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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, 1998
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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
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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
incorporation or organization) Identification No.)
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 15, 1999, the aggregate market value of the Registrant's
Common Stock held by nonaffiliates of the Registrant was $13,910,821 based on
the closing sales price of the Registrant's Common Stock on the Nasdaq
National Market. On that date, there were 12,324,558 shares of Common Stock
outstanding.
Portions of the Registrant's definitive Proxy Statement for its 1999
Annual Meeting of Shareholders are incorporated by reference into Part III
hereof.
MACKIE DESIGNS INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
INDEX
PAGE
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Part I
Item 1. Business.................................................................................... 3
Item 2. Properties.................................................................................. 13
Item 3. Legal Proceedings........................................................................... 14
Item 4. Submission of Matters to a Vote of Securities Holders....................................... 14
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................... 14
Item 6. Selected Financial Data..................................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 16
Item 7a. Qualitative and Quantitative Disclosures About Market Risk.................................. 23
Item 8. Consolidated Financial Statements and Supplementary Data.................................... 23
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure........ 40
Part III
Item 10. Directors and Executive Officers of the Registrant.......................................... 40
Item 11. Executive Compensation...................................................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 40
Item 13. Certain Relationships and Related Transactions.............................................. 40
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 40
Signatures..................................................................................................... 42
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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. and offers its products through local distributors in nearly 100
other countries.
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 various locations in
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 owns several subsidiaries which are
engaged in the distribution of its products in various countries. RCF will
work 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 mixers, mixer-related products,
speakers and amplifiers. 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 is distributed through the same channels as mixers.
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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. 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 DAW interface targets the rapidly growing
digital audio workstation market, and was developed in conjunction with
Digidesign, a division of Avid Technology, Inc., for ProTools 4.1. DAWs are
used in video, film, multimedia and recording studios.
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.
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.
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 (206) 487-4333. RCF was incorporated in Italy in 1949 and has its
executive and manufacturing offices in Reggio Emilia, Italy.
"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.
PRODUCTS
The Company currently offers professional audio mixers and related
accessories in seven main mixer product lines: compact mixers, 8-Bus
consoles, SR series mixers, digital consoles, other digital automation
systems, CFX compact mixers with effects and PPM powered mixers. The Company
also offers its line of Fast Recovery Series-TM- power amplifiers, an active
near field studio monitor, the HR824, and is planning to introduce several
active and passive families of speakers during 1999. Additionally, RCF offers
loudspeakers and speaker components under its own brand name.
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. Applications for the Company's compact mixers include recording and
project studios, live presentations, video post-production and multimedia.
Suggested retail prices for these mixers are from $429 to $1199. In the first
quarter of 1999, the Company will update the compact mixers with further
improvements in mic preamplifier specifications. The new mixer models will be
called VLZ Pro.
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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 $2,500 to $4,200, 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. 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.
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 have suggested retail
prices of $1,599 to $2,299. In December 1996, Mackie introduced the SR40-8, a
40-channel large-format sound reinforcement console, and in March 1998, the
Company introduced the SR56-8, a 56-channel console. The SR40-8 large-format
console retails for $9,995 and the SR56-8 retails for $13,595. 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
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 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-REGISTERED TRADEMARK- microprocessor running Mackie Real Time OS-TM-,
the Company's own operating system. The D8B features 48 input channels, 24
internal and 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.
CFX SERIES. The Company expects to begin 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
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utilize the same technologies as the compact mixers and include on-board
effects processing which provides reverberation, echo, chorusing and other
signal processing effects. 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
ranging from $599 to $999.
PPM SERIES. In the first quarter of 1999, the Company expects to
begin 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
and FR high-current, fast recovery amplifiers. The 808S is a stereo powered
mixer with two 500W amplifiers and eight input channels. The 808M is a mono
powered mixer with a 500W main and a 500W monitor amplifier. The 408S is a
stereo powered mixer with two 250W amplifiers and eight input channels. The
408M is a mono powered mixer with a 250W main and a 250W monitor amplifier.
The 406M is a mono powered mixer with a 250W main and a 250W monitor
amplifier and six input channels. Suggested retail prices are expected to
range from $699 to $999.
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 was 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. The Company introduced an additional amplifier to this product line,
the M-2600, in the fourth quarter of 1998 at a suggested retail price of
approximately $1,200. The Company plans to introduce the M-800 power
amplifier, with a suggested retail price of approximately $600, in the first
half of 1999.
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
applications including home and professional studio recording, video
post-production, broadcast post-production, and home stereos.
In 1999, the Company plans to begin shipping three lines of sound
reinforcement speakers, all of which utilize active amplification technology.
Each speaker contains its own amplifier, active equalizer, active cross-over
and time alignment and phase correction circuitry. This approach allows
efficiencies and accuracy not possible in passive speaker designs. The SRM
Sound Reinforcement Monitor series consists of the SRM450 12" two-way active
speaker in a composite molded enclosure and the SRS1500a active 15"
sub-woofer. With expected suggested retail prices of $799 each, the SRM
products will be targeted at the live sound and audio/visual and rental
markets. The MAS Mackie Active Stage System series is an affordable active
sound reinforcement system for live sound and smaller installations. The MAS
Series utilizes the same active technology as the SRM series but in a more
affordable wood and composite enclosure. Suggested retail prices range from
$699 to $999. The Fussion Series consists of large format active speakers
intended for large live sound touring systems, permanent installation,
corporate sound and audio/visual and rental customers. Products range from
active three-way speakers to active sub-woofers and active floor monitors.
Suggested retail prices are expected to range from $2,500 to $4,500.
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
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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.
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. Sales to customers outside of the U.S. accounted for
approximately 44%, 38% and 38% of the Company's net sales in 1998, 1997 and
1996, 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. Through the
acquisition of RCF, the Company now has sales offices in the United Kingdom,
France, Italy, Germany and China.
In the U.S., the Company's products are sold in musical instrument
stores, pro audio outlets and several mail order outlets. Top U.S. retail
dealers in 1998 included Guitar Center, Mar's Music, Musician's Friend,
Sweetwater Sound, Thoroughbred Music, Full Compass Systems, West LA Music,
Manny's Music, B&H Photo and Washington Music Center. These 10 dealers
represented approximately 34% of the Company's net sales in the U.S. in 1998.
Guitar Center accounted for approximately 14% of domestic net sales in 1998;
no other dealer accounted for more than 10% of domestic net sales in this
period.
Internationally, the Company has distribution in nearly 100
countries. The top international distributors in 1998 included Musik &
Technik (Germany), SF Marketing Inc. (Canada), Musikengro (France), Tropical
Music Corp. (South America excluding Brazil, Chile and Argentina; Central
America and the Caribbean nations), Hermes International (Mexico), Key Audio
Systems (United Kingdom), Recoton Italia S.r.l. (Italy), Korg Import Division
(Japan), Tom Lee Music (China), and Go Wild AG (Switzerland). These 10
distributors represented approximately 39% of the Company's international net
sales in 1998. No distributor accounted for more than 10% of international
net sales in this period.
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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
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 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, 1998, the Company's research and development staff
consisted of 59 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 $5.1 million in 1998, $5.9 million in
1997 and $3.6 million in 1996.
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
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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., Alesis Corporation, JBL (produced by Harman
International) 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.
To date, the Company has 47 issued design patents, in six countries,
including the U.S. that cover several products, including the SR24-4,
MS1202-VLZ, CR1604-VLZ, 40-8 Bus, FR Series, HR824 Studio Monitor, HUI and
Digital 8-Bus. In addition, the Company has 26 pending design patent
applications in at least five countries, including the U.S. Mackie has also
filed for utility patent protection in the U.S. and certain foreign countries
on several products, including the HR824 Studio Monitor and Digital 8-Bus.
While 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. There can be no assurance as to the degree and range of protection
any patent will afford, whether patents will issue or the extent to which the
Company may inadvertently infringe upon patents granted to others.
