UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
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For
the fiscal year ended December 31,
2000 |
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or |
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| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] |
For the transition period from __________to __________
Commission File Number: 0-26524
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MACKIE DESIGNS INC.
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| (Exact name of registrant as specified in its charter) |
| Washington | 91-1432133 |
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 16220 Wood-Red Road, N.E., Woodinville, Washington | 98072 |
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(Address of principal executive offices) |
(Zip Code) |
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(425) 487-4333
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| (Registrant's telephone number, including area code) | |
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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| None | None |
Securities registered pursuant to Section 12(g) of the Act:
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Common Stock - no par value
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| (Title of each class) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
As of March 7, 2001, the aggregate market value of the Registrant’s Common Stock held by nonaffiliates of the Registrant was $14,383,617 based on the closing sales price of the Registrant’s Common Stock on the Nasdaq National Market. On that date, there were 12,372,358 shares of Common Stock outstanding.
Portions of
the Registrant’s definitive Proxy Statement for its 2001 Annual Meeting of
Shareholders are incorporated by reference into Part III hereof.
MACKIE DESIGNS INC.
FORM 10-K
For the Year Ended December 31, 2000
INDEX
Introduction
Mackie Designs Inc. (“Mackie” or the “Company”) develops, manufactures, sells and supports high–quality, professional audio equipment. The Company’s products are used in a wide variety of sound applications including home and commercial recording studios, multimedia and video production, compact disc, read-only memory (“CD-ROM”) authoring, live performances, and public address systems. The Company offers a range of products at suggested retail prices of up to $14,000. The Company distributes its products in the U.S. through a network of independent representatives to over 1,500 retail dealers of professional audio equipment as well as over 500 installed sound contractors. Internationally, products are offered through subsidiaries in Italy, France, Germany, the United Kingdom and China and through local distributors in 70 other countries where the Company does not have direct operations.
In June 1998, the Company purchased Radio Cine Forniture (R.C.F.) S.p.A. (“RCF”), an Italian corporation with principal offices in Reggio Emilia, Italy, and manufacturing facilities located in northern and central Italy. In December 2000, the company name was changed from RCF to Mackie Designs (Italy) S.p.A (Mackie Italy). Mackie Italy’s principal activity is the manufacture of loudspeakers and speaker components. Its products are distributed throughout the world, and are well recognized for quality. Mackie Italy works in conjunction with the Company in the development and manufacture of speaker products bearing the “MACKIE.”, “RCF” and “EAW” brands.
In April 2000, the Company acquired Eastern Acoustic Works, Inc. (“EAW”). EAW, based in Whitinsville, Massachusetts, designs and manufactures loudspeaker systems, including integrated signal processing targeted at the mid to high-end of the installed and touring sound markets. In February 1999, EAW acquired SIA Software Company, maker of SMAART-PRO acoustical measurement and optimization software application. EAW works in conjunction with the Company in the development and manufacture of speaker products bearing the “MACKIE.”, “RCF” and “EAW” brands.
The Company’s primary products are analog and digital mixers, mixer-related products, amplifiers, loudspeakers and loudspeaker components. A mixer serves as the central component of any professional audio system by electronically blending, routing and enhancing sound sources, such as voices, musical instruments, sound effects and audio tape, video tape and other pre-recorded material. For example, using a mixer, a vocalist may be heard above the accompaniment, background singers are combined, and individual instruments are blended into the overall mix. The musician or sound technician accomplishes this task by using the mixer controls to adjust the relative volume of each sound source.
Audio mixers are a necessary component of any recording system, whether the system is being used to produce an audio tape, compact disc ("CD"), video soundtrack or multimedia CD-ROM. A mixer is used not only to balance sound inputs when recording initial tracks, but is also often used to further process and edit the tracks prior to duplication and distribution of the recording. Mixers are used in recording applications by commercial and home studios, in film and video post-production, in business presentations and teleconferencing, in the production of television and radio programming and in multimedia productions such as CD-ROM and on-line authoring.
Mixers are also used to control relative audio levels in live presentations at locations such as auditoriums, ballrooms, theaters and sports arenas. For example, a typical performing group uses from four to 32 microphones and electronic inputs. Large concert tours and musical road productions often have 56 or more sound inputs, which may include pre-recorded music and sound effects. Many churches use multiple microphones for spoken word and music during their services.
In late 1996, the Company introduced power amplifiers, its first line of products that are not directly related to mixers. Power amplifiers are used to amplify the output signals from mixers to a level sufficient to drive loudspeakers. Amplifiers are used with mixers and loudspeakers in a variety of applications, such as private and touring sound reinforcement systems, permanent industrial and commercial installations, recording studios, and theatre/cinema and broadcast facilities. The power amplifier line is distributed through the same channels as mixers.
In August 1997, the Company introduced powered monitor speakers. Powered monitors combine signal processing, power amplifiers, and speakers in one cabinet housing. Enclosing an amplifier in the speaker eliminates one step of the path the sound signal travels, reducing the chance of altering the original signal. This step is very important when recording with highly sensitive professional audio equipment to accurately reproduce sound. The Company’s powered monitors are used in conjunction with a mixer, and are sold through existing mixer distribution channels.
During 1997, the Company expanded its traditional market base with the introduction of digital technologies. The Company’s first digital product, the Human User Interface (“HUI”), provides an interface tool for digital audio workstations (“DAW”). This DAW interface targets the rapidly growing digital audio workstation market, and was developed in conjunction with Digidesign, a division of Avid Technology, Inc. DAWs are used in video, film, multimedia and recording studios.
With the acquisition of Mackie Italy in June 1998, the Company expanded its product line into loudspeakers and speaker components. Mackie Italy manufactures raw speaker components used by third-party speaker manufacturers. It also produces several families of finished loudspeakers ready for the installed sound and professional audio markets. Mackie Italy also produces and sells video projectors and consumer products for car and home use.
In July 1998, the Company began shipping the Digital 8•Bus digital mixing console (“D8B”). Like analog mixers, the D8B blends, routes and enhances sound sources but does so with the added capability of recalling all settings and automating them in real time. In addition, the D8B’s open hardware and software architecture allows the customer to configure the D8B to interface with any type of device, analog or digital, and the D8B’s internal sound processing capabilities can be enhanced with third-party software “plug-ins.” Markets include recorded sound, such as commercial and home studios, multimedia production, sound for video games and film and video post-production.
During 1999, the Mackie Industrial division was created to focus on the installed sound market in the U.S. This market encompasses installations in venues ranging in size from small cafés to commercial buildings to nationwide chains. The extensive Mackie Industrial product line offers all of the components required to design a complete sound system for virtually any installed sound application.
With the
acquisition of EAW in April 2000, the Company continued its expansion into the
mid to high-end loudspeaker and speaker component markets. EAW designs and manufactures loudspeaker systems,
including integrated signal processing for the installed and touring sound
markets. EAW offers over 140 standard
products. EAW also continues to advance
the technology available to audio professionals with developments such as Close
Coupled Processing, Tuned Dipolar Arrays, Concentric Phase Aligned Arrays, the
Virtual Line Array and the new Phase PointSource Technology™. Through the Acoustical Performance
Partnership Program, EAW works with acoustical consultants and systems
contractors to provide customized solutions for clients and audiences
worldwide.
