<PAGE>
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 September 30, 1999
-----------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-26524
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MACKIE DESIGNS INC.
- ------------------------------------------------------------------------------
(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)
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(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>
<S> <C>
Common Stock, no par value 12,100,758
- -------------------------- ----------------------------
Class Number of Shares Outstanding
(as of November 15, 1999)
</TABLE>
<PAGE>
MACKIE DESIGNS INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets - September 30, 1999 and
December 31, 1998
Condensed consolidated statements of income - Three and nine
months ended September 30, 1999 and 1998
Condensed consolidated statements of cash flows - Nine months
ended September 30, 1999 and 1998
Notes to condensed consolidated financial statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MACKIE DESIGNS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited)
----------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,596,128 $ 123,611
Available-for-sale securities 6,491,503 6,309,659
Accounts receivable, net 32,835,585 30,501,951
Inventories 36,244,554 39,748,903
Prepaid expenses and other current assets 1,983,016 1,786,964
Deferred income taxes 1,923,260 1,770,000
----------------- ------------------
Total current assets 83,074,046 80,241,088
Property, plant and equipment, net 21,917,471 24,569,027
Goodwill, net 7,383,999 7,868,783
Bonds 4,046,355 4,293,524
Other assets 2,456,027 1,917,086
----------------- ------------------
Total assets $ 118,877,898 $ 118,889,508
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 16,578,609 $ 12,057,654
Accounts payable 13,605,460 14,351,463
Accrued expenses 9,168,040 7,945,911
Income taxes payable 1,406,508 1,762,752
Current portion of long-term debt 7,240,152 8,339,468
----------------- ------------------
Total current liabilities 47,998,769 44,457,248
Long-term debt 16,661,693 18,984,200
Employee and other liabilities 3,306,709 4,026,514
Deferred income taxes 1,453,432 1,525,827
Other deferred items 149,500 206,776
Minority interest -- 119,886
Shareholders' equity:
Common stock 25,802,401 27,102,335
Retained earnings 23,866,438 22,401,585
Accumulated other comprehensive income (loss) (361,044) 65,137
----------------- ------------------
Total shareholders' equity 49,307,795 49,569,057
----------------- ------------------
Total liabilities and shareholders' equity $ 118,877,898 $ 118,889,508
================= ==================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
MACKIE DESIGNS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------------- -------------------------------------
1999 1998 1999 1998
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 39,558,161 $ 30,546,143 $ 109,137,878 $ 66,117,081
Cost of goods sold 25,681,287 18,564,110 71,147,135 40,376,706
----------------- ----------------- ------------------ ------------------
Gross profit 13,876,874 11,982,033 37,990,743 25,740,375
Operating expenses:
Marketing and sales 5,688,515 4,096,603 17,413,841 9,359,414
Administrative 3,837,638 3,342,243 11,484,330 6,568,069
Research and development 1,669,551 1,375,869 5,147,518 3,432,818
----------------- ----------------- ------------------ ------------------
Total operating expenses 11,195,704 8,814,715 34,045,689 19,360,301
----------------- ----------------- ------------------ ------------------
Operating income 2,681,170 3,167,318 3,945,054 6,380,074
Interest income 168,276 234,433 530,898 574,610
Interest expense (677,079) (779,841) (2,169,273) (804,911)
Other income 525,635 42,865 193,040 21,005
----------------- ----------------- ------------------ ------------------
Income before income taxes 2,698,002 2,664,775 2,499,719 6,170,778
Income taxes 984,988 888,766 1,034,866 1,940,566
----------------- ----------------- ------------------ ------------------
Net income $ 1,713,014 $ 1,776,009 $ 1,464,853 $ 4,230,212
================= ================= ================== ==================
Basic net income per share $ 0.14 $ 0.14 $ 0.12 $ 0.33
================= ================= ================== ==================
Diluted net income per share $ 0.14 $ 0.14 $ 0.12 $ 0.33
================= ================= ================== ==================
Basic weighted shares outstanding 12,177,615 12,583,654 12,251,116 12,656,366
================= ================= ================== ==================
Diluted weighted shares outstanding 12,177,615 12,916,847 12,315,799 13,006,782
