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, 2003
OR
o | 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.
Delaware (State or other jurisdiction of incorporation or organization) | 33-0204817 (I.R.S. Employer Identification No.) |
6101 Gateway Drive Cypress, California (Address of principal executive offices) | 90630 (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(g) of the Act:
Common Stock, par value $.01 per share
Yesx Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yesx Noo
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant’s definitive Proxy Statement for its 20032004 Annual Meeting of Stockholders to be held on June 18, 200314, 2004 are incorporated by reference into Part III of this Form 10-K. The Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2003.27, 2004.
Except as otherwise stated, the information contained in this Form 10-K is as of December 31, 2002.
2003.
Exhibit Index appears on page 53.57. This document contains 61109 pages.
UNIVERSAL ELECTRONICS INC.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 20022003
Table of Contents
Item | Page | ||||
Number | Number | ||||
PART I | |||||
1 | Business | 3 | |||
2 | Properties | 7 | |||
3 | Legal Proceedings | 8 | |||
4 | Submission of Matters to a Vote of Security Holders | 8 | |||
PART II | |||||
5 | Market for Registrant’s Common Stock and Related Stockholder Matters | 10 | |||
6 | Selected Consolidated Financial Data | 11 | |||
7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 | |||
7A | Quantitative and Qualitative Disclosures About Market Risk | 24 | |||
8 | Financial Statements and Supplementary Data | 25 | |||
9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 48 | |||
PART III | |||||
10 | Directors and Executive Officers of the Registrant | 48 | |||
11 | Executive Compensation | 48 | |||
12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 48 | |||
13 | Certain Relationships and Related Transactions | 49 | |||
14 | Controls and Procedures | 49 | |||
PART IV | |||||
15 | Exhibits, Financial Statement Schedules and Reports on Form 8-K | 49 | |||
Signatures | 50 | ||||
Certifications Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 | 51 | ||||
Exhibit Index | 53 |
Item | Page | |||
Number | Number | |||
PART I | ||||
1 | Business | 3 | ||
2 | Properties | 7 | ||
3 | Legal Proceedings | 8 | ||
4 | Submission of Matters to a Vote of Security Holders | 9 | ||
PART II | ||||
5 | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 11 | ||
6 | Selected Consolidated Financial Data | 12 | ||
7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 | ||
7A | Quantitative and Qualitative Disclosures About Market Risk | 26 | ||
8 | Financial Statements and Supplementary Data | 27 | ||
9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 53 | ||
9A | Controls and Procedures | 53 | ||
PART III | ||||
10 | Directors and Executive Officers of the Registrant | 53 | ||
11 | Executive Compensation | 53 | ||
12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 54 | ||
13 | Certain Relationships and Related Transactions | 55 | ||
14 | Principal Accountant Fees and Services | 55 | ||
PART IV | ||||
15 | Exhibits, Financial Statement Schedules and Reports on Form 8-K | 55 | ||
Signatures | 56 | |||
Exhibit Index | 57 |
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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 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 buildsElectronics Inc., based in Southern California, develops software, firmware and turnkey solutions designed to enable consumers to wirelessly connect, control and interact with an increasingly complex home environment. The Company’s primary markets pre-programmed, easy-to-use wireless control devicesinclude original equipment manufacturers (OEMs) in consumer electronics and chips principally for home entertainment equipment and the subscription broadcasting market. Universal’s product lines include wireless interface technologies, suchpersonal computing, as combination keyboard/remotes and touch-screen remotes. Universal licenses its patented technologies and database of infrared (“IR”) codes to companies selling intowell as multiple system operators in the cable and satellite industriessubscription broadcasting markets. Over the past 16 years, the Company has developed a broad portfolio of patented technologies and the industry’s leading database of home connectivity software that it licenses to original equipment manufacturers (“OEMs”). Theits customers, including many leading Fortune 500 companies. In addition, the Company also develops wireless control interface software for electronic display devices primarily for sale to companies in the computing industry. Universal also sells its universal wireless control products and other audio/visual accessories through its European headquarters in The Netherlands, and to distributors and retailers in Europe, Asia, Latin America, South Africa Australia, New Zealand, the Middle East, and AustraliaMexico under theOne For All®All® brand name. Call center support services are also offered to Universal’s customers. To learn more, visit Universal’s web siteMore information about the Company can be obtained at www.uei.com.
General Business Information
Universal has developed a broad line of easy-to-use, preprogrammedpre-programmed universal wireless control products whichthat 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 and more recently to companies in the computing industry. Universal believes that its universal wireless controls can operate virtually all infrared remote (“IR”) controlled TV’s, VCR’s,TVs, VCRs, DVD players, cable converters, CD players, audio components and satellite receivers, as well as most other infrared remote controlled devices worldwide.
Universal also believes its wireless control products incorporate certain significant technological advantages. First, beginningBeginning in 1986 and continuing today, Universal has compiled an extensive library of over 143,000171,000 IR codes that cover nearly 118,000141,000 individual device functions and over 1,8002,100 individual consumer electronic equipment brand names. Universal believes its database of IR codes is larger than any other existing library of IR codes for the operation of home video and audio devices sold worldwide. Universal’s library is regularly updated with new IR codes used in newly introduced video and audio devices. All such IR codes are captured from the original manufacturer’s remote control devices to ensure the accuracy and integrity of the database. Second, Universal’s proprietary software and know-how permit IR 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.its products. This provides significant cost and space efficiencies that enable Universal to include more codes and features in the limited memory space of the chipwireless control device than are included in similarly priced products of competitors. Third, Universal has developed a patented technology that provides the capability to easily upgrade the memory of the remotewireless control device by adding IR codes from its library that were not originally included. This technology utilizes both RAM and E2 chip technologies.
The matters discussed in this Annual Report on Form 10-K should be read in conjunction with the consolidated financial statements provided under Part II, Item 8 of this Annual Report on Form 10-K. Certain statements contained herein may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed more fully herein. See, “Factors That May Affect Financial Condition and Future Results” in this Form 10-K.
Products
Universal introduced its first product, theOne For All, in 1987. Universal’s family of products includes universal standard and touch screen remote controls, wireless keyboards, game controllers, antennas, joysticks and other gaming devices,various audio/video accessories, as well as custom and customizable chipsmicrocontrollers that include Universal’s library of IR codes and proprietary software, and licensing of Universal’s library of IR codes and proprietary software. These products cover a broad spectrum of suggested prices and performance
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capabilities. Universal sells its customized products to international retailers and distributors, consumer electronic accessory suppliers, private label customers, OEMs, cable operators and satellite service providers for resale under theOne For All® brand name and/or their customers’ respective brand names.private label brands. Universal’s products are
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capable of controlling up to twentya multitude of audio and video and audio devices, including, but not limited to, TVs, VCRs, DVD players, cable converters, CD players, satellite receivers, laser disc players, amplifiers, tuners, turntables, cassette players, digital audio tape players, and surround sound systems.systems, and most home automation control modules.
Each of Universal’s wireless control devices is designed to simplify the use of video, audio and audioother devices. To appeal to the mass market, the number of buttons is minimized to include only what Universal believes to be the most popular functions. Universal’s remotes are also designed for ease of initial set-up. For most of Universal’s products, the consumer simply inputs a three or four-digit code for each video or audio device to be controlled. Each remote contains a RAM, a ROM, or a combination of ROM and E2EEPROM chips. The RAM and the ROM and E2EEPROM combination products allow the remote to be upgraded with additional codes, one of Universal’s patented features. Another patented ease of use feature Universal offers in several of its universal remote controlsproducts is its 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.
Many of Universal’s products include its patented 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 within the product. Each of these products utilizes the E2 chip technology and 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 and integrated circuitsmicrocontrollers on which Universal’s software is embedded, Universal 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 Universal’s technology.
During 2002,2003, Universal launchedcontinued its product innovation by launching several new products based on the two popular new technologies, thetechnology platforms developed in 2002; Nevo™ technology,, an embedded solution that transforms anany electronic display (such as Compaq’sHP’s iPaq Pocket PC)PocketPCs) into a sophisticated and easy-to-use wireless home control and automation device, and the Kameleon™ interface technology,, a revolutionary display technology that provides ease of use by illuminating only active keys needed to control each entertainment device.
In addition, Universal’s products are easily customized to include the features that are important to customers. These include, but are not limited to, keys to control electronic program guides, one-button VCR record keys, customized macro set-up keys, and/or other features.
Distribution and Customers
Universal’s products are sold to a wide variety of customers in numerous distribution channels. In the United States, Universal principally sells its products and/or licenses its proprietary technology to cable operators, satellite service providers, private label customers and consumer electronics accessory manufacturers and companies in the computing industry for resale under their respective brand names. In addition, Universal sells its wireless control products and licenses its proprietary technologies to OEMs for use in their products. Universal has also licensed certain of its proprietary technology to third parties and itsOne For Allbrand name to a third party who in turn sells the products directly to certain domestic retailers. Outside of the United States, Universal sells remotes, other wireless control devices, and certain accessories under theOne For Alland certain other brand names to retailers and to other customers under private labels through its international subsidiaries and distributors. Universal 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, 2002,2003, the Company had sales to one company, Comcast Communications, Inc., that represented more than 10% of Universal’s net sales for the year.
Universal provides subscription broadcasters, namely cable operators and satellite service providers both domestically and internationally, with universal wireless control devices and integrated circuits on which Universal’s software is embedded, to support the demand associated with the deployment of digital set-top boxes and increased services.
Universal also sells its universal wireless control devices and integrated circuits, on which the Company’s software is embedded, to OEMs that manufacture cable converters and satellite receivers for resale with their products.
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Universal continues to pursue further penetration of the more traditional consumer electronics/OEM markets. Customers in these markets generally package Universal’s wireless control devices for resale with their audio and video home entertainment products (i.e.(e.g. TVs, DVD and CD players, VCRs, personal digital recorders, etc.). Universal 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 and increasing complexity of home entertainment equipment, emerging digital technology, the increase in multimedia and interactive internet applications, and the increase in the number of OEMs. Additionally, Universal supplies its Nevo technology, an embedded system software for home control, to OEM’s in the computing space.
Universal continues to place significant emphasis on expanding its sales and marketing efforts to subscription broadcasters and OEMs in Asia, Latin America and Europe. Universal will continue to add new sales people, as required, to support
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anticipated sales growth in these markets over the next few years. In addition, Universal continues to improve on its development processes to increase cost savings and to provide more timely delivery of its products to its customers.
In the international markets,One For Allbrand name products accounted for 26.3 %, 21.2%30.4%, 26.3%, and 18.8%21.2% of Universal’s sales for the years ended December 31, 2003, 2002, 2001, and 2000,2001, respectively. Throughout 2002,2003, Universal continued its retail sales and marketing efforts in Europe, Australia, New Zealand, South Africa, the Middle East, Mexico and selected countries in Asia and Latin America. Universal has seven 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, One For All (UK) Ltd., established in the United Kingdom, One For All Argentina S.R.L., established in Argentina, and One For All France S.A.S., established in France. Universal uses third party distributors in countries where it does not have subsidiaries.
Consumer Service and Support
Universal provides domestic and international consumer support to its various universal remote control marketers, including manufacturers, cable and satellite providers, retail distributors, and audio and video original equipment manufacturers through its automated “InterVoice” system. Live agent help is also available through certain programs. Universal continues to review its programs to determine their value in enhancing and improving the sales of Universal’sits 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 March 2003, the Company’s largest consumer service and support customer notified the Company that as a result of a merger, it would conduct all of its consumer service and support activities internally and ceaseceased using the Company’s services during the second quarter of 2003. Consequently, revenue for consumer service and support from this customer will cease. Revenues from this customer for consumer service and support amounted to $0.8 million, $3.4 $1.6million, and $0.3$1.6 million in 2003, 2002 2001and 2000,and 2001, respectively.
Raw Materials and Dependence on Suppliers
Universal utilizes third-party manufacturers and suppliers in Asia, Mexico and the United States to produce its wireless control products. The number of third party manufacturers or suppliers that provided Universal in excess of 10% of its manufacturing services and/or components werewas three, two, three, and three for 2003, 2002 and 2001, respectively. In 2003, Jetta, Computime, and 2000, respectively.Samsung collectively represented 45% of Universal’s manufacturing services and components. In 2002, Jetta and Samsung collectively represented 27% of Universal’s manufacturing services and components. In 2001, and 2000, Philips, Jetta and Samsung collectively represented 43% and 45%, respectively, of Universal’s manufacturing services and components. As in the past, Universal continues to evaluate alternative and additional third-party manufacturers and sources of supply.
During 2002,2003, Universal continued to diversify its suppliers and maintainmaintained duplicate tooling for certain of its products, as necessary.products. This has allowed Universal to stabilize its source for products and negotiate more favorable terms with its suppliers. In addition, where it can, Universal uses standard parts and components, which are available from multiple sources. To continue to reduce its dependence on suppliers, Universal continues to seek additional sources of integrated circuit chips to help reduce the potential for manufacturing and shipping delaysdelays. In addition, Universal has introduced flash microcontroller technology to its products. Flash microcontrollers have shorter lead times than standard microcontrollers and to help maintain additionalmay be reprogrammed if necessary, thus reducing excess or obsolete inventory of these component parts as safety stock.
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exposure.
Patents, Trademarks and Copyrights
Universal owns a number of United States and internationalforeign patents relating to its products and technology, and has filed domestic and internationalforeign applications for other patents that are pending. Universal had a total of 101 issued and pending andpatents at the end of 2003, an increase from 80 at the end of 2002. The life of Universal’s patents ranges from approximately four to eighteen years. Universal has also obtained copyright registration and claims copyright protection for certain of its proprietary software and libraries of IR codes. Universal had a total of 80 issued and pending patents atAdditionally, the end of 2002, an increase from 66 at the end of 2001. The life of Universal’s patents ranges from 5 to 18 years. While Universal follows the practice of obtaining patents or copyright registration on new developments whenever advisable, in certain cases, Universal has elected common law trade secret protection in lieu of obtaining such protection. In Universal’s opinion, engineering and production skills and experience are of equal importance to its market positions as are patents and copyrights. Universal further believes that none of its businesses is dependent to any material extent upon any single patent or trade secret. The names of most of Universal’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 up to 20 years which terms are renewableand may be renewed as long as the trademarks continue to be used and are deemed by management to be important to Universal’s operations. While Universal follows the practice of obtaining patent, copyright and trademark registrations on new developments whenever advisable, in certain cases, Universal has elected common law trade secret protection in lieu of obtaining such protection.
Seasonality
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Historically, Universal’s business has been influenced by the retail sales cycle, with increased sales in the last half of the year and the largest proportion of sales occurring in the last quarter. However, growth inThis pattern is expected to continue and the impact will fluctuate as the sales of Universal’s subscription broadcastingmix varies between retail and OEM products may outpace the growth in sales of its retail products and, consequently, the retail seasonality may have much less of an effect on the Company’s revenue.technology.
See “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA- Supplementary Data” for further details regarding the quarterly results of the Company.
Competition
Universal’s principal competitors in the international retail and private label markets for universal wireless controls include Philips, Thomson, and Thomson,Gemini as well as various manufacturers of wireless controls in Asia. Universal’s primary competitors in the OEM market are the original equipment manufacturers themselves and wireless control manufacturers in Asia. In the subscription broadcasting business line, Universal competes with various distributors in the United States and several of the larger set-top manufacturers, including Motorola and Scientific-Atlanta. Universal competes in its markets on the basis of product quality, product features, price, intellectual property, and customer and consumer support. Universal 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 Universal’s competitors have significantly larger financial, technical, marketing and manufacturing resources than the Company, and there can be no assurance that Universal will remain competitive in the future.
Engineering, Research and Development
During 2002,2003, Universal’s engineering efforts focused on modifying existing products and technologytechnologies to improve their features, andto lower their costs, and to develop measures to protect the Company’s proprietary technology and general know-how. Universal continues to regularly update its library of IR codes to include IR codes for new features and devices newly introduced both in the United States and internationally.worldwide. Universal’s library contains 143,000over 171,000 IR data codes, an increase from just over 118,000143,000 data codes in 2001.2002. Universal also continues to explore ways to improve its software to preprogrampre-program more codes into its memory chips and to simplify the upgrading of its wireless control products.
Also during 2002,2003, Universal’s research andproduct development efforts related tofocused on new and innovative wireless control devices with enhanced capabilities, as well as new applications of wireless control technology, resultedand interface solutions resulting in the launch of its Nevo technology andnew retail SKUs based on the Kameleon interface technology.
Universal also broadened its product portfolio with solutions that address emerging technology sectors like home media distribution and home automation. These advanced technology development efforts focused on both industry-based standards as well as specific universal extensions that maximize the end user experience utilizing a set of heterogeneous protocols and technologies that exist in the modern home today. This environment is also exploring various opportunitiesdriving the need for simplification of these new protocols and devices, since they were originally engineered and targeted towards the enterprise customer. The Company created the Nevo product offerings to supply wireless control devices forsimplify and manage the operation of additional electronic and otherend user’s experience interacting with devices in the home using— devices that may span over a decade, including traditional IR signals,based devices, and the more complex TCP/IP consumer electronic devices utilizing both open and proprietary protocols.
Universal also developed technologies aimed at unifying traditional technologies that are encountered within a home, and emerging technologies. This allows consumers to deploy Universal Electronics based solutions ranging from a simple IR based audio-visual stack to a modern digital media management experience allowing access to digital content such as well as combinations of infrared signals, radio frequencies, household electrical circuits,music, pictures and telephone lines and cable communication. videos.
Company personnel are 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.
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Universal’s engineering, research and development departments, located in Cypress, California, had approximately 75 full-time employees at December 31, 2002. Universal’sThe Company’s expenditures on engineering, research and development in 2002, 2001, and 2000 were $5.9, $5.6, and $4.5 million, respectively, of which approximately $4.5, $4.2, and $3.3 million, respectively, was for research and development.were:
(in millions): | 2003 | 2002 | 2001 | |||||||||
Research and Development | $ | 4.7 | $ | 4.5 | $ | 4.2 | ||||||
Engineering | 1.7 | 1.4 | 1.4 | |||||||||
Total Engineering, Research and Development | $ | 6.4 | $ | 5.9 | $ | 5.6 |
Environmental Matters
Universal believes it has6
We believe we have 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 iswe are subject. During the years ended December 31, 2003, 2002 2001 and 2000,2001, 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 Universal’sour 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 theour capital expenditures, earnings or financial conditioncondition.
The Company is committed to developing an infrastructure to support the control of hazardous substances. A fully integrated system with controls in product design and purchasing is being implemented internally.
Universal continues to work closely with its contract manufacturing base to move them toward becoming Sony Green Partners and already works with one fully certified Green Partner. Our goal is to provide a choice of two options to our customers: Green and Non-Green. The Green option will be fully compliant with the RoHS (Restriction on Hazardous Substances) requirements defined by the EEC with tolerances defined at the component level. All Green production processes will be segregated physically from standard production processes to eliminate the possibility of contamination. The Company will offer subsets of the Company.full Green requirement to accommodate the broad spectrum of customer needs.
Employees
At December 31, 2002,2003, Universal employed approximately 355259 employees, of whom 7582 were in engineering, research and development, 6656 in sales and marketing, 14149 in consumer service and support, 2128 in operations and warehousing and 5244 in executive and administrative staff. None of Universal’s employees is subject to a collective bargaining agreement or is represented by a union. Universal considers its employee relations to be good.
International Operations
Financial information relating to Universal’s international operations for the years ended December 31, 2003, 2002 2001 and 20002001 is included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA-Notes to Consolidated Financial Statements-Note 17”.
Available Information
Universal’s Internet address is www.uei.com. Universal makes available through its Internet website its annual report on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K and any amendments thereto as soon as reasonably practicable after it electronically files such reports with the Securities and Exchange Commission. Investors can also obtain copies of our SEC filings from the SEC website at www.sec.gov.
ITEM 2. PROPERTIES
Universal’s headquarters are located in Cypress, California. Universal utilizes the following office and warehouse facilities:
Square | ||||||||
Location | Purpose or Use | Feet | Status | |||||
Cypress, California | Corporate headquarters, warehouse, engineering, research and development | Leased, expires December 31, | ||||||
Twinsburg, Ohio | Consumer and customer call center | 8,509 | Leased, expires July | |||||
Enschede, Netherlands | International headquarters and call center | 18,292 | Leased, expires September 1, 2007 |
In addition to the facilities listed above, Universal leases space in various international locations, primarily for use as sales offices. See “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA –— Notes to Consolidated Financial Statements -— Note 12” for additional information regarding Universal’s obligations under leases.
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ITEM 3. LEGAL PROCEEDINGS
On November 15, 2000, Universalthe Company filed suit against Universal Remote Control Inc. alleging that Universal Remote has infringed certain of the Company’s patents (Universal Electronics Inc. v. Universal Remote Control, Inc., Civil Action No. SACV 00- 1125 AHS (EEx)). UniversalThe Company is seeking damages and injunctive relief. Universal Remote has answered the Complaintcomplaint and has denied infringement, and the parties areCompany is engaged in discovery. In addition, the parties are engaged in preliminary settlement discussions.
On November 19, 2002, the Company filed suit against Intrigue Technologies, Inc., which was amended on February 13, 2004, alleging that Intrigue Technologies has infringed onecertain of the Company’s patents (Universal Electronics Inc. v. Intrigue Technologies, Inc., Civil Action No. SA02-1089GLT (ANX)). Intrigue Technologies has answered this complaint denying infringement. In addition, Intrigue Technologies has filed suit against the Company (Intrigue Technologies, Inc. v. Universal Electronics Inc., Case Number A3-02-124) seeking a judgment to declare certain of the Company’s patents invalid, unenforceable and void and also alleging that the Compnay haswe have violated federal antitrust laws with respect to itsour patent enforcement. The Company has not yet answered this complaint,complaint; however, it intends to do so denying all of Intrigue Technologies’ material allegations. In addition,As of December 31 2003 and 2002, a loss contingency has not been recorded since management believes an unfavorable outcome for this matter is not probable.
On January 7, 2004, James D. Lyon, Trustee for the parties are engagedbankruptcy estate of Computrex, Inc. filed an action against the Company alleging that the Company received preferential treatment in preliminary settlement discussions.connection with certain payments made on the Company’s behalf by Computrex. (Computrex, Inc. (Debtor) and James D. Lyon (Trustee for the bankruptcy estate of Computrex, Inc.) v. Universal Electronics Inc., Case No. 01-53755 Chapter 7, United States Bankruptcy Court, Eastern District of Kentucky, Lexington Division). The Company has not yet answered this complaint and will not need to do so as this action is currently in abeyance while the trustee appeals an adverse ruling against it in another matter having facts similar to those in the trustee’s action against the Company. If and when the Company is to answer, it intends to deny all of the material allegations made against the Company and defend this matter vigorously. . As of December 31 2003 and 2002, a loss contingency has not been recorded since management believes an unfavorable outcome for this matter is not probable.
There are no other material pending legal proceedings, other than litigation that is incidental to the ordinary course of our business, to which Universalwe or any of itsour subsidiaries is a party or of which any of theirour respective property is the subject. In addition, as is typical in Universal’sour industry and to the nature and kind of business in which the Company iswe are engaged, from time to time, various claims, charges and litigation are asserted or commenced by third parties against the Companyus or by us 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.awards assessed against us or in our favor. In theour opinion, of management, final judgments, if any, which might be rendered against Universalus in potential or pending litigation would not have a material adverse effect on Universal’sour financial condition or results of operations. Moreover, management believeswe believe that Universal’sour products do not infringe any third parties’ patent or other intellectual property rights.
Universal maintainsWe maintain directors’ and officers’ liability insurance which insures our 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.
