1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
[ ] 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
___________________
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date -- 13,860,091 shares of Common
Stock, par value $.01 per share, of the Registrant were outstanding at March 30,
2001.
2
UNIVERSAL ELECTRONICS INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets 3
Consolidated Income Statements 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about 13
Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
2
3
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share-related data)
(Unaudited)
March 31, December 31,
2001 2000
-------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 27,163 $ 20,809
Accounts receivable 27,859 38,140
Inventories 22,270 18,847
Prepaid expenses and other current assets 1,216 1,111
Deferred income taxes 2,666 2,666
-------- --------
Total current assets 81,174 81,573
Equipment, furniture and fixtures, net 3,732 3,926
Goodwill and other intangible assets, net 6,557 6,898
Other assets 722 727
Deferred income taxes 642 642
-------- --------
Total assets $ 92,827 $ 93,766
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,962 $ 12,846
Accrued income taxes 2,534 3,617
Accrued compensation 1,594 3,037
Other accrued taxes 47 293
Other accrued expenses 3,288 3,456
-------- --------
Total current liabilities 19,425 23,249
Notes payable 149 163
-------- --------
Total liabilities 19,574 23,412
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; none issued or outstanding -- --
Common stock, $.01 par value, 50,000,000 shares
authorized; 15,506,363 and 15,429,584 shares
issued at March 31, 2001 and December 31, 2000,
respectively 155 154
Paid-in capital 65,453 64,937
Accumulated other comprehensive income (884) (706)
Retained earnings 15,229 12,688
Unamortized value of restricted stock grants (16) (29)
Common stock in treasury, 1,646,272 and
1,647,892 shares at March 31, 2001 and
December 31, 2000, respectively (6,684) (6,690)
-------- --------
Total stockholders' equity 73,253 70,354
-------- --------
Total liabilities and stockholders' equity $ 92,827 $ 93,766
======== ========
The accompanying notes are an integral part of these financial statements.
3
4
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
-----------------------
2001 2000
-------- --------
Net sales $ 31,023 $ 22,664
Cost of sales 17,713 12,986
-------- --------
Gross profit 13,310 9,678
Selling, general and administrative expenses 9,307 8,141
-------- --------
Operating income 4,003 1,537
Interest income, net (274) (179)
Other expense (income), net 42 (37)
-------- --------
Income before income taxes 4,235 1,753
Provision for income taxes 1,694 719
-------- --------
Net income $ 2,541 $ 1,034
======== ========
Net income per share:
Basic $ 0.18 $ 0.08
======== ========
Diluted $ 0.17 $ 0.07
======== ========
Weighted average common stock outstanding:
Basic 13,818 13,695
======== ========
Diluted 14,588 15,063
======== ========
The accompanying notes are an integral part of these financial statements.
4
5
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
-----------------------
2001 2000
-------- --------
Cash provided by operating activities:
Net income $ 2,541 $ 1,034
Adjustments to reconcile net income to net
cash provided by operating activities: 1,051 982
Depreciation and amortization
Deferred income taxes -- 632
Other 113 106
Changes in operating assets and liabilities:
Accounts receivable 9,550 7,339
Inventory (3,423) (2,770)
Prepaid expenses and other assets (141) 648
Accounts payable and accrued expenses (2,266) (3,640)
Accrued income and other taxes (1,312) (53)
-------- --------
Net cash provided by operating activities 6,113 4,278
Cash used for investing activities:
Acquisition of fixed assets (509) (351)
Payments for businesses acquired (33) --
Acquisition of intangible assets (7) (18)
-------- --------
Net cash used for investing activities (549) (369)
Cash provided by (used for) financing activities:
Proceeds from stock options exercised 431 388
Payments on note payable (4) (18)
-------- --------
Net cash provided by financing activities 427 370
Effect of exchange rate changes on cash 363 (6)
-------- --------
Net increase in cash and cash equivalents 6,354 4,273
Cash and cash equivalents at beginning of period 20,809 13,286
-------- --------
Cash and cash equivalents at end of period $ 27,163 $ 17,559
======== ========
The accompanying notes are an integral part of these financial statements.