================= ================= ================== ==================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
MACKIE DESIGNS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------------------
1999 1998
----------------- ------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,464,853 $ 4,230,212
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,264,237 3,274,512
Loss on asset dispositions -- 21,860
Decrease in minority interest (110,106) 19,604
Deferred income taxes (356,788) (171,398)
Changes in operating assets and liabilities:
Accounts receivable (3,808,135) (4,981,692)
Inventories 1,814,508 (974,073)
Prepaid expenses and other current assets (215,132) 376,084
Other assets (819,225) (1,063,903)
Accrued expenses 1,913,941 68,931
Income taxes payable (279,117) 922,189
Deferred items (57,276) 19,265
Other long term liabilities (154,494) 29,315
---------------- -----------------
Net cash provided by operating activities 3,657,266 1,770,906
INVESTING ACTIVITIES
Acquisition of business, net of cash acquired -- (14,863,163)
Purchases of available-for-sale securities (6,090,443) (13,033,718)
Proceeds from sales of available-for-sale securities -- 2,207,885
Proceeds from maturities of available-for-sale securities 5,945,000 12,202,597
Purchases of property, plant and equipment (2,162,261) (2,959,413)
Proceeds from asset dispositions -- 5,064
---------------- -----------------
Net cash used in investing activities (2,307,704) (16,440,748)
FINANCING ACTIVITIES
Proceeds from bank loan 720,001 18,142,276
Payments on bank loans (2,642,914) (197,014)
Net proceeds (payments) on bank line of credit and short-term debt 5,844,868 (1,209,801)
Repurchase and retirement of common stock (1,308,249) (1,260,719)
Net proceeds from exercise of stock options 8,325 55,500
---------------- -----------------
Net cash provided by financing activities 2,622,031 15,530,242
Effect of exchange rate changes on cash (499,076) 291,030
---------------- -----------------
Net increase in cash and cash equivalents 3,472,517 1,151,430
Cash and cash equivalents at beginning of period 123,611 975,180
---------------- -----------------
Cash and cash equivalents at end of period $ 3,596,128 $ 2,126,610
================ =================
SUPPLEMENTAL DISCLOSURES
Cash paid for income taxes $ 1,132,815 $ 1,454,500
================ =================
Cash paid for interest $ 1,970,318 $ 856,446
================ =================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
MACKIE DESIGNS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated 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 items, necessary for a fair presentation have
been included. The results of operations for interim periods are not
necessarily indicative of future financial results. For further information,
refer to the consolidated financial statements and footnotes thereto for the
year ended December 31, 1998 included in the Company's Form 10-K filed with
the Securities and Exchange Commission. Certain amounts reported in previous
periods have been reclassified to conform to the 1999 presentation.
2. ACQUISITION
On June 29, 1998, the Company acquired 100% of the capital stock of Radio
Cine Forniture (RCF) S.p.A. ("RCF"), an Italian corporation. RCF is a
manufacturer of audio speakers 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 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.
3. INVENTORIES
Inventories at September 30, 1999 and December 31, 1998 consisted of the
following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------ ----------------
<S> <C> <C>
Raw materials $ 15,680,165 $ 17,044,196
Work in process 5,143,376 5,012,847
Finished goods 15,421,013 17,691,860
------------------ ----------------
$ 36,244,554 $ 39,748,903
================== ================
</TABLE>
4. EARNINGS PER SHARE
Basic net income per share is based on the weighted-average number of common
shares outstanding for the period. Diluted net income per share includes the
effect of dilutive potential common shares outstanding, consisting of stock
options using the treasury stock method. The denominators of diluted net
income per share exclude the effect of unexercised stock options representing
the potential rights to 3,138,550 and 300,000 shares for the third quarters
of 1999 and 1998, respectively, as well as 3,146,550 and 311,670 shares for
the first nine months of 1999 and 1998, respectively, as including the effect
of such instruments would be antidilutive. The following schedule represents
a reconciliation of the numerators and denominators of basic and diluted net
income per share calculations on a quarter and year-to-date basis for 1999
and 1998.
