopted FAS No. 142 on January 1, 2002. As required by FAS No. 142,we performed the transitional impairment test on goodwill and otherintangibles, which consisted of assembled workforce, and recorded a $5.9million cumulative effect of a change in accounting principle at the adoptiondate.

 

# **Liquidity and Capital Resources**

 

In February 2003, Sun Mackie, LLC, an affiliate of Sun CapitalPartners, Inc., a private investment firm, made a strategic equity investmentin Mackie Designs totaling $6.3 million. Net proceeds after transaction relatedcosts were approximately $3.5 million.

 

A Loan and Security Agreement with a new lender was finalized on March31, 2003 and provides for a $26.0 million revolving line of credit.Availability under this line of credit is limited to eligible collateral whichtotaled $16.5 million at June 30, 2003. Total funds drawn at June 30, 2003 were$13.7 million and availability under the line was $2.8 million. Interest is duemonthly calculated at the bank’s prime rate plus 0.75% or Eurodollar Rate plus3.5%. This lender has also provided a $2.5 million term loan. Principalpayments on the term loan are due in equal monthly payments over five years,beginning in July 2003. Interest is due monthly and is calculated at the bank’sprime rate plus a specified margin. Both the revolving line of credit and termloan are secured by all U.S. based assets including, but not limited to,accounts receivable, inventory, fixed assets, intangible assets and patents.Additionally, a

 

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portion of the revolving line of credit is provided in the U.K. and issecured by accounts receivable of Mackie Designs UK Plc. Under the terms of theLoan and Security Agreement, we must meet certain operating covenants andmaintain certain availability levels. The term of the agreement is three years.

 

Our previous U.S. lender has provided a loan totaling $11.0 millionwhich is subordinate to the Loan and Security Agreement with our new lender.Principal is due beginning in May 2004 based upon our 2003 earnings beforeinterest, taxes, depreciation and amortization, less cash taxes paid, certaincapital expenditures and certain debt repayments. Interest accrues at a rate of10% and is paid on a regular basis as we have availability under the Loan andSecurity Agreement. In addition to its equity investment, Sun Mackie hasprovided $4.0 million of debt financing which also funded in March 2003.Interest accrues at 15% and is paid annually beginning March 2004. Theprincipal is due in a lump sum payment in 2007. In connection with the loanfrom Sun Mackie, we have issued warrants to purchase an additional 1.2 millioncommon shares at an exercise price of $.01 per share. The $4.0 million ofproceeds from the issuance of the debt and warrants was allocated based on theestimated relative value of each of the securities. The value assigned to thedebt was $3.4 million; the value assigned to the warrants was $600,000. Theresulting effective interest rate on the debt is 18.75%.

 

The Loan and Security Agreement and Subordinated Credit Agreementprovide, among other matters, restrictions on additional financing, dividends,mergers, acquisitions, an annual capital expenditure limit and minimum EBITDAlevels. At June 30, 2003, we were out of compliance with our EBITDA covenants.The senior lender can declare an event of default, which would allow them toaccelerate payment of all amounts due under the agreements. Although there isno assurance that it will be received, we are in discussions with our seniorlender and expect to receive an amendment and/or waiver to the Loan andSecurity Agreement. Additionally, the non-compliance may result in higherinterest costs and/or other fees. We are highly leveraged and would be unableto pay the accelerated amounts that would become immediately due and payable ifa default is declared under any of the loans. The total of the subordinateddebt and term loan is $13.5 million, and as a result of this non-compliance,this amount is classified as current liability under the caption "Currentportion of long-term debt and long-term debt callable under covenantprovisions."

 

Additionally, we have agreements with several banks in Italy thatprovide short-term credit facilities totaling approximately $26.7 million,subject to certain limitations. These limitations reduced the actual availabilityto approximately $18.9 million. At June 30, 2003, there was approximately $17.2million outstanding under these facilities. The majority of these creditfacilities are secured by receivables of Mackie Italy. There are other bankterm loans and notes in Italy totaling approximately $7.7 million at June 30,2003. Specific assets of Mackie Italy, including owned land and buildings,secure certain of these loans. Approximately $5.4 million of Italian debt waspaid off in May with the maturity of zero coupon bonds which had secured thedebt.

 

Certain of the Italian banks have indicated that they may be unwillingto provide additional receivables financing, or have indicated that they willno longer accept intercompany receivables as acceptable collateral. Thesecredit agreements are not guaranteed by the U.S. Company. If we are unable tocontinue to receive adequate receivables financing in Italy, we may be forcedto obtain alternate financing at less favorable rates. There is no guaranteethat such alternate financing will be available. Any reduction in our borrowingability would have an adverse effect on our results of operations and financialcondition.

