<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended October 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From to
-------------- --------------
Commission file number 0-22532
ULTIMATE ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-0585211
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
321A WEST 84TH AVENUE, THORNTON, COLORADO 80221
(Address of principal executive offices, zip code)
(303) 412-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X No
----- -----
The number of outstanding shares of common stock as of December 12, 1997 was
8,104,548.
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ULTIMATE ELECTRONICS, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited): Page No.
Condensed Consolidated Balance Sheets as of
October 31, 1997 and January 31, 1997 . . . . . . . 3
Consolidated Statements of Operations for the three
and nine months ended October 31, 1997 and
October 31, 1996 . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended October 31, 1997 and October 31, 1996 . 5
Notes to Condensed Consolidated Financial Statements . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . 11
Item 2. Changes in Securities . . . . . . . . . . . . 11
Item 3. Defaults Upon Senior Securities . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders . . 11
Item 5. Other Information. . . . . . . . . . . . . . 11
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . 11
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ULTIMATE ELECTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
(Unaudited)
October 31, January 31,
1997 1997
----------- -----------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 2,188 $ 764
Accounts receivable 18,255 13,788
Merchandise inventories 53,255 41,414
Other assets 2,526 642
-------- --------
Total current assets 76,224 56,608
Property and equipment, net 50,499 44,632
Property under capital leases,
including related parties, net 2,153 1,019
Other assets 3,315 1,051
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Total assets $132,191 $103,310
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 35,079 $ 21,651
Note payable 29,147 -
Other current liabilities 7,833 7,089
-------- --------
Total current liabilities 72,059 28,740
Note payable - 17,237
Bonds payable 13,000 13,000
Term loans 716 928
Capital lease obligations,
including related parties 2,133 1,007
Deferred tax liability 640 695
Commitments
Stockholders' equity:
Preferred stock, par value $.01 per share
Authorized shares - 10,000,000
No shares issued and outstanding - -
Common stock, par value $.01 per share
Authorized shares - 10,000,000
Issued and outstanding shares,
8,098,682 at October 31, 1997 and
6,995,000 at January 31, 1997 81 70
Additional paid-in capital 33,787 31,009
Retained earnings 9,775 10,624
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Total stockholders' equity 43,643 41,703
-------- --------
Total liabilities and stockholders' equity $132,191 $103,310
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-------- --------
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
3
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ULTIMATE ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
October 31, October 31,
------------------- ---------------------
1997 1996 1997 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales $81,990 $60,772 $199,442 $177,531
Cost of goods sold 59,140 44,468 145,228 130,591
------- ------- -------- --------
Gross profit 22,850 16,304 54,214 46,940
Selling, general and administrative expenses 21,923 15,161 52,698 44,950
------- ------- -------- --------
Income from operations 927 1,143 1,516 1,990
Interest expense, net 1,107 841 2,861 2,438
------- ------- -------- --------
Income (loss) before income taxes (180) 302 (1,345) (448)
Provision (benefit) for income taxes (65) 112 (497) (165)
------- ------- -------- --------
Net income (loss) $ (115) $ 190 $ (848) $ (283)
------- ------- -------- --------
------- ------- -------- --------
Earnings (loss) per share of common stock $ (. 01) $ .03 $ (.11) $ (.04)
Weighted average shares outstanding 8,038 6,995 7,459 6,995
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
4
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ULTIMATE ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(UNAUDITED)
(amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
October 31,
--------------------
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities $ 4,564 $ 3,723
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,333) (6,287)
Purchase of Audio King (3,302) -
------- -------
Net cash used in investing activities (7,635) (6,287)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from note payable 4,740 3,000
Proceeds from issuance of common stock 199 -
Proceeds from term loans - 225
Principal payments on term loans and
capital lease obligations (444) (357)
------- -------
Net cash provided by financing activities 4,495 2,868
------- -------
Net increase in cash and cash equivalents 1,424 304
Cash and cash equivalents at beginning of period 764 979
------- -------
Cash and cash equivalents at end of period $2 ,188 $ 1,283
------- -------
------- -------
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
5
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ULTIMATE ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
OCTOBER 31, 1997
1. ACCOUNTING POLICIES
The Company's unaudited condensed consolidated financial statements have
been prepared by the Company in accordance with generally accepted
accounting principles for interim financial reporting and the regulations
of the Securities and Exchange Commission for quarterly reporting.