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------- -------------------------------------
1999 1998 1999 1998
---------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted net income
per share - net income $ 1,713,014 $ 1,776,009 $ 1,464,853 $ 4,230,212
---------------- ---------------- ------------------ -----------------
Denominator:
Denominator for basic net income per share -
weighted average common shares 12,177,615 12,583,654 12,251,116 12,656,366
Effect of dilutive securities:
Stock options -- 333,193 64,683 350,416
---------------- ---------------- ------------------ -----------------
Denominator for diluted net income per share 12,177,615 12,916,847 12,315,799 13,006,782
---------------- ---------------- ------------------ -----------------
Basic net income per share $ 0.14 $ 0.14 $ 0.12 $ 0.33
================ ================ ================== =================
Diluted net income per share $ 0.14 $ 0.14 $ 0.12 $ 0.33
================ ================ ================== =================
</TABLE>
5. COMPREHENSIVE INCOME
Comprehensive income, in general, refers to the total change in equity during
a period except those changes that result from investments by owners and
distributions to owners. Comprehensive income includes net income as well as
an other comprehensive income component comprised of certain revenues,
expenses, gains and losses that under generally accepted accounting
principles are reflected in shareholders' equity but excluded from the
determination of net income. The Company has segregated the total accumulated
other comprehensive income (specifically, accumulated foreign currency
translation adjustments and unrealized gains and losses on available-for-sale
securities) from the other components of shareholders' equity in the
accompanying condensed consolidated balance sheets.
Comprehensive income for the three and nine month periods ended September 30,
1999 and 1998, is detailed below:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
--------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
Net income $ 1,713,014 $ 1,776,009 $ 1,464,853 $ 4,230,212
Other comprehensive income (loss):
Foreign currency translation adjustments 81,112 (386,681) (422,233) (386,681)
Unrealized gain (loss) on available-for-
sale securities 4,648 (3,948)
--------------------------------- -------------------------------------
Comprehensive income $ 1,798,774 $ 1,389,328 $ 1,038,672 $ 3,843,531
================================= =====================================
</TABLE>
<PAGE>
6. 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 and Mackie product offerings through its subsidiaries. A summary
of key financial data by segment is as follows:
<TABLE>
<CAPTION>
Elimination of
intercompany
Mackie RCF amounts Total
----------------- ---------------- ------------------ --------------
(in thousands)
<S> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1999:
Net sales $ 27,004 $ 15,761 $ (3,207) $ 39,558
Operating income 1,996 1,045 (360) 2,681
Interest income 409 80 (321) 168
Interest expense (222) (776) 321 (677)
Depreciation and amortization 894 498 -- 1,392
Income tax provision 525 460 -- 985
Purchases of property, plant and equipment 687 -- -- 687
Total property, plant and equipment, net 9,322 12,595 -- 21,917
Total assets 60,914 68,157 (9,280) 119,791
THREE MONTHS ENDED SEPTEMBER 30, 1998:
Net sales $ 20,588 $ 9,958 -- $ 30,546
Operating income 2,717 450 -- 3,167
Interest income 478 77 (321) 234
Interest expense (279) (822) 321 (780)
Depreciation and amortization 1,029 384 -- 1,413
Income tax provision 896 (7) -- 889
Purchases of property, plant and equipment 1,636 211 -- 1,847
Total property, plant and equipment, net 10,507 12,542 -- 23,049
Total assets 71,004 49,739 -- 120,743
NINE MONTHS ENDED SEPTEMBER 30, 1999:
Net sales $ 73,136 $ 44,123 $ (8,121) $ 109,138
Operating income (loss) 4,108 714 (877) 3,945
Interest income 1,232 263 (964) 531
Interest expense (873) (2,260) 964 (2,169)
Depreciation and amortization 2,788 1,476 -- 4,264
Income tax provision 1,210 (175) -- 1,035
Purchases of property, plant and equipment 1,146 1,016 -- 2,162
NINE MONTHS ENDED SEPTEMBER 30, 1998:
Net sales $ 56,159 $ 9,958 -- $ 66,117
Operating income (loss) 5,930 450 -- 6,380
Interest income 819 77 (321) 575
Interest expense (304) (822) 321 (805)
Depreciation and amortization 2,891 384 -- 3,275
Income tax provision 1,948 (7) -- 1,941
Purchases of property, plant and equipment 2,748 211 -- 2,959
</TABLE>
<PAGE>
7. SUBSEQUENT EVENT
On November 3, 1999, the Company entered into a full settlement with
Behringer Spezielle Studio-Technick Gmbh, a German corporation, Behringer
International GmbH, a German corporation, and Ulrich Bernard Behringer, the
defendants in the lawsuit filed in June 1997 alleging infringement of the
Company's intellectual property rights. The settlement did not have a
material impact on the Company's financial position, liquidity or results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following information 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 Quarterly Report on Form 10-Q 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 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 in those
countries have declined.
