1
The following items were the subject of
a Form 12b-25 and are included herein:
Item 6, Item 7, Item 8, Item 14(a)(1),
Item 14(a)(2) and Exhibits 11.1, 23.1
and 27.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K10-K/A
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, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________ .
COMMISSION FILE NUMBER: 0-21044
UNIVERSAL ELECTRONICS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0204817
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6101 GATEWAY DRIVE
CYPRESS, CALIFORNIA 90630
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 820-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's outstanding common stock
held by non-affiliates of the Registrant on February 26, 1999, determined using
the per share closing sale price thereof on the National Market of The Nasdaq
Stock Market of $12.125 on that date, was approximately $88,423,114.$78,364,154.
As of February 26, 1999, 7,344,1076,514,502 shares of Common Stock, par value
$.01 per share, of the Registrant were outstanding.
Pursuant to Rule 12b-25, the following items have been omitted from
this filing: Items 6, 7, 8, 14(a)(1), 14(a)(2) and Exhibits 11.1, 23.1 and 27.1.
------------------------
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement for its 1999
Annual Meeting of Stockholders to be held on June 8, 1999 are incorporated by
reference into Part III of this Form 10-K.
Except as otherwise stated,
the information contained in this Form 10-K is as of December 31, 1998.
Page 1 of 59
2
UNIVERSAL ELECTRONICS INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
ITEM PAGE
NUMBER NUMBER
------ ------
PART I
1 Business 3
2 Properties 9
3 Legal Proceedings 9
4 Submission of Matters to a Vote of Security Holders 11
PART II
5 Market for Registrant's Common Stock and Related 12
Stockholder Matters
6 Selected Consolidated Financial Data 13
7 Management's Discussion and Analysis of Financial 14
Condition and Results of Operations
7A Quantitative and Qualitative Disclosures about 25
Market Risk
8 Financial Statements and Supplementary Data 26
9 Changes in and Disagreements with Accountants on 48
Accounting and Financial Disclosure
PART III
10 Directors and Executive Officers of the Registrant 49
11 Executive Compensation 49
12 Security Ownership of Certain Beneficial Owners 49
and Management
13 Certain Relationships and Related Transactions 49
PART IV
14 Exhibits, Financial Statement Schedules and Reports 49
on Form 8-K
Signatures 50
Exhibit Index 51
i
3
PART I
ITEM 1. BUSINESS
BUSINESS OF UNIVERSAL ELECTRONICS INC.
Universal Electronics Inc. was incorporated under the laws of Delaware in 1986
and began operations in 1987. The principal executive offices of the Company are
located at 6101 Gateway Drive, Cypress, California 90630, and its telephone
number is (714) 820-1000. As used herein, the terms "Universal" and the
"Company" refer to Universal Electronics Inc. and its subsidiaries unless the
context indicates to the contrary.
Universal develops and markets easy-to-use, preprogrammed universal remote
controls principally for home video and audio entertainment equipment. The
Company sells and licenses its remote control products and proprietary
technologies to private label customers, original equipment manufacturers
("OEMs"), and companies involved in the subscription broadcast industry. The
Company also sells its remote control products internationally under the One For
All(R) brand name. In addition, the Company has licensed certain of its
proprietary technology and its One For All brand name to third parties who in
turn sell products directly to U.S. retailers. The Company also markets a line
of home safety and automation products under the Eversafe(R) brand name. Sales
of home safety and automation products have been primarily focused on the
domestic retail hardware, food and drug, and mass marketing distribution
channels.
GENERAL BUSINESS INFORMATION
Universal has developed a broad line of easy-to-use, preprogrammed universal
remote control products capable of controlling from one to eight video and
audio devices, which are marketed principally for home video and audio
entertainment equipment through various channels of distribution, including
international retailers, private label customers, OEMs, cable operators and
others in the subscription broadcast industry. The Company believes that its
universal remote controls can operate virtually all infrared remote controlled
TV's, VCR's, cable converters, CD players, audio components and satellite
receivers, as well as most other infrared remote controlled devices worldwide.
The Company believes its remote control products incorporate certain significant
technological advantages. First, the Company has compiled an extensive library
of over 74,000 infrared codes, which the Company believes is larger than any
other existing library of infrared codes for the operation of home video and
audio devices sold worldwide. The Company's library is updated on a daily basis
to add infrared codes used in newly introduced video and audio devices. Second,
the Company's proprietary software and know-how permit infrared codes to be
compressed before being loaded into a Read Only Memory ("ROM"), Random Access
Memory ("RAM") or an electronically erasable ROM ("E2") chip. This provides
significant cost and space efficiencies that enable the Company to include more
codes in the limited memory space of the chip than are included in similarly
priced products of competitors. Third, the Company has developed a patented
technology that provides the capability to easily upgrade the memory of the
remote control by adding codes from its library that were not originally
included. This technology utilizes both RAM and E2 chip technologies.
PRODUCTS
Universal Remote Controls
The Company's family of universal remote controls covers a broad spectrum of
suggested prices and performance capabilities. The Company sells customized
products to retailers, consumer electronic accessory suppliers, private label
customers, OEMs, cable operators, and others in the subscription broadcast
industry for resale under their respective brand names. Prior to its
restructuring in 1997, the Company sold its
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34
remote controls through a number of retailers and service centers under the One
For All brand name and to cable operators under the Uniwand(R) brand name. The
Company's products are capable of controlling from one to eight video and audio
devices, including, but not limited to, TVs, VCRs, cable converters, CD players,
satellite receivers, laser disc players, amplifiers, tuners, turntables,
cassette players, digital audio tape players, and surround sound systems.
Each of the Company's remotes is designed to simplify the use of video and audio
devices. To appeal to the mass market, the number of buttons is minimized to
include only the most popular functions. The Company's universal remotes are
also designed for ease of initial set-up. For most of the Company's products,
the consumer simply inputs a four-digit code for each video or audio device to
be controlled. Each remote contains either a RAM, a ROM, or a combination of ROM
and E2 chips. The RAM and the ROM and E2 combination products allow the remote
to be upgraded with additional codes.
The Company introduced its first product, the One For All, in 1987. In the
International markets, One For All brand name products accounted for 23.1%,
18.4%, and 21.7% of the Company's sales for the years ended December 31, 1998,
1997 and 1996, respectively. The Company discontinued retail operations in North
America in 1997 (see also discussion at "1997 RESTRUCTURING").
Many of the Company's products include its patented and highly proprietary
"upgradable" feature. These products are capable of controlling five to eight
video and audio devices. Each of these products utilizes the Company's E2
technology and, as a result of other improvements, 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 remote control technology in many forms, including finished
remote control products, integrated circuits, or custom software packages, the
Company can meet the needs of its customers, enabling those who manufacture or
subcontract their manufacturing requirements to use existing sources of supply
and more easily incorporate the Company's technology. In addition, the Company's
products are easily customized to include the features important to cable
operators. These may include electronic program guides that enable consumers to
record programs for future viewing after identifying their selection in the
electronic program guide, the customer's unique brand name and logos as well as
special dedicated "tune-in" keys for selected premium channels such as HBO(R),
Showtime(R) and Encore(R). Such keys provide the Company's customer with the
added value of built-in advertising.
DISTRIBUTION AND CUSTOMERS
The Company's products are sold to a wide variety of customers in numerous
distribution channels. In the United States, the Company principally sells its
products and/or licenses its proprietary technology to subscription broadcasting
companies, and to consumer electronics accessory manufacturers and selected
retailers for resale under their respective brand names. In addition, the
Company sells remote control products and licenses its proprietary technologies
to OEMs for packaging with their products. Internationally, the Company sells
remotes under the One For All brand name to retailers and to other customers
under private labels through its foreign subsidiaries and distributors. The
Company also sells its products to cable operators for sale or rental to their
subscribers. Finally, as a result of its 1997 restructuring, the Company has
licensed certain of its proprietary technology and its One For All brand name
and its Eversafe line of products to third parties who in turn sell the products
directly to United Statesdomestic retailers.
For the year ended December 31, 1998, sales to PrimeStar and Media One accounted
for approximately 12.3% and 11.1%, respectively, of the Company's net sales for
the year. While management considers the Company's relationships with each of
its customers to be good, the loss of any one key customer could have a material
adverse effect on the Company's results of operations.
4
45
North American Retail
In December 1997, the Company announced its decision to discontinue its North
American Retail line of business. As the Company anticipated when it made its
announcement, the discontinuation occurred primarily during the first half of
1998 and was completed during the third quarter of 1998. During this transition,
the Company continued to support its retail customers by selling through its
remaining inventory of North American Retail remote control products.
Thereafter, in accordance with the Company's plan, the Company licensed certain
of its proprietary technology and its One For All trademark to a third party and
an overseas manufacturer, to enable them to supply several of these customers
with a limited number of remote control products on a direct import basis. See
also discussion at "1997 RESTRUCTURING."
International Retail
Throughout 1998, the Company continued its sales and marketing efforts in
Europe, Australia, Mexico and selected countries in East Asia and South America.
As part of these efforts, the Company has three foreign subsidiaries, One For
All B.V., a Netherlands company, One For All GmbH, established in Germany,
and One for All (UK) Ltd., in the United Kingdom. In the first quarter of 1998,
the Company, through its Netherlands subsidiary, acquired substantially all of
the remote control business of one of its distributors in the United Kingdom. In
addition to these subsidiaries, the Company utilizes third party distributors in
various European and South American countries and in Mexico. The Company's
Canadian sales have been impacted by the discontinuation discussed previously.
Private Label
As a supplier of technology to private label customers, the Company is able to
achieve greater distribution of its proprietary technology in the retail market,
both by distributing to additional retail outlets and by obtaining further
penetration in certain retail outlets also selling the Company's branded
products. During 1998, the Company continued its efforts to improve product
cycles and planning to better meet the needs of its customers.
Cable
During 1998, the Company continued to provide multiple system operators ("MSOs")
with customized remote controls to complement services offered to their
customers, such as the interactive electronic programming guide. The Company
also sells its remotes to manufacturers of cable converters for resale with
their products. The Company is continuing to expand its marketing efforts to
other MSOs providing cable services in the United States, Canada, Australia and
throughout Europe. In addition, the Company continues to improve on its
manufacturing process to increase cost savings and to provide more timely
delivery of its products to these cable customers.
The activities of the Company's existing customers can also provide additional
opportunities for the future. The Company has an existing agreement to supply
all the remotes, keyboards and other universal handheld devices to General
Instrument Corp. ("GI"), which in turn contracts with cable providers and others
to distribute these products along with its set-top boxes. The Company believes
that in 1999, GI signed a major supplier agreement with Tele-Communications,
Inc. ("TCI"), in which GI will exclusively supply remote controls, keyboards and
other devices yet to be determined to TCI through the year 2004.
OEM
During 1998, the Company continued pursuing a further penetration of the OEM
market in the Far East and Europe. Since 1993, the Company has been working with
a major Japanese supplier of dedicated remote controls to large consumer
electronics manufacturers, which the Company believes has enabled it to reach a
much larger audience of OEM customers with whom the Company does business.
5
56
CONSUMER SERVICE AND SUPPORT
Throughout 1998, the Company continued its strategy to review its customer
support program and modified its service "help line" such that the majority of
calls received are directed through its automated "conversant" system. Live
agent help is still available in certain circumstances. In 1999, the Company
will continue to review these programs to determine their value in enhancing and
improving the sales of the Company's products. As a result of this continued
review, some or all of these programs may be modified or discontinued in the
future and new programs may be added.
RAW MATERIALS AND DEPENDENCE ON SUPPLIERS
The Company utilizes third-party manufacturers in the Far East, Mexico and the
United States to produce its remote control products. The number of third party
suppliers that provided the Company in excess of 10% of the Company's remote
control products were three, four and three for 1998, 1997 and 1996,
respectively. As in the past, the Company will continue to evaluate alternative
and additional sources of supply.
Commencing in 1996, the Company began a program of diversification of suppliers
and maintenance of duplicate tooling for its products. This program has allowed
the Company to stabilize its source for products and negotiate more favorable
terms with its suppliers. In addition, the Company generally uses standard parts
and components, which are available from multiple sources. The Company recently
developed a reliable second source for integrated circuit chips, and as such has
reduced the potential for manufacturing and shipping delays and the need to
maintain additional inventory of these component parts as safety stock by
purchasing some of its chips from a variety of sources.
PATENTS, TRADEMARKS AND COPYRIGHTS
The Company owns a number of United States and foreign patents relating to its
products and technology and has filed applications for other patents that are
pending and has obtained copyright registration for various of its proprietary
software and libraries of infrared codes. The lives of the Company's patents
range from eight to 17 years. While the Company follows the practice of
obtaining patents or copyright registration on new developments whenever
advisable, in certain cases, the Company has elected common law trade secret
protection in lieu of obtaining such protection. In the Company's opinion,
engineering and production skills and experience are of more importance to its
market position than are patents and copyrights. The Company further believes
that none of its business is dependent to any material extent upon any single
patent or trade secret or group of patents or trade secrets. The names of most
of the Company's products are registered or are being registered as trademarks
in the United States Patent and Trademark Office and in most of the other
countries in which such products are sold. These registrations are valid for a
variety of terms ranging from ten to 20 years, which terms are renewable as long
as the trademarks continue to be used. Management regularly renews those
registrations deemed by them to be important to the Company's operations.
SEASONALITY
Prior to the discontinuation of the Company's North American retailRetail line, the
majority of the Company's sales were to retailers either directly under its One
For All brand name or indirectly through its private label and OEM customers.
The Company has, accordingly, in the past, experienced stronger demand for its
products in the third and fourth calendar quarters rather than in the first
half of the year as retailers purchase remote controls prior to the holiday
selling season. Retail, private label and to a lesser degree OEM customers
generally commit to carry new and existing products for the year in the first
and second quarters and initial manufacturing and deliveries take place in the
second and third quarters. Generally, sales to private label customers peak in
the third quarter and branded product sales to retailers peak in the fourth
quarter.
With the discontinuation of the Company's North American retailRetail line and the
increasing significance of the Company's other lines of business including
subscription broadcasting and OEM, the seasonality effect on the Company's
business has lessened. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- - - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - NOTE 17" for further details
regarding the quarterly results of the Company.
6
67
BACKLOG
As of December 31, 1998, the Company had backlog orders representing
approximately $14.1 million in net sales compared to approximately $14.8 million
in net sales at December 31, 1997. Although the Company believes current orders
are firm and expects that substantially all of the backlog will be shipped in
1999, there can be no assurance that such orders will be shipped. The Company
believes that backlog is not a meaningful indicator of its future performance.
COMPETITION
The Company's principal competitors in the international retail and private
label markets for universal remote controls are currently Philips, RCA and Sony.
The Company's primary competitors in the OEM market are the original equipment
manufacturers themselves. In the subscription broadcasting business, the Company
competes with many companies including U.S. Electronics and ICX, two
privately-held remote control manufacturers, and several of the larger set-top
manufacturers, including General Instrument Corp,Corp. and Scientific-Atlanta Inc.
The Company has a small share of the home safety and automation market, which
consists of a few large and many small competitors operating in relatively small
markets. The Company competes in its markets on the basis of product quality,
product features, price, and customer and consumer support. The Company believes
that it will need to continue to introduce new and innovative products to remain
competitive and to obtain and retain competent personnel to successfully
accomplish its future objectives. Certain of the Company's competitors have
significantly larger financial, technical, marketing and manufacturing resources
than the Company, and there can be no assurance that the Company will remain
competitive in the future.
