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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 [Fee Required]
For the fiscal year ended December 31, 1997
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
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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
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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 17, 1998, the aggregate market value of the Registrant's
Common Stock held by nonaffiliates of the Registrant was $15,785,888 based on
the closing sales price of the Registrant's Common Stock on the Nasdaq National
Market. On that date, there were 12,662,650 shares of Common Stock outstanding.
Portions of the Registrant's 1997 Annual Report to Shareholders are
incorporated by reference into Parts II and IV hereof, and portions of the
Registrant's definitive Proxy Statement for its 1998 Annual Meeting of
Shareholders are incorporated by reference into Part III hereof.
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 from approximately $400 to $10,000, which generally
represents the 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. and
offers its products through local distributors in over 100 other countries.
The Company's primary products are mixers and mixer-related products. 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 six to 24 microphones
and electronic inputs. Large concert tours and musical road productions often
have 60 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 commercial installations, recording studios, and theatre/cinema
and broadcast facilities. The power amplifier line and future products are
distributed through the same channels as the 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.
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The Company's traditional markets have been analog mixers and related
products. Recently, digital technologies have been developed by the Company to
expand its market base. Mackie's first digital product, Human User Interface
(HUI) interface tool for digital audio workstations (DAW), was introduced in
late 1997. This digital audio workstation interface targets the rapidly growing
digital audio workstation market, and was developed in conjunction with
Digidesign for ProTools 4.1. DAWs are used in video, film, multimedia and
recording studios. Additionally, the Company plans to introduce digital mixers
in 1998. Digital mixers blend, route and enhance sound sources like analog
mixers, but have the added capability of recalling all settings and automating
them in real-time. Markets include live and recorded sound, such as commercial
and home studios, multimedia production, and film and video post-production.
Mackie was incorporated in Washington in 1988. The Company's executive
offices and manufacturing facilities are located at 16220 Wood-Red Road N.E.,
Woodinville, Washington 98072, and its telephone number is (206) 487-4333.
"MACKIE," the running figure and all of the Company's product names are
registered trademarks or trademarks of the Company. This document also contains
names and marks of other companies.
Products
The Company currently offers professional audio mixers and related
accessories in four main mixer product lines: compact mixers, 8-Bus consoles, SR
series mixers, and digital automation systems. The Company also began offering
its line of Fast Recovery Series -TM- power amplifiers in December 1996 and its
first active near field studio monitor, the HR824, in August 1997.
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 CR1604-VLZ, the MS1402-VLZ, the MS1202-VLZ and the
LM-3204.
The CR1604-VLZ, introduced in February 1996, is a 16-channel mixer that
has received wide acceptance for its low noise and high headroom (ability to mix
very loud signals without distortion or quiet signals without noise).
Applications include recording in project studios, live presentations by major
touring bands, video post-production and multimedia. The CR1604-VLZ has been
used to produce major label CDs, soundtracks for major motion pictures and
on-stage musical instrument mixing for network television shows. The CR1604-VLZ
features a two-part design that allows the mixer to be rack-mounted in order to
conserve space or to be configured for desk-top use for easy access to the
controls. The Company also offers the MixerMixer, an add-on product that expands
the capabilities of the CR1604-VLZ and other mixers, by allowing the combination
of up to 12 outputs from any three mixers without loss of channels or
functionality.
The MS1402-VLZ is a 14-channel mixer that the Company introduced in
January 1996. It has the same electronic specifications as the CR1604-VLZ but
has two fewer channels. It is designed for many of the same applications as the
CR1604-VLZ as well as the MS1202-VLZ.
The MS1202-VLZ is a 12-channel mixer that occupies less than one square
foot of workspace. Designed to be used alone or as a subcomponent of a larger
mixing system, the MS1202-VLZ has the same electronic specifications as the
CR1604-VLZ and the MS1402-VLZ, but has fewer channels. The success of the
product and its predecessor, the MS1202, has been in part due to its relatively
low price, flexibility and rugged construction (including solid steel chassis,
sealed rotary controls and built-in power supply). This mixer is used for small
home studios, on-stage mixing by small lounge acts, off-line
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video production, multimedia authoring, audiophile acoustic recordings and
electronic news gathering and as a supplemental mixer in conjunction with large
non-portable studio recording consoles.
