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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from____________________to____________________________
Commission File Number: 0-26524
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MACKIE DESIGNS INC.
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(Exact name of registrant as specified in its charter)
Washington 91-1432133
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16220 Wood-Red Road, N.E., Woodinville, Washington 98072
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(Address of principal executive offices) (Zip Code)
(425) 487-4333
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- - ----------------------------- ----------------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - no par value
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(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 6 , 2000 , the aggregate market value of the Registrant's
Common Stock held by nonaffiliates of the Registrant was $13,175,293 based on
the closing sales price of the Registrant's Common Stock on the Nasdaq National
Market. On that date, there were 12,107,758 shares of Common Stock outstanding.
Portions of the Registrant's definitive Proxy Statement for its 2000
Annual Meeting of Shareholders are incorporated by reference into Part III
hereof.
MACKIE DESIGNS INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
INDEX
Page
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Part I
Item 1. Business................................................................................... 3
Item 2. Properties................................................................................. 14
Item 3. Legal Proceedings.......................................................................... 14
Item 4. Submission of Matters to a Vote of Securities Holders...................................... 15
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................... 15
Item 6. Selected Financial Data.................................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 17
Item 7a. Qualitative and Quantitative Disclosures About Market Risk................................. 22
Item 8. Consolidated Financial Statements and Supplementary Data................................... 23
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.... 44
Part III
Item 10. Directors and Executive Officers of the Registrant......................................... 44
Item 11. Executive Compensation..................................................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 44
Item 13. Certain Relationships and Related Transactions............................................. 44
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 44
Signatures.............................................................................................. 46
2
PART I
ITEM 1. BUSINESS
INTRODUCTION
Mackie Designs Inc. ("Mackie" or the "Company") develops,
manufactures, sells and supports high-quality, reasonably priced professional
audio equipment. The Company's products are used in a wide variety of sound
applications including home and commercial recording studios, multimedia and
video production, compact disc, read-only memory ("CD-ROM") authoring, live
performances, and public address systems. The Company offers a range of
products at suggested retail prices of up to $13,000, which generally
represents the low to mid-range price points within the professional audio
market. Mackie distributes its products through a network of independent
representatives to over 1,000 retail dealers of professional audio equipment
in the U.S. Internationally products are offered through Mackie subsidiaries
in Italy, France, Germany, the United Kingdom and China and through local
distributors in nearly 70 other countries where the Company does not have
direct operations.
In June 1998, the Company purchased Radio Cine Forniture (R.C.F.)
S.p.A. ("RCF"), an Italian corporation with principal offices in Reggio Emilia,
Italy and manufacturing facilities located in northern and central Italy. RCF's
principal activity is the manufacture of loudspeakers and speaker components.
Its products are distributed throughout the world, and are well recognized for
quality. RCF works in conjunction with the Company in the development and
manufacture of speaker products bearing both the "MACKIE." and "RCF" brands.
The Company's primary products are analog and digital mixers,
mixer-related products, amplifiers, loudspeakers and loudspeaker components . A
mixer serves as the central component of any professional audio system by
electronically blending, routing and enhancing sound sources, such as voices,
musical instruments, sound effects and audio tape, video tape and other
pre-recorded material. For example, using a mixer, a vocalist may be heard above
the accompaniment, background singers are combined, and individual instruments
are blended into the overall mix. The musician or sound technician accomplishes
this task by using the mixer controls to adjust the relative volume of each
sound source.
Audio mixers are a necessary component of any recording system, whether
the system is being used to produce an audio tape, compact disc ("CD"), video
soundtrack or multimedia CD-ROM. A mixer is used not only to balance sound
inputs when recording initial tracks, but is also often used to further process
and edit the tracks prior to duplication and distribution of the recording.
Mixers are used in recording applications by commercial and home studios, in
film and video post-production, in business presentations and teleconferencing,
in the production of television and radio programming and in multimedia
productions such as CD-ROM and on-line authoring.
Mixers are also used to control relative audio levels in live
presentations at locations such as auditoriums, ballrooms, theaters and sports
arenas. For example, a typical performing group uses from four to 32 microphones
and electronic inputs. Large concert tours and musical road productions often
have 56 or more sound inputs, which may include pre-recorded music and sound
effects. Many churches use multiple microphones for spoken word and music during
their services.
In late 1996, the Company introduced power amplifiers, its first line
of products that are not directly related to mixers. Power amplifiers are used
to amplify the output signals from mixers to a level sufficient to drive
loudspeakers. Amplifiers are used with mixers and loudspeakers in a variety of
applications, such as private and touring sound reinforcement systems, permanent
industrial and
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commercial installations, recording studios, and theatre/cinema and broadcast
facilities. The power amplifier line is distributed through the same channels as
mixers.
In August 1997, the Company introduced powered monitor speakers.
Powered monitors combine signal processing, power amplifiers, and speakers in
one cabinet housing. Enclosing an amplifier in the speaker eliminates one step
of the path the sound signal travels, reducing the chance of altering the
original signal. This step is very important when recording with highly
sensitive professional audio equipment to accurately reproduce sound. Mackie's
powered monitors are used in conjunction with a mixer, and are sold through
existing mixer distribution channels.
The Company's traditional markets have been analog mixers and related
products. In 1997, digital technologies were developed by the Company to expand
its market base. Mackie's first digital product, Human User Interface ("HUI") an
interface tool for digital audio workstations ("DAW"), was introduced in late
1997. This DAW interface targets the rapidly growing digital audio workstation
market, and was developed in conjunction with Digidesign, a division of Avid
Technology, Inc . DAWs are used in video, film, multimedia and recording
studios.
With the acquisition of RCF, the Company expanded its product line into
speakers and speaker components. RCF manufactures raw speaker components used by
third-party speaker manufacturers. RCF also produces several types of finished
speakers ready for the installed sound and professional audio markets.
In July 1998, the Company began shipping the Digital 8-Bus digital
mixing console ("D8B"). Like analog mixers, the D8B blends, routes and enhances
sound sources but does so with the added capability of recalling all settings
and automating them in real time. In addition, the D8B's open hardware and
software architecture allows the customer to configure the D8B to interface with
any type of device, analog or digital, and the D8B's internal sound processing
capabilities can be enhanced with third party software "plug-ins." Markets
include recorded sound, such as commercial and home studios, multimedia
production, sound for video games and film and video post-production. In the
second quarter of 2000, the Company plans to ship its first digital recorder,
the HDR24/96. Every mixer sold to the recording market is connected to a
recorder of some sort making the HDR24/96 a natural product extension for
Mackie.
The HDR24/96 is a 24-track, 24 bit recorder with complete on-screen
editing capabilities. Utilizing off-the-shelf computer hardware controlled by
Mackie's own Real Time Operating System-TM- allows the HDR24/96 to offer
powerful recording and editing features at a very low price. In addition Mackie
is able to take advantage of falling prices and increasing speed and
capabilities generated by the computer industry. industry.
Mackie was incorporated in Washington in 1988. The Company's executive
offices and U.S. manufacturing facilities are located at 16220 Wood-Red Road
N.E., Woodinville, Washington 98072, and its telephone number is (425 )
487-4333. RCF was incorporated in Italy in 1949 and its executive offices are
located at Via G. Ferraris, 2-42029, S. Maurizio, Reggio Emilia, Italy , and its
telephone number is 390 522 354111 .
"MACKIE.", the running figure, "RCF," "Artesuono" and all of the names
of the Company's U.S.-produced products are registered trademarks or common law
trademarks of the Company. To the extent trademarks are unregistered, the
Company is unaware of any conflicts with trademarks owned by third parties. This
document also contains names and marks of other companies.
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PRODUCTS
The Company currently offers professional audio equipment in numerous
product categories including: Compact mixers, 8 Bus consoles, SR series mixers,
digital consoles, other digital automation systems, CFX compact mixers with
effects, PPM Powered mixers, amplifiers, studio monitors, active and passive
loudspeakers, contractor products and loudspeaker components.
COMPACT MIXERS. Compact mixers were the Company's first products and
are designed to be mounted in 19-inch equipment racks, which are the standard
housings for professional audio and video components. The Company offers four
basic compact mixers: the 1202 VLZ Pro, the 1402 VLZ pro, the 1604 VLZ pro and
the 1642 VLZ pro. Applications for the Company's compact mixers include
recording and project studios, live presentations, video post-production and
multi-media. Suggested retail prices for these mixers are from $429 to $1199.
CFX SERIES. The Company began shipping a new line of mixers, the CFX
series, in 1999. CFX mixers are intended for the amateur and semi-pro customer
as well as audio/visual and rental dealers. They utilize the same technologies
as the compact mixers and include 16 on-board effects and a 9-band stereo
graphic equalizer. The Company's EMAC-TM-effects circuitry digitally processes
audio at 32 bits for superior audio quality and control. Three models are
available with 12, 16 or 20 channels and suggested retail pricing ranges from
$699 to $1099.
PPM SERIES. In the first quarter of 1999, the Company began shipping
PPM powered mixers. These products combine the Company's compact mixer
technology with its FR Series amplifier technology to provide the customer with
an economical alternative to separate components. Each of the five models
features VLZ circuitry, EMAC-TM-digital effects processing, two 9-band graphic
equalizers, and dual FR high-current, fast recovery amplifiers. The 808S stereo
model and the 808M mono model both feature dual 600W amplifiers and eight input
channels. The 408S stereo model and the 408M stereo model both feature dual 250W
amplifiers and eight input channels. The 406M mono model features dual 250W
amplifiers and six input channels. Suggested retail prices range from $699 to
$999
FAST RECOVERY SERIES-TM- POWER AMPLIFIER. During 1999 the Company
introduced the M-800 power amplifier, with a suggested retail price of $549,
bringing the Company's power amp family to four available mode le. The Company's
FR Series-TM-power amplifiers are Mackie's first non-mixer related products and
became available in December 1996 with the introduction of the M1200, which was
later upgraded in 1998 to the M1400 and M1400i models currently at a suggested
retail price of $699. These These three models, plus the M2600, introduced in
1998 at a suggested retail price of $1,199, are designed to keep sound quality
intact when pushed to extreme levels through the use of exclusive fast recovery
(FR) circuitry. The FR Series power amps are targeted at live sound
reinforcement applications for touring companies, theaters, concert halls, clubs
and churches, and installed contractor markets.
8 BUS SERIES. The 8 Bus is a larger mixer console designed for
multi-track recording and live presentation applications. The Company introduced
8 Bus mixers in 1993. At suggested retail prices from $2,500 to $4,200, the 8
Bus consoles have opened the market to many new users and replaced many large
systems offered by competitors that typically cost over $50,000. The console is
available in three basic models: the 32-channel 32-8, the 24-channel 24-8 and
the 16-channel 16-8. The 8 Bus console's applications include pre-production and
recording of albums for major artists and groups, on-line video production,
movie soundtrack mixdown, television dialog editing, on stage mixing and live
sound reinforcement used by touring musical groups, theaters, concert halls,
clubs and churches.
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SR SERIES. The SR (Sound Reinforcement) Series are intended as high
quality, low cost 24-, 32-, 40-, or 56- channel audio mixers for live music
applications that compete with consoles selling for several times their retail
price. The first product in this line, the SR 24-4 was introduced in May 1995,
followed by the SR 32-4 in August 1995. These have suggested retail prices of
$1,599 to $2,299. In December 1996, Mackie introduced the 40-8, a 40-channel
large-format sound reinforcement console, and in March 1998, the Company
introduced the 56-8, a 56-channel console. The SR40.8 large format console
retails for $9,995 and the SR 40-8 retails for $13,595. The SR 24-4 and SR 32-4
are larger than a compact mixer but significantly smaller than Mackie's 8 Bus
consoles and include features necessary for use with multi-track digital
recorders. They incorporate much of the advanced technology first introduced in
the 8 Bus series including very low impedance circuitry, wide-ban equalization
and highly sensitive signal presence indicators. The SR 24-4 and 32-4 series
mixers are targeted at bands and other touring musical groups, audio/video
rental services and permanent sound reinforcement venues, including churches,
clubs, small theatres and auditoriums. The SR 40-8 and SR 56-8 large-format
consoles are intended for use as installed equipment in venues such as churches,
auditoriums, or sporting facilities.
DIGITAL CONSOLES. In July 1998, the Company entered the digital mixer
market with the Digital 8-Bus production and post-production console ("D8B").
With a suggested retail price of $9,999, the D8B has opened the high-end
production and post-production market to many new users at the professional and
semi-professional level. At the heart of the D8B is a Pentium
microprocessor running Mackie Real Time OS-TM-, the Company's own operating
system. The D8B features 48 input channels, 24 internal internal virtual
channels, 8 mix buses and 12 auxiliary buses used for effects processing and
monitoring. Each input channel includes user-configurable 4-band digital
equalization, dynamics processing, routing to internal effects processors and
surround panning capabilities. The D8B has 25 precision motorized faders to
instantly recall mix settings and allow for dynamic automation of mix levels.
Rear panel card slots allow the addition of up to four DSP (Digital Signal
Processing) cards that can run third-party signal processing software capable of
providing up to 16 different effects at once. Strategic partnerships with
software suppliers offer the customer a growing library of effects programs from
which to choose. The D8B's external Power Supply/CPU unit contains card slots
for synchronizing the console to other digital devices, linking multiple
consoles, connecting consoles to a LAN (Local Area Network) and transferring
files from one console to another.