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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 Universal’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 Universal as of February 28, 2003:27, 2004:
Name | Age | Position | ||||
Paul D. Arling | Chairman of the Board and Chief Executive Officer | |||||
Robert P. Lilleness | President and Chief Operating Officer | |||||
Bernard J. Pitz | 43 | Senior Vice President, Chief Financial Officer, and Treasurer | ||||
J. Stewart Ames | Senior Vice President of Sales, Product Development and Marketing | |||||
Paul J.M. Bennett | Senior Vice President, Managing Director, Europe | |||||
Richard A. Firehammer, Jr. | Senior Vice President, General Counsel and Secretary |
*Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
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Paul D. Arlingis Chairman and Chief Executive Officer of Universal.Universal Electronics. He joined Universalthe Company in May 1996 as Chief Financial Officer and was named to the Company’s Board of Directors in August of 1996. He was appointed President and COO in September 1998, was promoted to Chief Executive Officer in October of 2000 and appointed as Chairman in July 2001. From 1993 through May 1996, he served in various capacities at LESCO, Inc. (a manufacturer and distributor of professional turf care products). 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 obtained a BS degree from the University of Pennsylvania and an MBA from the Wharton School of the University of Pennsylvania.
Robert P. Lillenessjoined Universal Electronics as President and Chief Operating Officer in May 2001. Prior to joining Universal,the Company, he served as Vice President of Product Management and Marketing at Trilogy Software Inc. from June 1998 to May 2001 (a privately held company that develops and markets e-business software). Before Trilogy, Lillenesshe worked for Microsoft Corporation (NASDAQ: MSFT) from February 1993 to May 1998, in a number of marketing, management and operational roles. Prior to working for Microsoft, Lillenesshe served as an auditor for Ernst and Young in Zurich, Switzerland. LillenessHe received his undergraduate degree from the University of Puget Sound and holds an MBA from Harvard University.
Bernard J. Pitzjoined Universal Electronics as Senior Vice President and Chief Financial Officer and Treasurer in November 2003. Prior to joining the Company, he served as Vice President of Finance for the worldwide frequency control business at Corning Incorporated. Prior to Corning, he spent 15 years at Motorola beginning in corporate audit and then progressing into positions of increasing responsibility in accounting and finance, including joint venture development in Latin America. While living in Beijing, China he served as the Senior Division Controller of the Greater China Cellular Subscriber Division. He started his career as an auditor for Touche Ross & Co. in Chicago, Illinois. He received his undergraduate degree in accounting from Northern Illinois University and has passed the CPA examination. He holds an MBA from the University of Chicago Graduate School of Business where he studied at both the Chicago campus and in Barcelona Spain.
J. Stewart Ameshas been a Senior Vice President of Sales Product Development and Marketing of Universal managing the marketing and sales efforts for North America and JapanElectronics since January 1999. Prior to this position at Universal AmesElectronics, he served as the Company’s Vice President of Cable Sales from June 1987 to January 1999, directing the United States based sales force in selling universal wireless control products to multiple system operators. Before joining Universal Electronics in January 1991, Mr. Ameshe 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. Ameshe 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. AmesHe received a BS Degree in Biology from Bates College in Lewiston, Maine.
Jerry L.Bardinhas been a Senior Vice President of Engineering and Operations since joining Universal in August 1998. Prior to joining Universal, Mr. Bardin was with Science Applications International Corp. (a high technology research and engineering company) for 15 years serving in several executive management and consulting positions. Mr. Bardin earned his BS and Master of Science in Electrical Engineering at the University of Texas at Austin.
Paul J.M.Bennetthas been Managing Director and a Senior Vice President, Managing Director, Europe of Universal Electronics since July 1996. Prior to joining Universal, Mr. Bennettthe Company, he 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. BennettHe 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.
Richard A.Firehammer, Jr., Esq.has been a Senior Vice President of Universal Electronics since February 1999. He has been Universal’sthe Company’s General Counsel since October 1993 and Secretary since February 1994. He was Universal’sthe Company’s Vice President from May 1997 until August 1998. He was outside counsel to the Company from September 1998 untilbeinguntil being rehired in February 1999. 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. FirehammerHe is also a certified public accountant. He received a BS degree from Indiana University and a JD degree from Whittier College School of Law.
Mark Z.Belzowskihas been the Chief Financial Officer and Treasurer of Universal since January 2000. He has been a Vice President of Universal since May 1998 when he joined the Company. Prior to becoming the Company’s Chief Financial Officer, Mr. Belzowski was the Company’s Corporate Controller. 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. Prior to that, Mr. Belzowski was a Senior Auditor with Ernst and Young. 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 ANDEQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Universal’s common stock trades on the National Market of The NASDAQ Stock Market under the symbol “UEIC”.UEIC.
The following table sets forth, for the periods indicated, the high and low reported sale prices for Universal’s common stock, as reported on the National Market of The NASDAQ Stock Market:
2002 | 2001 | 2003 | 2002 | |||||||||||||||||||||||||||||
High | Low | High | Low | High | Low | High | Low | |||||||||||||||||||||||||
First Quarter | $ | 16.7000 | $ | 13.9300 | $ | 21.1250 | $ | 13.5312 | $ | 10.7500 | $ | 9.0100 | $ | 16.7000 | $ | 13.9300 | ||||||||||||||||
Second Quarter | 18.2300 | 14.1500 | 23.7500 | 15.2600 | 14.2500 | 9.1500 | 18.2300 | 14.1500 | ||||||||||||||||||||||||
Third Quarter | 15.0800 | 8.8000 | 18.1000 | 12.7500 | 14.0000 | 11.0000 | 15.0800 | 8.8000 | ||||||||||||||||||||||||
Fourth Quarter | 10.4700 | 6.7300 | 18.0000 | 14.0000 | 13.8400 | 11.3000 | 10.4700 | 6.7300 |
Stockholders of record on February 28, 200327, 2004 numbered approximately 122.
Universal has119. We have never paid cash dividends on itsour common stock, and does notnor do we intend to pay any cash dividends on itsour common stock in the foreseeable future. Universal intendsWe intend to retain itsour earnings, if any, for the future operation and expansion of itsour business. In addition, the terms of Universal’sour revolving credit facility limit the Company’sour ability to pay cash dividends on itsour 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 7.”
Recent Sales of Unregistered Securities
On November 9, 1998, Universal issued a warrant to purchase Company common stock to General Instrument Corporation (subsequently merged with Motorola in 2000) as consideration for entering into an exclusive supply agreement with the Company. The warrant was contingent upon General Instrument Corporation purchasing a specified minimum number of units of products from Universal for each of the calendar years 1999, 2000 and 2001. In 2001, 2000 and 1999, General Instrument Corporation failed to purchase the minimum requirements for each year. As such, the warrant expired and General Instrument Corporation forfeited its right to acquire up to 600,000 shares of Company common stock, at an exercise price of $6.3125 per share, and may not recoup such right through the purchase of products in any subsequent years. Registration under the Securities Act of 1933 was not affected with respect to the warrant in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act of 1933.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||
2002 | 2001 | 2000 | 1999 | 1998 | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||||||||||||||||||
(in thousands, except per share data) | (in thousands, except per share data) | |||||||||||||||||||||||||||||||||||||||||
Net sales | Net sales | $ | 103,891 | $ | 119,030 | $ | 124,740 | $ | 105,091 | $ | 96,123 | Net sales | $ | 120,468 | $ | 103,891 | $ | 119,030 | $ | 124,740 | $ | 105,091 | ||||||||||||||||||||
Operating income | Operating income | $ | 6,981 | $ | 16,009 | $ | 18,242 | $ | 12,968 | $ | 9,505 | Operating income | $ | 8,573 | $ | 6,981 | $ | 16,009 | $ | 18,242 | $ | 12,968 | ||||||||||||||||||||
Net income | Net income | $ | 5,939 | $ | 11,286 | $ | 11,601 | $ | 7,740 | $ | 5,638 | Net income | $ | 6,267 | $ | 5,939 | $ | 11,286 | $ | 11,601 | $ | 7,740 | ||||||||||||||||||||
Earnings per share: | Earnings per share: | Earnings per share: | ||||||||||||||||||||||||||||||||||||||||
Basic | $ | 0.43 | $ | 0.82 | $ | 0.84 | $ | 0.58 | $ | 0.44 | Basic | $ | 0.46 | $ | 0.43 | $ | 0.82 | $ | 0.84 | $ | 0.58 | |||||||||||||||||||||
Diluted | $ | 0.42 | $ | 0.78 | $ | 0.78 | $ | 0.55 | $ | 0.43 | Diluted | $ | 0.45 | $ | 0.42 | $ | 0.78 | $ | 0.78 | $ | 0.55 | |||||||||||||||||||||
Shares used in calculating earnings per share: | Shares used in calculating earnings per share: | Shares used in calculating earnings per share: | ||||||||||||||||||||||||||||||||||||||||
Basic | 13,790 | 13,844 | 13,743 | 13,312 | 12,772 | Basic | 13,703 | 13,790 | 13,844 | 13,743 | 13,312 | |||||||||||||||||||||||||||||||
Diluted | 14,163 | 14,523 | 14,941 | 14,126 | 13,200 | Diluted | 14,007 | 14,163 | 14,523 | 14,941 | 14,126 | |||||||||||||||||||||||||||||||
Gross margin | Gross margin | 40.1 | % | 41.2 | % | 41.3 | % | 41.3 | % | 37.7 | % | Gross margin | 38.4 | % | 40.1 | % | 41.2 | % | 41.3 | % | 41.3 | % | ||||||||||||||||||||
Operating margin | Operating margin | 6.7 | % | 13.4 | % | 14.6 | % | 12.4 | % | 9.9 | % | Operating margin | 7.1 | % | 6.7 | % | 13.4 | % | 14.6 | % | 12.4 | % | ||||||||||||||||||||
Selling, general and administrative expenses as a % of sales | 33.4 | % | 27.8 | % | 26.7 | % | 28.9 | % | 27.8 | % | ||||||||||||||||||||||||||||||||
Selling, general, administrative, research and development expenses as a % of sales | Selling, general, administrative, research and development expenses as a % of sales | 31.3 | % | 33.4 | % | 27.8 | % | 26.7 | % | 28.9 | % | |||||||||||||||||||||||||||||||
Net income as a % of sales | Net income as a % of sales | 5.7 | % | 9.5 | % | 9.3 | % | 7.4 | % | 5.9 | % | Net income as a % of sales | 5.2 | % | 5.7 | % | 9.5 | % | 9.3 | % | 7.4 | % | ||||||||||||||||||||
Return on average assets | Return on average assets | 6.1 | % | 12.0 | % | 13.9 | % | 11.5 | % | 9.3 | % | Return on average assets | 5.5 | % | 6.1 | % | 12.0 | % | 13.9 | % | 11.5 | % | ||||||||||||||||||||
Working capital | Working capital | $ | 71,457 | $ | 67,422 | $ | 58,323 | $ | 45,506 | $ | 26,921 | Working capital | $ | 82,191 | $ | 71,457 | $ | 67,422 | $ | 58,323 | $ | 45,506 | ||||||||||||||||||||
Ratio of current assets to current liabilities | Ratio of current assets to current liabilities | 5.3 | 5.5 | 3.5 | 4.0 | 2.7 | Ratio of current assets to current liabilities | 3.7 | 5.3 | 5.5 | 3.5 | 4.0 | ||||||||||||||||||||||||||||||
Total assets | Total assets | $ | 100,016 | $ | 94,705 | $ | 93,766 | $ | 73,751 | $ | 60,677 | Total assets | $ | 126,167 | $ | 100,016 | $ | 94,705 | $ | 93,766 | $ | 73,751 | ||||||||||||||||||||
Cash and cash equivalents | Cash and cash equivalents | $ | 18,064 | $ | 14,170 | $ | 9,309 | $ | 13,286 | $ | 1,489 | Cash and cash equivalents | $ | 58,481 | $ | 18,064 | $ | 14,170 | $ | 9,309 | $ | 13,286 | ||||||||||||||||||||
Short-term investments | Short-term investments | $ | 22,500 | $ | 20,100 | $ | 11,500 | — | — | Short-term investments | — | $ | 22,500 | $ | 20,100 | $ | 11,500 | — | ||||||||||||||||||||||||
Short-term debt | — | — | — | — | $ | 4,786 | ||||||||||||||||||||||||||||||||||||
Long-term debt | Long-term debt | $ | 41 | $ | 104 | $ | 163 | $ | 240 | — | Long-term debt | — | $ | 41 | $ | 104 | $ | 163 | $ | 240 | ||||||||||||||||||||||
Stockholders’ equity | Stockholders’ equity | $ | 83,237 | $ | 79,702 | $ | 70,353 | $ | 58,511 | $ | 44,532 | Stockholders’ equity | $ | 95,171 | $ | 83,237 | $ | 79,702 | $ | 70,353 | $ | 58,511 | ||||||||||||||||||||
Book value per share (a) | Book value per share (a) | $ | 6.17 | $ | 5.78 | $ | 5.10 | $ | 4.28 | $ | 3.48 | Book value per share (a) | $ | 6.89 | $ | 6.17 | $ | 5.78 | $ | 5.10 | $ | 4.28 | ||||||||||||||||||||
Ratio of liabilities to liabilities and stockholders’ equity | Ratio of liabilities to liabilities and stockholders’ equity | 16.8 | % | 15.8 | % | 25.0 | % | 20.7 | % | 26.6 | % | Ratio of liabilities to liabilities and stockholders’ equity | 24.6 | % | 16.8 | % | 15.8 | % | 25.0 | % | 20.7 | % |
(a) | Book value per share is defined as stockholders’ equity divided by common shares outstanding. |
A factor that affected the comparability of information between 2002 and 2001 was our implementation of Statement of Financial Accounting Standards (“SFAS”) No. 142 on January 1, 2002, which requires that goodwill no longer be amortized.
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We build and marketITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Universal has developed a broad line of easy-to-use, pre-programmed easy-to-useuniversal wireless control devices and chipsproducts that are marketed principally for home video and audio entertainment equipment through various channels of distribution, including international retail, private label, OEMs, and the subscription broadcasting market. We also develop wireless control interface software for electronic display devices sold bycable and satellite service providers and to companies in the computing industry. Our product lines includeUniversal believes that its universal wireless controls can operate virtually all infrared remote (“IR”) controlled TVs, VCRs, DVD players, cable converters, CD players, audio components and satellite receivers, as well as most other infrared remote controlled devices worldwide.
Beginning in 1986 and continuing today, Universal has compiled an extensive library of over 171,000 IR codes that cover nearly 141,000 individual device functions and over 2,100 individual consumer electronic equipment brand names. Universal’s library is regularly updated with new IR codes used in newly introduced video and audio devices. All such wireless interface technologies as combination keyboard/remotesIR codes are captured from the original manufacturer’s remote control devices to ensure the accuracy and touch-screen remotes. We sell our wireless control productsintegrity of the database. Universal’s proprietary software and license our patented technologies and database ofknow-how permit IR codes to companies sellingbe compressed before being loaded into its products. This provides significant cost and space efficiencies that enable Universal to include more codes and features in the cable and satellite industries and to original equipment manufacturers. We also sell our universalmemory space of the wireless control device than are included in similarly priced products of competitors. Universal has developed a patented technology that provides the capability to distributors and retailers in Europe, Asia, Latin America and Australia undereasily upgrade theOne For All® brand name. We also offer call center support services to our customers. memory of the wireless control device by adding IR codes from its library that were not originally included.
The matters discussed in this Annual Report on Form 10-K should be read in conjunction with the consolidated financial statements provided under Part II, Item 8 of this Annual Report on Form 10-K. Certain statements contained herein may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed more fully herein. See, “Factors That May Affect Financial Condition and Future Results” in this Form 10-K.
Among the factors that could cause actual results to differ materially from those expressed hereinanticipated in these forward-looking statements are the following: the failure of our markets to continue growing and expanding in the manner we anticipated;anticipate; the failure of our customers to grow and expand as we anticipated;anticipate; the effects of natural or other events beyond our control, including the effect a war or terrorist activities may have on the Company or the economy; the economic environment’s effect on us and our customers; the growth of, acceptance of and the demand for our products and technologies in various markets and geographical regions, including cable, satellite, consumer electronics, retail and interactive TV and home automation, not materializing as we believed;believe; our inability to add profitable complementary products which are accepted by the marketplace; our inability to continue to maintain our operating costs at acceptable levels through our cost containment efforts; our realization of tax benefits from various tax projects initiated from time to time; the continued strength of our balance sheet; our inability to continue selling our products or licensing our technologies at higher or profitable margins throughout 20032004 and beyond; the failure of the various markets and industries to grow or emerge as rapidly or as successfully as we believed; the continued growth of the digital market; our inability to obtain orders or maintain our order volume with new and existing customers; the possible dilutive effect our stock option program may have on our earnings per share and stock price; our inability to continue to obtain adequate quantities of component parts or secure adequate factory production capacity on a timely basis; and other factors listed from time to time in our press releases and filings with the Securities and Exchange Commission.
In addition, more information about risk factors that could affect our business and financial results is included in the section entitled “Factors That May Affect Financial Condition and Future Results” in this Form 10-K.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates
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and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for sales returns and doubtful accounts, inventories, valuation of long-lived assets, intangible assets and goodwill, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
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We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue recognition.We recognize revenue on the sale of products when title and risk of loss have passed to the customer, there is pervasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectibility is reasonably assured. For the majority of our sales, recognition occurs when products are shipped. We also license our intellectual property (including our patented technologiestechnologies) trade secrets, trademarks, and database of infrared codes. We record license revenue when our customers ship products incorporating our technologies and database,intellectual property, provided collection of such revenue is reasonably assured. In addition, we generate service revenues as a result of providing consumer support programs, through our call center,centers, to various universal remote control marketers.some of our customers. These service revenues are recognized when earned. We record a provision for estimated sales returns and allowances on product sales in the same period as the related revenues are recorded. These estimates are based on historical sales returns, analysis of credit memo data and other known factors. If the data we use to calculate these estimates do not properly estimate returns and sales allowances, revenue could be overstated.misstated.
Accounts receivable.We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We specifically analyze accounts receivables and historical bad debts, customer credit, current economic trends and changes in customer payment trends when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Inventories.Inventories consist of wireless control devices, including universal remote controls, wireless keyboards, antennas, and related component parts (including integrated circuits) and are valued at the lower of cost or market. Cost is determined using the first-in, first-out method. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Valuation of long-lived assets and other intangible assets.We assess the impairment of long-lived assets and other intangible assets whenever events or changes in circumstances indicate that thetheir carrying value may not be recoverable. Factors considered important which could trigger an impairment review include the following: (1) significant underperformance relative to expected historical or projected future operating results; (2) significant changes in the manner of our use of the acquired assets or strategy for our overall business; (3) significant negative industry or economic trends; (4) significant decline in our stock price for a sustained period; and (5) a significant variance between our market capitalization relative to net book value. When we determine that the carrying value may not be recoverable based upon the existence of one or more of the above indicators of impairment, and based on the carrying value of the asset being less than the undiscounted cash flows, we measure an impairment based on the projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. In assessing the recoverability, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets not previously recorded.
In October 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144, which we adopted on January 1, 2002, establishing standards for performing certain tests of impairment on long-lived assets. The adoption of SFAS No. 144 did not have a material effect on our financial position or results of operations.
Goodwill.In accordance with SFAS No. 142, we ceased amortization on approximately $3.0 million of net unamortized goodwill beginning January 1, 2002. We recorded approximately $565,000 of amortization during 2001 and would have recorded approximately $565,000 of amortization during both 2003 and 2002. We performed an initial impairment review of our goodwill on January 1, 2002,2002; conducted an annual impairment reviewreviews as of
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December 31, 2003 and 2002 and will perform an annual review in subsequent years. In performing the initial impairment review, we identified our reporting units and determined the carrying value of each reporting unit by assigning assets and liabilities, including the existing goodwill, to those reporting units as of January 1, 2002. We then determined the fair value of each reporting unit using the present value of expected future cash flows and compared it to the reporting unit’s carrying amount. Based on this analysis, we
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determined that each reporting unit’s fair value exceeded its carrying amount, and therefore concluded that there was no indication of a transitional impairment loss. As further mandated by SFAS No. 142, we performed an annual impairment test of our goodwill as of December 31, 2002 using the same methodology employed for the initial impairment review of our goodwill, and determined that there was no indication of an impairment loss.
Income Taxes.IncomeAs part of the process of preparing our consolidated financial statements, we estimate our income taxes in each of the taxing jurisdictions in which we operate. This process involves estimating our actual current tax expense includes U.S.together with assessing any temporary differences resulting from the different treatment of certain items, such as the timing for recognizing expenses, for tax and international income taxes. The carrying value of our netfinancial reporting purposes. These differences may result in deferred tax assets assumesand liabilities, which are included in our consolidated balance sheet. We are required to assess the likelihood that weour deferred tax assets, which include net operating loss carryforwards and temporary differences that are expected to be deductible in future years, will be able to generate sufficientrecoverable from future taxable income or other tax planning strategies. If recovery is not likely, we must provide a valuation allowance based on our estimates of future taxable income in certainthe various taxing jurisdictions, and the amount of deferred taxes that are ultimately realizable. The provision for tax jurisdictions, based on estimatesliabilities involves evaluations and assumptions. If these estimates and related assumptions changejudgments of uncertainties in the future,interpretation of complex tax regulations by various taxing authorities. In situations involving tax related uncertainties, we may be required to record valuation allowances against theprovide for deferred tax assets resulting in additional income tax expense in the Company’s consolidated income statements. We evaluate the realizability of the deferred tax assets quarterly and assess the need for valuation allowances quarterly. In the event thatliabilities when we determine that we would not be ablebelieve such liabilities are reasonably expected to realize all or part ofoccur. Actual results could differ from our net deferred tax asset in the future, an adjustment to the net deferred tax asset would be charged to income in the period such determination was made.estimates.
Results of Operations
The following table sets forth the statement of operations data of Universal expressed as a percentage of net sales for the periods indicated.
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |||||||||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.00 | % | 100.00 | % | ||||||||||||
Cost of sales | 59.9 | 58.8 | 58.7 | 61.6 | 59.9 | 58.8 | ||||||||||||||||||
Gross profit | 40.1 | 41.2 | 41.3 | 38.4 | 40.1 | 41.2 | ||||||||||||||||||
Research and development expenses | 3.9 | 4.3 | 3.5 | |||||||||||||||||||||
Selling, general and administrative expenses | 33.4 | 27.8 | 26.7 | 27.4 | 29.1 | 24.2 | ||||||||||||||||||
Operating income | 6.7 | 13.4 | 14.6 | 7.1 | 6.7 | 13.4 | ||||||||||||||||||
Interest income, net | (0.6 | ) | (0.8 | ) | (0.8 | ) | ||||||||||||||||||
Interest income | (0.5 | ) | (0.6 | ) | (0.8 | ) | ||||||||||||||||||
Other income, net | (0.2 | ) | (0.2 | ) | (0.4 | ) | (0.3 | ) | (0.2 | ) | (0.2 | ) | ||||||||||||
Income before income taxes | 7.5 | 14.4 | 15.8 | 7.9 | 7.5 | 14.4 | ||||||||||||||||||
Provision for income taxes | 1.8 | 4.9 | 6.5 | 2.7 | 1.8 | 4.9 | ||||||||||||||||||
Net income | 5.7 | % | 9.5 | % | 9.3 | % | 5.2 | % | 5.7 | % | 9.5 | % | ||||||||||||
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Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Net sales for the twelve months ended December 31, 2003 were $120.5 million, an increase of 16% over the net sales of $103.9 million for the same period last year. Net income for 2003 was $6.3 million or $0.46 per share (basic) and $0.45 per share (diluted) compared to $5.9 million or $0.43 per share (basic) and $0.42 per share (diluted) for 2002.
