<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(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, 2000
-------------------------------------------------
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)
WASHINGTON 91-1432133
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16220 WOOD-RED ROAD, N.E., WOODINVILLE, WASHINGTON 98072
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(425) 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.
Common Stock, no par value 12,372,358
-------------------------- ----------
Class Number of Shares
Outstanding
(as of November 1, 2000)
<PAGE>
MACKIE DESIGNS INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - September 30, 2000 and
December 31, 1999
Condensed consolidated statements of income - Three and nine
months ended September 30, 2000 and 1999
Condensed consolidated statements of cash flows - Nine months
ended September 30, 2000 and 1999
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
EXHIBITS
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MACKIE DESIGNS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,105,971 $ 4,629,234
Available-for-sale securities 991,665 6,328,146
Accounts receivable, net 40,464,540 31,679,300
Inventories 61,760,025 39,678,922
Prepaid expenses and other current assets 2,341,651 1,832,411
Deferred income taxes 3,488,686 2,488,666
-------------- --------------
Total current assets 113,152,538 86,636,679
Property, plant and equipment, net 22,100,559 20,501,755
Bonds 3,473,948 3,902,473
Other assets, net 1,363,902 2,491,247
Intangible assets, net 24,272,813 7,321,725
-------------- --------------
Total assets $ 164,363,760 $ 120,853,879
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 27,752,890 $ 16,009,408
Accounts payable 23,795,424 16,142,548
Accrued expenses 9,726,639 8,257,304
Income taxes payable 2,191,222 2,009,952
Current portion of long-term debt 7,014,767 6,959,779
-------------- --------------
Total current liabilities 70,480,942 49,378,991
Long-term debt, excluding current portion 29,655,194 15,664,662
Employee and other liabilities 3,485,109 3,778,149
Deferred income taxes 4,601,749 1,725,095
Other deferred items 185,249 --
Shareholders' equity:
Common stock 27,570,456 25,802,401
Retained earnings 31,248,963 25,658,852
Accumulated other comprehensive loss (2,863,902) (1,154,271)
-------------- --------------
Total shareholders' equity 55,955,517 50,306,982
-------------- --------------
Total liabilities and shareholders' equity $ 164,363,760 $ 120,853,879
============== ==============
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
MACKIE DESIGNS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 50,878,722 $ 40,344,334 $ 151,486,676 $ 111,224,105
Cost of goods sold 32,610,830 25,681,287 95,340,542 71,147,135
-------------- -------------- -------------- --------------
Gross profit 18,267,892 14,663,047 56,146,134 40,076,970
Operating expenses:
Selling, general and administrative 12,813,318 10,180,035 36,688,532 30,563,733
Research and development 2,033,058 1,669,551 6,746,073 5,147,518
-------------- -------------- -------------- --------------
Total operating expenses 14,846,376 11,849,586 43,434,605 35,711,251
-------------- -------------- -------------- --------------
Operating income 3,421,516 2,813,461 12,711,529 4,365,719
Interest income 98,442 168,276 441,300 530,898
Interest expense (1,238,379) (677,079) (2,990,615) (2,169,273)
Other income (expense), net (830,079) 525,635 (866,709) 193,040
-------------- -------------- -------------- --------------
Income before income taxes 1,451,500 2,830,293 9,295,505 2,920,384
Income taxes 526,433 1,117,279 3,705,394 1,455,531
-------------- -------------- -------------- --------------
Net income $ 925,067 $ 1,713,014 $ 5,590,111 $ 1,464,853
============== ============== ============== ==============
Basic net income per share $ 0.08 $ 0.14 $ 0.46 $ 0.12
============== ============== ============== ==============
Diluted net income per share $ 0.07 $ 0.14 $ 0.44 $ 0.12
============== ============== ============== ==============
Basic weighted average shares outstanding
12,229,601 12,177,615 12,157,129 12,251,116
============== ============== ============== ==============
Diluted weighted average shares outstanding