OTHER DIGITAL AUTOMATION SYSTEMS. The Company's other digital
automation systems include the UltraMix -Registered Trademark- Universal
Automation System and the Human User Interface ("HUI").
Digital audio workstations ("DAWs") are used in commercial, project and
home recording studios, and multimedia authoring such as video production,
commercials, and other uses that combine visual and sound effects. HUI was
developed in conjunction with Digidesign, a world leader in the DAW market. HUI
is a hands-on control surface that enhances DAW-user productivity with tactile
controls and visual displays for mixing and editing functions that were
previously controlled by conventional computer controls. HUI, which retails for
approximately $3,500, replaces a mouse with a control surface similar to a
mixer. The DAW market includes multimedia, film, video, and recording studio
professionals.
POWERED MONITOR SPEAKERS. Powered monitors are an essential tool in
accurate sound reproduction, and are used in conjunction with mixer products.
Powered monitors pre-process sound through equalization and cross-overs,
accurately amplify, then deliver a signal that is perfectly matched to the
speaker components. Mackie introduced its first monitor, the HR824 active
near-field studio monitor, in August 1997. Priced at approximately $1,500 a
pair, HR824s are primarily designed for studio recording with limited space.
These powered monitors are currently being used in a wide variety of
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applications including home and professional studio recording, video
post-production, broadcast post-production, and home stereos.
SPEAKERS. In 1999 the Company introduced its first sound reinforcement
speakers. The SRM450, at a suggested retail price of $899, is an active, 2-way
horn-loaded speaker in a lightweight polystyrene enclosure designed for local
and touring groups, fixed club PA systems, churches, theaters,
contractor/installed systems. The built-in dual FR Series power amps deliver 100
watts to the highs, and 300 watts to the mids/lows. Active technology optimizes
the speaker performance utilizing electronic equalization of the enclosure,
electronic crossover, and active time and phase correction circuitry. The second
speaker is the passive C300 designed for use with the PPM Series powered mixers.
This speaker features the same lightweight polystyrene enclosure for easy
portability and speaker configuration, but does not feature power amps or active
technology. Instead it utilizes the amplification and equalization delivered by
the PPM Series powered mixers. This speaker targets local and regional
performing groups, small churches and theaters, and boardroom/audio visual
installations. The C300 is available at a suggested retail price of $499.
RCF PRECISION COMPONENTS. RCF manufactures loudspeaker components.
These components are sold on an OEM basis to customers throughout the world who
use them in their own branded loudspeakers. RCF components are found in some of
the best performing speakers in the world. These speakers can be heard in many
large touring sound systems as well as stadiums, auditoriums, exhibit halls,
theatres, concert halls, clubs and churches.
PROFESSIONAL SPEAKERS. RCF also makes many families of finished
loudspeakers, which are marketed under the RCF brand name. These loudspeakers
are sold in the traditional passive format, meaning that amplification must be
provided, and more recently in the active format, meaning that the amplifier is
built into the loudspeaker. RCF introduced its Art Series of loudspeakers in
1997. The Art Series includes active and passive speakers in a molded plastic
enclosure.
CONTRACTOR PRODUCTS. For 50 years, RCF has produced and sold a large
range of commercial products to sound reinforcement contractors who use the
products to install public address systems throughout the world. The products
are used in everything from life safety systems to background and foreground
music systems. The products produced and sold to sound contractors include
speakers, amplifiers and mixers. RCF leads the Italian market for contractor
products and has begun expanding into other European markets where it is quickly
gaining acceptance.
ANCILLARY PRODUCTS. RCF produces and sells video projectors and
consumer products for car and home use.
DISTRIBUTION AND SALES
In the U.S., the Company uses a network of representatives to sell to
over 1,000 retail dealers, some of which have several outlets. The Company's
products are sold in musical instrument stores, pro audio outlets and several
mail order outlets. The Company's top 10 dealers represented approximately 37%
of the Company's net sales in the U.S. in 1999. One of the Company's dealers,
Guitar Center, accounted for approximately 13% of domestic net sales in 1999; no
other dealer accounted for more than 10% of domestic net sales in this period.
The Company carefully selects and reviews its representatives and
dealers, including mail order outlets. Representatives and domestic dealers
enter into agreements with the Company that govern the terms under which they
may sell the Company's products. Agreements with dealers and distributors
7
define an approved territory and set forth the products to be sold. These
agreements are reviewed on a six-month basis, and decisions to renew are based
on several factors, including sales performance and adequate representation of
the Company and its products. The Company's representatives are paid on a
commission basis. Dealers retain the difference between their cost and the sale
price of products sold.
Internationally, products are offered through Mackie subsidiaries in
Europe and China and through local distributors in nearly 70 other countries
where the Company does not have direct operations. The Company's top 10
international distributors represented approximately 16% of the Company's
international net sales in 1999. No single international distributor accounted
for more than 10% of international net sales in this period. Sales to customers
outside of the U.S. accounted for approximately 49%, 44% and 38% of the
Company's net sales in 1999, 1998 and 1997, respectively.
International distributors are selected on the basis of criteria
established by the Company. International distributors retain the difference
between their cost and the sale price of products sold. Through the
acquisition of RCF, the Company now has direct sales offices in the United
Kingdom, France, Italy, Germany and China.
MARKETING
The Company's marketing strategy is designed to communicate with
end-users directly and to educate them about its products. The Company's
in-house marketing and design department creates all of its advertising,
brochures, video, multimedia and trade show materials. Materials are provided by
its marketing department to representatives, distributors and dealers worldwide,
as part of the Company's overall sales strategy. Owner's manuals and sales
literature are currently produced in several different languages. These
materials are provided as a complement to the Company's direct advertising and
customer support follow-up program. To further enhance customer awareness and
understanding of its products, the Company advertises in leading trade
publications, provides ongoing technical training and education for
representatives and distributors, and participates in the primary industry trade
shows for the musical instrument, video, recording studio, permanent
installation and multimedia markets. Mackie has won several national
advertisement awards as a result of this commitment to detail and excellence.
CUSTOMER SUPPORT
The Company's customer support program is designed to enhance loyalty
by building customer understanding of product use and capabilities. The customer
service and support operation also provides the Company with a means of
understanding customer requirements for future product enhancements. This
understanding comes through direct customer contact, as well as through close
analysis of warranty card responses. To encourage the return of warranty cards,
the Company has established a policy of extending the warranty period for
certain products to customers returning completed warranty cards.
The Company maintains a staff of product support specialists at its
Woodinville, Washington headquarters to provide direct technical service and
support. Telephone support through a toll-free number is provided during
scheduled business hours, and via the Company's web-site after business hours.
Although most calls involve troubleshooting with owners of Mackie products,
product support specialists also field calls from inquiring purchasers and may
participate in making sales.
The Company has a separate technical assistance staff in Italy. They
interface directly with customers and service centers that service RCF products.
This technical support is provided free of charge. RCF offers a standard 1 year
warranty on all of its products when it sells directly to the end user. When it
sells through independent distributors, the distributors are responsible for
warranty repairs.
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The Company also relies on its international distributors to support
its products in countries where the Company does not have its own offices. These
distributors are responsible for the costs of carrying inventory required to
meet customer needs.
Service and repairs on Mackie's products sold in the U.S. are performed
at its headquarters and, for certain specialized products, at approximately 100
authorized warranty service centers located throughout the U.S. Multiple
locations are necessary for customer convenience and to minimize shipping costs.
All products shipped outside of the U.S., except to countries where the Company
has its own offices, are serviced by the Company's international distributors.
RESEARCH AND DEVELOPMENT
The Company's research and development strategy is to develop
affordable, high-quality products and related accessories for its targeted
markets. On December 31, 1999, the Company's research and development staff
consisted of 62 individuals who engineer and design all aspects of the Company's
new products. The Company's research and development expenses were approximately
$7.1 million in 1999, $5.1 million in 1998 and $5.9 million in 1997.
COMPETITION
The market for professional audio systems in general is highly
competitive. The Company must compete with several professional audio
manufacturers who have significantly greater development, sales and financial
resources than the Company. The Company's major competitors in the mixer
market are subsidiaries of Harman International (including Soundcraft Ltd.,
Allen & Heath Brenell Ltd. and DOD Electronics Corp.), Sony Corporation,
Yamaha Corporation, Peavey Electronics Corporation, Teac America, Inc.
(Tascam), SoundTracs PLC and Behringer Spezielle Studiotechnik GmbH.
Competitors in the amplifier market include Peavey Electronics Corporation
(including Crest Audio, Inc.), Crown International and QSC Audio Products,
Inc. Competing speaker manufacturers include Genelec, Inc., Event
Electronics, Inc., Alesis Corporation, JBL (a Harman International
subsidiary) and ElectroVoice, Inc. Competitors in the component speaker
market include Emminence Speaker Corporation, Acustica Beyma S.A. and B&C
Speakers S.p.A. Competitors in the installed sound category include Toa
Corporation, Philips Electronics N.V. and Bouyer S.A.
The Company competes primarily on the basis of product quality and
reliability, price, ease of use, brand name recognition and reputation, ability
to meet customers' changing requirements and customer service and support.
However, despite the Company's investment in research and development, there can
be no assurance that the Company will be successful in developing and marketing,
on a timely basis, product modifications or enhancements or new products that
respond effectively to technological advances by others.
PROPRIETARY TECHNOLOGY
Mackie has a strong interest in protecting the intellectual property
assets of the Company that reflect original research, creative development, and
product development. As such, the Company has sought protection through patents,
copyrights, trademarks, and trade secrets. The Company has applied and filed for
various design and utility patents, both domestically and internationally. The
Company has actively used certain trademarks, and has applied for and registered
specific trademarks in the U.S. and in foreign countries. To protect works of
original authorship, the Company asserts copyright protection.
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Along with extensive trademark and patent registration and filings, the
Company has claimed copyright protection for works of original authorship,
including product brochures, literature, advertisement, and web pages. In
certain cases, the Company has filed and will continue to file for copyright
registration in the U.S. While copyrights provide certain legal rights of
enforceability, there can be no assurance as to the ability to successfully
prevent others from infringing upon Mackie's copyrights.
The Company has never conducted a comprehensive patent search relating
to the technology used in its products. The Company believes that its products
do not infringe upon the proprietary rights of others. There can be no
assurance, however, that others will not assert infringement claims against the
Company in the future or that claims will not be successful.
While Mackie pursues patent, trademark and copyright protection for
products and various marks, it also relies on trade secrets, know-how and
continuing technology advancement, manufacturing capabilities, affordable,
high-quality products, brand name recognition, new product introduction and
direct marketing efforts to develop and maintain its competitive position. The
Company's policy is to have each employee enter into an agreement that contains
provisions prohibiting the disclosure of confidential information to anyone
outside the Company and to recognize Mackie's ownership of intellectual property
developed by employees. Consulting contracts generally provide for the
protection of the Company's intellectual property and the requirement of
confidentiality. There can be no assurance, however, that these confidentiality
agreements will be honored or that the Company can effectively protect its
rights to its unpatented trade secrets. Moreover, there can be no assurance that
others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to the Company's trade
secrets.
By contrast, RCF has traditionally not sought patent protection for its
products. Similarly, RCF has not pursued trademark or copyright protection
except for the name "RCF".
MANUFACTURING
The Company manufactures its products in its facilities in Woodinville,
Washington and in central and northern Italy. Nearly all of the Company's
products share many components, which allows for integrated manufacturing of
several distinct products and in certain cases significant part purchase volume
discounts. Much of the Company's mixer console and power amplifier assembly work
is performed on automated component-insertion machines. Currently, the assembly
of most of the parts in a circuit board is automated.
The Company relies on several vendors to support its product
manufacturing and attempts, if possible, to purchase certain materials from
multiple sources to allow for competitive pricing and to avoid reliance on
one or only a few vendors. The Company relies almost exclusively on one
vendor for its potentiometers, but is in contact with other potentiometer
manufacturers regularly. Interruption in, or cessation of, the supply of
potentiometers from this supplier could adversely affect the Company s
production capability, as the qualification process for another manufacturer,
from sample submission to production quality and quantity delivery, could
take several months. The Company has an approximate three month supply of
potentiometers at any given time which would serve to reduce any potential
disruption.
BACKLOG
The Company does not generally track backlog. Typically, orders are
shipped within two weeks after receipt. In the case of new product introductions
or periods where product demand exceeds
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production capacity, the Company allocates products to customers on a monthly
basis until demand is met.
EMPLOYEES
At December 31, 1999, the Company and its subsidiaries had 1,066
full-time equivalent employees, including 125 in marketing, sales and customer
support, 62 in research and development, 818 in manufacturing and manufacturing
support (which includes manufacturing engineering) and 61 in administration and
finance. Approximately 136 of the Company's employees in Italy are represented
by a labor union. The Company believes relations with all employees, union and
non-union, are favorable.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
DEVELOPMENT, INTRODUCTION AND SHIPMENT OF NEW PRODUCTS. The Company
currently is developing new analog and digital mixers, recording devices,
amplifiers and loudspeakers and loudspeaker components. Significant resource,
technological, supplier, manufacturing or other problems may delay the
development, introduction or manufacture of these products.
