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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 0-21044
UNIVERSAL ELECTRONICS INC.
(Exact Name of Registrant as Specified in its Charter)
     
Delaware   33-0204817
(State or Other Jurisdiction   (I.R.S. Employer
of Incorporation or Organization)   Identification No.)
     
6101 Gateway Drive    
Cypress, California   90630
(Address of Principal Executive Offices)   (Zip Code)
Registrant’s telephone number, including area code: (714) 820-1000
Securities registered pursuant to Section 12(b) of the Act:
     
Common Stock, par value $.01 per share   Nasdaq Global Select Market
(Title of Class)   (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if whether the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, any Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the
Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
    (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter was $224,358,998 based upon the closing sale price as reported on the NASDAQ Global Select Market for that date.
As of March 11, 2010, 13,683,819 shares of Common Stock, par value $.01 per share, of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s notice of annual meeting of shareowners and proxy statement to be filed pursuant to Regulation 14A within 120 days after registrant’s fiscal year end of December 31, 2009 are incorporated by reference into Part III of this Form 10-K. The Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2010.
Except as otherwise stated, the information contained in this Form 10-K is as of December 31, 2009.
Exhibit Index appears on page 84. This document contains 87 pages.
 
 

 


 

UNIVERSAL ELECTRONICS INC.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2009
Table of Contents
             
Item       Page  
Number       Number  
           
   
 
       
1       3  
1A       11  
1B       19  
2       19  
3       20  
   
 
       
           
   
 
       
4       20  
5       20  
6       23  
7       23  
7A       37  
8       39  
9       79  
9A       79  
9B       81  
   
 
       
           
   
 
       
10       81  
11       81  
12       81  
13       82  
14       82  
   
 
       
           
   
 
       
15       82  
        83  
        84  
 EX-10.31
 EX-10.32
 EX-21.1
 EX-23.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

 


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Forward-Looking Statements
This Annual Report on Form 10-K, including “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”, contains statements that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are statements that may be deemed forward-looking statements. Forward-looking statements include but are not limited to any projections of revenue, margins, expenses, tax provisions, earnings, cash flows, benefit obligations, share repurchases or other financial items; plans, strategies and objectives of management for future operations; expected development or relating to products or services; future economic conditions or performance; pending claims or disputes; expectation or belief; and assumptions underlying any of the foregoing.
These forward-looking statements are based upon management’s assumptions. While we believe the forward-looking statements made in this report are based upon reasonable assumptions, any assumption is subject to a number of risks and uncertainties. If these risks and uncertainties ever materialize and management’s assumptions prove incorrect, our results may differ materially from those expressed or implied by these forward-looking statements and assumptions. Further, any forward-looking statement speaks only as of the date the statement is made. We are not obligated to update forward-looking statements to reflect unanticipated events or circumstances occurring after the date the statement was made. New factors emerge from time to time. It is not possible for management to predict or assess the impact of all factors on the business, or the extent they 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.
Management assumptions that are subject to risks and uncertainties include those that are made about macroeconomic and geopolitical trends and events; foreign currency exchange rates; the execution and performance of contracts by customers, suppliers and partners; the challenges of managing asset levels, including inventory; the difficulty of aligning expense levels with revenue changes; the outcome of pending legislation and accounting pronouncements; and other risks described in this report, including those discussed in “ITEM 1A. RISK FACTORS”, and described in our Securities and Exchange Commission filings subsequent to this report.
PART I
ITEM 1. BUSINESS
Business of Universal Electronics Inc.
Universal Electronics Inc. was incorporated under the laws of Delaware in 1986 and began operations in 1987. The principal executive offices are located at 6101 Gateway Drive, Cypress, California 90630. As used herein, the terms “we”, “us” and “our” refer to Universal Electronics Inc. and its subsidiaries unless the context indicates to the contrary.
Additional information regarding UEI may be obtained at www.uei.com.

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Business Segment
Overview
Universal Electronics Inc. is a provider of a broad line of products, software, and technologies that are marketed to enhance home entertainment systems. Our offerings include the following:
    easy-to-use, pre-programmed universal infrared (“IR”) and radio frequency (“RF”) remote controls that are sold primarily to multiple systems operators (“MSOs”), consumers, original equipment manufacturers (“OEMs”), and private label customers,
    audio-video (“AV”) accessories sold to consumers,
    integrated circuits, on which our software and universal IR remote control database is embedded, sold primarily to OEMs and private label customers,
    intellectual property which we license primarily to OEMs, software development companies, private label customers, and MSOs, and
    software, firmware and technology solutions that can enable devices such as TVs, set-top boxes, stereos, automotive audio systems, cell phones and other consumer electronic devices to wirelessly connect and interact with home networks and interactive services to deliver digital entertainment and information.
Our business is comprised of one reportable segment.
Principal Products and Markets
Our principal markets include MSOs in the cable and satellite subscription broadcasting markets, as well as OEM, private label, retail and custom installer companies that operate in the consumer electronics market.
We provide MSOs (cable, satellite and internet protocol television providers) both domestically and internationally, with our universal remote control devices and integrated circuits, on which our software and IR code database is embedded, to support the demand associated with the deployment of digital set-top boxes that contain the latest technology and features. We also sell our universal remote control devices and integrated circuits, on which our software and IR code database is embedded, to OEMs that manufacture wireless control devices, cable converters or satellite receivers.
For the years ended December 31, 2009, 2008, and 2007, our sales to DirecTV and its sub-contractors collectively accounted for 21.1%, 19.3% and 16.9% of our net sales, respectively. Our sales to Comcast Communications, Inc. and its sub-contractors collectively accounted for 11.3%, 13.4% and 13.3% of our net sales for the years ended December 31, 2009, 2008 and 2007, respectively. No other single customer accounted for 10% or more of our net sales in 2009, 2008, or 2007.
We continue to pursue further penetration of the more traditional OEM consumer electronics markets. Customers in these markets generally package our wireless control devices for resale with their AV home entertainment products. We also sell customized chips, which include our software and/or customized software packages, to these customers. Growth in this line of business has been driven by the proliferation and increasing complexity of home entertainment equipment, emerging digital technology, multimedia and interactive internet applications, and the increasing number of OEMs.
We continue to place significant emphasis on expanding our sales and marketing efforts to subscription broadcasters and OEMs in Asia, Latin America and Europe. We will continue to add new sales people to support anticipated sales growth in these markets over the next few years.
In the international retail markets, our One For All® brand name remote control and accessories accounted for 12.6%, 15.6%, and 17.9% of our total net sales for the years ended December 31, 2009, 2008, and 2007,

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respectively. Throughout 2009, we continued our international retail sales and marketing efforts. Financial information relating to our international operations for the years ended December 31, 2009, 2008, and 2007 is included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA-Notes to Consolidated Financial Statements-Note 14”.
During the second quarter of 2008 we signed an agreement with Audiovox Accessories Corporation to be the exclusive supplier of embedded microcontrollers and infrared database software for Audiovox’s complete line of RCA universal remote controls sold in the North American retail market. We also agreed to develop remote controls in the future for existing brands in the Audiovox lineup and granted Audiovox an exclusive license to sell and distribute our One For All® brand remote controls and accessories in North America.
Technology
We hold a number of patents in the United States and abroad related to our products and technology, and have filed domestic and foreign applications for other patents that are pending. We had a total of 187 and 148 issued and pending United States patents at the end of 2009 and 2008, respectively. The increase in the number of issued and pending patents in the United States resulted from the purchase of 31 issued and pending patents from Zilog Inc. and 10 new patent filings, offset by our abandonment of 1 patent and the expiration of 1 patent.
Our patents have remaining lives ranging from approximately one to eighteen years. We have also obtained copyright registration and claim copyright protection for certain proprietary software and libraries of IR codes. Additionally, the names of most of our products are registered, or are being registered, as trademarks in the United States Patent and Trademark Office and in most of the other countries in which such products are sold. These registrations are valid for a variety of terms ranging up to 20 years and may be renewed as long as the trademarks continue to be used and are deemed by management to be important to our operations. While we follow the practice of obtaining patent, copyright and trademark registrations on new developments whenever advisable, in certain cases, we have elected common law trade secret protection in lieu of obtaining such other protection.
Since our beginning in 1986, we have compiled an extensive IR code library that covers over 451,000 individual device functions and over 4,000 individual consumer electronic equipment brand names. Our library is regularly updated with IR codes used in newly introduced AV devices. These IR codes are captured directly from the remote control devices or the manufacturer’s written specifications to ensure the accuracy and integrity of the database. We believe that our universal remote control database is capable of controlling virtually all IR controlled TVs, VCRs, DVD players, cable converters, CD players, audio components and satellite receivers, as well as most other infrared remote controlled home entertainment devices and home automation control modules worldwide.
Our proprietary software and know-how permit us to compress IR codes before we load them into our products. This provides significant cost and space efficiencies that enable us to include more codes and features in the memory space of our wireless control devices than are included in the similarly priced products of our competitors.
With today’s rapidly changing technology, upgradeability ensures the compatibility of our remote controls with future home entertainment devices. We have developed patented technology that provides users the capability to easily upgrade the memory of our remote controls with IR codes that were not originally included using their entertainment device, personal computer or telephone. These options utilize one or two-way communication to upgrade the remote controls’ IR codes or firmware depending on the requirements.
Each of our wireless control devices is designed to simplify the use of home entertainment and other equipment. To appeal to the mass market, the number of buttons is minimized to include only the most popular functions. Another patented ease of use feature we offer in several of our products is our user programmable macro key. This feature

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allows the user to program a sequence of commands onto a single key, to be played back each time that key is subsequently pressed.
Our remote controls are also designed for easy set-up. For most of our products, the consumer simply inputs a four-digit code for each device to be controlled. During 2007, building on our strategy to develop new products and technologies to further simplify remote control set-up, we created the XSight™ product line and the EZ-RCTM web-based remote control set-up application. The XSight™ products may be setup in minutes utilizing the intuitive menu on their color LCD display, without an instruction manual. Alternatively, the mini USB port on the XSightTM products may be connected to a personal computer. Once connected to a personal computer, our customers may utilize the EZ-RCTM web-based set-up application’s graphical interface to fully program the remote control. Each remote control user may create their own personal profile on the device with their favorite channels, custom functions, and more. The XSightTM product line and the EZ-RCTM web-based application were launched into the international retail market during the fourth quarter of 2008 and the North American retail market during the third quarter of 2009.
UEI QuickSet is a firmware application that may be embedded on an AV device, such as a set-top box. UEI QuickSet enables universal remote control set-up using guided on-screen instructions and a wireless two-way communication link between the remote and the UEI QuickSet embedded AV equipment. UEI’s XMP-2 technology, an extensible multimedia protocol, enables the two-way wireless communication between the universal remote control and the AV device, allowing IR code data and configuration settings to be sent to the remote control from the AV equipment. The user identifies the type and brand of the device to be controlled and then the UEI QuickSet application performs a test to confirm that the remote is controlling the equipment correctly. UEI QuickSet also saves the user-defined remote setting, enabling consumers to quickly transfer the setup configuration to a replacement remote. When the AV device has network connectivity, the IR code database and application may be continually updated to include the latest devices and functions.

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Methods of Distribution
Our distribution methods for our remote control devices are dependent on the sales channel. We distribute remote control devices directly to MSOs and OEMs, both domestically and internationally. In the North American retail channel, we license our One For All® brand name to Audiovox, who in turn sells products directly to certain domestic retailers and third party distributors. Outside of North America, we sell our wireless control devices and AV accessories under the One For All® and private label brand names to retailers through our international subsidiaries. We utilize third party distributors for the custom installer channel and for retail in countries where we do not have subsidiaries.
We have thirteen international subsidiaries, Universal Electronics B.V., established in the Netherlands, One For All GmbH, established in Germany, One for All Iberia S.L., established in Spain, One For All UK Ltd., established in the United Kingdom, One For All Argentina S.R.L., established in Argentina, One For All France S.A.S., established in France, Universal Electronics Italia S.R.L., established in Italy, UE Singapore Pte. Ltd., established in Singapore, UEI Hong Kong Pte. Ltd., established in Hong Kong, UEI Electronics Pte. Ltd., established in India, UEI Cayman Inc., established in the Cayman Islands, Ultra Control Consumer Electronics GmbH, established in Germany and UEI Hong Kong Holdings Co. Pte. Ltd., established in Hong Kong.
We have developed a broad portfolio of patented technologies and the industry’s leading database of IR codes. We ship integrated circuits, on which our software and IR code database is embedded, directly to manufacturers for inclusion in their products. In addition, we license our software and technology to manufacturers. Licenses are delivered upon the transfer of a product master or on a per unit basis when the software or technology is used in a customer device.
We provide domestic and international consumer support to our various universal remote control marketers, including manufacturers, cable and satellite providers, retail distributors, and audio and video original equipment manufacturers through our automated “InterVoice” system. Live agent help is available through certain programs. We also make available a free web-based support resource, www.urcsupport.com, designed specifically for MSOs. This solution offers interactive online demos and tutorials to help users easily setup their remote and commands, and as a result reduces call volume at customer support centers. Additionally, ActiveSupport®, a call center, provides customer interaction management services from service and support to retention. Pre-repair calls, post-install surveys, and inbound calls to customers provide greater bottom-line efficiencies. We continue to review our programs to determine their value in improving the sales of our products.
Raw Materials and Dependence on Suppliers
We utilize third-party manufacturers and suppliers primarily in Asia to produce our wireless control products. In 2009 and 2008, Computime, C.G. Development, Samsung and Samjin each provided more than 10% of our total inventory purchases. They collectively provided 77.5% and 73.1% of our total inventory purchases for 2009 and 2008, respectively. In 2007, Computime, C.G. Development and Samsung each provided more than 10% of our total inventory purchases. They collectively provided 63.2% of our total inventory purchases for 2007.
We continue to evaluate additional contract manufacturers and sources of supply. During 2009, we utilized multiple contract manufacturers and maintained duplicate tooling for certain of our products. Where possible we utilize standard parts and components, which are available from multiple sources. To reduce our dependence on our integrated circuits suppliers we continually seek additional sources, such as our new relationship with Maxim. To further manage our integrated circuit supplier dependence, we include flash microcontroller technology in most of

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our products. Flash microcontrollers can have shorter lead times than standard microcontrollers and may be reprogrammed if necessary. This allows us flexibility during any unforeseen shipping delays and has the added benefit of potentially reducing excess and obsolete inventory exposure. This diversification lessens our dependence on any one supplier and allows us to negotiate more favorable terms.
Seasonality
Historically, our business has been influenced by the retail sales cycle, with increased sales in the last half of the year. In 2007, our net sales in the first half of the year exceeded our net sales in the second. This was primarily the result of strong demand from our domestic cable customers in the first and second quarters of 2007. This demand was driven by their effort to meet the Open Cable Applications Platform (“OCAP”) July 1, 2007 deadline. In 2008 and 2009, our sales cycle returned to its historical pattern and we expect this pattern to be repeated in 2010.
See “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — Notes to the Consolidated Financial Statements — Note 22” for further details regarding our quarterly results.
Competition
Our principal competitors in the domestic MSO market is Philips Consumer Electronics, Universal Remote Control and Contec. In the international retail and private label markets for wireless controls we compete with Philips Consumer Electronics, Logitech, Ruwido and Sony as well as various manufacturers of wireless controls in Asia. Our primary competitors in the OEM market are the original equipment manufacturers themselves and wireless control manufacturers in Asia. We compete against Universal Remote Control, Logitech, and Ruwido in the IR database market. Our Nevo product line competes in the custom electronics installation market against AMX, RTI, Control4, Universal Remote Control, Philips Consumer Electronics, Logitech and many others. Our North American retail products compete against Universal Remote Control, Philips Consumer Electronics, Logitech, Sony and many others. We compete in our markets on the basis of product quality, features, price, intellectual property and customer support. We believe that we will need to continue to introduce new and innovative products to remain competitive and to recruit and retain competent personnel to successfully accomplish our future objectives.
Engineering, Research and Development
During 2009, our engineering efforts focused on the following:
    broadening our product portfolio;
    modifying existing products and technologies to improve features and lower costs;
    formulating measures to protect our proprietary technology and general know-how;
    improving our software so that we may pre-program more codes into our memory chips;
    simplifying the set-up and upgrade process for our wireless control products; and
    updating our library of IR codes to include IR codes for new features and devices introduced worldwide.
Our engineering efforts included the development of new remote controls that combine consumer friendly interfaces and intuitive setup with advance functions, such as our One For All® SmartControl™ released during the first quarter of 2010. The SmartControl™ enables the user to control multiple devices without the need to switch between devices on the remote control. The SmartControl™ also leverages SimpleSet™ technology, and may be setup by simply identifying the target device type and brand.
We also developed new wireless control platforms. UEI’s Glimmer advanced wireless control platform (a joint development with Broadcom® (NASDAQ: BRCM)) integrates an infrared and Bluetooth® compatible chip solution. This platform is optimized to address the emerging Bluetooth eco-system of personal and networked entertainment devices within the home. The Glimmer™ platform leverages the existing devices in the home to

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connect and interact with a variety of Bluetooth®-enabled devices ranging from next generation set-top boxes, game consoles, and mobile phones creating an environment where interesting and powerful applications may emerge.
During 2009, we began to integrate the UEI QuickSet firmware application into some of our customer’s consumer electronic devices. The UEI QuickSet firmware application will help our customers simplify the remote control setup process and improve the overall end-user experience.
We continued to improve our existing products during 2009. We released several software updates to our web based EZ-RC™ application and the XSight™ firmware. Our NevoStudio® Pro update enables two-way Z-Wave™ control and communication for home control systems such as lighting, HVAC, window coverings, and others. In addition, this software update enables two-way serial communication, including metadata transmission, with select third-party devices. These devices include digital media servers and AV distribution systems.
On February 18, 2009, we acquired certain patents, intellectual property and other assets related to the universal remote control business from Zilog Inc. (NASDAQ: ZILG) for approximately $9.5 million in cash. The purchase included Zilog’s full library and database of infrared codes and software tools. We also hired 116 of Zilog’s sales and engineering personnel, including all 107 of Zilog’s personnel located in India. The engineering personnel acquired from Zilog are focused on the capture of IR codes and the development of firmware leading to more complete solutions to customer needs, the conceptual formulation and design of possible alternatives, as well as the testing of process and product cost improvements. These efforts will enable us to provide customers with reductions in design cycle times, lower costs, and improvements in integrated circuit design, product quality and overall functional performance. These efforts will also enable us to further penetrate existing markets, pursue new markets more effectively and expand our business.
Our personnel are involved with various industry organizations and bodies, which are in the process of setting standards for infrared, radio frequency, power line, telephone and cable communications and networking in the home. There can be no assurance that any of our research and development projects will be successfully completed.
Our expenditures on engineering, research and development were:
                         
(in millions):   2009     2008     2007  
Research and development (1)
  $ 8.7     $ 8.2     $ 8.8  
Engineering (2)
    9.4       7.3       7.6  
 
                 
Total engineering, research and development
  $ 18.1     $ 15.5     $ 16.4  
 
                 
 
(1)   Research and development expense for each of the years ended December 31, 2009, 2008, and 2007 includes $0.4 million of stock-based compensation expense.
 
(2)   Engineering costs are included in SG&A.
Environmental Matters
Many of our products are subject to various federal, state, local and international laws governing chemical substances in products, including laws regulating the manufacture and distribution of chemical substances and laws restricting the presence of certain substances in electronics products. We may incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, third-party damages or personal injury claims, if we were to violate or become liable under environmental laws or if our products become non-compliant with environmental laws. We also face increasing complexity in our product design and procurement operations as we adjust to new and future requirements relating to the materials composition of our products.
We may also face significant costs and liabilities in connection with product take-back legislation. The European Union enacted the Waste Electrical and Electronic Equipment Directive (“WEEE”), which makes producers of electrical goods, including computers and printers, financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. During 2007, the majority of our European subsidiaries became WEEE compliant. Our Italian subsidiary became compliant in February 2008. Similar legislation has been or may be enacted in other jurisdictions, including in the United States, Canada, Mexico, China and Japan.

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We believe that we have materially complied with all currently existing international and domestic federal, state and local statutes and regulations regarding environmental standards and occupational safety and health matters to which we are subject. During the years ended December 31, 2009, 2008 and 2007, the amounts incurred in complying with federal, state and local statutes and regulations pertaining to environmental standards and occupational safety and health laws and regulations did not materially affect our earnings or financial condition. However, future events, such as changes in existing laws and regulations or enforcement policies, may give rise to additional compliance costs that may have a material adverse effect upon our capital expenditures, earnings or financial condition.
Employees
At December 31, 2009, we employed 565 employees, of which 261 worked in engineering and research and development, 67 in sales and marketing, 104 in consumer service and support, 58 in operations and warehousing and 75 in executive and administrative functions. On February 18, 2009, we acquired certain patents, intellectual property and other assets related to the universal remote control business from Zilog. As a result of this transaction, we hired 116 of Zilog’s sales and engineering personnel, including all 107 of Zilog’s personnel located in India. None of our employees are subject to a collective bargaining agreement or represented by a union. We consider our employee relations to be good.
International Operations
Financial information relating to our international operations for the years ended December 31, 2009, 2008 and 2007 is incorporated by reference to “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — Notes to Consolidated Financial Statements — Note 14”.
Available Information
Our Internet address is www.uei.com. We make available free of charge through the website our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to these reports as soon as reasonably practical after we electronically file such reports with the Securities and Exchange Commission. These reports may be found on our website at www.uei.com under the caption “SEC Filings” on the Investor page. Investors may also obtain copies of our SEC filings from the SEC website at www.sec.gov.
Executive Officers of the Registrant(1)
The following table sets forth certain information concerning our executive officers as of March 15, 2010:
             
Name   Age   Position
Paul D. Arling
    47     Chairman of the Board and Chief Executive Officer
Paul J.M. Bennett
    54     Executive Vice President, Managing Director, Europe
Mark S. Kopaskie
    52     Executive Vice President, General Manager U.S. Operations
Richard A. Firehammer, Jr.
    52     Senior Vice President, General Counsel and Secretary
Bryan M. Hackworth
    40     Senior Vice President and Chief Financial Officer
 
(1)   Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
Paul D. Arling is our Chairman and Chief Executive Officer. He joined us in May 1996 as Chief Financial Officer and was named to our Board of Directors in August 1996. He was appointed President and COO in September 1998, was promoted to Chief Executive Officer in October 2000 and appointed as Chairman in July 2001. At the 2009 Annual Meeting of Stockholders, Mr. Arling was re-elected as our Chairman to serve until the 2010 Annual Meeting of Stockholders. From 1993 through May 1996, he served in various capacities at LESCO, Inc. (a manufacturer and distributor of professional turf care products). Prior to LESCO, he worked for Imperial Wall coverings (a manufacturer and distributor of wall covering products) as Director of Planning, and The Michael Allen Company (a strategic management consulting company) where he was employed as a management consultant.
Paul J.M. Bennett is our Executive Vice President and Managing Director, Europe. He was our Managing Director and Senior Vice President, Managing Director, Europe from July 1996 to December 2006. He was promoted to his current position in December 2006. Prior to joining us, he held various positions at Philips Consumer Electronics

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over a seven year period, first as Product Marketing Manager for the Accessories Product Group, initially set up to support Philip’s Audio division, and then as head of that division.
Mark S. Kopaskie is our Executive Vice President and General Manager, U.S. Operations. He rejoined us in September 2006 as our Senior Vice President and General Manager, U.S. Operations and was promoted to his current position in December 2006. He was our Executive Vice President and Chief Operating Officer from 1995 to 1997. From 2003 until November 2005, Mr. Kopaskie was President and Chief Executive Officer of Packaging Advantage Corporation (PAC), a personal care and household products manufacturer, which was acquired by Marietta Corporation in November 2005. Following the acquisition, he served as Senior Vice President, Business Development for Marietta Corporation. From 1997 to 2003, he held senior management positions at Birdair Inc., a world leader in the engineering, manufacturing, and construction of tensioned membrane structures, and OK International, a manufacturer and marketer of fluid dispensing equipment, solder and de-solder systems, and wire wrap products. Prior to joining us in 1995, Mr. Kopaskie was Senior Vice President of Operations at Mr. Coffee Inc.
Richard A. Firehammer, Jr., Esq. has been our Senior Vice President since February 1999. He has been our General Counsel since October 1993 and Secretary since February 1994. He was our Vice President from May 1997 until August 1998. He was outside counsel to us from September 1998 until being rehired in February 1999. From November 1992 to September 1993, he was associated with the Chicago, Illinois law firm, Shefsky & Froelich, Ltd. From 1987 to 1992, he was with the law firm, Vedder, Price, Kaufman & Kammholz in Chicago, Illinois.
Bryan M. Hackworth is our Senior Vice President and Chief Financial Officer. He was promoted to Chief Financial Officer in August 2006. Mr. Hackworth joined us in June 2004 as Corporate Controller and subsequently assumed the role of Chief Accounting Officer in May 2006. Before joining us in 2004, he spent five years at Mars, Inc., a privately held international manufacturer and distributor of consumer products and served in several financial and strategic roles (Controller — Ice Cream Division; Strategic Planning Manager for the WHISKAS ® Brand) and various other financial management positions. Prior to joining Mars Inc., Mr. Hackworth spent six years at Deloitte & Touche LLP as an auditor, specializing in the manufacturing and retail industries.
ITEM 1A. RISK FACTORS
Forward Looking Statements
We caution that the following important factors, among others (including, but not limited to, factors discussed below in “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” as well as those factors discussed elsewhere in this Annual Report on Form 10-K, or in our other reports filed from time to time with the Securities and Exchange Commission), may affect our actual results and may contribute to or cause our actual consolidated results to differ materially from those expressed in any of our forward-looking statements. The factors included here are not exhaustive. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor can we assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Therefore, forward-looking statements should not be relied upon as a prediction of actual future results.
While we believe that the forward-looking statements made in this report are based on reasonable assumptions, the actual outcome of such statements is subject to a number of risks and uncertainties, including the failure of our markets to continue growing and expanding in the manner we anticipated; the failure of our customers to grow and expand as we anticipated; the effects of natural or other events beyond our control, including the effects a war or terrorist activities may have on us or the economy; the economic environment’s effect on us or our customers; the growth of, acceptance of and the demand for our products and technologies in various markets and geographical regions, including cable, satellite, consumer electronics, retail, digital media/technology, CEDIA, interactive TV, automotive, and cellular industries not materializing or growing as we believed; our inability to add profitable complementary products which are accepted by the marketplace; our inability to continue to maintain our operating costs at acceptable levels through our cost containment efforts; our inability to realize tax benefits from various tax projects initiated from time to time; our inability to continue selling our products or licensing our technologies at

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higher or profitable margins; our inability to obtain orders or maintain our order volume with new and existing customers; the possible dilutive effect our stock incentive programs may have on our earnings per share and stock price; our inability to continue to obtain adequate quantities of component parts or secure adequate factory production capacity on a timely basis; and other factors listed from time to time in our press releases and filings with the Securities and Exchange Commission.
We face a number of risks related to the recent financial crisis and severe tightening in the global credit markets
General economic conditions, both domestic and international, have an impact on our business and financial results. The ongoing global financial crisis affecting the banking system and financial markets has resulted in a severe tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in credit and equity markets. This financial crisis may impact our business in a number of ways, including:
Potential Deferment of Purchases and Orders by Customers: Uncertainty about current and future global economic conditions may cause consumers, businesses and governments to defer purchases in response to tighter credit, decreased cash availability and declining consumer confidence. Accordingly, future demand for our products may differ materially from our current expectations.
Customers’ Inability to Obtain Financing to Make Purchases from Us and/or Maintain Their Business: Some of our customers require substantial financing in order to fund their operations and make purchases from us. The inability of these customers to obtain sufficient credit to finance purchases of our products may adversely impact our financial results. In addition, if the financial crisis results in insolvencies for our customers, it may adversely impact our financial results.
Potential Impact on Trade Receivables: Credit market conditions may slow our collection efforts as customers experience increased difficulty in obtaining requisite financing, leading to higher than normal accounts receivable balances and longer DSOs. This may result in greater expense associated with collection efforts and increased bad debt expense.
Negative Impact from Increased Financial Pressures on Third-Party Dealers, Distributors and Retailers: We make sales in certain regions of the world through third-party dealers, distributors and retailers. Although many of these third parties have significant operations and maintain access to available credit, others are smaller and more likely to be impacted by the significant decrease in available credit that has resulted from the current financial crisis. If credit pressures or other financial difficulties result in insolvency for these third parties and we are unable to successfully transition our end customers to purchase products from other third parties or from us directly, it may adversely impact our financial results.
Negative Impact from Increased Financial Pressures on Key Suppliers: Our ability to meet customers’ demands depends, in part, on our ability to obtain timely and adequate delivery of quality materials, parts and components from our suppliers. Certain of our components are available only from a single source or limited sources. If certain key suppliers were to become capacity constrained or insolvent as a result of the financial crisis, it may result in a reduction or interruption in supplies or a significant increase in the price of supplies and adversely impact our financial results. In addition, credit constraints at key suppliers may result in accelerated payment of accounts payable by us, impacting our cash flow.
Dependence upon Key Suppliers
During 2009 and 2008, Computime, C.G. Development, Samsung, and Samjin each provided over 10% of our total inventory purchases. Purchases from these suppliers collectively amounted to $147.1 million, or 77.5%, of our total inventory purchases in 2009. Purchases from these suppliers collectively amounted to $135.5 million, or 73.1%, of total inventory purchases during 2008. During 2007, Computime, C.G. Development and Samsung, each provided over 10% of our total inventory purchases. Purchases from these suppliers collectively amounted to $100.7 million, representing 63.2% of total inventory purchases in 2007.
Most of the components used in our products are available from multiple sources. However, we have elected to purchase integrated circuits, used principally in our wireless control products, from three sources, Samsung,

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Freescale and Maxim. To reduce our dependence on our integrated circuits suppliers we continually seek additional sources. We generally maintain inventories of our integrated chips, which may be used in part to mitigate, but not eliminate, delays resulting from supply interruptions.
We have identified alternative sources of supply for our integrated circuit, component parts, and finished goods needs; however, there can be no assurance that we will be able to continue to obtain these inventory purchases on a timely basis. Any extended interruption, shortage or termination in the supply of any of the components used in our products, or a reduction in their quality or reliability, or a significant increase in prices of components, would have an adverse effect on our operating results, financial position and cash flows.
Dependence on Foreign Manufacturing
Third-party manufacturers located in Asia manufacture a majority of our products. Our arrangements with our foreign manufacturers are subject to the risks of doing business abroad, such as tariffs, environmental and trade restrictions, intellectual property protection and enforcement, export license requirements, work stoppages, political and social instability, economic and labor conditions, foreign currency exchange rate fluctuations, and other factors, which may have a material adverse effect on our business, results of operations and cash flows. We believe that the loss of any one or more of our manufacturers would not have a long-term material adverse effect on our business, results of operations and cash flows, because numerous other manufacturers are available to fulfill our requirements; however, the loss of any of our major manufacturers may adversely affect our business, operating results, financial condition and cash flows until alternative manufacturing arrangements are secured.
Potential Fluctuations in Quarterly Results
Historically, our business has been influenced by the retail sales cycle, with increased sales in the last half of the year. In 2007, sales in the first half of the year exceeded our sales in the second half. This was primarily the result of strong demand from our domestic cable customers in the first and second quarters of 2007. This demand was driven by their effort to meet the July 1, 2007 Open Cable Applications Platform (“OCAP”) deadline. In 2008 and 2009, our sales cycle returned to its historical pattern and we expect this pattern to be repeated in 2010, however, factors such as those we experienced during 2007 may cause our sales cycles to deviate from historical patterns. Such factors, including quarterly variations in financial results, may have a material adverse affect on the volatility and market price of our common stock.
We may from time to time increase our operating expenses to fund greater levels of research and development, sales and marketing activities, development of new distribution channels, improvements in our operational and financial systems and development of our customer support capabilities, and to support our efforts to comply with various government regulations. To the extent such expenses precede or are not subsequently followed by increased revenues, our business, operating results, financial condition and cash flows will be adversely affected.
In addition, we may experience significant fluctuations in future quarterly operating results that may be caused by many other factors, including demand for our products, introduction or enhancement of products by us and our competitors, the loss or acquisition of any significant customers, market acceptance of new products, price reductions by us or our competitors, mix of distribution channels through which our products are sold, product or supply constraints, level of product returns, mix of customers and products sold, component pricing, mix of international and domestic revenues, foreign currency exchange rate fluctuations and general economic conditions. In addition, as a strategic response to changes in the competitive environment, we may from time to time make certain pricing or marketing decisions or acquisitions that may have a material adverse effect on our business, results of operations or financial condition. As a result, we believe period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance.
Due to all of the foregoing factors, it is possible that in some future quarters our operating results will be below the expectations of public market analysts and investors. If this happens the price of our common stock may be materially adversely affected.
Dependence on Consumer Preference
We are susceptible to fluctuations in our business based upon consumer demand for our products. In addition, we cannot guarantee that increases in demand for our products associated with increases in the deployment of new technology will continue. We believe that our success depends on our ability to anticipate, gauge and respond to fluctuations in consumer preferences. However, it is impossible to predict with complete accuracy the occurrence and effect of fluctuations in consumer demand over a product’s life cycle. Moreover, we caution that any growth in revenues that we achieve may be transitory and should not be relied upon as an indication of future performance.