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of the Company, the statements include all adjustments,
consisting only of normal recurring adjustments, which are necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods. Operating results for the nine month period
ended October 31, 1997 are not necessarily indicative of the results that
may be expected for the year ending January 31, 1998. Seasonal
fluctuations in sales of the Company's products result primarily from the
purchasing patterns of individual consumers during the Christmas holiday
season. These patterns tend to moderately concentrate sales in the latter
half of the year, particularly in the fourth quarter. For further
information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report to Stockholders for the year ended
January 31, 1997.
2. PRINCIPLES OF CONSOLIDATION
The unaudited condensed consolidated financial statements include the
accounts of all subsidiaries. All intercompany accounts and transactions
have been eliminated upon consolidation.
3. ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share," which is required to be adopted on January
31, 1998 by the Company. At such time, the Company will be required to
change the method it currently uses to compute earnings per share and to
restate all prior periods. Under the new requirements for calculating
basic earnings per share, the dilutive effect of stock options will be
excluded. The impact of Statement No. 128 on prior periods is not expected
to be material.
4. MERGER
On June 27, 1997, the Company completed a merger in which the Company
acquired all of the outstanding shares of Audio King Corporation ("Audio
King"). Audio King, a consumer specialty electronics company, operated 11
retail stores; eight in Minnesota, two in Iowa and one in South Dakota.
The purchase price consisted of $2.5 million in cash, 986,432 shares of
Ultimate's common stock valued at $2.6 million, assumed debt of $7.2
million, and other expenses and severance costs of $1.2 million. The
transaction was accounted for as a purchase, whereby the purchase price has
been allocated to the acquired assets and liabilities based on estimated
fair value at the acquisition date. The transaction resulted in the
Company recording goodwill in the amount of $2.3 million. The results of
operations since the acquisition date are included in the accompanying
condensed consolidated financial statements.
6
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ULTIMATE ELECTRONICS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
4. MERGER (CONTINUED)
The following unaudited pro forma combined net sales, net income (loss) and
earnings (loss) per share data summarize the results of operations for the
nine month periods ended October 31, 1997 and 1996 as if Audio King had
been acquired February 1, 1996.
UNAUDITED PRO FORMA
(amounts in thousands, except per share data)
Nine Months Ended
------------------------------------
October 31, 1997 October 31, 1996
---------------- ----------------
Net sales $221,218 $224,838
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-------- --------
Net income (loss) $ (1,816) $ (1,167)
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-------- --------
Earnings (loss) per share $ (.23) $ (.15)
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-------- --------
The unaudited pro forma combined financial results do not purport to
represent the actual results of operations which would have occurred had
such transactions been at the beginning of the period indicated or the
Company's results of operations for any future period. Anticipated
operational efficiencies from the integration of the acquisition are not
fully reflected in the above pro forma data and there can be no assurance
that such efficiencies will be achieved in the future.
The above pro forma data include adjustments to: eliminate Audio King
consulting, legal and accounting costs directly related to the acquisition;
eliminate duplicate managements' and buyers' salaries; adjust interest
expense for the cash outlay for the purchase of Audio King; eliminate
Audio King goodwill amortization and amortize the new goodwill; and reflect
the tax effects of the above adjustments.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations and the financial statements and accompanying notes contain forward-
looking information which is subject to risks and uncertainties, including, but
not limited to, the effects of the completed merger, the ability of the Company
to combine the two companies profitably, increases in promotional activities of
competitors, further expansion by competitors into the Company's markets,
changes in consumer buying attitudes, the presence or absence of new products or
product features in the Company's merchandise categories, changes in vendor
support for advertising and promotional programs, changes in the Company's
merchandise sales mix and general economic conditions. Please refer to a
discussion of these and other factors in the Company's Annual Report on Form 10-
K for the year ended January 31, 1997 and other filings with the Securities and
Exchange Commission. The Company disclaims any intent or obligation to update
publicly these forward-looking statements, whether as a result of new
information, future events or otherwise.
RESULTS OF OPERATIONS
Net sales for the three months ended October 31, 1997 increased 35% to $82.0
million from $60.8 million for the three months ended October 31, 1996. Net
sales for the nine months ending October 31, 1997 increased 12% to $199.4
million from $177.5 million for the nine months ended October 31, 1996. The
increase in sales during these periods was due primarily to the acquisition of
Audio King effective June 27, 1997. Comparable store sales decreased 2% and 7%
for the three and nine months ended October 31, 1997, respectively. The
decrease in comparable store sales for the three and nine months ended October
31, 1997 was due in part to a continuing sluggish environment for consumer
electronics and the openings of competitors' stores within markets the Company
already serves, which openings adversely affected sales at the Company's
existing stores in these markets.