ENGINEERING, RESEARCH AND DEVELOPMENT
During 1998, the Company's engineering efforts focused on modifying existing
products and technology to improve their features and lower their costs, and to
develop measures to protect the Company's proprietary technology and general
know-how. In addition to taking steps in an attempt to control costs by
improving the efficiency of its activities and systematizing its operations, the
Company continued to update its library of infrared codes daily to include codes
for features and devices newly introduced both in the United States and
internationally and for uncommon devices. New infrared codes are identified by
the Company through many of its activities. The Company also continually
explores ways to improve its software to preprogram more codes into its memory
chips and to ease the upgrading of its remote control products.
Also during 1998, the Company's research and development efforts continued to
focus on the development of new and innovative remotes with enhanced
capabilities, as well as new applications of remote control technology. Work on
new applications to be used in combination with personal computers and the
internet continued as the Company increased the number of customers with whom it
worked in this area.
The Company is also exploring various opportunities to supply remote controls
for the operation of additional electronic and other devices in the home using
infrared signals, as well as combinations of infrared signals, radio
frequencies, household electrical circuits and telephone lines. Company
personnel are actively involved with various industry organizations and bodies,
which are in the process of setting standards for infrared, radio frequency,
power line, telephone and cable communications and networking in the home. There
can be no assurance that any of the Company's research and development projects
will be successfully completed.
The Company's engineering, research and development departments, located in
Cypress, California, had approximately 53 full-time employees at December 31,
1998. The Company's expenditures on engineering, research and development in
1998, 1997 and 1996 were $4.0 million, $5.1 million, and $2.6 million,
respectively, of which approximately $1,230,000, $1,072,000, and $288,000,
respectively, was for research and development.
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ENVIRONMENTAL MATTERS
The Company believes it has materially complied with all currently existing
federal, state and local statutes and regulations regarding environmental
standards and occupational safety and health matters to which it is subject.
During the years ended December 31, 1998, 1997 and 1996, the amounts incurred in
complying with federal, state and local statutes and regulations pertaining to
environmental standards and occupational safety and health laws and regulations
did not materially affect the Company's earnings or financial condition.
However, future events, such as changes in existing laws and regulations or
enforcement policies, may give rise to additional compliance costs that could
have a material adverse effect upon the capital expenditures, earnings or
financial condition of the Company.
EMPLOYEES
At December 31, 1998, the Company employed approximately 179 employees, of whom
53 were in engineering, research and development, 34 in sales and marketing, 40
in consumer service and support, 28 in operations and warehousing and 24 in
executive and administrative staff. None of the Company's employees is subject
to a collective bargaining agreement or is represented by a union. The Company
considers its employee relations to be good.
FOREIGN OPERATIONS
Financial information relating to the Company's foreign operations for the years
ended December 31, 1998, 1997 and 1996, is included in "ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA-NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS-NOTE 14".
1997 RESTRUCTURING
In December 1997, the Company announced its decision to discontinue its North
American One For All Retail line of business and the distribution channel
supported by the operations in the Twinsburg, Ohio facility. The Company
continues to supply a limited line of remote control products to several mass
merchandisers on a direct import basis. The Company closed the Twinsburg, Ohio
facility, with the exception of its customer service phone center, and moved its
headquarters to its Technology Center in Cypress, California during the second
quarter of 1998. The pre-tax restructuring charge of $8,419,000 taken in the
fourth quarter of fiscal year 1997 was composed of severance and employee
benefit costs, the write-down of fixed assets to be disposed of to their
estimated fair market value, the write-down of intangibles by the amount for
which no future benefit existed, write-off of prepaid advertising and other
prepaid assets to their estimated fair market value, certain of the Company's
consumer service and support, and other costs related to the discontinuation of
the North American Retail business. The restructuring was completed during 1998.
See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - NOTE 16."
In connection with the discontinuation of the North American Retail product
line, the Company increased the allowance for doubtful accounts by $2,500,000 in
the fourth quarter of 1997. This increase primarily related to certain customer
accounts of the Company that were deemed at risk due to the Company's exit from
this business. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - NOTE 3."
In 1997, the North American Retail product inventories were written down by
$3,892,000 to a carrying value of approximately $7.0 million from a carrying
value prior to the write down of approximately $10.9 million. The purpose of
this write down was to carry this inventory at what management believed its
estimated net realizable value was as a result of the discontinuation of this
business. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - NOTE 4."
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ITEM 2. PROPERTIES
The Company's headquarters are located in Cypress, California. The Company
utilizes the following office and warehouse facilities:
Square
Location Purpose or Use Feet Status
-
- -------- -------------- ------ ------
Twinsburg, Ohio Customer call center 8,509 Leased, expires July 17, 2002
Cypress, California Corporate headquarters and warehouse 30,768 Leased, expires December 31,
Engineering, research and development 2002
Enschede, Netherlands European headquarters and consumer support 9,149 Leased, expires August 2002
The Company believes its existing facilities will be adequate to meet the
Company's needs for the foreseeable future. See "ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - NOTE 11"
for additional information regarding the Company's obligations under leases.
ITEM 3. LEGAL PROCEEDINGS
On December 20, 1995, Jasco Products Co., Inc. filed a breach of contract action
against the Company in the U.S. District Court for the Western District of
Oklahoma, Jasco Products Co., Inc. v. Universal Electronics Inc., Case No.
CIV-95-1988T, alleging that the Company was in breach of warranties with respect
to product delivered by the Company, failed to return certain tooling and must
continue providing telephonic customer support. On January 5, 1996, the Company
filed a breach of contract action against Jasco Products Co., Inc. in the U.S.
District Court for the Northern District of Ohio, Universal Electronics Inc. v.
Jasco Products Co., Inc., Case No. 5:96CV0029, alleging that Jasco has failed to
pay for product delivered to and received by them. In the first quarter of 1996,
these two cases were consolidated, with the Ohio matter being transferred to
Oklahoma. In January 1997, the Company amended its complaint against Jasco by
adding allegations that Jasco defrauded the Company in connection with and in
addition to breaching its agreement with the Company. Throughout this
litigation, the Company vigorously denied liability. Jasco admitted owing monies
to the Company, but it sought to offset these amounts against amounts which it
believed it was owed by the Company. During the second quarter of 1998, the
parties entered into a settlement agreement and these matters were dismissed
with prejudiceprejudice. Pursuant to the settlement agreement, the Company paid Jasco
$300,000 in cash and agreed to forgive a receivable owed by Jasco to the Company
in the amount of approximately $450,000, in exchange for the forgiveness of
certain debts Jasco claimed were owed to Jasco by the Company.
On March 25, 1997, Furst Energy Incorporated and David A. Benoit filed an action
against the Company in the U.S. District Court for the District of New Jersey,
Furst Energy Incorporated, et.al. v. Universal Electronics Inc., Case No.
97CV1479 (JEI) alleging, among other things, that the Company's "The Finder J"
and "Five Device Remote Control with Finder" products contain material which was
misappropriated from Furst. At all times with respect to this matter and
particularly in its answer, the Company denied these allegations. On October 12,
1998, the parties entered into a Settlement Agreement and, in the first quarter
of 1999, this matter was dismissed with prejudice.
On June 23, 1998, Circuit Solutions, Inc. filed a suit against the Company in
the Court of Common Pleas, Lorain County, Ohio, Circuit Solutions, Inc. v.
Universal Electronics Inc., Case No. 98CV121418 alleging breach of contract and
further alleging damages in the amount of $110,000. On July 20, 1998, due to a
motion by the Company, the suit was transferred to the United States District
Court for the Northern District of Ohio,
9
910
Eastern Division, Circuit Solutions, Inc. v. Universal Electronics Inc., Case
No. 1:98 CV 1647. In January 1999, this matter was dismissed with prejudice
after the Company entered into a Release and Settlement Agreement with Circuit
Solutions in which all claims made by Circuit Solutions against the Company were
settled in exchange for which the Company has agreed to payCompany's payment of $55,000.
On June 25, 1998, a former executive officer of the Company, Bruce V. Vereecken,
filed suit against the Company in the Court of Common Pleas, Summit County,
Ohio, Bruce V. Vereecken v. Universal Electronics Inc., Case No. CV 98 06 2506,
alleging the Company has breached its Separation Agreement and General Release
with the plaintiff and, in addition, claiming promissory estoppel, unjust
enrichment and bad faith. The plaintiff is seeking damages in excess of $25,000.
This case is in the preliminary stages of pleading, with the Company filing its
answer on August 13, 1998 denying plaintiff's allegations and claims and it
intends to vigorously defend this action.
On November 8, 1998, SKR Resources, Inc. filed suit against the Company in the
United States District Court for the Northern District of Ohio, Eastern
Division, SKR Resources, Inc. v. Universal Electronics Inc., Case No. 1:98CV
2561, alleging the Company has breached a Sales Agreement alleged to have been
made in December 1997 with the plaintiff. The plaintiff is seeking damages in
excess of $630,000 and is also seeking specific performance on the Agreement. On
January 15, 1999, the Company filed its answer denying plaintiff's allegations.
In addition, the Company has filed a counterclaim asserting that SKR breached a
Sales Agreement entered into in April 1996 with the Company and in addition the
Company has claimed that SKR was unjustly enriched. The Company is seeking
damages in excess of $1,600,000. As a result of the Company's counterclaim, SKR
admitted its obligations under the April 1996 Sales Agreement, and the Company
dismissed its counterclaim without prejudice. This case is in the preliminary
stages of pleading and the Company intends to vigorously defend this action.
There are no other material pending legal proceedings, other than litigation
that is incidental to the ordinary course of business, to which the Company or
any of its subsidiaries is a party or of which any of their property is subject.
As is typical in the Company's industry and the nature and kind of business in
which the Company is engaged, from time to time, various claims, charges and
litigation are asserted or commenced by third parties against the Company
arising from or related to product liability, infringement of patent or other
intellectual property rights, breach of warranty, contractual relations, or
employee relations. The amounts claimed may be substantial but may not bear any
reasonable relationship to the merits of the claims or the extent of any real
risk of court awards. In the opinion of management, final judgments, if any,
which might be rendered against the Company in potential or pending litigation,
would not have a material adverse effect on the Company's financial condition or
results of operations. Moreover, management believes that the Company's products
do not infringe any third parties' patent or other intellectual property rights.
The Company maintains directors' and officers' liability insurance which insures
individual directors and officers of the Company against certain claims such as
those alleged in the above lawsuits, as well as attorney's fees and related
expenses incurred in connection with the defense of such claims.
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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 the Company's fiscal year through the solicitation of proxies or
otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT*
The following table sets forth certain information concerning the executive
officers of the Company as of February 28, 1999:
NAME AGE POSITION
---- --- --------
Paul D. Arling 36 President, Chief Operating Officer, and Chief Financial Officer
Richard A. Firehammer, Jr. 41 Senior Vice President, General Counsel and Secretary
Camille Jayne 46 Chairman and Chief Executive Officer
Mark Belzowski 40 Vice President and Corporate Controller
*Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
Paul D. Arling has been President, Chief Operating Officer, and Chief Financial
Officer of the Company since being rehired by the Company in September 1998. He
was the Company's Senior Vice President and Chief Financial Officer from May
1996.1996 until August 1998. From 1993 through May 1996, until August 1998, he served in various
capacities at LESCO, Inc. (a manufacturer and distributor of professional turf
care products) with the most recent being Acting Chief Financial Officer. Prior
to LESCO, he worked for Imperial Wallcoverings (a manufacturer and distributor
of wallcovering products) as Director of Planning and The Michael Allen Company
(a strategic management consulting company) where he was employed as a
management consultant. He obtained a BS degree from the University of
Pennsylvania in 1985 and an MBA from the Wharton School of the University of
Pennsylvania in 1992.
Richard A. Firehammer, Jr., Esq. has been Senior Vice President of the Company
since being rehired by the Company in February 1999. He has been the Company's
General Counsel since October 1993 and Secretary since February 1994, positions
he continued to hold after his employment with the Company ceased as part of the
1997 restructuring. He was the Company's Vice President from May 1997 until
August 1998. From November 1992 to September 1993, he was associated with the
Chicago, Illinois law firm, Shefsky & Froelich, Ltd. From 1987 to 1992, he was
with the law firm, Vedder, Price, Kaufman & Kammholz in Chicago, Illinois. He is
admitted to the Bars in the State of Illinois and the State of Ohio. Mr.
Firehammer is also a certified public accountant. He received a BS degree from
Indiana University and a JD degree from Whittier College School of Law.
Camille Jayne has been Chairman of the Company since December 1998 and has been
the Company's Chief Executive Officer since August 1998. She was the Company's
President and Chief Operating Officer of the Company since February 1998. Prior
to that, she was President and CEO of The Jayne Group (a consulting firm
specializing in the development, introduction and operation of digital cable TV
products and services) and a Senior Partner at BHC Consulting (a business
management and market research firm). Prior to The Jayne Group and BHC, Ms.
Jayne was Senior Vice President in charge of the digital TV business unit at
Tele-Communications, Inc (TCI). She holds both a BA and Masters degree from
Stanford and an MBA from the University of Michigan.
Mark Belzowski has been Vice President and Corporate Controller of the Company
since May 1998 when he joined the Company. From February 1997 through April
1998, he was a financial management consultant for various companies including a
cellular reseller and a local area network switch manufacturer. From September
11
1112
1994 through January 1997, he was Vice President Controller for three companies
(two of which were start-up companies) in the Turner Entertainment Group, a
division of Turner Broadcasting Systems, Inc. From September 1988 through August
1994, he served in various capacities at Orion Pictures Corporation with the
most recent being Vice President Corporate Controller. Prior to that, Mr.
Belzowski was a Senior Auditor with Ernst and Young, Certified Public
Accountants. He is a certified public accountant in the State of California. Mr.
Belzowski obtained a BS degree from California State University at Fullerton.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the National Market of The Nasdaq Stock
Market under the symbol "UEIC".
The following table sets forth, for the periods indicated, the high and low last
reported sale prices for the Company's common stock, as reported on the National
Market of The Nasdaq Stock Market:
1998 1997
---------------------- -----------------------
High Low High Low
------- ------- ------- -------
First Quarter $11-7/8 $9-5/8 $6-1/8 $4-1/2
Second Quarter 13-1/4 10-1/8 6-7/8 4-1/4
Third Quarter 14-1/2 10 8-11/16 6-3/16
Fourth Quarter 11-3/4 8-1/4 10-7/8 8-1/8
Stockholders of record on December 31, 1998 numbered approximately 175.
The Company has never paid cash dividends on its common stock and does not
intend to pay cash dividends on its common stock in the foreseeable future. The
Company intends to retain its earnings, if any, for the future operation and
expansion of its business. In addition, the terms of the Company's revolving
credit facility limit the Company's ability to pay cash dividends on its common
stock. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-LIQUIDITY AND CAPITAL RESOURCES" and "ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA-NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS-NOTE 6."
RECENT SALES OF UNREGISTERED SECURITIES
On September 1, 1998, in connection with the Company's acquisition of H&S
Management Corp., the Company issued 84,211 shares of Common Stock, valued at
$10.379$10.375 per share, as well as $1.5 million in cash to H & S Management Corp. as
consideration for the purchase price. Registration under the Securities Act of
1933 was not effected with respect to the transaction described above in
reliance upon the exemption from registration contained in Section 4(2) of the
Securities Act of 1933.