13,100,851 12,177,615 12,779,985 12,315,799
============== ============== ============== ==============
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
MACKIE DESIGNS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,590,111 $ 1,464,853
Adjustments to reconcile net income to net cash provided / (used) by
operating activities:
Depreciation and amortization 5,643,224 4,264,237
Deferred stock compensation 299,500 --
Deferred income taxes (842,397) (356,788)
Changes in operating assets and liabilities net of EAW acquisition:
Accounts receivable (5,770,756) (3,808,135)
Inventories (17,871,226) 1,814,508
Prepaid expenses and other current assets 441,900 (215,132)
Other assets 850,716 (819,225)
Accounts payable and accrued expenses 5,708,608 1,913,941
Income taxes payable 404,759 (279,117)
Other long term liabilities 661,039 (321,876)
------------ ------------
Cash provided / (used) by operating activities (4,884,522) 3,657,266
INVESTING ACTIVITIES
Acquisition of business, net of cash acquired (19,894,937) --
Purchases of available-for-sale securities (2,358,160) (6,090,443)
Proceeds from maturities of available-for-sale securities 7,702,543 5,945,000
Purchases of property, plant and equipment (4,619,729) (2,162,261)
------------ ------------
Cash used by investing activities (19,170,283) (2,307,704)
FINANCING ACTIVITIES
Proceeds from long-term debt 18,135,370 720,001
Payments on long-term debt (4,994,802) (2,642,914)
Net proceeds on bank line of credit and short-term borrowings 9,852,210 5,844,868
Repurchase and retirement of common stock -- (1,308,249)
Proceeds from the exercise of stock options 1,468,530 8,325
------------ ------------
Cash provided by financing activities 24,461,308 2,622,031
Effect of exchange rate changes on cash (929,766) (499,076)
------------ ------------
Increase / (decrease) in cash and cash equivalents (523,263) 3,472,517
Cash and cash equivalents at beginning of period 4,629,234 123,611
------------ ------------
Cash and cash equivalents at end of period $ 4,105,971 $ 3,596,128
============ ============
SUPPLEMENTAL DISCLOSURES
Cash paid for income taxes $ 3,476,042 $ 1,132,815
============ ============
Cash paid for interest $ 2,613,846 $ 1,970,318
============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
MACKIE DESIGNS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(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, 1999 included
in the Company's Form 10-K filed with the Securities and Exchange Commission.
2. ACQUISITION
In April 2000, the Company acquired 100% of the capital stock of Eastern
Acoustic Works, Inc. (EAW). EAW is a manufacturer of audio speakers based in
Whitinsville, Massachusetts. The acquisition was accounted for under the
purchase method of accounting. The aggregate purchase price, plus related
acquisition costs, was approximately $19.6 million. The excess of the purchase
price over the fair value of net tangible assets acquired approximating $18.7
million is included in intangible assets. A total of $8.2 million of the
purchase consideration was specifically allocated to identifiable intangible
assets, including developed technology ($5.2 million), assembled workforce ($1.6
million), and trademark ($1.4 million). The remaining $10.5 million is Goodwill.
Goodwill, developed technology and trademark are being amortized on the straight
line method over 20 years, while the assembled workforce is being amortized on
the straight line method over 5 years. The Company is still refining its
purchase price allocation and there could be some adjustments in the future. The
results of EAW have been included in the Company's consolidated results of
operations from the date of acquisition.
The following table presents unaudited pro forma consolidated financial
information for the nine-month periods ended September 30, 2000 and 1999 as if
the acquisition of EAW had occurred on January 1 of those years:
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE DATA NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
----------------------------------------
<S> <C> <C>
Revenue $ 161,103 $ 140,791
Net income $ 5,039 $ 654
Diluted net income per share $ 0.39 $ 0.05
</TABLE>
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.