Net sales in our technology lines (subscription broadcasting, OEM and private label) increased by $3.8 million, or 5.1%, to $79.0 million in 2003 from $75.2 million in 2002. Net sales to subscription broadcasting service providers and OEMs increased by $3.6 million, or 5.6%, to $68.0 million in 2003 from $64.4 million in 2002. Direct and OEM sales to subscription broadcasting service providers in the United States and in Europe, where additional geographic penetration was achieved, accounted for a significant portion of the increase. Private label sales increased by $2.1 million, or 29.9%, to $9.3 million in 2003 from $7.2 million in 2002 due to the success of the Kameleon product line which was introduced in late 2002. Net sales in the technology lines were approximately 65.6% of net sales in 2003 compared to 72.4% in 2002.
Net sales from the retail lines (One For All®international retail and direct import) increased $12.8 million, or 44.5%, to $41.5 million in 2003 from $28.6 million in 2002. Of this increase, theOne For All®international retail sales increased $9.3 million, or 34.2%, to $36.6 million in 2003 from $27.3 million in 2002. Reasons for the increase included Sky branded retail products sold in the U.K., Kameleon sales (particularly in Germany and Spain) and appreciation of the Euro relative to the U.S. dollar. United States direct import licensing and product revenues increased by $3.4 million or 248.8% to $4.8 million in 2003 from $1.4 million in 2002 due to the success of the Kameleon product line which was introduced into this channel in early 2003. Net sales in the retail lines accounted for approximately 34.4% of total 2003 net sales compared to 27.6% in 2002.
Gross profit was $46.3 million or 38.4% of net sales in 2003 as compared to $41.7 million or 40.1% of net sales in 2002. Gross profit as a percent of sales in 2003 was lower primarily due to price pressure in the subscription broadcasting service line, which resulted from consolidation within the industry. Other factors contributing to the decline in the gross profit percentage included changes in mix and inventory write-downs which included $0.4 million related to the Mosaic product line in the fourth quarter of 2003.
Research and development expenses increased to $4.7 million in 2003 from $4.5 million in 2002, primarily due to general cost increases. Resources have been realigned from core technology to advanced technology products, thus allowing a greater investment in future products while holding overall expenses relatively constant. Total research and development expenditures are expected to increase more significantly in 2004.
Selling, general and administrative expenses increased to $33.0 million in 2003 from $30.2 million in 2002. Of this increase, $1.3 million was attributable to increased employee bonuses. Other increases were related to the appreciation of the Euro relative to the U.S. dollar and costs associated with changes in staffing such as, severance, recruiting, and relocation. Selling, general and administrative expenses are expected to increase in 2004 as a result of the cost of compliance with the Sarbanes-Oxley requirements.
Other income, net increased to $0.3 million in 2003 from $0.2 million in 2002. The increase was attributable to an increase in the gain on foreign currency transactions of $0.3 million offset by a patent settlement of $0.2 million that occurred in 2002.
Income tax expense increased to $3.2 million in 2003 from $1.9 million in 2002. The increase in the effective tax rate to 34% in 2003 from 24% in 2002 is primarily related to a decrease in research and development credits in 2003 as compared to 2002.
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Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Net sales for the twelve months ended December 31, 2002 were $103.9 million, a decrease of 12.7% over the net sales of $119.0 million for the same period last year. Net income for 2002 was $5.9 million or $0.43 per share (basic) and $0.42 per share (diluted) compared to $11.3 million or $0.82 per share (basic) and $0.78 per share (diluted) for 2001.
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Net sales in our technology lines (subscription broadcasting, OEM and private label) in 2002 decreased by $16.6 million, or 18.1%, to $75.2 million from $91.8 million in 2001. Sales to subscription broadcasting service providers and OEMs decreased by $17.2 million, or 21.0%, from $81.6 million in 2001 to $64.4 million in 2002. Reductions in capital expenditures by our major subscription broadcasting and cable set top box OEM customers resulted in reduced digital set top box deployment during 2002 and consequently, reduced orders from these customers. Private label sales decreased by $0.5 million, or 7.1%, from $7.7 million in 2001 to $7.2 million in 2002 due to decreased consumer demand for these products in 2002. Net sales in our technology lines were approximately 72.4% of net sales in 2002 compared to 77.1% in 2001.
Net sales from the retail lines (One For All®international retail and direct import) increased $1.4 million, or 5.3%, from $27.2 million in 2001 to $28.6 million in 2002. Of this increase, theOne For All®international retail sales increased $2.1 million, or 8.2%, from $25.2 million in 2001 to $27.3 million in 2002 (due primarily to increased demand from retailers in the UK, Germany and Spain) while our domestic direct import licensing and product revenues decreased by $0.6 million or 31.6% from $2.0 million in 2001 to $1.4 million in 2002 due to less demand. Net sales from the retail lines accounted for approximately 27.6% of total 2002 net sales compared to 22.9% in 2001.
Gross profit was $41.7 million or 40.1% of net sales in 2002 as compared to $49.1 million or 41.2% of net sales in 2001. Gross margins in 2002 were lower due primarily to increased use of air freight-in to meet customer demands and higher provisions for inventory obsolescence.
Research and development expenses increased from $4.2 million in 2001 to $4.5 million in 2002, primarily due to the development of our Nevo and Kameleon technology.
Selling, general and administrative expenses increased to $34.7 million in 2002, compared to $33.1 million in 2001. This increase was attributable to increased delivery and freight expenses as well as higher professional service fees for tax planning projects.
Delivery and freight expenses increased $1.1 million, from $2.2 million in 2001 to $3.3 million in 2002, as a result of increased air shipments as well as increased fees and surcharges as a result of the port shutdowns in the western United States. Professional service fees increased from $1.0 million in 2001 to $1.5 million in 2002 due to an increase in fees for various tax planning projects. As a percentage of net sales, selling, general andadministrativeand administrative expense was 33.3% in 2002 compared to 27.8% in 2001.
Interest income decreased by $392,000 in 2002 to $595,000 as compared to $987,000 in 2001 due to a decrease in interest earned on cash balances and short- termshort-term investments in 2002.
Other income increased by $92,000 to $239,000 in 2002 compared to $147,000 in 2001 primarily due to the settlement of patent infringement suits totaling $163,000.
We recorded income tax expense of $1.9 million for 2002 compared to $5.9 million for 2001. The decrease is a result of lower pretax income and a reduction in tax expense of approximately $0.5 million due to the benefit recorded for research and development credits. Our effective tax rate was reduced from 34% in 2001 to 24% in 2002.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net sales for the twelve months ended December 31, 2001 were $119.0 million, a decrease of 4.6% over the net sales of $124.7 million for the same period last year. Net income for 2001 was $11.3 million or $0.82 per share (basic) and $0.78 per share (diluted) compared to $11.6 million or $0.84 per share (basic) and $0.78 per share (diluted) for 2000.
Net sales in our technology lines (subscription broadcasting, OEM and private label) in 2001 decreased by $7.9 million, or 7.9%, to $91.8 million from $99.7 million in 2000. Sales to subscription broadcasting service providers and OEMs decreased by $8.6 million, or 9.6%, from $90.2 million in 2000 to $81.6 million in 2001. This decrease was principally due to reductions in overall spending by our traditional OEM customers and a lower rate of digital set top box deployment during 2001 resulting in reduced orders from some of our major subscription broadcasting
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and cable set top box OEM customers. Private label sales decreased by $1.0 million, or 11.5%, from $8.7 million in 2000 to $7.7 million in 2001 due to decreased consumer demand for these products in 2001. Net sales in our technology lines were approximately 77.1% of net sales in 2001 compared to 79.9% in 2000.
Net sales from the retail lines (One For All®international retail and direct import) increased $2.2 million, or 8.8%, from $25.0 million in 2000 to $27.2 million in 2001. Of this increase,One For All®international retail sales increased $1.8 million, or 7.8%, from $23.4 million in 2000 to $25.2 million in 2001 (due primarily to increased demand from retailers in the UK, France, Latin America and Australia) while our domestic direct import licensing and product revenues increased by $0.4 million or 25.7% from $1.6 million in 2000 to $2.0 million in 2001. Net sales from the retail lines accounted for approximately 22.9% of total 2001 net sales compared to 20.1% in 2000.
Gross profit was $49.1 million or 41.2% of net sales in 2001 as compared to $51.6 million or 41.3% of net sales in 2000.
Research and development expenses increased from $3.3 million in 2000 to $4.2 million in 2001, primarily due to the development of our embedded solutions and other wireless interface technology.
Selling, general and administrative expenses decreased to $33.1 million in 2001, compared to $33.3 million in 2000 primarily due to an ongoing effort to contain and minimize our costs. This decrease was attributable to reduced delivery and freight expenses, reduced professional fees and an overall decrease in payroll, commission and bonus-related costs, partially offset by increased advertising costs and bad debt expenses.
Delivery and freight expenses decreased $0.7 million, from $2.9 million in 2000 to $2.2 million in 2001, as a result of lower sales volumes along with increased use of less expensive delivery methods and aggressive negotiations with our freight vendors, which have resulted in increased shipping and operating efficiencies. Professional fees decreased from $1.7 million in 2000 to $1.0 million in 2001. This decrease was primarily due to higher costs in 2000 relating to our corporate development activity including evaluation of potential acquisitions as compared to 2001. Employee payroll, bonus, commission and related fringe costs were $14.5 million in 2001 compared to $14.7 million in 2000, an overall decrease of $.2 million, principally due to reduced bonus and commission costs as a result of lower sales, partially offset by additional hiring of personnel in technology development, engineering and sales. Advertising, promotional and tradeshow expenses increased from $1.7 million in 2000 to $2.1 million in 2001 in an intensified effort to promote our technology and products. During 2000, we recorded income of $0.5 million as an offset to bad debt expense to reflect the settlement and collection of an older U.S. retail receivable, previously fully reserved. As a percentage of net sales, selling, general and administrative expense was 27.8% in 2001 compared to 26.7% in 2000.
Interest income increased by $66,000 in 2001 to $987,000 as compared to $921,000 in 2000 due to interest earned on higher accumulated cash balances in 2001.
Other income decreased by $353,000 to $147,000 in 2001 compared to $500,000 in 2000. This decrease is primarily due to devaluation of the European currencies against the U.S. dollar, partially offset by the favorable settlement of foreign currency exchange agreements we entered into to manage our exposure on cash flows.
We recorded income tax expense of $5.9 million for 2001 compared to $8.1 million for 2000. The decrease is a result of lower pretax income and a reduction in tax expense of approximately $1.0 million recorded in 2001 due to the benefit recorded for research and development credits. We may continue to benefit from any identified research and development credits in future periods. Our effective tax rate was reduced from 41% in 2000 to 34% in 2001.
Liquidity and Capital Resources
Universal’sOur principal sources of funds are from its operations and bank credit facilities. Cash provided by operating activities for 20022003 was $16.2$19.2 million as compared to $19.7$16.2 million in 2001.2002. The deceaseincrease in cash flow is primarily due to reduced net income.an increase in accounts payable.
In September, 2003, we terminated our $15,000,000 unsecured revolving credit agreement with Bank of America National Trust and Savings Association. On April 1, 2002,September 15, 2003, we entered into a $15 millionthree-year $15,000,000 unsecured revolving credit agreement (the “Agreement”) with Comerica Bank
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of America National Trust and Savings Association (“B of A”Comerica”). Under the Agreement with BComerica, the interest payable is variable and is based on either the bank’s cost of A which is set to expire on April 1, 2005, we can choose from several interestfunds or the LIBOR rate options at our discretion.plus a fixed margin of 1.25%. The interest rate in effect as of December 31, 20022003 using the IBORLIBOR Rate option plus a fixed margin of 1.25%, was 2.62%2.37%. We pay a commitment fee atranging from zero to a maximum rate of 1/84 of 1% per year on the unused portion of the credit line.line depending on the amount of cash investment retained with Comerica during each quarter. Under the terms of this Agreement, our abilitydividend payments are allowed up to pay cash dividends on our common stock is restricted100% of net income of the prior fiscal year period to be paid within 90 days of such prior year, and we are subject to certain financial covenants related to the Company’s net worth, quick ratio, and other restrictions that are standard for these types of agreements. However, wenet income. We have authority under this credit facility to acquire up to 1,000,0001,500,000 shares of our common stock in market purchases. We purchased 584,845 shares at a cost of $5,273,611 sinceBetween the date of this Agreement throughexecution of the credit agreement and December 31, 2002.2003, 45,736 shares of our common stock have been purchased. Amounts available for borrowing under this credit facility are reduced by the outstanding balance of our import letters of credit. As of December 31, 2002,2003, we had no amounts outstanding under this credit facility.facility and no outstanding import letters of credit. Furthermore, as of December 31, 2003, we are in compliance with all financial covenants required by the agreement.
In addition to the 584,84584,437 shares of our common stock purchased during 20022003 at a cost of $5,273,611,$963,168, we purchased 584,845 and 301,600 shares of common stock in 2001 on the open market purchases in 2002 and 2001, respectively, at a cost of $5,273,611 and $4,428,771. There were no open market purchases of our common stock in 2000. We hold shares purchased on the open market as treasury stock, and they are available for reissue. Presently, except for using a small number of these treasury shares to compensate our outside board members, we have no plans to distribute these shares, although we may change these plans if necessary to fulfill our on-going business objectives.
During 2002,2003, we received proceeds of approximately $1,334,000$3,343,000 from the exercise of stock options granted to the Company’sour employees, as compared to approximately $1,334,000 and $1,750,000 during 2002 and 2001, and $592,000 during 2000.respectively.
Capital expenditures in 2003, 2002, and 2001 were $2.5 million, $2.6 million and 2000 were approximately $2.1 $2.6, and $2.8 million, respectively. Annual capital expenditures relate primarily to acquiring product tooling each year.
During the second quarter of 2002, we completed an acquisition of certain multimedia protocol technologies from a software development company for $780,000. These technologies enable custom wireless control solutions for home entertainment hardware and software applications.
On August 25, 2000, we completed our acquisition of a remote control distributor in France for approximately $1.8 million, of which $1.5 million was paid during 2000, $143,000 was paid during 2001 and the remaining amount was paid during 2002.
Historically, our 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. At December 31, 2002,2003, we had $71.5$82.2 million of working capital as compared to $67.4 million and $58.3 million$71.5 at December 31, 2001 and 2000, respectively.2002. The increase in working capital during 2002these periods is principally due to increases in cash and short-term investments at December 31, 2002.cash.
The following summarizes our obligations at December 31, 20022003 and the effect such obligations are expected to have on our liquidity and cash flow in future periods. Other obligations primarily consist
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Payments Due by Period | ||||||||||||||||||||
December 31, 2003 | ||||||||||||||||||||
(In thousands) | Less than | 1 — 3 | 4 — 5 | After | ||||||||||||||||
Contractual Obligations | Total | 1 year | years | years | 5 years | |||||||||||||||
Long-Term Debt | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Capital Lease Obligations | — | — | — | — | — | |||||||||||||||
Operating Lease Obligations | 3,357 | 1,408 | 1,552 | 367 | 29 | |||||||||||||||
Purchase Obligations | — | — | — | — | — | |||||||||||||||
Other Obligations | — | — | — | — | — | |||||||||||||||
Total | $ | 3,357 | $ | 1,408 | $ | 1,552 | $ | 367 | $ | 29 | ||||||||||
The Company has bank guarantees totaling approximately $510,000 that provide for payment by the bank to the Company’s suppliers in the event of payments to onenon-payment for transactions in the ordinary course of our former directors for services rendered. business.
See “ITEM 8. FINANCIAL STATEMENTS AND SUPPLMENTARYSUPPLEMENTARY DATA- Notes to Consolidated Financial Statements-Note 18” for additional information regarding related party transactions.
December 31, 2002 | ||||||||||||||||||||
(In thousands) | Payments Due by Period | |||||||||||||||||||
Less than | 1 – 3 | 4-5 | After | |||||||||||||||||
Total | 1 year | years | years | 5 years | ||||||||||||||||
Contractual Obligations | ||||||||||||||||||||
Operating Leases | $ | 2,180 | $ | 889 | $ | 777 | $ | 514 | — | |||||||||||
Other Obligations | 258 | 258 | — | — | — | |||||||||||||||
Total Contractual Cash Obligations | $ | 2,438 | $ | 1,147 | $ | 777 | $ | 514 | $ | — | ||||||||||
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It is our policy to carefully monitor the state of our business, cash requirements and capital structure. We believe that funds generated from our operations and available from our borrowing facility will be sufficient to fund current business operations as well as anticipated growth at least through the end of 2003;2004; however, there can be no assurance that this will occur.
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New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Intangible Assets.” SFAS No. 141 requires that the purchase method of accounting be used for all business combinations, establishes specific criteria for recognizing intangible assets separately from goodwill and requires certain disclosures regarding reasons for a business combination and the allocation of the purchase price paid. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001. SFAS No. 142 establishes that goodwill and certain intangible assets will no longer be amortized to earnings, but instead tested for impairment at least annually. We adopted the provisions of SFAS No. 141 and SFAS No. 142 on January 1, 2002.
In accordance with SFAS No. 142, we ceased amortization on approximately $3.0 million of net unamortized goodwill beginning January 1, 2002. We recorded approximately $565,000 of amortization during 2001 and would have recorded approximately $565,000 of amortization during 2002. We performed an initial impairment review of our goodwill on January 1, 2002, conducted an annual impairment review as of December 31, 2002 and will perform an annual review in subsequent years.
In the performance of the initial impairment review, we identified our reporting units and determined the carrying value of each reporting unit by assigning assets and liabilities, including the existing goodwill, to those reporting units as of January 1, 2002. We then determined the fair value of each reporting unit using the present value of expected future cash flows and compared it to the reporting unit’s carrying amount. Based on this analysis, we determined that each reporting unit’s fair value exceeded its carrying amount, and therefore concluded that there was no indication of a transitional impairment loss.
As further mandated by SFAS No. 142, we performed an annual impairment test of our goodwill as of December 31, 2002 and using the same methodology employed for the intital impairment review of our goodwill, and determined there was no indication of an impairment loss.
In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 did not have a material effect on our financial position or results of operations.
In October 2001, the FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144, which we adopted on January 1, 2002, establishes standards for performing certain tests of impairment on long-lived assets. The adoption of SFAS No. 144 did not have a material effect on our financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which requires companies to recognize costs associated with exit or disposal activities when they are incurred, rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by this standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. The statement replaces EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. We do not believe that the adoption of SFAS No. 146 will have a significant impact on our financial condition, results of operations, or cash flow.
In November 2002, the FASB issued Interpretation No. 45 (“FIN No. 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 expands on the accounting guidance of Statements Nos. 5, 57, and 107 and incorporates without change the provisions of FASB Interpretation No. 34, which is being superseded. FIN No. 45 will affectaffects leasing transactions involving
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residual guarantees, vendor and manufacturer guarantees, and tax and environmental indemnities. All such guarantees will need tomust be disclosed in the notes to the financial statements starting with the period ending after December 15, 2002. For guarantees issued after December 31, 2002, the fair value of the obligation must be reported on the balance sheet. Existing guarantees will be grandfathered and will not be recognized on the balance sheet. We have made the required disclosures related to our warranties and are currently evaluating the impactThe adoption of FIN No. 45 did not have a material effect on our financial position, and results of operations.operations, or cash flows.
In November 2002, the Financial Accounting Standards BoardFASB issued Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities. EITF Issue No. 00-21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. EITF Issue No. 00-21 provides guidance with respect to the effect of certain customer rights due to company nonperformance on the recognition of revenue allocated to delivered units of accounting. EITF Issue No. 00-21 also addresses the impact on the measurement and/or allocation of arrangement consideration of customer cancellation provisions and consideration that varies as a result of future actions of the customer or the company. Finally, EITF Issue No. 00-21 provides guidance with respect to the recognition of the cost of certain deliverables that are excluded from the revenue accounting for an arrangement. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We are currently evaluating the effect that theThe adoption of EITF Issue No. 00-21 willdid not have a material effect on our financial position, and results of operations.operations, or cash flows.
In December 2002,January 2003, the FASB issued SFASFIN 46, “Consolidation of Variable Interest Entities,” an Interpretation of Accounting Research Bulletin No. 148, “Accounting51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for Stock-Based Compensation - Transition and Disclosure - an amendmentthe entity to FASB Statement No. 123, Accountingfinance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for Stock-Based Compensation.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of Statement 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years endingall new variable interest entities created or acquired after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002.January 31, 2003. The adoption of SFAS No. 148FIN 46 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In December 2003, the FASB issued FIN 46R with respect to variable interest entities created before January 31, 2003, which among other things, revised the implementation date to the first fiscal year or interim period ending after March 15, 2004, with the exception of Special Purpose Entities (“SPE”). The consolidation requirements apply to all SPE’s in the first fiscal year or interim period ending after December 15, 2003. The adoption of FIN 46R with respect to SPEs did not have a material effect on our financial position or results of operations.operations, and we do not expect the adoption of the provisions for non-SPEs to have a material impact on the Company’s financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS 150 establishes new standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for certain mandatorily redeemable non-controlling interests. The adoption of SFAS 150 did not have a material effect on the Company’s financial position, results of operations, or cash flows.
In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition,” which revises or rescinds portions of its previously existing revenue recognition guidance in order to make it consistent with current authoritative accounting and auditing guidance and Securities and Exchange Commission rules and regulations. The adoption of SAB No. 104 did not have a material effect on the Company’s financial position, results of operations or cash flows.
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Factors That May Affect Financial Condition And Future Results
We caution that the following important factors, among others (including but not limited to factors discussed below or in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as those factors discussed elsewhere in this Annual Report on Form 10-K, or in our other reports filed from time to time with the Securities and Exchange Commission), could affect our actual results and could contribute to or cause our actual consolidated results to differ materially from those expressed in any of our forward-looking statements. 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 we undertake no obligation to update any forward-looking statement 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 such factors, nor can we 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 forward-looking statements. Therefore, forward-looking statements should not be relied upon as a prediction of actual future results.
While we believe 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 the failure of our markets to continue growing and expanding in the manner we anticipated; the failure of our customers to grow and expand as we anticipated; the effects of natural or other events beyond our control, including the effect a war or terrorist activities may have on the Company or the economy; the economic environment’s effect on us and our customers; the growth of, acceptance of and the demand for our products and technologies in various markets and geographical regions, including cable, satellite, consumer electronics, retail and interactive TV and home automation, not materializing as we believed; our inability to add profitable complementary products which are
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accepted by the marketplace; our inability to continue to maintain our operating costs at acceptable levels through our cost containment efforts; our realization of tax benefits from various tax projects initiated from time to time, the continued strength of our balance sheet,;sheet; our inability to continue selling our products or licensing our technologies at higher or profitable margins; the failure of the various markets and industries to grow or emerge as rapidly or as successfully as we believed; the continued growth of the digital market; our inability to obtain orders or maintain our order volume with new and existing customers; the possible dilutive effect our stock option program may have on our earnings per share and stock price; our inability to continue to obtain adequate quantities of component parts or secure adequate factory production capacity on a timely basis; and other factors listed from time to time in our press releases and filings with the Securities and Exchange Commission.
Dependence Uponupon Key Suppliers
Most of the components used in our products are available from multiple sources; however, we have elected to purchase integrated circuit components used in our products, principally our wireless control products, and certain other components used in our products, from two main sources, each of which provides in excess of ten percent (10%) of our microprocessors for use in our products. We have developed alternative sources of supply for these integrated circuit components. However, there can be no assurance that we will be able to continue to obtain these components on a timely basis. We generally maintain inventories of our 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 our products, or a reduction in their quality or reliability, or a significant increase in prices of components, would have an adverse effect on our business, results of operations and cash flows.