On November 9, 1998, the Company issued 300,000 warrantsa warrant to purchase Company common
stock to General Instrument Corporation as consideration for entering into an
exclusive supply agreement with the Company. The warrants arewarrant is contingent upon
General Instrument Corporation purchasing a specified minimum number of units of
products from the Company for each of the calendar years 1999, 2000 and 2001.
Assuming such minimum purchase requirements are met, the warrants allowwarrant allows General
Instrument Corporation to purchase up to 300,000 shares of Company common stock
at an exercise price of $12.625 per share. Registration under the Securities Act
of 1933 was not effected with respect to the warrantswarrant 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,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ----------- -------- ---------- ----------
(in thousands, except per share data)
Net sales $ 96,123 $ 114,338 $ 98,589 $ 105,090 $ 95,939
Operating income (loss) $ 9,505 $ (9,289) $ (4,098) $ 1,179 $ (18,232)
Net income (loss) $ 5,638 $ (6,518) $ (2,295) $ 320 $ (12,833)
Net income (loss) per share:
Basic $ 0.88 $ (1.04) $ (0.34) $ 0.05 $ (1.91)
Diluted $ 0.85 $ (1.04) $ (0.34) $ 0.05 $ (1.91)
Weighted average common stock outstanding:
Basic 6,386 6,282 6,661 6,744 6,708
Diluted 6,600 6,282 6,661 6,778 6,708
Gross margin 37.7% 27.7% 24.9% 29.3% 17.3%
Selling, general and administrative
as a percent of sales 27.8% 26.3% 29.0% 27.3% 36.3%
Net income to sales 5.9% (5.7%) (2.3%) 0.3% (13.4%)
Return on average assets 9.3% (10.8%) (3.5%) 0.4% (17.1%)
Working capital $ 26,921 $ 29,350 $36,515 $ 43,996 $ 45,433
Ratio of current assets to liabilities 2.7 2.3 4.4 3.2 2.8
Total assets $ 60,677 $ 61,138 $59,451 $ 70,105 $ 75,270
Long-term debt -- -- $ 3,183 -- --
Stockholders' equity $ 44,532 $ 38,887 $45,627 $ 50,238 $ 49,803
Book value per share $ 6.96 $ 6.16 $ 7.16 $ 7.44 $ 7.39
Ratio of liabilities to liabilities and
stockholders' equity 26.6% 36.4% 23.3% 28.3% 33.8%
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the statement of operations data of the Company
expressed as a percentage of net sales for the periods indicated.
Year Ended December 31,
----------------------------
1998 1997 1996
----- ----- -----
Net sales
On-going business 92.6% 74.5% 64.5%
Discontinued North American Retail
business 7.4 25.5 35.5
----- ----- -----
Total net sales 100.0 100.0 100.0
Cost of sales
On-going business 54.8 48.3 41.4
Discontinued North American Retail
business 7.5 20.5 32.6
Inventory write-down -- 3.4 1.1
----- ----- -----
Total cost of sales 62.3 72.2 75.1
----- ----- -----
Gross profit 37.7 27.8 24.9
Selling, general and administrative
expenses 27.8 26.3 29.0
Discontinued North American Retail
business bad debt expenses -- 2.2 --
Restructuring expense -- 7.4 --
----- ----- -----
Operating income (loss) 9.9 (8.1) (4.1)
Interest expense (income) 0.5 0.6 0.8
Other expense (income) 0.1 (0.1) (0.3)
----- ----- -----
Income (loss) before income taxes 9.3 (8.6) (4.6)
Provision (benefit) for income taxes 3.4 (2.9) (2.3)
----- ----- -----
Net income (loss) 5.9% (5.7%) (2.3%)
===== ===== =====
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Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales in 1998 were $96.1 million compared to $114.3 million in 1997. Net
sales in the Company's technology businesses (subscription broadcasting, OEM and
private label) were approximately 65.3% of net sales in 1998 compared to 53.0%
in 1997. Net sales from the continuing retail businesses (One For All
international, Eversafe and direct import) accounted for approximately 27.3% of
total 1998 net sales compared to 21.5% in 1997. Net sales in 1998 from the
discontinued North American Retail business (One For All US and Canada) were
approximately 7.4% of overall net sales compared to 25.5% in 1997.
Net sales in the Company's technology businesses for 1998 increased by
approximately 3.6% from $60.6 million in 1997 to $62.8 million in 1998. Revenues
from subscription broadcasting (the largest component of the technology group)
increased by 14.1% to $46.4 million in 1998 compared to $40.7 million in 1997.
The increase in sales of subscription broadcasting products was primarily due to
continued strong demand in new remote control business with the providers of
satellite broadcast services. Delayed customer orders in anticipation of a new
line of remotes in combination with increased competition resulted in reduced
shipments in the private label business and accounted for a 39.5% decrease in
revenues from $11.2 million in 1997 to $6.8 million in 1998. OEM sales were flat
at $8.8 million in both 1998 and 1997.
The Company's net sales from its continuing retail businesses increased by 6.5%
in 1998 from $24.6 million in 1997 to $26.2 million in 1998. One For All
international revenues (the largest component of the continuing retail business
group) increased 5.8% in 1998 from $21.0 million in 1997 to $22.2 million in
1998. The change can be attributed to the growth in universal remote control
business in Europe. Net sales of Eversafe products decreased 49.7% to $1.8
million from $3.7 million primarily due to weaker demand.
Net sales in 1998 of the Company's discontinued North American Retail product
line decreased 75.7% from $29.1 million to $7.1 million as the Company sold off
its remaining inventory for this business line at an amount just below its
carrying value.
The Company's overall gross profit margin in 1998 was 37.7% compared to a gross
margin of 27.7% in 1997. In the Company's continuing businesses, the gross
margin increased to 40.8% in 1998 compared to 35.2% in 1997. This increase can
be attributed to improved margins in the Company's subscription broadcasting and
One For All international businesses due primarily to reduced product costs. In
the Company's discontinued North American Retail business, the gross margin
decreased from $5.7 million or 19.4% in 1997 to a negative gross margin of
$75,000 in 1998 as the Company sold the remaining product in this line at
average selling prices just below its carrying value. In 1997, the North
American Retail product inventories were written down by $3,892,000 to a
carrying value of approximately $7.0 million from a carrying value prior to the
write down of approximately $10.9 million. The purpose of this write down was to
carry this inventory at what management believed its estimated net realizable
value was as a result of the discontinuation of this business. In addition to
the factors discussed here, gross profit margin is affected by many factors
including, among other things, competitive market pressures, shifts in product
mix, fluctuations in manufacturing and freight costs, changes in customer mix
and aggressive consumer promotions.
As a percentage of net sales, selling, general and administrative expenses
increased to 27.8% in 1998 from 26.3% in 1997. In dollars, the Company's
selling, general and administrative expenses decreased 11.1% during 1998 to
$26,738,845 from $30,089,673 in 1997. Advertising and payroll expenses decreased
during 1998 by approximately $2.0 and $1.3 million, respectively, which were
partially
15
16
offset by an increase in amortization expense of $.6 million. The reductions in
advertising costs were attributable to the elimination of retail-related
advertising programs for the Company's discontinued North American Retail
product line. The payroll decreases were a result of headcount reductions
associated with the discontinuation of the North American Retail product line.
The increase in amortization expense was due to the amortization of additional
goodwill from businesses acquired and non-compete covenants entered into in
1998.
In connection with the discontinuation of the North American Retail product
line, the Company increased the allowance for doubtful accounts by $2,500,000 in
the fourth quarter of 1997. This increase primarily related to certain customer
accounts of the Company that were deemed at risk due to the Company's exit from
this business.
In December 1997, the Company announced its decision to discontinue its North
American One For All Retail business. As part of that announcement, the Company
advised its employees, stockholders and the investment community generally that
it would recognize a pre-tax charge of $8,419,000 during the fourth quarter of
1997 (see discussion in Year Ended December 31, 1997 Compared to Year Ended
December 31, 1996).
As the Company anticipated when it made its December 1997 announcement, the
discontinuation occurred primarily during the first half of 1998 and was
completed during the 1998 third quarter. During this transition, the Company
continued to support its retail customers by selling through its remaining
inventory of North American Retail remote control products. Thereafter, in
accordance with the Company's plan, the Company licensed certain of its
technology and its One For All trademark to a third party and an overseas
manufacturer, to enable them to supply several of these customers with a limited
number of remote control products on a direct import basis.
During the first half of 1998, the Company relocated its headquarters from its
Twinsburg, Ohio facility to its Technology Center in Cypress, California. In
connection with this move, all of the Company's operations and administrative
functions were moved to its new headquarters, with the exception of its customer
service phone center, which remained in the Company's Twinsburg facility. In the
third quarter of 1998, the Company sold its Twinsburg facility to a third party
at a price of $1,695,000 and leased back a portion of it to
house its customer service phone center on terms which the Company believed to
be competitive. The carrying value of the building at the time of the sale was
approximately $1,729,000 and the Company recognized a loss on the sale of the
building of approximately $34,000.
A reserve of $3,929,000 was established as part of the Company's 1997 fourth
quarter restructuring (see discussion in Year Ended December 31, 1997 Compared
to Year Ended December 31, 1996). During 1998, the Company completed this
restructuring and used the reserve in its entirety. The restructuring proceeded
according to the Company's plan and was completed without any significant
changes to the plan. The following table details the type and amount of costs
charged against the reserve during 1998.
Type of Cost Amount
------------ ----------
Severance and related employee
benefit costs $3,180,000
Consumer support and service 393,000
Other retail business
exit costs 356,000
----------
$3,929,000
==========
Interest expense decreased by $171,918 in 1998 to $455,577 from $627,495 in 1997
due to reduced borrowing under the Company's revolving letter agreement and
lower average borrowing costs. Other expense increased to $100,355 in 1998 from
$587 in 1997. This occurred as a result of higher net
16
17
currency exchange losses from the Company's international operations.
The Company had an effective income tax rate for 1998 of 37% as compared to
34.3% in 1997. The difference in the 1998 rate as compared to the 1997 rate was
primarily due to differences in NOL carryforward limitations in California
versus Ohio due to the relocation of the Company's headquarters from Ohio to
California.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales in 1997 were $114.3 compared to $98.6 million in 1996. During 1997,
net sales of the North American Retail product line accounted for approximately
25.5% of net sales compared to 35.5% in 1996. Net sales of subscription
broadcasting and OEM products accounted for approximately 43.2% of total net
sales for 1997, compared to 29.5% in 1996. International One For All net sales
accounted for approximately 18.4% of the total 1997 net sales compared to 21.7%
in 1996. Private label net sales during 1997 were approximately 9.8% compared to
10.7% in 1996. Net sales of Eversafe products accounted for approximately 3.2%
of total 1997 net sales compared to 2.6% in 1996.
The decrease in the North American Retail product line sales in 1997 was
principally due to unit volume decreasing by approximately 27.5% from the 1996
level. Private label unit volume and revenues in 1997 increased as compared to
1996, but decreased as a percent of total sales due to the strong growth in the
other components of the Company's technology businesses. The increase in net
sales of subscription broadcasting and OEM products as a percentage of total net
sales was primarily due to the new remote control business with satellite
broadcast service providers that the Company had expected and the acceptance of
the new line of cable remotes that were introduced during the fourth quarter of
1996.
Unit sales during 1997 were up by 25% over 1996 and 1997 revenues increased by
65% compared to 1996 in the subscription broadcasting and OEM businesses. Total
international revenues during 1997 remained flat as compared to 1996, however,
as a percent of total sales, international revenues decreased. During 1997,
Eversafe sales showed an improvement due to strong sales of the garage door
product line.
The Company's gross profit margin in 1997 was 27.7% compared to a gross margin
of 24.9% in 1996. The improvement in margin was principally due to improved
margins for the Company's subscription broadcasting and OEM products. Product
cost savings and a new line of lower cost and more efficient integrated circuits
added to the margin improvements. These margin improvements were partially
offset by a 1997 write-down of the North American Retail product inventories to
their estimated net realizable value as a result of the discontinuation of the
North American Retail business (see discussion in Year Ended December 31, 1998
Compared to Year Ended December 31, 1997). In addition to the factors discussed
here, gross profit margin is affected by many factors including, among other
things, competitive market pressures, shifts in product mix, fluctuations in
manufacturing and freight costs, changes in customer mix and aggressive consumer
promotions.
In December 1997, the Company announced its decision to discontinue its North
American One For All Retail business. As part of that announcement, the Company
advised its employees, stockholders and the investment community generally that
it would recognize a pre-tax charge of $8,419,000 during the fourth quarter of
1997. The table below depicts the costs associated with this action.
17
18
Type of Cost Amount
------------ ----------
Severance and related employee benefit
costs $3,260,000
Prepaid advertising for retail products 2,129,000
Fixed assets 1,738,000
Intangible assets - trademarks 460,000
Consumer support and service 393,000
Prepaid assets 163,000
Other retail business exit costs 276,000
----------
$8,419,000
==========
Severance and related employee benefits were determined by adding such estimated
amounts for each of the 105 employees of the Company that were terminated in the
restructuring. Charges for prepaid advertising, prepaid assets and fixed assets
were determined by comparing net book values to estimated fair market values.
The unamortized value of the trademarks used solely on products that were
discontinued and determined by the Company to not be usable in its on-going
businesses were written off in their entirety. Consumer support and service
costs relate to ongoing contractual obligations of the Company to provide
telephonic support for certain of its products that were discontinued as part of
this restructuring.
Under the Company's plan, the Company anticipated that the discontinuation would
(i) reduce its annual overhead by approximately $5.0 million as a result of
significantly reducing the advertising associated with the retail business,
eliminating the costs associated with owning and operating the Twinsburg
facility, terminating 105 employees during the first half of 1998, reducing the
Company's amortization expense as a result of writing off certain of the
Company's trademarks used solely on products that were discontinued and
determined by the Company to not be usable in its on-going businesses, and
eliminating costs associated with obtaining and holding an inventory of products
for sale to its retail customers; and (ii) create a profitable new marketing and
distribution channel for certain of its technology and trademarks by licensing
them to third party distributors and manufacturers for their use in the domestic
retail markets.
In 1996, the Company incurred a pre-tax charge of $1.1 million associated with
the write-down of certain microprocessors used in its One For All branded
products. The Company began ordering these chips in late 1993 in anticipation of
future orders for the Company's products and certain of these chips remained on
the Company's books in 1996 at their original cost or carrying value of $3.5
million. After this write down, the carrying value of this inventory was
approximately $2.4 million. This charge was recorded following a December 1996
announcement by one of the Company's key integrated circuit suppliers about the
planned introduction of a new line of lower cost, more efficient chips expected
to occur sometime during the third or fourth quarter of 1997. The Company had
hoped that it would be able to use these chips without incurring a loss,
however, when many of its customers indicated a willingness to delay product
orders until the new line of chips were available, the Company determined that
it would not be able to use these chips in its remote control products. During
1997, however, as a result of an unanticipated order from one of its customers,
the Company was able to use the bulk of these computer chips as a component in a
new product although at a reduced price. By using these chips, the Company was
able to remove them from its inventory without incurring any additional losses
and with no significant effect on the Company's gross margin.
Selling, general and administrative expenses during 1997, excluding the fourth
quarter pre-tax restructuring charge of $8,419,000, decreased compared to 1996
as a percentage of sales to 28.5% in 1997 from 29.0% in 1996. The decrease as a
percent of sales is principally due to the increased net sales for the year.
