April 30, 2010

 

Dear Stockholder:

 

You are cordially invited to attend the 2010 Annual Meeting of Stockholders of Universal Electronics Inc., to be held on Tuesday, June 15, 2010 at 4:00 p.m., Pacific Daylight Time, at our corporate office, 6101 Gateway Drive, Cypress, California 90630. We urge you to be present in person or represented by proxy at this Meeting of Stockholders.

 

You will be asked to consider and vote upon the election of members of our Board of Directors, the ratification of the Board of Directors’ engagement of our independent registered public accountants for the year ending December 31, 2010, and the adoption and approval of our 2010 Stock Incentive Plan. Details of these proposals and a description of our general business, directors and management are set forth in the accompanying Proxy Statement. The Board of Directors unanimously recommends that stockholders vote to approve all of the proposals.

 

Whether or not you plan to attend the Annual Meeting in person, it is important that your shares are represented. Therefore, please promptly complete, sign, date and return the enclosed proxy card in the accompanying envelope, which requires no postage if mailed within the United States. You are, of course, welcome to attend the Annual Meeting and vote in person even if you previously returned your proxy card.

 

On behalf of the Board of Directors and management of Universal Electronics Inc., we thank you for all of your support.

 

Sincerely yours,

 

 

Paul D. Arling
Chairman and Chief Executive Officer

 

UNIVERSAL ELECTRONICS INC.
6101 Gateway Drive
Cypress, California 90630
714-820-1000
714-820-1010 Facsimile
www.uei.com

TABLE OF CONTENTS

 

UNIVERSAL ELECTRONICS INC.
Corporate Headquarters:
6101 Gateway Drive
Cypress, California 90630

 

Notice of Annual Meeting of Stockholders
to be Held on Tuesday, June 15, 2010

 

The 2010 Annual Meeting of Stockholders of Universal Electronics Inc., a Delaware corporation (“Universal,” the “Company,” “we,” “us” or “our”), will be held on Tuesday, June 15, 2010 at 4:00 p.m., Pacific Daylight Time, at our corporate office, 6101 Gateway Drive, Cypress, California 90630.

 

The meeting will be conducted:

 

 

Proposal One:  The election of Paul D. Arling as a Class I director to serve on the Board of Directors until the next Annual Meeting of Stockholders to be held in 2011 or until the election and qualification of his successor; and the election of Satjiv S. Chahil, William C. Mulligan, J.C. Sparkman, Gregory P. Stapleton, Carl E. Vogel, and Edward K. Zinser as Class II directors to serve on the Board of Directors until the Annual Meeting of Stockholders to be held in 2012 or until their respective successors are elected and qualified; and

 

Proposal Two:  Ratification of the appointment of Grant Thornton LLP, an independent registered public accounting firm, as our auditors for the year ending December 31, 2010; and

 

Proposal Three:  Adoption and approval of our 2010 Stock Incentive Plan.

 

 

All holders of record of shares of our common stock (NASDAQ: UEIC) at the close of business on April 16, 2010 are entitled to vote at the meeting and at any postponements or adjournments of the meeting. To ensure that your vote is recorded promptly, please vote as soon as possible, even if you plan to attend the meeting in person. If you have Internet access, we encourage you to record your vote via the Internet at www.edocumentreview.com/ueic. It is convenient, and it saves us postage and processing costs. In addition, when you vote via the Internet, your vote is recorded immediately, and there is no risk that postal delays will cause your vote to arrive late and therefore not be counted. If you do not vote via the Internet, please vote by telephone or by completing, signing, dating and returning the accompanying proxy card in the enclosed return envelope. Submitting your proxy by Internet, telephone or mail will not affect your right to vote in person if you decide to attend the annual meeting.

 

IF YOU PLAN TO ATTEND THE MEETING:

 

Registration and seating will begin at 3:30 p.m. (Pacific Daylight Time). Each stockholder will need to bring valid picture identification, such as a driver’s license or passport, for admission to the meeting. Stockholders holding stock in brokerage accounts (“street name” holders) will need to bring a copy of a brokerage statement reflecting stock ownership as of the record date. Cameras, recording devices and other electronic devices will not be permitted at the meeting, and all cellular phones must be silenced during the meeting. We realize that many cellular phones have built-in digital cameras, and while these phones may be brought into the meeting, the camera function may not be used at any time.

 

By Order of the Board of Directors,

 

 

Richard A. Firehammer, Jr.
Senior Vice President, General
Counsel and Secretary

 

April 30, 2010

Cypress, California

UNIVERSAL ELECTRONICS INC.
6101 Gateway Drive
Cypress, California 90630

 

 

Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to Be Held on Tuesday, June 15, 2010, at 4:00 p.m. (Pacific Daylight Time): The Proxy Statement and the Annual Report on Form 10-K are available at www.uei.com under the heading “About Us”, then “Investor” and then “SEC Filings”.

 

This proxy statement contains information concerning our annual meeting of stockholders to be held on Tuesday, June 15, 2010, beginning at 4:00 p.m. (Pacific Daylight Time) at our office, 6101 Gateway Drive, Cypress, California 90630 and at any adjournments or postponements of the meeting. Your proxy for the meeting is being solicited by our Board of Directors. This proxy statement and our annual report are being mailed to stockholders beginning on or about May 7, 2010.

 

What is the purpose of the annual meeting?

 

At our annual meeting, stockholders will act upon the matters outlined in the notice of meeting provided with this proxy statement, including: the election of directors; ratification of the appointment of our independent registered public accounting firm; adoption and approval of our 2010 Stock Incentive Plan; and such other business as may properly come before the meeting. In addition, management will respond to questions from stockholders, if any.

 

Who may attend the meeting?

 

Subject to space availability, all stockholders as of April 16, 2010, the record date, or their duly appointed proxies, may attend the meeting. If you plan to attend the meeting, please note that you will need to bring valid picture identification, such as a driver’s license or passport. Cameras, recording devices and other electronic devices will not be permitted at the meeting, and all cellular phones must be silenced during the meeting. We realize that many cellular phones have built-in digital cameras, and while these phones may be brought into the meeting, the camera function may not be used at any time.

 

Please also note that if you hold your shares in “street name” (that is, through a broker or other nominee), you will need to bring a copy of a brokerage statement reflecting your stock ownership as of the record date.

 

Who is entitled to vote at the meeting?

 

Only stockholders of record at the close of business on April 16, 2010, the record date, are entitled to receive notice of and to participate in the annual meeting. If you were a stockholder of record on that date, you will be entitled to vote all of the shares that you held on that date at the meeting, or any postponements or adjournments of the meeting. There were 13,660,284 shares of our common stock outstanding on the record date.

 

What are the voting rights of the holders of the company’s common stock?

 

Each share of our common stock outstanding on the record date will be entitled to one vote on each matter considered at the meeting.

 

What is a quorum?

 

A quorum is the minimum number of our shares of common stock that must be represented at a duly called meeting in person or by proxy in order to conduct business legally at the meeting. For the annual meeting, the

presence, in person or by proxy, of the holders of a majority of the shares entitled to vote will be considered a quorum. If you are a registered stockholder, you must deliver your proxy by Internet, telephone or mail, or attend the annual meeting in person and vote, in order to be counted in the determination of a quorum. If you are a “street name” stockholder, your broker or other nominee will vote your shares pursuant to your proxy directions, and such shares will count in the determination of a quorum. If you do not provide any directions to your broker or other nominee, your shares will still count for purposes of attaining a quorum, and your broker or other nominee may vote your shares in its discretion on proposals 1 and 2.

 

How do I vote?

 

If you are a registered stockholder, you may submit your proxy by Internet, telephone or mail by following the instructions included with your proxy card. The deadline for submitting your proxy by Internet or telephone is 1:00 a.m. Central Time on June 15, 2010. The designated proxy will vote according to your instructions. You may also attend the meeting and deliver a proxy card to be voted in the same manner, or you may personally vote by ballot.

 

If you are a “street name” stockholder, your properly signed and returned voting instruction card will be tabulated and voted by your broker or other nominee. Please check your voting instruction card or contact your broker or other nominee to determine whether you will be able to deliver your voting instructions by Internet or telephone. If you are a “street name” stockholder and you want to vote at the meeting, you will need to obtain a signed proxy from the broker or nominee that holds your shares, because the broker or nominee is the legal, registered owner of the shares.

 

If you are a member of a retirement or savings plan or other similar plan, you may submit your voting instructions by Internet, telephone or mail by following the instructions included with your voting instruction card. The deadline for submitting your voting instructions by Internet or telephone is 1:00 a.m. Central Time on June 15, 2010. The trustee or administrator of the plan will vote according to your instructions and the rules of the plan.

 

Can I change my vote after I return my proxy or voting instruction card?

 

If you are a registered stockholder, you may revoke or change your vote at any time before the proxy card is voted, by filing with our transfer agent, Computershare Trust Company, N.A. either by a written notice of revocation or a duly executed proxy bearing a later date. If you attend the meeting in person, you may ask the judge of elections to suspend your proxy holder’s power to vote, and you may submit another proxy or vote by ballot. Your attendance at the meeting will not by itself revoke a previously granted proxy. Any written notice revoking a proxy should be sent to Computershare Trust Company, N.A., P.O. Box 43126, Providence, RI 02940.

 

If your shares are held in “street name” or you are a member of a retirement or savings plan or other similar plan, please check your voting instruction card or contact your broker, nominee, trustee or administrator to determine whether you will be able to revoke or change your vote.

 

Will my vote be confidential?

 

It is our policy to maintain the confidentiality of proxy cards, ballots and voting tabulations that identify individual stockholders except as might be necessary to meet any applicable legal requirements and, in the case of any contested proxy solicitation, as might be necessary to allow proper parties to verify proxies presented by any person and the results of the voting.

 

What are the board’s recommendations?

 

The board recommends that you vote:

 

 

What vote is required to approve each proposal?