In November 2000, the Company began shipping its first digital recorder, the HDR24/96. Every mixer sold to the recording market is connected to a recorder of some sort making the HDR24/96 a natural product extension for the Company. The HDR24/96 is a 24-track, 24 bit recorder with complete on-screen editing capabilities. Utilizing off-the-shelf computer hardware controlled by the Mackie Real Time Operating System™ allows the HDR24/96 to offer powerful recording and editing features at a very low price. In addition, the Company is able to take advantage of falling prices and increasing speed and capabilities generated by the computer industry.
Mackie was incorporated in Washington in 1988. Mackie’s executive offices and U.S. manufacturing facilities are located at 16220 Wood-Red Road N.E., Woodinville, Washington 98072, and its telephone number is (425) 487-4333. Mackie Italy, formerly RCF, was incorporated in Italy in 1949 and its executive offices are located at Via G. Ferraris, 2-42029, S. Maurizio, Reggio Emilia, Italy, and its telephone number is 390 522 354111. The Company’s European service center is located at Uiverweg 6, 1118 DS Luchthaven Schiphol, Netherlands, and its telephone number is (31) 20 654 40 00. EAW was incorporated in Massachusetts in 1978 and its executive offices and manufacturing facilities are located at 1 Main Street, Whitinsville, MA 01588, and its telephone number is (508) 234-6158.
“MACKIE.”, the running man figure, “RCF”, “Artesuono”, “EAW” and all of the names of the Company’s U.S.–produced products are registered trademarks or common law trademarks of the Company. To the extent trademarks are unregistered, the Company is unaware of any conflicts with trademarks owned by third parties. This document also contains names and marks of other companies.
Products
The Company currently offers professional audio equipment in numerous product categories including: Compact mixers, CFX compact mixers with effects, PPM powered mixers, FR Series amplifiers, 8•Bus consoles, SR Series mixers, digital consoles, other digital automation systems, hard disk recorders, studio monitors, active and passive loudspeakers, loudspeaker components, and contractor products.
Compact Mixers. Compact mixers were the Company’s first products and can be used as desk-top mixers or mounted in 19-inch equipment racks, which are the standard housings for professional audio and video components. The Company offers four basic compact mixers: the 1202 VLZ PRO, the 1402 VLZ PRO, the 1604 VLZ PRO, and the 1642 VLZ PRO. The current VLZ PRO version also includes the Company’s state-of-the-art XDR mic preamps. Applications for the Company’s compact mixers include recording and project studios, live music performances, audio/visual presentations, broadcast, video post-production and multi-media. Suggested retail prices for these mixers are from $459 to $1,249.
CFX Series. The Company began shipping a new line of mixers, the CFX series, in 1999. CFX mixers are intended for the amateur and semi-pro customer as well as audio/visual and rental dealers. They utilize the same technologies as the compact mixers and include 16 on-board effects and a 9-band stereo graphic equalizer. The Company’s EMAC™ effects circuitry digitally processes audio at 32 bits for superior audio quality and control. Three models are available with 12, 16 or 20 channels and suggested retail pricing ranges from $699 to $1099.
PPM Series. In the first
quarter of 1999, the Company began shipping professional-quality powered
mixers. These products combine the
Company’s compact mixer technology with its FR Series amplifier technology to
provide the customer with an economical alternative to separate
components. Each of the five models
features VLZ circuitry, EMAC™ digital effects processing, two 9-band graphic
equalizers, and dual FR high-current, fast recovery amplifiers. The 808S stereo model and the 808M mono
model both feature dual 600W amplifiers and eight input channels. The 408S
stereo model and the 408M stereo model both feature dual 250W amplifiers and
eight input channels. The 406M mono
model features dual 250W amplifiers and six input channels. Suggested retail prices range from $699 to
$999.
Fast Recovery Series™ Power Amplifier. The Company’s FR Series™ power amplifiers are the Company’s first non-mixer related products and became available in December 1996 with the introduction of the M1200, which was later upgraded in 1998 to the M1400 and M1400i models currently at a suggested retail price of $699. These three models, plus the M2600, introduced in 1998 at a suggested retail price of $1,199, are designed to keep sound quality intact when pushed to extreme levels through the use of exclusive fast recovery (FR) circuitry. The FR Series power amps are targeted at live sound reinforcement applications for touring companies, theaters, concert halls, clubs, churches, DJ, and installed contractor markets. During 1999 the Company introduced the M•800 power amplifier, with a suggested retail price of $549, bringing the Company’s power amp family to four available models.
8 Bus Series. The 8•Bus is a larger mixer console designed for multi-track recording and live presentation applications. The Company introduced 8•Bus mixers in 1993. At suggested retail prices from $2,500 to $4,200, the 8•Bus consoles have opened the market to many new users and replaced many large systems offered by competitors that typically cost over $50,000. The console is available in three basic models: the 32-channel 32•8, the 24-channel 24•8 and the 16-channel 16•8. The 8•Bus console’s applications include pre-production and recording of albums for major artists and groups, on-line video production, movie soundtrack mixdown, television dialog editing, onstage mixing and live sound reinforcement used by touring musical groups, theaters, concert halls, clubs and churches.
SR Series. The SR (Sound Reinforcement) Series are high quality low cost audio mixers for live performance and play back applications. The first product in this line, the SR 24•4, a 24-channel small format utility mixer, was introduced in May 1995, followed by the SR 32•4, a 32-channel version, in August 1995. These have manufacturer suggested retail prices (MSRP) of $1,599 and $1,999 respectively. In December 1996, the Company introduced the SR40•8, a 40-channel large-format sound reinforcement console followed in March 1998, by the SR56•8, a 56-channel version. The MSRP’s of the SR40•8 and SR56•8 are $9,995 and $13,595, respectively.
The SR 24•4 and 32•4 series mixers are targeted at bands and other touring musical groups, audio/video rental services and permanent sound reinforcement venues, including churches, clubs, small theatres and auditoriums. These units routinely serve double duty in end users’ live portable systems and in their home recording studios since they include features necessary for use with multi-track digital recorders. The SR40•8 and SR56•8 large-format consoles are intended for use in regional touring systems and for use as installed equipment in venues such as churches, auditoriums, music clubs or sporting facilities.
Digital Consoles. In July 1998, the Company entered the digital mixer market with the Digital 8•Bus production and post-production console (“D8B”). With a suggested retail price of $9,999, the D8B has opened the high-end production and post-production market to many new users at the professional and semi-professional level. At the heart of the D8B is an Intel Celeron® microprocessor running Mackie Real Time Operating System ™, the Company’s own operating system. The D8B features 48 input channels, 24 internal and virtual channels, 8 mix buses and 12 auxiliary buses used for effects processing and monitoring. Each input channel includes user-configurable 4-band digital equalization, dynamics processing, routing to internal effects processors and surround panning capabilities. The D8B has 25 precision motorized faders to instantly recall mix settings and allow for dynamic automation of mix levels. Rear panel card slots allow the addition of up to four DSP (Digital Signal Processing) cards that can run third-party signal processing software capable of providing up to 16 different effects at once. Strategic partnerships with software suppliers offer the customer a growing library of effects programs from which to choose. The D8B’s external Power Supply/CPU unit contains card slots for synchronizing the console to other digital devices, linking multiple consoles, connecting consoles to a LAN (Local Area Network) and transferring files from one console to another.