The LM-3204 is a 32-channel mixer with 16 stereo channels in a compact
chassis that occupies just five standard rack spaces. Besides providing all of
the control features of the CR1604-VLZ, it includes additional monitor and
mixing circuitry that optimizes the mixer's utility for both recording and live
presentation applications. The LM-3204 is designed for applications requiring
control of a large number of line level inputs such as keyboard submixing,
computer sequencing and electronic percussion mixing in stage, sound
reinforcement and project studio environments, as well as sound mixing in
auditoriums, exhibit halls and other permanent installations. The LM-3204's two
microphone preamplifiers extend the mixer's applications to small performing
groups such as nightclub single and duo acts and commercial production work
where announcer voiceovers are required. The LM-3204 is expandable with one or
more optional LM-3204Es, each of which adds 16 stereo channels.
8-Bus Series. The 8-Bus is a larger mixer console designed for
multitrack recording and live presentation applications. The Company introduced
8-Bus mixers in 1993. At suggested retail prices from approximately $3,000 to
$5,000, the 8-Bus consoles have opened the market to many new users and replaced
many larger 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. Each version includes eight submix buses, as well
as more elaborate equalization (tone control), signal routing and monitoring
capabilities than are found in compact mixers. 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. The 32- and 24-channel versions of
the Company's 8-Bus can be expanded with one or more 24-Channel Expander
Consoles, each of which adds 24 additional channels. The Company also offers
MB-32, MB-24 and MB-16 meter bridges for the 32-channel, 24-channel and
16-channel 8-Bus consoles, respectively; these bridges extend across the width
of the mixer and provide a bar-graph meter for each channel strip of the
console.
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 SR24-4, was introduced in May 1995,
followed by the SR32-4 in August 1995. These retail for approximately $1,600 to
$2,300. In December 1996, Mackie introduced the SR40-8, a 40-channel
large-format sound reinforcement console, with the SR56-8, a 56-channel console,
planned for addition to the line in 1998. The SR40-8 large-format console
retails for approximately $10,000. The SR24-4 and SR32-4 are larger than a
compact mixer but significantly smaller than Mackie's 8-Bus consoles, and
include features necessary for use with digital multitrack recorders. They
incorporate much of the advanced technology first introduced in the 8-Bus
series, including very-low-impedance circuitry, wide-band equalization and
highly sensitive signal presence indicators. The large-format 40-8 incorporates
these features plus an UltraMute -TM- computerized system for group and
individual sound muting, a built-in meter bridge, and left, right and center
master faders. The SR24-4 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 theaters and auditoriums.
The SR40-8 and SR56-8 large-format consoles are intended for use as installed
equipment in venues such as churches, auditoriums, or sporting facilities.
Digital Automation Systems. The Company's digital automation systems
include the UltraMix -Registered Trademark- Universal Automation System, the
Human User Interface (HUI), and the Digital 8-Bus (scheduled for introduction
in the second quarter of 1998).
Because many mixing systems involve controlling specific audio levels
on over 100 channels, there is a need for an add-on product to automatically
retain and recall a particular range of settings. In
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September 1995, the Company introduced a digitally controlled automation
system to address this need. The Company's UltraMix -Registered Trademark-
Universal Automation System, which has a suggested retail price of
approximately $2,800, consists of the Ultra-34, a 34-channel external volume
control system; the UltraPilot, an external control surface; and UltraMix
- -Registered Trademark- Pro automation software. These components, when used
in conjunction with a personal computer equipped with Microsoft's Windows 95
or with Apple Computer, Inc.'s Macintosh computer, provide a solution to
complex mixing tasks. As with the Company's other products, the UltraMix
- -Registered Trademark- is designed to provide much of the functionality of
systems prohibitively expensive to all but a limited group of users at a
price point attractive to a wide range of potential users.
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. Human User
Interface, or HUI, was developed in conjunction with Digidesign, a division of
Avid Technology, Inc. Digidesign is currently the world leader in the digital
audio workstation 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.