 

Election of directors.  Directors are elected by a plurality of votes cast. This means that the one Class I director receiving the most votes cast at the meeting will be elected to serve for the next year. In addition, six Class II directors receiving the most votes cast at the meeting will be elected to serve for the next two years. Only votes cast “for” are counted in determining whether a plurality has been cast in favor of a director. A properly executed proxy marked “withhold authority” with respect to the election of a director will not be voted with respect to the director. Votes to withhold authority, while included for purposes of attaining a quorum, will have no effect on the vote on this matter.

 

Other proposals.  For each other proposal, the affirmative vote of a majority of the votes cast will be required for approval. Abstentions, while included for purposes of attaining a quorum, will have no effect on the outcome of the proposal.

 

Street name shares and broker non-votes.  If you hold your shares in “street name” through a broker or other nominee, your broker or nominee may not be permitted to exercise voting discretion with respect to some proposals if you do not provide voting instructions. “Broker non-votes” are shares that a broker or nominee does not vote because it has not received voting instructions and does not have discretionary authority to vote. For this meeting, if you do not give specific instructions, your broker or nominee may cast your vote in its discretion for proposal 1, the election of directors, and for proposal 2, the ratification of the appointment of the company’s independent registered public accounting firm. Broker non-votes, if any, are included for purposes of attaining a quorum. On proposals where brokers do not have discretionary voting authority, including proposal 3, the adoption and approval of our 2010 Stock Incentive Plan, broker non-votes will have no effect on the outcome of a proposal.

 

Where can I find information about the governance of the company?

 

The company has adopted corporate governance principles that, along with the charters of the board committees, provide the framework for the governance of the company. The corporate governance and nominating committee is responsible for annually reviewing the principles and recommending any proposed changes to the board for approval. A copy of our corporate governance principles is posted on our website at www.uei.com under the heading “About Us”, then “Investor”, then “Corporate Governance,” along with the charters of our board committees and other information about our governance practices. We will provide to any person without charge a copy of any of these documents upon written request to our secretary at Universal Electronics Inc, 6101 Gateway Drive, Cypress, California 90630.

 

Does the company have a code of conduct?

 

We have adopted a Code of Conduct that applies to all directors, officers and employees, including without limitation our principal executive officer, principal financial officer and principal accounting officer. Any person subject to the Code of Conduct must avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and ethical manner, report all violations of the Code of Conduct and potential conflicts of interest and otherwise act with integrity and Universal’s best interest. The Code of Conduct also includes procedures to receive, retain and treat complaints received regarding accounting, internal accounting controls or auditing matters and to allow for the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters. The Code of Conduct complies with the requirements of NASD and the Sarbanes-Oxley Act of 2002 and is posted on the Corporate Governance page of our website at www.uei.com. Any amendment to the Code of Conduct or waiver of its provisions with respect to our principal executive officer, principal financial officer or principal accounting officer or any director will be promptly posted on our website www.uei.com.

Additionally, at the direction of the Board of Directors, management has established an “Ethics Line” to assist our employees in complying with their ethical and legal obligations and reporting suspected violations of applicable laws, policies or procedures. The Ethics Line is operated by Ethicspoint, an independent third party. Information about our Ethics Line may be found on the Corporate Governance page of our website at www.uei.com.

 

How does the Board determine which directors are considered independent?

 

The Board has adopted Director Independence Standards to assist in determining the independence of each director. In order for a director to be considered independent, the Board must affirmatively determine that the director has no material relationship with Universal. In each case, the Board broadly considers all relevant facts and circumstances, including the director’s commercial, industrial, banking, consulting, legal, accounting, charitable and family relationships and such other criteria as the Board may determine from time to time. These Director Independence Standards are published on our Corporate Governance page at www.uei.com. The Board has determined that each of the six current Class II Directors, Messrs. Chahil, Mulligan, Sparkman, Stapleton, Vogel and Zinser meets these standards and thus is independent and, in addition, satisfies the independence requirements of the NASDAQ Stock Market. To our knowledge, none of the independent directors has any direct or indirect relationships with our company or its subsidiaries and affiliates, other than serving as a director.

 

All members of the Audit, Compensation and Corporate Governance and Nominating Committees must be independent as defined by the Board’s Director Independence Standards. Members of the Audit Committee must also satisfy additional Securities and Exchange Commission (“SEC”) independence requirements, which provide that they may not accept, directly or indirectly, any consulting, advisory or other compensatory fees from Universal or any of its subsidiaries other than their director compensation.

 

Who is the chairman of the board?

 

The Board’s current leadership structure is characterized by:

 

 

Mr. Arling has served as our Chairman and Chief Executive Officer since July 2001. The Board believes that combining the roles of CEO and Chairman contributes to an efficient and effective Board. The CEO, with his in-depth knowledge and understanding of the Company, is best able to chair regular Board meetings by bringing key business issues and stockholder interests to the Board’s attention. In addition, the Board believes that combining these roles maximizes our CEO’s effectiveness. Within the Company, the CEO is primarily responsible for effectively leading significant change, improving operational efficiency, driving growth, managing the Company’s day-to-day business, managing the various risks facing the Company, and reinforcing the expectation for all employees of uncompromising honesty and integrity. Our Board believes that combining the roles of CEO and Chairman gives management clarity of leadership. Because of this, management knows that when the CEO is speaking, it is with the voice of the Board and not merely that of an Executive Officer. Coupled with our independent Directors, this combined structure provides independent oversight while avoiding unnecessary confusion regarding the Board’s oversight responsibilities and the day-to-day management of business operations.

 

What is the Board’s role in risk oversight?

 

The Board has delegated to the Audit Committee through its charter the primary responsibility for the oversight of risks facing the Company. The charter provides that the Audit Committee “discuss with management

the Company’s major risk exposures, including financial risk exposures, and the steps management has taken to monitor and control such exposures.”

 

Our Internal Auditor (“Auditor”), whose appointment and performance is reviewed and evaluated by the Audit Committee and who has direct access to the Committee, is responsible for leading the formal risk assessment and management process within the Company. The Auditor, through consultation with the Company’s senior management, periodically assesses the major risks facing the Company and works with those executives responsible for managing each specific risk. The Auditor periodically reviews with the Audit Committee the major risks facing the Company and the steps management has taken to monitor and mitigate those risks. The Auditor’s risk management report, which is provided in advance of the meetings, is reviewed by the entire Audit Committee. The executive responsible for managing a particular risk may also report to the Audit Committee or full Board on how the risk is being managed and mitigated.

 

While the Board’s primary oversight of risk is with the Audit Committee, the Board has delegated to other committees the oversight of risks within their areas of responsibility and expertise. For example, the Compensation Committee oversees the risks associated with the Company’s compensation practices, including a periodic review of the Company’s compensation policies and practices for its employees. The Corporate Governance and Nominating Committee oversees the risks associated with the Company’s overall governance and its succession planning process to understand that the Company has a slate of future, qualified candidates for key management positions.

 

The Board believes that its oversight of risks, primarily through delegation to the Audit Committee, but also through delegation to other committees to oversee specific risks within their areas of responsibility and expertise, and the sharing of information with the full Board, is appropriate for a company of our size and complexity. The chair of each committee that oversees risk provides a summary of the matters discussed with the committee to the full Board following each committee meeting. The minutes of each committee meeting are also provided to all Board members. The Board also believes its oversight of risk is enhanced by its current leadership structure (discussed above) because the CEO, who is ultimately responsible for the Company’s management of risk, also chairs regular Board meetings, and with his in-depth knowledge and understanding of the Company, is best able to bring key business issues and risks to the Board’s attention.

 

How is the board made up?

 

Our board presently consists of up to nine directors divided into two classes; a Class I Director is a director who is also an employee of Universal and is elected each year at the Annual Meeting of Stockholders to serve a one-year term and a Class II Director is a director who is not an employee and is generally elected every even-numbered year at the Annual Meeting of Stockholders to serve a two-year term.

 

We currently have seven directors; one is a Class I Director and six are Class II Directors. After this Annual Meeting of Stockholders, assuming all those nominated are elected, there will be seven members of the Board, one (1) Class I director, six (6) Class II directors and two (2) vacancies. We retain vacancies to accommodate additional qualified directors who come to the attention of the Board.

 

How often did the board meet during 2009?

 

The board formally met ten times and acted by unanimous written consent two times during 2009. Each director is expected to attend each meeting of the board and those committees on which he serves. No director attended less than 75% of the aggregate of all board meetings and meetings of committees on which the director served during 2009. We encourage each director to attend every annual meeting of stockholders; however, since attendance by our stockholders at these meetings has historically been via proxy and not in person, our outside directors have not regularly attended these meetings. At the 2009 Annual Meeting of Stockholders, no stockholders attended in person and one director, Mr. Arling, was present.

What is the role of the primary board committees?

 

The board has three standing committees — audit, compensation, and corporate governance and nominating. Each committee is composed entirely of independent directors, as determined by the board in accordance with applicable NASDAQ listing standards and the Board’s Director Independence Standards. In addition, audit committee members meet additional heightened independence criteria applicable to audit committee members under applicable SEC independence requirements. Each of the committees operates under a written charter that has been approved by the board. The table below provides information about the current membership of the committees and the number of meetings held in 2009.

 

 

The Audit Committee is primarily concerned with the integrity of our financial statements, our compliance with legal and regulatory requirements, the independence and qualifications of the independent auditor and the performance of our internal audit function and independent auditor. The Audit Committee’s functions include:

 

 

The independent registered public accountants have unrestricted access to the Audit Committee, and the members of the Audit Committee have unrestricted access to the independent registered public accountants.

 

All of the audit committee members are financially literate. The board has determined that Mr. Zinser is qualified as an audit committee financial expert within the meaning of applicable SEC regulations and that Mr. Zinser acquired his expertise primarily through his experience as a Chief Financial Officer.