Other Digital Automation Systems. The
Company’s other digital automation systems include the UltraMix® Universal
Automation System and the Human User Interface (“HUI”).
Digital audio workstations (“DAWs”) are used in commercial, project and home recording studios, and multimedia authoring such as video production, commercials, and other uses that combine visual and sound effects. HUI was developed in conjunction with Digidesign, a world leader in the DAW market. HUI is a hands-on control surface that enhances DAW-user productivity with tactile controls and visual displays for mixing and editing functions that were previously controlled by conventional computer controls. HUI, which retails for approximately $3,500, replaces a mouse with a control surface similar to a mixer. The DAW market includes multimedia, film, video, and recording studio professionals.
Hard Disk Recorder/Editors. In November 2000, The Company delivered its first audio recorder. A natural extension of the Company’s line of recording products, the HDR24/96 features 24 tracks of 24-bit digital audio recording on internal and external hard disk drives. The HDR24/96 is designed to serve the music production, broadcast and post-production markets. Priced at approximately $5,000, the HDR24/96 provides the recording and editing functions of computer-based digital audio workstations at a substantially lower cost, and no computer is needed. An Intel Celeron® microprocessor running Mackie Real Time Operating System™ manages all recording and editing functions. The built-in ATI Rage Pro™ graphics card supports powerful graphical editing of waveforms and track data with no additional computer needed. Editing features include cut, copy and paste of audio tracks, track trim, loop and fade. Volume envelopes can be added to any track, effectively automating any mixing console to which the HDR24/96 is attached. Mackie Media™ removable hard drives store recording projects as a traditional recorder would use tape. 20Gb fixed drives and 2.2 Gb Orb Drives are the current Mackie Media options, each at a suggested retail price of $299. The Remote 24, which serves as a remote control device for the HDR 24/96 is available for professional installations at a suggested retail price of $299.
Powered monitor speakers. Powered monitors are an essential tool in accurate sound reproduction, and are used in conjunction with mixer products. Powered monitors pre-process sound through equalization and cross-overs, accurately amplify, then deliver a signal that is perfectly matched to the speaker components. The Company introduced its first monitor, the HR824 active near-field studio monitor, in August 1997. Priced at approximately $1,500 a pair, HR824's are primarily designed for studio recording with limited space. These powered monitors are currently being used in a wide variety of applications including home and professional studio recording, video post-production, broadcast post-production, and home stereos.
Speakers. In 1999 the Company introduced its first sound reinforcement speaker, the SRM450, an active, 12” 2-way horn-loaded speaker in a lightweight polystyrene enclosure, at a suggested retail price of $899. The C300, at a suggested retail price of $499, is the 12” 2-way passive version of the SRM450, and is designed for use with the PPM Series powered mixers. This speaker features the same lightweight polystyrene enclosure for easy portability and speaker configuration, but does not feature power amps or active technology.
In 2000, the Company introduced three major new speakers as well as one new speaker family in this category. The SRS1500 is a 15” active subwoofer currently offered at a suggested retail price of $899. This unit was designed for use with the SRM450, but works well with other full-range speakers. The SR1530 is the world’s first active 3-way speaker currently offered at a suggested retail of $1,199. The S500 is a 15” passive 2-way speaker designed for use with Mackie powered mixers currently offered at a suggested retail price of $649. The Fussion Series speaker family currently consists of two products. The Fussion 3000, which has a suggested retail price of $4,999, is a high-output, 3-way, medium-throw, active speaker system. It features high-precision transducers combined with application-specific amplifier technology that allows this integrated system to generate high output levels with very low distortion characteristics. The Fussion 1800SA and 1800S, which have a suggested retail price of $2,999 and $1,249 respectively, is an extreme output, active subwoofer system featuring high-precision 18-inch transducers combined with application-specific amplifier technology. The system is composed of two subwoofer cabinets: the 1800SA, which contains a single 18-inch woofer and the active electronics, and the 1800S, a single 18-inch woofer cabinet that functions as a passive unit.
RCF Precision Components. Mackie Italy manufactures loudspeaker components. These components are sold on an OEM basis
to
customers throughout the world who use them in their own branded
loudspeakers. RCF Precision components
are found in some of the best performing speakers in the world. These speakers can be heard in many large
touring sound systems as well as stadiums, auditoriums, exhibit halls,
theatres, concert halls, clubs and churches.
Professional Speakers. Mackie Italy also makes many families of finished loudspeakers, which are marketed under the RCF brand name. These loudspeakers are sold both in the traditional passive format, meaning that amplification must be provided, and more recently in the active format, meaning that the amplifier is built into the loudspeaker. Mackie Italy introduced its Art Series of loudspeakers in 1997. The Art Series includes active and passive speakers in a molded plastic enclosure.
Contractor Products. For 50 years RCF, now Mackie Italy, has produced and sold a large range of commercial products to sound reinforcement contractors who use the products to install public address systems throughout the world. The products are used in everything from life safety systems to background and foreground music systems. The products produced and sold to sound contractors include speakers, amplifiers and mixers. Mackie Italy leads the Italian market for contractor products and has begun expanding into other European markets where it is quickly gaining acceptance.
Consumer Products. Mackie Italy also produces and sells video projectors and consumer products for car and home use.
Portable Sound Reinforcement. In 1985, EAW introduced the KF850 three-way, horn-loaded loudspeaker array system, which rapidly became the most popular concert touring loudspeaker in the world. The EAW product line now offers over 40 products specifically engineered to meet the needs of portable sound reinforcement.
Installed Sound. In 1989, EAW’s success with the then-new baseball stadium in Anaheim, CA launched its entry into the world of permanently installed sound reinforcement. Since then, EAW loudspeaker systems have been installed in thousands of large and small venues around the world. Today, EAW’s Phased PointSource Technology™ represents audio’s cutting edge for the largest outdoor stadiums.
Cinema Market. In 1995, EAW entered the cinema market by creating a group of loudspeaker systems specifically engineered to meet the needs of reproducing cinema’s digitally encoded soundtracks. Since THX™ first approved three-way loudspeaker for use in THX-certified theaters, EAW has become the world’s leading supplier of three-way screen-channel cinema loudspeaker systems.
Distribution and Sales
In the U.S., the Company uses a network of representatives to sell to over 1,500 retail dealers and 500 installed sound contractors, some of which have several outlets. The Company’s products are sold in musical instrument stores, pro audio outlets and several mail order outlets. The Company's top 10 dealers represented approximately 32%, 37% and 34% of the Company’s net sales in the U.S. in 2000, 1999 and 1998, respectively. The Company has one dealer, Guitar Center, that accounted for approximately 13%, 13% and 14% of domestic net sales in 2000, 1999 and 1998, respectively. No other dealer accounted for more than 10% of domestic net sales in this period.
