Universal Electronics Inc. 6101 Gateway Drive Cypress, CA 90630–4841 www.uei.com U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A R D e l i v e r i n g T h e C o n n e c t e d H o m e. U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t Seventeen years ago, Universal Electronics embarked on a mission: to simplify home technology by enabling users to easily control all devices within a single, universal inter face. Today, as the technology environment in the home becomes increasingly more diverse and complex, as new devices and content pour in from the consumer electronics, retail, subscription broadcasting and computing industries, our mission is more vital than ever. By providing the technology — the software, firmware and turnkey solutions that enable consumers to wirelessly connect, control and interact with a household full of dif ferent devices — and by investing in future technologies to control digital media in the home, we’re making the vision of the connected home a reality for millions of users the world over. C o n s u m e r E l e c t r o n i c s A m p l i f i e r C D P l a y e r D i g i t a l V i d e o R e c o r d e r D V D P l a y e r H i F i S t e r e o V C R H i g h D e f i n i t i o n T V H o m e T h e a t e r i n a B o x J P E G M P 3 V i d e o G a m e A m p l i f i e r C D P l a y e r D i g i t a l V i d e o R e c o r d e r D V D P l a y e r H i F i S t e r e o V C R H i g h D e f i n i t i o n T V H o m e T h e a t e r i n a B o x J P E G M P 3 V i d e o G a m e During the 2002 holiday season, 72% of American consumers set out to buy at least one consumer electr onics pr oduct — the hottest gift items being DVDs, digital TVs and digital cameras. 1 But once these new items are introduced into the home, how will they work with the devices that are already there? Will they be compatible and speak the same language? Will people be able to easily combine images from their new video and digital cameras and display them on their TVs — and do it all from the comfort of their living rooms? At Universal Electronics, we’re solving these problems by providing the intelligence inside personal computers, electronic devices, and wireless controllers — solutions that simplify access to, and control of, the growing complexity of devices in the home. We’re also addressing the issue of interoperability by designing products and licensing our connectivity software, covering nearly 150,000 device function codes, to companies around the world. 4 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 5 C a s e S t u d y 1 . C o n s u m e r E l e c t r o n i c s Hitachi Plasma TVs are state–of–the–ar t in consumer electronics. With their ALiS HDTV display technology and exclusive digital processing, they deliver the biggest, sharpest and brightest picture ever. In fact, in 2002, Hitachi’s 42” HDT20 Plasma TV was named Plasma Display of the Year by The Per fect Vision Magazine. There’s something else that makes Hitachi’s Plasma TVs extraordinary: the AV Control Center that ships with every set. The Center houses two tuners, audio circuitry, a digital video processor, and a UEI microcontroller chip with our unique embedded connectivity software. The intelligence provided by UEI’s chip enables unified on–screen control of the entire home enter tainment system — keeping the user’s center of attention where it should be: on the vivid, eye–popping display. Today’s home has become the hub for a complex collection of devices, each speaking a seemingly dif fer ent language. Universal Electr onics’ connectivity softwar e delivers the intelligence that facilitates accurate communication among these devices and pr ovides the critical links to digital media in the networked home. Bolster ed by a foundation of compr ehensive device codes, our connectivity softwar e is integrated into a gamut of home electr onics, including set–top boxes, high definition televisions, personal computers, watches, smar t displays, and personal digital assistants (PDA). So even if the technology inside dif fer ent devices causes them to speak dif fer ent languages, we pr ovide the universal translation. H i t a c h i P l a s m a 4 2 H D T 2 0 U E I ’ s I n t e l l i g e n c e I n s i d e R e t a i l C o m p u t e r D i g i t a l A u d i o S e r v e r D i g i t a l C a m e r a D V D R e c o r d e r J u k e b o x C D C h a n g e r M P E G P D A S t e r e o R e c e i v e r S u r r o u n d S p e a k e r s U n i v e r s a l R e m o t e C o n t r o l C o m p u t e r D i g i t a l A u d i o S e r v e r D i g i t a l C a m e r a D V D R e c o r d e r J u k e b o x C D C h a n g e r M P E G P D A S t e r e o R e c e i v e r S u r r o u n d S p e a k e r s U n i v e r s a l R e m o t e C o n t r o l The average U.S. household now has between 5 and 7 r emote devices. 2 In fact, 500 million of these pr oducts wer e shipped in 2002 alone. 3 As the number of remotes in the household continues to increase, consumers are ideally looking for the ability to control all their devices through a single, easy–to–use and intuitive interface. And Universal Electronics is answering the call. We’re cleaning up the cof fee table — eliminating the clutter created by excess devices and providing a unified control point for the home. With our proven exper tise in universal control technologies and patented innovations, no one is better equipped to deliver the promise of the connected home than Universal Electronics. 8 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 9 C a s e S t u d y 2 . R e t a i l ONE FOR ALL® products with our technology provide consumers with simple solutions for addressing the growing technical complexities within the home. Take Kameleon™, for example, which, since its debut in 2002, has drawn accolades from major publications worldwide. Kameleon–powered products intuitively illuminate only the active keys required by the par ticular device a user wants to control. Packed with patented technology like macro programmability, upgradeability, learning and favorite channel scan, Kameleon technology is quickly becoming the ideal solution for the complex home. At Universal Electr onics, we ar e r elentless in our dedication to r esear ch and development, and our R&D ef for ts have r esulted in br eakthr ough technology we not only integrate into our pr oducts but also license to other companies. The majority of our patents, 80, to be exact, focus on wir eless contr ol of electr onic devices and digital media for the home. In fact, over 40% of our patents have been generated during the last two years — r epr esenting a por tfolio of Intellectual Pr oper ty that continues to bring value to our customers and innovation to the end consumer. O N E F O R A L L K a m e l e o n R e s e a r c h / D e v e l o p m e n t / P a t e n t s S u b s c r i p t i o n B r o a d c a s t i n g A u d i o R e c e i v e r C a b l e / S a t e l l i t e R e c e i v e r C o m p u t e r D i g i t a l S e t – To p B o x H o m e T h e a t e r P a y – P e r – V i e w P e r s o n a l V i d e o R e c o r d i n g P l a s m a T V U n i v e r s a l R e m o t e C o n t r o l V i d e o – O n – D e m a n d A u d i o R e c e i v e r C a b l e / S a t e l l i t e R e c e i v e r C o m p u t e r D i g i t a l S e t – To p B o x H o m e T h e a t e r P a y – P e r – V i e w P e r s o n a l V i d e o R e c o r d i n g P l a s m a T V U n i v e r s a l R e m o t e C o n t r o l V i d e o – O n – D e m a n d Video–On–Demand (VOD) was available to 7 million households in 2002 and an estimated 37 million homes will generate r evenues of $2.8 billion by the end of 2006. 4 Today, cable and satellite companies deliver a vast array of digital offerings into the home — everything from news and spor ts to movies and music, not to mention services like Pay–Per–View and Video–On–Demand. Subscription broadcast service providers realize that to ensure these profitable on–demand services are utilized, the remote control they provide to customers needs to be the most used remote in the home. Therefore, our technology is critical — delivering universal control of all devices and patented features that increase the likelihood that the revenue–generating services will always be right in the consumer’s hand. 1 2 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 1 3 C a s e S t u d y 3 . S u b s c r i p t i o n B r o a d c a s t i n g Delivering innovative broadband services and content to more than 21 million customers, Comcast is one of the leading communications, media and enter tainment companies in the world. Providing basic cable, digital cable and high–speed Internet services, Comcast Cable is the company to look to first for the communications products and services that connect people to what’s impor tant in their lives. Par t of that vital connection centers on remote controls powered by UEI technology, that enable consumers to easily access all of Comcast’s services as well as other enter tainment devices in the home. For the past seven years, UEI has suppor ted Comcast’s ef for ts by providing tailored turnkey solutions that combine optimal quality, service and value. From key patented technologies that ensure upgradeability, increasing the lifespan of the remote to accommodate new services and devices, to award–winning industrial design that enhances the Comcast experience for customers. UEI’s exper tise ensures every user feels right at home with Comcast. Universal Electr onics’ custom and turnkey solutions addr ess the needs of our cable and satellite customers fr om initial concept to final pr oduct deliver y, no matter how specific their r equir ements or how sophisticated the content and ser vices they seek to pr ovide. A W A R D – W I N N I N G I N D U S T R I A L D E S I G N r esults in well–planned, er gonomic solutions. S O F T W A R E A N D E N G I N E E R I N G E X C E L L E N C E pr oduces functionally superior, r eliable technology. P R O D U C T I O N A N D O P E R A T I O N S E F F I C I E N C Y ensur es that our quality pr oducts arrive on time. At Universal Electr onics, we understand that the ultimate success of our customers’ pr oducts and ser vices depends on the end–users’ successful interaction with our of ferings. Content may be king, but the user still r ules in the connected home. C o m c a s t D i g i t a l C a b l e Tu r n k e y S o l u t i o n s C o m p u t i n g D i g i t a l M e d i a S t o r a g e H i g h D e f i n i t i o n T V J P E G M P 3 P l a y e r P e r s o n a l C o m p u t e r P D A S m a r t D i s p l a y S t r e a m i n g V i d e o S e r v e r S u r r o u n d S p e a k e r s D i g i t a l M e d i a S t o r a g e H i g h D e f i n i t i o n T V J P E G M P 3 P l a y e r P e r s o n a l C o m p u t e r P D A S m a r t D i s p l a y S t r e a m i n g V i d e o S e r v e r S u r r o u n d S p e a k e r s W i – F i Roughly 2 billion songs ar e traded online each month. 5 How can these vir tual soundtracks be accessed and played thr ough the home ster eo system without having to r ely on $10 speakers plugged into a PC? Personal computers have become so ubiquitous that people now wonder how they ever sur vived without them. Wireless broadband internet access is now being adopted with growing momentum, enabling users to download MP3 music files, share photos with family and friends, and network the home like never before. Clearly, the computing and consumer electronics industries are racing to provide innovative new ways to control and manage video and audio in the home. We are bridging the gap between these two industries with graphical control software and patents that unify the customer experience and deliver the connected home. 1 6 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 1 7 C a s e S t u d y 4 . C o m p u t i n g Hewlett–Packard has built a market leadership position in Pocket PC–based Personal Digital Assistants (PDA) by delivering products with sleek designs and innovative technology. HP has shipped millions of units and continues to set the standard in handheld innovation by identifying new ways to expand the functionality of its iPAQ Pocket PC line. With UEI’s advanced Nevo™ technology embedded in the h3900 and h5400 series of iPAQ Pocket PCs, each unit is equipped with consumer infrared capabilities and Nevo to transform it into a personalized control point — providing the visual inter face for home and of fice electronic devices. As Handheld Computing aptly puts it, “Nevo gets it right… it’s almost wor th buying a new iPAQ just to get this little program.” 6 A standard WLAN infrastructure, other Bluetooth–enabled devices, and a ser vice contract with a wireless air time provider may be required for applicable wireless communication. Wireless Internet use requires a separately purchased ser vice contract. Check with ser vice provider for availability and coverage in your area. Not all web content available. W ith innovative softwar e applications like Nevo™, UEI pr ovides companies such as HP, ViewSonic, Micr osoft and other leaders in the computing industr y with cutting–edge contr ol technology that transforms any display device into a sophisticated yet intuitive home contr ol. Making sense of the disparate technologies between the computing and home enter tainment envir onment is a critical step in delivering a tr uly connected home. Universal Electr onics is at the hear t of this pr ocess, ensuring that users enjoy the full benefits of today’s and tomorr ow’s digital technology. H e w l e t t – P a c k a r d i PA Q P o c k e t P C E m b e d d e d S o f t w a r e 1 8 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 1 9 To Our Shareholders & Friends 2002 was one of the most challenging years that Universal Electronics Inc. has faced. Though the global economy remained anemic, we strengthened our financial position, grew our technology base, and increased our customer reach. We also expanded to serve new industries. Over the past two years we have broadened our focus on developing technology for the home. This R&D effort led to significant and profitable new products we launched in 2002 — creating a new foundation for growth and profitability as we continue to expand our role in home technologies during 2003. Universal Electronics’ mission is to enable consumers to wirelessly connect, control, and interact with the increasingly complex home environment. We are committed to being at the forefront of home control — and looking back at 2002, we have succeeded. During times of economic uncer tainty, a company has to be smar t and savvy to stay ahead of customers’ needs while offering a compelling value proposition. Early in 2002, we renewed our commitment to leverage our patented technology, lead the industry in our core business, and expand our reach by penetrating additional markets for our technology, such as the computing industry. O U R P O S I T I O N I N O U R C O R E B U S I N E S S R E M A I N E D V E R Y S T R O N G . This is evidenced by our expanded relationships with Comcast and Cox and by the launch of Kameleon™. In addition, the 2002 Nevo™ product rollout positioned us squarely in the computing market. These accomplishments were realized in the most difficult macroeconomic environment our company has faced to date. We closed the year with a solid customer base, a superior product line and a strong balance sheet, and we look forward to continuing our progress in these areas in the future. This expanded role in the home has positioned the Company as a critical technology provider to the Consumer Electronics, Subscription Broadcasting, Retail, and Computing industries. This year’s annual repor t describes not only what we are doing for companies in these industries today, but also the Company’s vision for the “Connected Home”. UEI posted revenues of $103.9 million, and fully diluted earnings per share of $0.42. We ended 2002 with $40.6 million in cash and short–term investments on our balance sheet, an 18% increase over last year. The Company generated $16.2 million in operating cash flow during the year before purchasing 585,000 treasury shares at a total cost of $5.3 million. In addition, days sales outstanding 2 0 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 2 1 improved by 12 days to 79 days. We consider the strong state of our balance sheet and operating cash flow to be key to UEI’s long–term growth strategy, positioning us well for future revenue and profit growth. O U R F O U N D A T I O N S U P P O R T S F U T U R E G R O W T H A N D P R O F I T A B I L I T Y . As digital media enters the mainstream, the purchase and use of new digital technologies like MP3 and hard disk recorders are increasing exponentially in households nationwide. Most exper ts believe this is only the beginning of the digital wave. To ensure we are ahead of the competition when the eco– nomic recovery begins, we continued to target new markets and invest in new products in 2002. New product development remains a cornerstone of UEI’s long–term growth strategy. And we are very excited about two significant new product platforms we launched this past year: Kameleon and Nevo. O U R T E C H N O L O G Y I S R E V O L U T I O N I Z I N G T H E I N D U S T R Y . Kameleon, our revolutionary display technology, utilizes intelligent illumination that intuitively changes the display interface to reflect the user’s enter tain– ment choice — whether he is listening to music, enjoying the home theater or watching TV. Consumers using Kameleon–powered products enjoy simplified interaction with their entertainment devices through an easy–to–use, graphical, touch display that shows only the relevant functional keys for each device. Our One For All” brand has successfully launched Kameleon with the leading retailers in Europe and, in the U.S., RadioShack recently selected Kameleon to power its next–generation universal remote control offering. W E S U C C E S S F U L L Y P E N E T R A T E D T H E C O M P U T I N G I N D U S T R Y . Today, as consumers embrace digital media at an unprecedented rate and computing technology is beginning to revolutionize home enter tainment, UEI is bridging the gap between home computing and home enter tainment. Our embedded software solution, Nevo, transforms any electronic display into a sophisticated yet easy–to–use wireless home control and automation device — expanding the possibilities of what users can do with their computing devices. Nevo’s simplified and integrated graphical touch–screen inter face, which focuses on enhancing enjoyment of the enter tainment experience, marks a pivotal step in realizing our vision of the truly connected home. UEI’s advanced technology has attracted some major players in the computing industry and added them to our customer roster in 2002. ViewSonic is integrating our Nevo technology into its airpanel™ V110 and V150 Smart Displays; HP is embedding Nevo into its new iPAQ Pocket PC H3900 and H5400 series of PDAs, enabling these handhelds