6
<PAGE>
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Raw materials $ 27,635,940 $ 16,499,299
Work in process 6,501,999 4,845,789
Finished goods 27,622,086 18,333,834
------------ ------------
$ 61,760,025 $ 39,678,922
============ ============
</TABLE>
4. NET INCOME 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 potential dilutive common shares outstanding, consisting of stock
options using the treasury stock method. The denominators of the diluted net
income per share calculations exclude the effect of unexercised stock options
representing the potential rights to 135,000 and 3,138,550 shares for the third
quarters of 2000 and 1999, respectively, as well as 773,925 and 3,146,550 shares
for the first nine months of 2000 and 1999, 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 2000 and 1999.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted net income per
share - net income $ 925,067 $ 1,713,014 $ 5,590,111 $ 1,464,853
------------ ------------ ------------ ------------
Denominator:
Denominator for basic net income per share -
weighted average common shares 12,229,601 12,177,615 12,157,129 12,251,116
Effect of dilutive securities:
Stock options 871,250 -- 622,856 64,683
------------ ------------ ------------ ------------
Denominator for diluted net income per share 13,100,851 12,177,615 12,779,985 12,315,799
------------ ------------ ------------ ------------
Basic net income per share $ 0.08 $ 0.14 $ 0.46 $ 0.12
============ ============ ============ ============
Diluted net income per share $ 0.07 $ 0.14 $ 0.44 $ 0.12
============ ============ ============ ============
</TABLE>
5. COMPREHENSIVE INCOME
7
<PAGE>
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
other comprehensive income (loss) components 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
loss (specifically, accumulated foreign currency translation adjustments and
unrealized gain (loss) 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,
2000 and 1999, is detailed below:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 925,067 $ 1,713,014 $ 5,590,111 $ 1,464,853
Other comprehensive income (loss):
Foreign currency translation adjustments (895,001) 81,112 (1,717,111) (422,233)
Unrealized gain (loss) on available-
for-sale securities 3,669 4,648 7,480 (3,948)
------------ ------------ ------------ ------------
Comprehensive income $ 33,735 $ 1,798,774 $ 3,880,480 $ 1,038,672
============ ============ ============ ============
</TABLE>
8
<PAGE>
6. SEGMENT INFORMATION
The Company identifies its business segments based on management responsibility
using a combination of products and geographic factors. The Company has three
reportable segments: Mackie Designs Inc., its Italian subsidiary, Radio Cine
Forniture (RCF) S.p.A. ("RCF"), and its U.S. subsidiary, Eastern Acoustic Works,
Inc. ("EAW"). The Mackie segment offers audio mixers and other professional
audio equipment. The RCF segment offers loudspeakers, loudspeaker components and
Mackie product offerings through its subsidiaries. The EAW segment, acquired in
April 2000, offers loudspeakers targeted at the high-end of the installed and
touring sound markets. A summary of key financial data by segment is as follows:
<TABLE>
<CAPTION>
Elimination of
intercompany
Mackie RCF EAW amounts Total
----------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 2000:
Net sales, to external customers $ 26,978 $ 14,757 $ 9,144 $ -- $ 50,879
Net sales, intersegment 2,874 2,343 666 (5,883) --
Operating income / (loss) 3,435 469 (23) (459) 3,422
Interest income 723 100 -- (725) 98
Interest expense (667) (870) (426) 725 (1,238)
Depreciation and amortization 817 392 543 -- 1,752
Income taxes 1,003 (328) (149) -- 526
Purchases of property, plant
& equipment 1,389 491 150 -- 2,030
Total property, plant & equipment, net 8,642 10,140 3,319 -- 22,101
Total assets 114,679 76,025 6,461 (32,801) 164,364
THREE MONTHS ENDED SEPTEMBER 30, 1999:
Net sales, to external customers $ 25,368 $ 14,976 $ -- $ -- $ 40,344
Net sales, intersegment 1,962 1,245 -- (3,207) --
Operating income 2,261 912 -- (360) 2,813
Interest income 409 80 -- (321) 168
Interest expense (222) (776) -- 321 (677)
Depreciation and amortization 894 498 -- -- 1,392
Income taxes 525 592 -- -- 1,117
Purchases of property, plant
& equipment 687 -- -- 687
Total property, plant & equipment, net 9,322 12,595 -- -- 21,917
Total assets 60,914 67,244 -- (9,280) 118,878
9
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000:
Net sales to external customers $ 80,813 $ 50,226 $ 20,448 $ -- $ 151,487
Net sales, intersegment 9,941 7,686 1,233 (18,860) --
Operating income / (loss) 10,853 3,562 (159) (1,544) 12,712
Interest income 1,909 271 -- (1,739) 441
Interest expense (1,225) (2,460) (1,045) 1,739 (2,991)
Depreciation and amortization 3,080 1,525 1,038 -- 5,643
Income taxes 3,013 1,195 (503) -- 3,705
Purchases of property, plant
& equipment 2,987 1,141 492 -- 4,620
NINE MONTHS ENDED SEPTEMBER 30, 1999:
Net sales to external customers $ 68,473 $ 42,751 $ -- $ -- $ 111,224
Net sales, intersegment 5,579 2,542 -- (8,121) --
Operating income 4,407 710 -- (751) 4,366
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 taxes 1,210 246 -- -- 1,456
Purchases of property, plant
& equipment 1,146 1,016 -- -- 2,162
</TABLE>
7. CONTINGENCY
EAW has subrogated claims asserted against it from insurance companies who paid
claims made by EAW's landlord and other tenants in the building who were
affected by a fire started by a loaned employee in a portion of the building
occupied by EAW in 1996. The insurance company for the landlord alleges that EAW
is liable for up to $2.1 million for damages to the building. The Company
believes that these losses are not attributable to it under Massachusetts law.
