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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 SEPTEMBER 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)
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 - 6,731,463 shares of Common
Stock, par value $.01 per share, of the Registrant were outstanding at September
30, 1999.
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UNIVERSAL ELECTRONICS INC.
INDEX
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 14
Item 4. Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION
Item 6. Other Information 15
Item 7. Exhibits and Reports on Form 8-K 15
Signature 16
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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
UNIVERSAL ELECTRONICS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share-related data)
September 30, December 31,
1999 1998
(Unaudited)
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,291 $ 1,489
Accounts receivable 24,426 23,639
Inventories 14,465 14,834
Prepaid expenses and other current assets 2,037 1,835
Deferred income taxes 1,664 1,269
-------- --------
Total current assets 49,883 43,066
Equipment, furniture and fixtures, net 3,974 4,440
Goodwill and other intangible assets, net 5,502 6,158
Other assets 1,506 1,548
Deferred income taxes 2,700 5,465
-------- --------
Total assets $ 63,565 $ 60,677
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility $ -- $ 4,786
Accounts payable 7,706 7,757
Accrued income taxes 364 331
Accrued compensation 1,675 1,090
Other accrued expenses 2,838 2,180
-------- --------
Total current liabilities 12,583 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
authorized; 7,561,068 and 7,226,607 shares issued at
September 30, 1999 and December 31, 1998, respectively 76 72
Paid-in capital 60,427 57,972
Currency translation adjustment (118) (122)
Accumulated deficit (2,667) (6,653)
Common stock in treasury, 829,605 shares at September 30,
1999 and December 31, 1998 (6,736) (6,736)
-------- --------
Total stockholders' equity 50,982 44,533
-------- --------
Total liabilities and stockholders' equity $ 63,565 $ 60,677
======== ========
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)
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
------------ ------------ --------- --------------
Net sales
On-going business $ 28,116 $ 23,732 $ 71,814 $ 64,580
Discontinued North American retail
business -- 284 -- 7,087
-------- -------- -------- --------
28,116 24,016 71,814 71,667
Cost of sales
On-going business 16,328 14,164 42,577 38,690
Discontinued North American retail
business -- 359 -- 7,162
-------- -------- -------- --------
16,328 14,523 42,577 45,852
Gross profit 11,788 9,493 29,237 25,815
Selling, general and administrative
expenses 7,935 6,837 22,532 20,396
-------- -------- -------- --------
Operating income 3,853 2,656 6,705 5,419
Interest expense (income) (57) 81 (16) 313
Other expense (income) (53) (92) (35) (80)
-------- -------- -------- --------
Income before income taxes 3,963 2,667 6,756 5,186
Provision for income taxes 1,625 1,058 2,770 1,919
-------- -------- -------- --------
Net income $ 2,338 $ 1,609 $ 3,986 $ 3,267
======== ======== ======== ========
Net income per share:
Basic $ .35 $ .25 $ .60 $ .51
======== ======== ======== ========
Diluted $ .33 $ .24 $ .57 $ .49
======== ======== ======== ========
Weighted average common stock outstanding:
Basic 6,723 6,438 6,614 6,387
======== ======== ======== ========
Diluted 7,149 6,692 6,969 6,622
======== ======== ======== ========
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)
Nine Months Ended September 30,
-------------------------------
1999 1998
--------- -----------
Cash provided by operating activities:
Net income $ 3,986 $ 3,267
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,766 1,584
Provision for doubtful accounts 706 609
Deferred income taxes 2,370 1,833
Other -- 124
Changes in operating assets and liabilities:
Accounts receivable (1,493) 4,202
Inventory 369 (1,203)
Prepaid expenses and other assets 413 (692)
Accrued restructuring expense -- (3,929)
Accounts payable and accrued expenses 1,992 (186)
Accrued income taxes 33 424
-------- --------
Net cash provided by operating activities 11,142 6,033
Cash used for investing activities:
Acquisition of fixed assets (1,222) (1,729)
Payments for businesses acquired (1,550) (3,200)
Sale of building -- 1,680
Other (245) (1,205)
-------- --------
Net cash used for investing activities (3,017) (4,454)
-------- --------
Cash used for financing activities:
Short-term bank borrowing 10,810 36,026
Short-term bank payments (15,596) (37,112)
Proceeds from stock options exercised 2,459 1,530
Treasury stock purchased -- (2,761)
-------- --------
Net cash used for financing activities (2,327) (2,317)
Effect of exchange rate changes on cash 4 (25)
-------- --------
Net increase (decrease) in cash and cash 5,802 (763)
equivalents
Cash and cash equivalents at beginning of period 1,489 1,097
-------- --------
Cash and cash equivalents at end of period $ 7,291 $ 334
======== ========
The accompanying notes are an integral part of these financial statements.