The Company
carefully selects and reviews its representatives and dealers, including mail
order outlets. Representatives and
domestic dealers enter into agreements with the Company that govern the terms
under which they may sell the Company’s products. Agreements with dealers and distributors define an approved
territory and set forth the products to be sold. These agreements are reviewed on a six-month basis, and decisions
to renew are based on several factors, including sales performance and adequate
representation of the Company and its products. The Company’s representatives are paid on a commission
basis. Dealers retain the difference
between their cost and the sale price of products sold.
Internationally, products are offered through subsidiaries in Europe and China and through local distributors in 70 other countries where the Company does not have direct operations. The Company's top 10 international distributors represented approximately 18%, 16%, and 39% of the Company’s international net sales in 2000, 1999 and 1998, respectively. No single international distributor accounted for more than 10% of international net sales in this period. Sales to customers outside of the U.S. accounted for approximately 44%, 49%, and 43% of the Company’s net sales in 2000, 1999, and 1998, respectively.
International distributors are selected on the basis of criteria established by the Company. International distributors retain the difference between their cost and the sale price of products sold. Through the acquisition of Mackie Italy, the Company now has direct sales offices in the United Kingdom, France, Italy, Germany and China.
Marketing
The Company’s marketing strategy is designed to communicate with end-users directly and to educate them about its products. The Company’s in-house marketing and design department creates all of its advertising, brochures, video, multimedia and trade show materials. Additionally, the Company’s websites are developed and maintained in-house to provide timely and accurate product and support information. Materials are provided by its marketing department to representatives, distributors and dealers worldwide, as part of the Company’s overall sales strategy. Owner’s manuals and sales literature are currently produced in several different languages. These materials are provided as a complement to the Company’s direct advertising and customer support follow-up program. To further enhance customer awareness and understanding of its products, the Company advertises in leading trade publications, provides ongoing technical training and education for representatives and distributors, and participates in the primary industry trade shows for the musical instrument, video, recording studio, permanent installation and multimedia markets. The Company has won several national advertisement awards as a result of this commitment to detail and excellence.
Customer Support
The Company’s customer support program is designed to enhance loyalty by building customer understanding of product use and capabilities. The customer service and support operation also provides the Company with a means of understanding customer requirements for future product enhancements. This understanding comes through direct customer contact, as well as through close analysis of responses to various product registration surveys.
The Company maintains a staff of product support specialists at its Woodinville, Washington headquarters to provide direct technical service and support. Telephone support through a toll-free number is provided during scheduled business hours, and via the Company’s website after business hours.
The Company also relies on its international distributors to support its products in countries where the Company does not have its own offices. These distributors are responsible for warranty repairs and for the costs of carrying inventory required to meet customer needs.
Service and repairs on the Company’s products sold in the U.S. are performed at its Woodinville, Washington and Whitinsville, Massachusetts sites, and for certain specialized products, at approximately 100 authorized warranty service centers located throughout the U.S. Multiple locations are necessary for customer convenience and to minimize shipping costs. The Company’s international distributors service all products shipped outside of the U.S., except to countries where the Company has its own offices.
In 2000, a
customer support and service operation was put in place in Amsterdam,
Netherlands to provide more direct service and support for the customers
throughout Europe.
Mackie Italy has a separate technical assistance staff in Italy. They interact directly with customers and service centers that service Mackie Italy products. This technical support is provided free of charge. Mackie Italy offers a standard 1 year warranty on all of its products when it sells directly to the end user. When it sells through independent distributors, the distributors are responsible for warranty repairs.
Research and Development
The Company’s research and development strategy is to develop affordable, high-quality products and related accessories for its targeted markets. On December 31, 2000, the Company’s research and development staff consisted of 95 individuals. The Company’s research and development expenses were approximately $9.4 million in 2000, $7.1 million in 1999, and $5.1 million in 1998.
Competition
The market for professional audio systems in general is highly competitive. The Company must compete with a number of professional audio manufacturers, several of whom have significantly greater development, sales, and financial resources than the Company. The Company’s major competitors in the mixer market are subsidiaries of Harman International Industries, Inc. (including Soundcraft, Spirit by Soundcraft and Allen & Heath), Yamaha Corporation, Peavey Electronics Corporation, Teac America, Inc. (Tascam), SoundTracs PLC and Behringer Spezielle Studiotechnik GmbH. Competitors in the power amplifier market include Peavey Electronics Corporation (including Crest Audio, Inc.), Crown International and QSC Audio Products, Inc. Competing studio monitor loudspeaker manufacturers include Genelec, Inc., Event Electronics LLC, Alesis Corporation and JBL (a Harman International Industries, Inc. subsidiary). Competing stage loudspeaker system manufacturers include JBL, Peavey Electronics Corporation and Electro-Voice. Competitors in the component speaker market include JBL, Eminence Speaker Corporation, Acustica Beyma S.A. and B&C Speakers S.p.A. Competitors in the commercial sound products category include JBL, Bose Corporation and TOA Corporation. Competing installed sound loudspeaker system manufacturers include JBL, Electro-Voice, Community Professional Loudspeakers and Renkus-Heinz. Competitors in the touring sound loudspeaker system category include JBL, L-Acoustics, Meyer Sound Laboratories and Nexo.
The Company competes primarily on the basis of product quality and reliability, price, ease of use, brand name recognition and reputation, ability to meet customers' changing requirements and customer service and support. However, despite the Company’s investment in research and development, there can be no assurance that the Company will be successful in developing and marketing, on a timely basis, product modifications or enhancements or new products that respond effectively to technological advances by others.
Proprietary Technology
The Company has a strong interest in protecting the intellectual property assets of the Company that reflect original research, creative development, and product development. As such, the Company has sought protection through patents, copyrights, trademarks, and trade secrets. The Company has applied and filed for various design and utility patents, both domestically and internationally. The Company has actively used certain trademarks, and has applied for and registered specific trademarks in the U.S. and in foreign countries. To protect works of original authorship, the Company asserts copyright protection.
Along with
extensive trademark and patent registration and filings, the Company has
claimed copyright protection for works of original authorship, including
product brochures, literature, advertisement, and web pages. In certain cases, the Company has filed and
will continue to file for copyright registration in the U.S. While copyrights provide certain legal rights
of enforceability, there can be no assurance as to the ability to successfully
prevent others from infringing upon the Company’s copyrights.
The Company has never conducted a comprehensive patent search relating to the technology used in its products. The Company believes that its products do not infringe upon the proprietary rights of others. There can be no assurance, however, that others will not assert infringement claims against the Company in the future or that claims will not be successful.