5
6
UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADJUSTMENTS
The accompanying consolidated financial statements include the accounts of the
Company and all subsidiaries after elimination of all material intercompany
accounts and transactions. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. These financial statements should be read in conjunction
with the consolidated financial statements and related notes contained in the
Company's 2000 Form 10-K. The financial information presented in the
accompanying statements reflects all adjustments that are, in the opinion of
management, necessary for a fair presentation of the periods indicated. All such
adjustments are of a normal recurring nature.
INVENTORIES
Inventories consist of the following (in thousands):
March 31, December 31,
2001 2000
--------- ------------
Components $10,221 $10,079
Finished goods 12,049 8,768
------- -------
Total inventories $22,270 $18,847
======= =======
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding.
Diluted earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding and dilutive potential common
shares, which includes the dilutive effect of stock options and restricted stock
grants. Dilutive potential common shares for all periods presented are computed
utilizing the treasury stock method.
Earnings per share for the quarters ended March 31, 2001 and 2000 are calculated
as follows:
Quarter Ended
---------------------------------
March 31, 2001 March 31, 2000
--------------- --------------
(in 000's, except per share data)
BASIC
Net Income $ 2,541 $ 1,034
======= =======
Weighted-average common shares
outstanding 13,818 13,695
------- -------
Basic earnings per share $ 0.18 $ 0.08
======= =======
DILUTED
Net Income $ 2,541 $ 1,034
======= =======
Weighted-average common shares
outstanding for basic 13,818 13,695
Dilutive effect of stock options and
restricted stock 770 1,368
------- -------
Weighted-average common shares
outstanding on a diluted basis 14,588 15,063
------- -------
Diluted earnings per share $ 0.17 $ 0.07
======= =======
6
7
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning after
June 15, 1999, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities on the balance sheet,
measured at fair value. Gains and losses resulting from changes in the values of
those derivatives would be accounted for as either components of earnings or
accumulated other comprehensive income depending on the use of the derivative
and whether it qualifies for hedge accounting. Derivatives that are not hedges
must be adjusted to fair value through earnings. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities --
Deferral of the Effective Date of FASB Statement No. 133," which defers the
effective date of SFAS 133 to fiscal years beginning after June 15, 2000. In
June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities -- an Amendment of FASB Statement
No. 133," which amends the accounting and reporting standards of SFAS 133. The
Company's adoption of these new accounting pronouncements in the first quarter
of 2001 did not have a material effect on the Company's consolidated financial
statements.
ACCOUNTING POLICY FOR DERIVATIVES
The Company enters into foreign currency option-based arrangements, with
contract terms normally lasting less than six months, to protect against the
adverse effects that exchange-rate fluctuations may have on foreign-currency-
denominated trade receivables. These derivatives do not qualify for hedge
accounting, in accordance with SFAS 133, because they relate to existing assets
denominated in a foreign currency. The gains and losses on both the derivatives
and the foreign-currency-denominated trade receivables are recorded as
transaction adjustments in current earnings.
BUSINESS SEGMENTS AND FOREIGN OPERATIONS
The Company operates in a single industry segment and is engaged in the
development and marketing of pre-programmed wireless control devices and related
products principally for video and audio entertainment equipment. The Company's
customers consist primarily of international retailers, private label customers,
original equipment manufacturers and subscription broadcasting operators.
The Company's operations and identifiable assets by geographic area in thousands
are presented below:
Three Months Ended
March 31,
-----------------------
2001 2000
------- -------
Net Sales
United States $23,422 $14,328
Netherlands 2,410 3,609
United Kingdom 1,349 1,887
Germany 935 903
All Other 2,907 1,937
------- -------
Total Net Sales $31,023 $22,664
======= =======
March 31, December 31,
2001 2000
--------- ------------
Identifiable Assets
United States $ 6,396 $ 6,591
All Other Countries 4,615 4,960
------- -------
Total Identifiable Assets $11,011 $11,551
======= =======
Specific identification of customer location was the basis used for attributing
revenues from external customers to individual countries.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the presentation
utilized in the three-month period ended March 31, 2001.