The Company is vigorously defending these claims. The claims of the other
tenants have been covered by EAW's insurance carrier. The ultimate resolution of
this matter is not known at this time. No provision has been made in the
Company's consolidated financial statements related to these claims. Should EAW
be found liable for the claims, the obligation would result in an adjustment to
the allocation of the purchase price for EAW when it was acquired by the Company
in April 2000.
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
10
<PAGE>
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 and EAW, the assessment of the Company's Euro compliance
exposures and completion of remediation efforts, and any other guidance on
future periods are forward-looking statements. The following discussions
describe some, but not all, of the factors that could cause the actual results
to differ materially from the forward-looking statements including, among
others, the following: international, national and local general economic and
market conditions; the size and growth of the professional audio equipment
market; competition with other marketers, distributors and sellers of
professional audio equipment; the Company's ability to develop and introduce new
products; the Company's ability to sustain, manage or forecast its growth and
inventories; the Company's ability to integrate the operations of companies
acquired; the Company's ability to secure and protect trademarks, patents, and
other intellectual property; the performance and reliability of the Company's
products; customer service; the loss of significant customers or suppliers;
dependence on distributors; management of increased costs of freight and
transportation; the Company's ability to meet delivery deadlines; general risks
associated with doing business in foreign countries, including, without
limitation, import duties, tariffs, foreign currency fluctuations, political and
economic instability; changes in government regulations; its ability to attract
and retain qualified employees; liability and other claims asserted against the
Company; and other factors referenced or incorporated by reference in this
report and other reports. The risks included here are not exhaustive. The
Company operates in a very competitive environment and new risk factors may
emerge from time to time. It is not possible for management to predict all such
risk factors, nor can it assess the impact of all such risk factors on the
Company's business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any
forward-looking statements. Given these risks and uncertainties, investors
should not place undue reliance on forward-looking statements as a prediction of
actual results.
The Company derives its operating revenue from worldwide sales of 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 originating from the United States 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 have been lower than those sold
in the U.S. due to discounts offered to its international distributors. Neither
RCF nor EAW offer discounts to their distributors. The discounts offered by
Mackie are given because the international distributors typically incur 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 4.6% in the first nine months of 2000 and 4.8% for the
corresponding period in 1999. Sales outside the U.S. remained unchanged at 48.0%
of the Company's total net sales in the first nine months of 2000 and 1999.
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's gross margin was affected in the second quarter of 2000 by a
one-time write-up to inventory in EAW related to the acquisition. Purchase
accounting required an adjustment to opening inventory in EAW. The Company
recorded a $0.5 million write up to inventory, all of which was recognized as
cost of sales the second quarter of 2000.
11
<PAGE>
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2000 AS COMPARED WITH QUARTER ENDED SEPTEMBER 30,
1999
Net sales increased 26.3% to $50.9 million in the third quarter of 2000 from
$40.3 million in the third quarter of 1999. Of the $10.6 million increase, $9.4
million was attributable to the addition of EAW. New product offerings in the
mixer product families as well as the speaker product family accounted for an
additional $5.0 million of the growth. These increases were partially offset by
an unfavorable foreign exchange effect of $2.0 million and lower sales in the
digital market of $1.0 million. Sales outside the U.S. decreased to 45.2% of the
Company's total net sales in the third quarter of 2000 from 48.0% in the third
quarter of 1999. The decrease was due mainly to the inclusion of sales by EAW
whose sales outside of the U.S. comprised only 34.0% of its total net sales for
the third quarter of 2000.
Gross margin decreased slightly to 35.9% in the third quarter of 2000 from 36.3%
in the third quarter of 1999. This decline was primarily due to an unfavorable
foreign exchange effect on gross margin of approximately 1.8%, offset partially
by improved margins in the digital, speaker and mixer product families. Some of
these products were introduced in 1999 and the Company has begun to realize
efficiencies as it improves its manufacturing processes. Gross profit increased
to $18.3 million in the third quarter of 2000 from $14.7 million in the
corresponding period of 1999 for the same reasons affecting net sales noted
above.