While Mackie pursues patent, trademark and copyright protection for products and various marks, it also relies on trade secrets, know-how and continuing technology advancement, manufacturing capabilities, affordable, high-quality products, brand name recognition, new product introduction and direct marketing efforts to develop and maintain its competitive position. Mackie’s policy is to have each employee enter into an agreement that contains provisions prohibiting the disclosure of confidential information to anyone outside the Company and to recognize the Company’s ownership of intellectual property developed by employees. Consulting contracts generally provide for the protection of the Company’s intellectual property and the requirement of confidentiality. There can be no assurance, however, that these confidentiality agreements will be honored or that the Company can effectively protect its rights to its unpatented trade secrets. Moreover, there can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company’s trade secrets. EAW pursues patent, trademark and copyright protection for several of its processes, as well as for its products. By contrast, Mackie Italy has traditionally not sought patent protection for its products. Similarly, Mackie Italy has not pursued trademark or copyright protection except for the name “RCF”.
Manufacturing
The Company manufactures its products in its facilities in Woodinville, Washington; Whitinsville, Massachusetts; and central and northern Italy. Each facility is focused on core manufacturing technologies as follows: electronics, loudspeakers and loudspeaker systems, and transducers, respectively. In addition, the facilities work together as part of the supply chain to provide integrated products to the market. Many of the Company’s products share many components, which allows for integrated manufacturing of several distinct products and in certain cases significant part purchase volume discounts. Much of the Company’s circuit card assembly is aided by automated assembly equipment.
The Company relies almost exclusively on one vendor for its potentiometers and certain of its integrated circuits but is in contact with other manufacturers of these items regularly. These items are critical components in certain of the Company's products. Interruption in, or cessation of, the supply of these components from these suppliers could adversely affect the Company’s production capability, as the qualification process for another manufacturer, from sample submission to production quality and quantity delivery, could take several months. The Company has an approximate three month supply of potentiometers and one month supply of these specific integrated circuits on hand at any given time which would serve to reduce any potential disruption.
Backlog
The Company does not generally track backlog. Typically, orders are shipped within two weeks after receipt. In the case of new product introductions or periods where product demand exceeds production capacity, the Company allocates products to customers on a monthly basis until demand is met.
Employees
At December
31, 2000, the Company and its subsidiaries had 1,452 full-time equivalent
employees, including 166 in marketing, sales and customer support, 95 in
research and development, 1,105 in manufacturing and manufacturing support
(which includes manufacturing engineering) and 86 in administration and
finance. Approximately 144 of Mackie
Italy’s employees in Italy are represented by a labor union. The Company believes relations with all
employees, union and non-union, are favorable.
Cautionary Factors That May Affect Future Results
The
following risk factors and other information included in this Annual Report
should be carefully considered. The risks and uncertainties described below are
not exhaustive. There may be additional
risks and uncertainties not presently known to the Company or that the Company
currently deems immaterial which may impact the Company’s business
operations. If any of the following
risks occur, the Company’s business, financial condition, operating results and
cash flows could be materially adversely affected.
Development, Introduction and Shipment of New Products. The Company currently is developing new analog and digital mixers, recording devices, amplifiers and loudspeakers and loudspeaker components. Significant resource, technological, supplier, manufacturing or other problems may delay the development, introduction or manufacture of these products.
In the past, when the Company’s sales have been affected by delays in developing and releasing new products, some customers waited for the Company’s new products, while others purchased products from the Company’s competitors. Delays in the completion and shipment of new products, or failure of customers to accept new products, may affect future results.
Variability in Quarterly Operating Results. The Company’s operating results tend to vary from quarter to quarter. The Company’s revenue in each quarter is substantially dependent on orders received within that quarter. Conversely, the Company’s expenditures are based on investment plans and estimates of future revenues. The Company may, therefore, be unable to quickly reduce spending if revenues decline in a given quarter. As a result, operating results for that quarter will suffer. The Company’s results of operations for any one quarter are not necessarily indicative of results for any future period.
Other factors which may cause the Company’s quarterly results to fluctuate include:
• increased competition in the Company’s niche markets
• timing of new product announcements
• product releases and pricing changes by the Company or its competitors
• market acceptance or delays in the introduction of new products
• production constraints
• the timing of significant orders
• customers’ budgets
• foreign currency exchange rates
Due to all of the foregoing factors, it is possible that in some future quarters the Company’s operating results will be below the expectations of analysts and investors.
Rapid Technological Change. Product technology in certain of the Company’s industries evolves rapidly, making timely product innovation essential to success in the marketplace. The introduction of products with improved technologies or features may render the Company’s existing products obsolete and unmarketable. If the Company cannot develop products in a timely manner in response to industry changes, or if the Company’s products do not perform well, the Company’s business and financial condition will be adversely affected. Also, the Company’s new products may contain defects or errors which give rise to product liability claims against the Company or cause them to fail to gain market acceptance.
Economic and Market Conditions. The Company’s business is affected by
domestic and global economic conditions and by the health of the professional
audio market in the world. The
Company’s operations may in the future reflect substantial fluctuations from
period to period as a consequence of such general economic and market
conditions. These factors could have a
material adverse effect on the Company’s business and financial condition.
Competition. The Company expects competition to increase from both established and emerging companies. If the Company fails to compete successfully against current and future sources of competition, the Company’s profitability and financial performance may be adversely affected.
Dependence on Suppliers. Certain parts used in the Company’s products are currently available from either a single supplier or from a limited number of suppliers. If the Company cannot develop alternative sources of these components, or if the Company experiences deterioration in its relationship with these suppliers, there may be delays or reductions in product introductions or shipments, which may materially adversely affect the Company’s operating results.
Because the Company relies on a small number of suppliers for certain parts, the Company is subject to possible price increases by these suppliers. Also, the Company may be unable to accurately forecast its production schedule. If the Company underestimates its production schedule, suppliers may be unable to meet the Company’s demand for components. This delay in the supply of key components may materially adversely affect the Company’s business.
International Operations. International sales represented approximately 44% of the Company’s net sales for the year ended December 31, 2000. The Company expects that international sales will continue to be a significant portion of its revenue. International sales may fluctuate due to various factors, including:
• unexpected changes in regulatory requirements
• tariffs and taxes
• difficulties in staffing and managing foreign operations
• longer average payment cycles and difficulty in collecting accounts receivable
• fluctuations in foreign currency exchange rates
• product safety and other certification requirements
• political and economic instability
The European Community and European Free Trade Association have established certain electronic emission and product safety requirements (“CE”). All of the Company’s new products meet these requirements. Failure to obtain either a CE certification or a waiver for any product may prevent the Company from marketing that product in Europe.
The Company operates subsidiaries in Italy, the United Kingdom, Germany, France, the Netherlands and China. The Company’s business and financial condition is, therefore, sensitive to currency exchange rates or any other restrictions imposed on these currencies.
Protection of Intellectual Property. Refer to the section captioned “Proprietary Technology” in Item 1 above.
Acquisitions and Business Combinations. In April 2000, the Company acquired EAW, a
manufacturer of mid to high-end loudspeakers and loudspeaker systems. This strategic acquisition was made to
expand the Company’s product line and manufacturing capabilities. The Company continues to integrate product
offerings. Integration of the products
and operations may place significant burdens on the Company’s management and
operating teams, and may divert management’s attention from its other business
concerns. If the Company fails to integrate
its products and operations, the Company’s business and financial condition may
suffer.