7
8
COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to lawsuits and claims arising in the normal course of
its business. In the opinion of management, the Company's liability or recovery,
if any, under pending litigation and claims would not materially adversely
affect its results of operations, cash flows or financial condition.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
First Quarter 2001 versus 2000
Net sales for the 2001 first quarter were $31.0 million compared to $22.7
million for the same quarter last year. Net sales of the Company's technology
products (subscription broadcasting, OEM and private label) were approximately
81.5% of net sales for the first quarter of 2001 compared to 78.2% for the first
quarter of 2000. Net sales from the retail portion (One For All(R)
international, Eversafe and direct import) accounted for approximately 18.5% of
total first quarter 2001 net sales compared to 21.8% for the corresponding
period in 2000.
Net sales of the Company's technology products for the first quarter of 2001
increased by 42.7% to $25.3 million from $17.7 million for the same period last
year. The increase in technology sales is principally due to increased sales to
cable service providers attributable to strong growth in digital set-top box
deployments and increased sales to larger OEMs.
The Company's net sales for the 2001 first quarter from its retail customers
were $5.7 million, an increase of 16.1% from net sales of $5.0 million for the
same quarter last year. Direct import revenues increased for the first quarter
of 2001 from $236,000 to $607,000. One For All international revenues (the
largest component of the retail line) increased 9.4% from $4.7 million for the
first quarter of 2000 to $5.1 million for the same period in 2001 primarily due
to increased sales to customers in France and Argentina.
The Company's overall gross profit margin for the first quarter of 2001 was
42.9% compared to a gross margin of 42.7% for the same period last year. The
higher gross margin during the quarter was a result of increased shipment of
higher margin products.
Selling, general and administrative expenses increased 14.3% from $8.1 million
in the first quarter of 2000 to $9.3 million for the same period in 2001. The
increase was primarily attributable to increased payroll and related costs from
additional engineering and technology development new hires and increased
marketing expenses.
In the first quarter of 2001, the Company recorded $274,000 of interest income
compared to $179,000 for the same period last year. This $95,000 increase is
primarily due to interest earned on higher accumulated cash balances in 2001.
The Company recorded income tax expense of $1.7 million for the first quarter of
2001 compared to approximately $0.7 million for the same period last year. The
increase was due to improved results in 2001 partially offset by a change in the
effective tax rate from 41% in the first quarter of 2000 to 40% in the first
quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are its operations and bank credit
facilities. Cash provided by operating activities was $6.1 million for the three
months ended March 31, 2001 compared to $4.3 million for the same period in
2000. The increase in cash flow is primarily due to improved operating results
and a reduction in accounts receivable resulting from increased collections
during the quarter ended March 31, 2001.
On October 23, 1998, the Company entered into a $15 million revolving credit
agreement with Bank of America National Trust and Savings Association ("B of
A"), which was amended on September 19, 2000 (the "Agreement"). Under the
Agreement with B of A, the Company can choose from several interest rate options
at its discretion. The interest rate in effect as of March 31, 2001
8
9
using the Fixed Rate option as defined in the Agreement, which is intended to
approximate B of A's cost of funds, plus an applicable margin, was 6.33%. 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 March 31, 2001, the applicable margin was 1.25 percent. The revolving credit
facility, which expires on October 23, 2001, is collateralized by the Company's
cash and cash equivalents, accounts receivable, inventory, equipment, and
general intangibles of the Company. It is management's intention to extend the
revolving credit facility beyond its current maturity. 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 Agreement, the Company's ability to pay
cash dividends on its common stock is restricted and the Company is subject to
certain financial covenants and other restrictions that are standard for these
types of agreements. However, the Company has authority under this credit
facility to acquire up to 1,000,000 shares of its common stock in market
purchases and, since the date of this Agreement, the Company has acquired
approximately 109,000 shares of stock, at a cost of approximately $564,500,
which it holds as treasury shares and are available for reissue by the Company.