In the past, when t he Company's sales have been affected by delays in
developing and releasing new products, s ome customers waited for the Company's
new products, while others purchased products from the Company's competitors.
Delays in the completion and shipment of new products, or failure of customers
to accept new products, may affect future results.
VARIABILITY IN QUARTERLY OPERATING RESULTS. The Company's operating
results tend to vary from quarter to quarter. The Company's revenue in each
quarter is substantially dependent on orders received within that quarter.
Conversely, the Company's expenditures are based on investment plans and
estimates of future revenues. The Company may, therefore, be unable to quickly
reduce spending if revenues decline in a given quarter. As a result, operating
results for that quarter will suffer. The
11
Company's results of operations for any one quarter are not necessarily
indicative of results for any future period.
Other factors which may cause the Company's quarterly results to
fluctuate include:
- - - increased competition in the Company's niche markets
- - - timing of new product announcements
- - - product releases and pricing changes by the Company or its competitors
- - - market acceptance or delays in the introduction of new products
- - - production constraints
- - - the timing of significant orders
- - - customers' budgets
- - - foreign currency exchange rates
Due to all of the foregoing factors, it is possible that in some future
quarters the Company's operating results will be below the expectations of
analysts and investors.
RAPID TECHNOLOGICAL CHANGE. Product technology in the Company's
industry evolves rapidly, making timely product innovation essential to success
in the marketplace. The introduction of products with improved technologies or
features may render the Company's existing products obsolete and unmarketable.
If the Company cannot develop products in a timely manner in response to
industry changes, or if the Company's products do not perform well, the
Company's business and financial condition will be adversely affected. Also, the
Company's new products may contain defects or errors which give rise to product
liability claims against the Company or cause them to fail to gain market
acceptance.
ECONOMIC AND MARKET CONDITIONS. The Company's business is affected by
domestic and global economic conditions and by the health of the professional
audio market in the world. The Company's operations may in the future reflect
substantial fluctuations from period to period as a consequence of such general
economic and market conditions. These factors could have a material adverse
effect on the Company's business and financial condition.
COMPETITION. The Company expects competition to increase from both
established and emerging companies. If the Company fails to compete successfully
against current and future sources of competition, the Company's profitability
and financial performance may be adversely affected.
DEPENDENCE ON SUPPLIERS. Certain parts used in the Company's products
are currently available from either a single supplier or from a limited number
of suppliers. If the Company cannot develop alternative sources of these
components, or if the Company experiences deterioration in its relationship with
these suppliers, there may be delays or reductions in product introductions or
shipments, which may materially adversely affect the Company's operating
results.
Because the Company relies on a small number of suppliers for certain
parts, the Company is subject to possible price increases by these suppliers.
Also, the Company may be unable to accurately forecast its production schedule.
If the Company underestimates its production schedule, suppliers may be unable
to meet the Company's demand for components. This delay in the supply of key
components may materially adversely affect the Company's business.
12
INTERNATIONAL OPERATIONS. International sales represented approximately
49 % of the Company's net sales for the year ended December 31, 1999 . The
Company expects that international sales will continue to be a significant
portion of its revenue. International sales may fluctuate due to various
factors, including:
- - - unexpected changes in regulatory requirements
- - - tariffs and taxes
- - - difficulties in staffing and managing foreign operations
- - - longer average payment cycles and difficulty in collecting accounts
receivable
- - - fluctuations in foreign currency exchange rates
- - - product safety and other certification requirements
- - - political and economic instability
The European Community and European Free Trade Association have
established certain electronic emission and product safety requirements ("CE").
Certain of the Company's new products have not yet met these requirements.
Failure to obtain either a CE certification or a waiver for any product may
prevent the Company from marketing that product in Europe.
The Company operates subsidiaries in Italy, the United Kingdom,
Germany, France, the Netherlands and China. The Company's business and financial
condition is, therefore, sensitive to currency exchange rates or any other
restrictions imposed on these currencies.
PROTECTION OF INTELLECTUAL PROPERTY. Refer to the section captioned
"Proprietary Technology" in Item 1 above.
ACQUISITIONS AND BUSINESS COMBINATIONS. In June 1998, the Company
acquired RCF, a manufacturer of loudspeakers and speaker components. This was a
step to expand the Company's product line and manufacturing capabilities. The
Company continues to integrate the two companies' product offerings. Integration
of the products and operations of RCF with the Company's may place significant
burdens on the Company's management and operating teams, and may divert
management's attention from its other business concerns. If the Company fails to
integrate RCF's products and operations with its own, the Company's business and
financial condition may suffer. The RCF products may not be accepted by the
Company's sales channels or customers.
The Company may pursue additional acquisitions of complementary
technologies, product lines or businesses. Further acquisitions may include
risks like those involved in the Company's acquisition of RCF, as well as risks
of entering markets where the Company has no or limited prior experience, the
potential loss of key employees of the acquired company, and impairment of
relationships with existing employees, customers and business partners. Further
acquisitions may also impact the Company's financial position. For example, the
Company may use significant cash or incur additional debt, which would weaken
the Company's financial position. The Company may also amortize expenses related
to the goodwill and intangible assets acquired, which may reduce the Company's
profitability.
The Company is currently in negotiations for the acquisition of Eastern
Acoustic Works (EAW). In February 2000, the Company and EAW signed a non-binding
letter of intent by which the Company would purchase all shares of EAW. Based in
Whitinsville, Massachusetts, EAW is recognized as the world's leading high-end
professional loudspeaker design and manufacturing firm. It's products are
utilized in sound reinforcement systems at major stadiums and arenas, performing
arts centers, churches,
13
clubs, and more recently in the custom residential market.
The Company cannot guarantee that future acquisitions will improve
the Company's business or operating results.
DEPENDENCE ON KEY PERSONNEL. The Company's future success will depend
in large part on the continued service of many of its technical, marketing,
sales and management personnel (Greg Mackie in particular) and on its ability to
attract, train, motivate and retain highly qualified employees. The Company's
employees may voluntarily terminate their employment with the Company at any
time. Competition for highly qualified employees is intense, and the process of
locating technical, marketing, sales and management personnel with the
combination of skills and attributes required to execute the Company's strategy
is often lengthy. The Company believes that it will need to hire additional
technical personnel in order to enhance its existing products and to develop new
products. If the Company is unable to hire additional technical personnel, the
development of new products and enhancement would likely be delayed. The loss of
the services of key personnel or the inability to attract new personnel could
have a material adverse effect upon the Company's results of operations.
RISK OF EURO NON-COMPLIANCE. Refer to the section captioned "Euro
Conversion" in Item 7 below.
ITEM 2. PROPERTIES
The Company's headquarters in Woodinville, Washington house its
manufacturing, administrative, sales and marketing, research and development and
customer support operations. The building, which is occupied pursuant to a lease
through December 31, 2004, is an 89,000 square foot manufacturing and office
facility. The monthly rent stated in the lease is $56,613, adjusted annually for
changes in the Consumer Price Index (monthly rent expense in 1999 was $61,735).
The Company leases its facility from Mackie Holdings, LLC, an entity owned by
three significant shareholders and directors of the Company, on terms the
Company believes are at least as favorable to the Company as might have been
obtained from unaffiliated parties.
In November 1995, the Company entered into a 10-year lease, with an
option to extend for an additional 10 years, covering property that is adjacent
to the Company's existing facility. The building is approximately 81,250 square
feet. The Company is using the building for product shipping, additional
vertical integration of manufacturing processes and other manufacturing
activities. Initial base monthly rent for the entire building is $43,063; after
five years, the base rent increases to $49,563 per month.
RCF's primary facilities in Reggio Emilia, Italy comprise a
manufacturing facility totaling 119,000 square feet on a total site of 7 acres
and a building for administrative offices of 13,000 square feet. Both facilities
are owned by RCF.
ITEM 3. LEGAL PROCEEDINGS
In June 1997, the Company filed a lawsuit against certain parties,
including one of the Company's major competitors and a major dealer of the
Company's products, alleging infringement of its intellectual property rights.
The suit against the Company's former dealer was settled in full, and the dealer
resumed representation of Mackie's products on April 2, 1999. On November 3,
1999, the Company entered into a full settlement with the remaining defendants
Behringer Spezielle Studio-Technick Gmbh, a German corporation, Behringer
International GmbH, a German corporation, and
14
Ulrich Bernard Behringer. The settlement did not have a material impact on the
Company's financial position, liquidity or results of operations.
The Company is also involved in various legal proceedings and claims
that arise in the ordinary course of business. Management currently believes
that these matters will not have a material adverse impact on the Company's
financial position, liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ National Market
System under the symbol "MKIE." The following table sets forth the high and low
sale prices as reported on NASDAQ for the periods indicated. These prices do not
include retail markups, markdowns or commissions.
Common Stock
-----------------------------------------------------
HIGH LOW
-----------------------------------------------------
Year Ended December 31, 1998:
First Quarter $ 7.50 $ 6.19
Second Quarter $ 7.75 $ 6.25
Third Quarter $ 7.75 $ 5.88
Fourth Quarter $ 7.13 $ 5.25
Year Ended December 31, 1999:
First Quarter $ 6.88 $ 4.25
Second Quarter $ 6.38 $ 4.25
Third Quarter $ 5.00 $ 4.25
Fourth Quarter $ 6.50 $ 3.75
As of March 6, 2000, there were 12,107,758 shares of Common Stock
outstanding held by approximately 92 holders of record. The number of holders
does not include individual participants in security position listings.
In 1999 and 1998, the Company paid no dividends on its common stock.
The Company's present policy is to retain earnings to finance the Company's
business. Any future dividends will be dependent upon the Company's financial
condition, results of operations, current and anticipated cash requirements,
acquisition plans and plans for expansion, and any other factors that the
Company's Board of Directors deems relevant. Under its bank loan agreement, the
Company is prohibited from paying any dividends without prior approval from the
bank. The Company has no present intention of paying dividends on its common
stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
15
(in thousands, except per share data)
1999 1998 1997 1996 1995
(a)
--------------------------------------------------------------------------------
STATEMENT OF INCOME DATA
Net Sales $153,822 $101,995 $ 75,043 $ 73,319 $ 63,919
Gross Profit $ 57,102 $ 39,292 $ 27,950 $ 28,108 $ 27,163
Operating Expenses $ 48,927 $ 30,876 $ 20,824 $ 17,867 $ 13,627
Pro Forma Net Income (b) $ 3,257 $ 5,581 $ 5,537 $ 7,421 $ 9,026
December 31,
BALANCE SHEET DATA 1999 1998 1997 1996 1995
--------------------------------------------------------------------------------
Working Capital $ 37,258 $ 35,784 $ 35,956 $ 32,020 $ 30,154
Total Assets $120,854 $118,890 $ 53,372 $ 46,256 $ 38,046
Long-Term Debt $ 15,665 $ 18,984 $ 0 $ 0 $ 0
Shareholders' Equity $ 50,307 $ 49,569 $ 46,478 $ 42,283 $ 34,807
--------
PER COMMON SHARE DATA (DILUTED BASIS)
Diluted Net Income Per Share $ 0.27 $ 0.43 $ 0.41 $ 0.55 $ 0.73
Shares Used In Diluted Net Income
Per Share 12,265 12,945 13,401 13,611 12,362
(a) Includes financial data of RCF, which was acquired June 29, 1998. Results
of operations for RCF are included beginning July 1, 1998.
(b) Through August 16, 1995, the Company was taxed as an S Corporation and
therefore was not subject to income taxes. The proforma income statement
data includes certain adjustments to reflect a proforma provision for
income taxes as if the Company had been subject to income taxes as a C
Corporation in 1995.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
This Annual Report on Form 10-K and other reports incorporated by
reference contain "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Act").
Forward-looking statements include, without limitation, any statement that
may predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate," "project," "will be," "will continue," "will likely result," or
words or phrases of similar meaning. Forward-looking statements involve
risks and uncertainties which may cause actual results to differ materially
from the forward-looking statements.
The following discussions, including but not limited to, the
sections entitled "Cautionary Factors That May Affect Future Results" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" describe some, but not all, of the factors that could cause the
actual results to differ materially from the forward-looking statements
including, among others, the following: international, national and local
general economic and market conditions; the size and growth of the
professional audio equipment market; competition with other marketers,
distributors and sellers of professional audio equipment; the Company's
ability to develop and introduce new products; the Company's ability to
sustain, manage or forecast its growth and inventories, the Company's ability
to integrate the operations of companies acquired; the Company's ability to
secure and protect trademarks, patents, and other intellectual property; the
performance and reliability of the Company's products; customer service; the
loss of significant customers or suppliers; dependence on distributors;
management of increased costs of freight and transportation; the Company's
ability to meet delivery deadlines; general risks associated with doing
business in foreign countries, including, without limitation, import duties,
tariffs, foreign currency fluctuations, political and economic instability;
changes in government regulations; its ability to attract and retain
qualified employees; liability and other claims asserted against the Company;
and other factors referenced or incorporated by reference in this report and
other reports.
The risks included here are not exhaustive. The Company operates in
a very competitive environment and new risk factors may emerge from time to
time. It is not possible for management to predict all such risk factors,
nor can it assess the impact of all such risk factors on the Company's
business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statements. Given these risks and uncertainties, investors
should not place undue reliance on forward-looking statements as a prediction
of actual results.