The Company anticipates introducing its first digital console, the
Digital 8-Bus (D8B) in spring of 1998. Functions of the D8B are similar to the
company's analog 8-Bus. Unlike analog products, digital products store and
recall all setting and automate them in real-time, enabling users to more easily
and quickly accomplish complicated mixing tasks. Mackie's Digital 8-Bus will
allow direct connection to the Internet, with third party software effects
available for purchase to download onto the system through software cards. It is
designed for multitrack recording and live presentation systems, and will have a
suggested retail price of approximately $10,000.
Fast Recovery Series -TM- Power Amplifier. Use of a high-quality,
professional amplifier is necessary to retain sound integrity in audio
production. The Company's FR Series -TM- Power Amplifier is Mackie's first
non-mixer related product and became available in December 1996. The M-1400i and
M-1400 amplifier models are designed to keep sound quality intact when pushed to
extreme levels. Most power amplifiers use technology that can result in
distortion from internal feedback. The designs of the M-1400i and M-1400
minimize feedback while improving delivery through the use of high-speed digital
circuitry. The M-1400i and M-1400, at suggested retail prices of approximately
$600 and $650, respectively, are competitively priced and incorporate the high
performance capabilities of the Company's mixer lines.
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 the first of a family of monitors, 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
applications including home and professional studio recording, video
post-production, broadcast post-production, and home stereos.
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. In other
countries, the Company sells through approximately 70 local distributors, who in
turn sell to dealers. Until November 1, 1995, the Company used exclusively
5
the services of MMS, International ("MMS"), a manufacturer's representative, to
sell to distributors outside the U.S. and Canada, for which MMS received a
commission. Since November 1, 1995, the Company has supervised the international
marketing and sales of its products internally. Sales to customers outside of
the United States accounted for approximately 38%, 38% and 34% of the Company's
net sales in 1997, 1996 and 1995, respectively.
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
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.
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.
In the U.S., the Company's products are sold in musical instrument
stores, pro audio outlets and several mail order outlets. Musical instrument
stores range from small operations that sell a variety of instruments and
equipment to large outlets specializing in rock music equipment such as electric
guitars, synthesizers, mixers, drums, amplifiers and speakers. Top U.S. retail
dealers in 1997 included Guitar Center, Mar's Music, Musician's Friend,
Sweetwater Sound, Thoroughbred Music, Sam Ash Music, Washington Music Center,
Full Compass Systems, West LA Music and Manny's Music. These 10 dealers
represented approximately 33% of the Company's net sales in the U.S. in 1997.
Guitar Center accounted for approximately 12% of domestic net sales in 1997; no
other dealer accounted for more than 10% of domestic net sales in this period.
Internationally, the Company has distribution in over 100 countries.
The top international distributors in 1997 included Musik & Technik Marbury
(Germany), SF Marketing Inc. (Canada), Korg Import Division (Japan), Recoton
Italia s.r.l. (Italy), Manny's International (Brazil), Hermes International
(Mexico), Musikengro (France), Tropical Music Corp. (South America excluding
Brazil, Chile and Argentina; Central America and the Caribbean nations), Key
Audio Systems (United Kingdom) and A&T Trade, Inc. (former Soviet Union). These
10 distributors represented approximately 62% of the Company's international net
sales in 1997. No distributor accounted for more than 10% of international net
sales in this period.
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 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 five 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
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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 return of warranty cards
relating to its compact mixers, the Company has established a policy of
extending the warranty period for certain products an additional two years to
customers returning completed warranty cards.
The Company maintains a staff of product support specialists at its
headquarters to provide direct technical service and support. Telephone support
through a toll-free number is provided during scheduled business hours. Although
most calls involve troubleshooting with owners of Mackie products, product
support specialists also field calls from inquiring purchasers and thereby may
assist in making sales.
The Company also relies on its international distributors to support
its products in international countries. 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 larger 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. 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, 1997, the Company's research and development staff
consisted of 41 individuals, in addition to Mr. Mackie, who engineer and design
all aspects of the Company's new products. The Company's research and
development expenses were approximately $5.9 million in 1997, $3.6 million in
1996 and $1.2 million in 1995.
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, Crown International,
QSC Audio Products, Inc. and Crest Audio Inc. Competing speaker manufacturers
include Genelec, Inc., Event Electronics, Inc. and Alesis Corporation. 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.