Amounts available for borrowing under this credit facility are reduced by the
outstanding balance of the Company's import letters of credit. As of March 31,
2001, no amounts were outstanding under this credit facility. The Company had no
outstanding import letters of credit as of March 31, 2001.
There were no open market purchases of the Company's common stock in 2001 or
2000 under a program announced in 1996. The Company holds shares purchased on
the open market 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 the three months ended
March 31, 2001, the Company received proceeds of approximately $431,000 from the
exercise of stock options granted to the Company's current and former employees,
as compared to approximately $388,000 during the same period in 2000.
Capital expenditures in the first nine months of 2001 and 2000 were $509,000 and
$351,000, respectively. These expenditures related primarily to the acquisition
of product tooling.
On August 25, 2000, the Company acquired a remote control distributor in France
for approximately $1.8 million, of which $1.5 million was paid during 2000,
approximately $33,000 was paid during the first quarter of 2001 and the
remaining amount will be paid in installments through the end of 2002.
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 2001, however, there can be no assurances that this will occur.
RISK FACTORS
Forward Looking Statements
The Company cautions that the following important factors, among others
(including but not limited to factors discussed below, in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as those discussed elsewhere in this Quarterly Report on Form 10-Q, 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,
9
10
principally from satellite and other similar broadcast providers, general
economic and stock market conditions and other risks which are otherwise set
forth in this Quarterly Report on Form 10-Q and the Company's other filings with
the Securities and Exchange Commission.
Dependence Upon Key Suppliers
Most of the components used in the Company's products are available from
multiple sources; however, the Company has elected to purchase integrated
circuit components used in the Company's products, principally its wireless
control products, and certain other components used in the Company's products,
from two main sources, each of which provide in excess of ten percent (10%) of
the Company's microprocessors for use in its products. The Company has developed
alternative sources of supply for these integrated circuit components. However,
there can be no assurance that the Company will be able to continue to obtain
these components on a timely basis.
The Company generally maintains inventories of its integrated chips, which could
be used in part to mitigate, but not eliminate, delays resulting from supply
interruptions. An extended interruption, shortage or termination in the supply
of any of the components used in the Company's products, or a reduction in their
quality or reliability, or a significant increase in prices of components, would
have an adverse effect on the Company's business and results of operations.
Dependence on Foreign Manufacturing
Third-party manufacturers located in foreign countries manufacture a majority of
the Company's wireless controls. The Company's arrangements with its foreign
manufacturers are subject to the risks of doing business abroad, such as import
duties, trade restrictions, work stoppages, availability of production capacity,
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 and the loss or acquisition of any significant customers.
Historically the Company's business has been influenced by the retail sales
cycle, with increased sales in the last half of the year and the largest
proportion of sales occurring in the last quarter. However, the growth in our
subscription broadcasting and OEM lines has outpaced the growth in our retail
lines and consequently, the retail seasonality has and will continue to have
much less of an effect on our revenue. However, factors such as quarterly
variations in financial results could adversely affect the market price of the
Common Stock and cause it to fluctuate substantially. In addition, the Company
(i) may from time to time increase its operating expenses to fund greater levels
of research and development, increase its sales and marketing activities,
develop new distribution channels, improve its operational and financial systems
and broaden its customer support capabilities and (ii) may incur significant
operating expenses associated with any new acquisitions. To the extent that such
expenses precede or are not subsequently followed by increased revenues, the
Company's business, operating results and financial condition will be materially
adversely affected.