In January 2001, the Company signed an agreement with Sydec NV ("Sydec") for the purchase of all of the shares of Sydec. Based in Belgium, Sydec is recognized as a leading developer of products and services in the area of embedded electronics & software, networking, digital signal processing and Windowsä 95/98/NT/2000 driver & application development. The transaction is expected to close in early April 2001. The Company will face the same product integration issues in 2001 related to Sydec that are noted above for EAW.
The Company may pursue additional acquisitions of complementary technologies, product lines or businesses. Further acquisitions may include risks like those involved in the Company’s acquisition of Mackie Italy and EAW, as well as risks of entering markets where the Company has no or limited prior experience, the potential loss of key employees of the acquired company, and impairment of relationships with existing employees, customers and business partners. Further acquisitions may also impact the Company’s financial position. For example, the Company may use significant cash or incur additional debt, which would weaken the Company’s financial position. Goodwill and intangible assets acquired will be amortized to expense in the future, which may reduce the Company’s profitability.
The Company
cannot guarantee that future acquisitions will improve the Company’s business
or operating results.
Dependence on Key Personnel. The Company’s future success will depend in a large part on the continued service of many of its technical, marketing, sales and management personnel and on its ability to attract, train, motivate and retain highly qualified employees. The Company’s employees may voluntarily terminate their employment with the Company at any time. Competition for highly qualified employees is intense, and the process of locating technical, marketing, sales and management personnel with the combination of skills and attributes required to execute the Company’s strategy is often lengthy. The Company believes that it will need to hire additional technical personnel in order to enhance its existing products and to develop new products. If the Company is unable to hire additional technical personnel, the development of new products and enhancements could likely be delayed. The loss of the services of key personnel or the inability to attract new personnel could have a material adverse effect upon the Company’s results of operations.
Risk of Euro Non-compliance. Refer to the section captioned “Euro
Conversion” in Item 7 below.
The Company’s headquarters in Woodinville, Washington house its manufacturing, administrative, sales and marketing, research and development and customer support operations. The building, which is occupied pursuant to a lease through December 31, 2004, is an 89,000 square foot manufacturing and office facility. The monthly rent stated in the lease is $56,613, adjusted annually for changes in the Consumer Price Index (monthly rent expense in 2000 was $63,587). Mackie leases its facility from Mackie Holdings, LLC, an entity owned by three significant shareholders and directors of the Company, on terms the Company believes are at least as favorable to the Company as might have been obtained from unaffiliated parties.
In November 1995, Mackie entered into a 10-year lease, with an option to extend for an additional 10 years, covering property that is adjacent to Mackie’s existing facility. The building is approximately 81,250 square feet. Mackie is using the building for product shipping, additional vertical integration of manufacturing processes and other manufacturing activities. Initial base monthly rent for the entire building is $43,063; after five years, the base rent increases to $49,563 per month.
Mackie
Italy's primary facilities in Reggio Emilia, Italy comprise a manufacturing
facility totaling 119,000 square feet on a total site of 7 acres and a building
for administrative offices of 13,000 square feet. Both facilities are owned by Mackie Italy.
The Company’s European service center is located in The Netherlands in a 1,234 square foot facility. The Company intends to consolidate service activities for Europe at this facility. The building is occupied pursuant to a lease dated February 2000, for a period of ten years with a termination period of twelve months.
EAW’s entire operation is housed in a leased facility in Whitinsville, Massachusetts. A series of ten buildings, nine of which are connected in a manufacturing complex, utilize a total of 245,000 square feet. The current lease, originally dated March 1, 1996 and amended several times, expires in February 2003. The monthly rent is currently $50,023.
The Company believes its existing facilities will be adequate to meet its requirements for at least the next fiscal year.
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.
The Company is also involved in various legal proceedings and claims that arise in the ordinary course of business. Management currently believes that these matters will not have a material adverse impact on the Company’s financial position, liquidity or results of operations.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
The Company’s Common Stock is traded on the NASDAQ National Market System under the symbol “MKIE”. The following table sets forth the high and low sale prices as reported on NASDAQ for the periods indicated. These prices do not include retail markups, markdowns or commissions.
|
Common Stock
|
||
|
HIGH
|
LOW
|
|
| Year Ended December 31, 1999: | ||
| First Quarter | $ 6.88 | $ 4.25 |
| Second Quarter | $ 6.38 | $ 4.25 |
| Third Quarter | $ 5.00 | $ 4.25 |
| Fourth Quarter | $ 6.50 | $ 3.75 |
| Year Ended December 31, 2000: | ||
| First Quarter | $ 7.31 | $ 5.00 |
| Second Quarter | $ 7.06 | $ 5.50 |
| Third Quarter | $ 8.50 | $ 6.50 |
| Fourth Quarter | $ 7.81 | $ 5.00 |
As of March 7, 2001, there were 12,377,358 shares of Common Stock outstanding held by approximately 95 holders of record. The number of holders does not include individual participants in security position listings.
The Company has never paid dividends on its common stock. The Company’s present policy is to retain earnings to finance the Company’s business. Any future dividends will be dependent upon the Company’s financial condition, results of operations, current and anticipated cash requirements, acquisition plans and plans for expansion, and any other factors that the Company’s Board of Directors deems relevant. Under its bank loan agreement, the Company is prohibited from paying any dividends without prior approval from the bank. The Company has no present intention of paying dividends on its common stock in the foreseeable future.
Item 6. Selected Financial Data
(in thousands, except per share data)
|
2000 (a) |
1999 |
1998 (b) |
1997 |
1996 |
|||||||
|
Statement of Income
Data
|
|||||||||||
| Net Sales (c) | $207,476 | $156,340 | $104,154 | $ 76,582 | $ 74,806 | ||||||
| Gross Profit (c) | $72,827 | $ 54,202 | $ 38,271 | $ 29,642 | $ 29,678 | ||||||
| Operating Expenses (c) | $57,856 | $ 46,026 | $ 29,856 | $ 20,671 | $ 17,784 | ||||||
| Net Income | $6,226 | $ 3,257 | $ 5,581 | $ 5,537 | $ 7,421 | ||||||
|
|
|||||||||||
| December 31, | |||||||||||
| Balance Sheet Data | 2000 | 1999 | 1998 | 1997 | 1996 | ||||||
|
|
|||||||||||
| Working Capital | $42,138 | $ 37,258 | $ 35,784 | $ 35,956 | $ 32,020 | ||||||
| Total Assets | $165,198 | $120,854 | $118,890 | $ 53,372 | $ 46,256 | ||||||
| Long-Term Debt | $29,970 | $ 15,665 | $ 18,984 | $ 0 | $ 0 | ||||||
| Shareholders’ Equity | $57,770 | $ 50,307 | $ 49,569 | $ 46,478 | $ 42,283 | ||||||
|
|
|||||||||||
|
Per Common Share
Data (Diluted Basis)
|
|||||||||||
| Diluted Net Income Per Share | $ 0.49 | $ 0.27 | $ 0.43 | $ 0.41 | $ 0.55 | ||||||
| Shares Used In Diluted Net Income Per Share | 12,782 | 12,265 | 12,945 | 13,401 | 13,611 | ||||||
|
|
|||||||||||
| (a) | Includes financial data and results of operations of EAW from April 1, 2000. |
| (b) |
Includes financial data of Mackie Italy,
which was acquired June 29, 1998. Results of operations for Mackie Italy are included from July 1, 1998. |
| (c) | Amounts have been reclassified to conform with the adoption of Emerging Issues Task Force Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs". |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
This Annual Report on Form 10-K and other reports incorporated by reference contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “will be,” “will continue,” “will likely result,” or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements.