The Company derives its operating revenue from worldwide sales of
digital and analog audio mixers, speakers, amplifiers and other professional
audio equipment. A significant portion of the Company's total sales is to
customers outside the U.S. International sales volumes have historically been
affected by foreign currency fluctuations relative to the U.S. dollar. When
weaknesses of local currencies have made the Company's products more expensive,
sales to those countries have declined.
The Company's gross margins are also affected by its international
sales. Typically, gross margins from exported products by Mackie are lower than
from those sold in the U.S. due to discounts offered to its international
distributors. RCF does not offer discounts to its distributors. The discounts
offered by Mackie are given because the international distributor typically
incurs certain expenses, including technical support, product service and
in-country advertising that the Company normally incurs for domestic sales. The
Company offered its international distributors an average discount of
approximately 4.5% in 1999, 10.1% in 1998, and 14.8% in 1997. The decrease in
discounts in 1999 is attributable to the lack of discounts offered by RCF. Sales
outside the U.S. represented approximately 49%, 44%, and 38% of the Company's
net sales in 1999, 1998 and 1997, respectively.
The Company's gross margins are also affected by the purchase of some
components outside of the U.S. and Italy. As a result of fluctuations in the
value of local currencies relative to the U.S. dollar and Italian lira, some of
the Company's international component suppliers have increased prices and may
further increase prices. The Company currently does not employ any formal
foreign exchange hedging strategies, but may do so in the future.
The Company's gross margins have fluctuated from time to time due
primarily to inefficiencies related to the introduction and manufacturing of new
products and inefficiencies associated with integrating new equipment into the
Company's manufacturing processes. Historically, fluctuations have also resulted
from varying prices of components and competitive pressures.
The Company plans to introduce new products and product revisions at a
more rapid rate than it has in the past. Some anticipated new products will
require the implementation of manufacturing practices for which the Company is
not familiar. This could result in lower margins as the Company becomes more
familiar with new manufacturing procedures.
17
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 AS COMPARED WITH YEAR ENDED DECEMBER 31, 1998
NET SALES
The Company's net sales increased 50.8% to $153.8 million in 1999 from
$102.0 million in 1998. The increase was primarily attributable to the inclusion
of a full year of RCF's sales in 1999 of $59.7 million compared to only six
months in 1998 of $23.3 million. The Company also saw significant revenue
contribution worldwide from products introduced in 1999 in the product
categories of powered and CFX mixers, speakers and amplifiers of approximately
$24.5 million. Sales in the new product categories were aided by the Company's
successful shift to a captive distribution model in Europe during the first half
of 1999. These increases were offset partially by declines in sales of 8CBus
series large console mixers and SR series live music application mixers of
approximately $4.5 million. Sales outside the U.S. increased to 49% of the
Company's total net sales in 1999 from 44% in 1998. This increase was due mainly
to the inclusion of a full year of sales by RCF whose sales outside of the U.S.
comprised 96% of its total net sales for 1999.
GROSS PROFIT
Gross profit was $57.1 million in 1999 compared with $39.3 million in
1998. The increase was primarily attributable to the inclusion of a full year of
RCF's gross profit in 1999 of $21.9 million compared to only six months in 1998
of $9.4 million. Revenues were also up as a result of the new products
introduced during 1999 and improved international distribution as noted above.
Gross profit as a percentage of sales decreased to 37.1% in 1999 from 38.5% in
1998. The decrease in gross margin was the result of lower margins realized on
some of the new products introduced during 1999 and lower sales volumes of high
margin 8CBus series large console mixers and SR series live music application
mixers.
MARKETING AND SALES
Marketing and sales expenses increased to $27.3 million in 1999 from
$16.1 million in 1998. The increase was primarily attributable to the inclusion
of a full year of RCF's marketing and sales expenses in 1999 of $12.1 million
compared to only six months in 1998 of $4.9 million. Promotional and general
freight expenses were also up for 1999 resulting in a net increase of $1.9
million. Higher sales volumes causing corresponding increases in variable
expenses, such as commissions, along with incremental costs associated with new
product rollouts, promotional expenses related to demo products and initial
launch expenses related to the new Mackie Industrial Division (Mackie
Industrial) also contributed to the increase. Mackie Industrial is a new
division of the Company focusing on the installed sound market in the U.S. This
market encompasses installations in venues ranging in size from small cafes to
commercial buildings to nationwide chains. RCF has traditionally served the
installed sound market in Europe and now Mackie Industrial will enter the U.S.
installed market giving the Company a worldwide presence in this large segment.
The Company did not realize significant revenues from sales of Mackie Industrial
products during 1999 as operations were still in the development phase.
Contribution from this division is expected in the first half of 2000. As a
percentage of net sales, marketing and sales expenses increased to 17.7% in 1999
from 15.8% in 1998.
ADMINISTRATIVE
Administrative expenses increased to $14.5 million for 1999 from $9.7
million for 1998. The increase was primarily attributable to the inclusion of a
full year of RCF's administrative expenses in 1999 of $7.3 million compared to
only six months in 1998 of $3.4 million. Other contributing factors included
higher legal expenses associated with the Behringer lawsuit that was settled in
November 1999 (see Note 13 of Notes to Consolidated
18
Financial Statements). As a percentage of net sales, administrative expenses
declined slightly to 9.4% in 1999 compared with 9.5% in 1998.
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $7.1 million in 1999
from $5.1 million in 1998. The increase was primarily attributable to higher
spending related to new product development across all areas of the Company's
product line during 1999. A secondary cause was the inclusion of a full year of
RCF's research and development expenses in 1999 of $1.1 million compared to only
six months in 1998 of $0.8 million. As a percentage of net sales, these expenses
decreased to 4.6% in 1999 compared with 5.0% in 1998.
INTEREST INCOME AND INTEREST EXPENSE
Interest income decreased to $741,000 in 1999 compared with $782,000 in
1998. Interest expense increased to $2,772,000 in 1999 from $1,521,000 in 1998
primarily due to borrowings related to the acquisition of RCF and to Italian
debt carried by RCF. Included in 1999 is a full year of acquisition and RCF
interest expense compared to only six months in 1998. Prior to the acquisition
in June 1998, the Company had no long-term debt.
INCOME TAX PROVISION
Income tax expense for 1999 was $2,811,000 representing an overall
effective tax rate of 46.3% compared to $2,302,000 and 29.2% for 1998. The
increase in the effective tax rate was primarily attributable to foreign
operations.
Year Ended December 31, 1998 as Compared with Year Ended December 31, 1997
The results of operations for the year ended December 31, 1998 include
the results of operations for RCF beginning July 1, 1998.
NET SALES
The Company's net sales increased 35.9% to $102.0 million in 1998 from
$75.0 million in 1997. The increase was primarily attributable to the inclusion
of RCF's sales of $23.3 million. Sales outside the U.S. increased to 44% of the
Company's total net sales in 1998 from 38% in 1997. This increase was due mainly
to the inclusion of sales by RCF whose sales outside of the U.S. comprised 89%
of its total net sales for the six months ended December 31, 1998.
GROSS PROFIT
Gross profit was $39.3 million in 1998 compared with $27.9 million in
1997. The increase was largely attributable to the inclusion of RCF's gross
profit of $9.4 million. Gross profit as a percentage of sales increased to 38.5%
in 1998 from 37.2% in 1997. The increase in gross margin percentage was due
primarily to a difference in product mix for 1998 compared with 1997 as sales of
certain product lines provided higher gross margins than other product lines.
MARKETING AND SALES
Marketing and sales expenses increased to $16.1 million in 1998 from
$10.1 million in 1997. The increase was primarily attributable to the inclusion
of marketing and sales expenses for RCF of $4.9 million.
19
Higher promotional freight expenses and freight accommodations were also up for
1998 resulting in a net increase of $0.8 million. As a percentage of net sales,
marketing and sales expenses increased to 15.8% in 1998 from 13.4% in 1997.
ADMINISTRATIVE
Administrative expenses increased to $9.7 million for 1998 from $4.8
million for 1997. The increase was primarily attributable to the inclusion of
administrative expenses for RCF of $3.4 million. This increase was also due to
increased legal expenses due to the lawsuit filed by the Company against certain
parties alleging infringement of its intellectual property rights (see Note 13
of Notes to Consolidated Financial Statements). As a percentage of net sales,
administrative expenses were 9.5% in 1998 compared with 6.4% in 1997.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased to $5.1 million in 1998
from $5.9 million in 1997. As a percentage of net sales, these expenses
decreased to 5.0% in 1998 from 7.9% in 1997. This decrease was due primarily to
decreases in prototype and other expenditures. R&D expenses for RCF were
$759,000.
INTEREST INCOME AND INTEREST EXPENSE
Interest income decreased to $782,000 in 1998 compared with $791,000 in
1997 due to a lower average cash balance. Interest expense increased to
$1,521,000 in 1998 from none in 1997 primarily due to borrowings related to the
acquisition of RCF and to interest-bearing debt carried by RCF.
INCOME TAX PROVISION
Income tax expense for 1998 was $2,302,000 representing an overall
effective rate of 29.2% compared to $2,373,000 and 30% for 1997. The decrease in
the overall effective rate in 1998 compared with the statutory rate is primarily
due to the benefits provided by the Company's foreign sales corporation and the
research and development tax credit.
LIQUIDITY AND CAPITAL RESOURCES
The Company used internally generated cash to finance its operations
during 1999 and 1998. The Company's operating activities generated cash of
$5.6 million in 1999 and $1.5 million in 1998. Net cash provided by operating
activities in 1999 was primarily attributable to net income and increases in
accounts payable and accrued expenses offset by increases in accounts
receivable, inventory and other assets.
Net cash used in investing activities decreased to $3.1 million in 1999
from $15.4 million in 1998, due principally to the acquisition of RCF in June
1998. The Company had no significant capital expenditure commitments at December
31, 1999. The Company intends to finance its 2000 capital expenditures from cash
provided by operations, current cash reserves and existing credit facilities.
Net cash used in financing activities in 1999 was $2.2 million compared
with net cash provided by financing activities during 1998 of $12.3 million. The
cash provided by financing activities in 1998 was due principally to proceeds
from bank credit facilities used for the acquisition of RCF. During 1999, the
Company repaid $2.0 million on the acquisition debt and repurchased
approximately 250,000 shares of its own common stock at a total cost of $1.3
million. These uses of cash were offset partially by net borrowings on long-term
and short-term debt of approximately $2.5 million during 1999.
20
In June 1998, the Company entered into a credit agreement with a bank
to provide certain credit facilities to the Company, including a $12.8 million
loan for the acquisition of RCF of which $10.5 million was outstanding at
December 31, 1999. The loan, which is secured by all of the Company's assets,
bears interest at the bank's prime rate, or at a specified LIBOR rate plus a
specified margin, whichever the Company chooses. Interest on the loan is payable
monthly. Principal is payable on September 30 of each year from 1999 in
installments equal to 1/7 of the amount borrowed. All outstanding principal and
interest amounts are due on September 30, 2003. The agreement also provides a
$5.0 million unsecured line of credit to finance any unexpected working capital
needs. The line of credit bears interest at the same rate as the acquisition
loan. The agreement also provides a $2.5 million credit facility for capital
equipment purchases or general corporate purposes. Certain terms under this
facility, such as interest rate, repayment period and collateral, will be
determined at the time advances are made to the Company. At December 31, 1999,
there were no outstanding balances on any of these credit lines. These credit
facilities (excluding the acquisition loan) expire April 30, 2001. Under the
terms of the credit agreement, the Company must maintain certain financial
ratios and tangible net worth. The Company was in compliance with all covenants
at December 31, 1999. The agreement also provides, among other matters,
restrictions on additional financing, dividends, mergers, acquisitions, and an
annual capital expenditure limit of $10.0 million.
The Company also has entered into agreements with several banks in
Italy that provide short-term credit facilities totaling approximately $19
million. At December 31, 1999, there was approximately $13.1 million outstanding
under these facilities. The majority of these credit facilities are secured by
RCF's receivables. Interest rates on these credit facilities range from 3.6% to
11.2%. Approximately $4.7 million of RCF's debt was repaid in February 2000.
The Company believes that existing cash and cash equivalent balances
and its available-for-sale securities together with cash generated from
operations and cash available from credit facilities will be sufficient to
finance the Company's operations at least through 2000.
INFLATION AND CHANGES IN FOREIGN CURRENCY EXCHANGE RATES
Although the Company cannot accurately anticipate the effects of
inflation, the Company does not believe inflation has had or is likely to have a
material effect on its results of operations or liquidity.
Sales and expenses incurred by foreign subsidiaries are denominated in
the subsidiary's local currency and translated into U.S. dollar amounts at
average rates during the period. To date, the foreign currency exchange rates
have not significantly impacted the Company's profitability.
YEAR 2000 ISSUE
The "Year 2000" or "Y2K" issue referred to the potential risks
associated with the fact that many existing computer programs use only the last
two digits in reference to a year. When the year changed from 1999 to 2000 these
programs may not have been able to distinguish whether the year began with 19 or
with 20. This could have resulted in a system failure or miscalculations causing
disruptions of operations. The Y2K issue did not have any material impact on the
operations of the Company nor is any future impact anticipated.