 

The Compensation Committee assists the board in discharging its responsibilities relating to the compensation of the chief executive officer and other executive officers (including “Named Executives” as such term is defined below in the “Compensation Discussion and Analysis” under the heading Compensation Objectives). Among other things, the committee:

 

 

Compensation Committee Interlocks and Insider Participation

 

During 2009, none of the members of the Compensation Committee had any business or financial relationship with Universal requiring disclosure in this Proxy Statement.

 

The corporate governance and nominating committee assists the board in identifying qualified individuals to become board and committee members, considers matters of corporate governance and assists the board in evaluating the board’s effectiveness. Among other things, the committee:

 

 

The committee will consider director candidates recommended by our stockholders. Stockholders recommending candidates for consideration by the corporate governance and nominating committee should send their

recommendations to our secretary at Universal Electronics Inc. 6101 Gateway Drive, Cypress, California 90630. The recommendation must include the candidate’s name, biographical data and qualifications.

 

Any such recommendation should be accompanied by:

 

 

The board endeavors to have members representing diverse experience at policymaking levels in business, finance and technology and other areas that are relevant to the company’s global activities. The selection criteria for director candidates include the following:

 

 

The committee evaluates director candidates recommended by stockholders based on the same criteria used to evaluate candidates from other sources. The Corporate Governance and Nominating Committee may employ professional search firms (for which we would pay a fee) to assist in identifying potential Board members with the desired skills and disciplines.

 

Diversity

 

The Board of Directors values diversity as a factor in selecting nominees to serve on the Board, and believes that diversity in its composition may provide significant benefit to the Board and the Company. Although there is no specific policy on diversity on our board, the Corporate Governance and Nominating Committee, when considering a particular nominee for selection as a director, will include such factors as diverse experience, gender, race, national origin, functional background, executive or professional experience, and international experience.

 

How can stockholders communicate with the Board?

 

The Board has adopted a process by which stockholders and other interested parties may communicate with the Board, certain committee chairs or the non-management directors as a group by e-mail or regular mail. That process is described on the Corporate Governance page of our website at www.uei.com. Any communication by regular mail should be sent to Universal Electronics Inc., 6101 Gateway Drive, Cypress, California 90630, to the attention, as applicable, of the (i) Chair, Board of Directors; (ii) Chair, Audit Committee; (iii) Chair, Compensation Committee; (iv) Chair, Corporate Governance and Nominating Committee; or (v) the Non-Management Directors.

 

How can individuals report concerns relating to accounting, internal control or auditing matters?

 

Concerns relating to accounting, internal control or auditing matters may be submitted by writing to Chair, Audit Committee, Universal Electronics Inc., 6101 Gateway Drive, Cypress, California 90630. All correspondence will be handled in accordance with procedures established by the audit committee with respect to these matters.

 

Additionally, at the direction of the Board of Directors, management has established an “Ethics Line” to assist our employees in complying with their ethical and legal obligations and reporting suspected violations of applicable laws, policies or procedures. The Ethics Line is operated by Ethicspoint, an independent third party. Information about our Ethics Line may be found on the Corporate Governance page of our website at www.uei.com.

 

How are non-management directors compensated?

 

In June 2004, our stockholders adopted the 2004 Directors Compensation Plan, pursuant to which each Class II Director is to receive an annual cash retainer equal to $25,000 (or $6,250 quarterly), a fee of $1,500 for each board meeting attended in excess of four each fiscal year, a fee of $1,000 for each committee meeting attended, an annual fee of $10,000 for each committee chaired, and an annual award of 5,000 shares of our Common Stock, which vest ratably each quarter during the year awarded. During 2009, Mr. Vogel was granted 20,000 stock options with a grant price of $20.55 per share.

 

In addition, during the fourth quarter of 2009, the Compensation Committee, in consultation with an independent compensation consultant (Towers Perrin), concluded that the 2004 Directors’ Compensation Plan remains in line with industry standards and thus recommended to the Board that no changes be made to the Plan for 2010. The Board accepted the Compensation Committee’s recommendation in the first quarter of 2010.

 

 

 

 

Mr. Arling, who is an officer and the Company’s only Class I Director, received no additional compensation for his service as a director during 2009. However, all directors are reimbursed for travel expenses and other out-of-pocket costs incurred to attend meetings.

Additional Information about Fees Earned or Paid in Cash in Fiscal 2009

 

The following table provides additional information about fees earned or paid in cash to non-management directors in fiscal 2009:

 

 

 

 

Additional Information about Non-Management Director Equity Awards

 

The following table provides additional information about non-management director equity awards, including the stock awards and option awards made to non-management directors during fiscal 2009, the grant date fair value of each of those awards and the number of stock awards and option awards outstanding as of the end of fiscal 2009:

 

 

 

 

Which directors are nominated for election?

 

Paul D. Arling is nominated for election as a Class I Director to serve a one-year term expiring at our 2011 Annual Meeting of Stockholders. Satjiv S. Chahil, William C. Mulligan, J.C. Sparkman, Gregory P. Stapleton, Carl E. Vogel, and Edward K. Zinser are nominated for election as Class II Directors to serve a two-year term expiring at our 2012 Annual Meeting of Stockholders.

 

What are the directors’ backgrounds?

 

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR EACH OF THE NOMINEES.

 

The Board of Directors, acting on the recommendation of its Audit Committee, has appointed Grant Thornton LLP (“GT”), a firm of independent registered public accountants, as auditors, to examine and report to the Board and to our stockholders on our consolidated financial statements and our subsidiaries for 2010. GT has served as the independent registered public accounting firm of the company since 2005.

 

Although ratification of the appointment of GT is not legally required, the Board is submitting it to the stockholders as a matter of good corporate governance. If the stockholders do not ratify the appointment, the audit committee will consider the selection of another independent registered public accounting firm in future years.

 

Representatives of GT will be present at the Annual Meeting to make a statement, if they so desire, and will be available to respond to appropriate questions.

 

We engaged GT as our independent registered public accounting firm for the fiscal year ending December 31, 2009. The decision to engage GT was approved by the Board of Directors, upon the recommendation of the Audit Committee and ratification by our stockholders.

 

Fees Paid to Independent Registered Public Auditing Firm

 

Aggregate fees for professional services delivered by GT for the years ended December 31, 2009 and 2008 were as follows:

 

 

 

 

Audit Committee Pre-Approval Policy for Audit and Non-Audit Services of Independent Registered Public Accounting Firm

 

The audit committee’s policy requires that it pre-approve all audit and non-audit services to be performed by the company’s independent registered public accounting firm. Unless a service falls within a category of services that the audit committee has pre-approved, an engagement to provide the service requires pre-approval by the audit committee. Also, proposed services exceeding pre-approved cost levels require additional pre-approval.

 

Consistent with the rules established by the SEC, proposed services to be provided by the company’s independent registered public accounting firm are evaluated by grouping the service fees under one of the following four categories: Audit Services, Audit-Related Services , Tax Services and All Other Services. All proposed services are discussed and approved by the audit committee. In order to render approval, the audit committee has available a schedule of services and fees approved by category for the current year for reference, and specific details are provided. The audit committee does not pre-approve services related only to the broad categories noted above.

The audit committee has delegated pre-approval authority to its chairman for cases where services must be expedited. The company’s management provides the audit committee with reports of all pre-approved services and related fees by category incurred during the current fiscal year, with forecasts of additional services anticipated during the year.

 

All of the services related to fees disclosed above were pre-approved by the audit committee.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR RATIFICATION OF THE APPOINTMENT OF GRANT THORNTON LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE YEAR ENDED DECEMBER 31, 2010.

 

Overview

 

On April 27, 2010, the board unanimously adopted and approved the company’s 2010 Stock Incentive Plan (“2010 Plan”), and is submitting the 2010 Plan to stockholders for their adoption and approval at the Annual Meeting. The board believes the company’s interests are best advanced by stimulating the efforts of employees, officers, and non-employee directors, in each case who are selected to be participants, by heightening the desire of such persons to continue working toward and contributing to the success and progress of the company. The 2010 Plan allows grants of incentive and nonqualified stock options, stock appreciation rights, restricted stock and restricted stock units, any of which may be performance-based, and for incentive bonuses. The board has adopted and approved the 2010 Plan to permit the company to continue to use stock-based compensation to align stockholder and participant interests to the company. The company’s stock-based compensation program is currently operated under the company’s 2002 Stock Incentive Plan, 2003 Stock Incentive Plan, and 2006 Stock Incentive Plan (collectively, the “Prior Plans”). As of April 1, 2010, only 103,777 shares were available for future grants under the Prior Plans.

 

Why You Should Vote For the 2010 Plan

 

The board recommends that the company’s stockholders approve the 2010 Plan because it believes the company’s ability to grant equity-based awards continues to be crucial in allowing the company to effectively compete for and appropriately motivate and reward key talent. It is in the long-term interest of both the company and its stockholders to strengthen the company’s ability to attract, motivate and retain employees, officers, and non-employee directors and to provide additional incentive for those persons through stock ownership and other incentives to improve financial performance, increase profits and strengthen the mutuality of interest between those persons and the company’s stockholders.

