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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 JUNE 30, 1999
[ ] 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)
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<S> <C>
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)
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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 - 6,683,485 shares of Common
Stock, par value $.01 per share, of the Registrant were outstanding at June 30,
1999.
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UNIVERSAL ELECTRONICS INC.
INDEX
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 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 7
Item 3. Legal Proceedings 15
Item 4. Quantitative and Qualitative Disclosures about Market Risk 15
Item 5. Submission of Matters to a Vote of Security Holders 16
PART II. OTHER INFORMATION
Item 6. Other Information 17
Item 7. Exhibits and Reports on Form 8-K 17
Signature 18
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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share-related data)
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<CAPTION>
June 30, December 31,
1999 1998
(Unaudited) (Audited)
-------- --------
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ASSETS
Current assets:
Cash and cash equivalents $ 4,546 $ 1,489
Accounts receivable 19,619 23,639
Inventories 14,010 14,834
Prepaid expenses and other current assets 2,939 1,835
Deferred income taxes 1,664 1,269
-------- --------
Total current assets 42,778 43,066
Equipment, furniture and fixtures, net 3,975 4,440
Goodwill and other intangible assets, net 5,722 6,158
Other assets 1,621 1,548
Deferred income taxes 4,315 5,465
-------- --------
Total assets $ 58,411 $ 60,677
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility $ -- $ 4,786
Accounts payable 6,125 7,757
Accrued income taxes 622 331
Accrued compensation 1,112 1,090
Other accrued expenses 2,332 2,180
-------- --------
Total current liabilities 10,191 16,144
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 624,512 shares -- --
authorized; none issued or outstanding
Common stock, $.01 par value, 20,000,000 shares 75 72
authorized; 7,513,090 and 7,226,607 shares issued at
June 30, 1999 and December 31, 1998, respectively
Paid-in capital 60,074 57,972
Currency translation adjustment (189) (122)
Accumulated deficit (5,004) (6,653)
Common stock in treasury, 829,605 shares at June 30,
1999 and December 31, 1998 (6,736) (6,736)
-------- --------
Total stockholders' equity 48,220 44,533
-------- --------
Total liabilities and stockholders' equity $ 58,411 $ 60,677
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
-------- -------- -------- --------
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Net sales
On-going business $ 22,757 $ 22,273 $ 43,699 $ 40,849
Discontinued North American retail
business -- 2,446 -- 6,803
-------- -------- -------- --------
22,757 24,719 43,699 47,652
Cost of sales
On-going business 13,590 13,200 26,249 24,526
Discontinued North American retail
business -- 2,446 -- 6,803
-------- -------- -------- --------
13,590 15,646 26,249 31,329
Gross profit 9,167 9,073 17,450 16,323
Selling, general and administrative
expenses 7,146 6,956 14,597 13,560
-------- -------- -------- --------
Operating income 2,021 2,117 2,853 2,763
Interest expense 13 96 45 236
Other expense (income) (24) 53 14 8
-------- -------- -------- --------
Income before income taxes 2,032 1,968 2,794 2,519
Provision for income taxes 833 654 1,145 861
-------- -------- -------- --------
Net income $ 1,199 $ 1,314 $ 1,649 $ 1,658
======== ======== ======== ========
Net income per share:
Basic $ .18 $ .21 $ .25 $ .26
-------- -------- -------- --------
Diluted $ .17 $ .20 $ .24 $ .25
-------- -------- -------- --------
Weighted average common stock
outstanding:
Basic 6,631 6,366 6,564 6,332
-------- -------- -------- --------
Diluted 7,056 6,723 6,883 6,668
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Six Months Ended June 30,
-------------------------
1999 1998
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Cash provided by operating activities:
Net income $ 1,649 $ 1,658
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,796 655
Provision for doubtful accounts 494 580
Deferred income taxes 755 755
Other -- 61
Changes in operating assets and liabilities:
Accounts receivable 3,526 4,830
Inventory 824 1,101
Prepaid expenses and other assets (529) (2,125)
Accounts payable and accrued expenses (658) (6,121)
Accrued income taxes 291 298
-------- --------
Net cash provided by operating activities 8,148 1,692
Cash used for investing activities:
Acquisition of fixed assets (620) (1,038)
Payments for businesses acquired (1,550) --
Other (174) (98)
-------- --------
Net cash used for investing activities (2,344) (1,136)
Cash used for financing activities:
Short-term bank borrowing 10,810 24,506
Short-term bank payments (15,596) (25,385)