EURO CONVERSION
European business systems are being forced to handle currencies in a
new way with the introduction of the Euro. RCF's computer system does not
support the Euro, and reprogramming the system is not an
21
economically viable option. Although the date for mandatory Euro compliance is
January 1, 2002, it is believed that the existing system could only be utilized
until mid-2001 after which time the effort to run a non-compliant system will be
prohibitively high. The Company plans to replace all computer systems with a
single system worldwide. This system will be Euro compliant and is scheduled to
be in place in Italy prior to mid-2001.
SHARE REPURCHASE PROGRAM
The Company fulfilled the authorization from its Board of Directors to
repurchase up to 850,000 shares of its outstanding common stock during the three
year period ended December 31, 1999. These purchases were executed through open
market purchases at prevailing market prices. As of December 31, 1999, the
Company had repurchased all 850,000 shares authorized under the program at a
total cost of approximately $5.6 million. No additional authorizations are
currently pending.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, AAccounting for Derivative Instruments and Hedging Activities." SFAS No.
133 is effective for fiscal years beginning after June 15, 2000. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company does not expect that the adoption of SFAS No.
133 will have a material impact on its consolidated financial statements because
the Company does not currently hold any derivative instruments.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements". This SAB summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition. The Company
does not expect that its financial statements will be materially affected by SAB
No. 101.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company did not have any derivative financial instruments as of
December 31, 1999 and 1998. However, the Company is exposed to interest rate
risk. The Company's interest income and expense are most sensitive to changes in
the general level of U.S. and European interest rates. In this regard, changes
in U.S. and European interest rates affect the interest earned on the Company's
cash equivalents and available-for-sale securities as well as interest paid on
debt.
At December 31, 1999, the Company had cash and cash equivalents,
available-for-sale securities and bonds of $14.9 million and short-term
borrowings of $16.0 million, all subject to variable short-term interest rates.
A hypothetical change in the interest rate of 10% would not have a material
impact on the Company's earnings.
At December 31, 1998, the Company had cash and cash equivalents,
available-for-sale securities and bonds of $10.7 million and short-term
borrowings of $12.1 million, all subject to variable short-term interest rates.
A hypothetical change in the interest rate of 10% would not have a material
impact on the Company's earnings.
22
The Company has lines of credit and other debt whose interest rates are
based on various published prime rates that may fluctuate over time based on
economic changes in the environment. The Company is subject to interest rate
risk, and could be subject to increased interest payments if market interest
rates fluctuate. The Company does not expect any change in the interest rates to
have a material adverse effect on the Company's results from operations.
FOREIGN CURRENCY RISK
The Company operates subsidiaries in Italy, the United Kingdom,
Germany, France, the Netherlands and China. The Company's business and financial
condition are, therefore, sensitive to currency exchange rates or any other
restrictions imposed on their currencies. Sales and expenses incurred by foreign
subsidiaries are denominated in the subsidiary's local currency and translated
into U.S. Dollar amounts at average rates during the period. The Company does
not employ any derivative based hedging strategies, however, it has a
significant natural hedge in the form of Italian based manufacturing and
operating, interest and tax expenses.
Foreign exchange rate sensitivity analysis can be quantified by
estimating the impact on the Company's earnings as a result of hypothetical
changes in the value of the U.S. Dollar, the Company's functional currency,
relative to the other currencies in which the Company transacts business. All
other things being equal, an average 10% movement in the value of the U.S.
Dollar, throughout the year ended December 31, 1999, would have had the effect
of changing net income approximately $0.2 million. The same analysis for the
year ended December 31, 1998 would have had the effect of changing net income
approximately $0.05 million
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages 24 to 43
23
REPORT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Mackie Designs, Inc.
We have audited the accompanying consolidated balance sheet of Mackie
Designs Inc. and subsidiaries as of December 31, 1999, and the related
consolidated statements of income, cash flows, and shareholders' equity and
comprehensive income for the year then ended. Our audit also included the
financial statement schedule listed in the Index at Item 14(a) for the year
ended December 31, 1999. These consolidated financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and schedule
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mackie
Designs Inc. and subsidiaries at December 31, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule for the year ended December 31, 1999, when
considered in relation to the basic 1999 financial statements taken as a whole,
presents fairly in all material respects the information set forth herein.
KPMG LLP
Seattle, Washington
February 22, 2000
24
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Mackie Designs Inc.
We have audited the accompanying consolidated balance sheet of Mackie
Designs Inc. as of December 31, 1998, and the related consolidated statements
of income, cash flows and shareholders' equity and comprehensive income, for
each of the two years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Mackie
Designs Inc. at December 31, 1998, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1998, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth herein.
Ernst & Young LLP
Seattle, Washington
February 26, 1999
25
MACKIE DESIGNS INC.
CONSOLIDATED BALANCE SHEETS
December 31,
1999 1998
------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,629,234 $ 123,611
Available-for-sale securities 6,328,146 6,309,659
Accounts receivable, less allowance of $1,146,000 in 1999
and $1,421,000 in 1998 31,679,300 30,501,951
Inventories 39,678,922 39,748,903
Prepaid expenses and other current assets 1,832,411 1,786,964
Deferred income taxes 2,488,666 1,770,000
------------------ ------------------
Total current assets 86,636,679 80,241,088
Property, plant and equipment, net 20,501,755 24,569,027
Goodwill, net 7,321,725 7,868,783
Bonds 3,902,473 4,293,524
Other assets 2,491,247 1,917,086
------------------ ------------------
Total assets $120,853,879 $118,889,508
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $16,009,408 $12,057,654
Accounts payable 16,142,548 14,351,463
Accrued expenses 8,257,304 7,945,911
Income taxes payable 2,009,952 1,762,752
Current portion of long-term debt 6,959,779 8,339,468
------------------ ------------------
Total current liabilities 49,378,991 44,457,248
Long-term debt 15,664,662 18,984,200
Employee and other liabilities 3,778,149 4,146,400
Deferred income taxes 1,725,095 1,525,827
Other deferred items -- 206,776
Shareholders' equity:
Preferred stock, no par value:
Authorized shares - 5,000,000; Outstanding shares - none -- --
Common stock, no par value:
Authorized shares - 40,000,000; Issued and outstanding shares -
12,107,758 and 12,356,486 in 1999 and 1998, respectively 25,802,401 27,102,335
Retained earnings 25,658,852 22,401,585
Accumulated other comprehensive income (loss) (1,154,271) 65,137
------------------ ------------------
Total shareholders' equity 50,306,982 49,569,057
------------------ ------------------
Commitments, contingencies and subsequent event -- --
Total liabilities and shareholders' equity $120,853,879 $118,889,508
================== ==================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
MACKIE DESIGNS INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
1999 1998 1997
------------------- -------------------- ------------------
Net sales $153,822,022 $101,995,246 $ 75,042,694
Cost of goods sold 96,719,936 62,703,694 47,093,131
------------------- -------------------- ------------------
Gross profit 57,102,086 39,291,552 27,949,563
Operating expenses:
Marketing and sales 27,282,929 16,118,836 10,091,781
Administrative 14,496,684 9,662,627 4,839,780
Research and development 7,146,954 5,094,333 5,892,178
------------------- -------------------- ------------------
Total operating expenses 48,926,567 30,875,796 20,823,739
------------------- -------------------- ------------------
Operating income 8,175,519 8,415,756 7,125,824
Interest income 740,962 781,861 790,687
Interest expense (2,772,243) (1,520,648) --
Other income (expense), net (76,190) 206,016 (7,060)
------------------- -------------------- ------------------
Income before income taxes 6,068,048 7,882,985 7,909,451
Income taxes 2,810,781 2,302,211 2,372,800
------------------- -------------------- ------------------
Net income $ 3,257,267 $ 5,580,774 $ 5,536,651
=================== ==================== ==================
Net income per share:
Basic $ 0.27 $ 0.44 $ 0.43
=================== ==================== ==================
Diluted $ 0.27 $ 0.43 $ 0.41
=================== ==================== ==================
Weighted average common shares:
Basic 12,214,982 12,594,090 12,825,949
=================== ==================== ==================
Diluted 12,264,679 12,945,170 13,401,150
=================== ==================== ==================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
MACKIE DESIGNS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1999 1998 1997
----------------- ------------------ ----------------
OPERATING ACTIVITIES
Net income $ 3,257,267 $ 5,580,774 $ 5,536,651
Adjustments to reconcile net income to net cash provided
by operating activities:
DePreciation and amortization 6,399,855 4,743,883 3,160,237
Loss on asset dispositions -- 1,231 --
Deferred income taxes (1,311,115) (503,819) 266,000
Changes in operating assets and liabilities:
Accounts receivable (3,888,511) (3,227,231) (921,480)
Inventory (2,749,123) (5,063,801) (7,444,522)
Prepaid expenses and other current assets (78,184) 875,644 (431,099)
Other assets (1,064,760) (734,940) (257,114)
Accounts payable and accrued expenses 4,854,571 575,844 2,283,269
Income taxes payable 402,601 (532,733) 348,173
Other long term liabilities (174,250) (169,647) 39,000
----------------- ------------------ ---------------
Cash provided by operating activities 5,648,351 1,545,205 2,579,115
INVESTING ACTIVITIES
Acquisition of business, net of cash acquired -- (14,645,175) --
Purchases of available-for-sale securities (8,951,129) (18,769,653) (20,422,495)
Proceeds from sales of available-for-sale securities -- 7,375,556 6,311,193
Proceeds from maturities of available-for-sale securities 8,985,000 15,948,839 14,935,414
Purchases of property, plant and equipment (3,115,942) (5,337,924) (3,452,611)
Proceeds from asset dispositions -- 28,799 --
----------------- ------------------ ---------------
Cash used in investing activities (3,082,071) (15,399,558) (2,628,499)
FINANCING ACTIVITIES
Proceeds from long-term debt 396,385 17,239,457 --
Payments on long-term debt (2,890,132) (1,608,935) --
Net proceeds (payments) on bank line of credit and
short-term borrowings 5,974,760 (811,478) --
Repurchase and retirement of common stock (1,308,259) (2,638,125) (1,657,808)
Net proceeds from exercise of stock options 8,325 83,250 316,188
----------------- ------------------ ----------------
Cash provided by (used in) financing activities 2,181,079 12,264,169 (1,341,620)
----------------- ------------------ ----------------
Effect of exchange rate changes on cash (241,736) 738,615 --
----------------- ------------------ ----------------
Increase (decrease) in cash and cash equivalents 4,505,623 (851,569) (1,391,004)
Cash and cash equivalents at beginning of year 123,611 975,180 2,366,184
----------------- ------------------ ----------------
Cash and cash equivalents at end of year $ 4,629,234 $ 123,611 $ 975,180
================= ================== ================
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 2,409,000 $ 1,617,000 $ --
================= ================== ================
Cash paid for income taxes $ 3,468,000 $ 2,397,000 $ 1,576,000
================= ================== ================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
MACKIE DESIGNS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Accumulated Other
Retained Comprehensive
Shares Amount Earnings Income (Loss) Total
---------------- ----------------- -----------------
Balance at December 31, 1996 12,885,000 $30,998,830 $11,284,160 -- $42,282,990
Exercise of stock options 56,250 316,188 -- -- 316,188
Repurchase of common shares (207,600) (1,657,808) -- -- (1,657,808)
Net income -- -- 5,536,651 -- 5,536,651
---------------- ----------------- ---------------- --------------- -------------
Balance at December 31, 1997 12,733,650 29,657,210 16,820,811 -- 46,478,021
Exercise of stock options 15,000 83,250 -- -- 83,250
Repurchase of common shares (392,164) (2,638,125) -- -- (2,638,125)
Net income -- -- 5,580,774 -- 5,580,774
Foreign currency translation
adjustment -- -- -- 65,137 65,137
---------------- -----------
Comprehensive income 5,645,911
----------------- ----------------- ---------------- ---------------- -----------
Balance at December 31, 1998 12,356,486 27,102,335 22,401,585 65,137 49,569,057
Exercise of stock options 1,500 8,325 -- -- 8,325
Repurchase of common shares (250,228) (1,308,259) -- -- (1,308,259)
Net income -- -- 3,257,267 -- 3,257,267
Foreign currency translation
adjustment -- -- -- (1,211,927) (1,211,927)
Unrealized loss on
available-for-sale securities (7,481) (7,481)
Comprehensive income 2,037,859
---------------- ----------------- ---------------- ---------------- -----------
Balance at December 31, 1999 12,107,758 $25,802,401 $ 25,658,852 $(1,154,271) $50,306,982
================ ================= ================= ================ ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
29
MACKIE DESIGNS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Mackie
Designs, Inc. and its wholly-owned subsidiaries (the Company). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain amounts reported in previous years have been reclassified to conform to
the 1999 presentation.
OPERATIONS
The Company develops, manufactures, sells, and supports high-quality,
reasonably priced professional audio equipment. The Company sells to retailers
and distributors throughout the world, generally on open credit terms. Sales to
customers outside of the U.S. approximated 49%, 44%, and 38% of net sales in
1999, 1998, and 1997, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
the exchange rate on the balance sheet date. Net sales, costs and expenses are
translated at average rates of exchange prevailing during the period.
Translation adjustments resulting from this process are charged or credited to
other comprehensive income in shareholders' equity. Realized and
unrealized gains and losses on foreign currency transactions are included in
other income (expense), net.
REVENUE RECOGNITION
Revenues from sales of products are generally recognized upon shipment. The
Company has certain software related products within its digital product line.