Selling, general and administrative expense increased to $12.8 million in the
third quarter of 2000 from $10.2 million in the corresponding period of 1999. Of
the $2.6 million increase, $3.1 million is attributable to the inclusion of EAW
offset partially by a $0.6 million favorable impact of foreign exchange. As a
percentage of net sales, selling, general and administrative expenses were
unchanged at 25.2% for both quarterly periods.
Research and development expense increased to $2.0 million in the third quarter
of 2000 from $1.7 million in the corresponding period of 1999. Of the $0.3
million increase, $0.8 million is attributable to the inclusion of EAW offset
partially by lower spending at RCF. As a percentage of net sales, these expenses
decreased slightly to 4.0% in the third quarter of 2000 from 4.1% in the
corresponding period of 1999.
Interest income decreased to $0.1 million in the third quarter of 2000 compared
with $0.2 million in the third quarter of 1999 due to a decrease in invested
cash during the corresponding periods. Interest expense increased to $1.2
million in the third quarter of 2000 from $0.7 million in the corresponding
period of 1999. The increase was primarily attributable to the increase in
borrowings due to the purchase of EAW, increased short-term borrowing to fund
working capital needs and generally higher overall borrowing rates.
Other income (expense), net increased to ($0.8) million in the third quarter of
2000 compared with $0.5 million in the third quarter of 1999 due primarily to
the impact of foreign exchange on the revaluation of accounts payable and
accounts receivable balances. The Company currently does not employ any formal
foreign exchange hedging programs, but may do so in the future.
Income tax expense for the third quarter of 2000 was $0.5 million representing
an overall effective rate of 36.3% compared to a tax of $1.1 million and 39.5%
for the same period of 1999. The decrease in the effective tax rate was
primarily attributable to foreign operations.
12
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 AS COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1999
Net sales increased 36.2% to $151.5 million in the first nine months of 2000
from $111.2 million in the first nine months of 1999. Of the $40.3 million
increase, $21.0 million was attributable to the addition of EAW. New product
offerings in the mixer and speaker product families accounted for an additional
$19.5 million of the growth. These increases were partially offset by an
unfavorable foreign exchange effect of $6.9 million. Sales outside the U.S.
remained unchanged at 48.0% of the Company's total net sales in the first nine
months of 2000 and 1999.
Gross margin increased to 37.1% in the first nine months of 2000 from 36.0% in
the first nine months of 1999. This increase was primarily due to higher margins
in the digital, mixer, and speaker product families. Some of these products were
introduced in 1999 and the Company has begun to realize efficiencies as it
improves its manufacturing processes. These increases were partially offset by
an unfavorable impact of foreign exchange of approximately 2.3%. Gross profit
increased to $56.1 million in the first nine months of 2000 from $40.1 million
in the corresponding period of 1999 for the same reasons affecting net sales
noted above.
Selling, general and administrative expense increased to $36.7 million in the
first nine months of 2000 from $30.6 million in the corresponding period of
1999. Of the $6.1 million increase, $6.8 million is attributable to the
inclusion of EAW offset partially by a $1.9 million favorable impact of foreign
exchange. As a percentage of net sales, selling, general and administrative
expenses decreased to 24.2% in the first nine months of 2000 from 27.5% in the
corresponding period of 1999. The decline in the percentage is primarily
attributable to higher sales growth in relation to the relatively fixed nature
of selling, general and administrative expense.
Research and development expense increased to $6.7 million in the first nine
months of 2000 from $5.1 million in the corresponding period of 1999. Of the
$1.6 million increase, $1.5 million is attributable to the inclusion of EAW. As
a percentage of net sales, these expenses decreased slightly to 4.5% in the
first nine months of 2000 from 4.6% in the corresponding period of 1999.
Interest income decreased to $0.4 million in the first nine months of 2000
compared with $0.5 million in the first nine months of 1999 due to a decrease in
invested cash during the corresponding periods. Interest expense increased to
$3.0 million in the first nine months of 2000 from $2.2 million in the
corresponding period of 1999. The increase was primarily attributable to the
increase in borrowings due to the purchase of EAW, increased short-term
borrowing to fund working capital needs and generally higher overall borrowing
rates.
Other income (expense), net increased to ($0.9) million in the first nine months
of 2000 compared with $0.2 million in the corresponding period of 1999 due
primarily to the impact of foreign exchange on the revaluation of accounts
payable and accounts receivable balances. The Company currently does not employ
any formal foreign exchange hedging programs, but may do so in the future.