In order to remain competitive, the Company substantially increased its
research and development expenditures in 1997. However, 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
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Mackie has a strong interest in protecting assets of the Company
that reflect original research and development of products and product
identity. As such, the Company has made extensive filings for the protection
of trademarks under domestic and international trademark registrations and
applications, for protection of the design of products under domestic and
international filing, and for protection of utility aspects of products,
domestically and internationally. To date, the Company has 142 issued
trademark registrations and 134 additional trademark applications pending in
the United States and in multiple foreign countries regarding protection for
marks, including: MACKIE. -Registered Trademark-, the running man design, VLZ
- -Registered Trademark-, Ultramix -Registered Trademark-, the three
dimensional configuration of the 24-8-Bus and 32-8-Bus, HUI and "d8b". Mackie
intends to continue filing applications for trademark protection on various
marks, as well as identifying other marks as trademarks of the Company.
However, there is no assurance that trademark protection will be granted in
any or all countries in which Mackie has or will file for registration of
trademarks, or any country in which Mackie currently sells or intends to sell
products. There can be no assurance that, as regarding these applications,
Mackie will be granted the breadth of description of goods or services
identified in respective applications. Also, Mackie cannot provide any
assurance that any mark, whether or not registered could withstand a
challenge as to validity. There is no assurance that its trademarks would not
be considered confusingly similar to, or infringing of a third party mark, or
that Mackie could successfully defend any of its trademarks.
To date, Mackie has 54 issued design patents, in at least 6 countries including
the United States, for several products, including: SR24-4, MS1202-VLZ,
MS1402-VLZ, CR1604-VLZ, 40-8-Bus, FR Series, HR824 Studio Monitor, HUI and
Digital 8-Bus. In addition, the Company has 30 pending design patent
applications in at least 5 countries, including the United States. While design
patents provide certain legal rights of enforceability, there can be no
assurance that the historical legal standards surrounding questions of validity
and enforceability will continue to be applied or that current defenses as to
issued patents will, in fact, be considered substantial in the future. In
addition, there can be no assurance as to the degree and range of protection any
design patent will afford, whether patents will issue or the extent to which the
Company will not infringe patents granted to others. Mackie has also filed for
utility patent protection on selected products, in the United States and/or
certain foreign countries, for the HR824 Studio Monitor and the Digital 8-Bus.
Along with extensive trademark and patent registration and filings, the Company
has filed and will continue to file for copyright registration on various
aspects of its technology, products and literature, including filings on:
schematics, circuitry, graphics, net lists, bills of material, advertising,
brochures, manuals and similar material. While copyrights provide certain legal
rights of enforceability, there can be no assurance as to the ability to
successfully prevent others from infringing Mackie's copyrights.
The Company has never conducted a comprehensive patent search relating to the
technology used in its product. The Company believes that its products do not
infringe 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.
8
Manufacturing
The Company manufactures its products in its facility near Seattle,
Washington. 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.
Backlog
The Company does not generally track backlog. Generally, orders are
shipped within two weeks after receipt. In the case of new product introductions
or periods where product demand exceeds production capacity, the Company
allocates products to customers on a monthly basis until demand is met.
Employees
At December 31, 1997, the Company had 585 full-time equivalent
employees, including 45 in marketing, sales and customer support, 41 in research
and development, 474 in manufacturing and manufacturing support (which includes
manufacturing engineering) and 25 in administration and finance. None of the
Company's employees is represented by a labor union, and the Company has never
experienced a work stoppage.
Item 2. Properties
The Company's headquarters near Seattle, 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 a 89,000 square foot manufacturing and office
facility, the construction of which was substantially completed in December
1994. The monthly rent is $56,613, adjusted annually for changes in the consumer
price index. 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.
Item 3. Legal Proceedings
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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.
Defendants include Behringer Spezielle Studiotechnick GmbH ("Behringer"), Ulrich
Bernard Behringer, Sam Ash Music Corporation, Samson Technologies, Richard Ash
and Scott Goodman. The suit claims damages in the amount of $327 million. Cases
are pending in the United States District Court for the Western District of
Washington, the Southern District of New York, and local courts in the United
Kingdom and Italy. While the Company intends to vigorously prosecute these
lawsuits, there can be no assurance that the Company will prevail in any of the
actions.