The following discussions, including but not limited to, the sections entitled "Cautionary Factors That May Affect Future Results" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," describe some, but not all, of the factors that could cause the actual results to differ materially from the forward-looking statements. These factors include, 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, and 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 above are not exhaustive. The Company operates in a very competitive environment and new risk factors may emerge from time to time. Management cannot 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 digital and analog audio mixers, speakers, amplifiers and other professional audio equipment. A significant portion of the Company’s total sales is to customers outside the U.S. International sales volumes have historically been affected by foreign currency fluctuations relative to the U.S. Dollar. When weaknesses of local currencies have made the Company's products more expensive, sales to those countries have declined.
The
Company's gross margins are also affected by its international sales. Typically, gross margins from products
exported by Mackie are lower than from those sold in the U.S. due to discounts
offered to its international distributors.
Mackie Italy does not offer discounts to its 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 5.9% in 2000, 4.5% in 1999, and
10.1% in 1998. The increase in
discounts in 2000 relates to higher international discounts granted by EAW. The decrease in discounts in 1999 is
attributable to the lack of discounts offered by Mackie Italy. Sales outside the U.S. represented
approximately 44%, 49%, and 43% of the Company's net sales in 2000, 1999 and
1998, respectively.
The Company
will continue to introduce new products and product revisions as it has in the
past. Some anticipated new products
will require the implementation of manufacturing practices for which the
Company is not familiar. This could
result in lower margins as the Company becomes more familiar with new
manufacturing procedures.
Results of Operations
Year Ended December 31, 2000 as Compared with Year Ended December 31, 1999
The results of operations for the year ended December 31, 2000 include the results of operations for EAW beginning April 1, 2000.
Net Sales
The Company’s net sales increased 32.7% to $207.5 million in 2000 from $156.3 million in 1999. Of the $51.1 million increase, $30.6 million was attributable to the addition of EAW. The Company also saw significant revenue contribution worldwide from products introduced in 1999 and 2000 in the product categories of powered and CFX mixers, speakers, and digital products of approximately $20.9 million. These increases were partially offset by an unfavorable foreign currency exchange effect of $6.1 million and by declines in sales of M-1400 series amps and SR series live music application mixers of approximately $2.6 million. Sales outside the U.S. decreased to 44% of the Company’s total net sales in 2000 from 49% in 1999. This decrease was due mainly to the inclusion of sales by EAW whose sales outside of the U.S. comprised only 31% of its total net sales for 2000.
Gross Profit
Gross profit was $72.8 million in 2000 compared with $54.2 million in 1999. Of the $18.6 million increase, $11.6 million was attributable to the addition of EAW. Gross profit was also up as a result of the new products introduced during 1999 and 2000 as noted above. The increase was partially offset by an unfavorable foreign currency exchange effect on gross profit of approximately $2.4 million. Gross margin increased slightly to 35.1% in 2000 from 34.7% in 1999.
Selling, General and Administrative
Selling, general and administrative expense increased to $48.5 million in 2000 from $38.9 million in 1999. Of the $9.6 million increase, $9.3 million was attributable to the addition of EAW, $0.8 million of which represents amortization charges on intangible assets. Higher sales volumes causing corresponding increases in variable expenses, such as commissions, along with incremental costs associated with an increased headcount also contributed to the increase. These increases in expenses were partially offset by a $2.1 million favorable impact of foreign currency exchange. As a percentage of net sales, selling, general, and administrative expenses decreased to 23.4% in 2000 from 24.9% in 1999. The decline in the percentage is primarily attributable to higher sales.
Research and Development
Research and
development expenses increased to $9.4 million in 2000 from $7.1 million in
1999. The increase was primarily
attributable to the inclusion of EAW’s research and development expenses of
$2.3 million. As a percentage of net
sales, these expenses decreased slightly to 4.5% in 2000 compared with 4.6% in
1999.
Interest Income and Interest Expense
Interest
income decreased to $0.6 million in 2000 compared with $0.7 million in
1999. Interest expense increased to
$4.6 million in 2000 from $2.8 million in 1999 primarily due to borrowings
related to the acquisition of EAW and to significantly higher levels of
short-term borrowing.
Other Income (Expense), net
Other expense for 2000 was $0.5 million compared with $0.1 million in 1999. This increase was primarily due to the foreign exchange losses in 2000 as a result of the weakening of the Italian Lira against the U.S. Dollar over the past twelve months.
Income Tax Provision
Income tax
expense for 2000 was $4.2 million representing an overall effective tax rate of
40.5% compared to $2.8 million and 46.3% for 1999. The decrease in the effective
tax rate was primarily attributable to foreign operations.
Year Ended December 31, 1999 as Compared with Year Ended December 31, 1998
The results of operations for the year ended December 31, 1998 include the results of operations for Mackie Italy beginning July 1, 1998.
Net Sales
The Company’s net sales increased 50.1% to $156.3 million in 1999 from $104.2 million in 1998. The increase was primarily attributable to the inclusion of a full year of Mackie Italy’s sales in 1999 of $60.2 million compared to only six months in 1998 of $23.6 million. The Company also saw significant revenue contribution worldwide from products introduced in 1999 in the product categories of powered and CFX mixers, speakers and amplifiers of approximately $24.5 million. Sales in the new product categories were aided by the Company’s successful shift to a captive distribution model in Europe during the first half of 1999. These increases were offset partially by declines in sales of 8•Bus series large console mixers and SR series live music application mixers of approximately $4.5 million. Sales outside the U.S. increased to 49% of the Company’s total net sales in 1999 from 43% in 1998. This increase was due mainly to the inclusion of a full year of sales by Mackie Italy whose sales outside of the U.S. comprised 96% of its total net sales for 1999.
Gross Profit
Gross profit
was $54.2 million in 1999 compared with $38.3 million in 1998. The increase was primarily attributable to
the inclusion of a full year of Mackie Italy’s gross profit in 1999 of $25.6
million compared to only six months in 1998 of $8.6 million. Revenues were also up as a result of the new
products introduced during 1999 and improved international distribution as
noted above. Gross profit as a percentage
of sales decreased to 34.7% in 1999 from 36.7% in 1998. The decrease in gross margin was the result
of lower margins realized on some of the new products introduced during 1999
and lower sales volumes of high margin 8•Bus series large console mixers and SR
series live music application mixers.