Income tax expense for the first nine months of 2000 was $3.7 million
representing an overall effective rate of 39.9% compared to a tax expense of
$1.5 million and an effective tax rate of 49.8% for the same period of 1999. The
Company incurred significant tax expense compared to pre-tax income for the
first nine months of 1999 due to its inability to take income tax benefits for
losses incurred by certain subsidiaries of RCF and because certain taxes in
Italy are not based solely on pre-tax income.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used $4.9 million in cash during the first
nine months of 2000 due primarily to increases in inventory and accounts
receivable offset partially by net income and increases in accounts payable and
accrued expenses. Net cash used by investing activities totaled $19.2 million in
the first nine months of 2000, due to the purchase of EAW and acquisitions of
property, plant and equipment offset partially by maturities in excess of new
purchases of available-for-sale securities. Net cash provided by financing
activities in the first nine months of 2000 was $24.5 million, due principally
to proceeds from long-term debt, net proceeds from short-term borrowings and
proceeds from exercises of stock options offset partially by payments on
long-term debt.
In June 1998, the Company entered into a credit agreement with a bank to provide
certain credit facilities to the Company, including a $12.8 million loan for the
acquisition of RCF of which $10.5 million was outstanding at September 30, 2000.
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 in installments equal to 1/7
of the amount borrowed. All outstanding principal and interest amounts are due
on September 30, 2003.
In April 2000, the Company borrowed long-term debt of $19.0 million in
connection with the acquisition of EAW (see Note 2 of Notes to Condensed
Consolidated Financial Statements and Form 8-K filed April 21, 2000). The
Company also paid off approximately $5.8 million of EAW's existing debt. Funding
for this pay down came from cash and investments. The loan, which is an
amendment to the June 1998 credit agreement, is also 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 March 31 of each year
beginning in 2001 in installments equal to 1/7 of the amount borrowed. All
outstanding principal and interest amounts are due on September 30, 2003.
In September 2000, the Company restructured its U.S. line of credit. The new
line provides up to $15.0 million of short-term borrowing subject to certain
limitations. These limitations reduced the maximum allowable borrowing to
$11.5 million as of September 30, 2000. This line of credit, which is an
amendment to the June 1998 credit agreement, is secured by all of the
Company's U.S. based assets. At September 30, 2000, there was $6.6 million
outstanding on the line of credit, as well as a $1.5 million guarantee on
debt of RCF, leaving an available balance on the line of $3.3 million. This
credit facility expires April 30, 2002.
Under the terms of the June 1998 credit agreement and all related amendments,
the Company must maintain certain financial ratios and tangible net worth. The
agreements also provide, among other matters, restrictions on additional
financing, dividends, mergers, acquisitions, and an annual capital expenditure
limit of $15.0 million. The Company was in compliance with all covenants at
September 30, 2000.
RCF also has agreements with several banks in Italy that provide short-term
credit facilities totaling approximately $17.1 million. At September 30, 2000,
there was approximately $14.3 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 4.8% to 12.6%.
RCF also has various long-term loans outstanding at September 30, 2000, totaling
approximately $7.0 million, which bear interest at rates from .9% to 8.8%. These
loans, certain of which are secured by specific assets of RCF, mature at varying
dates up to 2007.
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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.
EURO CONVERSION
European business systems are being forced to handle currencies in a new way
with the introduction of the Euro. RCF's existing 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 can be utilized until early in the fourth
quarter 2001 after which time the transition to the new system would need to
begin. The Company has acquired an Oracle based software system and is in the
process of purchasing the computer hardware to run a single system for all
worldwide operations. Implementation procedures related to the system have
begun. This system will be Euro compliant and is scheduled to be in place in
Italy prior to the fourth quarter 2001. The cost of this system is preliminarily
estimated to be in the range of $6.0 to $7.0 million dollars.
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, 2000. SFAS No. 133, as
amended, requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. The Company does not expect that the adoption of
SFAS No. 133 will have a material impact on its consolidated financial
statements because the Company does not currently hold any derivative
instruments.
In June 2000, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101B. SAB 101B delays the effective date of SAB
101, "Revenue Recognition in Financial Statements," until no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999. SAB 101
provides guidance on revenue recognition and the SEC staff's views on the
application of accounting principles to selected revenue recognition issues. The
Company does not expect that the adoption of SAB 101 will have a material impact
on its consolidated financial statements.