Advertising and telephone expenses decreased by approximately $1.5 and $0.5
18
19
million, respectively, which were offset by cost increases for bad debt, payroll
and depreciation expense. The reduction in the advertising costs was the result
of the decision to eliminate certain fourth quarter planned advertising programs
for the Company's North American Retail product line when the decision was made
to discontinue this line of business. The telephone expenses were reduced
through the negotiation of a more favorable contract with the Company's long
distance carrier and the conversion to an automated attendant for a portion of
the calls to the Company's customer service phone center. In connection with the
discontinuation of the North American Retail product line, the Company increased
the allowance for doubtful accounts by $2.5 million in the fourth quarter of
1997. This increase primarily related to certain customer accounts of the
Company that were deemed at risk due to the Company's exit from this business.
The payroll increases were primarily due to additions to the Company's
technology and engineering departments. Depreciation expense increased due to
the reduction in the useful life for tooling from five to three years.
Interest expense decreased by $95,872 in 1997 to $627,495 compared to $723,367
in 1996. This decrease is due to reduced borrowing under the Company's revolving
letter agreement. Other expense (income) was a net loss of $587 in 1997 as
compared to a net gain of $234,486 in 1996 due primarily to lower net currency
exchange gains in 1997.
The Company had an effective income tax rate for 1997 of 34.3% as compared to
50% in 1996. The difference in the rates is primarily due to a reduction in
state income taxes and federal income tax credits.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are its operations and bank credit
facilities. Cash provided by operating activities for 1998 was $9.7 million as
compared to cash used for operating activities during 1997 of $186,000 and cash
provided by operating activities during 1996 of $8.6 million. The improvement in
1998 cash flow from operating activities is principally due to the significant
increase in income before taxes in 1998, offset by cash payments incurred during
1998 to complete the discontinuation of the North American Retail product line
and restructuring announced in late 1997.
On October 23, 1998, the Company paid off its outstanding credit line with The
Provident Bank and entered into a new $15 million revolving credit agreement
with Bank of America National Trust and Savings Association ("B of A"). Under
the revolving credit agreement with B of A, the Company can choose from several
interest rate options at its discretion. The interest rate option selected by
the Company as of December 31, 1998 was the Fixed Rate option as defined in the
agreement (7.375% at December 31, 1998), which is intended to approximate B of
A's cost of funds, plus an applicable margin. The applicable margin varies with
a range from 1.25% to 2.00% per annum depending on the Company's net income
before interest, taxes, depreciation and amortization. At December 31, 1998, the
applicable margin for the Company was two percent. The revolving credit
facility, which expires October 23, 2001, is secured by a first priority
security interest in the Company's cash and cash equivalents, accounts
receivable, inventory, equipment, and general intangibles of the Company. The
Company pays a commitment fee of a maximum rate of 3/16 of 1% per year on the
unused portion of the credit line. Under the terms of this revolving credit
agreement, the Company's ability to pay cash dividends on its common stock is
restricted and the Company is subject to certain financial covenants and other
restrictions which are standard for these types of agreements. However, the
Company has authority under this credit facility to acquire up to 1,000,000
shares of its common stock in market purchases and, since the date of this
agreement, the Company has acquired approximately 54,500 shares of stock, at a
cost of approximately $564,500, which it holds as treasury shares and are
available for reissue by the Company. Amounts available for borrowing under this
credit facility are reduced by the outstanding balance of the Company's import
letters of credit. As of December 31, 1998, the Company had utilized
approximately $4.8 million of the credit facility for business acquisitions,
payments to acquire fixed assets, treasury stock purchases and other working
capital needs. The Company had no outstanding import letters of credit as of
19
20
December 31, 1998. The Company's borrowing under this revolving credit facility
and outstanding import letters of credit fluctuates due to, among other things,
seasonality of the business, the timing of supplier shipments, customer orders
and payments, and vendor payments.
Open market purchases of the Company's common stock under a program first
announced in 1996 and continued each year thereafter amounted to approximately
$3.5 million in 1998, $700,000 during 1997 and $2.6 million in 1996. The Company
holds all of these shares as treasury stock and they are available for reissue
by the Company. Presently, except for using a small number of these treasury
shares to compensate its outside board members, the Company has no plans to
distribute these shares although the Company may change these plans if necessary
to fulfill its on-going business objectives. In addition, during 1998, the
Company received approximately $1.5 million of proceeds from the exercise of
stock options granted to the Company's current and former employees, as compared
to approximately $264,000 in 1997 and $143,000 in 1996. The primary reason for
the significant increase in stock option exercises during 1998 was that the
Company's stock began to trade at relatively high levels towards the second half
of 1998 and many employees who were terminated during 1998 as part of the
Company's restructuring (principally the Company's former Chairman of the Board)
elected to exercise their options.
Capital expenditures in 1998, 1997 and 1996 were approximately $2.4 million,
$2.7 million, and $3.4 million, respectively. These expenditures related
primarily to acquiring product tooling and relocating the Company's headquarters
from Twinsburg, Ohio to Cypress, California during 1998. The Company has
currently budgeted approximately $2.0 million in capital expenditures for 1999
primarily for acquiring product tooling.
During the first quarter of 1998, the Company acquired a remote control
distributor in the United Kingdom for $3.0 million, of which $1.7 million was
paid in cash in 1998 and the remaining $1.3 million will be paid in 1999. During
the third quarter of 1998, the Company acquired a remote control company, for
$1.5 million in cash and 84,211 shares of newly issued Company common stock
valued at $874,000.
Historically, the Company's working capital needs have typically been greatest
during the third and fourth quarters when accounts receivable and inventories
increase in connection with the fourth quarter holiday selling season. However,
due to the discontinuation of the Company's North American Retail line and the
increasing significance of the Company's other lines of business including
subscription broadcasting and OEM, the Company expects that some of this
historical need will be lessened. At December 31, 1998, the Company had $26.9
million of working capital compared to $29.4 million at December 31, 1997. The
reduction in working capital is principally due to the decreases discussed
above.
It is the Company's policy to carefully monitor the state of its business, cash
requirements and capital structure. The Company believes that funds generated
from operations and available from its borrowing capacity will be sufficient to
fund current business operations as well as anticipated growth at least through
the end of 1999, however, there can be no assurances that this will occur.
YEAR 2000 READINESS DISCLOSURES
In connection with the Year 2000 Information and Readiness Disclosure Act which
was signed by President Clinton on October 19, 1998 and its eventual passage
into law on December 3, 1998, the Company makes these Year 2000 readiness
disclosures in connection with addressing the universal problem commonly
referred to as "Year 2000 Compliance," which relates to the ability of computer
programs and systems to properly recognize and process date sensitive
information before and after January 1, 2000. Many existing computer systems and
software programs currently in use are coded to accept only two digit entries in
the date code field. These systems and programs were designed
20
21
and developed without considering the impact of the upcoming change in the
century. If not corrected, many computer applications could fail or create
erroneous results by or at the Year 2000.
The Company has continually evaluated the potential impact of the Year 2000
issue on its information technology systems and on its non-information
technology systems and products. In this connection, the Company has fully
tested and has recently upgraded the software it uses for all of its internal
information technology systems to a new version that is Year 2000 compliant. At
the same time, the Company also replaced its main computer hardware with Year
2000 compliant equipment. These program and information technology system
changes and the acquisition of new Year 2000 compliant computer equipment were
also made to increase functionality. Expenditures associated with completing
these changes totaled approximately $150,000 in 1998. The Company now believes
that its internal information technology systems are Year 2000 compliant.
In addition, the Company has performed a full internal evaluation of its
non-information technology systems and products. Based upon that evaluation and
certain ongoing tests that the Company performs from time to time, it believes
that its non-information technology systems and products are Year 2000
compliant. Because of these ongoing evaluations, the Company sells its products
with Year 2000 compliance warranties. Although the Company strongly believes
that its products are Year 2000 compliant and provides Year 2000 compliance
warranties with its products, there can be no assurance that the Company has
identified all possible Year 2000 product issues and that any such issues would
not have an adverse financial impact on the Company.
The Company also requests its customers and suppliers to make similar Year 2000
compliance representations regarding their information technology and
non-information technology. As a result of this request, the Company is not
aware that any of its suppliers and customers are not addressing the Year 2000
issue and, where appropriate, taking corrective action in connection with any
Year 2000 problems they may have discovered. Moreover, the Company will increase
the amount of monitoring it performs with respect to its customers and suppliers
to help ensure that their performance is not delayed or withheld.
Although the Company believes that it has taken and will continue to take
appropriate precautions against disruptions of its information technology and
non-information technology systems and products due to the Year 2000 issue,
there can be no assurance that the Company will identify all Year 2000 problems
in advance of their occurrence, or that the Company will be able to successfully
remedy any problems that are discovered. Furthermore, there can be no assurance
that the Company's suppliers and customers will not be adversely affected by the
Year 2000 issue. Although the Company believes that its information technology
and non-information technology systems and products are Year 2000 compliant, the
Company believes that the reasonable worst case scenario may involve the failure
of its customers to pay for the Company's product in a timely manner or the
failure of its suppliers to deliver products timely. However, the Company
believes that due to its state of readiness with respect to the Year 2000 issue,
that any such delays should not have a material adverse effect on the Company's
business, financial and operating results, as its systems should serve as
adequate backup to help ensure that its customers and suppliers perform their
obligations to the Company in a timely and adequate fashion. The Company
cautions, however, that until it enters the year 2000, the actual impact of the
Year 2000 issue will not be known and that such actual results may differ
materially from those anticipated by the Company resulting in a material adverse
effect on the Company's business, financial and operating results. The Company
will, however, continue to monitor its customers and suppliers, and take timely
steps to correct any system or product failures or interruptions that the
Company or any its suppliers or customers develop or that have been discovered.
RISK FACTORS
Forward Looking Statements
The Company cautions that the following important factors, among others
(including but not limited to factors discussed below, in the "Management's
Discussion and Analysis of Financial Condition and
21
22
Results of Operations," as well as those discussed elsewhere in this Annual
Report of the Form 10-K, and as mentioned from time to time in the Company's
other reports filed with the Securities and Exchange Commission), could affect
the Company's actual results and could cause or contribute to the Company's
actual consolidated results to differ materially from those expressed in any
forward-looking statements of the Company made by or on behalf of the Company.
The factors included here are not exhaustive. Further, any forward-looking
statement speaks only as of the date on which such statement is made, and the
Company undertakes no obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time and it is not possible for management to
predict all of such factors, nor can it assess the impact of each such factor on
the business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statements. Therefore, forward-looking statements should not be
relied upon as a prediction of actual future results.
While management believes that the forward looking statements made in this
report are based on reasonable assumptions, the actual outcome of such
statements is subject to a number of risks and uncertainties, including
continued acceptance of the Company's technology and products, the impact of
competitive pressures, including products and pricing, locating and finalizing
acceptable acquisition targets and/or strategic partners, the availability of
financing for acquisitions on terms acceptable to the Company, fluctuations in
currency exchange rates, the consolidation of and new competition experienced
by members in the cable industry, principally from satellite and other similar
broadcast providers, general economic and stock market conditions and other
risks which are otherwise set forth in this Annual Report on Form 10-K and the
Company's other filings with the Securities and Exchange Commission.
Dependence Upon Key Suppliers
Most of the components used in the Company's products are available from
multiple sources; however, the Company has elected to purchase integrated
circuit components used in the Company's products, principally its remote
control products, and certain other components used in the Company's products,
from one main source, which provides in excess of ten percent (10%) of the
Company's microprocessors for use in its products. The Company has recently
developed alternative sources of supply for these integrated circuit components.
However, there can be no assurance that the Company will be able to continue to
obtain these components on a timely basis. The Company generally maintains
inventories of its integrated chips, which could be used in part to mitigate,
but not eliminate, delays resulting from supply interruptions. An extended
interruption or termination in the supply of any of the components used in the
Company's products, or a reduction in their quality or reliability, would have
an adverse effect on the Company's business and results of operations.
Dependence on Foreign Manufacturing
Third-party manufacturers located in foreign countries manufacture substantially
all of the Company's remote controls. The Company's arrangements with its
foreign manufacturers are subject to the risks of doing business abroad, such as
import duties, trade restrictions, work stoppages, political instability and
other factors which could have a material adverse effect on the Company's
business and results of operations. The Company believes that the loss of any
one or more of its manufacturers would not have a long-term material adverse
effect on the Company's business and results of operations because numerous
other manufacturers are available to fulfill the Company's requirements,
however, the loss of any of the Company's major manufacturers could adversely
affect the Company's business until alternative manufacturing arrangements are
secured.
Potential Fluctuations in Quarterly Results
The Company's quarterly financial results may vary significantly depending
primarily upon factors such as the timing of significant orders, the timing of
new product offerings by the Company and its competitors and product
presentations. In addition, the Company's business historically has been
seasonal, with the largest proportion of sales occurring in September, October
and November of each calendar year. Factors such as quarterly variations in
financial results could adversely affect the market price of the Common Stock
and cause it to fluctuate substantially. In addition, the Company (i) may from
time to time increase its operating expenses to fund greater levels of research
and development, increase its sales and marketing activities, develop new
distribution channels, improve its operational and financial systems and broaden
its customer support capabilities and (ii) may incur significant
22
23
operating expenses associated with any new acquisitions. To the extent that such
expenses precede or are not subsequently followed by increased revenues, the
Company's business, operating results and financial condition will be materially
adversely affected.
Although the restructuring of the Company has been completed, the Company may
continue to experience significant fluctuations in future quarterly operating
results that may be caused by many factors, including demand for the Company's
products, introduction or enhancement of products by the Company and its
competitors, market acceptance of new products, price reductions by the Company
or its competitors, mix of distribution channels through which products are
sold, level of product returns, mix of products sold, component pricing, mix of
international and North American revenues, and general economic conditions. In
addition, as a strategic response to changes in the competitive environment, the
Company may from time to time make certain pricing or marketing decisions or
acquisitions that could have a material adverse effect on the Company's
business, results of operations or financial condition. As a result, the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as any indication of future
performance. Due to all of the foregoing factors, it is likely that in some
future quarters the Company's operating results will be below the expectations
of public market analysts and investors. In such event, the price of the
Company's common stock would likely be materially adversely affected.
Dependence on Consumer Preference
The Company is susceptible to fluctuations in its business based upon consumer
demand for its products. The Company believes that its success depends in
substantial part on its ability to anticipate, gauge and respond to such
fluctuations in consumer demand. However, it is impossible to predict with
complete accuracy the occurrence and effect of any such event that will cause
such fluctuations in consumer demand for the Company's products.
Dependence Upon Timely Product Introduction
The Company's ability to remain competitive in the remote control products
market will depend in part upon its ability to successfully identify new product
opportunities and to develop and introduce new products and enhancements on a
timely and cost effective basis. There can be no assurance that the Company will
be successful in developing and marketing new products or in enhancing its
existing products, or that such new or enhanced products will achieve consumer
acceptance, and if acquired, will sustain that acceptance, that products
developed by others will not render the Company's products non-competitive or
obsolete or that the Company will be able to obtain or maintain the rights to
use proprietary technologies developed by others which are incorporated in the
Company's products. Any failure by the Company to anticipate or respond
adequately to technological developments and customer requirements, or any
significant delays in product development or introduction, could have a material
adverse effect on the Company's financial condition and results of operations.
In addition, the introduction of new products which the Company may introduce in
the future may require the expenditure of a significant amount of funds for
research and development, tooling, manufacturing processes, inventory and
marketing. In order to achieve high volume production of any new product, the
Company may have to make substantial investments in inventory and expand its
production capabilities.