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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/A. 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):
September 30, December 31,
1999 1998
------------- ------------
Components $ 6,001 $ 5,993
Finished goods 8,464 8,841
------- -------
Total inventories $14,465 $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 nine-month periods ended September 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:
Nine Months Ended September 30,
-------------------------------
1999 1998
------- ---------
Net Sales
United States $50,041 $54,952
United Kingdom 5,358 5,519
Germany 4,935 3,657
All Other 11,480 7,539
------- -------
Total Net Sales $71,814 $71,667
======= =======
September 30, 1999 December 31, 1998
------------------ -----------------
Identifiable Assets
United States $ 7,726 $ 8,345
All Other Countries 3,256 3,801
------- -------
Total Identifiable Assets $10,982 $12,146
======= =======
Specific identification of customer location 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
Third Quarter 1999 versus 1998
Net sales for the 1999 third quarter were $28.1 million compared to $23.7
million for the same quarter last year (after excluding net sales of $.3 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 73.5% of net sales for the third quarter of
1999 compared to 69.5% for the third quarter of 1998. Net sales from the
continuing retail businesses (One For All(R) international, Eversafe and direct
import) accounted for approximately 26.5% of total third quarter 1999 net sales
compared to 29.4% for the corresponding period in 1998. There were no net sales
from the discontinued North American retail business (One For All US and Canada)
during the third quarter of 1999.
Net sales in the Company's technology businesses for the third quarter of 1999
increased by approximately 23.8% from $16.7 million for the same period last
year to $20.7 million in 1999. The increase in technology sales is primarily due
to increased shipments in cable, private label and European OEM.
The Company's net sales for the 1999 third quarter from its continuing retail
businesses were $7.5 million, an increase of 5.8% from net sales of $7.1 million
in 1998 for the same quarter last year. Direct import revenues decreased 58.0%
for the third quarter of 1999 from $952,000 to $399,000. Direct import revenues
for the third 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 continuing retail business group) increased 22.5% for the third
quarter of 1999 from $5.7 million for the 1998 third quarter to $7.0 million in
1999 due to continued retail growth in Europe.
Net sales for the third quarter of 1999 in the Company's discontinued North
American retail product line decreased from $.3 million to zero. This reduction
occurred because the Company completed its restructuring
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in the third quarter of 1998 and sold substantially 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 third quarter of 1999 was
41.9% compared to a gross margin of 39.5% for the same period last year. The
increase in gross margin was driven primarily by higher margins in the Company's
technology businesses, due to the introduction of new products and cost
reductions in certain component parts.
Selling, general and administrative expenses increased 16.1% from the third
quarter of 1998 to the third quarter of 1999. In dollars, the Company's selling,
general and administrative expenses increased $1.1 million during the third
quarter of 1999 to $7.9 million from $6.8 million in 1998. The increase was
primarily attributable to increased amortization, depreciation, research and
development, trade show costs, bonus accruals and bad debt expense.
In the third quarter of 1999, the Company recorded $57,000 of interest income
compared to $81,000 of interest expense for the third quarter of 1998. This
$138,000 difference occurred due to reduced borrowing under the Company's
revolving credit agreement and interest earned on accumulated cash balances in
1999.
The Company recorded income tax expense of $1.6 million for the third quarter of
1999 compared to approximately $1.1 million for the same quarter 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.
Nine Months 1999 versus 1998
Net sales for the nine months ended September 30, 1999 were $71.8 million, an
increase of 11.2% over the net sales of $64.6 million for the same period last
year (after excluding net sales of $7.1 million related to the Company's
discontinued North American retail business). Net income for the first nine
months of 1999 was $4.0 million or $0.60 per share (basic) and $0.57 per share
(diluted), compared to $3.3 million or $0.51 per share (basic) and $0.49 per
share (diluted) for the same period last year.
Net sales in the Company's technology businesses (subscription broadcasting, OEM
and private label) for the first nine months of 1999 increased 14.6% to $54.0
million from $47.1 million for the same period last year due primarily to
stronger sales to cable providers and increased shipments of private label
products, partially offset by reduced OEM product shipments. Net sales from the
continuing retail businesses (One For All(R) international, Eversafe and direct
import) for the first nine months of 1999 increased 1.9% to $17.8 million from
$17.4 million for the same period last year due to continued retail growth in
Europe. There were no net sales from the discontinued North American retail
business during the first nine months of 1999.
