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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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: 0-21044
UNIVERSAL ELECTRONICS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0204817
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6101 GATEWAY DRIVE
CYPRESS, CALIFORNIA 90630
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 820-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(d) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF 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, 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 the Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's outstanding common stock
held by non-affiliates of the Registrant on February 29, 2000, determined using
the per share closing sale price thereof on the National Market of The Nasdaq
Stock Market of $19.75 on that date, was approximately $270,547,000.
As of February 29, 2000, 13,715,499 shares of Common Stock, par value
$.01 per share, of the Registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement for its 2000
Annual Meeting of Stockholders to be held on June 21, 2000 are incorporated by
reference into Part III of this Form 10-K.
Except as otherwise stated, the information contained in this Form
10-K is as of December 31, 1999.
Exhibit Index appears on page 45.
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UNIVERSAL ELECTRONICS INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
ITEM PAGE
NUMBER NUMBER
- ------ ------
PART I
1 Business 3
2 Properties 8
3 Legal Proceedings 8
4 Submission of Matters to a Vote of Security Holders 9
PART II
5 Market for Registrant's Common Stock and Related 11
Stockholder Matters
6 Selected Consolidated Financial Data 12
7 Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
7A Quantitative and Qualitative Disclosures about Market Risk 23
8 Financial Statements and Supplementary Data 24
9 Changes in and Disagreements with Accountants on 43
Accounting and Financial Disclosure
PART III
10 Directors and Executive Officers of the Registrant 43
11 Executive Compensation 43
12 Security Ownership of Certain Beneficial Owners 43
and Management
13 Certain Relationships and Related Transactions 43
PART IV
14 Exhibits, Financial Statement Schedules and Reports 43
on Form 8-K
Signatures 44
Exhibit Index 45
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PART I
ITEM 1. BUSINESS
BUSINESS OF UNIVERSAL ELECTRONICS INC.
Universal Electronics Inc. was incorporated under the laws of Delaware in 1986
and began operations in 1987. The principal executive offices of the Company are
located at 6101 Gateway Drive, Cypress, California 90630. As used herein, the
terms "Universal" and the "Company" refer to Universal Electronics Inc. and its
subsidiaries unless the context indicates to the contrary.
Universal develops and markets easy-to-use, preprogrammed universal wireless
control devices (i.e. remote controls, wireless keyboards, gaming controls,
etc.) and technologies principally for home video and audio entertainment
equipment. The Company sells and licenses its wireless control devices and
proprietary technologies worldwide to original equipment manufacturers ("OEMs"),
private label customers, and companies involved in the cable and satellite
(collectively referred to as "subscription broadcasting") industries. The
Company also sells its wireless control devices internationally under the One
For All(R) brand name. In addition, the Company has licensed certain of its
proprietary technology and its One For All brand name to third parties who in
turn sell products directly to United States retailers. Through 1999, the
Company also marketed a line of home safety and automation products under the
Eversafe(R) brand name through domestic retail, hardware, food and drug, and
mass marketing distribution channels.
GENERAL BUSINESS INFORMATION
Universal has developed a broad line of easy-to-use, preprogrammed universal
wireless control products which are marketed principally for home video and
audio entertainment equipment through various channels of distribution,
including international retail, private label, OEMs, and cable and satellite
service providers. The Company believes that its universal wireless controls can
operate virtually all infrared remote controlled TV's, VCR's, DVD players, cable
converters, CD players, audio components and satellite receivers, as well as
most other infrared remote controlled devices worldwide.
The Company believes its wireless control products incorporate certain
significant technological advantages. First, the Company has compiled an
extensive library of over 82,000 infrared codes that cover over 100,000
individual device functions and over 1,500 individual consumer electronic
equipment brand names. The Company believes its database of infrared codes is
larger than any other existing library of infrared codes for the operation of
home video and audio devices sold worldwide. The Company's library is regularly
updated with new infrared codes used in newly introduced video and audio
devices. All such infrared codes are captured from the original manufacturer's
remote control devices to ensure the accuracy and integrity of the database.
Second, the Company's proprietary software and know-how permit infrared codes to
be compressed before being loaded into a Read Only Memory ("ROM"), Random Access
Memory ("RAM") or an electronically erasable programmable ROM ("E2") chip. This
provides significant cost and space efficiencies that enable the Company to
include more codes and features in the limited memory space of the chip than are
included in similarly priced products of competitors. Third, the Company has
developed a patented technology that provides the capability to easily upgrade
the memory of the remote control by adding codes from its library that were not
originally included. This technology utilizes both RAM and EEPROM ("E2") chip
technologies.
PRODUCTS
Universal Wireless Controls
The Company's family of products include universal standard and touch screen
remote controls, wireless keyboards, antennas, joysticks and other gaming
devices, custom and customizable chips that include the Company's library of
codes and proprietary software, and licensing of the Company's library of codes
and proprietary software. These products cover a broad spectrum of suggested
prices and performance capabilities. The Company sells its customized products
to International retailers, consumer electronic accessory suppliers, private
label customers, OEMs, cable operators and satellite service providers for
resale under their respective brand names. Prior to its restructuring in 1997,
the Company sold its wireless controls directly to a number of domestic
retailers and service centers under the One For All brand name and to cable
operators under the Uniwand(R) brand name. The Company's products are capable of
controlling from one to fifteen video and audio devices, including, but not
limited to, TVs, VCRs, DVD players, cable converters, CD players,
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satellite receivers, laser disc players, amplifiers, tuners, turntables,
cassette players, digital audio tape players, and surround sound systems.
Each of the Company's wireless control devices is designed to simplify the use
of video and audio devices. To appeal to the mass market, the number of buttons
is minimized to include only the most popular functions. The Company's universal
remotes are also designed for ease of initial set-up. For most of the Company's
products, the consumer simply inputs a four-digit code for each video or audio
device to be controlled. Each remote contains either a RAM, a ROM, or a
combination of ROM and E2 chips. The RAM, and the ROM and E2 combination
products allow the remote to be upgraded with additional codes. Another
proprietary ease of use feature the Company offers in several of its universal
remote controls is the user programmable macro key. This feature allows the user
to program a sequence of commands onto a single key, to be played back each time
that key is subsequently pressed.
The Company introduced its first product, the One For All, in 1987. In the
international markets, One For All brand name products accounted for 23.7%,
23.1%, and 18.4% of the Company's sales for the years ended December 31, 1999,
1998, and 1997, respectively. The Company discontinued direct retail operations
in North America in 1997 (see also discussion at "1997 Restructuring").
Many of the Company's products include its patented and highly proprietary
"upgradeability" feature. This feature provides the user with the capability to
easily upgrade the memory of the remote control by adding codes from its library
that were not originally included. Each of these products utilizes the E2 chip
technology and, as a result of other improvements, also retains memory while
changing batteries which eliminates the inconvenience experienced by consumers
of having to set up the remote control each time the batteries are changed.
By providing its wireless control technology in many forms, including finished
products, integrated circuits on which the Company's software is embedded, or
custom software packages, the Company can meet the needs of its customers,
enabling those who manufacture or subcontract their manufacturing requirements
to use existing sources of supply and more easily incorporate the Company's
technology. In addition, the Company's products are easily customized to include
the features that are important to customers. These may include keys to control
electronic program guides, one-button VCR record keys, customized macro set-up
keys, and/or other features.
DISTRIBUTION AND CUSTOMERS
The Company's products are sold to a wide variety of customers in numerous
distribution channels. In the United States, the Company principally sells its
products and/or licenses its proprietary technology to cable operators, private
label customers and consumer electronics accessory manufacturers for resale or
rental under their respective brand names. In addition, the Company sells its
wireless control products and licenses its proprietary technologies to OEMs for
packaging with their products. As a result of its 1997 restructuring, the
Company has also licensed certain of its proprietary technology and its One For
All brand name and Eversafe line of products to third parties who in turn sell
the products directly to certain domestic retailers. Outside of the United
States, the Company sells remotes, other wireless control devices, and certain
accessories under the One For All and certain other brand names to retailers and
to other customers under private labels through its international subsidiaries
and distributors. The Company also sells its products and/or licenses its
proprietary technology to OEMs, cable operators and satellite service providers
internationally.
For the year ended December 31, 1999, sales to Media One and Radio Shack
accounted for approximately 11.6% and 10.3%, respectively, of the Company's net
sales for the year. Also during the year, the Company lost a significant
customer when Primestar, a satellite service provider, was acquired by a third
party in early 1999. While management considers the Company's relationships with
each of its customers to be good, the loss of any one key customer could have a
material adverse effect on the Company's results of operations.
Subscription Broadcasting and OEM
The Company provides subscription broadcasters, namely cable operators or
multiple system operators ("MSOs") and satellite service providers both
domestically and internationally, with universal wireless control devices,
integrated circuits on which the Company's software is embedded, and/or
customized software packages to support the increased demand associated with the
launch of digital services, and increased cable and satellite household
penetration.
The Company also sells its universal wireless control devices, integrated
circuits on which the Company's software is embedded, and/or customized software
packages to OEMs which manufacture cable converters and satellite receivers for
resale with their products. Growth in this business line is driven by the same
factors noted for subscription broadcasting. Also during 1999, the Company
continued pursuing a further penetration of the more traditional consumer
electronics/OEM markets. Customers in these markets generally package the
Company's wireless control devices for resale with their audio and video home
entertainment products (i.e. TVs, DVD and CD players, VCRs, personal digital
recorders, etc.). The Company also sells customized chips which include the
Company's software and/or customized software packages to these customers.
Growth in this line of business has been driven by the proliferation of home
entertainment equipment, the emerging digital technology, the increase in
multimedia and interactive internet applications, and the increase in the number
of OEMs.
The Company continues to place significant emphasis on expanding its sales and
marketing efforts to subscription broadcasters and OEMs in Asia and Europe. In
1999, the Company hired a direct sales representative dedicated to expanding the
Company's customer base in Asia. Additional sales support staff were also added
in Europe to support the significant growth in the European markets. In
addition, the Company continues to improve on its manufacturing process to
increase cost savings and to provide more timely delivery of its products to its
customers.
Private Label
As a supplier of technology to private label customers, the Company is able to
achieve greater distribution of its proprietary technology. During 1999, the
Company continued its efforts to improve product cycles and planning to better
meet the needs of its customers.
International Retail
Throughout 1999, the Company continued its retail sales and marketing efforts in
Europe, Australia, New Zealand, South Africa, Mexico and selected countries in
Asia and Latin America. The Company has five international subsidiaries,
Universal Electronics B.V., established in the Netherlands, One For All GmbH and
Ultra Control Consumer Electronics Gmbh, both established in Germany, One for
All Iberia S.L., established in Spain, and One For All Ltd. (UK), established in
the United Kingdom. In the first quarter of 1998, the Company acquired
substantially all of the remote control business of one of its distributors in
the United Kingdom (One For All Ltd. (UK)). In the third quarter of 1999, the
Company completed its acquisition of a remote control distributor in Spain (One
For All Iberia S.L.). The Company also utilizes third party distributors in all
of the areas noted above where it does not have subsidiaries.
North American Retail
In December 1997, the Company announced its decision to discontinue its North
American Retail line of business. As the Company anticipated when it made its
announcement, the discontinuation occurred primarily during the first half of
1998 and was completed during the third quarter of 1998. During this transition,
the Company continued to support its retail customers by selling its remaining
inventory of North American Retail remote control products. Thereafter, in
accordance with the Company's plan, the Company licensed certain of its
proprietary technology and its One For All trademark to a third party
overseas manufacturer, to enable them to supply certain domestic retailers with
a limited number of remote control products on a direct import basis. See also
discussion at "1997 Restructuring".
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CONSUMER SERVICE AND SUPPORT
Throughout 1999, the Company continued its strategy to review its consumer
support program and modify its "help line" service such that the majority of
calls received are directed through its automated "Conversant" system. Live
agent help is also available through certain programs. The Company continues to
review its programs to determine their value in enhancing and improving the
sales of the Company's products. As a result of this continued review, some or
all of these programs may be modified or discontinued in the future and new
programs may be added. In addition, the Company provides consumer telephone
support services to several customers and is actively marketing these services
to other companies.
RAW MATERIALS AND DEPENDENCE ON SUPPLIERS
The Company utilizes third-party manufacturers and suppliers in the Far East,
Mexico and the United States to produce its wireless control products. The
number of third party manufacturers or suppliers that provided the Company in
excess of 10% of the Company's manufacturing services and/or components were
two, three and four for 1999, 1998, and 1997, respectively. In 1999, Philips and
Motorola exceeded the 10% threshold. Motorola, Philips and Jetta exceeded the
threshold
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in 1998. In 1997, Computime, Kimex, Jetta and Philips exceeded the 10%
threshold. As in the past, the Company continues to evaluate alternative and
additional third-party manufacturers and sources of supply.
During 1999, the Company continued its program of diversification of suppliers
and maintenance of duplicate tooling for its products. The purpose of this
program is to allow the Company to stabilize its source for products and
negotiate more favorable terms with its suppliers. In addition, the Company
generally uses standard parts and components, which are available from multiple
sources. The Company continues to seek other sources for integrated circuit
chips to reduce the potential for manufacturing and shipping delays and to
maintain additional inventory of these component parts as safety stock by
purchasing some of its chips from a variety of sources.
PATENTS, TRADEMARKS AND COPYRIGHTS
The Company owns a number of United States and international patents relating to
its products and technology, has filed applications for other patents that are
pending, and has obtained copyright registration for various of its proprietary
software and libraries of infrared codes. The lives of the Company's patents
range from seven to 17 years. While the Company follows the practice of
obtaining patents or copyright registration on new developments whenever
advisable, in certain cases, the Company has elected common law trade secret
protection in lieu of obtaining such protection. In the Company's opinion,
engineering and production skills, and experience are of more importance to its
market position than are patents and copyrights. The Company further believes
that none of its business is dependent to any material extent upon any single
patent or trade secret, or group of patents or trade secrets. The names of most
of the Company's products are registered or are being registered as trademarks
in the United States Patent and Trademark Office and in most of the other
countries in which such products are sold. These registrations are valid for a
variety of terms ranging from ten to 20 years, which terms are renewable as long
as the trademarks continue to be used. Management regularly renews those
registrations deemed by them to be important to the Company's operations.
SEASONALITY
Prior to the discontinuation of the Company's North American Retail line, the
majority of the Company's sales were to retailers either directly under its One
For All brand name or indirectly through its private label and OEM customers.
The Company has, accordingly, in the past but to a lesser extent going forward,
experienced stronger demand for its products in the third and fourth calendar
quarters rather than in the first half of the year as retailers purchase
products prior to the holiday selling season. Retail, private label and to a
lesser degree OEM customers generally commit to carry new and existing products
for the year in the first and second quarters and initial manufacturing and
deliveries take place in the second and third quarters. Generally, sales to
private label customers peak in the third quarter and branded product sales to
international retailers peak in the fourth quarter.
With the discontinuation of the Company's North American Retail line and the
increasing significance of the Company's other lines of business including
subscription broadcasting and OEM, the seasonality effect on the Company's
business has lessened. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA-Notes to Consolidated Financial Statements-Note 17" for further details
regarding the quarterly results of the Company.
COMPETITION
The Company's principal competitors in the international retail and private
label markets for universal wireless controls are currently Philips, Thomson and
Sony, as well as various manufacturers of wireless controls in Asia. The
Company's primary competitors in the OEM market are the original equipment
manufacturers themselves and remote control manufacturers in Asia. In the
subscription broadcasting business, the Company competes with various
distributors in the United States and several of the larger set-top
manufacturers, including General Instrument Corp. and Scientific-Atlanta, Inc.
The Company competes in its markets on the basis of product quality, product
features, price, and customer and consumer support. The Company believes that it
will need to continue to introduce new and innovative products to remain
competitive and to obtain and retain competent personnel to successfully
accomplish its future objectives. Certain of the Company's competitors have
significantly larger financial, technical, marketing and manufacturing resources
than the Company, and there can be no assurance that the Company will remain
competitive in the future.
ENGINEERING, RESEARCH AND DEVELOPMENT
During 1999, the Company's engineering efforts focused on modifying existing
products and technology to improve their features and lower their costs, and to
develop measures to protect the Company's proprietary technology and general
know-
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how. In addition to taking steps in an attempt to control costs by improving the
efficiency of its activities and systematizing its operations, the Company
continued to regularly update its library of infrared codes to include codes for
features and devices newly introduced both in the United States and
internationally and for uncommon devices. New infrared codes are identified by
the Company through many of its activities. The Company also continues to
explore ways to improve its software to preprogram more codes into its memory
chips and to simplify the upgrading of its wireless control products.
Also during 1999, the Company's research and development efforts continued to
focus on the development of new and innovative wireless control devices with
enhanced capabilities, as well as new applications of wireless control
technology. Work on new applications to be used in combination with personal
computers and the internet continued as the Company increased the number of
customers with whom it worked with in this area.