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 information required by this Item is included on page 22 of the
Financial Statements Section of the Company's Annual Report to Shareholders for
the fiscal year ended December 31, 1997 under the heading "Common Stock
Information and Dividend Policy" and is incorporated herein by reference.
Item 6. Selected Financial Data
Year Ended Year Ended Year Ended Year Ended Year Ended
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
----------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
Statement of Income Data
Net Sales $ 74,889 $ 73,236 $ 63,919 $ 49,907 $ 21,934
Gross Profit $ 27,796 $ 28,025 $ 27,163 $ 21,887 $ 9,610
Operating Expenses $ 20,670 $ 17,784 $ 13,627 $ 10,388 $ 5,881
Pro Forma Net Income(a) $ 5,537 $ 7,421 $ 9,026 $ 7,555 $ 2,437
Balance Sheet Data
Working Capital $ 35,956 $ 32,020 $ 30,154 $ 7,004 $ 2,850
Total Assets $ 53,372 $ 46,256 $ 38,046 $ 13,592 $ 6,552
Long-Term Debt $ 0 $ 0 $ 0 $ 383 $ 82
Shareholders' Equity $ 46,478 $ 42,283 $ 34,807 $ 8,244 $ 3,624
Per Common Share Data (Diluted Basis)
Diluted Income Per Share $ 0.41 $ 0.55 $ 0.73 $ 0.68 $ 0.22
Book Value Per Share $ 3.47 $ 3.11 $ 2.82 $ 0.74 $ 0.33
Shares Used In Diluted Income
Per Share 13,401,150 13,611,050 12,361,718 11,139,907 11,139,907
- ------------------------
(a) Through 8/16/95, the Company was taxed as an S Corporation and therefore
was not subject to income taxes. The pro forma income statement data includes
certain adjustments to reflect a provision for income taxes as if the Company
had been subject to income taxes as a C Corporation.
(b) Diluted per share amounts for 1997 and 1996 have been restated to comply
with Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per
Share," which was adopted in the fourth quarter of 1997. Diluted per share
amounts for 1995, 1994, and 1993 have been restated to comply with SFAS No.
128 and new SEC requirements.
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this Item is included on pages 2 to 7 of
the Financial Statements Section of the Company's Annual Report to Shareholders
for the fiscal year ended December 31, 1997 under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and is
incorporated herein by reference.
Item 8. Consolidated Financial Statements and Supplementary Data
The report of independent auditors, consolidated financial statements
and other information required by this Item are included on pages 8 to 21 of the
Financial Statements Section of the Company's Annual Report to Shareholders for
the fiscal year ended December 31, 1997 and are incorporated herein by
reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
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 1998 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 1998 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 1998 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 1998 Annual Meeting of Shareholders under the
heading "Certain Transactions" and is incorporated herein by reference.
11
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report:
Page Number in
Financial
Statements
1. Consolidated Financial Statements: Section of
Annual Report
---------------
A. Consolidated Balance Sheets as of December 31, 1997 and
December 31, 1996................................................ 8
B. Consolidated Statements of Income for each of the years ended
December 31, 1997, December 31, 1996 and December 31, 1995........ 9
C. Consolidated Statements of Cash Flows for
each of the years ended December 31, 1997,
December 31, 1996 and December 31, 1995........................... 10-11
D. Consolidated Statements of Shareholders' Equity for each of the
years ended December 31, 1997, December 31, 1996 and
December 31, 1995................................................. 12
E. Notes to Consolidated Financial Statements.......................... 13-20
F. Report of Independent Auditors...................................... 21
2. Financial Statement Schedules: Form 10-K
Page Number
Schedule II - Valuation and Qualifying Accounts.......................... 14
The independent auditor's report with respect to the financial statement schedule
appears in the exhibits to this report (Exhibit 23.1). All other 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 15.
(b) Reports on Form 8-K: None.
12
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, President and
Chief Executive Officer
Date: March 31, 1998
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 31, 1998.