Gross margins for the first nine months of 1999 were 40.7% compared to 36.0% for
the same period last year due primarily to the sale by the Company of
substantially all of its remaining inventory in the discontinued North American
retail business at average selling prices that approximated book value during
the first half of 1998, higher margins in the Company's technology businesses
due to the introduction of new products in 1999, and cost reductions in certain
component parts in 1999.
Selling, general and administrative expenses increased to $22.5 million in the
first nine months of 1999, compared to $20.4 million in the first nine months of
1998. The increase was primarily attributable to increased amortization,
depreciation, employee relocation costs, research and development expense, and
employee bonus accruals in the first nine months of 1999.
Interest expense decreased by $329,000 for the first nine months of 1999 to
$16,000 of interest income from $313,000 of interest expense for the same period
in 1998 due to reduced borrowing under the Company's revolving credit agreement
and interest earned on accumulated cash balances in 1999.
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The Company recorded income tax expense of $2.8 million for the first nine
months of 1999 compared to approximately $1.9 million 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 $11.1 million for the nine
months ended September 30, 1999 compared to $6.0 million for the same period in
1998. The improvement in 1999 cash flow from operating activities is principally
due to non-recurring expenditures of $3.9 million in the first nine 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 September 30, 1999 was the Fixed Rate option as defined in the
agreement (7.0% and 7.375% at September 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 September 30, 1999 and December 31, 1998, the
applicable margin was 1.5% and 2.0% 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 September
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 $619,000 of outstanding import letters of credit as of September 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 nine months of 1999 and 1998 were $1.2 million
and $1.7 million, respectively. These expenditures related primarily to
acquiring product tooling and relocating the Company's headquarters from
Twinsburg, Ohio to Cypress, California during 1998.
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
fourth quarter of 1999.
Effective July 1, 1999, the Company completed its acquisition of a remote
control distributor in Spain for $750,000.
It is the Company's policy to carefully monitor the state of its business, cash
requirements and capital structure. The Company believes that funds generated
from operations and available from its borrowing capacity will be sufficient to
fund current business operations as well as anticipated growth at least through
the end of 2000, however, there can be no assurances that this will occur.
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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, during this year, the
Company has fully tested and has 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
September 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 continues to
monitor its customers and suppliers to help ensure that their performance is not
delayed or withheld.
Although the Company believes that it has taken and will continue to take
appropriate precautions against disruptions of its information technology and
non-information technology systems and products due to the Year 2000 issue,
there can be no assurance that the Company will identify all Year 2000 problems
in advance of their occurrence, or that the Company will be able to successfully
remedy any problems that are discovered. Furthermore, there can be no assurance
that the Company's suppliers and customers will not be adversely affected by the
Year 2000 issue. Although the Company believes that its information technology
and non-information technology systems and products are Year 2000 compliant, the
Company believes that the reasonable worst case scenario may involve the failure
of its customers to pay for the Company's product in a timely manner or the
failure of its suppliers to deliver products timely. However, the Company
believes that due to its state of readiness with respect to the Year 2000 issue,
that any such delays should not have a material adverse effect on the Company's
business, financial and operating results, as its systems should serve as
adequate backup to help ensure that its customers and suppliers perform their
obligations to the Company in a timely and adequate fashion. The Company
cautions, however, that until it enters the year 2000, the actual impact of the
Year 2000 issue will not be known and that such actual results may differ
materially from those anticipated by the Company resulting in a material adverse
effect on the Company's business, financial and operating results. The Company
will, however, continue to monitor its customers and suppliers, and take timely
steps to correct any system or product failures or interruptions that the
Company or any its suppliers or customers develop or that have been discovered.
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RISK FACTORS
Forward Looking Statements
The Company cautions that the following important factors, among others
(including but not limited to factors discussed above, in "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 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, 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.
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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;
however, the Company cautions that such growth may be transitory in nature and,
thus, may not continue. 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 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.
12
13
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. The loss of any
of the Company's 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 affect on the Company's financial condition or results of
operations.
Competition
The remote control industry is characterized by intense competition based
primarily on product availability, price, speed of delivery, ability to tailor
specific solutions to customer needs, quality and depth of product lines. The
Company's competition is fragmented across its product lines, and accordingly,
the Company does not compete with any one company across all product lines. The
Company competes with a variety of entities, some of which have greater
financial and other resources than the Company. The Company's ability to remain
competitive in this industry depends in part on its ability to successfully
identify new product opportunities and develop and introduce new products and
enhancements on a timely and cost effective basis as well as its ability to
identify and enter into strategic alliances with entities doing business within
the industries the Company serves. There can be no assurances that the Company
and its product offerings will be and/or remain competitive or that any
strategic alliances, if any, which the Company enters into will achieve the
type, extent and amount of success or business that the Company expects or hopes
to achieve.