Dependence on Foreign Manufacturing
Third-party manufacturers located in foreign countries manufacture a majority of our wireless controls. Our arrangements with our 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 our business, results of operations and cash flows. We believe that the loss of any one or more of our manufacturers would not have a long-term material adverse effect on our business, results of operations and cash flows because numerous other manufacturers are available to fulfill our requirements; however, the loss of any of
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our major manufacturers could adversely affect our business until alternative manufacturing arrangements are secured.
Potential Fluctuations in Quarterly Results
Our quarterly financial results may vary significantly depending primarily upon factors such as the timing of significant orders, the timing of our new product offerings and our competitors and the loss or acquisition of any significant customers. Historically, our business has been influenced by the retail sales cycle, with increased sales in the last half of the year and the largest proportion of sales occurring in the last quarter. However, the growth in our subscription broadcasting and OEM products may outpace the growth in our retail products and consequently, retail seasonality may have less of an effect on our revenue. Factors such as quarterly variations in financial results could adversely affect the market price of our common stock and cause it to fluctuate substantially. In addition, we (i) may from time to time increase our operating expenses to fund greater levels of research and development, increase our sales and marketing activities, develop new distribution channels, improve our operational and financial systems and broaden our 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, our business, operating results, financial condition and cash flows will be materially adversely affected.
We may experience significant fluctuations in future quarterly operating results that may be caused by many factors, including demand for products, introduction or enhancement of products by us and our competitors, the loss or acquisition of any significant customers, market acceptance of new products, price reductions by us or our 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 domestic revenues, and general economic
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conditions. In addition, as a strategic response to changes in the competitive environment, we may from time to time make certain pricing or marketing decisions or acquisitions that could have a material adverse effect on our business, results of operations or financial condition. As a result, we believe 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 our operating results will be below the expectations of public market analysts and investors. In such event, the price of our common stock would likely be materially adversely affected.
Dependence on Consumer Preference
We are susceptible to fluctuations in our business based upon consumer demand for our products. We believe that our success depends in substantial part on our 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 our products. Moreover, we caution that any increases in sales or growth in revenue that we achieve may be transitory and should by no means be construed to mean that such increases or growth will continue.
Demand for Consumer Service and Support
We have continually provided domestic and international consumer service and support to our customers to add overall value and to help differentiate us from our competitors. In March 2003, our largest customer notified us that as a result of a merger, it would conduct all of its consumer service and support activities internally and cease using our services commencing the second quarter of 2003. Consequently, revenue for consumer service and support from this customer will cease. In light of this, we will review our domestic service and support group and determine how to best utilize this service to support our existing customers and to attract new customers. There can be no assurance that we will be able to attract new customers. In addition, in the event other customers decide to cease using this service, we would be unable to offset costs associated with providing this service resulting in a significant adverse affect to our financial condition, results of operations and cash flows.
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Dependence Upon Timely Product Introduction
Our ability to remain competitive in the wireless control products market will depend in part upon our 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 we will be successful in developing and marketing new products or in enhancing our existing products, or that such new or enhanced products will achieve consumer acceptance, and, if achieved, will sustain that acceptance, that products developed by others will not render our products non-competitive or obsolete or that we will be able to obtain or maintain the rights to use proprietary technologies developed by others which are incorporated in our products. Any failure 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 our Company’s financial condition, results of operations and cash flows.
In addition, the introduction of new products that we 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, we may have to make substantial investments in inventory and expand our production capabilities.
Dependence on Major Customers
The economic strength and weakness of our worldwide customers affect our performance. We sell our wireless control products and proprietary technologies to private label customers, original equipment manufacturers, and companies involved in the subscription broadcasting industry. We also supply our products to our wholly owned, non-U.S. subsidiaries and to independent foreign distributors, who in turn distribute our products worldwide, with Europe, Australia, New Zealand, Mexico and selected countries in Asia and Latin America currently representing our principal foreign markets. During 2002,2003, we had sales to one customer that amounted to more than ten percent of our net sales for the year. The future loss of that customer or any other key customer, either in the United States or abroad due to the financial weakness or bankruptcy of any such customer or our inability to obtain orders or maintain our order volume with our major customers, may have an adverse effect on our financial condition, results of operations and cash flows.
Competition
The wireless control industry is characterized by intense competition based primarily on product availability, price, and speed of delivery, ability to tailor specific solutions to customer needs, quality and depth of product lines. Our competition is fragmented across our product lines, and accordingly, we do not compete with any one company across all product lines. We compete with a variety of entities, some of which have greater financial and other resources. Our ability to remain competitive in this industry depends in part on our ability to successfully identify
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new product opportunities and develop and introduce new products and enhancements on a timely and cost effective basis, as well as our ability to identify and enter into strategic alliances with entities doing business within the industries we serve. There can be no assurance that we and our product offerings will be and/or remain competitive or that any strategic alliances, if any, which we enter into will achieve the type, extent and amount of success or business that we expect or hope to achieve.
Patents, Trademarks, and Copyrights
The procedures by which Universal identifies, documents, and files for patent, trademark, and copyright protection are based solely on engineering and management judgment, with no assurance that a specific filing will issue, or if issued, will deliver any lasting value to Universal. There is no assurance that the rights granted under any patent will provide competitive advantages to Universal, or will be adequate to safeguard and maintain Universal’s proprietary rights. Moreover, the laws of certain countries in which Universal’s products are or may be manufactured or sold may not protect such products and intellectual property rights to the same extent as the U.S. legal system.
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In Universal’s opinion, the engineering, production, and marketing skills and experience of its personnel are of equal importance to its market positions as are its intellectual property holdings. Universal further believes that none of its businesses is dependent to any material extent upon any single patent, copyright, trademark, or trade secret.
Some of Universal’s products include or use technology and/or components of third-parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of such products, Universal believes that based upon past experience and industry practice, such licenses generally could be obtained on commercially reasonable terms; however, there is no guarantee that such licenses could be obtained at all. Because of technological changes in the wireless and home control industry, current extensive patent coverage, and the rapid rate of issuance of new patents, it is possible certain components of Universal’s products and business methods may unknowingly infringe patents of others.
Potential for Litigation
As is typical in our industry and the nature and kind of business in which we are engaged, from time to time, various claims, charges and litigation are asserted or commenced by third parties against us or by us 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.awards assessed against us or in our favor. At the present time, there arewe have filed two lawsuits pending brought by the Company against third parties. In these actions, we are seeking money damages and injunctive relief.relief for infringement of certain of our intellectual property. In one of these actions, the third party has filed suita counterclaim against us seeking a declaration that certain of our patents are invalid and unenforceable. It is theour opinion of management that suchour patents are valid and enforceable and we intend to defend against such suitcounterclaim vigorously. In addition, there is one action pending against us in which a trustee for the bankruptcy estate of a former service provider has alleged that we received preferential treatment in connection with certain payments made on our behalf by the service provider. We disagree with these allegations and intend to vigorously defend ourselves against these allegations. While it is theour opinion of management that our products do not infringe any third party’s patent or other intellectual property rights or that we received preferential treatment, the costs associated with defending or pursuing any such claims or litigation, including the matters discussed in this Annual Report on Form 10-K, 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 our financial condition, results of operations and cash flows.flows..
Effects on Universal Due to International Operations
The risks of doing business in developing countries and economically volatile areas could adversely affect our sales, operations, earnings, and cash flows. Our expansion of sales into economically volatile areas, such as Asia-Pacific, Latin America and other emerging markets, subject usflows due to a numbervariety of economic and other risks. Such risks include financial instability among customers in these regions, the volatility of economic conditions in countries dependent on exports from the United States and European markets, and political instability and potential conflicts among developing nations. We generally have experienced longer accounts receivable cycles in some established European markets as well as emerging international markets, in particular Latin America, when compared with the United States. We are also subject to any political and financial instability in the countries in which we operate, including inflation, recession, trade protection measures, local labor conditions, and unexpected changes in regulatory requirements, currency devaluation and interest rate fluctuations.factors, including:
In 2000, we established a wholly owned subsidiary,One For AllArgentina S.R.L., in Argentina for the support of our retail sales activities in Latin America, specifically in Argentina and Brazil. Net sales during 2002 and 2001 were approximately $308,000 and $1.2 million, respectively. In early 2002, the United States dollar was eliminated as Argentina’s monetary benchmark, resulting in significant currency devaluation. As the functional currency in Argentina is the Argentinean peso and we anticipate that funds generated from collection of sales in Argentina will be maintained in Argentina, we do not anticipate that the elimination of the U.S. dollar as a monetary benchmark will result in a material adverse effect on our business. However, there can be no guarantee that economic circumstances in Argentina or elsewhere will not worsen, which could result in future effects on earnings should such events occur. Our failure to successfully manage economic, political and other risks relating to doing business in developing countries and economically and politically volatile areas could adversely affect our business.
• | changes in a country’s or region’s economic or political conditions, including inflation, recession, interest rate fluctuations and actual or anticipated military conflicts; | ||
• | currency fluctuations affecting sales, particularly in the British Pound and the Euro, which contribute to variations in sales of products and services in impacted jurisdictions and also affect our reported results expressed in U.S. dollars; | ||
• | currency fluctuations affecting costs, particularly the Euro and the Chinese Yuan, which contribute to variances in costs in impacted jurisdictions and also affect our reported results expressed in U.S. dollars | ||
• | longer accounts receivable cycles and financial instability among customers; | ||
• | trade regulations and procedures and actions affecting production, pricing and marketing of products; | ||
• | local labor conditions and regulations; |
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• | changes in the regulatory or legal environment; | ||
• | differing technology standards or customer requirements; | ||
• | import, export or other business licensing requirements or requirements relating to making foreign direct investments, which could affect our ability to obtain favorable terms for components or lead to penalties or restrictions; | ||
• | difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner and changes in tax laws; | ||
• | fluctuations in freight costs and disruptions at important geographic points of exit and entry; and; | ||
• | natural and medical disasters. |
General Economic Conditions
General economic conditions, both domestic and foreign, have an impact on our business and financial results. The global economy has weakened and market conditions continue to be challenging.remains uncertain. As a result, individuals and companies are delayingmay delay or reducingreduce expenditures. Continued weakWeak global economic conditions and continuedand/or softness particularly in the consumer and telecommunications sector and purchasers’ uncertainty about the extent of the global economic downturn could result in lower demand for our products.products, resulting in lower sales, earnings, and cash flows.
22
We have observedTerrorist acts of war (wherever located around the effects ofworld) may cause damage or disruption to the global economic downturn in some areas ofCompany, our business. The downturn has contributed to netemployees, facilities, partners, suppliers, distributors, resellers or customers, which could significantly impact our revenue, declines during fiscal 2002. During the current downturn, we also have experienced gross margin declines in certain businesses, reflecting the effect of competitive pressures as well as inventory write-downs. While worsening economic conditions have had a slightly negative impact on revenues to date, revenues, gross marginscosts, and earnings could deteriorate significantly or our growth rate could be adversely impacted in the future as a result of economic conditions. In addition, if our customers experienceexpenses and financial difficulties, we could suffer losses associated with the outstanding portion of accounts receivable.
condition. The terrorist attacks that took place in the United States on September 11, 2001 were unprecedented events thatand subsequent terrorist attacks in Iraq and other countries have created many economic and political uncertainties.uncertainties, some of which may materially harm our business and results of operations. The potential for future terrorist attacks, the national and international responses to terrorist attacks or perceived threats to national security, and other actual or potential conflicts or acts of war, or hostilityincluding the ongoing military operations in Iraq, have created many economic and political uncertainties whichthat could adversely affect our business, financial position, results of operations and cash flows in the short or long-termstock price in ways that we cannot presently be predicted.
By operating our business in countries outsidepredict. In addition, as a multi-national company, actions against or by the United States wemay impact our business. We are exposedpredominately uninsured for losses and interruptions caused by terrorist acts and acts of war.
Increased Regulation
Increased regulation, such as Sarbanes-Oxley, may require significant expenditures to fluctuations in foreign currency exchange rates, exchange ratios, nationalization or expropriation of assets, import/export controls, political instability,ensure compliance with documentation and 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 effect on our international operations, and consequently on our business, operating results, financial condition and cash flows. While we will continue to work toward minimizing any adverse effects of conducting our business abroad, no assurance can be made that we will be successful in minimizing any such effects.verification requirements.
Outlook
Our focus is to build the technology and products that make the consumer’s interaction with devices and content within their home easier and more enjoyable. The pace of change in the home is increasing. The growth of new devices, such as DVD players, PVR/DVR technologies and home theater solutions, to name a few, has beentransformed the entertainment center of the home into an increasingly complex challenge for the consumer. The more recent introduction, and projected growth, of digital media technologies in consumers’ lives will increase this complexity further. We have set out to build the interface for the connected home, building a bridge between the home devices of today to the networked home of the future. We intend to invest in new products and technology, particularly in the connected home space, which will expand our business beyond control of devices to the control of and access to content, such as digital media, to enrich the entertainment experience.
We will continue to be throughout 2003, the enhancement ofenhance our leadership position in our core business by developing custom products for our subscription broadcast and OEM customers, growing our capture expertise in existing infrared technology and emerging radio frequency standards, adding to our portfolio of patented or patent pending technologies, and
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developing new platform products. We are also developing new ways to enhance remote controls and exploring methodsother accessory products.
During 2003, we continued to control digital media in the home to enhance the offerings of industries we serve.
In 2002, we launched our Nevo technology, an embedded solution that transforms an electronic display (such as Compaq’s iPaq Pocket PC) into a sophisticated and easy-to-use wireless home control and automation device. Nevo has propelled us to serve customers in the computing industry. We also launchedintroduce new products featuring our Kameleon interface technology, a revolutionary display technology that provides ease of use by illuminating only active keys needed to control each entertainment device. We also continued development of our Nevo technology, an embedded solution that transforms an electronic display (such as HP’s iPaq Pocket PC) into a sophisticated and easy-to-use wireless home control and automation device. During 2003,2004, we will continue to seek ways to integrate our Nevo technology and Kameleon display technologythese platform technologies into other forms and devices.
We will continue to invest in our database of device codes by analyzing OEM products for inclusion into our library as we keep our commitment to maintaining a worldwide IR code library. In addition to our device code database, we will continue to invest in novel intellectual property to fortify our position in the market.
We will seek ways to increase our customer base worldwide, particularly in the areas of subscription broadcasting, OEM, andOne For Allinternational retail. We will continue to work on building stronger existing customer relationships by working with customers through joint surveys and product trials that will enable us to understand their needs.how to make the consumers interaction with products and services within the home easier and more enjoyable We intend to invest in new products and technology to meet our customer needs now and into the future.
In March 2003, our largest customer notified us that as a result of a merger, it would conduct all of its consumer service and support activities internally and cease using our services. Consequently, revenue for consumer service and support from this customer will cease. In light of this, during our 2003 second quarter,2004, we will review our domestic consumer service and support group to determine how we may best utilize this service to support our existing customers service and to attract new customers. There can be no assurance that we will be able to attract new customers to use this service.
We will also continue in 2003 to attempt to control our overall cost of doing business. We believe that through product design changes and our purchasing efforts, improvements in our gross margins and efficiencies in our selling, general and administrative expenses can be accomplished, although there can be no assurance that there will be any improvements to our gross margin or that we will achieve any cost savings through these efforts and if accomplished, that any such improvements or savings will be significant or maintained.
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Also during 2003, we will continue to pursue our overall strategy of seeking ways to operate all aspects of our business more profitably. This strategy will include looking atevaluate acceptable acquisition targets and strategic partnership opportunities.opportunities in our core business lines as well as in the networked home marketplace. We caution, however, that no assurance can be made that any suitable acquisition target or partnership opportunity will be identified and, if identified, that a transaction can be consummated. Moreover, if consummated, no assurance can be made that any such acquisition or partnership will profitably add to our operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including interest rate and foreign currency exchange rate fluctuations. We have established policies, procedures and internal processes governing our management of market risks and the use of financial instruments to manage our exposure to such risks. The interest payable under our revolving credit agreement with our bank is variable and generally based on either the bank’s cost of funds, or the IBORLIBOR rate, and is affected by changes in market interest rates. At December 31, 2002,2003, we had no borrowings on our 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, 20022003 was 2.62%2.37%. At December 31, 20022003 we had wholly owned subsidiaries in The Netherlands, United Kingdom, Germany, France, Argentina and Spain. Sales from these operations are typically denominated in local currencies including Euros, British Pounds, and Argentine Pesos thereby creating exposures to changes in exchange rates. Changes in local currencies exchange rates relative to the local currencies/U.S. Dollars exchange rateDollar may positively or negatively affect our sales, gross margins and retained earnings. From time to time, we enter into foreign currency exchange agreements to manage our exposure arising from fluctuating exchange rates that affect cash flows. We entered into no foreign currency forward exchange contracts during the year ended December 31, 2002.2003. However, we did purchase foreign currency exchange contracts with option-based arrangements and contract terms normally lasting less than 6 months, to protect against the adverse effects that exchange-rate fluctuations may have on foreign-currency-denominated trade receivables. We do 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 our assets, obligations and projected results of operations denominated in foreign currencies. Based on our overall foreign currency rate exposure at December 31, 2002,2003, we believe that movements in foreign currency rates should not materially affect our financial position, although no assurance can be made that any such foreign currency rate movements in the future will not have a material effect. Because of the foregoing factors (Factors That May Affect Financial Condition and Future Results and Quantitative and Qualitative Disclosures About Market Risk), as well as other variables that affect our operating results, past financial performance should not be considered a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||||||
Report of Independent Auditors | 28 | |||||
Consolidated Balance Sheets at December 31, | ||||||
Consolidated Income Statements for the years ended December 31, 2003, 2002 | ||||||
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2003, 2002 | ||||||
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 | ||||||
Notes to Consolidated Financial Statements | ||||||
Supplementary Data | ||||||
Financial Statement Schedule: | ||||||
Schedule for the years ended December 31, 2003, 2002 and 2001 II |
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
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REPORT OF INDEPENDENT ACCOUNTANTSAUDITORS
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, 20022003 and 2001,2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002,2003, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents 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 of America, 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 our opinion.
As discussed in Note 2, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Accordingly, the Company ceased amortization of its goodwill as of January 1, 2002.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Orange County, CaliforniaJanuary 29, 2003March 9, 2004
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UNIVERSAL ELECTRONICS INC.