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Demand for Consumer Service and Support
We have continually provided domestic and international consumer service and support to our customers to add overall value and to help differentiate us from our competitors. We continually review our service and support group and are marketing our expertise in this area to other potential customers. There can be no assurance that we will be able to attract new customers in the future.
In addition, certain of our products have more features and are more complex than others and therefore require more end-user technical support. In some instances, we rely on distributors or dealers to provide the initial level of technical support to the end-users. We provide the second level of technical support for bug fixes and other issues at no additional charge. Therefore, as the mix of our products includes more of these complex product lines, support costs may increase, which may have an adverse effect on our business, operating results, financial condition and cash flows.
Dependence Upon New Product Introduction
Our ability to remain competitive in the wireless control and AV accessory products market will depend considerably upon our ability to successfully identify new product opportunities, as well as develop and introduce these products and enhancements on a timely and cost effective basis. There can be no assurance that we will be successful at developing and marketing new products or enhancing our existing products, or that these new or enhanced products will achieve consumer acceptance and, if achieved, will sustain that acceptance. In addition, there can be no assurance that products developed by others will not render our products non-competitive or obsolete or that we will be able to obtain or maintain the rights to use proprietary technologies developed by others which are incorporated in our products. Any failure to anticipate or respond adequately to technological developments and customer requirements, or any significant delays in product development or introduction, may have a material adverse effect on our operating results, financial condition and cash flows.
In addition, the introduction of new products may require significant expenditures for research and development, tooling, manufacturing processes, inventory and marketing. In order to achieve high volume production of any new product, we may have to make substantial investments in inventory and expand our production capabilities.
Dependence on Major Customers
The economic strength and weakness of our worldwide customers affect our performance. We sell our wireless control products, AV accessory products, and proprietary technologies to subscription broadcasters, original equipment manufacturers, and private label customers. We also supply our products to our wholly owned, non-U.S. subsidiaries and to independent foreign distributors, who in turn distribute our products worldwide, with Europe, Asia, South Africa, and Australia currently representing our principal foreign markets.
In each of the years ended December 31, 2009, 2008 and 2007, we had sales to DirecTV and its sub-contractors and to Comcast Communications Inc. and its sub-contractors, that when combined, each exceeded 10% of our net sales. The loss of either of these customers or of any other key customer, either in the United States or abroad or our inability to maintain order volume with these customers, may have an adverse effect on our operating results, financial condition and cash flows.
Change in Warranty Claim Costs
We rely on third-party companies to service a large portion of our customer warranty claims. If the cost to service these warranty claims increases unexpectedly, or these outside services cease to be available, we may be required to increase our estimate of future claim costs, which may have a material adverse effect on our operating results, financial condition and cash flows.
Outsourced Labor
We employ a small number of personnel to develop and market additional products that are part of the Nevo® platform as well as products that are based on the Zigbee®, Z-Wave® and other radio frequency technology. Even

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after these hires, we continue to use outside resources to assist us in the development of these products. While we believe that such outside services will continue to be available to us, if they cease to be available, the development of these products may be substantially delayed, which may have a material adverse effect on our operating results, financial condition and cash flows.
Competition
The wireless control industry is characterized by intense competition based primarily on product availability, price, speed of delivery, ability to tailor specific solutions to customer needs, quality, and depth of product lines. Our competition is fragmented across our products, and, accordingly, we do not compete with any one company across all product lines. We compete with a variety of entities, some of which have greater financial resources. Our ability to remain competitive in this industry depends in part on our ability to successfully identify new product opportunities, develop and introduce new products and enhancements on a timely and cost effective basis, as well as our ability to successfully identify and enter into strategic alliances with entities doing business within the industries we serve. There can be no assurance that our product offerings will be, and/or remain, competitive or that strategic alliances, if any, will achieve the type, extent, and amount of success or business that we expect them to achieve. The sales of our products and technology may not occur or grow in the manner we expect, and thus we may not recoup costs incurred in the research and development of these products as quickly as we expect, if at all.
Patents, Trademarks, and Copyrights
The procedures by which we identify, document and file for patent, trademark, and copyright protection are based solely on engineering and management judgment, with no assurance that a specific filing will be issued, or if issued, will deliver any lasting value to us. Because of the rapid innovation of products and technologies that is characteristic of our industry, there can be no assurance that rights granted under any patent will provide competitive advantages to us or will be adequate to safeguard and maintain our proprietary rights. Moreover, the laws of certain countries in which our products are or may be manufactured or sold may not offer protection on such products and associated intellectual property to the same extent that the United States legal system may offer.
In our opinion, our intellectual property holdings as well as our engineering, production, and marketing skills and the experience of our personnel are of equal importance to our market position. We further believe that none of our businesses are materially dependent upon any single patent, copyright, trademark, or trade secret.
Some of our products include or use technology and/or components of third parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of such products, we believe that, based upon past experience and industry practice, such licenses generally may be obtained on commercially reasonable terms; however, there can be no guarantee that such licenses may be obtained on such terms or at all. Because of technological changes in the wireless and home control industry, current extensive patent coverage, and the rapid rate of issuance of new patents, it is possible certain components of our products and business methods may unknowingly infringe upon the patents of others.
Potential for Litigation
As is typical in our industry and for the nature and kind of business in which we are engaged, from time to time various claims, charges and litigation are asserted or commenced by third parties against us or by us against third parties, arising from or related to product liability, infringement of patent or other intellectual property rights, breach of warranty, contractual relations or employee relations. The amounts claimed may be substantial, but they may not bear any reasonable relationship to the merits of the claims or the extent of any real risk of court awards assessed against us or in our favor.
Risks of Conducting Business Internationally
Risks of doing business internationally may adversely affect our sales, operations, earnings and cash flows due to a variety of factors, including, but not limited to:

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  changes in a country or region’s economic or political conditions, including inflation, recession, interest rate fluctuations and actual or anticipated military conflicts;
  currency fluctuations affecting sales, particularly in the Euro and British Pound, which contribute to variations in sales of products and services in impacted jurisdictions and also affect our reported results expressed in U.S. dollars;
  currency fluctuations affecting costs, particularly the Euro, British Pound and the Chinese Yuan, which contribute to variances in costs in impacted jurisdictions and also affect our reported results expressed in U.S. dollars;
  longer accounts receivable cycles and financial instability among customers;
  trade regulations and procedures and actions affecting production, pricing and marketing of products;
  local labor conditions, customs, and regulations;
  changes in the regulatory or legal environment;
  differing technology standards or customer requirements;
  import, export or other business licensing requirements or requirements related to making foreign direct investments, which may affect our ability to obtain favorable terms for components or lead to penalties or restrictions;
  difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner and changes in tax laws; and
  fluctuations in freight costs and disruptions at important geographic points of exit and entry.
Effectiveness of Our Internal Control Over Financial Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our Annual Report on Form 10-K our assessment of the effectiveness of our internal control over financial reporting. Furthermore, our independent registered public accounting firm is required to audit our internal control over financial reporting and separately report on whether it believes we maintain, in all material respects, effective internal control over financial reporting. Although we believe that we currently have adequate internal control procedures in place, we cannot be certain that future material changes to our internal control over financial reporting will be effective. If we cannot adequately maintain the effectiveness of our internal control over financial reporting, we may be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission. Any such action may adversely affect our financial results and the market price of our common stock.
Changes in Generally Accepted Accounting Principles
Our financial statements are prepared in accordance with U.S. generally accepted accounting principles. These principles are subject to revision and interpretation by various governing bodies, including the FASB and the SEC. A change in current accounting standards or their interpretation may have a significant adverse effect on our operating results, financial condition and cash flows.
Unanticipated Changes in Tax Provisions or Income Tax Liabilities
We are subject to income taxes in the United States and numerous foreign jurisdictions. Our tax liabilities are affected by the amounts we charge for inventory and other items in intercompany transactions. From time to time, we are subject to tax audits in various jurisdictions. Tax authorities may disagree with our intercompany charges or other matters and assess additional taxes. We assess the likely outcomes of these audits in order to determine the appropriateness of the tax provision. However, there can be no assurance that we will accurately predict the

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outcomes of these audits, and the actual outcomes of these audits may have a material impact on our financial condition, results of operations and cash flows. In addition, our effective tax rate in the future may be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and the discovery of new information in the course of our tax return preparation process. Furthermore, our tax provisions may be adversely affected as a result of any new interpretative accounting guidance related to accounting for uncertain tax positions.
Inability to Use Deferred Tax Assets
We have deferred tax assets that we may not be able to use under certain circumstances. If we are unable to generate sufficient future taxable income in certain jurisdictions, or if there is a significant change in the actual effective tax rates or a significant change in the time period within which the underlying temporary differences become taxable or deductible, we may be required to increase our valuation allowances against our deferred tax assets resulting in an increase in our effective tax rate.
Environmental Matters
Many of our products are subject to various federal, state, local and international laws governing chemical substances in products, including laws regulating the manufacture and distribution of chemical substances and laws restricting the presence of certain substances in electronics products. With the passage of the European Union’s Restriction of Hazardous Substances Directive, which makes producers of electrical goods responsible for collection, recycling, treatment and disposal of recovered products, similar restrictions in China effective March 2007 and the European Union’s Waste Electrical and Electronic Equipment Directive, we may face significant costs and liabilities in complying with these laws and any future laws and regulations or enforcement policies that may have a material adverse effect upon our operating results, financial condition, and cash flows.
Leased Property
We lease all of the properties used in our business. We can give no assurance that we will enter into new or renewal leases, or that, if entered into, the new lease terms will be similar to the existing terms or that the terms of any such new or renewal leases will not have a significant and material adverse effect on our operating results, financial condition and cash flows.
Technology Changes in Wireless Control
We currently derive substantial revenue from the sale of wireless remote controls based on IR technology. Other control technologies exist or may be developed that may compete with IR. In addition, we develop and maintain our own database of IR and RF codes. There are competing IR and RF libraries offered by companies that we compete with in the marketplace. The advantage that we may have compared to our competitors is difficult to measure. If other wireless control technology gains acceptance and starts to be integrated into home electronics devices currently controlled through our IR remote controllers, demand for our products may decrease, resulting in decreased operating results, financial condition, and cash flows.
Failure to Recruit, Hire, and Retain Key Personnel
Our ability to achieve growth in the future will depend, in part, on our success at recruiting, hiring, and retaining highly skilled engineering, managerial, operational, sales and marketing personnel. Our corporate office, including our advanced technology engineering group, is based in Southern California. The high cost of living in Southern California makes it difficult to attract talent from outside the region and may also put pressure on overall employment related expense. Additionally, our competitors seek to recruit and hire the same key personnel. Therefore, if we fail to stay competitive in salary and benefits within the industry it may negatively impact our ability to hire and retain key personnel. The inability to recruit, hire, and retain qualified personnel in a timely manner, or the loss of any key personnel, may make it difficult to meet key objectives, such as timely and effective product introductions.

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Credit Facility
On January 8, 2010, we entered into a new $15 million unsecured revolving credit line with U.S. Bank (“Credit Facility”), expiring on October 31, 2011. Presently, we have no borrowings; however, we cannot make any assurances that we will not need to borrow amounts under this facility. If this or any other Credit Facility is not available to us at a time when we need to borrow, we would have to use our cash reserves, including potentially repatriating cash from foreign jurisdictions, which may have a material adverse effect on our operating results, financial condition and cash flows.
Change in Competition and Pricing
We rely on third-party manufacturers to build our universal wireless control products. Price is always an issue in winning and retaining business. If customers become increasingly price sensitive, new competition may arise from manufacturers who decide to go into direct competition with us or from current competitors who perform their own manufacturing. If such a trend develops, we may experience downward pressure on our pricing or lose sales, which may have a material adverse effect on our operating results, financial condition and cash flows.
Transportation Costs; Impact of Oil Prices
We ship products from our foreign manufacturers via ocean and air transport. It is sometimes difficult to forecast swings in demand or delays in production and, as a result, products may be shipped via air which is more costly than ocean shipments. We typically cannot recover the increased cost of air freight from our customers. Additionally, tariffs and other export fees may be incurred to ship products from foreign manufacturers to the customer. The inability to predict swings in demand or delays in production may increase the cost of freight which may have a material adverse effect on our product margins.
In addition, we have an exposure to oil prices in two forms. The first is in the prices of the oil-based materials that we use in our products, which are primarily the plastics and other components that we include in our finished products. The second is in the cost of delivery and freight, which would be passed on by the carriers that we use in the form of higher rates. We record freight-in as a cost of sales and freight-out in operating expenses. Rising oil prices may have an adverse effect on cost of sales and operating expenses.
Proprietary Technologies
We produce highly complex products that incorporate leading-edge technology, including hardware, firmware, and software. Firmware and software may contain bugs that may unexpectedly interfere with product operation. There can be no assurance that our testing programs will detect all defects in individual products or defects that may affect numerous shipments. The presence of defects may harm customer satisfaction, reduce sales opportunities, or increase returns. An inability to cure or repair such a defect may result in the failure of a product line, temporary or permanent withdrawal from a product or market, damage to our reputation, increased inventory costs, or product reengineering expenses, any of which may have a material impact on our operating results, financial condition and cash flows.
Strategic Business Transactions
We may, from time to time, pursue strategic alliances, joint ventures, business acquisitions, products or technologies (“strategic business transactions”) that complement or expand our existing operations, including those that may be material in size and scope. Strategic business transactions involve many risks, including the diversion of management’s attention away from day-to-day operations. There is also the risk that we will not be able to successfully integrate the strategic business transaction with our operations, personnel, customer base, products or technologies. Such strategic business transactions may also have adverse short-term effects on our operating results, and may result in dilutive issuances of equity securities, the incurrence of debt, and the loss of key employees. In addition, these strategic business transactions are generally subject to specific accounting guidelines that may adversely affect our financial condition, results of operations and cash flow. For instance, business acquisitions must be accounted for as purchases and, because most technology-related acquisitions involve the purchase of significant intangible assets, these acquisitions typically result in substantial amortization charges, which may have a material adverse effect on our results of

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operations. There can be no assurance that any such strategic business transactions will occur or, if such transactions do occur, that the integration will be successful or that the customer bases, products or technologies will generate sufficient revenue to offset the associated costs or effects.
Growth Projections
Management has made the projections required for the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America regarding future events and the financial performance of the company, including those involving:
  the benefits the company expects as a result of the development and success of products and technologies, including new products and technologies;
  the recently announced new contracts with new and existing customers and new market penetrations;
  the growth expected as a result of the digital from analog conversion;
  the expected continued growth in digital TVs, PVRs and overall growth in the company’s industry; and
  the effects we may experience due to the continued softness in worldwide markets driven by the current economic environment.
Actual events or results may be unfavorable to management’s projections, which may have a material adverse effect on our projected operating results, financial condition and cash flows.
ITEM 1B. UNRESOLVED STAFF COMMENTS
We have no unresolved staff comments as of the date of filing this Form 10-K.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Cypress, California. We utilize the following office facilities:
             
        Square    
Location   Purpose or Use   Feet   Status
Cypress, California
  Corporate headquarters, engineering, research and development   34,080    Leased, expires January 31, 2012
Twinsburg, Ohio
  Consumer and customer call center   21,509    Leased, expires May 30, 2011
Enschede, Netherlands
  International headquarters and call center   18,292    Leased, expires September 30, 2013
Bangalore, India
  Engineering, research and development   17,713    Leased, expired February 28, 2010
Shenzhen, China
  Engineering, quality assurance, research and development   6,127    Leased, expires February 15, 2013
San Mateo, California
  Engineering, research and development   4,868    Leased, expires June 30, 2011
Hong Kong, China
  Operations and administrative services   3,060    Leased, expires November 15, 2011
In addition to the facilities listed above, we lease space in various international locations, primarily for use as sales offices. Furthermore, in order to support the growth of our company, during 2008 we completed renovations to expand our corporate headquarters. Our lease for the Bangalore office expired on February 28, 2010. We are negotiating a renewal. We believe we will obtain a renewal under similar terms, however there can be no assurance that we will renew under similar terms or that our offer to renew will be accepted.
See “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — Notes to Consolidated Financial Statements — Note 10” for additional information regarding our obligations under leases.

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ITEM 3. LEGAL PROCEEDINGS
We are subject to lawsuits arising out of the conduct of our business. The discussion of our litigation matters in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — Notes to Consolidated Financial Statements — Note 12” is incorporated by reference.
PART II
ITEM 4. RESERVED
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the NASDAQ Global Select Market under the symbol UEIC. The closing price of our common stock as reported by NASDAQ on March 11, 2010 was $22.84. Our stockholders of record on March 11, 2010 numbered 136. We have never paid cash dividends on our common stock, nor do we currently intend to pay any cash dividends on our common stock in the foreseeable future. We intend to retain our earnings, if any, for the future operation and expansion of our business.
Recent Sales of Unregistered Securities
There were no unregistered sales of equity securities during 2009.
The following table sets forth, for the periods indicated, the high and low sale prices for our common stock, as reported by NASDAQ:
                                 
    2009   2008
    High   Low   High   Low
First Quarter
  $ 19.80     $ 10.85     $ 35.50     $ 18.04  
Second Quarter
    22.50       17.27       28.20       20.67  
Third Quarter
    22.12       16.99       27.99       19.02  
Fourth Quarter
    24.07       19.80       26.49       12.33  
Purchases of Equity Securities
The following table sets forth, for the fourth quarter, our total stock repurchases, average price paid per share and the maximum number of shares that may yet be purchased under our plans or programs:
                                 
                    Total Number of   Maximum
                    Shares   Number of
                    Purchased   Shares that May
                    as Part of   Yet Be
                    Publicly   Purchased
    Total Number of   Weighted Average   Announced   Under the
    Shares   Price Paid   Plans   Plans or
Period   Purchased   per Share   or Programs   Programs
10/1/2009 — 10/31/2009
    32,634     $ 20.69              
11/1/2009 — 11/30/2009
    43,878       21.90              
12/1/2009 — 12/31/2009
    39,679       21.91              
 
                       
Total during fourth quarter
    116,191     $ 21.57              
 
                       
During the year ended December 31, 2009, we repurchased 404,643 shares of our issued and outstanding common stock for $7.7 million under an ongoing and systematic program approved by our Board of Directors. We make stock repurchases to manage the dilution created by shares issued under our stock incentive plans or when we deem a repurchase is a good use of our cash and the price to be paid is at or below a threshold approved by our Board from time to time. On February 11, 2010, our Board of Directors revisited this program and authorized management to continue repurchasing up to an additional 1,000,000 shares of our issued and outstanding common stock.

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Equity Compensation Plans
Information regarding our equity compensation plans, including both stockholder approved plans and plans not approved by stockholders, is incorporated by reference to “ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS” under the caption “Equity Compensation Plan Information” and “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — Notes to Consolidated Financial Statements — Note 15” under the caption “Stock-Based Compensation.”
Performance Chart
The following graph and table compares the cumulative total stockholder return with respect to our common stock versus the cumulative total return of our Peer Group Index, Standard & Poor’s Small Cap 600 (the “S&P Small Cap 600”) and the NASDAQ Composite Index for the five year period ended December 31, 2009. The comparison assumes that $100 is invested on December 31, 2004 in each of our common stock, the Peer Group Index, S&P Small Cap 600 and the NASDAQ Composite Index and that all dividends are reinvested. We have not paid any dividends and, therefore, our cumulative total return calculation is based solely upon stock price appreciation and not upon reinvestment of dividends. The graph and table depicts year-end values based on actual market value increases and decreases relative to the initial investment of $100, based on information provided for each calendar year by the NASDAQ Stock Market and the New York Stock Exchange.
During the five years ended December 31, 2009, three of our peer group companies were acquired and as a result the Peer Group Index is composed of only two companies. Given the decrease in the number of companies and its composition, we believe the relevance of the Peer Group Index has been impaired. As a result we have replaced the Peer Group Index with the S&P Small Cap 600 (of which we are a member). In this year of change we have shown the new and old index for comparison purposes. Beginning with our 2010 Annual Report on Form 10-K, we will no longer include the Peer Group Index.

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The comparisons in the graph and table below are based on historical data and are not intended to forecast the possible future performance of our common stock.
Comparison of Stockholder Returns of Universal Electronics Inc.,
the Peer Group Index
(1), S&P Small Cap 600 and the NASDAQ Composite Index
PERFORMANCE GRAPH)
                                                 
    12/31/2004   12/31/2005   12/31/2006   12/31/2007   12/31/2008   12/31/2009
Universal Electronics Inc.
  $ 100     $ 98     $ 119     $ 190     $ 92     $ 132  
Peer Group Index
  $ 100     $ 107     $ 105     $ 82     $ 36     $ 50  
S&P Small Cap 600
  $ 100     $ 107     $ 122     $ 120     $ 82     $ 101  
NASDAQ Composite Index
  $ 100     $ 101     $ 111     $ 122     $ 72     $ 104  
 
(1)   Companies in the Peer Group Index are as follows: Harman International Industries, Inc. and Koss Corporation.
Information presented is as of the end of each calendar year for the period December 31, 2004 through 2009. This information shall not be deemed to be “solicited material” or to be “filed” with the Securities and Exchange Commission or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) nor shall this information be incorporated by reference into any prior or future filings under the Securities Act of 1933 or the Exchange Act, except to the extent that we specifically incorporate it by reference into a filing.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information below is not necessarily indicative of the results of future operations and should be read in conjunction with “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” and the Consolidated Financial Statements and notes thereto included in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,” of this Form 10-K, which are incorporated herein by reference, in order to understand further the factors that may affect the comparability of the financial data presented below.
                                         
    Year Ended December 31,
(in thousands, except per share data)   2009   2008   2007   2006   2005
Net sales
  $ 317,550     $ 287,100     $ 272,680     $ 235,846     $ 181,349  
Operating income
  $ 21,947     $ 20,761     $ 26,451     $ 18,517     $ 11,677  
Net income
  $ 14,675     $ 15,806     $ 20,230     $ 13,520     $ 9,701  
Earnings per share:
                                       
Basic
  $ 1.07     $ 1.13     $ 1.40     $ 0.98     $ 0.72  
Diluted
  $ 1.05     $ 1.09     $ 1.33     $ 0.94     $ 0.69  
Shares used in calculating earnings per share:
                                       
Basic
    13,667       14,015       14,410       13,818       13,462  
Diluted
    13,971       14,456       15,177       14,432       13,992  
Cash dividend declared per common share
                             
Gross margin
    32.0 %     33.5 %     36.4 %     36.4 %     37.0 %
Selling, general, administrative, research and development expenses as a % of net sales
    25.1 %     26.3 %     26.7 %     28.5 %     30.6 %
Operating margin
    6.9 %     7.2 %     9.7 %     7.9 %     6.4 %
Net income as a % of net sales
    4.6 %     5.5 %     7.4 %     5.7 %     5.4 %
Return on average assets
    6.5 %     7.3 %     10.2 %     8.3 %     6.8 %
Working capital
  $ 127,086     $ 122,303     $ 140,330     $ 106,179     $ 77,201  
Ratio of current assets to current liabilities
    3.1       3.0       4.0       3.4       2.8  
Total assets
  $ 233,307     $ 217,555     $ 217,285     $ 178,608     $ 146,319  
Cash and cash equivalents
  $ 29,016     $ 75,238     $ 86,610     $ 66,075     $ 43,641  
Long—term debt
                             
Stockholders’ equity
  $ 169,730     $ 153,353     $ 168,242     $ 134,217     $ 103,292  
Book value per share (a)
  $ 12.40     $ 11.24     $ 11.55     $ 9.58     $ 7.63  
Ratio of liabilities to liabilities and stockholders’ equity
    27.3 %     29.5 %     22.6 %     24.9 %     29.4 %
 
(a)   Book value per share is defined as stockholders’ equity divided by common shares issued, less treasury stock.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this document.
Overview
We have developed a broad line of pre-programmed universal wireless control products and audio-video accessories that are marketed to enhance home entertainment systems. Our customers operate in the consumer electronics market and include OEMs, MSOs (cable and satellite service providers), international retailers, CEDIA (Custom Electronic Design and Installation Association), North American retailers, private labels, and companies in the computing industry. We also sell integrated circuits, on which our software and IR code database is embedded, to OEMs that manufacture wireless control devices, cable converters or satellite receivers for resale in their products. We believe that our universal remote control database contains device codes that are capable of controlling virtually all IR controlled TVs, VCRs, DVD players, cable converters, CD players, audio components and satellite receivers, as well as most other infrared remote controlled devices worldwide.
Beginning in 1986 and continuing today, we have compiled an extensive IR code library that covers over 451,000 individual device functions and over 4,000 individual consumer electronic equipment brand names. Our library is

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regularly updated with new IR codes used in newly introduced video and audio devices. All such IR codes are captured from the original manufacturer’s remote control devices or manufacturer’s specifications to ensure the accuracy and integrity of the database. We have also developed patented technologies that provide the capability to easily upgrade the memory of the wireless control device by adding IR codes from the library that were not originally included.
We operate as one business segment. We have thirteen subsidiaries located in Argentina, Cayman Islands, France, Germany (2), Hong Kong (2), India, Italy, the Netherlands, Singapore, Spain and the United Kingdom.
To recap our results for 2009:
    Our revenue grew 10.6% from $287.1 million in 2008 to $317.6 million in 2009.
    Our sales growth in 2009 was the result of strong demand from the customers in our business category, due in part to the continuation of the upgrade cycle from analog to digital, consumer demand for advanced-function offerings from subscription broadcasters, increased share with existing customers, and new customer wins.
    Our 2009 operating income increased 5.7% to $21.9 million from $20.8 million in 2008. Our operating margin percentage decreased from 7.2% in 2008 to 6.9% in 2009 due primarily to the decrease in our gross margin percentage from 33.5% in 2008 to 32.0% in 2009. The decrease in our gross margin rate was due primarily to sales mix, as a higher percentage of our total sales was comprised of our lower-margin business category. In addition, the weakening of both the Euro and the British Pound versus the U.S. dollar also contributed to the decline in our gross margin percentage. Partially offsetting the decrease in our gross margin percentage was a 120 basis point improvement in operating expenses as a percentage of net sales in 2009 compared to 2008.
    In spite of challenging worldwide economic conditions that persisted throughout 2009, we continued to grow sales, acquired the remote control assets of Zilog, generated $24 million in cash flow from operations, and enter 2010 well-positioned.
Our strategic business objectives for 2010 include the following:
    increase our share with existing customers;
    acquire new customers in historically strong regions;
    continue our expansion into new regions, Asia in particular;
    continue to develop industry-leading technologies and products; and
    continue to evaluate potential acquisition and joint venture opportunities that may enhance our business.
We intend for the following discussion of our financial condition and results of operations to provide information that will assist in understanding our consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for sales returns and doubtful accounts, warranties, inventory valuation, business combination purchase price allocations, our review for impairment of long-

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lived assets, intangible assets and goodwill, income taxes and stock-based compensation expense. Actual results may differ from these judgments and estimates, and they may be adjusted as more information becomes available. Any adjustment may be significant.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably may have been used, or if changes in the estimate that are reasonably likely to occur may materially impact the financial statements. Management believes the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue recognition
We recognize revenue on the sale of products when delivery has occurred, there is persuasive evidence of an arrangement, the sales price is fixed or determinable and collectability is reasonably assured.
When a sales arrangement contains multiple elements, such as software products, licenses and/or services, we allocate revenue to each element based on its relative fair value. The fair values for the multiple elements are determined based on vendor specific objective evidence (“VSOE”), or the price charged when the element is sold separately. The residual method is utilized when VSOE exists for all the undelivered elements, but not for the delivered element. This is performed by allocating revenue to the undelivered elements (that have VSOE) and the residual revenue to the delivered elements. When the fair value for an undelivered element cannot be determined, we defer revenue for the delivered elements until the undelivered element is delivered. We limit the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services or subject to customer-specified return or refund privileges.
Sales allowances reduce gross accounts receivable and gross sales to arrive at accounts receivable, net and net sales in the same period the related receivable and revenue is recorded. We have no obligations after the delivery of our products other than any associated warranties.
We record a provision for estimated retail sales returns. These estimates are based on historical sales returns, analysis of credit memo data and other known factors. The provision recorded for estimated sales returns and allowances is deducted from gross sales to arrive at net sales in the period the related revenue is recorded. The allowance for sales returns balance at December 31, 2009 and 2008 was $2.0 million and $2.8 million, respectively. The allowance for sales returns balance at December 31, 2009 and 2008 contained reserves for items returned prior to year-end, but that were not completely processed, and therefore not yet removed from the allowance for sales returns balance. We estimate that if these returns had been fully processed the allowance for sales returns balance would have been approximately $1.4 million and $0.8 million on December 31, 2009 and 2008. The value of these returned goods was included in our inventory balance at December 31, 2009 and 2008.
We accrue for discounts and rebates on product sales in the same period as the related revenues are recorded based on our current expectations, after considering historical experience. Changes in such accruals may be required if future rebates and incentives differ from our estimates. Rebates and incentives are recognized as a reduction of sales if distributed in cash or customer account credits. Rebates and incentives are recognized as cost of sales if we provide products or services for payment.
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make payments for products sold or services rendered. The allowance for doubtful accounts is based on a variety of factors, including historical experience, length of time receivables are past due, current economic trends and changes in customer payment behavior. Also, we record specific provisions for individual accounts when we become aware of a customer’s inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. Our historical reserves have been sufficient to cover losses from uncollectible accounts. We incurred $0.4 million of bad debt expense in 2009 to reflect certain customer accounts where collection was highly uncertain in the current economic environment. If circumstances related to a customer change, our estimates of the recoverability of the receivables would be further adjusted, either upward or downward.

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We have not made any material changes in our methodology for recognizing revenue during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to recognize revenue. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that may be material.
Warranty
We warrant our products against defects in materials and workmanship arising during normal use. We service warranty claims directly through our customer service department or contracted third-party warranty repair facilities. Our warranty periods range up to three years. We estimate and recognize product warranty costs, which are included in cost of sales, as we sell the related products. Warranty costs are forecasted based on the best available information, primarily historical claims experience and the expected cost per claim. The costs we have incurred to service warranty claims have been minimal. Historically, product defects have been less than 0.5% of the net units sold. As a result the balance of our reserve for estimated warranty costs is not significant.
We have not made any material changes in our warranty reserve methodology during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate the warranty reserve. However, actual claim costs may differ from the amounts estimated. If a significant product defect were to be discovered on a high volume product, our financial statements may be materially impacted.
Inventories
Our inventories consist primarily of wireless control devices and the related component parts, primarily integrated circuits, and are valued at the lower of cost or market value. Cost is determined using the first-in, first-out method. We write-down our inventory for the estimated difference between the inventory’s cost and its estimated market value based upon our best estimates about future demand and market conditions.
We carry inventory in amounts necessary to satisfy our customers’ inventory requirements on a timely basis. We continually monitor our inventory status to control inventory levels and write-down any excess or obsolete inventories on hand. Our total excess and obsolete inventory reserve as of December 31, 2009 and 2008 was $1.8 million and $1.5 million, respectively, or 4.1% and 3.5% of total inventory. The increase in our excess and obsolete reserve in 2009 was the result of $3.4 million of additional write-downs, offset primarily by $3.1 million of scrapped inventory. This compared to additional write-downs of $2.4 million offset primarily by scrapped inventory of $2.7 million in 2008.
We have not made any material changes in the accounting methodology used to establish our excess and obsolete inventory reserve during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our excess and obsolete inventory reserve. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required which may have a material impact on our financial statements. Such circumstances may include, but are not limited to, the development of new competing technology that impedes the marketability of our products or the occurrence of significant price decreases in our component parts, such as integrated circuits. Each percentage point change in the ratio of excess and obsolete inventory reserve to inventory would impact cost of sales by approximately $0.4 million.
Business Combinations
We are required to allocate the purchase price of acquired companies to the tangible and intangible assets and the liabilities assumed, as well as in-process research and development (“IPR&D”), based upon their estimated fair values. We engage independent third-party appraisal firms to assist us in determining the fair values of assets acquired and liabilities assumed. Such valuations require management to make significant fair value estimates and assumptions, especially with respect to intangible assets. Management estimates the fair value of certain intangible assets by utilizing the following (but not limited to):

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    future free cash flow from customer contracts, customer lists, distribution agreements, acquired developed technologies, and patents;
    expected costs to develop IPR&D into commercially viable products and cash flows from the products once they are completed;
    brand awareness and market position, as well as assumptions regarding the period of time the brand will continue to be used in our product portfolio; and
    discount rates utilized in discounted cash flow models.
Our estimates are based upon assumptions believed to be reasonable; however, unanticipated events or circumstances may occur which may affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies.
Valuation of Long-Lived Assets and Intangible Assets
We assess long-lived and intangible assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Factors considered important which may trigger an impairment review if significant include the following:
    underperformance relative to historical or projected future operating results;
    changes in the manner of use of the assets;
    changes in the strategy of our overall business;
    negative industry or economic trends;
    a decline in our stock price for a sustained period; and
    a variance between our market capitalization relative to net book value.
We perform an impairment review when we determine that the carrying value of a long-lived asset or an intangible asset may not be recoverable based upon the existence of one or more of the above indicators of impairment. If the carrying value of the asset is larger than the undiscounted cash flows, the asset is impaired. We measure an impairment based on the projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. In assessing the recoverability, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets.
We have not made any material changes in our impairment loss assessment methodology during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate the impairment of long-lived assets and intangible assets. However, if actual results are not consistent with our estimates and assumptions we may be exposed to material impairment charges.
Capitalized Software Development Costs
At each balance sheet date, we compare the unamortized capitalized software development costs to the net realizable value of the related product. The amount by which the unamortized capitalized software development costs exceed the net realizable value of the related product is written off. The net realizable value is the estimated future gross revenues attributable to each product reduced by its estimated future completion costs and disposal. Any remaining amount of capitalized software development costs that have been written down are considered to be the cost for subsequent accounting purposes, and the amount of the write-down is not subsequently restored.

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We do not believe there is a reasonable likelihood that there will be a material change in the future estimates of net realizable value we use to test for impairment losses on capitalized software development costs. However, if actual results are not consistent with our estimates and assumptions we may be exposed to impairment charges.
Goodwill
We evaluate the carrying value of goodwill as of December 31 of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances may include, but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition or (3) an adverse action or assessment by a regulator.
When performing the impairment review, we determine the carrying amount of each reporting unit by assigning assets and liabilities, including the existing goodwill, to those reporting units. A reporting unit is defined as an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is deemed a reporting unit if the component constitutes a business for which discrete financial information is available, and segment management regularly reviews the operating results of that component. Our domestic and international operations are components and reporting units of our sole operating segment. On December 31, 2009, the goodwill allocated to the domestic and international reporting units was $8.3 million and $5.4 million, respectively.
To evaluate whether goodwill is impaired, we compare the estimated fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. We estimate the fair value of our reporting units based on income and market approaches. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Under the market approach, we estimate the fair value based on market multiples of Enterprise Value to EBITDA for comparable companies. If the carrying amount of a reporting unit exceeds its fair value, the amount of the impairment loss must be measured.
The impairment loss would be calculated by comparing the implied fair value of goodwill to its carrying amount. In calculating the implied fair value of the reporting unit’s goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the reporting unit’s fair value over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.
Determining the fair value of a reporting unit or an indefinite-lived purchased intangible asset is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units.
We have not made any material changes in our impairment loss assessment methodology during the past three fiscal years. We continue to estimate the fair value of our reporting units to be in excess of their carrying value, and therefore have not recorded any impairment. The amount by which the fair value of our reporting units exceeded their book value utilizing the income and market approaches ranged from 33 percent to 632 percent and therefore we concluded our goodwill was not impaired at December 31, 2009. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to test for impairment losses on goodwill. However, if actual results are not consistent with our estimates and assumptions we may be exposed to material impairment charges.
Income Taxes
We calculate our current and deferred tax provisions based on estimates and assumptions that may differ from the actual results reflected in our income tax returns filed during the subsequent year. We record adjustments based on

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filed returns when we have identified and finalized them, which is generally in the third and fourth quarters of the subsequent year for U.S. federal and state provisions, respectively.
We recognize deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts using enacted tax rates in effect for the year in which we expect the differences to reverse. We record a valuation allowance to reduce the deferred tax assets to the amount that we are more likely than not to realize. We have considered future market growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, we would increase the valuation allowance and make a corresponding charge to earnings in the period in which we make such determination. Likewise, if we later determine that we are more likely than not to realize the net deferred tax assets, we would reverse the applicable portion of the previously provided valuation allowance. In order for us to realize our deferred tax assets we must be able to generate sufficient taxable income in the tax jurisdictions in which the deferred tax assets are located.
Our effective tax rate includes the impact of certain undistributed foreign earnings for which we have not provided U.S. taxes because we plan to reinvest such earnings indefinitely outside the United States. The decision to reinvest our foreign earnings indefinitely outside the United States is based on our projected cash flow needs as well as the working capital and long-term investment requirements of our foreign subsidiaries and our domestic operations. Material changes in our estimates of cash, working capital and long-term investment requirements in the various jurisdictions in which we do business may impact our effective tax rate.
We are subject to income taxes in the United States and foreign countries, and we are subject to routine corporate income tax audits in many of these jurisdictions. We believe that our tax return positions are fully supported, but tax authorities are likely to challenge certain positions, which may not be fully sustained. However, our income tax expense includes amounts intended to satisfy income tax assessments that result from these challenges in accordance with the accounting for uncertainty in income taxes prescribed by U.S. GAAP. Determining the income tax expense for these potential assessments and recording the related assets and liabilities requires management judgments and estimates.
We have recorded a liability for uncertain tax positions of $2.8 million at December 31, 2009. We believe that our reserve for uncertain tax positions, including related interest and penalties, is adequate. Our reserve for uncertain tax positions is primarily attributable to uncertainties concerning the tax treatment of our international operations, including the allocation of income among different jurisdictions, and any related interest. We review our reserves quarterly, and we may adjust such reserves due to proposed assessments by tax authorities, changes in facts and circumstances, issuance of new regulations or new case law, previously unavailable information obtained during the course of an examination, negotiations between tax authorities of different countries concerning our transfer prices, execution of advanced pricing agreements, resolution with respect to individual audit issues, the resolution of entire audits, or the expiration of statutes of limitations. The amounts ultimately paid upon resolution of audits may be materially different from the amounts previously included in our income tax expense and, therefore, may have a material impact on our operating results, financial position and cash flows.
Stock-Based Compensation Expense
Stock-based compensation expense for each employee and director is presented in the same income statement caption as their cash compensation. During the year ended December 31, 2009, 2008 and 2007, we recorded $4.3 million, $4.2 million and $3.5 million, respectively, in pre-tax stock-based compensation expense. The income tax benefit associated with stock-based compensation expense was $1.5 million, $1.5 million and $1.2 million for the years ended December 31, 2009, 2008 and 2007, respectively.

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Stock-based compensation expense by income statement caption for the years ended December 31, 2009, 2008 and 2007 was the following:
                         
(in thousands)   2009     2008     2007  
 
                 
Cost of sales
  $ 33     $ 17     $ 31  
Research and development
    434       356       418  
Selling, general and administrative
    3,845       3,870       3,072  
 
                 
Total stock-based compensation expense
  $ 4,312     $ 4,243     $ 3,521  
 
                 
Selling, general and administrative expense includes pre-tax stock-based compensation related to restricted stock awards granted to outside directors of $0.5 million, $0.6 million and $0.7 million for the years ended December 31, 2009, 2008 and 2007, respectively. We issue restricted stock awards to the outside directors for services performed. Compensation expense for the restricted stock awards is recognized on a straight-line basis over the requisite service period of one year.
Selling, general and administrative expense includes pre-tax stock-based compensation related to stock option awards granted to outside directors of $0.3 million, $0.2 million and $0 for the years ended December 31, 2009, 2008 and 2007, respectively. We issue stock option awards to the outside directors for services performed. Compensation expense for the stock option awards is recognized on a straight-line basis over the requisite service period of three years.
Stock Option Grants
During the year ended December 31, 2009, the Compensation Committee and Board of Directors granted 233,400 stock options to our employees with an aggregate grant date fair value of $1.6 million under various stock incentive plans. The stock options granted to employees during 2009 consisted of the following:
(in thousands, except share amounts)
                         
        Number of     Grant      
        Shares     Date      
Stock Option     Underlying     Fair      
Grant Date   Options     Value     Vesting Period
January 1, 2009     15,000     $ 95    
4 -Year Vesting Period (25% each year)
February 18, 2009     15,000       74    
4 -Year Vesting Period (25% each year)
February 19, 2009     7,500       33    
4 -Year Vesting Period (25% each year)
February 21, 2009     10,000       58    
4 -Year Vesting Period (25% each year)
March 10, 2009     185,900       1,340    
4 -Year Vesting Period (6.25% each quarter)
                   
 
          233,400     $ 1,600    
 
On October 30, 2009, our Board of Directors appointed Carl E. Vogel to serve as a Class II Director. In connection with his appointment, our directors granted Mr. Vogel 20,000 stock options under the 2006 Stock Incentive Plan. These options are subject to a three-year vesting period (33.3% each year) and are in addition to the employee grants above. The aggregate grant date fair value of this award was $0.2 million.
During the year ended December 31, 2009, we recognized $0.3 million of pre-tax stock-based compensation expense related to our 2009 stock option grants.
At December 31, 2009, there was $2.9 million of unrecognized pre-tax stock-based compensation expense related to non-vested stock options which we expect to recognize over a weighted-average period of 2.2 years.
During the annual review cycle for 2010, the Compensation Committee granted our Named Executives 99,900 stock options under various Stock Incentive Plans. The options were granted as part of long-term incentive compensation to assist us in meeting our performance and retention objectives. The grant, dated January 25, 2010, is subject to a four-year vesting period (0% each quarter during the first year, 8.33% each quarter during the second, third and fourth years). The total grant date fair value of these awards was $1.1 million.