Proceeds from stock options exercised 2,106 429
Treasury stock purchased -- (493)
-------- --------
Net cash used for financing activities (2,680) (943)
Effect of exchange rate changes on cash (67) (45)
-------- --------
Net increase (decrease) in cash and cash 3,057 (432)
equivalents
Cash and cash equivalents at beginning of period 1,489 1,097
-------- --------
Cash and cash equivalents at end of period $ 4,546 $ 665
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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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 generally accepted
accounting principles 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 1998 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):
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<CAPTION>
June 30, December 31,
1999 1998
------- -------
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Components $ 5,555 $ 5,993
Finished goods 8,455 8,841
------- -------
Total inventories $14,010 $14,834
======= =======
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Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted
average number of common shares outstanding. Diluted net income per share is
computed by dividing net income by the weighted average number of common shares
and dilutive potential common shares which includes the dilutive effect of stock
options. Dilutive potential common shares for all periods presented are computed
utilizing the treasury stock method.
Reclassifications
Certain prior year amounts have been reclassified to conform to the presentation
utilized in the three and six-month periods ended June 30, 1999.
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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.
The Company's operations by geographic area in thousands are presented below:
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<CAPTION>
Six Months Ended June 30,
--------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Net Sales
United States $ 31,891 $ 39,443
United Kingdom 2,560 2,612
Germany 2,644 2,466
All Other 6,604 3,131
---------------- ----------------
Total Net Sales $ 43,699 $ 47,652
================ ================
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<CAPTION>
June 30, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Identifiable Assets
United States $ 7,693 $ 8,345
All Other Countries 3,625 3,801
-------------- -----------------
Total Identifiable Assets $ 11,318 $ 12,146
============== =================
</TABLE>
Specific identification was the basis used for attributing revenues from
external customers to individual countries.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Second Quarter 1999 versus 1998
Net sales for the 1999 second quarter were $22.8 million compared to $22.3
million for the same quarter last year (after excluding net sales of $2.4
million attributable to the Company's discontinued North American retail
business). Net sales in the Company's technology businesses (subscription
broadcasting, OEM and private label) were approximately 79.5% of net sales for
the second quarter of 1999 compared to 64.8% for the second quarter of 1998. Net
sales from the continuing retail businesses (One For All(R) international,
Eversafe and direct import) accounted for approximately 20.5% of total second
quarter 1999 net sales compared to 25.3% for the corresponding period in 1998.
There were no net sales from the discontinued North American retail business
during the second quarter of 1999.
Net sales in the Company's technology businesses for the second quarter of 1999
increased by approximately 13.1% from $16.0 million for the same period last
year to $18.1 million in 1999. The increase in technology sales is attributable
to stronger sales to cable providers.
The Company's net sales for the 1999 second quarter from its continuing retail
businesses were $4.6 million, a decrease of 25.7% from net sales of $6.3 million
in 1998 for the same quarter last year. Direct import revenues decreased 63.0%
for the second quarter of 1999 from $801,000 to $296,000. Direct import revenues
for the second quarter of 1998 included higher initial inventory shipments to
the Company's direct import partner. One For All international revenues (the
largest component of the
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continuing retail business group) decreased 17.1% for the second quarter of 1999
from $5.1 million for the 1998 second quarter to $4.2 million in 1999 due
primarily to lower sales in Germany and smaller European countries, and the
adverse impact of the stronger U.S. dollar on local European currency sales.
Net sales for the second quarter of 1999 in the Company's discontinued North
American retail product line decreased from $2.4 million to zero. This reduction
occurred because the Company completed its restructuring in the third quarter of
1998 and sold all of the remaining inventory of its discontinued North American
retail product line at that time.