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||||||
2002 | 2001 | |||||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 18,064,195 | $ | 14,170,403 | ||||||||
Short-term investments | 22,500,000 | 20,100,000 | ||||||||||
Accounts receivable, net | 26,306,632 | 28,209,060 | ||||||||||
Inventories | 16,046,512 | 16,699,494 | ||||||||||
Prepaid expenses and other current assets | 1,122,673 | 829,233 | ||||||||||
Deferred income taxes | 1,919,971 | 1,925,024 | ||||||||||
Income tax receivable | 2,234,358 | 387,456 | ||||||||||
Total current assets | 88,194,341 | 82,320,670 | ||||||||||
Equipment, furniture and fixtures, net | 3,382,969 | 3,827,528 | ||||||||||
Intangible assets, net | 3,681,868 | 3,132,189 | ||||||||||
Goodwill | 2,961,327 | 2,961,327 | ||||||||||
Other assets | 738,491 | 712,739 | ||||||||||
Deferred income taxes | 1,056,639 | 1,750,312 | ||||||||||
Total assets | $ | 100,015,635 | $ | 94,704,765 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Current liabilities: | ||||||||||||
Accounts payable | $ | 7,795,220 | $ | 9,383,256 | ||||||||
Accrued income taxes | 2,406,893 | 842,301 | ||||||||||
Accrued compensation | 1,253,039 | 860,497 | ||||||||||
Other accrued expenses | 5,282,229 | 3,812,366 | ||||||||||
Total current liabilities | 16,737,381 | 14,898,420 | ||||||||||
Note payable | 41,414 | 104,114 | ||||||||||
Total liabilities | 16,778,795 | 15,002,534 | ||||||||||
Commitments and contingencies (Notes 12 and 19) | ||||||||||||
Stockholders’ equity: | ||||||||||||
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued or outstanding | — | — | ||||||||||
Common stock, $.01 par value, 50,000,000 shares authorized; 16,001,206 and 15,729,928 shares issued at December 31,2002 and 2001, respectively | 160,012 | 157,299 | ||||||||||
Paid-in capital | 71,322,177 | 68,657,346 | ||||||||||
Accumulated other comprehensive income (loss) | (1,740,082 | ) | (1,804,670 | ) | ||||||||
Retained earnings | 29,912,423 | 23,973,170 | ||||||||||
Deferred stock-based compensation | (147,044 | ) | (308,093 | ) | ||||||||
99,507,486 | 90,675,052 | |||||||||||
Less cost of common stock in treasury, 2,521,313 and 1,943,304 shares at December 31, 2002 and 2001, respectively | (16,270,646 | ) | (10,972,821 | ) | ||||||||
Total stockholders’ equity | 83,236,840 | 79,702,231 | ||||||||||
Total liabilities and stockholders’ equity | $ | 100,015,635 | $ | 94,704,765 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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UNIVERSAL ELECTRONICS INC.CONSOLIDATED INCOME STATEMENTS
Year Ended December 31, | |||||||||||||
2002 | 2001 | 2000 | |||||||||||
Net sales | $ | 103,890,728 | $ | 119,029,715 | $ | 124,739,877 | |||||||
Cost of sales | 62,235,709 | 69,956,570 | 73,167,971 | ||||||||||
Gross profit | 41,655,019 | 49,073,145 | 51,571,906 | ||||||||||
Research and development expenses | 4,450,626 | 4,200,006 | 3,283,607 | ||||||||||
Selling, general and administrative expenses | 30,223,709 | 28,864,598 | 30,046,440 | ||||||||||
Operating income | 6,980,684 | 16,008,541 | 18,241,859 | ||||||||||
Interest income | 594,879 | 987,114 | 920,520 | ||||||||||
Other income, net | 239,243 | 147,309 | 499,709 | ||||||||||
Income before income taxes | 7,814,806 | 17,142,964 | 19,662,088 | ||||||||||
Provision for income taxes | (1,875,553) | (5,857,186) | (8,061,456) | ||||||||||
Net income | $ | 5,939,253 | $ | 11,285,778 | $ | 11,600,632 | |||||||
Earnings per share: | |||||||||||||
Basic | $ | 0.43 | $ | 0.82 | $ | 0.84 | |||||||
Diluted | $ | 0.42 | $ | 0.78 | $ | 0.78 | |||||||
Shares used in computing earnings per share: | |||||||||||||
Basic | 13,789,716 | 13,844,391 | 13,742,635 | ||||||||||
Diluted | 14,162,887 | 14,523,140 | 14,941,153 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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UNIVERSAL ELECTRONICS INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Accumulated | ||||||||||||||||||||||||||||||||||||||
Common Stock in | Other | Deferred | ||||||||||||||||||||||||||||||||||||
Common Stock Issued | Treasury | Paid-in | Comprehensive | Retained | Stock-Based | |||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Income (Loss) | Earnings | Compensation | Totals | ||||||||||||||||||||||||||||||
Balance at December 31, 1999 | 15,317,304 | $ | 153,173 | (1,652,384 | ) | $ | (6,708,444 | ) | $ | 64,299,603 | $ | (236,778 | ) | $ | 1,086,760 | $ | (83,117 | ) | $ | 58,511,197 | ||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | 11,600,632 | — | 11,600,632 | |||||||||||||||||||||||||||||
Currency translation adjustment | — | — | — | — | — | (469,179 | ) | — | — | (469,179 | ) | |||||||||||||||||||||||||||
Total comprehensive income | 11,131,453 | |||||||||||||||||||||||||||||||||||||
Shares issued for employee retirement plan | 14,216 | 142 | — | — | 293,230 | — | — | — | 293,372 | |||||||||||||||||||||||||||||
Stock options exercised | 97,864 | 979 | — | — | 591,096 | — | — | — | 592,075 | |||||||||||||||||||||||||||||
Shares issued to Directors | — | — | 4,492 | 18,237 | 76,342 | — | — | — | 94,579 | |||||||||||||||||||||||||||||
Restricted stock grants | 200 | 2 | — | — | 4,398 | — | — | 53,857 | 58,257 | |||||||||||||||||||||||||||||
Income tax benefit related to the exercise of non-qualified stock options | — | — | — | — | 477,206 | — | — | — | 477,206 | |||||||||||||||||||||||||||||
Adjustment to fair value of warrant issued to a customer | — | — | — | — | (804,797 | ) | — | — | — | (804,797 | ) | |||||||||||||||||||||||||||
Balance at December 31, 2000 | 15,429,584 | 154,296 | (1,647,892 | ) | (6,690,207 | ) | 64,937,078 | (705,957 | ) | 12,687,392 | (29,260 | ) | 70,353,342 | |||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||
Net income | 11,285,778 | 11,285,778 | ||||||||||||||||||||||||||||||||||||
Currency translation adjustment | (1,098,713 | ) | (1,098,713 | ) | ||||||||||||||||||||||||||||||||||
Total comprehensive income | 10,187,065 | |||||||||||||||||||||||||||||||||||||
Shares issued for employee retirement plan | 17,617 | 176 | 314,558 | 314,734 | ||||||||||||||||||||||||||||||||||
Purchase of treasury shares | (301,600 | ) | (4,428,771 | ) | (4,428,771 | ) | ||||||||||||||||||||||||||||||||
Stock options exercised | 284,497 | 2,845 | 1,746,707 | 1,749,552 | ||||||||||||||||||||||||||||||||||
Shares issued to Directors | 6,188 | 27,779 | 82,239 | 110,018 | ||||||||||||||||||||||||||||||||||
Restricted stock grants | (1,770 | ) | (18 | ) | 118,378 | 165,034 | (278,833 | ) | 4,561 | |||||||||||||||||||||||||||||
Income tax benefit related to the exercise of non-qualified stock options | 1,411,730 | 1,411,730 | ||||||||||||||||||||||||||||||||||||
Balance at December 31, 2001 | 15,729,928 | $ | 157,299 | (1,943,304 | ) | $ | (10,972,821 | ) | $ | 68,657,346 | $ | (1,804,670 | ) | $ | 23,973,170 | $ | (308,093 | ) | $ | 79,702,231 | ||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||
Net income | 5,939,253 | 5,939,253 | ||||||||||||||||||||||||||||||||||||
Currency translation adjustment | 64,588 | 64,588 | ||||||||||||||||||||||||||||||||||||
Total comprehensive income | 6,003,841 | |||||||||||||||||||||||||||||||||||||
Shares issued for employee retirement plan | 28,139 | 281 | 362,637 | 362,918 | ||||||||||||||||||||||||||||||||||
Purchase of treasury shares | (584,845 | ) | (5,273,611 | ) | (5,273,611 | ) | ||||||||||||||||||||||||||||||||
Stock options exercised | 243,139 | 2,432 | 1,331,818 | 1,334,250 | ||||||||||||||||||||||||||||||||||
Shares issued to Directors | 6,836 | 98,030 | 98,030 | |||||||||||||||||||||||||||||||||||
Forfeited Restricted stock grants | (24,214 | ) | (38,805 | ) | 63,019 | — | ||||||||||||||||||||||||||||||||
Income tax benefit related to the exercise of non-qualified stock options | 1,009,181 | 1,009,181 | ||||||||||||||||||||||||||||||||||||
Balance at December 31, 2002 | 16,001,206 | $ | 160,012 | (2,521,313 | ) | $ | (16,270,646 | ) | $ | 71,322,177 | $ | (1,740,082 | ) | $ | 29,912,423 | $ | (147,044 | ) | $ | 83,236,840 | ||||||||||||||||||
December 31, | ||||||||||||
2003 | 2002 | |||||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 58,481,227 | $ | 18,064,195 | ||||||||
Short-term investments | — | 22,500,000 | ||||||||||
Accounts receivable, net | 30,500,441 | 25,876,938 | ||||||||||
Inventories, net | 19,386,277 | 16,476,206 | ||||||||||
Prepaid expenses and other current assets | 1,108,331 | 1,122,673 | ||||||||||
Deferred income taxes | 2,543,965 | 1,919,971 | ||||||||||
Income tax receivable | 1,166,577 | 2,234,358 | ||||||||||
Total current assets | 113,186,818 | 88,194,341 | ||||||||||
Equipment, furniture and fixtures, net | 3,474,590 | 3,382,969 | ||||||||||
Intangible assets, net | 3,431,040 | 3,681,868 | ||||||||||
Goodwill | 3,347,968 | 2,961,327 | ||||||||||
Other assets | 1,444,541 | 738,491 | ||||||||||
Deferred income taxes | 1,282,035 | 1,056,639 | ||||||||||
Total assets | $ | 126,166,992 | $ | 100,015,635 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Current liabilities: | ||||||||||||
Accounts payable | $ | 13,753,888 | $ | 7,795,220 | ||||||||
Accrued income taxes | 4,503,926 | 2,406,893 | ||||||||||
Accrued compensation | 2,923,137 | 1,253,039 | ||||||||||
Other accrued expenses | 9,815,353 | 5,282,229 | ||||||||||
Total current liabilities | 30,996,304 | 16,737,381 | ||||||||||
Note payable | — | 41,414 | ||||||||||
Total liabilities | 30,996,304 | 16,778,795 | ||||||||||
Commitments and contingencies (Notes 12 and 19) | ||||||||||||
Stockholders’ equity: | ||||||||||||
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued or outstanding | — | — | ||||||||||
Common stock, $.01 par value, 50,000,000 shares authorized; 16,404,485 and 16,001,206 shares issued at December 31, 2003 and 2002, respectively | 164,067 | 160,012 | ||||||||||
Paid-in capital | 75,804,997 | 71,322,177 | ||||||||||
Accumulated other comprehensive income (loss) | 298,212 | (1,740,082 | ) | |||||||||
Retained earnings | 36,179,238 | 29,912,423 | ||||||||||
Deferred stock-based compensation | (42,012 | ) | (147,044 | ) | ||||||||
112,404,502 | 99,507,486 | |||||||||||
Less cost of common stock in treasury, 2,598,670 and 2,521,313 shares at December 31, 2003 and 2002, respectively | (17,233,814 | ) | (16,270,646 | ) | ||||||||
Total stockholders’ equity | 95,170,688 | 83,236,840 | ||||||||||
Total liabilities and stockholders’ equity | $ | 126,166,992 | $ | 100,015,635 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
29
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED INCOME STATEMENTS OF CASH FLOWS
Year Ended December 31, | ||||||||||||||||
2002 | 2001 | 2000 | ||||||||||||||
Cash provided by operating activities: | ||||||||||||||||
Net income | $ | 5,939,253 | $ | 11,285,778 | $ | 11,600,632 | ||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 3,702,248 | 4,100,190 | 3,784,586 | |||||||||||||
Provision for doubtful accounts | 384,859 | 337,257 | (91,493 | ) | ||||||||||||
Deferred income taxes | 698,726 | (193,786 | ) | 2,219,896 | ||||||||||||
Tax benefit from exercise of stock options | 1,009,181 | 1,411,730 | 477,206 | |||||||||||||
Employee benefit plan | 362,918 | 314,734 | 293,372 | |||||||||||||
Directors' compensation | 98,030 | 110,018 | 94,579 | |||||||||||||
Other | — | 4,561 | 58,258 | |||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | 4,130,883 | 8,373,931 | (10,964,373 | ) | ||||||||||||
Inventory | 652,982 | 2,147,843 | (4,993,472 | ) | ||||||||||||
Prepaid expenses and other assets | (249,792 | ) | (119,347 | ) | 861,258 | |||||||||||
Accounts payable and accrued expenses | (257,007 | ) | (5,507,720 | ) | 5,798,588 | |||||||||||
Accrued income and other taxes | (292,604 | ) | (2,546,057 | ) | 2,300,898 | |||||||||||
Net cash provided by operating activities | 16,179,677 | 19,719,132 | 11,439,935 | |||||||||||||
Cash used for investing activities: | ||||||||||||||||
Acquisition of equipment, furniture and fixtures | (2,124,474 | ) | (2,565,420 | ) | (2,751,440 | ) | ||||||||||
Payments for businesses acquired | (132,000 | ) | (143,000 | ) | (1,493,926 | ) | ||||||||||
Acquisition of intangible assets | (1,102,868 | ) | (173,061 | ) | (9,064 | ) | ||||||||||
Payments for patents | (580,026 | ) | (458,780 | ) | (477,673 | ) | ||||||||||
Purchases of short-term investments | (14,700,000 | ) | (15,600,000 | ) | (24,500,000 | ) | ||||||||||
Sale of short-term investments | 12,300,000 | 7,000,000 | 13,000,000 | |||||||||||||
Net cash used for investing activities | (6,339,368 | ) | (11,940,261 | ) | (16,232,103 | ) | ||||||||||
Cash provided by (used for) financing activities: | ||||||||||||||||
Payments on note payable | (73,531 | ) | (50,421 | ) | (60,910 | ) | ||||||||||
Proceeds from stock options exercised | 1,334,250 | 1,749,552 | 592,075 | |||||||||||||
Treasury stock purchased | (5,273,611 | ) | (4,428,771 | ) | — | |||||||||||
Net cash provided by (used for) financing activities | (4,012,892 | ) | (2,729,640 | ) | 531,165 | |||||||||||
Effect of exchange rate changes on cash | (1,933,625 | ) | (187,544 | ) | 283,500 | |||||||||||
Net increase (decrease) in cash and cash equivalents | 3,893,792 | 4,861,687 | (3,977,503 | ) | ||||||||||||
Cash and cash equivalents at beginning of year | 14,170,403 | 9,308,716 | 13,286,219 | |||||||||||||
Cash and cash equivalents at end of year | $ | 18,064,195 | $ | 14,170,403 | $ | 9,308,716 | ||||||||||
Year Ended December 31, | |||||||||||||
2003 | 2002 | 2001 | |||||||||||
Net sales | $ | 120,467,786 | $ | 103,890,728 | $ | 119,029,715 | |||||||
Cost of sales | 74,168,285 | 62,235,709 | 69,956,570 | ||||||||||
Gross profit | 46,299,501 | 41,655,019 | 49,073,145 | ||||||||||
Research and development expenses | 4,699,626 | 4,450,626 | 4,200,006 | ||||||||||
Selling, general and administrative expenses | 33,026,393 | 30,223,709 | 28,864,598 | ||||||||||
Operating income | 8,573,482 | 6,980,684 | 16,008,541 | ||||||||||
Interest income | 583,533 | 594,879 | 987,114 | ||||||||||
Other income, net | 338,159 | 239,243 | 147,309 | ||||||||||
Income before income taxes | 9,495,174 | 7,814,806 | 17,142,964 | ||||||||||
Provision for income taxes | (3,228,359 | ) | (1,875,553 | ) | (5,857,186 | ) | |||||||
Net income | $ | 6,266,815 | $ | 5,939,253 | $ | 11,285,778 | |||||||
Earnings per share: | |||||||||||||
Basic | $ | 0.46 | $ | 0.43 | $ | 0.82 | |||||||
Diluted | $ | 0.45 | $ | 0.42 | $ | 0.78 | |||||||
Shares used in computing earnings per share: | |||||||||||||
Basic | 13,702,504 | 13,789,716 | 13,844,391 | ||||||||||
Diluted | 14,007,094 | 14,162,887 | 14,523,140 | ||||||||||
Supplemental cash flow information — Income taxes paid were $1,492,108, $7,801,643, and $2,578,766 in 2002, 2001, and 2000, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
30
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Accumulated | ||||||||||||||||||||||||||||||||||||||
Common Stock in | Other | Deferred | ||||||||||||||||||||||||||||||||||||
Common Stock Issued | Treasury | Paid-in | Comprehensive | Retained | Stock-Based | |||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Income (Loss) | Earnings | Compensation | Totals | ||||||||||||||||||||||||||||||
Balance at December 31, 2000 | 15,429,584 | 154,296 | (1,647,892 | ) | (6,690,207 | ) | 64,937,078 | (705,957 | ) | 12,687,392 | (29,260 | ) | 70,353,342 | |||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||
Net income | 11,285,778 | 11,285,778 | ||||||||||||||||||||||||||||||||||||
Currency translation adjustment | (1,098,713 | ) | (1,098,713 | ) | ||||||||||||||||||||||||||||||||||
Total comprehensive income | 10,187,065 | |||||||||||||||||||||||||||||||||||||
Shares issued for employee retirement plan | 17,617 | 176 | 314,558 | 314,734 | ||||||||||||||||||||||||||||||||||
Purchase of treasury shares | (301,600 | ) | (4,428,771 | ) | (4,428,771 | ) | ||||||||||||||||||||||||||||||||
Stock options exercised | 284,497 | 2,845 | 1,746,707 | 1,749,552 | ||||||||||||||||||||||||||||||||||
Shares issued to Directors | 6,188 | 27,779 | 82,239 | 110,018 | ||||||||||||||||||||||||||||||||||
Restricted stock grants | (1,770 | ) | (18 | ) | 118,378 | 165,034 | (278,833 | ) | 4,561 | |||||||||||||||||||||||||||||
Income tax benefit related to the exercise of non-qualified stock options | 1,411,730 | 1,411,730 | ||||||||||||||||||||||||||||||||||||
Balance at December 31, 2001 | 15,729,928 | 157,299 | (1,943,304 | ) | (10,972,821 | ) | 68,657,346 | (1,804,670 | ) | 23,973,170 | (308,093 | ) | 79,702,231 | |||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||
Net income | 5,939,253 | 5,939,253 | ||||||||||||||||||||||||||||||||||||
Currency translation adjustment | 64,588 | 64,588 | ||||||||||||||||||||||||||||||||||||
Total comprehensive income | 6,003,841 | |||||||||||||||||||||||||||||||||||||
Shares issued for employee retirement plan | 28,139 | 281 | 362,637 | 362,918 | ||||||||||||||||||||||||||||||||||
Purchase of treasury shares | (584,845 | ) | (5,273,611 | ) | (5,273,611 | ) | ||||||||||||||||||||||||||||||||
Stock options exercised | 243,139 | 2,432 | 1,331,818 | 1,334,250 | ||||||||||||||||||||||||||||||||||
Shares issued to Directors | 6,836 | 98,030 | 98,030 | |||||||||||||||||||||||||||||||||||
Forfeited Restricted stock grants | (24,214 | ) | (38,805 | ) | 63,019 | — | ||||||||||||||||||||||||||||||||
Income tax benefit related to the exercise of non-qualified stock options | 1,009,181 | 1,009,181 | ||||||||||||||||||||||||||||||||||||
Balance at December 31, 2002 | 16,001,206 | 160,012 | (2,521,313 | ) | (16,270,646 | ) | 71,322,177 | (1,740,082 | ) | 29,912,423 | (147,044 | ) | 83,236,840 | |||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||
Net income | 6,266,815 | 6,266,815 | ||||||||||||||||||||||||||||||||||||
Currency translation adjustment | 2,038,294 | 2,038,294 | ||||||||||||||||||||||||||||||||||||
Total comprehensive income | 8,305,109 | |||||||||||||||||||||||||||||||||||||
Shares issued for employee retirement plan | 32,807 | 328 | 359,858 | 360,186 | ||||||||||||||||||||||||||||||||||
Purchase of treasury shares | (84,437 | ) | (963,168 | ) | (963,168 | ) | ||||||||||||||||||||||||||||||||
Stock options exercised | 370,472 | 3,727 | 3,339,021 | 3,342,748 | ||||||||||||||||||||||||||||||||||
Shares issued to Directors | 7,080 | 105,032 | 105,032 | |||||||||||||||||||||||||||||||||||
Stock-based compensation | 341,382 | 341,282 | ||||||||||||||||||||||||||||||||||||
Income tax benefit related to the exercise of non-qualified stock options | 442,659 | 442,659 | ||||||||||||||||||||||||||||||||||||
Balance at December 31, 2003 | 16,404,485 | $ | 164,067 | (2,598,670 | ) | $ | (17,233,814 | ) | $ | 75,804,997 | $ | 298,212 | $ | 36,179,238 | $ | (42,012 | ) | $ | 95,170,688 | |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
31
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, | ||||||||||||||||
2003 | 2002 | 2001 | ||||||||||||||
Cash provided by operating activities: | ||||||||||||||||
Net income | $ | 6,266,815 | $ | 5,939,253 | $ | 11,285,778 | ||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 3,357,748 | 3,702,248 | 4,100,190 | |||||||||||||
Provision for doubtful accounts | 76,420 | 886,332 | 178,460 | |||||||||||||
Deferred income taxes | (849,390 | ) | 698,726 | (193,786 | ) | |||||||||||
Tax benefit from exercise of stock options | 442,659 | 1,009,181 | 1,411,730 | |||||||||||||
Employee benefit plan | 360,186 | 362,918 | 314,734 | |||||||||||||
Non-cash stock-based compensation | 341,282 | — | — | |||||||||||||
Directors compensation | 105,032 | 98,030 | 110,018 | |||||||||||||
Other | (3,214 | ) | (10,831 | ) | 4,561 | |||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (828,914 | ) | 4,059,104 | 8,530,328 | ||||||||||||
Inventory | (3,339,765 | ) | 223,288 | 2,150,243 | ||||||||||||
Prepaid expenses and other assets | (657,544 | ) | (249,792 | ) | (119,347 | ) | ||||||||||
Accounts payable and accrued expenses | 11,006,067 | (257,007 | ) | (5,507,720 | ) | |||||||||||
Accrued income and other taxes | 2,967,405 | (292,604 | ) | (2,546,057 | ) | |||||||||||
Net cash provided by operating activities | 19,244,787 | 16,168,846 | 19,719,132 | |||||||||||||
Cash provided by (used for) investing activities: | ||||||||||||||||
Acquisition of equipment, furniture and fixtures | (2,470,170 | ) | (2,124,474 | ) | (2,565,420 | ) | ||||||||||
Payments for businesses acquired | — | (132,000 | ) | (143,000 | ) | |||||||||||
Acquisition of intangible assets | (847,623 | ) | (1,102,868 | ) | (173,061 | ) | ||||||||||
Payments for patents | — | (580,026 | ) | (458,780 | ) | |||||||||||
Purchases of short-term investments | (22,000,000 | ) | (14,700,000 | ) | (15,600,000 | ) | ||||||||||
Sale of short-term investments | 44,500,000 | 12,300,000 | 7,000,000 | |||||||||||||
Net cash provided by (used for) investing activities | 19,182,207 | (6,339,368 | ) | (11,940,261 | ) | |||||||||||
Cash provided by (used for) financing activities: | ||||||||||||||||
Payments on note payable | (41,414 | ) | (62,700 | ) | (50,421 | ) | ||||||||||
Proceeds from stock options exercised | 3,342,748 | 1,334,250 | 1,749,552 | |||||||||||||
Treasury stock purchased | (963,168 | ) | (5,273,611 | ) | (4,428,771 | ) | ||||||||||
Net cash provided by (used for) financing activities | 2,338,166 | (4,002,061 | ) | (2,729,640 | ) | |||||||||||
Effect of exchange rate changes on cash | (348,128 | ) | (1,933,625 | ) | (187,544 | ) | ||||||||||
Net increase in cash and cash equivalents | 40,417,032 | 3,893,792 | 4,861,687 | |||||||||||||
Cash and cash equivalents at beginning of year | 18,064,195 | 14,170,403 | 9,308,716 | |||||||||||||
Cash and cash equivalents at end of year | $ | 58,481,227 | $ | 18,064,195 | $ | 14,170,403 | ||||||||||
Supplemental Cash Flow Information — Income taxes paid were $1,145,973, $1,492,108 and $7,801,643 in 2003, 2002 and 2001, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
32
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -— Description of Business
Universal Electronics Inc. (the “Company”) builds and markets pre-programmed, easy-to-use wireless control devices and chips principally for home entertainment equipment and the subscription broadcasting market. UniversalThe Company also develops wireless control interface software for electronic display devices. Universal’sThe Company’s product lines include wireless interface technologies, such as combination keyboard/remotes and touch-screen remotes. UniversalThe Company licenses its patented technologies and database of infrared (“IR”) codes to companies selling into the cable and satellite industries and to original equipment manufacturers (“OEMs”). UniversalThe Company also sells its universal wireless control products to distributors and retailers in Europe, Asia, Latin America, South Africa, Australia, New Zealand, the Middle East, and AustraliaMexico under theOne For All® brand name. Call center support services are also offered to Universal’s customers.
Note 2 -— Summary of Significant Accounting Policies
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.
Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments 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. On an on-going basis, the Company evaluates its estimates and judgments, including those related to revenue recognition, allowance for sales returns and doubtful accounts, inventory valuation, valuation of long-lived assets, intangible assets and goodwill, and income taxes.
Revenue Recognition
The Company recognizes revenue on the sale of products when title and risk of loss have passed to the customer, there is pervasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectibility is reasonably assured. For the majority of the Company’s sales, recognition occurs when products are shipped to the customer. The Company also licenses its patented technologies and database of infrared codes. The Company records license revenue when its customers ship products incorporating its technologies and database, provided collection of such revenue is reasonably assured. In addition, the Company generates service revenues as a result of providing consumer support programs, through its call center, to its various universal remote control marketers. These service revenues are recognized when the service is performed. The Company records a provision for estimated sales returns and allowances on product sales in the same period as the related revenues are recorded. These estimates are based on historical sales returns, analysis of credit memo data and other known factors.
The Company maintains allowances for doubtful accounts. The allowance for doubtful accounts forincludes estimated losses resulting from the inability of its customers to make required payments. Management specifically analyzes accounts receivables and historical bad debts, customer credit, current economic trends and changes in customer payment trends when evaluating the adequacy of the allowance for doubtful accounts.
Foreign Currency Translation and Foreign Currency Transactions
The assets and liabilitiesFinancial statements of foreign subsidiaries, for which the functional currency is the local currency, are translated tointo U.S. dollars using the exchange rates in effectrate at theeach balance sheet date. Results of operations are translated using thedate for assets and liabilities and a weighted average exchange rates duringrate for each period for statement of income items. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are included in the period. Resultingforeign currency translation adjustments are recorded inadjustment, a separate component of stockholders’ equity, “Accumulatedaccumulated other comprehensive income.”income (loss) in stockholders’ equity.
3133
Transaction gains and losses generated by the effect of changes in foreign exchange rates on recorded assets and liabilities denominated in a currency different from the functional currency of the applicable Company entity are recorded currently in other income/expense. The portions of inter-company accounts receivable and accounts payable that are not intended for settlement are translated as described in the preceding paragraph.
Cash and Cash Equivalents
Cash and cash equivalents include cash accounts and all investments purchased with initial maturities of three months or less.