The Company is also exploring various opportunities to supply wireless control
devices for the operation of additional electronic and other devices in the home
using infrared signals, as well as combinations of infrared signals, radio
frequencies, household electrical circuits and telephone lines. Company
personnel are actively involved with various industry organizations and bodies,
which are in the process of setting standards for infrared, radio frequency,
power line, telephone and cable communications and networking in the home. There
can be no assurance that any of the Company's research and development projects
will be successfully completed.
The Company's engineering, research and development departments, located in
Cypress, California, had approximately 51 full-time employees at December 31,
1999. The Company's expenditures on engineering, research and development in
1999, 1998 and 1997 were $3.9 million, $4.0 million, and $5.1 million,
respectively, of which approximately $2,391,000, $2,712,000, and $2,950,000,
respectively, was for research and development.
ENVIRONMENTAL MATTERS
The Company believes it has materially complied with all currently existing
federal, state and local statutes and regulations regarding environmental
standards and occupational safety and health matters to which it is subject.
During the years ended December 31, 1999, 1998 and 1997, the amounts incurred in
complying with federal, state and local statutes and regulations pertaining to
environmental standards and occupational safety and health laws and regulations
did not materially affect the Company's earnings or financial condition.
However, future events, such as changes in existing laws and regulations or
enforcement policies, may give rise to additional compliance costs that could
have a material adverse effect upon the capital expenditures, earnings or
financial condition of the Company.
EMPLOYEES
At December 31, 1999, the Company employed approximately 232 employees, of whom
51 were in engineering, research and development, 50 in sales and marketing, 63
in consumer service and support, 23 in operations and warehousing and 45 in
executive and administrative staff. None of the Company's employees is subject
to a collective bargaining agreement or is represented by a union. The Company
considers its employee relations to be good.
INTERNATIONAL OPERATIONS
Financial information relating to the Company's international operations for the
years ended December 31, 1999, 1998 and 1997, is included in "ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA-Notes to Consolidated Financial
Statements-Note 14".
1997 RESTRUCTURING
In December 1997, the Company announced its decision to discontinue its North
American One For All Retail line of business and the domestic retail
distribution channel supported by the operations in the Twinsburg, Ohio
facility. The Company continues to supply a limited line of remote control
products indirectly to several domestic retailers on a direct import basis. The
Company closed the Twinsburg, Ohio facility, with the exception of its consumer
service phone center, and moved its headquarters to Cypress, California,
formerly the site of the Company's Technology Center, during the second quarter
of 1998. The pre-tax restructuring charge of $8,419,000 taken in the fourth
quarter of fiscal year 1997 was composed of severance and employee benefit
costs, a write-down of fixed assets to be disposed of to their estimated fair
market value, a write-down of intangibles by the amount for which no future
benefit existed, a write-off of prepaid advertising and other prepaid assets to
their estimated fair market value, certain of the Company's consumer service and
support costs, and other costs related to the discontinuation of the North
American Retail business. The restructuring was completed
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during 1998. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA-Notes to
Consolidated Financial Statements-Note 16".
In connection with the discontinuation of the North American Retail product
line, the Company increased the allowance for doubtful accounts by $2.5 million
in the fourth quarter of 1997. This increase primarily related to certain
customer accounts of the Company that were deemed significantly at risk due to
the Company's exit from this business. See "ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA-Notes to Consolidated Financial Statements-Note 3".
In 1997, the North American Retail product inventories were written down by
$3.9 million to a carrying value of approximately $7.0 million from a carrying
value prior to the write down of approximately $10.9 million. The purpose of
this write down was to carry this inventory at what management believed its
estimated net realizable value was as a result of the discontinuation of this
business. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA-Notes to
Consolidated Financial Statements-Note 4".
ITEM 2. PROPERTIES
The Company's headquarters are located in Cypress, California. The Company
utilizes the following office and warehouse facilities:
Square
Location Purpose or Use Feet Status
-------- -------------- ------- ------
Twinsburg, Ohio Consumer and customer call center 8,509 Leased, expires
July 17, 2002
Cypress, California Corporate headquarters, 30,768 Leased, expires
warehouse, engineering, December 31, 2002
research and development
Enschede, Netherlands European headquarters and 9,149 Leased, expires
consumer support August 2002
The Company believes its existing facilities will be adequate to meet the
Company's needs for the foreseeable future. See "ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA - Notes to Consolidated Financial Statements - Note 11"
for additional information regarding the Company's obligations under leases.
ITEM 3. LEGAL PROCEEDINGS
On November 8, 1998, SKR Resources, Inc. filed suit against the Company in the
United States District Court for the Northern District of Ohio, Eastern
Division, SKR Resources, Inc. v. Universal Electronics Inc., Case No. 1:98CV
2561, alleging the Company has breached a Sales Agreement alleged to have been
made in December 1997 with the plaintiff. The plaintiff was seeking damages in
excess of $630,000 and was also seeking specific performance on the Agreement.
On January 15, 1999, the Company filed its answer denying plaintiff's
allegations and also filed a counterclaim asserting that SKR breached a Sales
Agreement entered into in April 1996 with the Company and in addition the
Company has claimed that SKR was unjustly enriched. The Company was seeking
damages in excess of $1,600,000. On December 17, 1999, the parties entered into
a confidential Full and Final Release of all Claims and Settlement Agreement
and, on December 28, 1999, these matters were dismissed with prejudice.
On May 10, 1999, Kelly Temporary Services filed suit against the Company in the
Court of Common Pleas, Summit County, Ohio, Kelly Temporary Services v.
Universal Electronics, Case No. CV-1999-04-1721, alleging that the Company
failed to pay certain past amounts due Kelly Temporary Services. On August 4,
1999, the parties entered into a Settlement Agreement and on September 2, 1999,
this matter was dismissed with prejudice.
On July 7, 1999, The Chamberlain Group, Inc. filed suit against the Company, The
Chamberlain Group, Inc. v. Universal Electronics Inc. a/k/a One For All, Inc.,
Civil Action No. 99C-4471, alleging that by selling its garage door opener line
of products, the Company infringed and contributed to the infringement of one of
The Chamberlain Group's patents. On March 17, 2000, the parties entered into a
confidential Settlement and Patent License Agreement and on that date, this
matter was dismissed with prejudice.
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There are no other material pending legal proceedings, other than litigation
that is incidental to the ordinary course of business, to which the Company or
any of its subsidiaries is a party or of which any of their property is subject.
As is typical in the Company's industry and the nature and kind of business in
which the Company is engaged, from time to time, various claims, charges and
litigation are asserted or commenced by third parties against the Company
arising from or related to product liability, infringement of patent or other
intellectual property rights, breach of warranty, contractual relations, or
employee relations. The amounts claimed may be substantial but may not bear any
reasonable relationship to the merits of the claims or the extent of any real
risk of court awards. In the opinion of management, final judgments, if any,
which might be rendered against the Company in potential or pending litigation,
would not have a material adverse effect on the Company's financial condition or
results of operations. Moreover, management believes that the Company's products
do not infringe any third parties' patent or other intellectual property rights.
The Company maintains directors' and officers' liability insurance which insures
individual directors and officers of the Company against certain claims such as
those alleged in the above lawsuits, as well as attorney's fees and related
expenses incurred in connection with the defense of such claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year through the solicitation of proxies or
otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT*
The following table sets forth certain information concerning the executive
officers of the Company as of February 29, 2000:
NAME AGE POSITION
- ---- --- --------
Camille Jayne 47 Chairman and Chief Executive Officer
Paul D. Arling 37 President and Chief Operating Officer
Paul J.M. Bennett 44 Managing Director and Senior Vice President
J. Stewart Ames 41 Senior Vice President
Richard A. Firehammer, Jr. 42 Senior Vice President, General Counsel
and Secretary
Jerry L. Bardin 61 Senior Vice President
Mark Z. Belzowski 41 Vice President, Corporate Controller and
Chief Financial Officer
* Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
Camille Jayne has been Chairman of the Company since December 1998 and has been
the Company's Chief Executive Officer since August 1998. She was the Company's
President and Chief Operating Officer of the Company since February 1998. Prior
to that, she was President and CEO of The Jayne Group (a consulting firm
specializing in the development, introduction and operation of digital cable TV
products and services) and a Senior Partner at BHC Consulting (a business
management and market research firm). Prior to The Jayne Group and BHC, Ms.
Jayne was Senior Vice President in charge of the digital TV business unit at
Tele-Communications, Inc (TCI). She holds both a BA and Masters degree from
Stanford and an MBA from the University of Michigan.
Paul D. Arling has been President and Chief Operating Officer of the Company
since being rehired by the Company in September 1998. He was the Company's
Senior Vice President and Chief Financial Officer from May 1996 until August
1998. From 1993 through May 1996, he served in various capacities at LESCO, Inc.
(a manufacturer and distributor of professional turf care products) with the
most recent being Acting Chief Financial Officer. Prior to LESCO, he worked for
Imperial Wallcoverings (a manufacturer and distributor of wallcovering products)
as Director of Planning and The Michael Allen Company (a strategic management
consulting company) where he was employed as a management consultant. He
9
10
obtained a BS degree from the University of Pennsylvania and an MBA from the
Wharton School of the University of Pennsylvania.
Paul J.M. Bennett has been Managing Director and Senior Vice President
responsible for international retail and European OEM, Cable and Satellite
business lines. Prior to Universal Electronics, Mr. Bennett held various
positions at Philips Consumer Electronics over a seven year period, first as
Product Marketing Manager for the Accessories Product Group, initially set up to
support Philip's Audio division, and then as head of that division. Mr. Bennett
was educated at Terenure College and the College of Commerce in Dublin and
completed his studies at University College, where he gained a Bachelor of
Commerce Degree.
J. Stewart Ames has been Senior Vice President of Sales, Product Development and
Marketing of Universal Electronics Inc., managing the marketing and sales
efforts for North America and Japan. Prior to this position at UEI, Ames served
as the Company's Vice President of Cable Sales, directing the United States
based sales force in selling universal wireless control products to multiple
system operators. Before joining UEI in January 1991, Mr. Ames worked for three
years as Sales Manager for Calmold, a plastic injection molder in Southern
California, managing its sales force and selling injection molding capacity for
three factories to a variety of OEM businesses. Prior to Calmold, Mr. Ames held
sales and sales management positions at Spirol International, a manufacturer of
specialty metal fasteners, assembly equipment and metal stampings, over a period
of seven years. Mr. Ames received a B.S. Degree in Biology from Bates College in
Lewiston, Maine.
Richard A. Firehammer, Jr., Esq. has been Senior Vice President of the Company
since being rehired by the Company in February 1999. He has been the Company's
General Counsel since October 1993 and Secretary since February 1994, positions
he continued to hold after his employment with the Company ceased as part of the
1997 restructuring. He was the Company's Vice President from May 1997 until
August 1998. From November 1992 to September 1993, he was associated with the
Chicago, Illinois law firm, Shefsky & Froelich, Ltd. From 1987 to 1992, he was
with the law firm, Vedder, Price, Kaufman & Kammholz in Chicago, Illinois. He is
admitted to the Bars in the State of Illinois and the State of Ohio. Mr.
Firehammer is also a certified public accountant. He received a BS degree from
Indiana University and a JD degree from Whittier College School of Law.
Jerry L. Bardin has been Senior Vice President of Engineering and Operations
since August 1998. Prior to UEI, Mr. Bardin was with Science Applications
International Corp. (SAIC), a high technology research and engineering company
for 15 years serving in several executive, management and consulting positions.
Most recently, as a Senior Systems Engineer, Mr. Bardin was part of a contract
consulting team providing engineering and management expertise on several
product development and rollout projects as well as business process
re-engineering projects. From 1983 to 1994, Mr. Bardin managed the study and
development of undersea systems for acoustic propagation and reception at SAIC.
Mr. Bardin earned his Bachelor of Science and Master of Science in Electrical
Engineering at the University of Texas at Austin.
Mark Z. Belzowski has been the Chief Financial Officer of the Company since
January 2000. He has been a Vice President and the Corporate Controller of the
Company since May 1998 when he joined the Company. From February 1997 through
April 1998, he was a financial management consultant for various companies
including a cellular reseller and a local area network switch manufacturer. From
September 1994 through January 1997, he was Vice President Controller in the
Turner Entertainment Group, a division of Turner Broadcasting Systems, Inc. From
September 1988 through August 1994, he served in various capacities at Orion
Pictures Corporation with the most recent being Vice President Corporate
Controller. Prior to that, Mr. Belzowski was a Senior Auditor with Ernst and
Young, Certified Public Accountants. He is a certified public accountant in the
state of California. Mr. Belzowski obtained a BS degree from California State
University at Fullerton.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the National Market of The Nasdaq Stock
Market under the symbol "UEIC".
The following table sets forth, for the periods indicated, the high and low last
reported sale prices for the Company's common stock, as reported on the National
Market of The Nasdaq Stock Market:
1999 1998
-------------------- ------------------
High Low High Low
-------- -------- ------- -------
First Quarter $ 7.7500 $ 5.1250 $5.9375 $4.8125
Second Quarter 15.0000 6.3125 6.6250 5.0625
Third Quarter 15.6875 10.0000 7.2500 5.0000
Fourth Quarter 23.0000 10.5000 5.8750 4.1250
Stockholders of record on December 31, 1999 numbered approximately 146.
On December 20, 1999, the Company's Board of Directors authorized a two-for-one
split of its common stock effective January 31, 2000, in the form of a stock
dividend for stockholders of record at the close of business on January 10,
2000. All share and per-share amounts have been restated to give retroactive
effect to the stock split.
The Company has never paid cash dividends on its common stock and does not
intend to pay cash dividends on its common stock in the foreseeable future. The
Company intends to retain its earnings, if any, for the future operation and
expansion of its business. In addition, the terms of the Company's revolving
credit facility limit the Company's ability to pay cash dividends on its common
stock. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-Liquidity and Capital Resources" and "ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA-Notes to Consolidated Financial
Statements-Note 6."
RECENT SALES OF UNREGISTERED SECURITIES
On September 1, 1998, in connection with the Company's acquisition of H&S
Management Corp., the Company issued 168,422 shares of Common Stock, valued at
$5.1875 per share, as well as $1.5 million in cash to H&S Management Corp. as
consideration for the purchase price. Registration under the Securities Act of
1933 was not effected with respect to the transaction described above in
reliance upon the exemption from registration contained in Section 4(2) of the
Securities Act of 1933.
On November 9, 1998, the Company issued a warrant to purchase Company common
stock to General Instrument Corporation as consideration for entering into an
exclusive supply agreement with the Company. The warrant is contingent upon
General Instrument Corporation purchasing a specified minimum number of units of
products from the Company for each of the calendar years 1999, 2000 and 2001.
Assuming such minimum purchase requirements are met, the warrant allows General
Instrument Corporation to purchase up to 600,000 shares of Company common stock
at an exercise price of $6.3125 per share (both the number of shares and the
exercise price have been adjusted due to the stock split previously discussed in
this ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS). Registration under the Securities Act of 1933 was not effected with
respect to the warrant in reliance upon the exemption from registration
contained in Section 4(2) of the Securities Act of 1933. In 1999, General
Instrument Corporation failed to purchase the minimum requirement for that year.
As such, General Instrument Corporation forfeited its right to acquire up to
200,000 shares of Company common stock and may not recoup such forfeited shares
through the purchase of products in any subsequent years.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
-------- ------- -------- ------- --------
(in thousands, except per share data)
Net sales $105,091 $96,123 $114,338 $98,589 $105,090
Operating income (loss) $ 12,968 $ 9,505 $ (9,289) $(4,098) $ 1,179
Net income (loss) $ 7,740 $ 5,638 $ (6,518) $(2,295) $ 320
Net income (loss) per share:
Basic $ 0.58 $ 0.44 $ (0.52) $ (0.17) $ 0.02
Diluted $ 0.55 $ 0.43 $ (0.52) $ (0.17) $ 0.02
Weighted average common stock outstanding:
Basic 13,312 12,772 12,564 13,322 13,488
Diluted 14,126 13,200 12,564 13,322 13,556
Gross margin 41.3% 37.7% 27.7% 24.9% 29.3%
Operating margin (loss) 12.4% 9.9% (8.1%) (4.2%) 1.1%
Selling, general and administrative
expenses as a % of sales 28.9% 27.8% 26.3% 29.0% 27.3%
Net income (loss) as a % of sales 7.4% 5.9% (5.7%) (2.3%) 0.3%
Return on average assets 11.5% 9.3% (10.8%) (3.5%) 0.4%
Working capital $ 45,506 $26,921 $ 29,350 $36,515 $ 43,996
Ratio of current assets to current
liabilities 4.0 2.7 2.3 4.4 3.2
Total assets $ 73,751 $60,677 $ 61,138 $59,451 $ 70,105
Cash and cash equivalents $ 13,286 $ 1,489 $ 1,097 $ 510 $ 872
Long-term debt $ 240 -- -- $ 3,183 --
Stockholders' equity $ 58,511 $44,532 $ 38,887 $45,627 $ 50,238
Book value per share $ 4.40 $ 3.49 $ 3.10 $ 3.42 $ 3.71
Ratio of liabilities to liabilities and
stockholders' equity 20.7% 26.6% 36.4% 23.3% 28.3%
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the statement of operations data of the Company
expressed as a percentage of net sales for the periods indicated.