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Restricted Stock Grants
During the year ended December 31, 2009, the Compensation Committee and Board of Directors granted 298,170 restricted stock awards under the 2006 Stock Incentive Plan to our employees with an aggregate grant date fair value of $4.5 million. The restricted stock awards granted to employees during 2009 consisted of the following:
(in thousands, except share amounts)
                         
        Number     Grant      
        of     Date      
Restricted Stock   Shares     Fair      
Grant Date   Granted     Value     Vesting Period
January 1, 2009     5,000     $ 74    
4-Year Vesting Period (25% each year)
February 12, 2009     77,146       925    
3-Year Vesting Period (5% each quarter during years 1-2 and 15% each quarter during year 3)
March 4, 2009     24,723       376    
2-Year Vesting Period (12.5% each quarter)
March 10, 2009     147,693       2,400    
3-Year Vesting Period (8.75% each quarter during years 1-2 and 7.5% each quarter during year 3)
March 10, 2009     40,500       658    
4-Year Vesting Period (6.25% each quarter)
August 18, 2009     3,108       60    
3-Year Vesting Period (8.75% each quarter during years 1-2 and 7.5% each quarter during year 3)
                   
 
          298,170     $ 4,493    
 
In addition to the grants to employees, 28,333 shares of restricted stock were granted to our outside directors during 2009. On July 1, 2009, 25,000 shares of restricted stock, with a grant date fair value of $0.5 million, were granted to our outside directors as a part of their annual compensation package. These shares are subject to a one-year vesting period (25% each quarter). On October 30, 2009, our Board of Directors appointed Carl E. Vogel to serve as a Class II Director. In connection with his appointment, Mr. Vogel was granted 3,333 shares of restricted stock with a grant date fair value of $70 thousand (a prorated portion of the annual restricted stock grant made to each director). These shares are subject to an eight-month vesting period (833 shares vested during the fourth quarter 2009 and 1,250 shares will vest in both the first and second quarter of 2010).
During the year ended December 31, 2009, we recognized $1.5 million of pre-tax stock-based compensation expense related to our 2009 restricted stock grants.
At December 31, 2009, there was $4.5 million of unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards which we expect to recognize over a weighted-average period of 1.9 years.
During the annual review cycle for 2010, the Compensation Committee granted our Named Executives 45,500 restricted stock awards under the 2006 Stock Incentive Plan. The awards were granted as part of long-term incentive compensation to assist us in meeting our performance and retention objectives. The grant, dated January 25, 2010, is subject to a four-year vesting period (0% each quarter during the first year, 8.33% each quarter during the second, third and fourth years). The total grant date fair value of these awards was $1.1 million.
Determining the appropriate fair value model and calculating the fair value of share-based payment awards requires the utilization of highly subjective assumptions, including the expected life and forfeiture rate of the share-based payment awards and stock price volatility. Management determined that historical volatility calculated based on our actively traded common stock is a better indicator of expected volatility and future stock price trends than implied volatility. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense may be materially different in the future.
We do not believe it is reasonably likely that there will be a material change in the future estimates or assumptions used to determine stock-based compensation expense. However, if actual results are not consistent with our

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estimates and assumptions we may be exposed to material stock-based compensation expense. Refer to “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — Notes to Consolidated Financial Statements - Note 15” for additional disclosure regarding stock-based compensation expense.
Results of Operations
The following table sets forth our results of operations expressed as a percentage of net sales for the periods indicated.
                                                 
    Year Ended December 31,  
(in thousands)   2009     2008     2007  
Net sales
  $ 317,550       100.0 %   $ 287,100       100.0 %   $ 272,680       100.0 %
Cost of sales
    215,938       68.0       190,910       66.5       173,329       63.6  
 
                                   
Gross profit
    101,612       32.0       96,190       33.5       99,351       36.4  
Research and development expenses
    8,691       2.7       8,160       2.8       8,820       3.2  
Selling, general and administrative expenses
    70,974       22.4       67,269       23.5       64,080       23.5  
 
                                   
Operating income
    21,947       6.9       20,761       7.2       26,451       9.7  
Interest income
    471       0.1       3,017       1.1       3,104       1.1  
Other (expense) income, net
    (241 )     (0.0 )     311       0.1       7       0.0  
 
                                   
Income before income taxes
    22,177       7.0       24,089       8.4       29,562       10.8  
Provision for income taxes
    7,502       2.4       8,283       2.9       9,332       3.4  
 
                                   
Net income
  $ 14,675       4.6 %   $ 15,806       5.5 %   $ 20,230       7.4 %
 
                                   
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Consolidated
Net sales for the year ended December 31, 2009 were $317.6 million, an increase of 11% compared to $287.1 million for the same period last year. Net income for 2009 was $14.7 million or $1.05 per diluted share compared to $15.8 million or $1.09 per diluted share for 2008.
                                 
    2009     2008  
    $ (millions)     % of total     $ (millions)     % of total  
Net sales:
                               
Business
  $ 262.5       82.7 %   $ 231.5       80.6 %
Consumer
    55.1       17.3 %     55.6       19.4 %
 
                       
Total net sales
  $ 317.6       100.0 %   $ 287.1       100.0 %
 
                       
Net sales in our Business lines (subscription broadcasting, OEM, and computing companies) were approximately 83% of net sales for 2009 compared to approximately 81% for 2008. Net sales in our business lines for 2009 increased by approximately 13% to $262.5 million from $231.5 million in 2008. This increase in net sales resulted primarily from an increase in the volume of remote control sales, which was partially offset by lower prices. The increase in remote control sales volume was attributable to the continued deployment of advanced function set-top boxes by the service operators, market share gains with a few key subscription broadcasting customers and new customer wins. These advanced functions include digital video recording (“DVR”), video-on-demand (“VOD”), and high definition television (“HDTV”). We expect that the deployment of the advanced function set-top boxes by the service operators will continue into the foreseeable future as penetration for each of the functions cited continues to increase.
Net sales in our Consumer lines (One For All® retail, private label, custom installers, and direct import) were approximately 17% of net sales for 2009 compared to approximately 19% for 2008. Net sales in our consumer lines for 2009 decreased by 1% to $55.1 million from $55.6 million in 2008. The 2009 net sales were negatively impacted by the weakening of the Euro and the British Pound compared to the U.S. dollar, which resulted in a decrease in net sales of approximately $3.6 million. Net of the currency effect, net retail sales outside of the United States were down by an additional $0.9 million. Net private label sales in the United States decreased by $1.4 million, or 70%, to $0.6 million in 2009 from $2.0 million in 2008. In addition, net sales in the CEDIA market decreased by $0.8 million, or 11%, from $7.0 million in 2008 to $6.2 million in 2009. Partially offsetting these decreases was North

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American retail, which increased net sales by $6.2 million, from $2.0 million in 2008 to $8.2 million in 2009. The increase in North American retail was the result of our distribution agreement with Audiovox, which was signed during the second quarter of 2008.
Gross profit for 2009 was $101.6 million compared to $96.2 million for 2008. Gross profit as a percent of sales decreased to 32.0% in 2009 from 33.5% in 2008, due primarily to the following:
    Sales mix, as a higher percentage of our total sales was comprised of our lower margin Business category. In addition, sales mix within our sales categories also contributed to the decrease in our gross margin rate as consumers trended towards value-oriented products. Collectively, the aforementioned resulted in a decrease of 0.7% in the gross margin rate;
    Foreign currency fluctuations caused a decrease of 0.7% in the gross margin rate driven by the weakening of the Euro and British Pound as compared to the U.S. dollar;
    An increase in inventory scrap expense caused a decrease of 0.2% in the gross margin rate.
Included within the sales mix calculation was the positive benefit of our relationship with Maxim Integrated Products which resulted in an increase in our gross margin percentage of approximately 1.0%. During 2009 we agreed to be Maxim’s sales agent in return for a sales agency fee. The sales agency fee during 2009 was $4.4 million. During 2010, as the transition from the Zilog chip platform to the Maxim chip platform progresses, we will begin to take over full sales and distribution rights, procuring and selling the chips directly to Zilog’s former customers. We anticipate this relationship will lead to growth in revenue and earnings going forward.
Research and development expenses increased 7% from $8.2 million in 2008 to $8.7 million in 2009. The increase is primarily due to additional labor dedicated to general research & development activities.
Selling, general and administrative expenses increased 6% from $67.3 million in 2008 to $71.0 million in 2009. The weakening of the Euro compared to the U.S. dollar resulted in a decrease of $1.6 million; net of the currency effect, selling, general and administrative expenses increased by $5.3 million. Legal, accounting, and advisory professional service expense increased by $1.1 million, due to the acquisition of assets from Zilog, which was completed during the first quarter of 2009. The newly-acquired Zilog operations increased operating expenses by an additional $3.8 million. In addition, severance costs of approximately $0.9 million were incurred in 2009. During the fourth quarter of 2009, we also settled a copyright infringement lawsuit which increased operating expenses by approximately $0.6 million. Partially offsetting these increases was a decline in advertising and tradeshow expense which decreased by $1.1 million.
In 2009, we recorded $0.5 million of net interest income compared to $3.0 million for 2008. The decrease in interest income is due to significantly lower interest rates.
We recorded income tax expense of $7.5 million in 2009 compared to $8.3 million in 2008. Our effective tax rate was 33.8% in 2009 compared to 34.4% in 2008. The decrease in our effective tax rate was due primarily to the completion of our Dutch tax audit for 2002 through 2006 which resulted in approximately $0.4 million of tax reserves being reversed and credited into income in the fourth quarter of 2009, offset partially by a higher percentage of income earned in higher tax rate jurisdictions in 2009 compared to 2008.
Management expects net sales for the year ended December 31, 2010 to be between $325 million and $340 million as compared to $317.6 million for the year ended December 31, 2009. During 2009, we benefited from a significant customer purchasing the majority of its remote controls from us. In 2010, we expect this customer to return to a more traditional dual source arrangement, where we will continue to supply one-hundred percent of their chipsets, but will share the remote control volume with an additional source. A chipset is sold for less than a finished good remote, however they command a slightly higher gross margin percentage. We estimate this will decrease our net sales to this customer by approximately $25.0 million during 2010 compared to the year ended December 31, 2009. However, we believe that growth from our existing customers and the addition of new customers, both domestically and internationally, as well as the impact of the Zilog acquisition, will more than offset this decrease in net sales.

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Earnings per share for the year ending December 31, 2010 is expected to be between $1.20 and $1.35 as compared to the $1.05 per diluted share earned in the year ended December 31, 2009.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Consolidated
Net sales for the year ended December 31, 2008 were $287.1 million, an increase of 5% compared to $272.7 million for the year ended December 31, 2007. Net income for 2008 was $15.8 million or $1.09 per diluted share compared to $20.2 million or $1.33 per diluted share for 2007.
                                 
    2008     2007  
    $ (millions)     % of total     $ (millions)     % of total  
Net sales:
                               
Business
  $ 231.5       80.6 %   $ 214.7       78.7 %
Consumer
    55.6       19.4 %     58.0       21.3 %
 
                       
Total net sales
  $ 287.1       100.0 %   $ 272.7       100.0 %
 
                       
Net sales in our Business lines (subscription broadcasting, OEM, and computing companies) were approximately 81% of net sales for 2008 compared to approximately 79% for 2007. Net sales in our business lines for 2008 increased by approximately 8% to $231.5 million from $214.7 million in 2007. This increase in sales resulted primarily from an increase in the volume of remote control sales, which was partially offset by lower prices. The increase in remote control sales volume was attributable to the continued deployment of advanced function set-top boxes by the service operators, market share gains with a few key subscription broadcasting customers and new customer wins. These advanced functions include digital video recording (“DVR”), video-on-demand (“VOD”), and high definition television (“HDTV”). We expect that the deployment of the advanced function set-top boxes by the service operators will continue into the foreseeable future as penetration for each of the functions cited continues to increase.
Net sales in our Consumer lines (One For All® retail, private label, custom installers, and direct import) were approximately 19% of net sales for 2008 compared to approximately 21% for 2007. Net sales in our consumer lines for 2008 decreased by 4% to $55.6 million from $58.0 million in 2007. The sales were negatively impacted by the weakening of the British Pound compared to the U.S. dollar, which resulted in a decrease in net sales of approximately $2.1 million. The strengthening of the Euro compared to the U.S. dollar positively impacted sales, which resulted in an increase of $1.0 million. Net of the currency effect, retail sales outside of the United States were down by $3.1 million, primarily due to lower sales in the UK, Spain and France. Additionally, Private Label sales in the United States decreased by $1.2 million, or 38%, to $2.0 million in 2008 from $3.2 million in 2007. Partially offsetting these decreases is our expanding presence in the CEDIA market which increased sales by $2.2 million, or 47%, from 2007. In addition, other US Retail increased by $0.8 million, from $1.2 million in 2007 to $2.0 million in 2008, due to customer wins.
Gross profit for 2008 was $96.2 million compared to $99.4 million for 2007. Gross profit as a percent of sales for 2008 was 33.5%, compared to 36.4% for 2007, due primarily to the following reasons:
    Sales mix, as a higher percentage of our total sales was comprised of our lower margin Business category. In addition, sales mix within our sales categories also contributed to the decrease in our gross margin rate as consumers trended towards value-oriented products. Collectively, the aforementioned resulted in a decrease of 3.2% in the gross margin rate;
    Foreign currency fluctuations caused a decrease of 0.3% in the gross margin rate;
    A decrease in freight and handling expense (due to a lower percentage of air freight) caused an increase of 0.5% in the gross margin rate.
Research and development expenses decreased 8% from $8.8 million in 2007 to $8.2 million in 2008. The decrease is primarily due to the completion of the latest development phase for the Nevo platform in late 2007.

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Selling, general and administrative expenses increased 5% from $64.1 million in 2007 to $67.3 million in 2008. The strengthening of the Euro compared to the U.S. dollar resulted in an increase of $2.2 million; payroll and benefits increased by $0.8 million due to new hires and merit increases; stock-based compensation increased by $0.8 million; depreciation expense in 2008 increased by $0.7 million, primarily due to increased tooling to support a higher volume of sales and an office renovation completed in early 2008; sales commissions increased by $0.4 million; bad debt expense increased by $0.4 million; and trade show expense increased by $0.4 million. These items were partially offset by lower long term incentive compensation, which decreased by $1.5 million, and a decline in net outside product development spending, which decreased by $0.9 million.
In 2008, we recorded $3.0 million of net interest income comparable to $3.1 million for 2007.
We recorded income tax expense of $8.3 million in 2008 compared to $9.3 million in 2007. Our effective tax rate was 34.4% in 2008 compared to 31.6% in 2007. The increase in our effective tax rate is due primarily to additional income earned in higher tax-rate jurisdictions as well as lower federal research and development credits.
Liquidity and Capital Resources
Sources and Uses of Cash
                                         
    Year Ended           Year Ended           Year Ended
    December 31,   Increase   December 31,   Increase   December 31,
(In thousands)   2009   (Decrease)   2008   (Decrease)   2007
Cash provided by operating activities
  $ 23,987     $ (6,165 )   $ 30,152     $ 10,215     $ 19,937  
Cash used for investing activities
    (66,091 )     (58,671 )     (7,420 )     (1,237 )     (6,183 )
Cash (used for) provided by financing activities
    (4,222 )     20,965       (25,187 )     (26,585 )     1,398  
Effect of exchange rate changes on cash
    104       9,021       (8,917 )     (14,300 )     5,383  
                         
            Increase    
    December 31, 2009   (Decrease)   December 31, 2008
Cash and cash equivalents
  $ 29,016     $ (46,222 )   $ 75,238  
Working capital
    127,086       4,783       122,303  
Net cash provided by operating activities in 2009 was $24.0 million compared to $30.2 million during 2008. The decrease in cash flows from operating activities in 2009 compared to 2008 was primarily due to our deliberate effort to improve our vendor management which commenced during 2008 and resulted in a $15.6 million cash inflow by the end of 2008. As a result of the improved vendor terms being negotiated and implemented in 2008, there was minimal opportunity for improvement relating to accounts payable in 2009. Days in payables actually decreased from 81 days at December 31, 2008 to 67 days at December 31, 2009 resulting in a cash outflow of approximately $2.1 million in 2009. In addition, during 2009 we had cash outflows related to accounts receivable of $4.2 million compared to cash outflows of $1.5 million during 2008 due primarily to higher net sales over the last couple of years. Partially offsetting the aforementioned activity was an improvement in inventory turns from 4.4 turns in 2008 to 5.3 turns in 2009. Despite having higher sales, our inventory levels decreased from $43.7 million at December 31, 2008 to $40.9 million at December 31, 2009 compared to an inventory build of $8.8 million from December 31, 2007 to December 31, 2008.
Net cash provided by operating activities in 2008 was $30.2 million compared to $19.9 million during 2007. The increase in cash flows from operating activities in 2008 compared to 2007 was primarily due to an increase in accounts payable. Accounts payable increased at a higher rate compared to the prior year due to improved vendor management, including negotiating better payment terms with certain significant vendors.
Our days sales outstanding improved from 82 days for the fourth quarter 2007 to 68 days for the fourth quarter 2008 resulting in a $3.5 million improvement in working capital in 2008 compared to 2007. Partially offsetting the improvement in days sales outstanding is the decrease in inventory turns from 5.0 during 2007 to 4.4 during 2008. The decrease in inventory turns was a result of our deliberate effort to reduce costly air shipments by carrying additional safety stock as well as maintain high customer service levels with existing and newly acquired customers.

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Net cash used for investing activities during 2009 was $66.1 million as compared to $7.4 million and $6.2 million during 2008 and 2007, respectively. The increase in cash used for investing activities in 2009 was primarily due to the acquisition of intangible assets and goodwill of $9.5 million from Zilog and our term deposit investment of $49.2 million. Please refer to “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — Notes to Consolidated Financial Statements — Notes 7 and 21” for additional disclosure regarding our purchase of goodwill and intangible assets from Zilog.
Net cash used for financing activities was $4.2 million during 2009 compared to $25.2 million during 2008 and cash provided by financing activities of $1.4 million during 2007. Proceeds from stock option exercises were $3.3 million during 2009 compared to proceeds of $1.2 million and $12.6 million during 2008 and 2007, respectively. In 2009, gains from stock option exercises resulted in a $0.3 million excess tax benefit compared to $0.3 million and $3.3 million for 2008 and 2007, respectively. In addition, we purchased 404,643 shares of our common stock at a cost of $7.7 million during 2009, compared to 1,118,318 and 471,300 shares at a cost of $26.7 million and $14.5 million during 2008 and 2007, respectively. We hold these shares as treasury stock and they are available for reissue. Presently, except for using a minimal number of these treasury shares to compensate our outside board members, we have no plans to distribute these shares, although we may change these plans if necessary to fulfill our on-going business objectives.
On February 11, 2010, our Board of Directors authorized management to continue repurchasing up to an additional 1,000,000 shares of our issued and outstanding common stock. Repurchases may be made to manage dilution created by shares issued under our stock incentive plans or whenever we deem a repurchase is a good use of our cash and the price to be paid is at or below a threshold approved by our Board.
On January 8, 2010, we entered into a new $15 million unsecured revolving credit line with U.S. Bank (“Credit Facility”), expiring on October 31, 2011. Amounts available for borrowing under the Credit Facility are reduced by the balance of any outstanding import letters of credit and are subject to certain quarterly financial covenants related to our cash flow, fixed charges, quick ratio, and net income.
At December 31, 2009 we had no debt, however we cannot make any assurances that we will not need to borrow amounts under this Credit Facility. If this or any other facility is not available to us at a time when we need to borrow, we would have to use our cash reserves, including potentially repatriating cash from foreign jurisdictions, which may have a material adverse effect on our operating results, financial position and cash flows.
Contractual Obligations
The following table summarizes our contractual obligations and the effect these obligations are expected to have on our liquidity and cash flow in future periods.
                                         
    Payments Due by Period  
            Less than     1 - 3     4 - 5     After  
(in thousands)   Total     1 year     Years     years     5 years  
 
                             
Contractual obligations:
                                       
Operating lease obligations
  $ 4,649     $ 1,905     $ 2,376     $ 368     $  
Purchase obligations(1)
    39,516       11,516       16,000       12,000        
 
                             
Total contractual obligations
  $ 44,165     $ 13,421     $ 18,376     $ 12,368     $  
 
                             
 
(1)   Purchase obligations primarily include contractual payments to purchase minimum quantities of inventory under vendor agreements.
Liquidity
Historically, we have utilized cash provided from operations as our primary source of liquidity, as internally generated cash flows have been sufficient to support our business operations, capital expenditures, acquisitions and discretionary share repurchases. We are able to supplement our short-term liquidity, if necessary, with our Credit Facility.

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Our working capital needs have typically been greatest during the third and fourth quarters when accounts receivable and inventories increase in connection with the fourth quarter holiday selling season. At December 31, 2009, we had $127.1 million of working capital compared to $122.3 million at December 31, 2008.
Our cash balances are held in numerous locations throughout the world, including substantial amounts held outside of the United States. Most of the amounts held outside of the United States may be repatriated to the United States but, under current law, would be subject to United States federal income taxes, less applicable foreign tax credits. Repatriation of some foreign balances is restricted by local laws. We have not provided for the United States federal tax liability on these amounts for financial statement purposes as this cash is considered indefinitely reinvested outside of the United States. Our intent is to meet our domestic liquidity needs through ongoing cash flows, external borrowings, or both. We utilize a variety of tax planning strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed.
At December 31, 2009, we had approximately $9.3 million, $14.2 million, $2.4 million and $3.1 million of cash and cash equivalents in the United States, Europe, Asia and Cayman Islands, respectively. In addition, at December 31, 2009 we had a six-month term deposit of $49.2 million in Asia which matured on January 21, 2010. A new term deposit of $50.3 million was entered into on March 11, 2010 and will mature on June 11, 2010. We attempt to mitigate our exposure to interest rate, liquidity, credit and other relevant risks by placing our cash, cash equivalents, and term deposit with financial institutions we believe are high quality.
For information regarding our Credit Facility, see “ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.”
It is our policy to carefully monitor the state of our business, cash requirements and capital structure. We believe that the cash generated from our operations and funds from our Credit Facility will be sufficient to support our current business operations as well as anticipated growth at least through the end of 2010; however, there can be no assurance that such funds will be adequate for that purpose.
Off Balance Sheet Arrangements
We do not participate in any off balance sheet arrangements.
New Accounting Pronouncements
See “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — Notes to Consolidated Financial Statements — Note 2” for a discussion of new accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including interest rate and foreign currency exchange rate fluctuations. We have established policies, procedures and internal processes governing our management of these risks and the use of financial instruments to mitigate our risk exposure.
On January 8, 2010, we entered into a new $15 million unsecured revolving credit line with U.S. Bank (“Credit Facility”), expiring on October 31, 2011. Amounts available for borrowing under the Credit Facility are reduced by the balance of any outstanding import letters of credit and are subject to certain quarterly financial covenants related to our cash flow, fixed charges, quick ratio, and net income. Under the Credit Facility, we may elect to pay interest based on the bank’s prime rate or LIBOR plus a fixed margin of 1.8%. The applicable LIBOR (1, 3, 6, or 12-month LIBOR) corresponds with the loan period we select. At December 31, 2009, the 12-month LIBOR plus the fixed margin was 2.8% and the bank’s prime rate was 3.25%. If a LIBOR rate loan is prepaid prior to the completion of the loan period, we must pay the bank the difference between the interest the bank would have earned had prepayment not occurred and the interest the bank actually earned. We may prepay prime rate loans in whole or in part at any time without a premium or penalty.
At December 31, 2009 we had no debt, however we cannot make any assurances that we will not need to borrow amounts under this Credit Facility. If this or any other facility is not available to us at a time when we need to

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borrow, we would have to use our cash reserves, including potentially repatriating cash from foreign jurisdictions, which may have a material adverse effect on our earnings, cash flow and financial position.
At December 31, 2009 we had wholly owned subsidiaries in Argentina, Cayman Islands, France, Germany, Hong Kong, India, Italy, the Netherlands, Singapore, Spain, and the United Kingdom. We are exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales, anticipated purchases, assets and liabilities denominated in currencies other than the U.S. dollar. The most significant foreign currencies to our operations for fiscal 2009 were the Euro and the British Pound. For most currencies, we are a net receiver of the foreign currency and therefore benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar relative to the foreign currency. Even where we are a net receiver, a weaker U.S. dollar may adversely affect certain expense figures taken alone.
From time to time, we enter into foreign currency exchange agreements to manage the foreign currency exchange rate risks inherent in our forecasted income and cash flows denominated in foreign currencies. The terms of these foreign currency exchange agreements normally last less than nine months. We recognize the gains and losses on these foreign currency contracts in the same period as the remeasurement losses and gains of the related foreign currency-denominated exposures.
It is difficult to estimate the impact of fluctuations on reported income, as it depends on the opening and closing rates, the average net balance sheet positions held in a foreign currency and the amount of income generated in local currency. We routinely forecast what these balance sheet positions and income generated in local currency may be and we take steps to minimize exposure as we deem appropriate. Alternatively, we may choose not to hedge the foreign currency risk associated with our foreign currency exposures, primarily if such exposure acts as a natural foreign currency hedge for other offsetting amounts denominated in the same currency or the currency is difficult or too expensive to hedge. We do not enter into any derivative transactions for speculative purposes.
The sensitivity of earnings and cash flows to the variability in exchange rates is assessed by applying an approximate range of potential rate fluctuations to our assets, obligations and projected results of operations denominated in foreign currency with all other variables held constant. The analyses cover all of our foreign currency contracts offset by the underlying exposures. Based on our overall foreign currency rate exposure at December 31, 2009, we believe that movements in foreign currency rates may have a material affect on our financial position. We estimate that if the exchange rates for the Euro and the British Pound relative to the U.S. dollar fluctuate 10% from December 31, 2009, net income and cash flows in the first quarter of 2010 would fluctuate by approximately $0.6 million and $6.7 million, respectively.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
         
    Page
    40  
    41  
    42  
    43  
    44  
    45  
    78  
     All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Universal Electronics Inc.
We have audited the accompanying consolidated balance sheets of Universal Electronics Inc. (a Delaware corporation) as of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits of the basic financial statements included the financial statement schedule listed in the index to the consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Universal Electronics Inc. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Universal Electronics Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 15, 2010 expressed an unqualified opinion.
/s/ Grant Thornton LLP
Irvine, California
March 15, 2010

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UNIVERSAL ELECTRONICS INC.
CONSOLIDATED BALANCE SHEETS

(In thousands, except share-related data)
                 
    December 31,  
    2009     2008  
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 29,016     $ 75,238  
Term deposit
    49,246        
Accounts receivable, net
    64,392       59,825  
Inventories, net
    40,947       43,675  
Prepaid expenses and other current assets
    2,423       3,461  
Deferred income taxes
    3,016       2,421  
 
           
Total current assets
    189,040       184,620  
Equipment, furniture and fixtures, net
    9,990       8,686  
Goodwill
    13,724       10,757  
Intangible assets, net
    11,572       5,637  
Other assets
    1,144       609  
Deferred income taxes
    7,837       7,246  
 
           
Total assets
  $ 233,307     $ 217,555  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
               
Current liabilities:
               
Accounts payable
  $ 39,514     $ 44,705  
Accrued sales discounts, rebates and royalties
    6,028       4,848  
Accrued income taxes
    3,254       2,334  
Accrued compensation
    4,619       3,617  
Other accrued expenses
    8,539       6,813  
 
           
Total current liabilities
    61,954       62,317  
Long-term liabilities:
               
Deferred income taxes
    153       130  
Income tax payable
    1,348       1,442  
Other long-term liabilities
    122       313  
 
           
Total liabilities
    63,577       64,202  
 
           
 
               
Commitments and contingencies
               
 
               
Stockholders’ equity:
               
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued or outstanding
           
Common stock, $.01 par value, 50,000,000 shares authorized; 19,140,232 and 18,715,833 shares issued at December 31, 2009 and 2008, respectively
    191       187  
Paid-in capital
    128,913       120,551  
Accumulated other comprehensive income
    1,463       750  
Retained earnings
    118,989       104,314  
 
           
 
    249,556       225,802  
 
               
Less cost of common stock in treasury, 5,449,962 and 5,070,319 shares at December 31, 2009 and 2008, respectively
    (79,826 )     (72,449 )
 
           
Total stockholders’ equity
    169,730       153,353  
 
           
Total liabilities and stockholders’ equity
  $ 233,307     $ 217,555  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

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UNIVERSAL ELECTRONICS INC.
CONSOLIDATED INCOME STATEMENTS

(In thousands, except per share amounts)
                         
    Year Ended December 31,  
    2009     2008     2007  
Net sales
  $ 317,550     $ 287,100     $ 272,680  
Cost of sales
    215,938       190,910       173,329  
 
                 
Gross profit
    101,612       96,190       99,351  
 
                       
Research and development expenses
    8,691       8,160       8,820  
Selling, general and administrative expenses
    70,974       67,269       64,080  
 
                 
 
                       
Operating income
    21,947       20,761       26,451  
Interest income
    471       3,017       3,104  
Other (expense) income, net
    (241 )     311       7  
 
                 
 
                       
Income before provision for income taxes
    22,177       24,089       29,562  
Provision for income taxes
    7,502       8,283       9,332  
 
                 
Net income
  $ 14,675     $ 15,806     $ 20,230  
 
                 
 
                       
Earnings per share:
                       
Basic
  $ 1.07     $ 1.13     $ 1.40  
 
                 
Diluted
  $ 1.05     $ 1.09     $ 1.33  
 
                 
 
                       
Shares used in computing earnings per share:
                       
Basic
    13,667       14,015       14,410  
 
                 
Diluted
    13,971       14,456       15,177  
 
                 
The accompanying notes are an integral part of these consolidated financial statements.

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UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)
                                                                         
                                            Accumulated                      
    Common Stock     Common Stock             Other                      
    Issued     in Treasury     Paid-in     Comprehensive     Retained             Comprehensive  
    Shares     Amount     Shares     Amount     Capital     Income (Loss)     Earnings     Totals     Income  
Balance at December 31, 2006
    17,543     $ 175       (3,529 )   $ (31,964 )   $ 94,733     $ 2,759     $ 68,514     $ 134,217          
Comprehensive income:
                                                                       
Net income
                                                    20,230             $ 20,230  
Currency translation adjustment
                                            8,462                       8,462  
 
                                                                     
Total comprehensive income
                                                                  $ 28,692  
 
                                                                     
Shares issued for employee benefit plan
    23       1                       630                       631          
Purchase of treasury shares
                    (471 )     (14,519 )                             (14,519 )        
Stock options exercised
    981       9                       12,588                       12,597          
Shares issued to Directors
                    25       370       (370 )                              
Stock—based compensation expense
                                    3,521                       3,521          
Adoption of FIN 48 (Note 8)
                                                    (236 )     (236 )        
Tax benefit from exercise of non — qualified stock options
                                    3,339                       3,339          
             
Balance at December 31, 2007
    18,547     $ 185       (3,975 )   $ (46,113 )   $ 114,441     $ 11,221     $ 88,508     $ 168,242          
             
Comprehensive income:
                                                                       
Net income
                                                    15,806             $ 15,806  
Currency translation adjustment
                                            (10,471 )                     (10,471 )
 
                                                                     
Total comprehensive income
                                                                  $ 5,335  
 
                                                                     
Shares issued for employee benefit plan and compensation
    55       1                       632                       633          
Purchase of treasury shares
                    (1,118 )     (26,689 )                             (26,689 )        
Stock options exercised
    114       1                       1,157                       1,158          
Shares issued to Directors
                    23       353       (353 )                              
Stock—based compensation expense
                                    4,243                       4,243          
Tax benefit from exercise of non — qualified stock options and vested restricted stock
                                    431                       431          
             
Balance at December 31, 2008
    18,716     $ 187       (5,070 ) $   (72,449 )   $ 120,551     $ 750     $ 104,314     $ 153,353          
             
Comprehensive income:
                                                                       
Net income
                                                    14,675             $ 14,675  
Currency translation adjustment
                                            713                       713  
 
                                                                     
Total comprehensive income
                                                                  $ 15,388  
 
                                                                     
Shares issued for employee benefit plan and compensation
    145       1                       740                       741          
Purchase of treasury shares
                    (405 )     (7,747 )                             (7,747 )        
Stock options exercised
    279       3                       3,272                       3,275          
Shares issued to Directors
                    25       370       (370 )                              
Stock—based compensation expense
                                    4,312                       4,312          
Tax benefit from exercise of non — qualified stock options and vested restricted stock
                                    408                       408          
             
Balance at December 31, 2009
    19,140     $ 191       (5,450 )   $ (79,826 )   $ 128,913     $ 1,463     $ 118,989     $ 169,730          
             
The accompanying notes are an integral part of these consolidated financial statements.