The Company's gross margins are 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 14.8% in 1997, 10.1% in 1998, and 4.8% in the first
nine months of 1999. The decrease in discounts is attributable to the lack of
discounts offered by RCF. Sales outside the U.S. represented approximately
38%, 44% and 48% of the Company's net sales in 1997, 1998, and the first nine
months of 1999, respectively. The increase in the net sales outside the U.S.
in 1998 and the first nine months of 1999 is primarily attributable to the
inclusion of sales by RCF, which the Company acquired in June 1998.
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 the Italian Lira,
some of the Company's international component suppliers have increased prices
and may further increase prices. The Company currently does not employ any
formal foreign exchange hedging strategies, but may do so in the future.
The Company's gross margins have fluctuated from time to time due primarily
to inefficiencies related to the introduction and manufacturing of new
products and inefficiencies associated with integrating new
<PAGE>
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.
In August 1999, the Company laid off a total of 52 employees from its
manufacturing facility in Woodinville, Washington. This layoff was done in an
effort to streamline the manufacturing operations and to help improve
operating margins moving forward.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1999 AS COMPARED WITH QUARTER ENDED SEPTEMBER 30,
1998
Net sales increased 29.5% to $39.6 million in the third quarter of 1999 from
$30.5 million in the third quarter of 1998. The increase was primarily
attributable to strong revenue growth in both the RCF and Mackie segments.
The Company shifted to a captive distribution model in Europe during the
first half of 1999 and is starting to see the positive impact of the shift.
The Mackie segment saw strong revenue growth over the third quarter of 1998
in connection with its expanded product offerings. Sales outside the U.S.
increased slightly to 48% of the Company's total net sales in the third
quarter of 1999 from 47% in the third quarter of 1998.
Gross margin decreased to 35.1% in the third quarter of 1999 from 39.2% in
the third quarter of 1998. This decrease was primarily due to costs related
to a shift in sales mix during the quarter compared to the third quarter of
1998 toward lower margin products and additional reserves taken for certain
component inventories.
Marketing and sales expenses increased to $5.7 million in the third quarter
of 1999 from $4.1 million in the corresponding period of 1998. The increase
was primarily attributable to volume related expenses over the prior year,
increased promotional expenses related to demo units as well as initial
launch expenses related to the Mackie Industrial Division. As a percentage of
net sales, marketing and sales expenses increased to 14.4% in the third
quarter of 1999 from 13.4% in the corresponding period of 1998. Mackie
Industrial is a new division of the company focusing on the installed sound
market in the U.S. This market encompasses installations in venues ranging in
size from small cafe's to commercial buildings to nationwide chains. RCF has
traditionally served the installed sound market in Europe and now Mackie
Industrial will enter the U.S. market giving the Company a worldwide presence
in this large segment.
Administrative expenses increased to $3.8 million for the third quarter of
1999 from $3.3 million for the corresponding period of 1998. The increase was
primarily attributable to higher legal expenses associated with the Behringer
lawsuit that was settled November 3, 1999, as well as charges related to
severance packages. As a percentage of net sales, these expenses were 9.7% in
the third quarter of 1999 compared with 10.9% in the corresponding period of
1998. The increase in sales revenue outpaced the growth in administrative
spending resulting in the lower percentage.
Research and development (R&D) expenses increased to $1.7 million in the
third quarter of 1999 from $1.4 million in the corresponding period of 1998.
This increase was primarily due to the increased volume of new product
development activity and introductions in 1999 over the same period in 1998.
As a percentage of net sales, these expenses decreased slightly to 4.2% in
the third quarter of 1999 from 4.5% in the corresponding period of 1998. The
increase in sales revenue outpaced the growth in R&D spending resulting in
the lower percentage.