Investments
The Company accounts for its investments in accordance with Statements of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities”.Securities.” Investments include auction rate notes and bonds with original maturities ranging from 25 to 35 years. The interest rates on the auction rate securities are reset every 28 to 35 days through an auction facilitated by a registered broker-dealer. The interest is credited to the Company’s account immediately prior to the reset date; accordingly, unrealized gains or losses are insignificant. The Company’s investments are classified as available for saleavailable-for-sale and are recorded at fair value, which approximates their cost. The Company’s available-for-sale investments are classified as short-term investments in the consolidated balance sheets as the Company intends to sell these securities as necessary to meet its liquidity requirements. The cost of securities sold is determined based on specific identification. Such investments total $22,500,000$0 and $20,100,000$22,500,000 at December 31, 20022003 and December 31, 2001,2002, respectively, and are included in short-term investments in the accompanying balance sheets.
The Company accounts for its investment which does not have a readily determinable fair value using the cost method as the Company’s investment is less than 20% and the Company is unable to exercise significant influence over the investee. Under the cost method, investments are carried at cost and adjusted only for other-than-temporary declines in fair value, distributions of earnings or additional investments. Included in other assets is a $360,518 cost investment.
Inventories
Inventories consisting of wireless control devices, including universal remote controls, wireless keyboards, antennas, and related component parts, are valued at the lower of cost or market. Cost is determined using the first-in, first-out method. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about the future demand and market conditions.
The Company carries inventory in amounts necessary 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. Inventory write-downs in 2003 totaled approximately $1.8 million, with approximately $0.4 million recorded in the fourth quarter.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures 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 seven years. Furniture and fixtures are depreciated over five to seven years. Leasehold improvements are amortized over two to five years, which represent the shorter of their useful lives or the terms of the related leases. When 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.
Long-Lived Assets and Other Intangible Assets
Intangible assets consist principally of distribution rights, patents, trademarks and purchased technologies. Capitalized amounts related to patents represent external legal costs for the application and maintenance of patents. Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from five to ten years. The Company assesses the impairment of long-lived assets and other intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important which could trigger an impairment review include the following: (1) significant
34
underperformance relative to expected historical or projected future operating results; (2) significant changes in the manner of the Company’s use of the acquired assets or strategy for the overall business; (3) significant negative industry or economic trends; (4) significant decline in the stock price for a sustained period; and (5) the Company’s market capitalization relative to net book value. When the Company determines that the carrying value may not be recoverable based upon the existence of one or more of the above indicators of impairment, and based on the carrying value of the asset being less than the undiscounted cash flows, the Company measures an impairment based on projected discounted cash flows using a discount rate commensurate with the risk inherent in the Company’s current business model. In assessing recoverability, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets.
32
Goodwill
Goodwill represents the excess of the purchase price for business acquisitions over the fair value of identifiableindentified intangible assets and liabilitiesnet assets acquired. In 2002,accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” became effective and as a result, the Companywe ceased amortization on approximately $3.0 million of net unamortized goodwill. The Companygoodwill beginning January 1, 2002. We recorded approximately $565,000 of amortization during 2001 and would have recorded approximately $565,000 of amortization during both 2003 and 2002. In accordance with SFAS No. 142,We performed an initial impairment review of our goodwill was performed effectiveon January 1, 2002; conducted annual impairment reviews as of December 31, 2003 and 2002 and will perform an annual impairment review is required.in subsequent years. In the performance ofperforming the initial impairment review, the Companywe identified itsour reporting units and determined the carrying value of each reporting unit by assigning assets and liabilities, including the existing goodwill, to those reporting units as of January 1, 2002. The CompanyWe then determined the fair value of each reporting unit using the present value of expected future cash flows and compared it to the reporting unit’s carrying amount. Based on this analysis, we determined that each reporting unit’s fair value exceeded its carrying amount, and therefore concluded that there iswas no indication of a transitional impairment loss.
As further mandated by SFAS No. 142, the Company performed an annual impairment test of its goodwill as of December 31, 2002 and using the same methodology employed for the initial impairment review of its goodwill, the Company also determined that there was no indication of an impairment loss. For the yearsyear ended December 31, 2001, and 2000, the Company applied the provisions of SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets to be disposedBe Disposed of” to evaluate the recoverability of goodwill.
Income Taxes
Income tax expense includes U.S. and international income taxes. The Company records on its balance sheet deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in different periods for financial statement purposes versus tax return purposes. The Company provides a valuation allowance for net deferred tax assets when it is more likely than not that a portion of such net deferred tax assets will not be recovered.
Research and Development and Capitalized Software Costs
The Company accounts for research and development costs in accordance with SFAS No. 2, “Accounting for Research and Development Costs”,Costs,” and SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”.Marketed.” Costs incurred internally in creating a computer software product are expensed when incurred as research and development until technological feasibility has been established for the product. Research and development include costs such as salaries and employee benefits, supplies and materials. The Company has determined that technological feasibility for its products is reached when a working model is completed. Once technological feasibility is established, software costs are capitalized until the product is available for general release to customers and is then amortized using (i) the ratio that current gross revenues for a product bear to the total of current anticipated future gross revenues from that product or (ii) the straight-line method over the remaining estimated economic life of the product, whichever is greater. Capitalized software costs are stated at cost, net of accumulated amortization. The Company capitalized $321,484$0 and $183,197$321,484 for the years ended December 31, 20022003 and 2001,2002, respectively, and amortized $90,000 and $52,500 in the yearyears ended December 31, 2002.2003 and 2002, respectively. The amortization period for capitalized software costs is 5 years.
Advertising
Advertising costs are expensed as incurred. Advertising expense was $1,105,916, $1,319,653 $1,470,141, and $1,282,519$1,470,141, for the years ended December 31, 2003, 2002 and 2001, and 2000, respectively.
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Shipping and Handling Costs
The Company records shipping and handling costs in selling, general and administrative expenses. Shipping and handling costs amounted to $3,917,665, $3,525,127 $2,292,690, and $2,961,121$2,292,690 for the years ended December 31, 2003, 2002 and 2001, and 2000, respectively. Amounts charged to customers are included in net revenues.
Derivatives
The Company enters into foreign currency exchange contracts with option-based arrangements and contract terms normally lasting less than six months, to protect against the adverse effects that exchange-rate fluctuations may have on foreign-currency-denominated trade receivables. These derivatives do not qualify for hedge accounting, in accordance with SFAS No. 133, because they relate to existing assets denominated in a foreign currency.accounting. The
33
gains and losses on both the derivatives and the foreign-currency-denominated trade receivables are recorded as transaction adjustments in current earnings.
The Company’s currency exposures are primarily concentrated in the Euro and British Pound Sterling.Pound. The Company does not enter into financial instruments for speculation or trading purposes. The Company had no foreign currency exchange contracts or other derivatives outstanding at December 31, 20022003 and 2001.2002.
During 2003 we periodically invested in 30 day Dual Currency Deposits which required us to convert the invested amount to another currency at end of the contract period in the event certain changes occurred in foreign currency exchange rates. No such investments were outstanding as of December 31, 2003.
Stock-Based Compensation
The Company applies the provisions of Accounting Principles Board 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 accordance with SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation -— Transition and Disclosure,” the Company adopted the disclosure requirements of this Statement.
The Company has provided below, the pro forma disclosures of the effect of net income and earnings per share as if SFAS No. 123 had been applied in measuring compensation expense for all periods presented. The following table illustrates, pursuant to SFAS No. 123, as amended by SFAS No. 148, the effect on net income and related earnings per share, had compensation cost for stock based compensation plans been determined based on the fair value method prescribed under SFAS No. 123 (Note 10):
Year Ended December 31, | |||||||||||||||||||||||||||||
Year Ended December 31, | |||||||||||||||||||||||||||||
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | ||||||||||||||||||||||||
Net income | Net income | Net income | |||||||||||||||||||||||||||
As reported | $ | 5,939,253 | $ | 11,285,778 | $ | 11,600,632 | As reported | $ | 6,266,815 | $ | 5,939,253 | $ | 11,285,778 | ||||||||||||||||
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (3,281,112 | ) | (2,370,212 | ) | (1,782,460 | ) | Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (2,993,608 | ) | (3,281,112 | ) | (2,370,212 | ) | ||||||||||||||||
Pro forma | $ | 2,658,141 | $ | 8,915,566 | $ | 9,818,172 | Pro forma | $ | 3,273,207 | $ | 2,658,141 | $ | 8,915,566 | ||||||||||||||||
Basic earnings per share: | Basic earnings per share: | Basic earnings per share: | |||||||||||||||||||||||||||
As reported | $ | 0.43 | $ | 0.82 | $ | 0.84 | As reported | $ | 0.46 | $ | 0.43 | $ | 0.82 | ||||||||||||||||
Pro forma | $ | 0.19 | $ | 0.64 | $ | 0.71 | Pro forma | $ | 0.24 | $ | 0.19 | $ | 0.64 | ||||||||||||||||
Diluted earnings per share | |||||||||||||||||||||||||||||
Diluted earnings per share: | Diluted earnings per share: | ||||||||||||||||||||||||||||
As reported | $ | 0.42 | $ | 0.78 | $ | 0.78 | As reported | $ | 0.45 | $ | 0.42 | $ | 0.78 | ||||||||||||||||
Pro forma | $ | 0.19 | $ | 0.61 | $ | 0.66 | Pro forma | $ | 0.23 | $ | 0.19 | $ | 0.61 |
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 2003, 2002, 2001, and 2000,2001, respectively: risk-free interest rate of approximately 3.64%3.00%, 4.85%3.64%, and 6.18%4.85%; expected volatility of approximately 66.34%62.95%, 63.06%66.34%, and 62.61%63.06%; expected life of five years for 2003, 2002 2001, and 2000;2001; and the common stock will pay no dividends. The per share weighted average grant date fair values of the options granted in 2003, 2002 and 2001 were $5.87, $7.14 and 2000 were $7.14, $10.43, and $11.35, respectively.
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Reclassifications
Certain prior year amounts have been reclassified to conform withto the presentation utilized in the year ended December 31, 2002.2003.
New Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 did not have a material effect on the Company’s financial position or results of operations.
In October 2001, the FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144, which was adopted by the Company on January 1, 2002, establishes standards for performing certain tests of impairment on long-lived assets. The adoption of SFAS No. 144 did not have a material effect on the Company’s financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which requires companies to recognize costs associated with exit or disposal activities when they are incurred
34
rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. The statement replaces EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not believe that the adoption of SFAS No. 146 will have a significant impact on its financial condition, results of operations, or cash flow.
In November 2002, the FASB issued Interpretation No. 45 (“FIN No. 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 expands on the accounting guidance of Statements Nos. 5, 57, and 107 and incorporates without change the provisions of FASB Interpretation No. 34, which is being superseded. FIN No. 45 will affectaffects leasing transactions involving residual guarantees, vendor and manufacturer guarantees, and tax and environmental indemnities. All such guarantees will need tomust be disclosed in the notes to the financial statements starting with the period ending after December 15, 2002. For guarantees issued after December 31, 2002, the fair value of the obligation must be reported on the balance sheet. Existing guarantees will be grandfathered and will not be recognized on the balance sheet. The Company has made the required disclosures related to its warranties and is currently evaluating the impactadoption of FIN No. 45 did not have a material effect on itsthe Company’s financial position, and results of operations.operations, or cash flows.
In November 2002, the Financial Accounting Standards Board issued Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities. EITF Issue No. 00-21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. EITF Issue No. 00-21 provides guidance with respect to the effect of certain customer rights due to company nonperformance on the recognition of revenue allocated to delivered units of accounting. EITF Issue No. 00-21 also addresses the impact on the measurement and/or allocation of arrangement consideration of customer cancellation provisions and consideration that varies as a result of future actions of the customer or the company. Finally, EITF Issue No. 00-21 provides guidance with respect to the recognition of the cost of certain deliverables that are excluded from the revenue accounting for an arrangement. The provisions of EITF Issue No. 00-21 will applyapplies to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company is currently evaluating the effect that the adoption of EITF Issue No.No, 00-21 willdid not have a material effect on itsthe Company’s financial position, and results of operations.operations, or cash flows.
In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities,” an Interpretation of Accounting Research Bulletin No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. The adoption of FIN 46 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In December 2002,2003, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation -Transition and Disclosure-an amendmentFIN 46R with respect to FASB Statement No. 123, Accounting for Stock-Based Compensation.” SFAS No. 148 provides alternative methods of transition for a voluntary changevariable interest entities created before January 31, 2003, which among other things, revised the implementation date to the fair value based methodfirst fiscal year or interim period ending after March 15, 2004, with the exception of accounting for stock-based employee compensation. In addition, SFAS No. 148 amendsSpecial Purpose Entities (“SPE”). The consolidation requirements apply to all SPE’s in the disclosure requirements of Statement 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective forfirst fiscal yearsyear or interim period ending after December 15, 2002.2003. The interim disclosure provisions are effective foradoption of FIN 46R with respect to SPEs did not have a material effect on our financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company has made the required disclosuresposition or results of operations, and doeswe do not expect the adoption of SFAS No. 148the provisions for non-SPEs to have a material impact on itsthe Company’s financial position, or results of operations.operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS 150 establishes new standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for certain mandatorily redeemable non-controlling interests. The adoption of SFAS 150 did not have a material effect on the Company’s financial position, results of operations, or cash flows.
In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition,” which revises or rescinds portions of its previously existing revenue recognition guidance in order to make it consistent with current authoritative accounting and auditing guidance and Securities and Exchange Commission rules and regulations. The adoption of SAB No. 104 did not have a material effect on the Company’s financial position, results of operations or cash flows.
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Note 3 -— Goodwill and Other Intangible Assets
In July 2001, the FASB issued SFAS No. 14,141, “Business Combinations” and SFAS No. 142, “Goodwill and Intangible Assets.” As discussed in Note 2, the Company adopted the provisions of SFAS No. 141 immediately and SFAS No. 142 effective January 1, 2002.
The Company operates in a single industry segment. The Company separately monitors the financial performance of its domestic and international operations. Further, each of these operations generally serves a distinct customer base. Based upon these facts, the Company considers theits domestic and international operations ofas its reporting units for the assignment of goodwill. Goodwill for the domestic operations was generated from the acquisition of a remote control company in 1998. Goodwill for international operations resulted from the acquisition of remote control distributors in the UK in 1998, Spain in 1999 and France in 2000.
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Goodwill information for each reporting unit is as follows (in thousands):
December 31, 2002 | December 31, 2001 | December 31, 2003 | December 31, 2002 | |||||||||||||||
United States | United States | $ | 1,191 | $ | 1,191 | United States | $ | 1,191 | $ | 1,191 | ||||||||
All Other Countries | 1,770 | 1,770 | ||||||||||||||||
International | International | 2,157 | 1,770 | |||||||||||||||
Total Goodwill | $ | 2,961 | $ | 2,961 | Total Goodwill | $ | 3,348 | $ | 2,961 | |||||||||
The increase in international goodwill is due to currency translation adjustments.
The following table shows, on an as adjusted basis, what net income and earnings per share would have been if SFAS No. 142 had been applied beginning January 1, 2001 and 2000 (in thousands):
Year Ended December 31, | Year Ended December 31, | |||||||||||
2001 | 2000 | 2001 | ||||||||||
Net income, as reported | $ | 11,286 | $ | 11,601 | $ | 11,286 | ||||||
Add back: goodwill amortization, net of tax effect | 388 | 287 | 388 | |||||||||
As adjusted, net income | $ | 11,674 | $ | 11,888 | $ | 11,674 | ||||||
Basic earnings per share, as reported | $ | 0.82 | $ | 0.84 | $ | 0.82 | ||||||
Add back: goodwill amortization, net of tax effect | 0.02 | 0.03 | 0.02 | |||||||||
As adjusted, basic earnings per share | $ | 0.84 | $ | 0.87 | $ | 0.84 | ||||||
Diluted earnings per share, as reported | $ | 0.78 | $ | 0.78 | $ | 0.78 | ||||||
Add back: goodwill amortization, net of tax effect | 0.02 | 0.02 | 0.02 | |||||||||
As adjusted, diluted earnings per share | $ | 0.80 | $ | 0.80 | $ | 0.80 | ||||||
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Information regarding the Company’s other acquired intangible assets and patents are as follows (in thousands):
December 31, 2002 | December 31, 2001 | December 31, 2003 | December 31, 2002 | |||||||||||||||
Carrying amount: | Carrying amount: | Carrying amount: | ||||||||||||||||
Distribution rights | $ | 2,597 | $ | 2,597 | Distribution rights | $ | 2,597 | $ | 2,597 | |||||||||
Patents | 2,636 | 2,056 | Patents | 3,294 | 2,636 | |||||||||||||
Trademark | 348 | 389 | Trademark | 538 | 348 | |||||||||||||
Technology | 1,285 | 183 | Technology | 1,285 | 1,285 | |||||||||||||
Other | 1,048 | 1,066 | Other | 1,048 | 1,048 | |||||||||||||
Total carrying amount | Total carrying amount | $ | 7,914 | $ | 6,291 | Total carrying amount | $ | 8,762 | $ | 7,914 | ||||||||
Accumulated amortization: | Accumulated amortization: | Accumulated amortization: | ||||||||||||||||
Distribution rights | $ | 2,134 | $ | 1,705 | Distribution rights | $ | 2,562 | $ | 2,134 | |||||||||
Patents | 951 | 714 | Patents | 1,228 | 951 | |||||||||||||
Trademark | 77 | 43 | Trademark | 100 | 77 | |||||||||||||
Technology | 170 | — | Technology | 416 | 170 | |||||||||||||
Other | 900 | 696 | Other | 1,025 | 900 | |||||||||||||
Total accumulated amortization | Total accumulated amortization | $ | 4,232 | $ | 3,158 | Total accumulated amortization | $ | 5,331 | $ | 4,232 | ||||||||
Net carrying amount: | Net carrying amount: | Net carrying amount: | ||||||||||||||||
Distribution rights | $ | 463 | $ | 892 | Distribution rights | $ | 35 | $ | 463 | |||||||||
Patents | 1,685 | 1,342 | Patents | 2,066 | 1,685 | |||||||||||||
Trademark | 271 | 346 | Trademark | 438 | 271 | |||||||||||||
Technology | 1,115 | 183 | Technology | 869 | 1,115 | |||||||||||||
Other | 148 | 370 | Other | 23 | 148 | |||||||||||||
Total net carrying amount | Total net carrying amount | $ | 3,682 | $ | 3,133 | Total net carrying amount | $ | 3,431 | $ | 3,682 | ||||||||
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Amortization expense for 2003, 2002 2001, and 20002001 amounted to approximately $0.9 million, $1.1 $1.4,million and $1.3$1.4 million, respectively. Estimated amortization expense for existing intangible assets for each of the five succeeding years ended December 31 will be as follows (in thousands):
2003 | $ | 1,141 | ||||||
2004 | 757 | $ | 659 | |||||
2005 | 722 | 624 | ||||||
2006 | 722 | 624 | ||||||
2007 | 722 | 624 | ||||||
2008 | 624 |
Acquisitions39
In March 2002, the Company purchased multimedia protocol technologies from a software development company for $780,000. These technologies enable custom wireless control solutions for home entertainment hardware and software applications.
In August 2000, the Company completed its acquisition of a remote control distributor in France for approximately $1.8 million, of which $1,494,000 was paid in cash during 2000 and $143,000 was paid in cash during 2001. The remaining amount was paid in 2002. The acquisition was accounted for as a purchase with the excess of the aggregate purchase price over the fair market value of net assets acquired recorded as goodwill.
Note 4 -— Accounts Receivable
Accounts receivable consist of the following:
December 31, | December 31, | |||||||||||||||
2002 | 2001 | 2003 | 2002 | |||||||||||||
Accounts receivable, gross | $ | 28,481,871 | $ | 30,010,312 | $ | 34,278,539 | $ | 28,481,871 | ||||||||
Allowance for doubtful accounts | (2,175,239 | ) | (1,801,252 | ) | ||||||||||||
Allowances | (3,778,098 | ) | (2,604,933 | ) | ||||||||||||
Accounts Receivable, net | $ | 30,500,441 | $ | 25,876,938 | ||||||||||||
$ | 26,306,632 | $ | 28,209,060 | |||||||||||||
Note 5 -— Inventories
Inventories consist of the following:
December 31, | December 31, | |||||||||||||||
2002 | 2001 | 2003 | 2002 | |||||||||||||
Components | $ | 7,950,040 | $ | 8,525,412 | $ | 7,592,681 | $ | 7,950,040 | ||||||||
Finished goods | 8,096,472 | 8,174,082 | 11,793,596 | 8,526,166 | ||||||||||||
Inventory, net | $ | 19,386,277 | $ | 16,476,206 | ||||||||||||
$ | 16,046,512 | $ | 16,699,494 | |||||||||||||
Note 6 -— Equipment, Furniture and Fixtures
Equipment, furniture and fixtures consist of the following:
December 31, | December 31, | |||||||||||||||
2002 | 2001 | 2003 | 2002 | |||||||||||||
Tooling | $ | 6,039,332 | $ | 4,914,626 | $ | 7,664,091 | $ | 6,039,332 | ||||||||
Equipment | 5,697,916 | 5,174,601 | 6,298,838 | 5,697,916 | ||||||||||||
Furniture and fixtures | 1,143,719 | 1,038,223 | 1,201,868 | 1,143,719 | ||||||||||||
Leasehold improvements | 1,277,121 | 1,145,016 | 990,885 | 1,277,121 | ||||||||||||
14,158,088 | 12,272,466 | 16,155,682 | 14,158,088 | |||||||||||||
Accumulated depreciation | (10,775,119 | ) | (8,444,938 | ) | (12,681,092 | ) | (10,775,119 | ) | ||||||||
Equipment, furniture and fixtures, net | $ | 3,474,590 | $ | 3,382,969 | ||||||||||||
$ | 3,382,969 | $ | 3,827,528 | |||||||||||||
Depreciation expense was $2,378,549, $2,569,033 $2,663,791, and $2,522,445$2,663,791, for the years ended December 31, 2003, 2002 and 2001, and 2000, respectively.
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Note 7 -— Revolving Credit Line
On April 1, 2002,September 2, 2003, the Company terminated a $15,000,000 unsecured revolving credit agreement with Bank of America National Trust and Savings Association. On September 15, 2003, the Company entered into a $15 millionthree-year $15,000,000 unsecured revolving credit agreement (the “Agreement”) with Comerica Bank of America National Trust and Savings Association (“B of A”Comerica”). Under the Agreement with BComerica, the interest payable is variable and is based on either the bank’s cost of A, which is set to expire on April 1, 2005,funds or the Company can choose from several interestLIBOR rate options.plus a fixed margin of 1.25%. The interest rate in effect as of December 31, 20022003 using the IBORLIBOR Rate option plus a fixed margin of 1.25%, was 2.62%2.37%. The Company pays a commitment fee atranging from zero to a maximum rate of 1/84 of 1% per year on the unused portion of the credit line.line depending on the amount of cash investment retained with Comerica during each quarter. Under the terms of this Agreement, dividend payments are allowed up to 100% of net income of the Company’s abilityprior fiscal year period to pay cash dividends on its common stock is restrictedbe paid within 90 days of such prior year, and the Company is subject to certain financial covenants related to the Company’s net worth, quick ratio, and other restrictions.net income. The Company has the rightauthority under this credit facility to acquire up to 1,000,0001,500,000 shares of its common stock in market purchases. The Company purchased 584,845 shares at a costAs of $5,273,611 since the date of this Agreement through December 31, 2002.2003, 1,454,264 remained available for purchase. Amounts available for borrowing under this credit facility are reduced by the outstanding balance of our import letters of credit. No borrowings
The Company40
under the credit lines occurred during 2002 or 2003. As of December 31, 2003, we had no amounts outstanding under the revolvingthis credit facility and no outstanding import letters of credit outstanding atcredit. Furthermore, as of December 31, 2002.2003, we are in compliance with all financial covenants required by the Agreement. No interest was paid for the yearyears ended December 31, 2003 or 2002.