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UNIVERSAL ELECTRONICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
                         
    Year Ended December 31,  
    2009     2008     2007  
Cash provided by operating activities:
                       
Net income
  $ 14,675     $ 15,806     $ 20,230  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
    6,801       6,084       4,675  
Provision for doubtful accounts
    363       442       23  
Provision for inventory write-downs
    3,480       2,671       2,146  
Deferred income taxes
    (1,141 )     (448 )     219  
Tax benefit from exercise of stock options and vested restricted stock
    408       431       3,339  
Excess tax benefit from stock-based compensation
    (250 )     (344 )     (3,320 )
Shares issued for employee benefit plan
    741       633       631  
Stock-based compensation
    4,312       4,243       3,521  
Changes in operating assets and liabilities:
                       
Accounts receivable
    (4,206 )     (1,478 )     (5,033 )
Inventories
    (354 )     (12,219 )     (9,194 )
Prepaid expenses and other assets
    552       (1,888 )     837  
Accounts payable and accrued expenses
    (2,096 )     15,557       3,982  
Accrued income and other taxes
    702       662       (2,119 )
 
                 
Net cash provided by operating activities
    23,987       30,152       19,937  
 
                 
Cash used for investing activities:
                       
Term deposit
    (49,246 )            
Acquisition of equipment, furniture and fixtures
    (6,171 )     (5,945 )     (4,802 )
Acquisition of intangible assets
    (1,172 )     (1,475 )     (1,381 )
Acquisition of assets from Zilog, Inc.
    (9,502 )            
 
                 
Net cash used for investing activities
    (66,091 )     (7,420 )     (6,183 )
 
                 
Cash (used for) provided by financing activities:
                       
Proceeds from stock options exercised
    3,275       1,158       12,597  
Treasury stock purchased
    (7,747 )     (26,689 )     (14,519 )
Excess tax benefit from stock—based compensation
    250       344       3,320  
 
                 
Net cash (used for) provided by financing activities
    (4,222 )     (25,187 )     1,398  
Effect of exchange rate changes on cash
    104       (8,917 )     5,383  
 
                 
Net (decrease) increase in cash and cash equivalents
    (46,222 )     (11,372 )     20,535  
Cash and cash equivalents at beginning of year
    75,238       86,610       66,075  
 
                 
Cash and cash equivalents at end of year
  $ 29,016     $ 75,238     $ 86,610  
 
                 
Supplemental Cash Flow Information — Income taxes paid were $7.3 million, $8.2 million and $8.1 million in 2009, 2008, and 2007, respectively.
The accompanying notes are an integral part of these consolidated financial statements.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Note 1 — Description of Business
Universal Electronics Inc., based in Southern California, has developed a broad line of easy-to-use, pre-programmed universal wireless control products and audio-video accessories that are marketed to enhance home entertainment systems as well as software designed to enable consumers to wirelessly connect, control and interact with an increasingly complex home environment. Our primary markets include cable and satellite service providers, retail, original equipment manufacturers (“OEMs”), custom installers, private label, and companies in the personal computing industry. Over the past 22 years, we have developed a broad portfolio of patented technologies and a database of home connectivity software that we license to our customers, including many leading Fortune 500 companies. In addition, we sell our universal wireless control products and other audio-visual accessories through our European headquarters in the Netherlands and to distributors and retailers in Europe, Australia, New Zealand, South Africa, the Middle East, Mexico, and selected countries in Asia and Latin America under the One For All® brand name.
As used herein, the terms “we”, “us” and “our” refer to Universal Electronics Inc. and its subsidiaries unless the context indicates to the contrary.
Note 2 — Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All the intercompany accounts and transactions have been eliminated in the consolidated financial statements.
Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowance for sales returns and doubtful accounts, warranties, inventory valuation, business combination purchase price allocations, our review for impairment of long-lived assets, intangible assets and goodwill, income taxes and stock-based compensation expense. Actual results may differ from these assumptions and estimates, and they may be adjusted as more information becomes available. Any adjustment may be material.
Revenue Recognition and Sales Allowances
We recognize revenue on the sale of products when delivery has occurred, there is persuasive evidence of an arrangement, the sales price is fixed or determinable and collectability is reasonably assured. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Sales allowances reduce gross accounts receivable and gross sales to arrive at accounts receivable, net and net sales in the same period the related receivable and revenue is recorded (see Note 4 for further information concerning our sales allowances).
The provision recorded for estimated sales returns and allowances is deducted from gross sales to arrive at net sales in the period the related revenue is recorded. These estimates are based on historical sales returns, analysis of credit memo data and other known factors. We have no obligations after delivery of our products other than the associated warranties (see Note 12 for further information concerning our warranty obligations).
We accrue for discounts and rebates on product sales in the same period as the related revenues are recorded based on historical experience. Changes in such accruals may be required if future rebates and incentives differ from our estimates. Rebates and incentives are recognized as a reduction of sales if distributed in cash or customer account credits. Rebates and incentives are recognized as cost of sales if we provide products or services for payment.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make payments for products sold or services rendered. The allowance for doubtful accounts is based on a variety of factors, including historical experience, length of time receivables are past due, current economic trends and changes in customer payment behavior. Also, we record specific provisions for individual accounts when we become aware of a customer’s inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to a customer change, our estimates of the recoverability of the receivables would be further adjusted, either upward or downward.
We generate service revenue, which is paid monthly, as a result of providing consumer support programs to some of our customers through our call centers. These service revenues are recognized when services are performed, persuasive evidence of an arrangement exists, the sales price is fixed or determinable, and collectability is reasonably assured.
We also license our intellectual property including our patented technologies, trade secrets, trademarks, and database of infrared codes. We record license revenue when our customers ship a product incorporating our intellectual property, persuasive evidence of an arrangement exists, the sales price is fixed or determinable, and collectability is reasonably assured.
We may from time to time initiate the sale of certain intellectual property, including patented technologies, trademarks, or a particular database of infrared codes. When a fixed upfront fee is received in exchange for the conveyance of a patent, trademark, or database delivered that represents the culmination of the earnings process, we record revenue when delivery has occurred, persuasive evidence of an arrangement exists, the sales price is fixed or determinable and collectability is reasonably assured.
When a sales arrangement contains multiple elements, such as software products, licenses and/or services, we allocate revenue to each element based on its relative fair value. The fair values for the multiple elements are determined based on vendor specific objective evidence (“VSOE”), or the price charged when the element is sold separately. The residual method is utilized when VSOE exists for all the undelivered elements, but not for the delivered element. This is performed by allocating revenue to the undelivered elements (that have VSOE) and the residual revenue is allocated to the delivered elements. When the fair value for an undelivered element cannot be determined, we defer revenue for the delivered elements until the undelivered element is delivered. We limit the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services or subject to customer-specified return or refund privileges.
We present all non-income government-assessed taxes (sales, use and value added taxes) collected from our customers and remitted to governmental agencies on a net basis (excluded from revenue) in our financial statements. The government-assessed taxes are recorded in other accrued expenses until they are remitted to the government agency.
Income Taxes
Income tax expense includes U.S. and foreign income taxes. We account for income taxes using the liability method. We record deferred tax assets and deferred tax liabilities on our balance sheet for expected future tax consequences of events recognized in our financial statements in a different period than our tax return using enacted tax rates that will be in effect when these differences reverse. We record a valuation allowance to reduce net deferred tax assets if we determine that it is more likely than not that the deferred tax assets will not be realized. A current tax asset or liability is recognized for the estimated taxes refundable or payable for the current year.
A tax position that is more likely than not is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement, or else a full reserve is established against the tax asset or a liability is recorded. See Note 8 for further information concerning income taxes.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Research and Development
Research and development costs are expensed as incurred and consist primarily of salaries, employee benefits, supplies and materials.
Advertising
Advertising costs are expensed as incurred. Advertising expense totaled $1.3 million, $2.1 million and $1.9 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Shipping and Handling Fees and Costs
We include shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with in-bound freight are recorded in cost of goods sold. Other shipping and handling costs are included in selling, general and administrative expenses and totaled $7.9 million, $8.4 million and $7.9 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Stock-Based Compensation
We recognize the grant date fair value of stock-based compensation awards as expense, net of estimated forfeitures, in proportion to vesting during the requisite service period, which is generally one to four years. We determined the fair value of the restricted stock awards utilizing the average of the high and low trade prices of our Company’s shares on the date they were granted. We have evaluated the available option pricing models and the assumptions we may utilize to estimate the grant date fair value of stock options granted to employees and directors. We have elected to utilize the Black-Scholes option pricing model. The assumptions utilized in the Black-Scholes model include the following: weighted average fair value of grant, risk-free interest rate, expected volatility and expected life in years. As part of our assessment of possible assumptions, management determined that historical volatility calculated based on our actively traded common stock is a better indicator of expected volatility and future stock price trends than implied volatility. Therefore, we calculate the expected volatility of our common stock utilizing its historical volatility over a period of time equal to the expected term of the stock option. In addition, we examined the historical pattern of stock option exercises in an effort to determine if there were any discernable patterns based on employee classification. From this analysis, we identified two classifications: (1) Executives and Board of Directors and (2) Non-Executives. Our estimate of expected life is computed utilizing historical exercise patterns and post-vesting behavior within each of the two identified classifications. The risk-free interest rate over the expected term is equal to the prevailing U.S. Treasury note rate over the same period. See Notes 13 and 15 for further information regarding stock-based compensation.
Foreign Currency Translation and Foreign Currency Transactions
We use the U.S. dollar as our functional currency for financial reporting purposes. The functional currency for most of our foreign subsidiaries is their local currency. The translation of foreign currencies into U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet dates and for revenue and expense accounts using the average exchange rate during each period. The gains and losses resulting from the translation are included in the foreign currency translation adjustment account, a component of accumulated other comprehensive income in stockholders’ equity, and are excluded from net income. The portions of intercompany accounts receivable and accounts payable that are not intended for settlement are translated at exchange rates in effect at the balance sheet date. Our intercompany foreign investments and long-term debt that are not intended for settlement are translated using historical exchange rates.
We recorded a foreign currency translation gain of $0.7 million, a loss of $10.5 million and a gain of $8.5 million for the years ended December 31, 2009, 2008 and 2007, respectively. The foreign currency translation gain of $0.7 million for the year ended December 31, 2009 was driven by the weakening of the U.S. dollar versus the Euro. The U.S. dollar/Euro spot rate was 1.43 and 1.39 at December 31, 2009 and 2008, respectively.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
The foreign currency translation loss of $10.5 million for the year ended December 31, 2008 was driven by the strengthening of the U.S. dollar versus the Euro. The U.S. dollar/Euro spot rate was 1.39 and 1.46 at December 31, 2008 and 2007, respectively. The foreign currency translation loss during 2008 was compounded by our transfer of €47.0 million, or $60.2 million, into Hong Kong dollars (which are indexed to the U.S. dollar) in November 2008. The U.S. dollar/Euro spot rate at the time of transfer was 1.28. This composed approximately $7.2 million of the foreign currency translation loss for 2008.
The foreign currency translation gain of $8.5 million for the year ended December 31, 2007 was driven by the weakening of the U.S. dollar versus the Euro. The U.S. dollar/Euro spot rate was 1.46 and 1.32 at December 31, 2007 and December 31, 2006, respectively.
Transaction gains and losses generated by the effect of changes in foreign currency exchange rates on recorded assets and liabilities denominated in a currency different than the functional currency of the applicable entity are recorded in other (expense) income, net (see Note 16 for further information concerning transaction gains and losses).
Financial Instruments
Our financial instruments consist primarily of investments in cash and cash equivalents, a term deposit, accounts receivable, accounts payable and accrued liabilities. The carrying value of our financial instruments approximate fair value as a result of their short maturities (see Notes 3, 4, 5 and 9 for further information concerning our financial instruments).
Cash, Cash Equivalents, and Term Deposit
Cash and cash equivalents include cash accounts and all investments purchased with initial maturities of new term deposit is 3 months or less. We attempt to mitigate our exposure to interest rate, liquidity, credit and other relevant risks by placing our cash, cash equivalents, and term deposit with financial institutions we believe are high quality. These financial institutions are located in many different geographic regions. As part of our cash and risk management processes, we perform periodic evaluations of the relative credit standing of our financial institutions. We have not sustained credit losses from instruments held at financial institutions (see Note 3 for further information concerning cash, cash equivalents, and term deposit).
Inventories
Inventories consist of remote controls, audio-video accessories and the related component parts. Inventoriable costs include materials, labor, freight-in and manufacturing overhead related to the purchase and production of inventories. We value our inventories at the lower of cost or market. Cost is determined using the first-in, first-out method. We attempt to carry inventories in amounts necessary to satisfy our customer requirements on a timely basis (see Note 5 for further information concerning our inventories and suppliers).
Product innovations and technological advances may shorten a given product’s life cycle. We continually monitor our inventories to identify any excess or obsolete items on hand. We write-down our inventories for estimated excess and obsolescence in an amount equal to the difference between the cost of the inventories and its estimated net realizable value. These estimates are based upon management’s judgment about future demand and market conditions. Actual results may differ from management’s judgments and additional write-downs may be required. Our total excess and obsolete inventory reserve as of December 31, 2009 and 2008 was $1.8 million and $1.5 million, respectively, or 4.1% and 3.5% of our total inventory balance.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are recorded at cost. To qualify for capitalization an asset must have a useful life greater than one year and a cost greater than $1,000 for individual assets or $5,000 for assets purchased in bulk.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
We capitalize certain internal and external costs incurred to acquire or create internal use software, principally related to software coding, designing system interfaces and installation and testing of the software.
For financial reporting purposes, depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the appropriate accounts and any gain or loss is included as a component of depreciation expense in operating income.
Estimated useful lives consist of the following:
     
Tooling and equipment
  2-7 Years
Computer equipment
  3-7 Years
Software
  3-5 Years
Furniture and fixtures
  5-7 Years
Leasehold improvements
  Lesser of lease term or useful life (approximately 2 to 6 years)
See Note 6 for further information concerning our equipment, furniture and fixtures.
Goodwill
We record the excess purchase price of net tangible and intangible assets acquired over their estimated fair value as goodwill. We evaluate the carrying value of goodwill as of December 31 of each year and between annual evaluations if events occur or circumstances change that may reduce the fair value of the reporting unit below its carrying amount. Such circumstances may include, but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator.
When performing the impairment review, we determine the carrying amount of each reporting unit by assigning assets and liabilities, including the existing goodwill, to those reporting units. A reporting unit is defined as an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is deemed a reporting unit if the component constitutes a business for which discrete financial information is available, and segment management regularly reviews the operating results of that component. Our domestic and international operations are components and reporting units of our sole operating segment.
To evaluate whether goodwill is impaired, we compare the estimated fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. We estimate the fair value of our reporting units based on income and market approaches. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Under the market approach, we estimate the fair value based on market multiples of Enterprise Value to EBITDA for comparable companies. If the carrying amount of a reporting unit exceeds its fair value, the amount of the impairment loss must be measured.
The impairment loss would be measured by comparing the implied fair value of goodwill to its carrying amount. In calculating the implied fair value of the reporting unit’s goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the reporting unit’s fair value over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.
We conducted annual goodwill impairment reviews as of December 31, 2009, 2008 and 2007. Based on the analysis performed, we determined that the fair values of our reporting units exceeded their carrying amounts, including goodwill, and therefore they were not impaired. See Notes 7 and 21 for further information concerning goodwill.
Long-Lived and Intangible Assets Impairment
Intangible assets consist principally of distribution rights, patents, trademarks, trade names, developed and core technologies, capitalized software development costs (see also Note 2 under the caption Capitalized Software Development Costs) and customer relationships. Capitalized amounts related to patents represent external legal costs

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
for the application and maintenance of patents. Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from two to fifteen years.
We assess the impairment of long-lived assets and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important which may trigger an impairment review include the following: (1) significant underperformance relative to expected historical or projected future operating results; (2) significant changes in the manner or use of the assets or strategy for the overall business; (3) significant negative industry or economic trends and (4) a significant decline in our stock price for a sustained period.
We conduct an impairment review when we determine that the carrying value of a long-lived or intangible asset may not be recoverable based upon the existence of one or more of the above indicators of impairment. The asset is impaired if its carrying value exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. In assessing recoverability, we must make assumptions regarding estimated future cash flows and other factors.
The impairment loss is the amount by which the carrying value of the asset exceeds its fair value. We estimate fair value utilizing the projected discounted cash flow method and a discount rate determined by our management to be commensurate with the risk inherent in our current business model. When calculating fair value, we must make assumptions regarding estimated future cash flows, discount rates and other factors.
See Notes 6 and 14 for further information concerning long-lived assets. See Notes 7 and 21 for further information concerning intangible assets.
Capitalized Software Development Costs
Costs incurred to develop software for resale are expensed when incurred as research and development until technological feasibility has been established. We have determined that technological feasibility for our products is established when a working model is complete. Once technological feasibility is established, software development costs are capitalized until the product is available for general release to customers.
Capitalized software development costs are amortized on a product-by-product basis. Amortization is recorded in cost of sales and is the greater amount computed using:
a.   the net book value at the beginning of the period multiplied by the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product; or
b.   the straight-line method over the remaining estimated economic life of the product including the period being reported on.
The amortization of capitalized software development costs begins when the related product is available for general release to customers. The amortization periods normally range from one to two years.
We compare the unamortized capitalized software development costs of a product to its net realizable value at each balance sheet date. The amount by which the unamortized capitalized software development costs exceed the product’s net realizable value is written off. The net realizable value is the estimated future gross revenues of a product reduced by its estimated completion and disposal costs. Any remaining amount of capitalized software development costs are considered to be the cost for subsequent accounting purposes and the amount of the write-down is not subsequently restored. See Note 7 for further information concerning capitalized software development costs.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Derivatives
Our foreign currency exposures are primarily concentrated in the Euro, British Pound and Hong Kong dollar. We periodically enter into foreign currency exchange contracts with terms normally lasting less than nine months to protect against the adverse effects that exchange-rate fluctuations may have on our foreign currency-denominated receivables, payables, cash flows and reported income. We do not enter into financial instruments for speculation or trading purposes.
The derivatives we enter into have not qualified for hedge accounting. The gains and losses on both the derivatives and the foreign currency-denominated balances are recorded as foreign exchange transaction gains or losses and are classified in other (expense) income, net. Derivatives are recorded on the balance sheet at fair value. The estimated fair value of derivative financial instruments represents the amount required to enter into similar offsetting contracts with similar remaining maturities based on quoted market prices. See Note 18 for further information concerning derivatives.
Fair-Value Measurements
We measure fair value using the framework established by the FASB accounting guidance for fair value measurements and disclosures. This framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.
The valuation techniques are based upon observable and unobservable inputs. Observable or market inputs reflect market data obtained from independent sources. Unobservable inputs require management to make certain assumptions and judgments based on the best information available. Observable inputs are the preferred source of values. These two types of inputs create the following fair value hierarchy:
          Level 1:   Quoted prices (unadjusted) for identical instruments in active markets.
          Level 2:   Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
          Level 3:   Prices or valuations that require management inputs that are both significant to the fair value measurement and unobservable.
New Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-6 to improve the disclosure and transparency of fair value measurements. These amendments clarify the level of disaggregation required, and the necessary disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. The amendments in the update are effective prospectively for interim and annual periods beginning on or after December 15, 2009, except for the separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements, which are effective for fiscal years beginning on or after December 15, 2010, and for interim periods within those fiscal years. Early adoption is permitted. We have not yet adopted this ASU, and we do not expect its adoption will have a material effect on our consolidated results of operations and financial condition.
In October 2009, the FASB issued ASU No. 2009-14 to address accounting for arrangements that contain tangible products and software. The amendments in this update clarify what guidance should be utilized in allocating and measuring revenue for products that contain software that is “more than incidental” to the product as a whole. Currently, products that contain software that is “more than incidental” to the product as a whole are within the scope of software accounting guidance. Software accounting guidance requires a vendor to use vendor-specific objective evidence (“VSOE”) of selling price to separate the software from the product and account for the two

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
elements as a multiple-element arrangement. A vendor must sell, or intend to sell, a particular element separately to assert VSOE for that element. Third-party evidence for selling price is not allowed under the software accounting model. If a vendor does not have VSOE for the undelivered elements in the arrangement, the revenue associated with both the delivered and undelivered elements is combined into one unit of accounting. Any revenue attributable to the delivered elements is then deferred and recognized at a later date, which in many cases is as the undelivered elements are delivered by the vendor. This ASU addresses concerns that the current accounting model may not appropriately reflect the economics of the underlying transactions because no revenue is recognized for some products for which the vendor has already completed the related performance. In addition, this ASU addresses the concern that more software enabled products fall within the scope of the current software accounting model than was originally intended because of ongoing technical advancements. The amendments in the update are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted, however, if early adoption is elected, we would be required to apply the amendments retrospectively from the beginning of the fiscal year of adoption and make specific disclosures. We have not yet adopted this ASU, and we are currently evaluating the impact it may have on our consolidated financial statements.
In October 2009, the FASB issued ASU No. 2009-13 to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined accounting unit. Current accounting guidance requires a vendor to use VSOE or third-party evidence (“TPE”) of selling price to separate deliverables in a multiple-deliverable arrangement. VSOE of selling price is the price charged for a deliverable when it is sold separately or, for a deliverable not yet being sold separately, the price established by management with the appropriate authority. If a vendor does not have VSOE for the undelivered elements in the arrangement, the revenue associated with both the delivered and undelivered elements is combined into one unit of accounting. Any revenue attributable to the delivered products is then deferred and recognized at a later date, which in many cases is as the undelivered elements are delivered by the vendor. An exception to this guidance exists if the vendor has VSOE or TPE of selling price for the undelivered elements in the arrangement but not for the delivered elements. In those situations, the vendor uses the residual value method to allocate revenue to the delivered element, which results in the allocation of the entire discount in the arrangement, if any, to the delivered element. This ASU addresses concerns that the current accounting model may not appropriately reflect the economics of the underlying transactions because sometimes no revenue is recognized for products for which the vendor has already completed the related performance. As a result of this amendment, multiple element arrangements will be separated in more circumstances than under the existing accounting model. This amendment establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price utilized for each deliverable will be based on VSOE if available, TPE if VSOE is not available, or estimated selling price if neither VSOE or TPE evidence is available. The residual method is eliminated. The amendments in the update are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted, however, if early adoption is elected, we would be required to apply the amendments retrospectively from the beginning of the fiscal year of adoption and make specific disclosures. We have not yet adopted this ASU, and we are currently evaluating the impact it may have on our consolidated financial statements.
Recently Adopted Accounting Pronouncements
In December 2007, the FASB issued guidance that established principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. This guidance also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. The adoption of this guidance will affect the total purchase price of acquisitions, as acquisition costs will now be expensed, and the allocation of fair value to specific assets and liabilities will be different. This guidance was effective for us January 1, 2009. As a result of adopting this guidance, we recognized $1.1 million of acquisition costs during the year ended December 31, 2009 related to our purchase of assets from Zilog. The acquisition costs recognized during 2009 included $0.1 million of acquisition costs that were capitalized at December 31, 2008.
In addition to the recently adopted accounting standard above, we adopted the following accounting standards during 2009, none of which had a material effect on our consolidated financial position and results of operations:

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
  In September 2009, the FASB issued an ASU to address the need for additional implementation guidance on accounting for uncertainty in income taxes. We adopted this guidance during the quarter ended September 30, 2009.
  In August 2009, the FASB issued an ASU addressing the measurement of liabilities at fair value and reaffirmed the practice of measuring fair value using quoted market prices when a liability is traded as an asset. We adopted this guidance during the quarter ended September 30, 2009.
  In June 2009, the FASB issued new guidance establishing the FASB Accounting Standards Codification as the source of authoritative U.S. GAAP and identified the framework for selecting the principles to utilize in the preparation of financial statements for nongovernmental entities. We adopted this guidance during the quarter ended September 30, 2009.
  In April 2009, the FASB issued additional guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased and identifying circumstances that indicate a transaction is not orderly. We adopted this guidance during the quarter ended June 30, 2009.
  In April 2009, the FASB issued new guidance requiring disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. We adopted this guidance during the quarter ended June 30, 2009.
  In April 2009, the FASB issued new guidance to address application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. We adopted this guidance during the quarter ended March 31, 2009.
  In December 2008, the FASB issued guidance requiring employers to disclose certain information about plan assets of a defined benefit pension or other postretirement plan. We adopted this guidance during the quarter ended March 31, 2009.
  In November 2008, the FASB issued guidance clarifying how to account for defensive intangible assets subsequent to initial measurement. We adopted this guidance during the quarter ended March 31, 2009.
  In June 2008, the FASB issued new guidance addressing whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share. We adopted this guidance during the quarter ended March 31, 2009.
  In April 2008, the FASB issued guidance amending the factors that should be considered while developing renewal or extension assumptions to be utilized when determining the useful life of a recognized intangible asset. We adopted this guidance during the quarter ended March 31, 2009.
  In March 2008, the FASB issued guidance that amended and expanded the disclosure requirements for derivative instruments and hedging activities to provide improved transparency into their uses and financial statement impact. We adopted this guidance during the quarter ended March 31, 2009.
  In December 2007, the FASB issued new guidance changing the accounting for, and the financial statement presentation of, non-controlling equity interests in a consolidated subsidiary. We adopted this guidance during the quarter ended March 31, 2009.
  In November 2007, the FASB issued guidance defining collaborative arrangements and establishing reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. We adopted this guidance during the quarter ended March 31, 2009.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
  In September 2006, the FASB issued new guidance on fair value measurements. This guidance clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures of fair value measurements. In February 2008, the FASB delayed the effective date of the fair value measurements guidance for certain non-financial assets and liabilities. We adopted this new guidance for financial assets and liabilities during the quarter ended March 31, 2008. We adopted this new guidance for non-financial assets and liabilities during the quarter ended March 31, 2009.
Note 3 — Cash, Cash Equivalents, and Term Deposit
The following table sets forth our cash, cash equivalents, and term deposit that were accounted for at fair value on a recurring basis as of December 31, 2009:
                                 
            Fair Value Measurement Using  
            Quoted Prices in     Significant        
            Active Markets     Other     Significant  
    Year     for Identical     Observable     Unobservable  
(In thousands)   Ended     Asset     Inputs     Inputs  
Description   12/31/2009     (Level 1)     (Level 2)     (Level 3)  
Cash and cash equivalents
  $ 29,016     $ 29,016     $     $  
Term deposit
    49,246       49,246              
 
                       
 
  $ 78,262     $ 78,262     $     $  
 
                       
At December 31, 2009, we had approximately $9.3 million, $14.2 million, $2.4 million and $3.1 million of cash and cash equivalents in the United States, Europe, Asia and Cayman Islands, respectively. In addition, at December 31, 2009, we had a six-month term deposit cash account at Wells Fargo Bank denominated in Hong Kong dollars. The term began on July 21, 2009 and ended on January 21, 2010. The term deposit earned interest at an annual rate of 0.57%. The deposit amount and interest receivable related to this account as of December 31, 2009 was $49.2 million and 0.1 million, respectively.
On March 11, 2010, we entered into a three-month term deposit cash account at Wells Fargo Bank denominated in Hong Kong dollars. The term deposit of $50.3 million earns interest at an annual rate of 0.09%.
At December 31, 2008, we had approximately $8.4 million, $6.1 million and $60.7 million of cash and cash equivalents in the United States, Europe, and Asia, respectively.
See Note 2 under the caption Cash, Cash Equivalents, and Term Deposit for further information regarding our accounting principles.
Note 4 — Accounts Receivable, net and Revenue Concentrations
Accounts receivable, net consisted of the following at December 31, 2009 and 2008:
                 
(in thousands)   2009     2008  
 
           
Trade receivables, gross
  $ 68,458     $ 65,014  
Allowance for doubtful accounts
    (2,423 )     (2,439 )
Allowance for sales returns
    (1,999 )     (2,823 )
 
           
Net trade receivables
    64,036       59,752  
Other (1)
    356       73  
 
           
Accounts receivable, net
  $ 64,392     $ 59,825  
 
           
 
(1)   Other receivables as of December 31, 2009 consisted primarily of a reimbursement due from a vendor for quality issues, sales tax receivables, and interest due from Wells Fargo Bank on our term deposit (see Note 3).
Trade Receivables, Gross
Trade receivables, gross increased from $65.0 million at December 31, 2008 to $68.5 million at December 31, 2009. The increase in trade receivables, gross was driven primarily by net sales increasing from $78.7 million for the quarter ended December 31, 2008 to $84.9 million for the quarter ended December 31, 2009. Our days sales outstanding were approximately 68 days at both December 31, 2009 and 2008.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Allowance for Doubtful Accounts
The following changes occurred in the allowance for doubtful accounts during the years ended December 31, 2009, 2008 and 2007:
(in thousands)
                                 
    Balance at   Additions           Balance at
    Beginning of   to Costs and   (Write-offs)/   End of
Description   Period   Expenses   FX Effects   Period
Year Ended December 31, 2009
  $ 2,439     $ 363     $ (379 )   $ 2,423  
Year Ended December 31, 2008
  $ 2,330     $ 442     $ (333 )   $ 2,439  
Year Ended December 31, 2007
  $ 2,602     $ 23     $ (295 )   $ 2,330  
Sales Returns
The allowance for sales returns balance at December 31, 2009 and 2008 contained reserves for items returned prior to year-end, but that were not completely processed, and therefore had not yet been removed from the allowance for sales returns balance. We estimate that if these returns had been fully processed, the allowance for sales returns balance would have been approximately $1.4 million and $0.8 million on December 31, 2009 and 2008, respectively. The value of these returned goods was included in our inventory balance at December 31, 2009 and 2008.
Significant Customers
During the years ended December 31, 2009, 2008 and 2007, we had net sales to two customers, that when combined with their subcontractors, each amounted to more than 10% of our total net sales.
Net sales to the first significant customer, when combined with its sub-contractors, totaled $66.8 million, $55.3 million and $46.0 million, accounting for 21.1%, 19.3% and 16.9% of our total net sales for the years ended December 31, 2009, 2008 and 2007, respectively. Trade receivables with this customer and its sub-contractors amounted to $7.0 million and $11.7 million, or 10.9% and 19.5% of our accounts receivable, net at December 31, 2009 and 2008, respectively.
Net sales to our second significant customer, when combined with its sub-contractors, totaled $35.8 million, $38.6 million, and $36.4 million, accounting for 11.3%, 13.4% and 13.3% of our total net sales for the years ended December 31, 2009, 2008 and 2007, respectively. Trade receivables with this customer and its sub-contractors amounted to $6.5 million and $9.1 million, or 10.1% and 15.3% of our accounts receivable, net at December 31, 2009 and 2008, respectively. The December 31, 2008 trade receivables balance for this customer and its sub-contractors was significantly higher compared to the balance at December 31, 2009 as a result of an increase in large orders shipped late in the fourth quarter 2008 as compared to fourth quarter 2009.
We had a third customer that accounted for greater than 10% of accounts receivable, net at December 31, 2009, but did not account for greater than 10% of net sales for the year then ended. Trade receivables with this customer amounted to $6.9 million, or 10.7%, of our accounts receivable, net at December 31, 2009.
The loss of these customers or any other customer, either in the United States or abroad, due to their financial weakness or bankruptcy, or our inability to obtain orders or maintain our order volume with them, may have a material effect on our financial condition, results of operations and cash flows. Please see Note 2 under the captions Revenue Recognition and Sales Allowances and Financial Instruments for further information regarding our accounting principles.
Note 5 — Inventories, net and Significant Suppliers
Inventories, net consisted of the following at December 31, 2009 and 2008:
                 
(in thousands)   2009     2008  
 
           
Components
  $ 7,277     $ 7,879  
Finished goods
    35,420       37,331  
Reserve for inventory obsolescence
    (1,750 )     (1,535 )
 
           
Inventories, net
  $ 40,947     $ 43,675  
 
           
During the years ended December 31, 2009 and 2008, inventory write-downs totaled $3.4 million and $2.4 million, respectively. Inventory write-downs are a normal part of our business and result primarily from product life cycle estimation variances and manufacturing yield loss.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Please see Note 2 under the caption Inventories for further information regarding our accounting principles.
Significant Suppliers
We have elected to purchase integrated circuits (“IC”), used principally in our wireless control products, from two main sources. Purchases from one of these suppliers amounted to more than 10% of total inventory purchases in 2009, 2008 and 2007.
Purchases from this IC supplier amounted to $28.1 million, $28.2 million and $23.7 million, representing 14.8%, 15.2% and 14.9% of total inventory purchases for the years ended December 31, 2009, 2008 and 2007, respectively. Accounts payable amounted to $3.6 million and $3.6 million, representing 9.1% and 8.1% of total accounts payable at December 31, 2009 and 2008, respectively.
During the years ended December 31, 2009 and 2008, purchases from three of our component and finished good suppliers amounted to more than 10% of total inventory purchases. In addition, purchases from two of these suppliers amounted to more than 10% of total inventory purchases in 2007.
Purchases from the first significant component and finished good supplier amounted to $44.1 million, $50.6 million and $46.5 million, representing 23.2%, 27.3% and 29.2% of total inventory purchases for the years ended December 31, 2009, 2008 and 2007, respectively. Accounts payable amounted to $8.3 million and $11.0 million, representing 21.0% and 24.7% of total accounts payable at December 31, 2009 and 2008, respectively.
Purchases from the second significant component and finished good supplier amounted to $46.0 million, $38.1 million and $30.4 million, representing 24.3%, 20.6% and 19.1% of total inventory purchases for the years ended December 31, 2009, 2008 and 2007, respectively. Accounts payable amounted to $11.9 million and $15.6 million, representing 30.1% and 35.0% of total accounts payable at December 31, 2009 and 2008, respectively.
Purchases from the third significant component and finished good supplier amounted to $28.9 million and $18.6 million, representing 15.2% and 10.0% of total inventory purchases for the years ended December 31, 2009 and 2008, respectively. Accounts payable amounted to $6.8 million and $5.4 million, representing 17.1% and 12.0% of total accounts payable at December 31, 2009 and 2008, respectively.
We have identified alternative sources of supply for these integrated circuits, components, and finished goods; however, there can be no assurance that we will be able to continue to obtain these inventory purchases on a timely basis. We generally maintain inventories of our integrated circuits, which may be used in part to mitigate, but not eliminate, delays resulting from supply interruptions. An extended interruption, shortage or termination in the supply of any of the components used in our products, a reduction in their quality or reliability, or a significant increase in the prices of components, would have an adverse effect on our operating results, financial condition and cash flows.
Minimum Inventory Purchase Obligations
At December 31, 2009 we had contractual obligations to purchase $38.7 million of inventory from various suppliers over the subsequent five years.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Note 6 — Equipment, Furniture and Fixtures, net
Equipment, furniture, and fixtures, net consisted of the following at December 31, 2009 and 2008:
                 
(in thousands)   2009     2008  
 
           
Tooling
  $ 12,816     $ 10,567  
Computer equipment
    2,701       2,588  
Software
    3,066       2,937  
Furniture and fixtures
    1,651       1,740  
Leasehold improvements
    2,932       2,824  
Machinery and equipment
    1,482       1,040  
 
           
 
    24,648       21,696  
Accumulated depreciation
    (17,868 )     (14,275 )
 
           
 
    6,780       7,421  
Construction in progress
    3,210       1,265  
 
           
Total equipment, furniture and fixtures, net
  $ 9,990     $ 8,686  
 
           
Depreciation expense, including tooling depreciation which is recorded in cost of goods sold, was $5.0 million, $4.6 million and $3.4 million for the years ended December 31, 2009, 2008 and 2007, respectively.
We purchase tooling and machinery and equipment for the production of our products. The net book value of tooling and machinery and equipment located at our third party manufacturers primarily in China was $3.9 million and $3.7 million as of December 31, 2009 and 2008, respectively.
As of December 31, 2009, construction in progress included $0.6 million of tooling, $2.2 million of internal use software costs and $0.3 million of machinery and equipment. We expect that approximately 32% of the construction in progress costs will be placed in service during the first and second quarters of 2010. We will begin to depreciate those assets at that time. As of December 31, 2008, construction in progress included $0.7 million of tooling and $0.5 million of software.
Please see Note 2 under the captions Equipment, Furniture and Fixtures and Long-Lived and Intangible Assets Impairment for further information regarding our accounting principles.
Note 7 — Goodwill and Intangible Assets
Goodwill
Goodwill related to our domestic component was the result of our acquisition of a remote control company in 1998 and a software company (SimpleDevices, Inc.) in 2004. Goodwill related to our international component resulted from the acquisition of remote control distributors in the UK in 1998, Spain in 1999 and France in 2000 and the acquisition of certain assets and intellectual property from Zilog in the first quarter of 2009.
The goodwill amounts allocated to our domestic and international components as of December 31, 2009 and the changes in the carrying amount of goodwill during the fiscal year ended December 31, 2009 are as follows:
                         
(in thousands)   Domestic     International     Total  
 
                 
Balance at December 31, 2008
  $ 8,314     $ 2,443     $ 10,757  
Goodwill acquired during the period (1)
          2,902       2,902  
Goodwill adjustments (2)
          65       65  
 
                 
Balance at December 31, 2009
  $ 8,314     $ 5,410     $ 13,724  
 
                 
 
(1)   During the first quarter of 2009, we acquired certain assets and intellectual property from Zilog which resulted in $2.9 million of goodwill. Refer to Note 21 for further discussion related to the purchase.
 
(2)   The adjustment included in international goodwill reported at December 31, 2009, was the result of fluctuations in the foreign currency exchange rates used to translate the balance into U.S. dollars.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
We conducted annual goodwill impairment reviews as of December 31, 2009, 2008 and 2007 utilizing significant unobservable inputs (level 3). Based on the analysis performed, we determined that our goodwill was not impaired. Please see Note 2 under the captions Goodwill and Fair-Value Measurements for further information regarding our accounting principles and the valuation methodology utilized.
Intangible Assets
Detailed information regarding our intangible assets, net is as follows:
                                                 
    2009     2008  
            Accumulated                     Accumulated        
(in thousands)   Gross     Amortization     Net     Gross     Amortization     Net  
Carrying amount(1):
                                               
Distribution rights (10 years)
  $ 411     $ (54 )   $ 357     $ 399     $ (53 )   $ 346  
Patents (10 years)
    7,810       (3,925 )     3,885       7,115       (3,292 )     3,823  
Trademark and trade names (10 years)
    840       (441 )     399       840       (357 )     483  
Developed and core technology (5 -15 years)(2)
    3,500       (204 )     3,296       1,630       (1,386 )     244  
Capitalized software development costs (1-2 years)
    1,420       (704 )     716       1,030       (289 )     741  
Customer relationships (15 years)(3)
    3,100       (181 )     2,919                    
 
                                   
Total carrying amount
  $ 17,081     $ (5,509 )   $ 11,572     $ 11,014     $ (5,377 )   $ 5,637  
 
                                   
 
(1)   This table excludes fully amortized intangible assets of $7,598 thousand and $5,928 thousand as of December 31, 2009 and 2008, respectively.
 
(2)   During the first quarter of 2009, we purchased core technology from Zilog valued at $3.5 million, which is being amortized ratably over fifteen years. Refer to Note 21 for further discussion regarding the purchase.
 