23
24
Dependence on Major Customers
The Company's performance is affected by the economic strength and weakness of
its worldwide customers. The Company sells its remote control products and
proprietary technologies to private label customers, original equipment
manufacturers ("OEMs"), and companies involved in the subscription broadcast
industry. The Company also supplies its products to its wholly-owned, non-U.S.
subsidiaries and to independent foreign distributors, who in turn distribute the
Company's products worldwide, with the United Kingdom, Europe, and Australia
currently representing the Company's principal foreign markets. During 1998, the
Company had two customers that acquired more than ten percent of the Company's
products and the loss of either of these customers or any of the Company's other
key customers either in the United States or abroad due to the financial
weakness or bankruptcy of any such customer may have an adverse affect on the
Company's financial condition or results of operations.
Competition
The remote control industry is characterized by intense competition based
primarily on product availability, price, speed of delivery, ability to tailor
specific solutions to customer needs, quality and depth of product lines. The
Company's competition is fragmented across its product lines, and accordingly,
the Company does not compete with any one company across all product lines. The
Company competes with a variety of entities, some of which have greater
financial and other resources than the Company. The Company's ability to remain
competitive in this industry depends in part on its ability to successfully
identify new product opportunities and develop and introduce new products and
enhancements on a timely and cost effective basis as well as its ability to
identify and enter into strategic alliances with entities doing business within
the industries the Company serves. There can be no assurances that the Company
and its product offerings will be and/or remain competitive or that any
strategic alliances, if any, which the Company enters into will achieve the
type, extent and amount of success or business that the Company expects or hopes
to achieve.
Potential for Litigation
As is typical in the Company's industry and the nature and kind of business in
which the Company is engaged, from time to time, various claims, charges and
litigation are asserted or commenced by third parties against the Company or by
the Company against third parties arising from or related to product liability,
infringement of patent or other intellectual property rights, breach of
warranty, contractual relations, or employee relations. The amounts claimed may
be substantial but may not bear any reasonable relationship to the merits of the
claims or the extent of any real risk of court awards. While it is the opinion
of management that the Company's products do not infringe any third parties'
patent or other intellectual property rights, the costs associated with
defending or pursuing any such claims or litigation could be substantial and
amounts awarded as final judgments, if any, in any such potential or pending
litigation, could have a significant and material adverse effect on the
Company's financial condition or results of operations.
General Economic Conditions
General economic conditions, both domestic and foreign, have an impact on the
Company's business and financial results. From time to time the markets in which
the Company sells its products experience weak economic conditions that may
negatively affect the sales of the Company's products. To the extent that
general economic conditions affect the demand for products sold by the Company,
such conditions could have an adverse effect on the Company's business.
24
25
1997 Restructuring Efforts
The Company believes that the discontinuation of its North American Retail
business and its subsequent restructuring favorably impacted the Company's
ongoing operations due to (i) reductions in the Company's annual overhead which
were a result of closing the Company's Twinsburg, Ohio facility, (ii)
eliminating employee and other costs associated with operating this business,
and (iii) generating revenues from licensing certain of its technology and
trademarks. There can be no assurance that any such cost savings or revenues
will continue to occur and if they do, that they will be significant or
maintained.
Effects on the Company Due to International Operations
By operating its business in countries outside of the United States, the Company
is exposed to fluctuations in foreign currency exchange rates, exchange ratios,
nationalization or expropriation of assets, import/export controls, political
instability, variations in the protection of intellectual property rights,
limitations on foreign investments and restrictions on the ability to convert
currency. These risks are inherent in conducting operations in geographically
distant locations, with customers speaking different languages and having
different cultural approaches to the conduct of business, any one of which alone
or collectively, may have an adverse affect on the Company's international
operations, and consequently on the Company's business, operating results and
financial condition.
OUTLOOK
The Company's focus in 1999 is to continue to seek ways to increase its customer
base worldwide, particularly in the areas of subscription broadcasting, OEM, and
its One For All international retail business. In addition, the Company will
increase its focus on creating new applications for its proprietary and/or
patented technologies in the consumer electronics OEM market, and
computer/internet control markets.
The Company will also continue in 1999 to control its overall cost of doing
business. Management believes that through product design changes and its
purchasing efforts, improvements in the Company's gross margins and efficiencies
in its selling, general and administrative expenses can be accomplished.
In addition, during 1999, management will continue to pursue its overall
strategy of seeking out ways to operate all aspects of the Company more
profitably. This strategy will include looking at acceptable acquisition targets
and strategic partnership opportunities.
While management believes that the forward looking statements made in this
report are based on reasonable assumptions, the actual outcome of such
statements is subject to a number of risks and uncertainties, including
continued acceptance of the Company's technology and products, the impact of
competitive pressures, including products and pricing, locating and finalizing
acceptable acquisition targets and/or strategic partners, the availability of
financing for acquisitions on terms acceptable to the Company, fluctuations in
currency exchange rates, the consolidation of and new competition experienced by
members in the cable industry, principally from satellite and other similar
broadcast providers, general economic and stock market conditions and other
risks which are otherwise set forth in this Annual Report on Form 10-K and the
Company's other filings with the Securities and Exchange Commission.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including interest rate and
foreign currency exchange rate fluctuations. The Company has established
policies, procedures and internal processes governing its management of market
risks and the use of financial instruments to manage its exposure to such risks.
The interest payable under the Company's revolving credit agreement with B of Aits
bank is variable and generally based on either the bank's cost of funds or the
IBOR rate, and therefore, affected by changes in market interest rates. At
December 31, 1998, approximately $4.8 million was outstanding on the credit
line. The interest rate as of December 31, 1998 was 7.375%. The Company has
wholly-owned subsidiaries in the Netherlands, United Kingdom and Germany. Sales
from these operations are typically denominated in local currencies including
Dutch Gilders, French Francs, British Pounds, orand German Marks, respectively, thereby creating exposures to
changes in exchange rates. Changes in local currencies/U.S. Dollars exchange
rate may positively or negatively affect the Company's sales, gross margins and
retained earnings. The Company, from time to time, enters into foreign currency
exchange agreements to manage its exposure arising from fluctuating exchange
rates related to specific transactions, primarily foreign currency forward
contracts for inventory purchases. The Company does not enter into any
derivative transactions for speculative purposes. The sensitivity of earnings
and cash flows to variability in exchange rates is assessed by applying an
appropriate range of potential rate fluctuations to the Company's assets,
obligations and projected results of operations denominated in foreign
currencies. Based on the Company's overall foreign currency rate exposure at
December 31, 1998, movements in foreign currency rates would not materially
affect the financial position of the Company.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants 27
Consolidated Balance Sheets at December 31, 1998 and 1997 28
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 29
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996 30
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 32
Notes to Consolidated Financial Statements 33
Consolidated Financial Statements Schedules:
Schedules for the years ended December 31, 1998, 1997 and 1996
II - Valuation and Qualifying Accounts and Reserves 48
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
26
27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Universal Electronics Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Universal Electronics Inc. and its subsidiaries at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules listed in the accompanying index present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedules are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Costa Mesa, California
January 22, 1999
27
28
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------------
1998 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,488,672 $ 1,096,611
Accounts receivable 23,639,054 26,049,309
Inventories 14,834,058 16,639,394
Prepaid expenses and other current assets 1,835,035 1,060,205
Assets held for sale -- 1,729,000
Deferred income taxes 1,268,924 5,026,924
------------ ------------
Total current assets 43,065,743 51,601,443
Equipment, furniture and fixtures 4,439,947 3,950,220
Goodwill and other intangible assets 6,158,135 459,673
Other assets 1,547,641 474,708
Deferred income taxes 5,465,424 4,652,372
------------ ------------
Total assets $ 60,676,890 $ 61,138,416
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility $ 4,786,293 $ 7,236,766
Accounts payable 7,756,515 7,775,133
Accrued income taxes 331,395 100,629
Accrued compensation 1,090,149 713,942
Accrued restructuring expenses -- 3,928,933
Other accrued expenses 2,180,064 2,495,779
------------ ------------
Total current liabilities 16,144,416 22,251,182
------------ ------------
Commitments and contingencies (note 15)
Stockholders' equity:
Preferred stock, $.01 par value, 624,512 shares
authorized; none issued or outstanding -- --
Common stock, $.01 par value, 20,000,000 shares
authorized; 7,226,607 and 6,854,410 shares
issued at December 31, 1998 and 1997, respectively 72,266 68,544
Paid-in capital 57,971,439 54,454,040
Currency translation adjustment (121,753) (73,261)
Accumulated deficit (6,653,322) (12,290,972)
------------ ------------
51,268,630 42,158,351
Less cost of common stock in treasury, 829,605 and
542,211 shares in 1998 and 1997, respectively 6,736,156 3,271,117
------------ ------------
Total stockholders' equity 44,532,474 38,887,234
------------ ------------
Total liabilities and stockholders' equity $ 60,676,890 $ 61,138,416
============ ============
The accompanying notes are an integral part of these financial statements.
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29
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Net sales
On-going business $ 89,035,707 $ 85,231,450 $ 63,560,027
Discontinued North American Retail business 7,086,912 29,106,970 35,028,711
------------- ------------- -------------
96,122,619 114,338,420 98,588,738
Cost of sales
On-going business 52,717,177 55,275,357 40,806,244
Discontinued North American Retail business 7,161,912 23,451,789 32,137,099
Inventory write-down -- 3,892,215 1,112,041
------------- ------------- -------------
59,879,089 82,619,361 74,055,384
Gross profit 36,243,530 31,719,059 24,533,354
Selling, general and administrative expenses 26,738,845 30,089,673 28,631,064
Discontinued North American Retail
business bad debt expenses -- 2,500,000 --
Restructuring expense -- 8,418,742 --
------------- ------------- -------------
Operating income (loss) 9,504,685 (9,289,356) (4,097,710)
Interest expense 455,577 627,495 723,367
Other expense (income) 100,355 587 (234,486)
------------- ------------- -------------
Income (loss) before income taxes 8,948,753 (9,917,438) (4,586,591)
Provision (benefit) for income taxes 3,311,103 (3,399,076) (2,291,844)
------------- ------------- -------------
Net income (loss) $ 5,637,650 $ (6,518,362) $ (2,294,747)
============= ============= =============
Net income (loss) per share:
Basic $ 0.88 $ (1.04) $ (0.34)
============= ============= =============
Diluted $ 0.85 $ (1.04) $ (0.34)
============= ============= =============
Weighted average common stock outstanding:
Basic 6,386,398 6,282,031 6,661,285
============= ============= =============
Diluted 6,599,907 6,282,031 6,661,285
============= ============= =============
The accompanying notes are an integral part of these financial statements.
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30
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ISSUED COMMON STOCK IN TREASURY
---------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------- -------- -----------
Balance at December 31, 1995 6,750,898 $67,509 -- $ --
Stock options exercised 23,391 234 -- --
Purchase of treasury shares -- -- (415,000) (2,593,750)
Additional shares issued
for employee retirement plan 12,736 127 -- --
Repayment of loans by
employees for purchases of Common Stock -- -- -- --
Net loss -- -- -- --
Currency translation adjustment -- -- -- --
--------- ------- -------- -----------
Balance at December 31, 1996 6,787,025 67,870 (415,000) (2,593,750)
Additional shares issued
for employee retirement plan 20,760 208 -- --
Stock options exercised 46,625 466 -- --
Purchase of treasury shares -- -- (136,600) (736,048)
Shares issued to Directors -- -- 9,389 58,681
Repayment of loans by
employees for purchases
of Common Stock -- -- -- --
Net loss -- -- -- --
Currency translation adjustment -- -- -- --
--------- ------- -------- -----------
Balance at December 31, 1997 6,854,410 68,544 (542,211) (3,271,117)
Additional shares issued
for employee retirement plan 8,137 81 -- --
Issuance of warrant to customer -- -- -- --
Stock options exercised 279,849 2,799 -- --
TOTAL
CURRENCY STOCK-
PAID-IN TRANSLATION ACCUMULATED HOLDERS'
CAPITAL ADJUSTMENT DEFICIT EQUITY
----------- ---------- ------------ ------------
Balance at December 31, 1995 $53,623,341 $ 25,020 $ (3,477,863) $ 50,238,007
Stock options exercised 142,518 -- -- 142,752
Purchase of treasury shares -- -- -- (2,593,750)
Additional shares issued
for employee retirement plan 109,189 -- -- 109,316
Repayment of loans by
employees for purchases of Common Stock 75,382 -- -- 75,382
Net loss -- -- (2,294,747) (2,294,747)
Currency translation adjustment -- (50,104) -- (50,104)
----------- --------- ------------ ------------
Balance at December 31, 1996 53,950,430 (25,084) (5,772,610) 45,626,856
Additional shares issued
for employee retirement plan 129,033 -- -- 129,241
Stock options exercised 264,023 -- -- 264,489
Purchase of treasury shares -- -- -- (736,048)
Shares issued to Directors 1,319 -- -- 60,000
Repayment of loans by
employees for purchases
of Common Stock 109,235 -- -- 109,235
Net loss -- -- (6,518,362) (6,518,362)
Currency translation adjustment -- (48,177) -- (48,177)
----------- --------- ------------ ------------
Balance at December 31, 1997 54,454,040 (73,261) (12,290,972) 38,887,234
Additional shares issued
for employee retirement plan 88,602 -- -- 88,683
Issuance of warrant to customer 1,006,000 -- -- 1,006,000
Stock options exercised 1,527,618 -- -- 1,530,417
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31
COMMON STOCK ISSUED COMMON STOCK IN TREASURY
---------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------- -------- -----------
Purchase of treasury shares -- -- (291,800) (3,492,576)
Shares issued to Directors -- -- 4,406 27,537
Net income -- -- -- --
Shares issued in
connection with business acquired 84,211 842 -- --
Currency translation adjustment -- -- -- --
--------- ------- -------- -----------
Balance at December 31, 1998 7,226,607 $72,266 (829,605) $(6,736,156)
========= ======= ======== ===========
TOTAL
CURRENCY STOCK-
PAID-IN TRANSLATION ACCUMULATED HOLDERS'
CAPITAL ADJUSTMENT DEFICIT EQUITY
----------- ---------- ------------ ------------
Purchase of treasury shares -- -- -- (3,492,576)
Shares issued to Directors 22,332 -- -- 49,869
Net income -- -- 5,637,650 5,637,650
Shares issued in
connection with business acquired 872,847 -- -- 873,689
Currency translation adjustment -- (48,492) -- (48,492)
----------- --------- ------------ ------------
Balance at December 31, 1998 $57,971,439 $(121,753) $ (6,653,322) $ 44,532,474
=========== ========= ============ ============
The accompanying notes are an integral part of these financial statements.