The Company's overall gross profit margin for the second quarter of 1999 was
40.3% compared to a gross margin of 36.7% for the same period last year. The
lower gross margin in 1998 was due primarily to the selling by the Company of
its remaining inventory in the discontinued North American retail business at
average selling prices that approximated book value during the second quarter of
1998. In the Company's continuing businesses, the gross margin decreased
slightly to 40.3% for the second quarter of 1999 compared to 40.7% in the 1998
second quarter.
Selling, general and administrative expenses increased 2.7% from the second
quarter of 1998 to the second quarter of 1999. In dollars, the Company's
selling, general and administrative expenses increased $200,000 during the
second quarter of 1999 to $7.1 million from $6.9 million in 1998. The increase
was primarily attributable to increased amortization, depreciation and
commission expense, partially offset by lower bad debt expense provisions. The
increased amortization expense related to businesses acquired and non-compete
agreements entered into by the Company during or after the second quarter of
1998. In the second quarter of 1999, the Company expensed a full quarter of this
amortization compared to only a partial amount in the second quarter of 1998.
In the second quarter of 1999, the Company recorded $13,000 of interest expense
compared to $96,000 of interest expense for the second quarter of 1998. This
$83,000 difference occurred due to reduced borrowing under the Company's
revolving credit agreement and lower average borrowing costs.
The Company recorded income tax expense of $833,000 for the second quarter of
1999 compared to approximately $654,000 for the same quarter of 1998. The
increase was due to slightly improved results in 1999 and a higher tax rate in
1999 due to the effect of completing the Company's relocation of its
headquarters from Ohio to California during 1998.
Six Months 1999 versus 1998
Net sales for the six months ended June 30, 1999 were $43.7 million, an increase
of 7.0% over the net sales of $40.8 million for the same period last year (after
excluding the net sales of $6.8 million related to the Company's discontinued
North American retail business). Net income was comparable in the six month
period ended June 30, 1999 at $1,649,000 or $0.25 per share (basic) and $0.24
per share (diluted), compared to $1,658,000 or $0.26 per share (basic) and $0.25
per share (diluted) in the six month period ended June 30, 1998.
Net sales in the Company's technology businesses (subscription broadcasting, OEM
and private label) for the first half of 1999 increased 9.6% to $33.4 million
from $30.4 million for the same period last year due to stronger sales to cable
providers. Net sales from the continuing retail businesses (One For All(R)
international, Eversafe and direct import) for the first half of 1999 decreased
.8% to $10.3 million from $10.4 million for the same period last year. There
were no net sales from the discontinued North American retail business (One For
All US and Canada) during the first half of 1999.
Gross margins for the first six months of 1999 were 39.9% compared to 34.3% for
the same period last year due primarily to the selling by the Company of its
remaining inventory in the discontinued
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North American retail business at average selling prices that approximated book
value during the first half of 1998. In the Company's continuing businesses,
gross margin was 39.9% for the first half of 1999 compared to 40.0% in the 1998
first half.
Selling, general and administrative expenses increased to $14.6 million in the
first half of 1999, compared to $13.6 million in the first half of 1998. The
increase was partially attributable to increased amortization expense from the
effect of a full six months of amortization expense in 1999 compared to a
partial period of amortization in the first half of 1998 relating to businesses
acquired or noncompete agreements entered into by the Company during or after
the first half of 1998. Additionally, increased depreciation expense, employee
relocation costs, and employee bonus and commission accruals contributed to this
increase in the first half of 1999.
Interest expense decreased by $191,000 for the first half of 1999 to $45,000
from $236,000 for the same period in 1998 due to reduced borrowing under the
Company's revolving credit agreement and lower average borrowing costs.
The Company recorded income tax expense of $1.1 million for the first half of
1999 compared to approximately $861,000 for the same period of 1998. The
increase was due to improved results in 1999 and a higher tax rate in 1999 due
to the effect of completing the Company's relocation of its headquarters from
Ohio to California during 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are its operations and bank credit
facilities. Cash provided by operating activities was $8.1 million for the six
months ended June 30, 1999 compared to $1.7 million for the same period in 1998.
The improvement in 1999 cash flow from operating activities is principally due
to non-recurring expenditures of $3.1 million in the first six months of 1998
related to the Company's restructuring.
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 June 30, 1999 was the Fixed Rate option as defined in the
agreement (7.50% and 7.375% at June 30, 1999 and December 31, 1998,
respectively), 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 June 30, 1999 and December 31, 1998, the
applicable margin was 1.5% and 2%, respectively. The revolving credit facility,
which expires October 23, 2001, is secured by a first priority security interest
in the Company's cash and cash equivalents, accounts receivable, inventory,
equipment, and general intangibles of the Company. The Company pays a commitment
fee of a maximum rate of 3/16 of 1% per year on the unused portion of the credit
line. Under the terms of this revolving credit agreement, the Company's ability
to pay cash dividends on its common stock is restricted and the Company is
subject to certain financial covenants and other restrictions that are standard
for these types of agreements. However, the Company has authority under this
credit facility to acquire up to 1,000,000 shares of its common stock in market
purchases and, since the date of this agreement, the Company has acquired
approximately 54,500 shares of stock, at a cost of approximately $564,500, which
it holds as treasury shares and which 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 June 30,
1999, the Company had no balance outstanding on the credit line. The credit
facility can be used for business acquisitions, payments to acquire fixed
assets, treasury stock purchases and other working capital needs. The Company
had $534,000 of outstanding import letters of credit as of June 30, 1999. 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.
Capital expenditures in the first half of 1999 and 1998 were $620,000 and
$1,038,000, respectively. These expenditures related primarily to acquiring
product tooling and relocating the Company's headquarters from Twinsburg, Ohio
to Cypress, California during 1998.
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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 the first quarter of 1998 and $800,000 was paid in cash in the
first quarter of 1999. The remaining $500,000 is scheduled to be paid in the
third quarter of 1999.
Effective July 1, 1999, the Company acquired a remote control distributor in
Spain for $750,000. The acquisition was paid for in June and recorded as a
prepaid asset in the June 30, 1999 balance sheet. The Company will record the
purchase as an acquisition during the third quarter of 1999.
It is the Company's policy to carefully monitor the state of its business, cash
requirements and capital structure. The Company believes that funds generated
from operations and available from its borrowing capacity will be sufficient to
fund current business operations as well as anticipated growth at least through
the end of 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 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 through June 1999. The Company
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
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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 above, in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as those discussed elsewhere in this Quarterly Report of the 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, 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 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 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
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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. The effect of seasonality on the Company's
business has been reduced with the growth of the Company's technology business.
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.
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
12
<PAGE> 13
for the Company's products. Moreover, the Company cautions that any increases in
sales or growth in revenue that it achieves may be transitory and should by no
means be construed to mean that such increases or growth will continue.
Dependence Upon Timely Product Introduction
The Company's ability to remain competitive in the 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.
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.
13
<PAGE> 14
Potential for Litigation
As is typical in the Company's industry and the nature and kind of business in
which the Company is engaged, from time to time, various claims, charges and
litigation are asserted or commenced by third parties against the Company or by
the Company against third parties arising from or related to product liability,
infringement of patent or other intellectual property rights, breach of
warranty, contractual relations, or employee relations. The amounts claimed may
be substantial but may not bear any reasonable relationship to the merits of the
claims or the extent of any real risk of court awards. While it is the opinion
of management that the Company's products do not infringe any third parties'
patent or other intellectual property rights, the costs associated with
defending or pursuing any such claims or litigation could be substantial and
amounts awarded as final judgments, if any, in any such potential or pending
litigation, could have a significant and material adverse effect on the
Company's financial condition or results of operations.
General Economic Conditions
General economic conditions, both domestic and foreign, have an impact on the
Company's business and financial results. From time to time the markets in which
the Company sells its products experience weak economic conditions that may
negatively affect the sales of the Company's products. To the extent that
general economic conditions affect the demand for products sold by the Company,
such conditions could have an adverse effect on the Company's business.
1997 Restructuring Efforts
The Company believes that the discontinuation of its North American retail
business and its subsequent restructuring favorably impacted the Company's
ongoing operations due to (i) reductions in the Company's annual overhead which
were a result of closing the Company's Twinsburg, Ohio facility, (ii)
eliminating employee and other costs associated with operating this business,
and (iii) generating revenues from licensing certain of its technology and
trademarks. There can be no assurance that any such cost savings or revenues
will continue to occur and if they do, that they will be significant or
maintained.
Effects on the Company Due to International Operations
By operating its business in countries outside of the United States, the Company
is exposed to fluctuations in foreign currency exchange rates, exchange ratios,
nationalization or expropriation of assets, import/export controls, political
instability, variations in the protection of intellectual property rights,
limitations on foreign investments and restrictions on the ability to convert
currency. These risks are inherent in conducting operations in geographically
distant locations, with customers speaking different languages and having
different cultural approaches to the conduct of business, any one of which alone
or collectively, may have an adverse affect on the Company's international
operations, and consequently on the Company's business, operating results and
financial condition. While the Company will continue to work toward minimizing
any adverse affects of conducting its business abroad, no assurance can be made
that the Company will be successful in minimizing any such affects.
OUTLOOK
The Company's focus in 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,
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.
14
<PAGE> 15
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. The Company cautions, however, that no
assurances can be made that any suitable acquisition targets or partnership
opportunities will be identified and, if identified, that a transaction can be
consummated. Moreover, if consummated, no assurances can be made that any such
acquisition or partnership will profitably add to the Company's operations.
While management believes that the forward looking statements made in this
report are based on reasonable assumptions, the actual outcome of such
statements is subject to a number of risks and uncertainties, including
continued acceptance of the Company's technology and products, the impact of
competitive pressures, including products and pricing, locating and finalizing
acceptable acquisition targets and/or strategic partners, the availability of
financing for acquisitions on terms acceptable to the Company, fluctuations in
currency exchange rates, the consolidation of and new competition experienced by
members in the cable industry, principally from satellite and other similar
broadcast providers, general economic and stock market conditions and other
risks which are otherwise set forth in this Quarterly Report on Form 10-Q and
the Company's other filings with the Securities and Exchange Commission.
ITEM 3. LEGAL PROCEEDINGS
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 was seeking damages in excess of
$25,000. On June 25, 1999, the parties entered into a Settlement Agreement and
Mutual Release in which Vereecken dismissed with prejudice all claims he had
against the Company in exchange for which the Company allowed him to exercise
some stock options that were in dispute.
On May 10, 1999, Kelly Temporary Services filed suit against the Company in the
Court of Common Pleas, Summit County, Ohio, Kelly Temporary Services v.
Universal Electronics, Case No. CV-1999-04-1721, alleging that the Company
failed to pay amounts due Kelly Temporary Services. The Company believes that
the parties have reached agreement which has settled this suit. After completion
of the settlement documents, Kelly will dismiss this matter with prejudice.
On July 7, 1999, The Chamberlain Group, Inc. filed suit against the Company, The
Chamberlain Group, Inc. v. Universal Electronics Inc. a/k/a One For All, Inc.,
Civil Action No. 99C-4471, alleging that by selling its garage door opener line
of products, the Company infringes and contributes to the infringement of one of
The Chamberlain Group's patents. The Company has until approximately September
30, 1999 to answer the complaint, at which time, the Company will deny each and
every allegation made by The Chamberlain Group. In addition, the Company will
seek to enforce its rights to indemnification from the licensor of the garage
door opener technology used in the Company's products.
ITEM 4. 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 therefore, affected by changes in market interest rates. At June
30, 1999, the Company had no balance outstanding on the credit line. The
interest rate as of June 30, 1999 was 7.50%. 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, British Pounds, and German Marks, thereby
15
<PAGE> 16
creating exposures to changes in exchange rates. Changes in the local
currencies/U.S. Dollars exchange rate may positively or negatively affect the
Company's sales, gross margins and retained earnings. The Company, from time to
time, enters into foreign currency exchange agreements to manage its exposure
arising from fluctuating exchange rates related to specific transactions,
primarily foreign currency forward contracts for inventory purchases. The
Company 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 June 30, 1999, the Company believes that
movements in foreign currency rates should not materially affect the financial
position of the Company, although no assurance can be made that any such foreign
currency rate movements in the future will not have a material affect.
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders' was held on June 8, 1999. In
connection with the Annual Meeting of Stockholders, the following are the
results of the vote taken on the various matters presented to the Company's
stockholders.