Signature Title
--------- -----
/s/ Greg C. Mackie Chairman of the Board, President and Chief
- --------------------------------- Executive Officer
Greg C. Mackie (Principal Executive Officer)
/s/ William A. Garrard Vice President, Finance and Chief Financial
- --------------------------------- Officer
William A. Garrard (Principal Financial and
Accounting Officer)
/s/ David M. Tully Treasurer and Director
- ---------------------------------
David M. Tully
/s/ Raymond B. Ferguson Director
- ---------------------------------
Raymond B. Ferguson
/s/ Walter Goodman Director
- ---------------------------------
Walter Goodman
/s/ C. Marcus Sorenson Director
- ---------------------------------
C. Marcus Sorenson
13
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
MACKIE DESIGNS INC.
- ------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------
Additions
Balance at Charged to Balance at
Beginning Costs and Deductions-- End of
Description of Period Expenses Describe Period
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997:
Reserve and allowances deducted from asset accounts
Allowance for uncollectible accounts $ 808,000 $ -- $ 327,000(1) $ 481,000
Reserve for inventories $ 632,000 $ -- $ 187,000(2) $ 445,000
Reserve and allowances added to liability accounts
Reserve for warranty expenses $ 180,000 $ 120,000 $ -- $ 300,000
YEAR ENDED DECEMBER 31, 1996:
Reserve and allowances deducted from asset accounts
Allowance for uncollectible accounts $ 514,000 $ 471,000 $ 177,000(1) $ 808,000
Reserve for inventories $ 154,000 $ 478,000 $ -- $ 632,000
Reserve and allowances added to liability accounts
Reserve for warranty expenses $ 60,000 $ 120,000 $ -- $ 180,000
YEAR ENDED DECEMBER 31, 1995:
Reserve and allowances deducted from asset accounts
Allowance for uncollectible accounts $ 367,000 $ 196,000 $ 49,000(1) $ 514,000
Reserve for inventories $ -- $ 154,000 $ -- $ 154,000
Reserve and allowances added to liability accounts
Reserve for warranty expenses $ 50,000 $ 10,000 $ -- $ 60,000
- ------------------------
(1) Uncollectible accounts written off, net of recoveries, and adjustment to
reserves.
(2) Inventories written off, net of recoveries, and adjustment to
reserves.
14
INDEX TO EXHIBITS
Sequentially
Exhibits Description Numbered Page
- ---------- ----------- -------------
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. Second Amended and Restated 1995 Stock Option Plan .......
10.2 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...............................
10.3 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.....
10.4 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.....................................................
10.5 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.....................................................
10.6 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
15
Registrant's Registration Statement filed under the Securities
Act of 1933 on Form S-1, as amended, Registration No. 33-93514................
10.7 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. ...................................................
10.8 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.........................................
10.9 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.....................................................
10.10 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. ..............
10.11 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.............................................................
10.12 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..............
10.13 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..............
10.14 Employee Agreement dated May 19, 1997 between William A. Garrard and Mackie
Designs Inc. Incorporated by reference to Exhibit 10.3 to
16
Registrant's Quarterly Report on Form 10-Q for the period ended
June 30, 1997.................................................................
10.15 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........................
10.16 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......................................................
*10.17 Business Loan Agreement, dated October 27, 1997, by and between U.S. Bank of
Washington, National Association, and Mackie Designs Inc......................
*10.18 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........................................................
----------
11.1 Computation of net income per share. Incorporated by reference to the Notes to
Consolidated Financial Statements (Footnote 9) in the Annual Report to
Shareholders of Mackie Designs Inc. for the year ended December 31, 1997......
*13.1 Annual Report to Shareholders of Mackie Designs Inc. for the year ended
December 31, 1997.............................................................
----------
*21.1 Subsidiaries of Mackie Designs Inc............................................
----------
*23.1 Consent of Ernst & Young LLP, Independent Auditors............................
----------
*27.1 Financial Data Schedule.......................................................
----------
*27.2 Restated Financial Data Schedules for the periods ended March 31, 1997, June
30, 1997, and September 30, 1997..............................................
----------
*27.3 Restated Financial Data Schedules for the periods ended March 31, 1996, June
30, 1996, September 30, 1996, and December 31, 1996...........................
- ------------------------------
* Filed herewith
17