Year Ended December 31,
--------------------------
1999 1998 1997
----- ----- -----
Net sales
On-going business 100.0% 92.6% 74.5%
Discontinued North American Retail
business -- 7.4 25.5
----- ----- -----
100.0 100.0 100.0
Cost of sales
On-going business 58.7 54.8 48.3
Discontinued North American Retail
business -- 7.5 20.5
Inventory write-down -- -- 3.5
----- ----- -----
58.7 62.3 72.3
----- ----- -----
Gross profit 41.3 37.7 27.7
Selling, general and administrative
expenses 28.9 27.8 26.3
Discontinued North American Retail
business bad debt expenses -- -- 2.2
Restructuring expense -- -- 7.3
----- ----- -----
Operating income (loss) 12.4 9.9 (8.1)
Interest expense (income) (0.1) 0.5 0.6
Other expense (income) 0.0 0.1 (0.1)
----- ----- -----
Income (loss) before income taxes 12.5 9.3 (8.6)
Provision (benefit) for income taxes 5.1 3.4 (2.9)
----- ----- -----
Net income (loss) 7.4% 5.9% (5.7%)
===== ===== =====
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Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net sales for the twelve months ended December 31, 1999 were $105.1 million, an
increase of 18.0% over the net sales of $89.0 million for the same period last
year (after excluding net sales of $7.1 million related to the Company's
discontinued North American Retail business). Net income for 1999 was $7.7
million or $0.58 per share (basic) and $0.55 per share (diluted), compared to
$5.6 million or $0.44 per share (basic) and $0.43 per share (diluted) for the
same period last year.
Net sales in the Company's technology businesses (subscription broadcasting, OEM
and private label) in 1999 increased by $15.4 million, or 24.5%, to $78.2
million from $62.8 million in 1998. Net sales in the Company's technology
businesses were approximately 74.4% of net sales in 1999 compared to 65.3% in
1998. Sales to subscription broadcasting providers and OEMs increased by $11.3
million, or 20.3%, from $55.9 million in 1998 to $67.2 million in 1999 driven
primarily by increased demand for digital technology and related services,
growth in cable and satellite household penetration, the proliferation of home
entertainment equipment, and the increase in the number of OEMs. The Company
lost a significant customer in early 1999 when Primestar, a satellite service
provider, was acquired by DirectTV. Excluding sales to Primestar, sales to
subscription broadcasting providers and OEMs increased by 43.9% from 1998 to
1999. Private label sales increased by $4.2 million, or 61.8%, from $6.8 million
in 1998 to $11.0 million in 1999 due to strong demand for a new line of products
introduced in 1999.
Net sales from the continuing retail businesses (One For All(R) international
retail, Eversafe and direct import) increased $.7 million, or 2.7%, from $26.2
million in 1998 to $26.9 million in 1999 due to growth in international retail
sales offset by reduced sales of Eversafe product and reduced chip sales in the
direct import business. Net sales from the continuing retail businesses
accounted for approximately 25.6% of total 1999 net sales compared to 27.3% in
1998. One For All(R) international retail sales grew by $2.7 million, or 12.2%,
from $22.2 million in 1998 to $24.9 million in 1999 primarily due to increased
demand in the larger European countries including Spain and France, as well as
increased growth in Australia, New Zealand and South America. Revenue in the
Eversafe line of products decreased by $1.3 million, or 69.1%, from $1.8 million
for the year ended 1998 to $.6 million in 1999 as the Company focused less on
this remaining domestic direct retail line. Direct import sales decreased by $.8
million or 35.2% from $2.2 million in 1998 to $1.4 million in 1999, due to
higher initial chip sales in 1998 to fill the pipeline. There were no sales from
the discontinued North American Retail business line during 1999 and none are
expected in the future.
Gross margins for the year ended December 31, 1999 were 41.3% compared to 37.7%
for the same period last year. This increase can be attributed to the sale by
the Company of substantially all of its remaining inventory in the discontinued
North American Retail business at average selling prices that approximated book
value during the first half of 1998. In the Company's continuing businesses,
gross margins increased to 41.3% in 1999 compared to 40.8% in 1998. This
increase can be attributed to higher margins in the Company's technology
businesses due to the introduction of new products in 1999, and cost reductions
in certain component parts in late 1998 and throughout 1999.
Selling, general and administrative expenses increased to $30.4 million in 1999,
compared to $26.7 million in 1998. As a percentage of net sales, selling,
general and administrative expenses was 28.9% in 1999 compared to 27.8% in 1998.
The increase in selling, general and administrative expenses was primarily due
to increases in payroll and bonus related costs, increased bad debt expense, and
increased depreciation and amortization expense, offset by lower telephone
costs. Employee payroll and bonus, and related fringe costs were $12.7 million
in 1999 compared to $11.3 million in 1998, an increase of $1.4 million due to
increases in headcount, and higher management bonuses and employee profit
sharing payments based on the Company's stronger performance in 1999. For the
year ended December 31, 1999, bad debt expense increased by $1.2 million from
the year ended December 31, 1998 due to increased reserves on certain domestic
and international accounts.
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15
Depreciation and amortization expense increased by $1.0 million in 1999.
Depreciation expense increased as a result of the $1.4 million increase in fixed
assets with a shorter useful life during 1999. The increase in amortization
expense can be attributed to a full year of amortization expense in 1999 on
goodwill from acquisitions and non-compete agreements entered into in 1998
compared to a partial year of amortization expense in 1998 on such intangibles
as well as additional amortization expense on the goodwill associated with the
acquisition of a Spanish distributor in 1999. Telephone costs decreased by $.4
million in 1999 compared to 1998 due primarily to rate reductions in Europe as a
result of increased provider competition, and cost efficiencies from the
elimination of unused toll free lines and the implementation of more efficient
telephone systems and consumer support programs.
Interest expense (income) decreased by $564,000 in 1999 to $108,000 of interest
income from $456,000 of interest expense for the same period in 1998 due to
reduced borrowing under the Company's revolving credit agreement and interest
earned on accumulated cash balances in 1999.
Other expense (income) increased by $143,000 in 1999 when compared to 1998. This
is primarily attributed to favorable changes in currency rates in Europe
resulting in a gain on currency exchange transactions of $30,000 in 1999
compared to a $127,000 loss on currency exchange transactions in 1998.
The Company recorded income tax expense of $5.4 million for the year ended 1999
compared to approximately $3.3 million for the same period of 1998. The increase
was due to increased income in 1999. In 1999, the Company's effective tax rate
was 41% compared to an effective tax rate of 37% in 1998. The difference in the
1999 rate as compared to the 1998 rate was primarily due to differences in NOL
carryforward limitations in California versus Ohio due to the relocation of the
Company's headquarters from Ohio to California and a decrease in the valuation
allowance during 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales for the twelve months ended December 31, 1998 were $89.0 million, an
increase of 4.5% over the net sales of $85.2 million for the same period last
year (after excluding net sales of $7.1 million in 1998 and $29.1 million in
1997 related to the Company's discontinued North American Retail business). Net
income for 1998 was $5.6 million or $0.44 per share (basic) and $0.43 per share
(diluted), compared to a net loss of $6.5 million or $0.52 loss per share
(basic and diluted) for the same period last year.
Net sales in the Company's technology businesses (subscription broadcasting, OEM
and private label) were approximately 65.3% of net sales in 1998 compared to
53.0% in 1997. Net sales in the Company's technology businesses for 1998
increased by $2.2 million or 3.6%, from $60.6 million in 1997 to $62.8 million
in 1998. Sales to subscription broadcasting providers and OEMs increased by $6.5
million or 13.1%, from $49.4 million in 1997 to $55.9 million in 1998 driven
primarily by continued strong demand in new remote control business with the
providers of cable and satellite broadcast services. Delayed customer orders in
anticipation of a new line of remotes in combination with increased competition
resulted in reduced shipments in the private label business and accounted for a
decrease of $4.4 million or 39.5%, from $11.2 million in 1997 to $6.8 million in
1998.
Net sales from the continuing retail businesses (One For All international
retail, Eversafe and direct import) accounted for approximately 27.3% of total
1998 net sales compared to 21.5% in 1997. The Company's net sales from its
continuing retail businesses increased by $1.6 million or 6.5% in 1998 from
$24.6 million in 1997 to $26.2 million in 1998. One For All international retail
revenues (the largest component of the continuing retail business group)
increased $1.2 million or 5.8%, from $21.0 million in 1997 to $22.2 million in
1998. This change can be attributed to the growth in universal remote control
business in Europe. Net sales of Eversafe products decreased by $1.9 million or
49.7%, from $3.7 million in 1997 to $1.8 million in 1998 primarily due to weaker
demand. The direct import business line began during the first quarter of 1998,
with royalty income and significant initial chip sales of $2.2 million for 1998.
Net sales in 1998 from the discontinued North American Retail business (One For
All US and Canada) were approximately 7.4% of overall net sales compared to
25.5% in 1997. Net sales in 1998 of the Company's discontinued North American
Retail product line decreased 75.7% from $29.1 million to $7.1 million as the
Company sold off its remaining inventory for this business line at an amount
just below its carrying value.
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16
The Company's overall gross margin in 1998 was 37.7% compared to a gross margin
of 27.7% in 1997. In the Company's continuing businesses, the gross margin
increased to 40.8% in 1998 compared to 35.2% in 1997. This increase can be
attributed to improved margins in the Company's subscription broadcasting and
One For All international businesses due primarily to reduced product costs. In
the Company's discontinued North American Retail business, the gross margin
decreased from $5.7 million or 19.4% in 1997 to a negative gross margin of
$75,000 in 1998 as the Company sold the remaining product in this line at
average selling prices just below its carrying value. In 1997, the North
American Retail product inventories were written down by $3.9 million to a
carrying value of approximately $7.0 million from a carrying value prior to the
write down of approximately $10.9 million. The purpose of this write down was to
carry this inventory at what management believed its estimated net realizable
value was as a result of the discontinuation of this business.
As a percentage of net sales, selling, general and administrative expenses
increased to 27.8% in 1998 from 26.3% in 1997. In dollars, the Company's
selling, general and administrative expenses decreased 11.1% during 1998 to
$26.7 million from $30.1 million in 1997. Advertising and payroll expenses
decreased during 1998 by approximately $2.0 and $1.3 million, respectively,
which were partially offset by an increase in amortization expense of $.6
million. The reductions in advertising costs were attributable to the
elimination of retail-related advertising programs for the Company's
discontinued North American Retail product line. The payroll decreases were a
result of headcount reductions associated with the discontinuation of the North
American Retail product line. The increase in amortization expense was due to
the amortization of additional goodwill from businesses acquired and non-compete
covenants entered into in 1998.
In connection with the discontinuation of the North American Retail product
line, the Company increased the allowance for doubtful accounts by $2.5 million
in the fourth quarter of 1997. This increase primarily related to certain
customer accounts of the Company that were deemed at risk due to the Company's
exit from this business.
In December 1997, the Company announced its decision to discontinue its North
American One For All Retail business. As part of that announcement, the Company
advised its employees, stockholders and the investment community generally that
it would recognize a pre-tax charge of $8.4 million during the fourth quarter of
1997.
The table below depicts the costs associated with this action:
Type of Cost Amount
-------------------------------------------- ----------
Severance and related employee benefit costs $3,260,000
Prepaid advertising for retail products 2,129,000
Fixed assets 1,738,000
Intangible assets - trademarks 460,000
Consumer support and service 393,000
Prepaid assets 163,000
Other retail business exit costs 276,000
----------
$8,419,000
==========
Severance and related employee benefits were determined by adding such estimated
amounts for each of the 105 employees of the Company that were terminated in the
restructuring. Prepaid advertising amounts represent trade credits for various
types of advertising that were obtained by the Company in 1994 and 1996 in
exchange for remote control product. These prepaid advertising credits were
recorded by the Company at the carrying value of the inventory exchanged. The
advertising obtained in these arrangements was exclusively geared toward retail
products. Therefore, these credits were written off as part of the
discontinuation of the Company's North American One For All Retail business.
Fixed asset charges consisted primarily of the Company's Twinsburg facility,
tooling associated with the Company's North American One For All Retail product,
and equipment dedicated to the Company's North American One For All Retail line.
The book value of the plant and leasehold improvements for the Company's
Twinsburg facility was compared to the estimated market value of the building
pursuant to an existing purchase offer received from a non-affiliated third
party to determine the necessary charge. The Company's Twinsburg facility was
sold in August 1998 at a value approximating the book value after the write-down
16
17
with no material gain or loss. Charges for all other fixed assets and prepaid
assets were determined by comparing net book values to estimated fair market
values. The fair market values used in these comparisons represent the Company's
estimates based on an assessment of the usefulness of each item within the other
business lines of the Company. Gains or losses resulting from the dispositions
of these adjusted fixed assets in 1998 were not material. The unamortized value
of the trademarks used solely on products that were discontinued and determined
by the Company to not be usable in its on-going businesses were written off in
their entirety. Consumer support and service costs relate to on-going
contractual obligations of the Company to provide telephonic support for certain
of its products that were discontinued as part of this restructuring.
Under the Company's plan, the Company anticipated that the discontinuation would
(i) reduce its annual overhead by approximately $5.0 million as a result of
significantly reducing the advertising associated with the retail business,
eliminating the costs associated with owning and operating the Twinsburg
facility, terminating 105 employees during the first half of 1998, reducing the
Company's amortization expense as a result of writing off certain of the
Company's trademarks used solely on products that were discontinued and
determined by the Company to not be usable in its on-going businesses, and
eliminating costs associated with obtaining and holding an inventory of products
for sale to its retail customers; and (ii) create a profitable new marketing and
distribution channel for certain of its technology and trademarks by licensing
them to third party distributors and manufacturers for their use in the domestic
retail markets.
As the Company anticipated when it made its December 1997 announcement, the
discontinuation occurred primarily during the first half of 1998 and was
completed during the 1998 third quarter. During this transition, the Company
continued to support its retail customers by selling through its remaining
inventory of North American Retail remote control products. Thereafter, in
accordance with the Company's plan, the Company licensed certain of its
proprietary technology and its One For All trademark to a third party overseas
manufacturer, to enable them to supply several of these customers with a limited
number of remote control products on a direct import basis.
During the first half of 1998, the Company relocated its headquarters from its
Twinsburg, Ohio facility to its Technology Center in Cypress, California. In
connection with this move, all of the Company's operations and administrative
functions were moved to its new headquarters, with the exception of its customer
service phone center, which remained in the Company's Twinsburg facility. In the
third quarter of 1998, the Company sold its Twinsburg facility to a third party
at a price of $1.7 million and leased back a portion of it to house its customer
service phone center on terms which the Company believed to be competitive. The
carrying value of the building at the time of the sale was approximately $1.7
million and the Company recognized a loss on the sale of the building of
approximately $34,000.
A reserve for expected cash expenditures of $3.9 million was established as part
of the Company's 1997 fourth quarter restructuring. During 1998, the Company
completed this restructuring and used the reserve in its entirety. The
restructuring proceeded according to the Company's plan and was completed
without any significant changes to the plan. The following table details the
type and amount of costs charged against the reserve during 1998.
Type of Cost Amount
------------------------------ ----------
Severance and related employee
benefit costs $3,180,000
Consumer support and service 393,000
Other retail business exit costs 356,000
----------
$3,929,000
==========
Interest expense decreased by $172,000 in 1998 to $455,000 from $627,000 in 1997
due to reduced borrowing under the Company's revolving letter agreement and
lower average borrowing costs. Other expense increased to $100,000 in 1998 from
$1,000 in 1997. This occurred as a result of higher net currency exchange losses
from the Company's international operations.
The Company had an effective income tax rate for 1998 of 37% as compared to
34.3% in 1997. The difference in the 1998 rate as compared to the 1997 rate was
primarily due to differences in NOL carryforward limitations in California
versus Ohio due to the relocation of the Company's headquarters from Ohio to
California.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are its operations and bank credit
facilities. Cash provided by operating activities for 1999 was $17.5 million as
compared to cash provided by operating activities during 1998 of $9.7 million
and cash used for operating activities during 1997 of $186,000. The improvement
in 1999 cash flow from operating activities is principally due to the
significant increase in income before taxes, depreciation and amortization in
1999 and the effect of cash payments incurred during 1998 to complete the
discontinuation of the North American Retail product line and restructuring
announced in late 1997.