(3)   During the first quarter of 2009, we purchased customer relationships from Zilog valued at $3.1 million, which is being amortized ratably over fifteen years. Refer to Note 21 for further discussion regarding the purchase.
Amortization expense is recorded in selling, general and administrative expenses, except for amortization expense related to capitalized software development costs which is recorded in cost of sales. Amortization expense recorded in selling, general and administrative expense for the years ended December 31, 2009, 2008, and 2007 was $1.4 million, $1.2 million and $1.1 million, respectively. Amortization expense related to capitalized software development costs and recorded in cost of goods sold was $0.4 million, $0.3 million and $0.2 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Estimated future amortization expense related to our intangible assets at December 31, 2009, is as follows:
         
(in thousands)        
2010
  $ 1,713  
2011
    1,478  
2012
    1,237  
2013
    1,237  
2014
    1,216  
Thereafter
    4,691  
 
     
 
  $ 11,572  
 
     
The remaining weighted average amortization period of intangible assets is 10.1 years.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Intangibles Measured at Fair Value on a Nonrecurring Basis
We recorded impairment charges related to our intangible assets of $0.01 million, $0.1 million and $0.1 million for the years ended December 31, 2009, 2008 and 2007, respectively. Impairment charges related to intangible assets are recorded in amortization expense. The fair value adjustments for intangible assets measured at fair value on a nonrecurring basis during the year ended December 31, 2009 were the following:
                                         
            Fair Value Measurement Using    
            Quoted Prices in            
            Active Markets            
            for Identical   Significant Other   Significant    
(In thousands)   Year Ended   Assets   Observable Inputs   Unobservable Inputs   Total
Description   12/31/2009   (Level 1)   (Level 2)   (Level 3)   Gains (Losses)
Patents and trademarks
  $ 4,284                     $ 4,284     $ (13 )
Eleven patents and ten trademarks with an aggregate carrying amount of $13 thousand were disposed of, resulting in impairment charges of $13 thousand during 2009 which was included in selling, general, and administrative expenses. We disposed of patents with a carrying amount of $27 thousand, capitalized software development costs with a carrying value of $46 thousand, and other intangibles with a carrying amount of $55 thousand in 2008. We disposed of patents with carrying amounts of $73 thousand in 2007. These assets no longer held any probable future economic benefits and were written-off. Impairment charges are included in selling, general and administrative expenses except for capitalized software development impairment charges which are included in cost of goods sold. Please see Note 2 under the captions Long-Lived and Intangible Assets Impairment, Capitalized Software Development Costs, and Fair-Value Measurements for further information regarding our accounting principles and the valuation methodology utilized.
Note 8 — Income Taxes
In 2009, 2008 and 2007, pre-tax income was attributed to the following jurisdictions:
                         
    Year Ended December 31,  
(in thousands)   2009     2008     2007  
 
                 
Domestic operations
  $ 17,060     $ 16,650     $ 18,332  
Foreign operations
    5,117       7,439       11,230  
 
                 
Total
  $ 22,177     $ 24,089     $ 29,562  
 
                 
The provision for income taxes charged to operations was as follows:
                         
    Year Ended December 31,  
(in thousands)   2009     2008     2007  
 
                 
Current tax expense:
                       
U.S. federal
  $ 7,003     $ 5,407     $ 5,537  
State and local
    631       1,230       490  
Foreign
    904       2,205       3,130  
 
                 
Total current
    8,538       8,842       9,157  
 
                 
Deferred tax expense (benefit):
                       
U.S. federal
    (918 )     206       (60 )
State and local
    (376 )     (627 )     84  
Foreign
    258       (138 )     151  
 
                 
Total deferred
    (1,036 )     (559 )     175  
 
                 
Total provision
  $ 7,502     $ 8,283     $ 9,332  
 
                 

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Net deferred tax assets were comprised of the following at December 31, 2009 and 2008:
                 
(in thousands)   2009     2008  
 
           
Deferred tax assets:
               
Inventory reserves
  $ 272     $ 258  
Allowance for doubtful accounts
    154       117  
Capitalized research costs
    105       19  
Capitalized inventory costs
    768       757  
Net operating losses
    2,046       2,473  
Amortization of intangibles
    572       686  
Accrued liabilities
    1,155       764  
Income tax credits
    1,763       1,476  
Depreciation
    991       786  
Stock-based compensation
    2,769       2,270  
Long term incentive compensation
          201  
Other
    450       530  
 
           
Total deferred tax assets
    11,045       10,337  
 
           
Deferred tax liability:
               
Intangible assets
    (154 )     (292 )
Other
    (495 )     (675 )
 
           
Total deferred tax liabilities
    (649 )     (967 )
 
           
Net deferred tax assets before valuation allowance
    10,396       9,370  
Less: Valuation allowance
    (179 )     (189 )
 
           
Net deferred tax assets
  $ 10,217     $ 9,181  
 
           
As of December 31, 2009 and 2008, $0.5 million and $0.4 million, respectively, of current deferred tax liabilities were recorded in other accrued expenses (see Note 9).
The deferred tax valuation allowance was $0.2 million as of December 31, 2009 and 2008.
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pre-tax income from operations as a result of the following:
                         
    Year Ended December 31,  
(in thousands)   2009     2008     2007  
 
                 
Tax provision at statutory U.S. rate
  $ 7,764     $ 8,431     $ 10,347  
Increase (decrease) in tax provision resulting from:
                       
State and local taxes, net
    166       392       373  
Foreign tax rate differential
    (36 )     (154 )     (649 )
Nondeductible items
    682       251       302  
Federal research and development credits
    (272 )     (424 )     (918 )
Change in tax rate related to deferred taxes
                (147 )
Settlements
    (449 )          
Other
    (353 )     (213 )     24  
 
                 
Tax provision
  $ 7,502     $ 8,283     $ 9,332  
 
                 
At December 31, 2009, we had state Research and Experimentation (“R&E”) income tax credit carryforwards of approximately $1.7 million. The state R&E income tax credits do not have an expiration date.
At December 31, 2009, we had federal, state and foreign net operating losses of approximately $4.6 million, $5.0 million and $0.4 million, respectively. All of the federal and state net operating loss carryforwards were acquired as part of the acquisition of SimpleDevices. The federal and state net operating loss carryforwards begin to expire in 2020 and 2012, respectively. Approximately $0.2 million of the foreign net operating losses will begin to expire in 2020 and the remaining $0.2 million have an unlimited carryforward.
Internal Revenue Code Section 382 places certain limitations on the annual amount of net operating loss carryforwards that may be utilized if certain changes to a company’s ownership occur. Our acquisition of SimpleDevices was a change in ownership pursuant to Section 382 of the Internal Revenue Code, and the federal and state net operating loss carryforwards of SimpleDevices are limited but considered realizable in future periods.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
The annual federal limitation is as follows: approximately $1.2 million for 2009 and approximately $0.6 million thereafter. California has suspended utilization of net operating losses for 2008 and 2009.
As of December 31, 2009, we believed it was more likely than not that certain deferred tax assets related to the impairment of the investment in a private company (a capital asset) would not be realized due to uncertainties as to the timing and amounts of future capital gains. Accordingly, a valuation allowance of approximately $0.1 million was recorded as of December 31, 2009 and 2008. Additionally, we recorded $0.1 million of various state and foreign valuation allowances at December 31, 2009 and 2008.
During the years ended December 31, 2009, 2008 and 2007 we recognized a credit to paid-in capital and a reduction to income taxes payable of $0.4 million, $0.4 million and $3.3 million, respectively, related to the tax benefit from the exercises of non-qualified stock options and vesting of restricted stock under our stock-based incentive plans.
During 2009, we settled an audit in the Netherlands by the Dutch Tax Authorities for the fiscal years 2002 through 2006, which resulted in the reversal of $0.4 million of previously recorded uncertain tax positions being credited into income.
The undistributed earnings of our foreign subsidiaries are considered to be indefinitely reinvested. Accordingly, no provision for U.S. federal and state income taxes or foreign withholding taxes has been provided on such undistributed earnings. Determination of the potential amount of unrecognized deferred U.S. income tax liability and foreign withholding taxes is not practicable because of the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credits would be available to reduce some portion of the U.S. liability.
Uncertain Tax Positions
On January 1, 2007, we adopted the provisions of ASC 740-10. As a result of the implementation of ASC 740-10, we recognized a $0.2 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. We also recognized a decrease of $0.3 million in other comprehensive income related to foreign currency translation. At December 31, 2009 and 2008, we had unrecognized tax benefits of approximately $2.8 million and $8.7 million, including interest and penalties, respectively.
In accordance with accounting guidance, we have elected to classify interest and penalties as components of tax expense. Interest and penalties were $0.2 million, $1.2 million and $1.0 million at December 31, 2009, 2008 and 2007, respectively. Interest and penalties are included in the unrecognized tax benefits.
Our gross unrecognized tax benefits as of December 31, 2009 and 2008, and the changes in those balances for the years then ended are as follows:
                         
(in thousands)   2009     2008     2007  
 
                 
Beginning balance
  $ 7,504     $ 7,817     $ 6,778  
Additions as a result of tax provisions taken during the current year
    324       404       485  
Subtractions as a result of tax provisions taken during the prior year
    (82 )            
Foreign currency translation
    146       (410 )     609  
Lapse in statute of limitations
    (80 )     (307 )     (54 )
Settlements
    (5,232 )            
Other
                (1 )
 
                 
Ending balance
  $ 2,580     $ 7,504     $ 7,817  
 
                 
Approximately $2.3 million and $8.0 million of the total amount of gross unrecognized tax benefits at December 31, 2009 and 2008, respectively, would affect the annual effective tax rate, if recognized. Further, we are unaware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase within the next twelve months. We anticipate a decrease in gross unrecognized tax benefits of approximately $0.3 million within the next twelve months based on federal, state, and foreign statute expirations in various jurisdictions. Additionally, as a result of the completion of the Dutch tax audit in 2009, unrecognized tax benefits decreased by $6.1 million, including interest of $0.9 million, during 2009.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
We file income tax returns in the U.S. federal, various state and foreign jurisdictions. As of December 31, 2009, the open statutes of limitations for our significant tax jurisdictions are as follows: federal and state are 2005 through 2009 and non-U.S. are 2001 through 2009. We settled an audit in the Netherlands with the Dutch Tax Authorities and as a result, we had no unrecognized tax benefits being classified as short term at December 31, 2009. As of December 31, 2009, our gross unrecognized tax benefits of $2.8 million are classified as long term because we do not anticipate payment of cash related to those unrecognized tax benefits within one year..
Please see Note 2 under the caption Income Taxes for further information regarding our accounting principles.
Note 9 — Other Accrued Expenses
The components of other accrued expenses as of December 31, 2009 and 2008 are listed below:
                 
(in thousands)   2009     2008  
Accrued freight
  $ 1,525     $ 1,846  
Accrued professional fees
    1,512       1,245  
Accrued advertising and marketing
    589       644  
Deferred income taxes
    483       356  
Accrued third-party commissions
    301       262  
Accrued sales and VAT taxes
    845       410  
Sales tax refundable to customers
    454        
Legal settlement
    575        
Other
    2,255       2,050  
 
           
Total other accrued expenses
  $ 8,539     $ 6,813  
 
           
Note 10 — Leases
We lease office and warehouse space and certain office equipment under operating leases that expire at various dates through September 2013. Some of our leases are subject to rent escalations. For these leases, we recognize rent expense for the total contractual obligation utilizing the straight-line method over the lease term, ranging from 12 to 73 months. The related short term liability is recorded in other accrued expenses (see Note 9) and the related long term liability is recorded in other long term liabilities. The total liability related to rent escalations was $0.1 million at both December 31, 2009 and 2008.
The lease agreement for our corporate headquarters contains an allowance for tenant improvements of $0.4 million, which was paid to us upon completion of the renovation in 2008. This tenant improvement allowance is being amortized as a credit against rent expense over the 73 month term of the lease, which began on January 1, 2006.
The lease agreement for our customer call center contains an allowance for tenant improvements of $0.2 million, which was paid to us upon completion of the renovation in 2007. This tenant improvement allowance is being amortized as a credit against rent expense over the 48 month term of the lease, which began on June 1, 2007.
Rent expense for our operating leases was $2.5 million, $2.6 million and $2.2 million for the years ended December 31, 2009, 2008 and 2007, respectively.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
The following table summarizes future minimum non-cancelable operating lease payments with initial terms greater than one year at December 31, 2009:
         
(in thousands)   Amount  
 
     
Year ending December 31:
       
2010
  $ 1,905  
2011
    1,572  
2012
    804  
2013
    360  
2014
    8  
Thereafter
     
 
     
Total operating lease commitments
  $ 4,649  
 
     
Note 11 — Revolving Credit Line
Our $15 million unsecured revolving credit line with Comerica Bank expired on November 30, 2009.
On January 8, 2010, we entered into a new $15 million unsecured revolving credit line with U.S. Bank (“Credit Facility”), expiring on October 31, 2011. Amounts available for borrowing under the Credit Facility are reduced by the balance of any outstanding import letters of credit and are subject to certain quarterly financial covenants related to our cash flow, fixed charges, quick ratio, and net income. Under the Credit Facility, we may elect to pay interest based on the bank’s prime rate or LIBOR plus a fixed margin of 1.8%. The applicable LIBOR (1, 3, 6, or 12-month LIBOR) corresponds with the loan period we select. At December 31, 2009, the 12-month LIBOR plus the fixed margin was 2.8% and the bank’s prime rate was 3.25%. If a LIBOR rate loan is prepaid prior to the completion of the loan period, we must pay the bank the difference between the interest the bank would have earned had prepayment not occurred and the interest the bank actually earned. We may prepay prime rate loans in whole or in part at any time without a premium or penalty.
Presently, we have no debt, however we cannot make any assurances that we will not need to borrow amounts under this Credit Facility or that this Credit Facility will be extended to us under comparable terms or at all. If this or any other facility is not available to us at a time when we need to borrow, we would have to use our cash reserves, including potentially repatriating cash from foreign jurisdictions, which may have a material adverse effect on our operating results, financial position and cash flows.
Note 12 — Commitments and Contingencies
Indemnifications
We indemnify our directors and officers to the maximum extent permitted under the laws of the State of Delaware and we have entered into Indemnification Agreements with each of our directors and executive officers. In addition, we insure our individual directors and officers against certain claims and attorney’s fees and related expenses incurred in connection with the defense of such claims. The amounts and types of coverage may vary from period to period as dictated by market conditions. Management is not aware of any matters that require indemnification of its officers or directors.
Fair Price Provisions and Other Anti-Takeover Measures
Our Restated Certificate of Incorporation, as amended, contains certain provisions restricting business combinations with interested stockholders under certain circumstances and imposing higher voting requirements for the approval of certain transactions (“fair price” provisions). Any of these provisions may delay or prevent a change in control. The “fair price” provisions require that holders of at least two-thirds of the outstanding shares of voting stock approve certain business combinations and significant transactions with interested stockholders.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Product Warranties
Changes in the liability for product warranty claim costs are presented below:
(in thousands)
                                 
            Accruals for   Settlements    
    Balance at   Warranties   (in Cash or in   Balance at
    Beginning of   Issued During   Kind) During   End of
Description   Period   the Period(1)   the Period   Period
Year Ended December 31, 2009
  $ 90     $ (4 )   $ (4 )   $ 82  
Year Ended December 31, 2008
  $ 178     $ (31 )   $ (57 )   $ 90  
Year Ended December 31, 2007
  $ 416     $ (146 )   $ (92 )   $ 178  
 
(1)   In the second quarter 2007, we renegotiated pricing terms with our third-party warranty repair vendor which resulted in lower warranty costs per unit. As a result, our warranty accrual was reduced to reflect the lower pricing. An unexpected increase in our pricing for warranty claims, or the discovery of a significant product defect, would result in an increase in our warranty accrual and our financial statements may be materially impacted.
Litigation
In 2002, one of our subsidiaries (One For All France S.A.S.) brought an action against a former distributor of the subsidiary’s products seeking a recovery of accounts receivable. The distributor filed a counterclaim against our subsidiary seeking payment for amounts allegedly owed for administrative and other services rendered by the distributor for our subsidiary. In January 2005, the parties agreed to include in that action all claims between the distributor and two of our other subsidiaries, Universal Electronics BV and One For All Iberia SL. As a result, the single action covers all claims and counterclaims between the various parties. The parties further agreed that, before any judgment is paid, all disputes between the various parties would be concluded. These additional claims involve nonpayment for products and damages resulting from the alleged wrongful termination of agency agreements. On March 15, 2005, the court in one of the litigation matters brought by the distributor against one of our subsidiaries, rendered judgment against our subsidiary and awarded damages and costs to the distributor in the amount of approximately $102,000. The amount of this judgment was charged to operations during the second quarter of 2005 and has been paid. With respect to the remaining matters before the court, we were awaiting the expert to finalize and file his pre-trial report with the court. On November 15, 2009, the expert issued his draft report in which he preliminarily concluded that One For All France is owed €342,555 from DAM. The expert asked us and DAM to each provide him with our comments regarding his draft report. After he receives each of our comments, he will finalize and file the report with the court. DAM has asked for and received an extension to respond until March 31, 2010. Until the expert’s report is final and has been accepted and entered as judgment by the court, management will continue to pursue this matter in the courts and remains unable to estimate the likelihood of an unfavorable outcome, and the amount of loss, if any, in the case of an unfavorable outcome.
On February 19, 2009, we filed suit against Warren Communications News, Inc. claiming that through the unauthorized use of embedded email tracking and intercepting software and code, Warren had violated the Computer Fraud and Abuse Act, the Stored Communications Act, and various applicable California laws. In addition we asked for a declaration that we are not infringing Warren’s copyright to a daily electronic publication. On March 19, 2009, Warren answered our complaint with a general denial of all of our allegations. On the same date as filing their answer, Warren counterclaimed alleging copyright infringement seeking unspecified damages. On January 20, 2010, we entered into a confidential Settlement Agreement and Mutual Release with Warren in which we paid a one-time amount and all claims between the parties have been settled and release with prejudice. Due to the confidential nature of this agreement, certain terms of the settlement and agreement may not be disclosed.
There are no other material pending legal proceedings, other than litigation that is incidental to the ordinary course of our business, to which we or any of our subsidiaries is a party or of which our respective property is the subject. We do not believe that any of the claims made against us in any of the pending matters have merit and we intend to vigorously defend ourselves against them.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
We maintain directors’ and officers’ liability insurance to insure our individual directors and officers against certain claims and attorney’s fees and related expenses incurred in connection with the defense of such claims.
Long-Term Incentive Plan
During the second quarter of 2007, we adopted an Executive Long-Term Incentive Plan (“ELTIP”). The ELTIP provided a bonus pool for our executive management team contingent on achieving certain performance goals during a two-year performance period commencing on January 1, 2007 and ending on December 31, 2008. The performance goals were based on the compound annual growth rate of net sales and earnings per diluted share during the performance period. The ELTIP had a maximum pay out of $12 million if the highest performance goals were met. Management did not earn a bonus under the ELTIP based on our results through December 31, 2008. As a result, we lowered our ELTIP accrual from $1.0 million at December 31, 2007 to $0 at December 31, 2008. This adjustment resulted in a $1.0 million benefit to pre-tax income for the twelve months ended December 31, 2008.
In light of the ELTIP results, our Compensation Committee awarded a discretionary bonus of $1.0 million, to be paid out quarterly in 2009 and 2010. The Compensation Committee came to this decision after reviewing the economic environment and our relative financial and operating performance. The Compensation Committee believes this bonus is in alignment with our stockholders’ interests as well as our performance, alignment and retention objectives. The amount of a participant’s earned award will be paid in cash, in common shares or in any combination, as determined by the Compensation Committee. A participant’s earned award will vest in eight equal quarterly installments beginning March 31, 2009 and ending December 31, 2010. At December 31, 2009 and 2008, $0.3 million and $0.5 million, respectively, has been included in accrued compensation for this discretionary bonus. Approximately $0.5 million was paid out in cash during 2009 to our executive management team for this discretionary bonus. In the event a participant terminates their employment during the remaining service period (January 1, 2010 through December 31, 2010), they will forfeit their right to any remaining installments where the payment date has not yet occurred.
Non-Qualified Deferred Compensation Plan
We have adopted a non-qualified deferred compensation plan for the benefit of a select group of highly compensated employees. For each plan year a participant may elect to defer compensation in fixed dollar amounts or percentages subject to the minimums and maximums established under the plan. Generally, an election to defer compensation is irrevocable for the entire plan year. A participant is always fully vested in their elective deferrals and may direct these funds into various investment options available under the plan. These investment options are utilized for measurement purposes only, and may not represent the actual investment made by us. In this respect, the participant is an unsecured creditor of ours. At December 31, 2009, the amounts deferred under the plan were immaterial to our financial statements.
Defined Benefit Plan
Our India subsidiary maintains a defined benefit pension plan (“India Plan”) for local employees, which is consistent with local statutes and practices. The pension plan was adequately funded as of December 31, 2009 based on its latest actuarial report. The India Plan has an independent external manager that advises us of the appropriate funding contribution requirements to which we comply. At December 31, 2009, approximately 20 percent of our India subsidiary employees had qualified for eligibility. Generally, an employee must be employed by our India subsidiary for a minimum of five years before becoming eligible. At the time of eligibility we are liable, on termination, resignation or retirement, to pay the employee an amount equal to fifteen days salary for each full year of service completed. The total amount of liability outstanding at December 31, 2009 for the India Plan is not material. During the twelve months ended December 31, 2009, the net periodic benefit costs were also not material.
Note 13 — Treasury Stock
During the years ended December 31, 2009, 2008 and 2007, we repurchased 404,643, 1,118,318 and 471,300 shares of our common stock at a cost of $7.7 million, $26.7 million and $14.5 million, respectively. Repurchased shares are recorded as shares held in treasury at cost. We generally hold these shares for future use as management and the

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Board of Directors deem appropriate, including compensating our outside directors. During the years ended December 31, 2009, 2008 and 2007, we issued 25,000, 23,438 and 24,688 shares, respectively, to outside directors for services performed (see Note 15).
On February 11, 2010, our Board of Directors authorized management to continue repurchasing up to an additional 1,000,000 shares of our issued and outstanding common stock. Repurchases may be made whenever we deem a repurchase is a good use of our cash and the price to be paid is at or below a threshold approved by our Board.
Stock Awards to Outside Directors
We issue restricted stock awards to our outside directors as compensation for services performed. We grant each of our outside directors 5,000 shares of our common stock annually each July 1st. When an additional outside director is appointed to our Board of Directors, they receive a prorated number of shares based on the number of months they will serve during the initial year. Compensation expense related to restricted stock awards is based on the grant date fair value the shares awarded. The fair value of these shares is amortized on a straight-line basis over the requisite service period of one year (see Note 2 under the caption Stock-Based Compensation and Note 15). The shares are issued from treasury stock using a first-in-first-out cost basis, which amounted to $0.4 million and $0.4 million in 2009 and 2008, respectively.
Note 14 — Business Segment and Foreign Operations
Reportable Segment
An operating segment, in part, is a component of an enterprise whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. Operating segments may be aggregated only to a limited extent. We operate in a single operating and reportable segment.
Foreign Operations
Our net sales to external customers by geographic area for the years ended December 31, 2009, 2008 and 2007 were the following:
                         
(in thousands)   2009     2008     2007  
 
                 
Net sales:
                       
United States
  $ 194,279     $ 162,855     $ 151,034  
International:
                       
Asia
    54,931       48,511       31,624  
United Kingdom
    20,873       21,234       31,290  
Australia
    1,558       4,190       2,772  
France
    3,603       5,359       4,940  
Germany
    6,752       7,771       6,228  
Italy
    3,471       2,608       2,506  
Portugal
    4,168       1,780       816  
South Africa
    6,495       5,827       7,192  
Spain
    3,929       7,523       8,483  
Switzerland
    578       1,099       6,473  
All Other
    16,913       18,343       19,322  
 
                 
Total international
    123,271       124,245       121,646  
 
                 
Total net sales
  $ 317,550     $ 287,100     $ 272,680  
 
                 
Specific identification of the customer location was the basis used for attributing revenues from external customers to individual countries.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Long-lived asset information by our domestic and international components as of December 31, 2009, 2008 and 2007 were as follows:
                         
    2009     2008     2007  
Long-lived tangible assets:
                       
United States
  $ 7,440     $ 6,525     $ 5,238  
All other countries
    3,693       2,770       2,689  
 
                 
Total
  $ 11,133     $ 9,295     $ 7,927  
 
                 
Note 15 — Stock-Based Compensation
Stock-based compensation expense for each employee and director is presented in the same income statement caption as their cash compensation. We recorded $4.3 million, $4.2 million and $3.5 million (including stock-based compensation related to directors) of total pre-tax stock-based compensation expense during the years ended December 31, 2009, 2008, and 2007, respectively. The income tax benefit associated with stock-based compensation expense was $1.5 million, $1.5 million and $1.2 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Stock-based compensation expense by income statement caption for the years ended December 31, 2009, 2008 and 2007 was the following:
                         
(in thousands)   2009     2008     2007  
 
                 
Cost of sales
  $ 33     $ 17     $ 31  
Research and development
    434       356       418  
Selling, general and administrative
    3,845       3,870       3,072  
 
                 
Total stock-based compensation expense
  $ 4,312     $ 4,243     $ 3,521  
 
                 
Stock Options
During the year ended December 31, 2009, the Compensation Committee and Board of Directors granted 233,400 stock options to our employees with an aggregate grant date fair value of $1.6 million under various stock incentive plans. The stock options granted to employees during 2009 consisted of the following:
(in thousands, except share amounts)
                         
        Number of     Grant      
        Shares     Date      
Stock Option     Underlying     Fair      
Grant Date   Options     Value     Vesting Period
January 1, 2009     15,000     $ 95    
4 -Year Vesting Period (25% each year)
February 18, 2009     15,000       74    
4 -Year Vesting Period (25% each year)
February 19, 2009     7,500       33    
4 -Year Vesting Period (25% each year)
February 21, 2009     10,000       58    
4 -Year Vesting Period (25% each year)
March 10, 2009     185,900       1,340    
4 -Year Vesting Period (6.25% each quarter)
                   
 
          233,400     $ 1,600    
 
On October 30, 2009, our Board of Directors appointed Carl E. Vogel to serve as a Class II Director. In connection with his appointment, our directors granted Mr. Vogel 20,000 stock options under the 2006 Stock Incentive Plan. These options are subject to a three-year vesting period (33.3% each year) and are in addition to the employee grants above. The aggregate grant date fair value of this award was $0.2 million.
During the year ended December 31, 2009, we recognized $0.3 million of pre-tax stock-based compensation expense related to our 2009 stock option grants.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
The assumptions we utilized in the Black-Scholes option pricing model and the resulting weighted average fair value of stock option grants were the following:
                         
    December 31, (1)  
    2009     2008     2007  
Weighted average fair value of grants
  $ 7.20     $ 9.08     $ 11.77  
Risk-free interest rate
    1.95 %     2.75 %     4.56 %
Expected volatility
    49.54 %     40.85 %     39.06 %
Expected life in years
    4.85       4.74       5.25  
 
(1)   The weighted average fair value of grants was calculated utilizing the stock options granted during each respective period.
We recognize the compensation expense related to stock option awards net of estimated forfeitures over the service period of the award, which is generally the option vesting term of three to four years. We estimated the annual forfeiture rate for our executives and board of directors group to be 2.65%, 2.66%, and 2.41% as of December 31, 2009, 2008, and 2007, respectively, based upon our historical forfeitures. We estimated the annual forfeiture rate for our non-executive employee group to be 6.51%, 6.31%, and 5.95% as of December 31, 2009, 2008, and 2007, respectively, based on our historical forfeitures.
Stock option activity during the years ended December 31, 2009, 2008 and 2007 was the following:
                                                                                                 
    2009     2008     2007  
                    Weighted-
Average
                            Weighted-
Average
                            Weighted-
Average
       
            Weighted-     Remaining     Aggregate             Weighted-     Remaining     Aggregate             Weighted-     Remaining     Aggregate  
    Number of     Average     Contractual     Intrinsic     Number of     Average     Contractual     Intrinsic     Number of     Average     Contractual     Intrinsic  
    Options     Exercise     Term     Value     Options     Exercise     Term     Value     Options     Exercise     Term     Value  
    (in 000’s)     Price     (in years)     (in 000’s)     (in 000’s)     Price     (in years)     (in 000’s)     (in 000’s)     Price     (in years)     (in 000’s)  
Outstanding at beginning of the year
    1,729     $ 17.64                       1,739     $ 16.83                       2,480     $ 13.73                  
 
Granted
    253       16.26                       140       23.46                       329       27.80                  
 
Exercised
    (278 )     11.75             $ 2,320       (114 )     10.19             $ 1,562       (981 )     12.83             $ 17,263  
 
Forfeited/cancelled/ expired
    (11 )     22.43                       (36 )     24.70                       (89 )     14.91                  
                                                             
 
Outstanding at end of year
    1,693     $ 18.37       5.40     $ 9,677       1,729     $ 17.64       5.06     $ 3,045       1,739     $ 16.83       5.58     $ 28,884  
 
Vested and expected to vest at end of year
    1,655     $ 18.30       5.33     $ 9,532       1,688     $ 17.42       4.98     $ 3,045       1,650     $ 16.43       5.41     $ 28,079  
 
Exercisable at end of year
    1,239     $ 17.33       4.30     $ 8,034       1,267     $ 15.34       3.97     $ 3,044       1,081     $ 13.84       4.05     $ 21,187  
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between our closing stock price on the last trading day of 2009, 2008 and 2007 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2009, 2008 and 2007. This amount will change based on the fair market value of our stock. The total intrinsic value of stock options exercised in 2009, 2008 and 2007 was $2.3 million, $1.6 million and $17.3 million, respectively.
During 2009, 2008 and 2007, there were no modifications made to outstanding stock options.
Cash received from option exercises for the years ended December 31, 2009, 2008 and 2007 was $3.3 million, $1.2 million and $12.6 million, respectively. The actual tax benefit realized from option exercises of the share-based payment awards was $0.4 million, $0.4 million and $3.3 million for the years ended December 31, 2009, 2008 and 2007, respectively.
As of December 31, 2009, we expect to recognize $2.9 million of total unrecognized pre-tax stock-based compensation expense related to non-vested stock options over a remaining weighted-average life of 2.2 years.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Restricted Stock
During the year ended December 31, 2009, the Compensation Committee and Board of Directors granted 298,170 restricted stock awards to our employees with an aggregate grant date fair value of $4.5 million under the 2006 Stock Incentive Plan. The restricted stock awards granted to employees during 2009 consisted of the following:
(in thousands, except share amounts)
                     
    Number   Grant    
    of   Date    
Restricted Stock   Shares   Fair    
Grant Date   Granted   Value   Vesting Period
January 1, 2009     5,000     $ 74    
4-Year Vesting Period (25% each year)
February 12, 2009     77,146       925    
3-Year Vesting Period (5% each quarter during years 1-2 and 15% each quarter during year 3)
March 4, 2009     24,723       376    
2-Year Vesting Period (12.5% each quarter)
March 10, 2009     147,693       2,400    
3-Year Vesting Period (8.75% each quarter during years 1-2 and 7.5% each quarter during year 3)
March 10, 2009     40,500       658    
4-Year Vesting Period (6.25% each quarter)
August 18, 2009     3,108       60    
3-Year Vesting Period (8.75% each quarter during years 1-2 and 7.5% each quarter during year 3)
                   
 
      298,170     $ 4,493    
 
In addition to the grants to employees, 28,333 shares of restricted stock were granted to our outside directors during 2009. On July 1, 2009, 25,000 shares of restricted stock, with a grant date fair value of $0.5 million, were granted to our outside directors as a part of their annual compensation package. These shares are subject to a one-year vesting period (25% each quarter). On October 30, 2009, our Board of Directors appointed Carl E. Vogel to serve as a Class II Director. In connection with his appointment, 3,333 shares of restricted stock with a grant date fair value of $0.07 million were granted to Mr. Vogel (a prorated portion of the annual restricted stock grant made to each director). These shares are subject to an eight-month vesting period (833 shares vested during the fourth quarter 2009 and 1,250 shares will vest in both the first and second quarter of 2010).
During the year ended December 31, 2009, we recognized $1.5 million of pre-tax stock-based compensation expense related to our 2009 restricted stock grants.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Non-vested restricted stock award activity during the years ended December 31, 2009, 2008 and 2007 (including restricted stock issued to directors as described in Note 13) was the following:
                 
            Weighted-  
    Shares     Average  
    Granted     Grant Date  
    (in 000’s)     Fair Value  
Non-vested at December 31, 2006
    13     $ 18.74  
Granted
    25       36.25  
Vested
    (25 )     27.49  
Forfeited
    (3 )     36.25  
 
             
 
               
Non-vested at December 31, 2007
    10       36.25  
 
             
 
Granted
    142       23.15  
Vested
    (62 )     25.15  
Forfeited
           
 
             
 
               
Non-vested at December 31, 2008
    90       23.23  
 
             
Granted
    326       15.58  
Vested
    (136 )     18.66  
Forfeited
           
 
             
Non-vested at December 31, 2009
    280     $ 16.54  
 
             
As of December 31, 2009, we expect to recognize $4.5 million of total unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards over a weighted-average life of 1.9 years.
See Note 2 under the caption Stock-Based Compensation for further information regarding our accounting principles.
Stock Incentive Plans
1993 Stock Incentive Plan
On January 19, 1993, the 1993 Stock Incentive Plan (“1993 Plan”) was approved. Under the 1993 Plan, 400,000 shares of common stock were reserved for the granting of incentive and other stock options to officers, key employees and directors. The 1993 Plan provided for the granting of incentive and other stock options through January 18, 2003. All options outstanding at the time of termination of the 1993 Plan shall continue in full force and effect in accordance with their terms. The option price for incentive stock options and non-qualified stock options was not less than the fair market value at the date of grant. The Compensation Committee determined when each option was to expire, but no option was exercisable more than ten years after the date the option was granted. The 1993 Plan also provided for the award of stock appreciation rights subject to terms and conditions specified by the Compensation Committee. No stock appreciation rights have been awarded under this 1993 Plan. There are no remaining options available for grant under the 1993 Plan. There are 17,400 shares outstanding under this plan as of December 31, 2009.
1995 Stock Incentive Plan
On May 19, 1995, the 1995 Stock Incentive Plan (“1995 Plan”) was approved. Under the 1995 Plan, 800,000 shares of common stock were available for distribution to our key officers, employees and directors. The 1995 Plan provided for the issuance of stock options, stock appreciation rights, performance stock units, or any combination thereof through May 18, 2005. The option prices for the stock options were equal to the fair market value at the date of grant. The Compensation Committee determined when each option was to expire, but no option was exercisable more than ten years after the date the option was granted. No stock appreciation rights or performance stock units have been awarded under this 1995 Plan. There are no remaining options available for grant under the 1995 Plan. There are 20,910 shares outstanding under this plan as of December 31, 2009.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
1996 Stock Incentive Plan
On December 1, 1996, the 1996 Stock Incentive Plan (“1996 Plan”) was approved. Under the 1996 Plan, 800,000 shares of common stock were available for distribution to our key officers and employees. The 1996 Plan provided for the issuance of stock options, stock appreciation rights, performance stock units, or any combination thereof through November 30, 2007. The option price for the stock options was equal to the fair market value at the date of grant. The Compensation Committee determined when each option was to expire, but no option was exercisable more than ten years after the date the option was granted. No stock appreciation rights or performance stock units have been awarded under this 1996 Plan. There are no remaining options available for grant under the 1996 Plan. There are 21,334 shares outstanding under this plan as of December 31, 2009.
1998 Stock Incentive Plan
On May 27, 1998, the 1998 Stock Incentive Plan (“1998 Plan”) was approved. Under the 1998 Plan, 630,000 shares of common stock were available for distribution to our key officers, employees, and directors. The 1998 Plan provided for the issuance of stock options, stock appreciation rights, performance stock units, or any combination thereof through May 26, 2008. The option price for the stock options was not less than the fair market value at the date of grant. The Compensation Committee determined when each option was to expire, but no option was exercisable more than ten years after the date the option was granted. No stock appreciation rights or performance stock units have been awarded under this 1998 Plan. There are no remaining options available for grant under the 1998 Plan. There are 83,865 shares outstanding under this plan as of December 31, 2009.
1999 Stock Incentive Plan
On January 27, 1999, the 1999 Stock Incentive Plan (“1999 Plan”) was approved. Under the 1999 Plan, 630,000 shares of common stock were available for distribution to our key officers and employees. The 1999 Plan provided for the issuance of stock options, stock appreciation rights, performance stock units, or any combination thereof through January 26, 2009. The option price for the stock options was not less than the fair market value at the date of grant. The Compensation Committee determined when each option was to expire, but no option was exercisable more than ten years after the date the option was granted. No stock appreciation rights or performance stock units have been awarded under this 1999 Plan. There are no remaining options available for grant under the 1999 Plan. There are 14,510 shares outstanding under this plan as of December 31, 2009.
1999A Stock Incentive Plan
On October 7, 1999, the 1999A Nonqualified Stock Plan (“1999A Plan”) was approved and on February 1, 2000, the 1999A Plan was amended. Under the 1999A Plan, 1,000,000 shares of common stock were available for distribution to our key officers and employees. The 1999A Plan provided for the issuance of stock options, stock appreciation rights, performance stock units, or any combination thereof through October 6, 2009. The option price for the stock options was not less than the fair market value at the date of grant. The Compensation Committee determined when each option was to expire, but no option was exercisable more than ten years after the date the option was granted. No stock appreciation rights or performance stock units have been awarded under this 1999A Plan. There are no remaining options available for grant under the 1999A Plan. There are 190,497 shares outstanding under this plan as of December 31, 2009.
2002 Stock Incentive Plan
On February 5, 2002, the 2002 Stock Incentive Plan (“2002 Plan”) was approved. Under the 2002 Plan, 1,000,000 shares of common stock were available for distribution to our key officers, employees, and directors. The 2002 Plan provides for the issuance of stock options, stock appreciation rights, performance stock units, or any combination thereof through February 4, 2012, unless otherwise terminated by resolution of our Board of Directors. The option price for the stock options was not less than the fair market value at the date of grant. The Compensation Committee determined when each option was to expire, but no option was exercisable more than ten years after the date the option was granted. No stock appreciation rights or performance stock units have been awarded under this 2002

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Plan. As of December 31, 2009, there was 1 remaining option available for grant under the 2002 Plan. There are 383,671 shares outstanding under this plan as of December 31, 2009.
2003 Stock Incentive Plan
On June 18, 2003, the 2003 Stock Incentive Plan (“2003 Plan”) was approved. Under the 2003 Plan, 1,000,000 shares of common stock were available for distribution to our key officers, employees, and directors. The 2003 Plan provides for the issuance of stock options, stock appreciation rights, performance stock units, or any combination thereof through June 17, 2013, unless otherwise terminated by resolution of our Board of Directors. The option price for the stock options was not less than the fair market value at the date of grant. The Compensation Committee determined when each option was to expire, but no option was exercisable more than ten years after the date the option was granted. No stock appreciation rights or performance stock units have been awarded under this 2003 Plan. As of December 31, 2009, there were 2,750 remaining options available for grant under the 2003 Plan. There are 619,583 shares outstanding under this plan as of December 31, 2009.
2006 Stock Incentive Plan
On June 13, 2006, the 2006 Stock Incentive Plan (“2006 Plan”) was approved. Under the 2006 Plan, 1,000,000 shares of common stock were available for distribution to our key officers, employees, and directors. The 2006 Plan provides for the issuance of stock options, stock appreciation rights, restricted stock units, performance stock units, or any combination thereof through June 12, 2016, unless otherwise terminated by resolution of our Board of Directors. The option price for the stock options was not less than the fair market value at the date of grant. The Compensation Committee determined when each option is to expire, but no option was exercisable more than ten years after the date the option was granted. No stock appreciation rights or performance stock units have been awarded under this 2006 Plan. As of December 31, 2009, there were 244,926 remaining shares available for grant under the 2006 Plan. There are 278,435 restricted stock awards and 341,282 stock options outstanding under this plan as of December 31, 2009.
Vesting periods for the above referenced stock incentive plans range from two to four years.
Significant option groups outstanding at December 31, 2009 and the related weighted average exercise price and life information are listed below:
                                             