To date the Company has 161 issued trademark registrations and 155
pending trademark applications in the U.S. and in multiple foreign countries
for protection of marks, including MACKIE.-REGISTERED TRADEMARK-, the running
man design, VLZ-REGISTERED TRADEMARK-, ULTRAMIX-REGISTERED TRADEMARK-, and
the three dimensional configuration of the 24-8 Bus and 32-8 Bus. In addition
the Company asserts common law trademark protection for various marks, and
may in the future seek registration. 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 filed 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.
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.
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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 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 names "RCF" and "Artesuono."
MANUFACTURING
The Company manufactures its products in its facilities near
Seattle, Washington and in 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.
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, 1998, the Company and its subsidiaries had 946
full-time equivalent employees, including 106 in marketing, sales and
customer support, 60 in research and development, 710 in manufacturing and
manufacturing support (which includes manufacturing engineering) and 70 in
administration and finance. Approximately 120 of the Company's employees in
Italy are represented by a labor union, and the Company believes relations
with all employees, union and non-union, are favorable.
10
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
THE COMPANY'S DISCLOSURE AND ANALYSIS IN THIS REPORT CONTAIN SOME
FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS GIVE THE COMPANY'S
CURRENT EXPECTATIONS OR FORECASTS OF FUTURE EVENTS. YOU CAN IDENTIFY THESE
STATEMENTS BY THE FACT THAT THEY DO NOT RELATE STRICTLY TO HISTORICAL OR
CURRENT FACTS. IN PARTICULAR, THESE INCLUDE STATEMENTS RELATING TO FUTURE
ACTION, PROSPECTIVE PRODUCTS, NEW TECHNOLOGIES, FUTURE PERFORMANCE OR RESULTS
OF CURRENT AND ANTICIPATED PRODUCTS, SALES EFFORTS, EXPENSES, YEAR 2000 AND
EURO COMPLIANCE REMEDIATION ACTIVITIES, THE OUTCOME OF CONTINGENCIES, AND
FINANCIAL RESULTS.
ANY OR ALL OF THE COMPANY'S FORWARD-LOOKING STATEMENTS IN THIS
REPORT OR IN ANY OTHER PUBLIC STATEMENT MADE BY THE COMPANY MAY TURN OUT TO
BE WRONG. THEY CAN BE AFFECTED BY INACCURATE ASSUMPTIONS MADE BY THE COMPANY
OR BY KNOWN OR UNKNOWN RISKS OR UNCERTAINTIES. MANY FACTORS - FOR EXAMPLE,
PRODUCT COMPETITION AND PRODUCT DEVELOPMENT - WILL BE IMPORTANT IN
DETERMINING FUTURE RESULTS. CONSEQUENTLY, NO FORWARD-LOOKING STATEMENT CAN BE
GUARANTEED. ACTUAL RESULTS MAY MATERIALLY VARY.
THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE. YOU ARE ADVISED, HOWEVER, TO CONSULT ANY FUTURE
DISCLOSURES MADE BY THE COMPANY ON RELATED SUBJECTS IN THE COMPANY'S 10-Q,
8-K AND 10-K REPORTS TO THE SEC. ALSO, NOTE THAT THE COMPANY PROVIDES THE
FOLLOWING CAUTIONARY DISCUSSION OF RISKS, UNCERTAINTIES AND POSSIBLE
INACCURATE ASSUMPTIONS RELEVANT TO THE COMPANY'S BUSINESS. THESE ARE FACTORS
THAT THE COMPANY THINKS COULD CAUSE ITS ACTUAL RESULTS TO DIFFER MATERIALLY
FROM EXPECTED AND HISTORICAL RESULTS. OTHER FACTORS BESIDES THOSE LISTED HERE
COULD ALSO ADVERSELY AFFECT THE COMPANY. THIS DISCUSSION IS PERMITTED BY THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
DEVELOPMENT, INTRODUCTION AND SHIPMENT OF NEW PRODUCTS. The Company
currently is developing new analog and digital mixers, amplifiers and
loudspeakers. Significant resource, technological, supplier, manufacturing or
other problems may delay the development, introduction or manufacture of
these products.
The Company's sales have been significantly affected by delays in
developing and releasing new products. Some 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 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
11
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 impacted
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.
INTERNATIONAL OPERATIONS. International sales represented
approximately 44% of the Company's net sales for the year ended December 31,
1998. 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.
12
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 is currently working to integrate the two companies' product
offerings. Integrating 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 balance sheet. The Company
may also amortize expenses related to the goodwill and intangible assets
acquired, which may reduce the Company's profitability.
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 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 YEAR 2000 NON-COMPLIANCE. Refer to the section captioned
"Year 2000 Issue" in Item 7 below.
RISK OF EURO NON-COMPLIANCE. Refer to the section captioned "Euro
Conversion" in Item 7 below.
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 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
1998 was $60,982). The Company leases its facility from Mackie Holdings, LLC,
an entity owned by
13
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.
The Company's primary facilities in Reggio Emilia, Italy comprise a
manufacturing facility totaling 119,000 square feet and a building for
administrative offices of 14,000 square feet. Both facilities are
Company-owned.
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 has been settled in
full, and the dealer will resume representation of Mackie's products on April
2, 1999. The remaining defendants include Behringer Spezielle Studio-Technick
Gmbh ("Behringer") and Ulrich Bernard Behringer. 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 and a local court in the United
Kingdom. Behringer has filed counterclaims alleging unspecified damages.
While the Company intends to vigorously prosecute its claims and the
counterclaims, there can be no assurance that the Company will prevail in any
of these actions.
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, 1997:
First Quarter $ 8.00 $ 5.88
Second Quarter $ 8.88 $ 5.63
Third Quarter $ 9.88 $ 7.75
Fourth Quarter $ 10.25 $ 6.00
14
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
As of March 15, 1999, there were 12,324,558 shares of Common Stock
outstanding held by approximately 93 holders of record. The number of holders
does not include individual participants in security position listings.
In 1997 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
(in thousands, except per share data)
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/98 (a) 12/31/97 12/31/96 12/31/95 12/31/94
-------------- ------------ ------------- ------------- -------------
STATEMENT OF INCOME DATA
- -------------------------------------------------------------------------------------------------------------------------
Net Sales $100,975 $74,889 $73,236 $63,919 $49,907
- -------------------------------------------------------------------------------------------------------------------------
Gross Profit $ 38,271 $27,796 $28,025 $27,163 $21,887
- -------------------------------------------------------------------------------------------------------------------------
Operating Expenses $ 30,106 $20,670 $17,784 $13,627 $10,388
- -------------------------------------------------------------------------------------------------------------------------
Pro Forma Net Income (b) $ 5,581 $ 5,537 $ 7,421 $ 9,026 $ 7,555
- -------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
- -------------------------------------------------------------------------------------------------------------------------
Working Capital $ 35,784 $35,956 $32,020 $30,154 $ 7,004
- -------------------------------------------------------------------------------------------------------------------------
Total Assets $119,337 $53,372 $46,256 $38,046 $13,592
- -------------------------------------------------------------------------------------------------------------------------
Long-Term Debt $ 23,011 $ 0 $ 0 $ 0 $ 383
- -------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity $ 49,569 $46,478 $42,283 $34,807 $ 8,244
- -------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA (DILUTED BASIS)
- -------------------------------------------------------------------------------------------------------------------------
Diluted Income Per Share $ 0.43 $ 0.41 $ 0.55 $ 0.73 $ 0.68
- -------------------------------------------------------------------------------------------------------------------------
Shares Used In Diluted Income Per Share 12,945 13,401 13,611 12,362 11,140
- -------------------------------------------------------------------------------------------------------------------------
(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 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.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
This Annual Report on Form 10-K includes forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
This Act provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about themselves as long as they
identify these statements as forward-looking and provide meaningful
cautionary statements identifying important factors that could cause actual
results to differ from the projected results. All statements other than
statements of historical fact made in this Annual Report on Form 10-K are
forward-looking. In particular, statements herein regarding future results of
operations and financial position, the Company's ability to develop and
introduce new products, the Company's ability to manage its rapid growth, its
ability to integrate the operations of RCF, the assessment of the Company's
Year 2000 and euro compliance exposures and completion of remediation
efforts, and any other guidance on future periods are forward-looking
statements. Forward-looking statements reflect management's current
expectations and are inherently uncertain. The Company's actual results may
differ significantly from management's expectations. The following
discussions and the section entitled "Business - Cautionary Factors That May
Affect Future Results" describe some, but not all, of the factors that could
cause these differences.