<PAGE>
Interest income decreased to $168,000 in the third quarter of 1999 compared
with $234,000 in the third quarter of 1998 due to a decline in
available-for-sale securities during the corresponding periods. Interest
expense decreased to $677,000 in the third quarter of 1999 from $780,000 in
the corresponding period of 1998. The decrease was primarily attributable to
lower interest rates on the Italian debt as well as reductions in the RCF
acquisition debt from a $2 million dollar payment in July 1999.
Income tax expense for the third quarter of 1999 was $985,000 representing an
overall effective rate of 36.5% compared to $889,000 and 33.4% for the same
period of 1998. The increase in the effective tax rate was primarily
attributable to foreign operations.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AS COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales increased 65.1% to $109.1 million in the first nine months of 1999
from $66.1 million in the first nine months of 1998. The increase was
primarily attributable to the inclusion of nine months of RCF's sales in 1999
as opposed to three months in 1998 resulting in a net increase of $31.6
million. The Company also experienced strong revenue growth in both the
Mackie and RCF segments related to its revised distribution model and its
expanded product offerings. Sales outside the U.S. increased to 48% of the
Company's total net sales in the first nine months of 1999 from 37% in the
first nine months of 1998. This increase was due mainly to the inclusion of
sales by RCF for the full nine months of 1999. RCF's sales outside of the
U.S. comprised 95% of its total net sales for the first nine months of 1999.
Gross margin decreased to 34.8% in the first nine months of 1999 from 38.9%
in the first nine months of 1998. This decrease was primarily due to
infrastructure build-up in the manufacturing operations and increased initial
costs to produce many new products introduced in 1999. Secondary causes for
the decline included a shift in sales mix during the current period compared
to the prior year period toward lower margin products and additional
reserves taken for certain component inventories.
Marketing and sales expenses increased to $17.4 million in the first nine
months of 1999 from $9.4 million in the corresponding period of 1998. The
increase was primarily attributable to the inclusion of nine months of RCF's
marketing and sales expenses in 1999 compared with the inclusion of only
three months in 1998, for a net increase of $5.6 million. Higher sales
volumes along with the corresponding increases in variable expenses, such as
commissions, along with incremental costs associated with new product
rollouts, promotional expenses related to demo products and initial launch
expenses related to the new Mackie Industrial Division were also significant
contributing factors to the increase. As a percentage of net sales, marketing
and sales expenses increased to 16.0% in the first nine months of 1999 from
14.2% in the corresponding period of 1998.
Administrative expenses increased to $11.5 million for the first nine months
of 1999 from $6.6 million for the corresponding period of 1998. The increase
was primarily attributable to the inclusion of nine months of RCF's
administrative expenses in 1999 compared with the inclusion of only three
months in 1998, for a net increase of $4.2 million. Other contributing
factors included higher legal expenses associated with the Behringer lawsuit
that was settled November 3, 1999, as well as charges related to severance
packages. As a percentage of net sales, these expenses were 10.5% in the
first nine months of 1999 compared with 9.9% in the corresponding period of
1998. This increase is primarily due to the higher administrative expenses as
a percentage of sales incurred by RCF as well as the legal and severance
costs noted above.
Research and development expenses increased to $5.1 million in the first nine
months of 1999 from $3.4 million in the corresponding period of 1998. The
increase was primarily attributable to the inclusion of nine months of RCF's
R&D expenses in 1999 compared with the inclusion of only three months in
1998, for a net increase of $0.9 million. The increased volume of new product
development activity and
<PAGE>
introductions in 1999 over the same period in 1998 was also a contributing
factor. As a percentage of net sales, these expenses decreased to 4.7% in the
first nine months of 1999 from 5.2% in the corresponding period of 1998. The
significant increase in sales revenue outpaced the growth in R&D spending,
resulting in the lower percentage.
Interest income decreased to $531,000 in the first nine months of 1999
compared with $575,000 in the same period of 1998. The decrease was primarily
due to a decline in available-for-sale securities during the corresponding
periods. This decline was offset partially by a full nine months of cash
equivalent interest income from RCF compared with only three months in 1998.
Interest expense increased to $2.2 million in the first nine months of 1999
from $0.8 million in the corresponding period of 1998 primarily due to
borrowings related to the acquisition of RCF and to debt carried by RCF. 1999
included nine months of acquisition interest expense compared to only three
months in 1998.