Note 8 -— Financial Instruments
The Company’s financial instruments consist primarily of investments in cash and cash equivalents, short-term investments, accounts receivable, and accounts payable as well as obligations under the credit facility described above.and accrued liabilities. The carrying value of these instruments approximates fair value because of their short maturity.
Note 9 -— Stockholders’ Equity
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
During 2003, 2002 and 2001, 84,437, 584,845 and 301,600 shares of common stock were purchased by the Company on the open market at a cost of $963,168, $5,273,611 and $4,428,771, respectively (Note 7). During 2000 there was no stock purchased by the Company.respectively. 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 2003, 2002 and 2001, 7,080, 6,836 and 2000, 6,836, 6,188 and 4,492 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. In 1999, 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. During 2000, the remaining value of the warrant was adjusted by approximately $805,000. Subject to achieving the minimum purchase requirements of the warrant, the warrant was scheduled to vest 50% on January 1, 2003 and 50% on January 1, 2004. In 2001, 2000 and 1999, the customer failed to purchase the minimum requirement each year and thus, the warrant expired and the customer forfeited its right to acquire any of the 600,000 shares of Company common stock.
38
Restricted Stock Awards
On July 11, 2001, as compensation for the outside directors for the three year period commencing July 1, 2001, the Company granted each director restricted shares with a fair market value equivalent to approximately $84,000. These restricted shares have been recorded in a separate component of stockholders’ equity and are being amortized over their three-year vesting period. Each calendar quarter, 1/12 of the total stock award will vest and the shares will be distributed provided the director has served the entire calendar quarter term. Amortization expense amounted to $105,032, $98,030 and $56,017$110,018 in 2003, 2002 and 2001, respectively.
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 the award date. These awards have been recorded in a separate component of stockholders’ equity. The carrying value of the restricted stock grants was amortized over the two-year vesting period and has been fully amortized as of December 31, 2001. Amortization expense amounted to $29,260 and $53,857 in 2001 and 2000, respectively.2001.
Note 10 -— 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
41
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 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
39
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.
42
2002 Stock Incentive Plan
On February 5, 2002, the 2002 Nonqualified Stock Plan (“2002 Plan”) was approved. Under the 2002 Plan, 1,000,000 shares of common stock are available for distribution to the Company’s key officers and employees. The 2002 Plan provides for the issuance of stock options, stock appreciation rights, performance stock units, or any combination thereof through February 5, 2012, 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 2002 Plan.
2003 Stock Incentive Plan
On June 18, 2003, the 2003 Nonqualified Stock Plan (“2003 Plan”) was approved. Under the 2003 Plan, 1,000,000 shares of common stock are available for distribution to the Company’s key officers and employees. The 2003 Plan provides for the issuance of stock options, stock appreciation rights, performance stock units, or any combination thereof through June 17, 2013, 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 2003 Plan.
Vesting periods for the above referenced stock incentive plans range from three to four years.
The following table summarizes the changes in the number of shares of common stock under option:
2003 | 2002 | 2001 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2002 | 2001 | 2000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Weighted-Average | Shares | Weighted-Average | Shares | Weighted-Average | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Weighted-Average | Shares | Weighted-Average | Shares | Weighted-Average | (000) | Exercise Price | (000) | Exercise Price | (000) | Exercise Price | |||||||||||||||||||||||||||||||||||||||||||||||||
(000) | Exercise Price | (000) | Exercise Price | (000) | Exercise Price | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Outstanding at beginning of year | 2,260 | $ | 11.28 | 2,455 | $ | 10.29 | 2,142 | $ | 7.89 | 2,976 | $ | 12.00 | 2,260 | $ | 11.28 | 2,455 | $ | 10.29 | ||||||||||||||||||||||||||||||||||||||||||
Granted | 998 | 12.14 | 153 | 18.08 | 484 | 19.93 | 119 | 10.60 | 998 | 12.14 | 153 | 18.08 | ||||||||||||||||||||||||||||||||||||||||||||||||
Exercised | (243 | ) | 5.49 | (284 | ) | 6.15 | (98 | ) | 6.05 | (370 | ) | 8.96 | (243 | ) | 5.49 | (284 | ) | 6.15 | ||||||||||||||||||||||||||||||||||||||||||
Expired and/or forfeited | (39 | ) | 14.17 | (64 | ) | 13.79 | (73 | ) | 9.41 | (63 | ) | 13.92 | (39 | ) | 14.17 | (64 | ) | 13.79 | ||||||||||||||||||||||||||||||||||||||||||
Outstanding at end of year | 2,976 | $ | 12.00 | 2,260 | $ | 11.28 | 2,455 | $ | 10.29 | 2,662 | $ | 12.32 | 2,976 | $ | 12.00 | 2,260 | $ | 11.28 | ||||||||||||||||||||||||||||||||||||||||||
Options exercisable at year-end | 1,502 | 1,076 | 749 | 1,668 | 1,502 | 1,076 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
4043
Significant option groups outstanding at December 31, 20022003 and related weighted average price and life information are as follows:
Options Outstanding | Options Exercisable | Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||||||||||||||||||
Number | Weighted-Average | Weighted-Average | Number | Weighted-Average | Number | Weighted-Average | Weighted-Average | Number | Weighted-Average | |||||||||||||||||||||||||||||||||||||
Range of | Range of | Outstanding | Remaining | Exercise | Exercisable | Exercise | Range of | Outstanding | Remaining Years of | Exercise | Exercisable | Exercise | ||||||||||||||||||||||||||||||||||
Exercise Prices | Exercise Prices | At 12/31/02 | Contractual Life | Price | At 12/31/02 | Price | Exercise Prices | At 12/31/03 | Contractual Life | Price | At 12/31/03 | Price | ||||||||||||||||||||||||||||||||||
$2.16 to $7.50 | 702,041 | 5.81 | $ | 6.47 | 702,041 | $ | 6.47 | |||||||||||||||||||||||||||||||||||||||
$2.16 to $7.50 | $2.16 to $7.50 | 500 | 4.7 | $ | 6.11 | 500 | $ | 6.11 | ||||||||||||||||||||||||||||||||||||||
8.45 to 10.53 | 514,219 | 9.86 | 8.49 | 750 | 10.53 | 8.45 to 10.53 | 570 | 8.9 | 8.68 | 125 | 8.51 | |||||||||||||||||||||||||||||||||||
11.02 to 14.71 | 709,750 | 6.82 | 11.10 | 539,188 | 11.05 | 11.02 to 14.71 | 569 | 6.0 | 11.10 | 531 | 11.04 | |||||||||||||||||||||||||||||||||||
15.20 to 22.78 | 1,049,875 | 8.35 | 18.03 | 259,563 | 19.77 | 15.20 to 22.78 | 1,023 | 7.3 | 18.06 | 512 | 18.92 | |||||||||||||||||||||||||||||||||||
$2.16 to $22.78 | $2.16 to $22.78 | 2,975,885 | 7.65 | $ | 12.00 | 1,501,542 | $ | 10.42 | $2.16 to $22.78 | 2,662 | 6.9 | $ | 12.32 | 1,668 | $ | 11.79 | ||||||||||||||||||||||||||||||
During 2003, common stock options were modified for two employees as part of severance agreements. The total number of options modified was 92,647, which resulted in new measurement dates. The difference between the exercise price and the fair value of the common stock on the new measurement dates for the options totaled $341,282. As a result, $341,282 was charged to non-cash stock-based compensation.
Note 11 -— Significant Customers and Suppliers
One significant customer, with salespurchases of $18.1 million and $15.9 million, accounted for 15.0% and 15.3%, respectively of total 2003 and 2002 revenues and traderevenues. Trade receivables with this customer amounted to $2.7 million and $2.9 million or 9.0% and 11.2%, respectively of the total trade receivables at December 31, 2003 and 2002. During 2001, there were no customers with individual salespurchases exceeding 10% of total Company sales. Two significant customers with sales of $15.9 and $13.6 million accounted for 12.8% and 10.9%, respectively, of total 2000 revenues.
Trade receivables subject the Company to a concentration of credit risk. The risk is mitigated due to the large number of customers comprising the Company’s customer base, the relative size and strength of most of Thethe Company’s customers and the Company’s performance of ongoing credit evaluations.
The Company utilizes third-party manufacturers in Asia, Mexico and the United States to produce its wireless control products. Purchases with three major suppliers amounted to $13.4 million, $10.7 million and $6.9 million representing 19.7%, 15.6% and 10.1%, respectively of total inventory purchases in 2003. Purchases with two major suppliers amounted to $7.3 million and $9.4 million representing 11.7% and 15.2%, respectively, of total inventory purchases during 2002. Accounts payable with the previously mentioned three suppliers amounted to $940,000, $3,587,000 and $679,000 representing 6.8%, 26.1% and 4.9% of the total accounts payable at December 31, 2003. Additionally, there was one supplier with accounts payable of $1.7 million or 12.0% of the total accounts payable at December 31, 2003. Accounts payable with the previously mentioned two suppliers amounted to $758,000 and $796,000 or 9.7% and 10.2%, respectively, of the total accounts payable at December 31, 2002. Purchases with three major suppliers amounted to $10.5 million, $8.6 million and $10.9 million representing 15.0%, 12.3% and 15.7%, respectively, of total inventory purchases during 2001. Accounts payable with the previously mentioned suppliers amounted to $806,000, $258,000 and $531,000 representing 8.6%, 2.8% and 5.7% of the total accounts payable at December 31, 2001. Purchases with three major suppliers amounted to $12.7, $12.3 and $7.9 million representing 17.3%, 16.8% and 10.7%, respectively, of the total inventory purchases during 2000. Additionally, the Company currently purchases a significant portion of its integrated circuit chips from two vendors.
Note 12 -— Leases
The Company leases office and warehouse space and certain office equipment under operating leases.leases that expire at various dates through December 31, 2009. Rental expense under operating leases was $1,578,643, $1,211,852 $1,010,896, and $900,849$1,010,896 for the years ended December 31, 2003, 2002 2001, and 2000,2001, respectively.
The following summarizes future minimum non-cancelable operating lease payments with initial terms greater than one year at December 31, 2002:2003:
Year ending December 31: | Amount | |||
2003 | $ | 889,210 | ||
2004 | 447,127 | |||
2005 | 329,917 | |||
2006 | 275,154 | |||
2007 | 189,812 | |||
thereafter | 48,875 | |||
Total lease commitments | $ | 2,180,095 | ||
Amount | |||||
Year ending December 31: | |||||
2004 | $ | 1,408,094 | |||
2005 | 1,047,087 | ||||
2006 | 505,343 | ||||
2007 | 324,597 | ||||
2008 | 42,560 | ||||
thereafter | 29,378 | ||||
Total lease commitments | $ | 3,357,059 | |||
4144
Note 13 -— 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 matches 50% of the participants’ contributions in the form of newly issued shares of common stock of the Company. The expense recorded for the years ended December 31, 2003, 2002 2001 and 20002001 amounted to $390,087, $384,329 $283,352, and $292,388,$283,352, respectively.
Note 14 -— Other Income, Net
“Other income, net” in the Consolidated Income Statements consisted of the following for the periods:following:
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |||||||||||||||||||||
Net gain on realized foreign exchange transactions | $ | 93,740 | $ | 113,946 | $ | 512,623 | ||||||||||||||||||||
Net gain on foreign exchange transactions | Net gain on foreign exchange transactions | $ | 343,804 | $ | 93,740 | $ | 113,946 | |||||||||||||||||||
Patent settlements | Patent settlements | 162,964 | — | — | Patent settlements | — | 162,964 | — | ||||||||||||||||||
Other | Other | (17,461 | ) | 33,363 | (12,914 | ) | Other | (5,645 | ) | (17,461 | ) | 33,363 | ||||||||||||||
Total | $ | 239,243 | $ | 147,309 | $ | 499,709 | Total | $ | 338,159 | $ | 239,243 | $ | 147,309 | |||||||||||||
During 2002, the Company settled patent infringement suits resulting in payments totaling $162,964.
Note 15 -— Income Taxes
In 2003, 2002, 2001, and 2000,2001, pretax income was attributed to the following jurisdictions:
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |||||||||||||||||||||
Domestic operations | Domestic operations | $ | 4,898,516 | $ | 19,164,817 | $ | 19,393,318 | Domestic operations | $ | 6,002,416 | $ | 4,898,516 | $ | 19,164,817 | ||||||||||||
Foreign operations | Foreign operations | 2,916,290 | (2,021,853 | ) | 268,770 | Foreign operations | 3,492,758 | 2,916,290 | (2,021,853 | ) | ||||||||||||||||
Total | $ | 7,814,806 | $ | 17,142,964 | $ | 19,662,088 | Total | $ | 9,495,174 | $ | 7,814,806 | $ | 17,142,964 | |||||||||||||
The provision for income taxes charged to operations was as follows:
Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||||||||
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | ||||||||||||||||||||||||
Current tax expense: | Current tax expense: | Current tax expense: | |||||||||||||||||||||||||||
U.S. federal | $ | 554,105 | $ | 5,402,319 | $ | 4,060,306 | U.S. federal | $ | 2,438,395 | $ | 554,105 | $ | 5,402,319 | ||||||||||||||||
State and local | (389,006 | ) | 582,700 | 1,687,181 | State and local | 156,965 | (389,006 | ) | 582,700 | ||||||||||||||||||||
Foreign | 1,011,728 | 65,953 | 94,073 | Foreign | 1,482,389 | 1,011,728 | 65,953 | ||||||||||||||||||||||
Total current | 1,176,827 | 6,050,972 | 5,841,560 | Total current | 4,077,749 | 1,176,827 | 6,050,972 | ||||||||||||||||||||||
Deferred tax expense: | Deferred tax expense: | Deferred tax expense: | |||||||||||||||||||||||||||
U.S. federal | 492,992 | 322,750 | 2,205,254 | U.S. federal | (715,000 | ) | 492,992 | 322,750 | |||||||||||||||||||||
State and local | 42,009 | 95,800 | 14,642 | State and local | (46,000 | ) | 42,009 | 95,800 | |||||||||||||||||||||
Foreign | 163,725 | (612,336 | ) | — | Foreign | (88,390 | ) | 163,725 | (612,336 | ) | |||||||||||||||||||
Total deferred | 698,726 | (193,786 | ) | 2,219,896 | Total deferred | (849,390 | ) | 698,726 | (193,786 | ) | |||||||||||||||||||
Total provision | $ | 1,875,553 | $ | 5,857,186 | $ | 8,061,456 | Total provision | $ | 3,228,359 | $ | 1,875,553 | $ | 5,857,186 | ||||||||||||||||
The Company made income tax payments of $1,492,108, $7,801,643, and $2,578,766 in 2002, 2001 and 2000, respectively.
4245
Net deferred tax assets comprised the following at December 31:
2002 | 2001 | 2003 | 2002 | ||||||||||||||
Inventory reserves | $ | 438,686 | $ | 468,496 | Inventory reserves | $ | 990,199 | $ | 438,686 | ||||||||
Allowance for doubtful accounts | 688,777 | 577,218 | Allowance for doubtful accounts | 727,280 | 688,777 | ||||||||||||
Capitalized inventory costs | 408,832 | 259,161 | Capitalized inventory costs | 287,341 | 408,832 | ||||||||||||
Tax credit carry forwards | 448,611 | 612,336 | |||||||||||||||
Net operating losses | Net operating losses | 303,311 | 477,510 | ||||||||||||||
Amortization of intangibles | 333,315 | 649,923 | Amortization of intangibles | 758,653 | 333,315 | ||||||||||||
Accrued liabilities | 580,783 | 607,846 | Accrued liabilities | 693,049 | 660,583 | ||||||||||||
State taxes | 1,577 | 115,403 | State taxes | 18,407 | 1,577 | ||||||||||||
Depreciation | 17,062 | 105,612 | Depreciation | 17,062 | 17,062 | ||||||||||||
Other | 58,967 | 279,341 | Other | 168,104 | 58,967 | ||||||||||||
$ | 3,963,406 | $ | 3,085,309 | ||||||||||||||
Less: Valuation allowance | (137,406 | ) | (108,699 | ) | |||||||||||||
Net deferred tax assets | $ | 2,976,610 | $ | 3,675,336 | Net deferred tax assets | $ | 3,826,000 | $ | 2,976,610 | ||||||||
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, | Year Ended December 31, | |||||||||||||||||||||||||
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |||||||||||||||||||||
Tax provision at statutory U.S. rate | Tax provision at statutory U.S. rate | $ | 2,657,034 | $ | 6,000,037 | $ | 6,882,000 | Tax provision at statutory U.S. rate | ||||||||||||||||||
Increase (decrease) in tax provision resulting from: | Increase (decrease) in tax provision resulting from: | Increase (decrease) in tax provision resulting from: | $ | 3,228,359 | $ | 2,657,034 | $ | 6,000,037 | ||||||||||||||||||
State and local taxes, net | (225,554 | ) | 480,505 | 1,150,860 | State and local taxes, net | 80,288 | (225,554 | ) | 480,505 | |||||||||||||||||
Foreign tax rate differential | 183,915 | 76,669 | — | Foreign tax rate differential | 171,534 | 183,915 | 76,669 | |||||||||||||||||||
Nondeductible items | 14,663 | 19,316 | 22,777 | Nondeductible items | 29,199 | 14,663 | 19,316 | |||||||||||||||||||
Federal research and development credits | (645,251 | ) | (416,695 | ) | — | Federal research and development credits | (282,055 | ) | (645,251 | ) | (416,695 | ) | ||||||||||||||
Other | (109,254 | ) | (302,646 | ) | 5,819 | Other | 1,034 | (109,254 | ) | (302,646 | ) | |||||||||||||||
Tax provision | Tax provision | $ | 1,875,553 | $ | 5,857,186 | $ | 8,061,456 | Tax provision | $ | 3,228,359 | $ | 1,875,553 | $ | 5,857,186 | ||||||||||||
At December 31, 2003, the Company has certain foreign net operating losses of approximately $924,000, which begin to expire in 2007. At December 31, 2003, a valuation allowance of approximately $400,000 has been provided on certain foreign net operating losses.
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.
Subsequent to year-end,December 31, 2003, the California Franchise Tax Board began an audit of the years ended December 31, 1999 and 2000. The results of this audit are not expected to have a material impact on the Company’s financial position or results of operations.
46
Note 16 -— Earnings Per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares and dilutive potential common shares which includes the dilutive effect of stock options and restricted stock grants. Dilutive potential common shares for all periods presented are computed utilizing the treasury stock method. In the computation of diluted earnings per common share for the yearyears ended December 31, 2003, 2002 and December 31, 2001, approximately 1,031,125, 1,782,000 and 589,000 stock options, respectively, with exercise prices greater than the average market price of the underlying common stock, were excluded because their inclusion would have been antidilutive.
43
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
Year Ended | Year Ended | ||||||||||||||||||||||||||
December 31, | December 31, | December 31, | December 31, 2003 | December 31, 2002 | December 31, 2001 | ||||||||||||||||||||||
2002 | 2001 | 2000 | |||||||||||||||||||||||||
BASIC | |||||||||||||||||||||||||||
BASIC | |||||||||||||||||||||||||||
Net Income | Net Income | $ | 5,939 | $ | 11,286 | $ | 11,601 | $ | 6,267 | $ | 5,939 | $ | 11,286 | ||||||||||||||
Weighted-average common shares outstanding | Weighted-average common shares outstanding | 13,790 | 13,844 | 13,743 | 13,703 | 13,790 | 13,844 | ||||||||||||||||||||
Basic earnings per share | Basic earnings per share | $ | 0.43 | $ | 0.82 | $ | 0.84 | $ | 0.46 | $ | 0.43 | $ | 0.82 | ||||||||||||||
DILUTED | |||||||||||||||||||||||||||
DILUTED | |||||||||||||||||||||||||||
Net Income | Net Income | $ | 5,939 | $ | 11,286 | $ | 11,601 | $ | 6,267 | $ | 5,939 | $ | 11,286 | ||||||||||||||
Weighted-average common shares outstanding for basic | Weighted-average common shares outstanding for basic | 13,790 | 13,844 | 13,743 | 13,703 | 13,790 | 13,844 | ||||||||||||||||||||
Dilutive effect of stock options and restricted stock | Dilutive effect of stock options and restricted stock | 373 | 679 | 1,198 | 304 | 373 | 679 | ||||||||||||||||||||
Weighted-average common shares outstanding on a diluted basis | Weighted-average common shares outstanding on a diluted basis | 14,163 | 14,523 | 14,941 | 14,007 | 14,163 | 14,523 | ||||||||||||||||||||
Diluted earnings per share | Diluted earnings per share | $ | 0.42 | $ | 0.78 | $ | 0.78 | $ | 0.45 | $ | 0.42 | $ | 0.78 | ||||||||||||||
47
Note 17 -— Business Segments and Foreign Operations
The Company operates in a single industry segment and is engaged in the building and marketing of universal wireless controls and related products principally for video and audio entertainment equipment. The Company’s customers consist primarily of international retailers and distributors, private label customers, original equipment manufacturers, subscription broadcast operators and companies in the computing industry.
The Company’s operations by geographic area are presented below:
2002 | 2001 | 2000 | |||||||||||
Net Sales | |||||||||||||
United States | $ | 64,869,051 | $ | 81,013,675 | $ | 82,292,109 | |||||||
Netherlands | 11,712,572 | 12,703,846 | 19,013,186 | ||||||||||
United Kingdom | 11,734,250 | 8,723,896 | 7,511,173 | ||||||||||
France | 4,226,259 | 5,232,039 | 3,614,776 | ||||||||||
Germany | 3,437,778 | 2,686,711 | 5,227,083 | ||||||||||
All Other | 7,910,818 | 8,669,548 | 7,081,550 | ||||||||||
$ | 103,890,728 | $ | 119,029,715 | $ | 124,739,877 | ||||||||
Long-Lived Assets | |||||||||||||
United States | $ | 7,131,655 | $ | 6,509,690 | $ | 6,590,934 | |||||||
All Other Countries | 3,632,999 | 4,124,093 | 4,959,963 | ||||||||||
$ | 10,764,654 | $ | 10,633,783 | $ | 11,550,897 | ||||||||
Year ended | |||||||||||||
December 31, | December 31, | December 31, | |||||||||||
2003 | 2002 | 2001 | |||||||||||
Net Sales United States | $ | 67,641,896 | $ | 64,869,051 | $ | 81,013,675 | |||||||
Netherlands | 16,187,092 | 11,712,572 | 12,703,846 | ||||||||||
United Kingdom | 15,666,576 | 11,734,250 | 8,723,896 | ||||||||||
France | 4,430,504 | 4,226,259 | 5,232,039 | ||||||||||
Germany | 5,422,239 | 3,437,778 | 2,686,711 | ||||||||||
All Other | 11,119,479 | 7,910,818 | 8,669,548 | ||||||||||
$ | 120,467,786 | $ | 103,890,728 | $ | 119,029,715 | ||||||||
December 31, | |||||||||||||
2003 | 2002 | 2001 | |||||||||||
Long-Lived Assets | |||||||||||||
United States | $ | 3,002,066 | $ | 7,131,655 | $ | 6,509,690 | |||||||
All Other Countries | 1,917,065 | 3,632,999 | 4,124,093 | ||||||||||
$ | 4,919,131 | $ | 10,764,654 | $ | 10,633,783 | ||||||||
Specific identification was the basis used for attributing revenues from external customers to individual countries.
48
Note 18 -— Related Party Transactions
In August 2001, the Company entered into a 30-month consulting agreement with one of its former directors, under which the former director will receivereceived $600,000 for services rendered. Amounts paid under this agreement were $166,665$200,000, $200,000 and
44
$216,670 $200,000 for the years ended December 31, 2003, 2002 and 2001, respectively. ThisThe agreement expires in February 2004. There were no further amounts due at December 31, 2003.