The Company derives its operating revenue from worldwide sales of
audio mixers, speakers and other professional audio equipment. Sales outside
the U.S. account for a significant portion of the Company's total sales.
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 a
weighted-average discount of approximately 10.1% in 1998, 14.8% in 1997, and
12.7% in 1996. The decrease in discounts in 1998 is attributable to the lack
of discounts offered by RCF. Sales outside the U.S. represented approximately
44%, 38%, and 38% of the Company's net sales in 1998, 1997 and 1996,
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 employs foreign exchange hedging
strategies for certain currencies to help mitigate the effect of currency
fluctuations.
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 with which the Company
is not familiar. This could result in lower margins as the Company becomes
more familiar with new manufacturing procedures.
16
RESULTS OF 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 34.8% to $101.0 million in 1998
from $74.9 million in 1997. The increase was primarily attributable to the
inclusion of RCF's sales of $22.5 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.
COST OF SALES
Gross profit was $38.3 million in 1998 compared with $27.8 million
in 1997. The increase was largely attributable to the inclusion of RCF's
gross profit of $8.6 million. Gross profit as a percentage of sales increased
to 37.9% in 1998 from 37.1% 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 $15.1 million in 1998 from
$9.9 million in 1997. The increase was primarily attributable to the
inclusion of marketing and sales expenses for RCF of $4.1 million. The
primary components of marketing and sales expenses include salaries ($3.5
million in 1998 and $2.0 million in 1997), independent representatives'
commissions ($4.0 million in 1998 and $2.7 million in 1997), and advertising
($3.7 million in 1998 and $3.0 million in 1997). As a percentage of net
sales, marketing and sales expenses increased to 15.0% in 1998 from 13.3% in
1997.
ADMINISTRATIVE
Administrative expenses increased to $9.9 million for 1998 from $4.8
million for 1997. The increase was primarily attributable to the inclusion of
administrative expenses for RCF of $3.6 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 Item 3, "Legal Proceedings" in this Form 10-K). As a percentage of net
sales, administrative expenses were 9.8% in 1998 compared with 6.5% 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 the corresponding period of 1997. This
decrease was due primarily to decreases in prototype and other expenditures.
R&D expenses for RCF were $759,000. Mackie has historically incurred a higher
percentage of R&D expenses as a percentage of net sales when compared with
RCF due to a higher level of product development and innovation.
INTEREST INCOME AND INTEREST EXPENSE
17
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
The provision for income taxes for 1998 of $2,052,000 represents an
overall effective rate for 1998 of 26.8%. The provision for income taxes for
1997 of $2,373,000 represented an overall effective rate for 1997 of 30.0%.
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.
YEAR ENDED DECEMBER 31, 1997 AS COMPARED WITH YEAR ENDED DECEMBER 31, 1996
NET SALES
The Company's net sales increased 2.3% to $74.9 million in 1997 from
$73.2 million in 1996. The increase in sales was primarily attributable to
sales from new products (the SR40-8, FR Series power amplifiers, and the
HR824 active studio monitor), partially offset by a decrease in sales in two
mixer product lines (the 8-Bus Series mixers and compact mixers). Sales of
the SR40-8 (which became available in December 1996), FR Series power
amplifiers (which became available in December 1996), and the HR824 active
studio monitor (which became available in August 1997) accounted for 20% of
net sales in 1997. Sales of the 8-Bus Series mixers decreased to 16% of net
sales in 1997 from 25% in 1996. Sales of compact mixers were 47% of net sales
in 1997 compared with 53% in 1996. Sales outside the U.S. represented 38% of
the Company's net sales in both 1997 and 1996.
COST OF SALES
Gross profit was $27.8 million in 1997 compared with $28.0 million
in 1996. Gross profit as a percentage of net sales decreased to 37.1% in 1997
from 38.3% in 1996. The decrease in gross margin percentage was due to
start-up costs associated with initial production of the SR40-8 and the FR
Series -TM- power amplifier, both of which were shipped in significant
quantities for the first time in the first quarter of 1997. The gross margin
percentage decrease was also due to a higher weighted-average discount
offered to international distributors. Additionally, the decrease in gross
margin percentage was due to a difference in product mix in 1997 compared
with 1996 as sales of certain product lines provided lower gross margins than
other product lines.
MARKETING AND SALES
Marketing and sales expenses increased to $9.9 million in 1997 from
$9.2 million in 1996. This increase was due primarily to increased marketing
and sales staff and increased advertising expenses. The primary components of
marketing and sales expenses include salaries ($2.0 million in 1997 and $1.7
million in 1996), independent representatives' commissions ($2.7 million in
1997 and $2.9 million in 1996), and advertising ($3.0 million in 1997 and
$2.7 million in 1996). Marketing and sales expenses as a percentage of net
sales were 13.3% in 1997 compared with 12.6% in 1996.
ADMINISTRATIVE
Administrative expenses decreased to $4.8 million in 1997 from $5.0
million in 1996. This decrease was due primarily to a reallocation of rent
expense from administrative expenses to manufacturing overhead as additional
space was utilized in the manufacturing process, partially offset by an
increase in various other expenditures. Administrative expenses as a
percentage of net sales were 6.5% in 1997 compared with 6.8% in 1996.
18
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $5.9 million in 1997
from $3.6 million in 1996. As a percentage of net sales, these expenses
increased to 7.9% in 1997 from 4.9% in 1996. This increase was due primarily
to increases in R&D staff and expenditures as the Company expanded its
product line into other pro-audio categories.
INTEREST INCOME
Interest income decreased to $791,000 in 1997 from $863,000 in 1996
due to a lower average cash balance.
INCOME TAX PROVISION
The provision for income taxes for 1997 of $2.4 million represented
an overall effective rate of 30.0%. The provision for income taxes for 1996
of $3.7 million represented an overall effective rate for 1996 of 33.1%. The
decrease in the overall effective rate in 1997 compared with 1996 is due to
the increased 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 1998 and 1997. The Company's operating activities generated cash of
$177,000 in 1998 and $2.6 million in 1997. Net cash provided by operating
activities in 1998 was primarily attributable to net income, depreciation and
amortization, offset by increases in accounts receivable and inventory.
Net cash used in investing activities increased to $15.4 million in
1998 from $2.6 million in 1997, due principally to the acquisition of RCF and
purchases of furniture and equipment. The Company had no significant capital
expenditure commitments at December 31, 1998. The Company intends to finance
its 1998 capital expenditures from cash provided by operations, current cash
reserves and existing credit facilities.
Net cash provided by financing activities in 1998 was $14.0 million
compared with net cash used in financing activities during 1997 of $1.3
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 1998, the Company repurchased approximately 392,000 shares of
its own stock at a total cost of $2.6 million.
In June 1998, the Company entered into a credit agreement with a
bank to provide certain credit facilities to the Company, including a $14.0
million loan for the acquisition of RCF of which $12.5 million was
outstanding at December 31, 1998. Unused amounts under the loan may be used
for general corporate purposes. 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
under the loan is payable monthly. Principal is payable in installments equal
to 1/7 of the amount borrowed on September 30 of each year commencing
September 30, 1999. 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 requirements. 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. The Company also has a $1.75 million
line of credit for the purchase of foreign exchange contracts. At December
31, 1998, there was $200,000 outstanding on the $5.0 million line of credit
and there were no outstanding balances on the other credit lines. These
credit
19
facilities (excluding the acquisition loan) expire April 30, 2000. Under the
terms of the credit agreement, the Company must maintain certain financial
ratios and tangible net worth. The Company is in compliance with all such
covenants. The agreement also provides, among other matters, restrictions on
additional financing, dividends, mergers, and acquisitions. The agreement
also imposes an annual capital expenditure limit of $10 million.