to connect, control and interact with 20 categories of home and office devices; Microsoft selected UEI technology as the “intelligence inside” its Windows XP Media Center edition; and Intel has adopted Nevo for integration into its reference design for Microsoft’s Windows CE for Smart Displays. O U R V I S I O N F O R T H E F U T U R E L E V E R A G E S O U R C O M P E T I T I V E A D V A N T A G E S . Over the past year, our ef for ts to strengthen our balance sheet and our in– troduction of new strategic technologies have strongly positioned us for sustainable long–term growth. Our new relationships with HP, Intel, Microsoft, and ViewSonic — and our expanding relationships with Cox, Comcast and 2 2 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t other core customers — have demonstrated the strength of our new products and the promise they bring. But most important, they demonstrate our tenacity to succeed in the face of challenge. Look for continued progress as new technology and products begin to represent more and more of our revenue base. Despite continuing economic uncertainty, our mission has not changed. As tech– nology in the consumer electronics, cable and satellite, and computing industries continue to proliferate and converge — and users look for ways to simplify and enjoy their lives through the use of technology — we will be the company that makes the vision of the connected home a reality. In closing, I want to thank our board of directors, executive management team, dedicated employees, worldwide partners and shareholders for your continued support in helping us realize this vision. Sincerely, P A U L A R L I N G Chairman & Chief Executive Officer C h a i r m a n & C h i e f E x e c u t i v e O f f i c e r P r e s i d e n t & C h i e f O p e r a t i n g O f f i c e r P a u l A r l i n g R o b e r t L i l l e n e s s D e l i v e r i n g T h e C o n n e c t e d H o m e 2 5 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 “Universal” and the “Company” refer to Universal Electronics Inc. and its subsidiaries unless the context indicates to the contrary. Universal builds and markets pre–programmed, easy–to–use wireless control devices and chips principally for home enter tainment equipment and the subscription broadcasting market. Universal’s product lines include wireless interface technologies, such as combination keyboard/remotes and touch–screen remotes. Universal licenses its patented technologies and database of infrared (“IR”) codes to companies selling into the cable and satellite industries and to original equipment manufacturers (“OEMs”). The Company also develops wireless control inter face software for electronic display devices primarily for sale to companies in the computing industry. Universal also sells its universal wireless control products to distributors and retailers in Europe, Asia, Latin America and Australia under the One For All ® brand name. Call center suppor t services are also offered to Universal’s customers. To learn more, visit Universal’s web site at www.uei.com. G E N E R A L B U S I N E S S I N F O R M A T I O N Universal has developed a broad line of easy–to–use, preprogrammed universal wireless control products which are marketed principally for home video and audio enter tainment equipment through various channels of distribution, including international retail, private label, OEMs, and cable and satellite service providers and more recently to companies in the computing industry. Universal believes that its universal wireless controls can operate virtually all infrared remote controlled TV’s, VCR’s, DVD players, cable converters, CD players, audio components and satellite receivers, as well as most other infrared remote controlled devices worldwide. Universal also believes its wireless control products incorporate cer tain significant technological advantages. First, beginning in 1986 and continuing today, Universal has compiled an extensive library of over 143,000 IR codes that cover nearly 118,000 individual device functions and over 1,800 individual consumer electronic equipment brand names. Universal believes its database of IR codes is larger than any other existing library of IR codes for the operation of home video and audio devices sold worldwide. Universal’s library is 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 to ensure the accuracy and integrity of the database. Second, Universal’s proprietary software and know–how permit IR codes to be compressed before being loaded into a Read Only Memory (“ROM”), Random Access Memory (“RAM”) or an electronically erasable programmable ROM (“E2”) chip. This provides significant cost and space efficiencies that enable Universal to include more codes and features in the limited memory space of the chip than are included in similarly priced products of competitors. Third, Universal has developed a patented technology that provides the capability to easily upgrade the memory of the remote control by adding IR codes from its library that were not originally included. This technology utilizes both RAM and E2 chip technologies. P R O D U C T S Universal introduced its first product, the One For All, in 1987. Universal’s family of products includes universal standard and touch screen remote controls, wireless keyboards, antennas, joysticks and other gaming devices, custom and customizable chips that include Universal’s library of IR codes and proprietary software, and licensing of Universal’s library of IR codes and proprietary software. These products cover a broad spectrum of suggested prices and performance capabilities. Universal sells its customized products to international retailers and distributors, consumer electronic accessory suppliers, private label customers, OEMs, cable operators and satellite service providers for resale under the One For All® brand name and/or their respective brand names. Universal’s products are capable of controlling up to twenty video and audio devices, including, but not limited to, TVs, VCRs, DVD players, cable converters, CD players, satellite receivers, laser disc players, amplifiers, tuners, turntables, cassette players, digital audio tape players, and surround sound systems. F i n a n c i a l C o n t e n t s 25 Business of Universal Electronics Inc. 27 Five Year Selected Financial Data 28 Management’s Discussion & Analysis of Financial Condition and Results of Operations 40 Consolidated Balance Sheets 41 Consolidated Income Statements 42 Consolidated Statements of Stockholders’ Equity 44 Consolidated Statements of Cash Flows 45 Notes to Consolidated Financial Statements 59 Repor t of Independent Accountants 60 Corporate Information/Directors and Of ficers 2 6 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 2 7 Each of Universal’s wireless control devices is designed to simplify the use of video and audio devices. To appeal to the mass market, the number of buttons is minimized to include only what Universal believes to be the most popular functions. Universal’s remotes are also designed for ease of initial set–up. For most of Universal’s products, the consumer simply inputs a three or four–digit code for each video or audio device to be controlled. Each remote contains a RAM, a ROM, or a combination of ROM and E2 chips. The RAM and the ROM and E2 combination products allow the remote to be upgraded with additional codes, one of Universal’s patented features. Another patented ease of use feature Universal offers in several of its universal remote controls is its user programmable macro key. This feature allows the user to program a sequence of commands onto a single key, to be played back each time that key is subsequently pressed. Many of Universal’s products include its patented upgradeability feature. This feature provides the user with the capability to easily upgrade the memory of the remote control by adding codes from its library that were not originally included within the product. Each of these products utilizes the E2 chip technology and also retains memory while changing batteries which eliminates the inconvenience experienced by consumers of having to set up the remote control each time the batteries are changed. By providing its wireless control technology in many forms, including finished products and integrated circuits on which Universal’s software is embedded, Universal can meet the needs of its customers, enabling those who manufacture or subcontract their manufacturing requirements to use existing sources of supply and more easily incorporate Universal’s technology. During 2002, Universal launched two new technologies, the Nevo™ technology, an embedded solution that transforms an electronic display (such as Compaq’s iPaq Pocket PC) into a sophisticated and easy–to–use wireless home control and automation device, and the Kameleon™ interface technology, a revolutionary display technology that provides ease of use by illuminating only active keys needed to control each entertainment device. In addition, Universal’s products are easily customized to include the features that are important to customers. These include, but are not limited to, keys to control electronic program guides, one–button VCR record keys, customized macro set–up keys, and/or other features. E N G I N E E R I N G , R E S E A R C H A N D D E V E L O P M E N T During 2002, Universal’s engineering efforts focused on modifying existing products and technology to improve their features and lower their costs, and to develop measures to protect the Company’s proprietary technology and general know–how. Universal continues to regularly update its library of IR codes to include IR codes for features and devices newly introduced both in the United States and internationally. Universal’s library contains 143,000 IR data codes, an increase from just over 118,000 data codes in 2001. Universal also continues to explore ways to improve its software to preprogram more codes into its memory chips and to simplify the upgrading of its wireless control products. Also during 2002, Universal’s research and development efforts related to new and innovative wireless control devices with enhanced capabilities, as well as new applications of wireless control technology, resulted in the launch of its Nevo technology and Kameleon interface technology. Universal is also exploring various oppor tunities to supply wireless control devices for the operation of additional electronic and other devices in the home using IR signals, as well as combinations of infrared signals, radio frequencies, household electrical circuits, and telephone lines and cable communication. Company 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 Selected Consolidated Financial Data Year Ended December 31, (in thousands, except per share data) 2002 2001 2000 1999 1998 Net sales Operating income Net income Earnings per share: Basic Diluted Shares used in calculating earnings per share: Basic Diluted Gross margin Operating margin Selling, general and administrative expenses as a percentage of sales Net income as a percentage of sales Return on average assets Working capital Ratio of current assets to current liabilities Total assets Cash and cash equivalents Shor t–term investments Shor t–term debt Long–term debt Stockholders’ equity Book value per share (a) Ratio of liabilities to liabilities and stockholders’ equity $ $ $ $ $ $ $ $ $ $ $ $ 103,891 6,981 5,939 0.43 0.42 13,790 14,163 40.1% 6.7% 33.4% 5.7% 6.1% 71,457 5.3 100,016 18,064 22,500 — 41 83,237 6.17 16.8% $ $ $ $ $ $ $ $ $ $ $ $ 119,030 16,009 11,286 0.82 0.78 13,844 14,523 41.2% 13.4% 27.8% 9.5% 12.0% 67,422 5.5 94,705 14,170 20,100 — 104 79,702 5.78 15.8% $ $ $ $ $ $ $ $ $ $ $ $ 124,740 18,242 11,601 0.84 0.78 13,743 14,941 41.3% 14.6% 26.7% 9.3% 13.9% 58,323 3.5 93,766 9,309 11,500 — 163 70,353 5.10 25.0% $ $ $ $ $ $ $ $ $ $ $ 105,091 12,968 7,740 0.58 0.55 13,312 14,126 41.3% 12.4% 28.9% 7.4% 11.5% 45,506 4.0 73,751 13,286 — $ $ $ $ $ $ $ $ 96,123 9,505 5,638 0.44 0.43 12,772 13,200 37.7% 9.9% 27.8% 5.9% 9.3% 26,921 2.7 60,677 1,489 — — $ 4,786 240 58,511 4.28 20.7% $ $ — 44,532 3.48 26.6% (a) Book value per share is defined as stockholders’ equity divided by common shares outstanding. A factor that affected the comparability of information between 2002 and 2001 was our implementation of Statement of Financial Standards (“SFAS”) No. 142 on January 1, 2002, which requires that goodwill no longer be amor tized. that any of the Company’s research and development projects will be successfully completed. Universal’s common stock trades on the National Market of The NASDAQ Stock Market under the symbol “UEIC”. Universal’s engineering, research and development depar tments, located in Cypress, California, had approximately 75 full–time employees at December 31, 2002. Universal’s expenditures on engineering, research and development in 2002, 2001, and 2000 were $5.9, $5.6, and $4.5 million, respectively, of which approximately $4.5, $4.2, and $3.3 million, respectively, were for research and development. The following table sets for th, for the periods indicated, the high and low repor ted sale prices for Universal’s common stock, as repor ted on the National Market of The NASDAQ Stock Market: First Quar ter Second Quar ter Third Quar ter Four th Quar ter High 2002 Low High 2001 Low $ 16.7000 $ 13.9300 $ 21.1250 $ 13.5312 18.2300 15.0800 10.4700 14.1500 8.8000 6.7300 23.7500 18.1000 18.0000 15.2600 12.7500 14.0000 Stockholders of record on February 28, 2003 numbered approximately 122. Universal has never paid cash dividends on its common stock and does not intend to pay cash dividends on its common stock in the foreseeable future. Universal intends to retain its earnings, if any, for the future operation and expansion of its business. In addition, the terms of Universal’s revolving credit facility limit the Company’s ability to pay cash dividends on its common stock. See “Managements’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” and “Notes to Consolidated Financial Statements – Note 7.” 2 8 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 2 9 Management’s Discussion and Analysis of Financial Condition and Results of Operations Revenue Recognition. We recognize revenue on the sale of products when title and risk of loss have passed to the customer, there is pervasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectibility is reasonably assured. For the majority of our sales, recognition occurs when products are shipped. We also license our patented technologies and database of infrared codes. We record license revenue when our customers ship products incorporating our technologies and database, provided collection of such revenue is reasonably assured. In addition, we generate service revenues as a result of providing consumer support programs, through our call center, to various universal remote control marketers. These service revenues are recognized when earned. We record a provision for estimated sales returns and allowances on product sales in the same period as the related revenues are recorded. These estimates are based We build and market pre–programmed, easy–to–use wireless control devices and chips principally for home entertainment equipment and the on historical sales returns, analysis of credit memo data and other known factors. If the data we use to calculate these estimates do not properly subscription broadcasting market. We also develop wireless control interface software for electronic display devices sold by companies in the estimate returns and sales allowances, revenue could be overstated. computing industry. Our product lines include such wireless interface technologies as combination keyboard/remotes and touch–screen remotes. We sell our wireless control products and license our patented technologies and database of IR codes to companies selling into the cable and Accounts Receivable. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make satellite industries and to original equipment manufacturers. We also sell our universal wireless control products to distributors and retailers required payments. We specifically analyze accounts receivables and historical bad debts, customer credit, current economic trends and changes in Europe, Asia, Latin America and Australia under the One For All® brand name. We also offer call center support services to our customers. in customer payment trends when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The matters discussed in this Annual Report should be read in conjunction with the consolidated financial statements provided in this Annual Report. Certain statements contained herein may constitute forward–looking statements within the meaning of the Private Securities Litigation Inventories. Inventories consist of wireless control devices, including universal remote controls, wireless keyboards, antennas, and related component Reform Act of 1995. These statements involve a number of risks, uncer tainties and other factors that could cause actual results to differ par ts and are valued at the lower of cost or market. Cost is determined using the first–in, first–out method. We write down our inventory for materially, as discussed more fully herein. estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by Among the factors that could cause actual results to differ materially from those expressed herein are the following: the failure of our markets management, additional inventory write–downs may be required. 