 

Finally, Mackie Designs Engineering Services had a line of credit andlong-term loan with a bank in Belgium totaling approximately $500,000. Theseloans were secured by certain assets of Mackie Designs Engineering Services,and are guaranteed up to approximately $240,000 by Mackie Designs Inc. In March2003, we determined that we would no longer fund the engineering activities ofthis entity and Mackie Designs Engineering Services filed for bankruptcy inApril 2003.  In June 2003, the Belgianbank demanded repayment of the guaranteed amount from Mackie Designs.  The entire liability is included as a currentliability under the caption “Liabilities of unconsolidated affiliate.”

 

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

 

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measures. These measures included layoffs and reduction of capitalexpenditures in 2002 and further layoffs in 2003. In addition, we are in theprocess of closing certain manufacturing and engineering facilities and willcontinue to outsource product manufacturing to contract manufacturers. We havealso outsourced certain engineering activities. Additionally, we plan to closecertain international sales offices. Finally, there will continue to beintensive focus on controls over expenditures. If these planned cost reductionsare not realized and continued or there is a significant decline in net sales,our operating results will be adversely affected. There may be significantrestructuring costs and cash outlays associated with these activities over thenext two to three quarters. There is no certainty that we will have sufficientfunds from operations to cover these expenses. Although there is no assurance,additional credit facilities may be available from our existing lender,majority owner or from other sources.

 

Cash provided by operating activities was $5.2 million in the sixmonths ended June 30, 2003, and cash used in operating activities was $115,000for the comparable period in 2002. Net cash provided by operating activities inthe first six months of 2003 was primarily attributable to decreases ininventories and accounts receivable, offset by reductions in accounts payableand accrued liabilities. In the first six months of 2002, cash was usedprimarily to fund increases in accounts receivable and inventories offset byincreases in accounts payable and accrued expenses.

 

Cash used in investing activities was $789,000 for the first six monthsof 2003 and $1.6 million for the first six months of 2002. The cash flows usedin investing activities in both years consisted entirely of purchases ofproperty, plant and equipment.

 

Cash used in financing activities during the first six months of 2003was $6.9 million which relates primarily to the equity transaction and debtrestructuring mentioned elsewhere in this Quarterly Report on Form 10-Q. Cashprovided by financing activities in the first six months of 2002 was $2.5million which reflected repayments of long-term debt and net proceeds fromshort-term borrowings.

 

**New Accounting Pronouncements**

 

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

 

InJanuary 2003, the FASB issued Interpretation No. 46, “Consolidation ofVariable Interest Entities.” Variable interest entities often are created for asingle specified purpose, for example, to facilitate securitization, leasing,hedging, research and development, or other transactions or arrangements.Formerly “Consolidation of Certain Special Purpose Entities” in its draft form,this interpretation of Accounting Research Bulletin No. 51, “ConsolidatedFinancial Statements,” defines what these variable interest entities are andprovides guidelines on how to identify them and also on how an enterpriseshould assess its interests in a variable interest entity to decide whether toconsolidate that entity. Generally, FIN No. 46 applies to variable interestentities created after January 31, 2003, and to variable interest entities inwhich an enterprise obtains an interest after that date. For existing variableinterest entities in which an enterprise holds a variable interest that itacquired before February 1, 2003, the provision of this interpretation willapply no later than the beginning of the first interim or annual reportingperiod beginning after June 15, 2003. Currently, we do not have any variableinterest entities, and we do not expect the adoption of FIN No. 46 will have amaterial impact on our financial statements.

 

InMay 2003, the FASB issued Statement of Financial Accounting StandardsNo. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.” FAS 150 requires that certainfinancial instruments that, under previous guidance, could be accounted for asequity, now be classified as liabilities. These financial instruments includemandatorily redeemable

 

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shares,instruments that do or may require the issuer to buy back some of its shares inexchange for cash or other assets and certain obligations that can be settledwith shares. FAS 150 also requires additional disclosures about alternativeways of settling these types of instruments and the capital structure ofentities. Most of the provisions of FAS 150 are effective for all financialinstruments entered into or modified after May 31, 2003, and otherwise areeffective at the beginning of the first interim period beginning afterJune 15, 2003. This accounting pronouncement is not expected to have amaterial impact on our financial position or results of operations.

 

**Item3.  Quantitative and Qualitative Disclosures About Market Risk**

 

We are exposed to various market risks, including changes in foreigncurrency rates and interest rates. We may enter into various derivativetransactions to manage certain of these exposures; however we did not have anymaterial derivative financial instruments as of June 30, 2003.

 

At June 30, 2003, we had variable rate debt of approximately $39.8million provided by U.S. and Italian banks. Changes in U.S. and Europeaninterest rates affect interest paid on debt and we are exposed to interest raterisk. In the six months ended June 30, 2003, an increase in the averageinterest rate of 10%, i.e. from 6% to 6.6%, would have resulted in anapproximately $128,000 increase to the net loss before income taxes. A similarincrease during the six months ended June 30, 2002 would have resulted in anapproximately $191,000 increase to the net loss before income taxes. The fairvalue of such debt approximates the carrying amount on the consolidated balancesheet at June 30, 2003.