 

Promotion of Good Corporate Governance Practices

 

The board believes the use of stock-based incentive awards promotes best practices in corporate governance by maximizing stockholder value. By providing participants in the 2010 Plan with a stake in the company’s success, the interests of the participants are aligned with those of the company’s stockholders. Specific features of the 2010 Plan that are consistent with good corporate governance practices include, but are not limited to:

 

 

Key Data

 

The following table includes information regarding all of the company’s outstanding equity awards and shares available for future awards under the company’s equity plans as of April 1, 2010 (and without giving effect to this proposal 3):

 

 

Section 162(m) of the Code

 

The board believes that it is in the best interests of the company and its stockholders to continue to provide for an equity incentive plan under which compensation awards made to the company’s executive officers may qualify for deductibility by the company for federal income tax purposes. Accordingly, the 2010 Plan has been structured in a manner such that awards granted under it may satisfy the requirements for “performance-based” compensation within the meaning of Section 162(m) of the Internal Revenue Code of 1986 (the “Code”). In general, under Section 162(m), in order for the company to be able to deduct compensation in excess of $1,000,000 paid in any one year to the company’s chief executive officer or any of the company’s four other most highly compensated executive officers (other than the company’s chief financial officer), such compensation must qualify as “performance-based.” One of the requirements of “performance-based” compensation for purposes of Section 162(m) is that the material terms of the performance goals under which compensation may be paid be disclosed to and approved by the company’s stockholders. For purposes of Section 162(m), the material terms include (i) the employees eligible to receive compensation, (ii) a description of the business criteria on which the performance goal is based and (iii) the maximum amount of compensation that may be paid to an employee under the performance goal. With respect to the various types of awards under the 2010 Plan, each of these aspects is discussed below, and stockholder approval of the 2010 Plan will be deemed to constitute approval of each of these aspects of the 2010 Plan for purposes of the approval requirements of Section 162(m).

 

Plan Summary

 

The following summary of the material terms of the 2010 Plan are qualified in their entirety by reference to the complete statement of the 2010 Plan, which is set forth in Appendix C to this Proxy Statement.

 

Administration

 

The 2010 Plan will be administered by the Compensation Committee of the Board of Directors. Subject to the express provisions of the 2010 Plan, the Committee is authorized and empowered to do all things that it determines to be necessary or appropriate in connection with the administration of the 2010 Plan. In addition, the compensation committee may delegate any or all aspects of the day-to-day administration of the 2010 Plan to one or more officers or employees of the company or any subsidiary, and/or to one or more agents.

 

Participants

 

Any person who is a non-employee director or an employee of the company or of any subsidiary will be eligible for the grant of awards under the 2010 Plan. Options intending to qualify as “incentive stock options” (“ISOs”) within the meaning of Section 422 of the Code may only be granted to employees of the company or any subsidiary. Approximately 555 employees and 6 non-employee directors currently qualify to participate in the 2010 Plan.

 

Shares Subject to the Plan and to Awards

 

The aggregate number of shares of the company’s common stock issuable pursuant to the 2010 Plan may not exceed 1,000,000, subject to adjustment upon a change in the company’s capitalization. As noted above, as of

April 1, 2010, 103,777 shares remained available for issuance under future awards that may be granted under the Prior Plans.

 

The aggregate number of shares issued under the 2010 Plan at any time will equal the number of shares issued upon exercise or settlement of an award. Shares subject to awards that expire, terminate or are unexercised, or forfeited will again be available for issuance under the 2010 Plan.

 

Option Awards

 

The Committee will establish the exercise price per share under each option, which, other than in the event of options granted in connection with a merger or other acquisition, will not be less than the fair market value of a share on the date the option is granted. The Committee will establish the term of each option, which in no case may exceed a period of ten (10) years from the date of grant. Options granted under the 2010 Plan may either be ISOs or options which are not intended to qualify as ISO’s, or nonqualified stock options (“NQSOs”). The 2010 Plan prohibits repricing stock options without stockholder approval.

 

Stock Appreciation Rights

 

A stock appreciation right provides the right to the monetary equivalent of the increase in value of a specified number of the shares over a specified period of time after the right is granted. Stock appreciation rights may be granted to participants either in tandem with or as a component of other awards granted under the 2010 Plan (“tandem SARs”) or not in conjunction with other awards (“freestanding SARs”). All freestanding SARs will be granted subject to the same terms and conditions applicable to options as set forth above and in the 2010 Plan and all tandem SARs will have the same exercise price, vesting, exercisability, forfeiture and termination provisions as the award to which they relate. The 2010 Plan prohibits repricing stock appreciation rights without stockholder approval.

 

Restricted Stock and Restricted Stock Units

 

Restricted stock is an award or issuance of shares the grant, issuance, retention, vesting and/or transferability of which is subject during specified periods of time to conditions (including continued employment or performance conditions) and terms as the Committee deems appropriate. Restricted stock units are awards denominated in units of shares under which the issuance of shares is subject to conditions (including continued employment or performance conditions) and terms as the Committee deems appropriate. Participants will have no voting rights with respect to shares underlying restricted stock and restricted stock units unless and until such shares are reflected as issued and outstanding shares on the company’s stock ledger. Participants in whose name restricted stock is granted will be entitled to receive all dividends and other distributions paid with respect to those shares, unless determined otherwise by the Committee. Shares underlying restricted stock units will be entitled to dividends or dividend equivalents only to the extent provided by the Committee.

 

Qualifying Performance Criteria

 

The Committee may establish performance criteria and level of achievement versus such criteria that will determine the number of shares to be granted, retained, vested, issued or issuable under or in settlement of or the amount payable pursuant to an award, which criteria may be based on “qualifying performance criteria” (as described below) or other standards of financial performance and/or personal performance evaluations. In addition, the Committee may specify that an award or a portion of an award is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code, provided that the performance criteria for such award or portion of an award that is intended by the Committee to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code will be a measure based on one or more qualifying performance criteria selected by the Committee and specified at the time the award is granted. The Committee will certify the extent to which any qualifying performance criteria has been satisfied, and the amount payable as a result thereof, prior to payment, settlement or vesting of any award that is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code. Notwithstanding satisfaction of any performance goals, the number of shares issued under or the amount paid under an award may be reduced, but

not increased, by the Committee on the basis of such further considerations as the Committee in its sole discretion may determine.

 

For purposes of the 2010 Plan, the term “qualifying performance criteria” means any one or more of the following performance criteria, or derivations of such performance criteria, either individually, alternatively or in any combination, applied to either the company as a whole or to a business unit or subsidiary, either individually, alternatively or in any combination, and measured either annually or cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to previous years’ results or to a designated comparison group, in each case as specified by the Committee: (i) net sales; (ii) earnings from operations, earnings before or after taxes, earnings before or after interest, depreciation, amortization, or extraordinary or special items; (iii) net income or net income per common share (basic or diluted); (iv) return on assets (gross or net), return on investment, return on capital, or return on equity; (v) cash flow, free cash flow, cash flow return on investment (discounted or otherwise), net cash provided by operations, or cash flow in excess of cost of capital; (vi) interest expense after taxes; (vii) economic value added or created; (viii) operating margin or profit margin; (ix) stock price or total stockholder return; (x) average cash balance or cash position; and (xi) strategic business criteria, consisting of one or more objectives based on meeting specified product development, strategic partnering, licensing, research and development, market penetration, geographic business expansion goals, cost targets, customer satisfaction, employee satisfaction, management of employment practices and employee benefits, supervision of litigation and information technology, and goals relating to acquisitions or divestitures of subsidiaries, affiliates or joint ventures.

 

To the extent consistent with Section 162(m) of the Code, the Committee (i) may appropriately adjust any evaluation of performance under a qualifying performance criteria to eliminate the effects of charges for restructurings, discontinued operations, extraordinary items and all items of gain, loss or expense determined to be extraordinary or unusual in nature or related to the disposal of a segment of a business or related to a change in accounting principle all as determined in accordance with standards established by opinion No. 30 of the Accounting Principles Board (APA Opinion No. 30) or other applicable or successor accounting provisions, as well as the cumulative effect of accounting changes, in each case as determined in accordance with generally accepted accounting principles or identified in the company’s financial statements or notes to the financial statements, and (ii) may appropriately adjust any evaluation of performance under a qualifying performance criteria to exclude any of the following events that occurs during a performance period: (a) asset write-downs, (b) litigation, claims, judgments or settlements, (c) the effect of changes in tax law or other such laws or provisions affecting reported results, (d) accruals for reorganization and restructuring programs and (e) accruals of any amounts for payment under the 2010 Plan or any other compensation arrangement maintained by the company.

 

Settlement of Awards

 

Awards, may be settled in shares, cash or a combination thereof, as determined by the Committee.

 

Amendment and Termination

 

The board may amend, alter or discontinue the 2010 Plan and the Committee may amend, or alter any agreement or other document evidencing an award made under the 2010 Plan, except no such amendment may, without the approval of the stockholders of the company (other than in respect of a change in the company’s capitalization): increase the maximum number of shares for which awards may be granted under the 2010 Plan; reduce the exercise price of outstanding options; extend the term of the 2010 Plan; change the class of persons eligible to be participants; otherwise amend the 2010 Plan in any manner requiring stockholder approval by law or under the NASDAQ Global Select Market listing requirements.

 

No amendment or alteration to the 2010 Plan or an award or award agreement may be made which would impair the rights of the holder of an award, without such holder’s consent.

 

Change in Control

 

Unless otherwise expressly provided in an award agreement or another contract, including an employment agreement, or under the terms of a transaction constituting a change in control, the Committee may provide for the acceleration of the vesting and, if applicable, exercisability of any outstanding award, or the lapsing of any

conditions of restrictions on or the time for payment in respect of any outstanding award, upon termination of the participant’s employment following a change in control. In addition, unless otherwise expressly provided in an award agreement or another contract, including an employment agreement, or under the terms of a transaction constituting a change in control, the Committee may provide that any or all of the following will occur in connection with a change in control: (i) the substitution for the shares subject to any outstanding award, stock or other securities of the surviving corporation or any successor corporation to the company, in which event the aggregate purchase or exercise price, if any, of such award will remain the same, (ii) the conversion of any outstanding award into a right to receive cash or other property upon or following the consummation of the change in control in an amount equal to the value of the consideration to be received by holders of shares in connection with such transaction for one share, less the per share purchase or exercise price of such award, if any, multiplied by the number of shares subject to such award, and/or (iii) the cancellation of any outstanding and unexercised awards upon or following the consummation of the change in control.