The Company follows the principles of AICPA Statement of Position 97-2,
"Software Revenue Recognition" in recognizing revenues for these products.
CASH EQUIVALENTS
The Company considers all liquid investments purchased with a maturity at
purchase of three months or less to be cash equivalents.
MARKETABLE SECURITIES
Management determines the appropriate classification of marketable
securities at the time of purchase and re-evaluates such designation as of each
balance sheet date. Debt securities are treated as held-to-maturity when the
Company has the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost. The zero coupon bonds
held by RCF are the only securities the Company treats as held-to-maturity (see
Note 3 of Notes to Consolidated Financial Statements).
Debt and marketable equity securities not treated as held-to-maturity are
classified as available-for-sale. Available-for-sale securities are primarily
high-grade U.S. corporate securities, all of which are recorded at amortized
cost, which approximates fair value. Available-for-sale securities are
classified in the balance sheet as current based on maturity dates. Unrealized
gains and losses on available-for-sale securities are excluded from the results
of operations and are reported as a component of comprehensive income in
shareholders' equity.
30
The amortized cost of debt securities treated as held-to-maturity is
adjusted for accretion of discounts to maturity, over the estimated life of the
security. Such amortization is included in interest income.
INVENTORIES
Inventories are valued at the lower of cost, as determined by the
first-in, first-out method, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. Significant additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets of three to thirty-three years. Leasehold
improvements are amortized over the shorter of their useful lives or the term of
the lease.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
assets acquired. Goodwill is being amortized on the straight-line method over
twenty years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash, available-for-sale securities,
accounts receivable, bonds, short-term borrowings, accounts payable, income
taxes payable, and long-term debt approximate fair value because they are of a
short-term nature or have interest rates that approximate market rates.
WARRANTY COSTS
The Company provides an accrual for future warranty costs at the time of
sale of products. The warranty for the Company's products generally covers
defects in materials and workmanship for a period of one to five years.
ADVERTISING COSTS
The cost of advertising is expensed as incurred. For 1999, 1998, and 1997,
the Company incurred advertising expenses of $4.2 million, $3.7 million, and
$3.0 million, respectively.
STOCK COMPENSATION
The Company applies the disclosure-only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." Accordingly, the Company accounts for stock-based employee
compensation using the intrinsic-value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Compensation expense for employee stock options is
measured as the excess, if any, of the fair value of the Company's common stock
at the date of grant over the stock option exercise price.
INCOME TAXES
Income taxes are accounted for under the asset and liability method of
accounting. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributed to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and tax credits and loss carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences and
carryforwards are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
INCOME PER SHARE
Basic income per share is computed on the basis of the weighted average
number of common shares outstanding for the year. Diluted income per share is
computed on the basis of the weighted average number of common shares plus
dilutive potential common shares outstanding. Dilutive potential common shares
are calculated under the treasury stock method and consist of employee stock
options outstanding.
CONCENTRATIONS
The Company is subject to concentrations of credit risk from its holdings
of cash, cash equivalents, and securities. The Company's credit risk is managed
by investing in high-quality money market instruments, securities of the U.S.
Government and its agencies, and high-quality corporate issues. In addition, a
significant portion of the Company's accounts receivable is due from customers
outside of the U.S. The Company has credit
31
insurance on its open term international receivables and generally requires
letters of credit or advance payments in cases where credit insurance is not
applicable. No individual international country accounted for more than 10% of
net sales in any of the periods presented.
The Company relies almost exclusively on one vendor for its
potentiometers, but is in contact with other potentiometer manufacturers
regularly. Potentiometers are a critical component in many of the Company's
products. Interruption in, or cessation of, the supply of potentiometers from
this supplier could adversely affect the Company's production capability, as the
qualification process for another manufacturer, from sample submission to
production quality and quantity delivery, could take several months. The
Company has an approximate three month supply of potentiometers at any
given time which would serve to reduce any potential disruption.
COMPREHENSIVE INCOME
The Company's comprehensive income includes all items which comprise net
income, the effect of foreign currency translation and unrealized gains/losses
on available-for-sale securities. Comprehensive income is shown in the
Consolidated Statements of Shareholders' Equity and Comprehensive Income.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically assesses the recoverability of long-lived assets
including property, plant and equipment, goodwill and other intangible assets.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured as the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or the fair value less cost
to sell.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 is effective for fiscal years beginning after June 15, 2000. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company does not expect that the adoption of SFAS No.
133 will have a material impact on its consolidated financial statements because
the Company does not currently hold any derivative instruments.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements". This SAB summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition. The Company
does not expect that its financial statements will be materially affected by SAB
No. 101.
2. ACQUISITION
On June 29, 1998, the Company acquired 100% of the capital stock of Radio
Cine Forniture (R.C.F.) S.p.A. ("RCF"), an Italian corporation. RCF is a
manufacturer of loudspeakers and speaker components based in Reggio Emilia,
Italy. The acquisition was accounted for under the purchase method of
accounting. The aggregate purchase price, plus related acquisition costs, was
approximately $15 million. The excess of the purchase price over the fair value
of net assets acquired, aggregating approximately $8 million, is included in
goodwill. The results of operations of RCF have been included in the Company's
consolidated results of operations from July 1, 1998.
The following table presents unaudited pro forma consolidated financial
information for the years ended December 31, 1998 and 1997 as if the acquisition
of RCF had occurred on January 1 of those years:
Years Ended
December 31,
-------------------------------------
32
1998 1997
------------------ ------------------
Net sales $126,978,000 $122,127,000
================== ==================
Net income $ 4,717,000 $ 3,981,000
================== ==================
Diluted income per share $ 0.36 $ 0.30
================== ==================
The unaudited pro forma financial information is presented for
informational purposes only and is not necessarily indicative of the operating
results that would have occurred had the acquisition taken place on the basis
assumed above. In addition, the pro forma results are not intended to be a
projection of the future results and do not reflect any synergies that might
have been achieved from the combined operations.
3. INVESTMENTS
The amortized cost of available-for-sale securities approximated fair
market value and was as follows:
December 31,
1999 1998
------------------ ----------------
Bank certificates of deposit $ 574,725 $ 999,794
Corporate debt securities 5,273,499 5,309,865
U.S. Government securities 479,922 --
================== ==============
$6,328,146 $6,309,659
================== ==============
As of December 31, 1999, available-for-sale securities have contractual
maturities of one year or less.
RCF holds various zero-coupon Italian bank bonds as collateral for two
bank term loans (see Note 7 of Notes to Consolidated Financial Statements). The
bonds aggregated $3,902,473 and $4,293,524 at December 31, 1999 and 1998,
respectively, and are carried at amortized cost, which approximates market
value. The bank bonds have various maturities ranging from 2001 to 2004. The
interest rates on these bonds range from 2.4% to 7.3% (average rate was 6.8% and
7.0% at December 31, 1999 and 1998, respectively). These bonds are treated as
held-to-maturity on the balance sheet and are restricted as to their use.
4. INVENTORIES
Inventories consist of the following:
December 31,
1999 1998
------------------- ----------------
Raw materials $ 16,499,299 $ 17,044,196
Work in process 4,845,789 5,012,847
Finished goods 18,333,834 17,691,860
=================== ================
$ 39,678,922 $ 39,748,903
=================== ================
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31,
1999 1998
------------------- ----------------
Land $ 2,150,614 $ 3,548,000
Buildings 2,794,308 5,668,061
Machinery and equipment 18,300,422 17,227,588
33
Furniture and fixtures 8,506,274 7,307,409
Leasehold improvements 3,961,427 2,457,632
------------------- ----------------
35,713,045 36,208,690
Less accumulated depreciation and amortization 15,211,290 11,639,663
=================== ================
$ 20,501,755 $ 24,569,027
=================== ================
6. INCOME TAXES
For financial reporting purposes, income before income taxes is as
follows:
1999 1998 1997
-------------------- ------------------ ------------------
United States $6,900,322 $8,790,207 $7,909,451
Foreign (832,274) (907,222) --
==================== ================== ==================
Income before income taxes $6,068,048 $7,882,985 $7,909,451
==================== ================== ==================
The provision for income taxes is as follows:
1999 1998 1997
-------------------- ------------------ ------------------
Current taxes on income:
United States $2,763,450 $2,717,660 $2,106,800
Foreign 1,358,446 88,370 --
-------------------- ------------------ ------------------
Total current taxes on income 4,121,896 2,806,030 2,106,800
Deferred income taxes:
United States (644,963) (480,000) 266,000
Foreign (666,152) (23,819) --
-------------------- ------------------ ------------------
Total deferred income taxes (1,311,115) (503,819) 266,000
-------------------- ------------------ ------------------
Provision for income taxes $2,810,781 $2,302,211 $2,372,800
==================== ================== ==================
34
Significant components of the Company's deferred tax assets and
liabilities are as follows:
December 31,
1999 1998
------------------- ------------------
Deferred tax assets:
Accrued expenses $ 911,416 $ 639,081
Bad debt allowances 251,899 363,500
Inventory adjustments 1,279,659 1,042,500
Net operating loss carryforwards 386,033 --
Credit carryforwards 335,091 --
Other items, net 548,057 172,420
------------------- ------------------
3,712,155 2,217,501
Less valuation allowance (74,425) --
------------------- ------------------
3,637,730 2,217,501
Deferred tax liabilities:
Property, plant and equipment basis differences 2,874,159 1,973,328
------------------- ------------------
Total deferred tax liabilities 2,874,159 1,973,328
=================== ==================
Net deferred tax assets $ 763,571 $ 244,173
=================== ==================
In connection with the acquisition of RCF in 1998, the Company recorded a
net deferred tax credit of $333,646.
A reconciliation from the U.S. statutory rate of 34% to the effective rate
is as follows:
1999 1998 1997
-------------------------- -------------------------- ------------------------
Tax at the statutory rate $2,063,136 34.0% $2,680,215 34.0% $2,689,200 34.0%
Effect of the research and development tax
credit (200,000) (3.3) (280,000) (3.6) (280,000) (3.5)
Foreign sales corporation tax benefit (311,835) (5.1) (251,090) (3.2) (357,900) (4.5)
Limitation of recognition of benefit of
foreign operating losses 36,008 0.6 179,094 2.3 -- --
Nondeductible expenses and other permanent -- --
differences 424,452 7.0 122,987 1.6
Foreign tax greater than U.S. statutory rate
569,944 9.4 268,288 3.4 -- --
Other items, net 229,076 3.8 (417,283) (5.3) 321,500 4.1
================= ======== ================== ======= ================ =======
$2,810,781 46.3% $2,302,211 29.2% $2,372,800 30.0%
================= ======== ================== ======= ================ =======
The valuation allowance for deferred tax assets increased by 74,425 in
1999. This change relates primarily to net operating loss carryforwards
generated by foreign operations.
At December 31, 1999, the Company had US and international net operating
loss carryforwards of approximately $800,000 and $400,000 respectively. These
carryforwards generally begin expiring in 2013.
Provision has not been made for U.S. or additional foreign taxes on the
undistributed earnings of the Company's foreign subsidiaries. These earnings,
which are expected to be reinvested, could become subject to additional tax if
they were to be remitted as dividends, lent to the Company, or if the Company
should sell its stock in these subsidiaries.
35
7. DEBT
In June 1998, the Company entered into a credit agreement with a bank to
provide certain credit facilities to the Company, including a $12.8 million loan
for the acquisition of RCF of which $10.5 million was outstanding at December
31, 1999. The loan, which is secured by all of the Company's assets, bears
interest at the bank's prime rate, or at a specified LIBOR rate plus a specified
margin, whichever the Company chooses. Interest on the loan is payable monthly.
Principal is payable on September 30 of each year from 1999 in installments
equal to 1/7 of the amount borrowed. All outstanding principal and interest
amounts are due on September 30, 2003. The agreement also provides a $5.0
million unsecured line of credit to finance any unexpected working capital
needs. The line of credit bears interest at the same rate as the acquisition
loan. The agreement also provides a $2.5 million credit facility for capital
equipment purchases or general corporate purposes. Certain terms under this
facility, such as interest rate, repayment period and collateral, will be
determined at the time advances are made to the Company. At December 31, 1999,
there were no outstanding balances on any of these credit lines. These credit
facilities (excluding the acquisition loan) expire April 30, 2001. Under the
terms of the credit agreement, the Company must maintain certain financial
ratios and tangible net worth. The Company was in compliance with all covenants
at December 31, 1999. The agreement also provides, among other matters,
restrictions on additional financing, dividends, mergers, acquisitions, and an
annual capital expenditure limit of $10.0 million.
The Company also has entered into agreements with several banks in Italy
that provide short-term credit facilities totaling approximately $19 million. At
December 31, 1999, there was approximately $16.0 million outstanding under these
facilities. The majority of these credit facilities are secured by RCF's
receivables.
Interest rates on these credit facilities range from 3.6% to 11.2%.
The weighted-average interest rate on short-term borrowings at December
31, 1999 was 6.2%.