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 effect a war or terrorist activities may have on the Company or the economy; Valuation of long–lived assets and other intangible assets. We assess the impairment of long–lived assets and other intangible assets whenever the economic environment’s effect on us and our customers; the growth of, acceptance of and the demand for our products and technologies events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered impor tant which could trigger in various markets and geographical regions, including cable, satellite, consumer electronics, retail and interactive TV and home automation, an impairment review include the following: (1) significant underper formance relative to expected historical or projected future operating not materializing as we believed; our inability to add profitable complementary products which are accepted by the marketplace; our inability results; (2) significant changes in the manner of our use of the acquired assets or strategy for our overall business; (3) significant negative to continue to maintain our operating costs at acceptable levels through our cost containment efforts; our realization of tax benefits from various industry or economic trends; (4) significant decline in our stock price for a sustained period; and (5) our market capitalization relative to net tax projects initiated from time to time; the continued strength of our balance sheet; our inability to continue selling our products or licensing book value. When we determine that the carrying value may not be recoverable based upon the existence of one or more of the above indicators our technologies at higher or profitable margins throughout 2003 and beyond; the failure of the various markets and industries to grow or of impairment, and based on the carrying value of the asset being less than the undiscounted cash flows, we measure an impairment based emerge as rapidly or as successfully as we believed; the continued growth of the digital market; our inability to obtain orders or maintain our on the projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent order volume with new and existing customers; the possible dilutive effect our stock option program may have on our earnings per share and in our current business model. In assessing the recoverability, we must make assumptions regarding estimated future cash flows and other stock price; our inability to continue to obtain adequate quantities of component par ts or secure adequate factory production capacity on a factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be timely basis; and other factors listed from time to time in our press releases and filings with the Securities and Exchange Commission. required to record impairment charges for these assets not previously recorded. In addition, more information about risk factors that could affect our business and financial results is included in the section entitled “Factors In October 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.144, That May Affect Financial Condition and Future Results” in this Annual Repor t. “Accounting for the Impairment or Disposal of Long–Lived Assets. SFAS No. 144, which we adopted on January 1, 2002, establishing standards for per forming cer tain tests of impairment on long–lived assets. The adoption of SFAS No. 144 did not have a material effect on our financial C R I T I C A L A C C O U N T I N G P O L I C I E S A N D E S T I M A T E S position or results of operations. The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial Goodwill. In accordance with SFAS No. 142, we ceased amor tization on approximately $3.0 million of net unamor tized goodwill beginning statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, January 1, 2002. We recorded approximately $565,000 of amor tization during 2001 and would have recorded approximately $565,000 of and related disclosure of contingent assets and liabilities. On an on–going basis, we evaluate our estimates and judgments, including those amortization during 2002. We performed an initial impairment review of our goodwill on January 1, 2002, conducted an annual impairment review related to revenue recognition, allowance for sales returns and doubtful accounts, inventories, valuation of long–lived assets, intangible assets as of December 31, 2002 and will per form an annual review in subsequent years. In per forming the initial impairment review, we identified our and goodwill, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable repor ting units and determined the carrying value of each repor ting unit by assigning assets and liabilities, including the existing goodwill, under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are to those repor ting units as of January 1, 2002. We then determined the fair value of each repor ting unit using the present value of expected not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. future cash flows and compared it to the repor ting unit’s carrying amount. Based on this analysis, we determined that each repor ting unit’s fair value exceeded its carrying amount, and therefore concluded that there was no indication of a transitional impairment loss. As further mandated We believe the following critical accounting policies af fect our more significant judgments and estimates used in the preparation of our by SFAS No. 142, we per formed an annual impairment test of our goodwill as of December 31, 2002, using the same methodology employed consolidated financial statements. for the initial impairment review of our goodwill, and determined that there was no indication of an impairment loss. 3 0 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 3 1 Income Taxes. Income tax expense includes U.S. and international income taxes. The carrying value of our net deferred tax assets assumes that Delivery and freight expenses increased $1.1 million, from $2.2 million in 2001 to $3.3 million in 2002, as a result of increased air shipments as we will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates well as increased fees and surcharges as a result of the port shutdowns in the western United States. Professional service fees increased from $1.0 and related assumptions change in the future, we may be required to record valuation allowances against the deferred tax assets resulting in million in 2001 to $1.5 million in 2002 due to an increase in fees for various tax planning projects. As a percentage of net sales, selling, general and additional income tax expense in the Company’s consolidated income statements. We evaluate the realizability of the deferred tax assets quarterly administrative expense was 33.3% in 2002 compared to 27.8% in 2001. and assess the need for valuation allowances quarterly. In the event that we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the net deferred tax asset would be charged to income in the period such determination was made. Interest income decreased by $392,000 in 2002 to $595,000 as compared to $987,000 in 2001 due to a decrease in interest earned on cash balances and shor t– term investments in 2002. R E S U L T S O F O P E R A T I O N S The following table sets forth the statement of operations data of Universal expressed as a percentage of net sales for the periods indicated. Other income increased by $92,000 to $239,000 in 2002 compared to $147,000 in 2001 primarily due to the settlement of patent infringement Year Ended December 31, 2002 2001 2000 suits totaling $163,000. 100.0% 100.0% 100.0% We recorded income tax expense of $1.9 million for 2002 compared to $5.9 million for 2001. The decrease is a result of lower pretax income and a reduction in tax expense of approximately $0.5 million due to the benefit recorded for research and development credits. Our effective Net sales Cost of sales Gross profit Selling, general and administrative expenses Operating income Interest income, net Other income, net Income before income taxes Provision for income taxes Net income 59.9 40.1 33.4 6.7 (0.6) (0.2) 7.5 1.8 5.7% 58.8 41.2 27.8 13.4 (0.8) (0.2) 14.4 4.9 9.5% 58.7 41.3 26.7 14.6 (0.8) (0.4) 15.8 6.5 9.3% Y E A R E N D E D D E C E M B E R 3 1 , 2 0 0 2 C O M P A R E D T O Y E A R E N D E D D E C E M B E R 3 1 , 2 0 0 1 Net sales for the twelve months ended December 31, 2002 were $103.9 million, a decrease of 12.7% over the net sales of $119.0 million for the same period last year. Net income for 2002 was $5.9 million or $0.43 per share (basic) and $0.42 per share (diluted) compared to $11.3 million or $0.82 per share (basic) and $0.78 per share (diluted) for 2001. Net sales in our technology lines (subscription broadcasting, OEM and private label) in 2002 decreased by $16.6 million, or 18.1%, to $75.2 million from $91.8 million in 2001. Sales to subscription broadcasting service providers and OEMs decreased by $17.2 million, or 21.0%, from $81.6 million in 2001 to $64.4 million in 2002. Reductions in capital expenditures by our major subscription broadcasting and cable set top box OEM customers resulted in reduced digital set top box deployment during 2002 and consequently, reduced orders from these customers. Private label sales decreased by $0.5 million, or 7.1%, from $7.7 million in 2001 to $7.2 million in 2002 due to decreased consumer demand for these products in 2002. Net sales in our technology lines were approximately 72.4% of net sales in 2002 compared to 77.1% in 2001. Net sales from the retail lines (One For All® international retail and direct import) increased $1.4 million, or 5.3%, from $27.2 million in 2001 to $28.6 million in 2002. Of this increase, the One For All® international retail sales increased $2.1 million, or 8.2%, from $25.2 million in 2001 to $27.3 million in 2002 (due primarily to increased demand from retailers in the UK, Germany and Spain) while our domestic direct import licensing and product revenues decreased by $0.6 million or 31.6% from $2.0 million in 2001 to $1.4 million in 2002 due to less demand. Net sales from the retail lines accounted for approximately 27.6% of total 2002 net sales compared to 22.9% in 2001. Gross profit was $41.7 million or 40.1% of net sales in 2002 as compared to $49.1 million or 41.2% of net sales in 2001. Gross margins in 2002 were lower due primarily to increased use of air freight–in to meet customer demands and higher provisions for inventory obsolescence. Research and development expenses increased from $4.2 million in 2001 to $4.5 million in 2002, primarily due to the development of our Nevo and Kameleon technology. Selling, general and administrative expenses increased to $34.7 million in 2002, compared to $33.1 million in 2001. This increase was attributable to increased delivery and freight expenses as well as higher professional service fees for tax planning projects. tax rate was reduced from 34% in 2001 to 24% in 2002. Y E A R E N D E D D E C E M B E R 3 1 , 2 0 0 1 C O M P A R E D T O Y E A R E N D E D D E C E M B E R 3 1 , 2 0 0 0 Net sales for the twelve months ended December 31, 2001 were $119.0 million, a decrease of 4.6% over the net sales of $124.7 million for the same period last year. Net income for 2001 was $11.3 million or $0.82 per share (basic) and $0.78 per share (diluted) compared to $11.6 million or $0.84 per share (basic) and $0.78 per share (diluted) for 2000. Net sales in our technology lines (subscription broadcasting, OEM and private label) in 2001 decreased by $7.9 million, or 7.9%, to $91.8 million from $99.7 million in 2000. Sales to subscription broadcasting service providers and OEMs decreased by $8.6 million, or 9.6%, from $90.2 million in 2000 to $81.6 million in 2001. This decrease was principally due to reductions in overall spending by our traditional OEM customers and a lower rate of digital set top box deployment during 2001 resulting in reduced orders from some of our major subscription broadcasting and cable set top box OEM customers. Private label sales decreased by $1.0 million, or 11.5%, from $8.7 million in 2000 to $7.7 million in 2001 due to decreased consumer demand for these products in 2001. Net sales in our technology lines were approximately 77.1% of net sales in 2001 compared to 79.9% in 2000. Net sales from the retail lines (One For All® international retail and direct import) increased $2.2 million, or 8.8%, from $25.0 million in 2000 to $27.2 million in 2001. Of this increase, One For All® international retail sales increased $1.8 million, or 7.8%, from $23.4 million in 2000 to $25.2 million in 2001 (due primarily to increased demand from retailers in the UK, France, Latin America and Australia) while our domestic direct import licensing and product revenues increased by $0.4 million or 25.7% from $1.6 million in 2000 to $2.0 million in 2001. Net sales from the retail lines accounted for approximately 22.9% of total 2001 net sales compared to 20.1% in 2000. Gross profit was $49.1 million or 41.2% of net sales in 2001 as compared to $51.6 million or 41.3% of net sales in 2000. Research and development expenses increased from $3.3 million in 2000 to $4.2 million in 2001, primarily due to the development of our embedded solutions and other wireless inter face technology. Selling, general and administrative expenses decreased to $33.1 million in 2001, compared to $33.3 million in 2000 primarily due to an ongoing effort to contain and minimize our costs. This decrease was attributable to reduced delivery and freight expenses, reduced professional fees and an overall decrease in payroll, commission and bonus–related costs, partially offset by increased advertising costs and bad debt expenses. Delivery and freight expenses decreased $0.7 million, from $2.9 million in 2000 to $2.2 million in 2001, as a result of lower sales volumes along with increased use of less expensive delivery methods and aggressive negotiations with our freight vendors, which have resulted in increased shipping and operating efficiencies. Professional fees decreased from $1.7 million in 2000 to $1.0 million in 2001. This decrease was primarily due to higher costs in 2000 relating to our corporate development activity including evaluation of potential acquisitions as compared to 2001. Employee payroll, bonus, commission and related fringe costs were $14.5 million in 2001 compared to $14.7 million in 2000, an overall decrease of $.2 million, principally due to reduced bonus and commission costs as a result of lower sales, par tially offset by additional hiring of personnel in technology development, engineering and sales. Adver tising, promotional and tradeshow expenses increased from $1.7 million in 2000 to $2.1 million in 2001 in an intensified effor t to promote our technology and products. During 2000, we recorded income of $0.5 million as an offset to bad debt expense to reflect the settlement and collection of an older U.S. retail receivable, previously fully reserved. As a percentage of net sales, selling, general and administrative expense was 27.8% in 2001 compared to 26.7% in 2000. 3 2 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 3 3 Interest income increased by $66,000 in 2001 to $987,000 as compared to $921,000 in 2000 due to interest earned on higher accumulated The following summarizes our obligations at December 31, 2002 and the effect such obligations are expected to have on our liquidity and cash flow cash balances in 2001. in future periods. Other obligations primarily consist of payments to one of our former directors for services rendered. See “Notes to Consolidated Other income decreased by $353,000 to $147,000 in 2001 compared to $500,000 in 2000. This decrease is primarily due to devaluation of the European currencies against the U.S. dollar, par tially offset by the favorable settlement of foreign currency exchange agreements we entered into to manage our exposure on cash flows. We recorded income tax expense of $5.9 million for 2001 compared to $8.1 million for 2000. The decrease is a result of lower pretax income and a reduction in tax expense of approximately $1.0 million recorded in 2001 due to the benefit recorded for research and development credits. We may continue to benefit from any identified research and development credits in future periods. Our effective tax rate was reduced from 41% in 2000 to 34% in 2001. L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S Universal’s principal sources of funds are from its operations and bank credit facilities. Cash provided by operating activities for 2002 was $16.2 million as compared to $19.7 million in 2001. The decease in cash flow is primarily due to reduced net income. On April 1, 2002, we entered into a $15 million unsecured revolving credit agreement (the “Agreement”) with Bank of America National Trust and Savings Association (“B of A”). Under the Agreement with B of A, which is set to expire on April 1, 2005, we can choose from several interest rate options at our discretion. The interest rate in effect as of December 31, 2002 using the IBOR Rate option plus a fixed margin of 1.25%, was 2.62%. We pay a commitment fee at a maximum rate of 1/8 of 1% per year on the unused por tion of the credit line. Under the terms of this Agreement, our ability to pay cash dividends on our common stock is restricted and we are subject to cer tain financial covenants and other restrictions that are standard for these types of agreements. However, we have authority under this credit facility to acquire up to 1,000,000 shares of our common stock in market purchases. We purchased 584,845 shares at a cost of $5,273,611 since the date of this Agreement through December 31, 2002. Amounts available for borrowing under this credit facility are reduced by the outstanding balance of our impor t letters of credit. As of December 31, 2002, we had no amounts outstanding under this credit facility. In addition to the 584,845 shares of our common stock purchased during 2002 at a cost of $5,273,611, we purchased 301,600 shares of common stock in 2001 on the open market at a cost of $4,428,771. There were no open market purchases of our common stock in 2000. We hold shares purchased on the open market as treasury stock, and they are available for reissue. Presently, except for using a small 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. During 2002, we received proceeds of approximately $1,334,000 from the exercise of stock options granted to the Company’s employees, as compared to approximately $1,750,000 during 2001 and $592,000 during 2000. Capital expenditures in 2002, 2001, and 2000 were approximately $2.1, $2.6, and $2.8 million, respectively. Annual capital expenditures relate primarily to acquiring product tooling each year. During the second quarter of 2002, we completed an acquisition of certain multimedia protocol technologies from a software development company for $780,000. These technologies enable custom wireless control solutions for home enter tainment hardware and software applications. On August 25, 2000, we completed our acquisition of a remote control distributor in France for approximately $1.8 million, of which $1.5 million was paid during 2000, $143,000 was paid during 2001 and the remaining amount was paid during 2002. Historically, 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, 2002, we had $71.5 million of working capital compared to $67.4 million and $58.3 million at December 31, 2001 and 2000, respectively. The increase in working capital during 2002 is principally due to increases in cash and short–term investments at December 31, 2002. Financial Statements–Note 18” for additional information regarding related party transactions. December 31, 2002 Contractual Obligations Operating Leases Other Obligations Total Contractual Cash Obligations Total Less than 1 year 1–3 years 4–5 years After 5 years Payments Due by Period $ $ 2,180 258 2,438 $ $ 889 258 1,147 $ $ 777 — 777 $ $ 514 — 514 $ $ — — — It is our policy to carefully monitor the state of our business, cash requirements and capital structure. We believe that funds generated from our operations and available from our borrowing facility will be sufficient to fund current business operations as well as anticipated growth at least through the end of 2003; however, there can be no assurance that this will occur. N E W A C C O U N T I N G P R O N O U N C E M E N T S In July 2001, the FASB issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Intangible Assets.” SFAS No. 141 requires that the purchase method of accounting be used for all business combinations, establishes specific criteria for recognizing intangible assets separately from goodwill and requires certain disclosures regarding reasons for a business combination and the allocation of the purchase price paid. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001. SFAS No. 142 establishes that goodwill and certain intangible assets will no longer be amortized to earnings, but instead tested for impairment at least annually. We adopted the provisions of SFAS No. 141 and SFAS No. 142 on January 1, 2002. In accordance with SFAS No. 142, we ceased amor tization on approximately $3.0 million of net unamor tized goodwill beginning January 1, 2002. We recorded approximately $565,000 of amor tization during 2001 and would have recorded approximately $565,000 of amor tization during 2002. We per formed an initial impairment review of our goodwill on January 1, 2002, conducted an annual impairment review as of December 31, 2002 and will perform an annual review in subsequent years. In the per formance of the initial impairment review, we identified our repor ting units and determined the carrying value of each repor ting unit by assigning assets and liabilities, including the existing goodwill, to those repor ting units as of January 1, 2002. We then determined the fair value of each repor ting unit using the present value of expected future cash flows and compared it to the repor ting unit’s carrying amount. Based on this analysis, we determined that each repor ting unit’s fair value exceeded its carrying amount, and therefore concluded that there was no indication of a transitional impairment loss. As further mandated by SFAS No. 142, we performed an annual impairment test of our goodwill as of December 31, 2002 and using the same methodology employed for the initial impairment review of our goodwill, and determined there was no indication of an impairment loss. In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses financial accounting and repor ting obligations associated with the retirement of tangible long–lived assets and the associated retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 did not have a material effect on our financial position or results of operations. In October 2001, the FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long–Lived Assets. SFAS No. 144, which we adopted on January 1, 2002, establishes standards for per forming cer tain tests of impairment on long–lived assets. The adoption of SFAS No. 144 did not have a material effect on our financial position or results of operations. In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which requires companies to recognize costs associated with exit or disposal activities when they are incurred, rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by this standard include lease termination costs and cer tain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. The statement replaces EITF Issue No. 94–3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. We do not believe that the adoption of SFAS No. 146 will have a significant impact on our financial condition, results of operations, or cash flow. 3 4 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 3 5 In November 2002, the FASB issued Interpretation No. 45 (“FIN No. 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, levels through our cost containment efforts; our realization of tax benefits from various tax projects initiated from time to time; the continued Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 expands on the accounting guidance of Statements Nos. 5, 57, and 107 strength of our balance sheet; our inability to continue selling our products or licensing our technologies at higher or profitable margins; the failure and incorporates without change the provisions of FASB Interpretation No. 34, which is being superseded. FIN No. 45 will af fect leasing of the various markets and industries to grow or emerge as rapidly or as successfully as we believed; the continued growth of the digital market; transactions involving residual guarantees, vendor and manufacturer guarantees, and tax and environmental indemnities. All such guarantees our inability to obtain orders or maintain our order volume with new and existing customers; the possible dilutive effect our stock option program will need to be disclosed in the notes to the financial statements star ting with the period ending after December 15, 2002. For guarantees may have on our earnings per share and stock price; our inability to continue to obtain adequate quantities of component parts or secure adequate issued after December 31, 2002, the fair value of the obligation must be reported on the balance sheet. Existing guarantees will be grandfathered 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 and will not be recognized on the balance sheet. We have made the required disclosures related to our warranties and are currently evaluating Exchange Commission. the impact of FIN No. 45 on our financial position and results of operations. D E P E N D E N C E U P O N K E Y S U P P L I E R S In November 2002, the Financial Accounting Standards Board issued Emerging Issues Task Force (“EITF”) Issue No. 00–21, “Revenue Most of the components used in our products are available from multiple sources; however, we have elected to purchase integrated circuit Arrangements with Multiple Deliverables.” EITF Issue No. 00–21 addresses cer tain aspects of the accounting by a company for arrangements components used in our products, principally our wireless control products, and cer tain other components used in our products, from two main under which it will per form multiple revenue–generating activities. EITF Issue No. 00–21 addresses when and how an arrangement involving sources, each of which provides in excess of ten percent (10%) of our microprocessors for use in our products. We have developed alternative multiple deliverables should be divided into separate units of accounting. EITF Issue No. 00–21 provides guidance with respect to the effect sources of supply for these integrated circuit components. However, there can be no assurance that we will be able to continue to obtain of cer tain customer rights due to company nonper formance on the recognition of revenue allocated to delivered units of accounting. EITF these components on a timely basis. We generally maintain inventories of our integrated chips, which could be used in par t to mitigate, but Issue No. 00–21 also addresses the impact on the measurement and/or allocation of arrangement consideration of customer cancellation not eliminate, delays resulting from supply interruptions. An extended interruption, shor tage or termination in the supply of any of the provisions and consideration that varies as a result of future actions of the customer or the company. Finally, EITF Issue No. 00–21 provides components used in our products, or a reduction in their quality or reliability, or a significant increase in prices of components, would have guidance with respect to the recognition of the cost of cer tain deliverables that are excluded from the revenue accounting for an arrangement. an adverse effect on our business, results of operations and cash flows. The provisions of EITF Issue No. 00–21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We are currently evaluating the effect that the adoption of EITF Issue No. 00–21 will have on our financial position and results of operations. D E P E N D E N C E O N F O R E I G N M A N U F A C T U R I N G In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock–Based Compensation — Transition and Disclosure — an amendment manufacturers are subject to the risks of doing business abroad, such as import duties, trade restrictions, work stoppages, political instability to FASB Statement No. 123, Accounting for Stock–Based Compensation.” SFAS No. 148 provides alternative methods of transition for a voluntary and other factors, which could have a material adverse effect on our business, results of operations and cash flows. We believe that the loss change to the fair value based method of accounting for stock–based employee compensation. In addition, SFAS No. 148 amends the disclosure 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 requirements of Statement 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock–based flows because numerous other manufacturers are available to fulfill our requirements; however, the loss of any of our major manufacturers could compensation. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December adversely affect our business until alternative manufacturing arrangements are secured. Third–par ty manufacturers located in foreign countries manufacture a majority of our wireless controls. Our arrangements with our foreign 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The adoption of SFAS No. 148 did not have a material impact on our financial position or results of operations. P O T E N T I A L F L U C T U A T I O N S I N Q U A R T E R L Y R E S U L T S F A C T O R S T H A T M A Y A F F E C T F I N A N C I A L C O N D I T I O N A N D F U T U R E R E S U L T S Our quar terly financial results may vary significantly depending primarily upon factors such as the timing of significant orders, the timing of our new product offerings and our competitors and the loss or acquisition of any significant customers. Historically, our business has been influenced We caution that the following impor tant factors, among others (including but not limited to factors discussed below or in the “Management’s by the retail sales cycle, with increased sales in the last half of the year and the largest proportion of sales occurring in the last quarter. However, Discussion and Analysis of Financial Condition and Results of Operations,” as well as those factors discussed elsewhere in this Annual Repor t, the growth in our subscription broadcasting and OEM products may outpace the growth in our retail products and consequently, retail seasonality or in our other repor ts filed from time to time with the Securities and Exchange Commission), could af fect our actual results and could may have less of an effect on our revenue. Factors such as quar terly variations in financial results could adversely affect the market price of contribute to or cause our actual consolidated results to differ materially from those expressed in any of our forward–looking statements. The our common stock and cause it to fluctuate substantially. In addition, we (i) may from time to time increase our operating expenses to fund factors included here are not exhaustive. Fur ther, any forward–looking statement speaks only as of the date on which such statement is made, greater levels of research and development, increase our sales and marketing activities, develop new distribution channels, improve our and we under take no obligation to update any forward–looking statement to reflect events or circumstances after the date on which such operational and financial systems and broaden our customer suppor t capabilities and (ii) may incur significant operating expenses associated statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for with any new acquisitions. To the extent that such expenses precede or are not subsequently followed by increased revenues, our business, 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, operating results, financial condition and cash flows will be materially adversely affected. 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. We may experience significant fluctuations in future quarterly operating results that may be caused by many factors, including demand for products, While we believe that the forward–looking statements made in this report are based on reasonable assumptions, the actual outcome of such of new products, price reductions by us or our competitors, mix of distribution channels through which products are sold, level of product statements is subject to a number of risks and uncertainties, including the failure of our markets to continue growing and expanding in the returns, mix of customers and products sold, component pricing, mix of international and domestic revenues, and general economic conditions. manner we anticipated; the failure of our customers to grow and expand as we anticipated; the effects of natural or other events beyond our In addition, as a strategic response to changes in the competitive environment, we may from time to time make cer tain pricing or marketing control, including the effect a war or terrorist activities may have on the Company or the economy; the economic environment’s effect on us decisions or acquisitions that could have a material adverse effect on our business, results of operations or financial condition. As a result, and our customers; the growth of, acceptance of and the demand for our products and technologies in various markets and geographical regions, we believe that period–to–period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as any introduction or enhancement of products by us and our competitors, the loss or acquisition of any significant customers, market acceptance including cable, satellite, consumer electronics, retail and interactive TV and home automation, not materializing as we believed; our inability to indication of future per formance. add profitable complementary products which are accepted by the marketplace; our inability to continue to maintain our operating costs at acceptable 3 6 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 3 7 Due to all of the foregoing factors, it is likely that in some future quar ters our operating results will be below the expectations of public P O T E N T I A L F O R L I T I G A T I O N market analysts and investors. In such event, the price of our common stock would likely be materially adversely affected. As is typical in our industry and the nature and kind of business in which we are engaged, from time to time, various claims, charges and litigation D E P E N D E N C E O N C O N S U M E R P R E F E R E N C E are asser ted or commenced by third par ties against us or by us against third par ties, arising from or related to product liability, infringement of patent or other intellectual proper ty rights, breach of warranty, contractual relations, or employee relations. The amounts claimed may be We are susceptible to fluctuations in our business based upon consumer demand for our products. We believe that our success depends in substantial substantial but may not bear any reasonable relationship to the merits of the claims or the extent of any real risk of court awards. At the present part on our ability to anticipate, gauge and respond to such fluctuations in consumer demand. However, it is impossible to predict with complete time, there are two lawsuits pending brought by the Company against third par ties. In these actions, we are seeking money damages and accuracy the occurrence and effect of any such event that will cause such fluctuations in consumer demand for our products. Moreover, we injunctive relief. In one of these actions, the third par ty has filed suit against us seeking a declaration that cer tain of our patents are invalid caution that any increases in sales or growth in revenue that we achieve may be transitory and should by no means be construed to mean that and unenforceable. It is the opinion of management that such patents are valid and enforceable and we intend to defend against such suit vigorously. such increases or growth will continue. D E M A N D F O R C O N S U M E R S E R V I C E A N D S U P P O R T While it is the opinion of management that our products do not infringe any third par ty’s patent or other intellectual proper ty rights, the costs associated with defending or pursuing any such claims or litigation, including the matters discussed in this Annual Repor t, could be substantial and amounts awarded as final judgments, if any, in any such potential or pending litigation, could have a significant and material adverse We have continually provided domestic and international consumer service and support to our customers to add overall value and to help differentiate effect on our financial condition, results of operations and cash flows. us from our competitors. In March 2003, our largest customer notified us that as a result of a merger, it would conduct all of its consumer service and support activities internally and cease using our services commencing the second quarter of 2003. Consequently, revenue for consumer E F F E C T S O N U N I V E R S A L D U E T O I N T E R N A T I O N A L O P E R A T I O N S service and support from this customer will cease. In light of this, we will review our domestic service and support group and determine how to The risks of doing business in developing countries and economically volatile areas could adversely affect our operations, earnings and cash flows. best utilize this service to support our existing customers and to attract new customers. There can be no assurance that we will be able to attract Our expansion of sales into economically volatile areas, such as Asia–Pacific, Latin America and other emerging markets, subject us to a number new customers. In addition, in the event other customers decide to cease using this service, we would be unable to offset costs associated with of economic and other risks. Such risks include financial instability among customers in these regions, the volatility of economic conditions in providing this service resulting in a significant adverse affect to our financial condition, results of operations and cash flows. countries dependent on exports from the United States and European markets, and political instability and potential conflicts among developing D E P E N D E N C E U P O N T I M E L Y P R O D U C T I N T R O D U C T I O N nations. We generally have experienced longer accounts receivable cycles in some established European markets as well as emerging international markets, in particular Latin America, when compared with the United States. We are also subject to any political and financial instability in the Our ability to remain competitive in the wireless control products market will depend in par t upon our ability to successfully identify new countries in which we operate, including inflation, recession, trade protection measures, local labor conditions, and unexpected changes in regulatory product opportunities and to develop and introduce new products and enhancements on a timely and cost effective basis. There can be no assurance requirements, currency devaluation and interest rate fluctuations. that we will be successful in developing and marketing new products or in enhancing our existing products, or that such new or enhanced products