        Options Outstanding   Options Exercisable
        Number                   Number    
        Outstanding   Weighted-Average   Weighted-Average   Exercisable   Weighted-Average
Range of   At 12/31/09   Remaining Years of   Exercise   At 12/31/09   Exercise
Exercise Prices   (in 000’s)   Contractual Life   Price   (in 000’s)   Price
$ 8.45 to $9.83       120       2.89     $ 8.67       120     $ 8.67  
  10.92 to 13.27       224       4.70       12.60       201       12.58  
  14.85 to 16.88       429       6.07       16.13       253       16.08  
  17.11 to 17.62       276       5.05       17.58       275       17.58  
  18.01 to 21.95       317       4.10       20.20       234       19.85  
  23.66 to 28.08       320       7.47       27.56       153       27.79  
  32.40 to 35.35       7       7.94       34.51       3       34.86  
                                             
                                             
$ 8.45 to $35.35       1,693       5.40     $ 18.37       1,239     $ 17.33  
                                             
Note 16 — Other (Expense) Income, net
Other (expense) income, net in the Consolidated Income Statements consisted of the following:
                         
(in thousands)   2009     2008     2007  
 
                 
Net (loss) gain on foreign currency exchange transactions
  $ (246 )   $ 315     $ (35 )
Other income (expense)
    5       (4 )     42  
 
                 
Other (expense) income, net
  $ (241 )   $ 311     $ 7  
 
                 

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Note 17 — Earnings Per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares and dilutive potential common shares, which includes the dilutive effect of stock options and restricted stock grants. Dilutive potential common shares for all periods presented are computed utilizing the treasury stock method.
In the computation of diluted earnings per common share for the years ended December 31, 2009, 2008 and 2007, we have excluded 785,186, 534,418 and 153,705 stock options, respectively, with exercise prices greater than the average market price of the underlying common stock, because their inclusion would have been anti-dilutive. Furthermore, for the years ended December 31, 2009, 2008 and 2007, we have excluded 235,887, 105,944 and 10,174 of unvested shares of restricted stock, respectively, whose combined unamortized fair value and excess tax benefits were greater in each of those periods than the average market price of the underlying common stock, as their effect would be anti-dilutive.
Earnings per share for the years ended December 31, 2009, 2008 and 2007 were calculated as follows:
                         
(in thousands, except per-share amounts)   2009     2008     2007  
 
                 
BASIC
                       
Net income
  $ 14,675     $ 15,806     $ 20,230  
 
                 
Weighted-average common shares outstanding
    13,667       14,015       14,410  
Basic earnings per share
  $ 1.07     $ 1.13     $ 1.40  
 
                 
 
                       
DILUTED
                       
Net income
  $ 14,675     $ 15,806     $ 20,230  
 
                 
Weighted-average common shares outstanding for basic
    13,667       14,015       14,410  
Dilutive effect of stock options and restricted stock
    304       441       767  
 
                 
Weighted-average common shares outstanding on a diluted basis
    13,971       14,456       15,177  
 
                 
Diluted earnings per share
  $ 1.05     $ 1.09     $ 1.33  
 
                 
Note 18 — Derivatives
Derivatives Measured at Fair Value on a Recurring Basis
We are exposed to market risks from foreign currency exchange rates, which may adversely affect our operating results and financial position. Our foreign currency exposures are primarily concentrated in the Euro, British Pound, and Hong Kong dollar. We periodically enter into foreign currency exchange contracts with terms normally lasting less than nine months to protect against the adverse effects that exchange-rate fluctuations may have on our foreign currency-denominated receivables, payables, cash flows and reported income. Derivative financial instruments are used to manage risk and are not used for trading or other speculative purposes. We do not use leveraged derivative financial instruments and these derivatives have not qualified for hedge accounting.
The gains and losses on both the derivatives and the foreign currency-denominated balances are recorded as foreign exchange transaction gains or losses and are classified in other (expense) income, net. Derivatives are recorded on the balance sheet at fair value. The estimated fair values of our derivative financial instruments represent the amount required to enter into offsetting contracts with similar remaining maturities based on quoted market prices.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
We have determined that the fair value of our derivatives is derived from level 2 inputs in the fair value hierarchy (see Note 2 under the captions Derivatives and Fair-Value Measurements for further information concerning the accounting principles and valuation methodology utilized). The following table sets forth our financial assets that were accounted for at fair value on a recurring basis as of December 31, 2009:
(In thousands)
                                 
            Fair Value Measurement Using  
            Quoted Prices in     Significant        
            Active Markets     Other     Significant  
    Year     for Identical     Observable     Unobservable  
    Ended     Assets     Inputs     Inputs  
Description   12/31/2009     (Level 1)     (Level 2)     (Level 3)  
Foreign currency exchange futures contract
  $ (5 )   $     $ (5 )   $  
Foreign currency exchange put option contract
    2             2        
 
                       
 
  $ (3 )   $     $ (3 )   $  
 
                       
We held foreign currency exchange contracts which resulted in a net pre-tax loss of approximately $0.7 million for the year ended December 31, 2009, a net pre-tax loss of approximately $0.5 million for the year ended December 31, 2008 and a net pre-tax gain of $0.8 million for the year ended December 31, 2007.
Futures Contracts
We held one USD/Euro futures contract with a notional value of $1.5 million and a forward rate of $1.4386 USD/Euro at December 31, 2009. We held the Euro position on this contract, which settled on January 15, 2010. The loss on this contract as of December 31, 2009 was $5 thousand and is included in other accrued expenses. This contract was settled at a loss of $11 thousand resulting in a loss of $6 thousand in January 2010.
We held one USD/Euro futures contract with a notional value of $9.0 million and a forward rate of $1.277 USD/Euro at December 31, 2008. We held the Euro position on this contract, which settled on January 7, 2009. The gain on this contract as of December 31, 2008 was $0.8 million and is included in prepaid expenses and other current assets. This contract was settled at $0.4 million resulting in a loss of $0.4 million in January 2009.
Put Option
We entered into a USD/GBP put option with a notional value of $4.3 million in July 2009. The strike price of the put is $1.64 USD/GBP. The contract expired on December 31, 2009 and settled on January 5, 2010. The loss recorded related to this contract was $138 thousand during the year ended December 31, 2009. The fair value of this put option was approximately $2 thousand at December 31, 2009 and is included in accounts receivable, net (see Note 4).
We entered into a USD/GBP put option with a notional value of $5.0 million in August 2008. The strike price of the put is $1.85 USD/GBP. The contract expired on December 31, 2008 and settled on January 5, 2009. The gain recorded related to this contract was $0.5 million during the year ended December 31, 2008. The fair value of this put option was approximately $0.6 million at December 31, 2008 and was included in prepaid expenses and other current assets.
Note 19 — Employee Benefit Plans
We maintain a retirement and profit sharing plan under Section 401(k) of the Internal Revenue Code for all of our domestic employees that meet certain qualifications. Participants in the plan may elect to contribute up to the maximum allowed by law. We match 50% of the participants’ contributions up to 15% of their gross salary in the form of newly issued shares of our common stock. We may also make other discretionary contributions to the plan. We recorded $0.8 million, $0.7 million, and $0.6 million of expense for company contributions for the years ended December 31, 2009, 2008 and 2007, respectively.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Note 20 — Related Party Transactions
In April 1999, we provided a non-recourse interest bearing secured loan to our chief executive officer. The loan was in the amount of $200,000 and bore interest at the rate of 5.28% per annum, with interest payable annually to us on each December 15. The loan was collateralized by the primary residence purchased and the principal was payable on the earlier of (i) December 15, 2007, (ii) within twelve months following a demand from us but only in the event the chief executive officer ceases being our employee or in the event of a default under the loan; or (iii) on the closing of a sale or transfer of the property. This note, including accrued interest, was paid in full on December 14, 2007.
Note 21 — Business Combination
On February 18, 2009, we acquired certain patents, intellectual property and other assets related to the universal remote control business from Zilog (NASDAQ: ZILG) for approximately $9.5 million in cash. The purchase included Zilog’s full library and database of infrared codes, software tools and certain fixed assets. We also hired 116 of Zilog’s sales and engineering personnel, including all 107 of Zilog’s personnel located in India. In a related transaction, Maxim Integrated Products (NASDAQ: MXIM) acquired two of Zilog’s product lines, namely, the hardware portion of Zilog’s remote control business and Zilog’s secured transaction product line.
We have cross—licensed the remote control technology and intellectual property with Maxim Integrated Products for purpose of conducting our respective businesses. The arrangement involves an agreement to source silicon chips from Maxim. During 2009, we agreed to be Maxim’s sales agent in return for a sales agency fee. The sales agency fee during 2009 was $4.4 million. This arrangement was mildly accretive to our earnings in 2009, excluding acquisition costs. During 2010, as the transition from the Zilog chip platform to the Maxim chip platform progresses, we will begin to take over full sales and distribution rights, procuring and selling the chips directly to Zilog’s former customers. We anticipate this position will lead to growth in revenue and earnings going forward. Our consolidated financial statements include the operating results of the acquired assets, employees hired, and the related agreement with Maxim from February 18, 2009.
The total purchase price of approximately $9.5 million has been allocated to the net assets acquired based on their estimated fair values as follow:
         
(In thousands)        
Intangible assets:
       
Database
  $ 3,500  
Customer relationships
    3,100  
Goodwill
    2,902  
Equipment, furniture and fixtures
    44  
 
     
Purchase price
  $ 9,546  
 
     
Intangible Assets Subject to Amortization
Of the total purchase price, approximately $6.6 million was allocated to intangible assets subject to amortization including the database and customer relationships.
The database intangible is composed of the estimated fair value of patents, intellectual property and other assets related to Zilog’s database of infrared codes, and software tools. When determining the fair value of the database, we utilized the cost approach. In our valuation, we estimated the total costs to recreate the database, including the associated opportunity costs (or revenue lost while recreating). We discounted the after-tax cash flows to present value to arrive at our estimate of the fair value of the database. We are amortizing the database on a straight-line basis over an estimated useful life of approximately fifteen years.
The customer relationship intangible is composed of the fair value of customer relationships acquired as a result of the Zilog purchase. We utilized the income approach to estimate the fair value of the customer relationships intangible. We developed after-tax cash flows based on forecasted revenue from these customers assuming a

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
customer attrition rate based on our analysis of customer data for UEI and Zilog. We discounted the after-tax cash flows to present value to arrive at our estimate of the fair value of the customer relationships intangible. We are amortizing the customer relationships intangible on a straight-line basis over an estimated useful life of approximately fifteen years.
Goodwill
Goodwill represents the excess of the cost (purchase price) over the estimated fair value of identifiable tangible and intangible assets acquired. Goodwill from this transaction of $2.9 million will not be amortized, but will be analyzed for impairment at least on an annual basis in accordance with U.S. GAAP. We review our goodwill for impairment annually as of December 31 and whenever events or changes in circumstances indicate that an impairment loss may have occurred. We have not recorded any impairment related to the goodwill recognized as a result of the Zilog acquisition. Of the total goodwill recorded, none is expected to be deductible for tax purposes.
The goodwill recognized is attributable to the following value we received from this acquisition:
    This acquisition will expand the breadth and depth of our customer base in both subscription broadcasting and original equipment manufacturing, particularly in Asia.
    We believe integrating Zilog’s technologies with and into our own technology will reduce design cycle times, lower costs, and lead to improvements in our integrated circuit design, product quality and overall functional performance.
    The acquisition of former Zilog employees will allow us to leverage their experience to our advantage in the wireless control industry.
Acquisition Costs
We recognized $1.1 million of total acquisition costs related to the Zilog transaction in selling, general and administrative expenses during the year ended December 31, 2009. The acquisition costs consisted primarily of legal and investment banking services. Of the $1.1 million of acquisition costs recognized during the year ended December 31, 2009, $0.1 million was capitalized at December 31, 2008.
Pro forma Results (Unaudited)
The following unaudited pro forma financial information presents the combined results of our operations and the operations of the acquisition from Zilog as if the acquisition had occurred at the beginning of the periods presented. Adjustments netting $0.04 million for the year ended December 31, 2009 have been made to the combined results of operations, primarily reflecting net sales, salary costs and the amortization of purchased intangible assets that would have occurred had the acquisition date been January 1, 2009. Net adjustments of $0.4 million have been subtracted to the combined results of operations for the years ended December 31, 2008 and 2007, reflecting primarily net sales, salary costs, amortization of purchased intangible assets and the acquisition costs that would have occurred had the acquisition date been January 1 of each respective year. All adjustments are net of their related tax effects.
Pro forma results were as follows for the years ended December 31, 2009, 2008 and 2007:
                         
(in thousands, except per-share amounts)   2009   2008   2007
Net sales
  $ 318,037     $ 291,975     $ 277,555  
Net income
  $ 14,636     $ 15,441     $ 19,848  
Basic and diluted net income per share:
                       
Basic
  $ 1.07     $ 1.10     $ 1.38  
Diluted
  $ 1.05     $ 1.07     $ 1.31  
The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations that would have been achieved had the acquisition actually been completed as of the dates presented, and should not be taken as a projection of the future consolidated results of our operations.

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UNIVERSAL ELECTRONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Note 22 — Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for the years ended December 31, 2009 and 2008 are presented below:
                                 
    2009  
    March     June     September     December  
(In thousands, except per share amounts)   31,     30,     30,     31,  
Net sales
  $ 71,126     $ 78,303     $ 83,182     $ 84,939  
Gross profit
    21,437       25,495       26,070       28,610  
Operating income
    1,536       5,687       6,644       8,080  
Net income
    796       3,816       4,223       5,840  
Earnings per share (1):
                               
Basic
  $ 0.06     $ 0.28     $ 0.31     $ 0.43  
 
                       
Diluted
  $ 0.06     $ 0.27     $ 0.30     $ 0.42  
 
                       
Shares used in computing earnings per share:
                               
Basic
    13,658       13,621       13,687       13,700  
 
                       
Diluted
    13,831       13,981       14,008       14,063  
 
                       
                                 
    2008  
    March     June     September     December  
    31,     30,     30,     31,  
Net sales
  $ 61,191     $ 70,684     $ 76,532     $ 78,693  
Gross profit
    21,735       24,212       24,928       25,315  
Operating income
    2,683       4,357       5,910       7,811  
Net income
    2,473       3,495       4,005       5,833  
Earnings per share (1):
                               
Basic
  $ 0.17     $ 0.25     $ 0.29     $ 0.43  
 
                       
Diluted
  $ 0.17     $ 0.24     $ 0.28     $ 0.42  
 
                       
Shares used in computing earnings per share:
                               
Basic
    14,474       14,033       13,919       13,638  
 
                       
Diluted
    14,957       14,547       14,420       13,903  
 
                       
 
(1)   The earnings per common share calculations for each of the quarters were based upon the weighted average number of shares outstanding during each period, and the sum of the quarters may not be equal to the full year earnings per share amounts.

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SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007
                                 
            Additions            
    Balance at   Charged to           Balance at
    Beginning of   Costs and           End of
Description   Period   Expenses   Write-offs   Period
Valuation account for inventory:
                               
Year Ended December 31, 2009
  $ 1,535     $ 3,342     $ (3,127 )   $ 1,750  
Year Ended December 31, 2008
  $ 1,826     $ 2,411     $ (2,702 )   $ 1,535  
Year Ended December 31, 2007
  $ 2,179     $ 2,146     $ (2,499 )   $ 1,826  
                                 
            Additions            
    Balance at   Charged to           Balance at
    Beginning of   Costs and   Reduction/   End of
Description   Period   Expenses   Write-offs   Period
Valuation account for income tax:
                               
Year Ended December 31, 2009
  $ 189           $ (10 )   $ 179  
Year Ended December 31, 2008
  $ 264           $ (75 )   $ 189  
Year Ended December 31, 2007
  $ 620           $ (356 )   $ 264  

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Exchange Act Rule 13a-15(d) defines “disclosure controls and procedures” to mean controls and procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. The definition further states that disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
An evaluation was performed under the supervision and with the participation of our management, including our principal executive and principal financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our principal executive and principal financial officers have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this report, to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management to allow timely decisions regarding required disclosures.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive and principal financial officers, we evaluated the effectiveness of our internal control over financial reporting based on the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control Integrated Framework. Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.
The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in its attestation report which is included herein.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal controls or in other factors that may significantly affect our internal controls during 2009.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Universal Electronics Inc.
We have audited Universal Electronics Inc.’s (a Delaware Corporation) internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Universal Electronics Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on Universal Electronics Inc.’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Universal Electronics Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Universal Electronics Inc. as of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009, and our report dated March 15, 2010 expressed an unqualified opinion.
/s/ Grant Thornton LLP
Irvine, California
March 15, 2010

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ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Information required by Item 401 of Regulation S-K with respect to our directors will be contained in and is hereby incorporated by reference to our definitive Proxy Statement for our 2010 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A promulgated by the Securities and Exchange Commission under the Exchange Act. Information regarding executive officers of the Company is set forth in Part I of this Form 10-K.
Information required by Item 405 of Regulation S-K will be contained in and is hereby incorporated by reference to our definitive Proxy Statement for our 2010 Annual Meeting of Stockholders to be filed subsequent to the date of filing this Form 10-K, under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.” Copies of Section 16 reports, Forms 3, 4 and 5, are available on our website, www.uei.com under the caption “SEC Filings” on the Investor page.
Code of Conduct. We have adopted a code of conduct that applies to all of our employees, including without limitation our principal executive officer, principal financial officer and principal accounting officer. A copy of the Code of Conduct is included as Exhibit 14.1 to our Annual Report on Form 10-K for the year ended December 31, 2003 filed on March 14, 2004 (File No. 0-21044). The Code of Conduct is also available on our website, www.uei.com under the caption “Corporate Governance” on the Investor page. We will post on our website information regarding any amendment to, or waiver from, any provision of the Code of Conduct that applies to our principal executive officer, principal financial officer or principal accounting officer.
Information required by Items 407(c)(3), (d)(4) and (d)(5) of Regulation S-K will be contained in and is hereby incorporated by reference to our definitive Proxy Statement for our 2010 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A promulgated by the Securities and Exchange Commission under the Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Items 402 and 407(e)(4) and (e)(5) of Regulation S-K will be contained in and is hereby incorporated by reference to our definitive Proxy Statement for our 2010 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A promulgated by the Securities and Exchange Commission under the Exchange Act.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information required by Item 403 of Regulation S-K will be contained in and is hereby incorporated by reference to our definitive Proxy Statement for our 2010 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A promulgated by the Securities and Exchange Commission under the Exchange Act.

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The following summarizes our equity compensation plans at December 31, 2009:
Equity Compensation Plan Information
                         
    (a)   (b)   (c)
                    Number of
                    securities
                    remaining available
    Number of           for future issuance
    Securities to be           under equity
    issued upon   Weighted-average   compensation plans
    exercise of   exercise price of   (excluding
    outstanding   outstanding   securities
    options, warrants   options, warrants   reflected in column
Plan Category   and rights   and rights   (a))
 
Equity compensation plans approved by security holders
    1,397,319     $ 18.26       247,676  
 
Equity compensation plans not approved by security holders
    574,168       17.66       1  
 
Total
    1,971,487     $ 18.08       247,677  
 
See “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA- Notes to Consolidated Financial Statements - Note 15” for a description of each of our stock incentive plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Items 404 and 407(a) of Regulation S-K will be contained in and is hereby incorporated by reference to our definitive Proxy Statement for our 2010 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A promulgated by the Securities and Exchange Commission under the Exchange Act.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item will be contained in and is hereby incorporated by reference to our definitive Proxy Statement for our 2010 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A promulgated by the Securities and Exchange Commission under the Exchange Act.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) List of Financial Statements
See “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA-Index to Consolidated Financial Statements” for a list of the consolidated financial statements included herein.
(a)(2) List of Financial Statement Schedules
See “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA-Index to Consolidated Financial Statements” for a list of the consolidated financial statement schedules included herein.
(a)(3) List of Exhibits required to be filed by Item 601(a) of the Regulation S-K are included as Exhibits to this Report:
     See EXHIBIT INDEX at page 84 of Form 10-K.

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SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cypress, State of California on the 15th day of March, 2010.

         
  UNIVERSAL ELECTRONICS INC.
 
 
  By:   /s/ Paul D. Arling    
      Paul D. Arling   
    Chairman and Chief Executive Officer   
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Paul D. Arling and Bryan M. Hackworth as true and lawful attorneys-in-fact and agents, each acting alone, with full powers of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as he might or may do in person, thereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 15th day of March, 2010, by the following persons on behalf of the registrant and in the capacities indicated.
         
NAME & TITLE   SIGNATURE    
 
       
Paul D. Arling
       
Chairman and Chief Executive Officer
  /s/ Paul D. Arling    
 
       
(principal executive officer)
       
 
       
Bryan M. Hackworth
       
Chief Financial Officer
  /s/ Bryan M. Hackworth    
 
       
(principal financial officer and principal accounting officer)
       
 
       
Satjiv S. Chahil
       
Director
  /s/ Satjiv S. Chahil    
 
       
 
       
William C. Mulligan
       
Director
  /s/ William C. Mulligan    
 
       
 
       
J. C. Sparkman
       
Director
  /s/ J.C. Sparkman    
 
       
 
       
Gregory P. Stapleton
       
Director
  /s/ Gregory P. Stapleton    
 
       
 
       
Carl E. Vogel
       
Director
  /s/ Carl E. Vogel    
 
       
 
       
Edward K. Zinser
       
Director
  /s/ Edward K. Zinser    
 
       

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EXHIBIT INDEX
       
Exhibit    
Number   Document Description
 
     
2.1
    Asset Purchase Agreement dated as of February 17, 2009 by and among Zilog, Inc., Zilog India Electronics Pvt Ltd, Maxim Integrated Products, Inc., UEI Cayman Inc., Universal Electronics Inc., and UEI Electronics Private Limited (incorporated by reference to Exhibit 2.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 filed on March 13, 2009 (File No. 0-12044))
 
     
3.1
    Restated Certificate of Incorporation of Universal Electronics Inc., as amended (Incorporated by reference to Exhibit 3.1 to the Company’s Form S-1 Registration filed on or about December 24, 1992 (File No. 33-56358))
 
     
3.2
    Amended and Restated By-laws of Universal Electronics Inc. (Incorporated by reference to Exhibit 3.2 to the Company’s Form S-1 Registration filed on or about December 24, 1992 (File No. 33-56358))
 
     
3.3
    Certificate of Amendment to Restated Certificate of Incorporation of Universal Electronics Inc. (Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995 filed on April 1, 1996 (File No. 0-21044))
 
     
4.1
    Article Eighth of our Restated Certificate of Incorporation, as amended, contains certain provisions restricting business combinations with interested stockholders under certain circumstances and imposing higher voting requirements for the approval of certain transactions unless the transaction has been approved by two-thirds of the disinterested directors or fair price provisions have been met. (Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995 filed on April 1, 1996 (File No. 0-21044))
 
     
*10.1
    Form of Universal Electronics Inc. 1993 Stock Incentive Plan (Incorporated by reference to Exhibit 10.13 to Amendment No. 1 to the Company’s Form S-1 Registration filed on or about January 21, 1993 (File No. 33-56358))
 
     
*10.2
    Form of Universal Electronics Inc. 1995 Stock Incentive Plan (Incorporated by reference to Exhibit B to the Company’s Definitive Proxy Materials for the 1995 Annual Meeting of Stockholders of Universal Electronics Inc. filed on May 1, 1995 (File No. 0-21044))
 
     
*10.3
    Form of Stock Option Agreement by and between Universal Electronics Inc. and certain employees used in connection with options granted to the employees pursuant to the Universal Electronics Inc. 1995 Stock Incentive Plan (Incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1996 filed on March 28, 1997 (File No. 0-21044))
 
     
*10.4
    Form of Stock Option Agreement by and between Universal Electronics Inc. and certain non-affiliated directors used in connection with options granted to the non-affiliated directors pursuant to the Universal Electronics Inc. 1995 Stock Incentive Plan (Incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1996 filed on March 28, 1997 (File No. 0-21044))
 
     
*10.5
    Form of Universal Electronics Inc. 1996 Stock Incentive Plan (Incorporated by reference to Exhibit 4.5 to the Company’s Form S-8 Registration Statement filed on March 26, 1997 (File No. 333-23985))
 
     
*10.6
    Form of Stock Option Agreement by and between Universal Electronics Inc. and certain employers used in connection with options granted to the employees pursuant to the Universal Electronics Inc. 1996 Stock Incentive Plan (Incorporated by reference to Exhibit 4.6 to the Company’s Form S-8 Registration Statement filed on March 26, 1997 (File No. 333-23985))
 
     
*10.7
    Form of Salary Continuation Agreement by and between Universal Electronics Inc. and certain employees (Incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997, filed on March 30, 1998 (File No. 0-21044))
 
     
*10.8
    Form of Amendment to Salary Continuation Agreement by and between Universal Electronics Inc. and

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Exhibit    
Number   Document Description
 
    certain employees (Incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997, filed on March 30, 1998 (File No. 0-21044))
 
     
*10.9
    Form of Universal Electronics Inc. 1998 Stock Incentive Plan (Incorporated by reference to Exhibit A to the Company’s Definitive Proxy Materials for the 1998 Annual Meeting of Stockholders of Universal Electronics Inc. filed on April 20, 1998 (File No. 0-21044))
 
     
*10.10
    Form of Stock Option Agreement by and between Universal Electronics Inc. and certain employees used in connection with options granted to the employees pursuant to the Universal Electronics Inc. 1998 Stock Incentive Plan(Incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998 filed on March 31, 1999 (File No. 0-21044))
 
     
*10.11
    Form of Universal Electronics Inc. 1999 Stock Incentive Plan (Incorporated by reference to Exhibit A to the Company’s Definitive Proxy Materials for the 1999 Annual Meeting of Stockholders of Universal Electronics Inc. filed on April 29, 1999 (File No. 0-21044))
 
     
*10.12
    Form of Stock Option Agreement by and between Universal Electronics Inc. and certain employees used in connection with options granted to the employees pursuant to the Universal Electronics Inc. 1999 Stock Incentive Plan (Incorporated by reference to Exhibit A to the Company’s Definitive Proxy Materials for the 1999 Annual Meeting of Stockholders of Universal Electronics Inc. filed on April 29, 1999 (File No. 0-21044))
 
     
*10.13
    Form of Salary Continuation Agreement by and between Universal Electronics Inc. and certain employees (Incorporated by reference to Exhibit 10.39 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed on March 30, 2000 (File No. 0-21044))
 
     
*10.14
    Form of Universal Electronics Inc. 1999A Nonqualified Stock Plan effective October 7, 1999 and subsequently amended February 1, 2000 (Incorporated by reference to Exhibit 10.42 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed on March 30, 2000 (File No. 0-21044))
 
     
*10.15
    Form of Stock Option Agreement by and between Universal Electronics Inc. and certain employees used in connection with options granted to the employees pursuant to the Universal Electronics Inc. 1999A Nonqualified Stock Plan (Incorporated by reference to Exhibit 10.43 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 filed on March 30, 2000 (File No. 0-21044))
 
     
*10.16
    Form of Universal Electronics Inc. 2002 Stock Incentive Plan (Incorporated by reference to Exhibit 10.49 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 filed on August 14, 2002 (File No. 0-21044))
 
     
*10.17
    Form of Stock Option Agreement by and between Universal Electronics Inc. and certain directors, officers and other employees used in connection with options granted to the employees pursuant to the Universal Electronics Inc. 2002 Stock Incentive Plan (Incorporated by reference to Exhibit 10.50 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 filed on August 14, 2002 (File No. 0-21044))
 
     
*10.18
    Form of Universal Electronics Inc. 2003 Stock Incentive Plan (Incorporated by reference to Appendix B to the Company’s Definitive Proxy Materials for the 2003 Annual Meeting of Stockholders of Universal Electronics Inc. filed on April 28, 2003 (File No. 0-21044))
 
     
10.19
    Credit Agreement dated September 15, 2003 between Comerica Bank and Universal Electronics Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 filed on November 14, 2003 (File No. 0-21044))
 
     
10.20
    Promissory Agreement dated September 15, 2003 between Comerica Bank and Universal Electronics Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 filed on November 14, 2003 (File No. 0-21044))
 
     
*10.21
    Form of Executive Officer Employment Agreement dated April 23, 2003 by and between Universal Electronics Inc. and
Paul D. Arling (incorporated by reference to Exhibit 10.42 to the Company’s

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Exhibit    
Number   Document Description
 
    Annual Report on Form 10-K for the year ended December 31, 2003 filed on March 14, 2004 (File No. 0-21044))
 
     
*10.22
    Form of Executive Officer Employment Agreement dated April 2003 by and between Universal Electronics Inc. and Robert P. Lilleness (incorporated by reference to Exhibit 10.43 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 filed on March 14, 2004 (File No. 0-21044))
 
     
*10.23
    Form of First Amendment to Executive Officer Employment Agreement dated October 21, 2005 by and between Universal Electronics Inc. and Paul D. Arling (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 filed on March 16, 2006 (File No. 0-21044))
 
     
10.24
    Third Amendment to Lease dated December 1, 2006 between Warland Investments Company and Universal Electronics Inc. (incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 filed on March 16, 2006 (File No. 0-21044))
 
     
*10.25
    Form of Universal Electronics Inc. 2006 Stock Incentive Plan (incorporated by reference to Appendix C to the Company’s Definitive Proxy Materials for the 2006 Annual Meeting of Stockholders of Universal Electronics Inc. filed on April 26, 2006 (File No. 0-21044)
 
     
*10.26
    Employment and Separation Agreement and General Release dated August 17, 2006 between Robert P. Lilleness and Universal Electronics Inc. (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on August 22, 2006 (File No. 0-21044))
 
     
10.27
    Form of Lease dated January 31, 2007 between FirstCal Industrial 2 Acquisition, LLC and Universal Electronics Inc. (incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on March 16, 2007 (File No. 02-21044))
 
     
10.28
    Amendment Number One to Credit Agreement dated August 29, 2006 between Comerica Bank and Universal Electronics Inc. (incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on March 16, 2007 (File No. 02-21044))
 
     
*10.29
    Form of Indemnification Agreements, dated as of January 2, 2007 between the Company and each director and certain officers of the Company (incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on March 16, 2007 (File No. 02-21044))
 
     
*10.30
    Form of Restricted Stock Unit Agreement (incorporated herein by reference to Exhibit 4.5 to the Company’s Form S-8 Registration Statement filed on March 27, 2008 (File No. 333-149926))
 
     
10.31
    Credit Agreement dated December 23, 2009 between U.S. Bank National Association and Universal Electronics Inc. (filed herewith)
 
     
10.32
    Revolving Note dated December 23, 2009 from Universal Electronics Inc. to U.S. Bank National Association (filed herewith)
 
     
14.1
    Code of Conduct (incorporated by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 filed on March 14, 2004 (File No. 0-21044))
 
     
21.1
    List of Subsidiaries of the Registrant (filed herewith)
 
     
23.1
    Consent of Independent Registered Public Accounting Firm — Grant Thornton LLP (filed herewith)
 
     
24.1
    Power of Attorney (filed as part of the signature page hereto)
 
     
31.1
    Rule 13a-14(a) Certifications of the Chief Executive Officer (filed herewith)
 
     
31.2
    Rule 13a-14(a) Certifications of the Chief Financial Officer (principal financial officer and principal accounting officer) (filed herewith)

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Exhibit    
Number   Document Description
 
     
32.1
    Section 1350 Certifications of the Chief Executive Officer (filed herewith)
 
     
32.2
    Section 1350 Certifications of the Chief Financial Officer (principal financial officer and principal accounting officer) (filed herewith)
 
*   Management contract or compensation plan or arrangement identified pursuant to Items 15(a)(3) and 15(c) of Form 10-K.

87

exv10w31
Exhibit 10.31
Execution Copy
CREDIT AGREEMENT
by and between
UNIVERSAL ELECTRONICS INC.
and
U.S. BANK NATIONAL ASSOCIATION
Dated as of December 23, 2009

 


 

TABLE OF CONTENTS
         
ARTICLE I. DEFINITIONS AND ACCOUNTING TERMS
    1  
 
       
Section 1.1. Defined Terms
    1  
Section 1.2. Accounting Terms and Calculations
    9  
Section 1.3. Computation of Time Periods
    9  
Section 1.4. Other Definitional Terms
    10  
 
       
ARTICLE II. TERMS OF THE CREDIT FACILITIES
    10  
 
       
Section 2.1. The Revolving Commitments
    10  
Section 2.2. Procedure for Revolving Loans
    10  
Section 2.3. The Revolving Note
    11  
Section 2.4. Interest Rates; Conversions and Continuations; Etc.
    11  
Section 2.5. Payment of Interest and Principal of Revolving Loans
    12  
Section 2.6. Optional Prepayments
    13  
Section 2.7. Letters of Credit
    13  
Section 2.8. Procedures for Letters of Credit
    13  
Section 2.9. Terms of Letters of Credit
    13  
Section 2.10. Agreement to Repay Letter of Credit Drawings
    14  
Section 2.11. Obligations Absolute
    14  
Section 2.12. Outstanding Letters of Credit Following Event of Default
    15  
Section 2.13. Revolving Loans to Cover Unpaid Drawings
    15  
Section 2.14. Facility Fees and Letter of Credit Fees
    15  
Section 2.15. Computation
    16  
Section 2.16. Payments
    16  
Section 2.17. Revolving Commitment Ending Date
    16  
Section 2.18. Use of Revolving Loan Proceeds
    16  
Section 2.19. Taxes
    16  
 
       
ARTICLE III. CONDITIONS PRECEDENT
    17  
 
       
Section 3.1. Conditions of Initial Transaction
    17  
Section 3.2. Conditions Precedent to all Revolving Loans and Letters of Credit
    19  
 
       
ARTICLE IV. REPRESENTATIONS AND WARRANTIES
    19  
 
       
Section 4.1. Organization, Standing, Etc.
    19  
Section 4.2. Authorization and Validity
    20  
Section 4.3. No Conflict; No Default
    20  
Section 4.4. Government Consent
    20  
Section 4.5. Financial Statements and Condition
    20  
Section 4.6. Litigation
    20  
Section 4.7. Environmental, Health and Safety Laws
    21  
Section 4.8. ERISA
    21  
Section 4.9. Federal Reserve Regulations
    21  

i


 

         
Section 4.10. Title to Property; Leases; Liens; Subordination
    21  
Section 4.11. Taxes
    22  
Section 4.12. Trademarks; Patents
    22  
Section 4.13. Burdensome Restrictions
    22  
Section 4.14. Force Majeure
    22  
Section 4.15. Investment Company Act
    22  
Section 4.16. Retirement Benefits
    22  
Section 4.17. Full Disclosure
    22  
Section 4.18. Subsidiaries
    23  
Section 4.19. Labor Matters
    23  
Section 4.20. Solvency
    23  
 
       
ARTICLE V. AFFIRMATIVE COVENANTS
    23  
 
       
Section 5.1. Financial Statements and Reports
    23  
Section 5.2. Existence
    25  
Section 5.3. Insurance
    25  
Section 5.4. Payment of Taxes and Claims
    26  
Section 5.5. Inspection
    26  
Section 5.6. Maintenance of Properties
    26  
Section 5.7. Books and Records
    26  
Section 5.8. Compliance
    26  
Section 5.9. ERISA
    26  
Section 5.10. Environmental Matters; Reporting
    27  
Section 5.11. Further Assurances
    27  
Section 5.12. Compliance with Terms of Material Contracts
    27  
Section 5.13. Maintenance of Bank Accounts
    28  
Section 5.14. Additional Restricted Subsidiaries
    28  
 
       
ARTICLE VI. NEGATIVE COVENANTS
    28  
 
       
Section 6.1. Merger
    28  
Section 6.2. Disposition of Assets
    28  
Section 6.3. Plans
    29  
Section 6.4. Change in Nature of Business
    29  
Section 6.5. Negative Pledges; Subsidiary Restrictions
    29  
Section 6.6. Restricted Payments
    29  
Section 6.7. Transactions with Affiliates
    29  
Section 6.8. Accounting Changes
    29  
Section 6.9. Subordinated Debt
    30  
Section 6.10. Investments
    30  
Section 6.11. Indebtedness
    31  
Section 6.12. Liens
    31  
Section 6.13. Contingent Liabilities
    32  
Section 6.14. Cash Flow Leverage Ratio
    33  
Section 6.15. Fixed Charge Coverage Ratio
    33  
Section 6.16. Quick Ratio
    33  

ii


 

         
Section 6.17. Revolving Loan Proceeds
    33  
Section 6.18. Sale and Leaseback Transactions
    33  
Section 6.19. Rate Protection and Foreign Currency Hedging Agreements
    33  
 
       
ARTICLE VII. EVENTS OF DEFAULT AND REMEDIES
    33  
 
       
Section 7.1. Events of Default
    33  
Section 7.2. Remedies
    35  
Section 7.3. Deposit Accounts; Offset
    35  
 
       
ARTICLE VIII. MISCELLANEOUS
    36  
 
       
Section 8.1. Modifications
    36  
Section 8.2. Expenses
    36  
Section 8.3. Waivers, Etc.
    36  
Section 8.4. Notices
    36  
Section 8.5. Taxes
    37  
Section 8.6. Successors and Assigns; Participations; Purchasing Banks
    37  
Section 8.7. Confidentiality of Information
    38  
Section 8.8. Governing Law and Construction
    39  
Section 8.9. Consent to Jurisdiction
    39  
Section 8.10. Judicial Reference Agreement
    39  
Section 8.11. Survival of Agreement
    41  
Section 8.12. Indemnification
    41  
Section 8.13. Captions
    42  
Section 8.14. Entire Agreement
    42  
Section 8.15. Counterparts
    42  
Section 8.16. Borrower Acknowledgements
    42  
Section 8.17. Interest Rate Limitation
    42  
List of Exhibits and Schedules
    1  

iii


 

CREDIT AGREEMENT
     THIS CREDIT AGREEMENT (this “Agreement”), dated as of December 23, 2009, is by and between UNIVERSAL ELECTRONICS INC., a corporation organized under the laws of the State of Delaware (the “Borrower”), and U.S. BANK NATIONAL ASSOCIATION, a national banking association (the “Bank”).
ARTICLE I.
DEFINITIONS AND ACCOUNTING TERMS
     Section 1.1. Defined Terms. As used in this Agreement, the following terms have the following meanings (and such meanings apply to both the singular and plural forms of the term defined, as the context requires):
     “Advance”: Any portion of the outstanding Revolving Loans by the Bank as to which one of the available interest rate options and, if pertinent, a Loan Period, is applicable. An Advance may be a LIBOR Rate Loan or a Prime Rate Loan.
     “Affiliate”: When used with reference to any Person, (a) each Person that, directly or indirectly, controls, is controlled by, or is under common control with the Person referred to, (b) each Person that beneficially owns or holds, directly or indirectly, 5% or more of any class of voting Equity Interests of the Person referred to, (c) each Person, 5% or more of the voting Equity Interests (or if such Person is not a corporation, 5% or more of the equity interest) of which is beneficially owned or held, directly or indirectly, by the Person referred to, and (d) each of such Person’s officers, directors, joint venturers, and partners. The term “control” (including the terms “controlled by” and “under common control with”) means the possession, directly, of the power to direct or cause the direction of the management and policies of the Person in question.
     “Applicable Margin”:
     (a) For LIBOR Rate Loans: 1.8%.
     (b) For Prime Rate Loans: 0%.
     “Acquisition”: Any acquisition of the assets or Equity Interests of another Person in one or more transactions.
     “Acquisition Target”: The Person from which beneficial ownership of assets or Equity Interests of another Person is acquired in an Acquisition.
     “Bank”: As defined in the opening paragraph hereof.
     “Banking Day”: Any day (other than a Saturday, Sunday, or federal or state legal holiday in the State of California) on which banks are permitted to be open in the State of California and New York City, New York.