RCF has entered into agreements with several banks that provide
short-term credit facilities totaling approximately $25 million. At December
31, 1998, there was approximately $11.8 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 2.2% to
12.5%. RCF also has various long-term loans outstanding at December 31, 1998,
totaling approximately $14.8 million, which bear interest at rates from 3.1%
to 8.8%. These loans mature at varying dates up to 2007 and certain of these
loans are secured by specific assets of RCF.
The Company has granted options to various individuals to purchase
shares of the Company's common stock. As of December 31, 1998, options to
purchase 3,417,900 shares of common stock at exercise prices of $5.55 per
share to $13.88 per share are outstanding and 2,010,950 of these options are
exercisable. The exercise of these options would provide additional cash to
the Company.
The Company believes that existing cash and cash equivalent balances
together with cash generated from operations and cash available from credit
facilities will be sufficient to finance the Company's operations at least
through 1999.
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 Issue" or "Y2K" refers to the practice of many
existing computer programs using only the last two digits when designating a
year. Therefore, these programs cannot distinguish a year that begins with 19
from a year that begins with 20. If not corrected, many computer applications
could fail or create erroneous results beginning January 1, 2000. The
following analysis addresses the issues at the Company's locations in
Woodinville, Washington (referred to as "Mackie-Woodinville") and in Italy
(referred to as "RCF").
READINESS
INFORMATION SYSTEM - ENTERPRISE RESOURCE PLANNING SYSTEM (ERP). Y2K
inspection at Mackie-Woodinville has revealed two systems requiring updating:
the shipping manifest system, and the general ledger module of the
manufacturing system. Integration of the replacement shipping system is
scheduled to begin March 1999 and be completed in April 1999. The general
ledger module is to be replaced by a Y2K compliant version from the software
developer. This work is scheduled to begin May 1999, and be completed by the
end of the second quarter of 1999. Both of these systems, if left unchanged,
would run correctly until December 31, 1999.
RCF completed the analysis of its system in mid-1998. Its ERP was
determined to be Y2K non-compliant and implementation of a solution began
February 1999. The project is scheduled to have the first
20
release of converted software available for testing in early April 1999, with
a six-week test cycle to follow. The problem resolution phase of the project
is scheduled to run for a six-week period following the test cycle. The
revised software is scheduled to be in place in July 1999. At present, the
project is on schedule.
INFORMATION SYSTEMS - HARDWARE. Hardware at Mackie-Woodinville has
undergone a preliminary review showing no major problems. A detailed PC
hardware analysis is under way and is scheduled to be completed by April 30,
1999. Server hardware has already been found to be Y2K compliant. The primary
ERP server at Mackie recently had its Unix operating system upgraded to make
it entirely Y2K compliant. Other equipment with embedded systems are
currently also being inspected, with completion scheduled for the end of the
second quarter of 1999.
RCF has purchased all server hardware required for Y2K compliance.
The new hardware will be used initially for testing of the Y2K modifications,
then run as the live system following the conversion. The PC and network
server analyses are expected to take place in October 1999. The Company does
not consider this to be a point of risk given that, with the exception of a
small number of PCs, all hardware is new and Y2K compliant.
VENDORS. Mackie-Woodinville has undergone a process to evaluate the
Y2K preparedness of its critical vendors. Of these vendors, any that are "in
the process" of completing their Y2K preparations will be audited quarterly
for progress. Mackie-Woodinville has in place a plan to evaluate the cost and
time to develop alternate sources for goods, plus a program to evaluate the
cost and storage requirements to ensure an uninterrupted supply of goods
while engaging alternate suppliers.
RCF has begun the process of identifying key vendors and assessing
the Y2K compliance of these vendors. Vendors will be asked about their Y2K
compliance plans and based on their responses, RCF plans to take appropriate
actions to mitigate the possible impact of Y2K issues.
CUSTOMERS. A customer evaluation process is being put in place by
Mackie-Woodinville to ensure that critical customers will be compliant. Of
these customers who are not already Y2K compliant, those preparing for Y2K
compliance will be audited quarterly. These customers may ultimately receive
an onsite visit and be asked to demonstrate contingency plans if Y2K
preparation efforts do not appear to be adequate or timely.
RCF plans to assess customer Y2K issues through direct inquiry of
key customers. Based on their responses, RCF will determine the steps that
need to be taken to minimize the impact of Y2K issues.
PRODUCTS. All Mackie products using microprocessors or other
digital-based technology have been reviewed and found to be Y2K compliant.
All RCF products are manufactured without a microprocessor or other
digital-based technology and, therefore, are not affected by Y2K issues.
COSTS
All Y2K resolution issues at Mackie-Woodinville have been budgeted
at less than $50,000.
RCF has a total Y2K budget of $250,000. All costs are
expected to be funded by cash flow from operations.
RISKS
Risk to Mackie-Woodinville is fairly low regarding issues that are
directly within the Company's control. Systems at risk of failure are
scheduled to be Y2K compliant by the end of the second quarter of 1999, and
21
would not fail until January 1, 2000. External influences are being managed
to minimize any potential impact on the business.
The greatest risk for RCF is in the conversion of the
manufacturing/MRP module of its ERP. In this area, the most likely error
would be one of missing the conversion of a date field, or the incorrect
conversion of a date. The Company contracted to do this conversion will be
available following the "go live" date on the converted software and will
support the system on a maintenance agreement. Another point of risk is the
timing of availability of the converted software for installation, although
this risk is deemed by the Company to be fairly low.
CONTINGENCY PLANS
Contingency plans are being worked on for RCF in the event that
software is not available for installation until some period after the
scheduled "go live" date. The primary focus is on the manufacturing system
and MRP. Research is being done on finding an option to quickly port critical
manufacturing information over to a backup system to keep the Company running
for a short period should the converted software not be available by the
required date.
If the remediation efforts of the Company's key suppliers and
customers are unsuccessful in dealing with Y2K problems and if the Company's
efforts to mitigate the impact of such problems are unsuccessful, there may
be a material adverse impact on the Company's consolidated results and
financial condition. The Company is unable to quantify any potential impact
at this time, but will continue to monitor and evaluate the situation.
EURO CONVERSION
With the introduction of the euro, European business systems are
being forced to handle currencies in a new way. There are many rules
governing precisely how these systems must act when transacting the euro.
Greatly simplified, some of the systems-related business issues include:
- -- As of January 1, 1999, it is optional to use euro in business
transactions in participating countries. An example of the impact would
be: companies may request to be invoiced in euro and the company writing
the invoice is obliged to do so. During the period of optional
compliance, a company may choose to run its financial systems in its
existing currency, or in euro.
- -- As of January 1, 2002, there will be mandatory euro compliance in
participating countries. At this time, it will be necessary to make all
financial transactions within the participating countries using euro, as
well as run the financial systems with the "base currency" being euro.
- -- In the past it was possible for a system to simply multiply or divide by
some factor to find the amount of exchange between two currencies. Under
the rules governing the euro, it will soon be necessary to "triangulate"
the exchange between any two non-euro currencies by first exchanging to
euro, then to the target currency. There are a minimum number of digits
of precision that are to be carried throughout all exchange calculations.
RCF's computer system does not support the euro currency, and at
this time it is believed that reprogramming the system is likely not an
economically viable option. Until a euro solution is implemented, the current
system must continue to be used. One major shortcoming of doing so is the
ability of this system to invoice multiple currencies when a Value-Added Tax
(VAT) is being applied. Currently, the system is only able to properly apply
VAT to lira-denominated invoices. This means that euro invoices for Italian
customers who request to be billed in euros instead of lira will need to be
done external to the primary business system. Although the date for mandatory
euro compliance is January 1, 2002, it is believed that the existing system
will be utilized until mid-2001 after which time the effort to run a
non-compliant system will increase to the point that it's no longer a
feasible option.
22
The task of making RCF euro-compliant has already begun with the
investigation of alternate systems. The cost to achieve euro-compliance for
RCF is currently unknown.