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32
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Cash provided by (used for) operating activities:
Net income (loss) $ 5,637,650 $ (6,518,362) $ (2,294,747)
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation and amortization 2,600,514 2,131,179 1,646,766
Provision for doubtful accounts 342,661 2,850,000 232,769
Inventory write-down -- 3,892,215 1,112,041
Restructuring expense -- 8,418,742 --
Deferred income taxes 2,944,948 (3,531,008) (2,452,028)
Other 138,552 189,242 109,316
Changes in operating assets and liabilities:
Accounts receivable 2,067,594 (8,736,334) 6,193,730
Inventory 1,805,336 676,397 7,935,572
Prepaid expenses and other assets (841,762) (3,660) (1,336,298)
Accounts payable and accrued expenses (1,258,126) 541,938 (3,260,796)
Accrued restructuring expense (3,928,933) -- --
Accrued income taxes 230,766 (96,648) 722,891
------------ ------------ ------------
Net cash provided by (used for) operating activities 9,739,200 (186,299) 8,609,216
Cash provided by (used for) investing activities:
Acquisition of fixed assets (2,395,498) (2,739,028) (3,436,951)
Sale of building and other assets 1,862,711 -- --
Payments for businesses acquired (3,200,000) -- --
Employee loan repayments for common stock -- 109,235 75,382
Acquisition of intangible assets (1,153,228) (131,322) (211,373)
------------ ------------ ------------
Net cash used for investing activities (4,886,015) (2,761,115) (3,572,942)
------------ ------------ ------------
Cash provided by (used for) financing activities:
Short-term bank borrowing 49,931,280 46,766,476 58,506,665
Short-term bank payments (52,381,753) (42,713,186) (64,626,839)
Long-term debt borrowing -- -- 4,593,751
Long-term debt repayments -- -- (1,410,275)
Proceeds from stock options exercised 1,530,417 264,489 142,752
Treasury stock purchased (3,492,576) (736,048) (2,593,750)
------------ ------------ ------------
Net cash provided by (used for) financing activities
(4,412,632) 3,581,731 (5,387,696)
Effect of exchange rate changes on cash (48,492) (48,177) (10,350)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 392,061 586,140 (361,772)
Cash and cash equivalents at beginning of year 1,096,611 510,471 872,243
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,488,672 $ 1,096,611 $ 510,471
============ ============ ============
The accompanying notes are an integral part of these financial statements.
32
33
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
Business
Universal Electronics develops and markets easy-to-use, pre-programmed universal
remote controls principally for home video and audio entertainment equipment.
The Company sells its remote control products and proprietary technologies to
private label customers, original equipment manufacturers ("OEMs"), retail
businesses, and companies involved in the subscription broadcast industry. In
December 1997, the Company decided to discontinue its North American One For All
retail business. During 1998, the Company continued to sell its remote control
products internationally under the One for All(R) brand name. The Company also
markets a line of home automation products under the Eversafe(R) brand name,
principally a universal garage door opener.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany accounts and significant transactions have
been eliminated in the consolidated financial statements.
Revenue Recognition
Product revenues are recognized upon product shipment. The Company provides
allowances for estimated returns of defective or damaged product and other sales
promotions and discounts at the time of product shipment.
Foreign Currency Translation
The assets and liabilities of foreign subsidiaries are translated to U.S.
dollars using the exchange rates in effect at the balance sheet date. Results of
operations are translated using the average exchange rates during the period.
Resulting translation adjustments are recorded in a separate component of
stockholders' equity, "Currency Translation Adjustment".
Cash and Cash Equivalents
Cash and cash equivalents include cash accounts and all investments purchased
with initial maturities of three months or less.
Inventories
Inventories consist of remote control devices, home safety and automation
devices and related spare parts and are valued at the lower of cost or market.
Cost is determined using the first-in, first-out method.
Equipment, Furniture and Fixtures
Fixed assets are recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets. Annual rates
of depreciation range from 15% for furniture, fixtures and office equipment to
50% for engineering equipment. Leasehold improvements are amortized over the
terms of the related leases. When fixed assets are retired or otherwise disposed
33
34
of, the cost and accumulated depreciation are removed from the appropriate
accounts and any gain or loss is included in current income.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are stated on the basis of cost and are
amortized on a straight-line basis over the estimated future periods to be
benefited. The amortization periods range from five to ten years. Goodwill and
other intangible assets are periodically reviewed for impairment based on an
assessment of undiscounted future cash flows to ensure that they are
appropriately valued. At December 31, 1998, 1997 and 1996, accumulated
amortization was $962,178, $225,331 and $321,980, respectively. Amortization
expense was $737,497, $128,805 and $112,481 for the years ended December 31,
1998, 1997 and 1996, respectively.
Income Taxes
Income taxes are recognized during the year in which transactions enter into the
determination of financial statement income. Deferred income taxes are provided
utilizing an asset and liability method that requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. A valuation allowance is established to reduce deferred tax assets if
it is more likely than not that all, or some portion, of the deferred tax assets
will not be realized.
Research and Development
Research and development expenditures are expensed as incurred. Research and
development expense was $1,230,091, $1,072,392 and $287,665 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Advertising
Advertising costs are expensed as incurred. Advertising expense was $1,511,065,
$3,536,835, and $5,087,865 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted net income
(loss) per share is computed by dividing net income (loss) by the weighted
average number of common shares and dilutive potential common shares which
includes the dilutive effect of stock options. Dilutive potential common shares
for all periods presented are computed utilizing the treasury stock method.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". This statement establishes standards for reporting and display of
comprehensive income and its components in the Company's consolidated financial
statements. Comprehensive income consists of net income and other gains and
losses affecting stockholders' equity that, under generally accepted accounting
principles, are excluded from net income. SFAS No. 130 did not have a material
effect on the Company's consolidated financial statements.
In June 1997, the FASB issued
34
35
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information", which amends the disclosure requirements of SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise". The Company adopted
the provisions of SFAS No. 131 in the year ended December 31, 1998 and has
restated certain disclosure amounts for all periods presented.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". The statement is effective for fiscal years
beginning after June 15, 1999. The Company is assessing the impact this
statement will have on the consolidated financial statements and has not yet
adopted the provisions of SFAS No. 133 as of December 31, 1998.
Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
presentation utilized in the year ended December 31, 1998.
NOTE 2 - ACQUISITIONS
During the first quarter of 1998, the Company acquired a remote control
distributor in the United Kingdom for $3.0 million, of which $1.7 million was
paid in cash in 1998 and the remaining $1.3 million, which is included in
accounts payable in the accompanying consolidated balance sheet, will be paid in
1999.
On September 1, 1998, the Company acquired a domestic remote control company for
approximately $2.4 million. The acquisition was funded by $1.5 million in cash
and 84,211 shares of the Company's newly issued common stock valued at $874,000.
The excess of the aggregate purchase prices for these acquisitions over the fair
market value of net assets acquired is recorded as goodwill and is being
amortized over periods ranging from 5 to 10 years.
Pro forma results for 1998, assuming the acquisitions had occurred at the
beginning of the period, would not have been materially different from the
Company's historical results for the period presented.
On October 12, 1998, the Company entered into a covenant not to compete
agreement with a former officer of the Company at a cost of $949,000 in cash,
which is recorded as an intangible asset and is being amortized over the five
year duration of the contract.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable are expected to be collected within one year and consist of
the following:
DECEMBER 31,
-------------------------------
1998 1997
------------ ------------
Accounts receivable, gross $ 25,250,522 $ 28,999,857
Allowance for doubtful accounts (1,611,468) (2,950,548)
------------ ------------
$ 23,639,054 $ 26,049,309
============ ============
In connection with the discontinuation of the Company's North American Retail
business as discussed in Note 16, the Company increased the allowance for
doubtful accounts by $2,500,000 in 1997. This increase primarily related to
certain customer accounts of the Company that were deemed at risk due to the
Company's exit from the North American Retail business.
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NOTE 4 - INVENTORIES
Inventories consist of the following:
DECEMBER 31,
----------------------------
1998 1997
----------- -----------
Components $ 5,993,160 $ 6,479,069
Finished goods 8,840,898 10,160,325
----------- -----------
$14,834,058 $16,639,394
=========== ===========
The Company carries significant amounts of inventory in order to satisfy certain
of its customers' inventory requirements on a timely basis. New product
innovations and technological advances may shorten a given product's life cycle,
which may require special programs to reduce inventory to desired levels.
Management continually monitors the inventory status and has developed programs,
when necessary, to control inventory levels and dispose of any excess or
obsolete inventories on hand. Management believes an adequate provision has been
made in the financial statements for any loss on disposition of inventory.
In 1997, the North American Retail product inventories were written down by
$3,892,000 to their estimated net realizable value as a result of the
discontinuation of the Company's North American Retail business as discussed in
Note 16.
NOTE 5 - EQUIPMENT, FURNITURE AND FIXTURES
Fixed assets consist of the following:
DECEMBER 31,
-------------------------------
1998 1997
----------- -----------
Equipment $ 7,431,760 $ 5,888,306
Furniture and fixtures 779,126 601,111
Leasehold improvements 858,040 463,953
Construction in progress -- 15,300
----------- -----------
9,068,926 6,968,670
Accumulated depreciation (4,628,979) (3,018,450)
----------- -----------
$ 4,439,947 $ 3,950,220
=========== ===========
Depreciation expense was $1,863,667, $2,018,979 and $1,531,520 for the years
ended December 31, 1998, 1997 and 1996, respectively.
In 1997, all fixed assets related to the North American Retail business to be
disposed of in connection with the discontinuation discussed in Note 16
(including the Company's Twinsburg, Ohio facility), were written down to their
estimated fair market value. The Company's Twinsburg, Ohio building was
classified as held for sale in the accompanying consolidated balance sheet as of
December 31, 1997. In August 1998, the Company sold the building for $1,695,000,
a price approximating the book value.
NOTE 6 - REVOLVING CREDIT LINE
On October 23, 1998, the Company paid off its outstanding credit line with The
Provident Bank and entered into a new $15 million revolving credit agreement
with Bank of America National Trust and Savings Association ("B of A"). Under
the revolving credit agreement with B of A, the Company can choose from several
interest rate options at its discretion. The interest rate option selected by
the Company as of December 31, 1998 was the Fixed Rate option as defined in the
agreement (7.375%
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37
at December 31, 1998), which is intended to approximate B of A's cost of funds,
plus an applicable margin. The applicable margin varies with a range from 1.25%
to 2.00% per annum depending on the Company's net income before interest, taxes,
depreciation and amortization. At December 31, 1998, the applicable margin for
the Company was two percent. The revolving credit facility, which expires
October 23, 2001, is secured by a first priority security interest in the
Company's cash and cash equivalents, accounts receivable, inventory, equipment,
and general intangibles of the Company. The Company pays a commitment fee of a
maximum rate of 3/16 of 1% per year on the unused portion of the credit line.
Under the terms of this revolving credit agreement, the company's ability to pay
cash dividends on its common stock is restricted and the Company is subject to
certain financial covenants and other restrictions. However, the Company has
authority under this credit facility to acquire up to 1,000,000 shares of its
common stock in market purchases and, since the date of this agreement, the
Company has acquired approximately 54,500 shares of stock which it holds as
treasury shares and are available for reissue by the Company. Amounts available
for borrowing under the credit facility are reduced by the outstanding balance
of the Company's import letters of credit.
On November 22, 1995, the Company entered into a $22 million revolving credit
agreement with The Provident Bank that expired on April 30, 1998. The interest
rate on the borrowing was modified periodically based on formulas specified in
the agreement and was based on the bank's prime rate (8.50% at December 31,
1997) plus one-quarter percent. Effective in January 1997, the agreement was
amended to modify certain of the financial covenants and adjust the interest
rate to be equal to the bank's prime rate plus one-quarter of one percent. Under
the terms of this revolving credit facility, the Company's ability to pay cash
dividends on its common stock was restricted and the Company was subject to
certain financial covenants with limits on its ability to repurchase its stock
and other restrictions. Further, amounts available for borrowing under this
credit facility were reduced by the outstanding balance of the Company's import
letters of credit. The Company paid a commitment fee of a maximum rate of 1/8 of
1% per year on the unused portion of the credit line. The revolving credit
facility was secured by a first priority security interest in the accounts
receivable, inventory, equipment and general intangibles of the Company.
The Company had approximately $4.8, $7.2 and $3.2 million at December 31, 1998,
1997 and 1996, respectively, outstanding under the revolving credit facilities
and approximately $0, $0.5, and $0.5 million of import letters of credit
outstanding at December 31, 1998, 1997 and 1996, respectively. The weighted
average interest rate was 8.07%, 8.30% and 7.47% for the years ended December
31, 1998, 1997 and 1996, respectively. Interest paid on the revolving credit
facilities amounted to $488,144, $616,239 and $780,411 for the years ended
December 31, 1998, 1997 and 1996, respectively.
NOTE 7 - FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of investments in cash and
cash equivalents, accounts receivable and accounts payable, as well as
obligations under the credit facility described above. The carrying values of
these instruments approximate fair value because of their short maturity.
The Company enters into forward exchange contracts to hedge foreign currency
transactions on a continuing basis for periods consistent with its committed
exposures. These contracts are with major financial institutions and the risk of
loss due to the financial institutions' nonperformance is considered remote. The
gains and losses on these forward contracts are recognized in net income when
the underlying foreign currency gain and loss is recognized. The Company had a
number of forward exchange contracts outstanding at December 31, 1998 with an
aggregate notional value of approximately $5.6 million.
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NOTE 8 - STOCKHOLDERS' EQUITY
Loans to Employees for Common Stock Purchases
During 1994, the Company loaned $484,989 to certain of its officers and key
employees to enable them to purchase 74,409 shares of the Company's Common Stock
on the open market. The principal amount of the loans is due in five years from
the inception date, with interest on the loans accruing at the minimum rate
required per annum by the Internal Revenue Code and payable at maturity. These
loans are reflected as a reduction of Stockholders' Equity and are secured by
the Common Stock purchased in accordance with the corresponding Stock Pledge
Agreement. The Stock Pledge Agreement in certain instances accelerates debt
repayment and provides for the forgiveness of the debt. During 1998, 1997 and
1996, $42,875, $109,235 and $5,600, respectively, in loan principal was forgiven
under the terms of these agreements.
Fair Price Provisions and Other Anti-Takeover Measures
The Company's Restated Certificate of Incorporation, as amended, contains
certain provisions restricting business combinations with interested
stockholders under certain circumstances and imposing higher voting requirements
for the approval of certain transactions ("fair price" provision). Any of these
provisions could delay or prevent a change in control of the Company.
The "fair price" provisions require that holders of at least two-thirds of the
outstanding shares of voting stock approve certain business combinations and
significant transactions with interested stockholders.
Treasury Stock
During 1998, 291,800 shares of common stock were purchased by the Company on the
open market at a cost of approximately $3.5 million. During 1997, 136,600 shares
were purchased for an approximate cost of $0.7 million. In September 1996,
415,000 shares were purchased at a cost of approximately $2.6 million. These
shares are recorded as shares held in treasury at cost. The shares will
generally be held by the Company, however, some of these shares will be used by
the Company to compensate the outside directors of the Company. During 1998 and
1997, 4,406 and 9,389 shares, respectively, were issued to the outside
directors. No shares were issued to outside directors in 1996.
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 to the
customer to purchase up to 300,000 shares of the Company's common stock at
$12.625 per share. Based on the expected number of shares to be issued, the fair
value of this warrant of $1,006,000 has been recorded as additional paid in
capital of the Company with a corresponding increase in other assets. This asset
will be amortized on a straight-line basis over the 5 year term of the
agreement. Subject to achieving the minimum purchase requirements of the
Warrant, the warrant will vest 50% on January 1, 2003 and the remaining 50%
will vest on January 1, 2004.