will achieve consumer acceptance, and, if achieved, will sustain that acceptance, that products developed by others will not render our In 2000, we established a wholly owned subsidiary, One For All Argentina S.R.L., in Argentina for the support of our retail sales activities in Latin products non–competitive or obsolete or that we will be able to obtain or maintain the rights to use proprietary technologies developed by others America, specifically in Argentina and Brazil. Net sales during 2002 and 2001 were approximately $308,000 and $1.2 million, respectively. In which are incorporated in our products. Any failure to anticipate or respond adequately to technological developments and customer requirements, early 2002, the United States dollar was eliminated as Argentina’s monetary benchmark, resulting in significant currency devaluation. As the or any significant delays in product development or introduction, could have a material adverse effect on our Company’s financial condition, functional currency in Argentina is the Argentinean peso and we anticipate that funds generated from collection of sales in Argentina will be results of operations and cash flows. maintained in Argentina, we do not anticipate that the elimination of the U.S. dollar as a monetary benchmark will result in a material adverse effect on our business. However, there can be no guarantee that economic circumstances in Argentina or elsewhere will not worsen, which could In addition, the introduction of new products that we may introduce in the future may require the expenditure of a significant amount of funds result in future effects on earnings should such events occur. Our failure to successfully manage economic, political and other risks relating to for research and development, tooling, manufacturing processes, inventory and marketing. In order to achieve high volume production of any doing business in developing countries and economically and politically volatile areas could adversely affect our business. new product, we may have to make substantial investments in inventory and expand our production capabilities. G E N E R A L E C O N O M I C C O N D I T I O N S D E P E N D E N C E O N M A J O R C U S T O M E R S General economic conditions, both domestic and foreign, have an impact on our business and financial results. The global economy has The economic strength and weakness of our worldwide customers affect our performance. We sell our wireless control products and proprietary weakened and market conditions continue to be challenging. As a result, individuals and companies are delaying or reducing expenditures. technologies to private label customers, original equipment manufacturers, and companies involved in the subscription broadcasting industry. Continued weak global economic conditions and continued softness, particularly in the consumer and telecommunications sector, and purchasers’ We also supply our products to our wholly owned, non–U.S. subsidiaries and to independent foreign distributors, who in turn distribute our uncer tainty about the extent of the global economic downturn could result in lower demand for our products. products worldwide, with Europe, Australia, New Zealand, Mexico and selected countries in Asia and Latin America currently representing our principal foreign markets. During 2002, we had sales to one customer that amounted to more than ten percent of our net sales for the We have observed the effects of the global economic downturn in some areas of our business. The downturn has contributed to net revenue year. The future loss of that customer or any other key customer, either in the United States or abroad due to the financial weakness or declines during fiscal 2002. During the current downturn, we also have experienced gross margin declines in cer tain businesses, reflecting bankruptcy of any such customer or our inability to obtain orders or maintain our order volume with our major customers, may have an adverse the effect of competitive pressures as well as inventory write–downs. While worsening economic conditions have had a slightly negative impact effect on our financial condition, results of operations and cash flows. on revenues to date, revenues, gross margins and earnings could deteriorate significantly or our growth rate could be adversely impacted in the future as a result of economic conditions. In addition, if our customers experience financial difficulties, we could suffer losses associated C O M P E T I T I O N with the outstanding por tion of accounts receivable. The wireless control industry is characterized by intense competition based primarily on product availability, price, and speed of delivery, ability to tailor specific solutions to customer needs, quality and depth of product lines. Our competition is fragmented across our product lines, and The terrorist attacks that took place in the United States on September 11, 2001 were unprecedented events that have created many economic accordingly, we do not compete with any one company across all product lines. We compete with a variety of entities, some of which have and political uncertainties. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other greater financial and other resources. Our ability to remain competitive in this industry depends in part on our ability to successfully identify acts of war or hostility have created many economic and political uncertainties, which could adversely affect our business, financial position, new product opportunities and develop and introduce new products and enhancements on a timely and cost effective basis, as well as our ability results of operations and cash flows in the short or long–term in ways that cannot presently be predicted. to identify and enter into strategic alliances with entities doing business within the industries we serve. There can be no assurance that we and our product offerings will be and/or remain competitive or that any strategic alliances, if any, which we enter into will achieve the type, extent and amount of success or business that we expect or hope to achieve. 3 8 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 3 9 By operating our business in countries outside the United States, we are exposed to fluctuations in foreign currency exchange rates, exchange Q U A N T I T A T I V E A N D Q U A L I T A T I V E D I S C L O S U R E S A B O U T M A R K E T R I S K ratios, nationalization or expropriation of assets, impor t/expor t controls, political instability, and variations in the protection of intellectual We are exposed to various market risks, including interest rate and foreign currency exchange rate fluctuations. We have established policies, proper ty rights, limitations on foreign investments and restrictions on the ability to conver t currency. These risks are inherent in conducting procedures and internal processes governing our management of market risks and the use of financial instruments to manage our exposure operations in geographically distant locations, with customers speaking different languages and having different cultural approaches to the to such risks. The interest payable under our revolving credit agreement with our bank is variable and generally based on either the bank’s conduct of business, any one of which alone or collectively, may have an adverse effect on our international operations, and consequently on cost of funds, or the IBOR rate, and is affected by changes in market interest rates. At December 31, 2002, we had no borrowings on our credit our business, operating results, financial condition and cash flows. While we will continue to work toward minimizing any adverse effects of line. The interest rate in effect on the credit line using the bank’s cost of funds rate as the base as of December 31, 2002 was 2.62%. At December conducting our business abroad, no assurance can be made that we will be successful in minimizing any such effects. 31, 2002 we had wholly owned subsidiaries in The Netherlands, United Kingdom, Germany, France, Argentina and Spain. Sales from these O U T L O O K operations are typically denominated in local currencies including Euros, British Pounds, and Argentine Pesos thereby creating exposures to changes in exchange rates. Changes in the local currencies/U.S. Dollars exchange rate may positively or negatively affect our sales, gross Our focus has been and will continue to be throughout 2003, the enhancement of our leadership position by developing custom products for our margins and retained earnings. From time to time, we enter into foreign currency exchange agreements to manage our exposure arising from subscription broadcast and OEM customers, growing our capture expertise in existing infrared technology and emerging radio frequency standards, fluctuating exchange rates that affect cash flows. We entered into no foreign currency forward exchange contracts during the year ended adding to our portfolio of patented or patent pending technologies, and developing new platform products. We are also developing new ways to December 31, 2002. We do not enter into any derivative transactions for speculative purposes. The sensitivity of earnings and cash flows to enhance remote controls and exploring methods to control digital media in the home to enhance the offerings of industries we serve. 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 currencies. Based on our overall foreign currency rate exposure at December 31, 2002, we believe In 2002, we launched our Nevo technology, an embedded solution that transforms an electronic display (such as Compaq’s iPaq Pocket PC) into that movements in foreign currency rates should not materially affect our financial position, although no assurance can be made that any such a sophisticated and easy–to–use wireless home control and automation device. Nevo has propelled us to serve customers in the computing foreign currency rate movements in the future will not have a material effect. Because of the foregoing factors (Factors That May Affect Financial industry. We also launched our Kameleon interface technology, a revolutionary display technology that provides ease of use by illuminating only Condition and Future Results and Quantitative and Qualitative Disclosures About Market Risk), as well as other variables that affect our operating active keys needed to control each entertainment device. During 2003, we will continue to seek ways to integrate our Nevo technology and results, past financial performance should not be considered a reliable indicator of future performance and investors should not use historical trends Kameleon display technology into other forms and devices. to anticipate results or trends in future periods. We will continue to invest in our database of device codes by analyzing OEM products for inclusion into our library as we keep our commitment to maintaining a worldwide IR code library. In addition to our device code database, we will continue to invest in novel intellectual proper ty to for tify our position in the market. We will seek ways to increase our customer base worldwide, par ticularly in the areas of subscription broadcasting, OEM, and One For All international retail. We will continue to work on building stronger existing customer relationships by working with customers through joint surveys and product trials that will enable us to understand their needs. We intend to invest in new products and technology to meet our customer needs now and into the future. In March 2003, our largest customer notified us that as a result of a merger, it would conduct all of its consumer service and support activities internally and cease using our services. Consequently, revenue for consumer service and support from this customer will cease. In light of this, during our 2003 second quarter, we will review our domestic consumer service and support group to determine how we may best utilize this service to support our existing customers and to attract new customers. There can be no assurance that we will be able to attract new customers to use this service. We will also continue in 2003 to attempt to control our overall cost of doing business. We believe that through product design changes and our purchasing efforts, improvements in our gross margins and efficiencies in our selling, general and administrative expenses can be accomplished, although there can be no assurance that there will be any improvements to our gross margin or that we will achieve any cost savings through these efforts and if accomplished, that any such improvements or savings will be significant or maintained. Also during 2003, we will continue to pursue our overall strategy of seeking ways to operate all aspects of our business more profitably. This strategy will include looking at acceptable acquisition targets and strategic partnership opportunities. We caution, however, that no assurance can be made that any suitable acquisition target or par tnership oppor tunity will be identified and, if identified, that a transaction can be consummated. Moreover, if consummated, no assurance can be made that any such acquisition or partnership will profitably add to our operations. 4 0 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 4 1 Consolidated Balance Sheets December 31, A S S E T S Current assets: Cash and cash equivalents Shor t–term investments Accounts receivable, net Inventories Prepaid expenses and other current assets Deferred income taxes Income tax receivable Total current assets Equipment, furniture and fixtures, net Intangible assets, net Goodwill Other assets Deferred income taxes Total assets Consolidated Income Statements 2002 2001 Year Ended December 31, 2002 2001 2000 $ 18,064,195 $ 14,170,403 22,500,000 20,100,000 26,306,632 28,209,060 16,046,512 16,699,494 1,122,673 1,919,971 2,234,358 829,233 1,925,024 387,456 88,194,341 82,320,670 3,382,969 3,681,868 2,961,327 738,491 3,827,528 3,132,189 2,961,327 712,739 1,056,639 1,750,312 $ 100,015,635 $ 94,704,765 Net sales Cost of sales Gross profit Research and development expenses Selling, general and administrative expenses Operating income Interest income Other income, net Income before income taxes Provision for income taxes Net income Earnings per share: Basic Diluted Shares used in computing earnings per share: Basic Diluted $ 103,890,728 $ 119,029,715 $ 124,739,877 62,235,709 69,956,570 73,167,971 41,655,019 49,073,145 51,571,906 4,450,626 4,200,006 3,283,607 30,223,709 28,864,598 30,046,440 6,980,684 16,008,541 18,241,859 594,879 239,243 987,114 147,309 920,520 499,709 7,814,806 17,142,964 19,662,088 (1,875,553) (5,857,186) (8,061,456) $ $ $ 5,939,253 0.43 0.42 $ $ $ 11,285,778 0.82 0.78 $ $ $ 11,600,632 0.84 0.78 13,789,716 13,844,391 13,742,635 14,162,887 14,523,140 14,941,153 L I A B I L I T I E S A N D S T O C K H O L D E R S ’ E Q U I T Y The accompanying notes are an integral par t of these consolidated financial statements. Current liabilities: Accounts payable Accrued income taxes Accrued compensation Other accrued expenses Total current liabilities Note payable Total liabilities $ 7,795,220 $ 9,383,256 2,406,893 1,253,039 5,282,229 842,301 860,497 3,812,366 16,737,381 14,898,420 41,414 104,114 16,778,795 15,002,534 Commitments and contingencies (Notes 12 and 19) 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; 16,001,206 and 15,729,928 shares issued at December 31, 2002 and 2001, respectively Paid–in capital Accumulated other comprehensive loss Retained earnings Deferred stock–based compensation Less cost of common stock in treasury, 2,521,313 and 1,943,304 shares at December 31, 2002 and 2001, respectively Total stockholders’ equity Total liabilities and stockholders’ equity The accompanying notes are an integral par t of these consolidated financial statements. 160,012 157,299 71,322,177 68,657,346 (1,740,082) (1,804,670) 29,912,423 23,973,170 (147,044) (308,093) 99,507,486 90,675,052 (16,270,646) (10,972,821) 83,236,840 79,702,231 $ 100,015,635 $ 94,704,765 4 2 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 4 3 Consolidated Statements of Stockholders’ Equity Balance at December 31, 1999 Comprehensive income: Net income Currency translation adjustment Total comprehensive income Shares issued for employee retirement plan Stock options exercised Shares issued to Directors Restricted stock grants Income tax benefit related to the exercise of non–qualified stock options Adjustment to fair value of warrant issued to a customer Balance at December 31, 2000 Comprehensive income: Net income Currency translation adjustment Total comprehensive income Shares issued for employee retirement plan Purchase of treasury shares Stock options exercised Shares issued to Directors Restricted stock grants Income tax benefit related to the exercise of non–qualified stock options Common Stock Issued Shares Amount Common Stock in Treasur y Shares Amount Paid–in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Deferred Stock–Based Compensation Totals 15,317,304 $ 153,173 (1,652,384) $ (6,708,444) $ 64,299,603 $ (236,778) $ 1,086,760 $ (83,117) $ 58,511,197 — — 14,216 97,864 — 200 — — — — 142 979 — 2 — — — — — — — — — — 4,492 18,237 — — — — — — — — 293,230 591,096 76,342 4,398 477,206 (804,797) — 11,600,632 (469,179) — — — — — — — — — — — — — — — — — — 53,857 — — 11,600,632 (469,179) 11,131,453 293,372 592,075 94,579 58,257 477,206 (804,797) 15,429,584 154,296 (1,647,892) (6,690,207) 64,937,078 (705,957) 12,687,392 (29,260) 70,353,342 — — 17,617 — 284,497 — (1,770) — — — 176 — 2,845 — (18) — — — — — — — (301,600) (4,428,771) — — 314,558 — — 6,188 — — — 1,746,707 27,779 118,378 82,239 165,034 — 1,411,730 — 11,285,778 (1,098,713) — — — — — — — — — — — — — — — — — — — (278,833) 11,285,778 (1,098,713) 10,187,065 314,734 (4,428,771) 1,749,552 110,018 4,561 — 1,411,730 Balance at December 31, 2001 15,729,928 $ 157,299 (1,943,304) $ (10,972,821) $ 68,657,346 $ (1,804,670) $ 23,973,170 $ (308,093) $ 79,702,231 Comprehensive income: Net income Currency translation adjustment Total comprehensive income Shares issued for employee retirement plan Purchase of treasury shares Stock options exercised Shares issued to Directors For feited Restricted stock grants Income tax benefit related to the exercise of non–qualified stock options — — 28,139 — 243,139 — — — — — 281 — 2,432 — — — — — — — — — (584,845) (5,273,611) — — 362,637 — 1,331,818 — — 6,836 — — — — (24,214) (38,805) — 1,009,181 — 5,939,253 64,588 — — — — — — — — — — — — — — — — — — 98,030 63,019 5,939,253 64,588 6,003,841 362,918 (5,273,611) 1,334,250 98,030 — — 1,009,181 Balance at December 31, 2002 16,001,206 $ 160,012 (2,521,313) $ (16,270,646) $ 71,322,177 $ (1,740,082) $ 29,912,423 $ (147,044) $ 83,236,840 The accompanying notes are an integral par t of these consolidated financial statements. 