Income tax expense for the first nine months of 1999 was $1,035,000
representing an overall effective tax rate of 41.4% compared to $1,941,000
and 31.4% for the same period of 1998. The increase in the effective tax rate
was primarily attributable to foreign operations.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1999, the Company's operating activities
generated cash of $3.6 million. Net cash generated by operating activities in
the first nine months of 1999 was primarily attributable to net income
adjusted for certain non-cash charges. Secondary causes included a decrease
in inventory related to higher sales volumes and an increase in accounts
payable related to timing of vendor payments, offset by increases in accounts
receivable. Net cash used in investing activities totaled $2.3 million in the
first nine months of 1999, due principally to purchases of equipment. Net
cash provided by financing activities in the first nine months of 1999 was
$2.6 million, due principally to proceeds from short-term borrowings offset
by payments on long-term debt and repurchases of Company stock. During this
period, the Company repurchased approximately 250,000 shares of its own stock
at a total cost of $1.3 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 $10.5 million was outstanding at
September 30, 1999. 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 on the loan
is payable monthly. Principal is payable on September 30 of each year
commencing September 30, 1999 in installments equal to 1/7 of the amount
borrowed. All outstanding principal and interest amounts are due on September
30, 2003. The agreement also provides a $5.0 million unsecured line of credit
to finance any unexpected working capital needs. The line of credit bears
interest at the same rate as the acquisition loan. The agreement also
provides a $2.5 million credit facility for capital equipment purchases or
general corporate purposes. Certain terms under this facility, such as
interest rate, repayment period and collateral, will be determined at the
time advances are made to the Company. The Company also has a $1.75 million
line of credit for the purchase of foreign exchange contracts. At September
30, 1999, $0.9 million was outstanding on the working capital line. There
were no outstanding balances on any of the other credit lines. These credit
facilities (excluding the acquisition loan) expire April 30, 2001. Under the
terms of the credit agreement, the Company must maintain certain financial
ratios and tangible net worth. The Company renegotiated these covenants with
the bank effective June 30, 1999 and was in compliance with all covenants at
September 30, 1999. 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 $10.0
million.
RCF has short-term credit facilities totaling approximately $23 million. At
September 30, 1999, there was approximately $15.7 million outstanding under
these facilities. The majority of these credit facilities are secured by
RCF's receivables. Interest rates on these credit facilities range from 3.5%
to 10.3%. RCF also has various long-term loans outstanding at September 30,
1999, totaling approximately $13.4
<PAGE>
million, which bear interest at rates from 3.1% to 8.8%. These loans, certain
of which are secured by specific assets of RCF, mature at varying dates up to
2007. RCF is subject to certain financial covenants on its long-term loans.
Compliance with covenants is measured annually against the year-end financial
statements. RCF was not in compliance with one of these covenants at December
31, 1998. Discussions between the bank and RCF have occurred but no official
waiver or covenant changes resulted. It is the Company's belief that the
loans will not be called; however, as a result of the non-compliance at
December 31, 1998, the loan balance of approximately $4.9 million has been
included in the current portion of long-term debt. The next compliance
measurement will be based on the December 31, 1999 financial statements. As
of September 30, 1999 RCF was in compliance with the covenant. There can be
no assurance however, that RCF will be in compliance at year-end.
INFLATION
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.
YEAR 2000 ISSUE
The "Year 2000" or "Y2K" issue refers to the potential risks associated with
the fact that many existing computer programs use only the last two digits in
reference to a year. When the year changes from 1999 to 2000 these programs
may not be able to distinguish whether the year begins with 19 or with 20.
This could result in a system failure or miscalculations causing disruptions
of operations. The following analysis addresses the Y2K issue at the
Company's locations in Woodinville, Washington (referred to as
"Mackie-Woodinville") and in Italy (referred to as "RCF").
INFORMATION SYSTEM
Enterprise Resource Planning (ERP) systems at Mackie Woodinville require a
minor patch in the General Ledger module for Y2K compliance. Installation of
the patch is scheduled for mid November 1999. ERP systems at RCF are Y2K
ready.
VENDORS.
Mackie-Woodinville has undergone a process to evaluate the Y2K preparedness
of its critical vendors. Any of these vendors who are in the process of
completing their Y2K preparations will be monitored quarterly for progress.