In April 1999, the Company provided a non-recourse interest bearing secured loan to one of the Company’s executive officers. The loan in the amount of $200,000, bears interest at the rate of 5.28% per annum, whichwith interest is payable annually to the Company on each December 15th. The loan is securedcollateralized by the primary residence purchased and the principal is payable on the earlier of (i) December 15, 2007, (ii) within twelve months following a demand from the Company or (iii) on the closing of a sale or transfer of the property.
Note 19 -— Contingencies
Product Warranties
The Company provides for estimated product warranty expenses when we sellconcurrent with the related products.recognition of revenue. Because warranty estimates are forecasts that are based on the best available information, mostly historical claims experience, claims costs may differ from amounts provided. An analysis of changes in the liability for product warranties follows:
Accruals | |||||||||||||||||||||
Relating to | |||||||||||||||||||||
Accruals for | Preexisting | Settlements | |||||||||||||||||||
Balance at | Warranties | Warranties | (in Cash or in | Balance at | |||||||||||||||||
December 31, | Issued During | and Changes | Kind) During | December 31, | |||||||||||||||||
Description | 2001 | the Period | in Estimates | the Period | 2002 | ||||||||||||||||
Year Ended December 31, 2002 | $ | 267,456 | $ | 314,095 | $ | (39,814 | ) | $ | (17,037 | ) | $ | 524,700 |
Accruals | ||||||||||||||||||||
Relating to | ||||||||||||||||||||
Accruals for | Preexisting | Settlements (in | ||||||||||||||||||
Balance at | Warranties | Warranties and | Cash or in Kind) | |||||||||||||||||
beginning of | Issued During | Changes in | During the | Balance at | ||||||||||||||||
Description | period | the Period | Estimates | Period | end of period | |||||||||||||||
Year Ended December 31, 2003 | $ | 95,005 | $ | 181,466 | $ | 0 | $ | (181,466 | ) | $ | 95,005 | |||||||||
Year Ended December 31, 2002 | $ | 134,819 | $ | 51,142 | $ | 0 | $ | (90,956 | ) | $ | 95,005 |
Litigation
On November 15, 2000, Universalthe Company filed suit against Universal Remote Control Inc. alleging that Universal Remote has infringed certain of the Company’s patents (Universal Electronics Inc. v. Universal Remote Control, Inc., Civil Action No. SACV 00- 1125 AHS (EEx)). UniversalThe Company is seeking damages and injunctive relief. Universal Remote has answered the Complaintcomplaint and has denied infringement, and the parties areCompany is engaged in discovery.
On November 19, 2002, the Company filed suit against Intrigue Technologies, Inc., which was amended on February 13, 2004, alleging that Intrigue Technologies has infringed onecertain of the Company’s patents (Universal Electronics Inc. v. Intrigue Technologies, Inc., Civil Action No. SA02-1089GLT (ANX)). Intrigue Technologies has answered this complaint denying infringement. In addition, Intrigue Technologies has filed suit against the Company (Intrigue Technologies, Inc. v. Universal Electronics Inc., Case Number A3-02-124) seeking a judgment to declare certain of the Company’s patents invalid, unenforceable and void and also alleging that the Company haswe have violated federal antitrust laws with respect to itsour patent enforcement. The Company has not yet answered this complaint,complaint; however, it intends to do so denying all of Intrigue Technologies’ material allegations. ItAs of December 31 2003 and 2002, a loss contingency has not been recorded since management believes an unfavorable outcome for this matter is not probable.
On January 7, 2004, James D. Lyon, Trustee for the opinionbankruptcy estate of Computrex, Inc. filed an action against the Company alleging that the Company received preferential treatment in connection with certain payments made on the Company’s behalf by Computrex. (Computrex, Inc. (Debtor) and James D. Lyon (Trustee for the bankruptcy estate of Computrex, Inc.) v. Universal Electronics Inc., Case No. 01-53755 Chapter 7, United States Bankruptcy Court, Eastern District of Kentucky, Lexington Division). The Company has not yet answered this complaint and will not need to do so as this action is currently in abeyance while the trustee appeals an adverse ruling against it in another matter having facts similar to those in the trustee’s action against the Company. If and when the Company
49
is to answer, it intends to deny all of the material allegations made against the Company and defend this matter vigorously. As of December 31 2003, a loss contingency has not been recorded since management that such patents are valid and enforceable and we intend to defend against such suit vigorously. believes an unfavorable outcome for this matter is not probable.
While it is the opinion of management that ourthe Company’s products do not infringe any third party’s 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 ourthe Company’s financial condition, results of operations and cash flows.
4550
Supplementary Data
Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for the years ended December 31, 2003 and 2002 and 2001.is presented below.
2002 | 2003 | |||||||||||||||||||||||||||||||||
March | June | September | December | March | June | September | December | |||||||||||||||||||||||||||
31, | 30, | 30, | 31, | 31, | 30, | 30, | 31(2), | |||||||||||||||||||||||||||
Net sales | Net sales | $ | 23,410,925 | $ | 24,590,031 | $ | 26,004,420 | $ | 29,885,352 | Net sales | $ | 26,918,697 | $ | 27,711,796 | $ | 30,300,217 | $ | 35,537,076 | ||||||||||||||||
Gross profit | Gross profit | 9,416,218 | 10,856,843 | 10,029,122 | 11,352,836 | Gross profit | 10,156,897 | 10,830,374 | 11,832,663 | 13,479,567 | ||||||||||||||||||||||||
Operating income | Operating income | 891,591 | 1,810,926 | 1,794,724 | 2,483,443 | Operating income | 1,305,943 | 1,577,218 | 2,390,154 | 3,300,167 | ||||||||||||||||||||||||
Net income | Net income | $ | 675,386 | $ | 1,402,312 | $ | 1,857,498 | $ | 2,004,057 | Net income | 939,045 | 1,201,629 | 1,666,992 | 2,459,149 | ||||||||||||||||||||
Earnings per share: | ||||||||||||||||||||||||||||||||||
Earnings per share (1): | Earnings per share (1): | |||||||||||||||||||||||||||||||||
Basic | $ | 0.05 | $ | 0.10 | $ | 0.13 | $ | 0.15 | Basic | $ | 0.07 | $ | 0.09 | $ | 0.12 | $ | 0.18 | |||||||||||||||||
Diluted | $ | 0.05 | $ | 0.10 | $ | 0.13 | $ | 0.15 | Diluted | $ | 0.07 | $ | 0.09 | $ | 0.12 | $ | 0.17 | |||||||||||||||||
Shares used in computing earnings per share: | Shares used in computing earnings per share: | Shares used in computing earnings per share: | ||||||||||||||||||||||||||||||||
Basic | 13,799,834 | 13,958,596 | 13,835,742 | 13,564,702 | Basic | 13,581,581 | 13,612,039 | 13,750,669 | 13,835,281 | |||||||||||||||||||||||||
Diluted | 14,370,383 | 14,515,073 | 14,045,679 | 13,720,409 | Diluted | 13,785,008 | 13,880,922 | 14,145,423 | 14,186,574 | |||||||||||||||||||||||||
2001 | 2002 | |||||||||||||||||||||||||||||||||
March | June | September | December | March | June | September | December | |||||||||||||||||||||||||||
31, | 30, | 30, | 31, | 31, | 30, | 30, | 31, | |||||||||||||||||||||||||||
Net sales | Net sales | $ | 31,022,723 | $ | 29,107,281 | $ | 31,030,337 | $ | 27,869,374 | Net sales | $ | 23,410,925 | $ | 24,590,031 | $ | 26,004,420 | $ | 29,885,352 | ||||||||||||||||
Gross profit | Gross profit | 13,309,998 | 12,133,186 | 12,656,019 | 10,973,942 | Gross profit | 9,416,218 | 10,856,843 | 10,029,122 | 11,352,836 | ||||||||||||||||||||||||
Operating income | Operating income | 4,003,579 | 3,694,786 | 4,188,769 | 4,121,407 | �� | Operating income | 891,591 | 1,810,926 | 1,794,724 | 2,483,443 | |||||||||||||||||||||||
Net income | Net income | $ | 2,541,169 | $ | 2,316,673 | $ | 2,798,142 | $ | 3,629,794 | Net income | 675,386 | 1,402,312 | 1,857,498 | 2,004,057 | ||||||||||||||||||||
Earnings per share: | ||||||||||||||||||||||||||||||||||
Earnings per share (1): | Earnings per share (1): | |||||||||||||||||||||||||||||||||
Basic | $ | 0.18 | $ | 0.17 | $ | 0.20 | $ | 0.26 | Basic | $ | 0.05 | $ | 0.10 | $ | 0.13 | $ | 0.15 | |||||||||||||||||
Diluted | $ | 0.17 | $ | 0.16 | $ | 0.19 | $ | 0.25 | Diluted | $ | 0.05 | $ | 0.10 | $ | 0.13 | $ | 0.15 | |||||||||||||||||
Shares used in computing earnings per share: | Shares used in computing earnings per share: | Shares used in computing earnings per share: | ||||||||||||||||||||||||||||||||
Basic | 13,818,075 | 13,926,002 | 13,867,913 | 13,766,966 | Basic | 13,799,834 | 13,958,596 | 13,835,742 | 13,564,702 | |||||||||||||||||||||||||
Diluted | 14,587,560 | 14,704,618 | 14,435,241 | 14,366,529 | Diluted | 14,370,383 | 14,515,073 | 14,045,679 | 13,720,409 | |||||||||||||||||||||||||
46
(1) | Net income per common share calculations for each of the quarters were based upon the weighted average number of shares outstanding for each period, and the sum of the quarters may not be equal to the full year net income per common share amount. | ||
(2) | During the fourth quarter of 2003, the Company recorded a $430,042 net increase in the inventory reserve. |
51
UNIVERSAL ELECTRONICS INC.
SCHEDULE II -— VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, 2001, AND 20002001
Balance at | Additions | Additions | ||||||||||||||||||||||||||||||||
Beginning | Charged to | Balance at | Balance at | Charged to | Balance at | |||||||||||||||||||||||||||||
of | Costs and | End of | Beginning of | Costs and | End of | |||||||||||||||||||||||||||||
Description | Description | Period | Expenses | Write-offs | Period | Description | Period | Expenses | Write-offs | Period | ||||||||||||||||||||||||
Valuation account for accounts receivable: | Valuation account for accounts receivable: | Valuation account for accounts receivable: | ||||||||||||||||||||||||||||||||
Year Ended December 31, 2002 | $ | 1,801,252 | $ | 384,859 | $ | 10,872 | $ | 2,175,239 | Year Ended December 31, 2003 | $ | 2,604,933 | $ | 1,387,544 | $ | 214,379 | $ | 3,778,098 | |||||||||||||||||
Year Ended December 31, 2001 | $ | 1,680,100 | $ | 337,257 | $ | 216,105 | $ | 1,801,252 | Year Ended December 31, 2002 | $ | 1,798,852 | $ | 886,332 | $ | 80,251 | $ | 2,604,933 | |||||||||||||||||
Year Ended December 31, 2000 | $ | 1,879,931 | $ | (91,493 | ) | $ | 108,338 | $ | 1,680,100 | Year Ended December 31, 2001 | $ | 1,646,100 | $ | 178,460 | $ | 25,709 | $ | 1,798,852 | ||||||||||||||||
Valuation account for inventory: | Valuation account for inventory: | Valuation account for inventory: | ||||||||||||||||||||||||||||||||
Year Ended December 31, 2002 | $ | 1,201,271 | $ | 524,650 | $ | 451,085 | $ | 1,274,836 | Year Ended December 31, 2003 | $ | 1,274,836 | $ | 1,942,312 | $ | 190,706 | $ | 3,026,442 | |||||||||||||||||
Year Ended December 31, 2001 | $ | 2,607,603 | $ | 342,205 | $ | 1,748,537 | $ | 1,201,271 | Year Ended December 31, 2002 | $ | 1,201,271 | $ | 524,650 | $ | 451,085 | $ | 1,274,836 | |||||||||||||||||
Year Ended December 31, 2000 | $ | 1,650,774 | $ | 2,002,053 | $ | 1,045,224 | $ | 2,607,603 | Year Ended December 31, 2001 | $ | 2,607,603 | $ | 342,205 | $ | 1,748,537 | $ | 1,201,271 |
4752
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9A. CONTROLS AND PROCEDURES
As of December 31, 2003, management, including the Company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that all material information required to be filed in this annual report has been made known to them in a timely manner. There have been no significant changes in internal controls or in other factors that could significantly affect the Company’s internal controls subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation.
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 20032004 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.
Information required by Item 405 will be contained in and is hereby incorporated by reference to the Company’s definitive Proxy Statement for its 20032004 Annual Meeting of Stockholders to be filed subsequent to the date of filing this Form 10-K, under the caption “Compliance with Section 16(a) of the Exchange Act.”
Code of Conduct.Universal has adopted a code of conduct that applies to all its employees, including without limitation its principal executive officer, principal financial officer and principal accounting officer. A copy of the code of conduct is included as Exhibit 14.1 to this Annual Report on Form 10-K. The code of conduct also is available on the Company’s website, www.uei.com. The Company will post on its website information regarding any amendment to, or waiver from, any provision of the code of ethics that applies to its principal executive officer, principal financial officer or principal accounting officer.
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 20032004 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.
53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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 20032004 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.
The following summarizes the Company’s equity compensation plans at December 31, 2002:2003:
Equity Compensation Plan Information
(a) | (b) | (c) | ||||||||||||||||||||||||
(a) | (b) | (c) | Number of | Number of securities | ||||||||||||||||||||||
Number of securities | Securities to be | remaining available | ||||||||||||||||||||||||
remaining available for | issued upon | Weighted-average | for future issuance | |||||||||||||||||||||||
Number of Securities to be | Weighted-average | future issuance under | exercise of | exercise price of | under equity | |||||||||||||||||||||
issued upon exercise of | exercise price of | equity compensation plans | outstanding | outstanding | compensation plans | |||||||||||||||||||||
outstanding options, | outstanding options, | (excluding securities | options, warrants | options, warrants | (excluding securities | |||||||||||||||||||||
Plan Category | Plan Category | warrants and rights | warrants and rights | reflected in column (a)) | Plan Category | and rights | and rights | reflected in column(a)) | ||||||||||||||||||
Equity compensation plans approved by security holders | Equity compensation plans approved by security holders | 1,156,135 | $ | 4.09 | 58,648 | Equity compensation plans approved by security holders | 1,042,463 | $ | 11.07 | 1,048,648 | ||||||||||||||||
Equity compensation plans not approved by security holders | Equity compensation plans not approved by security holders | 1,819,750 | 7.91 | 125,250 | Equity compensation plans not approved by security holders | 1,619,050 | 13.13 | 24,650 | ||||||||||||||||||
Total | 2,661,513 | $ | 12.32 | 1,073,298 | ||||||||||||||||||||||
Total | 2,975,885 | $ | 6.43 | 183,898 | ||||||||||||||||||||||
See “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA- Notes to Consolidated Financial Statements –— Note 10” for a description of each of the Company’s stock option plans.
4854
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 20032004 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 14. Principal Accountant Fees and Services
Information required by this item will be contained in and is hereby incorporated by reference to the Company’s definitive Proxy Statement for its 2004 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. CONTROLS AND PROCEDURES
Within the ninety-day period prior to the date of filing this annual report, management, including the Company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that all material information required to be filed in this annual report has been made known to them in a timely manner. There have been no significant changes in internal controls or in other factors that could significantly affect the Company’s internal controls subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) |
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) |
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) |
See EXHIBIT INDEX at page |
(b) No reports on Form 8-K were filed by the Company during the quarter ended December 31, 2002.
(b) | Reports on Form 8-K |
49
On October 28, 2003, the Company furnished a report on Form 8-K under Item 7, Financial Statements and Exhibits, concerning the Company’s announcement of its financial results for the quarter ended September 30, 2003. |
55
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cypress, State of California on the 28th15th day of March, 2003.
UNIVERSAL ELECTRONICS INC.2004.
UNIVERSAL ELECTRONICS INC | ||
By: /s/Paul D. Arling | ||
Paul D. Arling | ||
Chairman and Chief Executive Officer |
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Paul D. Arling and Robert P. LillenessBernard J. Pitz as true and lawful attorneys-in-fact and agents, each acting alone, with full powers of substitution, for him and in 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 he might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or 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 28th15th day of March, 2003,2004, by the following persons on behalf of the registrant and in the capacities indicated.
NAME & TITLE | SIGNATURE | |
Paul D. Arling Chairman and Chief Executive Officer (Principal Executive Officer) | /s/Paul D. Arling | |
Robert P. Lilleness President and Chief Operating Officer | /s/Robert P. Lilleness | |
Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) | /s/ Bernard J. Pitz | |
Satjiv Chahil Director | /s/Satjiv Chahil | |
Bruce A. Henderson Director | /s/Bruce A. Henderson | |
William C. Mulligan Director | /s/William C. Mulligan | |
J. C. Sparkman Director | /s/J.C. Sparkman |
5056
CERTIFICATIONS
I, Paul D. Arling, certify that:
Date: March 28, 2003
/s/ Paul D. Arling
Paul D. ArlingChief Executive Officer
51
CERTIFICATIONS
I, Mark Z. Belzowski, certify that:
Date: March 28, 2003
/s/ Mark Z. Belzowski
Mark Z. BelzowskiChief Financial Officer
52
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 (Incorporated by reference to Exhibit 2.2 to The Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed on March 30,2000 (File No. 0-21044) | |
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)) | |
4.1 | Stockholder Protection Rights Agreement, dated as of May 19, 1995, between Universal Electronics Inc. and Society National Bank, as Rights Agent (Incorporated by reference to Exhibit 1 to the Company’s Form 8-A Registration filed on or about June 5, 1995) | |
4.2 | Form of Certificate of Designation and Terms of Participating Preferred Stock of Universal Electronics Inc., included as Exhibit A to the Stockholder Protection Rights Agreement, dated as of May 19, 1995, between Universal Electronics Inc. and Society National Bank, as Rights Agent (Incorporated by reference to Exhibit 2 to the Company’s Form 8-A Registration filed on or about June 5, 1995) | |
4.3 | Form of Rights Certificate and of Election to Exercise, included as Exhibit B to the Stockholder Protection Rights Agreement, dated as of May 19, 1995, between Universal Electronics Inc. and Society National Bank, as Rights Agent (Incorporated by reference to Exhibit 3 to the Company’s Form 8-A Registration filed on or about June 5, 1995). | |
*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 | ||
53
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)) | ||
* | 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. |
57
Exhibit | ||
Number | Document Description | |
* | 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)) | |
* | 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)) | |
* | 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)) | |
* | 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)) | |
* | 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)) | |
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)) | ||
* | 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)) | |
* | 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)) |
54
* | 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)) | |
* | 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)) | |
* | 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)) | |
* | 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)) |
58
Number | Document Description | |
10.16 | 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 ended December 31, 1998 filed on March 31, 1999 (File No. 0-21044)) | |
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)) | ||
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)) | ||
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)) | ||
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)) | ||
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)) | ||
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)) |
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* | 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)) | |
* | 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)) | |
* | Form of Salary Continuation Agreement by and between Universal Electronics Inc. and certain employees (Incorporated by reference to Exhibit 10.39 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed on March 30,2000 (File No. 0-21044)) | |
* | Form of Universal Electronics Inc. 1999A Nonqualified Stock Plan effective October 7, 1999 and subsequently amended February 1, 2000 (Incorporated by reference to Exhibit 10.42 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed on March 30,2000 (File No. 0-21044)) |
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Exhibit | ||
Number | Document Description | |
* | 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 (Incorporated by reference to Exhibit 10.43 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed on March 30,2000 (File No. 0-21044)) | |
First Amendment to Revolving Loan and Security Agreement dated September 19, 2000 by and between Universal Electronics Inc. and Bank of America, N.A. (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 filed on November 14, 2000 (File No. 0-21044)) | ||
Purchase Agreement dated August 25, 2000 by and between Universal Electronics BV, a wholly owned subsidiary of Universal Electronics Inc. and DAM Company (Incorporated by reference to Exhibit 10.44 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 filed on March 28, 2001 (File No. 0-21044)) | ||
Extension of Revolving Loan and Security Agreement dated October 23, 2001 by and between Universal Electronics Inc. and Bank of America, N.A. (Incorporated by reference to Exhibit 10.45 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 filed on November 13, 2001 (File No. 0-21044)) | ||
* | Termination Agreement dated August 1, 2001 by and between Universal Electronics Inc. |
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and Camille K. Jayne (Incorporated by reference to Exhibit 10.46 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 filed on November 13, 2001 (File No. 0-21044)) | ||
* | Consulting Agreement dated August 1, 2001 by and between Universal Electronics Inc. and Camille K. Jayne (Incorporated by reference to Exhibit 10.47 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 filed on November 13, 2001 (File No. 0-21044)) | |
* | ||
Form of Universal Electronics Inc. 2002 Stock Incentive Plan (Incorporated by reference to Exhibit 10.49 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 filed on August 14, 2002 (File No. | ||
* | Form of Stock Option Agreement by and between Universal Electronics Inc. and certain directors, officers and other employees used in connection with options granted to the employees pursuant to the Universal Electronics Inc. 2002 Stock Incentive Plan (Incorporated by reference to Exhibit 10.50 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 filed on August 14, 2002 (File No. | |
Business Loan Agreement dated April 1, 2002 between Bank of America, N.A. and Universal Electronics Inc. (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 filed on May 15, 2002 (File No. 0-21044)) | ||
*10.36 | Form of Universal Electronics Inc. 2003 Stock Incentive Plan (Incorporated by reference to Appendix B to the Company’s Definitive Proxy Materials for the 2003 Annual Meeting of Stockholders of Universal Electronics Inc. filed on April 28, 2003 (File No. 0-21044)) | |
10.37 | Credit Agreement dated September 15, 2003 between Comerica Bank and Universal Electronics Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 filed on November 14, 2003 (File No. 0-21044)) | |
10.38 | Promissory Agreement dated September 15, 2003 between Comerica Bank and Universal Electronics Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 filed on November 14, 2003 (File No. 0-21044)) |
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Exhibit | ||
Number | Document Description | |
*10.39 | Form of Separation Agreement and General Release dated October 7, 2003 between Universal Electronics Inc. and Jerry Bardin (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 filed on November 14, 2003 (File No. 0-21044)) | |
*10.40 | Form of Consulting Agreement dated October 7, 2003 between Universal Electronics Inc. and Jerry Bardin (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 filed on November 14, 2003 (File No. 0-21044)) | |
*10.41 | Form of Employment and Separation Agreement and General Release dated October 31, 2003 between Universal Electronics Inc. and Mark Z. Belzowski (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 filed on November 14, 2003 (File No. 0-21044)) | |
*10.42 | Form of Executive Officer Employment Agreement dated April 23, 2003 by and between Universal Electronics Inc. and Paul D. Arling (filed herewith) | |
*10.43 | Form of Executive Officer Employment Agreement dated April , 2003 by and between Universal Electronics Inc. and Robert P. Lilleness (filed herewith) | |
14.1 | Code of Conduct (filed herewith) | |
21.1 | List of Subsidiaries of the Registrant (filed herewith) | |
23.1 | Consent of PricewaterhouseCoopers LLP (filed herewith) | |
24.1 | Power of Attorney (filed as part of the signature page hereto) | |
32.1 | Section 1350 | |
32.2 | Section 1350 Certifications of |
* Management contract or compensation plan or arrangement identified pursuant to Items 15(a)(3) and 15(c) of Form 10-K.
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