 

The assets and liabilities of our non-U.S. subsidiaries have functionalcurrencies other than the U.S. Dollar, and are translated into U.S. Dollars atexchange rates in effect at the balance sheet date. These subsidiaries arelocated in western Europe and the U.K., the functional currencies of which arethe Euro and British Pound. Income and expense items are translated at theaverage exchange rates prevailing during the period. A 10% decrease in thevalue of the U.S. Dollar compared to the functional currencies of our non-U.S.subsidiaries, throughout the six months ended June 30, 2003, would haveresulted in an approximately $772,000 increase to the net loss before incometaxes. 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 to net loss before income taxes.

 

**Item4.  Controls and Procedures**

 

Our Chief Executive Officer and ChiefFinancial Officer conducted an evaluation as of the end of the period coveredby this report of the effectiveness of our disclosure controls and procedures.Based on that evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that, as of the evaluation date, our disclosure controls andprocedures are effective in alerting them on a timely basis to material informationrequired to be included in this report. Our Chief Executive Officer and ChiefFinancial Officer also conducted an evaluation of our internal control overfinancial reporting to determine whether any changes occurred during thequarter covered by this report that have materially affected, or are reasonablylikely to materially affect our internal control over financial reporting.  Based on that evaluation, they havedetermined that there has been no such change during the quarter covered bythis report.

 

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**PARTII.  OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

Subrogated claims have been asserted against us from insurancecompanies who prior to our acquisition of Eastern Acoustic Works, Inc. (EAW),paid claims made by EAW’s landlord and other tenants of the Whitinsvillebuilding who were affected by a fire started by a loaned employee in a portionof the building in 1996. The potential loss from this claim may exceed $4million inclusive of interest; some portion of which we anticipate would becovered by insurance. We expect the matter to come to trial in March 2004. Webelieve that these losses are not attributable to us under Massachusetts’ lawand are vigorously defending the litigation. The claims of the other tenantshave been covered by EAW’s insurance carrier. The ultimate resolution of thismatter is not known at this time. No provision has been made in ourconsolidated financial statements related to these claims.

 

We are also involved in various legal proceedings and claims that arisein the ordinary course of business. We currently believe that these matterswill not have a material adverse impact on our financial position, liquidity orresults of operations.

 

**Item2.  Changes in Securities and Use of Proceeds**

 

None.

 

**Item3.  Defaults upon Senior Securities**

 

None.

 

# **Item4.  Submission of Matters to a Vote of Security Holders**

 

(a)                                  Our annual meeting ofshareholders was held on April 30, 2003.

 

(b)                                 At the annual meeting,R. Lynn Skillen was elected to serve as Class 1 director for a two-year term;Marc J. Leder, Rodger R. Krouse, Kevin Calhoun and C. Deryl Couch were electedto serve as Class 2 directors each for a three-year term; and Clarence E. Terryand C. Daryl Hollis were elected to serve as Class 3 directors each for aone-year term.

 

(c)                                  The results of votingfor the election of directors at the annual meeting were as follows:

 
| **Nominee**       |   | **For**    |   | **Withheld** |   |
|-------------------|--------|------------|--------|--------------|--------|
|              |   |       |   |         |   |
| R. Lynn Skillen   |   | 14,606,262 |   | 2,004        |   |
| Marc J. Leder     |   | 14,533,651 |   | 75,011       |   |
| Rodger R. Krouse  |   | 14,533,651 |   | 75,011       |   |
| Kevin Calhoun     |   | 14,606,262 |   | 2,004        |   |
| C. Deryl Couch    |   | 14,606,262 |   | 2,004        |   |
| Clarence E. Terry |   | 14,533,651 |   | 75,011       |   |
| C. Daryl Hollis   |   | 14,606,262 |   | 2,004        |   |

 

**Item5.  Other Information**

 

None.

 

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# **Item6.  Exhibits and Reports on Form 8-K**

 

(a)          Exhibits

 

31.1 Certification of Principal Executive Officer Pursuant to Section302 of the Sarbanes-Oxley Act of 2002.

 

31.2 Certification of Principal Financial Officer Pursuant to Section302 of the Sarbanes-Oxley Act of 2002.

 

32.1 Certification pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002. 

 

(b)         Reportson Form 8-K

 

The Company filed a report on Form 8-K on April 8, 2003 to announce therestructuring of its credit facilities completed on March 31, 2003.

 

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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:  August 14, 2003 | By:                                                                                                                        | /s/ James T. Engen |
|                         | James T. Engen                                                                                                             |
|                         | *President, Chief Executive Officer and  Director*                                                                         |
|                         |                                                                                                                       |
| Dated:  August 14, 2003 | By:                                                                                                                        | /s/ Tim O’Neil |
|                         | Tim O’Neil                                                                                                            |
|                         | *Chief Financial Officer, Vice President  Finance, Secretary and Treasurer  (Principal Financial and Accounting  Officer)* |

 

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