 

Adjustments

 

In the event that any dividend or other distribution (whether in the form of cash, shares, other securities or other property), stock split or a combination or consolidation of the outstanding shares into a lesser number of shares, is declared with respect to the shares, the authorization limits provided in the 2010 Plan may be increased or decreased proportionately, and the shares then subject to each award may be increased or decreased proportionately without any change in the aggregate purchase price of those shares. In the event the shares will be changed into or exchanged for a different number or class of shares of stock or securities of the company or of another corporation, whether through recapitalization, reorganization, reclassification, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of shares or other securities of the company, issuance of warrants or other rights to purchase shares or other securities of the company, or any other similar corporate transaction or event affects the shares such that an equitable adjustment would be required in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the 2010 Plan, then the authorization limits provided in the 2010 Plan may be adjusted proportionately, and an equitable adjustment may be made to each share subject to an award such that no dilution or enlargement of the benefits or potential benefits occurs.

 

Transferability

 

Awards may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated by a participant other than by will or the laws of descent and distribution, and during a participant’s lifetime, each option or stock appreciation right may be exercisable only by the participant or his or her legal guardian, and thereafter, a option may be exercised for a one-year period (or such shorter or longer period at the discretion of the Committee). Notwithstanding the foregoing, to the extent permitted by the Committee, the person to whom an award is initially granted may make certain limited transfers to certain family members, family trusts, or family partnerships.

 

No Right to Company Employment

 

Nothing in the 2010 Plan or an award agreement will interfere with or limit in any way the right of the company, its subsidiaries and/or its affiliates to terminate any participant’s employment, service on the board or service for the company at any time or for any reason not prohibited by law, nor will the 2010 Plan or an award itself confer upon any participant any right to continue his or her employment or service for any specified period of time. Neither an award nor any benefits arising under the 2010 Plan will constitute an employment contract with the company, any subsidiary and/or its affiliates.

 

Compliance with Law

 

The 2010 Plan, the grant, issuance, vesting, exercise and settlement of awards thereunder, and the obligation of the company to sell, issue or deliver shares under such awards, will be subject to all applicable foreign, federal, state and local laws, rules and regulations, stock exchange rules and regulations, and to such approvals by any governmental or regulatory agency as may be required. The company will not be required to issue or deliver any certificates for shares prior to the completion of any registration or qualification of such shares under any

federal or state law or issuance of any ruling or regulation of any government body which the company will, in its sole discretion, determine to be necessary or advisable.

 

Effective Date and Termination of the 2010 Plan

 

The 2010 Plan will become effective on June 15, 2010, subject to approval by the company’s stockholders. The 2010 Plan will remain available for the grant of awards until the tenth (10th) anniversary of the effective date.

 

Federal Income Tax Treatment

 

The following discussion of the federal income tax consequences of the 2010 Plan is intended to be a summary of applicable federal law as currently in effect. It should not be taken as tax advice by 2010 Plan participants, who are urged to consult their individual tax advisors.

 

Stock Options

 

ISOs and NQSOs are treated differently for federal income tax purposes. ISOs are intended to comply with the requirements of Section 422 of the Code. NQSOs do not comply with such requirements.

 

An optionee is not taxed on the grant or exercise of an ISO. The difference between the exercise price and the fair market value of the shares on the exercise date will, however, be a preference item for purposes of the alternative minimum tax. If an optionee holds the shares acquired upon exercise of an ISO for at least two years following the option grant date and at least one year following exercise, the optionee’s gain, if any, upon a subsequent disposition of such shares is long term capital gain. The measure of the gain is the difference between the proceeds received on disposition and the optionee’s basis in the shares (which generally equals the exercise price). If an optionee disposes of stock acquired pursuant to exercise of an ISO before satisfying these holding periods, the optionee will recognize both ordinary income and capital gain in the year of disposition. The company is not entitled to an income tax deduction on the grant or exercise of an ISO or on the optionee’s disposition of the shares after satisfying the holding period requirement described above. If the holding periods are not satisfied, the company will be entitled to a deduction in the year the optionee disposes of the shares in an amount equal to the ordinary income recognized by the optionee.

 

In order for an option to qualify for ISO tax treatment, the grant of the option must satisfy various other conditions more fully described in the Code. The company does not guarantee that any option will qualify for ISO tax treatment even if the option is intended to qualify for such treatment. In the event an option intended to be an ISO fails to so qualify, it will be taxed as an NQSO described below.

 

An optionee is not taxed on the grant of an NQSO. On exercise, the optionee recognizes ordinary income equal to the difference between the exercise price and the fair market value of the shares acquired on the date of exercise. The company is entitled to an income tax deduction in the year of exercise in the amount recognized by the optionee as ordinary income. The optionee’s gain (or loss) on subsequent disposition of the shares is long term capital gain (or loss) if the shares are held for at least one year following exercise. The company does not receive a deduction for this gain.

 

Stock Appreciation Rights

 

An optionee is not taxed on the grant of a stock appreciation right. On exercise, the optionee recognizes ordinary income equal to the cash or the fair market value of any shares received. The company is entitled to an income tax deduction in the year of exercise in the amount recognized by the optionee as ordinary income.

 

Restricted Stock and Restricted Stock Units

 

Grantees of restricted stock or restricted stock units do not recognize income at the time of the grant. When the award vests or is paid, grantees generally recognize ordinary income in an amount equal to the fair market value of the stock or units at such time, and the company will receive a corresponding deduction. However, no later than 30 days after a participant receives an award of restricted stock, the participant may elect to recognize taxable ordinary income in an amount equal to the fair market value of the shares at the time of receipt. Provided that the

election is made in a timely manner, when the restrictions on the shares lapse, the participant will not recognize any additional income. If the participant forfeits the shares to the company (e.g., upon the participant’s termination prior to vesting), the participant may not claim a deduction with respect to the income recognized as a result of the election. Dividends paid with respect to unvested shares of restricted stock generally will be taxable as ordinary income to the participant at the time the dividends are received.

 

Company Deduction and Section 162(m)

 

For the individual serving as the chief executive officer of the company at the end of the taxable year and for the individuals serving as officers of the company or a subsidiary at the end of such year who are among the three highest compensated officers (other than the chief executive officer and chief financial officer) for proxy reporting purposes, Section 162(m) limits the amount of compensation otherwise deductible by the company and its subsidiaries for such year to $1,000,000 for each such individual except to the extent that such compensation is “performance-based compensation.” The company expects that NQSOs, ISOs and stock appreciation rights should qualify as performance-based compensation. The compensation committee may establish performance conditions and other terms with respect to grants of restricted stock, restricted stock units and incentive compensation awards in order to qualify such grants as performance-based compensation for purposes of Section 162(m).

 

New Plan Benefits

 

The benefits that will be awarded or paid under the 2010 Plan are not currently determinable. Such awards are within the discretion of the compensation committee, and the compensation committee has not determined future awards or who might receive them. Information about awards granted in prior fiscal years under the company’s prior plans to the company’s named executive officers may be found in the table under the heading “Stock-Based Compensation” in the Compensation Discussion and Analysis section of this proxy statement. As of April 1, 2010, the closing price of a share of the company’s common stock was $22.32.

 

Vote Required and Board Recommendation

 

The affirmative vote of a majority of the votes cast is required for the adoption and approval of the company’s 2010 Stock Incentive Plan.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR ADOPTION AND APPROVAL OF THE COMPANY’S 2010 STOCK INCENTIVE PLAN.

 

 

The goal of our executive officer compensation program is the same as our goal for operating the Company — to create long-term value for our stockholders. Toward this goal, our compensation programs for our executives (including, the “Named Executives” (as defined below)) have been and will be designed to reward them for sustained financial and operating performance and leadership excellence, to align their interests with those of our stockholders and to encourage them to remain with the Company for long and productive careers. Most of our compensation elements simultaneously fulfill one or more of our performance, alignment and retention objectives. These elements have consisted of base salary, annual bonus incentive, stock-based compensation and an Executive Long-Term Incentive Plan that was driven by the achievement of objective financial performance criteria. In deciding on the type and amount of compensation for each executive, we focus on both current pay and the opportunity for future compensation. We combine the compensation elements for each executive in a manner we believe optimizes the executive’s contribution to the Company.

 

Terms

 

This Compensation Discussion and Analysis uses the following terms when discussing executive compensation of the Company:

 

 

 

Performance — Our five executives who are identified in the Summary Compensation Table below (whom we refer to as our “Named Executives”) have a combined total of approximately 54 years with Universal, during which they have held different positions and have been promoted to increasing levels of responsibility. The compensation of each Named Executive reflects his management experience, continued high performance and exceptional career of service to the Company over a long period of time. Key elements of compensation that depend upon the Named Executives’ performance include:

 

 

Alignment — We seek to align the interests of our executives with those of our investors by evaluating executive performance on the basis of key financial measurements, which we believe closely correlate to long-term stockholder value, including net sales, organic growth, operating profit, earnings per share, operating margins, cash

flow from operating activities and total stockholder return. The key elements of compensation that align the interests of the executives with stockholders include:

 

 

Retention — Our executives are often presented with other professional opportunities, including those at potentially higher compensation levels. We attempt to retain our executives by using continued service as a determinant of target total direct compensation opportunity. Key elements of compensation that require continued service to receive the maximum payout include:

 

 

 

Role of Compensation Committee and the CEO — The primary responsibility of our Compensation Committee is to assist the Board of Directors with the following:

 

 

The Compensation Committee assesses the performance and determines the compensation of executives other than the CEO (including the Named Executives), based on initial recommendations from the CEO. No executive (including any Named Executive) has any role in the determination of his own compensation, other than discussing their individual performance objectives with the CEO and/or the Compensation Committee.

 

Role of Compensation Consultant — During the fourth quarter of 2009, the Compensation Committee hired Towers Perrin, an independent compensation consulting firm to discuss the design of programs that affect or may affect executive officer and outside director compensation. Towers Perrin was selected as it had provided similar services to the Committee in the past. Our executives (including the Named Executives) did not participate in the selection of the independent compensation consulting firm. This firm provided the Compensation Committee with market data on compensation trends along with general views on specific compensation programs designed by management. Except for the foregoing, we do not receive any other services from this firm. In the future, the Compensation Committee or UEI may engage or seek the advice of other compensation consultants.