 


 

     “Board”: The Board of Governors of the Federal Reserve System or any successor thereto.
     “Borrower”: As defined in the opening paragraph hereof.
     “Capital Expenditures”: For any period, the sum of all amounts that would, in accordance with GAAP, be included as additions to property, plant, and equipment on a consolidated statement of cash flows for the Borrower during such period, in respect of (a) the acquisition, construction, improvement, replacement, or betterment of land, buildings, machinery, equipment, or any other fixed assets or leaseholds, (b) to the extent related to and not included in (a) above, materials and contract labor (excluding expenditures properly chargeable to repairs or maintenance in accordance with GAAP), and (c) other capital expenditures and other uses recorded as capital expenditures or similar terms having substantially the same effect.
     “Capitalized Lease”: A lease of (or other agreement conveying the right to use) real or personal property with respect to which at least a portion of the rent or other amounts thereon constitutes Capitalized Lease Obligations.
     “Capitalized Lease Obligations”: As to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real or personal property which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP (including Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board). For purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP (including such Statement No. 13).
     “Cash Flow Leverage Ratio”: At any time of determination, the ratio of (a) interest-bearing Indebtedness to (b) EBITDA.
     “Change of Control”: The occurrence, after the Effective Date, of any of the following circumstances: (a) any Person or two or more Persons acting in concert acquiring beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934), directly or indirectly, of Equity Interests of the Borrower representing 30% or more of the combined voting power of all Equity Interests of the Borrower entitled to vote in the election of directors; (b) during any period of up to twelve consecutive months, whether commencing before or after the Effective Date, individuals who at the beginning of such twelve-month period were directors of the Borrower ceasing for any reason to constitute a majority of the board of directors of the Borrower (other than by reason of death, disability, or scheduled retirement); or (c) any Person or two or more Persons acting in concert acquiring by contract or otherwise, or entering into a contract or arrangement that upon consummation will result in its or their acquisition of, control over Equity Interests of the Borrower representing 30% or more of the combined voting power of all Equity Interests of the Borrower entitled to vote in the election of directors.

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     “Charges”: As defined in Section 8.17.
     “Code”: The Internal Revenue Code of 1986, as amended.
     “Contingent Obligation”: With respect to any Person at the time of any determination, without duplication, any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other Person (the “primary obligor”) in any manner, whether directly or otherwise, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or advance or supply funds for the purchase of) any direct or indirect security therefor, (b) to purchase property, securities, Equity Interests, or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness, (c) to maintain working capital, equity capital, or other financial statement condition of the primary obligor so as to enable the primary obligor to pay such Indebtedness or otherwise to protect the owner thereof against loss in respect thereof, or (d) entered into for the purpose of assuring in any manner the owner of such Indebtedness of the payment of such Indebtedness or to protect the owner against loss in respect thereof; provided, that the term “Contingent Obligation” shall not include endorsements for collection or deposit, in each case in the ordinary course of business.
     “Current Liabilities”: As of any date, the consolidated current liabilities of the Borrower, determined in accordance with GAAP.
     “Default”: Any event that with the giving of notice (whether such notice is required under Section 7.1, under some other provision of this Agreement, or otherwise) or lapse of time, or both, would constitute an Event of Default.
     “EBITDA”: For any period of determination, the consolidated net income of the Borrower before deductions for income taxes, Interest Expense, depreciation, and amortization, all as determined in accordance with GAAP.
     “EBITDAR”: For any period of determination, the consolidated net income, plus interest expense, plus income tax expense, plus depreciation expense, plus amortization expense, plus rent or lease expense of the Borrower, all as determined for said period in accordance with GAAP.
     “Effective Date”: Any Banking Day on which all the conditions precedent to the Bank’s obligation to make the initial Advance, as set forth in Article III, have been, or, on such Effective Date, will be, satisfied.
     “Equity Interests”: All shares, interests, participations, or other equivalents, however designated, of or in a corporation or limited liability company, whether or not voting, including but not limited to common stock, member interests, warrants, preferred stock, convertible debentures, and all agreements, instruments, and documents convertible, in whole or in part, into any one or more of the foregoing.
     “ERISA”: The Employee Retirement Income Security Act of 1974, as amended.

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     “ERISA Affiliate”: Any trade or business (whether or not incorporated) that is a member of a group of which the Borrower is a member and that is treated as a single employer under § 414 of the Code.
     “Event of Default”: Any event described in Section 7.1.
     “Federal Funds Rate”: For any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions, with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Banking Day, for the next preceding Banking Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Banking Day, the average of the quotations the Bank receives for such day on such transactions from three Federal funds brokers of recognized standing that the Bank selects.
     “Fixed Charge Coverage Ratio”: For any period of determination, (a) EBITDAR minus cash taxes, cash dividends, cash distributions, and Maintenance Capital Expenditures divided by (b) the sum of all consolidated required principal payments (on short and long term debt and capital leases), interest, and rental or lease expense, all as determined for said period in accordance with GAAP.
     “Foreign Currency Hedging Agreement: Any foreign currency swap, exchange, cap, collar, floor, forward, future or option agreement, or any other similar hedging arrangement, between the Borrower or any Restricted Subsidiary, as the case may be, and any one or more counterparties, including the Bank, provided that such agreements are entered into by such Person in the ordinary course of its business and not for purposes of speculation.
     “GAAP”: Generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, statements and pronouncements of the Financial Accounting Standards Board, or such other statements by such other entity as are approved by a significant segment of the accounting profession that are applicable to the circumstances as of any date of determination.
     “Holding Account”: A deposit account belonging to the Bank into which the Borrower may be required to make deposits pursuant to this Agreement, such account to be under the sole dominion and control of the Bank and not subject to withdrawal by the Borrower, with any amounts therein to be held for application as specified in Section 2.6, 2.10, and 2.13 as the case may be.
     “Immediately Available Funds”: Funds with good value on the day and in the city in which payment is received.
     “Indebtedness”: With respect to any Person at the time of any determination, without duplication, all obligations, contingent or otherwise, of such Person that in accordance with GAAP should be classified upon the balance sheet of such Person as liabilities, but in any event including: (a) all obligations of such Person for borrowed

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money (including non-recourse obligations), (b) all obligations of such Person evidenced by bonds, debentures, notes, or other similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid or accrued, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property purchased by such Person, (e) all obligations of such Person issued or assumed as the deferred purchase price of property or services, but excluding trade payables incurred in the ordinary course of business that are not more than 90 days past due, (f) all obligations of others secured by any Lien on property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (g) all Capitalized Lease Obligations of such Person, (h) all obligations of such Person in respect of interest rate swap agreements, cap or collar agreements, interest rate futures or option contracts, currency swap agreements, currency futures or option agreements, and other similar contracts, (i) all obligations of such Person, actual or contingent, as an account party in respect of letters of credit or bankers’ acceptances, (j) all obligations of any partnership or joint venture as to which such Person is or may become personally liable, (k) all obligations of such Person under any Equity Interests issued by such Person, and (l) all Contingent Obligations of such Person.
     “Indemnitee”: As defined in Section 8.12.
     “Interest Expense”: For any period of determination, the aggregate consolidated amount, without duplication, of interest paid, accrued, or scheduled to be paid in respect of any Indebtedness of the Borrower, including (a) all but the principal component of payments in respect of conditional sale contracts, Capitalized Leases, and other title retention agreements, (b) commissions, discounts, and other fees and charges with respect to letters of credit and bankers’ acceptance financings, and (c) net costs under interest rate protection agreements, in each case determined in accordance with GAAP.
     “Interest Differential”: As defined in Section 2.4(d).
     “Investment”: (a) The acquisition, purchase, making, or holding of any Equity Interests or other security, or any loan, advance, contribution to capital, or extension of credit (except for trade and customer accounts receivable for inventory sold or services rendered in the ordinary course of business and payable in accordance with customary trade terms), (b) any acquisition of real or personal property (other than real and personal property acquired in the ordinary course of business), and any purchase of or commitment or option to purchase Equity Interests, securities, or other debt of or any interest in another Person or any integral part of any business or the assets constituting such business or part thereof, and (c) the formation of, or entry into, any partnership as a limited or general partner with any other Person or the entry into any joint venture with any other Person. The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments for increases or decreases in value or write-ups, write-downs, or write-offs with respect to such Investment.
     “Letter of Credit”: A letter of credit issued by the Bank pursuant to this Agreement for the account of the Borrower.

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     “Letter of Credit Fee”: As defined in Section 2.14.
     “Letter of Credit Outstandings”: The aggregate maximum amount available to be drawn under Letters of Credit outstanding on any date of determination.
     “LIBOR Rate Loan”: As defined in Section 2.4(a).
     “Lien”: With respect to any Person, any security interest, mortgage, pledge, lien, charge, encumbrance, title retention agreement, or analogous instrument or device (including the interest of each lessor under any Capitalized Lease) in, of, or on any assets or properties of such Person, now owned or hereafter acquired, whether arising by agreement or operation of law.
     “Loan Documents”: This Agreement and the Revolving Note.
     “Loan Period”: As defined in Section 2.4(b).
     “Maintenance Capital Expenditures”: For any period of determination, 50% of the consolidated equipment depreciation expense of the Borrower, determined in accordance with GAAP.
     “Material Adverse Occurrence”: Any occurrence of whatsoever nature (including, without limitation, any adverse determination in any litigation, arbitration, or governmental investigation or proceeding) that could reasonably be expected to materially and adversely affect (a) the financial condition or operations of the Borrower and its Subsidiaries taken as a whole, (b) the ability of the Borrower or any Subsidiary to perform its obligations under any Loan Document, or any writing executed pursuant thereto, (c) the validity or enforceability of the material obligations of the Borrower or any Subsidiary under any Loan Document, (d) the rights and remedies of the Bank against the Borrower or any Subsidiary under any Loan Document, or (e) the timely payment of the principal of and interest on the Revolving Loans or other amounts payable by the Borrower hereunder.
     “Maximum Rate”: As defined in Section 8.17.
     “Multiemployer Plan”: A multiemployer plan, as such term is defined in § 4001(a)(3) of ERISA, that is maintained (on the Effective Date, within the five years preceding the Effective Date, or at any time after the Effective Date) for employees of the Borrower or any ERISA Affiliate.
     “Obligations”: The Borrower’s obligations in respect of the due and punctual payment of principal and interest on the Revolving Note and Unpaid Drawings when and as due, whether by acceleration or otherwise, all fees, expenses, indemnities, reimbursements, and other obligations of the Borrower under the Loan Documents, and the Rate Protection Obligations, in all cases whether now existing or hereafter arising or incurred.
     “Other Taxes”: As defined in Section 2.20(b).

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     “Participants”: As defined in Section 8.6(b).
     “PBGC”: The Pension Benefit Guaranty Corporation, established pursuant to Subtitle A of Title IV of ERISA, and any successor thereto or to the functions thereof.
     “Permitted Acquisition”: An Acquisition to which the Bank has provided written consent or an Acquisition for which the following conditions are met:
     (a) such Acquisition is not “hostile” and has been approved by the Acquisition Target by action of the board of directors or other similar governing body of the Acquisition Target;
     (b) the Acquisition Target is in a line of business the same as or similar to the electronics industry or is complementary to the line of business engaged in by the Borrower as of the Effective Date; and
     (c) the Borrower has delivered to the Bank a pro forma Compliance Certificate, certified by the chief financial officer of the Borrower, demonstrating that both before and after giving effect to such Acquisition, no Event of Default is continuing or will result therefrom.
     “Person”: Any natural person, corporation, partnership, limited partnership, limited liability company, joint venture, firm, association, trust, unincorporated organization, government, governmental agency or political subdivision, or other entity, whether acting in an individual, fiduciary, or other capacity.
     “Plan”: Each employee benefit plan (whether in existence on the Effective Date or thereafter instituted), as such term is defined in § 3 of ERISA, maintained for the benefit of employees, officers, or directors of the Borrower or of any ERISA Affiliate.
     “Prime Rate”: As defined in Section 2.4(a).
     “Prime Rate Loan”: As defined in Section 2.4(a).
     “Prohibited Transaction”: As defined in § 4975 of the Code and § 406 of ERISA.
     “Quick Ratio”: As of any date of determination, the ratio of (a) the Borrower’s consolidated accounts receivable plus the Borrower’s consolidated cash on hand and marketable securities to (b) Current Liabilities (including the Obligations).
     “Rate Protection Agreement”: Any interest rate swap, cap, or option agreement, or other agreement pursuant to which the Borrower hedges interest rate risk with respect to a portion of the Obligations, entered into by the Borrower with a Rate Protection Provider.
     “Rate Protection Obligations”: The liabilities, indebtedness, and obligations of the Borrower, if any, to Rate Protection Providers under Rate Protection Agreements.

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     “Rate Protection Provider”: The Bank, or any Affiliate of the Bank, that is the counterparty of the Borrower under any Rate Protection Agreement.
     “Regulatory Change”: Any change after the Effective Date in federal, state, or foreign laws or regulations or the adoption or making after such date of any interpretations, directives, or requests applying to a class of banks including the Bank under any federal, state, or foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof.
     “Reportable Event”: A reportable event as defined in § 4043 of ERISA and the regulations issued under such section, with respect to a Plan, excluding, however, such events as to which the PBGC by regulation has waived the requirement of § 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided that a failure to meet the minimum funding standard of § 412 of the Code and § 302 of ERISA shall be a Reportable Event regardless of the issuance of any waiver in accordance with § 412(d) of the Code.
     “Restricted Payments”: With respect to the Borrower and its Subsidiaries, collectively, all dividends or other distributions of any nature (whether cash, Equity Interests other than common stock of the Borrower, assets, or otherwise), and all payments on any class of Equity Interests (including warrants, options, or rights therefor) issued by the Borrower, whether or not such Equity Interests are authorized or outstanding on the Effective Date or at any time thereafter, and any redemption or purchase of, or distribution in respect of, any of the foregoing, whether directly or indirectly.
     “Restricted Subsidiary”: (a) Universal Electronics BV and (b) each other Subsidiary designated in writing by the Borrower pursuant to Section 5.14.
     “Revolving Commitment”: The Bank’s obligation to make Revolving Loans to, and issue Letters of Credit for, the Borrower in an aggregate principal amount outstanding at any time not to exceed the Revolving Commitment Amount upon the terms and subject to the conditions and limitations of this Agreement.
     “Revolving Commitment Amount”: $15,000,000.
     “Revolving Commitment Ending Date”: As defined in Section 2.17.
     “Revolving Loan”: As defined in Section 2.1.
     “Revolving Loan Date”: The date of the making of any Revolving Loan hereunder.
     “Revolving Note”: A promissory note of the Borrower in the form of Exhibit A, evidencing the Borrower’s obligation to repay the Revolving Loan.
     “Standby Letter of Credit Sublimit”: $4,500,000.

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     “Subordinated Debt”: Any Indebtedness of the Borrower, now existing or hereafter created, incurred, or arising, that is subordinated in right of payment to the payment of the Obligations in a manner and to an extent (a) that the Bank has approved in writing prior to the creation of such Indebtedness, or (b) as to any Indebtedness of the Borrower existing on the date of this Agreement, that the Bank has approved as Subordinated Debt in a writing delivered by the Bank to the Borrower on or prior to the Effective Date.
     “Subsidiary”: Any corporation or other entity of which Equity Interests having ordinary voting power for the election of a majority of the board of directors or other Persons performing similar functions are owned by the Borrower either directly or through one or more Subsidiaries.
     “Tangible Net Worth”: As of any date of determination, the sum of the amounts set forth on the consolidated balance sheet of the Borrower as the sum of the common stock, preferred stock, additional paid-in capital, and retained earnings of the Borrower (excluding treasury stock), less the book value of all intangible assets of the Borrower and its Subsidiaries, including all such items as goodwill, trademarks, trade names, service marks, copyrights, patents, licenses, unamortized debt discount and expenses, and the excess of the purchase price of the assets of any business acquired by the Borrower or any of its Subsidiaries over the book value of such assets.
     “Termination Date”: The earlier of (a) October 31, 2011, or (b) the date on which the Revolving Commitment is terminated pursuant to Section 7.2 hereof.
     “Total Revolving Outstandings”: As of any date of determination, the sum of (a) the aggregate unpaid principal balance of Revolving Loans outstanding on such date, (b) the Letter of Credit Outstandings, and (c) the aggregate amount of Unpaid Drawings on such date.
     “Unpaid Drawing”: As defined in Section 2.10.
     “Universal Electronics BV”: Universal Electronics, B.V., a corporation organized under the laws of the Netherlands.
     “U.S. Taxes”: As defined in Section 2.19 (e).
     Section 1.2. Accounting Terms and Calculations. Except as expressly provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP. To the extent any change in GAAP affects any computation or determination required to be made pursuant to this Agreement, such computation or determination shall be made as if such change in GAAP had not occurred unless the Borrower and the Bank agree in writing on an adjustment to such computation or determination to account for such change in GAAP.
     Section 1.3. Computation of Time Periods. In this Agreement, in the computation of a period of time from a specified date to a later specified date, unless

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otherwise stated the word “from” means “from and including” and the words “to” and “until” mean “to but excluding.”
     Section 1.4. Other Definitional Terms. The words “hereof,” “herein,” and “hereunder” and words of similar import when used in this Agreement refer to this Agreement as a whole and not to any particular provision hereof. References to sections, exhibits, and schedules and like references are to sections, exhibits, schedules, and the like of this Agreement unless otherwise provided. The words “include,” “includes,” and “including” shall be deemed to be followed by the phrase “without limitation.” Unless the context otherwise clearly requires, “or” has the inclusive meaning represented by the phrase “and/or.” All covenants, terms, definitions, or other provisions from other agreements incorporated by reference are incorporated into this Agreement as if fully set forth herein, and such incorporation shall include all necessary definitions and related provisions from such other agreements but only amendments thereto agreed to by the Bank, and shall survive any termination of such other agreements until the obligations of the Borrower under the Loan Documents are irrevocably paid in full, all Letters of Credit have expired without renewal or been returned to the Bank, and the Bank’s commitments to advance funds to the Borrower are terminated.
ARTICLE II.
TERMS OF THE CREDIT FACILITIES
Part A—Terms of Lending
     Section 2.1. The Revolving Commitments. On the terms and subject to the conditions hereof, the Bank agrees to make loans (the “Revolving Loans”) to the Borrower on a revolving basis at any time and from time to time from the Effective Date to the Termination Date, during which period the Borrower may borrow, repay, and reborrow in accordance with the provisions hereof, provided, that no Revolving Loan will be made in any amount that, after giving effect thereto, would cause the Total Revolving Outstandings to exceed the Revolving Commitment Amount. Revolving Loans may be obtained and maintained, at the election of the Borrower but subject to the limitations hereof, as Prime Rate Loans or LIBOR Rate Loans.
     Section 2.2. Procedure for Revolving Loans. Any request by the Borrower for a Revolving Loan shall be in writing or by telephone and shall be received by the Bank not later than 9:00 A.M. (Pacific time) two Banking Days prior to the requested Revolving Loan Date if the Revolving Loan (or any portion thereof) is requested as a LIBOR Rate Loan and not later than 12:00 P.M. (Pacific time) on the requested Revolving Loan Date if the Revolving Loan is requested as a Prime Rate Loan. Each request for a Revolving Loan hereunder shall be irrevocable and shall be deemed a representation by the Borrower that on the requested Revolving Loan Date and after giving effect to the requested Revolving Loan the applicable conditions specified in Article III have been and will be satisfied. Each request for a Revolving Loan hereunder shall specify (i) the requested Revolving Loan Date, (ii) the amount of the Revolving Loan to be made on such date, (iii) whether such Revolving Loan is to be funded as a Prime Rate Loan or a LIBOR Rate Loan (and, if such Revolving Loan is to be made with more than one applicable interest rate choice, the amount to which each interest rate choice is applicable), and (iv) in the case of a LIBOR Rate Loan, the duration of the initial Loan Period

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applicable thereto. The Bank may rely on any telephone request by the Borrower for a Revolving Loan hereunder that it believes in good faith to be genuine, and the Borrower hereby waives the right to dispute the Bank’s record of the terms of such telephone request. Unless the Bank determines that any applicable condition specified in Article III has not been satisfied, the Bank will make available to the Borrower at the Bank’s principal office in Newport Beach, California in Immediately Available Funds not later than 3:00 P.M. (Pacific time) on the requested Revolving Loan Date the amount of the requested Revolving Loan.
     Section 2.3. The Revolving Note. The Advances shall be evidenced by a single Revolving Note payable to the order of the Bank in a principal amount equal to the Revolving Commitment Amount. The Bank shall enter in its ledgers and records the amount of each Revolving Loan, including any conversion or continuation thereof, and the payments made thereon, and the Borrower authorizes the Bank to enter on a schedule attached to the Revolving Note a record of such Revolving Loans, Advances, and payments; provided, however that any failure by the Bank to make any such entry or any error in making such entry shall not limit or otherwise affect the obligation of the Borrower hereunder and on the Revolving Note, and, in all events, the principal amounts owing by the Borrower in respect of the Revolving Note shall be the aggregate amount of all Revolving Loans made by the Bank less all payments of principal thereof made by the Borrower.
     Section 2.4. Interest Rates; Conversions and Continuations; Etc.
     (a) Interest Rate Options. Interest on each Advance shall accrue at one of the following per annum rates selected by the Borrower: (i) upon notice to the Bank, the Applicable Margin plus the prime rate announced by the Bank from time to time (the “Prime Rate”), as and when such rate changes (a “Prime Rate Loan”); or (ii) upon a minimum of two Banking Days’ prior notice, the Applicable Margin plus the 1, 3, 6, or 12 month LIBOR rate quoted by the Bank from Reuters Screen LIBOR01 Page or any successor thereto (which shall be the LIBOR rate in effect two Banking Days prior to commencement of the advance), adjusted for any reserve requirement and any subsequent costs arising from a change in government regulation (a “LIBOR Rate Loan”), provided, however, that no Advance may be converted into or continued as a LIBOR Rate Loan if after giving effect to such conversion or continuation there would be more than 5 LIBOR Rate Loans outstanding.
     (b) Conversions and Continuations. In the event the Borrower does not timely select another interest rate option at least two Banking Days before the end of the Loan Period for a LIBOR Rate Loan, the Bank may at any time after the end of the Loan Period convert such LIBOR Rate Loan to a Prime Rate Loan, but until such conversion, the funds advanced under the LIBOR Rate Loan shall continue to accrue interest at the same rate as the interest rate in effect for such LIBOR Rate Loan prior to the end of the Loan Period. The term “Loan Period” means the period commencing on the advance date of the applicable LIBOR Rate Loan and ending on the numerically corresponding day 1, 3, 6, or 12 months thereafter matching the interest rate term selected by the Borrower; provided, that (a) if any Loan Period would otherwise end on a day that is not a Banking Day, then the Loan Period shall end on the next succeeding Banking Day unless the next succeeding Banking Day falls in another calendar month, in which case

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the Loan Period shall end on the immediately preceding Banking Day; or (b) if any Loan Period begins on the last Banking Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of the Loan Period), then the Loan Period shall end on the last Banking Day of the calendar month at the end of such Loan Period.
     (c) Limitations on LIBOR Rate Loans. No LIBOR Rate Loan may extend beyond the Termination Date. In any event, if the Loan Period for a LIBOR Rate Loan extends beyond the Termination Date, such LIBOR Rate Loan must be prepaid on the Termination Date. Notwithstanding anything to the contrary, the Bank’s internal records of applicable interest rates shall be determinative absent manifest error. Notwithstanding anything to the contrary, each LIBOR Rate Loan shall be in a minimum principal amount of $500,000.
     (d) Prepayment of LIBOR Rate Loans. If a LIBOR Rate Loan is prepaid prior to the end of the Loan Period for such Revolving Loan, whether voluntarily or because prepayment is required due to the relevant Revolving Loan maturing, acceleration of the relevant Revolving Loan upon an Event of Default, or otherwise, the Borrower shall pay all of the Bank’s costs, expenses, and Interest Differential (as determined by the Bank) incurred as a result of such prepayment. The term “Interest Differential” means the greater of zero and the financial loss incurred by the Bank resulting from prepayment, calculated as the difference between the amount of interest the Bank would have earned (from like investments in the Money Markets as of the first day of the LIBOR Rate Loan) had prepayment not occurred and the interest the Bank will actually earn (from like investments in the Money Markets as of the date of prepayment) as a result of the redeployment of funds from the prepayment. Because of the short-term nature of the Revolving Loan facilities, the Borrower agrees that the Interest Differential shall not be discounted to its present value. Any prepayment of a LIBOR Rate Loan shall be in an amount equal to the remaining entire principal balance of such Revolving Loan. The term “Money Markets” refers to one or more wholesale funding markets available to and selected by the Bank, including negotiable certificates of deposit, commercial paper, Eurodollar deposits, bank notes, federal funds, interest rate and swaps, or others.
     (e) Interest Upon Event of Default. Upon any Event of Default, each Advance shall, at the option of the Bank (or, in the case of an Event of Default under Sections 7.1(e), (f), or (g), automatically upon such Event of Default), bear interest until paid in full at the rate otherwise applicable thereto plus 5.0% per annum. Further, notwithstanding anything to the contrary in this Agreement, upon any Event of Default, at the Bank’s option (or, in the case of an Event of Default under Sections 7.1(e), (f), or (g), automatically upon such Event of Default), no Advance may be made, converted, or continued as a LIBOR Rate Loan.
     Section 2.5. Payment of Interest and Principal of Revolving Loans.
     (a) Interest shall be payable (i) with respect to each LIBOR Rate Loan and Prime Rate Loan, on the last day of each month, and (ii) with respect to all Advances, on

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the Termination Date; provided that interest under Section 2.4(e) shall be payable on demand.
     (b) Principal on the Revolving Loans is payable on the Termination Date.
     (c) The Bank is hereby authorized by the Borrower to charge on any day the depository accounts of the Borrower maintained with the Bank for any amount of accrued and unpaid interest or principal which is due and owing, unless such amount is being disputed in good faith in writing by the Borrower.
     Section 2.6. Optional Prepayments. The Borrower may prepay Prime Rate Advances, in whole or in part, at any time, without premium or penalty. Each partial prepayment shall be in a minimum amount of $500,000 or an integral multiple thereof. The Borrower may prepay LIBOR Rate Loans only if it pays any indemnities payable with respect to such Revolving Loans pursuant to Section 2.4(d). Amounts paid (unless following an acceleration or upon termination of the Revolving Commitment in whole) or prepaid on Advances under this section may be reborrowed upon the terms and subject to the conditions and limitations of this Agreement.
Part B—Terms of the Letter of Credit Facility
     Section 2.7. Letters of Credit. Upon the terms and subject to the conditions of this Agreement, the Bank agrees to issue commercial and standby Letters of Credit for the account of the Borrower from time to time between the Effective Date and the Termination Date in such amounts as the Borrower requests up to an aggregate amount at any time outstanding not exceeding the Revolving Commitment Amount; provided that no Letter of Credit will be issued in any amount that, after giving effect to such issuance, would cause (a) the Total Revolving Outstandings to exceed the Revolving Commitment Amount or (b) the Letter of Credit Outstandings with respect to standby Letters of Credit to exceed the Standby Letter of Credit Sublimit.
     Section 2.8. Procedures for Letters of Credit. The Borrower shall make each request for a Letter of Credit in writing by facsimile transmission, or electronic conveyance received by the Bank by 12:00 P.M. (Pacific time) on a Banking Day that is not less than three Banking Days before the requested date of issuance (which shall also be a Banking Day). Each request for a Letter of Credit shall be deemed a representation by the Borrower that on the date of issuance of such Letter of Credit and after giving effect thereto the applicable conditions specified in Article III have been and will be satisfied. The Bank may require that such request be made on such letter of credit application and reimbursement agreement form as the Bank from time to time specifies, along with satisfactory evidence of the authority and incumbency of the officials of the Borrower making such request.
     Section 2.9. Terms of Letters of Credit. Letters of Credit shall be issued in support of obligations of the Borrower or any Subsidiary, contingent or otherwise, and to finance the working capital and business needs of the Borrower or any Subsidiary. All Letters of Credit must expire not later than the Banking Day preceding the Revolving Commitment Ending Date. No standby Letter of Credit may have a term longer than 12 months.

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     Section 2.10. Agreement to Repay Letter of Credit Drawings. If the Bank has received documents purporting to draw under a Letter of Credit that the Bank believes conform to the requirements of such Letter of Credit, or if the Bank has decided that it will comply with the Borrower’s written or oral request or authorization to pay a drawing on any Letter of Credit that the Bank does not believe conforms to the requirements of the Letter of Credit, it will notify the Borrower of that fact. The Borrower shall reimburse the Bank by 10:00 A.M. (Pacific time) on the day on which such drawing is to be paid in Immediately Available Funds in an amount equal to the amount of such drawing. Any amount by which the Borrower has failed to reimburse the Bank for the full amount of such drawing by 10:00 A.M. (Pacific time) on the date on which the Bank in its notice indicated that it would pay such drawing, until reimbursed by the Borrower from the proceeds of Revolving Loans pursuant to Section 2.13 or out of funds available in the Holding Account, is an “Unpaid Drawing.” Unpaid Drawings shall bear interest at a rate equal to the sum of (a) the Applicable Margin for Prime Rate Loans plus (b) the Prime Rate plus (c) 5.0% per annum. Such interest shall be payable on demand.
     Section 2.11. Obligations Absolute. The Borrower’s obligation under Section 2.10 to repay the Bank for any amount drawn on any Letter of Credit and for any Revolving Loans made under Section 2.13 to cover Unpaid Drawings shall be absolute, unconditional, and irrevocable, shall continue so long as any Letter of Credit is outstanding notwithstanding any termination of this Agreement, and shall be paid strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including without limitation the following circumstances:
     (a) Any lack of validity or enforceability of any Letter of Credit;
     (b) The existence of any claim, setoff, defense, or other right that the Borrower has or claims at any time against any beneficiary, transferee, or holder of any Letter of Credit (or any Person for whom any such beneficiary, transferee, or holder is acting), the Bank, or any other Person, whether in connection with a Letter of Credit, this Agreement, the transactions contemplated hereby, or any unrelated transaction; or
     (c) Any statement or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid, or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever.
Neither the Bank nor its officers, directors, or employees shall be liable or responsible for, and the obligations of the Borrower to the Bank shall not be impaired by:
     (w) The use made of any Letter of Credit or any acts or omissions of any beneficiary, transferee, or holder thereof in connection therewith;
     (x) The validity, sufficiency, or genuineness of documents, or of any endorsements thereon, even if such documents or endorsements in fact prove to be in any or all respects invalid, insufficient, fraudulent, or forged;
     (y) The Bank’s acceptance of documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary; or

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     (z) Any other action of the Bank in making or failing to make payment under any Letter of Credit if in good faith and in conformity with U.S. or foreign laws, regulations, or customs applicable thereto.
Notwithstanding the foregoing, the Borrower shall have a claim against the Bank, and the Bank shall be liable to the Borrower, to the extent, but only to the extent, of any direct, as opposed to consequential, damages suffered by the Borrower that the Borrower proves were caused by the Bank’s willful misconduct or gross negligence in determining whether documents presented under any Letter of Credit comply with the terms thereof.
     Section 2.12. Outstanding Letters of Credit Following Event of Default. Upon a Default or Event of Default, the Borrower shall either (a) replace all outstanding Letters of Credit with letters of credit issued by another issuer acceptable to the respective beneficiaries of such Letters of Credit (whereupon such Letters of Credit shall be canceled), or (b) provide the Bank, as security for all outstanding Letters of Credit, with a cash collateral deposit in an amount that equals at least 110% of the Letter of Credit Outstandings at all times during the continuance of such Default or Event of Default. The Borrower hereby grants to the Bank a security interest in such cash collateral to secure all Obligations. The Bank will apply such cash collateral to the payment of drafts drawn under such Letters of Credit and customary costs and expenses charged or incurred by the Bank in connection therewith, and apply the unused portion thereof after all such Letters of Credit have expired or been fully drawn upon, if any, to repay other Obligations. After all such Letters of Credit have expired or been fully drawn upon, all Obligations have been paid in full in cash, and the Bank’s obligations hereunder have terminated, the balance, if any, of such cash collateral shall be returned to the Borrower. The Borrower shall execute and deliver to the Bank such further documents and instruments as the Bank requests to evidence the creation and perfection of the security interest in such cash collateral account.
Part C—General
     Section 2.13. Revolving Loans to Cover Unpaid Drawings. Whenever any Unpaid Drawing exists and there are not then funds in the Holding Account to cover the same, the Bank is authorized (and the Borrower does here so authorize the Bank) to, and shall, make a Revolving Loan (as a Prime Rate Loan) to the Borrower in an amount equal to the amount of the Unpaid Drawing. The Bank shall apply the proceeds of such Revolving Loan directly to reimburse itself for such Unpaid Drawing. If at the time the Bank makes a Revolving Loan pursuant to this section, the applicable conditions precedent specified in Article III have not been satisfied, the Borrower shall pay to the Bank interest on the funds so advanced at a floating rate per annum equal to the sum of (a) the Applicable Margin for Prime Rate Loans plus (b) the Prime Rate plus (c) 5.0% per annum.
     Section 2.14. Facility Fees and Letter of Credit Fees. Upon the Effective Date, the Borrower shall pay to the Bank a one-time facility fee in the amount of $2,500. For each Letter of Credit issued, the Borrower shall pay to the Bank a fee (a “Letter of Credit Fee”) equal to (a) in the case of each standby Letter of Credit, at all times such Letter of Credit is outstanding, an amount determined by multiplying the Applicable Margin for LIBOR Rate Loans by the original face amount of each such Letter of Credit determined on a per annum basis, payable on the date such Letter of Credit is issued, and (b) in the case of commercial Letters of Credit, the

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Bank’s standard fees as set forth on the Bank’s Commercial Letter of Credit Fee Schedule, as updated from time to time. In addition to the Letter of Credit Fees, the Borrower shall pay to the Bank, on demand, all issuance, amendment, drawing, and other fees regularly charged by the Bank to its letter of credit customers and all reasonable out-of-pocket expenses the Bank incurs in connection with the issuance, amendment, administration, or payment of any Letter of Credit.
     Section 2.15. Computation. Letter of Credit Fees and interest on Obligations shall be computed on the basis of actual days elapsed (or, in the case of Letter of Credit Fees that are paid in advance, actual days to elapse) and a year of 360 days.
     Section 2.16. Payments. Payments and prepayments of principal of, and interest on, the Revolving Note and all fees, expenses, and other obligations under this Agreement payable to the Bank shall be made without setoff or counterclaim in Immediately Available Funds not later than 1:00 P.M. (Pacific time) on the dates called for under the Loan Documents to the Bank at its main office in Newport Beach, California. Funds received after such time shall be deemed to have been received on the next Banking Day. Whenever any payment to be made under the Loan Documents is stated to be due on a day that is not a Banking Day, such payment shall be made on the next succeeding Banking Day, and such extension of time, in the case of a payment of principal, shall be included in the computation of any interest on such principal payment; provided, however, that if such extension would cause payment of interest on or principal of a LIBOR Rate Loan to be made in the next following calendar month, such payment shall be made on the next preceding Banking Day.
     Section 2.17. Revolving Commitment Ending Date. The “Revolving Commitment Ending Date” is October 31, 2011.
     Section 2.18. Use of Revolving Loan Proceeds. The Revolving Loans shall be used to (a) provide financing for the Borrower’s general corporate purposes, (b) support the issuance of commercial and standby Letters of Credit, and (c) provide temporary bridge financing for certain Permitted Acquisitions, in each case in a manner not in conflict with any of the Borrower’s covenants in this Agreement.
     Section 2.19. Taxes.
     (a) Any and all payments by the Borrower under the Loan Documents shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges, or withholdings, and all liabilities with respect thereto, excluding, in the case of the Bank, taxes imposed on its overall net income and franchise taxes imposed on it in lieu of net income taxes (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings, and liabilities in respect of payments under the Loan Documents being hereinafter referred to as “Taxes”).
     (b) The Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges, or similar levies that arise from any payment made under the Loan Documents or from the execution, delivery, or registration of, performing under, or otherwise with respect to the Loan Documents (hereinafter referred to as “Other Taxes”).