In September 2000, the Emerging Issues Task Force (EITF) reached consensus on
Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs." Issue
No. 00-10 deals with the accounting for income billed and costs related to
shipping and handling charges on processing and delivery of customer orders.
Historically, accounting for these elements varied significantly from company
to company. Application of 00-10 is required no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. The EITF concluded
that amounts directly billed to customers for shipping and handling should be
classified as revenue and that the related costs to provide such services may
be classified as cost of sales. The Company currently nets these elements as
selling, general and administrative (SG&A) expense and plans to record
amounts directly billed as revenue and costs to provide such services as cost
of sales in the future. Application of Issue No. 00-10 will cause
restatements of net sales, cost of sales and SG&A expense.
The following restatements would occur upon application of Issue No. 00-10 for
the three and nine-month periods ended September 30, 2000 and 1999. Net sales
would increase $2.0 million to $153.5 million for the first nine months of 2000
and $2.0 million to $113.3 million for the corresponding period in 1999. Net
sales would increase $0.6 million to $51.4 million for the third quarter of 2000
and $0.6 million to $41.0 million for the corresponding period in 1999. Cost of
sales would increase $2.7 million to $98.1 million for the first nine months of
2000 and $4.1 million to $75.3 million for the corresponding period in 1999.
Cost of sales would increase $1.1 million to $33.7 million for the third quarter
of 2000 and $1.4 million to $27.1 million for the corresponding period in 1999.
SG&A expense would decrease $0.7 million to $36.0 million for the first nine
months of 2000 and $2.1 million to $28.5 million for the
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corresponding period in 1999. SG&A expense would decrease $0.5 million to $12.3
million for the third quarter of 2000 and $0.8 million to $9.4 million for the
corresponding period in 1999.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 (FIN 44), "Accounting for Certain Transactions involving Stock
Compensation." FIN 44 clarifies the application of Accounting Principles Board
Opinion No. 25 (APB 25) and was effective July 1, 2000. FIN 44 clarifies the
definition of "employee" for purposes of applying APB 25, the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. The adoption of FIN 44 did not have a material impact
on the Company's consolidated financial statements.
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, 2000. However, the Company is exposed to interest rate risk. The Company's
interest income and expense are most sensitive to changes in the general level
of U.S. and European interest rates. In this regard, changes in U.S. and
European interest rates affect the interest earned on the Company's cash
equivalents and available-for-sale securities as well as interest paid on debt.
At September 30, 2000, the Company had cash and cash equivalents and
available-for-sale securities of $5.1 million and short-term borrowings of $27.8
million, all subject to variable short-term interest rates. A hypothetical
change in the interest rate of 10% (for example from 8% to 8.8%) would not have
a material effect on the Company's earnings for the nine month period ended
September 30, 2000.
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 changes in the interest rates to have a
material adverse effect on the Company's results of operations.
FOREIGN CURRENCY RISK
The Company operates foreign subsidiaries in Canada, Italy, the United Kingdom,
Germany, France, the Netherlands, China and the Czech Republic. The Company's
business and financial condition are, therefore, sensitive to currency exchange
rates or any other restrictions imposed on their currencies. Sales and expenses
incurred by foreign subsidiaries are denominated in the subsidiary's local
currency and translated into U.S. Dollar amounts at average rates during the
period. The Company does not employ any derivative based hedging strategies,
however, it has a significant natural hedge in the form of Italian based
manufacturing and European based operating, interest and tax expenses.
Foreign exchange rate sensitivity analysis can be quantified by estimating the
impact on the Company's earnings as a result of hypothetical changes in the
value of the U.S. Dollar, the Company's functional currency, relative to the
other currencies in which the Company transacts business. All other things being
equal, an average 10% increase in the value of the U.S. Dollar, throughout the
nine month period ended September 30, 2000, would have had the effect of
reducing net income approximately $0.7 million.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
There have been no material changes from the information previously reported
under Item 1 of Part II of the Company's Form 10-Q filed on August 14, 2000.
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
EXHIBIT NO. DESCRIPTION
*27 Financial Data Schedule
*FILED HEREWITH
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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 14, 2000 By: /s/ William A. Garrard
-----------------------------------
William A. Garrard
VICE PRESIDENT, FINANCE AND CHIEF
FINANCIAL OFFICER
(Principal Financial and Accounting
Officer)
18
