<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
--------------------------------------------------
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission File Number: 0-26524
--------------------------------------------------------
MACKIE DESIGNS INC.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Washington 91-1432133
- - ----------------------------------------------------------------------------------------------------
<S> <C>
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
16220 Wood-Red Road, N.E., Woodinville, Washington 98072
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(206) 487-4333
- - --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- - --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Common Stock, no par value 12,875,000
- - -------------------------- ----------------------------
<S> <C>
Class Number of Shares Outstanding
(as of May 6, 1996)
</TABLE>
<PAGE> 2
MACKIE DESIGNS INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance sheets - March 31, 1996 and December 31, 1995
Statements of income - Three months ended March 31, 1996 and 1995
Condensed statements of cash flows - Three months ended March 31,
1996 and 1995
Notes to financial statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBITS
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MACKIE DESIGNS INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
(Unaudited)
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,486,315 $ 3,857,185
Marketable securities 7,742,609 10,775,942
Accounts receivables, less allowance for doubtful accounts 13,358,106 9,703,927
Inventories 6,747,713 7,642,892
Income taxes receivable -- 379,100
Deferred taxes 256,000 204,000
Prepaid expenses and other current assets 492,905 607,847
----------- -----------
Total current assets 36,083,648 33,170,893
Furniture and equipment, net of accumulated depreciation 5,593,601 4,651,271
Other assets 130,356 112,893
----------- -----------
Total assets $41,807,605 $37,935,057
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,018,872 $ 1,468,066
Commissions payable 777,674 737,190
Accrued payroll and related taxes 605,492 522,717
Accrued vacation 209,747 162,891
Other accrued liabilities 292,196 237,362
Income taxes payable 768,300 --
----------- -----------
Total current liabilities 4,672,281 3,128,226
Deferred rent 13,000 --
Shareholders' equity:
Common stock 30,943,330 30,943,330
Retained earnings 6,178,994 3,863,501
----------- -----------
Total shareholders' equity 37,122,324 34,806,831
----------- -----------
Total liabilities and shareholders' equity $41,807,605 $37,935,057
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE> 4
MACKIE DESIGNS INC.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net sales $19,504,089 $14,269,707
Cost of goods sold 11,719,639 7,832,412
----------- -----------
Gross profit 7,784,450 6,437,295
Operating expenses:
Marketing and sales 2,592,017 2,066,840
Administrative 1,285,231 737,525
Research and development 674,179 236,422
----------- -----------
Total operating expenses 4,551,427 3,040,787
----------- -----------
Operating income 3,233,023 3,396,508
Interest income 216,144 17,646
Interest expense -- (16,017)
Other income 12,226 --
----------- -----------
Income before income taxes 3,461,393 3,398,137
Income tax provision 1,145,900 --
----------- -----------
Net income $ 2,315,493 $ 3,398,137
=========== ===========
Pro forma data:
Income before pro forma provision for income taxes $ 3,461,393 $ 3,398,137
Pro forma provision for income taxes 1,145,900 1,162,200
----------- -----------
Pro forma net income $ 2,315,493 $ 2,235,937
=========== ===========
Pro forma net income per share $ 0.17 $ 0.18
=========== ===========
Shares used in computation of pro forma net income per share 13,760,524 12,088,433
=========== ===========
</TABLE>
See accompanying notes.
4
<PAGE> 5
MACKIE DESIGNS INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net cash provided by operating activities $ 1,948,288 $ 2,782,782
INVESTING ACTIVITIES
Purchases of marketable securities (6,270,499) --
Proceeds from sale of marketable securities 9,303,832 --
Purchases of furniture and equipment (1,416,522) (856,934)
Proceeds from asset dispositions 64,031 --
----------- -----------
Net cash provided by (used in) investing activities 1,680,842 (856,934)
FINANCING ACTIVITIES
Payments on long-term debt -- (74,500)
Payments of dividends -- (2,158,566)
----------- -----------
Net cash used in financing activities -- (2,233,066)
----------- -----------
Net increase (decrease) in cash and cash equivalents 3,629,130 (307,218)
Cash and cash equivalents at beginning of period 3,857,185 307,218
----------- -----------
Cash and cash equivalents at end of period $ 7,486,315 $ --
=========== ===========
SUPPLEMENTAL DISCLOSURES
Noncash financing and investing activities:
Dividends declared but not paid $ -- $ 1,406,978
=========== ===========
Cash paid for interest $ -- $ 16,017
=========== ===========
Cash paid for income taxes $ 50,500 $ --
=========== ===========
</TABLE>
See accompanying notes.