4 4 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 4 5 Tax benefit from exercise of stock options 1,009,181 1,411,730 Consolidated Statements of Cash Flows Year Ended December 31, Cash provided by operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amor tization Provision for doubtful accounts Deferred income taxes Employee benefit plan Directors compensation Other Changes in operating assets and liabilities: Accounts receivable Inventory Prepaid expenses and other assets Accounts payable and accrued expenses Accrued income and other taxes Net cash provided by operating activities Cash used for investing activities: Acquisition of equipment, furniture and fixtures Payments for businesses acquired Acquisition of intangible assets Payments for patents Purchases of shor t–term investments Sale of shor t–term investments Net cash used for investing activities Cash provided by (used for) financing activities: Payments on note payable Proceeds from stock options exercised Treasury stock purchased Notes to Consolidated Financial Statements 2002 2001 2000 N o t e 1 . D e s c r i p t i o n o f B u s i n e s s $ 5,939,253 $ 11,285,778 $ 11,600,632 3,702,248 4,100,190 3,784,586 384,859 698,726 337,257 (91,493) (193,786) 2,219,896 362,918 98,030 — 314,734 110,018 4,561 477,206 293,372 94,579 58,258 4,130,883 8,373,931 (10,964,373) 652,982 2,147,843 (4,993,472) (249,792) (119,347) 861,258 (257,007) (5,507,720) 5,798,588 (292,604) (2,546,057) 2,300,898 16,179,677 19,719,132 11,439,935 (2,124,474) (2,565,420) (2,751,440) (132,000) (143,000) (1,493,926) (1,102,868) (580,026) (173,061) (458,780) (9,064) (477,673) (14,700,000) (15,600,000) (24,500,000) 12,300,000 7,000,000 13,000,000 (6,339,368) (11,940,261) (16,232,103) Universal Electronics Inc. (the “Company”) builds and markets pre–programmed, easy–to–use wireless control devices and chips principally for home enter tainment equipment and the subscription broadcasting market. Universal also develops wireless control inter face software for electronic display devices. Universal’s product lines include wireless inter face technologies, such as combination keyboard/remotes and touch–screen remotes. Universal licenses its patented technologies and database of infrared (“IR”) codes to companies selling into the cable and satellite industries and to original equipment manufacturers (“OEMs”). Universal also sells its universal wireless control products to distributors and retailers in Europe, Asia, Latin America and Australia under the One For All® brand name. Call center suppor t services are also offered to Universal’s customers. N o t e 2 . S u m m a r y o f S i g n i f i c a n t A c c o u n t i n g P o l i c i e s Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and significant transactions have been eliminated in the consolidated financial statements. Estimates and Assumptions. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management 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. Actual results could differ from those estimates. On an on–going basis, the Company evaluates its estimates and judgments, including those related to revenue recognition, allowance for sales returns and doubtful accounts, inventory valuation, valuation of long–lived assets, intangible assets and goodwill, and income taxes. Revenue Recognition. The Company recognizes revenue on the sale of products when title and risk of loss have passed to the customer, there is pervasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectibility is reasonably assured. For the majority of the Company’s sales, recognition occurs when products are shipped to the customer. The Company also licenses its patented technologies and database of infrared codes. The Company records license revenue when its customers ship products incorporating its technologies and database, provided collection of such revenue is reasonably assured. In addition, the Company generates service revenues as a result of providing consumer support programs, through its call center, to its various universal remote control marketers. These service revenues are recognized when the service is performed. The Company records a provision for estimated sales returns and allowances on product sales in the same period as the related revenues are recorded. These estimates are based on historical sales returns, analysis of credit memo data and other known factors. (73,531) (50,421) 1,334,250 1,749,552 (5,273,611) (4,428,771) (60,910) 592,075 — The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management specifically analyzes accounts receivables and historical bad debts, customer credit, current economic trends and changes in customer payment trends when evaluating the adequacy of the allowance for doubtful accounts. Net cash provided by (used for) financing activities (4,012,892) (2,729,640) 531,165 Effect of exchange rate changes on cash (1,933,625) (187,544) 283,500 Net increase (decrease) in cash and cash equivalents 3,893,792 4,861,687 (3,977,503) Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 14,170,403 9,308,716 13,286,219 $ 18,064,195 $ 14,170,403 $ 9,308,716 Supplemental Cash Flow Information – Income taxes paid were $1,492,108, $7,801,643, and $2,578,766 in 2002, 2001 and 2000, respectively. The accompanying notes are an integral par t of these consolidated financial statements. Foreign Currency Translation. The assets and liabilities of foreign subsidiaries are translated to U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rates during the period. Resulting translation adjustments are recorded in a separate component of stockholders’ equity, “Accumulated other comprehensive income.” Cash and Cash Equivalents. Cash and cash equivalents include cash accounts and all investments purchased with initial maturities of three months or less. 4 6 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 4 7 Investments. The Company accounts for its investments in accordance with Statements of Financial Accounting Standards (SFAS) No. 115, As fur ther mandated by SFAS No. 142, the Company per formed an annual impairment test of its goodwill as of December 31, 2002 and using “Accounting for Certain Investments in Debt and Equity Securities”. Investments include auction rate notes and bonds with original maturities the same methodology employed for the initial impairment review of its goodwill, the Company also determined that there was no indication ranging from 25 to 35 years. The interest rates on the auction rate securities are reset every 28 to 35 days through an auction facilitated by a of an impairment loss. For the years ended December 31, 2001 and 2000, the Company applied the provisions of SFAS No. 121, “Accounting registered broker–dealer. The interest is credited to the Company’s account immediately prior to the reset date; accordingly, unrealized gains or for the Impairment of Long–Lived Assets to be disposed of” to evaluate the recoverability of goodwill. losses are insignificant. The Company’s investments are classified as available for sale and are recorded at fair value, which approximates their cost. The Company’s available–for–sale investments are classified as short–term investments in the consolidated balance sheets as the Company Income Taxes. Income tax expense includes U.S. and international income taxes. The Company records on its balance sheet deferred tax intends to sell these securities as necessary to meet its liquidity requirements. The cost of securities sold is determined based on specific assets and liabilities for expected future tax consequences of events that have been recognized in different periods for financial statement identification. Such investments total $22,500,000 and $20,100,000 at December 31, 2002 and December 31, 2001, respectively and are purposes versus tax return purposes. The Company provides a valuation allowance for net deferred tax assets when it is more likely than not included in short–term investments in the accompanying balance sheets. that a por tion of such net deferred tax assets will not be recovered. The Company accounts for its investment which does not have a readily determinable fair value using the cost method as the Company’s Research and Development. The Company accounts for research and development costs in accordance with SFAS No. 2, “Accounting for investment is less than 20% and the Company is unable to exercise significant influence over the investee. Under the cost method, investments Research and Development Costs”, and SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise are carried at cost and adjusted only for other–than–temporary declines in fair value, distributions of earnings or additional investments. Marketed”. Costs incurred internally in creating a computer software product are expensed when incurred as research and development until Included in other assets is a $360,518 cost investment. technological feasibility has been established for the product. Research and development include costs such as salaries and employee benefits, supplies and materials. The Company has determined that technological feasibility for its products is reached when a working model is Inventories. Inventories consisting of wireless control devices, including universal remote controls, wireless keyboards, antennas, and related completed. Once technological feasibility is established, software costs are capitalized until the product is available for general release to component par ts, are valued at the lower of cost or market. Cost is determined using the first–in, first–out method. The Company writes down customers and is then amor tized using (i) the ratio that current gross revenues for a product bear to the total of current anticipated future its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated gross revenues from that product or (ii) the straight–line method over the remaining estimated economic life of the product, whichever is market value based upon assumptions about the future demand and market conditions. greater. Capitalized software costs are stated at cost, net of accumulated amor tization. The Company capitalized $321,484 and $183,197 for the years ended December 31, 2002 and 2001, respectively, and amor tized $52,500 in the year ended December 31, 2002. The Company carries inventory in amounts necessary to satisfy certain of its customers’ inventory requirements on a timely basis. New product innovations and technological advances may shor ten a given product’s life cycle. Management continually monitors the inventory status to Adver tising. Adver tising costs are expensed as incurred. Adver tising expense was $1,319,653, $1,470,141, and $1,282,519 for the years control inventory levels and dispose of any excess or obsolete inventories on hand. ended December 31, 2002, 2001, and 2000, respectively. Equipment, Furniture and Fixtures. Equipment, furniture and fixtures are recorded at cost. Depreciation is provided using the straight–line Shipping and Handling Costs. The Company records shipping and handling costs in selling, general and administrative expenses. Shipping and method over the estimated useful lives of the assets. Tooling and equipment are depreciated over two to seven years. Furniture and fixtures handling costs amounted to $3,525,127, $2,292,690, and $2,961,121 for the years ended December 31, 2002, 2001 and 2000, respectively. are depreciated over five to seven years. Leasehold improvements are amor tized over two to five years, which represent the shor ter of their useful lives or the terms of the related leases. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are Derivatives. The Company enters into foreign currency exchange contracts with option–based arrangements and contract terms normally lasting removed from the appropriate accounts and any gain or loss is included in current income. less than six months, to protect against the adverse effects that exchange–rate fluctuations may have on foreign–currency–denominated trade Long–Lived Assets and Other Intangible Assets. Intangible assets consist principally of distribution rights, patents, trademarks and purchased denominated in a foreign currency. The gains and losses on both the derivatives and the foreign–currency–denominated trade receivables are receivables. These derivatives do not qualify for hedge accounting, in accordance with SFAS No. 133, because they relate to existing assets technologies. Capitalized amounts related to patents represent external legal costs for the application and maintenance of patents. Intangible recorded as transaction adjustments in current earnings. assets are amor tized using the straight–line method over their estimated period of benefit, ranging from five to ten years. The Company assesses the impairment of long–lived assets and other intangible assets whenever events or changes in circumstances indicate that the The Company’s currency exposures are primarily concentrated in the Euro and British Pound Sterling. The Company does not enter into financial carrying value may not be recoverable. Factors considered impor tant which could trigger an impairment review include the following: (1) instruments for speculation or trading purposes. The Company had no foreign currency exchange contracts outstanding at December 31, 2002 and 2001. significant underperformance relative to expected historical or projected future operating results; (2) significant changes in the manner of the Company’s use of the acquired assets or strategy for the overall business; (3) significant negative industry or economic trends; (4) significant Stock–Based Compensation. The Company applies the provisions of Accounting Principles Board Opinion No. 25 in accounting for stock–based employee decline in the stock price for a sustained period; and (5) the Company’s market capitalization relative to net book value. When the Company compensation; therefore, no compensation expense has been recognized for its fixed stock option plans as options generally are granted at fair determines that the carrying value may not be recoverable based upon the existence of one or more of the above indicators of impairment, market value on the date of the grant. In accordance with SFAS No. 123, “Accounting for Stock–Based Compensation”, as amended by SFAS No. and based on the carrying value of the asset being less than the undiscounted cash flows, the Company measures an impairment based on 148, “Accounting for Stock–Based Compensation – Transition and Disclosure,” the Company adopted the disclosure requirements of this Statement. projected discounted cash flows using a discount rate commensurate with the risk inherent in the Company’s current business model. In assessing recoverability, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. Goodwill. Goodwill represents the excess of the purchase price for acquisitions over the fair value of identifiable assets and liabilities acquired. In 2002, SFAS No. 142, “Goodwill and Other Intangible Assets” became ef fective and as a result, the Company ceased amor tization on approximately $3.0 million of net unamor tized goodwill. The Company recorded approximately $565,000 of amor tization during 2001 and would have recorded approximately $565,000 of amor tization during 2002. In accordance with SFAS No. 142, an initial impairment review of goodwill was per formed effective January 1, 2002 and an annual impairment review is required. In the per formance of the initial impairment review, the Company identified its repor ting units and determined the carrying value of each repor ting unit by assigning assets and liabilities, including the existing goodwill, to those repor ting units as of January 1, 2002. The Company then determined the fair value of each repor ting unit using the present value of expected future cash flows and compared it to the repor ting unit’s carrying amount. Based on this analysis, there is no indication of a transitional impairment loss. 4 8 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 4 9 The Company has provided below, the pro forma disclosures of the effect of net income and earnings per share as if SFAS No. 123 had been In November 2002, the Financial Accounting Standards Board issued Emerging Issues Task Force (“EITF”) Issue No. 00–21, “Revenue applied in measuring compensation expense for all periods presented. The following table illustrates, pursuant to SFAS No. 123, as amended Arrangements with Multiple Deliverables.” EITF Issue No. 00–21 addresses cer tain aspects of the accounting by a company for arrangements by SFAS No. 148, the effect on net income and related earnings per share, had compensation cost for stock based compensation plans been under which it will per form multiple revenue–generating activities. EITF Issue No. 00–21 addresses when and how an arrangement involving determined based on the fair value method prescribed under SFAS No. 123 (Note 10): multiple deliverables should be divided into separate units of accounting. EITF Issue No. 00–21 provides guidance with respect to the effect 2002 2001 2000 Issue No. 00–21 also addresses the impact on the measurement and/or allocation of arrangement consideration of customer cancellation of cer tain customer rights due to company nonper formance on the recognition of revenue allocated to delivered units of accounting. EITF Year Ended December 31, Net income As repor ted $ 5,939,253 $ 11,285,778 $ 11,600,632 Less: Total stock–based employee compensation expense determined under fair value based method for all awards, net of related tax effects (3,281,112) (2,370,212) (1,782,460) Pro forma Basic earnings per share: As repor ted Pro forma Diluted earnings per share As repor ted Pro forma $ $ $ $ $ 2,658,141 0.43 0.19 0.42 0.19 $ $ $ $ $ 8,915,566 0.82 0.64 0.78 0.61 $ $ $ $ $ 9,818,172 0.84 0.71 0.78 0.66 The fair value of options at date of grant was estimated using the Black–Scholes model. The following assumptions were used for the grants in 2002, 2001, and 2000, respectively: risk–free interest rate of approximately 3.64%, 4.85%, and 6.18%; expected volatility of approximately 66.34%, 63.06%, and 62.61%; expected life of five years for 2002, 2001, and 2000; and the common stock will pay no dividends. The per share weighted average grant date fair values of the options granted in 2002, 2001, and 2000 were $7.14, $10.43, and $11.35, respectively. Reclassifications. Certain prior year amounts have been reclassified to conform with the presentation utilized in the year ended December 31, 2002. New Accounting Pronouncements. In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses financial accounting and repor ting obligations associated with the retirement of tangible long–lived assets and the associated retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 did not have a material effect on the Company’s financial position or results of operations. In October 2001, the FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long–Lived Assets. SFAS No. 144, which was adopted by the Company on January 1, 2002, establishes standards for per forming cer tain tests of impairment on long–lived assets. The adoption of SFAS No. 144 did not have a material effect on the Company’s financial position or results of operations. provisions and consideration that varies as a result of future actions of the customer or the company. Finally, EITF Issue No. 00–21 provides guidance with respect to the recognition of the cost of cer tain deliverables that are excluded from the revenue accounting for an arrangement. The provisions of EITF Issue No. 00–21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company is currently evaluating the effect that the adoption of EITF Issue No. 00–21 will have on its financial position and results of operations. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock–Based Compensation – Transition and Disclosure – an amendment to FASB Statement No. 123, Accounting for Stock–Based Compensation.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock–based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of Statement 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock–based compensation. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company has made the required disclosures and does not expect the adoption of SFAS No. 148 to have a material impact on its financial position or results of operations. N o t e 3 . G o o d w i l l a n d O t h e r I n t a n g i b l e A s s e t s In July 2001, the FASB issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Intangible Assets.” As discussed in Note 2, the Company adopted the provisions of SFAS No. 141 immediately and SFAS No. 142 effective January 1, 2002. The Company operates in a single industry segment. The Company separately monitors the financial performance of its domestic and international operations. Fur ther, each of these operations generally serves a distinct customer base. Based upon these facts, the Company considers the domestic and international operations of its repor ting units for the assignment of goodwill. Goodwill for the domestic operations was generated from the acquisition of a remote control company in 1998. Goodwill for international operations resulted from the acquisition of remote control distributors in the UK in 1998, Spain in 1999 and France in 2000. Goodwill information for each repor ting unit is as follows (in thousands): In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and cer tain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. The statement replaces EITF Issue United States All Other Countries Total Goodwill No. 94–3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred The following table shows, on an as adjusted basis, what net income and earnings per share would have been if SFAS No. 142 had been applied in a Restructuring).” SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company beginning January 1, 2001 and 2000 (in thousands): does not believe that the adoption of SFAS No. 146 will have a significant impact on its financial condition, results of operations, or cash flow. In November 2002, the FASB issued Interpretation No. 45 (“FIN No. 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 expands on the accounting guidance of Statements Nos. 5, 57, and 107 and incorporates without change the provisions of FASB Interpretation No. 34, which is being superseded. FIN No. 45 will affect leasing transactions involving residual guarantees, vendor and manufacturer guarantees, and tax and environmental indemnities. All such guarantees will need to be disclosed in the notes to the financial statements starting with the period ending after December 15, 2002. For guarantees issued after December 31, 2002, the fair value of the obligation must be repor ted on the balance sheet. Existing guarantees will be grandfathered and will not be recognized on the balance sheet. The Company has made the required disclosures related to its warranties and is currently evaluating the impact of FIN No. 45 on its financial position and results of operations. Year Ended December 31, Net income, as repor ted Add back: goodwill amor tization, net of tax effect As adjusted, net income Basic earnings per share, as repor ted Add back: goodwill amor tization, net of tax effect As adjusted, basic earnings per share Diluted earnings per share, as repor ted Add back: goodwill amor tization, net of tax effect As adjusted, diluted earnings per share 2001 2000 11,286 388 11,674 0.82 0.02 0.84 0.78 0.02 0.80 $ $ $ $ $ $ 11,601 287 11,888 0.84 0.03 0.87 0.78 0.02 0.80 $ $ $ $ $ $ Dec. 31, 2002 Dec. 31, 2001 $ $ 1,191 1,770 2,961 $ $ 1,191 1,770 2,961 5 0 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 5 1 Information regarding the Company’s other acquired intangible assets and patents are as follows (in thousands): Carrying amount: Distribution rights Patents Trademark Technology Other Total carrying amount Accumulated amor tization: Distribution rights Patents Trademark Technology Other Total accumulated amor tization Net carrying amount: Distribution rights Patents Trademark Technology Other Total net carrying amount Dec. 31, 2002 Dec. 31, 2001 $ 2,597 $ $ $ $ $ 2,636 348 1,285 1,048 7,914 $ 2,134 $ 951 77 170 900 4,232 $ 463 $ 1,685 271 1,115 148 2,597 2,056 389 183 1,066 6,291 1,705 714 43 — 696 3,158 892 1,342 346 183 370 $ 3,682 $ 3,133 N o t e 7 . R e v o l v i n g C r e d i t L i n e N o t e 5 . I n v e n t o r i e s Inventories consist of the following: December 31, Components Finished goods N o t e 6 . E q u i p m e n t , F u r n i t u r e a n d F i x t u r e s Equipment, furniture and fixtures consist of the following: December 31, Tooling Equipment Furniture and fixtures Leasehold improvements Accumulated depreciation 2002 2001 $ $ 7,950,040 8,096,472 16,046,512 $ $ 8,525,412 8,174,082 16,699,494 2002 2001 $ 6,039,332 $ 4,914,626 5,697,916 1,143,719 1,277,121 5,174,601 1,038,223 1,145,016 14,158,088 12,272,466 (10,775,119) (8,444,938) $ 3,382,969 $ 3,827,528 Depreciation expense was $2,569,033, $2,663,791, and $2,522,445 for the years ended December 31, 2002, 2001, and 2000, respectively. On April 1, 2002, the Company entered into a $15 million unsecured revolving credit agreement (the “Agreement”) with Bank of America National Trust and Savings Association (“B of A”). Under the Agreement with B of A, which is set to expire on April 1, 2005, the Company can choose from several interest rate options. The interest rate in effect as of December 31, 2002 using the IBOR Rate option plus a fixed margin of 1.25%, was 2.62%. The Company pays a commitment fee at a maximum rate of 1/8 of 1% per year on the unused portion of the credit line. Under the terms of this Agreement, the Company’s ability to pay cash dividends on its common stock is restricted and the Company is subject to cer tain financial covenants and other restrictions. The Company has the right under this credit facility to acquire up to 1,000,000 shares of its common stock in market purchases. The Company purchased 584,845 shares at a cost of $5,273,611 since the date of this Agreement through December 31, 2002. Amounts available for borrowing under this credit facility are reduced by the outstanding balance of our impor t letters of credit. The Company had no amounts outstanding under the revolving credit facility and no impor t letters of credit outstanding at December 31, 2002. No interest was paid for the years ended December 31, 2002. N o t e 8 . F i n a n c i a l I n s t r u m e n t s The Company’s financial instruments consist primarily of investments in cash and cash equivalents, short–term investments, accounts receivable and accounts payable, as well as obligations under the credit facility described above. The carrying value of these instruments approximates fair value because of their shor t maturity. N o t e 9 . S t o c k h o l d e r s ’ E q u i t y 2002 2001 $ $ 28,481,871 (2,175,239) 26,306,632 $ $ 30,010,312 (1,801,252) 28,209,060 Fair Price Provisions and Other Anti–Takeover Measures. The Company’s Restated Cer tificate of Incorporation, as amended, contains cer tain provisions restricting business combinations with interested stockholders under certain circumstances and imposing higher voting requirements for the approval of certain transactions (“fair price” provision). Any of these provisions could delay or prevent a change in control of the Company. The “fair price” provisions require that holders of at least two–thirds of the outstanding shares of voting stock approve cer tain business combinations and significant transactions with interested stockholders. Amortization expense for 2002, 2001 and 2000 amounted to approximately $1.1, $1.4, and $1.3 million, respectively. Estimated amortization expense for existing intangible assets for each of the five succeeding years ended December 31 will be as follows (in thousands): 2003 2004 2005 2006 2007 $ 1,141 757 722 722 722 Acquisitions. In March 2002, the Company purchased multimedia protocol technologies from a software development company for $780,000. These technologies enable custom wireless control solutions for home enter tainment hardware and software applications. In August 2000, the Company completed its acquisition of a remote control distributor in France for approximately $1.8 million, of which $1,494,000 was paid in cash during 2000 and $143,000 was paid in cash during 2001. The remaining amount was paid in 2002. The acquisition was accounted for as a purchase with the excess of the aggregate purchase price over the fair market value of net assets acquired recorded as goodwill. N o t e 4 . A c c o u n t s R e c e i v a b l e Accounts receivable consist of the following: December 31, Accounts receivable, gross Allowance for doubtful accounts 5 2 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 5 3 Treasur y Stock. During 2002 and 2001, 584,845 and 301,600 shares of common stock were purchased by the Company on the open market 1998 Stock Incentive Plan. On May 27, 1998, the 1998 Stock Incentive Plan (“1998 Plan”) was approved. Under the 1998 Plan, 630,000 shares at a cost of $5,273,611 and $4,428,771, respectively (Note 7). During 2000 there was no stock purchased by the Company. These shares of common stock are available for distribution to the Company’s key officers and employees. The 1998 Plan provides for the issuance of stock are recorded as shares held in treasury at cost. The shares will generally be held by the Company for future use as management and the Board options, stock appreciation rights, performance stock units, or any combination thereof through May 27, 2008, unless otherwise terminated of Directors shall deem appropriate. In addition, some of these shares will be used by the Company to compensate the outside directors of by resolution of the Company’s Board of Directors. The option price for the stock options will not be less than the fair market value at the date the Company. During 2002, 2001, and 2000, 6,836, 6,188, and 4,492 shares, respectively, were issued to the outside directors. of grant. The Compensation Committee shall determine when each option is to expire, but no option shall be exercisable more than ten years after the date the option is granted. No stock appreciation rights or performance stock units have been awarded under this 1998 Plan. Warrant Issued to Customer. On November 9, 1998, the Company entered into an exclusive supply agreement with a customer. As a result of this agreement, the Company issued a warrant entitling the customer to purchase up to 600,000 shares of the Company’s common stock at 1999 Stock Incentive Plan. On January 27, 1999, the 1999 Stock Incentive Plan (“1999 Plan”) was approved. Under the 1999 Plan, 630,000 $6.3125 per share. In 1999, based on the expected number of shares to be issued, the fair value of this warrant of $1,006,000 was recorded shares of common stock are available for distribution to the Company’s key officers and employees. The 1999 Plan provides for the issuance of as additional paid in capital of the Company with a corresponding increase in other assets. The fair value of the warrant was determined using stock options, stock appreciation rights, per formance stock units, or any combination thereof through January 27, 2009, unless otherwise the Black–Scholes Model. The following assumptions were used for the warrant: risk–free interest rate of approximately 4.84%; expected terminated by resolution of the Company’s Board of Directors. The option price for the stock options will not be less than the fair market value volatility of approximately 48.11%; and expected life of five years. During 2000, the remaining value of the warrant was adjusted by approximately at the date of grant. The Compensation Committee shall determine when each option is to expire, but no option shall be exercisable more than $805,000. Subject to achieving the minimum purchase requirements of the warrant, the warrant was scheduled to vest 50% on January 1, 2003 ten years after the date the option is granted. No stock appreciation rights or performance stock units have been awarded under this 1999 Plan. and 50% on January 1, 2004. In 2001, 2000 and 1999, the customer failed to purchase the minimum requirement each year and thus, the warrant expired and the customer for feited its right to acquire any of the 600,000 shares of Company common stock. 1999A Stock Incentive Plan. On October 7, 1999, the 1999A Nonqualified Stock Plan (“1999A Plan”) was approved and on February 1, 2000, Restricted Stock Awards. On July 11, 2001, as compensation for the outside directors for the three–year period commencing July 1, 2001, the officers and employees. The 1999A Plan provides for the issuance of stock options, stock appreciation rights, performance stock units, or any Company granted each director restricted shares with a fair market value equivalent to approximately $84,000. These restricted shares have combination thereof through October 7, 2009, unless otherwise terminated by resolution of the Company’s Board of Directors. The option been recorded in a separate component of stockholders’ equity and are being amor tized over their three–year vesting period. Each calendar price for the stock options will not be less than the fair market value at the date of grant. The Compensation Committee shall determine when quar ter, 1/12 of the total stock award will vest and the shares will be distributed provided the director has served the entire calendar quar ter each option is to expire, but no option shall be exercisable more than ten years after the date the option is granted. No stock appreciation term. Amor tization expense amounted to $98,030 and $56,017 in 2002 and 2001, respectively. rights or per formance stock units have been awarded under this 1999A Plan. the 1999A Plan was amended. Under the 1999A Plan, 1,000,000 shares of common stock are available for distribution to the Company’s key During the year ended December 31, 1999, a total of 7,950 restricted shares of the Company’s common stock were reserved for issuance to 2002 Stock Incentive Plan. On February 5, 2002, the 2002 Nonqualified Stock Plan (“2002 Plan”) was approved. Under the 2002 Plan, 1,000,000 cer tain employees. The restricted shares vest over a two–year period and had a market value of $107,713 at the award date. These awards shares of common stock are available for distribution to the Company’s key officers and employees. The 2002 Plan provides for the issuance of have been recorded in a separate component of stockholders’ equity. The carrying value of the restricted stock grants was amor tized over the stock options, stock appreciation rights, per formance stock units, or any combination thereof through February 5, 2012, unless otherwise two–year vesting period and has been fully amor tized as of December 31, 2001. Amor tization expense amounted to $29,260 and $53,857 in terminated by resolution of the Company’s Board of Directors. The option price for the stock options will not be less than the fair market value 2001 and 2000, respectively. N o t e 1 0 . S t o c k O p t i o n s 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 are reserved for the granting of incentive and other stock options to officers, key employees and non–affiliated directors. The 1993 Plan provides for the granting of incentive and other stock options through January 19, 2003. All options outstanding at the time of termination of the 1993 Plan shall continue in full force and effect in accordance with their terms. The option price for incentive stock options and non–qualified stock options will not be less than the fair market value at the date of grant. The Compensation Committee shall determine when each option is to expire, but no option shall be exercisable more than ten years after the date the option is granted. The 1993 Plan also provides for the award of stock appreciation rights subject to terms and conditions specified by the Compensation Committee. No stock appreciation rights have been awarded under this 1993 Plan. 1995 Stock Incentive Plan. On May 19, 1995, the 1995 Stock Incentive Plan (“1995 Plan”) was approved. Under the 1995 Plan, 800,000 shares of common stock are available for distribution to the Company’s key officers, employees and non–affiliated directors. The 1995 Plan provides for the issuance of stock options, stock appreciation rights, performance stock units, or any combination thereof through May 19, 2005, unless otherwise terminated by resolution of the Board of Directors. The option price for the stock options will be equal to the fair market value at the date of grant. The Compensation Committee shall determine when each option is to expire, but no option shall be exercisable more than ten years after the date the option is granted. No stock appreciation rights or performance stock units have been awarded under this 1995 Plan. 1996 Stock Incentive Plan. On December 1, 1996, the 1996 Stock Incentive Plan (“1996 Plan”) was approved. Under the 1996 Plan, 800,000 shares of common stock are available for distribution to the Company’s key officers and employees. The 1996 Plan provides for the issuance of stock options, stock appreciation rights, performance stock units, or any combination thereof through November 30, 2007, unless otherwise terminated by the resolution of the Company’s Board of Directors. The option price for the stock options will be equal to the fair market value at the date of grant. The Compensation Committee shall determine when each option is to expire, but no option shall be exercisable more than ten years after the date the option is granted. No stock appreciation rights or performance stock units have been awarded under this 1996 Plan. at the date of grant. The Compensation Committee shall determine when each option is to expire, but no option shall be exercisable more than ten years after the date the option is granted. No stock appreciation rights or performance