Potential for Litigation
As is typical in the Company's industry and the nature and kind of business in
which the Company is engaged, from time to time, various claims, charges and
litigation are asserted or commenced by third parties against the Company or by
the Company against third parties arising from or related to product liability,
infringement of patent or other intellectual property rights, breach of
warranty, contractual relations, or employee relations. The amounts claimed may
be substantial but may not bear any reasonable relationship to the merits of the
claims or the extent of any real risk of court awards. While it is the opinion
of management that the Company's products do not infringe any third parties'
patent or other intellectual property rights, the costs associated with
defending or pursuing any such claims or litigation could be substantial and
amounts awarded as final judgments, if any, in any such potential or pending
litigation, could have a significant and material adverse effect on the
Company's financial condition or results of operations.
General Economic Conditions
General economic conditions, both domestic and foreign, have an impact on the
Company's business and financial results. From time to time the markets in which
the Company sells its products experience weak economic conditions that may
negatively affect the sales of the Company's products. To the extent that
general economic conditions affect the demand for products sold by the Company,
such conditions could have an adverse effect on the Company's business.
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
13
14
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.
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 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. In September 1999, the
parties reached a confidential settlement and at such time, Kelly dismissed its
action against the Company with prejudice.
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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
September 30, 1999, the Company had no balance outstanding on the credit line.
The interest rate as of September 30, 1999 was 7.0%. The Company has wholly
owned subsidiaries in the Netherlands, United Kingdom and Germany. Sales from
these operations are typically denominated in local currencies including Euro
Dollars, Dutch Gilders, British Pounds, and German Marks, thereby creating
exposures to changes in exchange rates. Changes in the local currencies/U.S.
Dollars exchange rate may positively or negatively affect the Company's sales,
gross margins and retained earnings. The Company, from time to time, enters into
foreign currency exchange agreements to manage its exposure arising from
fluctuating exchange rates related to specific transactions, primarily foreign
currency forward contracts for inventory purchases. The Company 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
September 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.
PART II. OTHER INFORMATION
ITEM 6. OTHER INFORMATION
ITEM 7. EXHIBITS AND REPORTS ON FORM 8-K
Page
----
(A) Exhibits
11.1 Statements re: Computation of Per Share
Earnings (filed herewith) 17
(B) Reports on Form 8-K
There were no reports on Forms 8-K filed
during the quarter ended September 30, 1999.
(C) Exhibit 27 Financial Data Schedule 18
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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: November 15, 1999 \s\ Paul Arling
----------------------------------------
Paul Arling
President, Chief Operating Officer and
Chief Financial Officer
16
1
Exhibit 11.1
UNIVERSAL ELECTRONICS INC.
COMPUTATION OF PER SHARE EARNINGS
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Common stock outstanding
beginning of period 6,683,000 6,351,000 6,397,000 6,312,000
---------- ---------- ---------- ----------
Weighted average common
stock outstanding from
exercise of stock options,
treasury stock purchases
and employee benefit plan 40,000 87,000 217,000 75,000
---------- ---------- ---------- ----------
Weighted average common
stock outstanding 6,723,000 6,438,000 6,614,000 6,387,000
========== ========== ========== ==========
Stock options 426,000 254,000 355,000 235,000
========== ========== ========== ==========
Weighted average common
stock and common stock
equivalents outstanding 7,149,000 6,692,000 6,969,000 6,622,000
========== ========== ========== ==========
Net income attributable to
common stockholders $2,338,000 $1,609,000 $3,986,000 $3,267,000
========== ========== ========== ==========
Net income per common
stock and common stock
equivalents:
Basic $ 0.35 $ 0.25 $ 0.60 $ 0.51
========== ========== ========== ==========
Diluted $ 0.33 $ 0.24 $ 0.57 $ 0.49
========== ========== ========== ==========
5
9-MOS
DEC-31-1999
JAN-01-1999
SEP-30-1999
7,291
0
26,553
(2,127)
14,465
49,883
10,291
(6,317)
63,565
12,583
0
0
0
76
50,906
63,565
71,814
71,814
42,577
22,532
(35)
0
(16)
6,756
2,770
3,986
0
0
0
3,986
.60
.57