SHARE REPURCHASE PROGRAM
The Company has been authorized by its board of directors to
repurchase up to 850,000 shares of its outstanding common stock. These
purchases may be executed through open market purchases at prevailing market
prices, and may commence or be discontinued at any time. As of December 31,
1998, the Company had repurchased approximately 600,000 shares under this
program at a total cost of approximately $4.3 million.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company does not have any derivative financial instruments as of
December 31, 1998. However, the Company is exposed to interest rate risk. The
Company employs established policies and procedures to manage its exposure to
changes in the market risk of its marketable securities.
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 marketable securities as well as
interest paid on debt.
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 is, therefore, sensitive to currency exchange rates or
any other restrictions imposed on their currencies.
The Company employs foreign exchange hedging strategies for certain
currencies to help mitigate the effect of currency fluctuations. To date, the
foreign currency exchange rates have not significantly impacted the Company's
profitability.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages 24 through 39.
23
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Mackie Designs Inc.
We have audited the accompanying consolidated balance sheets of Mackie
Designs Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the
three 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 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 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 1997, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. 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
24
MACKIE DESIGNS INC.
CONSOLIDATED BALANCE SHEETS
December 31,
1998 1997
------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 123,611 $ 975,180
Available-for-sale securities 6,309,659 10,864,401
Accounts receivable, less allowance of $1,421,000 in 1998 and $481,000 in
1997 30,501,951 10,614,515
Inventories 39,748,903 17,761,462
Prepaid expenses and other current assets 1,786,964 1,287,311
Deferred taxes 1,770,000 670,000
------------------ ------------------
Total current assets 80,241,088 42,172,869
Property, plant and equipment, net of accumulated depreciation 24,569,027 10,605,164
Goodwill, net of accumulated amortization 7,868,783 --
Bonds 4,293,524 --
Other assets 1,917,086 594,390
Deferred taxes 447,501 --
------------------ ------------------
Total assets $119,337,009 $ 53,372,423
------------------ ------------------
------------------ ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,351,463 $ 3,822,239
Bank line of credit and other short-term debt 12,057,654 --
Commissions payable 2,001,716 664,983
Accrued payroll and related taxes 2,731,363 785,530
Other accrued liabilities 3,212,832 596,227
Income taxes payable 1,762,752 348,173
Current portion of long-term debt 8,339,468 --
------------------ ------------------
Total current liabilities 44,457,248 6,217,152
Long-term debt 18,984,200 --
Employee and other liabilities 4,026,514 --
Deferred taxes 1,973,328 596,000
Other deferred items 206,776 81,250
Minority interest 119,886 --
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 -
12,356,486 and 12,733,650 in 1998 and 1997, respectively 27,102,335 29,657,210
Retained earnings 22,401,585 16,820,811
Accumulated other comprehensive income 65,137 --
------------------ ------------------
Total shareholders' equity 49,569,057 46,478,021
------------------ ------------------
Total liabilities and shareholders' equity $119,337,009 $ 53,372,423
------------------ ------------------
------------------ ------------------
SEE ACCOMPANYING NOTES.
25
MACKIE DESIGNS INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
1998 1997 1996
------------------- ------------------- -------------------
Net sales $100,975,066 $ 74,889,420 $ 73,235,925
Cost of goods sold 62,703,694 47,093,131 45,210,585
------------------- ------------------- -------------------
Gross profit 38,271,372 27,796,289 28,025,340
Operating expenses:
Marketing and sales 15,098,656 9,938,507 9,202,448
Administrative 9,912,627 4,839,780 4,979,320
Research and development 5,094,333 5,892,178 3,602,727
------------------- ------------------- -------------------
Total operating expenses 30,105,616 20,670,465 17,784,495
------------------- ------------------- -------------------
Operating income 8,165,756 7,125,824 10,240,845
Interest income 781,861 790,687 862,518
Interest expense (1,520,648) -- --
Other income (expense) 227,932 (7,060) (11,104)
------------------- ------------------- -------------------
Income before income taxes and minority interest 7,654,901 7,909,451 11,092,259
Income tax provision 2,052,211 2,372,800 3,671,600
------------------- ------------------- -------------------
Income before minority interest 5,602,690 5,536,651 7,420,659
Minority interest (21,916) -- --
------------------- ------------------- -------------------
Net income $ 5,580,774 $ 5,536,651 $ 7,420,659
------------------- ------------------- -------------------
------------------- ------------------- -------------------
Basic income per share $ 0.44 $ 0.43 $ 0.58
------------------- ------------------- -------------------
------------------- ------------------- -------------------
Diluted income per share $ 0.43 $ 0.41 $ 0.55
------------------- ------------------- -------------------
------------------- ------------------- -------------------
SEE ACCOMPANYING NOTES.
26
MACKIE DESIGNS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1998 1997 1996
------------------- ------------------ ------------------
OPERATING ACTIVITIES
Net income $ 5,580,774 $ 5,536,651 $ 7,420,659
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,743,883 3,160,237 1,969,131
Loss on asset dispositions 1,231 -- 11,104
Increase in minority interest 21,916 -- --
Deferred income taxes (503,819) 266,000 (136,000)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (4,380,292) (921,480) 10,892
Increase in inventory (6,279,108) (7,444,522) (2,674,048)
Decrease in income taxes receivable -- 182,627 196,473
(Increase) decrease in prepaid expenses and other
current assets 799,572 (613,726) (65,738)
Increase in other assets (1,085,594) (257,114) (341,059)
Increase in accounts payable and accrued expenses 1,574,960 2,245,660 567,300
Increase (decrease) in commissions payable 99,287 37,609 (109,816)
Increase (decrease) in income taxes payable (415,255) 348,173 --
Increase in other deferred items 19,627 39,000 42,250
------------------- ------------------ ------------------
Net cash provided by operating activities 177,182 2,579,115 6,891,148
INVESTING ACTIVITIES
Acquisition of business, net of cash acquired (14,645,175) -- --
Purchases of marketable securities (18,769,653) (20,422,495) (45,287,047)
Proceeds from sales of marketable securities 7,375,556 6,311,193 6,362,768
Proceeds from maturities of marketable securities 15,948,839 14,935,414 38,011,708
Purchases of property, plant and equipment (5,337,924) (3,452,611) (7,611,708)
Proceeds from asset dispositions 28,799 -- 86,630
------------------- ------------------ ------------------
Net cash used in investing activities (15,399,558) (2,628,499) (8,437,649)
FINANCING ACTIVITIES
Proceeds from bank loans 18,073,280 -- --
Payments on bank loans (1,608,935) -- --
Additions to employee liabilities 313,168 -- --
Payments on employee liabilities (232,790) -- --
Net proceeds on bank line of credit and short-term debt 75,206 -- --
Repurchase and retirement of common stock (2,638,125) (1,657,808) --
Net proceeds from exercise of stock options 83,250 316,188 55,500
------------------- ------------------ ------------------
Net cash provided by (used in) financing activities 14,065,054 (1,341,620) 55,500
------------------- ------------------ ------------------
Translation adjustments 305,753 -- --
------------------- ------------------ ------------------
Net decrease in cash and cash equivalents (851,569) (1,391,004) (1,491,001)
Cash and cash equivalents at beginning of period 975,180 2,366,184 3,857,185
------------------- ------------------ ------------------
Cash and cash equivalents at end of period $ 123,611 $ 975,180 $ 2,366,184
------------------- ------------------ ------------------
------------------- ------------------ ------------------
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 1,617,000 $ -- $ --
------------------- ------------------ ------------------
------------------- ------------------ ------------------
Cash paid for income taxes $ 2,397,000 $ 1,576,000 $ 3,611,000
------------------- ------------------ ------------------
------------------- ------------------ ------------------
SEE ACCOMPANYING NOTES.