Use of Benchmarking Data

 

When making compensation decisions, the Compensation Committee begins by reviewing competitive market data to compare our executive pay levels to our peer group companies, however, the Compensation Committee does not use formulas or rigidly set the compensation of our executives based on this data alone. The latest review was performed utilizing an analysis of peer group data compiled during the fourth quarter of 2009 by an independent compensation consulting firm (Towers Perrin). The peer group analysis consisted of 15 companies that design and/or manufacture electronic equipment. The Committee believes that these companies are an appropriate peer group for comparison, as well as a group that is large and diverse enough so that any one company does not alter the overall analysis. The peer group was approved by the Compensation Committee and is identified below.

 

 

 

 

Of the 18 peer group companies utilized in the last compensation study (2006), eight companies were retained, ten companies were dropped and seven were added to the 2009 compensation study. The ten companies were dropped due to their privatization or significant underperformance and anomalous executive compensation.

 

When making compensation decisions, the Compensation Committee begins by reviewing competitive market data obtained from a variety of sources to compare our executive pay levels to other companies. The Compensation Committee does not use formulas or rigidly set the compensation of our executives based on this data alone. After reviewing the market data the Compensation Committee examines our executive compensation structure to assess whether we are meeting our intent to recognize and reward the contributions of all our executives, in achieving our strategic and business goals, while aligning our compensation program with our guiding objectives. Once our executive compensation structure is examined, the Compensation Committee evaluates the performance of each executive. Throughout the process, the Compensation Committee considers input from our CEO and at the end of 2009 from an independent compensation consultant (Towers Perrin).

The performance rating of our executive officers (including our Named Executives) depends on various factors. This assessment has generally been subjective, not subject to formulas. The weight given to each factor may differ from year to year and may differ among individual executive officers in any given year. Executives are rated based on the following three criteria:

 

1. performance;

 

2. individual capability and maturity in their role; and

 

3. role criticality and the difficulty to replace the executive.

 

The performance of each executive is carefully evaluated against established goals while taking into consideration the business environment. Factors evaluated during this process include the following:

 

 

The Compensation Committee’s assessments for each of the three criteria are combined into an overall rating. The overall rating indicates the warranted placement of the individual executive in the lower, middle or upper third of the target total direct compensation opportunity range (annual base salary and target bonus incentive and target long-term incentive opportunity). This range is calculated utilizing the compensation observed in the benchmarking data for comparable positions. For an individual executive the midpoint of the range is anchored to the market 50th percentile, the low end of the range reflects the market 25th percentile, and the high end of the range reflects the market 75th percentile. This strategy is consistent with our primary intent of offering compensation that is contingent on the achievement of performance objectives yet competitive within the market place.

 

Within the portion of 2010 target total direct compensation opportunity representing performance-based pay, approximately 24% to 33% is tied to achievement of annual incentive goals and 67% to 76% is tied to performance over a longer period of time. This mix of short and long term incentives provides sufficient rewards in the short-term to motivate near-term performance, while at the same time providing significant incentives to keep our executives focused on longer-term corporate goals that drive stockholder value. This mix also mitigates the risk of Named Executives focusing solely on short-term or long-term goals and is consistent with the practice of our peer group companies.

 

Determination of CEO Compensation

 

Since 2000, Mr. Arling has been the Company’s CEO. Over his thirteen year career with the Company, he has held a number of key positions, as described in his biography under Proposal 1. Under Mr. Arling’s leadership, revenues have grown at a 15% compound annual growth rate (“CAGR”) since 2004, rising to $318 million in 2009 from $158 million in 2004, or 100% cumulative. During the same period, diluted earnings per share have also grown at a 10% CAGR, from $0.65 in 2004 to $1.05 in 2009, or 62% cumulative. Over $109 million of cash flow from operating activities has been generated since 2004.

During 2009, we achieved solid financial results in a very challenging global economic environment. This performance was driven by our acquisition of new customers and the deepening of relationships with existing customers, resulting in the growth of our business both domestically and internationally. A key part of this growth is our ability to turn leading technologies into solutions for our customers in multiple industries. These changes not only contributed to our solid 2009 performance, but also positioned the company well for the future. Total stockholder return during 2009 was 43% compared to 24% for the S&P SmallCap 600 Index during that period.

 

At the beginning of each year, Mr. Arling, with the company’s senior management team, develops the objectives that he believes need to be achieved for the Company to be successful. He then reviews these objectives with the Board for the corollary purpose of establishing how his performance will be assessed. These objectives are derived largely from the Company’s financial and strategic planning sessions, during which, in-depth reviews by our senior management team of the Company’s growth opportunities are analyzed and goals are established for the upcoming year. They include both quantitative financial measurements and qualitative strategic and operational considerations that help determine the factors that our CEO and the Board believe create long-term stockholder value. Mr. Arling reviews and discusses preliminary considerations as to the executive officers (including his own) compensation with the Compensation Committee. Mr. Arling does not participate in the final determination of his compensation.

 

The Compensation Committee does not base Mr. Arling’s compensation on any specific quantitative or qualitative factors, but upon a subjective review of various performance indicators taken as a whole. This review is performed while considering the general state of the economy and the industries in which we operate. In determining Mr. Arling’s compensation for 2010, the Compensation Committee considered his performance against his financial, strategic and operational goals for the prior year, as follows:

 

Financial Objectives and Goal Performance

 

 

 

 

Strategic and Operational Goals Assessment

 

 

Determination of CFO and Other Named Executive Officers Compensation

 

In determining the compensation of Messrs. Hackworth, Bennett, Kopaskie and Firehammer, the Compensation Committee compared their achievements against their performance objectives, the overall performance of the Company and their contributions to that performance, as well as the performance of the functions that each leads, when relevant.

 

Annual Cash Compensation

 

Annual cash compensation for our Named Executives consists of base salary and our annual bonus incentive program.

 

Base Salary

 

Base salaries are reviewed approximately every twelve months, but are not automatically increased if the Compensation Committee believes that other elements of compensation are more appropriate in light of our stated objectives. In setting base salaries for the executives, the Compensation Committee considers input from our CEO and, at the end of 2009, from an independent compensation consultant (Towers Perrin), as well as the performance ratings of the executives.

 

The 2009 base salaries of our Named Executives as compared to the market 50th percentile of our peer group were the following:

 

 

 

 

Base Salary of Our CEO — Mr. Arling did not receive any base salary increase during 2010, 2009 or 2008. Mr. Arling’s base salary increased 21% for 2007, from $420,000 to $510,300.

 

Base Salary of Named Executives Other Than Our CEO — Mr. Hackworth’s base salary increased 12% for 2010, from $250,000 to $280,000. Mr. Hackworth’s base salary increased 4% for 2009, from $240,000 to $250,000. The Board of Directors promoted Mr. Hackworth to the position of Senior Vice President and Chief Financial Officer, effective April 2008. Prior to this promotion Mr. Hackworth was our Vice President and Chief Financial Officer. In connection

with his promotion to Senior Vice President, for 2008 Mr. Hackworth’s base salary increased 14% from $210,000 to $240,000. For 2007, Mr. Hackworth’s base salary increased by 5% from $200,000 to $210,000.

 

Mr. Bennett’s base salary was not increased for 2010. Mr. Bennett’s base salary increased 2% for 2009, from €245,000 to €250,000. For 2008, Mr. Bennett’s base salary increased 2%, from €240,000 to €245,000. Mr. Bennett’s salary increased 12% for 2007, from €213,480 to €240,000.

 

Mr. Kopaskie’s base salary was not increased for 2010. Mr. Kopaskie’s base salary increased 3% for 2009, from $300,000 to $310,000. For 2008, Mr. Kopaskie’s base salary increased 11%, from $270,400 to $300,000. During 2007, Mr. Kopaskie’s base salary was increased 4% from $260,000 to $270,400.

 

Mr. Firehammer’s base salary increased 8% for 2010, from $250,000 to $270,000. Mr. Firehammer’s base salary increased 4% for 2009 from $240,000 to $250,000. For 2008, Mr. Firehammer’s base salary increased 2% from $235,000 to $240,000. Mr. Firehammer’s base salary increased 4% for 2007, from $225,000 to $235,000.

 

Subsequent to the salary increases for 2010, the base salaries of our Named Executives as compared to the market 50th percentile of our peer group were the following:

 

 

 

 

Annual Bonus Incentive

 

Annually, the CEO reviews, with the Compensation Committee, our full-year financial results. The Compensation Committee, with input from the CEO (regarding the Named Executives other than the CEO) uses discretion in determining the bonus, if any, for each individual executive. They evaluate the overall performance of the Company, the performance of the function that the executive leads and the performance rating of each executive. Based on the level at which their expectations were achieved, the Compensation Committee may pay each executive officer a bonus equal to a percentage of the executive’s base salary. For the CEO, the percentage ranges between 10% and 120% of his base salary as of year-end. For the other executive officers, the percentage ranges between 10% and 100% of the executive’s base salary as of year-end.

 

Following the completion of 2009, the preliminary award amount for each participant was equal to the product of (i) the executive’s base salary and (ii) the percentage determined in accordance with the following matrix:

 

The 2009 target bonus opportunities (percentage of base salary) of our Named Executives as compared to the market 50th percentile of our peer group were the following:

 

 

Subsequent to the examination of our executive compensation structure during the fourth quarter of 2009, the Compensation Committee adjusted the percentages of base salary the Named Executives can earn under the Annual Bonus Incentive for 2010 to the following:

 

 

The Compensation Committee may utilize its sole discretion to increase or reduce the amount of any participant’s earned award to reflect the Compensation Committee’s assessment of the participant’s performance during the year. In certain circumstances, an additional bonus may be awarded if the Compensation Committee determines that an executive officer’s individual performance warrants such award. We believe that the annual bonus rewards the executives who drive desired results and encourages them to sustain this performance.