On October 23, 1998, the Company paid off its outstanding credit line with The
Provident Bank and entered into a $15 million revolving credit agreement with
Bank of America National Trust and Savings Association ("B of A"). Under the
revolving credit agreement with B of A, the Company can choose from several
interest rate options at its discretion. The interest rate in effect as of
December 31, 1999 using the Fixed Rate option as defined in the agreement, which
is intended to approximate B of A's cost of funds, plus an applicable margin was
7.08%. The applicable margin varies with a range from 1.25% to 2.00% per annum
depending on the Company's net income before interest, taxes, depreciation and
amortization. At December 31, 1999, the applicable margin was 1.25 percent. The
revolving credit facility, which expires October 23, 2001, is secured by a first
priority security interest in the Company's cash and cash equivalents, accounts
receivable, inventory, equipment, and general intangibles of the Company. The
Company pays a commitment fee of a maximum rate of 3/16 of 1% per year on the
unused portion of the credit line. Under the terms of this revolving credit
agreement, the Company's ability to pay cash dividends on its common stock is
restricted and the Company is subject to certain financial covenants and other
restrictions that are standard for these types of agreements. However, the
Company has authority under this credit facility to acquire up to 1,000,000
shares of its common stock in market purchases and, since the date of this
agreement, the Company has acquired approximately 109,000 shares of stock, at a
cost of approximately $564,500, which it holds as treasury shares and are
available for reissue by the Company. Amounts available for borrowing under this
credit facility are reduced by the outstanding balance of the Company's import
letters of credit. As of December 31, 1999, no amounts were outstanding under
this credit facility. The Company had no outstanding import letters of credit as
of December 31, 1999.
Open market purchases of the Company's common stock under a program announced in
1996 amounted to zero in 1999, approximately $3.5 million during 1998 and
$700,000 in 1997. The Company holds all of these shares as treasury stock and
they are available for reissue by the Company. Presently, except for using a
small number of these treasury shares to compensate its outside board members,
the Company has no plans to distribute these shares although the Company may
change these plans if necessary to fulfill its on-going business objectives. In
addition, during 1999, the Company received proceeds of approximately $3.0
million from the exercise of stock options granted to the Company's current and
former employees, as compared to approximately $1.5 million in 1998 and $264,000
in 1997. The primary reason for the significant increase in stock option
exercises during 1999 and 1998 was that the Company's stock began to trade at
relatively high levels towards the second half of 1998 and into 1999 and many
employees, as well as former employees who were terminated during 1998 as part
of the Company's restructuring (principally the Company's former Chairman of the
Board), elected to exercise their options.
Capital expenditures in 1999, 1998 and 1997 were approximately $1.4 million,
$2.4 million, and $2.7 million, respectively. These expenditures related
primarily to acquiring product tooling in each year and relocating the Company's
headquarters from Twinsburg, Ohio to Cypress, California during 1998. The
Company has currently budgeted approximately $2.2 million for capital
expenditures in 2000 primarily for acquiring product tooling.
Effective July 1, 1999, the Company completed its acquisition of a remote
control distributor in Spain for $750,000 in cash. During the third quarter of
1998, the Company acquired a remote control company in the United States for
$2.4 million, for which 168,422 shares of newly issued Company common stock
valued at $874,000 were issued and $1.5 million was paid in cash. During the
first quarter of 1998, the Company acquired a remote control distributor in the
United Kingdom for $3.0 million in cash, of which $1.7 million was paid in 1998
and the remaining $1.3 million was paid in 1999.
Historically, the Company's working capital needs have typically been greatest
during the third and fourth quarters when accounts receivable and inventories
increase in connection with the fourth quarter holiday selling season.
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19
However, due to the discontinuation of the Company's North American Retail line
and the increasing significance of the Company's other lines of business
including subscription broadcasting and OEM, the Company expects that this
seasonality will be lessened. At December 31, 1999, the Company had $45.5
million of working capital compared to $26.9 million at December 31, 1998. The
increase in working capital is principally due to increases in accumulated cash
and cash equivalents and higher accounts receivable balances due from customers
at December 31, 1999.
It is the Company's policy to carefully monitor the state of its business, cash
requirements and capital structure. The Company believes that funds generated
from operations and available from its borrowing capacity will be sufficient to
fund current business operations as well as anticipated growth at least through
the end of 2000, however, there can be no assurances that this will occur.
YEAR 2000 READINESS DISCLOSURES
As previously reported, over the past several years the Company developed and
implemented a plan to address the anticipated impacts of the so-called Year 2000
problem on its information technology (IT) systems and non-IT systems. The
Company also surveyed selected third parties to determine the status of their
Year 2000 compliance programs. In addition, contingency plans were developed
specifying what the Company would do if it or important third parties
experienced disruptions to critical business activities as a result of the Year
2000 problem.
The Company's Year 2000 plan was completed in all material respects prior to the
anticipated Year 2000 failure dates. As of March 24, 2000, the Company has not
experienced any materially important business disruptions or system failures as
a result of Year 2000 issues, nor is it aware of any Year 2000 issues that have
impacted its customers, suppliers or other significant third parties to an
extent significant to the Company. However, Year 2000 compliance has many
elements and potential consequences, some of which may not be foreseeable or may
be realized in future periods. Consequently, there can be no assurance that
unforeseen circumstances may not arise, or that the Company will not in the
future identify equipment or systems which are not Year 2000 compliant.
As of December 31, 1999, the Company's total incremental costs of addressing
Year 2000 issues were approximately $165,000. This amount has been incurred and
was funded through operating cash flow.
In addition, the Company has performed a full internal evaluation of its
non-information technology systems and products. Based upon that evaluation and
certain ongoing tests that the Company performs from time to time, it believes
that its non-information technology systems and products are Year 2000
compliant. Because of these ongoing evaluations, the Company sells its products
with Year 2000 compliance warranties. Although the Company strongly believes
that its products are Year 2000 compliant and provides Year 2000 compliance
warranties with its products, there can be no assurance that the Company has
identified all possible Year 2000 product issues and that any such issues would
not have an adverse financial impact on the Company.
RISK FACTORS
Forward Looking Statements
The Company cautions that the following important factors, among others
(including but not limited to factors discussed below, in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as those discussed elsewhere in this Annual Report of the Form 10-K, and as
mentioned from time to time in the Company's other reports filed with the
Securities and Exchange Commission), could affect the Company's actual results
and could cause or contribute to the Company's actual consolidated results to
differ materially from those expressed in any forward-looking statements of the
Company made by or on behalf of the Company. The factors included here are not
exhaustive. Further, any forward-looking statement speaks only as of the date on
which such statement is made, and the Company undertakes no obligation to update
any forward-looking statement or statements to reflect events or circumstances
after the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time and it is not
possible for management to predict all of such factors, nor can it assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any
19
20
forward-looking statements. Therefore, forward-looking statements should not be
relied upon as a prediction of actual future results.
While management believes that the forward looking statements made in this
report are based on reasonable assumptions, the actual outcome of such
statements is subject to a number of risks and uncertainties, including
continued acceptance of the Company's technology and products, the impact of
competitive pressures, including products and pricing, locating and finalizing
acceptable acquisition targets and/or strategic partners, the availability of
financing for acquisitions on terms acceptable to the Company, fluctuations in
currency exchange rates, the consolidation of and new competition experienced by
members in the cable industry, principally from satellite and other similar
broadcast providers, general economic and stock market conditions and other
risks which are otherwise set forth in this Annual Report on Form 10-K and the
Company's other filings with the Securities and Exchange Commission.
Dependence Upon Key Suppliers
Most of the components used in the Company's products are available from
multiple sources; however, the Company has elected to purchase integrated
circuit components used in the Company's products, principally its wireless
control products, and certain other components used in the Company's products,
from two main sources, each of which provide in excess of ten percent (10%) of
the Company's microprocessors for use in its products. The Company has developed
alternative sources of supply for these integrated circuit components. However,
there can be no assurance that the Company will be able to continue to obtain
these components on a timely basis. The Company generally maintains inventories
of its integrated chips, which could be used in part to mitigate, but not
eliminate, delays resulting from supply interruptions. An extended interruption,
shortage or termination in the supply of any of the components used in the
Company's products, or a reduction in their quality or reliability, or a
significant increase in prices of components, would have an adverse effect on
the Company's business and results of operations.
Dependence on Foreign Manufacturing
Third-party manufacturers located in foreign countries manufacture all of the
Company's wireless controls. The Company's arrangements with its foreign
manufacturers are subject to the risks of doing business abroad, such as import
duties, trade restrictions, work stoppages, political instability and other
factors which could have a material adverse effect on the Company's business and
results of operations. The Company believes that the loss of any one or more of
its manufacturers would not have a long-term material adverse effect on the
Company's business and results of operations because numerous other
manufacturers are available to fulfill the Company's requirements, however, the
loss of any of the Company's major manufacturers could adversely effect the
Company's business until alternative manufacturing arrangements are secured.
Potential Fluctuations in Quarterly Results
The Company's quarterly financial results may vary significantly depending
primarily upon factors such as the timing of significant orders, the timing of
new product offerings by the Company and its competitors and product
presentations and the loss or acquisition of any significant customers. In
addition, historically the Company's business has been seasonal, with the
largest proportion of sales occurring in September, October and November of each
calendar year. Factors such as quarterly variations in financial results could
adversely affect the market price of the Common Stock and cause it to fluctuate
substantially. In addition, the Company (i) may from time to time increase its
operating expenses to fund greater levels of research and development, increase
its sales and marketing activities, develop new distribution channels, improve
its operational and financial systems and broaden its customer support
capabilities and (ii) may incur significant operating expenses associated with
any new acquisitions. To the extent that such expenses precede or are not
subsequently followed by increased revenues, the Company's business, operating
results and financial condition will be materially adversely effected.
The Company may experience significant fluctuations in future quarterly
operating results that may be caused by many factors, including demand for the
Company's products, introduction or enhancement of products by the Company and
its competitors, the loss or acquisition of any significant customers, market
acceptance of new products, price reductions by the Company or its competitors,
mix of distribution channels through which products are sold, level of product
returns, mix of customers and products sold, component pricing, mix of
international and
20
21
domestic revenues, and general economic conditions. In addition, as a strategic
response to changes in the competitive environment, the Company may from time to
time make certain pricing or marketing decisions or acquisitions that could have
a material adverse effect on the Company's business, results of operations or
financial condition. As a result, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as any indication of future performance. Due to all of
the foregoing factors, it is likely that in some future quarters the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's common stock would likely
be materially adversely effected.
Dependence on Consumer Preference
The Company is susceptible to fluctuations in its business based upon consumer
demand for its products. The Company believes that its success depends in
substantial part on its ability to anticipate, gauge and respond to such
fluctuations in consumer demand. However, it is impossible to predict with
complete accuracy the occurrence and effect of any such event that will cause
such fluctuations in consumer demand for the Company's products. Moreover, the
Company cautions that any increases in sales or growth in revenue that it
achieves may be transitory and should by no means be construed to mean that such
increases or growth will continue.
Dependence Upon Timely Product Introduction
The Company's ability to remain competitive in the wireless control products
market will depend in part upon its ability to successfully identify new product
opportunities and to develop and introduce new products and enhancements on a
timely and cost effective basis. There can be no assurance that the Company will
be successful in developing and marketing new products or in enhancing its
existing products, or that such new or enhanced products will achieve consumer
acceptance, and if acquired, will sustain that acceptance, that products
developed by others will not render the Company's products non-competitive or
obsolete or that the Company will be able to obtain or maintain the rights to
use proprietary technologies developed by others which are incorporated in the
Company's products. Any failure by the Company to anticipate or respond
adequately to technological developments and customer requirements, or any
significant delays in product development or introduction, could have a material
adverse effect on the Company's financial condition and results of operations.
In addition, the introduction of new products which the Company may introduce in
the future may require the expenditure of a significant amount of funds for
research and development, tooling, manufacturing processes, inventory and
marketing. In order to achieve high volume production of any new product, the
Company may have to make substantial investments in inventory and expand its
production capabilities.
Dependence on Major Customers
The Company's performance is affected by the economic strength and weakness of
its worldwide customers. The Company sells its wireless control products and
proprietary technologies to private label customers, original equipment
manufacturers ("OEMs"), and companies involved in the subscription broadcasting
industry. The Company also supplies its products to its wholly-owned, non-U.S.
subsidiaries and to independent foreign distributors, who in turn distribute the
Company's products worldwide, with Europe, Australia, New Zealand, Mexico and
selected countries in Asia and Latin America currently representing the
Company's principal foreign markets. In 1999, the Company lost a significant
customer in its subscription broadcasting business due to that customer being
acquired by a third party. During 1999, the Company had two customers that
acquired more than ten percent of the Company's products and the loss of either
of these customers or any of the Company's other key customers either in the
United States or abroad due to the financial weakness or bankruptcy of any such
customer or the inability of the Company to obtain orders or maintain its order
volume with its major customers may have an adverse effect on the Company's
financial condition or results of operations.
Competition
The wireless control industry is characterized by intense competition based
primarily on product availability, price, speed of delivery, ability to tailor
specific solutions to customer needs, quality and depth of product lines. The
Company's competition is fragmented across its product lines, and accordingly,
the Company does not compete
21
22
with any one company across all product lines. The Company competes with a
variety of entities, some of which have greater financial and other resources
than the Company. The Company's ability to remain competitive in this industry
depends in part on its ability to successfully identify new product
opportunities and develop and introduce new products and enhancements on a
timely and cost effective basis as well as its ability to identify and enter
into strategic alliances with entities doing business within the industries the
Company serves. There can be no assurances that the Company and its product
offerings will be and/or remain competitive or that any strategic alliances, if
any, which the Company enters into will achieve the type, extent and amount of
success or business that the Company expects or hopes to achieve.
Potential for Litigation
As is typical in the Company's industry and the nature and kind of business in
which the Company is engaged, from time to time, various claims, charges and
litigation are asserted or commenced by third parties against the Company or by
the Company against third parties arising from or related to product liability,
infringement of patent or other intellectual property rights, breach of
warranty, contractual relations, or employee relations. The amounts claimed may
be substantial but may not bear any reasonable relationship to the merits of the
claims or the extent of any real risk of court awards. While it is the opinion
of management that the Company's products do not infringe any third parties'
patent or other intellectual property rights, the costs associated with
defending or pursuing any such claims or litigation could be substantial and
amounts awarded as final judgments, if any, in any such potential or pending
litigation, could have a significant and material adverse effect on the
Company's financial condition or results of operations.
General Economic Conditions
General economic conditions, both domestic and foreign, have an impact on the
Company's business and financial results. From time to time the markets in which
the Company sells its products experience weak economic conditions that may
negatively affect the sales of the Company's products. To the extent that
general economic conditions affect the demand for products sold by the Company,
such conditions could have an adverse effect on the Company's business.
1997 Restructuring Efforts
The Company believes that the discontinuation of its North American Retail
business and its subsequent restructuring favorably impacted the Company's
ongoing operations due to (i) reductions in the Company's annual overhead which
were a result of closing the Company's Twinsburg, Ohio facility, (ii)
eliminating employee and other costs associated with operating this business,
and (iii) generating revenues from licensing certain of its technology and
trademarks. There can be no assurance that any such cost savings or revenues
will continue to occur and if they do, that they will be significant or
maintained.
Effects on the Company Due to International Operations
By operating its business in countries outside of the United States, the Company
is exposed to fluctuations in foreign currency exchange rates, exchange ratios,
nationalization or expropriation of assets, import/export controls, political
instability, variations in the protection of intellectual property rights,
limitations on foreign investments and restrictions on the ability to convert
currency. These risks are inherent in conducting operations in geographically
distant locations, with customers speaking different languages and having
different cultural approaches to the conduct of business, any one of which alone
or collectively, may have an adverse affect on the Company's international
operations, and consequently on the Company's business, operating results and
financial condition. While the Company will continue to work toward minimizing
any adverse affects of conducting its business abroad, no assurance can be made
that the Company will be successful in minimizing any such affects.
OUTLOOK
The Company's focus in 2000 is to continue to seek ways to increase its customer
base worldwide, particularly in the areas of subscription broadcasting, OEM, and
its One For All international retail business. In addition, the Company will
increase its focus on creating new applications for its proprietary and/or
patented technologies in the
22
23
consumer electronics/OEM market, and computer/internet control markets.