27
MACKIE DESIGNS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Other
Retained Comprehensive
Shares Amount Earnings Income Total
---------------- ----------------- ----------------- ------------------ ---------------
Balance at December 31, 1995 12,875,000 $ 30,943,330 $ 3,863,501 $ -- $ 34,806,831
Issuance of common shares upon
exercise of stock options 10,000 55,500 -- -- 55,500
Net income -- -- 7,420,659 -- 7,420,659
---------------- ----------------- ---------------- ----------------- ----------------
Balance at December 31, 1996 12,885,000 30,998,830 11,284,160 -- 42,282,990
Issuance of common shares upon
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
Issuance of common shares upon
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 -- -- -- 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
---------------- ----------------- ---------------- ----------------- ----------------
---------------- ----------------- ---------------- ----------------- ----------------
SEE ACCOMPANYING NOTES.
28
MACKIE DESIGNS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Mackie Designs Inc. (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 44%, 38%, and 38% of net sales in 1998, 1997, and 1996,
respectively.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
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 amounts reported in the financial statements and
accompanying notes. Actual results could 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 shareholders' equity, net of taxes. Realized and unrealized gains and
losses on foreign currency transactions are included in other income
(expense).
REVENUE RECOGNITION
Generally, revenues from sales of products are recognized when products
are shipped.
CASH EQUIVALENTS
The Company considers all highly-liquid investments purchased with
an initial maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES
Management determines the appropriate classification of debt securities
at the time of purchase and re-evaluates such designation as of each balance
sheet date. Debt securities are classified 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.
Debt securities not classified as held-to-maturity or trading and
marketable equity securities not classified as trading 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.
The amortized cost of debt securities classified 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 from
investments.
INVENTORIES
Inventories are carried at the lower of cost, using 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. Depreciation and amortization is computed
using the straight-line method over the estimated useful lives of the assets
of three to twenty years.
GOODWILL
Goodwill represents the excess of the purchase price over the fair
value of assets acquired. Goodwill is being amortized on a straight-line
basis over twenty years.
29
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash, marketable securities,
prepaid expenses and other current assets, accounts payable, commissions
payable, accrued payroll and other accrued liabilities, and long-term debt
approximate fair value.
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 the years ended
December 31, 1998, 1997, and 1996, the Company incurred advertising expenses
of $3.7 million, $3.0 million, and $2.7 million, respectively.
STOCK COMPENSATION
The Company has elected to apply 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
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 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 tax expense includes U.S. and foreign income taxes. Certain
items of income and expense are not reported in both the tax returns and
financial statement in the same year. The Company accounts for income taxes
under the liability method. Under the liability method, deferred tax and
liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities, and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected
to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
INCOME PER SHARE
Basic income per share excludes any dilutive effects of stock options.
Basic income per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted income per share is
computed using the weighted-average number of common shares and common
equivalent shares outstanding during the period. Common stock equivalent
shares are excluded from the computation if their effect is antidilutive.
CONCENTRATIONS OF CREDIT RISK
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 its cash 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 are due from sales outside of the U.S. No international
country accounted for more than 10% of net sales in any of the periods
presented.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display
of comprehensive income and its components in a full set of general-purpose
financial statements and requires reclassification of financial statements
for earlier periods to be provided for comparative purposes. The Company's
comprehensive income includes all items which comprise net income and the
effect of foreign currency translation. Comprehensive income is shown on the
consolidated statement of shareholders' equity.
BUSINESS SEGMENTS
As of January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
standards for reporting information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers.
Information related to segment disclosures is contained in Note 14.
30
NEW ACCOUNTING PRONOUNCEMENTS
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, 1999. 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 designed 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.
2. ACQUISITION
On June 29, 1998, the Company, through a wholly owned subsidiary,
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 beginning on 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,
-------------------------------------
1998 1997
------------------ ------------------
Net sales $125,958,000 $121,974,000
------------------ ------------------
------------------ ------------------
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 securities available-for-sale approximated fair
market value and was as follows:
December 31,
-------------------------------------
1998 1997
------------------ ------------------
U.S. corporate securities $ 6,309,659 $ 6,680,463
U.S. Government securities -- 4,183,938
------------------ ------------------
------------------ ------------------
$ 6,309,659 $ 10,864,401
------------------ ------------------
------------------ ------------------
As of December 31, 1998, the securities available-for-sale 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). The bonds aggregated $4,293,524 at December 31,
1998 and are carried at amortized cost which approximates market value. The
bank bonds have various maturities ranging from 2002 to 2004. The interest
rates on these bonds range from 4.9% to 9.5% (average rate was 7.0% at
December 31, 1998).
31
4. INVENTORIES
Inventories consisted of the following:
December 31,
-------------------------------------
1998 1997
------------------ ------------------
Raw materials $ 17,044,196 $ 10,987,890
Work in process 5,012,847 2,901,785
Finished goods 17,691,860 3,871,787
------------------ ------------------
$ 39,748,903 $ 17,761,462
------------------ ------------------
------------------ ------------------
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
December 31,
-------------------------------------
1998 1997
------------------ ------------------
Land $ 3,548,000 $ --
Buildings 5,668,061 --
Machinery and equipment 17,227,588 10,115,125
Furniture and fixtures 7,307,409 5,211,871
Leasehold improvements 2,457,632 1,834,954
------------------ ------------------
36,208,690 17,161,950
Less accumulated depreciation
and amortization 11,639,663 6,556,786
------------------ ------------------
$ 24,569,027 $ 10,605,164
------------------ ------------------
------------------ ------------------
6. INCOME TAXES
For financial reporting purposes, income before income taxes and minority
interest is as follows:
Years Ended December 31,
1998 1997 1996
-------------------- ------------------ ------------------
United States $ 8,790,207 $7,909,451 $11,092,259
Foreign (1,135,306) -- --
-------------------- ------------------ ------------------
Income before income
taxes and minority
interest $ 7,654,901 $7,909,451 $11,092,259
-------------------- ------------------ ------------------
-------------------- ------------------ ------------------
The provision for income taxes is as follows:
Years Ended December 31,
1998 1997 1996
-------------------- ------------------ ------------------
Current taxes on income:
United States $ 2,717,660 $2,106,800 $3,807,600
Foreign (161,630) -- --
-------------------- ------------------ ------------------
Total current taxes on
income 2,556,030 2,106,800 3,807,600
Deferred income taxes (503,819) 266,000 (136,000)
-------------------- ------------------ ------------------
Provision for income
taxes $ 2,052,211 $2,372,800 $3,671,600
-------------------- ------------------ ------------------
-------------------- ------------------ ------------------
32
Significant components of the Company's deferred tax assets and
liabilities are as follows:
December 31,
1998 1997
------------------ ------------------
Deferred tax assets:
Accrued expenses $ 639,081 $ 238,000
Bad debt reserves 363,500 168,000
Inventory adjustments 1,042,500 175,000
Other items, net 172,420 89,000
------------------ ------------------
Total deferred tax assets 2,217,501 670,000
Deferred tax liabilities:
Fixed asset basis differences 1,973,328 596,000
------------------ ------------------
Total deferred tax liabilities 1,973,328 596,000
------------------ ------------------
Net deferred tax assets $ 244,173 $ 74,000
------------------ ------------------
------------------ ------------------
The net deferred tax assets are classified on the balance sheet as
follows:
December 31,
1998 1997
------------------ ------------------
Current assets $ 1,770,000 $ 670,000
Long-term assets 447,501 --
Long-term liabilities (1,973,328) (596,000)
------------------ ------------------
$ 244,173 $ 74,000
------------------ ------------------
------------------ ------------------
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 to the effective rate is
as follows:
Years Ended December 31,
1998 1997 1996
-------------------------- -------------------------- ------------------------
Tax at the statutory rate $2,602,666 34.0% $2,689,200 34.0% $ 3,771,400 34.0%
Effect of the research and development tax
credit (280,000) (3.6) (280,000) (3.6) (111,400) (1.0)
Foreign sales corporation tax benefit (251,090) (3.3) (357,900) (4.5) (353,000) (3.2)
Limitation of recognition of benefit of
foreign operating losses 179,094 2.3 -- -- -- --
Nondeductible goodwill and other permanent -- -- -- --
differences 122,987 1.6
Foreign tax greater than U.S. statutory rate 18,288 0.2 -- -- -- --
Other items, net (339,734) (4.4) 321,500 4.1 364,600 3.3
----------------- -------- -------------------------- ---------------- -------
$2,052,211 26.8% $2,372,800 30.0% $ 3,671,600 33.1%
----------------- -------- -------------------------- ---------------- -------
----------------- -------- -------------------------- ---------------- -------
Beginning January 1, 1998, companies doing business in Italy are subject
to a 4.25% IRAP tax, a tax on productive activities, in addition to the 37%
corporate income tax rate. The 4.25% IRAP tax is not considered by the
Company to be an income tax. Accordingly, the Company has classified
approximately $250,000 of the IRAP tax as a component of administrative
expenses for the year ended December 31, 1998.
33
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 $14.0
million loan for the acquisition of RCF of which $12.5 million was
outstanding at December 31, 1998. Unused amounts under the loan may be used
for general corporate purposes. 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
under the loan is payable monthly. The agreement also provides a $5.0 million
unsecured line of credit to finance any unexpected working capital
requirements. 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. The Company
also has a $1.75 million line of credit for the purchase of foreign exchange
contracts. These credit facilities (excluding the acquisition loan) expire
April 30, 2000. Under the terms of the credit agreement, the Company must
maintain certain financial ratios and tangible net worth. The Company is in
compliance with all such covenants. The agreement also provides, among other
matters, restrictions on additional financing, dividends, mergers, and
acquisitions. The agreement also imposes an annual capital expenditure limit
of $10 million. At December 31, 1998, there was $200,000 outstanding on the
$5.0 million line of credit and there were no outstanding balances on the
other credit lines.
The Company also has entered into agreements with several banks that
provide short-term credit facilities totaling approximately $25 million. At
December 31, 1998, there was approximately $11.8 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 2.2%
to 12.5%.
The weighted-average interest rate of short-term borrowings at December
31, 1998 was 5.5%.
Long-term debt consisted of the following at December 31, 1998:
Revolving Credit Note (A) $ 12,500,000
Bank Term Loan (B) 5,438,066
Bank Term Loan (C) 4,506,254
Bank Term Loan (D) 1,037,729
Various Notes (E) 3,841,619
------------------
27,323,668
Less current portion 8,339,468
------------------
$ 18,984,200
------------------
------------------
(A) Borrowings under the Revolving Credit Note ($14.0 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, 1998, the interest rate in effect
was 7.8%. 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 commencing September 30, 1999. 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% (3.7% at December 31, 1998). Interest-only payments are
made semi-annually and the principal is due in one payment in
2000. The Company has an option to extend this payment to 2001.
This loan requires the Company to maintain certain covenants with
respect to its subsidiary, RCF.
(C) The Bank Term Loan bears interest at the six-month LIBOR rate plus
2% (7.7% at December 31, 1998). Interest-only payments are made
semi-annually and the principal is due in one payment 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.
34
(D) The Bank Term Loan bears a fixed interest rate of 3.1%, which will
change to a fixed interest rate of 7.7% in October 1999.
Interest-only payments are made semi-annually. In addition,
semi-annual principal payments of approximately $104,000 will
begin in October 1999 with the final principal payment due in
2004. This loan is secured by a bank bond held by RCF.
(E) The various other notes bear interest rates at December 31, 1998
of 6.1% 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, 1998. RCF is working with the financial institution to modify the
existing and future debt covenants so that RCF can be in compliance with the
terms of the loan. Management expects to obtain such modifications with the
financial institution in the second quarter of 1999. As a result of RCF not
being in compliance with the debt covenant at December 31, 1998, the loan has
been included in the current portion of long-term debt.
The long-term debt described above in (B) through (E) are denominated
in Italian lira.
Future aggregate annual principal payments of long-term debt are as
follows:
1999 $ 8,339,468
2000 2,668,071
2001 2,436,830
2002 2,456,439
2003 10,468,800
Thereafter 954,060
------------------
$ 27,323,668
------------------
------------------
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 $3.4
million at December 31, 1998. In addition, RCF commissioned sales agents are
entitled to similar severance benefits based upon commissions earned and
length of service. This liability aggregated approximately $600,000 at
December 31, 1998. Under these severance programs, RCF recognized severance
expense of approximately $300,000 during the period ended December 31, 1998.
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. Transactions are
summarized as follows:
Years Ended December 31,
1998 1997 1996
--------------------- ------------------ ------------------
Commissions expense $279,972 $294,609 $371,968
--------------------- ------------------ ------------------
--------------------- ------------------ ------------------
Commissions payable at end of year $ 22,789 $ 38,090 $ 35,102
--------------------- ------------------ ------------------
--------------------- ------------------ ------------------
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
35
the Company are based on a matching formula as defined in the Plan.
Additional contributions are at the discretion of the Board of Directors. The
Company made contributions of $112,000, $51,000, and $32,000 to the Plan in
1998, 1997, and 1996, respectively.
The Company insures health care costs for its eligible employees and
dependents. The Company has obtained an insurance policy to cover claims
incurred during the policy year in excess of $30,000 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. INCOME PER SHARE
The following table sets forth the computation of basic and diluted
income per share:
Years Ended December 31,
1998 1997 1996
------------------- ------------------- ------------------
Numerator:
Numerator for basic and diluted income per share
- net income $ 5,580,774 $ 5,536,651 $ 7,420,659
------------------- ------------------- ------------------
------------------- ------------------- ------------------
Denominator:
Denominator for basic income per share -
weighted-average common shares 12,594,090 12,825,949 12,881,038
Effect of dilutive stock options, net 351,080 575,201 730,012
------------------- ------------------- ------------------
Denominator for diluted income per share 12,945,170 13,401,150 13,611,050
------------------- ------------------- ------------------
------------------- ------------------- ------------------
Basic income per share $ 0.44 $ 0.43 $ 0.58
------------------- ------------------- ------------------
------------------- ------------------- ------------------
Diluted income per share $ 0.43 $ 0.41 $ 0.55
------------------- ------------------- ------------------
------------------- ------------------- ------------------
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 of
grant, as determined by the stock option committee of the Company's Board of
Directors at its discretion. The Company has reserved 3,500,000 shares of
common stock for issuance under the Plan. The options vest over a period
determined by the Plan administrator and expire no later than 10 years after
the date of grant.
The following table summarizes the Company's stock option activity:
Weighted
Shares subject to Option price average
option range exercise price
------------------------------------------------------------
Options outstanding at January 1, 1996 1,784,700 $5.55 - 13.88 $ 5.64
Granted 367,000 $6.63 - 10.00 $ 8.78
Canceled (141,000) $5.55 - 10.00 $ 8.24
Exercised (10,000) $5.55 $ 5.55
------------------------------------------------------------
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
Canceled (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
Canceled (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
------------------------------------------------------------
------------------------------------------------------------
36
At December 31, 1998, 850 shares of common stock were available for
future grants.
The following table summarizes information about options outstanding and
exercisable at December 31, 1998:
Options Outstanding
-------------------
Weighted average remaining Weighted average
Range of exercise price Options outstanding contractual life (years) exercise price
--------------------------- -------------------- ---------------------------- --------------------
$5.55 - 8.00 3,312,900 7.69 $ 6.01
$8.01 - 13.88 105,000 7.03 $ 9.24
--------------------------------------------------------------------------------------------------
$5.55 - 13.88 3,417,900 7.67 $ 6.11
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
Options Exercisable
-------------------
Weighted
Range of exercise Options average exercise
price exercisable price
--------------------------- --------------------- -------------------
$5.55 - 8.00 1,955,950 $ 5.69
$8.01 - 13.88 55,000 $ 9.45
---------------------------------------------------------------------
$5.55 - 13.88 2,010,950 $ 5.79
---------------------------------------------------------------------
---------------------------------------------------------------------
The Company follows the intrinsic value method in accounting for its
stock options. Had compensation costs been recognized based on the fair value
at the date of grant for options awarded under the Plan, the pro forma
amounts of the Company's net income and net income per share for the years
ended December 31, 1998, 1997, and 1996 would have been as follows:
1998 1997 1996
--------------------- ------------------ ------------------
Net income - as reported $ 5,580,774 $ 5,536,651 $ 7,420,659
Net income - pro forma $ 4,776,084 $ 4,869,064 $ 7,157,908
Basic income per share - as reported $ 0.44 $ 0.43 $ 0.58
Basic income per share - pro forma $ 0.38 $ 0.38 $ 0.56
Diluted income per share - as reported $ 0.43 $ 0.41 $ 0.55
Diluted income per share - pro forma $ 0.37 $ 0.36 $ 0.53
The fair value of each option grant was estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: risk-free interest rates of 4.3% to 7.2%; expected option life
of three to six years; expected volatility of 0.40% to 0.48%; and no expected
dividends. The weighted-average fair value of options granted during the
years 1998, 1997, and 1996 was $2.15, $2.43, and $3.46, respectively.