Mackie-Woodinville has a plan in place 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 in place at Mackie-Woodinville to ensure
that critical customers will be compliant. Of the customers who are not
already Y2K compliant, those preparing for Y2K compliance will be monitored
quarterly.
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 products using microprocessors or other digital-based technology have
been reviewed and found to be Y2K compliant. All other products are
manufactured without a microprocessor or other digital-based
<PAGE>
technology and, therefore, are not affected by the Y2K issue.
RISKS
The Company's primary Y2K risk is felt to be in the potential failure of key
vendors to achieve Y2K compliance. Risks regarding issues that are directly
within the Company's control are considered to be low. External influences
are being managed by the Company in an effort to minimize any potential
impact on the business.
CONTINGENCY PLANS
The Company believes that any possible disruption due to Y2K issues will be
minor and addressed through the use of internal resources.
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
European business systems are being forced to handle currencies in a new way
with the introduction of the Euro. RCF's computer system does not support the
Euro, and reprogramming the system is not an economically viable option.
Although the date for mandatory Euro compliance is January 1, 2002, it is
believed that the existing system could only be utilized until mid-2001 after
which time the effort to run a non-compliant system will be prohibitively
high. There is currently a project in place to replace all ERP's within
Mackie to centralize on a single system worldwide. This system will be Euro
compliant and is scheduled to be in place in Italy prior to mid-2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company did not have any derivative financial instruments as of September
30, 1999. 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 available-for-sale 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. Sales and expenses incurred by
foreign
<PAGE>
subsidiaries are denominated in the subsidiary's local currency and
translated into U.S. Dollar amounts at average rates during the period. To
date, fluctuations in foreign currency exchange rates have not significantly
impacted the Company's profitability.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Through the quarter ended September 30, 1999, the Company continued to
maintain a lawsuit filed in June 1997 alleging infringement of its
intellectual property rights against defendants Behringer Spezielle
Studio-Technick Gmbh, a German corporation, Behringer International GmbH, a
German corporation, and Ulrich Bernard Behringer. See Item 5 of Part II for
subsequent events to this litigation.
The Company is 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 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
On November 3, 1999, the Company entered into a full settlement with
Behringer Spezielle Studio-Technick Gmbh, a German corporation, Behringer
International GmbH, a German corporation, and Ulrich Bernard Behringer, the
defendants in the lawsuit filed in June 1997 alleging infringement of the
Company's intellectual property rights. The settlement did not have a
material impact on the Company's financial position, liquidity or results
of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
*27 Financial Data Schedule
</TABLE>
*FILED HEREWITH
(b) REPORTS ON FORM 8-K
The Company filed the following current report on Form 8-K under Item
4: Changes in Registrant's Certifying Accountant.
<TABLE>
<CAPTION>
Form Date of Filing Date of Report Topic
---- -------------- -------------- -----
<S> <C> <C> <C>
<PAGE>
8-K August 16, 1999 August 12, 1999 Appointment of New Certifying
Accountant.
</TABLE>
<PAGE>
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: November 15, 1999 By: /s/ William A. Garrard
------------------------------------
William A. Garrard
VICE PRESIDENT, FINANCE AND CHIEF
FINANCIAL OFFICER
(Principal Financial and Accounting
Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,596,128
<SECURITIES> 6,491,503
<RECEIVABLES> 34,435,265
<ALLOWANCES> (1,599,680)
<INVENTORY> 36,244,554
<CURRENT-ASSETS> 83,074,046
<PP&E> 36,158,543
<DEPRECIATION> (14,241,072)
<TOTAL-ASSETS> 118,877,898
<CURRENT-LIABILITIES> 47,998,769
<BONDS> 16,661,693
0
0
<COMMON> 25,802,401
<OTHER-SE> 23,505,394
<TOTAL-LIABILITY-AND-EQUITY> 118,877,898
<SALES> 109,137,878
<TOTAL-REVENUES> 109,137,878
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<OTHER-EXPENSES> 34,045,689
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<INCOME-PRETAX> 2,499,719
<INCOME-TAX> (1,034,866)
<INCOME-CONTINUING> 1,464,853
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<NET-INCOME> 1,464,853
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