Proposal One: The election of the Company's Board of Directors
<TABLE>
<CAPTION>
Nominee - Class I Directors In Favor Withheld
- --------------------------- -------- --------
<S> <C> <C>
Paul D. Arling 5,945,990 5,050
Camille Jayne 5,945,890 5,150
Nominee - Class II Directors
- ----------------------------
J.C. Sparkman 5,945,590 5,450
</TABLE>
The remaining Class II Directors are Peter L. Gartman, Bruce A. Henderson, F.
Rush McKnight and William C. Mulligan. They were elected to serve a two year
term at the 1998 Annual Meeting of Stockholders.
Proposal Two: The ratification and approval of the Universal Electronics
Inc. 1999 Stock Incentive Plan
<TABLE>
<CAPTION>
In Favor Opposed Abstained Broker Non-Vote
-------- ------- --------- ---------------
<S> <C> <C> <C>
5,694,089 247,701 9,250 0
</TABLE>
Proposal Three: The ratification of the approval of PricewaterhouseCoopers
L.L.P. as the Company's independent auditors for the year
ending December 31, 1999
<TABLE>
<CAPTION>
In Favor Opposed Abstained Broker Non-Vote
-------- ------- --------- ---------------
<S> <C> <C> <C>
5,929,350 17,675 4,015 0
</TABLE>
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 6. OTHER INFORMATION
ITEM 7. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
(A) Exhibits
11.1 Statements re: Computation of Per Share
Earnings (filed herewith) 19
(B) Reports on Form 8-K
There were no reports on Forms 8-K filed
during the quarter ended June 30, 1999.
(C) Exhibit 27 Financial Data Schedule 20
</TABLE>
17
<PAGE> 18
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: August 16, 1999 /s/ Paul Arling
----------------------------------------
Paul Arling
President and Chief Operating Officer
18
<PAGE> 1
EXHIBIT 11.1
UNIVERSAL ELECTRONICS INC.
COMPUTATION OF PER SHARE EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- --------------------------------
1999 1998 1999 1998
----------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
Common stock
outstanding 6,397,002 6,312,199 6,397,002 6,312,199
beginning of year
----------- -------------- ----------- ---------------
Weighted average
common stock
outstanding from
exercise of stock 234,069 53,888 167,143 19,831
options, treasury
stock purchases
and employee
benefit plan
----------- -------------- ----------- ---------------
Weighted average
common stock 6,631,071 6,366,087 6,564,145 6,332,030
outstanding
=========== ============== =========== ===============
Stock options 424,807 357,100 318,950 336,232
=========== ============== =========== ===============
Weighted average
common stock and
common stock 7,055,878 6,723,187 6,883,095 6,668,262
equivalents
outstanding
=========== ============== =========== ===============
Net income
attributable to $ 1,199,413 $ 1,313,778 $ 1,648,176 $ 1,657,680
common stockholders
=========== ============== =========== ===============
Net income per
common stock and
common stock
equivalents:
Basic $ 0.18 $ 0.21 $ 0.25 $ 0.26
=========== ============== =========== ===============
Diluted $ 0.17 $ 0.20 $ 0.24 $ 0.25
=========== ============== =========== ===============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,546
<SECURITIES> 0
<RECEIVABLES> 21,493
<ALLOWANCES> (1,874)
<INVENTORY> 14,010
<CURRENT-ASSETS> 42,778
<PP&E> 9,689
<DEPRECIATION> (5,714)
<TOTAL-ASSETS> 58,411
<CURRENT-LIABILITIES> 10,191
<BONDS> 0
0
0
<COMMON> 75
<OTHER-SE> 48,145
<TOTAL-LIABILITY-AND-EQUITY> 58,411
<SALES> 43,699
<TOTAL-REVENUES> 43,699
<CGS> 26,249
<TOTAL-COSTS> 14,597
<OTHER-EXPENSES> 14
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45
<INCOME-PRETAX> 2,794
<INCOME-TAX> 1,145
<INCOME-CONTINUING> 1,649
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,649
<EPS-BASIC> .25
<EPS-DILUTED> .24
</TABLE>