Long-term debt consisted of the following at December 31:
1999 1998
Revolving Credit Note (A) $ 10,500,000 $ 12,500,000
Bank Term Loan (B) 4,670,472 5,438,066
Bank Term Loan (C) 3,870,187 4,506,254
Bank Term Loan (D) 802,127 1,037,729
Other Notes (E) 2,781,655 3,841,619
--------------------- --------------------
22,624,441 27,323,668
Less current portion 6,959,779 8,339,468
--------------------- --------------------
$ 15,664,662 $ 18,984,200
===================== ====================
(A) Borrowings under the Revolving Credit Note ($12.8 million acquisition
loan) bear interest at the bank's prime rate, or at a specified LIBOR
rate plus a specified margin, whichever the Company chooses. At
December 31, 1999, the interest rate in effect was 7.4%. Interest is
payable monthly. Principal is payable in installments equal to 1/7 of
the amount borrowed ($12.8 million) on September 30 of each year. All
outstanding principal and interest amounts are due on September 30,
2003.
(B) The Bank Term Loan bears interest at the six-month Euribor rate plus
0.65% (4.2% at December 31, 1999). Interest-only payments are made
semi-annually and the principal is due on February 5, 2000. This loan
requires the Company to maintain certain covenants with respect to
its subsidiary, RCF. This loan was paid off in February 2000.
36
(C) The Bank Term Loan bears interest at the six-month LIBOR rate plus 2%
(8.1% at December 31, 1999). Interest-only payments are made
semi-annually and the principal is due in 2003. This loan is secured
by a bank bond held by RCF, which at time of maturity in 2003, will
be used to repay the principal amount of the loan.
(D) The Bank Term Loan bears a fixed interest rate of 7.7%. Interest-only
payments are made semi-annually. In addition, semi-annual principal
payments of approximately $90,000 began in October 1999 with the
final principal payment due in 2004. This loan is secured by a bank
bond held by RCF.
(E) The other notes bear interest at rates from 4.4% to 8.8%. Principal
payments on these loans are made in varying amounts until 2007.
Certain of these loans are secured by specific assets of RCF.
The Bank Term Loan described above in (B) contains several financial
covenants. RCF was not in compliance with one of the covenants at December 31,
1999 and 1998. This loan was due and paid off by the Company in February 2000
and was therefore included in the current portion of long-term debt at both
December 31, 1999 and 1998.
The long-term debt described above in (B) through (E) are denominated in
Italian lira and have been converted to U.S. Dollars using applicable rates for
the periods presented for disclosure purposes.
Future aggregate annual principal payments of long-term debt at December
31, 1999 are as follows:
2000 $ 6,959,779
2001 2,639,877
2002 2,358,878
2003 9,408,317
2004 323,831
Thereafter 933,759
------------------
$ 22,624,441
==================
8. EMPLOYEE AND OTHER LIABILITIES
Under Italian law, RCF employees are entitled to severance benefits
calculated primarily based upon compensation and length of service. These
severance benefits vest immediately and are payable upon the employee's
separation from the Company. This liability aggregated approximately $3.2
million and $3.4 million at December 31, 1999 and 1998, respectively. In
addition, RCF commissioned sales agents are entitled to similar severance
benefits based upon commissions earned and length of service. This liability
aggregated approximately $560,000 and $600,000 at December 31, 1999 and 1998,
respectively. Under these severance programs, severance expense of approximately
$650,000 and $300,000 was recognized in 1999 and 1998, respectively.
9. RELATED-PARTY TRANSACTIONS
The Company has an agreement to receive marketing and sales services from
an entity affiliated with a shareholder of the Company. The Company also made a
loan to one of its officers in November 1999. The principal amount of the loan
is due and payable in full on or before October 31, 2004 or upon termination of
the officer, whichever shall occur first. The loan bears no interest.
Transactions are summarized as follows:
37
Years Ended December 31,
1999 1998 1997
------------------- ------------------ ------------------
Marketing and sales services $348,232 $279,972 $294,609
=================== ================== ==================
Payables to a related party $ 44,604 $ 22,789 $ 38,090
=================== ================== ==================
Loan to officer $ 250,000
=================== ================== ==================
10. EMPLOYEE BENEFIT PLANS
The Company has a qualified profit-sharing plan (the Plan) under the
provisions of Internal Revenue Code Section 401(k). The Plan is available to all
employees meeting the eligibility requirements. Contributions by the Company are
based on a matching formula as defined in the Plan. Additional contributions are
at the discretion of the Board of Directors. Company contributions to the plan
vest ratably over a 5-year period. The Company made contributions of $113,000,
$112,000, and $51,000 to the Plan in 1999, 1998, and 1997, respectively.
The Company self-insures for health care costs of its eligible employees
and dependents. The Company has obtained an insurance policy to cover claims
incurred during the policy year in excess of $50,000 per person and has a $1
million annual stop loss on total claims for all employees in the aggregate.
Estimated costs of all incurred claims that are not covered by insurance are
recognized in the financial statements.
11. NET INCOME PER SHARE
The following table represents a reconciliation of the numerators and
denominators of the basic and diluted earnings per share calculations:
1999 1998 1997
------------------- ------------------- ------------------
Numerator:
Numerator for basic and diluted net income per
share - net income $ 3,257,267 $ 5,580,774 $ 5,536,651
=================== =================== ==================
Denominator:
Denominator for basic net income per share -
weighted-average common shares
12,214,982 12,594,090 12,825,949
Effect of dilutive stock options 49,697 351,080 575,201
------------------- ------------------- ------------------
Denominator for diluted net income per share
12,264,679 12,945,170 13,401,150
=================== =================== ==================
Basic net income per share $ 0.27 $ 0.44 $ 0.43
=================== =================== ==================
Diluted net income per share $ 0.27 $ 0.43 $ 0.41
=================== =================== ==================
Stock options totaling 3,086,000, 325,000 and 133,000 shares in 1999,
1998 and 1997, respectively, were excluded from the calculation of diluted
net income per share, as they were antidilutive.
12. SHAREHOLDERS' EQUITY
In April 1995, the Company established a stock option plan for the
granting of incentive and non-qualified stock options (the Plan). The exercise
price of incentive stock options granted under the Plan may not be less than the
fair market value of the common stock on the date of grant. The exercise price
of non-qualified stock options granted under the Plan may be greater or less
than the fair market value of the common stock on the date
38
of grant, as determined by the stock option committee of the Company's Board of
Directors at its discretion. The Company has reserved 4,500,000 shares of common
stock for issuance under the Plan. The options generally vest over a four-year
period and expire no later than ten years after the date of grant.
The following table summarizes the Company's stock option activity for the
three-year period ended December 31, 1999:
Weighted
Shares subject to Option price average
option range exercise price
--------------------- ------------------ ------------------
Options outstanding at December 31, 1996 2,000,700 $5.55 - 13.88 $ 6.04
Granted 1,093,000 $5.55 - 6.88 $ 6.32
Forfeited (185,250) $5.55 - 13.88 $ 7.78
Exercised (56,250) $5.55 - 8.75 $ 5.62
--------------------- ------------------ -------------------
Options outstanding at December 31, 1997 2,852,200 $5.55 - 13.88 $ 6.04
Granted 608,200 $6.25 - 7.75 $ 6.56
Forfeited (27,500) $8.75 $ 8.75
Exercised (15,000) $5.55 $ 5.55
--------------------- ------------------ -------------------
Options outstanding at December 31, 1998 3,417,900 $5.55 - 13.88 $ 6.11
Granted 355,500 $4.75 - 5.91 $ 4.79
Forfeited (360,900) $6.00 - 8.75 $ 6.42
Exercised (1,500) $5.55 $ 5.55
===================== ================== ===================
Options outstanding at December 31, 1999 3,411,000 $4.75 - 13.88 $ 5.94
===================== ================== ===================
At December 31, 1999, 1,006,250 shares of common stock were available for
future grants.
The following table summarizes information about options outstanding and
exercisable at December 31, 1999:
Options Outstanding
-------------------
Weighted average Weighted
remaining contractual average exercise
Range of exercise price Options outstanding life (years) price
--------------------------- -------------------- ---------------------------- --------------------
$4.75 - 8.00 3,316,000 6.87 $ 5.85
$8.01 - 13.88 95,000 6.03 $ 9.29
--------------------------- -------------------- ---------------------------- --------------------
$4.75 - 13.88 3,411,000 6.84 $ 5.94
=========================== ==================== ============================ ====================
Options Exercisable
-------------------
Weighted average exercise price
----------------------------------------------------- -----------------------------------
Range of
exercise price 1999 1998 1997 1999 1998 1997
---------------------------------------------------- -----------------------------------
$4.75 - 8.00 2,341,275 1,955,950 1,730,950 $ 5.81 $ 5.69 $ 5.59
$8.01 - 13.88 73,750 55,000 35,625 $ 9.44 $ 9.45 $ 9.47
---------------------------------------------------- -----------------------------------
$4.75 - 13.88 2,415,025 2,010,950 1,766,575 $ 5.92 $ 5.79 $ 5.67
==================================================== ===================================
The Company follows the intrinsic value method in accounting for its stock
options. Had compensation costs been determined consistent with SFAS No. 123,
the Company's net income and earnings per share would have been reduced to the
proforma amounts as indicated below:
1999 1998 1997
---------------- -------------- --------------
39
Net income - as reported $ 3,257,267 $ 5,580,774 $ 5,536,651
Net income - pro forma $ 1,995,458 $ 4,490,247 $ 4,751,734
Basic net income per share - as reported $ 0.27 $ 0.44 $ 0.43
Basic net income per share - pro forma $ 0.16 $ 0.36 $ 0.37
Diluted net income per share - as reported $ 0.27 $ 0.43 $ 0.41
Diluted net income per share - pro forma $ 0.16 $ 0.35 $ 0.35
The fair value of each option grant was estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions for 1999,
1998 and 1997, respectively: risk-free interest rates of 5.79%, 5.28% and 6.33%;
expected option life of 6.0 years for all three years; expected volatility of
61.6%, 61.4% and 65.9%; and no expected dividends. The weighted-average fair
value of options granted during the years 1999, 1998, and 1997 was $2.99, $4.04,
and $4.16, respectively.
The Company fulfilled the authorization from its Board of Directors to
repurchase up to 850,000 shares of its outstanding common stock during the three
year period ended December 31, 1999. These purchases were executed through open
market purchases at prevailing market prices. As of December 31, 1999, the
Company had repurchased all 850,000 shares authorized under the program at a
total cost of approximately $5.6 million. No additional authorizations are
currently pending.
13. COMMITMENTS AND CONTINGENCIES
In December 1994, the Company entered into a lease for office and
manufacturing facilities with Mackie Holdings, LLC, an entity owned by three
significant shareholders and directors of the Company. The lease commenced on
December 31, 1994 and expires December 31, 2004. The annual rent under this
lease was $740,820, $826,664, and $679,356 in 1999, 1998 and 1997, respectively.
Taxes, insurance, utilities, and maintenance are the responsibility of the
Company. Future minimum rental payments under this lease and other equipment and
facility leases at December 31, 1999 are as follows:
2000 $1,657,000
2001 1,536,000
2002 1,523,000
2003 1,534,000
2004 1,493,000
Thereafter 311,000
------------------
$8,054,000
==================
The Company expects to renew or replace certain leases at expiration.
Total rent expense for 1999, 1998, and 1997 was $1,649,000, $1,731,000, and
$1,328,000, respectively.
On November 3, 1999, the Company entered into a full settlement with
Behringer Spezielle Studio-Technick Gmbh, a German corporation, Behringer
International GmbH, a German corporation, and Ulrich Bernard Behringer, the
defendants in the lawsuit filed in June 1997 alleging infringement of the
Company's intellectual property rights. The settlement did not have a material
impact on the Company's financial position, liquidity or results of operations.
The Company is also involved in various legal proceedings and claims that
arise in the ordinary course of business. Management currently believes that
these matters will not have a material adverse impact on the Company's financial
position, liquidity or results of operations.
14. SEGMENT AND GEOGRAPHIC INFORMATION
40
The Company identifies its business segments based on management
responsibility using a combination of products and geographic factors. The
Company has two reportable segments: Mackie Designs Inc. and its subsidiary,
RCF. The Mackie segment offers audio mixers and other professional audio
equipment. The RCF segment offers loudspeakers, loudspeaker components and
Mackie product offerings through its subsidiaries. There were no intersegment
sales in 1998. A summary of key financial data by segment is as follows:
Elimination of
intercompany
Mackie RCF amounts Total
--------------- ---------------- ------------------ --------------
(in thousands)
Year ended December 31, 1999:
Net sales, to external customers $ 94,094 $ 59,728 $ -- $153,822
Net sales, intersegment 8,542 4,733 (13,275) --
Operating income 6,754 1,958 (536) 8,176
Interest income 1,658 366 (1,283) 741
Interest expense (999) (3,056) 1,283 (2,772)
Depreciation and amortization 4,386 2,014 -- 6,400
Income taxes 2,351 460 -- 2,811
Purchases of property, plant and equipment 1,499 1,617 -- 3,116
Total property, plant and equipment, net 8,508 11,994 -- 20,502
Total assets 73,450 70,374 (22,970) 120,854
Elimination of
intercompany
Mackie RCF amounts Total
---------------------------------------------------------------
(in thousands)
Year ended December 31, 1998:
Net sales $ 78,716 $ 23,279 $ -- $101,995
Operating income 8,050 366 -- 8,416
Interest income 1,276 148 (642) 782
Interest expense (583) (1,580) 642 (1,521)
Depreciation and amortization 3,796 948 -- 4,744
Income taxes 2,238 64 -- 2,302
Purchases of property, plant and equipment 4,269 1,069 -- 5,338
Total property, plant and equipment, net 11,184 13,385 -- 24,569
Total assets 57,222 62,590 (922) 118,890
Major operations of the Company outside the U.S. include manufacturing
facilities in Italy, and sales and support offices in Germany, the United
Kingdom, France and China. Geographic information for the three years ended
December 31, 1999 is presented in the table that follows. Sales between
affiliated entities are excluded from the numbers below. Net sales, as shown in
the table below, are based upon the geographic area into which the products were
sold and delivered. As such, U.S. export sales of $17.4 million, $24.1 million
and $28.1 million in 1999, 1998 and 1997, respectively, have been excluded from
U.S. reported net sales. The profit on transfers between geographic areas is not
recognized until sales are made to non-affiliated customers. Long-lived assets
exclude goodwill, bonds and deferred taxes and are those assets that can be
directly associated with a particular
41
geographic area.