In addition, the Company may experience significant fluctuations in future
quarterly operating results that may be caused by many factors, including demand
for the Company's products, introduction or enhancement of products by the
Company and its competitors, the loss or acquisition of any significant
customers, market acceptance of new products, price reductions by the Company or
its competitors, mix of distribution channels through which products are sold,
level of product returns, mix of customers and products sold, component pricing,
mix of international and domestic revenues, and general economic conditions. In
addition, as a strategic response to changes in the competitive environment, the
Company may from time to time make certain pricing or marketing decisions or
acquisitions that could have a material adverse effect on the Company's
business, results of operations or financial condition. As a result, the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as any indication of future
performance. Due to all of the foregoing factors, it is likely that in some
future quarters the Company's operating results will be below the expectations
of public market analysts and investors. In such event, the price of the
Company's common stock would likely be materially adversely affected.
10
11
Dependence on Consumer Preference
The Company is susceptible to fluctuations in its business based upon consumer
demand for its products. The Company believes that its success depends in
substantial part on its ability to anticipate, gauge and respond to such
fluctuations in consumer demand. However, it is impossible to predict with
complete accuracy the occurrence and effect of any such event that will cause
such fluctuations in consumer demand for the Company's products. Moreover, the
Company cautions that any increases in sales or growth in revenue or increases
in its gross margins that it achieves may be transitory and should by no means
be construed to mean that such increases or growth will continue.
Dependence Upon Timely Product Introduction
The Company's ability to remain competitive in the wireless control products
market will depend in part upon its ability to successfully identify new product
opportunities and to develop and introduce new products and enhancements on a
timely and cost effective basis. There can be no assurance that the Company will
be successful in developing and marketing new products or in enhancing its
existing products, or that such new or enhanced products will achieve consumer
acceptance, and if acquired, will sustain that acceptance, that products
developed by others will not render the Company's products non-competitive or
obsolete or that the Company will be able to obtain or maintain the rights to
use proprietary technologies developed by others which are incorporated in the
Company's products. Any failure by the Company to anticipate or respond
adequately to technological developments and customer requirements, or any
significant delays in product development or introduction, could have a material
adverse effect on the Company's financial condition and results of operations.
In addition, the introduction of new products, which the Company may introduce
in the future, may require the expenditure of a significant amount of funds for
research and development, tooling, manufacturing processes, inventory and
marketing. In order to achieve high volume production of any new product, the
Company may have to make substantial investments in inventory and expand its
production capabilities.
Dependence on Major Customers
The Company's performance is affected by the economic strength and weakness of
its worldwide customers. The Company sells its wireless control products and
proprietary technologies to private label customers, original equipment
manufacturers ("OEMs"), and companies involved in the subscription broadcasting
industry. The Company also supplies its products to its wholly owned, non-U.S.
subsidiaries and to independent foreign distributors, who in turn distribute the
Company's products worldwide, with Europe, Australia, New Zealand, Mexico and
selected countries in Asia and Latin America currently representing the
Company's principal foreign markets. During 2000, the Company had three
customers that acquired more than ten percent of the Company's products and the
loss of any of these customers or any of the Company's other key customers
either in the United States or abroad due to the financial weakness or
bankruptcy of any such customer or the inability of the Company to obtain orders
or maintain its order volume with its major customers may have an adverse effect
on the Company's financial condition or results of operations.
Competition
The wireless control industry is characterized by intense competition based
primarily on product availability, price, speed of delivery, ability to tailor
specific solutions to customer needs, quality and depth of product lines. The
Company's competition is fragmented across its product lines, and accordingly,
the Company does not compete 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
11
12
relationship to the merits of the claims or the extent of any real risk of court
awards. In the fourth quarter of 2000, the Company filed lawsuits against four
separate companies claiming that each of the four companies is infringing
certain of the Company's patents. In these actions, the Company is seeking money
damages and injunctive relief. 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, including the four matters discussed in this
Quarterly Report on Form 10-Q, 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 due to, among other
things, some of the Company's customers canceling or delaying their purchases 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.