Selling, General and Administrative
Selling, general and administrative expenses increased to $38.9 million in 1999 from $24.8 million in 1998. The increase was primarily attributable to the inclusion of a full year of Mackie Italy’s selling, general and administrative expenses in 1999 of $17.4 million compared to only six months in 1998 of $7.8 million. Higher sales volumes causing 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 (Mackie Industrial) also contributed to the increase. Mackie Industrial was created as a new division of the Company in 1999 to focus on the installed sound market in the U.S. This market encompasses installations in venues ranging in size from small cafés to commercial buildings to nationwide chains. Mackie Italy has traditionally served the installed sound market in Europe and now Mackie Industrial has entered the U.S. installed market giving the Company a worldwide presence in this large segment. The Company did not realize significant revenues from sales of Mackie Industrial products during 1999 as operations were still in the development phase. Other contributing factors to the increase included higher legal expenses associated with the Behringer lawsuit that was settled in November 1999. As a percentage of net sales, selling, general and administrative expenses increased to 24.9% in 1999 from 23.8% in 1998.
Research and Development
Research and development expenses increased to $7.1 million in 1999 from $5.1 million in 1998. The increase was primarily attributable to higher spending related to new product development across all areas of the Company’s product line during 1999. A secondary cause was the inclusion of a full year of Mackie Italy’s research and development expenses in 1999 of $1.1 million compared to only six months in 1998 of $0.8 million. As a percentage of net sales, these expenses decreased to 4.6% in 1999 compared with 4.9% in 1998.
Interest Income and Interest Expense
Interest income decreased to $0.7 million in 1999 compared with $0.8 million in 1998. Interest expense increased to $2.8 million in 1999 from $1.5 million in 1998 primarily due to borrowings related to the acquisition of Mackie Italy and to Italian debt carried by Mackie Italy. Included in 1999 is a full year of acquisition and Mackie Italy interest expense compared to only six months in 1998. Prior to the acquisition in June 1998, the Company had no long-term debt.
Income Tax Provision
Income tax expense for 1999 was $2.8 million representing an overall effective tax rate of 46.3% compared to $2.3 million and 29.2% for 1998. The increase in the effective tax rate was primarily attributable to foreign operations.
Liquidity and Capital Resources
The Company used internally generated cash, as well as bank borrowings, to finance its operations during 2000 and 1999. The Company’s operating activities used cash of $5.3 million in 2000 and generated cash of $5.6 million in 1999. Net cash used by operating activities in 2000 was primarily attributable to increases in inventories, accounts receivable and a decline in income taxes payable offset partially by net income, increases in accounts payable and accrued expenses and a decline in prepaid expenses and other current assets. The large increase in inventories for 2000 over 1999 is attributable to higher levels of required inventory resulting from the expansion of the Company’s product lines, certain product release delays and anticipated sales volume increases that did not materialize. The increase in depreciation and amortization expense was primarily related to the amortization of intangible assets that were booked on the acquisition of EAW.
Net cash used in investing activities
increased to $20.6 million in 2000 from $3.1 million in 1999, due principally
to the acquisition of EAW, net of cash acquired of $19.9 million and purchases
of property, plant and equipment of $6.6 million. These uses were partially offset by net proceeds from
transactions involving available-for-sale securities of $5.9 million. At December 31, 2000, the Company has an
agreement for consulting services related to the implementation of an Oracle
based software system. The agreement
totals approximately $2.8 million all of which was outstanding at December 31,
2000 and will be due and payable during 2001.
Approximately $0.6 million was accrued as of December 31, 2000. The Company intends to finance its 2001
capital expenditures and commitments from cash provided by operations, current
cash reserves and existing credit facilities.
Net cash provided by financing activities increased to $25.3 million in 2000 from $2.2 million 1999, due principally to proceeds from bank credit facilities used for the acquisition of EAW of $19.0 million and net proceeds on bank line of credit and other short-term borrowings of $11.9 million. These inflows were partially offset by repayments of long-term debt related to the Mackie Italy acquisition, EAW long-term debt and Italian based long-term debt totaling $9.2 million.
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 Mackie Italy of which $8.7 million was outstanding at December 31, 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 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 using cash and available-for-sale securities. 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. bank 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 $12.4 million as of December 31, 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 December 31, 2000, there was $11.5 million outstanding on the line of credit (zero at December 31, 1999) as well as a $1.5 million guarantee on debt of Mackie Italy. The Company was not in compliance with the borrowing limitation on the line of credit at December 31, 2000 by approximately $0.6 million but obtained a waiver from the bank. 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.
Mackie Italy also has agreements with several banks in Italy that provide short-term credit facilities totaling approximately $25.2 million. At December 31, 2000 and 1999, there was approximately $19.8 million and $16.0 million outstanding under these facilities, respectively. The majority of these credit facilities are secured by Mackie Italy’s receivables. Interest rates on these credit facilities range from 4.8% to 13.5%.
The weighted-average interest rate on short-term borrowings for the Company of $31.3 million at December 31, 2000 was 7%.
Mackie Italy
also has various long-term loans outstanding at December 31, 2000, totaling
approximately $6.8 million, which bear interest at rates from 6.3% to
8.9%. These loans, certain of which are
secured by specific assets of Mackie Italy, mature at varying dates up to 2013.
The Company believes that its existing cash, cash equivalents, available-for-sale securities and credit facilities will be sufficient to provide adequate working capital to fund operations over the next twelve months. However, there can be no assurance that the Company will not be required to seek other financing sooner or that such financing, if required, will be available on terms satisfactory to the Company. The Company may also utilize cash to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies (see Note 17 of Notes to Consolidated Financial Statements).
Inflation and Changes in Foreign Currency Exchange Rates
Although the Company cannot accurately anticipate the effects of inflation, the Company does not believe inflation has had or is likely to have a material effect on its results of operations or liquidity.
Sales and expenses incurred by foreign subsidiaries are denominated in each subsidiary’s local currency and translated into U.S. dollar amounts at average rates during the period. The impacts of foreign exchange when significant are disclosed in the “Results of Operations” section of Item 7 to Form 10-K.
Euro Conversion
European business systems are being forced to handle currencies in a new way with the introduction of the Euro. Mackie Italy’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 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 the related computer hardware to run a single system for all worldwide operations. Implementation procedures related to the system began during the third quarter of 2000. This system will be Euro compliant and is scheduled to be in place in Italy during the second half of 2001. The cost of this system is preliminarily estimated to be in the range of $6.0 to $8.0 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, 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. This statement, as amended, is effective for the Company beginning January 1, 2001. The adoption of SFAS No. 133 will not have a material impact on the Company’s consolidated financial position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, which was adopted by the Company in the fourth quarter of 2000. 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 adoption of SAB 101 did not have a material impact on the Company’s 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. 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 adopted Issue No. 00-10 in the fourth quarter of 2000. Previously, the Company netted shipping and handling charges billed to customers against selling, general and administrative (SG&A) expense. The following reclassifications to net sales, cost of sales and SG&A expense for the years ended December 31, 1999 and 1998 resulted from the adoption of this EITF. Net sales increased $2.5 million to $156.3 million for 1999, and $2.2 million to $104.2 million for 1998. Cost of sales increased $5.4 million to $102.1 million for 1999, and $3.2 million to $65.9 million in 1998. SG&A expense decreased