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     (c) The Borrower shall indemnify the Bank for the full amount of Taxes or Other Taxes imposed on or paid by the Bank and any penalties, interest, and expenses with respect thereto. Payments on this indemnification shall be made within 30 days from the date the Bank makes written demand therefor.
     (d) Within 30 days after the date of any payment of Taxes, the Borrower shall furnish to the Bank, at its address referred to on the signature page hereof, a certified copy of a receipt evidencing payment thereof. In the case of any payment under the Loan Documents by or on behalf of the Borrower through an account or branch outside the United States or by or on behalf of the Borrower by a payor that is not a United States person, if the Borrower determines that no Taxes are payable in respect thereof, the Borrower shall furnish or shall cause such payor to furnish to the Bank at such address an opinion of counsel reasonably acceptable to the Bank stating that such payment is exempt from Taxes. For purposes of this subsection (d), the terms “United States” and “United States person” have the meanings specified in § 7701 of the Code.
     (e) If the Borrower is required by law or regulation to make any deduction, withholding, or backup withholding of any taxes, levies, imposts, duties, fees, liabilities, or similar charges of the United States of America, any possession or territory of the United States of America (including the Commonwealth of Puerto Rico), or any area subject to the jurisdiction of the United States of America (“U.S. Taxes”) from any payments to the Bank pursuant to any Loan Document in respect of the Obligations payable to the Bank then or thereafter outstanding, the Borrower shall make such withholdings or deductions and pay the full amount withheld or deducted to the relevant taxation authority or other authority in accordance with applicable law.
ARTICLE III.
CONDITIONS PRECEDENT
     Section 3.1. Conditions of Initial Transaction. The making of the initial Revolving Loan and the issuance of the initial Letter of Credit shall be subject to the prior or simultaneous fulfillment of the following conditions:
     (a) Documents. The Bank shall have received the following:
     (i) The Revolving Note executed by a duly authorized officer (or officers) of the Borrower and dated the Effective Date.
     (ii) A certificate of a Secretary or Assistant Secretary of the Borrower dated of as the Effective Date and certifying as to the following:
  (A)   A copy of the Borrower’s corporate resolutions authorizing the execution, delivery, and performance of the Loan Documents;
 
  (B)   The incumbency, names, titles, and signatures of the Borrower’s officers authorized to execute the Loan Documents and to request Letters of Credit, Revolving

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      Loans, and conversions and continuations of Advances hereunder;
  (C)   A true and accurate copy of the Borrower’s Restated Certificate of Incorporation and all amendments thereto; and
 
  (D)   A true and accurate copy of the Borrower’s Amended and Restated Bylaws.
     (iii) A copy of the Borrower’s Restated Certificate of Incorporation with all amendments thereto, certified by the appropriate governmental official of the State of Delaware as of a date not more than 30 days prior to the Effective Date.
     (iv) Certificates of good standing for the Borrower in the States of Delaware and California certified by the appropriate governmental officials as of a date not more than 30 days prior to the Effective Date.
     (v) A certificate dated the Effective Date of the chief executive officer or chief financial officer of the Borrower certifying as to the matters set forth in Sections 3.2(a) and (b) below.
     (vi) ACORD 24 and 25 certificates of insurance with respect to each of the businesses and real properties of the Borrower and its Restricted Subsidiaries in such amounts and with such carriers as are reasonably acceptable to the Bank.
     (b) Opinion. The Borrower shall have requested Richard A. Firehammer, Jr., its Senior Vice President, General Counsel and Secretary, to prepare a written opinion, addressed to the Bank and dated the Effective Date, covering the matters set forth in Exhibit B, and such opinion shall have been delivered to the Bank.
     (c) Compliance. The Borrower shall have performed and complied with all agreements, terms, and conditions in this Agreement required to be performed or complied with by the Borrower prior to or simultaneously with the Effective Date.
     (d) Other Matters. All corporate and legal proceedings relating to the Borrower and all instruments and agreements in connection with the transactions contemplated by this Agreement shall be satisfactory in scope, form, and substance to the Bank and its counsel, and the Bank shall have received all information and copies of all documents, including records of corporate proceedings, as the Bank or its counsel reasonably has requested in connection therewith, such documents where appropriate to be certified by proper corporate or governmental authorities.
     (e) Fees and Expenses. The Bank shall have received all fees and other amounts due and payable by the Borrower on or prior to the Effective Date, including the facility fee described in Section 2.14 and the reasonable fees and expenses of counsel to the Bank payable pursuant to Section 8.2.

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Any one or more of the conditions set forth above that the Borrower has not satisfied on or before the date of disbursement of the initial Revolving Loan under this Agreement shall not be deemed permanently waived by the Bank unless the Bank waives the same in a writing that expressly states that the waiver is permanent, and in all cases in which the waiver is not stated to be permanent the Bank may at any later time insist upon compliance and satisfaction of any such condition as a condition to any subsequent Revolving Loan or Letter of Credit hereunder, and the Borrower’s failure to comply with any such condition within 5 Banking Days’ written notice from the Bank to the Borrower shall constitute an Event of Default under this Agreement.
     Section 3.2. Conditions Precedent to all Revolving Loans and Letters of Credit. The Bank’s obligation to make any Revolving Loan hereunder (including the initial Revolving Loan) or to issue any Letters of Credit (including the initial Letter of Credit) shall be subject to fulfillment of the following conditions:
     (a) Representations and Warranties. The representations and warranties in Article IV shall be true and correct on and as of the Effective Date and on the date of each Revolving Loan and the date of issuance of each Letter of Credit with the same force and effect as if made on such dates.
     (b) No Default. No Default or Event of Default shall have occurred on the Effective Date and on the date of each Revolving Loan and the date of issuance of each Letter of Credit or will exist after giving effect to each Revolving Loan made or Letter of Credit issued on such dates.
     (c) Notices and Requests. The Bank shall have received the Borrower’s request for such Revolving Loan as required under Section 2.2 or its application for such Letter of Credit specified under Section 2.8.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
     To induce the Bank to enter into this Agreement, to make Revolving Loans, and to issue Letters of Credit, the Borrower represents and warrants to the Bank:
     Section 4.1. Organization, Standing, Etc. The Borrower is a corporation duly incorporated, validly existing, and in good standing under the laws of the State of Delaware and has all requisite power and authority to carry on its business as now conducted, to enter into this Agreement, to issue the Revolving Note, and to perform its obligations under the Loan Documents. Each Restricted Subsidiary is duly organized, validly existing, and in good standing under the laws of the jurisdiction of its organization and has all requisite power and authority to carry on its business as now conducted. Each of the Borrower and the Restricted Subsidiaries (a) holds all certificates of authority, licenses, and permits necessary to carry on its business as presently conducted in each jurisdiction in which it is carrying on such business, except where the failure to hold such certificates, licenses, or permits could not constitute a Material Adverse Occurrence and (b) is duly qualified and in good standing as a foreign corporation (or other organization) in each jurisdiction in which the character of the properties it owns, leases, or operates or the business it conducts makes such qualification necessary and the failure so to

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qualify could permanently preclude the Borrower or such Restricted Subsidiary from enforcing its rights with respect to any assets or expose the Borrower to any Material Adverse Occurrence.
     Section 4.2. Authorization and Validity. The execution, delivery, and performance by the Borrower of the Loan Documents have been duly authorized by all necessary corporate action by the Borrower. This Agreement constitutes, and the Revolving Note when executed will constitute, the legal, valid, and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, subject to limitations as to enforceability that might result from bankruptcy, insolvency, moratorium, and other similar laws affecting creditors’ rights generally and subject to limitations on the availability of equitable remedies.
     Section 4.3. No Conflict; No Default. The Borrower’s execution, delivery, and performance of the Loan Documents will not (a) violate any provision of any law, statute, rule, or regulation or any order, writ, judgment, injunction, decree, determination, or award of any court, governmental agency, or arbitrator presently in effect applying to the Borrower, (b) violate or contravene any provision of the Borrower’s Restated Certificate of Incorporation or Amended and Restated Bylaws, or (c) result in a breach of or constitute a default under any indenture, loan or credit agreement, or other agreement, lease, or instrument to which the Borrower is a party or by which it or any of its properties may be bound or result in the creation of any Lien thereunder. Neither the Borrower nor any Restricted Subsidiary is in default under or in violation of any such law, statute, rule, regulation, order, writ, judgment, injunction, decree, determination, or award or any such indenture, loan or credit agreement, or other agreement, lease, or instrument in any case in which the consequences of such default or violation could constitute a Material Adverse Occurrence.
     Section 4.4. Government Consent. No order, consent, approval, license, authorization, or validation of, filing, recording, or registration with, or exemption by any governmental or public body or authority is required on the Borrower’s part to authorize, or is required in connection with, the execution, delivery, and performance of, or the legality, validity, binding effect, or enforceability of, the Loan Documents.
     Section 4.5. Financial Statements and Condition. The Borrower’s audited consolidated financial statements as at December 31, 2008, and its unaudited financial statements as at September 30, 2009, as heretofore furnished to the Bank, have been prepared in accordance with GAAP on a consistent basis (except for the absence of footnotes and subject to year-end audit adjustments as to the interim statements) and fairly present the financial condition of the Borrower and its Subsidiaries as at such dates and the results of their operations and changes in financial position for the respective periods then ended. As of the dates of such financial statements, neither the Borrower nor any Subsidiary had any material obligation, contingent liability, liability for taxes, or long-term lease obligation that is not reflected in such financial statements or in the notes thereto. Since September 30, 2009, there has been no Material Adverse Occurrence.
     Section 4.6. Litigation. Other than as set forth in the Borrower’s financial statements delivered pursuant to Section 4.5, there are no actions, suits, or proceedings pending or, to the Borrower’s knowledge, threatened against or affecting the Borrower, any Subsidiary, or any of their properties before any court or arbitrator or any governmental department, board, agency, or

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other instrumentality that, if determined adversely to the Borrower or any Subsidiary, could constitute a Material Adverse Occurrence, and there are no unsatisfied judgments against the Borrower or any Subsidiary the satisfaction or payment of which could constitute a Material Adverse Occurrence.
     Section 4.7. Environmental, Health and Safety Laws. There exists no violation by the Borrower or any Restricted Subsidiary of any applicable federal, state, or local law, rule or regulation, or order of any government, governmental department, board, agency, or other instrumentality relating to environmental, pollution, health, or safety matters that has imposed, will impose, or threatens to impose a material liability on the Borrower or a Restricted Subsidiary or that has required or would require a material expenditure by the Borrower or a Restricted Subsidiary to cure. Neither the Borrower nor any Restricted Subsidiary has received any notice to the effect that any part of its operations or properties is not in material compliance with any such law, rule, regulation, or order or notice that it or its property is the subject of any governmental investigation evaluating whether any remedial action is needed to respond to any release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could constitute a Material Adverse Occurrence. Except as set out on Schedule 4.7, the Borrower has no knowledge that it, its property, any Restricted Subsidiary, or any Restricted Subsidiary’s property will become subject to environmental laws or regulations during the term of this Agreement, compliance with which could require Capital Expenditures that could constitute a Material Adverse Occurrence.
     Section 4.8. ERISA. Each Plan is in substantial compliance with all applicable requirements of ERISA and the Code and with all material applicable rulings and regulations issued under the provisions of ERISA and the Code setting forth those requirements. No Reportable Event has occurred and is continuing with respect to any Plan. All of the minimum funding standards applicable to such Plans have been satisfied and there exists no event or condition that would reasonably be expected to result in the institution of proceedings to terminate any Plan under § 4042 of ERISA. With respect to each Plan subject to Title IV of ERISA, as of the most recent valuation date for such Plan, the present value (determined on the basis of reasonable assumptions employed by the independent actuary for such Plan and previously furnished in writing to the Bank) of such Plan’s projected benefit obligations did not exceed the fair market value of such Plan’s assets.
     Section 4.9. Federal Reserve Regulations. Neither the Borrower nor any Subsidiary is engaged principally or as one of its important activities in the business of extending credit for the purpose of purchasing or carrying margin stock (as defined in Regulation U of the Board). The value of all margin stock owned by the Borrower does not constitute more than 25% of the value of the assets of the Borrower.
     Section 4.10. Title to Property; Leases; Liens; Subordination. Each of the Borrower and its Restricted Subsidiaries has (a) good and marketable title to its real properties and (b) good and sufficient title to, or valid, subsisting, and enforceable leasehold interest in, its other material properties, including all real properties and other properties and assets referred to as owned by the Borrower or any of its Restricted Subsidiaries in the most recent financial statement referred to in Section 5.1 (other than property disposed of since the date of such financial statements in the ordinary course of business). None of such properties is subject to a Lien, except as allowed

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under Section 6.12. The Borrower has not subordinated any of its rights under any obligation owing to it to the rights of any other person.
     Section 4.11. Taxes. Each of the Borrower and the Subsidiaries has filed all federal, state, and local tax returns required to be filed and has paid or made provision for the payment of all taxes due and payable pursuant to such returns and pursuant to any assessments made against it or any of its property and all other taxes, fees, and other charges imposed on it or any of its property by any governmental authority (other than taxes, fees, or charges the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in accordance with GAAP have been provided on the books of the Borrower). No tax Liens have been filed and no material claims are being asserted with respect to any such taxes, fees, or charges. The charges, accruals, and reserves on the books of the Borrower in respect of taxes and other governmental charges are adequate, and the Borrower knows of no proposed material tax assessment against it or any Subsidiary or any basis therefor.
     Section 4.12. Trademarks; Patents. Each of the Borrower and the Restricted Subsidiaries possesses or has the right to use all of the patents, trademarks, trade names, service marks, and copyrights, and applications therefor, and all technology, know-how, processes, methods, and designs used in or necessary for the conduct of its business, without known conflict with the rights of others.
     Section 4.13. Burdensome Restrictions. Neither the Borrower nor any Restricted Subsidiary is a party to or otherwise bound by any indenture, loan or credit agreement, or lease or other agreement or instrument or subject to any charter, corporate, or partnership restriction that could constitute a Material Adverse Occurrence.
     Section 4.14. Force Majeure. Since the date of the most recent financial statement referred to in Section 5.1, the business, properties, and other assets of the Borrower and the Restricted Subsidiaries have not been materially and adversely affected in any way as the result of any fire or other casualty, strike, lockout, or other labor trouble, embargo, sabotage, confiscation, condemnation, riot, civil disturbance, activity of armed forces, or act of God.
     Section 4.15. Investment Company Act. Neither the Borrower nor any Subsidiary is an “investment company” or a company “controlled” by an investment company within the meaning of the Investment Company Act of 1940, as amended.
     Section 4.16. Retirement Benefits. Except as required under § 4980B of the Code, § 601 of ERISA, or applicable state law, the Borrower is not obligated to provide post-retirement medical or insurance benefits with respect to employees or former employees.
     Section 4.17. Full Disclosure. Subject to the following sentence, neither the financial statements referred to in Section 5.1 nor any other certificate, written statement, exhibit, or report furnished by or on behalf of the Borrower in connection with or pursuant to this Agreement contains any untrue statement of a material fact or omits any material fact necessary to make the statements therein not misleading. Certificates or statements furnished by or on behalf of the Borrower to the Bank consisting of projections or forecasts of future results or events have been prepared in good faith and based on good faith estimates and assumptions of the management of

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the Borrower, and the Borrower has no reason to believe that such projections or forecasts are not reasonable.
     Section 4.18. Subsidiaries. Schedule 4.18 sets forth as of the date of this Agreement a list of all Subsidiaries, the number and percentage of the shares of each class of Equity Interests owned beneficially or of record by the Borrower or any Subsidiary therein and the jurisdiction of incorporation of each Subsidiary, and designates whether such Subsidiary is a Restricted Subsidiary.
     Section 4.19. Labor Matters. There are no pending or threatened strikes, lockouts, or slowdowns against the Borrower or any Restricted Subsidiary. Neither the Borrower nor any Restricted Subsidiary has been or is in violation in any material respect of the Fair Labor Standards Act or any other applicable federal, state, local, or foreign law dealing with such matters. All payments due from the Borrower or any Restricted Subsidiary on account of wages and employee health and welfare insurance and other benefits (in each case, except for de minimis amounts) have been paid or accrued as a liability on the books of the Borrower or such Restricted Subsidiary. The consummation of the transactions contemplated under the Loan Documents will not give rise to any right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which the Borrower or any Restricted Subsidiary is bound.
     Section 4.20. Solvency. As of the Effective Date and after the making of any Revolving Loan and giving effect thereto, (a) the fair value of the assets of the Borrower will exceed its debts and liabilities, subordinated, contingent, or otherwise; (b) the present fair saleable value of the property of the Borrower will be greater than the amount that will be required to pay the probable liability of its debts and other liabilities, subordinated, contingent, or otherwise, as such debts and other liabilities become absolute and matured; (c) the Borrower will be able to pay its debts and liabilities, subordinated, contingent, or otherwise, as such debts and liabilities become absolute and matured; and (d) the Borrower will not have unreasonably small capital with which to conduct the business in which it is engaged as such business is proposed to be conducted following the Effective Date.
ARTICLE V.
AFFIRMATIVE COVENANTS
     Until any obligation of the Bank hereunder to make the Revolving Loans and to issue Letters of Credit has expired or terminated, the Revolving Note and all of the other Obligations have been paid in full, and all outstanding Letters of Credit have expired or the liability of the Bank thereon has otherwise been discharged, unless the Bank otherwise consents in writing:
     Section 5.1. Financial Statements and Reports. The Borrower will furnish to the Bank:
     (a) As soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, the consolidated financial statements of the Borrower and the Subsidiaries consisting of at least statements of income, cash flow, and changes in stockholders’ equity, and a consolidated balance sheet as at the end of such year, setting forth in each case in comparative form corresponding figures from the previous

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annual audit, certified without qualification by independent certified public accountants of recognized national standing selected by the Borrower and acceptable to the Bank, together with any management letters, management reports, or other supplementary comments or reports to the Borrower or its board of directors furnished by such accountants.
     (b) As soon as available and in any event within 60 days after the end of each fiscal quarter, unaudited consolidated statements of income, cash flow, and changes in stockholders’ equity for the Borrower and the Subsidiaries for such quarter and for the period from the beginning of such fiscal year to the end of such quarter, and a consolidated balance sheet of the Borrower as at the end of such quarter, setting forth in comparative form figures for the corresponding period for the preceding fiscal year, accompanied by a certificate signed by the chief financial officer of the Borrower stating that such financial statements present fairly the financial condition of the Borrower and the Subsidiaries and that the same have been prepared in accordance with GAAP (except for the absence of footnotes and subject to year-end audit adjustments as to the interim statements).
     (c) As soon as practicable and in any event within 60 days after the end of each fiscal quarter, a Compliance Certificate in the form of Exhibit C signed by the chief financial officer of the Borrower and demonstrating in reasonable detail compliance (or noncompliance, as the case may be) with Sections 5.14, 6.14, 6.15, and 6.16 as at the end of such quarter and stating that as at the end of such quarter there existed no Default or Event of Default or, if a Default or Event of Default existed, specifying the nature and period of existence thereof and what action the Borrower proposes to take with respect thereto.
     (d) As soon as practicable and in any event within 120 days after the beginning of each fiscal year of the Borrower, statements of forecasted consolidated income for the Borrower and the Subsidiaries on a quarterly basis in such fiscal year and a forecasted consolidated balance sheet of the Borrower and the Subsidiaries, together with supporting assumptions, as at the end of each fiscal quarter, all in reasonable detail and reasonably satisfactory in scope to the Bank.
     (e) As soon as practicable and in any event within 30 days after the beginning of each fiscal year of the Borrower ACORD 24 and 25 certificates of insurance with respect to each of the businesses and real properties of the Borrower and its Restricted Subsidiaries in such amounts and with such carriers as are reasonably acceptable to the Bank.
     (f) Immediately upon any officer of the Borrower becoming aware of any Default or Event of Default, a notice describing the nature thereof and what action the Borrower proposes to take with respect thereto.
     (g) Immediately upon any officer of the Borrower becoming aware of the occurrence, with respect to any Plan, of any Reportable Event or any Prohibited Transaction, a notice specifying the nature thereof and what action the Borrower

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proposes to take with respect thereto, and, when received, copies of any notice from PBGC of intention to terminate or have a trustee appointed for any Plan.
     (h) Immediately upon any officer of the Borrower becoming aware of any matter that has resulted or could result in a Material Adverse Occurrence, a notice from the Borrower describing the nature thereof and what action Borrower proposes to take with respect thereto.
     (i) Immediately upon any officer of the Borrower becoming aware of (i) the commencement of any action, suit, investigation, proceeding, or arbitration before any court or arbitrator or any governmental department, board, agency, or other instrumentality affecting the Borrower, any Subsidiary, or any property of such Person, or to which the Borrower or any Subsidiary is a party (other than litigation where insurance insures against the damages claimed and the insurer has assumed defense of the litigation without reservation), in each case in which an adverse determination or result could individually or in the aggregate constitute a Material Adverse Occurrence; or (ii) any adverse ruling that occurs in any litigation, arbitration, or governmental investigation or proceeding previously disclosed by the Borrower or any Subsidiary that, if determined adversely to the Borrower or a Subsidiary, could constitute a Material Adverse Occurrence, a notice from the Borrower describing the nature and status thereof and what action the Borrower proposes to take with respect thereto, to the extent such notice does not violate any confidentiality agreement, order of the court or breach any attorney-client privileged communication provided that the Borrower or such Subsidiary has undertaken good faith efforts to obtain consent to disclosure under such confidentiality agreement or court order and to prepare a disclosure which would not breach attorney-client privileged communication.
     (j) Promptly upon the mailing or filing thereof, copies of all financial statements, reports, and proxy statements mailed to the Borrower’s shareholders, and copies of all registration statements, periodic reports, and other documents filed with the Securities and Exchange Commission (or any successor thereto) or any national securities exchange.
     (k) From time to time, such other information regarding the business, operation, and financial condition of the Borrower and the Subsidiaries as the Bank reasonably requests.
     Section 5.2. Existence. The Borrower shall maintain, and cause each Restricted Subsidiary to maintain, its corporate existence in good standing under the laws of its jurisdiction of organization and its qualification to transact business in each jurisdiction where failure so to qualify would permanently preclude the Borrower or such Restricted Subsidiary from enforcing its rights with respect to any material asset or would expose the Borrower or such Restricted Subsidiary to any material liability; provided, however, that nothing herein shall prohibit the merger or liquidation of any Subsidiary allowed under Section 6.1.
     Section 5.3. Insurance. The Borrower shall maintain, and cause each Restricted Subsidiary to maintain, with financially sound and reputable insurance companies such insurance

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as is required by law and such other insurance in such amounts and against such hazards as is reasonably customary in the case of reputable firms engaged in the same or similar business and similarly situated.
     Section 5.4. Payment of Taxes and Claims. The Borrower shall file, and cause each Subsidiary to file, all tax returns and reports required by law to be filed by it and shall pay, and cause each Subsidiary to pay, before they become delinquent all taxes, assessments, and governmental charges and levies imposed upon it or its property and all claims or demands of any kind (including but not limited to those of suppliers, mechanics, carriers, warehouses, landlords, and other like Persons) that, if unpaid, might result in the creation of a Lien upon its property; provided that the foregoing items need not be paid if they are being contested in good faith by appropriate proceedings, as long as the Borrower’s or such Subsidiary’s title to its property is not materially adversely affected, its use of such property in the ordinary course of its business is not materially interfered with, and adequate reserves with respect thereto have been set aside on its books in accordance with GAAP.
     Section 5.5. Inspection. The Borrower shall permit any Person designated by the Bank to visit and inspect any of the properties, books, and financial records of the Borrower and the Subsidiaries, to examine and to make copies of the books of accounts and other financial records of the Borrower and the Subsidiaries, and to discuss the affairs, finances, and accounts of the Borrower and the Subsidiaries with, and to be advised as to the same by, its officers at such reasonable times and intervals as the Bank designates.
     Section 5.6. Maintenance of Properties. The Borrower shall maintain, and cause each Restricted Subsidiary to maintain, its properties used or useful in the conduct of its business in good condition, repair, and working order, and supplied with all necessary equipment, and make all necessary repairs, renewals, replacements, betterments, and improvements thereto, all as reasonably necessary for the business carried on in connection therewith to be properly and advantageously conducted at all times.
     Section 5.7. Books and Records. The Borrower shall keep, and cause each Subsidiary to keep, adequate and proper records and books of account in which full and correct entries will be made of its dealings, business, and affairs.
     Section 5.8. Compliance. The Borrower shall comply, and cause each Restricted Subsidiary to comply, in all material respects with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees, or awards to which it may be subject; provided, however, that failure so to comply shall not be a breach of this covenant if such failure could not constitute a Material Adverse Occurrence and the Borrower or such Restricted Subsidiary is acting in good faith and with reasonable dispatch to cure such noncompliance.
     Section 5.9. ERISA. The Borrower shall maintain, and cause each Subsidiary to maintain, each Plan in compliance with all material applicable requirements of ERISA and of the Code and with all applicable rulings and regulations issued under the provisions of ERISA and of the Code and shall not, and shall not permit any of the ERISA Affiliates to, (a) engage in any transaction in connection with which the Borrower or any of the ERISA Affiliates would be subject to either a civil penalty assessed pursuant to § 502(i) of ERISA or a tax imposed by

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§ 4975 of the Code, in either case in an amount exceeding $50,000, (b) fail to make full payment when due of all amounts that, under the provisions of any Plan, the Borrower or any ERISA Affiliate is required to pay as contributions thereto, or permit to exist any accumulated funding deficiency (as defined in § 302 of ERISA and § 412 of the Code), whether or not waived, with respect to any Plan in an aggregate amount exceeding $50,000, or (c) fail to make any payments in an aggregate amount exceeding $50,000 to any Multiemployer Plan that the Borrower or any of the ERISA Affiliates is required to make under any agreement relating to such Multiemployer Plan or any law pertaining thereto.
     Section 5.10. Environmental Matters; Reporting. The Borrower shall observe and comply with, and cause each Restricted Subsidiary to observe and comply with, all laws, rules, regulations, and orders of any government or government agency relating to health, safety, pollution, hazardous materials, or other environmental matters to the extent non-compliance could result in a material liability or otherwise constitute a Material Adverse Occurrence. The Borrower shall give the Bank prompt written notice of any violation as to any environmental matter by the Borrower or any Restricted Subsidiary and of the commencement of any judicial or administrative proceeding relating to health, safety, or environmental matters (a) in which an adverse determination or result could result in the revocation of or have a material adverse effect on any operating permits, air emission permits, water discharge permits, hazardous waste permits, or other permits held by the Borrower or any Restricted Subsidiary that are material to the operations of the Borrower or such Restricted Subsidiary, or (b) that will or threatens to impose a material liability on the Borrower or such Restricted Subsidiary to any Person or that will require a material expenditure by the Borrower or such Restricted Subsidiary to cure any alleged problem or violation.
     Section 5.11. Further Assurances. The Borrower shall promptly correct any defect or error that is discovered in any Loan Document or in the execution, acknowledgment, or recordation thereof. Promptly upon request by the Bank, the Borrower also shall, and shall cause each Restricted Subsidiary to, do, execute, acknowledge, deliver, record, re-record, file, re-file, register, and re-register such deeds, conveyances, mortgages, deeds of trust, trust deeds, assignments, estoppel certificates, financing statements and continuations thereof, notices of assignment, transfers, certificates, assurances, and other instruments as the Bank reasonably requires from time to time (a) to carry out more effectively the purposes of the Loan Documents; and (b) to better assure, convey, grant, assign, transfer, preserve, protect, and confirm unto the Bank the rights granted now or hereafter intended to be granted to the Bank under any Loan Document or under any other instrument executed in connection with any Loan Document or that the Borrower may be or become bound to convey, mortgage, or assign to the Bank to carry out the intention or facilitate the performance of the provisions of any Loan Document. The Borrower shall furnish to the Bank evidence satisfactory to the Bank of every such recording, filing, or registration.
     Section 5.12. Compliance with Terms of Material Contracts. The Borrower shall, and shall cause each Restricted Subsidiary to, make all payments and otherwise perform all obligations in respect of all material contracts to which the Borrower or any Restricted Subsidiary is a party.

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     Section 5.13. Maintenance of Bank Accounts. The Borrower shall maintain its primary United States borrowing, depository and treasury management relationships with the Bank.
     Section 5.14. Additional Restricted Subsidiaries
          In the event that upon (a) the delivery of a Compliance Certificate pursuant to Section 5.1(c) or (b) the completion of any transaction involving the Borrower or any of its Subsidiaries, including the formation or acquisition of any Subsidiary, the aggregate amount of the consolidated assets or aggregate EBITDA of the Borrower and the Restricted Subsidiaries existing as of the date for which such Compliance Certificate was prepared or upon giving effect to such transaction was, respectively, either less than (i) 70% of the aggregate amount of the consolidated assets of the Borrower and the Borrower’s Subsidiaries or (ii) 70% of the aggregate consolidated EBITDA of the Borrower and the Borrower’s Subsidiaries, then the Borrower shall, within 30 days thereafter, designate one or more additional Subsidiaries as Restricted Subsidiaries, and each such additional Restricted Subsidiary shall thereafter be a Restricted Subsidiary for all purposes under this Agreement.
ARTICLE VI.
NEGATIVE COVENANTS
     Until any obligation of the Bank hereunder to make the Revolving Loans and to issue Letters of Credit has expired or terminated, the Revolving Note and all of the other Obligations have been paid in full, and all outstanding Letters of Credit have expired or the liability of the Bank thereon has otherwise been discharged, unless the Bank otherwise consents in writing:
     Section 6.1. Merger. The Borrower shall not merge, consolidate, or enter into any analogous reorganization or transaction with any Person or liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution) nor permit any Restricted Subsidiary to do any of the foregoing; provided, however, any Subsidiary may be merged with or liquidated into the Borrower or any wholly-owned Subsidiary (if the Borrower or such wholly-owned Subsidiary is the surviving corporation) and after giving effect to such transaction, the Borrower complies with Section 5.14.
     Section 6.2. Disposition of Assets. The Borrower shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, sell, assign, lease, convey, transfer, or otherwise dispose of (whether in one transaction or a series of transactions) any property (including accounts and notes receivable, with or without recourse) or enter into any agreement to do any of the foregoing, except:
     (a) dispositions of inventory or used, worn-out, or surplus equipment and other equipment no longer useful in the business of the Borrower or a Restricted Subsidiary, in each case determined and disposed of in the ordinary course of business;
     (b) the sale of equipment to the extent that such equipment is exchanged for credit against the purchase price of similar replacement equipment, or the proceeds of

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such sale are applied with reasonable promptness to the purchase price of such replacement equipment; and
     (c) other dispositions of property during the term of this Agreement whose net book value in the aggregate does not exceed 10% of the Borrower’s total consolidated assets as shown on its balance sheet for its most recent prior fiscal quarter.
     Section 6.3. Plans. The Borrower shall not permit, and shall not allow any Subsidiary to permit, any event to occur or condition to exist that would permit any Plan to terminate under any circumstances that would cause the Lien provided for in § 4068 of ERISA to attach to any assets of the Borrower or any Subsidiary; and the Borrower shall not permit, as of the most recent valuation date for any Plan subject to Title IV of ERISA, the present value (determined on the basis of reasonable assumptions employed by the independent actuary for such Plan and previously furnished in writing to the Bank) of such Plan’s projected benefit obligations to exceed the fair market value of such Plan’s assets.
     Section 6.4. Change in Nature of Business. The Borrower shall not, and shall not permit any Restricted Subsidiary to, make any material change in the nature of the business of the Borrower or such Restricted Subsidiary, as carried on at the date hereof.
     Section 6.5. Negative Pledges; Subsidiary Restrictions. The Borrower shall not, and shall not permit any Subsidiary to, enter into any agreement, bond, note, or other instrument with or for the benefit of any Person other than the Bank that would (a) except in connection with Liens permitted under Section 6.12, prohibit the Borrower or such Subsidiary from granting, or otherwise limit the ability of the Borrower or such Subsidiary to grant, to the Bank any Lien on any assets or properties of the Borrower or such Subsidiary, or (b) require the Borrower or such Subsidiary to grant a Lien to any other Person if the Borrower or such Subsidiary grants any Lien to the Bank. The Borrower shall not permit any Subsidiary to place or allow any restriction, directly or indirectly, on the ability of such Subsidiary to (a) pay dividends or any distributions on or with respect to such Subsidiary’s capital stock or (b) make loans or other cash payments to the Borrower.
     Section 6.6. Restricted Payments. The Borrower shall not make any Restricted Payment if a Default or Event of Default has occurred or is continuing or a Default or Event of Default would exist after giving effect to the making of any such Restricted Payment immediately or by reference to pro forma compliance with under the most recent Compliance Certificate delivered by the Borrower pursuant to Section 5.1(c).
     Section 6.7. Transactions with Affiliates. The Borrower shall not, and shall permit any Restricted Subsidiary to, enter into any transaction with any Affiliate of the Borrower, except upon fair and reasonable terms no less favorable than the Borrower, or such Restricted Subsidiary, would obtain in a comparable arm’s-length transaction with a Person not an Affiliate.
     Section 6.8. Accounting Changes. The Borrower shall not, and shall not permit any Subsidiary to, make any significant change in accounting treatment or reporting practices, except as required by GAAP, or change its fiscal year or the fiscal year of any Subsidiary.

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     Section 6.9. Subordinated Debt. The Borrower shall not, and shall not permit any Restricted Subsidiary to, (a) make any scheduled payment of the principal of or interest on any Subordinated Debt that would be prohibited by the terms of such Subordinated Debt and any related subordination agreement; (b) directly or indirectly make any prepayment on or purchase, redeem, or defease any Subordinated Debt or offer to do so (whether such prepayment, purchase or redemption, or offer with respect thereto is voluntary or mandatory); (c) amend or cancel the subordination provisions applicable to any Subordinated Debt; (d) take or omit to take any action if as a result of such action or omission the subordination of such Subordinated Debt, or any part thereof, to the Obligations might be terminated, impaired, or adversely affected; or (e) omit to give the Bank prompt notice of any notice received from any holder of Subordinated Debt, or any trustee therefor, or of any default under any agreement or instrument relating to any Subordinated Debt by reason whereof such Subordinated Debt might become or be declared to be due or payable.
     Section 6.10. Investments. The Borrower shall not, and shall not permit any Restricted Subsidiary to, acquire for value, make, have, or hold any Investments, except:
     (a) Investments existing on the date of this Agreement identified on Schedule 6.10.
     (b) Investments in Subsidiaries after the date of this Agreement, whether through the formation or acquisition of such Subsidiaries, as long as the Borrower has complied with Section 5.14, no Default or Event of Default then exists or would occur as a result of any such Investment, and if any such Investment occurs through an Acquisition, such Acquisition is a Permitted Acquisition.
     (c) Investments in joint ventures, provided that no Default or Event of Default then exists or would occur as a result of any such Investment.
     (d) Travel advances to management personnel and employees in the ordinary course of business.