5
<PAGE> 6
MACKIE DESIGNS INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by Mackie
Designs Inc. (the "Company") in accordance with generally accepted accounting
principles for interim financial statements and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and disclosures required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation have been included. The results of operations for the
three month period ended March 31, 1996 are not necessarily indicative of future
financial results. For further information, refer to the financial statements
and footnotes thereto for the year ended December 31, 1995 included in the
Company's Form 10-K filed with the Securities and Exchange Commission.
2. PRO FORMA NET INCOME PER SHARE
Pro forma net income per share is computed based on the weighted average number
of common shares outstanding and gives effect to the following adjustments:
- In accordance with the Securities and Exchange Commission requirements,
common and common equivalent shares issued during the 12-month period
prior to the filing of an initial public offering ("IPO") have been
included in the calculation as if they were outstanding for all periods
presented prior to the Company's IPO on August 17, 1995 using the treasury
stock method and the IPO price of $12 per share.
- The net proceeds from the sale of 1,139,907 shares of common stock from
the Company's IPO are assumed to repay shareholder notes and to be used to
pay distributions to existing shareholders equal to the Company's
undistributed S Corporation earnings through the termination of the
Company's S Corporation status on August 17, 1995. These shares have been
included in the calculation as if they were outstanding for all periods
presented prior to the IPO.
3. INCOME TAXES
Through August 16, 1995, the Company was treated as an S Corporation for federal
income tax purposes. A pro forma income tax provision has been included in the
statements of income for the three months ended March 31, 1995, as if the
Company had been a taxable entity during that period. On August 17, 1995, the
Company terminated its S Corporation status and became a taxable C Corporation.
4. INVENTORIES
Inventories at March 31, 1996 and December 31, 1995 consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------- ------------
<S> <C> <C>
Raw materials $5,242,670 $5,170,726
Work in process 976,550 345,512
Finished goods 528,493 2,126,654
---------- ----------
$6,747,713 $7,642,892
========== ==========
</TABLE>
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following information contains certain forward-looking statements that
anticipate future trends or events. These statements are based on certain
assumptions that may prove to be erroneous and are subject to certain risks
including, but not limited to, the Company's ability to introduce new products,
the concentration of the Company's current products in a relatively narrow
segment of the professional audio market, technological change and increased
competition in the industry, the Company's ability to manage its rapid growth,
its limited protection of technology and trademarks, various factors that impact
the Company's international operations including custom and tariff regulations,
currency fluctuations and lower gross margins, the Company's dependence on a
limited number of suppliers and on its network of representatives and
distributors, and its dependence on certain key personnel within the Company.
Accordingly, actual results may differ, possibly materially, from the
predictions contained herein.
The Company derives its operating revenue from worldwide sales of audio mixers
and related products. 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. The
Company prices its products in U.S. dollars worldwide. 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 affected by its international sales. Typically,
gross margins from exported products are lower than from those sold in the U.S.
due to discounts offered by the Company to its foreign distributors. The Company
offered its foreign distributors a weighted average discount of approximately
8.1% in 1993, 7.7% in 1994, 8.1% in 1995, and 12.1% in the first quarter of
1996. Sales outside the U.S. represented approximately 30%, 36%, 34% and 36% of
the Company's net sales in 1993, 1994, 1995 and the first quarter of 1996,
respectively. The Company expects to increase the percentage of sales to its
international markets. This trend is expected to have a negative effect on gross
margins.
Effective November 1, 1995, the Company terminated the services of its exclusive
representative for sales to distributors outside the U.S. and Canada. Since
then, the Company has supervised the international marketing and sales of its
products internally. Because of this change, the Company has modified its
discount structure to foreign distributors such that the weighted average
discount is expected to increase. This will have a negative effect on gross
margins as a percentage of net sales. Also because of this change, the Company
has eliminated the commissions it was paying to its international
representative; however, the Company has incurred and will continue to incur
additional expenses associated with managing the international marketing and
sales of its products internally. This is expected to result in a net decrease
in sales and marketing expenses as a percentage of net sales. The Company also
plans to increase its advertising efforts in international markets, which will
increase sales and marketing expenses.