 

In 2009, we achieved diluted GAAP EPS of $1.05, below the minimum diluted GAAP EPS required to obtain a payout as established by the Compensation Committee and is set forth in the matrix above. As such, annual cash bonuses were not awarded for fiscal 2009.

 

In 2008, we achieved diluted GAAP EPS of $1.09, below the minimum diluted GAAP EPS required to obtain a payout as established by the Compensation Committee. As such, annual cash bonuses were not awarded for fiscal 2008.

 

We surpassed our fiscal target diluted GAAP EPS goal in 2007, with $1.33 diluted GAAP EPS. However, our fourth quarter GAAP EPS guidance would not have been achieved had management bonuses been paid. In addition, we did not achieve our fourth quarter net sales guidance. In light of this assessment, annual cash bonuses were not awarded for fiscal 2007.

 

The salaries paid and the annual bonus incentives awarded to the Named Executives for 2009, 2008 and 2007 are shown in the Summary Compensation Table below.

 

Long-Term Incentive Compensation

 

Overview

 

Long-term incentive compensation has consisted of stock option grants, restricted stock awards, and our 2007 Executive Long-Term Incentive Plan (“ELTIP”). When determining the appropriate combination of stock-based and cash compensation, our goal is to weigh the cost of each with their potential benefits as a compensation tool. We consider the grant size and the appropriate combination of equity-based compensation and cash compensation when making award decisions. We believe that providing stock-based compensation grants and cash compensation effectively balances our objectives of focusing the Named Executives on delivering long-term value to our stockholders and providing value to the executives.

Stock-Based Compensation

 

Our stock-based compensation program has been designed to recognize scope of responsibilities, reward demonstrated performance and leadership, motivate future superior performance, align the interests of the executive with those of our stockholders and retain the executives through the term of the awards. The Compensation Committee has also issued stock-based compensation to attract new executive officers. The amount and composition of the stock-based compensation granted is based upon our strategic, operational and overall financial performance and reflects the executives’ expected contributions to our future success.

 

Stock-based compensation grants may take place at various times throughout the year, but grant decisions are made without regard to anticipated earnings or other major announcements made by us. The grant price of stock options and restricted stock awards granted to our employees under our stock incentive plans is the average of the high and low trades of our stock on the grant date. We prohibit the re-pricing or backdating of stock options. Existing stock ownership levels are not a factor in award determination, as we do not want to discourage executives from holding our stock. None of our employees are subject to a minimum stock ownership level or are required to hold vested stock-based compensation for any minimum length of time.

 

Our stock options become exercisable ratably, on an annual or quarterly basis, over four years. Stock options have a maximum ten-year term. We believe that this vesting schedule aids us in retaining executives and motivating long-term performance. Under the terms of our stock incentive plans, unvested stock options are forfeited if the executive voluntarily leaves the Company. Stock options only have value to the extent the price of our stock on the date of exercise exceeds the grant price, and thus, we believe, are an effective compensation element only if the stock price increases over the term of the award.

 

Restricted stock awards granted to our Named Executives vest in various proportions over a three or four year time period. We determine the vesting schedule of each award after considering our performance, alignment, and retention objectives, as well as the financial impact of the award. Under the terms of our stock incentive plans, unvested restricted stock awards are forfeited if the executive voluntarily leaves the Company. Restricted stock awards provide executives the benefits of share price increases while still allowing the risks that other stockholders assume for share price declines.

 

2007 Stock-Based Compensation

 

2007 Restricted Stock Awards — No employees were granted restricted stock awards during 2007.

 

2007 Stock Option Grants — During 2007, the Compensation Committee granted certain executives and non-executives 311,750 stock options under various stock incentive plans. None of the Named Executives were granted any stock options during 2007.

 

2008 Stock-Based Compensation

 

2008 Restricted Stock Awards — During 2008, the Compensation Committee granted our executives 115,926 restricted stock awards under the 2006 Stock Incentive Plan, including 56,121 restricted stock awards to our Named Executives. The restricted stock awards granted to Named Executives consisted of the following:

 

 

 

 

 

2008 Stock Option Grants — During 2008, the Compensation Committee granted certain executives and non-executives 40,500 stock options under various stock incentive plans. None of the Named Executives were granted any stock options during 2008.

 

2009 Stock-Based Compensation

 

2009 Restricted Stock Awards— During 2009, the Compensation Committee granted certain executives and non-executives 298,170 restricted stock awards under the 2006 Stock Incentive Plan, including 117,646 restricted stock awards to our Named Executives. The restricted stock awards granted to Named Executives consisted of the following:

 

 

 

 

2009 Stock Option Grants — During 2009, the Compensation Committee granted certain executives and non-executives 233,400 stock options under various stock incentive plans, including 185,900 stock options to our Named Executives. The stock options granted to Named Executives consisted of the following:

 

 

 

 

The restricted stock awards and stock options granted on March 10, 2009, were made in lieu of establishing a second ELTIP. The total value of the equity grant was the equivalent of the annual equity compensation outlined in the 2007 independent compensation consultant’s study (Towers Perrin) prepared for and used by the Compensation Committee (using the midpoint between the 50th and 75th percentile). Given the uncertain economic environment, the 2007 ELTIP results and our compensation objectives, the Compensation Committee believed granting stock-based compensation during this cycle was a better alternative than a new ELTIP plan.

 

2010 Stock-Based Compensation

 

2010 Restricted Stock Awards — During the annual review cycle for 2010, the Compensation Committee granted our Named Executives 45,500 restricted stock awards under the 2006 Stock Incentive Plan. The 2010 restricted stock awards granted to Named Executives consisted of the following:

 

 

 

 

2010 Stock Option Grants — During the annual review cycle for 2010, the Compensation Committee granted our Named Executives 99,900 stock options under various stock incentive plans. The 2010 stock options granted to our Named Executives consisted of the following:

 

 

 

 

Executive Long-Term Incentive Plan

 

In January 2007, after reviewing the structure of our compensation arrangements, the Compensation Committee approved our first long-term incentive plan under our existing stockholder approved stock-based compensation plans. As part of the Compensation Committee’s analysis of our compensation structure they considered whether to grant awards other than stock-based compensation as part of our long-term incentive strategy. In 2007,

the Compensation Committee determined that a long-term incentive plan was an appropriate alternative to stock-based compensation, since the total payout is at risk if the required financial metrics are not met.

 

The overriding purpose of the Universal Electronics Inc. 2007 Executive Long-Term Incentive Plan (“ELTIP”) was to benefit and advance the interests of the Company and its stockholders by providing performance-based incentives to the Named Executive officers for 2007 and 2008 results, while requiring four years of continuous service to receive the earned award. The 2007 ELTIP was designed to foster the following goals:

 

(a) focus the senior executive team upon achieving superior operating performance;

 

(b) supplement the equity awards currently held by the members of the senior executive team; and

 

(c) ensure stability of the senior executive team by providing a multi-year retention incentive.

 

The following financial metrics were required to have been met or exceeded for a participant to earn all, any portion of, or more than his target award, subject to the other provisions of the 2007 ELTIP:

 

 

Our net sales CAGR over the performance period was 10% and our diluted GAAP EPS was $2.42, both below the minimum required to earn an award under the 2007 ELTIP. Had management met or exceeded the minimum level of GAAP net sales and diluted GAAP EPS required to earn an award the total bonus pool would have been fixed between $2 million and $12 million. The ranges of individual awards for the Named Executives were the following:

 

 

Further information regarding our 2007 ELTIP may be found in our 2008 Proxy Statement.

 

During the first quarter of 2009, after reviewing the global economic environment and our relative strong performance, the Compensation Committee concluded that a discretionary cash award was warranted notwithstanding the 2007 ELTIP results. The Compensation Committee concluded that the global economic recession was much to blame and that management performed very well under these circumstances. After considering our performance, alignment and retention objectives, the Compensation Committee believed a discretionary cash award was in the best interest of the company and our stockholders. The awards vest ratably over eight quarters beginning on March 31, 2009, and will continue each calendar quarter thereafter until paid in full. Further, by stretching these payments over two years, the Committee believed it accomplished its stated retention goal. The amounts awarded to each Named Executive Officer were the following:

 

Total Target Long-Term Incentive Opportunity

 

2007-2009 Target Long-Term Incentive Opportunity

 

During January 2010, the compensation committee revisited the structure of our compensation arrangements. As part of this review, the committee examined a competitive assessment of our target long-term incentive (“LTI”) structure. The competitive assessment compared the average annual LTI opportunity over the prior three years of our Named Executives to the average annual LTI opportunity over the prior three years of comparable positions at the peer group companies.

 

A comparison of our Named Executive’s average annual LTI opportunity over the prior three years (2007-2009) compared to the 50th percentile of the average annual LTI opportunity over the prior three years (2007-2009) for comparable positions at the peer group companies is the following:

 

 

 

 

2010 Target Long-Term Incentive Opportunity

 

Subsequent to the 2010 stock-based compensation grants, a comparison of our Named Executive’s LTI opportunity for 2010 compared to the 50th percentile of the average annual LTI opportunity over the prior three years (2007-2009) for comparable positions at the peer group companies is the following:

 

 

 

 

Target Total Direct Compensation Opportunity

 

Total direct compensation (“TDC”) includes annual base salary, annual bonus incentive, and long-term incentive compensation. The Compensation Committee calculates the estimated future realizable value of TDC with the assistance of an independent compensation consultant (Towers Perrin). The estimated future realizable value of TDC is initially set to achieve the market percentile warranted by the Compensation Committee’s performance assessment. Ultimately, the Compensation Committee may in its sole discretion increase or reduce the amount of any participant’s TDC to reflect the Compensation Committee’s assessment of the participant’s performance.