stock units have been awarded under this 2002 Plan. The following table summarizes the changes in the number of shares of common stock under option: 2002 2001 2000 Shares Weighted–Average Shares Weighted–Average Shares Weighted–Average (000) Exercise Price (000) Exercise Price (000) Exercise Price Outstanding at beginningof year 2,260 $ Granted Exercised Expired and/or for feited Outstanding at end of year Options exercisable at year–end 998 (243) (39) 2,976 1,502 $ 11.28 12.14 5.49 14.17 12.00 2,455 $ 153 (284) (64) 2,260 1,076 $ 10.29 18.08 6.15 13.79 11.28 2,142 $ 484 (98) (73) 2,455 749 7.89 19.93 6.05 9.41 $ 10.29 Significant option groups outstanding at December 31, 2002 and related weighted average price and life information are as follows: Range of Exercise Prices $2.16 to $7.50 8.45 to 10.53 11.02 to 14.71 15.20 to 22.78 $2.16 to $22.78 Options Outstanding Options Exercisable Number Weighted–Average Weighted–Average Number Weighted–Average Outstanding Remaining Exercise Exercisable At 12/31/02 Contractual Life Price At 12/31/02 702,041 514,219 709,750 1,049,875 2,975,885 5.81 9.86 6.82 8.35 7.65 $ $ 6.47 8.49 11.10 18.03 12.00 702,041 $ 750 539,188 259,563 1,501,542 $ Exercise Price 6.47 10.53 11.05 19.77 10.42 5 4 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 5 5 N o t e 1 1 . S i g n i f i c a n t C u s t o m e r s a n d S u p p l i e r s N o t e 1 5 . I n c o m e Ta x e s One significant customer, with sales of $15.9 million accounted for 15.3% of total 2002 revenues and trade receivables with this customer In 2002, 2001, and 2000, pretax income was attributed to the following jurisdictions: amounted to $2.9 million or 11.2% of the total trade receivables at December 31, 2002. During 2001, there were no customers with individual sales exceeding 10% of total Company sales. Two significant customers with sales of $15.9 and $13.6 million accounted for 12.8% and 10.9%, Year Ended December 31, 2002 2001 2000 respectively, of total 2000 revenues. Trade receivables subject the Company to a concentration of credit risk. The risk is mitigated due to the large number of customers comprising the Company’s customer base, the relative size and strength of most of The Company’s customers and the Company’s performance of ongoing credit evaluations. The Company utilizes third–party manufacturers in Asia, Mexico and the United States to produce its wireless control products. Purchases with two major suppliers amounted to $7.3 and $9.4 million representing 11.7% and 15.2%, respectively, of total inventory purchases during 2002. Accounts payable with the previously mentioned suppliers amounted to $758,000 and $796,000 or 9.7% and 10.2%, respectively, of the total accounts payable at December 31, 2002. Purchases with three major suppliers amounted to $10.5, $8.6 and $10.9 million representing 15.0%, 12.3% and 15.7%, respectively, of total inventory purchases during 2001. Accounts payable with the previously mentioned suppliers amounted to $806,000, $258,000 and $531,000 representing 8.6%, 2.8% and 5.7% of the total accounts payable at December 31, 2001. Purchases with three major suppliers amounted to $12.7, $12.3 and $7.9 million representing 17.3%, 16.8% and 10.7%, respectively, of the total inventory purchases during 2000. Additionally, the Company currently purchases a significant portion of its integrated circuit chips from two vendors. N o t e 1 2 . L e a s e s The Company leases office and warehouse space and cer tain office equipment under operating leases. Rental expense under operating leases was $1,211,852, $1,010,896, and $900,849 for the years ended December 31, 2002, 2001, and 2000, respectively. The following summarizes future minimum non–cancelable operating lease payments with initial terms greater than one year at December 31, 2002: Year ending December 31: 2003 2004 2005 2006 2007 thereafter Total lease commitments $ Amount 889,210 447,127 329,917 275,154 189,812 48,875 $ 2,180,095 N o t e 1 3 . E m p l o y e e B e n e f i t P l a n s The Company maintains a retirement and profit sharing plan under Section 401(k) of the Internal Revenue Code for all of its domestic employees that meet cer tain qualifications. Par ticipants in the plan may elect to contribute from 1% to 15% of their annual salary to the plan. The Company may, at its discretion, make contributions to the plan. The Company matches 50% of the par ticipants’ contributions in the form of newly issued shares of common stock of the Company. The expense recorded for the years ended December 31, 2002, 2001 and 2000 amounted to $384,329, $283,352, and $292,388, respectively. N o t e 1 4 . O t h e r I n c o m e , N e t “Other income, net” in the Consolidated Income Statements consisted of the following for the periods: Year Ended December 31, 2002 2001 2000 Net gain on realized foreign exchange transactions $ 93,740 $ 113,946 $ 512,623 Patent settlements Other Total 162,964 (17,461) — 33,363 — (12,914) $ 239,243 $ 147,309 $ 499,709 During 2002, the Company settled patent infringement suits resulting in payments totaling $162,964. Domestic operations Foreign operations Total $ 4,898,516 $ 19,164,817 $ 19,393,318 2,916,290 (2,021,853) 268,770 $ 7,814,806 $ 17,142,964 $ 19,662,088 The provision for income taxes charged to operations was as follows: Year Ended December 31, Current tax expense: U.S. federal State and local Foreign Total current Deferred tax expense: U.S. federal State and local Foreign Total deferred Total provision 2002 2001 2000 $ 554,105 $ 5,402,319 $ 4,060,306 (389,006) 1,011,728 1,176,827 582,700 65,953 1,687,181 94,073 6,050,972 5,841,560 492,992 42,009 163,725 698,726 322,750 95,800 (612,336) (193,786) 2,205,254 14,642 — 2,219,896 $ 1,875,553 $ 5,857,186 $ 8,061,456 The Company made income tax payments of $1,492,108, $7,801,643, and $2,578,766 in 2002, 2001 and 2000, respectively. Net deferred tax assets comprised the following at December 31: Inventory reserves Allowance for doubtful accounts Capitalized inventory costs Tax credit carry forwards Amor tization of intangibles Accrued liabilities State taxes Depreciation Other Net deferred tax assets 2002 2001 $ 438,686 $ 468,496 688,777 408,832 448,611 333,315 580,783 1,577 17,062 58,967 577,218 259,161 612,336 649,923 607,846 115,403 105,612 279,341 $ 2,976,610 $ 3,675,336 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, 2002 2001 2000 Tax provision at statutory U.S. rate $ 2,657,034 $ 6,000,037 $ 6,882,000 Increase (decrease) in tax provision resulting from: State and local taxes, net Foreign tax rate differential Nondeductible items Federal research and development credits Other Tax provision (225,554) 480,505 1,150,860 183,915 14,663 (645,251) (109,254) 76,669 19,316 (416,695) (302,646) — 22,777 — 5,819 $ 1,875,553 $ 5,857,186 $ 8,061,456 5 6 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 5 7 No income taxes have been provided on the undistributed earnings of foreign subsidiaries as the earnings are expected to be permanently N o t e 1 8 . R e l a t e d P a r t y Tr a n s a c t i o n s reinvested in the foreign operations. Determination of the amount of unrecognized deferred tax liability for temporary differences related to In August 2001, the Company entered into a 30–month consulting agreement with one of its former directors, under which the former director the undistributed earnings of the Company’s foreign operations is not practicable. Subsequent to year–end, the California Franchise Tax Board will receive $600,000 for services rendered. Amounts paid under this agreement were $166,665 and $216,670 for the years ended December began an audit of the years ended December 31, 1999 and 2000. The results of this audit are not expected to have a material impact on the 31, 2002 and 2001, respectively. This agreement expires in February 2004. Company’s financial position or results of operations. N o t e 1 6 . E a r n i n g s P e r S h a r e In April 1999, the Company provided a non–recourse interest bearing secured loan to one of the Company’s executive officers. The loan in the amount of $200,000, bears interest at the rate of 5.28% per annum, which interest is payable annually to the Company on each December 15th. The loan is secured by the primary residence purchased and the principal is payable on the earlier of (i) December 15, 2007, (ii) within twelve Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares months following a demand from the Company or (iii) on the closing of a sale or transfer of the property. outstanding. 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 year ended N o t e 1 9 . C o n t i n g e n c i e s December 31, 2002 and December 31, 2001, approximately 1,782,000 and 589,000 stock options, respectively, with exercise prices greater Product Warranties. The Company provides for estimated product warranty expenses when we sell the related products. Because warranty than the average market price of the underlying common stock, were excluded because their inclusion would have been antidilutive. estimates are forecasts that are based on the best available information, mostly historical claims experience, claims costs may differ from amounts provided. An analysis of changes in the liability for product warranties follows: The following table sets for th the computation of basic and diluted earnings per share (in thousands, except per share data): Year Ended December 31, 2002 2001 2000 B A S I C Net Income Weighted–average common shares outstanding Basic earnings per share D I L U T E D Net Income Weighted–average common shares outstanding for basic Dilutive effect of stock options and restricted stock Weighted–average common shares outstanding on a diluted basis Diluted earnings per share $ $ $ $ 5,939 13,790 0.43 $ $ 11,286 13,844 0.82 $ $ 11,601 13,743 0.84 5,939 $ 11,286 $ 13,790 373 14,163 13,844 679 14,523 11,601 13,743 1,198 14,941 0.42 $ 0.78 $ 0.78 N o t e 1 7 . B u s i n e s s S e g m e n t s a n d F o r e i g n O p e r a t i o n s The Company operates in a single industry segment and is engaged in the building and marketing of universal wireless controls and related products principally for video and audio enter tainment equipment. The Company’s customers consist primarily of international retailers and distributors, private label customers, original equipment manufacturers, subscription broadcast operators and companies in the computing industry. The Company’s operations by geographic area are presented below: Description Balance at Accruals for Warranties Accruals Relating to Preexisting Warranties Settlements (in Cash or in Kind) Balance at December 31, Issued During and Changes During December 31, 2001 the Period in Estimates the Period 2002 Year Ended December 31, 2002 $ 267,456 $ 314,095 $ (39,814) $ (17,037) $ 524,700 Litigation. On November 15, 2000, Universal filed suit against Universal Remote Control Inc. alleging that Universal Remote has infringed cer tain of the Company’s patents (Universal Electronics Inc. v. Universal Remote Control, Inc., Civil Action No. SACV 00– 1125 AHS (EEx)). Universal is seeking damages and injunctive relief. Universal Remote has answered the Complaint and has denied infringement, and the par ties are engaged in discovery. On November 19, 2002, the Company filed suit against Intrigue Technologies, Inc. alleging that Intrigue Technologies has infringed one of the Company’s patents (Universal Electronics Inc. v. Intrigue Technologies, Inc., Civil Action No. SA02–1089GLT (ANX)). Intrigue Technologies has answered this complaint denying infringement. In addition, Intrigue Technologies has filed suit against the Company (Intrigue Technologies, Inc. v. Universal Electronics Inc., Case Number A3–02–124) seeking a judgment to declare certain of the Company’s patents invalid, unenforceable and void and also alleging that the Company has violated federal antitrust laws with respect to its patent enforcement. The Company has not yet answered this complaint, however intends to do so denying all of Intrigue Technologies’ material allegations. It is the opinion of management that such patents are valid and enforceable and we intend to defend against such suit vigorously. While it is the opinion of management that our products do not infringe any third party’s patent or other intellectual property rights, the costs associated with defending or pursuing any such claims or litigation could be substantial and amounts awarded as final judgments, if any, in any such potential or pending litigation, could have a significant and material adverse effect on our financial condition, results of operations and cash flows. Net Sales United States Netherlands United Kingdom France Germany All Other Long–Lived Assets United States All Other Countries 2002 2001 2000 $ 64,869,051 $ 81,013,675 $ 82,292,109 11,712,572 12,703,846 19,013,186 11,734,250 4,226,259 3,437,778 7,910,818 8,723,896 5,232,039 2,686,711 8,669,548 7,511,173 3,614,776 5,227,083 7,081,550 $ 103,890,728 $ 119,029,715 $ 124,739,877 $ $ 7,131,655 3,632,999 10,764,654 $ $ 6,509,690 4,124,093 10,633,783 $ $ 6,590,934 4,959,963 11,550,897 Specific identification was the basis used for attributing revenues from external customers to individual countries. 5 8 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t D e l i v e r i n g T h e C o n n e c t e d H o m e 5 9 Supplementary Data Repor t of Independent Public Accountants Summarized quar terly financial data for the years ended December 31, 2002 and 2001. T O T H E B O A R D O F D I R E C T O R S A N D S T O C K H O L D E R S O F U N I V E R S A L E L E C T R O N I C S I N C . March 31, June 30, September 30, December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 2002 cash flows present fairly, in all material respects, the financial position of Universal Electronics Inc. and its subsidiaries at December 31, In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders’ equity and Net sales Gross profit Operating income Net income Earnings per share: Basic Diluted Shares used in computing earnings per share: Basic Diluted Net sales Gross profit Operating income Net income Earnings per share: Basic Diluted Shares used in computing earnings per share: Basic Diluted $ 23,410,925 $ 24,590,031 $ 26,004,420 $ 29,885,352 9,416,218 10,856,843 10,029,122 11,352,836 891,591 675,386 0.05 0.05 $ $ $ 1,810,926 1,402,312 0.10 0.10 $ $ $ 1,794,724 1,857,498 0.13 0.13 $ $ $ 2,483,443 2,004,057 0.15 0.15 $ $ $ 13,799,834 13,958,596 13,835,742 13,564,702 14,370,383 14,515,073 14,045,679 13,720,409 March 31, June 30, September 30, December 31, 2001 $ 31,022,723 $ 29,107,281 $ 31,030,337 $ 27,869,374 13,309,998 12,133,186 12,656,019 10,973,942 4,003,579 2,541,169 0.18 0.17 $ $ $ $ $ $ 3,694,786 2,316,673 0.17 0.16 $ $ $ 4,188,769 2,798,142 0.20 0.19 $ $ $ 4,121,407 3,629,794 0.26 0.25 13,818,075 13,926,002 13,867,913 13,766,966 14,587,560 14,704,618 14,435,241 14,366,529 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and per form 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 suppor ting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 2, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Accordingly, the Company ceased amor tization of its goodwill as of January 1, 2002. PricewaterhouseCoopers LLP Orange County, California January 29, 2003 6 0 U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t Corporate Information D I R E C T O R S Paul D. Arling Chairman and O F F I C E R S Paul D. Arling Chairman and Chief Executive Of ficer Chief Executive Of ficer O F F I C E R S ( C O N T I N U E D ) F O R M 1 0 – K Debbie Watts Vice President of Cable Sales Any stockholder who desires a copy of the Company’s 2002 Annual Repor t on Form 10–K filed with the Securities and Exchange Rober t P. Lilleness President and Jacques Mathijsen Commission may obtain a copy Vice President of Product, (excluding exhibits) without charge Chief Operating Of ficer Planning and Strategy, by addressing a request to Investor Universal Electronics Inc. Cypress, CA Satjiv Chahil Advisor to Palm, Inc. Santa Clara, CA Bruce A. Henderson1,2 Richmond, VA William C. Mulligan1,3,4 Managing Par tner, Chairman of Palm, Inc Paul J. M. Bennett Europe Managing Director, Vice President of Sales, to the reproduction cost will Senior Vice President, Olav Pouw Europe Europe Chief Executive Of ficer, Richard A. Firehammer, Jr. C O R P O R A T E O F F I C E Edgecombe Holdings, LLC Senior Vice President, General Counsel and Secretar y 6101 Gateway Drive Cypress, CA 90630 (714) 820–1000 Relations, Universal Electronics Inc., 6101 Gateway Drive, Cypress, California 90630. A charge equal be made if the exhibits are requested. Universal’s Internet address is www.uei.com. Universal makes available through its Internet Web site its annual Primus Venture Par tners, Inc. Senior Vice President 9:00 a.m. June 18, 2003 can also obtain copies of our Cleveland, OH of Sales and Marketing Universal Electronics Inc. SEC filings from the SEC John S. Ames A N N U A L M E E T I N G repor t on Form 10–K. Investors J.C. Sparkman1,2,3 Jerry Bardin Retired Executive Vice Senior Vice President 6101 Gateway Drive Cypress, CA 90630 of Engineering, Operations and Quality I N D E P E N D E N T A C C O U N T A N T S Web site at www.sec.gov. L O C A T I O N S U.S. Locations 6101 Gateway Drive President and Chief Operating Of ficer, TCI Denver, CO 1. Member – Audit Committee Patrick H. Hayes Vice President of 2. Member – Compensation Committee Advanced Technology 3. Member – Nominating Committee 4. Member – Acquisition Advisor y Committee Mark Belzowski PricewaterhouseCoopers LLP Cypress, CA 90630 Ir vine, CA 92614 R E G I S T E R A N D T R A N S F E R A G E N T Fifth Third Bank 1864 Enterprise Parkway West Twinsburg, Ohio 44087 International Location Vice President Finance, Corporate Trust Administration The Netherlands Chief Financial Of ficer 38 Fountain Square Plaza — Universal Electronics BV and Treasurer MD 10AT60 Pam Price Vice President of Cable Sales Cincinnati, OH 45202 Phone: (513) 534–5405 Institutenweg 21 7521 PH Enschede, Netherlands Universal Electronics Inc. is an equal oppor tunity employer. l a i n r o f i l a C , y t n u o C e g n a r O & s e l e g n A s o L l p m a r l n o i t c u d o r P & n g i s e D S O U R C E S 1. Page 2 *eBrain Market Research for Consumer Electronics America, “9th Annual Consumer Electronics Holiday Purchase Patterns” 2. Page 6 *The Wall Street Journal/Carmel Group December 10, 2002. 3. Page 6 *IDC 4. Page 10 *Yankee Group, Video–On–Demand: Sustained MSO Commitment Drives Rapid Growth) 5. Page 14 *Recording Industr y Association of America–RIAA) 6. Page 16 *Handheld Computing Magazine, Februar y/March 2003 Universal Electronics Inc. 6101 Gateway Drive Cypress, CA 90630–4841 www.uei.com U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A R D e l i v e r i n g T h e C o n n e c t e d H o m e. U n i v e r s a l E l e c t r o n i c s I n c . 2 0 0 2 A n n u a l R e p o r t