The Company's gross margins are also affected by the purchase of some components
abroad. As a result of fluctuations in the value of local currencies relative to
the U.S. dollar, some of the Company's foreign component suppliers have
increased prices and may further increase prices. The Company currently does not
employ any foreign exchange hedging strategies, but may employ such strategies
in the future.
7
<PAGE> 8
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.
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
increases in overhead associated with each of the Company's several relocations,
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. It is anticipated that these products will
have a slightly lower gross margin than current products, as more features are
added to products without increasing prices. In addition, 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.
As a result of its election to be treated as an S Corporation, the Company was
exempt from the payment of federal income taxes through August 16, 1995.
Accordingly, the Company's financial statements do not contain a provision for
income tax expense for periods through that date. Pro forma income statement
information is provided to reflect a provision for income taxes as if the
Company had been subject to federal income taxes as a C Corporation for all
periods presented.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1996 AS COMPARED WITH QUARTER ENDED MARCH 31, 1995
Net sales increased 36.7% to $19.5 million in the first quarter of 1996 from
$14.3 million in the first quarter of 1995. The increase in sales was primarily
attributable to the success of two SR Series mixers which were introduced in May
1995 (SR24o4) and August 1995 (SR32o4), and also to the success of two new
compact mixers, the MS1202-VLZ (successor to the MS1202) introduced in October
1995 and the MS1402-VLZ introduced in January 1996. Sales outside the United
States increased to 36% of the Company's total net sales in the first quarter of
1996 from 32% in the first quarter of 1995 primarily due to the Company's
continued emphasis on increasing international sales.
Gross margin decreased to 39.9% in the first quarter of 1996 from 45.1% in the
first quarter of 1995. The decrease was due to increases in discounts offered to
international distributors following the Company's decision, effective November
1, 1995, to terminate the services of its exclusive representative for sales to
distributors outside the U.S. and Canada. Since then, the Company has supervised
the international marketing and sales of its products internally. The decrease
in gross margin percentage was also due to a difference in product mix for the
first quarter of 1996 compared with the first quarter of 1995 as sales of the
SR24o4, the MS1202-VLZ and the CR1604-VLZ (introduced in February 1996 as the
successor to the CR-1604) provided lower gross margin percentages. As the
Company has introduced new versions of existing products, it has added more
features to them without significant price increases.
Marketing and sales expenses increased to $2.6 million in the first quarter of
1996 from $2.1 million in the corresponding period of 1995. This increase was
due primarily to increases in marketing staff and increased expenditures in
advertising media creation and placement. As a percentage of net sales,
marketing and sales expenses decreased to 13.3% in the first quarter of 1996
from 14.5% in the
8
<PAGE> 9
corresponding period of 1995 due to leveraging fixed marketing and sales
expenses over a growing revenue base.
Administrative expenses increased to $1.3 million for the first quarter of 1996
from $738,000 for the corresponding period of 1995. As a percentage of net
sales, these expenses increased to 6.6% in the first quarter of 1996 from 5.2%
in the corresponding period of 1995. The increase was due primarily to an
increase in staff and expenditures related to the Company's increased business
volume and various expenses associated with being a publicly held company.
Research and development expenses increased to $674,000 in the first quarter of
1996 from $236,000 in the corresponding period of 1995. As a percentage of net
sales, these expenses increased to 3.5% in the first quarter of 1996 from 1.7%
in the corresponding period of 1995. The increase was due primarily to increases
in R&D staff and expenditures related to the creation of two new engineering
groups (Digital Product Group and Acoustic Product Group) as the Company expands
its product line into other pro-audio categories.
Interest income increased to $216,000 in the first quarter of 1996 compared with
$18,000 in the first quarter of 1995 due to higher overall cash balances
stemming from the Company's August 1995 initial public offering ("IPO"). There
was no interest expense in the first quarter of 1996 compared with $16,000 in
the first quarter of 1995, primarily due to the repayment of all
interest-bearing debt following the Company's IPO. Other income of $12,000 in
the first quarter of 1996 (compared with none in the first quarter of 1995)
resulted from gains on the sale of capital equipment.