Gross profit for the three months ended October 31, 1997 increased 40% to $22.9
million (27.9% of net sales) from $16.3 million (26.8% of net sales) for the
three months ended October 31, 1996. Gross profit for the three months ended
October 31, 1997 was negatively impacted by the Company's continued close out of
certain products and the completion of the phasing out of two product lines at
Audio King. Gross profit for the nine months ended October 31, 1997 increased
15% to $54.2 million (27.2% of net sales) from $46.9 million (26.4% of net
sales) for the nine months ended October 31, 1996. The increase in gross profit
as a percentage of net sales for the nine months ended October 31, 1997 was
primarily attributable to a higher mix of sales of discontinued and promotional
computer products sold in the same period of the prior year.
Selling, general and administrative expenses for the three months ended October
31, 1997 increased to $21.9 million (26.8% of net sales) from $15.2 million
(24.9% of net sales) for the three months ended October 31, 1996. The $6.7
million increase in expenses was due primarily to higher sales commissions,
advertising and other sales related costs associated with the higher sales
volume, higher store facility expenses associated with the Company's larger and
newer stores, as well as the acquisition of Audio King. Selling, general and
administrative expenses for the nine months ending October 31, 1997 increased to
$52.7 million (26.4% of net sales) from $45.0 million (25.3% of net sales) for
the nine months ended October 31, 1996.
As a result of the foregoing, income from operations decreased 19% to $927,000
(1.1% of net sales) for the three months ended October 31, 1997, compared to
income from operations of $1.1 million (1.9% of net sales) for the three months
ended October 31, 1996. Income from operations decreased 24% to $1.5 million
(0.8% of net sales) for the nine months ended October 31, 1997 from $2.0 million
(1.1% of net sales) for the nine months ended October 31, 1996.
Interest expense increased to $1.1 million and $2.9 million for the three and
nine months ended October 31, 1997, respectively, from $841,000 and $2.4 million
for the three and nine months ended October 31, 1996, respectively. These
increases were due primarily to a slightly higher interest rate on amounts
outstanding under the Company's revolving line of credit as well as the
additional borrowings required as a result of the acquisition of Audio King.
8
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LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of liquidity have been net cash from
operations and from revolving credit lines and term loans. With the addition of
Audio King and the opening of a new store in August 1997 in Lakewood, Colorado,
the Company now operates a total of 30 stores in nine states. The Company has
funded this expansion in part through two public offerings of its common stock
and additional borrowings under the Company's line of credit facility with
Norwest Bank Colorado, N.A. ("Norwest Bank").
In March 1995, the Company received proceeds of $12.3 million (net of the
underwriting discount and other associated costs) from the sale of $13.0 million
aggregate principal amount of 10.25% First Mortgage Bonds (the "Bond Offering").
The proceeds of the Bond Offering were used to fund a substantial portion of the
construction of the Company's warehouse, office, service and store facility in
Thornton, Colorado (the "Thornton Facility"). Interest on the bonds accrues at
the rate of 10.25% per year until maturity or earlier redemption. The Company
is required to redeem $3.25 million aggregate principal amount of the bonds
annually (reduced to the extent of the bonds purchased or redeemed by the
Company earlier) on January 31, 2002 and on January 31 of each of the three
years thereafter, at a redemption price equal to par plus accrued interest to
the date of redemption. The bonds are not redeemable prior to March 31, 2000
and are secured by the Thornton Facility.
Net cash provided by operations was $4.6 million for the nine months ended
October 31, 1997 compared to net cash provided by operations of $3.7 million for
the nine months ended October 31, 1996. The increase in cash provided by
operations for the nine months ending October 31, 1997 was primarily the result
of higher accounts payable levels compared to the prior year.
The Company intends to continue its expansion into select metropolitan areas in
the Rocky Mountain, Midwest and Southwest regions with its larger format stores.
In May 1997, the Company replaced its Aurora, Colorado store with a larger
format store in Englewood, Colorado. In August 1997, the Company opened a
larger format store in Lakewood, Colorado and on November 14, 1997, the Company
completed the remodel of two Audio King stores and grand opened the stores under
the name Ultimate Electronics. The Company also completed changes to four of the
Minneapolis Audio King stores to allow for increased selection in those stores
in the key area of larger format television as well as other product categories.
The Company's primary capital requirements are directly related to expenditures
for new store openings and the remodeling and upgrading of existing store
locations. With the exception of the Thornton Facility, all stores are leased.