Years Ended December 31,
1999 1998 1997
---------------------------------------------
(in thousands)
Net sales:
U.S. $ 77,999 $ 57,117 $ 46,770
Europe 54,540 31,305 13,216
The Americas, excluding U.S. 9,994 8,082 7,827
Asia-Pacific, including Australia and New Zealand 8,524 3,999 6,669
Other 2,765 1,492 561
---------------------------------------------
$ 153,822 $ 101,995 $ 75,043
=============================================
Long-lived assets:
U.S. $ 8,695 $ 11,718 $ 11,200
Europe 14,296 14,766 --
Other 2 2 --
---------------------------------------------
$ 22,993 $ 26,486 $ 11,200
=============================================
15. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 FIRST SECOND THIRD FOURTH
- - --------------------------------------------------------------------------------------------------------
Net sales $ 31,624 $ 39,256 $ 40,344 $ 42,598
Gross profit $ 10,869 $ 14,545 $ 14,663 $ 17,025
Net income (loss) $ (1,369) $ 1,121 $ 1,713 $ 1,792
Basic net income (loss) per share $ (0.11) $ 0.09 $ 0.14 $ 0.15
Diluted net income (loss) per share $ (0.11) $ 0.09 $ 0.14 $ 0.15
1998 FIRST SECOND THIRD FOURTH
- - --------------------------------------------------------------------------------------------------------
Net sales $ 17,354 $ 18,291 $ 31,196 $ 35,155
Gross profit $ 6,829 $ 7,003 $ 12,632 $ 12,828
Net income $ 1,158 $ 1,297 $ 1,776 $ 1,350
Basic net income per share $ 0.09 $ 0.10 $ 0.14 $ 0.11
Diluted net income per share $ 0.09 $ 0.10 $ 0.14 $ 0.11
16. SUBSEQUENT EVENT
In February 2000, the Company and Eastern Acoustic Works Inc. (EAW)
signed a non-binding letter of intent by which the Company would purchase all
shares of EAW. Based in Whitinsville, Massachusetts, EAW is recognized as the
world's leading high-end professional loudspeaker design and manufacturing firm.
It's products are utilized in sound reinforcement systems at major stadiums and
arenas, performing arts centers, churches, clubs, and more recently in the
custom residential market.
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this Item is included in the Company's
Form 8-K dated May 7, 1999 and filed on May 14, 1999 relating to a change in
the Company's certifying accountants from Ernst & Young LLP to KPMG LLP and
is included herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is included in the Company's
definitive Proxy Statement for its 2000 Annual Meeting of Shareholders under the
heading "Proposal No. 1: Election of Directors" and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the Company's
definitive Proxy Statement for its 2000 Annual Meeting of Shareholders under the
heading "Executive Compensation" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included in the Company's
definitive Proxy Statement for its 2000 Annual Meeting of Shareholders under the
heading "Principal Shareholders" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in the Company's
definitive Proxy Statement for its 2000 Annual Meeting of Shareholders under the
heading "Certain Transactions" and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. CONSOLIDATED FINANCIAL STATEMENTS: PAGE NUMBER
Independent Auditors' Reports on Consolidated Financial
Statements:.............................................................. 24-25
Consolidated Balance Sheets at December 31, 1999 and 1998................ 27
Consolidated Statements of Income for each of the years
in the three-year period ended December 31, 1999......................... 28
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1999......................... 29
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for each of the years in the three-year period ended
December 31, 1999........................................................ 30
43
Notes to Consolidated Financial Statements................. 31-43
2. FINANCIAL STATEMENT SCHEDULES: PAGE NUMBER
Schedule II - Valuation and Qualifying Accounts........................... 47
All financial statement schedules not listed are
omitted either because they are not applicable, not
required, or the required information is included in
the consolidated financial statements or notes
thereto.
3. EXHIBITS: See Index to Exhibits on page 48.
(b) Reports on Form 8-K:
The Company filed the following current reports on Forms 8-K under Item 5:
Other Events.
FORM DATE OF FILING DATE OF REPORT TOPIC
8-K October 12, 1999 October 5, 1999 Resignation of Roy D. Wemyss
as Chief Executive Officer and
President.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MACKIE DESIGNS INC.
By: /s/ Greg C. Mackie
-----------------------------------------
Greg C. Mackie
CHAIRMAN OF THE BOARD
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 30, 2000.
SIGNATURE TITLE
/s/ Greg C. Mackie Chairman of the Board
- - ---------------------------------------------------- (Principal Executive Officer)
Greg C. Mackie
/s/ William A. Garrard Vice President, Finance and Chief Financial Officer
- - ---------------------------------------------------- (Principal Financial and Accounting Officer)
William A. Garrard
/s/ James T. Engen Chief Operating Officer
- - ----------------------------------------------------
James T. Engen
/s/ David M. Tully Treasurer and Director
- - ----------------------------------------------------
David M. Tully
/s/ Raymond B. Ferguson Director
- - ----------------------------------------------------
Raymond B. Ferguson
/s/ Gregory Riker Director
- - ----------------------------------------------------
Gregory Riker
/s/ C. Marcus Sorenson Director
- - ----------------------------------------------------
C. Marcus Sorenson
/s/ Roy D. Wemyss Director
- - ----------------------------------------------------
Roy D. Wemyss
45
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
MACKIE DESIGNS INC.
- - ------------------------------------------------------------ ------------- ------------- -------------
RCF Additions
Balance at Allowances Charged to Balance at
Beginning at Date of Costs and Deductions - End of
Description of Period Acquisition Expenses Describe Period
- - ------------------------------------------------------------ ------------- ------------- ------------- ------------ -----------
YEAR ENDED DECEMBER 31, 1999:
Allowances deducted from asset accounts:
Allowance for uncollectible accounts receivable $ 1,421,000 $ 471,000 $ 746,000 (1) $ 1,146,000
YEAR ENDED DECEMBER 31, 1998:
Allowances deducted from asset accounts:
Allowance for uncollectible accounts receivable $ 481,000 $ 1,008,000 $ 279,000 $ 347,000 (1) $ 1,421,000
YEAR ENDED DECEMBER 31, 1997:
Allowances deducted from asset accounts:
Allowance for uncollectible accounts receivable $ 808,000 $ -- $ -- $ 327,000 (1) $ 481,000
(1) Uncollectible accounts written off, net of recoveries, and adjustment to
reserves.
46
INDEX TO EXHIBITS
3.1 Restated Articles of Incorporation. Incorporated by reference to Exhibit 3.1
to Registrant's Registration Statement filed under the Securities Act of 1933
on Form S-1, as amended, Registration No. 33-93514...............................
3.2 Restated Bylaws. Incorporated by reference to Exhibit 3.2 to Registrant's
Registration Statement filed under the Securities Act of 1933 on Form S-1, as
amended, Registration No. 33-93514...............................................
4.1 See Articles II, III and IV of Exhibit 3.1 and Sections 1, 5 and 9 of
Exhibit 3.2 confirming the rights of the holders of Common Stock.................
10.1 Mackie Designs Inc. Amended and Restated 1995 Stock Option Plan, as amended on
March 11, 1997. Incorporated by reference to Exhibit 10.1 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996..................
10.2 Amendment to Mackie Designs Inc. Amended and Restated 1995 Stock Option Plan,
dated March 16, 1998.............................................................
10.3 Industrial Lease, dated December 15, 1994, by and between Mackie Holdings,
L.L.C. and Mackie Designs Inc. Incorporated by reference to Exhibit 10.3 to
Registrant's Registration Statement filed under the Securities Act of 1933 on
Form S-1, as amended, Registration No. 33-93514..................................
10.4 Industrial Real Estate Lease, dated April 28, 1995, by and between Intrawest
Properties Partnership U.S. and Mackie Designs Inc. Incorporated by reference
to Exhibit 10.4 to Registrant's Registration Statement filed under the
Securities Act of 1933 on Form S-1, as amended, Registration No. 33-93514........
10.5 Exhibit C to Industrial Real Estate Lease, dated April 28, 1995, by and
between Intrawest Properties Partnership U.S. and Mackie Designs Inc.
Incorporated by reference to Exhibit 10.4A to Registrant's Registration
Statement filed under the Securities Act of 1933 on Form S-1, as amended,
Registration No. 33-93514........................................................
10.6 Mackie Sales Representative Agreement, dated January 24, 1994, by and between
Mackie Designs Inc. and C.M. Sorenson Co. dba Calwest Marketing So.
Incorporated by reference to Exhibit 10.5 to Registrant's Registration
Statement filed under the Securities Act of 1933 on Form S-1, as amended,
Registration No. 33-93514.......................................................
10.7 Exhibit C to Mackie Sales Representative Agreement, dated January 24, 1994,
by and between Mackie Designs Inc. and C. M. Sorenson Co. dba Calwest
Marketing So. Incorporated by reference to Exhibit 10.5A to Registrant's
Registration Statement filed under the Securities Act of 1933 on Form S-1, as
amended, Registration No. 33-93514........................................
47
10.8 Form of Authorized Dealer Agreement. Incorporated by reference
to Exhibit 10.13 to Registrant's Registration Statement filed
under the Securities Act of 1933 on Form S-1, as amended,
Registration No. 33-93514........................................................
10.9 Form of Sales Representative Agreement. Incorporated by
reference to Exhibit 10.14 to Registrant's Registration
Statement filed under the Securities Act of 1933 on Form S-1,
as amended, Registration No. 33-93514............................................
10.10 Mackie Designs Inc. 401(k) Profit Sharing Plan dated December 20, 1993.
Incorporated by reference to Exhibit 10.15 to Registrant's Registration
Statement filed under the Securities Act of 1933 on Form S-1, as amended,
Registration No. 33-93514........................................................
10.11 Agreement between A&R Technology and Mackie Designs Inc. for
the Development and Publishing of MIDI Mix Automation Software
dated December 5, 1993, as amended on August 16, 1994 and June
14, 1995. Incorporated by reference to Exhibit 10.16 to
Registrant's Registration Statement filed under the Securities
Act of 1933 on Form S-1, as amended, Registration No.
33-93514.........................................................................
10.12 Software License Agreement among Alexander Hopmann, Robert Tudor and Mackie
Designs Inc. dated February 9, 1996. Incorporated by reference to
Exhibit 10.22 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995................................................................
10.13 Employee Agreement dated April 28, 1997 between Roy D. Wemyss and Mackie
Designs Inc. Incorporated by reference to Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1997.................
10.14 Employee Agreement dated April 28, 1997 between Patric Wiesmann and Mackie
Designs Inc. Incorporated by reference to Exhibit 10.2 to Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1997.................
10.15 Employee Agreement dated May 19, 1997 between William A. Garrard and Mackie
Designs Inc. Incorporated by reference to Exhibit 10.3 to Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1997.................
10.16 Employee Agreement dated June 20, 1997 between Robert May and Mackie Designs
Inc. Incorporated by reference to Exhibit 10.4 to Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1997...........................
10.17 Speaker Design Agreement dated September 18 1997 between Mackie Designs Inc.
and Radio Cine Forniture (R.C.F.) S.p.A. Incorporated by reference to
Exhibit 10.25 to Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 1997.........................................................
10.18 Business Loan Agreement, dated October 27, 1997, by and between U.S. Bank of
Washington, National Association, and Mackie Designs Inc.........................
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10.19 Promissory Note made by Mackie Designs Inc. to the order of U.S. Bank of
Washington, National Association, in the principal amount of $5,000,000.00
dated October 27, 1997...............................................................
*10.20 Loan Agreement dated October 21, 1999 between James T. Engen and Mackie Designs,
Inc. in the amount of $250,000.......................................................
*10.21 Second Amendment to Employment Agreement of william A. Garrard dated
September 28, 1999 between William A. Garrard and Machie Designs, Inc................
11.1 Computation of net income per share. Incorporated by reference to the Notes
to Consolidated Financial Statements (Footnote 11) in the Annual Report to
Shareholders of Mackie Designs Inc. for the year ended December 31, 1999.............
13.1 Annual Report to Shareholders of Mackie Designs Inc. for the year ended
December 31, 1999....................................................................
*21.1 Subsidiaries of Mackie Designs Inc...................................................
*23.1 Consent of KPMG LLP, Independent Auditors............................................
*23.2 Consent of Ernst & Young LLP, Independent Auditors...................................
*27.1 Financial Data Schedule..............................................................
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* Filed herewith
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