The provision for income taxes for the first quarter of 1996 of $1,146,000 is
based upon an expected overall effective rate for 1996 of 33.1%. The pro forma
provision for income taxes for the first quarter of 1995 of $1,162,200 was based
upon an expected overall effective rate for 1995 of 34.2%. The decrease in the
expected overall effective rate in 1996 compared with 1995 is due to the benefit
provided by the Company's foreign sales corporation formed in September 1995.
LIQUIDITY AND CAPITAL RESOURCES
During the first three months of 1996, the Company's operating activities
generated cash of $2.2 million. Accounts receivable, net of allowances,
increased to $13.4 million at March 31, 1996 from $9.7 million at December 31,
1995 due to increasing sales and an increase in days' sales outstanding.
Inventory levels decreased to $6.7 million at March 31, 1996 from $7.6 million
at December 31, 1995 due to increased demand for the Company's products. Net
cash provided by investing activities totaled $1.7 million during this period,
attributable primarily to net proceeds from sales of marketable securities of
$3.0 million, partially offset by net purchases of furniture and equipment of
$1.3 million.
In November 1995, the Company entered into a business loan agreement with a
bank. The agreement provides three credit facilities to the Company including a
$5.0 million unsecured line of credit to finance any unexpected working capital
requirements. The line of credit bears interest at the bank's prime rate or at a
specified IBOR rate plus 1.5%, whichever the Company chooses. 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. There were no borrowings outstanding
on any of the bank credit facilities at March 31, 1996. These credit facilities
expire October 31, 1997. Under the terms of the business loan agreement, the
Company must maintain certain financial ratios and tangible net worth. The
Company is in compliance with all such covenants. The agreement also
9
<PAGE> 10
provides, among other matters, restrictions on additional financing, dividends,
mergers, and acquisitions. The agreement also imposes an annual capital
expenditure limit of $5.0 million.
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.
10
<PAGE> 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material litigation or legal proceedings
at this time and is not aware of any potentially material litigation or
proceeding threatened against it.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
11 Computation of Pro Forma Net Income Per Share
</TABLE>
(b) Reports on Form 8-K
Current Report on Form 8-K dated March 27, 1996 reporting under Item 5,
"Other Events," certain management changes. No financial statements
were filed.
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MACKIE DESIGNS INC.
-------------------------------------
(Registrant)
Dated: May 6, 1996 By: /s/ Greg C. Mackie
-------------------------------------
Greg C. Mackie
President and Chief Executive Officer
Dated: May 6, 1996 By: /s/ Thomas M. Elliott
-------------------------------------
Thomas M. Elliott
Vice President-Finance and Chief
Financial Officer
12
<PAGE> 13
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Location
- - ----------- ----------- --------
<S> <C> <C>
11 Computation of Pro Forma Net Income Per Share Page 14
</TABLE>
13
<PAGE> 14
EXHIBITS
EXHIBIT 11 - COMPUTATION OF PRO FORMA NET INCOME PER SHARE
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Weighted average common shares outstanding 12,875,000 10,000,000
Net effect of dilutive stock equivalents based on the treasury stock
method using average market price 885,524 948,526
Sale of common stock from the initial public offering assumed to repay
amounts due to pre-IPO shareholders for undistributed S Corporation
earnings -- 1,139,907
----------- -----------
Total weighted shares outstanding 13,760,524 12,088,433
=========== ===========
Pro forma net income $ 2,315,493 $ 2,235,937
=========== ===========
Pro forma net income per share $ 0.17 $ 0.18
=========== ===========
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 7,486,315
<SECURITIES> 7,742,609
<RECEIVABLES> 13,983,712
<ALLOWANCES> (625,606)
<INVENTORY> 6,747,713
<CURRENT-ASSETS> 36,083,648
<PP&E> 7,607,866
<DEPRECIATION> (2,014,265)
<TOTAL-ASSETS> 41,807,605
<CURRENT-LIABILITIES> 4,672,281
<BONDS> 0
0
0
<COMMON> 30,943,330
<OTHER-SE> 6,178,994
<TOTAL-LIABILITY-AND-EQUITY> 41,807,605
<SALES> 19,504,089
<TOTAL-REVENUES> 19,504,089
<CGS> 11,719,639
<TOTAL-COSTS> 4,440,263
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 111,164
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,461,393
<INCOME-TAX> 1,145,900
<INCOME-CONTINUING> 2,315,493
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,315,493
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