The Company will also continue in 2000 to control its overall cost of doing
business. Management believes that through product design changes and its
purchasing efforts, improvements in the Company's gross margins and efficiencies
in its selling, general and administrative expenses can be accomplished,
although there can be no assurances that there will be any improvements to the
Company's gross margin or that the Company will achieve any cost savings through
these efforts and if obtained, that any such improvements or savings will be
significant or maintained.
In addition, during 2000, management will continue to pursue its overall
strategy of seeking out ways to operate all aspects of the Company more
profitably. This strategy will include looking at acceptable acquisition targets
and strategic partnership opportunities. The Company cautions, however, that no
assurances can be made that any suitable acquisition targets or partnership
opportunities will be identified and, if identified, that a transaction can be
consummated. Moreover, if consummated, no assurances can be made that any such
acquisition or partnership will profitably add to the Company's operations.
While management believes that the forward looking statements made in this
report are based on reasonable assumptions, the actual outcome of such
statements is subject to a number of risks and uncertainties, including
continued acceptance of the Company's technology and products, the impact of
competitive pressures, including products and pricing, locating and finalizing
acceptable acquisition targets and/or strategic partners, the availability of
financing for acquisitions on terms acceptable to the Company, fluctuations in
currency exchange rates, the consolidation of and new competition experienced by
members in the cable industry, principally from satellite and other similar
broadcast providers, general economic and stock market conditions and other
risks which are otherwise set forth in this Annual Report on Form 10-K and the
Company's other filings with the Securities and Exchange Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including interest rate and
foreign currency exchange rate fluctuations. The Company has established
policies, procedures and internal processes governing its management of market
risks and the use of financial instruments to manage its exposure to such risks.
The interest payable under the Company's revolving credit agreement with its
bank is variable and generally based on either the bank's cost of funds, or the
IBOR rate, and is affected by changes in market interest rates. At December 31,
1999, the Company had no borrowings on its credit line. The interest rate in
effect on the credit line using the bank's cost of funds rate as the base as of
December 31, 1999 was 7.08%. The Company has wholly owned subsidiaries in the
Netherlands, United Kingdom, Germany and Spain. Sales from these operations are
typically denominated in local currencies including Euros, British Pounds,
German Marks, and Spanish Pesetas thereby creating exposures to changes in
exchange rates. Changes in the local currencies/U.S. Dollars exchange rate may
positively or negatively affect the Company's sales, gross margins and retained
earnings. The Company, from time to time, enters into foreign currency exchange
agreements to manage its exposure arising from fluctuating exchange rates
related to specific transactions, primarily foreign currency forward contracts
for inventory purchases. The Company had a number of forward exchange contracts
outstanding at December 31, 1999 with an aggregate notional value of
approximately $9.1 million. The Company does not enter into any derivative
transactions for speculative purposes. The sensitivity of earnings and cash
flows to variability in exchange rates is assessed by applying an approximate
range of potential rate fluctuations to the Company's assets, obligations and
projected results of operations denominated in foreign currencies. Based on the
Company's overall foreign currency rate exposure at December 31, 1999, the
Company believes that movements in foreign currency rates should not materially
affect the financial position of the Company, although no assurance can be made
that any such foreign currency rate movements in the future will not have a
material affect.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants 25
Consolidated Balance Sheets at December 31, 1999 and 1998 26
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 27
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997 28
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 29
Notes to Consolidated Financial Statements 30
Financial Statement Schedule:
Schedules for the years ended December 31, 1999, 1998 and 1997
II - Valuation and Qualifying Accounts and Reserves 42
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
24
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Universal Electronics Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Universal Electronics Inc. and its subsidiaries at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. In addition, in our opinion,
the financial statement schedule listed in the accompanying index present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Costa Mesa, California
January 21, 2000
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26
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------
1999 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 13,286,219 $ 1,488,672
Accounts receivable, net 27,932,794 23,639,054
Inventories 13,493,813 14,834,058
Prepaid expenses and other current assets 1,887,367 1,835,035
Deferred income taxes 3,906,102 1,268,924
------------ ------------
Total current assets 60,506,295 43,065,743
Equipment, furniture and fixtures, net 3,696,906 4,439,947
Goodwill and other intangible assets, net 6,264,603 6,158,135
Other assets 1,661,867 1,547,641
Deferred income taxes 1,621,795 5,465,424
------------ ------------
Total assets $ 73,751,466 $ 60,676,890
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility $ -- $ 4,786,293
Accounts payable 8,824,212 7,756,515
Accrued income taxes 793,902 331,395
Accrued compensation 1,928,110 1,090,149
Other accrued taxes 830,953 439,729
Other accrued expenses 2,623,271 1,740,335
------------ ------------
Total current liabilities 15,000,448 16,144,416
Notes payable 239,821 --
------------ ------------
Total liabilities 15,240,269 16,144,416
Commitments and contingencies (note 15)
Stockholders' equity:
Preferred stock, $.01 par value, 624,512 shares
authorized; none issued or outstanding -- --
Common stock, $.01 par value, 20,000,000 shares
authorized; 15,317,304 and 14,453,214 shares issued at
December 31, 1999 and 1998, respectively 153,173 144,532
Paid-in capital 64,299,603 57,899,173
Currency translation adjustment (236,778) (121,753)
Retained earnings/(accumulated deficit) 1,086,760 (6,653,322)
Unamortized value of restricted stock grants (83,117) --
------------ ------------
65,219,641 51,268,630
Less cost of common stock in treasury, 1,652,384 and
1,659,210 shares in 1999 and 1998, respectively 6,708,444 6,736,156
------------ ------------
Total stockholders' equity 58,511,197 44,532,474
------------ ------------
Total liabilities and stockholders' equity $ 73,751,466 $ 60,676,890
============ ============
The accompanying notes are an integral part of these financial statements.
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UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------------------------------
1999 1998 1997
------------- ------------- -------------
Net sales
On-going business $ 105,091,183 $ 89,035,707 $ 85,231,450
Discontinued North American Retail
business -- 7,086,912 29,106,970
------------- ------------- -------------
105,091,183 96,122,619 114,338,420
Cost of sales
On-going business 61,714,724 52,717,177 55,275,357
Discontinued North American Retail
business -- 7,161,912 23,451,789
Inventory write-down -- -- 3,892,215
------------- ------------- -------------
61,714,724 59,879,089 82,619,361
Gross profit 43,376,459 36,243,530 31,719,059
Selling, general and administrative expenses 30,408,321 26,738,845 30,089,673
Discontinued North American Retail
business bad debt expenses -- -- 2,500,000
Restructuring expense -- -- 8,418,742
------------- ------------- -------------
Operating income (loss) 12,968,138 9,504,685 (9,289,356)
Interest expense (income) (107,594) 455,577 627,495
Other expense (income) (43,051) 100,355 587
------------- ------------- -------------
Income (loss) before income taxes 13,118,783 8,948,753 (9,917,438)
Provision (benefit) for income taxes 5,378,701 3,311,103 (3,399,076)
------------- ------------- -------------
Net income (loss) $ 7,740,082 $ 5,637,650 $ (6,518,362)
============= ============= =============
Net income (loss) per share:
Basic $ 0.58 $ 0.44 $ (.52)
============= ============= =============
Diluted $ 0.55 $ 0.43 $ (.52)
============= ============= =============
Weighted average common stock outstanding:
Basic 13,311,594 12,772,796 12,564,062
============= ============= =============
Diluted 14,126,210 13,199,814 12,564,062
============= ============= =============
The accompanying notes are an integral part of these financial statements.
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28
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock in
Common Stock Issued Treasury
Shares Amount Shares Amount
---------- -------- ---------- -----------
Balance at December 31, 1996
as previously reported 6,787,025 $ 67,870 (415,000) $(2,593,750)
2-for-1 stock split effective
January 31, 2000 6,787,025 67,870 (415,000) --
---------- -------- ---------- -----------
Balance at December 31, 1996 13,574,050 135,740 (830,000) (2,593,750)
---------- -------- ---------- -----------
Additional shares issued for
employee retirement plan 41,520 415 -- --
Stock options exercised 93,250 933 -- --
Purchase of treasury shares -- -- (273,200) (736,048)
Shares issued to Directors -- -- 18,778 58,681
Repayment of loans by
employees for purchases of
Common Stock -- -- -- --
Net loss -- -- -- --
Currency translation adjustment -- -- -- --
---------- -------- ---------- -----------
Balance at December 31, 1997 13,708,820 137,088 (1,084,422) (3,271,117)
---------- -------- ---------- -----------
Additional shares issued for
employee retirement plan 16,274 163 -- --
Issuance of warrant to customer -- -- -- --
Stock options exercised 559,698 5,597 -- --
Purchase of treasury shares -- -- (583,600) (3,492,576)
Shares issued to Directors -- -- 8,812 27,537
Net income -- -- -- --
Shares issued in connection
with business acquired 168,422 1,684 -- --
Currency translation adjustment -- -- -- --
---------- -------- ---------- -----------
Balance at December 31, 1998 14,453,214 144,532 (1,659,210) (6,736,156)
---------- -------- ---------- -----------
Additional shares issued for
employee retirement plan 20,222 202 -- --
Stock options exercised 835,918 8,359 -- --
Shares issued to Directors -- -- 6,826 27,712
Restricted stock grants 7,950 80 -- --
Amortization of restricted
stock grants -- -- -- --
Income tax benefit related to
the exercise of non-qualified
stock options -- -- -- --
Net income -- -- -- --
Currency translation adjustment -- -- -- --
---------- -------- ---------- -----------
Balance at December 31, 1999 15,317,304 $153,173 (1,652,384) $(6,708,444)
---------- -------- ---------- -----------
Unamortized
Retained Value of
Currency Earnings/ Restricted Total
Paid in Translation (Accumulated Stock Stockholders'
Capital Adjustment Deficit) Grants Equity
----------- ----------- ------------ ----------- -------------
Balance at December 31, 1996
as previously reported $53,950,430 $ (25,084) $(5,772,610) $ -- $45,626,856
2-for-1 stock split effective
January 31, 2000 (67,870) -- -- -- --
----------- --------- ----------- --------- -----------
Balance at December 31, 1996 53,882,560 (25,084) (5,772,610) -- 45,626,856
----------- --------- ----------- --------- -----------
Additional shares issued for
employee retirement plan 128,826 -- -- -- 129,241
Stock options exercised 263,556 -- -- -- 264,489
Purchase of treasury shares -- -- -- -- (736,048)
Shares issued to Directors 1,319 -- -- -- 60,000
Repayment of loans by
employees for purchases of
Common Stock 109,235 -- -- -- 109,235
Net loss -- -- (6,518,362) -- (6,518,362)
Currency translation adjustment -- (48,177) -- -- (48,177)
----------- --------- ----------- --------- -----------
Balance at December 31, 1997 54,385,496 (73,261) (12,290,972) -- 38,887,234
----------- --------- ----------- --------- -----------
Additional shares issued for
employee retirement plan 88,520 -- -- -- 88,683
Issuance of warrant to customer 1,006,000 -- -- -- 1,006,000
Stock options exercised 1,524,820 -- -- -- 1,530,417
Purchase of treasury shares -- -- -- -- (3,492,576)
Shares issued to Directors 22,332 -- -- -- 49,869
Net income -- -- 5,637,650 -- 5,637,650
Shares issued in connection
with business acquired 872,005 -- -- -- 873,689
Currency translation adjustment -- (48,492) -- -- (48,492)
----------- --------- ----------- --------- -----------
Balance at December 31, 1998 57,899,173 (121,753) (6,653,322) -- 44,532,474
----------- --------- ----------- --------- -----------
Additional shares issued for
employee retirement plan 194,719 -- -- -- 194,921
Stock options exercised 3,027,862 -- -- -- 3,036,221
Shares issued to Directors 23,313 -- -- -- 51,025
Restricted stock grants 107,633 -- -- (107,713) --
Amortization of restricted
stock grants -- -- -- 24,596 24,596
Income tax benefit related to
the exercise of non-qualified
stock options 3,046,903 -- -- -- 3,046,903
Net income -- -- 7,740,082 -- 7,740,082
Currency translation adjustment -- (115,025) -- -- (115,025)
----------- --------- ----------- --------- -----------
Balance at December 31, 1999 $64,299,603 $(236,778) $ 1,086,760 $ (83,117) $58,511,197
----------- --------- ----------- --------- -----------
The accompanying notes are an integral part of these financial statements.
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UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
Cash provided by (used for) operating activities:
Net income (loss) $ 7,740,082 $ 5,637,650 $ (6,518,362)
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating
activities:
Depreciation and amortization 3,616,267 2,600,514 2,131,179
Provision for doubtful accounts 1,504,275 342,661 2,850,000
Inventory write-down -- -- 3,892,215
Restructuring expense -- -- 8,418,742
Deferred income taxes 4,253,354 2,944,948 (3,531,008)
Other 246,914 138,552 189,242
Changes in operating assets and liabilities:
Accounts receivable (5,518,015) 2,067,594 (8,736,334)
Inventory 1,340,245 1,805,336 676,397
Prepaid expenses and other assets (369,755) (841,762) (3,660)
Accounts payable and accrued expenses 3,808,594 (1,258,126) 541,938
Accrued restructuring expense -- (3,928,933) --
Accrued income and other taxes 853,731 230,766 (96,648)
------------ ------------ ------------
Net cash provided by (used for)
operating activities 17,475,692 9,739,200 (186,299)
Cash used for investing activities:
Acquisition of fixed assets (1,441,601) (2,395,498) (2,739,028)
Sale of building and other assets -- 1,862,711 --
Payments for businesses acquired (2,050,000) (3,200,000) --
Employee loan repayments for common stock -- -- 109,235
Acquisition of intangible assets (321,447) (1,153,228) (131,322)
------------ ------------ ------------
Net cash used for investing activities (3,813,048) (4,886,015) (2,761,115)
------------ ------------ ------------
Cash provided by (used for) financing activities:
Short-term bank borrowing 10,810,000 49,931,280 46,766,476
Short-term bank payments (15,596,293) (52,381,753) (42,713,186)
Proceeds from stock options exercised 3,036,221 1,530,417 264,489
Treasury stock purchased -- (3,492,576) (736,048)
------------ ------------ ------------
Net cash provided by (used for)
financing activities (1,750,072) (4,412,632) 3,581,731
Effect of exchange rate changes on cash (115,025) (48,492) (48,177)
------------ ------------ ------------
Net increase in cash and cash equivalents 11,797,547 392,061 586,140
Cash and cash equivalents at beginning of year 1,488,672 1,096,611 510,471
------------ ------------ ------------
Cash and cash equivalents at end of year $ 13,286,219 $ 1,488,672 $ 1,096,611
============ ============ ============
The accompanying notes are an integral part of these financial statements.
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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
Business
Universal Electronics develops and markets easy-to-use, pre-programmed universal
wireless control devices and technologies principally for home video and audio
entertainment equipment. The Company sells its wireless control products and
proprietary technologies to private label customers, original equipment
manufacturers ("OEMs"), retail businesses, and companies involved in the
subscription broadcasting industry. In December 1997, the Company decided to
discontinue its North American One For All Retail business. During 1998 and
1999, the Company continued to sell its wireless control products
internationally under the One for All(R) brand name. The Company also marketed a
line of home automation products under the Eversafe(R) brand name, principally a
universal garage door opener.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany accounts and significant transactions have
been eliminated in the consolidated financial statements.
Revenue Recognition
Product revenues are recognized upon product shipment. The Company provides
allowances for estimated returns of defective or damaged product and other sales
promotions and discounts at the time of product shipment.
Foreign Currency Translation
The assets and liabilities of foreign subsidiaries are translated to U.S.
dollars using the exchange rates in effect at the balance sheet date. Results of
operations are translated using the average exchange rates during the period.
Resulting translation adjustments are recorded in a separate component of
stockholders' equity, "Currency Translation Adjustment".
Cash and Cash Equivalents
Cash and cash equivalents include cash accounts and all investments purchased
with initial maturities of three months or less.
Inventories
Inventories consist of wireless control devices, including universal remote
controls, wireless keyboards, antennas, and related component parts, and home
safety and automation devices and are valued at the lower of cost or market.
Cost is determined using the first-in, first-out method.
Equipment, Furniture and Fixtures
Fixed assets are recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets. Tooling and
equipment are depreciated over two to 7 years. Furniture and fixtures are
depreciated over five to 7 years. Leasehold improvements are amortized over
the terms of the related leases. When fixed assets are retired or otherwise
disposed of, the cost and accumulated depreciation are removed from the
appropriate accounts and any gain or loss is included in current income.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are stated on the basis of cost and are
amortized on a straight-line basis over the estimated future periods to be
benefited. The amortization periods range from five to 10 years. Goodwill and
other intangible assets are periodically reviewed for impairment based on an
assessment of undiscounted future cash flows to ensure that they are
appropriately valued. At December 31, 1999, 1998 and 1997, accumulated
amortization was $2,098,780, $962,178 and $225,331, respectively. Amortization
expense was $1,339,799, $737,497 and $128,805 for the years ended December 31,
1999, 1998 and 1997, respectively.
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31
Income Taxes
Deferred income taxes are provided utilizing an asset and liability method that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. A valuation allowance is established to
reduce deferred tax assets if it is more likely than not that all, or some
portion, of the deferred tax assets will not be realized.
Research and Development
Research and development expenditures are expensed as incurred. Research and
development expense was $2,391,000, $2,712,000 and $2,950,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
Advertising
Advertising costs are expensed as incurred. Advertising expense was $1,263,344,
$1,511,065, and $3,536,835 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted net income
(loss) per share is computed by dividing net income (loss) by the weighted
average number of common shares and dilutive potential common shares which
includes the dilutive effect of stock options. Dilutive potential common shares
for all periods presented are computed utilizing the treasury stock method.
Stock Split
On December 20, 1999, the Board of Directors declared a two-for-one split of the
Company's common stock effective January 31, 2000, in the form of a stock
dividend for stockholders of record at the close of business on January 10,
2000. All share and per-share amounts in the accompanying consolidated financial
statements and notes to consolidated financial statements have been restated to
give retroactive effect to the stock split.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". This statement establishes standards for reporting and display of
comprehensive income and its components in the Company's consolidated financial
statements. Comprehensive income consists of net income and other gains and
losses affecting stockholders' equity that, under generally accepted accounting
principles, are excluded from net income. SFAS No. 130 did not have a material
effect on the Company's consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information", which amends the disclosure requirements of
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise". The
Company adopted the provisions of SFAS No. 131 in the year ended December 31,
1998 and has added certain disclosures for all periods presented.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". The statement is effective for fiscal years
beginning after June 15, 2000. The Company is assessing the impact this
statement will have on the consolidated financial statements and has not yet
adopted the provisions of SFAS No. 133 as of December 31, 1999.
Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
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32
Reclassifications
Certain prior year amounts have been reclassified to conform with the
presentation utilized in the year ended December 31, 1999.
NOTE 2 - ACQUISITIONS
Effective July 1, 1999, the Company completed its acquisition of a remote
control distributor in Spain for $750,000 in cash. On September 1, 1998 the
Company acquired a domestic remote control company for approximately $2.4
million. The acquisition was funded by $1.5 million in cash and 168,422 shares
of the Company's newly issued common stock valued at $874,000. During the first
quarter of 1998, the Company acquired a remote control distributor in the United
Kingdom for $3.0 million, of which $1.7 million was paid in 1998 and the
remaining $1.3 million was paid in 1999.
The excess of the aggregate purchase prices for these acquisitions over the fair
market value of net assets acquired is recorded as goodwill and is being
amortized over periods ranging from five to 10 years.
Pro forma results for 1999 and 1998, assuming the acquisitions had occurred at
the beginning of the periods, would not have been materially different from the
Company's historical results for the periods presented.
On October 12, 1998, the Company entered into a covenant not to compete
agreement with a former officer of the Company at a cost of $949,000 in cash,
which is recorded as an intangible asset and is being amortized over the five
year duration of the contract.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
DECEMBER 31,
----------------------------
1999 1998
----------- -----------
Accounts receivable, gross $29,812,725 $25,250,522
Allowance for doubtful accounts (1,879,931) (1,611,468)
----------- -----------
27,932,794 $23,639,054
=========== ===========
In connection with the discontinuation of the Company's North American Retail
business as discussed in Note 16, the Company increased the allowance for
doubtful accounts by $2,500,000 in 1997. This increase primarily related to
certain customer accounts of the Company that were deemed at risk due to the
Company's exit from the North American Retail business. As of December 31, 1999
and 1998, accounts receivable for the Company's North American Retail business
were $678,000 and $2,011,000, respectively. Write-offs in 1999 and 1998
attributable to the accounts receivable for the Company's North American Retail
business were $1,226,000 and $1,320,000, respectively.
NOTE 4 - INVENTORIES
Inventories consist of the following:
DECEMBER 31,
----------------------------
1999 1998
----------- -----------
Components $ 5,710,349 $ 5,993,160
Finished goods 7,783,464 8,840,898
----------- -----------
$13,493,813 $14,834,058
=========== ===========
The Company carries some additional amounts of inventory in order to satisfy
certain of its customers' inventory requirements on a timely basis. New product
innovations and technological advances may shorten a given product's life cycle.
Management continually monitors the inventory status to control inventory levels
and dispose of any excess or obsolete inventories on hand. Management believes
an adequate provision has been made in the financial statements for any loss on
disposition of inventory.
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33
In 1997, the North American Retail product inventories were written down by
$3,892,000 to their estimated net realizable value as a result of the
discontinuation of the Company's North American Retail business as discussed in
Note 16.
NOTE 5 - EQUIPMENT, FURNITURE AND FIXTURES
Fixed assets consist of the following:
DECEMBER 31,
----------------------------
1999 1998
----------- -----------
Tooling $ 4,564,749 $ 3,679,610
Equipment 4,214,863 3,752,150
Furniture and fixtures 762,343 779,126
Leasehold improvements 889,140 858,040
----------- -----------
10,431,095 9,068,926
Accumulated depreciation (6,734,189) (4,628,979)
----------- -----------
3,696,906 $ 4,439,947
=========== ===========
Depreciation expense was $2,276,468, $1,863,667 and $2,018,979 for the years
ended December 31, 1999, 1998 and 1997, respectively.
In 1997, all fixed assets related to the North American Retail business to be
disposed of in connection with the discontinuation discussed in Note 16
(including the Company's Twinsburg, Ohio facility), were written down to their
estimated fair market value. The Company's Twinsburg, Ohio building was
classified as held for sale in the consolidated balance sheet as of December 31,
1997. In August 1998, the Company sold the building for $1,695,000, a price
approximating the book value.
NOTE 6 - REVOLVING CREDIT LINE
On October 23, 1998, the Company paid off its outstanding credit line with The
Provident Bank and entered into a $15 million revolving credit agreement with
Bank of America National Trust and Savings Association ("B of A"). Under the
revolving credit agreement with B of A, the Company can choose from several
interest rate options at its discretion. The interest rate in effect as of
December 31, 1999 using the Fixed Rate option as defined in the agreement, which
is intended to approximate B of A's cost of funds, plus an applicable margin,
was 7.08%. The applicable margin varies with a range from 1.25% to 2.00% per
annum depending on the Company's net income before interest, taxes, depreciation
and amortization. At December 31, 1999, the applicable margin for the Company
was 1.25 percent. The revolving credit facility, which expires on October 23,
2001, is secured by a first priority security interest in the Company's cash and
cash equivalents, accounts receivable, inventory, equipment, and general
intangibles of the Company. The Company pays a commitment fee of a maximum rate
of 3/16 of 1% per year on the unused portion of the credit line. Under the terms
of this revolving credit agreement, the company's ability to pay cash dividends
on its common stock is restricted and the Company is subject to certain
financial covenants and other restrictions. However, the Company has authority
under this credit facility to acquire up to 1,000,000 shares of its common stock
in market purchases and, since the date of this agreement, the Company has
acquired approximately 109,000 shares of stock which it holds as treasury shares
and are available for reissue by the Company. Amounts available for borrowing
under the credit facility are reduced by the outstanding balance of the
Company's import letters of credit.
On November 22, 1995, the Company entered into a $22 million revolving credit
agreement with The Provident Bank that expired on April 30, 1998. The interest
rate on the borrowing was modified periodically based on formulas specified in
the agreement and was based on the bank's prime rate (8.50% at December 31,
1997) plus one-quarter percent. Effective in January 1997, the agreement was
amended to modify certain of the financial covenants and adjust the interest
rate to be equal to the bank's prime rate plus one-quarter of one percent. Under
the terms of this revolving credit facility, the Company's ability to pay cash
dividends on its common stock was restricted and the Company was subject to
certain financial covenants with limits on its ability to repurchase its stock
and other restrictions. Further, amounts available for borrowing under this
credit facility were reduced by the outstanding balance of the Company's import
letters of credit. The Company paid a commitment fee of a maximum rate of 1/8 of
1% per year on the unused portion of the credit line. The revolving credit
facility was secured by a
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first priority security interest in the accounts receivable, inventory,
equipment and general intangibles of the Company.
The Company had approximately $0, $4.8 and $7.2 million at December 31, 1999,
1998 and 1997, respectively, outstanding under the revolving credit facilities
and approximately $0, $0, and $0.5 million of import letters of credit
outstanding at December 31, 1999, 1998 and 1997, respectively. The weighted
average interest rate was 6.56%, 8.07% and 8.30% for the years ended December
31, 1999, 1998 and 1997, respectively. Interest paid on the revolving credit
facilities amounted to $28,422, $488,144 and $616,239 for the years ended
December 31, 1999, 1998 and 1997, respectively.
NOTE 7 - FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of investments in cash and
cash equivalents, accounts receivable and accounts payable, as well as
obligations under the credit facility described above. The carrying values of
these instruments approximate fair value because of their short maturity.
The Company enters into forward exchange contracts to hedge foreign currency
transactions on a continuing basis for periods consistent with its committed
exposures. These contracts are with major financial institutions and the risk of
loss due to the financial institutions' nonperformance is considered remote. The
gains and losses on these forward contracts are recognized in net income when
the underlying foreign currency gain and loss is recognized. The Company had a
number of forward exchange contracts outstanding at December 31, 1999 with an
aggregate notional value of approximately $9.1 million.
NOTE 8 - STOCKHOLDERS' EQUITY
Loans to Employees for Common Stock Purchases
During 1994, the Company loaned $484,989 to certain of its officers and key
employees to enable them to purchase 148,818 shares of the Company's Common
Stock on the open market. The principal amount of the loans was due five years
from the inception date, with interest on the loans accruing at the minimum rate
required per annum by the Internal Revenue Code and payable at maturity. These
loans are reflected as a reduction of Stockholders' Equity and are secured by
the Common Stock purchased in accordance with the corresponding Stock Pledge
Agreement. The Stock Pledge Agreement in certain instances accelerates debt
repayment and provides for the forgiveness of the debt. During 1999, 1998 and
1997, $0, $42,875 and $109,235, respectively, in loan principal was forgiven
under the terms of these agreements.
Fair Price Provisions and Other Anti-Takeover Measures
The Company's Restated Certificate of Incorporation, as amended, contains
certain provisions restricting business combinations with interested
stockholders under certain circumstances and imposing higher voting requirements
for the approval of certain transactions ("fair price" provision). Any of these
provisions could delay or prevent a change in control of the Company.
The "fair price" provisions require that holders of at least two-thirds of the
outstanding shares of voting stock approve certain business combinations and
significant transactions with interested stockholders.
Treasury Stock
No treasury stock was purchased by the Company during 1999. During 1998, 583,600
shares of common stock were purchased by the Company on the open market at a
cost of approximately $3.5 million. During 1997, 273,200 shares were purchased
for an approximate cost of $0.7 million. These shares are recorded as shares
held in treasury at cost. The shares will generally be held by the Company for
future use as management and the Board of Directors shall deem appropriate. In
addition, some of these shares will be used by the Company to compensate the
outside directors of the Company. During 1999, 1998 and 1997, 6,826, 8,812 and
18,778 shares, respectively, were issued to the outside directors.
Warrant Issued to Customer
On November 9, 1998, the Company entered into an exclusive supply agreement with
a customer. As a result of this agreement, the Company issued a warrant
entitling the customer to purchase up to 600,000 shares of the Company's common
stock at $6.3125 per share.
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35
Based on the expected number of shares to be issued, the fair value of this
warrant of $1,006,000 was recorded as additional paid in capital of the Company
with a corresponding increase in other assets. The fair value of the warrant was
determined using the Black-Scholes Model. The following assumptions were used
for the warrant: risk-free interest rate of approximately 4.84%; expected
volatility of approximately 48.11%; and expected life of five years. This asset
is amortized on a straight-line basis over the five year term of the agreement.
Subject to achieving the minimum purchase requirements of the warrant, the
warrant will vest 50% on January 1, 2003 and the remaining 50% will vest on
January 1, 2004.
Stock Split
On December 20, 1999, the Company's Board of Directors declared a two-for-one
stock split effected in the form of a 100 percent stock dividend to be
distributed on January 31, 2000 to shareholders of record on January 10, 2000.
Shareholders' equity has been restated to give retroactive recognition to the
stock split for all periods presented by reclassifying the par value of the
additional shares arising from the split from paid-in capital to common stock.
In addition, all references in the financial statements and in the notes to the
financial statements to number of shares, per share amounts, stock option data,
and market prices of the Company's common stock have been restated.
Restricted Stock Awards
During the year ended December 31, 1999, a total of 7,950 restricted shares of
the Company's common stock were reserved for issuance to certain employees. The
restricted shares vest over a two year period and had a market value of $107,713
at that date. These awards have been recorded as a separate component of
stockholders' equity. The carrying value of the restricted stock grants is being
amortized to expense over the two year vesting period. Amortization expense
amounted to $24,596 in 1999.
NOTE 9 - STOCK OPTIONS
1993 Stock Incentive Plan
On January 19, 1993, the 1993 Stock Incentive Plan ("1993 Plan") was approved.
Under the 1993 Plan, 400,000 shares of Common Stock are reserved for the
granting of incentive and other stock options to officers, key employees and
non-affiliated directors. The 1993 Plan provides for the granting of incentive
and other stock options through January 19, 2003. All options outstanding at the
time of termination of the 1993 Plan shall continue in full force and effect in
accordance with their terms. The option price for incentive stock options and
non-qualified stock options will not be less than the fair market value at the
date of grant. The Compensation Committee shall determine when each option is to
expire, but no option shall be exercisable more than ten years after the date
the option is granted. The 1993 Plan also provides for the award of stock
appreciation rights subject to terms and conditions specified by the
Compensation Committee. No stock appreciation rights have been awarded under
this 1993 Plan.
1995 Stock Incentive Plan
On May 19, 1995, the 1995 Stock Incentive Plan ("1995 Plan") was approved. Under
the 1995 Plan, 800,000 shares of Common Stock are available for distribution to
the Company's key officers, employees and non-affiliated directors. The 1995
Plan provides for the issuance of stock options, stock appreciation rights,
performance stock units, or any combination thereof through May 19, 2005, unless
otherwise terminated by resolution of the Board of Directors. The option price
for the stock options will be equal to the fair market value at the date of
grant. The Compensation Committee shall determine when each option is to expire,
but no option shall be exercisable more than ten years after the date the option
is granted. No stock appreciation rights or performance stock units have been
awarded under this 1995 Plan.
1996 Stock Incentive Plan
On December 1, 1996, the 1996 Stock Incentive Plan ("1996 Plan") was approved.
Under the 1996 Plan, 800,000 shares of Common Stock are available for
distribution to the Company's key officers and employees. The 1996 Plan provides
for the issuance of stock options, stock appreciation rights, performance stock
units, or any combination thereof through November 30, 2007, unless otherwise
terminated by the resolution of the Company's Board of Directors. The option
price for the stock options will be equal to the fair market value
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36
at the date of grant. The Compensation Committee shall determine when each
option is to expire, but no option shall be exercisable more than ten years
after the date the option is granted. No stock appreciation rights or
performance stock units have been awarded under this 1996 Plan.
1998 Stock Incentive Plan
On May 27, 1998, the 1998 Stock Incentive Plan ("1998 Plan") was approved. Under
the 1998 Plan, 630,000 shares of Common Stock are available for distribution to
the Company's key officers and employees. The 1998 Plan provides for the
issuance of stock options, stock appreciation rights, performance stock units,
or any combination thereof through May 27, 2008, unless otherwise terminated by
resolution of the Company's Board of Directors. The option price for the stock
options will not be less than the fair market value at the date of grant. The
Compensation Committee shall determine when each option is to expire, but no
option shall be exercisable more than ten years after the date the option is
granted. No stock appreciation rights or performance stock units have been
awarded under this 1998 Plan.
1999 Stock Incentive Plan
On January 27, 1999, the 1999 Stock Incentive Plan ("1999 Plan") was approved.
Under the 1999 Plan, 630,000 shares of Common Stock are available for
distribution to the Company's key officers and employees. The 1999 Plan provides
for the issuance of stock options, stock appreciation rights, performance stock
units, or any combination thereof through January 27, 2009, unless otherwise
terminated by resolution of the Company's Board of Directors. The option price
for the stock options will not be less than the fair market value at the date of
grant. The Compensation Committee shall determine when each option is to expire,
but no option shall be exercisable more than ten years after the date the option
is granted. No stock appreciation rights or performance stock units have been
awarded under this 1999 Plan.