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NOTE 9 - STOCK OPTIONS
1993 Stock Incentive Plan
On January 19, 1993, the Company's stockholders approved the 1993 Stock
Incentive Plan ("1993 Plan"). Under the 1993 Plan, 200,000 shares of Common
Stock are reserved for the granting of incentive and other stock options to
officers, key employees and non-affiliated directors. The 1993 Plan provides for
the granting of incentive and other stock options through January 19, 2003. All
options outstanding at the time of termination of the 1993 Plan shall continue
in full force and effect in accordance with their terms. The option price for
incentive stock options and non-qualified stock options will not be less than
the fair market value at the date of grant. The Compensation Committee shall
determine when each option is to expire, but no option shall be exercisable more
than ten years after the date the option is granted. The 1993 Plan also provides
for the award of stock appreciation rights subject to terms and conditions
specified by the Compensation Committee. No stock appreciation rights have been
awarded under this 1993 Plan.
1995 Stock Incentive Plan
On May 19, 1995, the Company's stockholders approved the 1995 Stock Incentive
Plan ("1995 Plan"). Under the 1995 Plan, 400,000 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 Company's Board of Directors approved the 1996 Stock
Incentive Plan ("1996 Plan"). Under the 1996 Plan, 400,000 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 Company's stockholders approved the 1998 Stock Incentive
Plan ("1998 Plan"). Under the 1998 Plan, 315,000 shares of Common Stock are
available for distribution to the Company's key officers and employees. The 1998
Plan provides for the issuance of stock options, stock appreciation rights,
performance stock units, or any combination thereof through May 27, 2008, unless
otherwise terminated by resolution of the Company's board of directors. The
option price for the stock options will not be less than the fair market value
at the date of grant. The Compensation Committee shall determine when each
option is to expire, but no option shall be exercisable more than ten years
after the date the option is granted. No stock appreciation rights or
performance stock units have been awarded under this 1998 Plan.
The Company applies the provisions of APB Opinion No. 25 in accounting for
stock-based employee compensation; therefore, no compensation expense has been
recognized for its fixed stock option plan
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40
as options generally are granted at fair market value on the date of the grant.
In October 1995, Statement of Financial Accounting No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), was issued. The Company adopted the
disclosure requirements of this Statement in 1996 and accordingly, had
compensation expense been determined consistent with SFAS No. 123, the Company's
1998 net income and basic and diluted income per share would have been
$5,080,578, $0.80 and $0.77, respectively. The Company's 1997 and 1996 net loss
and basic and diluted loss per share would have been $6,904,381 and $2,658,136,
and $1.10 and $0.40, respectively.
The fair value of options at date of grant was estimated using the Black-Scholes
model. The following assumptions were used for the grants in 1998, 1997 and
1996, respectively: risk-free interest rate of approximately 5.28%, 6.38% and
5.86%; expected volatility of approximately 45.26%, 49.38% and 46.95%; expected
life of five years for 1998, 1997 and 1996; and the common stock will pay no
dividends. The weighted average grant date fair value of the options granted in
1998, 1997 and 1996 was $4.97, $2.74 and $2.61.
The following table summarizes the changes in the number of shares of Common
Stock under option:
1996 1997 1998
-------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
------- --------- ------ --------- ----- ---------
Outstanding at beginning of year 455 7.26 803 6.47 726 6.35
Granted 447 6.26 95 6.00 402 10.43
Exercised (23) 6.22 (46) 5.73 (280) 5.47
Expired and/or forfeited (76) 10.05 (126) 7.05 (4) 6.94
----- ----- ----
Outstanding at end of year 803 6.47 726 6.35 844 8.59
===== ===== ====
Options exercisable at year-end 262 365 394
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Significant option groups outstanding at December 31, 1998 and related weighted
average price and life information follows:
Options Outstanding Options Exercisable
------------------------------------------------------ --------------------------------
Number Weighted-Average Weighted-Average Number Weighted-Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/98 Contractual Life Price at 12/31/98 Price
- ----------------- ------------- ---------------- ------------ -------------- ---------------
$ 4.19 to 6.375 279,067 7.64 $ 5.60 234,067 $ 5.61
6.938 to 10.63 412,500 8.57 9.22 134,750 7.81
11.47 to 13.00 152,880 8.63 11.98 25,380 13.00
-------- --------
$ 4.19 to 13.00 844,447 8.27 8.52 394,197 6.84
======== ========
NOTE 10 - SIGNIFICANT CUSTOMERS AND SUPPLIERS
The Company had annual sales to two customers in 1998, one customer in 1997, and
two customers in 1996 that individually exceeded 10% of total Company sales in
the years ended December 31, 1998, 1997 and 1996. The sales amounted to $11.8
million and $10.6 million in 1998, $14.8 million in 1997, $12.3 million and
$10.5 million in 1996. Trade receivables with the previously mentioned customers
amounted to $5.3 million, $3.3 million and $3.0 million at December 31, 1998,
1997 and 1996, respectively.
Trade receivables subject the Company to a concentration of credit risk. The
risk is limited due to the large number of customers comprising the Company's
customer base, the relative size and strength of the Company's customers and the
Company's performance of ongoing credit evaluations.
The Company utilizes third-party manufacturers in the Far East, Mexico and the
United States to produce its remote control products and home automation
products. Commencing in 1996, the Company began a program to reduce its
dependence on any one supplier of its remote control and home automation
products in an attempt to stabilize its sources for products and negotiate more
favorable terms with its suppliers. The number of third party suppliers that
provided the Company in excess of 10% of the Company's remote control and home
automation products were three, four and three for 1998, 1997 and 1996,
respectively.
The Company currently purchases a significant portion of its integrated circuit
chips from one vendor. Although there are a limited number of manufacturers of
this component part, management believes that other suppliers could provide
similar parts on comparable terms. A change in suppliers, however,
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could cause a delay in manufacturing and a possible loss of sales, which would
affect operating results adversely.
NOTE 11 - LEASES
The Company leases office and warehouse space and certain office equipment under
operating leases. Rental expense under operating leases was $837,976, $914,712
and $793,779, for the years ended December 31, 1998, 1997 and 1996,
respectively.
The following summarizes future minimum noncancellable operating lease payments
at December 31, 1998:
Year ending December 31: AMOUNT
-----------
1999 $ 892,606
2000 517,403
2001 404,828
2002 309,672
2003 & beyond --
----------
Total lease commitments $2,124,509
==========
NOTE 12 - EMPLOYEE BENEFIT PLANS
The Company maintains a retirement and profit sharing plan under Section 401(k)
of the Internal Revenue Code for all of its domestic employees that meet certain
qualifications. Participants in the plan may elect to contribute from 1% to 15%
of their annual salary to the plan. The Company may, at its discretion, make
contributions to the plan. The Company's match was 25% of participants'
contributions for the years ended December 31, 1998, 1997 and 1996 and the
expense recorded amounted to $123,332, $123,911 and $134,899, respectively. The
Company's match in 1998, 1997 and 1996 was in the form of shares of common stock
of the Company.
NOTE 13 - INCOME TAXES
In 1998, 1997 and 1996, pretax income (loss) was attributed to the following
jurisdictions:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Domestic operations $ 8,210,501 $(10,174,279) $ (4,867,074)
Foreign operations 738,252 256,841 280,483
------------ ------------ ------------
Total $ 8,948,753 $ (9,917,438) $ (4,586,591)
============ ============ ============
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The provision (benefit) for income taxes charged to operations was as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996
----------- ----------- -----------
Current tax expense (benefit):
U.S. federal $ -- $ -- $ (49,797)
State and local 114,999 72,720 93,900
Foreign 251,156 59,531 118,082
----------- ----------- -----------
Total current 366,155 132,251 162,185
----------- ----------- -----------
Deferred tax expense (benefit):
U.S. federal 2,521,779 (3,406,385) (2,286,243)
State and local 423,169 (124,942) (167,786)
Foreign -- -- --
----------- ----------- -----------
Total deferred 2,944,948 (3,531,327) (2,454,029)
----------- ----------- -----------
Total provision (benefit) $ 3,311,103 $(3,399,076) $(2,291,844)
=========== =========== ===========
Deferred tax assets were comprised of the following at December 31:
1998 1997 1996
----------- ----------- -----------
Depreciation $ 723,604 $ 591,825 $ 636,189
Gross deferred tax liabilities 723,604 591,825 636,189
----------- ----------- -----------
Capitalized packaging costs (72,365) (68,897) (93,979)
Advertising allowance (41,570) (256,447) (228,739)
Inventory reserves (256,441) (317,573) (489,398)
Allowance for doubtful accounts (256,440) (984,244) (109,832)
Sales return reserve (57,885) (128,216) (175,685)
Capitalized inventory costs (259,983) (255,304) (136,540)
NOL and credit carry forwards (6,278,675) (5,265,390) (5,353,650)
Promotional rebate reserve -- (4,147) (12,444)
Discontinuation reserves -- (2,324,297) --
Other (234,593) (840,805) (362,315)
----------- ----------- -----------
Gross deferred tax assets (7,457,952) (10,445,320) (6,962,582)
----------- ----------- -----------
Valuation allowance -- 174,199 174,199
----------- ----------- -----------
$(6,734,348) $(9,679,296) $(6,152,194)
=========== =========== ===========
In management's opinion, future taxable income will be sufficient to utilize the
tax benefit recognized as deferred tax assets. The decrease in the valuation
allowance in 1998 was due to the Company's assessment that benefits from
alternative minimum tax and other credit carryforwards will more likely than not
be realized prior to their expiration.
43
44
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,
--------------------------------------------------
1998 1997 1996
----------- ----------- -----------
Tax provision (benefit)
at statutory U.S. rate $ 3,042,704 $(3,371,235) $(1,559,441)
Increase (decrease) in
tax provision resulting from:
State and local taxes, net 423,169 (76,947) (304,177)
Foreign tax rate differential -- (27,795) 22,718
Nondeductible items 28,763 35,908 24,501
Research and development credit -- -- (349,797)
Reduction in valuation allowance (174,199) -- --
Other (9,334) 40,993 (125,648)
----------- ----------- -----------
Tax provision (benefit), as above $ 3,311,103 $(3,399,076) $(2,291,844)
=========== =========== ===========
Income taxes refunded were $30,829, $0 and $48,897, for the years ended December
31, 1998, 1997 and 1996, respectively. The Company has an alternative minimum
tax credit carryforward of $278,365 and a federal net operating loss
carryforward of $15,159,074 that begins to expire in 2010. The Company also has
a research and development credit carryforward of $744,207 that begins to expire
in 2006. No income taxes have been provided on the undistributed earnings of
foreign subsidiaries as the earnings are expected to be permanently reinvested
in the foreign operations.
NOTE 14 - BUSINESS SEGMENTS AND FOREIGN OPERATIONS
The Company operates in a single industry segment and is engaged in the
development, manufacturing and marketing of universal remote controls and
related products principally for home video and audio entertainment equipment.
In 1997 and 1996, the Company's customers consisted primarily of domestic and
international retailers, private label customers, original equipment
manufacturers and subscription broadcasting operators. In 1998 the Company's
customers remained the same although the number of domestic retail customers
decreased as the Company exited its North American Retail business line.
The Company's operations by geographic area are presented below:
1998 1997 1996
------------ ------------ ------------
Net Sales
United States $ 73,272,673 $ 92,149,517 $ 75,904,960
United Kingdom 8,807,684 5,818,232 2,175,834
Germany 5,865,240 4,958,049 3,457,901
All Other 8,177,022 11,412,622 17,050,043
------------ ------------ ------------
Total Net Sales 96,122,619 114,338,420 98,588,738
============ ============ ============
Identifiable Assets
United States 8,344,489 4,236,717 7,950,615
All Other Countries 3,801,234 647,884 135,267
------------ ------------ ------------
Total Identifiable Assets 12,145,723 4,884,601 8,085,882
============ ============ ============
Specific identification was the basis used for attributing revenues from
external customers to individual countries. In addition to the operations of the
foreign subsidiaries, the Company had export sales in
44
45
1998, 1997 and 1996 of $7,717,208, $12,351,530, $11,231,679, respectively.
Foreign currency exchange gains (losses) of $(97,066), $(27,364) and $42,586,
were included in the determination of net income for the years ended December
31, 1998, 1997 and 1996, respectively.
NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to several lawsuits and claims arising in the normal
course of its business. In the opinion of management, the Company's liability or
recovery, if any, under pending litigation and claims would not materially
adversely affect its results of operations, cash flows, or financial condition.
NOTE 16 - RESTRUCTURING
In December 1997, the Company announced its decision to discontinue its North
American One For All Retail line of business and the distribution channel
supported by the operations in the Twinsburg, Ohio facility. The Company
continues to supply a limited line of remote control products to several mass
merchandisers on a direct import basis. The Company closed the Twinsburg, Ohio
facility, with the exception of its customer service phone center, and moved its
headquarters to its Technology Center in Cypress, California during the second
quarter of 1998. The pre-tax restructuring charge of $8,419,000 taken in the
fourth quarter of fiscal year 1997 primarily related to severance and employee
benefit costs ($3,260,000), the write-down of fixed assets to be disposed of to
their estimated fair market value ($1,738,000), the write-down of intangibles by
the amount for which no future benefit existed ($460,000), consumer support and
service costs relating to contractual obligations of the Company to provide
telephonic support for certain of its products that were discontinued as part of
the restructuring ($393,000), write-off of prepaid advertising and other prepaid
assets to their estimated fair market value ($2,129,000 and $163,000,
respectively), and other costs related to the discontinuation of the North
American Retail business ($276,000). Severance and related employee benefit
costs were determined by estimating such amounts for each of the 105 employees
of the Company that were terminated in the restructuring. Charges for prepaid
advertising, other prepaid assets and fixed assets were determined by comparing
net book values to the estimated fair market values. Intangibles consisting of
trademark costs were evaluated for future benefits and an estimate was made of
the amount for which no future benefits existed. Other costs related to the
disposition of assets were primarily related to operating expenses associated
with the liquidation of the North American Retail business. After an income tax
benefit of $2,863,000, the restructuring charge reduced fiscal year 1997
earnings by $5,556,000 or $0.88 per share. See also Note 3 - Accounts Receivable
and Note 4 - Inventories for explanation of additional expenses related to the
restructuring. The restructuring was completed during 1998.
45
46
NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the years ended December 31, 1998, 1997,
and 1996.