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 monthly rent under this
lease is $56,613, adjusted annually for changes in the Consumer Price Index
(monthly rent expense in 1998 was $60,982). Taxes, insurance, utilities, and
maintenance are the responsibility of the Company. Future minimum rental
payments under this lease and other leases at December 31, 1998 are as
follows:
37
1999 $1,675,000
2000 1,649,000
2001 1,527,000
2002 1,441,000
2003 1,372,000
Thereafter 2,015,000
------------------
$9,679,000
------------------
------------------
Total rent expense for the years ended December 31, 1998, 1997, and
1996 was $1,731,000, $1,328,000, and $1,313,000, respectively.
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 has been settled in
full, and the dealer will resume representation of Mackie's products on April
2, 1999. The suit against the competitor claims damages in the amount of $327
million. Cases are pending in the United States District Court for the
Western District of Washington and a local court in the United Kingdom. The
defendant has filed counterclaims alleging unspecified damages. While the
Company intends to vigorously prosecute its claims and defend the
counterclaims, there can be no assurance that the Company will prevail in any
of these actions.
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
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 and speaker
components. A summary of key financial data by segment is as follows:
Elimination of
intercompany
Mackie RCF amounts Total
----------------- ---------------- ------------------ --------------
(in thousands)
Year ended December 31, 1998:
Net sales $ 78,467 $ 22,508 $ -- $100,975
Operating income 8,050 116 -- 8,166
Interest income 1,276 148 (642) 782
Interest expense (583) (1,580) 642 (1,521)
Depreciation and amortization 3,796 948 -- 4,744
Income tax provision 2,238 (186) -- 2,052
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 63,037 (922) 119,337
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, 1998 is presented in the table that follows. 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 $24.1
million, $28.1 million and $27.9 million in 1998, 1997 and 1996,
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
38
non-affiliated customers. Long-lived assets, excluding goodwill, bonds and
deferred taxes, are those assets that can be directly associated with a
particular geographic area.
Years Ended December 31,
1998 1997 1996
----------------- ----------------- ------------------
(in thousands)
Net sales:
U.S. $ 56,811 $ 46,770 $ 45,319
Europe 30,591 13,062 14,041
The Americas, excluding U.S. 8,082 7,827 6,519
Asia-Pacific, including Australia and New Zealand 3,999 6,669 6,322
Other 1,492 561 1,035
----------------- ----------------- ------------------
$100,975 $ 74,889 $ 73,236
----------------- ----------------- ------------------
----------------- ----------------- ------------------
Long-lived assets:
U.S. $ 11,718 $ 11,200 $ 10,650
Europe 14,766 -- --
Other 2 -- --
----------------- ----------------- ------------------
$ 26,486 $ 11,200 $ 10,650
----------------- ----------------- ------------------
----------------- ----------------- ------------------
15. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------------------------------------------------------------------
Net sales $ 17,354 $ 18,217 $ 30,546 $ 34,858
Gross profit $ 6,829 $ 6,929 $ 11,982 $ 12,531
Net income $ 1,158 $ 1,297 $ 1,776 $ 1,350
Basic income per share $ 0.09 $ 0.10 $ 0.14 $ 0.11
Diluted income per share $ 0.09 $ 0.10 $ 0.14 $ 0.11
1997 FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------------------------------------------------------------------
Net sales $ 16,768 $ 18,684 $ 21,596 $ 17,841
Gross profit $ 6,391 $ 7,122 $ 7,850 $ 6,433
Net income $ 1,140 $ 1,413 $ 1,818 $ 1,166
Basic income per share $ 0.09 $ 0.11 $ 0.14 $ 0.09
Diluted income per share $ 0.09 $ 0.11 $ 0.13 $ 0.09
39
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 1999 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 1999 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 1999 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 1999 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
-----------
A. Report of Ernst & Young LLP, Independent Auditors.... 24
B. Consolidated Balance Sheets as of December 31, 1998
and December 31, 1997................................ 25
C. Consolidated Statements of Income for each of the
three years in the period ended December 31, 1998.... 26
D. Consolidated Statements of Cash Flows for each of
the three years in the period ended December
31, 1998............................................. 27
40
E. Consolidated Statements of Shareholders' Equity for
each of the three years in the period ended December
31, 1998............................................. 28
F. Notes to Consolidated Financial Statements............ 29-39
2. FINANCIAL STATEMENT SCHEDULES: PAGE NUMBER
-----------
Schedule II - Valuation and Qualifying Accounts.......... 43
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 44.
(b) Reports on Form 8-K:
None.
41
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 29, 1999
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 29, 1999.
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
- ------------------------------- (Principal Financial and Accounting Officer)
William A. Garrard
/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/ Gregory Riker Director
- -------------------------------
Gregory Riker
/s/ C. Marcus Sorenson Director
- -------------------------------
C. Marcus Sorenson
42
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
MACKIE DESIGNS INC.
- ----------------------------------------------------------------------------------------------------------------------------------
RCF Additions
Balance at Reserves at Charged to Balance at
Beginning Date of Costs and Deductions - End of
Description of Period Acquisition Expenses Describe Period
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998:
Reserve and allowances deducted from asset accounts:
Allowance for uncollectible accounts $ 481,000 $ 1,008,000 $ 279,000 $ 347,000 (1) $ 1,421,000
Reserve for inventories $ 445,000 $ 698,000 $ 191,000 $ -- $ 1,334,000
Reserve and allowances added to liability accounts:
Reserve for warranty expenses $ 300,000 $ -- $ 120,000 $ -- $ 420,000
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
(1) Uncollectible accounts written off, net of recoveries, and adjustment to
reserves.
(2) Inventories written off, net of recoveries, and adjustment to reserves.
43
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBITS DESCRIPTION NUMBERED PAGE
-------- ----------- -------------
2.1 Stock Purchase and Sale Agreement between the Company and Radio Cine Forniture
(R.C.F.) S.p.A. consisting of letters dated November 9, 1997, April 30, 1998,
June 25, 1998, and June 29, 1998. Incorporated by reference to Exhibit 2.1 to
Registrant's Current Report on Form 8-K dated June 29, 1998...............
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 May 19, 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........................................
44
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 Credit Agreement between U.S. Bank National Association 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, 1998....................
10.18 Acquisition Note made by Mackie Designs Inc. to the order of U.S. Bank
National Association. Incorporated by reference to Exhibit 10.2 to
Registrant's Quarterly Report on Form 10-Q for the period ended June 30,
1998......................................................................
45
10.19 Revolving Note made by Mackie Designs Inc. to the order of U.S. Bank National
Association. Incorporated by reference to Exhibit 10.3 to Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1998..........
10.20 First Amendment to Credit Agreement dated June 29, 1998 between Mackie Designs
Inc. and U.S. Bank National Association. Incorporated by reference to
Exhibit 10.4 to Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 1998.......................................................
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, 1998
*13.1 Annual Report to Shareholders of Mackie Designs Inc. for the year ended
December 31, 1998......................................................... 47
*21.1 Subsidiaries of Mackie Designs Inc........................................ 54
*23.1 Consent of Ernst & Young LLP, Independent Auditors........................ 55
*27.1 Financial Data Schedule................................................... 56
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* Filed herewith
46