Capital expenditures to relocate and expand existing stores in fiscal 1998
averaged $1.5 million per store, excluding preopening expenses averaging
$125,000. Preopening costs include such items as advertising prior to opening,
recruitment and training of new employees and any costs of early termination of
store leases. During fiscal 1999, the Company will be analyzing new store
opportunities in existing markets to replace the Company's smaller, older
locations. The Company expects to relocate and expand two to five of its
locations within the next three years along with the possibility of adding new
stores. At the present time, no firm commitments for relocated stores have been
made. The size of these future stores is anticipated to be approximately 24,000
to 36,000 square feet at a projected cost of $30 to $55 per square foot. The
inventory requirement for the Company's new larger format stores averages
approximately $2.0 million per store, approximately $1.0 million of which is
financed through trade credit.
The Company has a revolving line of credit agreement with Norwest Bank that
expires on September 30, 1998. At October 31, 1997, amounts payable under the
term loan agreement have been classified in the accompanying consolidated
balance sheet as short term, however, management intends to renew or extend the
existing credit agreement. Borrowings under the revolving line of credit are
limited to the lesser of $35 million or 70% of eligible inventory. Borrowings
under this credit facility in the amount of $29.1 million were outstanding as of
October 31, 1997. Due to lower than expected sales performance in the fourth
quarter of fiscal 1997, the Company was in violation of certain of its financial
covenants under the current credit agreement and received a waiver from the
9
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bank for the violations. On March 11, 1997, the credit agreement was amended
to reduce the minimum net worth requirement and the maximum ratio of funded
debt to earnings before interest, taxes, depreciation and amortization. On
June 27, 1997, the credit agreement was further amended to adjust covenant
requirements to levels conforming with the Audio King acquisition. Management
believes the Company's operations for fiscal 1998 will be sufficient to enable
the Company to be in compliance with the amended covenants for all periods of
fiscal year 1998.
The Company believes that its cash flow from operations and borrowings under
existing and new credit facilities will be sufficient to fund the Company's
operations and its store relocation plans for fiscal 1998. There can be no
assurance that the Company will not experience significant delays, cost overruns
or completion problems in connection with the relocation of existing stores or
additional unanticipated costs associated with the acquisition of Audio King.
Moreover, there can be no assurance that the capital requirements for the
Company's stores will not exceed the Company's current estimates. In order to
fund the capital requirements for its anticipated expansion plans beyond fiscal
1998, the Company may be required to seek additional financing, which may take
the form of expansion of its existing credit facility or possibly additional
debt or equity financings. There can be no assurance that the Company will be
able to obtain such funds on favorable terms, if at all.
SEASONALITY
The Company's business is affected by seasonal consumer buying patterns. As is
the case with other retailers, the Company's sales and profits have been
greatest in the fourth quarter (which includes the Christmas selling season).
If, for any reason, the Company's sales were to be substantially below
expectations during these months, the Company's annual results would be affected
in an adverse and disproportionate manner. Operating results are dependent upon
a number of factors, including discretionary consumer spending, which is in turn
affected by local, regional or national economic conditions affecting disposable
consumer income, such as employment, business conditions, interest rates and
taxation. The Company's quarterly results of operations may fluctuate
significantly as a result of a number of factors, including the timing of new or
relocated and expanded store openings and related expenses, the success of new
stores and the impact of new stores on existing stores, among others. As the
Company has opened additional stores or relocated and expanded stores within
markets it already serves, sales at existing stores have been adversely
affected. Such adverse effects may occur in the future. The Company's
quarterly operating results also may be affected by increases in merchandise
costs, price changes in response to competitive factors, new and increased
competition, product availability and the costs associated with the opening of
new stores.
10
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company is a party to certain legal proceedings
arising in the ordinary course of its business. Management believes
that any resulting liability, individually or in the aggregate, will
either be covered by insurance or will not have a material adverse
effect on the Company's financial condition.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Documents filed with this report:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ultimate Electronics, Inc.
Date: December 12, 1997 By: /s/ Alan E. Kessock
------------------------- --------------------------------------------
Alan E. Kessock
Vice President, Chief Financial Officer,
Secretary and a Director (Principal
Financial and Accounting Officer)
12
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 2,188
<SECURITIES> 0
<RECEIVABLES> 18,711
<ALLOWANCES> 456
<INVENTORY> 53,255
<CURRENT-ASSETS> 76,224
<PP&E> 63,032
<DEPRECIATION> 12,533
<TOTAL-ASSETS> 132,191
<CURRENT-LIABILITIES> 72,059
<BONDS> 44,996
0
0
<COMMON> 81
<OTHER-SE> 43,562
<TOTAL-LIABILITY-AND-EQUITY> 132,191
<SALES> 199,442
<TOTAL-REVENUES> 199,442
<CGS> 145,228
<TOTAL-COSTS> 197,926
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 2,861
<INCOME-PRETAX> (1,345)
<INCOME-TAX> (497)
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