1999A Stock Incentive Plan
On October 7, 1999, the 1999A Nonqualified Stock Plan ("1999A Plan") was
approved and on February 1, 2000, the 1999A Plan was amended. Under the 1999A
Plan, 1,000,000 shares of Common Stock are available for distribution to the
Company's key officers and employees. The 1999A Plan provides for the issuance
of stock options, stock appreciation rights, performance stock units, or any
combination thereof through October 7, 2009, unless otherwise terminated by
resolution of the Company's Board of Directors. The option price for the stock
options will not be less than the fair market value at the date of grant. The
Compensation Committee shall determine when each option is to expire, but no
option shall be exercisable more than ten years after the date the option is
granted. No stock appreciation rights or performance stock units have been
awarded under this 1999A Plan.
The Company applies the provisions of APB Opinion No. 25 in accounting for
stock-based employee compensation; therefore, no compensation expense has been
recognized for its fixed stock option plans as options generally are granted at
fair market value on the date of the grant. In October 1995, Statement of
Financial Accounting No. 123 "Accounting for Stock-Based Compensation" ("SFAS
No. 123"), was issued. The Company adopted the disclosure requirements of this
Statement in 1996 and accordingly, had compensation expense been determined
consistent with SFAS No. 123, the Company's 1999 net income and basic and
diluted income per share would have been $6,627,088, $0.50 and $0.47,
respectively. The Company's 1998 net income and basic and diluted income per
share would have been $5,080,578, $0.40 and $0.38, respectively. The Company's
1997 net loss and basic and diluted loss per share would have been $6,904,381,
$0.55 and $0.55, respectively.
The fair value of options at date of grant was estimated using the Black-Scholes
model. The following assumptions were used for the grants in 1999, 1998 and
1997, respectively: risk-free interest rate of approximately 5.56%, 5.28% and
6.38%; expected volatility of approximately 51.75%, 45.26% and 49.38%; expected
life of five years for 1999, 1998 and 1997; and the common stock will pay no
dividends. The weighted average grant date fair value of the options granted in
1999, 1998 and 1997 was $9.95, $4.97 and $2.74.
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The following table summarizes the changes in the number of shares of Common
Stock under option:
1997 1998 1999
-------------------------- -------------------------- --------------------------
Shares Weighted-Average Shares Weighted-Average Shares Weighted-Average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
Outstanding at beginning
of year 1,606 3.24 1,452 3.18 1,688 4.29
Granted 190 3.00 804 5.22 1,352 9.58
Exercised (92) 2.87 (560) 2.74 (836) 3.63
Expired and/or forfeited (252) 3.53 (8) 3.47 (62) 4.31
----- ---- ----- -----
Outstanding at end of year 1,452 3.18 1,688 4.29 2,142 7.89
===== ==== ===== =====
Options exercisable at year-end 730 788 181
Significant option groups outstanding at December 31, 1999 and related weighted
average price and life information follows:
Options Outstanding Options Exercisable
Number Weighted-Average Weighted-Average Number Weighted-Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices At 12/31/99 Contractual Life Price At 12/31/99 Price
- --------------- ----------- ------------------- ---------------- ----------- ----------------
$2.09 to 3.84 109,800 6.79 2.94 61,300 2.97
4.97 to 5.97 631,850 8.35 5.21 90,850 5.19
6.19 to 7.50 578,600 8.77 7.40 28,600 6.53
9.91 to 13.00 822,000 9.77 10.93 -- --
--------- -------
$2.09 to 13.00 2,142,250 8.93 7.88 180,750 4.65
========= =======
NOTE 10 - SIGNIFICANT CUSTOMERS AND SUPPLIERS
The Company had annual sales to two customers in 1999, two customers in 1998,
and one customer in 1997 that individually exceeded 10% of total Company sales
in the years ended December 31, 1999, 1998 and 1997. The sales amounted to $12.2
million and $10.8 million in 1999, $11.8 million and $10.6 million in 1998, and
$14.8 million in 1997. Trade receivables with the previously mentioned customers
amounted to $2.1 million, $5.3 million and $3.3 million at December 31, 1999,
1998 and 1997, respectively.
Trade receivables subject the Company to a concentration of credit risk. The
risk is limited due to the large number of customers comprising the Company's
customer base, the relative size and strength of most of the Company's customers
and the Company's performance of ongoing credit evaluations.
The Company utilizes third-party manufacturers in the Far East, Mexico and the
United States to produce its wireless control products. The number of third
party manufacturers or suppliers that provided the Company in excess of 10% of
the Company's wireless control products and/or components were two, three and
four for 1999, 1998, and 1997, respectively.
The Company currently purchases a significant portion of its integrated circuit
chips from two vendors. Although there are a limited number of manufacturers of
this component part, management believes that other suppliers could provide
similar parts on comparable terms. A change in suppliers, however, could cause a
delay in manufacturing and a possible loss of sales, which would affect
operating results adversely.
37
38
NOTE 11 - LEASES
The Company leases office and warehouse space and certain office equipment under
operating leases. Rental expense under operating leases was $953,475, $837,976
and $914,712, for the years ended December 31, 1999, 1998 and 1997,
respectively.
The following summarizes future minimum non-cancellable operating lease payments
at December 31, 1999:
Year ending December 31: AMOUNT
----------
2000 $1,067,754
2001 700,622
2002 518,874
2003 96,053
2004 and beyond 0
----------
Total lease commitments $2,383,303
==========
NOTE 12 - EMPLOYEE BENEFIT PLANS
The Company maintains a retirement and profit sharing plan under Section 401(k)
of the Internal Revenue Code for all of its domestic employees that meet certain
qualifications. Participants in the plan may elect to contribute from 1% to 15%
of their annual salary to the plan. The Company may, at its discretion, make
contributions to the plan. The Company's match was 25% of participants'
contributions for the years ended December 31, 1998 and 1997 and the expense
recorded amounted to $123,332 and $123,911, respectively. The Company's match
was increased from 25% to 50% of participants' contributions effective April 22,
1999 and the expense recorded for the year ended December 31, 1999 amounted to
$200,236. The Company's match in 1999, 1998 and 1997 was in the form of newly
issued shares of common stock of the Company.
NOTE 13 - INCOME TAXES
In 1999, 1998 and 1997, pretax income (loss) was attributed to the following
jurisdictions:
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
----------- ----------- ------------
Domestic operations $13,032,767 $ 8,210,501 $(10,174,279)
Foreign operations 86,016 738,252 256,841
----------- ----------- ------------
Total $13,118,783 $ 8,948,753 $ (9,917,438)
=========== =========== ============
The provision (benefit) for income taxes charged to operations was as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
---------- ---------- -----------
Current tax expense:
U.S. federal $3,458,002 $ -- $ --
State and local 685,003 114,999 72,720
Foreign 29,245 251,156 59,531
---------- ---------- -----------
Total current 4,172,250 366,155 132,251
---------- ---------- -----------
Deferred tax expense (benefit):
U.S. federal 1,004,848 2,521,779 (3,406,385)
State and local 201,603 423,169 (124,942)
Foreign -- -- --
---------- ---------- -----------
Total deferred 1,206,451 2,944,948 (3,531,327)
---------- ---------- -----------
Total provision (benefit) $5,378,701 $3,311,103 $(3,399,076)
========== ========== ===========
38
39
Net deferred tax assets (liabilities) comprised the following at December 31:
1999 1998 1997
------------ ------------ ------------
Capitalized packaging costs $ 37,188 $ 72,365 $ 68,897
Advertising allowance 38,935 41,570 256,447
Inventory reserves 660,310 256,441 317,573
Allowance for doubtful
accounts 738,390 256,440 984,244
Sales return reserve 64,882 57,885 128,216
Capitalized inventory costs 218,855 259,983 255,304
NOL and credit carry forwards 2,983,469 6,278,675 5,265,390
Discontinuation reserves -- -- 2,324,297
Other 971,264 234,593 844,952
------------ ------------ ------------
Gross deferred tax assets 5,713,293 7,457,952 10,445,320
------------ ------------ ------------
Depreciation (185,396) (723,604) (591,825)
Gross deferred tax liabilities (185,396) (723,604) (591,825)
------------ ------------ ------------
Less Valuation allowance -- -- (174,199)
------------ ------------ ------------
$ 5,527,897 $ 6,734,348 $ 9,679,296
============ ============ ============
In management's opinion, future taxable income will be sufficient to utilize the
tax benefit recognized as deferred tax assets. The decrease in the valuation
allowance in 1998 was due to the Company's assessment that benefits from
alternative minimum tax and other credit carryforwards will more likely than not
be realized prior to their expiration.
The provision for income taxes differs from the amount of income tax determined
by applying the applicable U.S. statutory federal income tax rate to pre-tax
income from operations as a result of the following:
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
----------- ----------- -----------
Tax provision (benefit) at statutory U.S. rate $ 4,460,386 $ 3,042,704 $(3,371,235)
Increase (decrease) in tax provision resulting from:
State and local taxes, net 782,280 423,169 (76,947)
Nondeductible items 28,763 28,763 35,908
Reduction in valuation allowance -- (174,199) --
Other 107,272 (9,334) 13,198
----------- ----------- -----------
Tax provision (benefit), as above $ 5,378,701 $ 3,311,103 $(3,399,076)
=========== =========== ===========
The Company has federal and state net operating loss carryforwards of
$4,773,969 and $494,029, respectively, that begin to expire in 2010 and an
alternative minimum tax credit carryforward of $473,573 which does not expire.
The Company also has a research and development credit carryforward of $744,207
that begins to expire in 2006.
No income taxes have been provided on the undistributed earnings of foreign
subsidiaries as the earnings are expected to be permanently reinvested in the
foreign operations. Determination of the amount of unrecognized deferred tax
liability for temporary differences related to the undistributed earnings of the
Company's foreign operations is not practicable.
NOTE 14 - BUSINESS SEGMENTS AND FOREIGN OPERATIONS
The Company operates in a single industry segment and is engaged in the
development, manufacturing and marketing of universal wireless controls and
related products principally for video and audio entertainment equipment. In
1997 the Company's customers consisted primarily of domestic and international
retailers, private label customers, original equipment manufacturers and
subscription broadcasting operators. Beginning in 1998
39
40
and going forward, the Company's customers remained the same although the number
of domestic retail customers decreased as the Company exited its North American
Retail business line.
The Company's operations by geographic area are presented below:
1999 1998 1997
------------ ------------ ------------
Net Sales
United States $ 70,067,412 $ 70,667,968 $ 92,149,517
United Kingdom 8,889,076 8,807,684 5,818,232
Germany 6,467,420 5,865,240 4,958,049
All Other 19,667,275 10,781,727 11,412,622
------------ ------------ ------------
Total Net Sales 105,091,183 96,122,619 114,338,420
============ ============ ============
Identifiable Assets
United States 7,617,945 8,344,489 4,236,717
All Other Countries 4,005,430 3,801,234 647,884
------------ ------------ ------------
Total Identifiable Assets 11,623,375 12,145,723 4,884,601
============ ============ ============
Specific identification was the basis used for attributing revenues from
external customers to individual countries. Foreign currency exchange gains
(losses) of $30,344, $(97,066) and $(27,364), were included in the determination
of net income for the years ended December 31, 1999, 1998 and 1997,
respectively.
NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to lawsuits and claims arising in the normal course of
its business. In the opinion of management, the Company's liability or recovery,
if any, under pending litigation and claims would not materially adversely
affect its results of operations, cash flows, or financial condition.
NOTE 16 - RESTRUCTURING
In December 1997, the Company announced its decision to discontinue its North
American One For All Retail line of business and the distribution channel
supported by the operations in the Twinsburg, Ohio facility. The Company
licensed certain of its proprietary technology and its One For All trademark to
a third party overseas manufacturer, to enable them to supply certain domestic
retailers with a limited number of remote control products on a direct import
basis. The Company closed the Twinsburg, Ohio facility, with the exception of
its consumer service phone center, and moved its headquarters to its Technology
Center in Cypress, California during the second quarter of 1998. The pre-tax
restructuring charge of $8,419,000 taken in the fourth quarter of fiscal year
1997 primarily related to severance and employee benefit costs ($3,260,000), the
write-down of fixed assets to be disposed of to their estimated fair market
value ($1,738,000), the write-down of intangibles by the amount for which no
future benefit existed ($460,000), consumer support and service costs relating
to contractual obligations of the Company to provide telephonic support for
certain of its products that were discontinued as part of the restructuring
($393,000), write-off of prepaid advertising and other prepaid assets to their
estimated fair market value ($2,129,000 and $163,000, respectively), and other
costs related to the discontinuation of the North American Retail business
($276,000). Severance and related employee benefit costs were determined by
estimating such amounts for each of the 105 employees of the Company that were
terminated in the restructuring. Charges for prepaid advertising, other prepaid
assets and fixed assets were determined by comparing net book values to the
estimated fair market values. Intangibles consisting of trademark costs were
evaluated for future benefits and an estimate was made of the amount for which
no future benefits existed. Other costs related to the disposition of assets
were primarily related to operating expenses associated with the liquidation of
the North American Retail business. After an income tax benefit of $2,863,000,
the restructuring charge reduced fiscal year 1997 earnings by $5,556,000 or
$0.44 per share. See also Note 3 - Accounts Receivable and Note 4 - Inventories
for explanation of additional expenses related to the restructuring. The
restructuring was completed during 1998.
40
41
NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the years ended December 31, 1999, 1998,
and 1997.
1999
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
----------- ----------- ------------- ------------
Net sales
On-going business $20,941,528 $22,756,972 $28,115,949 $33,276,734
Discontinued North
American Retail business -- -- -- --
----------- ----------- ----------- -----------
20,941,528 22,756,972 28,115,949 33,276,734
Gross profit
On-going business 8,282,374 9,167,183 11,787,577 14,139,324
Discontinued North American
Retail business -- -- -- --
----------- ----------- ----------- -----------
8,282,374 9,167,183 11,787,577 14,139,324
Operating income 831,221 2,021,426 3,852,979 6,262,512
Net income $ 448,763 $ 1,199,413 $ 2,338,057 $ 3,753,849
----------- ----------- ----------- -----------
Net income per share:
Basic $ 0.03 $ 0.09 $ 0.17 $ 0.28
----------- ----------- ----------- -----------
Diluted $ 0.03 $ 0.08 $ 0.16 $ 0.26
----------- ----------- ----------- -----------
Weighted average common stock outstanding:
Basic 12,997,000 13,262,000 13,446,000 13,537,000
----------- ----------- ----------- -----------
Diluted 13,402,000 14,112,000 14,299,000 14,667,000
----------- ----------- ----------- -----------
1998
----------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
------------ ------------ ------------- ------------
Net sales
On-going business $ 18,575,778 $ 22,272,821 $ 23,731,761 $ 24,455,346
Discontinued North
American Retail business 4,356,540 2,446,099 284,274 --
------------ ------------ ------------ ------------
22,932,318 24,718,920 24,016,035 24,455,346
Gross profit (loss)
On-going business 7,249,639 9,073,208 9,567,461 10,428,222
Discontinued North
American Retail business -- -- (75,000) --
------------ ------------ ------------ ------------
7,249,639 9,073,208 9,492,461 10,428,222
Operating income 646,875 2,116,671 2,655,658 4,085,481
Net income $ 343,903 $ 1,313,777 $ 1,609,322 $ 2,370,648
------------ ------------ ------------ ------------
Net income per share:
Basic $ 0.03 $ 0.10 $ 0.12 $ 0.18
------------ ------------ ------------ ------------
Diluted $ 0.03 $ 0.10 $ 0.12 $ 0.18
------------ ------------ ------------ ------------
Weighted average common stock outstanding:
Basic 12,676,000 12,732,000 12,876,000 12,836,000
------------ ------------ ------------ ------------
Diluted 13,300,000 13,446,000 13,384,000 13,162,000
------------ ------------ ------------ ------------
41
42
1997
------------ ------------ ------------ ------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
------------ ------------ ------------- ------------
Net sales
On-going business $ 16,538,559 $ 17,152,545 $ 26,095,641 $ 25,444,705
Discontinued North
American Retail business 5,841,691 6,778,502 7,403,283 9,083,494
------------ ------------ ------------ ------------
22,380,250 23,931,047 33,498,924 34,528,199
Gross profit (loss)
On-going business 5,606,265 5,662,342 8,527,383 10,163,271
Discontinued North
American Retail business 1,151,149 1,620,637 1,763,268 1,116,959
Inventory write-down -- -- -- (3,892,215)
------------ ------------ ------------ ------------
6,757,414 7,282,979 10,290,651 7,388,015
Operating income (loss) (313,909) 548,511 1,958,168 (11,482,127)
Net income (loss) $ (280,786) $ 288,488 $ 1,187,387 $ (7,713,452)
------------ ------------ ------------ ------------
Net income (loss) per share:
Basic $ (0.02) $ 0.02 $ 0.09 $ (0.61)
------------ ------------ ------------ ------------
Diluted $ (0.02) $ 0.02 $ 0.09 $ (0.61)
------------ ------------ ------------ ------------
Weighted average common stock outstanding:
Basic 12,626,000 12,532,000 12,522,000 12,592,000
------------ ------------ ------------ ------------
Diluted 12,626,000 12,598,000 12,718,000 12,592,000
------------ ------------ ------------ ------------
The Company has restated the presentation of certain information for the first
three quarters of 1998. The net effect of the restatement was to reclassify 1998
sales and cost of sales associated with the discontinued North American Retail
business from accrued restructuring expenses to net sales and cost of sales. In
1997, the North American Retail product inventories were written down by
$3,892,000 to their estimated net realizable value as a result of the
discontinuation discussed in Note 16. The 1997 write down amounted to $0.31 per
share for the full year on a pretax basis.