1998
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 31, DECEMBER 31,
------------ ------------ -------------- ------------
Net sales
On-going business $ 18,575,778 $ 22,272,821 $ 23,731,761 $ 24,455,346
Discontinued North
American Retail business 4,356,540 2,446,099 284,274 --
------------ ------------ ------------ ------------
22,932,318 24,718,920 24,016,035 24,455,346
Gross profit (loss)
On-going business 7,249,639 9,073,208 9,567,461 10,428,222
Discontinued North
American Retail business -- -- (75,000) --
------------ ------------ ------------ ------------
7,249,639 9,073,208 9,492,461 10,428,222
Operating income (loss) 2,116,671 2,655,658 4,085,481 646,875
Net income (loss) $ 343,903 $ 1,313,777 $ 1,609,322 $ 2,370,648
------------ ------------ ------------ ------------
Net income (loss) per share:
Basic $ 0.05 $ 0.21 $ 0.25 $ 0.37
------------ ------------ ------------ ------------
Diluted $ 0.05 $ 0.20 $ 0.24 $ 0.36
------------ ------------ ------------ ------------
Weighted average common stock outstanding:
Basic 6,338,000 6,366,000 6,438,000 6,418,000
------------ ------------ ------------ ------------
Diluted 6,650,000 6,723,000 6,692,000 6,581,000
------------ ------------ ------------ ------------
1997
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 31, DECEMBER 31,
------------ ------------ -------------- ------------
Net sales
On-going business $ 16,538,559 $ 17,152,545 $ 26,095,641 $ 25,444,705
Discontinued North
American Retail business 5,841,691 6,778,502 7,403,283 9,083,494
------------ ------------ -------------- ------------
22,380,250 23,931,047 33,498,924 34,528,199
Gross profit (loss)
On-going business 5,606,265 5,662,342 8,527,383 10,163,271
Discontinued North
American Retail business 1,151,149 1,620,637 1,763,268 1,116,959
Inventory write-down -- -- -- (3,892,215)
------------ ------------ -------------- ------------
6,757,414 7,282,979 10,290,651 7,388,015
Operating income (loss) (313,909) 548,511 1,958,168 (11,482,127)
Net income (loss) (280,786) 288,488 1,187,387 (7,713,452)
------------ ------------ -------------- ------------
Net income (loss) per share:
Basic $ (0.04) $ 0.05 $ 0.19 $ (1.23)
------------ ------------ -------------- ------------
46
47
Diluted $ (0.04) $ 0.05 $ 0.19 $ (1.23)
------------ ------------ -------------- ------------
Weighted average common stock outstanding:
Basic 6,313,000 6,266,000 6,261,000 6,296,000
------------ ------------ -------------- ------------
Diluted 6,313,000 6,299,000 6,359,000 6,296,000
------------ ------------ -------------- ------------
1996
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 31, DECEMBER 31,
------------ ------------ -------------- ------------
Net sales
On-going business $ 9,852,790 $ 12,965,913 $ 18,249,261 $ 22,492,063
Discontinued North
American Retail business 12,052,176 8,560,328 7,391,891 7,024,316
------------ ------------ ------------ ------------
21,904,966 21,526,241 25,641,152 29,516,379
Gross profit (loss)
On-going business 6,450,131 5,315,024 5,303,355 5,685,273
Discontinued North
American Retail business (608,111) 1,309,491 1,467,610 722,622
Inventory write-down -- -- -- (1,112,041)
------------ ------------ ------------ ------------
5,842,020 6,624,515 6,770,965 5,295,854
Operating income (loss) (1,279,314) 373,874 165,462 (3,667,232)
Net income (loss) (570,152) 247,656 112,183 (2,084,434)
------------ ------------ ------------ ------------
Net income (loss) per share:
Basic $ (0.08) $ 0.04 $ 0.02 $ (0.33)
------------ ------------ ------------ ------------
Diluted $ (0.08) $ 0.04 $ 0.02 $ (0.33)
------------ ------------ ------------ ------------
Weighted average common stock outstanding:
------------ ------------ ------------ ------------
Basic 6,758,000 6,772,000 6,749,000 6,369,000
Diluted 6,758,000 6,945,000 6,855,000 6,369,000
------------ ------------ ------------ ------------
The Company has restated the presentation of certain information for the first
three quarters of 1998. The net effect of the restatement was to reclassify 1998
sales and cost of sales associated with the discontinued North American Retail
business from accrued restructuring expenses to net sales and cost of sales. In
1997, the North American Retail product inventories were written down by
$3,892,000 to their estimated net realizable value as a result of the
discontinuation discussed in Note 16. The 1997 write down amounted to $0.62 per
share for the full year on a pretax basis. During the fourth quarter of 1996,
the Company wrote down a portion of its inventory of microprocessors after one
of its major suppliers announced a new line of lower cost chips would be
available in the second half of 1997. The write down amounted to $1,112,000 on a
pretax basis or $0.11 per share for the full year.
47
48
UNIVERSAL ELECTRONICS INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
ADDITIONS
BALANCE AT CHARGED TO WRITE-OFFS BALANCE AT
BEGINNING OF COSTS AND AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ----------
Valuation account for accounts
receivable:
Year Ended December 31, 1998 $2,950,548 $ 342,662 $1,681,742 $1,611,468
Year Ended December 31, 1997 $ 359,480 $2,850,000 $ 258,932 $2,950,548
Year Ended December 31, 1996 $ 342,450 $ 232,625 $ 215,595 $ 359,480
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
48
1449
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 1999 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of 1934.
Information regarding executive officers of the Company is set forth in Part I
of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 402 of Regulation S-K will be contained in and is
hereby incorporated by reference to the Company's definitive Proxy Statement for
its 1999 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 403 of Regulation S-K will be contained in and is
hereby incorporated by reference to the Company's definitive Proxy Statement for
its 1999 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 404 of Regulation S-K will be contained in and is
hereby incorporated by reference to the Company's definitive Proxy Statement for
its 1999 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) LIST OF FINANCIAL STATEMENTS
See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA-INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS" for a list of the
consolidated financial statements included herein.
(a)(2) LIST OF FINANCIAL STATEMENT SCHEDULES
See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA-INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS" for a list of the
consolidated financial statement schedules included herein.
(a)(3) LIST OF EXHIBITS REQUIRED TO BE FILED BY ITEM 601(a) OF THE
REGULATION S-K ARE INCLUDED AS EXHIBITS TO THIS REPORT.REPORT:
See EXHIBIT INDEX at page 51 to Item 601(a) of this Regulation
S-K.
(b) No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1998.
49
1550
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Cypress, State of
California on the 31st8th day of March,April, 1999.
UNIVERSAL ELECTRONICS INC.
By:/s/Camille Jayne
-------------------
Camille Jayne
Chairman and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Camille Jayne
and Paul D. Arling as true and lawful attorneys-in-fact and agents, each acting
alone, with full powers of substitution, for her/him and in her/his name, place
and stead, in any and all capacities, to sign any and all amendments to this
Annual Report on Form 10-K, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, each acting alone,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully for all
intents and purposes as she/he might or could do in person, thereby ratifying
and confirming all that said attorneys-in-fact and agents, each acting alone, or
her/his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on the 31st8th day of March,April, 1999, by the following persons
in the capacities indicated.
NAME & TITLE SIGNATURE
-
- ------------ ---------
Paul D. Arling
President and Chief Operating Officer,
Chief Financial Officer and Director /s/Paul D. ArlingArling*
(Principal Financial Officer) --------------------------------
Camille Jayne
Chairman and Chief Executive Officer
and Director /s/Camille Jayne
(Principal Executive Officer) --------------------------------
Mark Belzowski
Vice President and Corporate Controller /s/Mark BelzowskiBelzowski*
(Principal Accounting Officer) --------------------------------
Peter L. Gartman /s/Peter L. GartmanGartman*
Director --------------------------------
Bruce A. Henderson /s/Bruce A. HendersonHenderson*
Director --------------------------------
William C. Mulligan /s/William C. MulliganMulligan*
Director --------------------------------
J. C. Sparkman /s/J.C. SparkmanSparkman*
Director --------------------------------
F. Rush McKnight /s/F. Rush McKnightMcKnight*
Director --------------------------------
* The undersigned, by signing her name hereto, does sign this Report on behalf
of the above Directors and Officers of Universal Electronics Inc. pursuant to
a Power of Attorney executed on behalf of each such Director and Officer and
which has been filed with the Securities and Exchange Commission.
By: /s/ Camille Jayne
--------------------------------
Camille Jayne
As Attorney-In-Fact
50
1651
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 (filed herewith)
3.1 Restated Certificate of Incorporation of Universal Electronics
Inc., as amended (Incorporated by reference to Exhibit 3.1 to
the Company's Form S-1 Registration filed on or about December
24, 1992 (File No. 33-56358))
3.2 Amended and Restated By-laws of Universal Electronics Inc.
(Incorporated by reference to Exhibit 3.2 to the Company's Form
S-1 Registration filed on or about December 24, 1992 (File No.
33-56358))
3.3 Certificate of Amendment to Restated Certificate of
Incorporation of Universal Electronics Inc. (Incorporated by
reference to Exhibit 3.3 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 filed on April 1, 1996
(File No. 0-21044))
*10.1 Form of Universal Electronics Inc. 1993 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.13 to Amendment No. 1
to the Company's Form S-1 Registration filed on or about January
21, 1993 (File No. 33-56358))
10.2 Standard Industrial Lease dated January 24, 1992 by and between
Universal Electronics Inc. and RREEF USA Fund II, Inc.
(Incorporated by reference to Exhibit 10.24 to the Company's
Form S-1 Registration filed on or about June 25, 1993 (File No.
33-65082))
10.3 Form of Secured Promissory Note by and between Universal
Electronics Inc. and certain employees used in connection with
loans made to the employee to enable them to make open market
purchases of shares of Universal Electronics Inc. Common Stock
(Incorporated by reference to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1994 (File No. 0-21044))
10.4 Form of Stock Pledge Agreement by and between Universal
Electronics Inc. and certain employees used in connection with
loans made to the employees to enable them to make open market
purchases of shares of Universal Electronics Inc. Common Stock
(Incorporated by reference to Exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1994 (File No. 0-21044))
10.5 Loan and Security Agreement dated November 21, 1995 by and
between Universal Electronics Inc. and The Provident Bank
(Incorporated by reference to Exhibit 10.20 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995
filed on April 1, 1996 (File No. 0-21044))
10.6 Copy of Promissory Note dated November 21, 1995 by and between
Universal Electronics Inc. and The Provident Bank (Incorporated
by reference to Exhibit 10.21 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995 filed on April 1,
1996 (File No. 0-21044))
10.7 Commercial Letters of Credit Master Agreement dated November 21,
1995 by and between Universal Electronics Inc. and The Provident
Bank (Incorporated by reference to Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995 filed on April 1, 1996 (File No. 0-21044))
10.8 Intercreditor Agreement dated November 21, 1995 by and between
The Provident Bank and Society National Bank and acknowledged
and agreed to by Universal Electronics Inc. (Incorporated by
reference to Exhibit 10.23 to the
1752
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
Company's Annual Report on Form 10-K for the year ended December
31, 1995 filed on April 1, 1996 (File No. 0-21044))
10.9 Lockbox Service Contract dated November 10, 1995 by and between
Universal Electronics Inc. and The Provident Bank (Incorporated
by reference to Exhibit 10.24 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995 filed on April 1,
1996 (File No. 0-21044))
*10.10 Form of Universal Electronics Inc. 1995 Stock Incentive Plan
(Incorporated by reference to Exhibit B to the Company's
Definitive Proxy Materials for the 1995 Annual Meeting of
Stockholders of Universal Electronics Inc. filed on May 1, 1995
(File No. 0-21044))
*10.11 Form of Stock Option Agreement by and between Universal
Electronics Inc. and certain employees used in connection with
options granted to the employees pursuant to the Universal
Electronics Inc. 1995 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.20 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 filed on March
28, 1997 (File No. 0-21044))
*10.12 Form of Stock Option Agreement by and between Universal
Electronics Inc. and certain non-affiliated directors used in
connection with options granted to the non-affiliated directors
pursuant to the Universal Electronics Inc. 1995 Stock Incentive
Plan (Incorporated by reference to Exhibit 10.21 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996 filed on March 28, 1997 (File No. 0-21044))
10.13 First Amendment to Loan and Security Agreement dated July 31,
1996 by and between Universal Electronics Inc. and The Provident
Bank (Incorporated by reference to Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996 filed on March 28, 1997 (File No. 0-21044))
*10.14 Form of Universal Electronics Inc. 1996 Stock Incentive Plan
(Incorporated by reference to Exhibit 4.5 to the Company's Form
S-8 Registration Statement filed on March 26, 1997 (File No.
333-23985))
*10.15 Form of Stock Option Agreement by and between Universal
Electronics Inc. and certain employers used in connection with
options granted to the employees pursuant to the Universal
Electronics Inc. 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 4.6 to the Company's Form S-8 Registration
Statement filed on March 26, 1997 (File No. 333-23985))
10.16 Sublease dated January 10, 1997 by and between Universal
Electronics Inc. and Edgemont Sales Company, a division of IKON
Office Solutions, Inc. (Incorporated by reference to Exhibit
10.25 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 filed on March 28, 1997 (File No.
0-21044))
*10.17 Form of Salary Continuation Agreement by and between Universal
Electronics Inc. and certain employees (Incorporated by
reference to Exhibit 10.25 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, filed on March
30, 1998 (File No. 0-21044))
*10.18 Form of Amendment to Salary Continuation Agreement by and
between Universal Electronics Inc. and certain employees
(Incorporated by reference to Exhibit 10.26 to the Company's
Annual Report on Form 10-K for the year ended
1853
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
December 31, 1997, filed on March 30, 1998 (File No. 0-21044))
10.19 Second Amendment to Loan and Security Agreement dated January 24,
1997 by and between Universal Electronics Inc. and The Provident
Bank (Incorporated by reference to Exhibit 10.27 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1997, filed on March 30, 1998 (File No. 0-21044))
10.20 Lease dated November 1, 1997 by and between Universal
Electronics Inc. and Warland Investments Company (Incorporated
by reference to Exhibit 10.28 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, filed on March
30, 1998 (File No. 0-21044))
10.21 Letter Agreement in Principal dated March 18, 1998 by and
between Universal Electronics Inc. and The Provident Bank
further amending that certain Loan and Security Agreement
(Incorporated by reference to Exhibit 10.29 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997,
filed on March 30, 1998 (File No. 0-21044))
*10.22 Executive Officer Employment Agreement dated January 29, 1998 by
and between Universal Electronics Inc. and Camille Jayne (filed
herewith)
*10.23 Form of Universal Electronics Inc. 1998 Stock Incentive Plan
(Incorporated by reference to Exhibit A to the Company's
Definitive Proxy Materials for the 1998 Annual Meeting of
Stockholders of Universal Electronics Inc. filed on April 20,
1998 (File No. 0-21044))
*10.24 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 (filed herewith)
10.25 Agreement for Purchase and Sale of Property dated May 29, 1998
by and between Universal Electronics Inc. and Duke Realty
Limited Partnership (filed herewith)
10.26 Agreement dated August 12, 1998 by and between Universal
Electronics Inc., and David M. Gabrielsen (filed herewith)
10.27 Stock Acquisition Representations and Covenants Certificate
dated September 1, 1998 from H & S Management Corp., J.C.
Sparkman and Steven Helbig (filed herewith)
10.28 Non-Compete Agreement dated September 1, 1998 by and among
Universal Electronics Inc., H & S Management Corp., J.C.
Sparkman and Steven Helbig (filed herewith)
10.29 Consulting Agreement dated September 1, 1998 by and between
Universal Electronics Inc. and J.C. Sparkman (filed herewith)
*10.30 Form of Executive Officer Employment Agreement dated September
29, 1998 by and between Universal Electronics Inc. and Paul D.
Arling (filed herewith)
10.31 Revolving Loan and Security Agreement dated October 2, 1998 by
and between Universal Electronics Inc. and Bank of America
National Trust and
1954
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
Savings Association (filed herewith)
10.32 Copy of Revolving Note dated October 2, 1998 by and between
Universal Electronics Inc. and Bank of America National Trust
and Savings Association (filed herewith)
10.33 Patent and Trademark Collateral Assignment dated October 2, 1998
by and between Universal Electronics Inc. and Bank of America
National Trust and Savings Association (filed herewith)
10.34 Purchase Agreement dated November 8, 1998 by and between
Universal Electronics Inc. and General Instrument Corporation
(filed herewith)
10.35 Warrant dated November 9, 1998 by and between Universal
Electronics Inc. and General Instrument Corporation (filed
herewith)
10.36 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. MacizumiMaeizumi (filed herewith)
10.37 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 (filed herewith)
11.1 Statement re: computation of per share earnings (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 (previously filed)
27.1 Financial Data Schedule (filed as part of the signature page hereto)herewith)
* Management contract or compensation plan or arrangement identified
pursuant to Item 14(c) of the Form 10-K.