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 effect on the Company's international
operations, and consequently on the Company's business, operating results and
financial condition. While the Company will continue to work toward minimizing
any adverse effects of conducting its business abroad, no assurance can be made
that the Company will be successful in minimizing any such effects.
OUTLOOK
The Company's focus in 2001 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 product lines. In addition, the Company
will increase its focus on diversifying product lines and creating new
applications for its proprietary and/or patented technologies in the consumer
electronics/OEM market, and computer/internet/home control markets.
The Company will also continue in 2001 to control its overall cost of doing
business. Management believes that through product design changes and its
purchasing efforts, improvements in the Company's gross margins and efficiencies
in its selling, general and administrative expenses can be accomplished,
although there can be no assurances that there will be any improvements to the
Company's gross margin or that the Company will achieve any cost savings through
these efforts and, if obtained, that any such improvements or savings will be
significant or maintained.
In addition, during 2001, 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 and the divestiture of portions of the
Company's business or assets. The Company cautions, however, that no assurances
can be made that any suitable acquisition targets or partnership opportunities
or divestitures will be identified and, if identified, that a transaction can be
consummated. Moreover, if consummated, no assurances can be made that any such
transaction will profitably add to the Company's operations.
While management believes that the forward looking statements made in this
report are based on reasonable assumptions, the actual outcome of such
statements is subject to a number of risks and uncertainties, including
continued acceptance of the Company's technology and products, the impact of
competitive pressures, including products and pricing, locating and finalizing
acceptable acquisition targets and/or strategic partners, the availability of
financing for acquisitions on terms acceptable to the Company, fluctuations in
currency exchange rates, the consolidation of and new competition experienced by
members in the cable industry, principally from satellite and other similar
broadcast providers, general economic and stock market conditions and other
risks which are otherwise set forth in this Quarterly Report on Form 10-Q and
the Company's other filings with the Securities and Exchange Commission.
12
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including interest rate and
foreign currency exchange rate fluctuations. The Company has established
policies, procedures and internal processes governing its management of market
risks and the use of financial instruments to manage its exposure to such risks.
The interest payable under the Company's revolving credit agreement with its
bank is variable and generally based on either the bank's cost of funds, or the
IBOR rate, and is affected by changes in market interest rates. At March 31,
2001, the Company had no borrowings on its credit line. The interest rate in
effect on the credit line using the bank's cost of funds rate as the base as of
March 31, 2001 was 6.33%. The Company has wholly owned subsidiaries in the
Netherlands, United Kingdom, Germany, France, Argentina and Spain. Sales from
these operations are typically denominated in local currencies including Euros,
Dutch Guilders, British Pounds, German Marks, French Francs, Argentine Pesos and
Spanish Pesetas thereby creating exposures to changes in exchange rates. Changes
in the local currencies/U.S. Dollars exchange rate may positively or negatively
affect the Company's sales, gross margins and retained earnings. The Company,
from time to time, enters into foreign currency exchange agreements to manage
its exposure arising from fluctuating exchange rates that affect cash flows. The
Company had no forward exchange contracts outstanding at March 31, 2001. The
Company does not enter into any derivative transactions for speculative
purposes. The sensitivity of earnings and cash flows to variability in exchange
rates is assessed by applying an approximate range of potential rate
fluctuations to the Company's assets, obligations and projected results of
operations denominated in foreign currencies. Based on the Company's overall
foreign currency rate exposure at March 31, 2001, the Company believes that
movements in foreign currency rates should not materially affect the financial
position of the Company, although no assurance can be made that any such foreign
currency rate movements in the future will not have a material effect.
13
14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits pursuant to Item 601 of Regulation S-K
None.
(B) Reports on Form 8-K
There were no reports on Forms 8-K filed during
the quarter ended March 31, 2001.
14
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
(Registrant) Universal Electronics Inc.
Date: May 14, 2001 \s\ Mark Belzowski
--------------------------------------
Mark Belzowski
Vice President, Chief Financial
Officer and Treasurer
15