UNIVERSAL ELECTRONICS INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ADDITIONS
BALANCE AT CHARGED TO WRITE-OFFS BALANCE AT
BEGINNING OF COSTS AND AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ----------
Valuation account for accounts receivable:
Year Ended December 31, 1999 $1,611,468 $1,504,275 $1,235,812 $1,879,931
Year Ended December 31, 1998 $2,950,548 $ 342,661 $1,681,741 $1,611,468
Year Ended December 31, 1997 $ 359,480 $2,850,000 $ 258,932 $2,950,548
(1) Includes reclassification of North American Retail return reserve of
$280,000 as of December 31, 1998 to the allowance for doubtful accounts.
42
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 401 of Regulation S-K with respect to the directors
of the Company will be contained in and is hereby incorporated by reference to
the Company's definitive Proxy Statement for its 2000 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of 1934.
Information regarding executive officers of the Company is set forth in Part I
of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 402 of Regulation S-K will be contained in and is
hereby incorporated by reference to the Company's definitive Proxy Statement for
its 2000 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 403 of Regulation S-K will be contained in and is
hereby incorporated by reference to the Company's definitive Proxy Statement for
its 2000 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 404 of Regulation S-K will be contained in and is
hereby incorporated by reference to the Company's definitive Proxy Statement for
its 2000 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) LIST OF FINANCIAL STATEMENTS
See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA-Index to
Consolidated Financial Statements" for a list of the consolidated
financial statements included herein.
(a)(2) LIST OF FINANCIAL STATEMENT SCHEDULES
See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA-Index to
Consolidated Financial Statements" for a list of the consolidated
financial statement schedules included herein.
(a)(3) LIST OF EXHIBITS REQUIRED TO BE FILED BY ITEM 601(a) OF THE REGULATION
S-K ARE INCLUDED AS EXHIBITS TO THIS REPORT:
See EXHIBIT INDEX at page 45 to Item 601(a) of this Regulation S-K.
(b) No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1999.
43
44
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Cypress, State of
California on the 30th day of March, 2000.
UNIVERSAL ELECTRONICS INC.
By: /s/ Camille Jayne
Camille Jayne
Chairman and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Camille Jayne
and Paul D. Arling as true and lawful attorneys-in-fact and agents, each acting
alone, with full powers of substitution, for her/him and in her/his name, place
and stead, in any and all capacities, to sign any and all amendments to this
Annual Report on Form 10-K, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, each acting alone,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully for all
intents and purposes as she/he might or could do in person, thereby ratifying
and confirming all that said attorneys-in-fact and agents, each acting alone, or
her/his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on the 30th day of March, 2000, by the following persons
in the capacities indicated.
NAME & TITLE SIGNATURE
- ------------ ---------
Paul D. Arling
President, Chief Operating Officer
and Director /s/ Paul D. Arling
------------------
Camille Jayne
Chairman, Chief Executive Officer
and Director /s/ Camille Jayne
(Principal Executive Officer) -----------------
Mark Belzowski
Vice President, Corporate Controller /s/ Mark Belzowski
and Chief Financial Officer ------------------
(Principal Financial and Accounting Officer)
David Beddow /s/ David Beddow
Director ----------------
Bruce A. Henderson /s/ Bruce A. Henderson
Director ----------------------
William C. Mulligan /s/ William C. Mulligan
Director -----------------------
J.C. Sparkman /s/ J.C. Sparkman
Director -----------------
44
45
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
2.1 Asset Purchase Agreement dated September 1, 1998 by and among
Universal Electronics Inc., H&S Management Corp., J.C. Sparkman
and Steven Helbig (Incorporated by reference to Exhibit 2.1 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1998 filed on March 31, 1999 (File No. 0-21044))
2.2 Contract for Sale of Participations of Unimand Espana, S.L. dated
June 30, 1999 by and among Universal Electronics, BV and Diffusion
Artistique et Musicale D.A.M. S.A. and Mr. Francisco Muro (filed
herewith)
3.1 Restated Certificate of Incorporation of Universal Electronics
Inc., as amended (Incorporated by reference to Exhibit 3.1 to the
Company's Form S-1 Registration filed on or about December 24,
1992 (File No. 33-56358))
3.2 Amended and Restated By-laws of Universal Electronics Inc.
(Incorporated by reference to Exhibit 3.2 to the Company's Form
S-1 Registration filed on or about December 24, 1992 (File No.
33-56358))
3.3 Certificate of Amendment to Restated Certificate of Incorporation
of Universal Electronics Inc. (Incorporated by reference to
Exhibit 3.3 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 filed on April 1, 1996 (File No.
0-21044))
*10.1 Form of Universal Electronics Inc. 1993 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.13 to Amendment No. 1 to
the Company's Form S-1 Registration filed on or about January 21,
1993 (File No. 33-56358))
10.2 Standard Industrial Lease dated January 24, 1992 by and between
Universal Electronics Inc. and RREEF USA Fund II, Inc.
(Incorporated by reference to Exhibit 10.24 to the Company's Form
S-1 Registration filed on or about June 25, 1993 (File No.
33-65082))
10.3 Form of Secured Promissory Note by and between Universal
Electronics Inc. and certain employees used in connection with
loans made to the employee to enable them to make open market
purchases of shares of Universal Electronics Inc. Common Stock
(Incorporated by reference to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994
(File No. 0-21044))
10.4 Form of Stock Pledge Agreement by and between Universal
Electronics Inc. and certain employees used in connection with
loans made to the employees to enable them to make open market
purchases of shares of Universal Electronics Inc. Common Stock
(Incorporated by reference to Exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994
(File No. 0-21044))
10.5 Loan and Security Agreement dated November 21, 1995 by and between
Universal Electronics Inc. and The Provident Bank (Incorporated by
reference to Exhibit 10.20 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 filed on April 1, 1996
(File No. 0-21044))
10.6 Copy of Promissory Note dated November 21, 1995 by and between
Universal Electronics Inc. and The Provident Bank (Incorporated by
reference to Exhibit 10.21 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 filed on April 1, 1996
(File No. 0-21044))
10.7 Commercial Letters of Credit Master Agreement dated November 21,
1995 by and between Universal Electronics Inc. and The Provident
Bank (Incorporated by reference to Exhibit 10.22 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995
45
46
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
filed on April 1, 1996 (File No. 0-21044))
10.8 Intercreditor Agreement dated November 21, 1995 by and between The
Provident Bank and Society National Bank and acknowledged and
agreed to by Universal Electronics Inc. (Incorporated by reference
to Exhibit 10.23 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 filed on April 1, 1996 (File No.
0-21044))
10.9 Lockbox Service Contract dated November 10, 1995 by and between
Universal Electronics Inc. and The Provident Bank (Incorporated by
reference to Exhibit 10.24 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 filed on April 1, 1996
(File No. 0-21044))
*10.10 Form of Universal Electronics Inc. 1995 Stock Incentive Plan
(Incorporated by reference to Exhibit B to the Company's
Definitive Proxy Materials for the 1995 Annual Meeting of
Stockholders of Universal Electronics Inc. filed on May 1, 1995
(File No. 0-21044))
*10.11 Form of Stock Option Agreement by and between Universal
Electronics Inc. and certain employees used in connection with
options granted to the employees pursuant to the Universal
Electronics Inc. 1995 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.20 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 filed on March 28, 1997
(File No. 0-21044))
*10.12 Form of Stock Option Agreement by and between Universal
Electronics Inc. and certain non-affiliated directors used in
connection with options granted to the non-affiliated directors
pursuant to the Universal Electronics Inc. 1995 Stock Incentive
Plan (Incorporated by reference to Exhibit 10.21 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
filed on March 28, 1997 (File No. 0-21044))
10.13 First Amendment to Loan and Security Agreement dated July 31, 1996
by and between Universal Electronics Inc. and The Provident Bank
(Incorporated by reference to Exhibit 10.22 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
filed on March 28, 1997 (File No. 0-21044))
*10.14 Form of Universal Electronics Inc. 1996 Stock Incentive Plan
(Incorporated by reference to Exhibit 4.5 to the Company's Form
S-8 Registration Statement filed on March 26, 1997 (File No.
333-23985))
*10.15 Form of Stock Option Agreement by and between Universal
Electronics Inc. and certain employers used in connection with
options granted to the employees pursuant to the Universal
Electronics Inc. 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 4.6 to the Company's Form S-8 Registration
Statement filed on March 26, 1997 (File No. 333-23985))
10.16 Sublease dated January 10, 1997 by and between Universal
Electronics Inc. and Edgemont Sales Company, a division of IKON
Office Solutions, Inc. (Incorporated by reference to Exhibit 10.25
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 filed on March 28, 1997 (File No. 0-21044))
*10.17 Form of Salary Continuation Agreement by and between Universal
Electronics Inc. and certain employees (Incorporated by reference
to Exhibit 10.25 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, filed on March 30, 1998 (File
No. 0-21044))
*10.18 Form of Amendment to Salary Continuation Agreement by and between
Universal Electronics Inc. and certain employees (Incorporated by
reference to Exhibit 10.26 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997, filed on March 30, 1998
(File No. 0-21044))
46
47
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
10.19 Second Amendment to Loan and Security Agreement dated January 24,
1997 by and between Universal Electronics Inc. and The Provident
Bank (Incorporated by reference to Exhibit 10.27 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997,
filed on March 30, 1998 (File No. 0-21044))
10.20 Lease dated November 1, 1997 by and between Universal Electronics
Inc. and Warland Investments Company (Incorporated by reference to
Exhibit 10.28 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, filed on March 30, 1998 (File No.
0-21044))
10.21 Letter Agreement in Principal dated March 18, 1998 by and between
Universal Electronics Inc. and The Provident Bank further amending
that certain Loan and Security Agreement (Incorporated by
reference to Exhibit 10.29 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997, filed on March 30, 1998
(File No. 0-21044))
*10.22 Form of Universal Electronics Inc. 1998 Stock Incentive Plan
(Incorporated by reference to Exhibit A to the Company's
Definitive Proxy Materials for the 1998 Annual Meeting of
Stockholders of Universal Electronics Inc. filed on April 20, 1998
(File No. 0-21044))
*10.23 Form of Stock Option Agreement by and between Universal
Electronics Inc. and certain employees used in connection with
options granted to the employees pursuant to the Universal
Electronics Inc. 1998 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.24 to the Company's Annual Report on Form
10-K for the year ended December 31, 1998 filed on March 31, 1999
(File No. 0-21044))
10.24 Agreement for Purchase and Sale of Property dated May 29, 1998 by
and between Universal Electronics Inc., and Duke Realty Limited
Partnership (Incorporated by reference to Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1998 filed on March 31, 1999 (File No. 0-21044))
10.25 Agreement dated August 12, 1998 by and between Universal
Electronics Inc., and David M. Gabrielsen (Incorporated by
reference to Exhibit 10.26 to the Company's Annual Report on Form
10-K for the year ended December 31, 1998 filed on March 31, 1999
(File No. 0-21044))
10.26 Stock Acquisition Representations and Covenants Certificate dated
September 1, 1998 from H & S Management Corp., J.C. Sparkman and
Steven Helbig (Incorporated by reference to Exhibit 10.27 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1998 filed on March 31, 1999 (File No. 0-21044))
10.27 Non-Compete Agreement dated September 1, 1998 by and among
Universal Electronics Inc., H & S Management Corp., J.C. Sparkman
and Steven Helbig (Incorporated by reference to Exhibit 10.28 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 filed on March 31, 1999 (File No. 0-21044))
10.28 Consulting Agreement dated September 1, 1998 by and between
Universal Electronics Inc. and J.C. Sparkman (Incorporated by
reference to Exhibit 10.29 to the Company's Annual Report on Form
10-K for the year ended December 31, 1998 filed on March 31, 1999
(File No. 0-21044))
*10.29 Form of Executive Officer Employment Agreement dated September 29,
1998 by and between Universal Electronics Inc. and Paul D. Arling
(Incorporated by reference to Exhibit 10.30 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998
filed on March 31, 1999 (File No. 0-21044))
10.30 Revolving Loan and Security Agreement dated October 2, 1998 by and
between Universal Electronics Inc. and Bank of America National
Trust and Savings Association (Incorporated by reference to
Exhibit 10.31 to the Company's Annual Report on Form 10-K for the
year
47
48
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
ended December 31, 1998 filed on March 31, 1999 (File No.
0-21044))
10.31 Copy of Revolving Note dated October 2, 1998 by and between
Universal Electronics Inc. and Bank of America National Trust and
Savings Association (Incorporated by reference to Exhibit 10.32 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 filed on March 31, 1999 (File No. 0-21044))
10.32 Patent and Trademark Collateral Assignment dated October 2, 1998
by and between Universal Electronics Inc. and Bank of America
National Trust and Savings Association (Incorporated by reference
to Exhibit 10.33 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998 filed on March 31, 1999 (File No.
0-21044))
10.33 Purchase Agreement dated November 8, 1998 by and between Universal
Electronics Inc. and General Instrument Corporation (Incorporated
by reference to Exhibit 10.34 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 filed on March 31,
1999 (File No. 0-21044))
10.34 Warrant dated November 9, 1998 by and between Universal
Electronics Inc. and General Instrument Corporation (Incorporated
by reference to Exhibit 10.35 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 filed on March 31,
1999 (File No. 0-21044))
10.35 Agreement dated January 30, 1998, as amended on December 30, 1998
by and among Universal Electronics BV, a wholly owned subsidiary
of Universal Electronics Inc. and Euro quality Assurance Ltd. And
T. Maeizumi (Incorporated by reference to Exhibit 10.37 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1998 filed on March 31, 1999 (File No. 0-21044))
10.36 Agreement dated February 3, 1998, as amended on December 30, 1998
by and among Universal Electronics BV, a wholly owned subsidiary
of Universal Electronics Inc., Strand Europe Ltd. and Ashok Suri
(Incorporated by reference to Exhibit 10.37 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998
filed on March 31, 1999 (File No. 0-21044))
*10.37 Form of Universal Electronics Inc. 1999 Stock Incentive Plan
(Incorporated by reference to Exhibit A to the Company's
Definitive Proxy Materials for the 1999 Annual Meeting of
Stockholders of Universal Electronics Inc. filed on April 29, 1999
(File No. 0-21044))
*10.38 Form of Stock Option Agreement by and between Universal
Electronics Inc. and certain employees used in connection with
options granted to the employees pursuant to the Universal
Electronics Inc. 1999 Stock Incentive Plan (Incorporated by
reference to Exhibit A to the Company's Definitive Proxy Materials
for the 1999 Annual Meeting of Stockholders of Universal
Electronics Inc. filed on April 29, 1999 (File No. 0-21044))
*10.39 Form of Salary Continuation Agreement by and between Universal
Electronics Inc. and certain employees (filed herewith)
*10.40 Form of Executive Officer Amended Employment Agreement dated
January 29, 1998 by and between Universal Electronics Inc. and
Camille Jayne (filed herewith)
*10.41 Form of First Amendment to Executive Officer Employment Agreement
dated April 22, 1999 by and between Universal Electronics Inc. and
Paul D. Arling, together with Exhibit C attached thereto (filed
herewith)
*10.42 Form of Universal Electronics Inc. 1999A Nonqualified Stock Plan
effective October 7, 1999 and subsequently amended February 1,
2000 (filed herewith)
*10.43 Form of Stock Option Agreement by and between Universal
Electronics Inc. and certain employees used in connection with
options granted to the employees pursuant to the Universal
Electronics Inc. 1999A Nonqualified Stock Plan (filed herewith)
11.1 Statement re: computation of per share earnings (filed herewith)
21.1 List of Subsidiaries of the Registrant (filed herewith)
48
49
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
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23.1 Consent of PricewaterhouseCoopers LLP (filed herewith)
24.1 Power of Attorney (filed as part of the signature page hereto)
27.1 Financial Data Schedule (filed herewith)
* Management contract or compensation plan or arrangement identified pursuant
to Item 14(c) of the Form 10-K.
49