 

2007-2009 Target Total Direct Compensation Opportunity

 

During January 2010, the compensation committee revisited the structure of our compensation arrangements. As part of this review, the committee examined a competitive assessment of our target TDC structure. The competitive assessment compared our Named Executive’s average annual target TDC opportunity over the prior three years to the average annual target TDC over the prior three years for comparable positions at the peer group companies. The average annual target TDC of our Named Executives was calculated as the sum of the following components:

 

1. 2009 base salary;

 

2. 2009 target annual cash bonus incentive opportunity; and

 

 

A comparison of our Named Executive’s average annual target TDC opportunity over the prior three years (2007-2009) compared to the 50th percentile of the average annual target TDC opportunity over the prior three years (2007-2009) for comparable positions at the peer group companies is the following:

 

 

 

 

2010 Target Total Direct Compensation Opportunity

 

Subsequent to the 2010 stock-based compensation grants and base salary increases, a comparison of our Named Executive’s target TDC opportunity for 2010 (the sum of 2010 base salary, 2010 target cash bonus and 2010 LTI opportunity) compared to the 50th percentile of the average annual target TDC opportunity over the prior three years (2007-2009) for comparable positions at the peer group companies is the following:

 

 

 

 

Other Compensation

 

All Other Compensation — We provide our executives (including the Named Executives) with other benefits, reflected in the “All Other Compensation” column in the “Summary Compensation Table” below, that we believe are reasonable, competitive and consistent with our overall executive compensation program. Other compensation includes premiums paid on life insurance policies and Company contributions to our defined contribution 401(k) plan, which is generally available to all employees. We also provide the associated tax gross-up on the premiums paid on behalf of the executive officers (including the Named Executives) for their life insurance policy. For 2007, Mr. Arling’s other compensation includes $200,000 related to his stay bonus (see the “Compensation Agreements” section below).

 

Tax Deductibility of Compensation

 

Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), imposes a $1 million limit on the amount that a public Company may deduct for compensation paid to the Company’s CEO or any of our four other most highly compensated executive officers who are employed as of the end of the year. This limitation does not apply to compensation that meets the requirements under the Code for “qualifying performance-based” compensation.

 

We may from time to time pay or award compensation to our executive officers that may not be deductible. Furthermore, because of the ambiguities and uncertainties as to the application and interpretation of the Code and the regulations issued thereunder, no assurance can be given, notwithstanding our efforts in this area, that compensation intended by us to satisfy the requirements for deductibility under the Code does in fact do so. In 2007, $4.0 million of Mr. Arling’s compensation, of which $3.8 million related to stock option exercises, was not deductible under Section 162(m). In 2008, $0.1 million of Mr. Arling’s compensation related to stock option exercises was not deductible under Section 162(m). In 2009, $0.7 million of Mr. Arling’s compensation related to stock option exercises was not deductible under Section 162(m). Deductible compensation for the other four Named Executives for 2007, 2008 and 2009 was not limited. The Compensation Committee does not believe that the Code will limit the deductibility of compensation expected to be paid by the Company during 2010 to the other four Named Executives, however, in the event Mr. Arling receives compensation related to stock option exercises during 2010, some of his compensation may not be deductible under Section 162(m).

Potential Impact on Compensation from Executive Misconduct

 

If the Board determines that an executive officer has engaged in fraudulent or intentional misconduct, the Board will take action to remedy the misconduct, prevent its recurrence, and impose discipline on the wrongdoer as appropriate. Discipline may vary depending on the facts and circumstances, and may include, without limit, (i) termination of employment, (ii) initiating an action for breach of fiduciary duty, and (iii) if the misconduct resulted in a significant restatement of the Company’s financial results, seeking reimbursement of any portion of performance-based or incentive compensation paid or awarded to the executive that is greater than would have been paid or awarded if calculated based on the restated financial results. These remedies would be in addition to, and not in lieu of, any actions imposed by law enforcement agencies, regulators or other authorities.

 

Paul D. Arling.  On April 23, 2003, the Company and Mr. Arling entered into an employment agreement with a three-year term that, unless terminated by either party in accordance with the terms of the agreement, automatically renews for successive one-year terms. In October 2005, the parties agreed to extend the expiration date of this employment agreement to April 30, 2009, and amended the agreement by providing Mr. Arling a stay bonus. The stay bonus of $200,000 was paid to Mr. Arling on December 15, 2007. This agreement, and amendments, did not modify the $200,000 non-recourse interest-bearing secured loan provided to Mr. Arling by an earlier agreement. The loan was used by Mr. Arling for the acquisition of his primary residence in Southern California. The loan bore interest at the rate of 5.28% per annum, which was payable annually to us on each December 15th. The loan was secured by Mr. Arling’s primary residence located in Southern California. As part of the earlier agreement, Mr. Arling received grossed-up payments to assist him in the payment of interest on the loan and the taxes resulting from these payments. Mr. Arling paid the entire principal balance on December 15, 2007 and the Company has since released the security on his primary residence. In February 2008, the parties agreed to extend the expiration date of this employment agreement, as amended, to April 30, 2011.

 

This agreement requires that, during its term, Mr. Arling must (i) devote his full working time and energy to us, (ii) refrain from disclosing and/or using any of our trade secrets and proprietary information, and (iii) during the term of the agreement and for a period of two years thereafter, refrain from soliciting certain of our large customers or any key employees. The agreement also provides Mr. Arling the opportunity to receive increases (but not decreases) in his annual salary as determined and set by the Compensation Committee in accordance with plans and policies established by that committee.

 

If, during the term of the agreement, Mr. Arling should resign for “good reason” (as defined in the agreement), Mr. Arling will receive salary, bonus, other incentive compensation and perquisites, and may continue to participate in our benefit plans, for an eighteen-month period following such resignation or twenty-four months if such resignation is due to a “Change in Control,” as defined in the agreement (see “Potential Payments upon Termination or Change in Control” below).

 

Paul J.M. Bennett.  On June 16, 1996, our subsidiary, Universal Electronics B.V., entered into an employment agreement with Mr. Bennett. We believe that the agreement contains terms and provisions that are typical of these types of agreements in the Netherlands. Mr. Bennett’s compensation is split among the various Universal Electronics B.V. subsidiaries for which Mr. Bennett devotes his time. Mr. Bennett has also received a salary continuation agreement from us (see “Salary Continuation Agreements” below).

 

Salary Continuation Agreements — Messrs. Hackworth, Bennett, Kopaskie and Firehammer and certain other officers have salary continuation agreements (“SCA”). Each SCA takes effect upon the occurrence of a “Change in Control”. When effective, each SCA operates as an employment agreement providing for a term of employment with us for a period ranging from twelve to eighteen months (twenty-four to thirty-six months in the event of a hostile acquisition). In addition, each SCA provides that the executive or other officer receive increases in salary and bonuses during the term of the SCA in accordance with our standard policies and practices; however, in no event would this base salary and bonus be less than the base salary and bonus the executive or other officer received in the year immediately preceding the effective date of the SCA. Furthermore, each SCA provides that the executive or other officer be entitled to receive stock option grants and to otherwise participate in our incentive compensation and benefits plans and other

customary benefit programs in effect from time to time, but in no event would such participation be less than that provided to the executive or other officer immediately prior to the effective date of the SCA.

 

Under each SCA, if we terminate the executive or other officer’s employment for reasons other than the executive or other officer’s death or disability or “for cause” (as defined in each SCA) or if the executive or other officer resigns for “good reason” (as defined in each SCA which includes resignation in connection with a “Change in Control”), the executive or other officer would receive, in one lump sum, an amount equal to salary, bonus and other incentive compensation. In addition, the executive or other officer may continue all health, disability and life insurance benefits. Included in other incentive compensation is the cash value of all stock-based compensation held by the executive or other officer including any unvested stock-based compensation which, under the terms of the stock-based compensation agreements, would become fully vested on the date of the executive or other officer’s termination or resignation. The executive or officer would be eligible for these benefits under the SCA for periods ranging from twelve to eighteen months (twenty-four to thirty-six months in the event of a hostile acquisition) following such termination or resignation.

 

Severance Plan for Executive Officers

 

Except for the severance benefits provided to Mr. Arling as part of his employment agreement, we do not have a written severance benefits program for our Named Executives. However, in the past we have provided severance packages to certain executives and in the future we will continue to provide such benefits if we determine they are in the best interest of the Company and our stockholders.

 

Definitions of Termination Scenarios

 

“For Cause” Termination — Generally speaking, “cause” is defined as (i) the willful and continued failure by the executive to substantially perform his or her duties after a demand for substantial performance is delivered by the Company which specifically identifies the manner in which it is believed that the executive has not substantially performed their duties; (ii) the willful engaging by the executive in gross misconduct materially and demonstratably injurious to the property or business of the Company; or (iii) the executive’s commission of fraud, misappropriation or a felony.

 

“Constructive Termination” — In general, “constructive termination” occurs on that date on which the executive resigns from employment with the Company, if such resignation occurs within eighteen months after the occurrence of (i) the failure of the executive to be elected or re-elected or appointed or reappointed to such office that the executive holds (other than as a result of a termination for “cause”) if the executive is an officer of the Company and the office which the executive holds is one to which they are elected according to the Company’s By-laws; (ii) a change in the executive’s functions, duties, or responsibilities such that the executive’s position with the Company becomes substantially less in responsibility, importance, or scope; or (iii) a “Change in Control”.

 

“Change in Control” — A “Change in Control” occurs when (i) anyone acquires 20% or more of the total voting power of the outstanding securities of the Company which are entitled to vote in the election of directors; (ii) a majority of our directors is replaced, other than by those approved by existing directors; (iii) a merger occurs where the voting stock of the Company outstanding immediately prior to the merger does not continue to represent at least 80% of the total voting power immediately after the merger; or (iv) the Company is dissolved or liquidated.

 

“Good Reason” — For Mr. Arling, a termination for “good reason” is defined in his employment agreement and includes an executive’s resignation as a result of one of the following: