<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 11, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ULTIMATE ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5731 84-0585211
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
321-A WEST 84TH AVENUE
THORNTON, COLORADO 80221
(303) 412-2500
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
ALAN E. KESSOCK
VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY
ULTIMATE ELECTRONICS, INC.
321-A WEST 84TH AVENUE
THORNTON, COLORADO 80221
(303) 412-2500
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
J. JUSTYN SIRKIN, ESQ. ROBERT RANUM, ESQ.
N. ANTHONY JEFFRIES, ESQ. JAMES KORN, ESQ.
DAVIS, GRAHAM & STUBBS LLP FREDRIKSON & BYRON. P.A.
370 SEVENTEENTH STREET, SUITE 4700 1100 INTERNATIONAL CENTRE
DENVER, COLORADO 80202 900 SECOND AVENUE SOUTH
(303) 892-9400 MINNEAPOLIS, MINNESOTA 55402
(612) 347-7000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of this Registration Statement
and the satisfaction
or waiver of certain other conditions under the Agreement and Plan of Merger
described herein.
--------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED MAXIMUM
AMOUNT TO BE MAXIMUM OFFERING AGGREGATE AMOUNT OF
TITLE OF SHARES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share(3)........................... 1,000,000 shares $4.41 $4,412,022 $1,337
</TABLE>
(1) Reflects the maximum number of shares of Common Stock of the Registrant that
may be issued in connection with the merger.
(2) The price is estimated solely for the purpose of calculating the
registration fee pursuant to Rule 457(f)(1) promulgated under the Securities
Act of 1933, as amended, and represents the market value of the securities
to be received by the Registrant.
(3) Each share of Common Stock of the Registrant includes a Preferred Stock
Purchase Right pursuant to the Registrant's Stockholder Rights Plan.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS..................................... 2
AVAILABLE INFORMATION................................................................. 2
SUMMARY............................................................................... 4
Parties to the Merger............................................................... 4
Audio King Special Meeting.......................................................... 4
The Merger.......................................................................... 5
SUMMARY FINANCIAL INFORMATION......................................................... 11
Summary Historical Financial Information of Ultimate................................ 11
Summary Historical Financial Information of Audio King.............................. 12
Summary Unaudited Pro Forma Combined Condensed Financial Information................ 13
Comparative Unaudited Per Share Data................................................ 14
Comparative Market Price Data....................................................... 15
Dividend Policy..................................................................... 16
RISK FACTORS.......................................................................... 17
THE SPECIAL MEETING................................................................... 24
THE MERGER............................................................................ 26
Background of Merger................................................................ 26
Audio King's Reasons for the Merger; Recommendation of the Audio King
Board of Directors................................................................ 28
Opinion of Audio King's Financial Advisor........................................... 29
The Merger Agreement................................................................ 32
Effects of the Merger............................................................... 32
Effective Date of the Merger........................................................ 32
Proration Provisions................................................................ 33
Conversion of Audio King Options.................................................... 34
Election and Exchange Procedures.................................................... 35
Certain Terms of the Merger Agreement............................................... 36
Financing Arrangements.............................................................. 42
Conflicts of Interest............................................................... 42
Regulatory Matters.................................................................. 44
Conduct of Ultimate's Business after the Merger..................................... 44
Certain Other Transactions and Agreements........................................... 44
Nasdaq National Market Listing of Ultimate Stock.................................... 45
Certain Federal Income Tax Consequences............................................. 45
Accounting Treatment................................................................ 47
Certain Federal Securities Law Consequences......................................... 47
Dissenters' Rights.................................................................. 47
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION.......................... 51
SELECTED ULTIMATE FINANCIAL INFORMATION............................................... 55
ULTIMATE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 57
SELECTED AUDIO KING FINANCIAL INFORMATION............................................. 61
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
AUDIO KING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 63
CERTAIN INFORMATION CONCERNING ULTIMATE............................................... 67
Business of Ultimate................................................................ 67
Directors and Executive Officers.................................................... 74
Executive Compensation.............................................................. 76
Principal Stockholders.............................................................. 78
CERTAIN INFORMATION CONCERNING AUDIO KING............................................. 81
Business of Audio King.............................................................. 81
Principal Shareholders.............................................................. 87
DESCRIPTION OF ULTIMATE STOCK......................................................... 88
COMPARISON OF RIGHTS OF HOLDERS OF ULTIMATE STOCK AND HOLDERS OF AUDIO KING STOCK..... 90
LEGAL MATTERS......................................................................... 99
EXPERTS............................................................................... 99
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
Annex A -- Merger Agreement
Annex B -- Fairness Opinion of Greene Holcomb & Lannin LLC
Annex C -- Minnesota Dissenters' Rights Statute -- Sections 302A.471 and 302A.473 of
the Minnesota Business Corporation Act
</TABLE>
ii
<PAGE>
[AUDIO KING LETTERHEAD]
, 1997
To Our Shareholders:
I am pleased to invite you to attend a Special Meeting of Shareholders (the
"Special Meeting") of Audio King Corporation ("Audio King"), which meeting will
be held on , 1997, at 8:30 a.m., local time, at the Audio King store
located at 12350 Wayzata Boulevard, Minnetonka, Minnesota. At the Special
Meeting you will be asked to consider and vote upon an Agreement and Plan of
Merger (the "Merger Agreement"), dated as of March 4, 1997, among Audio King,
Ultimate Electronics, Inc., a Delaware corporation ("Ultimate"), and Ultimate
AKquisition Corp., a Delaware corporation and wholly owned subsidiary of
Ultimate ("UAC"), which agreement provides that Audio King will merge into UAC
and, as a result, become a wholly owned subsidiary of Ultimate (the "Merger").
Under the terms of the Merger Agreement, each outstanding share of common
stock, par value $.001 per share, of Audio King (the "Audio King Stock"), other
than Audio King Stock as to which dissenters' rights have been effectively
exercised, will be converted, at the election of the holder thereof, into either
$1.75 cash or 0.7 shares of common stock, par value $.01 per share, of Ultimate
(the "Ultimate Stock"). Audio King shareholder elections to receive cash or
shares will be adjusted on a prorated basis, however, so that 50% of the shares
of Audio King Stock are converted into Ultimate Stock and 50% are exchanged for
cash. Audio King shareholders must elect to receive either cash or Ultimate
Stock with respect to all of the Audio King Stock that they beneficially own.
The attached Proxy Statement/Prospectus is intended to provide you with the
information that you will need to make an informed decision regarding your vote
on the proposed Merger. It also serves as a Prospectus for Ultimate, describing
the investment in Ultimate that you will be making if the Merger is approved and
you elect to exchange your Audio King Stock for Ultimate Stock. A copy of the
Merger Agreement is attached to the Proxy Statement/Prospectus as Annex A.
Complete details on the Merger Agreement, the method by which you can elect to
receive cash or stock in exchange for your shares or change your election,
federal income tax considerations that may affect your election and other
information of which you should be aware in making your decision are contained
in the attached Proxy Statement/ Prospectus. We urge you to read the enclosed
proxy materials carefully before voting on the proposed Merger.
Based upon the recommendation of a committee of disinterested directors (the
"Special Committee"), the Board of Directors of Audio King believes that the
proposed transaction is fair to and in the best interests of Audio King and its
shareholders and unanimously recommends approval of the Merger and the
transactions contemplated by the Merger Agreement.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE MERGER IS FAIR
TO AND IN THE BEST INTERESTS OF AUDIO KING'S SHAREHOLDERS AND UNANIMOUSLY
RECOMMENDS A VOTE FOR APPROVAL OF ADOPTION OF THE MERGER AGREEMENT. SHAREHOLDERS
SHOULD BE AWARE THAT CERTAIN MEMBERS OF THE BOARD HAVE CERTAIN CONFLICTS OF
INTEREST WITH RESPECT TO THE MERGER THAT ARE DESCRIBED IN GREATER DETAIL IN THE
SECTION ENTITLED "THE MERGER--CONFLICTS OF INTEREST" IN THE ATTACHED PROXY
STATEMENT/PROSPECTUS.
Audio King retained the investment banking firm Greene Holcomb & Lannin LLC
("GH&L") to advise the Special Committee with respect to the consideration to be
received by the Audio King shareholders in the Merger. GH&L has advised the
Special Committee that, in its opinion, the consideration to be received by the
Audio King shareholders pursuant to the Merger Agreement is fair from a
financial point of view. A copy of the opinion is attached to the Proxy
Statement/Prospectus as Annex B.
For the Merger to become effective, the proposal must receive the approval
of the majority of the outstanding shares of Audio King Stock. For that reason,
it is very important that your shares be represented at the Special Meeting,
whether or not you are able to attend in person. ACCORDINGLY, YOU ARE
<PAGE>
URGED TO VOTE FOR THE MERGER BY MARKING, SIGNING, DATING AND RETURNING THE
ACCOMPANYING PROXY IN THE ENCLOSED ENVELOPE. Your vote is important no matter
how many shares you own.
In a separate mailing which will be made on or about , 1997, you
will receive an election form on which you may indicate whether you wish to have
your shares of Audio King Stock converted into Ultimate Stock or exchanged for
cash. You may make only one election with respect to all of the Audio King Stock
which you beneficially own. Instructions regarding the completion of the
election form will be provided in the separate mailing. The deadline for
returning election forms, together with your stock certificate(s) or a proper
guaranty of delivery, is 1997.
Thank you for your continued support.
On behalf of the Board of Directors,
HENRY G. THORNE
CHIEF EXECUTIVE OFFICER
<PAGE>
AUDIO KING CORPORATION
3501 S. HIGHWAY 100
MINNEAPOLIS, MINNESOTA 55416
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 1997
TO THE SHAREHOLDERS OF AUDIO KING CORPORATION:
A Special Meeting of the Shareholders (the "Special Meeting") of Audio King
Corporation ("Audio King") will be held on , 1997, commencing at
8:30 a.m., local time, at the Audio King store located at 12350 Wayzata
Boulevard, Minnetonka, Minnesota, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Merger, dated as of March 4, 1997, among Ultimate
Electronics, Inc. ("Ultimate"), Ultimate AKquisition Corp., a
wholly-owned subsidiary of Ultimate ("UAC"), and Audio King, which
agreement provides for the merger of Audio King with and into UAC (the
"Merger"), whereby holders of common stock, par value $.001 per share, of
Audio King ("Audio King Stock") will be entitled to elect to receive, in
exchange for each share of Audio King Stock, either $1.75 in cash or 0.7
shares of common stock, par value $.01 per share of Ultimate ("Ultimate
Stock"). Audio King shareholder elections to receive cash or shares will
be adjusted on a pro rata basis, however, so that 50% of the shares of
Audio King Stock are converted into Ultimate Stock and 50% are exchanged
for cash. Audio King shareholders must elect to receive either cash or
Ultimate Stock with respect to all of the Audio King Stock that they
beneficially own.
2. To consider and vote on such other matters as may properly be presented
incident to the conduct of the Special Meeting or any postponement or
adjournment thereof.
Shareholders of record at the close of business on , 1997 will
be entitled to notice of and to vote at the Special Meeting or at any
postponement or adjournment thereof.
Shareholders of record are entitled to dissenters' rights under Sections
302A.471 and 302A.473 of the Minnesota Business Corporation Act (the "MBCA").
Those shareholders exercising their dissenters' rights for their shares of Audio
King Stock must not vote in favor of the Merger and must deliver to Audio King a
written demand stating that they are exercising their dissenters' rights in
accordance with the procedures set forth in Section 302A.473 of the MBCA.
Reference is made to the discussion of dissenters' rights in the accompanying
Proxy Statement/Prospectus and to Sections 304A.471 and 302A.473 of the MBCA, a
copy of which is attached as Annex C to the Proxy Statement/ Prospectus.
If a proxy is signed and returned to Norwest Bank Minnesota, N.A., the
exchange agent (the "Exchange Agent"), without indicating any voting
instructions, shares of Audio King Stock represented by the proxy will be voted
FOR the Merger. The Audio King proxy holders may, in their discretion, vote
shares voted for the Merger to adjourn the Special Meeting in order to solicit
additional proxies in favor of the Merger. Proxies voting against the Merger
will not be voted for adjournment of the Special Meeting.
YOU ARE REQUESTED TO MARK, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY IN
THE ENCLOSED ENVELOPE AS PROMPTLY AS POSSIBLE. TO BE EFFECTIVE, PROXIES MUST BE
DELIVERED TO THE EXCHANGE AGENT AT OR PRIOR TO THE SPECIAL MEETING. Your proxy
may be revoked at any time before it is voted by signing and returning a later
dated proxy with respect to the same shares, by filing with the Exchange Agent a
written revocation bearing a later date, or by attending and voting your shares
at the Special Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
STUART L. FINNEY
SECRETARY
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN
AND DATE THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED PROXY
RETURN ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THE PROXY CARD.
STOCK CERTIFICATES (OR A GUARANTY OF DELIVERY) SHOULD INSTEAD BE RETURNED WITH
THE ELECTION FORM THAT WILL BE MAILED TO SHAREHOLDERS SEPARATELY ON OR ABOUT
, 1997.
THE BOARD OF DIRECTORS OF AUDIO KING RECOMMENDS THAT SHAREHOLDERS OF AUDIO
KING VOTE FOR THE MERGER.
<PAGE>
SUBJECT TO COMPLETION, DATED , 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THIS REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
AUDIO KING CORPORATION
PROXY STATEMENT
FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 1997
------------------------
ULTIMATE ELECTRONICS, INC.
PROSPECTUS
---------------------
This Proxy Statement and Prospectus (the "Proxy Statement/Prospectus") is
being furnished to the shareholders of Audio King Corporation, a Minnesota
corporation ("Audio King," which term includes its consolidated subsidiaries
unless the context indicates otherwise), in connection with the solicitation of
proxies by the Board of Directors of Audio King (the "Audio King Board") from
holders of outstanding shares of common stock, par value $.001 per share (the
"Audio King Stock"), of Audio King for use at the Special Meeting of
Shareholders of Audio King to be held at 8:30 a.m., local time, on ,
1997 at the Audio King store located at 12350 Wayzata Boulevard, Minnetonka,
Minnesota, and at any adjournment or postponement thereof (the "Special
Meeting"). This Proxy Statement/Prospectus and the accompanying form of proxy
are first being mailed to shareholders of Audio King on or about ,
1997.
Audio King shareholders will be asked at the Special Meeting to consider and
vote upon a proposal to approve and adopt an Agreement and Plan of Merger, dated
as of March 4, 1997 (the "Merger Agreement"), among Ultimate Electronics, Inc.,
a Delaware corporation ("Ultimate"), Ultimate AKquisition Corp., a Delaware
corporation and wholly owned subsidiary of Ultimate ("UAC"), and Audio King,
pursuant to which Audio King will be merged with and into UAC and UAC will
continue as the surviving corporation and a wholly owned subsidiary of Ultimate
(the "Merger").
This Proxy Statement/Prospectus also constitutes a prospectus of Ultimate
with respect to the issuance of up to an aggregate of 1,000,000 shares of the
common stock, par value $.01 per share (the "Ultimate Stock"), in connection
with the Merger. All information contained in this Proxy Statement/Prospectus
relating to Ultimate and UAC has been supplied by Ultimate and is its sole
responsibility. All information relating to Audio King has been supplied by
Audio King and is its sole responsibility. On April 9, 1997, the last reported
sale price per share of the Ultimate Stock on The Nasdaq National Market was
$3.625 and the last reported sale price per share of Audio King Stock on the
Nasdaq SmallCap Market was $1.6875.
In accordance with Sections 302A.471 and 302A.473 of the Minnesota Business
Corporation Act, holders of Audio King Stock are entitled to dissenters' rights
in connection with the Merger. See "The Merger--Dissenters' Rights."
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY SHAREHOLDERS OF AUDIO KING BEFORE VOTING ON THE MERGER AND IN
EVALUATING AN INVESTMENT IN ULTIMATE STOCK.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/ PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in the Summary, under the captions "Summary--Dividend
Policy," "Risk Factors," "The Merger--Audio King's Reasons for the Merger;
Recommendation of the Audio King Board of Directors," and "--Opinion of Audio
King's Financial Advisor" and elsewhere in this Proxy Statement/ Prospectus,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of Audio King, Ultimate or UAC
or industry results to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include the following: the consummation of the Merger
with Audio King, the effects of the Merger, the ability of Ultimate to combine
the two companies effectively or profitably, as well as risks regarding
increases in promotional activities of competitors, changes in consumer buying
attitudes, the presence or absence of new products or product features in
Ultimate's merchandise categories, changes in vendor support for advertising and
promotional programs, changes in Ultimate's merchandise sales mix, general
economic conditions, the cost and availability of suitable store locations, cost
effective and timely construction of new stores, fluctuations in consumer
demand, Ultimate's ability to address adequately all of the changing demands
that its planned expansion will impose, the results of financing efforts and
other risk factors detailed or referenced in this Proxy Statement/Prospectus and
in Ultimate's Securities and Exchange Commission (the "Commission") filings. See
"Risk Factors." Many of such factors are beyond Ultimate's ability to control or
predict. Readers are cautioned not to put undue reliance on forward-looking
statements. Ultimate disclaims any intent or obligation to update publicly these
forward-looking statements, whether as a result of new information, future
events or otherwise.
AVAILABLE INFORMATION
Ultimate has filed with the Commission a Registration Statement on Form S-4
(including all amendments, exhibits, annexes and schedules thereto, the
"Registration Statement") pursuant to the Securities Act of 1933, as amended
(the "Securities Act"), and the rules and regulations promulgated thereunder
covering the Ultimate Stock to be issued by it in connection with the Merger.
This Proxy Statement/Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement. Statements
made in this Proxy Statement/Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement or incorporated by reference herein, reference is
made to the exhibit for a more complete description of the matters involved, and
each such statement shall be deemed qualified in its entirety by such reference.
The information in this Proxy Statement/Prospectus concerning Audio King and
Ultimate has been furnished by Audio King and Ultimate, respectively.
Audio King and Ultimate are each subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy and information statements and other
information with the Commission. Such reports and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Regional Offices of the Commission at 7 World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material can be obtained by mail from the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates.
In addition, Audio King Stock and Ultimate Stock are listed on the Nasdaq
SmallCap Market and the Nasdaq National Market ("Nasdaq"), respectively, and
Audio King and Ultimate are required to file reports, proxy and information
statements and other information with the Nasdaq SmallCap Market and
2
<PAGE>
Nasdaq, as applicable. These documents can be inspected at the principal office
of the NASDAQ Stock Market, 1735 K Street, N.W., Washington, D.C. 20016-1500.
Further, Audio King (since June 30, 1996) and Ultimate (since June 13, 1996)
have been filing documents with the Commission through the Electronic Data
Gathering, Analysis and Retrieval system. Accordingly, copies of documents filed
by Audio King with the Commission on or after June 30, 1996 or by Ultimate on or
after June 13, 1996, as well as copies of the Registration Statement (including
the exhibits filed therewith), are also available through the Commission's Web
site (http://www.sec.gov/).
3
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN IMPORTANT MATTERS DISCUSSED ELSEWHERE
IN THIS PROXY STATEMENT/ PROSPECTUS. THIS SUMMARY SETS FORTH CERTAIN ELEMENTS OF
SUCH MATTERS, BUT DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION APPEARING IN THIS PROXY
STATEMENT/ PROSPECTUS AND THE ANNEXES HERETO. SHAREHOLDERS ARE URGED TO READ
THIS PROXY STATEMENT/PROSPECTUS AND THE ANNEXES HERETO IN THEIR ENTIRETY. SEE
ALSO "RISK FACTORS" FOR CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH THE MERGER.
PARTIES TO THE MERGER
ULTIMATE AND UAC. Ultimate is a leading speciality retailer of home
entertainment and consumer electronics in Colorado, Idaho, Nevada, New Mexico,
Oklahoma and Utah. Ultimate strives to appeal to a wide range of customers with
an emphasis on selling mid to upscale products. Ultimate believes that its
larger format stores enable it to differentiate itself from its competitors by
providing a comprehensive selection of name brand consumer electronics, with an
emphasis on limited distribution upscale brands, as well as by offering an
extensive range of customer services and by displaying multiple home theater and
audio demonstration rooms. Ultimate believes that these factors, together with
its open and uncrowded merchandise displays and its policy of matching the
lowest prices of its competitors, make it an attractive alternative to
appliance/electronics superstores and mass merchants selling consumer
electronics. Ultimate operates 18 stores, including nine stores in Colorado
under the trade name SoundTrack and nine stores outside Colorado under the trade
name Ultimate Electronics.
UAC is a wholly-owned subsidiary of Ultimate formed solely for the purpose
of the Merger.
Ultimate was incorporated as a Delaware corporation in 1993. UAC was
incorporated as a Delaware corporation in March 1997. Ultimate's and UAC's
principal offices are located at 321A West 84th Avenue, Thornton, Colorado
80221. Their phone number is (303) 412-2500.
AUDIO KING. Audio King operates consumer electronics specialty stores that
seek to attract discriminating consumers of home, car and video electronics by
offering such consumers a broad selection of competitively priced name-brand
products in comfortable store environments staffed with professional sales
consultants. Audio King also offers personalized services, such as custom design
and installation of home and automobile electronics systems and repair services.
Audio King currently operates eleven specialty stores: six in Minneapolis-St.
Paul, Minnesota, and one store in each of Rochester and St. Cloud, Minnesota,
Sioux Falls, South Dakota and Des Moines and Cedar Rapids, Iowa.
Audio King was incorporated as a Minnesota corporation in 1985. Its
principal offices are located at 3501 South Highway 100, Minneapolis, Minnesota
55416. Its phone number is (612) 920-0505.
AUDIO KING SPECIAL MEETING
The Special Meeting of Audio King Shareholders will be held on ,
, 1997 at the Audio King store located at 12350 Wayzata Blvd.,
Minnetonka, Minnesota, commencing at 8:30 a.m., local time, and at any
adjournment or postponement thereof. The holders of record at the close of
business on , 1997 (the "Audio King Record Date") of shares of Audio
King Stock are entitled to notice of and to vote at the Special Meeting. The
purpose of the Special Meeting is to consider and vote upon a proposal to adopt
the Merger Agreement and the transactions contemplated thereby and such other
matters as may properly come before the Special Meeting.
Each share of Audio King Stock will be entitled to one vote on the proposal
to adopt the Merger Agreement at the Special Meeting. The affirmative vote of
the holders of a majority of the outstanding shares of Audio King Stock is
required to adopt the Merger Agreement. The directors and executive officers of
Audio King and their affiliates own approximately 28.1% of the shares of Audio
King Stock
4
<PAGE>
entitled to vote at the Special Meeting. The directors and executive officers of
Audio King have indicated their intention to vote such shares FOR the adoption
of the Merger Agreement.
Approval of the Merger Agreement by Ultimate stockholders is not required
under applicable law and, accordingly, will not be sought.
See "The Special Meeting."
THE MERGER
If the Merger Agreement is approved by the requisite vote of Audio King
shareholders at the Special Meeting and the other conditions to the Merger are
satisfied or waived (where permissible), the Merger will be consummated and
become effective at the time at which Articles of Merger meeting the
requirements of Section 302A.615 of the Minnesota Business Corporation Act (the
"MBCA") are filed with the Secretary of State of the State of Minnesota and a
Certificate of Merger meeting the requirements of Section 251 of the General
Corporation Law of the State of Delaware (the "DGCL") is filed with the
Secretary of State of the State of Delaware (the time of such filing being the
"Effective Time" and the day of such filing being the "Effective Date"). One of
the conditions to Ultimate's obligation to consummate the Merger is that the
holders of no more than 140,000 shares of Audio King Stock have properly
exercised their dissenters' rights under Section 302A.473 of the MBCA. See "The
Merger--Dissenters' Rights." It is expected that the Effective Time will be as
soon as practicable following completion of the Special Meeting. At the
Effective Time, Audio King will be merged with and into UAC and will thereby
become a wholly owned subsidiary of Ultimate. See "The Merger--Conduct of
Ultimate's Business After the Merger."
In connection with the Merger, each issued and outstanding share of Audio
King Stock (other than shares held by holders who effectively exercise
dissenters' rights) will be converted into the right to receive either $1.75 in
cash or 0.7 shares of Ultimate Stock, at the election of the holder. Audio King
shareholder elections to receive cash or shares will be adjusted on a prorated
basis, however, so that 50% of the shares of Audio King Stock are converted into
Ultimate Stock and 50% are exchanged for cash. Audio King shareholders must
elect to receive either cash or Ultimate Stock with respect to all of the Audio
King Stock that they beneficially own.
It should be recognized that the actual market price for Ultimate Stock on
the Effective Date or the day on which checks and/or certificates for shares of
Ultimate Stock are sent to former Audio King shareholders may be more or less
than the market price for Ultimate Stock on the day an Audio King shareholder
may make an election to receive cash or Ultimate Stock in the Merger.
Consequently, the cash received in the Merger for each share of Audio King Stock
may be more or less than the value of the Ultimate Stock received in the Merger
for each share of Audio King Stock, depending on market values of Ultimate Stock
at the Effective Date or the date on which certificates of Ultimate are
distributed.
The Merger Agreement provides that not more than 50% of the shares of Audio
King Stock may be converted into Ultimate Stock or exchanged for cash in the
Merger. In the event that elections to receive Ultimate Stock or cash exceed the
limitation set forth above, Ultimate Stock or cash will be allocated among
shareholders making such elections on the terms set forth in the Merger
Agreement. Notwithstanding the foregoing paragraph, in order to ensure that the
Merger is treated as a tax-free reorganization, there is a requirement that the
cash to be exchanged for shares of Audio King Stock not exceed 60% of the total
Merger Consideration (as defined in the Merger Agreement). If the elections
received from the shareholders of Audio King require the issuance of shares of
Ultimate Stock representing less than 40% of the value of the total Merger
Consideration, then the proportions of Ultimate Stock and cash to be received by
the shareholders of Audio King would be adjusted so that the percentage of total
Merger Consideration constituted by Ultimate Stock meets the 40% threshold. See
"The Merger--Proration Provisions."
5
<PAGE>
Upon consummation of the Merger, all outstanding shares of Audio King Stock
will cease to be outstanding and will be converted into the right to receive
shares of Ultimate Stock or cash, as the case may be, without interest, in
accordance with the terms of the Merger Agreement. Fractional shares of Ultimate
Stock will not be issued in connection with the Merger. Holders of Audio King
Stock otherwise entitled to a fractional share will be paid the cash value of
such fractional share, which amount will equal the product of such fractional
share amount and $1.75. See "The Merger--Effective Date of Merger."
ELECTION PROCEDURES
Election forms are being sent to Audio King shareholders as soon as
practicable after the mailing of this Joint Proxy Statement/Prospectus (an
"Election Form"). Subject to the election and allocation procedures described
herein, each holder of Audio King Stock may submit an Election Form specifying
whether such holder desires to convert his or her shares for Ultimate Stock (a
"Stock Election") or exchange his or her shares for $1.75 per share (a "Cash
Election"). No election will be effective unless a properly executed Election
Form is received by the Exchange Agent by 5:00 p.m., New York City time, on
, (such date and time being herein referred to as the "Election
Deadline"). If a holder of Audio King Stock does not make an effective election,
such shareholder will be deemed to have made a Cash Election and will receive
the cash consideration without regard to such holder's preference. ACCORDINGLY,
ANY HOLDER OF AUDIO KING STOCK WHO DOES NOT INTEND TO VOTE HIS OR HER SHARES FOR
THE MERGER SHOULD NEVERTHELESS PROPERLY COMPLETE AND RETURN AN ELECTION FORM
UNLESS SUCH HOLDER PREFERS TO RECEIVE $1.75 PER SHARE OF AUDIO KING STOCK,
RATHER THAN SHARES OF ULTIMATE STOCK, IF THE MERGER IS APPROVED. See "The
Merger--Election and Exchange Procedures".
Any record holder of shares of Audio King Stock may change his or her
election by written notice received by the Exchange Agent prior to the Election
Deadline, accompanied by a properly completed revised Election Form, or may
revoke his or her election by written notice received by the Exchange Agent at
or prior to the Election Deadline. Elections will be binding upon the successors
or transferees of any Audio King shareholder who has submitted an Election Form.
Additional Election Forms may be obtained from the Exchange Agent by contacting
the Exchange Agent at its offices located at or by calling the
Exchange Agent, at 612 .
BACKGROUND OF MERGER
On February 18, 1997, the Audio King Board met to consider the ongoing
negotiations with Ultimate regarding a proposed merger. In order to comply with
Minnesota law and to remove from the Audio King Board's decision making process
those insiders with interests in the transaction that may be different from the
interests of Audio King shareholders generally and to avoid the restrictions of
certain applicable anti-takeover laws, the Audio King Board formed a special
committee of its disinterested directors (the "Special Committee"). The Special
Committee was charged with the responsibility of evaluating the proposed
transaction and judging whether the transaction would be in the best interests
of and fair to the Audio King shareholders. Ultimate's proposal included a
voting agreement pursuant to which key shareholders of Audio King would agree to
vote in favor of the proposed merger. See "The Merger-- Certain Other
Transactions and Agreements." According to Minnesota's anti-takeover laws, if
the proposed voting agreement were entered into before approval of either the
voting agreement or the Merger by the Special Committee, Ultimate would have
been prevented from completing the Merger for at least four years from the date
of the voting agreement. With respect to its consideration of the Merger, the
Special Committee was not subject to any direction or control by the Audio King
Board.
At the meeting on February 18, 1997, the Audio King Board and the Special
Committee discussed the terms of the proposed Merger with management of Audio
King, a representative of Greene Holcomb & Lannin LLC ("GH&L"), Audio King's
financial advisor, and Audio King's legal counsel. A representative of GH&L
reported to the Audio King Board and the Special Committee that, based on the
information about the parties assembled to date, the trends within the industry
and market factors affecting the value
6
<PAGE>
of other companies in the industry, he expected that GH&L would be able to
provide a fairness opinion with respect to the transaction. No vote on the
Merger Agreement was taken at this meeting.
For a further description of the negotiations leading up to the approval and
execution of the Merger Agreement and related matters, see "The
Merger--Background of the Merger."
RECOMMENDATIONS OF THE AUDIO KING BOARD OF DIRECTORS
BASED UPON THE RECOMMENDATION OF THE SPECIAL COMMITTEE THE AUDIO KING BOARD
HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND CONCLUDED THAT THE MERGER IS
FAIR TO AND IN THE BEST INTERESTS OF THE SHAREHOLDERS OF AUDIO KING. THE AUDIO
KING BOARD RECOMMENDS A VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT. SHAREHOLDERS SHOULD BE AWARE THAT CERTAIN MEMBERS OF THE AUDIO KING
BOARD HAVE CERTAIN CONFLICTS OF INTEREST WITH RESPECT TO THE MERGER. SEE "THE
MERGER--CONFLICTS OF INTEREST."
For a discussion of the factors considered by the Audio King Board in
reaching its decision, see "The Merger--Audio King's Reasons for the Merger;
Recommendations of the Audio King Board of Directors."
OPINION OF AUDIO KING'S FINANCIAL ADVISOR
Audio King retained GH&L as its financial advisor in connection with the
Merger. GH&L has delivered its written fairness opinion to the Audio King Board,
dated March 4, 1997, stating that, at the time of such opinion, the
consideration to be paid to holders of Audio King Stock in the Merger is fair
from a financial point of view. This opinion was based upon the procedures and
subject to the assumptions described in the opinion letter. GH&L confirmed its
fairness opinion as of April - , 1997 and a copy of the April - , 1997
opinion letter is attached hereto as Annex B and should be read by Audio King
shareholders carefully in its entirety. See "The Merger--Opinion of Audio King's
Financial Advisor."
CERTAIN TERMS OF THE MERGER AGREEMENT
The Merger Agreement contains customary representations and warranties of
the parties, none of which survive the consummation of the Merger, as well as
customary covenants regarding the conduct of the business of Audio King prior to
the Effective Time. See "The Merger--Certain Terms of the Merger Agreement," and
"-- Representations, Warranties and Covenants." Each party's obligation to
consummate the Merger is subject to the satisfaction of customary conditions
prior to the Effective Time as set forth in the Merger Agreement, including the
approval of the Merger Agreement by Audio King shareholders, the receipt of
necessary consents, freedom from any legal restraint to the Merger, the accuracy
of representations and warranties contained therein and the receipt of the
proceeds of the financing described below. See "The Merger--Certain Terms of the
Merger Agreement--Conditions to the Merger."
The Merger Agreement also contains provisions under which Audio King has
agreed to refrain from soliciting or encouraging certain proposals to acquire
Audio King, although Audio King is permitted, to the extent required by the
fiduciary obligations of the Audio King Board, to furnish information to any
person in response to an unsolicited inquiry and to participate in discussions
and negotiations with such person. See "The Merger--Certain Terms of the Merger
Agreement--No Solicitation."
The Merger Agreement may be terminated before the consummation of the Merger
by any of Ultimate, UAC or Audio King under various circumstances, including the
failure to consummate the Merger on or before August 15, 1997. Under the Merger
Agreement, Audio King is required to make a payment to Ultimate in the amount of
$300,000 plus costs if the Merger Agreement is terminated because
7
<PAGE>
of the Audio King Board approving, recommending or entering into any Takeover
Proposal. See "The Merger--Certain Terms of the Merger Agreement--Fee and
Expenses."
FINANCING ARRANGEMENTS
In connection with the consummation of the Merger, Ultimate expects to
secure financing in an amount of at least $3.5 million under a term loan
agreement through its current credit facility with Norwest Bank Colorado, N.A.
("Norwest"). This financing, as well as availability under Ultimate's revolving
line of credit, will be used to pay the cash portion of the Merger
Consideration, current Audio King debt (estimated to be approximately $6.0
million as of March 31, 1997) and all the fees and expenses of the parties
relating to the Merger. The indebtedness will be secured by substantially all of
Ultimate's assets. Ultimate and Norwest have executed a commitment letter
pursuant to which Norwest has agreed to provide such financing, subject to the
terms and conditions set forth therein, including negotiations and execution of
definitive documentation. Receipt of such financing is a condition to Ultimate's
obligations under the Merger Agreement to consummate the Merger. Ultimate has
agreed in the Merger Agreement to use its best efforts to obtain such financing.
CONFLICTS OF INTEREST
In considering the recommendations of the Audio King Board with respect to
the Merger, shareholders should be aware that certain members of Audio King's
management and the Audio King Board have certain conflicts of interest with
respect to the Merger. Audio King's Board and the Special Committee were aware
of these interests and considered them, among other factors, in approving the
Merger Agreement and the transactions contemplated thereby.
INDEMNIFICATION; INSURANCE; EMPLOYEE BENEFITS. The Merger Agreement
contains customary provisions with respect to the continuation for three years
of existing indemnification rights in favor of directors, officers, employees
and agents of Audio King and its subsidiaries. The Merger Agreement also
contains customary provisions regarding the continuation of directors' and
officers' liability insurance. Ultimate has agreed in the Merger Agreement to
merge the Audio King 401(k) Savings Plan into the Ultimate 401(k) Savings Plan
and to protect all optional benefits which have accrued to participants in both
plans as of the Effective Date. See "The Merger--Conflicts of Interest" and
"Information Concerning Audio King."
Pursuant to the Merger Agreement, Audio King and Ultimate will make such
adjustments to all outstanding Audio King Options (as defined below) as may be
necessary to provide that at the Effective Time each such Audio King Option will
be canceled, converted into options to purchase shares of Ultimate Stock or
cashed out. See "The Merger--Conversion of Audio King Options."
TERMINATION AGREEMENTS AND EMPLOYMENT AGREEMENTS. On March 4, 1997, and
effective upon the date of the Merger, Audio King, Ultimate and UAC entered into
(i) termination agreements with each of Randel S. Carlock and Henry G. Thorne
(which provide for the termination of their respective employment with Audio
King), (ii) amended employment agreements with each of Philip Ward and Samuel F.
Nichols and (iii) an employment agreement with Robert E. Thiner. Randel S.
Carlock and Henry G. Thorne are directors of Audio King. See "Certain
Information Concerning Audio King." Ultimate has generally guaranteed Audio
King's payments of amounts owed to these persons pursuant to these agreements.
Pursuant to Mr. Carlock's termination agreement, Audio King has agreed to
pay $190,000 in termination payments to Mr. Carlock in two installments: $95,000
on the Effective Date and $95,000 on the later of January 2, 1998 or six months
after the Merger. Mr. Carlock's termination agreement limits Mr. Carlock's
ability to compete with Ultimate or solicit Ultimate's employees or customers
during the two years following the Merger.
8
<PAGE>
Pursuant to Mr. Thorne's termination agreement, Audio King has agreed to pay
$330,000 in termination payments to Mr. Thorne in three installments: $165,000
on the Effective Date, $82,500 on the later of January 2, 1998 or six months
after the Effective Date, and $82,500 one year after the Effective Date. Audio
King has also agreed to continue to provide certain insurance benefits to Mr.
Thorne for ninety days after the Merger. Mr. Thorne has agreed, under the
termination agreement, to provide up to 100 hours of consulting and advisory
services to Ultimate during the six months following the Merger at the rate of
$200 per hour. Mr. Thorne's termination agreement limits Mr. Thorne's ability to
solicit Audio King's employees or customers during the two years following the
Merger.
For more complete disclosure relating to the matters discussed in the
preceding paragraphs the employment agreements with other officers, see "The
Merger--Conflicts of Interest."
REGULATORY MATTERS
The receipt of certain governmental or regulatory approvals are required in
order to consummate the Merger, including approval under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended. Ultimate and Audio King have
agreed in the Merger Agreement to use reasonable efforts to obtain such
approvals or waivers, but there can be no assurance as to when or if such
approvals or waivers will be obtained.
CONDUCT OF ULTIMATE'S BUSINESS AFTER THE MERGER
Following consummation of the Merger, Ultimate intends that the business of
Audio King will continue to be operated in its customary manner and with certain
of its former management. See
"The Merger--Conflicts of Interest." At the Effective Date, UAC, as the
surviving corporation of the Merger, will succeed, by operation of law, to all
rights, assets, liabilities and obligations of Audio King and will assume such
liabilities and obligations. UAC may be merged with and into Ultimate at a
future date.
NASDAQ NATIONAL MARKET LISTING
The shares of Ultimate Stock to be issued in connection with the Merger have
been approved for listing on Nasdaq, subject to official notice of issuance. See
"--Terms of the Merger--Conditions to the Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify as a tax-free reorganization. It is a
condition to the obligation of Audio King to consummate the Merger that Audio
King receive advice from its counsel or its accountants to the effect that the
Merger should be treated as a tax-free reorganization and that no gain or loss
will be recognized by a shareholder of Audio King Stock as a result of the
Merger except (i) with respect to cash received by such shareholder, including
cash received in lieu of fractional shares or pursuant to the exercise of
dissenters' rights, and (ii) if a holder of Audio King Stock receives cash,
gain, if any, realized by such holder of Audio King Stock pursuant to the Merger
will be recognized, but only to the extent of the cash received. See "The
Merger--Certain Federal Income Tax Consequences."
Assuming that the Merger is treated as a tax-free reorganization, no gain or
loss will be recognized to the Audio King shareholders upon their receipt of
Ultimate Stock in exchange for their Audio King Stock. If an Audio King
shareholder receives cash, however, he or she will be required to recognize the
gain, if any, that he or she realizes in the transaction, but not in excess of
the cash received by such shareholder. Any recognized gain generally will be
treated as capital gain (provided that the Audio King Stock is held as a
"capital asset" at the Effective Date), unless the receipt of cash has the
effect of a dividend distribution. Because a shareholder of Audio King Stock may
receive either (i) cash, (ii) Ultimate Stock, or (iii) subject to proration
adjustments, a combination of cash and Ultimate Stock, the federal income tax
consequences
9
<PAGE>
to a Audio King shareholder will depend, in part, upon the form of consideration
such shareholder receives in the Merger.
AUDIO KING SHAREHOLDERS SHOULD READ CAREFULLY THE DISCUSSION IN "THE
MERGER--FEDERAL INCOME TAX CONSEQUENCES," THE OTHER SECTIONS OF THIS PROXY
STATEMENT/PROSPECTUS AND THE OTHER DOCUMENTS REFERRED TO HEREIN AND SHOULD
CONSULT WITH THEIR TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF
THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF ANY FEDERAL, STATE, LOCAL
AND FOREIGN INCOME AND OTHER TAX LAWS.
ACCOUNTING TREATMENT
The Merger and other ancillary transactions will be accounted for using the
purchase method of accounting in accordance with generally accepted accounting
principles. These transactions result for financial accounting purposes in the
effective purchase of all the Audio King Stock by Ultimate. Accordingly, the
assets and liabilities of Audio King will be adjusted to fair value for
financial accounting purposes and the results of operations of Audio King will
be included in the results of operations of Ultimate for periods subsequent to
the Effective Date.
DISSENTERS' RIGHTS
Under Minnesota law, any holder of Audio King Stock can exercise dissenters'
rights entitling such holder to payment in cash of the "fair value" of such
shares. Shareholders who exercise their dissenters' rights must comply with the
requirements set forth in Sections 302A.471 and 302A.473 of the MBCA. Failure to
comply strictly with these requirements will result in the loss of dissenters'
rights. See "The Merger--Dissenters' Rights" and Annex C to this Proxy
Statement/Prospectus. Holders of shares of Ultimate Stock will not have
appraisal rights under Delaware law with respect to the Merger.
10
<PAGE>
SUMMARY FINANCIAL INFORMATION
The information below sets forth summary historical financial information
and summary unaudited pro forma financial information. This financial
information should be read in conjunction with the historical financial
statements and notes thereto of Ultimate and Audio King appearing elsewhere in
this Proxy Statement/Prospectus. See also "Selected Ultimate Financial
Information," "Selected Audio King Financial Information," "Unaudited Pro Forma
Combined Condensed Financial Information," "Ultimate Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Audio King
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SUMMARY HISTORICAL FINANCIAL INFORMATION OF ULTIMATE
The following summary historical financial information of Ultimate are
derived from the financial statements of Ultimate for each of the five fiscal
years in the period ended January 31, 1997. See "Selected Ultimate Financial
Information" and the financial statements and notes thereto appearing elsewhere
in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Net sales..................................................... $ 261,154 $ 251,807 $ 165,069 $ 88,158 $ 62,619
Net income(1)................................................. 785 3,832 4,212 2,005 1,312
BALANCE SHEET DATA:
Total assets.................................................. $ 103,310 $ 100,466 $ 69,194 $ 39,538 $ 17,313
Working capital............................................... 27,868 30,995 4,061 15,694 2,576
Long-term debt................................................ 31,165 31,996 -- -- 167
Stockholders' equity.......................................... 41,703 40,918 25,611 20,721 3,313
PER SHARE DATA:
Net income(1)................................................. $ 0.11 $ 0.65 $ 0.76 $ 0.48 $ 0.37
Book value.................................................... 5.96 5.85 4.66 3.77 1.04
</TABLE>
- ------------------------
(1) Ultimate changed its accounting method for preopening expenses in fiscal
1996. Net income for fiscal 1996 is shown prior to a cumulative effect
adjustment of ($0.17) per share, net of taxes. The income statement data
includes certain pro forma adjustments for the years prior to fiscal 1996 to
reflect this change in accounting method. Prior to October 15, 1993,
Ultimate was not subject to income taxes because of its S corporation
status. The income statement data includes certain pro forma adjustments to
reflect a provision for income taxes as if Ultimate had been paying federal
and state income taxes as a C corporation throughout the periods presented
at the rate applicable in each period.
11
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION OF AUDIO KING
The following summary historical financial information of Audio King are
derived from the financial statements of Audio King for each of the five fiscal
years in the period ended June 30, 1996 and for the six-month periods ended
December 31, 1996 and 1995. The summary financial data set forth below for the
six months ended December 31, 1996 and 1995 are derived from unaudited financial
statements that, in the opinion of Audio King management, contain all
adjustments necessary for the fair presentation of this information. Due to the
seasonal nature of Audio King's business, results for the six months ended
December 31, 1996 are not indicative of the results that may be expected for any
other interim period or for the year as a whole. See "Selected Audio King
Financial Information," and the financial statements and notes appearing
elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, FISCAL YEAR ENDED JUNE 30,
-------------------- -----------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA
Net sales................... $ 35,348 $ 34,996 $ 65,567 $ 56,914 $ 45,826 $ 34,314 $ 29,240
Net income (loss)........... 193 447 (251) 633 637 382 207
BALANCE SHEET DATA
Total assets................ $ 22,422 $ 24,475 $ 20,880 $ 18,398 $ 14,860 $ 10,988 $ 9,860
Working capital............. 5,379 8,685 6,450 6,587 4,744 4,043 3,726
Long-term obligations....... 5,909 8,832 7,750 6,201 3,955 2,673 2,298
Shareholders' equity........ 6,773 7,170 6,579 6,711 5,929 5,285 4,879
PER SHARE DATA
Net income (loss)........... $ 0.07 $ 0.16 ($ 0.09) $ 0.23 $ 0.23 $ 0.14 $ 0.09
Book value.................. 2.44 2.63 2.37 2.47 2.24 2.01 1.87
</TABLE>
12
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following summary unaudited pro forma combined condensed financial
information combines the historical balance sheet data and statements of
operations data of Ultimate and Audio King after giving effect to the Merger.
The unaudited pro forma combined condensed balance sheet at January 31, 1997
gives effect to the Merger as if it had occurred at January 31, 1997 and
reflects Ultimate's balance sheet at January 31, 1997 and Audio King's balance
sheet at December 31, 1996. The unaudited pro forma combined condensed
statements of operations for the twelve months ended January 31, 1997 give
effect to the Merger as if it had occurred at February 1, 1996. The unaudited
pro forma combined condensed statements of operations for the twelve months
ended January 31, 1997 reflect Audio King's historical results of operations
recasted from its fiscal year end of June 30, 1996 to an assumed fiscal year
ended December 31, 1996 by adding and deducting the results of operations for
the six months ended December 31, 1996 and 1995, respectively, to and from the
results of operations for the fiscal year ended June 30, 1996. The pro forma
adjustments account for the Merger as a purchase and are based upon the
assumptions set forth in the Notes to the Unaudited Pro Forma Combined Condensed
Financial Information.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
1997
---------------------------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C>
INCOME STATEMENT DATA:
Net sales..................................................................... $ 327,648
Net income.................................................................... 68
BALANCE SHEET DATA:
Total assets.................................................................. $ 125,991
Working capital............................................................... 33,047
Long-term debt and capital lease obligations, less current maturities......... 42,175
Stockholders' equity.......................................................... 44,441
PER SHARE DATA:
Net income.................................................................... $ 0.01
Book value.................................................................... 5.53
</TABLE>
13
<PAGE>
COMPARATIVE UNAUDITED PER SHARE DATA
The following table sets forth certain unaudited per share data of Ultimate
and Audio King on a historical, pro forma combined basis and on an equivalent
pro forma basis for Audio King. This table should be read in conjunction with
the historical financial statements and pro forma combined condensed financial
information, and the related notes thereto, of Ultimate and Audio King appearing
elsewhere in this Proxy Statement/Prospectus. See also "Unaudited Pro Forma
Combined Condensed Financial Information." Unaudited pro forma combined and
equivalent pro forma per share data reflect the combined results of Ultimate and
Audio King after giving effect to the Merger. In the case of operating data, the
comparative per share data reflects net income per share as if the Merger had
occurred on February 1, 1996 and reflects Ultimate's operations for the fiscal
year ended January 31, 1997 and Audio King's operations recasted from its fiscal
year ended June 30, 1996 to an assumed fiscal year ended December 31, 1996 by
adding and deducting the results of operations for the six months ended December
31, 1996 and 1995, respectively, to and from the results of operations for the
fiscal year ended June 30, 1996. In the case of book value data, the comparative
per share data reflects book value per share as if the Merger had occurred on
January 31, 1997 and reflects Ultimate's book value at January 31, 1997 and
Audio King's book value at December 31, 1996. The unaudited pro forma financial
data are presented for informational purposes only and are not necessarily
indicative of the operating results or financial position that would have
occurred had the Merger and other transactions presented in the unaudited pro
forma combined information been completed on the dates indicated nor is it
indicative of future operating results or financial position.
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEAR ENDED
JANUARY 31, 1997
-----------------
<S> <C>
ULTIMATE:(1)
Net income per share of Ultimate Stock
Historical........................................................................... $ 0.11
Pro forma (2)........................................................................ 0.01
Book value per share of Ultimate Stock
Historical........................................................................... $ 5.96
Pro forma (2)........................................................................ 5.53
AUDIO KING:(1)
Net income (loss) per share of Audio King Stock
Historical........................................................................... ($ 0.18)
Pro forma equivalent(3).............................................................. 0.01
Book value per share of Audio King Stock
Historical........................................................................... $ 2.43
Pro forma equivalent(3).............................................................. 3.87
</TABLE>
- ------------------------
(1) Neither Ultimate or Audio King paid any cash dividends for the period
presented.
(2) Pro forma equivalent numbers were computed assuming the issuance of 987,977
shares of Ultimate Stock to acquire 1,411,396 shares of Audio King Stock at
the conversion ratio of 0.7 shares of Ultimate Stock for each share of Audio
King Stock. The actual number of shares of Ultimate Stock issuable in the
Merger may vary in accordance with the terms of the Merger Agreement.
(3) Equivalent pro forma data for Audio King was computed by multiplying the pro
forma combined per share data of Ultimate by the conversion ratio. The
equivalent pro forma per share information can be used for a comparison with
the historical per share data of Audio King.
14
<PAGE>
COMPARATIVE MARKET PRICE DATA
The Ultimate Stock is quoted on Nasdaq under the symbol "ULTE" and the Audio
King Stock is quoted on the Nasdaq SmallCap Market under the symbol "AUDK." The
table below sets forth the high and low closing bids of the Ultimate Stock and
Audio King Stock on Nasdaq and Nasdaq SmallCap Market, respectively, for the
periods indicated, as reported in published financial sources:
<TABLE>
<CAPTION>
ULTIMATE
------------------------
HIGH LOW
------------ -----
<S> <C> <C>
FISCAL YEAR ENDING JANUARY 31, 1996:
First Quarter.............................................................. $ 121/4 $ 7
Second Quarter............................................................. 12 81/2
Third Quarter.............................................................. 133/8 83/4
Fourth Quarter............................................................. 91/2 51/2
FISCAL YEAR ENDING JANUARY 31, 1997:
First Quarter.............................................................. 63/4 41/2
Second Quarter............................................................. 53/8 31/2
Third Quarter.............................................................. 5 31/8
Fourth Quarter............................................................. 4 25/8
FISCAL YEAR ENDING JANUARY 31, 1998:
First Quarter (through April 9, 1997)...................................... 33/4 25/8
<CAPTION>
AUDIO KING
------------------------
HIGH LOW
------------ -----
<S> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1995:
First Quarter.............................................................. $ 41/8 $ 31/2
Second Quarter............................................................. 45/8 33/4
Third Quarter.............................................................. 41/8 33/8
Fourth Quarter............................................................. 31/2 23/4
FISCAL YEAR ENDING JUNE 30, 1996:
First Quarter.............................................................. 33/4 27/8
Second Quarter............................................................. 33/8 23/8
Third Quarter.............................................................. 25/8 21/4
Fourth Quarter............................................................. 211/16 2
FISCAL YEAR ENDING JUNE 30, 1997:
First Quarter.............................................................. 21/4 11/8
Second Quarter............................................................. 111/16 1
Third Quarter.............................................................. 111/16 7/8
Fourth Quarter (through April 9, 1997)..................................... 15/8 19/16
</TABLE>
On March 4, 1997, the last full day of trading prior to the public
announcement of the execution and delivery of the Merger Agreement, the closing
price per share of Ultimate Stock was $2.625 and the closing price per share of
Audio King Stock was $1.3125. Each holder of a share of Audio King Stock that is
converted into shares of Ultimate Stock will receive that number of shares of
Ultimate Stock multiplied by 0.7, subject to proration adjustments. Accordingly,
the market value of shares of Audio King Stock on March 4, 1997, on an
equivalent per share basis (assuming the Merger was consummated on that date at
an Ultimate trading price of $2.625), was $1.8375 per share.
On April 9, 1997, the most recent date for which it was practicable to
obtain market price data prior to the printing of this Proxy
Statement/Prospectus, the closing price per share of (i) Ultimate Stock was
$3.625 and (ii) Audio King Stock was $1.6875 (or $2.4938 on an equivalent per
share basis, calculated as described above).
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On April 9, 1997, there were approximately 2,860 beneficial holders of
Ultimate Stock and approximately 1,200 beneficial holders of Audio King Stock.
THE MARKET PRICES OF ULTIMATE STOCK AND AUDIO KING STOCK ARE SUBJECT TO
FLUCTUATION. ULTIMATE STOCKHOLDERS AND AUDIO KING SHAREHOLDERS ARE URGED TO
OBTAIN CURRENT MARKET QUOTATIONS FOR ULTIMATE STOCK AND AUDIO KING STOCK.
DIVIDEND POLICY. As a public company, Ultimate has never declared or paid
any cash dividends on the Ultimate Stock. Ultimate currently intends to retain
future earnings for use in the operation and expansion of its business and
therefore does not anticipate paying cash dividends in the foreseeable future.
Ultimate's current credit facility also restricts Ultimate's ability to pay
dividends.
As a public company, Audio King has never declared or paid any cash
dividends on the Audio King Stock.
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RISK FACTORS
THIS PROSPECTUS/PROXY STATEMENT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT, AND SECTION 21E OF THE
EXCHANGE ACT. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT
STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS.
WITHOUT LIMITING THE FOREGOING, THE WORDS "BELIEVES," "ANTICIPATES," "PLANS,"
"EXPECTS," "ESTIMATES" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
INDICATED BY SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN RISK FACTORS
SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS/PROXY STATEMENTS. SEE "SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS" FOR ADDITIONAL FACTORS RELATING TO
SUCH STATEMENTS.
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS/PROXY
STATEMENT, AUDIO KING SHAREHOLDERS SHOULD CAREFULLY CONSIDER, AMONG OTHER
THINGS, THE FOLLOWING RISK FACTORS RELATING TO THE MERGER IN EVALUATING THE
PROPOSAL TO BE VOTED ON AT THE SPECIAL MEETING AND IN EVALUATING AN INVESTMENT
IN ULTIMATE STOCK.
FACTORS CONCERNING THE MERGER CONSIDERATION
RIGHTS AS HOLDERS OF ULTIMATE STOCK. Upon consummation of the Merger, the
former shareholders of Audio King will have the right to become stockholders of
Ultimate. As such, the rights of the shareholders of Audio King who become
stockholders of Ultimate will no longer be governed by Minnesota law and the
articles of incorporation and bylaws of Audio King, but instead will be governed
by Delaware law and the certification of incorporation and bylaws of Ultimate.
See "Description of Ultimate Stock" and "Comparison of Rights of Holders of
Ultimate Stock and Holders of Audio King Stock" for a summary comparison of
certain differences between the rights of shareholders of Audio King and the
rights of stockholders of Ultimate. Upon consummation of the Merger, former
shareholders of Audio King will own approximately 12% of the then outstanding
shares of Ultimate Stock and, as such, will not, individually or as a group, be
in a position to affect the corporate policies of Ultimate.
DILUTION OF VOTING POWER. Each former shareholder of Audio King will own a
significantly smaller percentage of the outstanding shares of Ultimate Stock
immediately following the Effective Date than the percentage of the outstanding
shares of Audio King Stock which that shareholder owned immediately prior to the
Effective Date. Consequently, the Merger will cause an immediate dilution of
voting power of each shareholder of Audio King relative to the outstanding
shares of Ultimate Stock.
EXCHANGE RATIO. The Merger Agreement provides that upon consummation of the
Merger and subject to certain proration provisions, each share of Audio King
Stock will be exchanged for, at the election of its holder, 0.7 shares of
Ultimate Stock or $1.75 in cash. Shareholder elections will be adjusted on a pro
rata basis, however, so that 50% of the shares of Audio King Stock are converted
into Ultimate Stock and 50% are exchanged for cash. As the price of Ultimate
Stock at the Effective Date may vary from the price on the date on which the
Merger Agreement was executed and the price on the date of this Prospectus/Proxy
Statement due to changes in the business, operations and prospects of Ultimate,
general market and economic conditions, and other factors, the market value of
the shares of Ultimate Stock that holders of Audio King Stock will receive in
the Merger (other than holders of Audio King Stock who make a Cash Election that
is not subject to proration) may be greater or less than the market value of
such Ultimate Stock on the date of the Merger Agreement and on the date of this
Prospectus/Proxy Statement or greater or less than the Cash Consideration. Audio
King obtained the opinion of its financial advisor, dated as of March 4, 1997
and confirmed as of April , 1997, that the consideration to be received by the
shareholders of Audio King upon the consummation of the Merger is fair from a
financial point of view. See "The Merger--Opinion of Audio King's Financial
Advisor." There can be no assurance as to the fair market value of the
consideration to be received by holders of Audio King Stock in the Merger at the
Effective Date. See "Summary Financial Information--Comparative Market Price
Data."
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CHALLENGES OF INTEGRATION
The managements of Ultimate and Audio King have entered into the Merger
Agreement with the expectation that the Merger will result in beneficial
synergies. See "The Merger--Audio King's Reasons for the Merger; Recommendation
of the Audio King Board of Directors." Achieving the anticipated benefits of the
Merger will depend in part upon whether the integration of the two companies'
businesses is accomplished in an efficient and effective manner, and there can
be no assurance that this will occur. Ultimate's management has limited
experience in integrating companies. The combination of the two companies will
require, among other things, integration of the companies' respective product
offerings and coordination of their sales and marketing efforts. There can be no
assurance that such integration will be accomplished smoothly or successfully.
The difficulties of such integration may be increased by the necessity of
coordinating geographically separated organizations and addressing possible
differences in corporate cultures and management philosophies. The integration
of certain operations following the Merger will require the dedication of
management resources that may temporarily distract attention from the day-to-day
business of the combined company. The business of the combined companies may
also be disrupted by employee uncertainty and lack of focus during such
integration. The inability of Ultimate management to successfully integrate the
operations of Ultimate and Audio King could have a material adverse effect on
Ultimate following the Merger.
LOSS OF KEY EMPLOYEES
The successful continuation of Audio King's business by Ultimate and the
successful integration of the companies' operations depends upon the retention
and continued contribution of key employees of Audio King. Competition for
qualified personnel is intense and Audio King's competitors may undertake
initiatives to recruit Audio King's key employees before and after the Merger.
There can be no assurance that Ultimate will be successful in retaining Audio
King's key employees. The loss of key personnel of Audio King could adversely
affect the financial condition and results of operations of Audio King before
completion of the Merger and of Ultimate following the Merger.
LOSS DUE TO DELAYS IN COMPLETION OF MERGER
Since Audio King incurred a net loss in fiscal 1996 and may incur additional
losses prior to completion of the Merger, delays in completion of the Merger may
adversely impact the financial condition and results of operations of Audio King
before completion of the Merger and may adversely affect Ultimate after
completion of the Merger. In addition, possible delays in completion of the
Merger may increase the risk of loss of key personnel of Audio King and will
require the continued operation of duplicative functions and staffs of the
companies, which will adversely impact the financial condition and results of
operations of Audio King before completion of the Merger and of Ultimate after
completion of the Merger.
UNCERTAINTY IN COSTS SAVINGS FOLLOWING MERGER
Although the managements of Ultimate and Audio King believe that beneficial
synergies will result from the Merger, there can be no assurance that the
combining of the two companies' businesses, even if achieved in an efficient and
effective manner, will result in increased earnings per share of Ultimate Stock
(taking into consideration the greater number of shares of Ultimate Stock
outstanding as a result of the Merger) or a financial condition superior to that
which would have been achieved by Ultimate. While neither Ultimate nor Audio
King anticipates that the Merger will result in decreased earnings per share
over the long term, there can be no assurance that, if the Merger fails to
produce the anticipated benefits, or if it has other adverse effects that are
not currently anticipated, the Merger could not have the dilutive effect of
causing the per share earnings of the combined company to be lower than they
would have been for either company if operated independently. Even if the
effects of the Merger prove to be as anticipated, there can be no assurance that
the future earnings of the combined company will not be adversely affected by
any number of economic, market or other factors that are not related to the
Merger.
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ADVERSE ACCOUNTING AND TAX CONSEQUENCES OF GOODWILL
As of March 4, 1997, the date the Merger Agreement was signed, there were
2,822,791 shares of Audio King Stock outstanding (including 24,178 shares to
employees as a result of their participation in the Employee Stock Purchase Plan
that will be issued upon completion of the Merger), with a total market
capitalization, based on the closing price of $1.3125 per share on that date, of
$3,704,913. Based on total Merger Consideration of approximately 987,977 shares
of Ultimate Stock and approximately $2,469,942 (assuming an equal number of
shares of Audio King Stock elect to receive Ultimate Stock as elect to receive
the Cash Consideration), the aggregate purchase price to be paid for Audio King
in the Merger is $5,063,382 (not including Merger costs). The Merger will be
accounted for using the purchase method of accounting. Under this accounting
method, a portion of the purchase price for Audio King, approximately $1.4
million, will be allocated to goodwill, which amount will represent
approximately 1.1% of the total assets and approximately 3.2% of the
stockholders' equity of Ultimate post-Merger. The combined companies will incur
an annual non-cash charge to operations for the amortization of the goodwill of
approximately $47,000 over the next thirty years, which charge will not be
deductible for income tax purposes. See "Unaudited Pro Forma Combined Condensed
Financial Information."
EXPENSES OF MERGER
The total transaction costs of the Merger, including nonrecurring expenses
associated with consolidating the two companies' operations and the fees of
financial advisors, attorneys and accountants, are anticipated to be
approximately $1,824,000. The respective managements of the two companies
believe that the above estimate of the costs of integrating the two companies is
reasonable. There can be no assurance, however, that unanticipated contingencies
will not occur that will increase the costs of integrating the two companies.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
In considering the recommendation of the Audio King Board with respect to
the Merger, shareholders of Audio King should be aware that certain members of
Audio King's management and the Audio King Board have certain interests in the
Merger that may present them with actual or potential conflicts of interest. See
"The Merger--Conflicts of Interest."
RISKS RELATING TO ULTIMATE AND AUDIO KING
The following paragraphs describe risks relating to Ultimate and/or Audio
King. Ultimate will be subject to all of these risks following the Merger.
RECENT DECLINES IN COMPARABLE STORE SALES; RISK OF LOSSES
Due primarily to slower growth of certain audio and video categories,
increased competition, limitations on growth at certain of Ultimate's smaller
Colorado stores and the sharing of sales among stores in certain of its markets,
Ultimate has experienced declines of comparable store sales since October 1995
and earnings have been less than previous years for its corresponding previous
quarters. There can be no assurance that Ultimate's comparable store sales will
increase in the future or that Ultimate will not suffer losses in the future.
Audio King has similarly incurred recent declines in comparable store sales
after several years of growth. During the quarter ended December 31, 1996, Audio
King's comparable store sales decreased 4% from the same quarter in the prior
year. Although in the past Audio King had achieved sales increases with a
"promoting specialist" strategy utilizing increased advertising, larger product
assortment, larger stores and trained salespeople, this strategy may not be
utilized in the future or, if utilized, effective in the increasingly
competitive market in which Audio King operates. If this strategy is not
effective in increasing sales, the high costs associated with such strategy will
adversely affect operating results. There can be no
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assurance that Audio King's comparable store sales will increase in the future
or that Audio King's results of operations will not adversely affect Ultimate
following the Merger.
MANAGEMENT OF GROWTH; EXPANSION IN NEW TERRITORIES
Ultimate plans to expand its business. The ability of Ultimate to implement
its expansion plans will depend upon the adequacy of its capital resources,
management's ability to oversee expanded operations in several states, general
and regional economic conditions and Ultimate's ability to negotiate, finance
and construct or refurbish new locations on acceptable terms and to hire and
train additional store personnel. In addition, Ultimate may have to spend
substantial funds on advertising and marketing to establish name recognition in
new geographic areas. In fiscal 1998, Ultimate expects to relocate or
consolidate and expand two of its Colorado stores to its larger store format. In
fiscal 1999, Ultimate expects to expand or relocate and expand at least two
Audio King stores into the larger store format. There can be no assurance that
Ultimate's current and new store designs will prove to be successful in the
future. There also can be no assurance that Ultimate's expansion plans will be
implemented successfully or that Ultimate will be able to open or operate any
new store or relocate any existing store on a timely or profitable basis. As
Ultimate expands, there can be no assurance that Ultimate's historical larger
stores' sales levels will be achieved or that it will be able to remain
profitable. See "Certain Information Concerning Ultimate--Business of
Ultimate--Expansion Strategy."
RISK OF INABILITY TO OBTAIN FINANCING
Ultimate believes that its cash flow from operations and borrowings under
existing and new credit facilities will be sufficient to fund Ultimate's
operations, the purchase of Audio King and associated acquisition costs, and its
store relocation plans for fiscal 1998. There can be no assurance that Ultimate
will not experience significant delays, cost overruns or completion problems in
connection with the relocation of existing stores or the acquisition of Audio
King. Moreover, there can be no assurance that the capital requirements for
Ultimate's stores will not exceed Ultimate's current estimates. In order to fund
the capital requirements for its anticipated expansion plans beyond fiscal 1998,
Ultimate will be required to seek additional financing, which financing may take
the form of expansion of its existing credit facility or additional debt or
equity financings. There can be no assurance that Ultimate will be able to
obtain credit or additional funds on favorable terms, if at all. See "Certain
Information Concerning Ultimate--Business of Ultimate" and "Ultimate
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
LIMITED NUMBER OF STORES IN OPERATION; GEOGRAPHIC CONCENTRATION IN
ROCKY MOUNTAIN REGION AND UPPER MIDWEST REGION
Ultimate currently operates nine stores under the name Ultimate Electronics
in Idaho, Nevada, New Mexico, Oklahoma and Utah and nine stores under the name
SoundTrack in Colorado. In connection with the Merger, Ultimate will acquire
eleven Audio King stores in Minnesota, Iowa and South Dakota. As a result of
this geographic concentration, Ultimate is susceptible to a downturn in such
states' economies that could materially adversely affect Ultimate's sales and
profitability. Because of Ultimate's previous concentration in the Rocky
Mountain region, the results achieved to date by Ultimate's stores may not be
indicative of its prospects or market acceptance in the Upper Midwest and other
markets, which markets may have different competitive conditions and demographic
characteristics.
COMPETITION
Both Ultimate and Audio King operate in a highly competitive and price
sensitive industry. Both companies face competition from mass merchants,
department stores, specialty stores, appliance/electronics stores and smaller
independent merchants. Ultimate and Audio King consider their primary
competitors to include consumer electronics retailers such as Best Buy and
Circuit City, as well as mass merchants
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such as Sears and Montgomery Ward and other regional and local competition.
These companies will continue to be Ultimate's primary competitors after the
Merger and they have greater financial and other resources than Ultimate. Many
of these competitors have recently entered Ultimate's markets and continue to
add stores, mainly Circuit City in Utah (April 1995), Colorado (August 1995) and
New Mexico (November 1996). Additionally, Ultimate has experienced new
competition in Las Vegas from The Good Guys! with three new stores since
September 1995, as well as one new store from each of Circuit City and Best Buy.
Audio King has also recently experienced increased competition from certain of
these competitors. For fiscal 1997, Ultimate's operating results were adversely
affected by such increased competition and there can be no assurance that
Ultimate's operating results will not be adversely affected in fiscal 1998 and
beyond by such increased competition. In addition, if such competitors seek to
gain or retain market share by reducing prices, Ultimate may be required to
reduce its prices, thereby reducing gross margins and profits. In addition, as
Ultimate expands into markets where Ultimate's name may not be recognized, its
success will depend in part on its ability to compete with established and any
future competitors in such markets. See "Certain Information Concerning
Ultimate--Business of Ultimate--Competition" and "Certain Information Concerning
Audio King--Business of Audio King--Competition."
FLUCTUATIONS IN QUARTERLY RESULTS; CONSUMER SPENDING; SEASONALITY
The consumer electronics business is affected by seasonal and other consumer
buying patterns. As is the case with other retailers, the sales and profits of
Ultimate and Audio King have been greatest in the quarter that includes November
and December. Due to a slower than expected Holiday selling season during fiscal
1997, Ultimate's and Audio King's sales were substantially below expectations
during these months and the companies' results were 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.
Ultimate's and Audio King's quarterly results of operations may fluctuate
significantly as a result of a number of factors, including, particularly in the
case of Ultimate, 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 Ultimate 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. Ultimate'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. See "Ultimate Management's Discussion
and Analysis of Results of Operations and Financial Condition--Seasonal and
Quarterly Fluctuations" and "Audio King Management's Discussion and Analysis of
Results of Operations and Financial Condition--Seasonal and Quarterly
Fluctuations."
DEPENDENCE UPON KEY PERSONNEL
The success of Ultimate will be highly dependent upon the efforts of key
personnel of Ultimate, particularly William J. Pearse, its Chief Executive
Officer, and David J. Workman, its President. The loss of the services of either
person could have a material adverse effect on Ultimate. Ultimate presently does
not have employment agreements with any of its employees and it does not carry
key man life insurance on any of its executive officers. In order to implement
the integration of Ultimate and Audio King and manage anticipated growth
successfully, Ultimate will be dependent upon its ability to retain existing
personnel and to hire additional qualified personnel. Ultimate competes with
other consumer electronics retailers for such personnel. See "Certain
Information Concerning Ultimate--Directors and Executive Officers."
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CERTAIN ANTI-TAKEOVER EFFECTS
Ultimate's Amended and Restated Certificate of Incorporation (the "Ultimate
Certificate") and Bylaws include provisions that may be deemed to have
anti-takeover effects and may delay, defer or prevent a takeover attempt that
stockholders might consider in their best interests. These provisions include
the ability of the Board of Directors of Ultimate (the "Ultimate Board") to
issue up to 10,000,000 shares of preferred stock in one or more series with such
rights, obligations and preferences as the Ultimate Board may provide, a
provision under which only the Ultimate Board may call meetings of the Ultimate
stockholders and certain advance notice procedures for nominating candidates for
election to the Ultimate Board. See "Description of Ultimate Stock."
The Ultimate Board adopted a stockholder rights plan on January 31, 1995
and, pursuant thereto, declared a dividend of one preferred stock purchase right
(a "Right") for each share of Ultimate Stock outstanding as of the close of
business on February 10, 1995. The Rights have certain anti-takeover effects. If
triggered, the Rights would cause substantial dilution to a person or group of
persons (other than certain exempt persons) who acquire more than 15% of
Ultimate Stock on terms not approved by the Ultimate Board. The Rights could
discourage or make more difficult a tender offer, acquisition, merger or other
similar transaction, even if favorable to Ultimate's stockholders. See
"Description of Ultimate Stock-- Stockholder Rights Plan."
CONTROL BY CURRENT STOCKHOLDERS
Upon completion of the Merger, William J. Pearse, Ultimate's Chairman, Chief
Executive Officer and a founder of Ultimate, and his family will own, directly
or indirectly, 3,200,000 shares of Ultimate Stock, constituting approximately
40% of the outstanding Ultimate Stock. As a result, Mr. Pearse and his family
are able to exercise significant influence on the election of the Ultimate Board
and thereby direct the policies of Ultimate. See "Certain Information Concerning
Ultimate--Principal Stockholders" and "Description of Ultimate Stock."
PRICE VOLATILITY
The market price of the Ultimate Stock has been and could continue to be
subject to significant fluctuations in response to variations in quarterly
operating results and other factors relating to Ultimate's performance. In
addition, the securities markets have experienced significant price and volume
fluctuations from time to time in recent years that have often been unrelated or
disproportionate to the operating performance of particular companies. These
broad fluctuations may continue to adversely affect the market price of the
Ultimate Stock. See "Summary Financial Information--Comparative Market Price
Data and --Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Ultimate Stock after the Merger,
or the perception that such sales could occur, could adversely affect the market
price of the Ultimate Stock and could impair Ultimate's ability to raise capital
through the sale of equity securities. Ultimate will have 7,982,977 shares of
Ultimate Stock outstanding immediately following the Merger. As of April 2,
1997, there were options to purchase 510,850 shares of Ultimate Stock
outstanding under Ultimate's employee and director stock option plans, 139,682
of which were immediately exercisable or exercisable within 60 days of such
date. In addition, in connection with the Merger, holders of options to purchase
367,313 shares of Audio King Stock may elect to convert such options into
options to purchase 257,119 shares of Ultimate Stock after the Merger (except
that all Audio King Options that have exercise prices above 70% of the Ultimate
Stock price based upon the average between the last bid and asked price prior to
the Closing of the Merger will be canceled). These Audio King Options will be
immediately exercisable. Future sales of shares of Ultimate Stock under Rule 144
of the Securities Act, by existing stockholders of Ultimate Stock or through
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the issuance of shares of Ultimate Stock upon the exercise of options or
otherwise, could have an adverse effect on the price of the Ultimate Stock.
NO DIVIDENDS ON ULTIMATE STOCK
Ultimate anticipates that for the foreseeable future, all earnings, if any,
will be retained for the operation and expansion of its business and that it
will not pay cash dividends. See "Summary Financial Information--Dividend
Policy."
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THE SPECIAL MEETING
INTRODUCTION
This Proxy Statement/Prospectus is being furnished to the shareholders of
Audio King in connection with the solicitation by the Audio King Board of
proxies to be voted at the Special Meeting to be held on , 1997.
At the Special Meeting, Audio King shareholders will be asked to consider
and vote upon a proposal to adopt the Merger Agreement, providing for the Merger
of Audio King with and into UAC, whereupon the separate existence of Audio King
will cease and UAC will continue as the surviving corporation. A copy of the
Merger Agreement is attached as Annex A to this Proxy Statement/Prospectus.
Under the terms of the Merger Agreement, each outstanding share of Audio
King Stock, other than shares as to which dissenters' rights are effectively
exercised, will be converted, at the election of the holder thereof, into either
$1.75 cash or 0.7 shares of Ultimate Stock. Audio King shareholder elections
will be adjusted on a pro rata basis, however, so that 50% of the shares of
Audio King Stock are converted into Ultimate Stock and 50% are exchanged for
cash. See "The Merger--Effective Date of the Merger and-- Proration Provisions."
The Audio King Board does not know, as of the date of mailing of this Proxy
Statement/Prospectus, of any other business to be brought before the Special
Meeting. However, the enclosed proxy card authorizes the voting of the shares
represented by the proxy on all other matters that may properly come before the
Special Meeting and any adjournment or adjournments thereof. It is the intention
of the proxy holders to take such action in connection therewith in accordance
with their best judgment.
BOARD OF DIRECTORS RECOMMENDATION
BASED UPON THE RECOMMENDATION OF A COMMITTEE OF ITS NON-EMPLOYEE DIRECTORS
(THE "SPECIAL COMMITTEE"), THE AUDIO KING BOARD HAS UNANIMOUSLY APPROVED THE
MERGER. The Ultimate Board has approved the Merger and the issuance of shares of
Ultimate Stock in connection with the Merger. See "The Merger-- Background of
the Merger." Applicable Minnesota law requires that Audio King shareholders
approve the Merger.
THE BOARD OF DIRECTORS OF AUDIO KING RECOMMENDS THAT THE SHAREHOLDERS VOTE
FOR THE APPROVAL OF THE MERGER AGREEMENT. See "The Merger--Conflicts of
Interest" for a discussion of conflicts of interest that certain directors and
members of management have in connection with the Merger.
DATE, PLACE AND TIME; RECORD DATE
The Audio King Special Meeting will be held on , 1997 at the
Audio King store located at 12350 Wayzata Boulevard commencing at 8:30 a.m.
local time, and at any adjournment or postponement thereof. The close of
business on , 1997 (the "Record Date") has been fixed as the record
date for determination of the holders of Audio King Stock who are entitled to
notice of and to vote at the Special Meeting or at any adjournment thereof.
Audio King has only one class of capital stock outstanding, the Audio King
Stock. As of Record Date, there were shares of Audio King Stock
outstanding.
VOTING RIGHTS
The holders of record on the Record Date of shares of Audio King Stock are
entitled to one vote per share at the Special Meeting. The presence at the
Special Meeting in person or by proxy of the holders of a majority of the
outstanding shares of Audio King Stock entitled to vote constitute a quorum for
the transaction of business. The affirmative vote of the holders of a majority
of the outstanding shares of Audio King Stock is required for approval of the
Merger.
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The directors and executive officers of Audio King, together with their
affiliates as a group, own beneficially (excluding unexercised options)
approximately 28.1% of the outstanding shares of Audio King Stock entitled to
vote at the Special Meeting. The directors and executive officers of Audio King
have indicated their intention to vote such shares FOR the approval of the
Merger Agreement.
PROXIES AND PROXY SOLICITATION
A proxy card is enclosed for use by Audio King shareholders. Such
shareholders are solicited on behalf of the Audio King Board of Directors to
SIGN AND RETURN THE PROXY CARD IN THE ACCOMPANYING ENVELOPE. No postage is
required if mailed within the United States. QUESTIONS OR REQUESTS FOR
ASSISTANCE IN COMPLETING AND SUBMITTING PROXY CARDS MAY BE DIRECTED TO NORWEST
BANK MINNESOTA, N.A., SHAREOWNER SERVICES, AT (800) 468-9716.
All properly executed proxies not revoked will be voted at the Special
Meeting in accordance with the instructions contained therein. Proxies
containing no instructions will be voted in favor of approval and adoption of
the Merger Agreement and the transactions contemplated thereby. A shareholder
who has executed and returned a proxy may revoke it at any time before it is
voted, but only by executing and returning a proxy bearing a later date, or by
giving written notice of revocation to an officer of Audio King. Abstentions
will be treated as shares present for purposes of determining a quorum for the
Special Meeting but will have the same effect as a vote against approval and
adoption of the Merger Agreement. If a broker or other record holder or nominee
indicates on a proxy that it does not have direction or authority as to certain
shares to vote on the Merger Agreement, those certain shares will not be
considered as present at the Special Meeting with respect to the vote on the
Merger Agreement.
In addition to the solicitation of proxies by use of mail, the directors,
officers or regular employees of Audio King may, but without compensation other
than their regular compensation, solicit proxies personally or by telephone or
telegraph. Such directors, officers and employees will not be additionally
compensated, but may be reimbursed for reasonable out-of-pocket expenses in
connection with such solicitation.
SHAREHOLDERS SHOULD NOT SEND THEIR STOCK CERTIFICATES WITH THEIR PROXY
CARDS. INSTEAD, STOCK CERTIFICATES (OR A GUARANTY OF DELIVERY) SHOULD BE
RETURNED WITH THE ELECTION FORMS BEING SENT IN A SEPARATE MAILING TO
SHAREHOLDERS ON OR ABOUT , 1997.
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THE MERGER
BACKGROUND OF MERGER
During early May 1996, Randel S. Carlock, Chairman of Audio King, was
contacted by William J. Pearse, Chairman and Chief Executive Officer of
Ultimate, to discuss a possible business combination of Ultimate and Audio King.
Audio King and Ultimate have a long history of working together as founding
members of the Progressive Retailers' Organization ("PRO") group. Through the
PRO group, participants share marketing information and tactics, a national
training program, national credit programs and a joint merchandise buying
program. Mr. Pearse reviewed the strategic challenges that Ultimate faced and
then discussed informally with Mr. Carlock a possible business relationship that
would address the industry challenges, create a stronger combined entity and
enhance shareholder value for the shareholders of Audio King and the
stockholders of Ultimate.
Mr. Carlock and Henry G. Thorne, Audio King's Chief Executive Officer,
reviewed and discussed the opportunity on Thursday, May 9, and Monday, May 13,
1996. Also on that Monday, Ultimate's management met to discuss further the
possibility of acquiring Audio King in a business transaction and the steps that
would be necessary to complete such a transaction. Mr. Pearse contacted Mr.
Carlock by telephone and negotiated a confidentiality agreement.
Audio King and Ultimate executed a confidentiality agreement on May 14th,
1996 to protect confidential information and prevent disclosure of the
discussions. At that time, the parties exchanged preliminary financial and
business information related to future projections and business plans.
On Wednesday, May 15, and Thursday, May 16, Mr. Thorne, Mr. Pearse and Alan
E. Kessock, the Chief Financial Officer of Ultimate, met in Phoenix at a vendor
conference to go over operating results of each of Audio King and Ultimate and
to explore the potential cost savings opportunities of a combined company.
On Saturday, May 18, Mr. Pearse met with Mr. Thorne in Minneapolis and
toured the majority of the Audio King stores in the metropolitan area.
On Tuesday, May 23, at its quarterly board meeting, the Ultimate Board and
management of Ultimate discussed the proposed merger with Audio King and
discussed the capital and operating requirements of such a transaction, as well
as investment banking advice. A decision was made to continue to explore the
transaction.
On Thursday, May 25, Messrs. Pearse and Kessock met with a representative of
Piper Jaffray Inc. to discuss the ramifications of a business combination with
Audio King.
On Thursday, May 30, at a board meeting, Audio King management reviewed the
possible business combination with Ultimate and an extensive discussion ensued
regarding potential benefits to Audio King shareholders, employees and
customers. The Audio King Board authorized Mr. Carlock to continue informal
discussions and obtain an investment banking advisor to work with Audio King if
discussions continued.
On Wednesday, June 5, Mr. Carlock, Mr. Thorne and Gary Kohler, a
non-employee director of Audio King, met informally with Mr. Pearse, Mr. Kessock
and a representative of Piper Jaffray Inc. to discuss Ultimate's long-term
strategies and to review the slide show and other information that Ultimate had
prepared for the Piper Jaffray Inc. conference being conducted in Minneapolis
during the same week.
On Friday, June 7, Mr. Carlock and Mr. Thorne met to review the timing of
any transaction relative to Audio King's year end. After further discussions
with Ultimate, it was determined that the timing and market conditions were not
right for either company to continue further discussions.
On June 10, Mr. Carlock wrote a letter to Mr. Pearse thanking him for his
interest and offering to continue the discussions at a later date when market
conditions had changed.
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During mid October, Mr. Carlock and Mr. Pearse exchanged telephone messages
and spoke briefly about the possibility of exploring a business combination in
early 1997 following the completion of the Christmas selling season.
On Wednesday, November 6, the Audio King Board met to review Audio King's
business performance. The Audio King Board was informed that Ultimate had again
expressed an interest in discussing a merger or some other business combination.
Charles B. Lannin of GH&L was invited to participate at this Audio King Board
meeting on an informational basis and to share his insights regarding a business
combination. Mr. Carlock was authorized to continue informational discussions.
Following this meeting, the Audio King Board met to discuss management
effectiveness, specific issues of operations and Christmas business plans, as
well as what could be done to create shareholder value. On Wednesday, November
13, the Audio King Board met prior to the annual shareholders meeting for an
update on business results and actions related to the Ultimate discussions.
After several discussions between Mr. Carlock and Mr. Pearse, it was decided
that Mr. Thorne should visit Ultimate in Denver to exchange financial and
operating information and tour Ultimate's distribution center and a newer store.
On November 29, Mr. Thorne met with David J. Workman, President and Chief
Operating Officer of Ultimate, and Mr. Kessock to discuss operating economies
and to develop a financial model for future discussions. This information
sharing session was designed to help the companies develop an understanding of
the financial implications of a business combination and provide financial
projections for a combined entity.
During early December, Mr. Pearse and Mr. Carlock continued informal
discussions for a potential business combination. Mr. Carlock updated the Audio
King Board on these discussions and it was determined that he and Barry R.
Rubin, a non-employee director of Audio King, should visit Ultimate. On Sunday,
December 8, Ultimate management met to discuss a meeting scheduled for the next
day with representatives of Audio King.
On December 9, Mr. Carlock and Mr. Rubin toured Ultimate's distribution
center, corporate headquarters, and newest prototype store; met one of
Ultimate's Board members; reviewed a combined financial model and held
discussions with Ultimate's management team.
On Wednesday, December 11, the Audio King Board met to discuss Ultimate's
plans and general business conditions. Mr. Rubin and Mr. Carlock reported to the
Audio King Board on the information they had received and the status of
preliminary discussions regarding the specific terms of a transaction. The Audio
King Board authorized Mr. Thorne and Mr. Carlock to meet with representatives of
GH&L to discuss investment advisory services for the Audio King Board with
respect to a business combination. Immediately following this meeting, Mr.
Thorne and Mr. Carlock met with representatives of GH&L to discuss engagement of
GH&L to provide investment advisory services. Audio King executed an engagement
letter with GH&L on December 18, 1996.
During the remainder of December, several informational discussions were
held and both Audio King and Ultimate agreed to review the information obtained
and to structure a business combination in early 1997. Management of both
companies was focused on sales and merchandising activities and the finalization
of reports and inventories for the Christmas selling season. Management from
both companies also were focused on developing merchandising strategies with
manufacturers for the International Consumer Electronics show in early January.
During the last week of January 1997, Mr. Carlock and Mr. Pearse again began
serious discussions to generate a term sheet for a business combination.
On Thursday, February 13, 1997, Mr. Kessock and Mr. Thorne met in Denver
with attorneys for both parties and negotiated the material terms of the Merger
Agreement.
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On February 18, 1997, the Audio King Board met to consider the ongoing
negotiations with Ultimate regarding the proposed Merger. In order to comply
with Minnesota law and to remove from the Audio King Board's decision making
process those insiders whose interest in the transaction may differ from Audio
King's public shareholders, the Audio King Board formed a special committee of
its disinterested directors (the "Special Committee") consisting of Sherman A.
Swenson, Barry R. Rubin and Gary S. Kohler. The Special Committee was charged
with the responsibility of evaluating the proposed transaction and judging
whether the transaction is in the best interests of Audio King's shareholders.
In addition to removing any possible conflict of interest from the Audio King
Board's decision making process, delegation to the Special Committee was
necessary to avoid the restrictions of certain anti-takeover provisions of the
MBCA. Ultimate's proposal included a voting agreement pursuant to which key
shareholders of Audio King would agree to vote in favor of the proposed Merger.
See "--Certain Other Transactions and Agreements." According to Minnesota's
anti-takeover laws, if the proposed voting agreement were entered into before
approval of either the voting agreement or the Merger by the Special Committee,
Ultimate would have been prevented from completing the Merger for at least four
years from the date of voting agreement. With respect to its consideration of
the Merger, the Special Committee was not subject to any direction or control by
the Audio King Board of Directors.
At the meeting on February 18, 1997, the Audio King Board and the members of
the Special Committee (except Gary Kohler who was absent) discussed the terms of
the proposed Merger with management of Audio King, representatives of GH&L and
Audio King's legal counsel. The Special Committee and the Audio King Board
discussed the financial terms of the Merger, the shareholders' election to take
either Ultimate Stock or cash, and the proration of elections so that 50% of the
Audio King Stock is converted into Ultimate Stock and 50% of the Audio King
Stock is exchanged for cash. A representative of GH&L reported to the Audio King
Board and the Special Committee that, based on the information about the parties
assembled to date, the trends within the industry and market factors affecting
the value of participants in the industry, he expected that GH&L would be able
to provide a fairness opinion with respect to the transaction. Management of
Audio King reported to the Audio King Board that they expected to provide a
draft of the proposed Merger Agreement to the board members prior to the next
board meeting scheduled for February 27, 1997. It was determined that GH&L would
deliver its opinion regarding the fairness of the consideration to be received
in the Merger at the meeting scheduled for February 27, 1997 and that the
Special Committee would vote upon the Merger Agreement at that meeting.
On February 27, 1997, the Special Committee and the Audio King Board held a
joint meeting to consider the proposed Merger Agreement. The Special Committee
and the Audio King Board discussed the terms of the Merger Agreement with Audio
King's legal counsel and representatives of GH&L. The Special Committee also
discussed with management of Audio King the strategic position of Audio King in
the changing consumer electronics industry and the increasing competition from
large volume electronics vendors such as Best Buy and Circuit City. GH&L
reported to the Special Committee that they had determined the transaction was
fair to the shareholders of Audio King from a financial point of view and
reviewed their analysis with the Special Committee. After further discussion,
the Special Committee voted unanimously to approve the Merger and to authorize
the officers of Audio King to execute the Merger Agreement on behalf of Audio
King. The Special Committee also recommended that the full Board of Directors of
Audio King approve the Merger and submit the Merger to the shareholders of Audio
King with a recommendation for approval. Based upon the recommendation of the
Special Committee, the Audio King Board also voted unanimously to approve the
Merger and recommended unanimously that the shareholders of Audio King vote for
approval of the Merger.
AUDIO KING'S REASONS FOR THE MERGER; RECOMMENDATION OF THE AUDIO KING BOARD OF
DIRECTORS
In reaching its decision that the Merger is fair to, and in the best
interest of, Audio King and its shareholders and recommending that the Audio
King shareholders vote in favor of the Merger and
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approve and adopt the Merger Agreement, the Special Committee considered a
number of factors, including the following:
(i) The Special Committee recognized that the Merger would provide the
shareholders of Audio King with the opportunity to receive a premium for their
shares of Audio King Stock compared to the market price at the time the Merger
Agreement was executed and that the structure of the Merger allows shareholders
to elect whether to continue their investment in the combined company or receive
cash in exchange for their shares, subject to the proration provisions of the
Merger Agreement.
(ii) The Merger would result in a company with a market capitalization
significantly larger than the market capitalization of Audio King. The Special
Committee believed that the increased market capitalization of the combined
company may enhance liquidity through increased trading volumes and encourage
investment in the combined company by institutional investors (which tend to
favor companies with larger market capitalizations).
(iii) The Special Committee expected that the combined operations of Audio
King and Ultimate would achieve certain synergies that would allow the combined
business to compete more effectively in the electronics industry than either
Audio King or Ultimate could achieve while operating as a separate company.
(iv) Audio King would benefit from Ultimate's experienced management team.
(v) The Merger could result in on-going operational cost savings, including
general and administrative cost savings as a result of consolidated operating
functions and the elimination of duplicative public company costs, as well as
legal and accounting savings.
(vi) GH&L has advised the Special Committee that, as of March 4, 1997 and
updated as of April , 1997, the Merger Consideration is fair to the
shareholders of Audio King from a financial point of view. See 'Opinion of Audio
King's Financial Advisor.
In the course of its deliberations, the Special Committee reviewed and
considered a number of additional factors relevant to the Merger. In particular,
the Special Committee considered, among other factors: (i) information
concerning Audio King's and Ultimate's respective businesses, prospects,
financial performances, financial conditions and operations; (ii) the current
and historical trading prices and volumes of Audio King Stock and Ultimate
Stock; (iii) premiums to market and multiples paid in other acquisition and
merger transactions in the consumer electronics industry; (iv) the material
assumptions and valuation methodologies underlying GH&L's fairness opinion,
including the projections provided by the management of Ultimate to GH&L; (v)
the strategic and financial alternatives available to Audio King (including
remaining an independent company and pursuing its existing growth strategy), the
value to shareholders of such alternatives and the timing and likelihood of
achieving additional value from these alternatives (including the possibility
that Audio King's future performance might not lead to a stock price having a
higher present value than the Merger Consideration); (vi) an analysis of the
respective prospects and pro forma operations of the combined companies; (vii)
the financial presentation by GH&L; (viii) the terms and conditions of the
Merger Agreement, the Voting Agreement and the employment agreements; (ix) the
risks inherent in Ultimate's business, including the difficulties of
successfully managing the combined operations of entities with a different
management team, (x) possibilities that the Merger might not be consummated; and
(xi) that certain executives of Audio King had certain interests in the Merger
that are in addition to those of shareholders of Audio King generally.
OPINION OF AUDIO KING'S FINANCIAL ADVISOR
At the February 27, 1997 meeting of the Special Committee, GH&L presented
and discussed its fairness opinion analysis. GH&L subsequently rendered its
written fairness opinion on March 4, 1997 to the Audio King Board stating that,
as of such date, the Merger Consideration is fair, from a financial point of
view, to Audio King's shareholders. GH&L confirmed its fairness opinion as of
April , 1997 and the
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full text of the written opinion of GH&L, dated April , 1997, which sets forth
assumptions made, matters considered and limitations of the review undertaken in
connection with the opinion, is attached as Annex B to this Proxy
Statement/Prospectus and is incorporated herein by reference. Shareholders of
Audio King are urged to and should read such opinion in its entirety.
GH&L, as part of its investment banking business, is engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, private placements and valuations for corporate and other
purposes.
In connection with its opinion, GH&L undertook such review, analyses and
inquiries as it deemed necessary and appropriate under the circumstances. Among
other things, it reviewed (i) drafts of the Merger Agreement (which drafts, it
assumed, would be identical, in all material respects, to the Merger Agreement
as executed), (ii) certain publicly available financial statements and other
information of Audio King and Ultimate, and (iii) certain internal financial
statements and other information of Audio King and Ultimate prepared by the
management of Audio King and Ultimate, respectively, for financial planning
purposes. It visited certain Audio King and Ultimate facilities in Minnesota and
Colorado and had discussions with members of the management of Audio King and
Ultimate concerning their respective financial conditions, current operating
results and business outlook.
It analyzed the historical reported market prices and trading activity of
Audio King and Ultimate Stock. It compared certain financial and stock market
information of Audio King and Ultimate to similar information for certain
comparable publicly traded companies. It also reviewed, to the extent publicly
available, the terms of selected relevant mergers and acquisitions, analyzed the
general economic outlook for electronics retailing companies and performed such
other studies and analyses as it considered appropriate.
GH&L relied upon and assumed the accuracy, completeness and fairness of the
financial statements and other information provided to it by Audio King and
Ultimate or otherwise made available to it and did not attempt to verify such
information independently. It assumed, in reliance upon the assurances of the
management of Audio King and Ultimate that the information provided to it by
Audio King and Ultimate had been prepared on a reasonable basis, and, with
respect to financial planning data and other business outlook information,
reflected the best currently available estimates and judgments of their
respective managements, and that neither Audio King nor Ultimate management is
aware of any information or facts that would make the information so provided to
it incomplete or misleading. GH&L assumed there had been no material changes in
the assets, financial condition, results of operation, business or prospects
since the date of the last financial statements of Audio King and Ultimate made
available to it. In arriving at its opinion, it did not perform any appraisals
or valuations of specific assets of Audio King or Ultimate and it expresses no
opinion regarding the liquidation value of Audio King or Ultimate. GH&L's
opinion was based upon the information made available to it, and the facts and
circumstances as they existed and were subject to evaluation on the date of the
opinion.
As a basis for its opinion, GH&L conducted certain analyses, including:
DISCOUNTED CASH FLOW ANALYSIS. GH&L performed a discounted cash flow
analysis to calculate a range of theoretical values per share of Audio King
Stock based upon (i) the net present value of the projected future cash flows of
Audio King and (ii) a terminal value assuming Audio King is sold in the year
2001 at a multiple of earnings before income taxes ("EBIT"). Assuming an EBIT
multiple of five to seven and a discount rate of 12% to 18%, GH&L determined
that the net present value of each share of Audio King Stock would be $0.31 to
$1.71. This range of values was then compared to the Merger Consideration.
PREMIUM ANALYSIS. GH&L reviewed 114 transactions announced between January
1, 1994 and January 14, 1997 in which the purchase price was $20 million or
less. The purpose of this review was to compare the premium to be paid by
Ultimate (relative to Audio King's stock price of $1.25 one week prior to
announcement of the transaction) to the median one-week premium paid for
companies in the above
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analysis, which was 26.7%. Assuming a shareholder elects to receive $1.75 in
cash, the one-week premium would be 40%. Assuming a shareholder elects to
receive Ultimate Stock and using an Ultimate Stock price of $2.625, the one-week
premium would be 47%. Assuming shareholders are pro-rated between cash and
stock, the effective premium will be somewhere in between these two figures. As
an example, if the cash and stock were pro-rated equally, and assuming an
Ultimate Stock price of $2.625, the one-week premium would be 43.5%.
Additionally, GH&L compared the premium to be paid by Ultimate (relative to
Audio King's Stock price of $1.25 one month prior to announcement of the
transaction) to the median one-month premium paid for companies in the above
analysis, which was 28.0%. Assuming a shareholder elects to receive $1.75 in
cash, the one-month premium would be 40%. Assuming a shareholder elects to
receive Ultimate Stock and using an Ultimate Stock price of $2.625, the
one-month premium would be 47%. Assuming shareholders are pro-rated between cash
and stock, the effective premium will be somewhere in between these two figures.
As an example, if the stock and cash were pro-rated 50% cash and 50% stock, and
assuming an Ultimate Stock price of $2.625, the one-month premium would be
43.5%.
COMPARABLE TRANSACTION ANALYSIS. GH&L examined comparable transactions in
the consumer electronics retailing industry, identified by SIC codes 5731 and
4732 during the period from January 1, 1994 to February 14, 1997. Fifteen
transactions were identified, but relevant valuation information was not
available.
GH&L broadened its search to examine comparable transactions in the general
retailing industry, identified by SIC codes 5231, 5261, 5712-5714, 5719, 5722,
5734-5736, 5941, 5944-5946, 5948 and 5999 for the period from January 1, 1994 to
February 14, 1997. Although 99 transactions were identified, there was limited
available information having no direct relevance to the Audio King transaction.
COMPARABLE AUDIO KING ANALYSIS. GH&L compared financial and stock market
information for Audio King with corresponding information for selected
comparable public companies. The selected comparable public companies in the
consumer electronics retailing industry were: Campo Electronics and Appliances,
Inc., The Good Guys!, Inc., Rex Stores Corp., Sun TV & Appliances, Inc., Sound
Advice, Inc. and Ultimate Electronics, Inc. (collectively referred to as the
"Comparable Companies"). The multiples and ratios for each of the selected
companies were based on the most recent publicly available information and
selected analysts' earnings estimates. The purpose of the analysis was to
provide an indicated equity value for Audio King based upon mean and median
ratios for the Comparable Companies. GH&L determined that for the Comparable
Companies the mean company value to net sales was .2x, the median was .1x and
the indicated equity values for Audio King were $5.1 million and $3.1 million,
respectively. It determined that for the Comparable Companies, the mean equity
value to common equity was .5x, the median was .4x, and the indicated equity
values for Audio King were $3.1 million and $2.9 million, respectively. It
determined that for Comparable Companies, the mean stock price to calendar year
1997 estimated earnings was 9.7x, the median was 9.4x and the indicated equity
values for Audio King were $4.8 million and $4.6 million, respectively.
HISTORICAL STOCK TRADING ANALYSIS. GH&L reviewed the historical trading
prices and volumes for Audio King's and Ultimate's Stock.
QUALITATIVE FACTORS. In addition to performing the analyses described
above, GH&L considered factors such as, but not limited to, challenges facing
the electronics retailing industry, product diversity and selection, vendor
issues and potential costs savings and synergies that Audio King and Ultimate
believe may be possible as a result of the merger.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selection of
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying GH&L's opinion. In arriving at its fairness determination, GH&L
considered the results of all such
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analyses. No company or transaction used in the above analyses as a comparison
is identical to Audio King or Ultimate or to the contemplated transaction. The
analyses were prepared solely for purposes of GH&L's providing its opinion to
the Special Committee and the Audio King Board as to the fairness of the Merger
Consideration and do not purport to be appraisals or necessarily reflect the
prices at which businesses or securities actually may be sold. Analyses based
upon forecasts of further results are not necessarily indicative of actual
future results, which may be significantly more or less favorable than suggested
by such analyses. Because such analyses are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of the parties or
their respective advisors, none of Audio King, Ultimate, GH&L, or any other
person, assumes responsibility if future results are materially different from
those forecast.
For services in rendering this opinion, Audio King will pay to GH&L a fee of
$75,000, which fee is not contingent upon consummation of the Merger. Audio King
has also agreed to pay to GH&L a success fee of $140,000 upon closing and to
indemnify GH&L against certain liabilities in connection with its services as
financial advisor to Audio King and in rendering this opinion.
THE MERGER AGREEMENT
Ultimate, Audio King and UAC entered into the Merger Agreement on March 4,
1997. The following description of the Merger and the Merger Agreement does not
purport to be complete and is qualified in its entirety by reference to the
Merger Agreement, a copy of which is attached as Annex A to this Proxy
Statement/Prospectus and is incorporated herein by reference. Shareholders of
Audio King are urged to read the Merger Agreement in its entirety. Capitalized
terms used but not defined in this section shall have the meanings ascribed to
them in the Merger Agreement.
EFFECTS OF THE MERGER
The Merger Agreement provides that, subject to the approval of the Merger by
the Audio King shareholders and the satisfaction or waiver of the other
conditions to the Merger, Audio King will merge with UAC, whereupon the separate
existence of Audio King will cease and UAC will be the surviving corporation of
the Merger. At the Effective Date, the conversion of Audio King Stock pursuant
to the Merger Agreement will be effected as described below. Following
completion of the Merger, UAC may be merged with and into Ultimate, at
Ultimate's discretion. The directors and executive officers of Ultimate will be
the individuals identified below in "Certain Information Concerning
Ultimate--Directors and Executive Officers."
EFFECTIVE DATE OF THE MERGER
Following the approval of the Merger by the Audio King shareholders and
subject to satisfaction or waiver of the terms and conditions of the Merger
Agreement, the Merger will become effective upon the filing of Articles of
Merger for the Merger with the Secretary of State of the State of Minnesota, and
the filing of the Certificate of Merger for the Merger with the Secretary of
State of the State of Delaware, which filings will be made as soon as
practicable following the approval of the Merger by the Audio King shareholders.
Subject to the Proration Provisions (as defined below) the rights of
dissenting shareholders, and certain adjustments, at the Effective Time, each
outstanding share of Audio King Stock will be converted, at the election of the
holder, into one of the following (collectively, the "Merger Consideration"):
(i) for each such share of Audio King Stock with respect to which an
election to receive stock has been effectively made and not revoked or lost
(a "Stock Election"), the right to receive 0.70 shares of Ultimate Stock
(such consideration, the "Stock Consideration"); or
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(ii) for each such share of Audio King Stock with respect to which an
election to receive cash has been effectively made and not revoked or lost
(a "Cash Election") and any other shares of Audio King Stock as to which a
Stock Election was not made, the right to receive cash, without interest,
$1.75 (the "Cash Consideration").
No fractional shares of Ultimate Stock will be issued pursuant to the
Merger. In lieu of the issuance of any fractional share of Ultimate Stock
pursuant to the Merger, cash adjustments will be paid to holders for any
fractional share of Ultimate Stock that would otherwise be issuable, and the
amount of such cash adjustment will equal the product of such fractional amount
and the Cash Consideration.
PRORATION PROVISIONS
In the event that Stock Elections received from holders of the Audio King
Stock require the conversion into Ultimate Stock of more than 50% of the shares
of Audio King Stock outstanding on the Effective Date, then each holder of Audio
King Stock outstanding on the Effective Date that has made a Stock Election will
receive cash and Ultimate Stock in the following manner: (i) a stock proration
factor (the "Stock Proration Factor") will be determined by dividing (y) 50% of
the number of shares of Audio King Stock outstanding on the Effective Date by
(z) the total number of shares of Audio King Stock with respect to which
effective Stock Elections were made; (ii) the number of shares of Audio King
Stock covered by each Stock Election to be converted into Ultimate Stock will be
determined by multiplying the Stock Proration Factor by the total number of
shares of Audio King Stock covered by such Stock Election, rounded to the next
lowest whole number; and (iii) shares of Audio King Stock covered by a Stock
Election and not converted into Ultimate Stock will convert into the right to
receive the Cash Consideration.
In the event that Stock Elections received from the holders of Audio King
Stock require the conversion into Ultimate Stock of less than 50% of the shares
of Audio King Stock outstanding on the Effective Date, then each holder of Audio
King Stock that has not made a Stock Election and holds more than 143 shares of
Audio King Stock (a "Prorated Holder") will receive Ultimate Stock and cash in
the following manner: (i) a number of additional shares of Audio King Stock (the
"Additional Shares") to be converted into Ultimate Stock will be determined by
taking the difference between (y) 50% of the number of shares of Audio King
Stock outstanding on the Effective Date, less (z) the number of shares of Audio
King Stock subject to effective Stock Elections; (ii) each Prorated Holder shall
be assigned a proration factor (the "Additional Shares Proration Factor")
determined by dividing the number of shares of Audio King Stock held by such
holder by the total number of shares of Audio King Stock held by all Prorated
Holders in the aggregate; (iii) the number of shares of Audio King Stock held by
each Prorated Holder to be converted into Ultimate Stock will be determined by
multiplying the Additional Shares Proration Factor applicable to such holder by
the number of Additional Shares, and rounding the result down to the next lowest
whole number; and (iv) shares of Audio King Stock held by Prorated Holders which
are not converted into Ultimate Stock shall be converted into the right to
receive the Cash Consideration.
In order for the Merger to qualify as a tax-free business combination, the
Stock Consideration must equal at least 40% of the total Merger Consideration at
the Effective Time. To ensure that this occurs, the Merger Agreement provides
that, in the event that Stock Elections received from the holders of Audio King
Stock and the proration adjustments described above require the issuance of a
number of shares of Ultimate Stock which, when valued at the closing sale price
of Ultimate Stock on the day preceding the Effective Date, represent less than
40% of the value of the total Merger Consideration at the Effective Date, then
the proration adjustments described above will not be made and, in lieu thereof,
each Audio King shareholder who has made a Stock Election will receive Ultimate
Stock in exchange for all of the Audio King Stock held by that shareholder and
each holder of Audio King Stock that has not made a Stock Election will receive
cash and Ultimate Stock in the following manner: (i) the total Merger
Consideration will be determined on the Effective Date as though holders of
Audio King Stock had made Stock Elections for exactly 50% and Cash Elections for
exactly 50% of the shares of Audio King Stock outstanding on the Effective Date
(the "Adjusted Consideration"); (ii) the total number of shares of Audio King
Stock that
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will be deemed to have made valid Stock Elections will equal (x) 40% of the
Adjusted Consideration divided by (y) the product of (a) the closing price of
the Ultimate Stock on the day preceding the Effective Date and (b) 0.7 (the
"Total Adjusted Audio King Shares"); (iii) the number of Total Adjusted Audio
King Shares that will be allocated to those holders of Audio King Stock who have
not made a Stock Election will equal the Total Adjusted Audio King Shares less
the actual number of shares of Audio King Stock for which a valid Stock Election
was made (the "Additional Audio King Shares"); (iv) a stock proration factor
(the "Proration Factor") will be determined by dividing the number of Additional
Audio King Shares by the number of shares of Audio King Stock for which a valid
Stock Election has not been made; (v) the number of shares of Audio King Stock
held by each shareholder who has not made a Stock Election that will be deemed
to be subject to a Stock Election will equal the total number of shares of Audio
King Stock held by such holder multiplied by the Proration Factor, rounded up to
the next highest whole number (the "Deemed Stock Election Shares"); shares of
Audio King Stock held by each shareholder that are not converted into Deemed
Stock Election Shares will be converted into cash; and (vi) in the event Audio
King shareholders exercise dissenters' rights under the MBCA, Audio King shall
deem those holders as having made valid Cash Elections (for purposes of clause
(i) above) to assure that sufficient shares of Ultimate Stock are issued to
represent 40% of the total Merger Consideration at the Effective Date.
NONE OF ULTIMATE, AUDIO KING, UAC, THE ULTIMATE BOARD OR THE AUDIO KING
BOARD MAKES ANY RECOMMENDATION AS TO WHETHER HOLDERS OF AUDIO KING STOCK SHOULD
MAKE A CASH ELECTION OR STOCK ELECTION. EACH HOLDER OF AUDIO KING STOCK MUST
MAKE HIS OR HER OWN DECISION WITH RESPECT TO ANY SUCH ELECTION. AS A RESULT OF
THE PRORATION PROCEDURES DESCRIBED HEREIN, A SHAREHOLDER WHO MAKES A CASH
ELECTION OR A STOCK ELECTION MAY RESULT IN THE RECEIPT BY SUCH SHAREHOLDER OF
BOTH ULTIMATE STOCK AND CASH.
CONVERSION OF AUDIO KING OPTIONS.
At the Effective Date, each outstanding option or right to purchase shares
of Audio King Stock that is or will be vested at or prior to July 2, 1997
(without acceleration) (an "Audio King Option") will be canceled, converted or
cashed out as set forth below. Each Audio King Option that has an exercise price
equal to or greater than the product of 0.7 times the average of the closing
sale price of Ultimate Stock on Nasdaq over the ten trading days prior to the
Effective Date (an "Out of the Money Option") will be canceled on the Effective
Date. All other Audio King Options will, at the election of the holder of the
Audio King Option, either be assumed by Ultimate in such a manner that such
Audio King Options will convert into options to purchase shares of Ultimate
Stock or be exercised and the holder paid a cash amount equal to the excess of
the Cash Consideration over the per share exercise price of such option, each as
provided below. Following the Effective Date, each Audio King Option with
respect to which an election to convert to an option to purchase Ultimate Stock
has been effectively made and not revoked (an "Option Conversion Election") will
be exercisable upon the same terms and conditions as then are applicable to such
Audio King Option, except that (i) each such Audio King Option will be
exercisable for that number of shares of Ultimate Stock equal to the number of
shares of Audio King Stock for which such Audio King Option was exercisable
times 0.7 and (ii) the exercise price of such option will equal the exercise
price of such Audio King Option as of the Effective Date divided by 0.7. It is
the intention of the parties that, to the extent that any such Audio King Option
constituted an "incentive stock option" (within the meaning of Section 422 of
the Code), immediately prior to the Effective Date, such option will continue to
qualify as an incentive stock option to the maximum extent permitted by Section
422 of the Internal Revenue Code of 1986, as amended (the "Code.") Audio King
Options other than Out of the Money Options or Audio King Options with respect
to which an Option Conversion Election has been received that are outstanding at
the Effective Date will convert into the right to receive in settlement thereof,
for each share of Audio King Stock subject to each such option, an amount in
cash equal to the Cash Consideration minus the per share exercise price of such
Audio King Option as of the Effective Date.
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ELECTION AND EXCHANGE PROCEDURES
On or about , 1997, Norwest Bank Minnesota, N.A., Shareowner
Services, in its capacity as exchange agent (the "Exchange Agent") will mail to
each holder of record of Audio King Stock an election form (the "Election
Form"), pursuant to which each such holder will have the right to specify
whether such holder desires to make a Cash Election or a Stock Election. Except
as provided in the following sentence, each Audio King shareholder must submit
only one Election Form for all shares of Audio King Stock held by such
shareholder, indicating whether such holder desires to make a Cash Election or a
Stock Election with respect to his or her shares. Multiple Election Forms may be
submitted for different portions of a holder's shares only if each such Election
Form covers all shares of Audio King Stock held on behalf of a particular
beneficial owner. Holders of record of shares of Audio King Stock who act as
nominees, trustees or in other representative capacities must certify that each
such Election Form submitted by them covers all the shares of Audio King Stock
that they hold for a particular beneficial owner.
Two or more holders of shares of Audio King Stock, either of whom may be
deemed constructively to own the other's shares of Audio King Stock by reason of
the ownership attribution rules of Section 318 of the Code, may submit a
combined Election Form containing a single Election as to their shares of Audio
King Stock. Any combined Election Form and change in or revocation of such
combined Election Form must be signed by or on behalf of all holders of the
Audio King Stock covered thereby. All shares of Audio King Stock covered by a
single combined Election Form held by holders of Audio King Stock submitting
such combined Election Form will be treated as being held by a single holder.
A holder of Audio King Stock will have the right to make a Cash Election or
a Stock Election by submitting to the Exchange Agent, at any time prior 5:00
p.m., New York time, on , 1997 (the "Election Deadline"), an Election
Form properly completed and executed by such holder accompanied by certificates
representing such holder's Audio King Stock ("Audio King Certificates"), or by
an appropriate guarantee of delivery of such Audio King Certificates. Any holder
of Audio King Stock who has made an election by submitting an Election Form to
the Exchange Agent will have the right, prior to the Election Deadline, to
change such holder's election by submitting a revised Election Form, properly
completed and executed and received by the Exchange Agent prior to the Election
Deadline. Any holder of Audio King Stock may at any time prior to the Election
Deadline revoke such holder's election and withdraw such holder's Audio King
Certificates deposited with the Exchange Agent by written notice to the Exchange
Agent received by the close of business on the day prior to the Election
Deadline. As of the Election Deadline, all holders of Audio King Stock
immediately prior to the Effective Time who have not submitted to the Exchange
Agent, or who have properly revoked an effective, properly completed Election
Form, without submitting a revised, properly completed Election Form will be
deemed to have made a Cash Election.
As soon as practicable after the mailing of the Proxy Statement/Prospectus,
the Exchange Agent will mail to each holder of record of Audio King Stock (i) an
Election Form, (ii) a letter of transmittal and (iii) instructions for use in
effecting the surrender of the Audio King Certificates in exchange for the Stock
Consideration or the Cash Consideration, as applicable.
Upon surrender of an Audio King Certificate for cancellation to the Exchange
Agent, together with the Election Form, duly executed, and such other documents
as Ultimate, Audio King or the Exchange Agent reasonably requests, the holder of
such Audio King Certificate will be entitled to receive as soon as practicable
after the Effective Date in exchange therefor (i) any cash that such holder has
the right to receive pursuant to the Merger Agreement (including any cash in
lieu of fractional shares) and/or (ii) certificates representing that number of
shares of Ultimate Stock that such holder has the right to receive (in each case
less the amount of any required withholding taxes, if any), and the Audio King
Certificate so surrendered will be canceled. Until surrendered, each Audio King
Certificate will, at any
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time after the Effective Time, represent only the right to receive the Cash
Consideration or Stock Consideration, as applicable, with respect to the shares
of Audio King Stock formerly represented thereby.
HOLDERS OF AUDIO KING STOCK SHOULD NOT SEND AUDIO KING CERTIFICATES WITH THE
ENCLOSED PROXY CARD. AUDIO KING CERTIFICATES (OR A GUARANTY OF DELIVERY) SHOULD
INSTEAD BE RETURNED WITH THE ELECTION FORM THAT IS BEING MAILED TO SHAREHOLDERS
SEPARATELY ON OR ABOUT , 1997.
No fractional shares of Ultimate Stock will be issued upon the surrender for
exchange of Audio King Certificates, and such fractional shares will not entitle
the owner thereof to vote or to any rights of a shareholder of Ultimate. Cash
adjustments will be paid to holders in respect of any fractional shares of
Ultimate Stock that would be issuable, and the amount of such cash adjustment
will equal the product of such fractional amount and the Cash Consideration.
No dividends or other distributions declared after the Effective Time on
Ultimate Stock will be paid with respect to any shares of Ultimate Stock
represented by an Audio King Certificate until such Audio King Certificate is
surrendered for exchange in accordance with the procedures described above. See,
however, "The Summary--Dividend Policy."
Ultimate and Audio King have the right to make additional rules not
inconsistent with the Merger Agreement governing the validity of the Election
Forms, the manner and extent to which the Cash Election and Stock Election are
to be taken into account in selecting the shares of Audio King Stock to be
converted into the right to receive cash or Ultimate Stock or a combination
thereof, the issuance and delivery of certificates for shares of Ultimate Stock
into which shares of Audio King Stock are converted in the Merger, and the
payment for shares of Audio King Stock converted into the right to receive cash
in the Merger. All such rules and determinations shall be final and binding on
all holders of Audio King Stock.
CERTAIN TERMS OF THE MERGER AGREEMENT
REPRESENTATIONS AND WARRANTIES. The Merger Agreement contains certain
customary representations and warranties relating to, among other things: (a)
each of Ultimate's, UAC's and Audio King's valid organization and similar
corporate matters; (b) each of Ultimate's, UAC's and Audio King's capital
structure; (c) the due authorization, execution and delivery of the Merger
Agreement by each of Ultimate, UAC and Audio King; (d) the performance and
enforceability of the Merger Agreement with respect to Ultimate, UAC and Audio
King; (e) the absence of conflict between the terms of the Merger Agreement and
the organizational documents and other material agreements of each of Ultimate,
UAC and Audio King; (f) the general compliance with applicable laws by each of
Ultimate, UAC and Audio King; (g) the timely filing with the Commission of all
required documents by Ultimate and Audio King and the accuracy of the
information contained therein; (h) the absence of undisclosed material
litigation and other undisclosed liabilities relating to Ultimate and Audio
King; (i) the absence of material changes with respect to business of Ultimate,
UAC and Audio King; (j) certain tax, property, insurance, contract, intellectual
property and employee benefit matters with respect to Audio King and its
subsidiaries; and (k) certain environmental matters with respect to Audio King
and its subsidiaries.
CERTAIN COVENANTS. The Merger Agreement contains certain customary
covenants and agreements, including, without limitation, the following:
Audio King has agreed that, during the period from March 4, 1997 until the
Effective Time, except as permitted by the Merger Agreement or as otherwise
consented to in writing by Ultimate, Audio King will, and will cause its
subsidiaries to, conduct their respective businesses in the ordinary and usual
course of business, and will maintain and preserve intact their respective
business organizations, use their best efforts to keep available the services of
their respective officers and employees and maintain significant beneficial
business relationships with suppliers, contractors, distributors, customers,
licensors, licensees and others having business relationships with it.
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From March 4, 1997 until the Effective Date, Audio King will not and will
cause its subsidiaries not to do any of the following unless such action is in
the ordinary and usual course of business, consistent with past practice and has
been budgeted for, or unless Ultimate otherwise agrees in advance in writing:
(i) sell, lease, transfer, dispose of, or mortgage or otherwise encumber or
subject to any lien, any of its properties or assets, or enter into any material
commitment or transaction; (ii) amend or propose to amend its articles of
incorporation or bylaws or, in the case of Audio King's subsidiaries, their
respective incorporation documents, or reincorporate in any jurisdiction; (iii)
split, combine or reclassify any outstanding shares of, or interests in, its
capital stock; (iv) declare, set aside or pay any dividend or distribution,
payable in cash, stock, property or otherwise with respect to any of its capital
stock; (v) except as permitted in the Merger Agreement, redeem, purchase or
otherwise acquire or offer to redeem, purchase or otherwise acquire any shares
of capital stock of Audio King or any of its subsidiaries or any options,
warrants or rights to acquire capital stock of Audio King or any of the
subsidiaries; (vi) except for the Audio King Stock (a) issuable upon exercise of
options outstanding on July 2, 1997 in accordance with the terms of the
applicable agreements, or (b) issuable through February 28, 1997 pursuant to
Audio King's Employee Stock Purchase Plan, issue, sell, pledge, dispose of or
encumber, or authorize, propose or agree to the issuance, sale, pledge or
disposition or encumbrance by Audio King or any of the subsidiaries of, any
shares of, or any options, warrants or rights of any kind to acquire any shares
of, or any securities convertible into or exchangeable for any shares of, its
capital stock of any class, or any other securities in respect of, in lieu of,
or in substitution for any class of its capital stock outstanding on the date
hereof; (vii) enter into any contracts, commitments or transactions pertaining
to its business; (viii) incur any indebtedness, obligations or liability or make
any payment in respect thereof, including the making of any royalty or option
payment; (ix) acquire or agree to acquire additional assets; (x) sell, agree to
sell or otherwise dispose of any of its assets; (xi) make any payments of any
type to any officer, director, or shareholder of Audio King or any person not
dealing at arms' length with any of the foregoing; (xii) modify the terms of any
existing indebtedness for borrowed money or incur any indebtedness for borrowed
money or issue any debt securities; (xiii) assume, guarantee, endorse or
otherwise as an accommodation become responsible for, the obligations of any
other person, enter into any "keep well" or other agreement to maintain any
financial statement condition of another person or enter into any arrangement
having the economic effect of any of the foregoing or make any loans or advances
or capital contributions to, or investments in, any other person, except to
Audio King or any of its subsidiaries; (xiv) authorize, recommend or propose any
change in its capitalization, or any release or relinquishment of any material
contract right or effect or permit any of the foregoing; (xv) adopt or establish
any new employee benefit plan or amend any employee benefit plan or increase the
compensation or fringe benefits of any employee or pay any benefit not
consistent with any existing employee benefit plan; (xvi) make, grant, pay or
commit to pay any bonus or any wage increase, salary increase or other
compensation increase, whether in the form of cash, options, stock, or
otherwise, to any officer, director or employee of Audio King or any of its
subsidiaries; (xvii) enter into or amend any employment, consulting, severance
or indemnification agreement entered into or made by Audio King or any of its
subsidiaries with any of their respective directors, officers or employees, or
any collective bargaining agreement or other obligation to any labor
organization or employee incurred or entered into by Audio King or any of its
subsidiaries; (xviii) fail to timely pay and discharge all federal and state
taxes and other accounts payable for which it is liable; (xix) make any tax
election or settle or compromise any liability for taxes; (xx) make or commit to
make capital expenditures, acquisitions of other businesses, capital assets,
properties or intellectual property; (xxi) make any material changes in its
reporting for taxes or accounting procedures other than as required by generally
accepted accounting principles or applicable law; (xxii) pay, discharge or
satisfy any claims, liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (and the
notes thereto) of Audio King included in its reports filed with the Commission
or incurred after the date of such financial statements, settle any litigation
or other legal proceedings (notwithstanding the foregoing) or waive the benefits
of, or agree to modify in any manner, any confidentiality, standstill or similar
agreement to which Audio King or any of its subsidiaries is a party; (xxiii)
write off any accounts or notes receivable except in the ordinary
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course of business; (xxiv) acquire or agree to acquire: (a) by merging or
consolidating with, or by purchasing a substantial portion of the assets of, or
by any other manner, any business or any corporation, partnership, joint
venture, association or other business organization or division thereof of or
(b) any assets that are material, individually or in the aggregate, to Audio
King and its subsidiaries taken as a whole, except purchases of inventory in the
ordinary course of business consistent with past practice; (xxv) adopt any
shareholder rights or similar plan or take any other action with the intention
of, or which may have the effect of, discriminating against Ultimate as a
shareholder of Audio King (or any successor); (xxvi) take any action that would,
or that could reasonably be expected to, result in (a) any of the
representations and warranties of Audio King set forth in the Merger Agreement
that are qualified as to materiality becoming untrue, (b) any of such
representations and warranties that are not so qualified becoming untrue in any
material respect or (c) any of the conditions to the Merger not being satisfied;
(xxvii) take any other action or enter into any other transaction or agreement,
other than in the ordinary course of business; or (xxviii) enter into, modify or
authorize any contract, agreement, commitment or arrangement to do any of the
foregoing.
MEETING OF AUDIO KING SHAREHOLDERS. Consummation of the Merger is
conditioned upon the approval of the Merger and the transactions contemplated
thereby, by the Audio King shareholders at the Special Meeting. Certain
shareholders who are also directors of Audio King have agreed to vote certain of
their shares of Audio King Stock in favor of the Merger at the Special Meeting,
which shares, in the aggregate, represent approximately 20% of the outstanding
Audio King Stock. See "--Conditions to the Merger," and "--Certain Other
Transactions and Agreements."
Subject to the fiduciary duties of the Audio King Board under applicable
laws and to the right of the Audio King Board to terminate the Merger Agreement
in the event of a Superior Proposal, Audio King has agreed, through its Board of
Directors, to recommend and use its best efforts to solicit from shareholders
proxies in favor of adoption of the Merger Agreement and the transactions
contemplated thereby and to take all other action necessary to secure such
approval at the Special Meeting. See "Termination--Termination Events."
NO SOLICITATION. From the date of the Merger Agreement until the Effective
Time, Audio King has agreed that it will not nor will it permit anyone acting on
its behalf, directly or indirectly, to (i) solicit, initiate or participate in
or encourage any negotiations or discussions with respect to any Takeover
Proposal (as defined below), (ii) disclose any information not customarily
disclosed to any person concerning Audio King's business and properties or
afford any person or entity access to its properties, books or records, or (iii)
assist or cooperate with any person to make any proposal to consummate a
transaction of the type referred to in clause (i) PROVIDED, HOWEVER, to the
extent required by the fiduciary obligations of the Audio King Board under
applicable law (after duly considering the written advice of outside counsel to
Audio King), Audio King may, in response to any unsolicited request therefor,
furnish information with respect to itself to any person pursuant to a customary
confidentiality agreement with terms no more favorable to such person than the
terms of the confidentiality agreement between Ultimate and Audio King.
In addition, Audio King has agreed that it will not nor will it permit any
person acting on its behalf, directly or indirectly, to participate in
discussions or negotiations with any person concerning a Takeover Proposal, nor
can the Audio King Board approve, recommend, or enter into an agreement in
connection with, or propose to approve, recommend, or enter into an agreement in
connection with, any Takeover Proposal; PROVIDED, HOWEVER, that the Audio King
Board, to the extent required by their fiduciary obligations, as determined in
good faith by the Audio King Board (after duly considering the written advice of
outside counsel), may participate in discussions or negotiations, approve,
recommend or enter into an agreement in connection with a Superior Proposal (as
hereinafter defined); PROVIDED, FURTHER, that Audio King may not enter into such
discussions or negotiations or approve, recommend or enter into any agreement in
connection with such Superior Proposal (or any other Takeover Proposal) unless
Audio King simultaneously pays Ultimate a termination fee of $300,000, plus all
of Ultimate's costs and expenses
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incurred in connection with the proposed transaction between Audio King and
Ultimate, plus interest on such fees, costs and expenses from the date payable
until paid at a rate of 12% calculated on a per annum basis (such fee, costs and
expenses, the "Termination Fee").
Audio King is required by the terms of the Merger Agreement to advise
Ultimate orally and in writing of any Takeover Proposal or any inquiry with
respect to or which could lead to any Takeover Proposal and the identity of the
person making any such Takeover Proposal or inquiry. Audio King is required to
keep Ultimate fully informed of the status and details of any such Takeover
Proposal or inquiry.
As used in the Merger Agreement and herein, "Takeover Proposal" means any
proposal or offer (whether or not in writing and whether or not delivered to the
shareholders of Audio King generally) for a merger or other business combination
involving Audio King or to acquire in any manner, directly or indirectly, a
material equity interest in, any voting securities of, or a substantial portion
of the assets of Audio King or its subsidiaries, other than the Merger and
transactions contemplated thereby.
As used in the Merger Agreement and herein, "Superior Proposal" means a BONA
FIDE proposal made by a third party for a merger or other business combination
involving Audio King or to acquire in any manner, directly or indirectly, a
material equity interest in, any voting securities of, or a substantial portion
of the assets of Audio King or its subsidiaries, on terms which the Board of
Directors determines in its good faith judgment to be more favorable to Audio
King's shareholders than the Merger (based on the written advice of Audio King's
independent financial advisor that the value of the consideration provided for
in such proposal exceeds the value of the consideration offered by Ultimate) and
for which financing, to the extent required, is then committed or which, in the
good faith judgment of the Board of Directors (based on the written advice of
Audio King's independent financial advisor), is reasonably capable of being
financed by such third party.
CERTAIN EFFORTS. Pursuant to the Merger Agreement, Audio King, Ultimate and
UAC have agreed to use all reasonable best efforts to take, or cause to be
taken, all action and to do, or cause to be done, all things reasonably
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective, in the most expeditious manner practicable, the
transactions contemplated by the Merger Agreement, including obtaining all
consents, approvals and authorizations, including without limitation any consent
required from Ultimate's bankers under its loan agreements and the making of all
necessary filings and registrations required for or in connection with the
consummation of the transactions contemplated by the Merger Agreement, the
defending of lawsuits or other legal proceedings challenging the Merger or the
transactions contemplated thereby and the execution and delivery of any
additional instruments necessary to consummate the transactions contemplated by
the Merger Agreement.
Audio King, UAC and Ultimate have agreed to use their reasonable efforts to
obtain all necessary permits, consents, approvals and authorizations of all
governmental bodies, including without limitation, any clearance required under
the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act") for the consummation of the Merger.
CERTAIN OTHER COVENANTS. Ultimate, UAC and Audio King have also agreed,
among other things: (i) to make promptly all filings that may be required with
respect to the Merger and the transactions contemplated thereby; (ii) to consult
with each other prior to issuing any press release or public statement; and
(iii) that Ultimate and its representatives be granted access to the officers,
employees, agents, properties, facilities, books, records, contracts and other
assets of Audio King.
CONDITIONS TO THE MERGER. In addition to the approval of the Merger by the
Audio King shareholders, the obligations of Ultimate and UAC, on the one hand,
and Audio King on the other, to effect the Merger and to consummate the
transactions contemplated thereby are subject to the satisfaction or waiver of
certain other conditions including, among other things, that: (a) there not be
threatened or pending any suit, action or proceeding by any governmental entity
or any other person, before any court or governmental authority, agency or
tribunal, domestic or foreign, in each case that has a reasonable likelihood of
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success: (i) enjoining the acquisition by Ultimate or UAC of any shares of Audio
King Stock, seeking to restrain or prohibit the consummation of the Merger or
any of the other transactions contemplated by the Merger Agreement, or seeking
to obtain from Audio King, Ultimate or UAC any damages that are material in
relation to Audio King and the subsidiaries, taken as a whole, (ii) prohibiting
or limiting the ownership or operation by Audio King, Ultimate or any of their
respective subsidiaries of any material portion of the business or assets of
Audio King, Ultimate or any of their respective subsidiaries, or to compel Audio
King, Ultimate or any of their respective subsidiaries to dispose of or hold
separate any material portion of the business or assets of Audio King, Ultimate
or any of their respective subsidiaries, as a result of the Merger or any of the
other transactions contemplated by the Merger Agreement, (iii) imposing
limitations on the ability of Ultimate or UAC to acquire or hold, or exercise
full rights of ownership of, any shares of Audio King Stock, including, without
limitation, the right to vote the Audio King Stock purchased by it on all
matters properly presented to the shareholders of Audio King, or (iv) seeking to
prohibit Ultimate or any of its subsidiaries from effectively controlling in any
material respect the business or operations of Audio King or its subsidiaries;
and (b) the shares of Ultimate Stock to be delivered to Audio King shareholders
pursuant to the Merger have been listed on the Nasdaq National Market, subject
to official notice of issuance.
The obligations of Audio King to effect the Merger and consummate the
transactions contemplated by the Merger Agreement are further conditioned upon,
among other things, the following: (i) the approval and adoption of the Merger,
the Merger Agreement and the consummation of the transactions contemplated by
the Merger Agreement by the shareholders of Audio King; (ii) the performance of
each obligation and agreement and compliance with each covenant to be performed
by Ultimate and UAC other than failures to comply that would not be likely to
prevent the Merger; (iii) the continuing accuracy through the Effective Date in
all material respects of the representations and warranties made by Ultimate and
UAC in the Merger Agreement; (iv) the absence of any injunction or other legal
prohibition against the Merger or the transactions contemplated thereby; (v) the
receipt of opinions of counsel for Ultimate as to certain corporate matters,
including corporate authority to enter into and perform the Merger and
transactions contemplated thereby and the validity of the Ultimate Stock to be
issued to Audio King shareholders, among others; and (vi) the receipt of advice
from counsel or accountants to Audio King about the tax treatment of the Merger
and other tax issues.
The obligations of Ultimate and UAC to effect the Merger and consummate the
transactions contemplated by the Merger Agreement are further conditioned upon,
among other things, the following: (i) the approval and adoption of the Merger,
the Merger Agreement and the consummation of the transactions contemplated by
the Merger Agreement by the shareholders of Audio King; (ii) the performance of
each obligation and agreement and compliance with each covenant to be performed
by Audio King; (iii) the continuing accuracy through the Effective Date in all
material respects of the representations and warranties made by Audio King in
the Merger Agreement, except for any breach of up to three representations or
warranties that, individually or in the aggregate, are not reasonably likely to
have a material adverse effect on Audio King in excess of $75,000; (iv) the
absence of any material change in the inventory of Audio King through the
Effective Date, subject to sales and historical "shrinkage;" (v) the delivery of
certain employment agreements and the Voting Agreement; (vi) the receipt of
consents and waivers from third parties which, if not obtained, would have a
material adverse effect on Audio King; (vii) the receipt of opinions of counsel
to Audio King as to (a) the organization and good standing of Audio King and its
subsidiaries; (b) the authority of Audio King to execute, deliver and perform
the Merger Agreement; (c) that the Merger Agreement has been duly authorized and
constitutes a valid and legally binding agreement of Audio King; (d) the absence
of any violation or breach of any agreement due to the execution and performance
by Audio King of the Merger Agreement; (e) the effect of the filing of the
Articles of Merger, including the Plan of Merger; (f) there being no consent or
approval of any governmental entity, known to counsel, not previously obtained
that is required for the consummation of the Merger; and (g) the enforceability
of certain employment agreements; (viii) there not having occurred a material
adverse effect of Audio King (which is defined as being a negative financial
effect on Audio
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King in excess of $25,000 or, in some cases, $75,000); (ix) the receipt of all
waivers and consents, except for the filing of the Articles of Merger with the
Secretary of State of the State of Minnesota and the filing of the Certificate
of Merger with the Secretary of State of the State of Delaware, necessary to
consummate the transactions contemplated by the Merger Agreement; (x) the
receipt of written consent of Ultimate's banks for the Merger and the
consummation of the transactions contemplated thereby and for the loan to
Ultimate of at least $3,500,000 in connection with the Merger; and (xi) there
being holders of fewer than 140,000 shares of Audio King Stock who have properly
exercised their dissenters' rights under the MBCA.
TERMINATION. The Merger Agreement may be terminated at any time prior to
the Effective Date by any of Ultimate, UAC or Audio King if the Effective Date
has not occurred by August 15, 1997; PROVIDED, HOWEVER, that the right to
terminate is not available to any party whose material breach of the Merger
Agreement causes the Effective Date to occur after such date; and, PROVIDED,
FURTHER, that such period shall be tolled if during such period any party is
subject to a nonfinal order restraining, enjoining or otherwise prohibiting the
Merger or the Special Meeting; (a) by mutual consent of the parties; (b) by
Ultimate, UAC or Audio King if there is a permanent injunction prohibiting the
Merger and the transactions contemplated by the Merger Agreement; (c) by
Ultimate or Audio King if the Audio King Board of Directors agrees to a Superior
Proposal; or (d) by either Ultimate or Audio King if the requisite vote of Audio
King shareholders is not obtained at the Special Meeting.
EFFECT OF TERMINATION. In the event of termination by any of Ultimate, UAC
or Audio King and, except as otherwise provided in the Merger Agreement, the
transactions contemplated by the Merger Agreement will be terminated, without
further action by any party. Notwithstanding the foregoing, nothing in the
Merger Agreement will be deemed to release any party from any liability for any
breach by such party of the terms and provisions of the Merger Agreement or to
impair the right of Audio King, on the one hand, and Ultimate and UAC, on the
other hand, to compel specific performance of the other party of its obligations
under the Merger Agreement.
FEES AND EXPENSES. Except as described below, each of Ultimate and Audio
King has agreed to pay the fees and expenses of its respective counsel,
accountants and other experts and to pay all other costs and expenses incurred
by it in connection with the negotiation, preparation and execution of the
Merger Agreement and the consummation of the transactions contemplated thereby.
In the event the Merger Agreement is terminated by Ultimate or Audio King in
connection with the approvals or recommendations by the Audio King Board of a
Superior Proposal, Audio King will pay Ultimate the Termination Fee (equal to
$300,000, plus Ultimate's expenses). See "--Certain Terms of the Merger
Agreement--No Solicitation." In the event the Merger Agreement is terminated in
circumstances described in clauses (a) and (b) under "--Termination," Ultimate
will pay two-thirds and Audio King will pay one-third of (i) the fees paid to
any governmental agency in connection with all filings made pursuant to the HSR
Act, and (ii) the fees and expenses of the financial printer incurred in
connection with the preparation, printing and distribution of this Proxy
Statement/Prospectus and the Registration Statement of which this Proxy
Statement/Prospectus is a part.
AMENDMENT; WAIVER. The Merger Agreement may be amended only by written
agreement of Ultimate, UAC and Audio King at any time prior to the Effective
Date with respect to any of the terms contained in the Merger Agreement;
PROVIDED, HOWEVER, that, after the Merger Agreement is adopted by Audio King's
shareholders, no party will be permitted to make any amendments or modifications
to the Merger Agreement that require approval of the Audio King shareholders
without the further approval of the Audio King shareholders.
Any obligation, covenant, agreement or condition in the Merger Agreement may
be waived at any time prior to the Effective Date by any of the parties entitled
to the benefit thereof only by a written instrument signed by each such party
granting the waiver. A waiver or failure to insist upon strict compliance with
any obligation, representation, warranty, covenant, agreement or condition does
not operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
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FINANCING ARRANGEMENTS
In connection with the consummation of the Merger, Ultimate expects to
secure financing in an amount of at least $3.5 million under a term loan
agreement through its current credit facility with Norwest Bank Colorado, N.A.
("Norwest"). This financing, as well as availability under Ultimate's revolving
line of credit, will be used to pay the cash portion of the Merger
Consideration, current Audio King debt (estimated to be approximately $6.0
million as of March 31, 1997) and all the fees and expenses of the parties
relating to the Merger. The indebtedness will be secured by substantially all of
Ultimate's assets. Ultimate and Norwest have executed a commitment letter
pursuant to which Norwest has agreed to provide such financing, subject to the
terms and conditions set forth therein, including negotiations and execution of
definitive documentation. Receipt of such financing is a condition to Ultimate's
obligations under the Merger Agreement to consummate the Merger. Ultimate has
agreed in the Merger Agreement to use its best efforts to obtain such financing.
CONFLICTS OF INTEREST
In considering the recommendations of the Audio King Board with respect to
the Merger, shareholders should be aware that certain members of Audio King's
management and the Audio King Board have certain conflicts of interest with
respect to the Merger. The Audio King Board and the Special Committee were aware
of these interests and considered them, among other factors, in approving the
Merger Agreement and the transactions contemplated thereby.
INDEMNIFICATION; INSURANCE. Ultimate has agreed that for three years after
the Effective Time, it will indemnify and hold harmless the present and former
officers and directors of Audio King (a) in respect of acts or omissions
occurring prior to the Effective Date to the extent provided under Ultimate's
certificate of incorporation and bylaws in effect on March 4, 1997, and (b) to
the extent provided in Ultimate's certificate of incorporation and bylaws, from
any damage, liability, payment or expense, which shall include reasonable costs
of investigation of any claim and attorney's fees, incurred by such officers or
directors in connection with any claim arising from or related to the
negotiation, execution, delivery or performance of the Merger Agreement.
Ultimate has also agreed that for three years after the Effective Date, it
will at its own expense provide officers and directors liability insurance in
respect of acts or omissions occurring prior to the Effective Date covering each
such person currently covered by Audio King's officers' and directors' liability
insurance policy on terms with respect to coverage and amount no less favorable
than those of such policy in effect on March 4, 1997; PROVIDED, HOWEVER, that,
subject to limitations in Ultimate's certificate of incorporation and bylaws, in
the event any claim or claims are asserted or made within such three year
period, all rights to indemnification in respect of any such claim or claims
will continue until final disposition of any and all such claims.
EMPLOYEE BENEFITS. Audio King presently sponsors a 401(k) Savings Plan
("Audio Plan") for its employees. The Audio Plan received a favorable
determination letter from the IRS dated November 20, 1995. The Audio Plan allows
employees to direct investment of their accounts in various selected funds
including Audio King Stock.
Ultimate presently sponsors a 401(k) Savings Plan (the "Ultimate Plan") for
its employees. The Ultimate Plan received a favorable determination letter from
the IRS dated December 27, 1995. The Ultimate Plan allows employees to direct
investment of their accounts in various selected funds including Ultimate Stock.
Ultimate has determined to merge the Audio Plan into the Ultimate Plan
concurrently with, or as soon as practicable after, the Effective Date. The
Ultimate Plan will continue for the benefit of employees of Audio King and
Ultimate. Ultimate will protect all optional benefits which have accrued to
participants pursuant to Section 411(d)(6) in both the Audio Plan and the
Ultimate Plan as of the Effective Date so
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that the accrued benefits of each participant will be no less after the
Effective Date than before the Effective Date. Any Ultimate Stock that the
Ultimate Board determines to make available for investment under the Ultimate
Plan after the Effective Date will be made available to all participants in the
Ultimate Plan. See also "Conversion of Audio King Options."
TERMINATION AGREEMENTS AND EMPLOYMENT AGREEMENTS. On March 4, 1997, and
effective upon the date of the Merger, Audio King, Ultimate and UAC entered into
(i) termination agreements with each of Randel S. Carlock and Henry G. Thorne
(which provide for the termination of their respective employment with Audio
King), (ii) amended employment agreements with each of Philip Ward and Samuel F.
Nichols and (iii) an employment agreement with Robert E. Thiner. Randel S.
Carlock and Henry G. Thorne are directors of Audio King. See "Certain
Information Concerning Audio King--Directors and Executive Officers." Ultimate
has guaranteed Audio King's payments of amounts owed to these persons pursuant
to these agreements.
Pursuant to Mr. Carlock's termination agreement, Audio King has agreed to
pay $190,000 in termination payments to Mr. Carlock in two installments: $95,000
on the date of the Merger and $95,000 on the later of January 2, 1998 or six
months after the Merger. Mr. Carlock's termination agreement limits Mr.
Carlock's ability to compete with Ultimate or solicit Ultimate's or Audio King's
employees or customers during the two years following the Merger.
Pursuant to Mr. Thorne's termination agreement, Audio King has agreed to pay
$330,000 in termination payments to Mr. Thorne in three installments: $165,000
on the date of the Merger, $82,500 on the later of January 2, 1998 or six months
after the date of the Merger, and $82,500 one year after the date of the Merger.
Audio King has also agreed to continue to provide certain insurance benefits to
Mr. Thorne for ninety days after the Merger. Under the termination agreement,
Ultimate and UAC agree not to object to Audio King's extension of the term, for
one year, of certain options to purchase 50,000 shares of Audio King Stock at an
exercise price of $1.28 per share. These options, which would otherwise have
terminated on January 12, 1997, were extended by the Audio King Board for a term
ending January 12, 1998. Mr. Thorne has agreed, under the termination agreement,
to provide up to 100 hours of consulting and advisory services to Ultimate
during the six months following the Merger at the rate of $200 per hour. Mr.
Thorne's termination agreement limits Mr. Thorne's ability to solicit Ultimate's
or Audio King's employees or customers during the two years following the
Merger.
Pursuant to Mr. Ward's amended employment agreement, he will be employed as
the Director of Sales of Audio King, Inc., a subsidiary of Audio King, beginning
on the date of the Merger and continuing through December 31, 1998. During the
term of the agreement, Mr. Ward is entitled to an annual salary of $100,000,
performance bonuses of up to $1,500 a month, a car allowance and certain
standard employee benefits generally available to officers of Audio King. Upon
the termination of Mr. Ward's employment with Audio King, other than for "cause"
or voluntarily by Mr. Ward (unless Mr. Ward voluntarily terminates his
employment following a "change of control" of Ultimate, as defined in the
employment agreement), he will be entitled to a termination payment of
approximately $100,000. Two-thirds of this termination payment will be paid
during the first year following such termination and one-third of it will be
paid during the second year following termination. If Mr. Ward voluntarily
terminates his employment with Audio King during the first twelve months of the
term, he will be entitled to a termination payment of $75,000, to be paid as
described in the preceding sentence. Mr. Ward's amended employment agreement
limits his ability to compete with Audio King during the one year after the
termination of his employment and limits his ability to solicit Ultimate's or
Audio King's employees or customers during the two years after such termination.
Mr. Nichols' employment agreement has a term of three months beginning on
the date of the Merger, although it may be extended by up to an additional three
months by Ultimate. During the term of the agreement, Mr. Nichols is entitled to
a base salary of $100,000 per year, a car allowance and certain standard
employee benefits generally available to officers of Audio King. Mr. Nichols is
also entitled to a
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payment of $25,000 at the time of the Merger. Upon the termination of Mr.
Nichols' employment with Audio King, other than for "cause" or voluntarily by
Mr. Nichols, he will be entitled to a termination payment of $75,000 as well as
reimbursement of up to $5,000 of outplacement services expenses. The termination
payment will be paid in two installments: $25,000 three months after the Merger
and $50,000 on the later of January 2, 1998 or six months after the Merger. Mr.
Nichol's employment agreement limits his ability to solicit Ultimate's or Audio
King's employees or customers during the two years following the termination of
his employment.
Mr. Thiner's employment agreement has a term of three months beginning on
the date of the Merger. During the term of the agreement, he is entitled to an
annual salary of $115,000, a car allowance and certain standard employee
benefits generally available to officers of Audio King. Upon the termination of
Mr. Thiner's employment with Audio King, other than for "cause" or voluntarily
by Mr. Thiner, he will be entitled to a lump sum termination payment of
approximately $42,000. Mr. Thiner's employment agreement limits his ability to
solicit Ultimate's or Audio King's employees or customers during the two years
following the termination of his employment.
REGULATORY MATTERS
The receipt of certain governmental or regulatory approvals are required in
order to consummate the Merger, including approval under the HSR Act. Ultimate
and Audio King have agreed in the Merger Agreement to use reasonable efforts to
obtain such approvals or waivers, but there can be no assurance as to when or if
such approvals or waivers will be obtained.
CONDUCT OF ULTIMATE'S BUSINESS AFTER THE MERGER
Following consummation of the Merger, Ultimate intends that the business of
Audio King will continue to be operated in its customary manner and with certain
of its former management. See "--Conflicts of Interest--Termination Agreements
and Employment Agreements." At the Effective Date, UAC, as the surviving
corporation of the Merger, will succeed, insofar as permitted by law, to all
rights, assets, liabilities and obligations of Audio King and will assume such
liabilities and obligations. UAC may be merged with and into Ultimate at a
future date.
CERTAIN OTHER TRANSACTIONS AND AGREEMENTS
VOTING AGREEMENTS. Each of Randel S. Carlock, Gary S. Kohler and Henry G.
Thorne (the "Principal Shareholders") who are each shareholders and directors of
Audio King and are entitled to exercise voting power with respect to an
aggregate of 718,402 shares of Audio King Stock (the "Shares") (approximately
25.9%, in the aggregate, of the Audio King Stock entitled to vote at the Special
Meeting), have entered into a voting agreement, dated April , 1997, with
Ultimate (the "Voting Agreement"). Under the MBCA, certain antitakeover
provisions would be triggered if the Principal Shareholders contractually agreed
to vote in excess of 20% of the outstanding shares of Audio King in favor of the
Merger. Therefore, pursuant to the terms of the Voting Agreement, the Principal
Shareholders have agreed to vote 556,657 of their shares of Audio King Stock,
(approximately 19.9%, in the aggregate, of the Audio King Stock entitled to vote
at the Special Meeting), in favor of the Merger and the transactions
contemplated thereby at the Special Meeting. The Principal Shareholders have
also agreed with Ultimate that until the Merger has been consummated, each such
Shareholder will not, without the prior written consent of Ultimate, directly or
indirectly, (i) grant any proxies or enter into any voting trust or other
agreement or arrangement with respect to the voting of any Shares, (ii) acquire
or sell, assign, transfer or otherwise dispose of any Shares, (iii) enter into
any contract, option or other arrangement or understanding with respect to the
acquisition or sale, assignment, transfer or other disposition of any Shares or
(iv) subject to the Merger Agreement and fiduciary obligations, encourage,
solicit, initiate or participate in any way in discussions or negotiations with,
or knowingly provide any information to, any corporation, partnership, person or
other entity or
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group (other than Ultimate or any affiliate or associate of Ultimate) concerning
any transaction that is the subject of a Takeover Proposal or Superior Proposal.
NASDAQ NATIONAL MARKET LISTING OF ULTIMATE STOCK
The shares of Ultimate Stock to be issued in the Merger have been approved
for listing on the Nasdaq, subject to official notice of issuance. See "--Terms
of the Merger--Conditions to the Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of certain material United
States federal income tax consequences of the Merger. This discussion is based
upon the Internal Revenue Code of 1986, as amended (the "Code") and the
regulations promulgated thereunder, judicial precedent relating thereto, and
current rulings and administrative practice of the Internal Revenue Service
("IRS"), in each case as in effect as of the date of this Proxy
Statement/Prospectus and all of which are subject to change at any time,
possibly with retroactive effect. This discussion does not take into account the
facts and circumstances of any particular shareholder of Audio King, and assumes
that the Audio King Stock is held as a "capital asset" (I.E., property held for
investment) within the meaning of Section 1221 of the Code at the Effective
Time. Neither Ultimate nor Audio King has sought a ruling from the IRS with
respect to the income tax consequences of the Merger and related transactions,
and there can be no assurance that the IRS will not take a different view of the
transaction.
HOLDERS OF AUDIO KING STOCK SHOULD CONSULT WITH THEIR TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABILITY
AND EFFECT OF ANY FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
TAX CONSEQUENCES OF THE MERGER.
The Merger is intended to qualify as a reorganization under Section 368(a)
of the Code. It is a condition to the obligation of Audio King to consummate the
Merger that Audio King has received advice from its counsel or its accountants
to the effect that the Merger should be treated as a reorganization within the
meaning of Section 368(a) of the Code and that no gain or loss will be
recognized by a shareholder of Audio King Stock as a result of the Merger except
(i) with respect to cash received by such shareholder, including cash received
in lieu of fractional shares or pursuant to the exercise of dissenters' rights
and (ii) if a holder of Audio King Stock receives cash, gain, if any, realized
by such holder of Audio King Stock pursuant to the Merger will be recognized,
but only to the extent of the cash received.
Assuming that the Merger is so treated, no gain or loss will be recognized
to the Audio King shareholders upon their receipt of Ultimate Stock in exchange
for their Audio King Stock. If an Audio King shareholder receives cash, however,
he or she will be required to recognize the gain, if any, that he or she
realizes in the transaction, but not in excess of the cash received by such
shareholder. Because a shareholder of Audio King Stock may receive under the
Cash Election and Stock Election, or by operation of the proration mechanism,
either (i) cash, (ii) Ultimate Stock, or (iii) a combination of cash and
Ultimate Stock, the federal income tax consequences to a Audio King shareholder
will depend, in part, upon the form of consideration such shareholder ultimately
receives in the Merger.
EXCHANGE SOLELY FOR ULTIMATE STOCK. A shareholder of Audio King Stock who
receives solely Ultimate Stock in exchange for Audio King Stock pursuant to the
Merger will not recognize gain or loss upon the exchange (except as described
below with respect to cash received in lieu of fractional shares). The aggregate
basis of the Ultimate Stock to be received by an Audio King shareholder will be
the same as the aggregate basis of the Audio King Stock surrendered in exchange
therefor (reduced by the tax basis allocable to fractional shares for which cash
is received). The holding period of the Ultimate Stock to be
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received by an Audio King shareholder will include the holding period of the
Audio King Stock surrendered in exchange therefor.
EXCHANGE SOLELY FOR CASH. An Audio King shareholder who receives solely
cash for his or her Audio King Stock pursuant to a Cash Election (or the
exercise of dissenters' rights) will be obligated to report either (i) capital
gain or loss equal to the difference between the cash received and the
shareholder's basis in his or her Audio King Stock, or (ii) dividend income,
depending on whether the deemed redemption of Audio King Stock qualifies for
sale or exchange treatment under the tests set forth in Section 302(b) of the
Code, as described in greater detail below. If the deemed redemption of their
Audio King Stock constitutes a complete termination of their interest in Audio
King (and Ultimate, after the Merger), such shareholders should receive capital
gain or loss treatment, and such gain or loss will be long-term gain or loss if
such Audio King Stock has been held for more than one year at the Effective
Date. To the extent that persons related to any such shareholder hold stock in
Ultimate after the Merger, however, the attribution rules of Section 318 of the
Code may require dividend treatment (depending upon the amount of Ultimate Stock
held by such related person after the Merger) unless Section 302 of the Code
permits those rules to be waived in a particular instance.
EXCHANGE FOR ULTIMATE STOCK AND CASH. A shareholder who receives a
combination of Ultimate Stock and cash in exchange for Audio King Stock pursuant
to the Merger (I.E., through the operation of the proration mechanism of the
Merger Agreement), will realize gain or loss equal to the excess of the fair
market value of the Ultimate Stock and the cash received by such shareholder
over the shareholder's basis in his or her Audio King Stock. Any such loss will
not be recognized and such gain will be recognized only to the extent of the
cash received. As to each shareholder, the recognized portion of the realized
gain will be treated (i) as capital gain or, (ii) if the exchange has the effect
of the distribution of a dividend under the tests set forth in Sections 356 and
302 of the Code, then as a dividend to the extent of the shareholder's ratable
share of Audio King's accumulated earnings and profits, with the remainder of
the gain, if any, treated as capital gain. In applying the dividend tests under
Section 302 of the Code to a particular Audio King shareholder, Audio King Stock
or Ultimate Stock that is held by a person related to the Audio King shareholder
may be deemed to be constructively owned by such shareholder, in accordance with
the rules under Section 318 of the Code.
CHARACTERIZATION OF CASH RECEIVED. Under Section 302, a redemption will be
treated as a sale or exchange of stock (and not as a dividend) if it is a
"complete redemption" of a shareholder's interest, if it is "substantially
disproportionate" with respect to a shareholder, or if it is "not essentially
equivalent to a dividend." In determining whether a reorganization exchange has
the effect of the distribution of a dividend, the application of Section 302 of
the Code is determined as if the gain is recognized as a result of a deemed
post-reorganization redemption of the acquiring corporation's stock. Thus, for
this purpose, each Audio King shareholder will be treated as having received
solely Ultimate Stock for the shareholder's Audio King Stock, a portion of which
Ultimate Stock will then be treated as redeemed by Ultimate for an amount equal
in value to the cash that such shareholder actually received. The determination
as to whether an exchange has the effect of the distribution of a dividend is
made on a shareholder-by-shareholder basis. A distribution will be
"substantially disproportionate" with respect to a particular shareholder (thus
qualifying for sale or exchange treatment) if that shareholder's actual and
constructive percentage interest in Ultimate after his or her shares are treated
as redeemed is less than 80% of that shareholder's actual and constructive
percentage interest in Ultimate immediately prior to such redemption and, after
such redemption, the shareholder owns, actually and constructively, less than
50% of the total combined voting power of all Ultimate stock entitled to vote.
Even if a shareholder fails to meet the "substantially disproportionate" test
described above, an exemption from dividend treatment may nevertheless be
available depending upon the individual shareholder's particular facts and
circumstances under the "not essentially equivalent to a dividend" test. For
example, under the facts of a published IRS administrative ruling, the receipt
of cash by a shareholder whose relative stock interest was minimal
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(approximately .0001%) and who exercised no control over the affairs of the
issuing corporation was treated as "not essentially equivalent to a dividend."
BASIS AND HOLDING PERIOD OF ULTIMATE COMMON STOCK RECEIVED. The aggregate
basis of the Ultimate Stock to be received by an Audio King shareholder will be
the same as the aggregate basis of the Audio King Stock surrendered in exchange
therefor, decreased by the amount of cash received (including cash received in
lieu of fractional shares), and increased by the amount of gain recognized on
the exchange (including any portion of such gain that was treated as a
dividend). The holding period of the Ultimate Stock to be received by an Audio
King shareholder will include the holding period of the Audio King Stock
surrendered in exchange therefor.
CASH IN LIEU OF A FRACTIONAL SHARES. An Audio King shareholder who receives
cash in lieu of a fractional share of Ultimate Stock will generally be obligated
to report capital gain or loss equal to the difference between the cash received
and the portion of the shareholder's basis in his or her Audio King Stock
allocable to such fractional share interest. Such gain or loss will be long-term
if such Audio King Stock has been held for more than one year at the Effective
Date.
BACKUP WITHHOLDING. Under the Code, a shareholder of Audio King Stock may
be subject, under certain circumstances, to backup withholding at a 31% rate
with respect to the amount of cash, if any, received pursuant to the Merger,
unless such shareholder provides proof of an applicable exemption or a correct
taxpayer identification number, and otherwise complies with applicable
requirements of the backup withholding rules. Any amounts withheld under the
backup withholding rules are not an additional tax and may be refunded or
credited against the holder's federal income tax liability, provided the
required information is furnished to the IRS.
ACCOUNTING TREATMENT
The Merger and Other Transactions will be accounted for using the purchase
method of accounting in accordance with generally accepted accounting
principles. These transactions result, for financial accounting purposes, in the
effective purchase of all the Audio King Stock by Ultimate. Accordingly, the
assets and liabilities of Audio King will be adjusted to fair value for
financial accounting purposes and the results of operations of Audio King will
be included in the results of operations of Ultimate for periods subsequent to
the Effective Time.
CERTAIN FEDERAL SECURITIES LAW CONSEQUENCES
All shares of Ultimate Stock received by Audio King shareholders in the
Merger will be freely transferable, except that shares of Ultimate Stock
received by persons who are deemed to be "affiliates" (as such term is defined
under the Securities Act) of Audio King prior to the date of the Audio King
Special Meeting may be resold by them only in transactions permitted by the
resale provisions of Rule 145 promulgated under the Securities Act or as
otherwise permitted under the Securities Act. Persons who may be deemed to be
affiliates of Audio King generally include individuals or entities that control,
are controlled by, or are under common control with, such party and may include
certain officers and directors of Audio King, as well as principal shareholders
of Audio King.
DISSENTERS' RIGHTS
The following discussion is not a complete statement of the law pertaining
to dissenters' rights under the MBCA and is qualified in its entirety by
reference to the full text of Section 302A.471 and 302A.473 of the MBCA attached
to this Proxy Statement/Prospectus as Annex C. Any shareholder who wishes to
exercise such dissenters' rights or who wishes to preserve his or her right to
do so should review the following discussion and Annex C carefully because
failure to timely and properly comply with the procedures specified will result
in the loss of dissenters' rights under the MBCA.
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PROCEDURE TO PRESERVE DISSENTERS' RIGHTS. Under Minnesota law, any holder
of Audio King Stock who follows the procedures set forth in Section 302A.473 of
the MBCA will be entitled to receive payment in cash of the "fair value" of such
shareholder's shares.
Under Section 302A.473 of the MBCA, if a corporation calls a shareholder
meeting at which a plan of merger to which such corporation is a party is to be
voted upon, the notice of the meeting must inform each shareholder of the right
to dissent and must include a copy of sections 302A.471 and 302A.473 of the MBCA
and a brief description of the procedures to be followed under such sections.
This Proxy Statement/ Prospectus constitutes such notice to the shareholders of
Audio King and the applicable statutory provisions of the MBCA are attached to
this Proxy Statement/Prospectus as Annex C.
The Merger Agreement must be approved by the holders of a majority of the
outstanding shares of Audio King Stock. A shareholder who wishes to exercise
dissenters' rights must file with Audio King before the vote on the Merger
Agreement a written notice of intent to demand the fair value of the shares
owned by such shareholder and must not vote his or her shares in favor of the
Merger Agreement.
The "fair value of the shares" means the value of the shares of Audio King
immediately before the effective date of the Merger.
After the proposed Merger has been approved by the Audio King Board and the
Audio King shareholders, Audio King must send a written notice to all
shareholders who have not voted their shares in favor of the Merger Agreement
and who have filed with Audio King before the vote on the Merger Agreement a
written notice of intent to demand the fair value of the shares owned by such
shareholder. The notice from Audio King must contain:
(1) The address to which a demand for payment and certificates of
certified shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertified shares that will apply
after the demand for payment is received;
(3) A form to be used to certify the date on which the stockholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of sections 302A.471 and 302A.473 of the MBCA and a brief
description of the procedures to be followed under such sections.
In order to receive the fair market value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice was given, but the dissenter retains all other rights of a shareholder
until the Merger takes effect.
A shareholder may not assert dissenters' rights as to less than all of the
shares registered in the name of the shareholder, unless the shareholder
dissents with respect to all the shares that are beneficially owned by another
person but registered in the name of the shareholder and discloses the name and
address of each beneficial owner on whose behalf the shareholder dissents. In
that event, the rights of the dissenter will be determined as if the shares as
to which the shareholder has dissented and the other shares were registered in
the names of different shareholders.
A beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of such beneficial
owner, and will be treated as a dissenting shareholder under the terms of
sections 302A.471 and 302A.473 of the MBCA, if the beneficial owner submits
written consent of the shareholder holding such beneficial owner's shares to
Audio King at the time of or before the assertion of the rights.
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PROCEDURES FOLLOWING AN ASSERTION OF DISSENTERS' RIGHTS. After the Merger
takes effect, or after Audio King receives a valid demand for payment, whichever
is later, Audio King must remit to each dissenting shareholder who has not voted
his or her shares in favor of the proposed Merger and has filed with Audio King
before the vote on the proposed Merger a written notice of intent to demand the
fair value of the shares owned by such shareholder, the amount Audio King
estimates to be the fair value of the shares, plus interest ("interest"
commences five days after the effective date of the Merger up to and including
the date of payment, calculated at a rate provided under Minnesota law for
interest on verdicts and judgments), accompanied by:
(1) Audio King's balance sheet and statement of operations for a fiscal
year ending not more than 16 months before the effective date of the Merger,
together with the latest available interim financial statements;
(2) An estimate by Audio King of the fair value of the shares and a
brief description of the procedures to be followed in demanding supplemental
payment.
(3) A copy of sections 302A.471 and 302A.473 of the MBCA, and a brief
description of the procedures to be followed in demanding supplemental
payment.
Audio King may withhold the above-described remittance from a person who was
not a shareholder on the date the Merger Agreement was first announced to the
public or who is dissenting on behalf of a person who was not a beneficial owner
on that date. If such dissenter has not voted his or her shares in favor of the
proposed Merger Agreement and has filed with Audio King before the vote on the
proposed Merger Agreement a written notice of intent to demand the fair value of
the shares owned by such shareholder, Audio King must forward to such dissenter
the materials described in the preceding paragraph, a statement of reason for
withholding the remittance, and an offer to pay to such dissenter the amount
listed in the materials if the dissenter agrees to accept that amount in full
satisfaction. Such dissenter may decline the offer and demand payment of such
dissenter's own estimate of the fair value of the shares, plus interest, by
written notice to Audio King. Failure to do so entitles such dissenter only to
the amount offered. If such dissenter makes demand, the procedures, costs, fees
and expenses described below for petitioning the court will apply.
If Audio King fails to remit payment within 60 days of the deposit of
certificates or the imposition of transfer restrictions on uncertified shares,
it must return all deposited certificates and cancel all transfer restrictions.
However, Audio King may require deposit or restrict transfer at a later time and
again give notice that contains:
(1) The address to which a demand for payment and certificates of
certified shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of sections 302A.471 and 302A.473 of the MBCA and a brief
description of the procedures to be followed under such sections.
If a dissenter believes that the amount remitted by Audio King is less than
the fair value of the shares plus interest, the dissenter may give written
notice to Audio King of the dissenter's own estimate of the fair value of
shares, plus interest, within 30 days after Audio King mails the remittance, and
demand payment of the difference (a "Demand"). Otherwise, a dissenter is
entitled only to the amount remitted by Audio King.
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If Audio King receives a Demand, it must, within 60 days after receiving the
Demand, either pay to the dissenter the amount demanded, or an amount agreed to
by the dissenter after discussion with Audio King, or file in court a petition
requesting that the court determine the fair value of the shares, plus interest.
The petition must be filed in Hennepin County, Minnesota. The petition must name
as parties all dissenters who made a Demand and who have not reached agreement
with Audio King. The jurisdiction of the court is plenary and exclusive. The
court may appoint appraisers, with powers and authorities the court deems
proper, to receive evidence on and recommend the amount of the fair value of the
shares. The court must determine whether the shareholder or shareholders in
question have fully complied with the requirements of section 302A.473 of the
MBCA, and must determine the fair value of the shares, taking into account any
and all factors the court finds relevant, computed by any method or combination
of methods that the court, in its discretion, sees fit to use, whether or not
used by Audio King or by a dissenter. The fair value of the shares as determined
by the court is binding on all shareholders, wherever located. A dissenter is
entitled to judgment for the amount by which the fair value of the shares as
determined by the court, plus interest, exceeds the amount, if any, remitted by
Audio King, but shall not be liable to Audio King for the amount, if any, by
which the amount, if any, remitted to the dissenter exceeds the fair value of
the shares as determined by the court, plus interest.
The court must determine the costs and expenses of any appraisers of a
proceeding under the preceding paragraph, including the reasonable expenses and
compensation of any appraisers appointed by the court, and must assess those
costs and expenses against Audio King, except that the court may assess part or
all of those costs and expenses against a dissenter whose Demand is found to be
arbitrary, vexatious, or not in good faith.
If the court finds that Audio King has failed to comply substantially with
section 302A.473 of the MBCA, the court may assess all fees and expenses of any
experts or attorneys as the court deems equitable. These fees and expenses may
also be assessed against a person who has acted arbitrarily, vexatiously, or not
in good faith in bringing the proceeding, and may be awarded to a party injured
by those actions.
The court may award, in its discretion, fees and expenses to an attorney for
the dissenters out of the amount awarded to the dissenters, if any.
50
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial information
combines the historical balance sheets and statements of operations of Ultimate
and Audio King after giving effect to the Merger. The unaudited pro forma
combined condensed balance sheet at January 31, 1997 gives effect to the Merger
as if it had occurred at January 31, 1997 and reflects Ultimate's balance sheet
at January 31, 1997 and Audio King's balance sheet at December 31, 1996. The
unaudited pro forma combined condensed statements of operations for the twelve
months ended January 31, 1997 give effect to the Merger as if it had occurred at
February 1, 1996. The unaudited pro forma combined condensed statements of
operations for the twelve months ended January 31, 1997 reflect Audio King's
historical results of operations recasted from its fiscal year ended June 30,
1996 to an assumed fiscal year ended December 31, 1996 by adding and deducting
the results of operations for the six months ended December 31, 1996 and 1995,
respectively, to and from the results of operations for the fiscal year ended
June 30, 1996. The pro forma adjustments account for the Merger as a purchase
and are based upon the assumptions set forth in the notes hereto.
The unaudited pro forma combined condensed financial information reflects
the Merger at Ultimate's closing price of $2.625 on March 4, 1997 for one half
of Audio King's outstanding shares on the consummation date of the Merger, which
calculation results in 987,977 shares of Ultimate Stock being issued in the
Merger.
The following unaudited pro forma combined condensed financial information
has been prepared from, and should be read in conjunction with, the historical
financial statements and related notes of Ultimate and Audio King contained
elsewhere in this Proxy Statement/Prospectus. The following information is not
necessarily indicative of the financial position or operating results that would
have occurred had the Merger been consummated on the date, or at the beginning
of the periods, for which the Merger is being given effect nor is it necessarily
indicative of future operating results or financial position. Instead, it
reflects actual historical results of the combined companies without benefit of
savings or other efficiencies that are expected to be achieved.
51
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF JANUARY 31, 1997
----------------------------------------------------
PRO FORMA
HISTORICAL --------------------------
------------------------ ADJUSTMENTS
ULTIMATE AUDIO KING (NOTE 1) COMBINED
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents.................................... $ 764 $ 11 $ 4,294(a) $ 775
(1,009)(b)
(815)(c)
(2,470)(d)
Accounts receivable.......................................... 13,788 3,790 -- 17,578
Merchandise inventories...................................... 41,414 10,041 -- 51,455
Prepaid expenses and other................................... 642 627 -- 1,269
----------- ----------- ------------- -----------
Total current assets....................................... 56,608 14,469 -- 71,077
Property and equipment, net.................................. 44,632 5,591 -- 50,223
Property under capitalized leases............................ 1,019 968 -- 1,987
Excess of purchase price over net assets acquired (Note 2)... -- 1,162 (1,162)(e) 1,421
1,421(e)
Other assets................................................. 1,051 232 -- 1,283
----------- ----------- ------------- -----------
Total assets................................................... $ 103,310 $ 22,422 $ 259 $ 125,991
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable............................................. $ 21,651 $ 6,256 $ -- $ 27,907
Accrued liabilities.......................................... 6,257 2,298 -- 8,555
Current portion of term loans................................ 262 500 (500)(a) 962
700(a)
Current portion of capital lease obligations................. 287 36 -- 323
Deferred tax liability....................................... 283 -- -- 283
----------- ----------- ------------- -----------
Total current liabilities.................................. 28,740 9,090 200 38,030
Note payable................................................. 17,237 2,650 (2,650)(a) 23,431
6,194(a)
Terms loans, less current portion............................ 928 2,250 (2,250)(a) 3,728
2,800(a)
Bonds payable................................................ 13,000 -- -- 13,000
Capital lease obligations, less current portion.............. 1,007 1,009 -- 2,016
Deferred tax liability....................................... 695 -- -- 695
Other liabilities............................................ -- 650 -- 650
Stockholders' equity:
Common stock................................................. 70 3 10(d) 80
(3)(f)
Additional paid-in capital................................... 31,009 4,560 2,583(d) 33,737
(4,560)(f)
145(g)
Retained earnings............................................ 10,624 2,210 (2,210)(f) 10,624
----------- ----------- ------------- -----------
Total stockholders' equity................................. 41,703 6,773 (4,035) 44,441
----------- ----------- ------------- -----------
Total liabilities and stockholders' equity..................... $ 103,310 $ 22,422 $ 259 $ 125,991
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
</TABLE>
The accompanying notes are an integral part of these pro forma combined
condensed financial statements.
52
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED JANUARY 31, 1997
-----------------------------------------------------
HISTORICAL
------------------------
ULTIMATE PRO FORMA
ELECTRONICS, AUDIO KING ---------------------------
INC. CORPORATION ADJUSTMENTS COMBINED
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Net Sales..................................................... $ 261,154 $ 66,494 $ -- $ 327,648
Cost of goods sold.......................................... 191,903 42,009 -- 233,912
----------- ----------- ----- -----------
Gross profit.................................................. 69,251 24,485 0 93,736
Selling, general and administrative expenses................ 64,786 24,554 8(h) 89,348
----------- ----------- ----- -----------
Income (loss) from operations................................. 4,465 (69) (8) 4,388
Interest expense, net....................................... 3,210 734 354(i) 4,298
----------- ----------- ----- -----------
Income (loss) before taxes.................................... 1,255 (803) (362) 90
Income taxes................................................ 470 (299) (149)(j) 22
----------- ----------- ----- -----------
Net income (loss)............................................. $ 785 $ (504) $ (213) $ 68
----------- ----------- ----- -----------
----------- ----------- ----- -----------
Earnings per share............................................ $ 0.11 $ 0.01
----------- -----------
----------- -----------
Weighted average shares outstanding........................... 6,995 1,043(k) 8,038
----------- ----- -----------
----------- ----- -----------
</TABLE>
The accompanying notes are an integral part of these pro forma combined
condensed financial statements.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEET AND STATEMENT OF OPERATIONS
AS OF JANUARY 31, 1997
NOTE 1: PRO FORMA ADJUSTMENTS ASSUMING COMPLETION OF THE MERGER
(a) Adjustment to record proceeds from a bank under a five-year term loan
($3,500,000) (which Ultimate expects to secure in connection with the
Merger) and proceeds from Ultimate's revolving line of credit ($6,194,000)
and repayment of Audio King's working capital line of credit and term loan
($5,400,000).
(b) Adjustment for the payment of $1,009,000 to certain executives and other
employees under terms of the severance agreements.
(c) Adjustment for direct acquisition costs, primarily brokers fees, legal and
accounting expenses of approximately $815,000.
(d) Adjustment to record the acquisition of all of Audio King's 2,822,791 shares
outstanding (1,411,395 acquired for cash of $1.75 share; 1,411,396 acquired
by the issuance of 987,677 shares of Ultimate Stock at $2.625 per share).
(e) Adjustment to eliminate Audio King's pre-existing excess of purchase price
over net assets acquired of $1,162,000 and to record excess of purchase
price over net assets acquired resulting from the Merger of $1,421,000.
(f) Adjustment to eliminate Audio King's equity accounts.
(g) Adjustment for the value of Audio King Options held primarily by employees
and directors and converted into Ultimate options. See Note (ii) of Note 2
of Notes to Unaudited Pro Forma Combined Condensed Balance Sheet at
Statement of Operations.
(h) Adjustment to record additional amortization of goodwill resulting in total
amortization expense equivalent to amortizing goodwill ($1,421,000) over a
30 year life.
(i) Adjustment to increase interest expense associated with Merger financing net
of decrease resulting from the retirement of Audio King's working capital
line of credit and term loan.
(j) Adjustment of the federal and state income tax provisions based upon the pro
forma operations.
(k) To adjust the weighted average shares outstanding to reflect the pro forma
effect of the shares of Ultimate Stock issued for Audio King Stock. The pro
forma earnings per share reflect the assumed issuance of approximately
55,000 shares of Ultimate Stock (using the Treasury Stock method) to give
effect to the potential exercise of the Audio King Options converted into
Ultimate options discussed in (g) above.
53
<PAGE>
NOTE 2: PURCHASE PRICE SUMMARY AND RELATED ALLOCATION
A summary of the purchase price and the related allocation is as follows (in
thousands, except share and per share data):
<TABLE>
<S> <C>
Purchase Price:
$1.75 per share for 1,411,395 shares of Audio King Stock(i)......... $ 2,470
Exchange 1,411,396 shares of Audio King Stock for 0.7 shares
(987,977 shares) of Ultimate Stock at $2.625 per share(i)......... 2,593
Exchange of Audio King Options(ii).................................. 145
Fees and expenses related to Merger................................. 815
Lump-sum severance payments due within one year after consummation
of Merger(iii).................................................... 1,009
---------
Total purchase price.............................................. $ 7,032
---------
---------
Allocation (based upon fair value):
Cash and cash equivalents........................................... $ 11
Accounts receivable................................................. 3,790
Merchandise inventories............................................. 10,041
Prepaid expenses and other.......................................... 859
Property, equipment and property under capitalized leases,
net(iv)........................................................... 6,559
Accounts payable, accrued liabilities and other..................... (9,204)
Debt and capital lease obligations.................................. (6,445)
Excess of purchase price over net assets acquired(iv)............... 1,421
---------
Total allocation.................................................. $ 7,032
---------
---------
</TABLE>
(i) The Merger Agreement provides that, subject to certain proration provisions,
Audio King shareholders may elect for each share of Audio King Stock either
$1.75 or 0.7 shares of Ultimate Stock.
(ii) Under the terms of the Merger Agreement, all Audio King Options that have
exercise prices below 70% of Ultimate Stock price based upon the average of
the closing sale price on the Nasdaq National Market of the Ultimate Stock
over the ten trading days prior to the effective date will be able to be
exercised (and the difference between (a) the exercise price divided by 0.7
and (b) $1.75 will be paid to the holder) or exchanged for an equivalent
option to purchase Ultimate Stock. Each option for Ultimate Stock will have
the same vesting and term as the old Audio King Option. All other Audio King
Options outstanding will be canceled. Options to acquire 214,500 shares of
Audio King Stock are outstanding with an exercise price ranging from $.75 to
$1.50 per share. Ultimate has recorded the difference between the
consideration given of $1.8375 per share of Audio King Stock and the
proceeds to be received upon exercise as additional purchase price. In
addition, options to acquire 152,813 shares of Audio King Stock are
outstanding with an exercise price ranging from $1.875 to $4.625 and may be
considered as part of the purchase price depending upon Ultimate Stock price
as defined above.
(iii) Upon consummation of the Merger, certain executives and other employees
will receive severance and termination payments over a period generally not
to exceed one year. See "The Merger-- Conflicts of Interest."
(iv) Property, equipment and property under capitalized leases are comprised
primarily of leasehold improvements, store fixtures, office equipment, and
property under capitalized leases. In the opinion of management, the net
book value of such assets approximates its fair market value. Ultimate
expects to expand certain of the current Audio King stores. Because of such,
some assets may be disposed of prior to their current expected lives.
54
<PAGE>
SELECTED ULTIMATE FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The selected historical financial information of Ultimate set forth below
(except for operating data) were derived from the financial statements of
Ultimate for each of the five fiscal years in the period ended January 31, 1997.
The financial statements for each of the three years in the period ended January
31, 1997 have been audited by Ernst & Young LLP, independent auditors, whose
report with respect to each of the three fiscal years ended January 31, 1997
appears elsewhere in this Proxy Statement/Prospectus. The selected financial
information should be read in conjunction with the consolidated financial
statements and related notes included elsewhere in this Proxy
Statement/Prospectus and with "Ultimate Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
---------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................................... $ 261,154 $ 251,807 $ 165,069 $ 88,158 $ 62,619
Cost of goods sold.......................... 191,903 184,343 120,588 63,536 43,947
--------------- --------------- --------------- -------------- --------------
Gross profit................................ 69,251 67,464 44,481 24,622 18,672
Selling, general and administrative
expenses.................................. 64,786 59,525 36,276 20,610 16,104
--------------- --------------- --------------- -------------- --------------
Income from operations...................... 4,465 7,939 8,205 4,012 2,568
Interest expense, net....................... 3,210 1,866 407 374 509
--------------- --------------- --------------- -------------- --------------
Income before taxes and cumulative effect of
change in accounting method............... 1,255 6,073 7,798 3,638 2,059
Income taxes................................ 470 2,241 2,908 190 --
--------------- --------------- --------------- -------------- --------------
Income before cumulative effect of change in
accounting method......................... 785 3,832 4,890 3,448 2,059
Cumulative effect of change in accounting
for preopening expenses, net of
taxes(1).................................. -- (988) -- -- --
--------------- --------------- --------------- -------------- --------------
Net income.................................. $ 785 $ 2,844 $ 4,890 $ 3,448 $ 2,059
--------------- --------------- --------------- -------------- --------------
--------------- --------------- --------------- -------------- --------------
Pro forma information:
Historical income before taxes and
cumulative effect of change in
accounting method....................... $ 7,798 $ 3,638 2,059
Income taxes or charge in lieu of income
taxes for S corporation(2).............. 2,908 1,355 775
--------------- -------------- --------------
Pro forma income before cumulative effect
of change in accounting method.......... 4,890 2,283 1,284
Pro forma effect of change in accounting
method, net of taxes(1)................. (678) (278) 28
--------------- -------------- --------------
Pro forma net income...................... $ 4,212 $ 2,005 $ 1,312
--------------- -------------- --------------
--------------- -------------- --------------
Earnings per share before cumulative
effect of change in accounting
method(1)............................... $ -- $ .65 $ -- $ -- $ --
Earnings per share.......................... .11 .48 .88 -- --
Pro forma earnings per share(1,2)........... -- -- .76 .48 .37
Weighted average shares outstanding......... 6,995 5,906 5,583 4,188 3,582
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
---------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Number of stores open at end of period...... 18 18 14 11 9
Inventory turns(3).......................... 4.7 5.1 5.5 6.1 5.2
Average sales per store open during the
entire period presented(4)................ $ 13,906,000 $ 14,784,000 $ 12,808,000 $ 8,358,000 $ 6,654,000
Retail sales per weighted average square
foot of selling space..................... $ 905 $ 1,185 $ 1,336 $ 1,067 $ 836
Comparable store sales change(5)............ (16)% (2)% 29% 24% 17%
<CAPTION>
JANUARY 31,
---------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................. $ 27,868 $ 30,995 $ 4,061 $ 15,694 $ 2,576
Total assets................................ 103,310 100,466 69,194 39,538 17,313
Long-term debt(6)........................... 31,165 31,996 -- -- 167
Capital lease obligations(6)................ 1,007 1,295 3,120 2,930 3,262
Total stockholders' equity.................. 41,703 40,918 25,611 20,721 3,313
</TABLE>
- ------------------------
(1) During fiscal 1996, Ultimate changed its accounting method for preopening
expenses, resulting in a cumulative effect adjustment of ($0.17) per share,
net of taxes. The income statement data includes certain pro forma
adjustments for the years prior to fiscal 1996 to reflect this change in
accounting method.
(2) Prior to October 15, 1993, Ultimate was not subject to income taxes because
of its S corporation status. The income statement data includes certain pro
forma adjustments to reflect a provision for income taxes as if Ultimate had
been paying federal and state income taxes as a C corporation throughout the
periods presented at the rate applicable in each period.
(3) Calculated based upon the average of end-of-month inventory levels.
(4) Excludes warehouse sales.
(5) Comparable store sales are for stores open at least 13 months and exclude
recently relocated and expanded stores for 13 months after their completion
date.
(6) Less current portions.
56
<PAGE>
ULTIMATE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SHOULD BE READ IN CONJUNCTION WITH ULTIMATE'S HISTORICAL FINANCIAL STATEMENTS
AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROXY STATEMENT/ PROSPECTUS.
STATEMENTS WHICH ARE NOT HISTORICAL FACTS CONTAINED IN THIS REPORT ARE FORWARD
LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER FROM PROJECTED RESULTS. FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY INCLUDE, AMONG OTHERS, GENERAL ECONOMIC CONDITIONS,
ULTIMATE'S ABILITY TO COMPLETE ITS ACQUISITION OF AUDIO KING IN A TIMELY,
EFFECTIVE AND COST-EFFICIENT MANNER, ULTIMATE'S ABILITY TO INTEGRATE AUDIO
KING'S OPERATIONS INTO ITS OWN OPERATIONS, THE SYNERGISTIC EFFECTS OF THE
MERGER, IF ANY, COST AND AVAILABILITY OF SUITABLE STORE LOCATIONS, COST
EFFECTIVE AND TIMELY CONSTRUCTION OF NEW STORES, FLUCTUATIONS IN CONSUMER
DEMAND, COMPETITIVE FACTORS, ULTIMATE'S ABILITY TO ADDRESS ADEQUATELY ALL OF THE
CHANGING DEMANDS THAT ITS PLANNED EXPANSION WILL IMPOSE, THE RESULTS OF
FINANCING EFFORTS AND OTHER RISK FACTORS DETAILED IN "RISK FACTORS" AND
ULTIMATE'S COMMISSION FILINGS.
RESULTS OF OPERATIONS. The following table is derived from Ultimate's
statements of income for the periods indicated and presents the results of
operations as a percentage of net sales.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES FOR THE
YEARS ENDED JANUARY 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net sales............................................ 100.0% 100.0% 100.0%
Cost of goods sold................................... 73.5 73.2 73.1
----- ----- -----
Gross profit......................................... 26.5 26.8 26.9
Selling, general and administrative expenses......... 24.8 23.6 22.0
----- ----- -----
Income from operations............................... 1.7 3.2 4.9
Interest expense, net................................ 1.2 0.8 0.2
----- ----- -----
Income before taxes and accounting change............ 0.5 2.4 4.7
Income taxes......................................... 0.2 0.9 1.7
----- ----- -----
Income before effect of change in accounting
method............................................. 0.3 1.5 3.0
Pro forma effect of change in accounting method...... -- -- (0.4)
----- ----- -----
Pro forma net income................................. 0.3% 1.5% 2.6%
----- ----- -----
----- ----- -----
</TABLE>
FISCAL 1997 COMPARED TO FISCAL 1996. For the year ending January 31, 1997,
sales were $261.2 million, a 4% increase from sales of $251.8 million for the
same period in the prior year. The increase in sales during fiscal 1997 was due
primarily to the opening of new stores in Utah, Idaho and Oklahoma since July
1995 and the relocation and expansion of three of its Colorado stores.
Comparable store sales decreased 16% for the year ended January 31, 1997
compared to a decrease of 2% in comparable store sales for the year ended
January 31, 1996. The decrease in comparable store sales over the past year was
due in part to a sluggish retail environment for consumer electronics and
increased competition in Ultimate's markets.
Gross profit in fiscal 1997 increased 3% to $69.3 million (26.5% of net
sales) from $67.5 million (26.8% of net sales) in fiscal 1996. The increase in
gross profit was directly related to the increase in sales.
Selling, general and administrative expenses in fiscal 1997 increased 9% to
$64.8 million (24.8% of net sales) from $59.5 million (23.6% of net sales) in
fiscal 1996. The percentage increase in selling, general and administrative
expenses was due primarily to increased advertising expenses that were incurred
to establish Ultimate's name in the new markets it entered. In addition,
depreciation, rent and property taxes increased
57
<PAGE>
in fiscal 1997 due to the number of stores with larger formats in operation for
an entire year and the additional costs associated with the new warehouse,
office, service and store facility (the "Thornton Facility").
As a result of the foregoing, income from operations in fiscal 1997
decreased 44% to $4.5 million (1.7% of net sales) from $7.9 million (3.2% of net
sales) in fiscal 1996.
Interest expense, net in fiscal 1997 increased to $3.2 million from $1.9
million in fiscal 1996 due to higher average amounts outstanding under
Ultimate's revolving line of credit that was used for new store expansion over
the past year and additional interest expense from the 10.25% First Mortgage
Bonds due January 31, 2005 (the "Bonds") used for the construction of Ultimate's
new Thornton Facility. Ultimate's effective tax rate of 37.4% in fiscal 1997
increased slightly from the 36.9% tax rate in fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995. Net sales for fiscal 1996 increased
53% to $251.8 million from $165.1 million in fiscal 1995. The increase in sales
during fiscal 1996 was due primarily to the opening of new stores in Nevada, New
Mexico, Utah, Idaho and Oklahoma since October 1994. Comparable store sales
decreased 2% for the year ended January 31, 1996 compared to an increase of 29%
in comparable store sales for the year ended January 31, 1995. The small
decrease in comparable store sales over the past year was due in part to a
sluggish retail environment, particularly in the fourth quarter of fiscal 1996,
increased competition in Ultimate's markets during the past year and the opening
of new stores within markets Ultimate already serves which store openings
adversely affected sales at the existing stores in these markets.
Gross profit in fiscal 1996 increased 52% to $67.5 million (26.8% of net
sales) from $44.5 million (26.9% of net sales) in fiscal 1995. The increase in
gross profit was directly related to the increase in sales.
Selling, general and administrative expenses in fiscal 1996 increased 64% to
$59.5 million (23.6% of net sales) from $36.3 million (22.0% of net sales) in
fiscal 1995. The increase in selling, general and administrative expenses as a
percentage of sales was due primarily to an increase in net advertising expenses
as Ultimate entered new markets.
As a result of the foregoing, income from operations in fiscal 1996
decreased 3% to $7.9 million (3.2% of net sales) from $8.2 million (4.9% of net
sales) in fiscal 1995.
Interest expense in fiscal 1996 increased to $1.9 million from $407,000 in
fiscal 1995 reflecting higher borrowings used for expansion and the additional
inventory necessary for the new stores. Ultimate's effective tax rate of 36.9%
in fiscal 1996 decreased slightly from the 37.3% tax rate in fiscal 1995 due
primarily to Ultimate entering markets where no state income tax is assessed.
Effective February 1, 1995, Ultimate changed its accounting method for
preopening expenses and began expensing costs as incurred. This change resulted
in a one time charge to income of $988,000 (net of taxes) or 17 cents per share
for the year ended January 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES. Historically, Ultimate's primary sources
of liquidity have been net cash from operations and from revolving credit lines
and term loans. Over the last three and one-half years, Ultimate has expanded
its operations outside Colorado and now operates stores in six states. Ultimate
has funded this expansion in part through two public offerings of its common
stock. Ultimate's initial public offering in October 1993 resulted in net
proceeds of $18.2 million (net of underwriting discounts). Ultimate completed a
second offering of Ultimate Stock in November 1995 and received net proceeds of
$12.7 million (net of underwriting discounts).
In March 1995, Ultimate 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 the Bonds (the "Bond Offering"). The proceeds of
the Bond Offering were used to fund a substantial portion of the construction of
Ultimate's Thornton Facility. Interest on the Bonds accrues at the rate of
10.25% per year until maturity or earlier redemption. Ultimate is required to
redeem $3.25 million aggregate principal amount of the
58
<PAGE>
Bonds annually (reduced to the extent of the bonds purchased or redeemed by
Ultimate 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 $8.1 million for the year ended January
31, 1997 compared to net cash used in operations of $10.7 million for the year
ended January 31, 1996. The increase in cash provided by operations over the
past year was primarily the result of stabilized inventory and accounts
receivable levels as Ultimate completed its prior year expansion into new
markets.
Ultimate intends to continue its expansion into select metropolitan areas in
the Rocky Mountain, Midwest and Southwest regions with its larger format stores.
As part of this expansion process, on March 4, 1997, Ultimate announced the
signing of a Merger Agreement with Audio King. Audio King, a consumer specialty
electronics company, operates eleven retail stores; eight in Minnesota, two in
Iowa and one in South Dakota. In fiscal 1998, Ultimate expects to relocate and
expand two of its Colorado stores to its larger store format. In fiscal 1999,
Ultimate expects to expand or relocate and expand at least two of the Audio King
stores into Ultimate's larger store format.
Ultimate's primary capital requirements are directly related to expenditures
for new store openings and the remodeling and upgrading of existing store
locations. The increase over the past two fiscal years in the purchase of
property and equipment is a result of these capital requirements. With the
exception of Thornton, all stores opened in the last two fiscal years have been
leased. Capital expenditures to open these new stores have averaged $2.3
million, excluding preopening costs ranging from $300,000 to $600,000. Capital
expenditures to relocate and expand existing stores in fiscal 1998 are expected
to average $2.0 million per store, excluding preopening expenses ranging from
$100,000 to $300,000. 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. Effective February 1, 1995, Ultimate changed its
method of accounting for preopening expenses and began expensing preopening
costs as incurred prior to the relocation or opening of a new store. Ultimate's
financial statements for the year ended January 31, 1996 reflect the cumulative
effect of this change in accounting method. The initial inventory requirement
for Ultimate's new larger format stores averages approximately $2.4 million per
store, approximately $1.0 million of which is financed through trade credit.
In May 1995, Ultimate completed a sale/leaseback transaction with Cirque
Property L.C. for $5.6 million for a store and adjacent retail space located in
Las Vegas, Nevada. Proceeds of the sale were used to pay down a portion of
Ultimate's revolving line of credit.
Ultimate executed a new revolving line of credit agreement with Norwest Bank
Colorado, N.A. on November 21, 1996 that expires on September 30, 1998.
Borrowings under the revolving line of credit are limited to the lesser of $35
million or 70% of eligible inventory. The highest amount outstanding during the
term of this agreement was $25.7 million. Borrowings under this credit facility
in the amount of $17.2 million were outstanding as of January 31, 1997. Due to
lower than expected sales performance in the fourth quarter of fiscal 1997,
Ultimate was in violation of certain of its financial covenants under the
current credit agreement and received a waiver from the 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. Management believes Ultimate's
operations for fiscal 1998 will be sufficient to enable Ultimate to be in
compliance with the amended covenants for all periods of fiscal year 1998.
Accordingly, amounts payable under the term loan agreement are classified as
long term in the accompanying balance sheet. Ultimate expects to borrow an
additional three to five million dollars under a term loan agreement with its
primary lender to cover acquisition costs associated with the proposed merger
with Audio King and expects borrowings under the current line of credit to
increase six to nine million dollars to retire Audio Kings' current debt.
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Ultimate believes that its cash flow from operations and borrowings under
existing and new credit facilities will be sufficient to fund Ultimate's
operations, purchase of Audio King and associated acquisition costs, and its
store relocation plans for fiscal 1998. There can be no assurance that Ultimate
will not experience significant delays, cost overruns or completion problems in
connection with the relocation of existing stores or the acquisition of Audio
King. Moreover, there can be no assurance that the capital requirements for
Ultimate's stores will not exceed Ultimate's current estimates. In order to fund
the capital requirements for its anticipated expansion plans beyond fiscal 1998,
Ultimate will 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 Ultimate will be able to
obtain such funds on favorable terms, if at all.
SEASONALITY. Ultimate's business is affected by seasonal consumer buying
patterns. As is the case with other retailers, Ultimate's sales and profits have
been greatest in the fourth quarter (which includes the Christmas selling
season). Due to a slower than expected Christmas selling season during fiscal
1997, Ultimate's sales were substantially below expectations during these months
and Ultimate's annual results were 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. Ultimate'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 Ultimate 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. Ultimate'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.
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SELECTED AUDIO KING FINANCIAL INFORMATION
The selected historical information of Audio King set forth below are
derived from the financial statements of Audio King for each of the five fiscal
years in the period ended June 30, 1996 and the six months ended December 31,
1996 and 1995. The financial statements for each of the five years in the period
ended June 30, 1996 have been audited by Arthur Andersen LLP, independent public
accountants, whose report with respect to each of the three years ended June 30,
1996 appears elsewhere in this Proxy Statement/Prospectus. In the opinion of
Audio King management, such unaudited information as of December 31, 1996 and
1995 includes all adjustments, consisting only of normal recurring accruals,
necessary for a fair presentation of this information. Due to the seasonal
nature of Audio King's business, results for the six months ended December 31,
1996 are not indicative of the results that may be expected for any other
interim period or for the year as a whole. The selected financial information
should be read in conjunction with the consolidated financial statements and
related Notes included elsewhere in this Proxy Statement/Prospectus and with
"Audio King Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
-------------------- -----------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE, NUMBER OF STORES AND PER SQUARE FOOT DATA)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................................... $ 35,348 $ 34,996 $ 65,567 $ 56,914 $ 45,826 $ 34,314 $ 29,240
Cost of merchandise sold........................ 22,615 21,785 41,180 36,062 28,970 21,312 18,115
--------- --------- --------- --------- --------- --------- ---------
Gross profit.................................... 12,733 13,211 24,387 20,852 16,856 13,002 11,125
Selling, general and administrative expenses.... 12,075 12,200 24,679 19,472 15,484 12,155 10,566
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)......................... 658 1,011 (292) 1,380 1,372 846 559
Interest expense, net........................... 324 240 649 317 179 151 183
Other income.................................... -- -- 575 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting for income
taxes......................................... 334 771 (366) 1,063 1,193 695 376
Provision (benefit) for income taxes............ 140 324 (115) 430 511 313 169
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) before cumulative effect of
change in accounting for income taxes......... -- -- (251) 633 682 382 207
--------- --------- --------- --------- --------- --------- ---------
Cumulative effect on prior years of change in
accounting for income taxes(1)................ -- -- -- -- (45) -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)............................... $ 194 $ 447 $ (251) $ 633 $ 637 $ 382 $ 207
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
EARNINGS (LOSS) PER SHARE:
Net income (loss) before cumulative effect of
change in accounting for income taxes......... $ 0.07 $ 0.16 $ 0.09 $ 0.23 $ 0.25 $ 0.14 $ 0.09
Cumulative effect on prior years of change in
accounting for income taxes(1)................ -- -- -- -- (0.02) -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per share..................... 0.07 0.16 (0.09) 0.23 0.23 0.14 0.09
Weighted average number of common shares
outstanding................................... 2,813 2,771 2,735 2,811 2,814 2,717 2,210
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
STORE DATA:
Number of retail stores open at end of period... 11 11 11 11 10 9 9
Weighted average annual net retail sales per
store......................................... -- -- $ 5,960 $ 5,629 $ 4,719 $ 3,813 $ 3,249
Weighted average annual net retail sales per
square foot of retail space................... -- -- $ 706 $ 807 $ 793 $ 733 $ 718
</TABLE>
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
-------------------- -----------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE, NUMBER OF STORES AND PER SQUARE FOOT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................. $ 5,378 $ 8,685 $ 6,450 $ 6,587 $ 4,744 $ 4,043 $ 3,726
Inventories..................................... 10,041 10,601 8,727 8,398 6,864 5,048 4,561
Total assets.................................... 22,422 24,475 20,880 18,398 14,860 10,988 9,860
Long-term obligations, less current portion..... 5,908 8,832 7,750 6,201 3,955 2,673 2,298
Total liabilities............................... 15,649 17,305 14,301 11,687 8,932 5,703 4,981
Shareholders' investment........................ 6,773 7,170 6,579 6,711 5,929 5,285 4,879
</TABLE>
- ------------------------
(1) On July 1, 1993, Audio King adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," resulting in a
non-recurring charge to operations of $45,000.
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AUDIO KING MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SHOULD BE READ IN CONJUNCTION WITH AUDIO KING'S HISTORICAL CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROXY
STATEMENT. STATEMENTS WHICH ARE NOT HISTORICAL FACTS CONTAINED IN THIS REPORT
ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER FROM PROJECTED RESULTS. FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, AMONG OTHERS, AUDIO KING'S ABILITY
TO COMPLETE THE PROPOSED MERGER WITH ULTIMATE, GENERAL ECONOMIC CONDITIONS, THE
RESULTS OF FINANCING EFFORTS AND OTHER RISK FACTORS DETAILED IN "RISK FACTORS"
AND IN AUDIO KING'S COMMISSION FILINGS.
RESULTS OF OPERATIONS. For the past several years, Management has been
directed to make long-term investments which will provide the best long-term
return for Audio King's shareholders. The growth strategy for Audio King has
been its "promoting specialist strategy" which emphasizes consultative selling
coupled with broad selection, competitive prices, outstanding display and
demonstration facilities and aggressive advertising and promotion. Audio King
has pursued this strategy since 1992 through investment in its stores by
expanding the demonstration and display space at its existing stores, adding two
new stores in the Iowa marketplace and expanding investment in advertising and
promotion. The following table shows the growth in sales that has resulted from
Audio King's shift from small stores to large stores incorporating the promoting
specialist strategy:
<TABLE>
<CAPTION>
SMALL STORES LARGE STORES
SALES (UNDER 6,000 (OVER 6,000 TOTAL
YEAR (IN THOUSANDS) SQUARE FEET) SQUARE FEET) NEW STORES STORES
- --------- -------------- --------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1992 $ 29,240 5 4 0 9
1993 34,314 3 6 0 9
1994 45,826 2 7 1 10
1995 56,914 2 8 1 11
1996 65,567 2 9 0 11
</TABLE>
The following table sets forth, for the periods indicated, certain items in
Audio King's Statements of Operations as a percentage of net sales.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES FOR THE YEARS
SIX MONTHS SIX MONTHS ENDED JUNE 30,
ENDED DECEMBER ENDED DECEMBER -------------------------------------
31, 1996 31, 1995 1996 1995 1994
--------------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales............................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................... 64.0 62.2 62.8 63.4 63.2
----- ----- ----- ----- -----
Gross profit......................................... 36.0 37.8 37.2 36.6 36.8
Selling, general and administrative expenses......... 34.2 34.9 37.6 34.2 33.8
----- ----- ----- ----- -----
Income (loss) from operations........................ 1.8 2.9 (0.4) 2.4 3.0
Interest expense, net................................ 0.9 0.7 1.0 0.6 0.4
Other income......................................... -- -- 0.8 -- --
----- ----- ----- ----- -----
Income (loss) before taxes and accounting changes.... 0.9 2.2 (0.6) 1.8 2.6
Income taxes......................................... 0.4 0.9 (0.2) 0.7 --
Cumulative effect of change in accounting for income
taxes.............................................. -- -- -- -- 1.2
----- ----- ----- ----- -----
Net income (loss).................................... 0.5% 1.3% (0.4)% 1.1% 1.4%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
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<PAGE>
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1995. Net sales for the six-month period ended December 31, 1996 were
$35,348,000, an increase of 1.0% from net sales of $34,996,400 for the same
period in the prior year. Comparable store sales decreased 1% for the six-month
period ended December 31, 1996 over the same period last year. Management
believes the sales results were due to the competitive nature of the consumer
electronics industry and the overall consumer spending levels during the past
holiday season.
Seasonality is a factor in Audio King's results of operations on a quarterly
basis. Net sales for Audio King's first and fourth quarters historically have
represented the weakest sales quarters of the year. Audio King's second quarter
which ended December 31 is typically the strongest quarter, due to the higher
demand associated with the holiday season.
For the six-month period ended December 31, 1996, gross profit decreased
3.6% to $12,733,200 from $13,211,000 for the same period in the prior year.
Gross profit as a percentage of net sales for the six-month period ended
December 31, 1996 was 36.0% as compared to 37.7% for the same period in the
prior year. The decrease in gross margin percentage was due primarily to higher
levels of promotion pricing coupled with continued deflation of prices in the
consumer electronics industry.
For the six-month period ended December 31, 1996, selling, general, and
administrative expenses as a percentage of net sales decreased to 34.2% from
34.9% in the same period in the prior year. Selling, general, and administrative
expenses for the six-month period ended December 31, 1996 decreased
approximately 1.0% or $125,000 over the comparable period in the prior year. The
decreases in selling, general, and administrative expenses are due primarily to
higher depreciation expense in the prior year due to writing off leasehold
improvements related to the Edina store remodeling and a decrease in advertising
expense in the current period.
For the six-month period ended December 31, 1996, interest expense was
approximately $324,500 compared to approximately $239,300 for the same period in
the prior year.
Audio King's effective income tax rate was estimated at 42.0% for the
purpose of recording the income tax effects for the six months ended December
31, 1996 and 1995.
FISCAL 1996 COMPARED TO FISCAL 1995. Net sales for fiscal 1996 were
$65,567,000, an increase of 15% from net sales of $56,914,000 in fiscal 1995.
Management believes the comparable store sales increase of 6% was a result of
its "promoting specialist retail" strategy, which utilizes increased
advertising, product assortment, larger stores to increase store traffic and
trained salespeople to produce increased sales. The total sales increase can
also be attributed to the relocation of the Southdale store in October 1995 and
the expansion of the Rosedale store completed in February 1996. The sales
increase can also be attributed to sales growth in televisions that are 31" and
larger. Although prices have decreased 10% to 15% on technologically less
advanced products such as audio components, car audio products, video cassette
recorders, and camcorders, Audio King's unit sales increases offset the price
decreases.
Gross profit increased to $24,387,000 for fiscal 1996 compared to
$20,852,000 for fiscal 1995 and increased as a percentage of sales to 37.2% in
fiscal 1996 from 36.6% in fiscal 1995. Sales of services, furniture and
accessory sales, which carry a higher gross margin, grew as a percentage of
total sales and were the primary reason for the increased percentages.
Selling, general and administrative expense, as a percentage of net sales,
increased to 37.6% for fiscal 1996 from 34.2% for fiscal 1995. The $5,207,000
increase in such expenses for fiscal 1996 is attributable largely to an increase
in sales commissions, salaries and benefits of $2,300,000; occupancy costs,
insurance and depreciation of approximately $1,142,000; increased advertising of
$697,000; increased fees paid to finance companies related to customer financing
arrangements of $247,000; and restructuring costs related to reduction of
personnel of $90,000. The increased expenses were due in part to the addition of
selling square footage in the Edina and Roseville stores and to unit sales
increases which resulted in increased expenses for warehousing, handling,
personnel and home delivery.
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<PAGE>
Interest expense for fiscal 1996 increased as a percentage of net sales to
1% from 0.6% in fiscal 1995. The increase of $332,000 was attributable to
increased borrowings for inventory and capital expenses and includes interest of
$105,000 related to the Cedar Rapids store capital lease.
Audio King recorded other income of $575,000 as a result of a revised
agreement related to cellular telephone sales commissions. The previous
agreement provided for a commission for cellular phone activation to be paid at
the time of the sale and an additional commission to be paid monthly for three
years based on phone usage. The revised agreement provides for all revenues to
be received at time of sale. The revised agreement also provided for a lump-sum
payment for the phone usage commissions for the cellular phones that were sold
over the past three years. The revised agreement is not expected to have a
negative material impact on future earnings.
Audio King reported a net loss for fiscal 1996 of $251,000 ($.09 per share)
compared to net income of $633,000 ($.23 per share) in fiscal 1995.
FISCAL 1995 COMPARED TO FISCAL 1994. Net sales for fiscal 1995 were
$56,914,000, an increase of 24.5% from net sales of $45,826,000 in fiscal 1994.
Management believes the comparable store sales increase of 13% was a result of
its "promoting specialist" retail strategy, which strategy utilizes increased
advertising, product assortment, larger stores to increase store traffic and
trained salespeople to produce increased sales. The total sales increase can
also be attributed to the opening of two stores, one in Des Moines, Iowa in
April 1994 and one in Cedar Rapids, Iowa in May 1995.
Gross profit increased to $20,852,000 for fiscal 1995 compared to
$16,856,000 for fiscal 1994 and decreased as a percentage of sales to 36.6% in
fiscal 1995 from 36.8% in fiscal 1994. Video and cellular sales, which carry a
lower gross margin, grew as a percentage of total sales and were the primary
reason for the reduced margins.
Selling, general and administrative expense, as a percentage of net sales,
increased to 34.2% for fiscal 1995 from 33.8% for fiscal 1994. The $3,988,000
increase in such expenses for fiscal 1995 is attributable largely to an increase
in sales commissions, salaries and benefits of $2,026,000; occupancy costs,
insurance and depreciation of $516,000; increased advertising of $406,000; and
increased fees paid to finance companies related to customer financing
arrangements of $205,000.
Interest expense for fiscal 1995 increased $138,000 and increased as a
percentage of net sales to 0.6% for fiscal 1995 from 0.4% in fiscal 1994.
Audio King reported fiscal 1995 net income of $633,000 ($.23 per share)
compared to $637,000 ($.23 per share) in fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
SIX MONTHS ENDED DECEMBER 31, 1996. During the six-month period ended
December 31, 1996, cash of $1,833,600 was provided by operations compared to
$1,009,400 provided by operations for the comparable period in the prior year.
Capital expenditures for the six month period were $52,600, principally for the
purchase of computers and other equipment.
Working capital at December 31, 1996 was $5,379,300 as compared to
$6,449,400 at June 30, 1996. The current ratio was 1.6 to 1.0 as of December 31,
1996 and 2.1 to 1.0 as of June 30, 1996. The decrease in working capital was
attributable primarily to an increase in inventory levels and accounts payable.
Inventories increased to $10,040,800 at December 31, 1996 from $8,727,400 at
June 30, 1996. The December 31, 1996 inventory level is more typical for that
time of the year.
Audio King maintains a credit agreement which provides for two credit
facilities. The first facility is a working capital line of credit which
provides for up to $6,500,000 in borrowings and bears interest at the bank's
reference rate or at the adjusted certificate of deposit rate plus 2%, at Audio
King's option. Outstanding advances on the working capital line of credit as of
December 31, 1996 were $2,650,000. The
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<PAGE>
second credit facility is a term loan of $2,750,000 and bears interest at the
bank's references rate plus 0.25% or at the adjusted certificate of deposit rate
plus 2.25%, at Audio King's option.
Borrowings under the bank agreement are collateralized by inventory,
accounts receivable and fixed assets. Terms of the agreement require that Audio
King meet certain financial and other covenants. Audio King was in compliance
with, or had obtained a waiver of, all of its line of credit agreement covenants
as of December 31, 1996.
Audio King believes that cash generated from operations and borrowings
available under its bank line of credit will be sufficient to fund its working
capital and capital expenditure requirements for at least the next twelve
months.
FISCAL 1996. For fiscal 1996, cash provided by operations totaled $747,000
compared to cash used for operations of $492,000 during fiscal 1995. Capital
expenditures during fiscal 1996 totaled $2,936,000 compared to $2,271,000 during
fiscal 1995. These expenditures were principally for store remodeling or
relocation, furniture and fixtures, and other equipment. The capital
expenditures were partially financed through additional borrowings under Audio
King's line of credit agreement. Outstanding advances on Audio King's line of
credit as of June 30, 1996 and 1995 were $7,225,000 and $5,225,000,
respectively.
Working capital at June 30, 1996 was $6,450,000 compared to $6,587,000 at
June 30, 1995. The current ratio was 2.1 to 1.0 at June 30, 1996 compared to 2.3
to 1.0 at June 30, 1995.
Inventories were valued at $8,727,000 and $8,398,000 at June 30, 1996 and
1995, respectively. The increase in inventories was a result of the display and
stocking requirements of new product lines and the relocation and expansion of
one store and the expansion of another store.
In the event the proposed Merger does not take place, Audio King anticipates
capital expenditures of $250,000 for fiscal 1997, primarily for computer
equipment and updating store displays and fixtures.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121. Statement of Financial
Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," requires
impairment losses on long-lived assets to be recognized when an asset's book
value exceeds its expected future cash flows (undiscounted). Audio King adopted
SFAS 121 effective July 1, 1996. The adoption did not have a material impact on
the financial position or results of operations of Audio King.
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<PAGE>
CERTAIN INFORMATION CONCERNING ULTIMATE
BUSINESS OF ULTIMATE
Ultimate is a leading specialty retailer of home entertainment and consumer
electronics in Colorado, Idaho, Nevada, New Mexico, Oklahoma and Utah. Ultimate
operates eighteen stores, including nine stores in Colorado under the trade name
SoundTrack and nine stores outside Colorado under the trade name Ultimate
Electronics. Since 1993, Ultimate has opened nine Ultimate Electronics stores
and relocated and expanded four of its Colorado stores to the larger Ultimate
Electronics format. These larger format stores occupy 32,000 to 52,000 square
feet (with 18,000 to 30,000 square feet of selling space). Ultimate believes
that these larger format, full service, upscale stores have enhanced its ability
to compete in new markets as an audio, video and consumer electronics specialist
and will serve as the prototype for Ultimate's future expansion. With the
exception of the four relocated stores, Ultimate's Colorado stores range in size
from 10,000 to 16,600 square feet (6,500 to 9,900 square feet of selling space).
Ultimate intends to relocate or consolidate and expand most of the remaining
Colorado stores in the next three years.
Ultimate strives to appeal to a wide range of customers with an emphasis on
selling mid to upscale products. Ultimate believes that its larger format stores
enable it to differentiate itself from its competitors by providing a
comprehensive selection of name brand consumer electronics, with an emphasis on
limited distribution upscale brands, as well as by offering an extensive range
of customer services and by displaying multiple home theater and audio
demonstration rooms. Ultimate believes that these factors, together with its
open and uncrowded merchandise displays and its policy of matching the lowest
prices of its competitors, make it an attractive alternative to
appliance/electronics superstores and mass merchants selling consumer
electronics.
For the year ending January 31, 1997, sales were $261.2 million, a 4%
increase from sales of $251.8 million for the same period in the prior year. The
increase in sales during fiscal 1997 was due primarily to the opening of new
stores in Utah, Idaho and Oklahoma since July 1995 and the relocation and
expansion of three of its Colorado stores in the same period. Comparable store
sales decreased 16% for the year ended January 31, 1997 compared to a decrease
of 2% in comparable store sales for the year ended January 31, 1996. The
decrease in comparable store sales over the past year was due in part to a
sluggish retail environment for certain consumer electronics products and
increased competition in Ultimate's markets.
BUSINESS STRATEGY. Ultimate's strategy is to position itself as the
upscale, full service consumer electronics alternative to its competitors and to
satisfy consumer demand for increasingly sophisticated consumer electronics
products, particularly in the core categories of audio and video. Key elements
of its business strategy include:
EXTENSIVE PRODUCT SELECTION. Ultimate is committed to offering an extensive
selection of high quality, brand name home entertainment and consumer
electronics products. Ultimate offers over 6,000 stock keeping units ("SKU's")
representing approximately 200 brand names, a significant portion of which are
limited distribution brands that are only available through selected retailers.
As a result, Ultimate carries a larger selection of full-featured, high quality
products than is generally available at Ultimate's competitors. Each product
category includes a wide range of price points.
EXCELLENT CUSTOMER SERVICE. Since its inception, Ultimate has been
committed to providing excellent customer service through well-trained sales
consultants and an extensive range of customer services. Ultimate provides its
new sales consultants with more than two weeks of intensive classroom training
and continues with on-the-job instruction in product and vendor knowledge, sales
techniques and customer service. Most of Ultimate's stores have service
personnel who are able to evaluate and complete simple repairs on site.
Additionally, Ultimate has regional service centers in Albuquerque, Boise, Las
Vegas, Salt
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Lake City and Tulsa enabling it to provide fast service. Ultimate also provides
a 30-day money-back satisfaction guarantee, an in-stock guarantee on advertised
items, home delivery and set-up, home theater and audio installation and design,
home satellite installation, mobile electronics installation and extended
service contracts.
ADVERTISING AND MARKETING. Ultimate's advertising strategy stresses
nationally recognized brands at competitive prices primarily through newspaper,
radio and direct mail media. Ultimate is a signficant newspaper advertiser in
the markets it serves, producing all of its print advertising through its
in-house advertising department. Ultimate also employs an outside advertising
agency that produces and places Ultimate's radio commercials. Ultimate's
marketing programs are designed to create an awareness of Ultimate's
comprehensive selection of high quality, brand name merchandise, as well as its
competitive pricing. Ultimate typically advertises a broader selection of audio
and video products than its competitors and presents a blend of aggressive
promotional starting price points on competing products with higher price points
on more fully featured products. Ultimate has spent substantial funds on
advertising and marketing in various forms of media to establish name
recognition for its new stores and intends to continue to do so as it enters new
markets.
UPSCALE STORE FORMAT. Ultimate has developed a store format to emphasize
and merchandise mid to upscale products. Each store has displays designed to
provide the customer with a full spectrum of Ultimate's products upon entering a
store. These displays allow customers to make extensive side-by-side product
comparisons. Ultimate's new and recently relocated stores have substantially
larger selling space, providing customers with an uncluttered presentation of
the latest technology and featuring multiple demonstration rooms dedicated to
home theater and mobile electronics products.
COMPETITIVE PRICING. Ultimate emphasizes competitive product pricing and
reinforces this strategy with extensive advertising and a "60-day price
guarantee." Ultimate monitors pricing at competing stores on a weekly basis
through pricing surveys and adjusts its prices by market as necessary. Ultimate
believes that competitive pricing enables it to attract new customers as well as
to maintain customer loyalty.
EXPANSION STRATEGY. Ultimate intends to continue its expansion into select
metropolitan areas in the Rocky Mountain, Midwest and Southwest regions with its
larger format stores. As part of this expansion process, on March 4, 1997,
Ultimate announced the signing of a definitive merger agreement with Audio King
pursuant to which Ultimate will acquire all of the shares of Audio King for
stock and cash. Audio King, a consumer specialty electronics company, operates
eleven retail stores; eight in Minnesota, two in Iowa and one in South Dakota.
In fiscal 1998, Ultimate expects to relocate or consolidate and expand two of
its Colorado stores to the larger store format. Ultimate expects to relocate, or
consolidate and expand several of the Audio King stores. Ultimate may also
change the name of one or more of the Audio King stores to Ultimate Electronics
at any point in time to optimize its marketing efforts.
Ultimate's expansion strategy focuses on identification of attractive
metropolitan markets in the Rocky Mountain, the Midwest and the Southwest
regions based on an evaluation of local market opportunities, as well as the
size, strength and merchandising philosophy of potential competitors. Ultimate
obtains demographic analyses of major metropolitan areas to determine new store
locations and potential sales volumes, as well as the optimum number of stores
to open in a specific market. Ultimate's specific location strategy focuses on
anchor positions in highly visible shopping centers or a free-standing location
near a regional shopping mall. In choosing sites within a market, Ultimate
applies standard site selection criteria which take into account numerous
factors including local demographics, traffic patterns and overall retail
activity.
Capital expenditures to relocate and expand existing stores in fiscal 1998
are expected to average approximately $2.4 million per store, excluding
preopening costs ranging from $100,000 to $300,000. 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. Effective
February 1, 1995, Ultimate changed
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<PAGE>
its method of accounting for preopening expenses and began expensing preopening
costs as incurred prior to the relocation or opening of a new store. The initial
inventory requirement for Ultimate's new larger format stores averages
approximately $2.4 million per store, approximately $1.0 million of which is
financed through trade credit.
MERCHANDISING
PRODUCTS. Ultimate offers its customers a comprehensive selection of high
quality, brand name television, video, home audio, mobile electronics and home
office products. This selection consists of over 6,000 SKUs, representing
approximately 200 brand names. Ultimate offers customers a wide range of price
points within each product category, with the greatest depth in middle to higher
priced items. Within its product categories, Ultimate carries and actively
promotes new models as they become available. Ultimate does not carry home
appliances.
The following table, which is derived from Ultimate's internal sales
records, indicates the percentage of sales in each major product group for
Ultimate's last three fiscal years. The percentages include installation and
other services in these categories. Historical percentages may not be indicative
of Ultimate's future product mix.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
PRODUCT CATEGORY
Television/Satellite...................................... 29% 27% 23%
Audio..................................................... 22% 23% 26%
Home Office............................................... 16% 16% 16%
Video..................................................... 13% 15% 15%
Mobile.................................................... 12% 11% 12%
Other..................................................... 8% 8% 8%
</TABLE>
PRICING. Ultimate emphasizes competitive pricing on high visibility items
and reinforces this strategy with extensive advertising. Ultimate monitors
pricing at competing stores on a weekly basis through pricing surveys and
adjusts its prices by market as necessary. Ultimate's commitment to offer
competitive prices is supported by its "60-day price guarantee", under which
Ultimate refunds 110% of the difference between the original purchase price and
any locally available lower price for the same item under the same purchase
conditions. Sales and other special events, which Ultimate conducts from time to
time, may have lower than normal prices on selected products and product
categories.
PURCHASING. Substantially all of Ultimate's products are purchased directly
from manufacturers. Each of Ultimate's buyers has responsibility for specified
product categories. Buyers are assisted by a management information system which
provides them with current inventory quantity, price and sales information by
SKU, thus allowing them to react quickly to market changes. Ultimate works
closely with its manufacturers and forecasts purchases on a non-binding basis up
to one year in advance.
Ultimate is a member of a volume buying group, Progressive Retailers'
Organization, consisting of other companies similar to Ultimate with respect to
the type of merchandise sold. Membership in this organization has enabled
Ultimate to obtain volume rebates, special buys and access to close-out and
final production items. As a result, Ultimate believes it is able to obtain
competitive pricing and terms.
During the fiscal year ended January 31, 1997, Ultimate's ten largest
suppliers accounted for approximately 64% of the merchandise purchased by
Ultimate. Two of Ultimate's suppliers, Sony and Mitsubishi, each accounted for
more than 10% of its merchandise mix. The master agreements under which Ultimate
operates with each of such suppliers are terminable upon 30 to 60 days notice by
either
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<PAGE>
party. Ultimate does not have commitments of longer than one year with any of
its product suppliers, as is customary in the industry.
STORE OPERATIONS
STORES. Ultimate's larger format stores each occupy 32,000 to 52,000 square
feet, with 18,000 to 30,000 square feet of selling space. Ultimate has developed
this store format to emphasize and merchandise mid to upscale products. Each
store has displays designed to provide the customer with a full spectrum of
Ultimate's products upon entering a store. These stores have additional home
audio and car stereo demonstration rooms, additional home theater rooms,
expanded portable electronics displays and expanded computer and home office
displays as compared to the smaller store format. In addition, the new stores
offer home installation, home satellite installation, a home planning center,
home theater furniture, and an expanded area for large-screen televisions. The
remaining space is dedicated to a designated play area for children, a car
installation facility, a service facility, a store warehouse and general office
space.
With the exception of four relocated stores, Ultimate's Colorado stores
range in size from 10,000 to 16,600 square feet (6,500 to 9,900 square feet of
selling space). Ultimate intends to relocate or consolidate and expand most of
its remaining Colorado stores in the next three years. The selling space in
Ultimate's Colorado stores typically contains two audio and two car stereo
demonstration rooms, one home entertainment theater and an automobile equipped
with the latest in car audio and car security products.
DISTRIBUTION. Ultimate currently distributes products to all of its stores
from a 175,000 square foot warehouse located in Thornton, Colorado, a suburb of
Denver. All of Ultimate's stores in Colorado are located within approximately 60
miles of this warehouse. For stores over 100 miles away from Denver, Ultimate
uses contract carriers for distribution from its warehouse.
MANAGEMENT INFORMATION SYSTEMS. Ultimate's management information system,
using proven third party software, was installed in August 1990. During the fall
of 1994, Ultimate increased its system capabilities significantly with the
installation of Unix-based Hewlett Packard computer hardware. Ultimate believes
that this system will support Ultimate's anticipated growth. This on-line system
connects all of Ultimate's facilities through digital phone lines which allows
sales consultants to determine the location of all of Ultimate's inventory at
any time. Pricing can be changed immediately in each geographical market by
Ultimate's buyers and store management to react to competitor pricing. New
signage can be generated on a daily basis.
CUSTOMER SERVICE. Since its inception, Ultimate has been committed to
providing excellent customer service through well-trained sales consultants and
a broad range of customer services.
SALES CONSULTANTS. Ultimate provides its sales consultants with a minimum
of two weeks of intensive classroom training which begins with an orientation
from Ultimate's executive officers and continues with instruction in areas such
as technical knowledge by product category and vendor, policies and procedures
of Ultimate and various other sales techniques. On an ongoing basis, sales
consultants attend in-house training sessions conducted by dedicated in-house
trainers and manufacturers' representatives and also receive sales, product and
other information in daily store meetings. Certain sales consultants specialize
in particular product categories to provide customers with greater technical
assistance.
Ultimate's sales consultants are compensated pursuant to a flexible
incentive pay plan with commissions determined on the basis of sales and gross
margins. Ultimate also motivates its sales consultants by providing
opportunities for advancement within Ultimate.
SERVICES. Ultimate supports its product sales by providing many important
customer services, including home delivery and set-up, home theater and audio
installation and design, home satellite installation, mobile electronics
installation, extended service contracts and regional service centers that offer
in-home
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<PAGE>
and carry-in repair services. Ultimate also provides in-store product
instruction and will provide follow-up instruction at a customer's home upon
request.
Virtually all merchandise purchased from Ultimate may be taken to any of
Ultimate's stores for repair, whether or not the product is under the
manufacturer's warranty or an extended service contract. In order to provide
maximum service to its customers, Ultimate has regional service centers in
Albuquerque, Boise, Las Vegas, Salt Lake City and Tulsa. Ultimate's main service
facility, located at its distribution center in Thornton, provides backup for
each of Ultimate's regional service centers. Ultimate employs over 100 full-time
employees in connection with Ultimate's service business. Each service
department is staffed with product specialists capable of making complex
repairs. In addition, Ultimate operates a fleet of approximately 50 customer
service vehicles to provide in-home repair and delivery, installation and setup
of home satellites, home theater components and televisions.
Ultimate offers extended service contracts to its customers for most
categories of its products. The extended service contracts cover services or
time periods not covered by the manufacturer's warranty on such products and are
non-cancelable. These contracts are administered for Ultimate by Warrantech
Corporation, an unaffiliated third party, which pays for the repair service.
Warrentech is required by its agreement with Ultimate to maintain insurance to
protect Ultimate in the event that Warrentech fails to fulfill its obligations
under the extended service contracts and Ultimate is a named loss-payee under
the agreement. Ultimate sells the extended service contracts to Warrentech on a
non-recourse basis. Gross margins from the sale of extended service contracts
are higher than the average gross margins of Ultimate's other products.
Ultimate has a private label credit card which is financed, operated and
serviced by GE Capital Commercial Finance, Inc. ("GECAF"). Ultimate entered into
an agreement with GECAF which provides that GECAF will retain all credit risk
associated with the private label credit card. In addition, certain
manufacturers sponsor their own private label credit cards. These arrangements
permit Ultimate to provide its customers with financing promotions, including
interest-free and deferred payments, without using its working capital.
Approximately 32% of Ultimate's sales were purchased through these private label
and manufacturer sponsored credit cards in the last twelve months.
COMPETITION. Ultimate operates in a highly competitive and price sensitive
industry. Ultimate faces competition from mass merchants, department stores,
specialty stores, appliance/electronics stores and smaller independent
merchants. Ultimate considers its primary competitors to include consumer
electronics retailers such as Best Buy, Circuit City, and Incredible Universe
(which opened its stores in 1995 in Colorado and Utah and closed these stores in
February of 1997), as well as mass merchants such as Sears and Montgomery Ward.
Ultimate's primary competitors have greater financial and other resources than
Ultimate. Many of these competitors have recently entered Ultimate's markets and
continue to add stores, mainly Circuit City in Utah (April 1995), Colorado
(August 1995) and New Mexico (November 1996). Additionally, Las Vegas has
experienced new competition from The Good Guys! with three new stores since
September of 1995, as well as one new store from each of Circuit City and Best
Buy. For fiscal 1997, Ultimate's operating results were adversely affected by
such increased competition and there can be no assurance that Ultimate's
operating results will not be adversely affected in fiscal 1998 and beyond by
such increased competition. In addition, if such competitors seek to gain or
retain market share by reducing prices, Ultimate may be required to reduce its
prices, thereby reducing gross margins and profits. In addition, as Ultimate
expands into markets where Ultimate's name may not be recognized, its success
will depend in part on its ability to compete with established and any future
competitors in such markets.
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<PAGE>
PROPERTIES. As of January 31, 1997, Ultimate operated nine stores in
Colorado, four stores in Utah, two stores in Las Vegas, Nevada, and one store
each in Albuquerque, New Mexico, Boise, Idaho and Tulsa, Oklahoma. Each store,
other than the store located in Thornton, Colorado, is leased. In addition to
the store located at 321 West 84th Avenue, Ultimate's Thornton Facility is
comprised of 175,000 square feet of warehouse space, 30,000 square feet for
Ultimate's business offices, 21,000 square feet for a service department and
18,000 square feet for a training and employee facility. The Bonds are secured
by the Thornton Facility. See "Ultimate Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
The following table sets forth data regarding Ultimate's store locations.
<TABLE>
<CAPTION>
APPROXIMATE
YEAR APPROXIMATE RETAIL LEASE
ORIGINALLY TOTAL SQUARE SELLING EXPIRATION
CURRENT STORE LOCATIONS OPENED FEET SQUARE FEET DATE(1)
- ------------------------------------------------------ ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
COLORADO:
6490 Wadsworth Boulevard 1968 14,500 9,500 2006
Arvada, CO(2)
15022 East Mississippi Avenue 1983 10,900 6,500 1997
Aurora, CO(2)(3)
1955 28th Street 1985 34,700 20,300 2047
Boulder, CO
1230 North Academy Boulevard 1989 14,900 9,800 1999
Colorado Springs, CO
1370 South Colorado Boulevard 1976 31,600 16,700 2004
Denver, CO
4606 South Mason Street 1990 16,600 8,400 2005
Fort Collins, CO
8262 South University Boulevard 1986 16,600 9,900 2007
Littleton, CO (3)
8196 West Bowles Avenue 1984 39,100 22,600 2027
Littleton, CO
321 West 84th Avenue 1985 40,300 25,900 N/A
Thornton, CO
IDAHO:
1085 North Milwaukee Avenue 1995 37,100(4) 19,500 2025
Boise, ID
NEVADA:
2555 East Tropicana Avenue 1995 37,300(4) 17,900 2025
Las Vegas, NV
741 South Rainbow Boulevard 1994 31,500 17,600 2014
Las Vegas, NV
NEW MEXICO:
3821 Menaul Boulevard, N.E. 1994 37,100(4) 17,700 2014
Albuquerque, NM
OKLAHOMA:
10021 East 71st Street 1995 51,700(4) 30,400 2025
Tulsa, OK
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
YEAR APPROXIMATE RETAIL LEASE
ORIGINALLY TOTAL SQUARE SELLING EXPIRATION
CURRENT STORE LOCATIONS OPENED FEET SQUARE FEET DATE(1)
- ------------------------------------------------------ ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
UTAH:
879 West Hill Field Road 1995 33,800 18,600 2025
Layton, UT
6284 South State Street 1994 32,200 18,000 2024
Murray, UT
1375 South State Street 1993 32,900 17,100 2010
Orem, UT
1130 East Brickyard Road 1993 33,400(4) 18,200 2013
Salt Lake City, UT
</TABLE>
- ------------------------------
(1) Including renewal options.
(2) These stores are expected to be relocated during fiscal 1998.
(3) The store at 8262 South University Blvd. may be closed if Ultimate is able
to sublease the space because Ultimate believes that the customer base for
this area may be better served from the larger format store that will
replace Ultimate's Aurora store.
(4) Includes regional service center.
EMPLOYEES. As of January 31, 1997, Ultimate employed approximately 1,200
persons, approximately 1,060 of whom were store, customer delivery or service
employees and approximately 140 of whom were main warehouse or corporate
personnel. Ultimate considers its employee relations to be good. Most employees,
other than corporate and store support personnel, are paid pursuant to a
flexible pay plan. Ultimate believes that it provides working conditions and
wages that compare favorably with those of other companies within the industry.
Ultimate's employees do not have a collective bargaining agreement.
SERVICE MARKS. Ultimate Electronics-Registered Trademark- is a registered
service mark and SoundTrack-SM- is a service mark of Ultimate.
LEGAL PROCEEDINGS. Ultimate is not a party to any material legal
proceedings. Ultimate is, however, involved in various routine claims and legal
actions which arise in the ordinary course of business. Management of Ultimate
intends to vigorously defend these claims and believes that the final
disposition of these matters will not have a material adverse effect on
Ultimate's financial condition, results of operations or cash flow.
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<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Ultimate are the directors and
officers of UAC, the surviving corporation in the Merger. Ultimate's directors
and executive officers are as follows:
<TABLE>
<CAPTION>
SERVED AS CLASS/YEAR IN
OFFICER OR WHICH TERM WILL
NAME AGE POSITIONS DIRECTOR SINCE EXPIRE
- ----------------------------- --- -------------------------------------------- --------------- ----------------
<S> <C> <C> <C> <C>
William J. Pearse............ 55 Chairman, Chief Executive Officer, Director 1968 Class III/1997
and Founder
David J. Workman............. 40 President, Chief Operating Officer and 1985 Class II/1999
Director
Alan E. Kessock.............. 37 Vice President, Chief Financial Officer, 1988 Class I/1998
Secretary and Director
Neal A. Bobrick.............. 36 Vice President--Sales and Store Operations 1992 --
J. Edward McEntire........... 53 Vice President--Operations 1993 --
Robert W. Beale.............. 60 Director 1993 Class I/1998
Randall F. Bellows........... 68 Director 1995 Class II/1999
</TABLE>
All executive officers hold office at the discretion of the Board of
Directors.
WILLIAM J. PEARSE. Mr. Pearse is Chairman of the Ultimate Board of
Directors and Chief Executive Officer of Ultimate. He founded Ultimate with his
wife, Barbara, in 1968. Mr. Pearse is a founding member and former president of
Progressive Retailers' Organization, a current member of the Chief Executives
Organization, a former member and chairman of the Rocky Mountain Young
Presidents Organization, and he presently serves on various private corporate
and charitable boards.
DAVID J. WORKMAN. Mr. Workman has been President and Chief Operating
Officer of Ultimate since 1992. He joined Ultimate in 1979 as a sales consultant
and was promoted to store manager in 1982. From 1985 until 1991, Mr. Workman
worked with Ultimate as Vice President of Sales and Store Operations. He was
promoted to Executive Vice President and General Manager in 1991. Mr. Workman
was part owner of Dakota Sight and Sound from 1976 until 1979.
ALAN E. KESSOCK. Mr. Kessock has been Secretary and Treasurer since April
1993 and Vice President of Finance and Administration since 1988. He joined
Ultimate in 1985 as Controller. Mr. Kessock worked two years with the accounting
firm of KPMG Peat Marwick and two years with American Home Video Corporation dba
Video Concepts prior to joining Ultimate. Mr. Kessock is currently a member of
the Colorado Society of CPAs and he taught a national CPA review course from
1983 until 1991.
NEAL A. BOBRICK. Mr. Bobrick has been Vice President of Sales and Store
Operations since 1992. Mr. Bobrick joined Ultimate in 1981 as a sales consultant
and was promoted to store manager in 1984. He was made Director of Sales in 1989
and promoted again in 1992 to his current position. Mr. Bobrick has worked in
the consumer electronics industry since 1979.
J. EDWARD MCENTIRE. Mr. McEntire became Vice President -- Operations of
Ultimate on February 1, 1995. He was a Director of Ultimate from August 1993 to
January 31, 1995. From 1993 to January 31, 1995, Mr. McEntire operated JEM
Enterprises, a private investing and consulting firm. From 1991 until 1993, he
was the President of the Regulatory Products Division of IHS Group, an
information publishing company. From 1989 until 1991, Mr. McEntire was the
Executive Vice President--Investor Services and, from 1981 until 1988, was the
Group Vice President of Standard & Poor's Corporation.
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<PAGE>
ROBERT W. BEALE. Mr. Beale has been a Director of Ultimate since April 1993
and is the President of Beale International, a management consulting firm
specializing in support to mid-sized businesses. Mr. Beale was formerly the
Chief Executive Officer and founder of Management Design Associates, a national
management consulting firm. He was also an employee of IBM in the marketing
division, and a consultant on the staff of Deloitte & Touche.
RANDALL F. BELLOWS. Mr. Bellows became a Director of Ultimate on January
31, 1995. Mr. Bellows was a co-founder of Cobe Laboratories, Inc in 1965. He had
been an Executive Vice President of Cobe Laboratories from 1965 until its
acquisition by Gambro A.B. in 1990. Mr. Bellows has also served as a director of
Scimed Life Systems, Inc. from 1992 to the present. Scimed Life Systems, Inc.
was acquired by Boston Scientific Corp. in February 1996. Mr. Bellows continues
to serve as a director of Boston Scientific Corp.
COMPENSATION OF DIRECTORS. Ultimate has adopted compensation and incentive
benefit plans to enhance its ability to continue to attract, retain and motivate
qualified persons to serve as nonemployee directors of Ultimate. Ultimate pays
its nonemployee directors $4,000 per year, $8,000 per year beginning in fiscal
1998, and reimburses each nonemployee director for reasonable expenses in
attending Ultimate meetings. Under the Nonemployee Directors' Stock Option Plan
(the "Directors' Plan"), which was approved by Ultimate's stockholders in
October 1993 and became effective upon consummation of Ultimate's initial public
offering, nonemployee directors of Ultimate receive stock options. Only
directors who are not also employees of Ultimate are eligible to participate in
the Directors' Plan. Ultimate has two nonemployee directors.
An aggregate of 20,000 shares of Ultimate Stock has been reserved for
issuance under the Directors' Plan and is administered by the Board of
Directors. On October 15, 1993, Ultimate granted options for a total of 4,000
shares at an exercise price equal to Ultimate's initial public offering price of
$8.50 per share, which options vested immediately. In addition, each nonemployee
director is granted an option to purchase 2,000 shares of Ultimate Stock on
February 1 of each year, which options vest one year from the date of grant.
Upon the termination of a director's status following his resignation,
retirement or a change in control of Ultimate, options outstanding under the
Directors' Plan will immediately become fully vested and exercisable for a
period of three months.
Each option granted under the Directors' Plan expires ten years from the
date of grant. The option exercise price must be equal to 100% of the fair
market value of the Ultimate Stock on the date of grant of the option. Options
granted to directors under the Directors' Plan will be treated as non-statutory
stock options under the Code. To date, Ultimate had granted options to purchase
20,000 shares of Ultimate Stock under this plan (4,000 of which have been
canceled) at exercise prices ranging from $2.75 per share to $12.75 per share,
of which 8,000 options were exercisable as of January 31, 1997.
The Board of Directors may amend the Directors' Plan at any time or may
terminate such plan without approval of the stockholders. However, stockholder
approval is required for any amendment which increases the number of shares for
which options may be granted, changes the designation of the class of persons
eligible to participate or changes in any material respect the limitation or
provisions of the options subject to the Directors' Plan. However, no action by
the Board of Directors or stockholders may alter or impair any award previously
granted without the consent of the award holder.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by Ultimate to its
Chief Executive Officer and its four most highly compensated executive officers
whose salary and bonus exceeded $100,000, other than its Chief Executive
Officer, for services rendered for the fiscal years ended January 31, 1997,
1996, and 1995.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------
-------------------- SECURITIES
BONUS UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) ($)(1) OPTIONS(#) COMPENSATION($)(2)
- ---------------------------------------------------- ----------- --------- --------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
William J. Pearse................................... 1997 350,000 500 12,300(3) 9,606
Chairman and Chief 1996 350,000 -- -- 2,250
Executive Officer 1995 300,000 259,126 -- --
David J. Workman.................................... 1997 250,000 500 100,268(3) 10,445
Chief Operating Officer and President 1996 250,000 2,000 -- 2,346
1995 200,000 174,750 -- 250
Alan E. Kessock..................................... 1997 150,000 500 73,511(3) 9,781
Vice President, Chief 1996 150,000 2,000 -- 2,308
Financial Officer and Secretary 1995 140,000 122,295 -- 250
Neal A. Bobrick..................................... 1997 150,000 500 78,677(3) 9,983
Vice President--Sales 1996 150,000 2,000 -- 1,863
and Store Operations 1995 110,000 97,013 50,000(4) 489
J. Edward McEntire.................................. 1997 115,000 500 51,233(3) 686
Vice President-- 1996 115,000 7,000 50,000(4) --
Operations 1995 -- -- -- --
</TABLE>
- ------------------------
(1) Amounts reflect annual, quarterly and discretionary bonuses paid under
Ultimate's Bonus Plan.
(2) Consists of Ultimate's contributions pursuant to Ultimate's 401(k) defined
contribution plan.
(3) Represents all options granted to the named executive officer in fiscal
1997, net of options subsequently canceled during the year.
(4) These options were canceled in exchange for new options included in the
fiscal 1997 grants.
The executive officers of Ultimate are awarded annual bonuses from a bonus
pool in proportion to their salaries. In fiscal 1997 and 1996, the calculation
of the bonus pool was as follows: if pretax earnings exceeded 2.5% of net sales
but did not exceed 3.5% of net sales, the bonus pool was equal to 10% of the
pretax earnings in excess of 2.5% of net sales. If pretax earnings exceeded 3.5%
of net sales, the bonus pool was equal to 15% of the pretax earnings in excess
of 2.5% of net sales. For fiscal 1997 and 1996, pretax earnings did not exceed
2.5% of net sales, and as a result, no bonuses were paid to Ultimate's
executives from this bonus pool. Ultimate expects to adopt a similar plan in
fiscal 1998 based upon revised parameters, as well as a discretionary plan based
upon the meeting of certain goals.
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<PAGE>
OPTION GRANTS IN THE LAST FISCAL YEAR. The following table sets forth
information regarding options granted to the executives named in the Summary
Compensation Table above during the fiscal year ended January 31, 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM(6)
OPTIONS TO EMPLOYEES IN PRICE ($/ EXPIRATION --------------------
NAME GRANTED(#) FISCAL YEAR SHARE) DATE 5%($) 10%($)
- ------------------------------------------------- ------------- ----------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
William J. Pearse................................ 12,300(1) 3% 3.3000 02/01/01 4,305 13,407
22,500(2) -- 7.3563 02/01/01 -- --
David J. Workman................................. 93,000(3) 23% 3.0000 10/15/03 104,160 239,010
17,268(4) 4% 3.0000 02/01/06 28,492 70,281
22,500(5) -- 6.6875 02/01/06 -- --
Alan E. Kessock.................................. 61,667(3) 15% 3.0000 10/15/03 69,067 158,484
11,844(4) 3% 3.0000 02/01/06 19,543 48,205
15,000(5) -- 6.6875 02/01/06 -- --
Neal A. Bobrick.................................. 30,833(3) 8% 3.0000 10/15/03 34,533 79,241
36,000(3) 9% 3.0000 02/01/06 59,400 146,520
11,844(4) 3% 3.0000 02/01/06 19,543 48,205
15,000(5) -- 6.6875 02/01/06 -- --
J. Edward McEntire............................... 36,000(3) 9% 3.0000 02/01/06 59,400 146,520
11,844(4) 3% 3.0000 02/01/06 19,543 48,205
15,000(5) -- 6.6875 02/01/06 -- --
</TABLE>
- ------------------------------
(1) These options were granted on January 31, 1997 in exchange for certain
options granted on February 1, 1996--see note (2). These options will vest
and become exercisable in equal annual installments over the three years
following February 1, 1996.
(2) These options were granted on February 1, 1996 and would have become
exercisable in equal annual installments over the three years following
their date of grant. These options were canceled and exchanged for the stock
options described in note (1).
(3) These options were granted on January 31, 1997 in exchange for the
cancellation of options granted to these officers in fiscal 1994, 1995, and
1996. These options will vest and become exercisable in equal annual
installments over the six years following the date of grant of the options
for which they were exchanged.
(4) These options were granted on January 31, 1997 in exchange for certain
options granted on February 1, 1996--see note (5). These options will vest
and become exercisable in equal annual installments over the six years
following February 1, 1996.
(5) These options were granted on February 1, 1996 and would have become
exercisable in equal annual installments over the six years following their
date of grant. These options were canceled and exchanged for the stock
options described in footnote (4).
(6) Amounts reflect certain assumed rates of appreciation set forth in the
Commission's executive compensation disclosure rules. Actual gains, if any,
on stock option exercises, will depend on future performances of the
Ultimate Stock. No assurance can be made that the amounts reflected in these
columns will be achieved.
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<PAGE>
FISCAL YEAR-END OPTION VALUES. The following table sets forth information
concerning outstanding options held by the executives named in the Summary
Compensation Table above as of the fiscal year ended January 31, 1997. No
executive exercised any options during the fiscal year ending January 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR IN-THE- MONEY OPTIONS AT
END(#) FISCAL YEAR END($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- ----------------------------------------------------------- ------------------------ ---------------------------
<S> <C> <C>
William J. Pearse.......................................... 0 / 12,300 0 / 0
David J. Workman........................................... 46,500 / 63,768 0 / 0
Alan E. Kessock............................................ 30,833 / 42,678 0 / 0
Neal A. Bobrick............................................ 15,416 / 63,261 0 / 0
J. Edward McEntire......................................... 0 / 47,844 0 / 0
</TABLE>
- ------------------------
(1) These options are not in-the-money options as the exercise prices of these
options equal or exceed the fair market value of the common stock underlying
the options ($3.00 per share on the last trading day of the fiscal year).
EMPLOYMENT AGREEMENTS. Ultimate currently has no employment agreements with
any of its officers or employees. Four of Ultimate's officers, David J. Workman,
Alan E. Kessock, Neal A. Bobrick and J. Edward McEntire have each entered into a
non-compete agreement with Ultimate. Each agreement provides that none of Mr.
Workman, Mr. Kessock, Mr. Bobrick or Mr. McEntire, as the case may be, will work
for any competitor in particular geographic areas for two years after he
voluntarily leaves, or is terminated for cause by Ultimate.
EMPLOYEE STOCK OPTION PLAN. In August 1993, Ultimate adopted an employees'
stock option plan (the "Employees' Plan"). The purpose of the Employees' Plan is
to provide long-term incentives to Ultimate's officers, employees and
consultants. There are currently 900,000 shares of Ultimate Stock reserved for
issuance under the Employees' Plan.
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of
Ultimate Stock and options to purchase Ultimate Stock that are exercisable
within sixty days of April 9, 1997 held by (i) each person or group of persons
known by Ultimate to own beneficially five percent (5%) or more of the
outstanding shares of Ultimate Stock, (ii) each director of Ultimate, (iii) each
executive officer named in the Summary Compensation Table and (iv) all executive
officers and directors of Ultimate as a group. All information is taken from or
based upon ownership filings made by such persons with the Commission or
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<PAGE>
upon information provided by such persons to Ultimate. Unless otherwise
indicated, the stockholders listed below have sole voting and investment power
with respect to the shares reported as owned.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP CLASS
- ---------------------------------------------------------------- -------------------- ---------------
<S> <C> <C>
William J. Pearse (2)........................................... 1,124,100 16.1%
Barbara A. Pearse (3)........................................... 1,120,000 16.0%
Various family trusts of William and Barbara Pearse (4)......... 960,000 13.7%
David J. Workman (5)............................................ 51,830 *
Alan E. Kessock (6)............................................. 39,201 *
Neal A. Bobrick (7)............................................. 24,377 *
J. Edward McEntire (8).......................................... 15,574 *
Randall F. Bellows (9).......................................... 16,000 *
Robert Beale (10)............................................... 10,000 *
All directors and officers as a group (7 persons)............... 1,281,082 18.3%
</TABLE>
- ------------------------
* less than 1%.
(1) The address of each such persons, unless otherwise noted, is c/o Ultimate
Electronics, Inc., 321A W. 84th Avenue, Thornton, Colorado 80221.
(2) Includes 4,100 shares obtainable upon exercise of options granted pursuant
to the Employees' Plan and excludes 1,120,000 shares of Common Stock owned
by Mr. Pearse's wife, Barbara A. Pearse, as to which shares he may be deemed
a beneficial owner.
(3) Excludes 1,120,000 shares of Common Stock and 4,100 shares obtainable upon
exercise of options granted pursuant to the Employees' Plan owned by Ms.
Pearse's husband, William J. Pearse, as to which shares she may be deemed a
beneficial owner.
(4) Arthur Shenkin, 5251 DTC Parkway, Suite 1200, Englewood, Colorado 80111, is
the trustee of the various family trusts with sole voting and dispositive
power over the shares held in the trusts.
(5) Includes 49,378 shares obtainable upon exercise of options granted pursuant
to the Employees' Plan.
(6) Includes 32,808 shares obtainable upon exercise of options granted pursuant
to the Employees' Plan.
(7) Includes 23,391 shares obtainable upon exercise of options granted pursuant
to the Employees' Plan.
(8) Includes 7,974 shares obtainable upon exercise of options granted pursuant
to the Employees' Plan.
(9) Includes 4,000 shares obtainable upon exercise of options granted pursuant
to the Employees' Plan.
(10) Includes 8,000 shares obtainable upon exercise of options granted pursuant
to the Employees' Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Ultimate entered into a
lease agreement with William J. and Barbara A. Pearse (the "Lessors") on April
1, 1989 for the lease of Ultimate's store in Colorado Springs, Colorado. The
lease is for a term of 10 years and three months, commencing on April 1, 1989,
at an annual base rent of $97,500. Ultimate paid $110,337 in fiscal 1997 for the
property. In addition, Ultimate is responsible for all real property taxes and
insurance premiums on the property.
Ultimate entered into a lease agreement with the Lessors on October 13, 1989
for the lease of Ultimate's store in Fort Collins, Colorado. The lease is for a
term of 15 years, commencing on April 1, 1990, at an annual base rent of
$120,000. Commencing April 1, 1992, the rent increases annually at a rate equal
to the lesser of (i) $6,000 or (ii) an amount based upon the increase, if any,
over the prior year in the DCPI. Ultimate paid $140,400 in fiscal 1997 for the
property. Ultimate is also responsible for all real property taxes and insurance
premiums on the property.
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<PAGE>
Although Ultimate did not obtain independent appraisals in connection with
these transactions, Ultimate believes that the terms of all of the forgoing
transactions were comparable to the terms that Ultimate would have reached with
independent third parties. All future transactions with the Lessors or any other
affiliate of Ultimate will be subject to the approval of Ultimate's
disinterested directors and will be on terms believed by such directors to be no
less favorable to Ultimate than those available from unaffiliated third parties.
Jim Pearse, the son of William J. and Barbara A. Pearse, is employed by
Ultimate as a Marketing Manager. His total compensation (salary and bonus) in
fiscal 1997 was $79,022 and his total compensation for fiscal 1998 is likely to
exceed $60,000.
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<PAGE>
CERTAIN INFORMATION CONCERNING AUDIO KING
BUSINESS OF AUDIO KING
Audio King Corporation is a holding company which owns all of the
outstanding Common Stock of Audio King, Inc. (references herein to "Audio King"
refer collectively to both Audio King Corporation and Audio King, Inc. unless
specifically stated otherwise). Audio King operates consumer electronics
specialty stores that seek to attract discriminating consumers of home, car and
video electronics by offering such consumers a broad selection of competitively
priced name-brand products in comfortable store environments staffed with
professional sales consultants. Audio King also offers personalized services,
such as custom design and installation of home and automobile electronics
systems and repair services.
Audio King currently operates eleven specialty stores: six in
Minneapolis-St. Paul, Minnesota, and one store in each of Rochester and St.
Cloud, Minnesota, Sioux Falls, South Dakota and Des Moines and Cedar Rapids,
Iowa. In each of its stores, Audio King employs trained sales consultants and
emphasizes a high level of customer service before and after the sale. Audio
King's stores provide sophisticated displays and separate demonstration rooms in
modern, comfortable settings for home, car and video electronics. The Audio
Video Environments division of Audio King also operates a design showroom in
Edina, Minnesota, which offers custom design and installation of home
entertainment systems. In addition, Audio King currently operates Fast Trak
Electronics Repair Service Center, a merchandise clearance center which sells
merchandise received on trade-in and floor samples and an insurance replacement
division which services customer insurance claims.
BUSINESS STRATEGY
ADVERTISING AND PROMOTION. Audio King's advertising program consists
primarily of television, newspaper, direct mail and radio advertisements. It is
designed to appeal to value-driven, discriminating customers and emphasizes the
broad selection of high quality, competitively priced, name brand products and
specialized services offered by Audio King. Audio King's advertisements are
prepared by independent production companies and advertising agencies working in
conjunction with Audio King's own advertising personnel.
Net advertising expenditures and the corresponding percentage of net sales
were approximately $3.1 million (4.6%) during fiscal 1996, $2.4 million (4.2%)
during fiscal 1995 and $2.0 million (4.3%) for fiscal 1994. Certain advertising
expenditures made by Audio King are reimbursed through cooperative advertising
allowances and market development funds provided by certain vendors.
SUPPLIERS. Audio King currently purchases products from over fifty vendors
and has authorized dealer or vendor agreements with a majority of its suppliers.
However, such agreements can generally be terminated by either party with as
little as 30 days' notice. During the fiscal year ended June 30, 1996, sales of
Mitsubishi, Sony and Alpine products accounted for approximately 18%, 15% and
6%, respectively, of Audio King's net sales. Audio King has had a long-term
business relationship with each of these vendors and believes its current
relationship with each of them is good. There is no guarantee that Audio King
will be able to substitute the products of another vendor in the event the
products of one of these vendors were no longer available to it. If Audio King
lost one of its significant vendors, its business could be adversely affected.
Audio King is a member of Progressive Retailers Organization, Inc. ("PRO
Group"), a buying group formed by several independent audio and video specialty
retailers to provide competitive merchandise programs based on volume
purchasing. The PRO Group offers improved discounts, better access to
promotional products and the ability to earn additional rebates and credits than
would otherwise be available to Audio King if it purchased inventory directly
from manufacturers.
MANAGEMENT INFORMATION SYSTEM. Audio King uses a computerized system to
monitor operations and merchandise inventory through an industry specific
management information, accounting and inventory
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<PAGE>
control system. This system is designed to track each product, beginning with
the placement of the order, receipt in the warehouse, delivery to the store and
eventual sale to the customer. Audio King has integrated its data processing for
its service facility onto its mainframe computer system.
STORE OPERATIONS. Each store has a sales manager and two department
managers. Store sales managers receive base salaries, sales commissions and
performance bonuses. Sales and service personnel are compensated primarily on a
commission basis, which varies based on their individual productivity and
profitability. Audio King has developed training programs and coordinates
training by factory representatives to keep sales and service personnel informed
of new technologies and products.
Sales to customers are made primarily on a cash or credit card basis. Audio
King generally does not extend credit to customers; however, qualifying
customers may pay for their purchases in installments through arrangements with
independent consumer credit companies.
MARKETING STRATEGY. Audio King's marketing strategy is designed to attract
those customers for whom product price, quality, selection and service are the
primary considerations. As part of this strategy, management of Audio King has
developed a "promoting specialist" strategy for marketing consumer electronics.
The tactics to support this strategy include increasing product assortment,
increasing awareness through advertising and continuing to develop new services
and customer strategies. To implement this strategy, many of Audio King's
existing stores have been expanded to meet design criteria which Audio King
calls "the Audio King large store format."
Innovative aspects of this format include broad demonstration and
comparative capabilities for home audio, car audio and video products.
Additionally, this format also demonstrates to the customer how to integrate
both audio and video products. Audio King's marketing strategy also seeks to
build customer loyalty by offering a broad range of benefits, including trained
sales consultants, product performance plans, quarterly mailings, product
seminars, extensive car or home installation services and fast, competent repair
services.
During fiscal 1996, Audio King continued the execution of the "promoting
specialist" strategy it began in fiscal 1992. In order to implement this
strategy, management has expanded certain store locations and has closed others
which were not compatible with the overall objectives of the strategy. In
general, stores which had created excessive coverage of the marketplace have
been closed. Closure of these stores allowed other Audio King locations to serve
these market areas more effectively. During fiscal 1996, one store was relocated
and one store was expanded, bringing the total number of stores using the large
store format to nine of Audio King's eleven stores.
PRODUCTS AND SERVICES. Audio King offers a broad selection of high quality,
competitively priced, name brand, home entertainment electronics products. Its
product lines are designed to appeal to the middle market and more
discriminating or affluent buyer. Audio King's product lines include Adcom,
Alpine, Bang & Olufsen, Bose, Boston Acoustics, Canon, Canton, Denon, KEF,
Kenwood, Klipsch, Monster Cable, Mitsubishi, Panasonic, Pioneer, Polk, RCA, Sony
and Yamaha.
Audio King's products and services can be grouped into four major
categories: audio components and systems, automobile audio systems, video
products, and customer services and repair. A majority of the audio products
sold by Audio King are offered on a limited distribution basis in its market
area; however, the video products sold by it generally have broader
distribution, including selected department/chain stores and electronic
superstores. Audio King's automobile audio products are offered on both a
limited and broad distribution basis.
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<PAGE>
The table below shows the approximate percentage of net sales for each of
the principal product and service groups for Audio King during fiscal years
1996, 1995 and 1994.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-------------------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Audio components and systems............................................................... 31% 32% 33%
Automobile audio products.................................................................. 24% 25% 25%
Video Products............................................................................. 35% 34% 29%
Customer services and repair............................................................... 10% 9% 13%
</TABLE>
The percentage of net sales for each product and service group is affected
by consumer trends, promotional activities, the development and introduction of
new products, the availability of products and seasonal factors. The increase in
sales of video products is largely the result of increased emphasis on sales of
these products resulting from the promoting specialist strategy and changes in
consumer preferences. The percentages set forth above are not necessarily
indicative of the relative contribution to net income for each product and
service group.
CUSTOMER SERVICE. Audio King provides warranty and nonwarranty repair of
consumer electronics products through its wholly owned subsidiary, Specialty
Home Electronics Repair, Inc. ("SHER"). SHER, which operates under the name Fast
Trak Electronic Repair Service, is an independent service center which provides
repair services on a fee basis for customers and receives reimbursement from
manufacturers for warranty repair. In addition, Audio King installs automobile
audio systems at certain stores and provides delivery and installation on
certain of its products, such as large screen televisions.
COMPETITION. The home entertainment market is highly competitive, with
product selection, quality, service and price being the main competitive
factors. Audio King's competitors are mass merchandising stores, including
electronics superstores, department/chain stores and other specialty consumer
electronics stores. The mass merchandising stores, electronics superstores and
department/chain stores generally compete on the basis of price and advertising.
In the Minneapolis-St. Paul, Minnesota area, Audio King's principal competitors
are Best Buy Company, Circuit City, Montgomery Wards, Sears, Walmart, Kmart and
Target. Audio King believes its primary market is the more discriminating or
affluent customer who is more concerned with product quality, selection and
service than price. Audio King competes with mass merchandising stores,
electronics superstores and department/chain stores by offering higher quality
products, more knowledgeable sales staff and personalized service. Audio King
competes with other specialty consumer electronics stores on the basis of a
broader selection of high quality products, more store locations and
advertising.
EMPLOYEES. As of February 28, 1997, Audio King employed 351 persons, of
which 46 were salaried, 86 were compensated on an hourly basis and 219 were
compensated on a commission basis. Of its employees, 29 were employed in Audio
King's corporate headquarters, 46 in service and repair and 21 in its warehouse
and distribution facility, with the balance employed in Audio King's retail
locations. Audio King's employees are not covered by any collective bargaining
agreements, and Audio King believes its employee relationships are good.
TRADEMARKS. Audio King has registered the "Audio King" and "FastTrak" trade
names in the United States Patent and Trademark Office. In addition, the trade
name "Audio Video Environments" has been registered in Minnesota and South
Dakota.
PROPERTY. Generally, the leases for Audio King's retail locations provide
for either base rental with an annual percentage increase or a fixed minimum
rent together with a percentage of net sales. In addition, the leases require
Audio King to pay a pro rata portion of the real estate taxes and assessments,
utilities, insurance and common area and other maintenance costs. Audio King
leases its retail locations,
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which range in size from approximately 3,000 to 28,000 square feet. The majority
of these retail locations are located in shopping centers and regional malls.
Audio King leases 45,000 square feet for its headquarters, warehouse and
repair facilities. The lease for this facility provides for monthly payments of
$21,396 and expires February 28, 2002. Lease expense for all retail locations
and other facilities paid by Audio King for the fiscal years ended June 30,
1996, 1995 and 1994 aggregated $1,819,000, $1,395,000 and $1,285,000,
respectively.
The following table provides certain information concerning Audio King's
specialty retail locations, clearance center and design showroom:
<TABLE>
<CAPTION>
APPROXIMATE
RETAIL
YEAR APPROXIMATE SELLING LEASE
ORIGINALLY TOTAL SQUARE SQUARE EXPIRATION
CURRENT STORE LOCATIONS OPENED FEET FEET(1) DATE (2)
- ----------------------------------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
IOWA:
Cedar Rapids Store 1995 15,400 11,600 2015
4701 1st Avenue Southeast
Cedar Rapids, IA52402
Des Moines Store 1994 20,000 12,000 2009
4100 Merle Hay Road
Des Moines, IA
MINNESOTA:
Brookdale Store 1980 15,000 9,000 2008
5939 John Martin Drive
Brooklyn Center, MN
Burnsville Store (3) 1979 10,000 6,500 1999
14232 Burnhaven Drive
Burnsville, MN
Maplewood Store 1989 9,340 6,000 2004
1868 Beam Avenue
Maplewood, MN
Ridgedale Store (3) 1977 15,000 9,000 2008
12350 Wayzata Boulevard
Minnetonka, MN
Rochester Store 1986 3,150 2,700 1997
103 Apache Mall
Rochester, MN
Rosedale Store (3) 1977 17,000 13,500 2015
1723 West County Road B-2
Roseville, MN
Southdale Store (3) 1974 28,000 20,000 2015
7435 France Avenue South
Minneapolis, MN
St. Cloud Store 1987 10,000 6,300 2001
2716 Division Street
St. Cloud, MN
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
RETAIL
YEAR APPROXIMATE SELLING LEASE
ORIGINALLY TOTAL SQUARE SQUARE EXPIRATION
CURRENT STORE LOCATIONS OPENED FEET FEET(1) DATE (2)
- ----------------------------------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
St. Louis Park 1986 1,850 1,700 1997
Clearance Center
4818 Excelsior Boulevard
St. Louis Park, MN
SOUTH DAKOTA:
Sioux Falls Store 1986 3,138 2,388 1999
701 Empire Mall
Sioux Falls, SD
</TABLE>
- ------------------------------
(1) The retail selling area square footage is exclusive of merchandise storage
areas and car installation bays.
(2) Including renewal options.
(3) The retail location is located in a shopping center adjacent to the regional
shopping center with such name.
LEGAL PROCEEDINGS
There are no pending legal proceedings other than ordinary routine
litigation incidental to the business of Audio King.
SEASONALITY
Audio King's business historically has been subject to seasonal
fluctuations, with the highest sales activity occurring during Audio King's
second fiscal quarter (October, November, December). This quarter contains the
Christmas season.
EMPLOYEE STOCK OPTION PLAN
The stock option program is Audio King's long-term incentive plan for
executive officers and key managers. The objectives of the program are to align
executive and shareholder long-term interests by creating a strong and direct
link between executive pay and shareholder return, and to enable executives to
develop and maintain a significant, long-term ownership position in Audio King
Stock.
The 1994 Stock Option Plan authorizes a committee of disinterested directors
to award key executives stock options. Stock option grants are considered
annually at an option price equal to the fair market value of Audio King Stock
on the date of the grant, have ten-year terms and may have vesting requirements
over a five-year period. Both the amounts of the awards and the proportion of
stock options increase as a function of higher salary and position in Audio
King. Awards are made at a level calculated to be competitive within the
electronics and retail industries as well as a broader group of companies of
comparable size and complexity.
401(K) SAVINGS PLAN
Audio King sponsors a 401(k) Savings Plan (the "401(k) Plan"). Employees of
Audio King are eligible to participate in the 401(k) Plan after reaching age 21
and after completing 1,000 hours of service during a 12-month period.
Under the 401(k) Plan, eligible employees are permitted to defer up to 20%
of their compensation limited by: (i) the maximum amount which can be deferred
for federal income tax purposes, (ii) the maximum amount which will not cause
the 401(k) Plan to violate any non-discrimination rules or (iii) the amount
which would not cause the 401(k) Plan to exceed the maximum amount allowable as
a deduction under Section 404 of the Code. The maximum allowable deferral for
any one employee in 1997 is $9,500.
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Subject to certain restrictions, contributions to the 401(k) Plan will be
invested by the trustees of the 401(k) Plan in their discretion in various
investment funds including Audio King securities.
Each plan year, Audio King may match employee contributions in its
discretion if the employee has completed 1,000 hours of service in the plan year
and is an Audio King employee on the last day of the plan year. During fiscal
1996, Audio King contributed $37,449 to the 401(k) Plan as matching
contributions.
Salary deferral contributions are always 100% vested. Matching contributions
are fully vested after seven years of employment. Participants or their
beneficiaries (in the case of the participant's death) are entitled to payment
of benefits: (i) upon retirement either at age 55 with seven years of employment
with Audio King or at age 65, (ii) upon death or disability or (iii) upon
termination of employment, if the participant elects to receive a distribution
of his or her account balance prior to one of the events listed in (i) or (ii)
above. In addition, hardship distributions to participants from the 401(k) Plan
are available under certain conditions. The amount of benefits ultimately
payable to a participant under the 401(k) Plan depends on the performance of the
funds in which a participant's contributions are invested.
86
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of Audio King Stock as of March 31, 1997, by (i) each
shareholder who is known by Audio King to beneficially own more than 5% of the
outstanding shares of Audio King Stock, (ii) each director of Audio King, (iii)
the Chief Executive Officer and each of the four next most highly paid executive
officers whose salaries exceed $100,000, and (iv) all directors and executive
officers of Audio King as a group. Unless otherwise indicated, all person have
sole voting and investment power over such shares.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO MERGER
---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT
- -------------------------------------------------------------------------- ---------- ---------
<S> <C> <C>
Randel S. Carlock(1) 300,478 10.7%
1817 Knox Avenue South
Minneapolis, Minnesota 55403
Gary S. Kohler(2) 423,334 15.0%
5140 Norwest Center
Minneapolis, Minnesota 55402
First Bank System, Inc.(3) 302,500 10.8%
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
Henry G. Thorne (4)(5) 148,165 5.1%
Sherman A. Swenson(4)(6) 41,000 1.4%
Barry R. Rubin(4)(7) 37,000 1.3%
Samuel S. Nichols(4)(8) 58,566 2.1%
M. Phillip Ward(4)(9) 55,250 2.0%
All Executive Officers and Directors as a Group 1,092,509 35.7%
(10 persons)(4)(10)
</TABLE>
- ------------------------
(1) Includes 7,825 shares that Mr. Carlock may purchase upon exercise of
options, which are currently exercisable, and 15,000 shares held by the
Carlock Family Foundation; Mr. Carlock in his capacity as director, shares
the voting and dispositive power over the shares.
(2) Includes 393,334 shares held by Okabena Partnership K, a Minnesota
partnership, which partnership holds 14.1% of the outstanding shares of
Audio King. Mr. Kohler, in his capacity as Vice President of Okabena
Company, shares voting and dispositive power authority over such shares.
Includes 30,000 shares which may be purchased upon exercise of options that
are currently exercisable.
(3) Represents shares held by First Trust National Association and First Bank
National Association, subsidiaries of First Bank System, Inc.,which shares
are held for the beneficial ownership of various trust or agency accounts
for which the respective holder is trustee and acts in a fiduciary capacity,
having sole voting and investment power over the shares. Audio King has
relied upon information set forth in a Schedule 13G dated February 13, 1997
filed with the Commission by First Bank Systems, Inc.
(4) The address of each such person is c/o Audio King, 3501 S. Hwy 100,
Minneapolis, Minnesota 55416.
(5) Includes 115,750 shares which may be purchased by Mr. Thorne upon exercise
of options that are currently exercisable and 3,015 shares held in Audio
King's 401(k) plan as of December 31, 1996.
(6) Includes 40,000 shares that may be purchased by Mr. Swenson upon exercise of
options which are currently exercisable.
(7) Includes 37,000 shares that may be purchased by Mr. Rubin upon exercise of
options which are currently exercisable.
(8) Includes 25,450 shares that may be purchased by Mr. Nichols upon exercise of
options which are currently exercisable.
(9) Includes 25,450 shares that may be purchased by Mr. Ward upon exercise of
options which are currently exercisable and 674 shares held in Audio King's
401(k) plan as of December 31, 1996.
(10) Includes 304,291 shares that may be purchased by executive officers and
directors upon exercise of options which are currently exercisable or become
exercisable within 60 days of the record date for vote on the Merger and
3,811 shares held in Audio King's 401(k) plan as of December 31, 1996
87
<PAGE>
DESCRIPTION OF ULTIMATE STOCK
The authorized capital stock of Ultimate consists of 10,000,000 shares of
Stock, $0.01 par value per share, of which, as of April 9, 1997, 6,995,000
shares were outstanding and 10,000,000 shares of preferred stock, $0.01 par
value per share (the "Preferred Stock"), none of which is outstanding. The
following description of the capital stock of Ultimate and certain provisions of
the Ultimate Certificate and Bylaws are qualified in their entirety by reference
to such documents, copies of which have been previously filed with the
Commission. As of April 9, 1997, Ultimate Stock was held of record by
approximately 2,860 stockholders.
COMMON STOCK
Holders of Ultimate Stock are entitled to one vote for each share held on
all matters submitted to a vote of the shareholders, including the election of
directors. Accordingly, holders of a majority of the shares of Ultimate Stock
entitled to vote in any election of directors may elect all of the directors
standing for election if they choose to do so. The Ultimate Certificate does not
provide for cumulative voting for the election of directors. Holders of Ultimate
Stock are entitled to receive ratably such dividends, if any, as may be declared
from time-to-time by the Ultimate Board of Directors out of funds legally
available therefor, and are entitled to receive, pro rata, all assets of
Ultimate available for distribution to such holders upon liquidation. Holders of
Ultimate Stock have no preemptive, subscription or redemption rights.
PREFERRED STOCK
Pursuant to the Ultimate Certificate, Ultimate is authorized to issue
10,000,000 shares of Preferred Stock, which may be issued from time-to-time in
one or more series upon authorization by Ultimate Board. The Ultimate Board,
without further approval of the stockholders, are authorized to fix the dividend
rights and terms, conversion rights, voting rights, redemption rights and terms,
liquidation preferences, and any other rights, preferences, privileges and
restrictions applicable to each series of the Preferred Stock. The issuance of
Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes could, among other things, adversely
affect the voting power of the holders of Ultimate Stock and, under certain
circumstances, make it more difficult for a third party to gain control of
Ultimate and discourage bids for Ultimate Stock at a premium or otherwise
adversely affect the market price of the Ultimate Stock.
In connection with the issuance of the Rights (described below), 500,000
shares of Preferred Stock were designated as "Series A Junior Participating
Preferred Stock." Shares of that series could become issuable under certain
circumstances if the Rights become exercisable and are exercised.
Ultimate has no current plans to issue any Preferred Stock other than any
shares that may become issuable in connection with the Rights Agreement.
Ultimate is not aware of any plans by a third party to seek control of Ultimate.
STOCKHOLDER RIGHTS PLAN
On January 31, 1995, the Ultimate Board declared a dividend of one right to
purchase preferred stock (a "Right") for each outstanding share of Ultimate
Stock to stockholders of record at the close of business on February 10, 1995.
Each share of subsequently issued Ultimate Stock, including each share of
Ultimate Stock offered hereby, will also incorporate one Right. The Rights will
expire on February 10, 2005. Each Right will entitle stockholders, in certain
circumstances, to buy one-hundredth of a newly issued share of Series A Junior
Participating Preferred Stock (the "Junior Preferred Stock") of Ultimate at the
initial purchase price of $75.00 per share.
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<PAGE>
The Rights will be exercisable and transferable apart from the Ultimate
Stock only if a person or group (other than certain exempt persons) acquires
beneficial ownership of 15% or more of the Ultimate Stock, or commences a tender
or exchange offer upon consummation of which such person or group would
beneficially own 15% or more of the Ultimate Stock.
Ultimate will generally be entitled to redeem the Rights at $.001 per Right
at any time until a person or group (other than certain exempt persons) has
become the beneficial owner of 15% or more of the Ultimate Stock. Under the
Rights "flip-in" feature, if any such person or group becomes the beneficial
owner of 15% or more of the Ultimate Stock, then each Right not owned by such
person or group of certain related parties will entitle its holder to purchase,
at the Right's then current purchase price, shares of Ultimate Stock (or in
certain circumstances as determined by the Ultimate Board, cash, other property
or other securities) having a value of twice the Right's purchase price.
Under the Rights "flip-over" provision, if, after any other person or group
(other than certain exempt persons) becomes the beneficial owner of 15% or more
of the Ultimate Stock, Ultimate is involved in a merger or other business
combination transaction with another person, or sells 25% or more of its assets
or earning power in one or more transactions, each Right will entitle its holder
to purchase, at the Right's then current purchase price, shares of Ultimate
Stock of such other person having a value of twice the Right's purchase price.
The Junior Preferred Stock will not be redeemable and, unless otherwise
provided in connection with the creation of a subsequent series of preferred
stock, will be subordinate to all other series of Ultimate's preferred stock.
Each share of Junior Preferred Stock will represent the right to receive, when
and if declared, a quarterly dividend at an annual rate equal to the greater of
$1.00 per share or 100 times the quarterly per share cash dividends declared on
the Ultimate Stock during the immediately preceding fiscal year. In addition,
each share of Junior Preferred Stock will represent the right to receive 100
times any noncash dividends (other than dividends payable in Ultimate Stock)
declared on the Ultimate Stock, in like kind. In the event of the liquidation,
dissolution or winding up of Ultimate, each share of Junior Preferred Stock will
represent the right to receive a liquidation payment in an amount equal to the
greater of $1.00 per share or 100 times the liquidation payment made per share
of Ultimate Stock. Each share of Junior Preferred Stock will have 100 votes,
voting together with the Ultimate Stock. In the event of any merger,
consolidation, or other transaction in which common shares are exchanged, each
share of Junior Preferred Stock represents the right to receive 100 times the
amount received per share of Ultimate Stock. The rights of the Junior Preferred
Stock as to dividends, liquidation, voting rights and merger participation are
protected by anti-dilution provisions.
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COMPARISON OF RIGHTS OF HOLDERS OF ULTIMATE STOCK
AND HOLDERS OF AUDIO KING STOCK
GENERAL
Ultimate is incorporated in the State of Delaware and Audio King is
incorporated in the State of Minnesota. The rights of Audio King shareholders
are governed by the laws of the State of Minnesota and by the Articles of
Incorporation and Bylaws of Audio King (the "Audio King Articles" and the "Audio
King Bylaws," respectively). Upon consummation of the Merger, the shareholders
of Audio King who elect to receive shares of Ultimate Stock will have their
rights governed by the laws of the State of Delaware and by the Ultimate
Certificate and Bylaws of Ultimate (the "Ultimate Bylaws").
The following is a summary of certain material differences between the
rights of Audio King shareholders and Ultimate stockholders. This summary
includes the material elements of the provisions discussed, but is not intended
to be relied upon as an exhaustive list or a detailed description of such
provisions and is qualified in its entirety by reference to the DGCL, the MBCA,
the Ultimate Certificate, the Ultimate Bylaws, the Audio King Articles and the
Audio King Bylaws. See "Available Information."
AUTHORIZED CAPITAL STOCK
The DGCL requires that a corporation's certificate of incorporation set
forth the total number of shares of all classes of stock that the corporation
has authority to issue and a statement of the powers, rights, preferences,
qualifications, limitations and restrictions thereof. The Ultimate Certificate
provides that Ultimate has the authority to issue 20,000,000 shares, of which
10,000,000 are common stock, each share with a par value of $.01 and 10,000,000
are preferred stock, each share with a par value of $.01.
The MBCA requires that a corporation's articles of incorporation set forth
the aggregate number of shares of stock that the corporation has authority to
issue, and, if separate classes or series are to be issued, the articles must
set forth (or allow the board to establish) the classes or series into which
such stock may be divided and the number of shares of each class which the
corporation is authorized to issue and, if there is more than one class or
series, the relative rights and preferences of each class or series. The Audio
King Articles provide that Audio King has authority to issue 12,000,000 shares,
of which 6,000,000 are common stock, each share with a par value of $.001, and
6,000,000 are preferred stock, without par value.
STOCKHOLDER APPROVED PREFERRED STOCK
The DGCL permits a corporation's certificate of incorporation to allow its
board of directors to issue, without stockholder approval, series of preferred
stock and to designate their rights, preferences, privileges and restrictions
thereto. The Ultimate Certificate grants such power to the Ultimate Board. In
connection with the issuance of the Rights (described above), 500,000 shares of
Preferred Stock were designated as "Series A Junior Participating Preferred
Stock." Shares of that series could become issuable under certain circumstances
if the Rights become exercisable and are exercised.
The MBCA permits a corporation's certificate of incorporation to allow a
corporation's board of directors to determine the designation of a class or
series and to fix the relative rights and preferences of each class or series of
stock. The Audio King Articles grant such power to the Audio King Board. The
Audio King Board has not designated a series of preferred stock and no preferred
stock has otherwise been issued by Audio King.
VOTING RIGHTS
The DGCL states that, unless a corporation's certificate of incorporation
or, with respect to clauses (ii) and (iii) below, the bylaws specify otherwise:
(i) each share of the corporation's capital stock is entitled to one vote, (ii)
a majority of voting power of the shares entitled to vote, present in person or
represented by proxy shall constitute a quorum at a stockholder meeting and
(iii) in all matters other than the election
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of directors, the affirmative vote of the majority of the voting power of
shares, present in person or represented by proxy at the meeting or entitled to
vote on the subject matter, shall be the act of stockholders. The holders of
shares of Ultimate Stock are entitled to one vote per share on all matters to be
voted upon by stockholders of Ultimate.
The MBCA provides that, unless a corporation's articles of incorporation or,
in the case of clause (A), the terms of the shares specify otherwise: (A) each
share of its capital stock is entitled to one vote, (B) a majority of voting
power of shares entitled to vote constitutes a quorum and (C) action on a matter
is approved by the affirmative vote of the holders of the greater of (i) the
majority of the voting power of shares present and entitled to vote on such
matters or (ii) a majority of the voting power of the minimum number of shares
entitled to vote that would constitute a quorum. For the transaction of business
at the meeting at which such matter is considered. Holders of Audio King Stock
are entitled to one vote per share on all matters to be voted on by holders of
Audio King Stock.
VOTE ON MERGERS AND SALES OF SUBSTANTIALLY ALL CORPORATE ASSETS
Under the DGCL, mergers must be approved by a corporation's board of
directors and generally require the approval of the holders of a majority of the
outstanding stock of each of the merging corporations entitled to vote thereon.
Unless otherwise required in a corporation's certificate of incorporation, the
DGCL does not require a stockholder vote of the surviving corporation in a
merger if: (i) the merger agreement does not amend the existing certificate of
incorporation of the surviving corporation, (ii) each share of the surviving
corporation outstanding before the merger is an identical outstanding or
treasury share after the merger and (iii) either no shares of common stock of
the surviving corporation and no securities convertible into such stock are to
be issued in the merger or the number of shares to be issued by the surviving
corporation in the merger plus those initially issuable upon conversion of any
other securities does not exceed 20% of the shares outstanding immediately prior
to the merger.
A disposition of all or substantially all of a corporation's assets must be
approved by a corporation's board of directors and requires the approval of the
holders of a majority of the outstanding stock of the corporation entitled to
vote thereon.
Neither the Ultimate Certificate nor the Ultimate Bylaws contain any
additional provisions relating to mergers or sales of substantially all
corporate assets.
The MBCA also generally requires approval of any merger or sale of
substantially all the assets of a corporation that is not in the ordinary course
of business by a corporation's board of directors and by a majority of the
voting power of all shares entitled to vote. The articles of incorporation of a
Minnesota corporation may provide for a greater vote, but the Audio King
Articles do not contain such a provision.
DISSENTERS' RIGHTS
Under the DGCL, holders of shares have the right, in certain circumstances,
to dissent from certain merger or consolidation transactions and seek an
appraisal of the fair value of such shares (exclusive of any increase in share
value resulting from the consummation or expectation of the merger or
consolidation), as determined by the Delaware Court of Chancery in an action
timely brought by the corporation or such holders. The DGCL grants appraisal
rights to the shares of any class of a constituent corporation in a statutory
merger or consolidation subject to the appraisal statute, provided stockholders
are not required by the terms of the merger or consolidation to accept anything
in consideration other than (i) shares of stock of the surviving corporation,
(ii) shares of stock of another corporation which are listed on a national
securities exchange or designated by Nasdaq or held of record by more than 2,000
stockholders or (iii) cash in lieu of fractional shares of such stock, or any
combination thereof. Notwithstanding the above, such shareholder appraisal
rights are not available for: (i) shares of stock of the surviving corporation
if no vote of its stockholders is required for such transaction under the DGCL,
(ii) shares of stock listed on a national securities exchange or designated as a
national market system security on the Nasdaq National Market or
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(iii) held of record by more than 2,000 stockholders. The DGCL also permits a
corporation to grant in its certificate of incorporation appraisal rights in
connection with transactions other than statutory mergers and consolidations
otherwise subject to the foregoing provisions.
Neither the Ultimate Articles nor the Ultimate Bylaws contain any additional
provision relating to dissenters' rights of appraisal.
The MBCA grants shareholders the right to dissent and receive payment of the
fair value of their shares in the event of (i) certain amendments or changes to
the articles of incorporation adversely affecting their shares, (ii) a sale,
lease, transfer or other disposition of substantially all of the assets of the
corporation, (iii) a plan of merger or exchange and (iv) any other corporate
action taken pursuant to a shareholder vote with respect to which the articles,
the bylaws or a resolution approved by the board of directors directs that
dissenting shareholders may obtain payment for their shares. The Audio King
Articles and Audio King Bylaws do not modify this provision on dissenters'
rights.
DIVIDENDS AND OTHER DISTRIBUTIONS
The DGCL permits a corporation, subject to any restrictions in its
certificate of incorporation, to declare and pay dividends out of surplus or, if
there is no surplus, out of net profits for the fiscal year in which the
dividend is declared and/or for the preceding fiscal year as long as the amount
of capital of the corporation is not less than the aggregate amount of the
capital represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets. In addition, subject to certain
limitations, the DGCL generally provides that a corporation may redeem or
repurchase its shares if the capital of the corporation is not impaired or such
redemption or repurchase would not impair the capital of the corporation.
Neither the Ultimate Certificate nor the Ultimate Bylaws contain
restrictions on the payment of dividends or the repurchase of shares.
The MBCA permits the Audio King Board to declare dividends without
stockholder approval so long as the corporation will be able to pay its debts in
the ordinary course of business after making the distribution. Neither the Audio
King Articles nor the Audio King Bylaws contain restrictions on the payment of
dividends.
AMENDMENT OF CERTIFICATE OR ARTICLES OF INCORPORATION; AMENDMENT OF BYLAWS
Under the DGCL, an amendment to a corporation's certificate of incorporation
must be approved by a resolution of the board of directors declaring the
advisability of the amendment and by the affirmative vote of a majority of the
outstanding stock entitled to vote thereon and by a majority of the outstanding
stock of each class entitled to vote thereon as a class. Under the DGCL, the
holders of the outstanding shares of a class are entitled to vote as a separate
class on a proposed amendment that would increase or decrease the aggregate
number of authorized shares of such class, increase or decrease the par value of
the shares of such class or alter or change the powers, preferences or special
rights of the shares of such class so as to affect them adversely. If any
proposed amendment would alter or change the powers, preferences or special
rights of one or more series of any class so as to affect them adversely, but
would not so affect the entire class, then only the shares of the series so
affected by the amendment will be considered a separate class for purposes of
voting by classes. Under the DGCL, a provision in a corporation's certificate of
incorporation requiring a super-majority vote of the board of directors,
stockholders or holders of any other securities having voting power may be
amended only by such super-majority vote.
The DGCL provides that stockholders may amend the bylaws of a corporation
and that the corporation may, in its certificate of incorporation, also confer
such power upon the board of directors.
The Ultimate Bylaws provide that a majority vote of stockholders, or a
majority vote of the directors present at any meeting, may amend or alter any
provision of the Bylaws, provided that in the notice of a
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special meeting of stockholders, notice of such purpose is given. The Ultimate
Certificate expressly authorizes the Ultimate Board to alter the Ultimate
Bylaws, but the Ultimate Board cannot amend or repeal the Bylaws in a manner
that will divest the stockholders of their power to amend or repeal the Bylaws.
The Ultimate Certificate does not contain provisions requiring a vote greater
than that specified in the DGCL to amend the Ultimate Certificate.
The MBCA provides that a corporation's articles may be amended by the
holders of the greater of (1) a majority of the voting power of the shares
present and entitled to vote at a meeting of shareholders, or (2) a majority of
the voting power of the minimum number of shares entitled to vote that would
constitute a quorum for the transaction of business at the meeting unless a
greater proportion is required by such articles. The Audio King Articles do not
require a greater proportion.
The MBCA provides that a corporation's bylaws may be amended by the holders
of the greater of (1) a majority of the voting power of the shares present and
entitled to vote at a meeting of shareholders, or (2) a majority of the voting
power of the minimum number of shares entitled to vote that would constitute a
quorum for the transaction of business at the meeting unless a greater
proportion is specified. The Audio King Bylaws provide that they may be amended
by the majority vote of the Audio King Board, subject to the power of Audio King
shareholders to change or repeal such Bylaws.
ACTION BY WRITTEN CONSENT
Under the DGCL, unless otherwise provided in a corporation's certificate of
incorporation, any action that may be taken at any annual or special meeting of
stockholders may be taken without a meeting without prior notice and without a
vote, if a consent or consents in writing, setting forth the action so taken, is
signed by the holders of outstanding shares having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
The Ultimate Certificate provides that no action that requires the consent
of stockholders of the corporation may be taken without a meeting and vote of
stockholders.
The MBCA provides that any action required or permitted to be taken at any
meeting of the shareholders may be taken without a meeting if all shareholders
entitled to vote on the matter consent to the action in writing. The Audio King
Bylaws provide for shareholder action by written consent provided that the
conditions set forth in the MBCA are satisfied.
SPECIAL MEETING OF STOCKHOLDERS
Under the DGCL, special stockholder meetings may be called by the board of
directors and by any person or persons authorized to do so by the certificate of
incorporation or bylaws.
The Ultimate Certificate and Ultimate Bylaws provide that special meetings
of the stockholders may be called only by the chairman of the board of
directors, the chief executive officer, the president or the board of directors
pursuant to a resolution approved by a majority of the entire board of
directors.
The MBCA provides that special meetings of shareholders may be called by:
(i) the chief executive officer; (ii) the chief financial officer; (iii) two or
more directors; (iv) shareholders holding 10% or more of the voting power of all
shares entitled to vote (except that the voting power needed to demand a special
meeting to directly or indirectly effect a business combination is 25%); or (v)
any other person authorized in the articles or by-laws. The Audio King Bylaws
provide that special meetings of shareholders may be called by the chairman of
the board and chief executive officer, the president, the board of directors or
by any two or more members thereof, or by one or more of the holders of not less
than ten percent (10%) of the outstanding shares of Audio King Stock entitled to
vote at the particular meeting.
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ELECTION OF BOARD OF DIRECTORS
The DGCL provides that a corporation's directors shall be elected by a
plurality of the voters of the shares present in person or represented by proxy
at a meeting and entitled to vote on the election of directors. Neither the
Ultimate Bylaws nor the Ultimate Certificate contain provisions requiring a
greater vote for the election of directors than is required under the DGCL.
Under the DGCL, cumulative voting rights must be provided in a corporation's
certificate of incorporation if stockholders are to be entitled to cumulative
voting rights. Neither the Ultimate Certificate nor the Ultimate Bylaws provide
for cumulative voting.
Under the MBCA, the method of election for directors may be imposed by or in
the manner provided in the articles of incorporation and by-laws. The Audio King
Bylaws provide that any vacancy occurring on the Audio King Board may be filled
by the affirmative vote of the majority of the remaining directors although less
than a quorum. Any such person so elected will be a director until his successor
is elected and qualified. The directors hold their respective offices for an
indefinite term that expires at the next regular meeting of the shareholders.
The MBCA provides that unless the articles of incorporation provide otherwise,
the shareholders of a corporation can elect directors by cumulative voting. The
Audio King Articles provide that there shall be no cumulative voting.
CLASSIFICATION OF THE BOARD
The DGCL and MBCA permit the adoption of a "classified" board of directors
with staggered terms under which part of the board of directors is elected each
year for a maximum term of three years. The DGCL authorizes removal of a member
of a classified board by the stockholders only for cause.
The Ultimate Certificate provides for classified directors. The directors of
Ultimate are divided into three classes designated Class I, Class II and Class
III. Each class consists, as nearly as possible, of one-third the total number
of directors. Directors in each class are elected for a three-year term. A
director may only be removed with cause.
The MBCA permits a corporation to divide its directors into classes as
provided in its articles of incorporation and by-laws. Neither the Audio King
Articles nor the Audio King Bylaws provides for staggered terms for directors. A
director may be removed with or without cause.
NUMBER AND QUALIFICATION OF DIRECTORS
Under the DGCL, the minimum number of directors is one. The DGCL provides
that the number of directors shall be fixed by, or in the manner provided in,
the bylaws of a corporation unless the number of directors is fixed in the
corporation's certificate of incorporation, in which case a change in the number
of directors can be made only if the stockholders approve an amendment to the
certificate of incorporation.
The Ultimate Bylaws together with the Ultimate Certificate provides for the
number of directors to be fixed from time to time exclusively by resolutions
adopted by the Ultimate Board, PROVIDED, HOWEVER, that the number of directors
shall at no time be less than three nor greater than eleven and further provided
that no decrease in the number of directors constituting the board shall shorten
the term of any incumbent director.
Nominations for the election of directors may be made by the Ultimate Board
or a committee appointed by the Ultimate Board or by any stockholder entitled to
vote in the election of directors generally, provided that, any stockholder
nominating one or more persons for election as director may do so only if
written notice of such stockholder's intent to make such nomination or
nominations has been given to the secretary of Ultimate no later than: (i) the
anniversary date of the immediately preceding annual meeting and (ii) with
respect to an election to be held at a special meeting of stockholders for the
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election of directors, the close of business on the tenth day following the date
on which notice of such meeting is first given to stockholders.
Under the MBCA, a board of directors may consist of one or more directors.
The MBCA also provides that the number of directors must be fixed by, or in the
manner provided in, the articles of incorporation or bylaws.
The Audio King Bylaws provide that the Audio King Board will consist of
three or more members and that at each regular meeting the shareholders shall
determine the number of directors; provided, that between regular meetings the
authorized number of directors may be increased or decreased (to not less than
three members) by the shareholders or increased by the Audio King Board. Each
director serves for an indefinite term that expires at the next regular meeting
of shareholders, and until his successor is elected and qualified, or until his
earlier death, resignation, disqualification, or removal as provided by the
MBCA.
TRANSACTIONS INVOLVING OFFICERS OR DIRECTORS OR INTERESTED SHAREHOLDERS
Under the DGCL, no contract or transaction between a corporation and one or
more of its directors or officers, or between a corporation and any other entity
in which one or more of its directors or officers are directors or officers or
have a financial interest, is void or voidable solely because the director or
officer has a financial interest in the transaction, or solely because the
director or officer is present at or participates in the meeting of the board or
committee which authorizes the contract or transaction, or solely because the
vote of the director or officer was counted for such purpose, if: (i) the
material facts as to the director's or officer's relationship or interest and as
to the contract or transaction are disclosed or known to the board of directors
or committee which in good faith authorizes the contract or transaction by the
affirmative vote of a majority of the disinterested directors, even though the
number of disinterested directors is less than a quorum; (ii) the material facts
as to the director's or officer's relationship or interest and as to the
contract or transaction are disclosed or known to the stockholders entitled to
vote thereon, and the contract or transaction is specifically approved in good
faith by a majority vote of the stockholders; or (iii) the contract or
transaction is fair as to the corporation as of the time it is authorized,
approved or ratified by the board of directors, a committee thereof, or the
stockholders. A corporation may make loans to, guarantee the obligations of or
otherwise assist its officers or other employees and those of its subsidiaries,
including directors who are also officers or employees, when such action, in the
judgment of the directors, may reasonably be expected to benefit the
corporation. Any such loan, guaranty or other assistance may be with or without
interest, and may be unsecured, or secured in such manner as approved by the
board of directors, including a pledge of stock of the corporation.
Neither the Ultimate Bylaws or Certificate provide for greater voting
requirement relating to interested stockholder or interested director
transactions.
Under the MBCA, a contract or other transaction between a corporation and
one or more of its directors, or between a corporation and an organization in or
of which one or more of its directors are directors, officers, or legal
representative or have a material financial interest, is not void or voidable
because the director or directors or the other organizations are parties or
because the director or directors are present at the meeting of the shareholders
or the board or a committee at which the contract or transaction is authorized,
approved or ratified, if (i) the contract or transaction was, and the person
asserting the validity of the contract or transaction sustains the burden of
establishing that the contract or transaction was, fair and reasonable as to the
corporation at the time it was authorized, approved or ratified, (ii) the
material facts as to the contract or transaction and as to the director's or
directors' interest are fully disclosed or known to the shareholders and the
contract or transaction is approved in good faith by (a) the holders of
two-thirds of the voting power of the shares entitled to vote which are owned by
persons other than the interested director or directors, or (b) the unanimous
affirmative vote of the holders of all outstanding shares, whether or not
entitled to vote; (iii) the material facts as to the contract
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or transaction and as to the director's or directors' interest are fully
disclosed or known to the board or a committee, and the board or committee
authorizes, approves, or ratifies the contract or transaction in good faith by a
majority of the board or committee, but the interested director directors shall
not be counted in determining the presence of a quorum and shall not vote; or
(iv) the contract or transaction is distribution described in MBCA section
302A.551, subdivision 1, or a merger or exchange described in MBCA section
302A.601, subdivision 1 or 2.
INDEMNIFICATION AND LIMITATION OF LIABILITY
Under the DGCL, a corporation has the power to indemnify any person who was
or is a party, or is threatened to be made a party, to any threatened, pending
or completed action, suit or proceeding by reason of the fact that the person is
or was a director, officer, employee or agent of the corporation against
expenses, judgments, fines and settlements incurred in any such action, suit or
proceeding, other than an action by or in the right of the corporation, if the
person acted in good faith and in a manner that the person reasonably believed
to be in or not opposed to the best interests of the corporation and, in the
case of a criminal proceeding, had no reasonable cause to believe that such
person's conduct was unlawful.
In the case of an action by or in the right of the corporation, the
corporation has the power to indemnify any person who was or is a party, or is
threatened to be made a party, to any threatened, pending or completed action,
suit or proceeding by reason of the fact that the person is or was a director,
officer, employee or agent of the corporation against expenses incurred in
defending or settling the action if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation; provided, however, that no indemnification may be
made when a person is adjudged liable to the corporation, unless a court of
competent jurisdiction determines such person is entitled to indemnity for
expenses, and then such indemnification may be made only to the extent that such
court shall determine. The DGCL requires that, to the extent an officer,
director, employee or agent of a corporation is successful on the merits or
otherwise in defense of any proceeding referred to within this paragraph, or in
defense of any claim, issue or matter therein, the corporation must indemnify
such person against expenses incurred in connection therewith.
Under the DGCL, a corporation may advance expenses incurred by an officer or
director prior to final disposition of the action, suit or proceeding upon an
undertaking by the officer or director to repay such amount if it is ultimately
determined that such officer or director is not entitled to be indemnified by
the corporation. Expenses of employees and agents may be advanced by the
corporation upon such terms and conditions, if any, as the board of directors
deems appropriate.
The rights to indemnification and advancement of expenses provided by the
DGCL are not exclusive of any other such rights that may be provided under a
corporation s charter or by-laws, by contract or otherwise.
Under the DGCL, a corporation may adopt a provision in its certificate of
incorporation eliminating or limiting the personal liability of a director to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for: (i) breaches of the director's duty of loyalty
to the corporation or its stockholders; (ii) acts or omissions not in good faith
or involving intentional misconduct or knowing violations of law; (iii) the
payment of unlawful dividends or unlawful stock repurchases or redemptions; or
(iv) any transaction in which the director received an improper personal
benefit.
The Ultimate Certificate provides that, to the fullest extent permitted
under Delaware law, Ultimate will indemnify any person who is a director or
officer of Ultimate or who is or was serving a the request of Ultimate as a
director, officer, employee or agent of another corporation, partnership, joint
venture or other enterprise against any expenses, judgments, fines penalties,
taxes and amounts paid in settlement actually and reasonably incurred by the
director in connection with such action, suit or proceeding as a derivative
action by or in the right of Ultimate.
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The MBCA permits a corporation's articles to eliminate or limit a director's
personal liability to the corporation or its shareholders for monetary damages
for breaches of a director's fiduciary duty as a director. However, the articles
cannot deprive the corporation or its shareholders of the right to enjoin
transactions which violate a director's duty of care. Moreover, the articles
cannot limit liability for any breach of the director's duty of loyalty, for
transactions resulting in an improper personal benefit to the director or for
acts or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law. In addition, liability for illegal dividends, stock
repurchases or other distributions to shareholders or for violations of
Minnesota's securities statutes cannot be limited. The Audio King Bylaws provide
for the indemnification of directors to the extent permitted the MBCA.
The Audio King Bylaws provides for mandatory indemnification of directors,
officers, employees and agents of Audio King to the full extent permitted by the
MBCA. The MBCA provides for mandatory indemnification of a person acting in an
official capacity on behalf of the corporation (including a director, officer,
employee or agent) if such person acted in good faith, received no improper
personal benefit, acted in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and, in the case of a criminal
proceeding, had no reasonable cause to believe his conduct was unlawful.
However, insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of Audio King and Ultimate, Audio King and Ultimate have been advised that in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS
Section 203 of the DGCL ("Section 203") prohibits a Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
three years following the time that such person becomes an interested
stockholder, subject to certain exceptions contained in Section 203. As defined
in Section 203, a business combination generally includes mergers,
consolidations, sales of 10% or more of a corporation's assets, certain stock
issuances or other transactions benefitting the interested stockholder.
Interested stockholders include, among others, persons who beneficially own 15%
or more of the outstanding voting stock of a corporation.
The three-year moratorium imposed on business combinations by Section 203
does not apply if: (i) prior to the time that such stockholder becomes an
interested stockholder, the board of directors approves either the business
combination or the transaction which resulted in the person becoming an
interested stockholder; (ii) upon consummation of the transaction which made him
an interested stockholder, the interested stockholder owns at least 85% of the
corporation's voting stock outstanding at the time the transaction commenced
(excluding from the 85% calculation shares owned by directors who are also
officers of the corporation and shares held by employee stock plans which do not
permit employees to decide confidentially whether to accept a tender or exchange
offer); or (iii) at or after the time such person becomes an interested
stockholder, the board approves the business combination and it is also approved
at a stockholder meeting (and not by written consent) by at least 66 2/3% of the
outstanding voting stock not owned by the interested stockholder.
Section 203 only applies to Delaware corporations which have a class of
voting stock that is listed on a national securities exchange, are authorized
for quotation on Nasdaq or are held of record by more than 2,000 stockholders.
However, a Delaware corporation may elect not to be governed by Section 203 by a
provision in its original certificate of incorporation or an amendment thereto
or to the bylaws, which amendment must be approved by the holders of a majority
of shares entitled to vote and any such by-law amendment may not be further
amended by the board of directors. Neither the Ultimate Certificate nor the
Ultimate Bylaws elects not to be governed by Section 203.
The MBCA provides that Audio King may not engage in any "business
combination" with any "interested shareholder" or affiliate or associate of an
interested stockholder for a period of four years
97
<PAGE>
after the interested shareholder's "share acquisition date" unless either the
business combination or the acquisition of shares by the interested shareholder
on his share acquisition date is approved by a disinterested committee of the
Audio King Board before such interested shareholder's share acquisition date.
For purposes of the MBCA, an "interested shareholder" is a 10% or more
beneficial owner of voting shares of such corporation, or a person who is an
associate and an affiliate of the corporation and who at any time within the
four year period preceding the date in question was a 10% or more beneficial
owner of voting shares of such corporation. Neither the Audio King Articles nor
the Audio King Bylaws provide that such corporation will not be subject to the
MBCA.
Audio King is subject to the Minnesota Control Share Acquisition Act (the
"MCSSA"). The MCSSA provides that any person (an "acquiring person") proposing
to make a control share acquisition must disclose certain information to the
target corporation and the target corporation's shareholders must thereafter
approve the control share acquisition or certain of the shares acquired in the
control share acquisition shall not have voting rights and shall be subject to
redemption by the target corporation for a specified period of time at the
market value of such shares. A control share acquisition is an acquisition of
shares of the issuing public corporation which results in the acquiring person
having voting power that exceeds one of the following thresholds: (i) at least
20 percent but less than 33 1/3 percent; (ii) at least 33 1/3 percent but less
than or equal to 50 percent; and (iii) over 50 percent. The definition of a
control share acquisition specifically excludes acquisition of shares from the
corporation issuing such shares, and acquisition of shares pursuant to plans of
merger or exchange which are approved by the shareholders of the corporation.
The MCSSA applies to a control share acquisition with respect to an issuing
public corporation unless otherwise expressly provided in the issuing public
corporation unless otherwise expressly provided in the issuing public
corporation's articles of incorporation or in the by-laws approved by the
stockholders. The Audio King Articles do not provide that MCSSA will not apply
to Audio King.
DISSOLUTION
Under the DGCL, unless the board of directors approves a proposal to
dissolve a corporation, the dissolution must be approved by stockholders holding
100% of the shares entitled to vote upon the dissolution. If the dissolution is
initiated by the board of directors, it need only be approved by the
stockholders holding a majority of the shares entitled to vote on the
dissolution.
Under the MBCA, a corporation may be dissolved by the directors or
incorporators, shareholders, by order of the court, or by the secretary of
state. Directors or incorporators may only dissolve a corporation that has not
issued shares. Shareholders may dissolve the corporation upon a majority vote of
the shares entitled to vote on the dissolution.
INSPECTION RIGHTS
Under the DGCL, any shareholder, in person or by attorney or other agent
shall, upon written demand under oath stating the purposes thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's: (i) stock ledger, (ii) list of stockholders and (iii) its other
books and records and to make copies or extracts therefrom. A proper purpose
means a purpose reasonably related to such person's interest as a stockholder.
Under the MBCA, a stockholder has an "absolute right", upon written demand,
to examine the following corporate documents: (i) the share register; (ii)
records of all proceedings of shareholders for the last three years; (iii)
records of all proceedings of the board for the last three years; (iv) the
corporation's articles and all amendments currently in effect; (v) the
corporation's bylaws and all amendments currently in effect; (vi) certain
financial statements and the financial statement for the most recent interim
period prepared in the course of the operation of the corporation for
distribution to the shareholders or to a governmental agency as a matter of
public record; (vii) reports made to shareholders generally within the
98
<PAGE>
last three years; (viii) a statement of the names and usual business addresses
of its directors and principal officers; (ix) voting trust agreements; (x)
shareholder control agreements; and (xi) a copy of agreements, contracts, or
other arrangements or portions of them fixing the rights of a class or series of
securities issued by the company.
PREEMPTIVE RIGHTS
The Audio King Articles and the Ultimate Certificate each deny preemptive
rights to stockholders.
LEGAL MATTERS
The validity of the Ultimate Stock to be issued in connection with the
Merger is being passed upon for Ultimate by Davis, Graham & Stubbs LLP, Denver,
Colorado.
Certain legal matters in connection with the Merger are being passed upon
for Audio King by Fredrikson & Byron, P.A., Minneapolis, Minnesota.
EXPERTS
The financial statements of Ultimate at January 31, 1997 and 1996 and for
each of the three years in the period ended January 31, 1997 included in this
Proxy Statement/Prospectus have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon (which includes an explanatory
paragraph with respect to the change in the method of accounting for store
preopening expenses in fiscal 1996) appearing elsewhere herein and in the Proxy
Statement/Prospectus and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
The audited financial statements of Audio King as of June 30, 1996 and 1995
and for each of the three years in the period ended June 30, 1996 included in
this Proxy Statement/Prospectus and elsewhere in the Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
Reference is made to said report, which report includes an explanatory paragraph
with respect to the change in the method of accounting for income taxes in 1994
as discussed in Note 2 to the Consolidated Financial Statements and Notes
thereto.
99
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ULTIMATE ELECTRONICS, INC.
<S> <C>
Report of Ernst & Young LLP........................................................ F-2
Statements of Income for the years ended January 31, 1997, 1996 and 1995........... F-3
Balance Sheets at January 1997 and 1996............................................ F-4
Statements of Stockholders' Equity for the years ended January 31, 1997, 1996 and F-5
1995.............................................................................
Statements of Cash Flows for the years ended January 31, 1997, 1996 and 1995....... F-6
Notes to Financial Statements...................................................... F-7
AUDIO KING CORPORATION
Report of Arthur Andersen LLP...................................................... F-18
Consolidated Balance Sheets for the years ended June 30, 1996 and 1995 and the six F-19
months ended December 31, 1996 (unaudited).......................................
Consolidated Statements of Operations for the years ended June 30, 1996, 1995 and F-20
1994 and the six months ended December 31, 1996 and 1995 (unaudited).............
Consolidated Statements of Changes in Shareholders' Investment for the years ended F-21
June 30, 1996, 1995 and 1994 and the six months ended December 31, 1996
(unaudited)......................................................................
Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1995 and F-22
1994 and the six months ended December 31, 1996 and 1995 (unaudited).............
Notes to Consolidated Financial Statements......................................... F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors of Ultimate Electronics, Inc.:
We have audited the accompanying balance sheets of Ultimate Electronics,
Inc. as of January 31, 1997 and 1996, and the related statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended January 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ultimate Electronics, Inc.
at January 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended January 31, 1997 in
conformity with generally accepted accounting principles.
As discussed in Note 5, effective February 1, 1995, the Company changed its
method of accounting for store preopening expenses.
/s/ ERNST & YOUNG LLP
Denver, Colorado
March 7, 1997
F-2
<PAGE>
ULTIMATE ELECTRONICS, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES.................................................................... $ 261,154 $ 251,807 $ 165,069
Cost of goods sold........................................................... 191,903 184,343 120,588
---------- ---------- ----------
GROSS PROFIT................................................................. 69,251 67,464 44,481
Selling, general and administrative expenses................................. 64,786 59,525 36,276
---------- ---------- ----------
INCOME FROM OPERATIONS....................................................... 4,465 7,939 8,205
Interest expense, net........................................................ 3,210 1,866 407
---------- ---------- ----------
Income before taxes and cumulative effect of change in accounting method..... 1,225 6,073 7,798
Income taxes................................................................. 470 2,241 2,908
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD............... 785 3,832 4,890
Cumulative effect of change in accounting for preopening expenses, net of
taxes -- (988) --
---------- ---------- ----------
NET INCOME................................................................... $ 785 $ 2,844 $ 4,890
---------- ---------- ----------
---------- ---------- ----------
Historical income before cumulative effect of change in accounting
method................................................................... 4,890
Pro forma effect of change in accounting method, net of taxes.............. (678)
----------
PRO FORMA NET INCOME......................................................... $ 4,212
----------
----------
EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD... $ .65
Cumulative effect of change in accounting for preopening expenses, net of
taxes....................................................................... (.17)
----------
EARNINGS PER SHARE........................................................... $ .11 $ .48 $ .88
PRO FORMA EARNINGS PER SHARE................................................. .76
Weighted average shares outstanding.......................................... 6,995 5,906 5,583
</TABLE>
See accompanying notes.
F-3
<PAGE>
ULTIMATE ELECTRONICS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 764 $ 979
Accounts receivable...................................................................... 13,788 16,406
Merchandise inventories.................................................................. 41,414 38,053
Prepaid expenses and other............................................................... 642 885
Deferred tax assets...................................................................... -- 262
--------- ---------
Total current assets....................................................................... 56,608 56,585
Property and equipment at cost:
Furniture, fixtures and equipment........................................................ 18,462 16,964
Leasehold improvements................................................................... 16,320 10,979
Autos and trucks......................................................................... 349 341
Land buildings........................................................................... 17,773 15,048
Construction-in-progress................................................................. 632 3,414
--------- ---------
53,536 46,746
Less accumulated depreciation............................................................ (8,904) (5,243)
--------- ---------
44,632 41,503
Property under capital leases, including related parties, net.............................. 1,019 1,283
Other assets............................................................................... 1,051 1,095
--------- ---------
Total assets............................................................................... $ 103,310 $ 100,466
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................................... $ 21,651 $ 16,972
Accrued liabilities...................................................................... 6,257 8,163
Current portion of term loans............................................................ 262 198
Current portion of capital lease obligations, including related parties.................. 287 257
Deferred tax liability................................................................... 283 --
--------- ---------
Total current liabilities.................................................................. 28,740 25,590
Note payable............................................................................... 17,237 18,000
Term loans, less current portion........................................................... 928 996
Bonds payable.............................................................................. 13,000 13,000
Capital lease obligations, including related parties less current portion.................. 1,007 1,295
Deferred tax liability..................................................................... 695 667
--------- ---------
Total liabilities.......................................................................... 61,607 59,548
Commitments
Stockholder's 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, 6,995,000 at January 31, 1997 and 1996.................. 70 70
Additional paid-in capital............................................................... 31,009 31,009
Retained earnings........................................................................ 10,624 9,839
--------- ---------
Total stockholders' equity................................................................. 41,703 40,918
--------- ---------
Total liabilities and stockholders' equity................................................. $ 103,310 $ 100,466
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-4
<PAGE>
ULTIMATE ELECTRONICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCES, JANUARY 31, 1994............................... 5,500,000 $ 55 $ 18,561 $ 2,105 $ 20,721
Net income............................................. 4,890 4,890
---------- --- ----------- --------- ---------
BALANCES, JANUARY 31, 1995............................... 5,500,000 55 18,561 6,995 25,611
Proceeds from issuance of common stock, net of offering
costs................................................ 1,495,000 15 12,448 12,463
Net income............................................. 2,844 2,844
---------- --- ----------- --------- ---------
BALANCES, JANUARY 31, 1996............................... 6,995,000 70 31,009 9,839 40,918
Net income............................................. 785 785
---------- --- ----------- --------- ---------
BALANCES, JANUARY 31, 1997............................... 6,995,000 $ 70 $ 31,009 $ 10,624 $ 41,703
---------- --- ----------- --------- ---------
---------- --- ----------- --------- ---------
</TABLE>
See accompanying notes.
F-5
<PAGE>
ULTIMATE ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
---------------------------------
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 785 $ 2,844 $ 4,890
Adjustments to reconcile net income to net cash provided by (used in) operating
activities
Cumulative effect of change in accounting method (net of taxes)............... -- 988 --
Depreciation and amortization................................................. 4,449 3,425 1,843
Deferred tax expense.......................................................... 573 597 885
Changes in operating assets and liabilities:
Accounts receivable......................................................... 2,618 (5,649) (5,037)
Merchandise inventories..................................................... (3,361) (9,127) (13,199)
Prepaid expenses and other.................................................. 243 6 (1,459)
Other assets................................................................ 44 (795) (34)
Accounts payable and accrued liabilities.................................... 2,773 (2,982) 12,562
--------- ---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............................. 8,124 (10,693) 451
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net........................................ (7,314) (27,342) (17,536)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in note payable...................................................... (763) 6,500 11,500
Proceeds from bonds payable..................................................... -- 13,000 --
Proceeds from sale/leaseback of property and equipment.......................... -- 5,614 --
Proceeds from term loans........................................................ 225 1,211 --
Principal payments on term loans and capital lease obligations.................. (487) (2,012) (427)
Proceeds from issuance of common stock, net..................................... -- 12,463 --
--------- ---------- ----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES............................. (1,025) 36,776 11,073
--------- ---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS....................................... (215) (1,259) (6,012)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................ 979 2,238 8,250
--------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 764 $ 979 $ 2,238
--------- ---------- ----------
--------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................................... $ 3,210 $ 2,033 $ 476
Income taxes................................................................ 353 2,248 1,212
</TABLE>
See accompanying notes.
F-6
<PAGE>
ULTIMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND
Ultimate Electronics, Inc., a Delaware corporation (the "Company"), is a
consumer electronics retailer engaged in selling a wide range of audio and video
components and home office equipment. The Company currently operates eighteen
stores, including nine stores in Colorado under the trade name SoundTrack and
nine stores in Idaho, Nevada, New Mexico, Oklahoma and Utah under the trade name
Ultimate Electronics.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
The Company states merchandise inventories at the lower of cost (weighted
average cost) or market.
DEPRECIATION AND AMORTIZATION
Depreciation is provided principally using the straight-line method based
upon the following useful lives:
<TABLE>
<S> <C>
Furniture, fixtures and equipment..................... 5 - 7 years
Leasehold improvements................................ 7 - 20 years
Autos and trucks...................................... 5 years
Property under capital leases......................... 5 - 15 years
Buildings............................................. 30 years
</TABLE>
CAPITALIZED INTEREST
For the fiscal years ended January 31, 1997, 1996 and 1995, the Company
capitalized interest of $160,000, $900,000, and $154,000 respectively,
associated with the construction of remodeled stores and the Thornton Facility.
F-7
<PAGE>
ULTIMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCRUED LIABILITIES (IN THOUSANDS)
Accrued liabilities are comprised of the following:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Compensation............................................................... $ 1,993 $ 2,851
Sales taxes................................................................ 965 1,181
Customer deposits.......................................................... 1,635 1,840
Other...................................................................... 1,664 2,291
--------- ---------
Total...................................................................... $ 6,257 $ 8,163
--------- ---------
--------- ---------
</TABLE>
DEFERRED REVENUE AND COMMISSIONS
The Company sells extended warranty contracts on behalf of an unrelated
party. The contracts extend beyond the normal manufacturer's warranty period,
usually with terms of coverage (including the manufacturer's warranty period)
between 12 and 60 months. Extended warranty contracts are accounted for in
accordance with FASB Technical Bulletin No. 90-1, "Accounting for Separately
Priced Extended Warranty and Product Maintenance Contracts."
All revenue and direct costs, principally sales commissions, from the sale
of the Company's own extended warranty contracts sold prior to January 31, 1997
have been deferred and amortized on a straight-line basis over the life of the
contracts. All other costs, including the cost of repairs, are charged to
expense as incurred.
ADVERTISING COSTS AND COOPERATIVE REVENUE
In accordance with Statement of Position 93-7, "Reporting on Advertising
Costs," all advertising costs are deferred until the first time the advertising
takes place. In addition, the Company accrues rebates based upon varying
percentages of inventory purchases and records such amounts as a reduction of
advertising expense. The Company also deducts amounts for cooperative
advertising directly from payment to manufacturers for inventory purchases based
on individual agreements with the Company's manufacturers. Net advertising
expense charged to operations was $5,485,000, $3,924,000 and $1,277,000 for the
years ended January 31, 1997, 1996 and 1995, respectively.
EARNINGS PER SHARE OF COMMON STOCK
Earnings per share of common stock for the year ended January 31, 1997 are
based on (i) 6,995,000 outstanding shares of common stock and (ii) no
outstanding shares of common stock to give effect to the potential exercise of
options under the Company's stock option plans (Note 6). Earnings per share of
common stock for the year ended January 31, 1996 are based on (i) 5,500,000
outstanding shares of common stock for the entire year and an additional
1,495,000 outstanding shares since November 1, 1995 and (ii) 45,231 outstanding
shares of common stock to give effect to the potential exercise of options under
the Company's stock option plans. Earnings per share of common stock for the
year ended January 31, 1995 are based on (i) 5,500,000 outstanding shares of
common stock and (ii) 83,224 outstanding shares to give effect to the potential
exercise of options under the Company's stock option plans.
F-8
<PAGE>
ULTIMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG LIVED ASSETS
In March, 1995 the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (SFAS 121), which required impairment
losses to be recorded on long-lived assets used in operations when indications
of impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. SFAS 121
also addresses the accounting for long-lived assets that are expected to be
disposed of. The Company adopted the provisions of SFAS 121 in the first quarter
of fiscal 1997, with no material effect to its financial statements.
CERTAIN RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal 1995 and 1996
financial statements to conform with the fiscal 1997 financial statement
presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash, accounts receivable,
note payable and other long-term debt, have fair values which approximate their
recorded values as the financial instruments are either short term in nature or
carry interest rates which approximate market rates except bonds payable, which
are trading at 92% of face value at January 31, 1997.
2. PUBLIC STOCK OFFERINGS
On October 15, 1993, the Company completed an initial public offering (the
"Offering") for the sale of 2,000,000 shares of common stock at the Offering
price of $8.50 per share. The Company received proceeds from the Offering of
$15,432,000, net of all offering costs. On November 12, 1993, the Underwriters
exercised an option to purchase 300,000 additional shares of common stock to
cover overallotments. Net proceeds to the Company, after deducting all offering
costs, were $2,373,000. From the proceeds of the Offering, the Company made an S
corporation distribution of $3,250,000 to the Company's principal Stockholders
prior to the Offering.
On November 1, 1995, the Company completed a second public offering (the
"Second Offering") for the sale of 1,300,000 shares of common stock at the
Second Offering price of $9.00 per share. The Company received proceeds from the
Second Offering of $10,810,000, net of all offering costs. On December 1, 1995,
the Underwriters exercised an option to purchase 195,000 additional shares of
common stock to cover over-allotments. Net proceeds to the Company, after
deducting all offering costs, were $1,653,000. The proceeds of the Second
Offering were used by the Company to reduce amounts outstanding under its
revolving line of credit.
3. NOTE PAYABLE
On November 21, 1996, the Company amended the terms of its revolving line of
credit agreement with Norwest Bank Colorado, N.A. Under the amended terms,
borrowings on the revolving line of credit are limited to the lesser of
$35,000,000 or 70% of merchandise inventory. The agreement expires on September
30, 1998, at which time all outstanding principal borrowings are due. Borrowings
bear interest, which are payable monthly, based on a blend of LIBOR plus 3.05%
(weighted average of 8.59% at January 31, 1997) or the bank's prime rate (8.25%
at January 31, 1997). Amounts outstanding under the
F-9
<PAGE>
ULTIMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. NOTE PAYABLE (CONTINUED)
agreement were $17.2 million as of January 31, 1997. Borrowings are secured by
accounts receivable, inventories and equipment. A commitment fee of .125% per
annum is payable, monthly in arrears, on the difference between the commitment
and the daily average sum of the aggregate outstanding principal balance of the
borrowings.
Under the provisions of the $35,000,000 revolving line of credit agreement
discussed above, subject to amendments, the Company was required, among other
things, to maintain (i) a current ratio (as defined in the agreement) of at
least 1.10 to 1.00 computed monthly; and (ii) a minimum net worth (as defined in
the agreement) of at least $42,000,000 at December 31, 1996 to and including
December 30, 1997, $44,500,000 from December 31, 1997 to and including September
30, 1998, and to meet certain working capital and liabilities to tangible net
worth ratios; and (iii) a maximum ratio of funded debt (as defined in the
agreement) to earnings before interest, taxes, depreciation and amortization
(EBITDA) of 3.5 to 1.0 for each of the fiscal quarters beginning January 31,
1997 through the expiration of the agreement.
Due to the lower than expected sales performance in the fourth quarter of
fiscal 1997, the Company's minimum net worth was approximately $41,700,000, and
the maximum funded debt to EBITDA ratio was 3.67 to 1.0 at January 31, 1997. The
Company received a waiver from the bank for these two covenant violations at
January 31, 1997. On March 11, 1997, the credit agreement was amended to reduce
the minimum net worth requirement to $41,000,000 for the months ended February
28, 1997 through November 30, 1997, after which time, the minimum net worth
increases to $43,000,000 for the months ended December 31, 1997 through
September 30, 1998. The maximum ratio of funded debt to EBITDA was amended to
4.0 to 1.0 for the first and second quarters of fiscal year 1998, and to 3.5 to
1.0 and 3.0 to 1.0 for the third and fourth quarters of fiscal year 1998,
respectively. Management believes the Company's operations for fiscal year 1998
will be sufficient to enable the Company to be in compliance with the amended
minimum net worth and maximum funded debt to EBITDA covenants for all periods of
fiscal year 1998. Accordingly, amounts payable under the term loan agreement are
classified as long-term in the accompanying balance sheets.
4. BONDS PAYABLE
On March 23, 1995, the Company completed an offering for the sale of
$13,000,000 aggregate principal amount of Bonds. Interest on the Bonds accrues
at the rate of 10.25% per year until maturity or earlier redemption and is
payable on the last day of each month. 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
redeemable by the Company at any time after March 31, 2000. The Bonds are full
recourse obligations of the Company and are secured by, among other things, a
first priority lien on the Company's real property, including all facilities and
fixtures thereon, located at the Thornton Facility. The purchase, construction
and development of the property was financed in part by the net proceeds of the
Bonds.
5. PREOPENING EXPENSES
In the fourth quarter of fiscal 1996, the Company changed its method of
accounting for preopening expenses. With this change, which has been recorded as
if it occurred at the beginning of fiscal 1996, the Company will expense
preopening costs as incurred rather than capitalizing such costs and amortizing
them over twelve months for a new store and six months for a remodeled store.
The Company believes this
F-10
<PAGE>
ULTIMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PREOPENING EXPENSES (CONTINUED)
new method is preferable because it results in a more conservative presentation
of financial position and results of operations and is a more prevalent practice
amongst other companies in its industry. This method resulted in a charge to
income of $988,000, net of $577,000 for income taxes, or 17 cents per share for
the year ended January 31, 1996.
The effect of this accounting change was to increase (decrease) income
before the cumulative effect of the change in accounting method and earnings per
share for fiscal years 1996 and 1995 as follows:
<TABLE>
<CAPTION>
NET INCOME
-------------------------
YEAR ENDING TOTAL PER SHARE
- ----------------------------------------------------------------------- ---------- -------------
<S> <C> <C>
January 31, 1996....................................................... 141,000 .02
January 31, 1995....................................................... (678,000) (.12)
</TABLE>
6. STOCK OPTION PLANS
Under the terms of the employees' stock option plan (the "Plan"), the
Company may grant to officers, employees and consultants awards of options to
purchase shares of common stock and other types of awards. The Plan, as most
recently amended in fiscal 1997, provides for an authorization of 900,000 shares
of common stock. Under the terms of the nonemployee directors' stock option plan
(the "Directors' Plan"), the Company may grant to nonemployee directors awards
of stock options. The Directors' Plan provides for an initial authorization of
20,000 shares of common stock. Each nonemployee director receives options to
purchase 2,000 shares of common stock effective February 1 of each year, which
options are exercisable one year from the date of grant. At January 31, 1997,
options to purchase 12,000 shares of common stock were outstanding under the
Directors' Plan, of which 8,000 are currently exercisable. A disinterested
compensation committee of the Board of Directors determines the persons to whom
employee awards are granted, the type of award granted, the number of shares
granted, the vesting schedule and the term of any option (which cannot exceed
ten years). The exercise price for incentive stock options for employees and
non-qualified options for outside directors is the market value of the
underlying common stock at the date of grant. Options issued to the Chairman of
the Board are at an exercise price of 110% of market value of the underlying
common stock at the date of grant. No options have been exercised and no
performance awards have been granted under the Plan.
On January 31, 1997, the Compensation Committee repriced all employee
options at the exercise price of $3.00 (the Chairman of the Boards' options were
repriced to $3.30) with the original vesting schedule. The market value of the
underlying common stock was $3.00 on January 31, 1997. The number of options
held by the executive officers was reduced from 490,000 to 322,600 in exchange
for the repriced options.
F-11
<PAGE>
ULTIMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTION PLANS (CONTINUED)
Changes in the employees' stock option plan outstanding (and option exercise
prices for such options) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Options outstanding at beginning of year............................... 480,000 447,000 312,000
Granted ($3.25 to $12.875)............................................. 95,000 60,000 135,000
Canceled ($6.6875 to $12.875).......................................... 170,150 27,000 --
--------- --------- ---------
Options outstanding at end of year..................................... 404,850 480,000 447,000
--------- --------- ---------
--------- --------- ---------
Options exercisable at end of year..................................... 118,042 121,250 52,000
Options available for grant at end of year............................. 495,150 220,000 53,000
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations, in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to January 31, 1995 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
or the date of repricing using a Black-Scholes option pricing model with the
following weighted-average assumptions: risk-free interest rates of 6.5%; a
dividend yield of 0%; volatility factors of the expected market price of the
Company's common stock for fiscal years 1997 and 1996, respectively, of .573 and
.436, and a weighted-average expected life of the options of 5 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting period.
The Company's pro forma information follows:
<TABLE>
<CAPTION>
1997 1996
---------- ------------
<S> <C> <C>
Pro forma net income................................................ $ 688,000 $ 2,805,000
Pro forma earnings per share........................................ $ 0.10 $ 0.47
</TABLE>
F-12
<PAGE>
ULTIMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. PROVISION FOR INCOME TAXES (IN THOUSANDS)
Under the liability method of accounting for income taxes as prescribed by
FASB Statement No. 109, "Accounting for Income Taxes", deferred income taxes
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and amounts
used for income tax purposes. The components of the provision for income taxes
as of January 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
January 31, 1997
Federal....................................................... $ (90) $ 501 $ 411
State......................................................... (13) 72 59
----------- ----- ---------
Total....................................................... $ (103) $ 573 $ 470
----------- ----- ---------
----------- ----- ---------
January 31, 1996
Federal....................................................... $ 1,453 $ 528 $ 1,981
State......................................................... 191 69 260
----------- ----- ---------
Total....................................................... $ 1,644 $ 597 $ 2,241
----------- ----- ---------
----------- ----- ---------
January 31, 1995
Federal....................................................... $ 1,771 $ 775 $ 2,546
State......................................................... 252 110 362
----------- ----- ---------
Total....................................................... $ 2,023 $ 885 $ 2,908
----------- ----- ---------
----------- ----- ---------
</TABLE>
The following is a reconciliation of the provision for income taxes to the
federal statutory rate for the years ended January 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Income taxes at the federal statutory rate......................... $ 427 $ 2,065 $ 2,651
State income taxes, net of federal benefit......................... 41 172 257
Other.............................................................. 2 4 --
--------- --------- ---------
Provision for income taxes......................................... $ 470 $ 2,241 $ 2,908
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-13
<PAGE>
ULTIMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. PROVISION FOR INCOME TAXES (IN THOUSANDS) (CONTINUED)
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax assets and liabilities at January 31, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Deferred revenue....................................................... $ -- $ 50
Accrued liabilities.................................................... 260 248
Valuation reserves..................................................... 207 264
Uniform capitalization................................................. 80 70
Capital leases......................................................... 90 100
--------- ---------
637 732
Deferred tax liabilities:
Volume/cash discounts.................................................. (560) --
Co-op advertising...................................................... (270) (370)
LIFO deferral.......................................................... (40) (87)
Depreciation........................................................... (745) (680)
--------- ---------
(1,615) (1,137)
--------- ---------
Net deferred tax liability............................................... $ (978) $ (405)
--------- ---------
--------- ---------
</TABLE>
8. LEASES
OPERATING LEASES
The Company leases retail stores under agreements which expire at various
dates through 2017. Several leases contain escalation clauses and/or options to
renew at negotiated or specified minimum lease payments for periods ranging from
two to 15 years beyond the initial noncancelable lease terms. Total rent expense
charged to operations was $4,119,000, $3,186,000 and $1,587,000 for the years
ended January 31, 1997, 1996 and 1995, respectively.
In May 1995, the Company completed a sale/leaseback transaction with Cirque
Property L.C. for $5.6 million for a store and adjacent retail space located in
Las Vegas, Nevada.
CAPITAL LEASES, INCLUDING RELATED PARTY LEASES (IN THOUSANDS)
The following property is held under capital leases:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Buildings and improvements................................................. $ 1,520 $ 1,520
Computer equipment......................................................... 711 711
--------- ---------
2,231 2,231
Less accumulated depreciation.............................................. 1,212 948
--------- ---------
$ 1,019 $ 1,283
--------- ---------
--------- ---------
</TABLE>
F-14
<PAGE>
ULTIMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. LEASES (CONTINUED)
The Company leases two retail stores under capital lease agreements with two
principal stockholders of the Company. The lease agreements for the two retail
stores provide for annual rent increases over the initial noncancelable lease
terms. Total rental payments to related parties under these leases, excluding
the office and service lease buyout, were $250,000, $645,000 and $620,000 for
the years ended January 31, 1997, 1996 and 1995, respectively. The aggregate
minimum annual rental commitments as of January 31, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
----------- ---------
<S> <C> <C>
1998..................................................................... $ 4,731 $ 438
1999..................................................................... 4,684 444
2000..................................................................... 4,746 309
2001..................................................................... 4,882 161
2002..................................................................... 4,964 166
2003 - 2017.............................................................. 49,445 557
----------- ---------
Total minimum lease payments............................................. $ 73,452 2,075
-----------
-----------
Less amount representing interest........................................ 781
---------
Present value of net minimum lease payments.............................. 1,294
Less portion due within one year......................................... 287
---------
Long term capital lease obligations...................................... $ 1,007
---------
---------
</TABLE>
F-15
<PAGE>
ULTIMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING COSTS AND DEDUCTIONS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) END OF PERIOD
- ------------------------------------------------------------------ ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Year ended January 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts............................... $ 251 $ 196 $ 267(1) $ 180
Reserve for cash and cooperative advertising discounts........ 96 213 237(1) 72
Allowance for obsolete inventory.............................. 344 6 84(2) 266
----- ----- ----- -----
Total..................................................... $ 691 $ 415 $ 588 $ 518
----- ----- ----- -----
----- ----- ----- -----
Year ended January 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts............................... $ 146 $ 403 $ 298(1) $ 251
Reserve for cash and cooperative advertising discounts........ 181 140 225(1) 96
Allowance for obsolete inventory.............................. 150 263 69(2) 344
----- ----- ----- -----
Total..................................................... $ 477 $ 806 $ 592 $ 691
----- ----- ----- -----
----- ----- ----- -----
Year ended January 31, 1995
Deducted from asset accounts:
Allowance for doubtful accounts............................... $ 101 $ 218 $ 173(1) $ 146
Reserve for cash and cooperative advertising discounts........ 144 67 30(1) 181
Allowance for obsolete inventory.............................. 150 15 15(2) 150
----- ----- ----- -----
Total..................................................... $ 395 $ 300 $ 218 $ 477
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
- ------------------------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Write-offs of obsolete inventory.
10. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Savings Plan for the benefit of substantially all
employees. The Plan provides for both employee and employer contributions. The
Company matches 25% of the employee's contribution limited to 1.5% of the
employee's annual compensation subject to limitations set annually by the
Internal Revenue Service. The Company's contributions were $235,000, $173,000
and $109,000 for the years ended January 31, 1997, 1996 and 1995, respectively.
F-16
<PAGE>
ULTIMATE ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
--------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Fiscal 1997
Net sales.......................................................... $ 59,615 $ 57,144 $ 60,772 $ 83,623
Gross profit....................................................... 14,901 15,734 16,304 22,312
Income (loss) from operations...................................... (293) 1,141 1,143 2,474
Net income (loss).................................................. (653) 180 190 1,068
Earnings (loss) per share.......................................... (.09) .03 .03 .15
Fiscal 1996
Net sales.......................................................... $ 48,395 $ 52,398 $ 62,547 $ 88,467
Gross profit....................................................... 13,037 14,652 17,010 22,765
Income before cumulative effect of accounting change............... 1,171 1,523 2,444 2,801
Net income (loss).................................................. (444) 667 1,194 1,427
Earnings (loss) per share.......................................... (.08) .12 .21 .21
</TABLE>
12. SUBSEQUENT EVENT
On March 4, 1997, the Company announced the signing of a definitive merger
agreement pursuant to which the Company will acquire all of the shares of Audio
King Corporation ("Audio King") for stock and cash. Audio King, a consumer
specialty electronics company, operates 11 retail stores: eight in Minnesota,
two in Iowa and one in South Dakota. The merger is subject to various
conditions, including approval of Audio King shareholders, registration of the
Ultimate Electronics shares to be issued, final approval by Ultimate
Electronics' bank, satisfaction of obligations under the Hart, Scott, Rodino
Antitrust Improvements Act and completion of due diligence by both parties.
F-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Audio King Corporation:
We have audited the accompanying consolidated balance sheets of Audio King
Corporation (a Minnesota corporation) and subsidiaries as of June 30, 1996 and
1995, and the related consolidated statements of operations, changes in
shareholders' investment and cash flows for each of the three years in the
period ended June 30, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Audio King Corporation and
subsidiaries as of June 30, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1996, in conformity with generally accepted accounting principles.
As discussed in Note 2, the Company changed its method of accounting for
income taxes effective July 1, 1993.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
September 26, 1996
F-18
<PAGE>
AUDIO KING CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1996 1995
DECEMBER 31, --------- ---------
1996
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................................. $ 11 $ 7 $ 29
Vendor and other accounts receivable, net of allowances.................... 3,790 3,340 2,953
Inventories................................................................ 10,041 8,727 8,398
Prepaid income taxes and other............................................. 627 342 423
------------ --------- ---------
Total current assets..................................................... 14,469 12,416 11,803
------------ --------- ---------
Property And Equipment:
Building................................................................... 961 961 961
Furniture, fixtures and equipment.......................................... 3,741 3,690 3,183
Leasehold improvements..................................................... 5,496 5,494 3,516
Accumulated depreciation and amortization.................................. (3,639) (3,094) (2,335)
------------ --------- ---------
Total property and equipment, net........................................ 6,559 7,051 5,325
Other Assets, principally goodwill........................................... 1,394 1,413 1,270
------------ --------- ---------
$ 22,422 $ 20,880 $ 18,398
------------ --------- ---------
------------ --------- ---------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Current portion of long-term obligations................................... $ 536 $ 536 $ 102
Vendor and other accounts payable.......................................... 6,256 4,074 4,172
Accrued liabilities........................................................ 2,298 1,356 942
------------ --------- ---------
Total current liabilities................................................ 9,090 5,966 5,216
Long-Term Obligations, less current portion.................................. 5,909 7,750 6,201
Long-Term Liabilities, primarily deferred lease incentives................... 650 585 270
Commitments And Contingencies
Shareholders' Investment:
Preferred stock, 6,000,000 shares authorized; no shares issued and
outstanding.............................................................. -- -- --
Common stock, $.001 par, 20,000,000 shares authorized; 2,774,980 and
2,713,329 shares issued and outstanding.................................. 3 3 3
Additional paid-in capital................................................. 4,560 4,559 4,441
Retained earnings.......................................................... 2,210 2,017 2,267
------------ --------- ---------
Total shareholders' investment........................................... 6,773 6,579 6,711
------------ --------- ---------
$ 22,422 $ 20,880 $ 18,398
------------ --------- ---------
------------ --------- ---------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
F-19
<PAGE>
AUDIO KING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, FOR THE YEARS ENDED JUNE 30,
---------------------- -------------------------------
1996 1995 1996 1995 1994
----------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Sales............................................... $ 35,348 $ 34,996 $ 65,567 $ 56,914 $ 45,826
Cost Of Merchandise Sold................................ 22,615 21,785 41,180 36,062 28,970
----------- --------- --------- --------- ---------
Gross Profit.......................................... 12,733 13,211 24,387 20,852 16,856
Selling, General And Administrative Expenses............ 12,075 12,200 24,679 19,472 15,484
----------- --------- --------- --------- ---------
Operating Income (Loss)............................... 658 1,011 (292) 1,380 1,372
Interest Expense, Net................................... 325 240 649 317 179
Other Income, (Note 2).................................. -- -- 575 -- --
----------- --------- --------- --------- ---------
Income (Loss) Before Income Taxes And Cumulative
Effect Of Change In Accounting For Income Taxes..... 333 771 (366) 1,063 1,193
Income Tax Provision (Benefit).......................... 140 324 (115) 430 511
----------- --------- --------- --------- ---------
Net Income (Loss) Before Cumulative Effect Of Change
In Accounting For Income Taxes...................... 193 447 (251) 633 682
Cumulative Effect Of Change In Accounting For Income
Taxes.................................................. -- -- -- -- 45
----------- --------- --------- --------- ---------
Net Income (Loss)..................................... $ 193 $ 447 $ (251) $ 633 $ 637
----------- --------- --------- --------- ---------
----------- --------- --------- --------- ---------
Earnings (loss) Per Share--Primary And Fully Diluted:
Net Income (Loss) Before Cumulative Effect Of Change
In Accounting For Income Taxes...................... $ .07 $ .16 $ (.09) $ .23 $ .25
Cumulative Effect Of Change In Accounting For Income
Taxes............................................... -- -- -- -- (.02)
----------- --------- --------- --------- ---------
Total................................................. $ .07 $ .16 $ (.09) $ .23 $ .23
----------- --------- --------- --------- ---------
----------- --------- --------- --------- ---------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-20
<PAGE>
AUDIO KING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INVESTMENT
----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1993.................................... 2,624 $ 3 $ 4,285 $ 997 $ 5,285
Stock Options and Warrants Exercised.................... 18 -- 7 -- 7
Net income.............................................. -- -- -- 638 637
--
----- ----------- ----------- ------
BALANCE, June 30, 1994.................................... 2,642 $ 3 $ 4,292 $ 1,635 $ 5,929
Sale of Common Stock.................................... 42 -- 122 -- 122
Stock Options and Warrants Exercised.................... 29 -- 27 -- 27
Net income.............................................. -- -- -- 633 633
--
----- ----------- ----------- ------
BALANCE, June 30, 1995.................................... 2,713 $ 3 $ 4,441 $ 2,268 $ 6,711
Sale of Common Stock.................................... 44 -- 99 -- 99
Stock Options Exercised................................. 18 -- 19 -- 20
Net income.............................................. -- -- -- (251) (251)
--
----- ----------- ----------- ------
BALANCE, June 30, 1996.................................... 2,775 $ 3 4,559 2,017 6,579
Stock Options Exercised (unaudited)..................... 1 -- 1 -- 1
Net income (unaudited).................................. -- -- -- 193 193
--
----- ----------- ----------- ------
BALANCE, December 31, 1996 (unaudited).................... 2,776 $ 3 $ 4,560 $ 2,210 $ 6,773
--
--
----- ----------- ----------- ------
----- ----------- ----------- ------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-21
<PAGE>
AUDIO KING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, FOR THE YEARS ENDED JUNE 30,
-------------------- -------------------------------
1996 1995 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................... $ 193 $ 447 $ (251) $ 633 $ 637
Adjustments required to reconcile net income to net cash
provided by (used for) operating activities--
Depreciation and amortization........................... 564 654 1,249 693 487
Deferred income taxes................................... (101) (125) (235) (83) (43)
Cumulative effect of change in accounting for income
taxes................................................. -- -- 45
Changes in other operating items (Note 6)............... 1,243 (1,809) (16) (1,734) (682)
--------- --------- --------- --------- ---------
Net cash provided by (used for) operating activities...... 1,899 (833) 747 (492) 445
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment....................... (53) (1,819) (2,936) (2,271) (1,725)
Sale of property and equipment............................ -- 1,380 --
--------- --------- --------- --------- ---------
Net cash provided by (used for) investing activities...... (53) (1,819) (2,936) (891) (1,725)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Borrowings (repayments) under revolving agreement......... (4,575) 2,575 2,000 1,325 (150)
Borrowings under term loan facility....................... 2,750 -- -- 1,500
Net borrowings (repayments) under capital lease
obligations............................................. (18) 56 48 (80) (64)
Sale of common stock and exercise of stock options........ 1 12 119 149 7
--------- --------- --------- --------- ---------
Net cash provided by financing activities............... (1,842) 2,643 2,167 1,394 1,293
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH............................. 4 (9) (22) 11 13
CASH, beginning of period................................... 7 29 29 17 4
--------- --------- --------- --------- ---------
CASH, end of period......................................... $ 11 $ 20 $ 7 $ 29 $ 17
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
NONCASH ACTIVITIES:
Capital lease obligations entered into for property and
equipment............................................... $ -- $ -- $ 62 $ 1,041 $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-22
<PAGE>
AUDIO KING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS
Audio King Corporation, a Minnesota corporation (the "Company," which term
includes its consolidated subsidiaries unless the context indicates otherwise),
is a retail sales and service organization for audio and video equipment with
eleven specialty stores; six in Minneapolis/Saint Paul, Minnesota, and one store
each in Rochester and St. Cloud, Minnesota, Sioux Falls, South Dakota, and Des
Moines and Cedar Rapids, Iowa. Additionally, the Company operates a design
showroom and clearance center in the Minneapolis area.
(2) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Audio King Corporation and its wholly owned subsidiaries.
Significant intercompany accounts and transactions have been eliminated.
INVENTORIES: Merchandise and repair parts inventories are stated at the
lower of cost or market as determined by the weighted average cost method which
approximates the first-in, first-out cost method.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost. Capital
leases are recorded at the lesser of fair value or the discounted present value
of the minimum lease payments. Depreciation and amortization for financial
reporting purposes is provided on the straight-line method over the estimated
useful lives of the respective assets. The principal estimated useful lives are
five to ten years for furniture, fixtures, and equipment and five years for
vehicles. Leasehold improvements are depreciated over the lesser of their useful
life or the life of the lease.
Maintenance and repairs are charged to expense as incurred. Betterments and
renewals that extend the life of an asset are capitalized and depreciated. Cost
of assets sold or retired and the related amounts of accumulated depreciation
and amortization are removed from the related accounts, and any residual values
are charged or credited to income.
OTHER ASSETS: Other assets consists principally of goodwill which is being
amortized on a straight-line basis over 40 years. Accumulated amortization
approximated $385,000 and $346,000 at June 30, 1996 and 1995. Goodwill
originated when Audio King Corporation acquired Audio King, Inc. and totaled
$1,182,000 and $1,221,000 at June 30, 1996 and 1995, respectively (see Note 5).
ACCRUED LIABILITIES: Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, ------------------------
1996 1996 1995
------------ ------------ ----------
<S> <C> <C> <C>
(UNAUDITED)
Payroll-related...................................... $1,111,000 $ 626,000 $ 491,000
Other................................................ 1,187,000 730,000 451,000
------------ ------------ ----------
$2,298,000 $ 1,356,000 $ 942,000
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
REVENUE RECOGNITION: Revenues from the sale of merchandise inventory are
recognized at the time of sale, net of cancellations or refunds. Repair and
service and installation revenues are recognized net of cancellations and
refunds when the service is performed. The Company grants credit to customers,
substantially all of whom are local residents, businesses and governmental
agencies, third-party consumer finance companies and vendors.
F-23
<PAGE>
AUDIO KING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EXTENDED SERVICE PROGRAM: The Company contracts with a third party to
provide the services called for under service contracts sold by the Company. The
Company has no future liability under the contracts. The Company records the
sales of service contracts net of cancellations and refunds. Under this
arrangement, gross profit is recognized to the extent of the contract's sale
price net of amounts paid to the third party. The Company recognized
approximately $1,956,000, $1,710,000, and $1,285,000 of gross profit in 1996 and
1995, and 1994, respectively, related to these sales. The Company also provides
repair services under these contracts and is compensated by the third party at
rates customarily charged for these repairs.
OTHER INCOME: The Company recorded other income of $575,000 during 1996 as
a result of a revised agreement related to cellular telephone sales commissions.
The previous agreement provided for a commission for cellular phone activation
to be paid at the time of the sale and an additional commission to be paid
monthly for three years based on phone usage. The revised agreement provides for
all revenues to be received at time of sale. The revised agreement also provided
for a lump-sum payment for the phone usage commissions for the cellular phones
that were sold over the past three years. The revised agreement is not expected
to have a negative material impact on future earnings.
ADVERTISING EXPENSE: Advertising expense, net of cooperative advertising
allowances, is charged to operations as incurred. The net amount of advertising
expense charged to operations totaled approximately $3,100,000, $2,400,000 and
$2,000,000 for the years ended June 30, 1996, 1995, and 1994, respectively.
INCOME TAXES: The Company accounts for income taxes under the liability
method whereby deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
EARNINGS (LOSS) PER SHARE: Earnings (loss) per share has been computed by
dividing net income (loss) by the number of weighted average shares of common
stock and common stock equivalent shares outstanding during the period except to
the extent deemed anti-dilutive. Common stock equivalents represent the dilutive
effect of the assumed exercise of outstanding stock options and warrants. The
number of weighted average shares of common stock and common stock equivalent
shares on a fully diluted basis used in the computation of earnings per share
for earnings per common and common stock equivalent share was 2,734,000 in 1996,
2,811,000 in 1995, and 2,814,000 in 1994.
INTERIM FINANCIAL INFORMATION: The consolidated balance sheet as of
December 31, 1996 and the consolidated statements of operations, changes in
shareholders' investment and cash flows for the six months ended December 31,
1996 and 1995 are unaudited. In the opinion of management, these statements
contain all adjustments necessary to present fairly the financial position of
the Company as of December 31, 1996 and the results of its operations and its
cash flows for the six months ended December 31, 1996 and 1995. All such
adjustments are of a normal recurring nature. The results of operations for
interim periods are not necessarily indicative of the results to be expected for
the fiscal year.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Ultimate results could differ from those estimates.
F-24
<PAGE>
AUDIO KING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121
Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," requires impairment losses on long-lived assets to be
recognized when an asset's book value exceeds its expected future cash
flows(undiscounted). The Company adopted SFAS 121 July 1, 1996. The adoption did
not have a material impact on the financial position or results of operations of
the Company.
(3) LONG-TERM OBLIGATIONS
The Company had the following long-term obligations as of:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1996 1995
DECEMBER 31, ------------ ------------
1996
------------
(UNAUDITED)
<S> <C> <C> <C>
Bank borrowings.............................................. $5,400,000 $ 7,225,000 $ 5,225,000
Capitalized lease obligations for property, equipment, and
vehicles, interest at 5.8% to 12%, payable at varying
amounts through 2015....................................... 1,045,000 1,061,000 1,078,000
------------ ------------ ------------
6,445,000 8,286,000 6,303,000
Less - current portion....................................... (536,000) (536,000) (102,000)
------------ ------------ ------------
Long-term obligations........................................ $5,909,000 $ 7,750,000 $ 6,201,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Scheduled annual maturities of long-term obligations for each of the five
fiscal years following June 30, 1996 are as follows: $536,000 in 1997, $528,000
in 1998, $4,735,000 in 1999, $489,000 in 2000, $510,000 in 2001 and $1,488,000
thereafter.
At June 30, 1996, the Company maintained a working capital line of credit
which provided for up to $11,000,000 from October 1 of any one year through
February 15 of the succeeding year, at which time available borrowings were
reduced to $8,000,000. The credit facility bore interest at the bank's reference
rate or at the adjusted certificate of deposit rate plus 2%, at the Company's
option (7.6% at June 30, 1996).
Outstanding advances on the revolving credit line as of June 30, 1996 and
1995, were $7,225,000 and $5,225,000, respectively. Total borrowings outstanding
under the agreement are limited based on eligible accounts receivable and
inventories. The amount available for borrowing as of June 30, 1996 was
$5,512,000. The Company agreed, among other matters, to maintain minimum
tangible net worth and earnings and equity ratios, all as defined by the
agreement. The Company is in compliance with or has obtained waivers and
amendments for all covenants June 30, 1996. On September 12, 1996, the Company
amended this credit agreement to provide for two credit facilities through
September 30, 1998. The first facility is a working capital line of credit which
provides for up to $6,500,000 in available borrowings and bears interest at the
bank's reference rate or at the adjusted certificate of deposit rate plus 2%, at
the Company's option. The second credit facility is a term loan of $3,000,000
and bears interest at the bank reference rate plus .25% or the adjusted
certificate of deposit rate plus 2.25%, at the Company's option.
F-25
<PAGE>
AUDIO KING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) INCOME TAXES
The Company files consolidated federal and state income tax returns.
Components of the provision for income taxes and the effects of timing
differences between the recognition of income and expenses for financial
reporting and income tax reporting purposes are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
------------------------ -----------------------------------
1996 1995 1996 1995 1994
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current payable.........................
Federal............................... $ 175,000 $ 305,000 $ 88,000 $ 395,000 $ 432,000
State................................. 66,000 144,000 32,000 118,000 122,000
----------- ----------- ----------- ---------- ----------
241,000 449,000 120,000 513,000 554,000
Deferred tax benefit.................... (101,000) (125,000) (235,000) (83,000) (43,000)
----------- ----------- ----------- ---------- ----------
Total provision (benefit)............... $ 140,000 $ 324,000 $ (115,000) $ 430,000 $ 511,000
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
</TABLE>
The approximate effect of temporary differences between the financial
statement and tax bases of certain assets and liabilities that gave rise to
deferred tax balances were as follows:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, ----------------------
1996 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
CURRENT DEFERRED TAX ASSET:
Accounts receivable allowance.................................... $ 71,000 $ 66,000 $ 56,000
Inventories...................................................... -- -- 38,000
Accrued expenses................................................. 192,000 156,000 83,000
Current portion of deferred revenue related to extended to
service program................................................ -- -- 10,000
------------ ---------- ----------
Net current deferred tax asset................................. $ 263,000 $ 222,000 $ 145,000
------------ ---------- ----------
------------ ---------- ----------
LONG-TERM DEFERRED TAX ASSET (LIABILITY):
Excess tax depreciation.......................................... $ 87,000 $ 34,000 $ (72,000)
Deferred lease incentives........................................ 150,000 143,000 108,000
------------ ---------- ----------
Net long-term deferred tax asset............................... $ 237,000 $ 177,000 $ 36,000
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
F-26
<PAGE>
AUDIO KING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) INCOME TAXES (CONTINUED)
A reconciliation of the provision (benefit) for income taxes at the federal
statutory income tax rate to the provision as reported is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
---------------------- -----------------------------------
1996 1995 1996 1995 1994
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Provision computed at the statutory
federal income tax rate................. $ 108,000 $ 257,000 $ (124,000) $ 372,000 $ 405,700
State income taxes, net of federal
effect.................................. 25,000 61,000 (29,000) 67,000 78,800
Amortization of goodwill and other
intangibles............................. 7,000 6,000 13,000 12,000 13,300
Other..................................... -- -- 25,000 (21,000) 13,200
---------- ---------- ----------- ---------- ----------
Provision (benefit) as reported........... $ 140,000 $ 324,000 $ (115,000) $ 430,000 $ 511,000
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
</TABLE>
(5) SHAREHOLDERS' INVESTMENT
STOCK OPTION PLAN: Under the Company's 1994 stock option plan (the 1994
Plan), 400,000 common shares are reserved for grant as either nonqualified or
incentive stock options to officers, directors, key employees and consultants or
advisors. Grants of incentive stock options can be made until 2004 and grants of
nonqualified stock options can be made until the 1994 Plan is terminated, in
each case as determined by the board of directors or a board-designated
committee. Incentive stock options must be granted with an exercise price of not
less than 100% of the fair market value on the date of grant. Nonqualified
options may be granted at less than the fair market value on the date of grant
if approved by the board of directors or a board-designated committee. If an
incentive stock option is granted to an individual who owns more than 10% of the
voting rights of the Company's common stock, the option price may not be less
than 110% of the fair market value on the date of grant. The term of the options
may not exceed ten years after the date of grant, except in the case of
nonqualified stock options, whereby the terms are established by the board of
directors or a board-designated committee. Outstanding options at June 30, 1995
may be exercised in whole or in installments at various dates through fiscal
year 2004, as determined by the board of directors or a board-designated
committee. The Company also has a 1987 Stock Option Plan (the 1987 Plan) with
terms similar to the 1994 Plan; however, the Board of Directors determined that
F-27
<PAGE>
AUDIO KING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) SHAREHOLDERS' INVESTMENT (CONTINUED)
no additional options would be granted under the 1987 Plan upon shareholder
approval of the 1994 Plan in November 1994. The following information relates to
the options under both the 1994 Plan and 1987 Plan.
<TABLE>
<CAPTION>
OPTIONS PRICE PER
OUTSTANDING SHARE ($)
----------- ------------
<S> <C> <C>
June 30, 1993..................................................... 256,800 .75 - 4.00
Forfeited or canceled........................................... (1,000) .75 - 1.88
Granted......................................................... 9,000 2.88
Exercised....................................................... (5,400) .75 - 1.88
----------- ------------
June 30, 1994..................................................... 259,400 .75 - 4.00
Forfeited or canceled........................................... (700) .75 - 1.88
Granted......................................................... 48,701 3.06 - 4.63
Exercised....................................................... (13,800) .75 - 1.88
----------- ------------
June 30, 1995..................................................... 293,601 .75 - 4.63
Forfeited or canceled........................................... --
Granted......................................................... 36,900 3.16 - 3.68
Exercised....................................................... (17,400) .75 - 1.88
----------- ------------
June 30, 1996 Options Available for Grant......................... 313,101 .75 - 4.63
-----------
-----------
June 30, 1996 Options Exercisable................................. 302,501
-----------
-----------
</TABLE>
(6) SUPPLEMENTAL CASH FLOW INFORMATION
Changes in other operating items consist of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
---------------------------- -----------------------------------------
1996 1995 1996 1995 1994
------------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Accounts Receivable........... $ (450,000) $ (2,583,000) $ (387,000) $ (694,000) ($ 766,000)
Inventories................... (1,313,000) (2,203,000) (329,000) (1,534,000) (1,816,000)
Prepaid Income Taxes and
other....................... (285,000) (130,000) 81,000 7,000 (104,000)
Accounts Payable.............. 2,182,000 2,088,000 (97,000) 523,000 1,647,000
Accrued Liabilities........... 1,109,000 1,019,000 716,000 (36,000) 357,000
------------- ------------- ----------- ------------- -------------
$ 1,243,000 $ (1,809,000) $ (16,000) $ (1,734,000) $ (682,000)
------------- ------------- ----------- ------------- -------------
------------- ------------- ----------- ------------- -------------
</TABLE>
Additional supplemental cash flow information is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Interest paid................ $ 328,000 $ 239,000 $ 649,000 $ 317,000 $ 179,000
Income taxes paid, net of
refunds received........... -- 120,000 550,000 552,000 668,000
</TABLE>
F-28
<PAGE>
AUDIO KING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the fiscal years ended June 30, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1996
----------------------------------------------------------
FIRST SECOND FOURTH
QUARTER QUARTER THIRD QUARTER QUARTER
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales................................. $ 15,336,000 $ 19,660,000 $ 16,220,000 $ 14,351,000
Gross profit.............................. 5,689,000 7,522,000 6,105,000 5,072,000
Net income (loss)......................... 5,000 443,000 75,000 (773,000)
Net income (loss) per share............... .00 .16 .03 (.28)
<CAPTION>
1995
----------------------------------------------------------
FIRST SECOND FOURTH
QUARTER QUARTER THIRD QUARTER QUARTER
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales................................. $ 12,342,000 $ 17,504,000 $ 13,400,000 $ 13,668,000
Gross profit.............................. 4,644,000 6,033,000 5,159,000 5,017,000
Net income (loss)......................... 105,000 499,000 103,000 (74,000)
Net income (loss) per share............... .04 .18 .04 (.03)
</TABLE>
The results for the second quarter of 1996 included a one time charge for
leasehold improvement write off of $192,000 related to the relocation of the
Edina store. In the third quarter of 1996, the Company recorded other income of
$575,000 as a result of a revised agreement related to cellular telephone sales
commissions. In the fourth quarter of 1996, the Company recorded an inventory
book to physical adjustment of $283,000.
The results for the fourth quarter of 1995 included an inventory valuation
adjustment of $94,000 and an adjustment to increase the reserve for salaries
related to vacation pay of $26,000.
(8) COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS: The Company leases store space at its retail locations
and office/warehouse space under operating leases which expire at various dates
through 2015. Certain of the leases provide for additional rents based on a
percentage of annual retail sales in excess of stipulated minimums. In addition,
the Company has received lease incentives in connection with certain leases. The
Company is recognizing the benefits related to these lease incentives on a
straight-line basis over the applicable lease terms. At June 30, 1996 and 1995,
the Company has recorded deferred lease incentives of $585,000 and $270,000,
respectively.
The leases generally contain renewal options and require the Company to pay
maintenance, insurance, taxes, and other expenses in addition to minimum annual
rents. Total rental expense, including percentage rents for such operating
leases, was approximately $1,819,000 in 1996, $1,395,000 in 1995, and $1,285,000
in 1994.
F-29
<PAGE>
AUDIO KING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
The following is a schedule, by year, of future minimum lease payments under
leases with an initial noncancelable term in excess of one year as of June 30,
1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------ -------------
<S> <C> <C>
1997....................................................................... $ 153,000 $ 1,883,000
1998....................................................................... 151,000 1,823,000
1999....................................................................... 130,000 1,696,000
2000....................................................................... 108,000 1,599,000
2001....................................................................... 130,000 1,627,000
Thereafter................................................................. 2,166,000 14,513,000
------------ -------------
Total payments............................................................. 2,838,000 $ 23,141,000
-------------
-------------
Amounts representing interest.............................................. 1,777,000
------------
1,061,000
Less current maturities.................................................... 36,000
------------
Long term capital lease obligations........................................ $ 1,025,000
------------
------------
</TABLE>
LITIGATION: In the normal course of business, the Company is involved in
various legal proceedings. In the opinion of management, upon consultation with
legal counsel, any liability resulting from such proceedings would not have a
material adverse effect on the Company's financial position or results of
operations.
EMPLOYMENT AGREEMENTS: The Company has entered into executory
employment/non-compete agreements with certain key officers covering employment
through June 30, 1997. These agreements provide for minimum salary levels as
well as incentive bonuses which are payable if specified management goals are
attained. The aggregate commitment for future salaries at June 30, 1997,
excluding bonuses, was approximately $460,000. Under the terms of all
agreements, among other matters, the key officers agreed not to compete with the
Company during the terms of the agreements and for two years thereafter. Total
compensation expense under these agreements was approximately $580,000 in 1996,
$614,000 in 1995 and $544,000 in 1994.
F-30
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of March 4,
1997 is among Ultimate Electronics, Inc., a Delaware corporation ("Parent"),
Ultimate AKquisition Corp., a Delaware corporation and wholly-owned subsidiary
of Parent ("Merger Sub"), and Audio King Corporation, a Minnesota corporation
(the "Company").
WHEREAS, all of the issued and outstanding shares of common stock, par value
$.01 per share, of Merger Sub ("Merger Sub Common Stock") are presently held by
Parent;
WHEREAS, the respective boards of directors of Parent, Merger Sub and the
Company, deeming it advisable for the respective benefit of Parent, Merger Sub,
the Company and their respective stockholders, have unanimously approved the
merger of the Company with Merger Sub (the "Merger"), upon the terms and subject
to the conditions set forth in this Agreement;
WHEREAS, the board of directors of the Company (the "Board of Directors")
and a committee of the disinterested members of the Board of Directors have
approved the Merger, determined that the Merger is fair to, and in the best
interests of, the holders of the common stock, $.001 par value, of the Company
(the "Company Common Stock") and resolved unanimously to recommend the approval
of the Merger by the shareholders of the Company;
WHEREAS, simultaneously with the execution and delivery of this Agreement,
certain shareholders of the Company (the "Principal Shareholders") are entering
into agreements to vote in favor of the Merger and certain related matters
(collectively, the "Voting Agreements"); and
WHEREAS, simultaneously with the execution and delivery of this Agreement,
Parent and Merger Sub and each of Henry G. Thorne, Phillip Ward, Samuel F.
Nichols and Randel S. Carlock (collectively, the "Executives") are entering into
amended employment agreements or termination agreements, in the forms set forth
in Annex A hereto (collectively, the "Employment Agreements");
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants contained in this Agreement and for other valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Parent, Merger Sub and
the Company, intending to be legally bound, hereby agree as follows:
ARTICLE 1
THE MERGER
1.1 THE MERGER. On and subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 1.2), in accordance
with the Business Corporation Act of the State of Minnesota (the "MBCA"),
the Company will merge with and into Merger Sub, the separate existence of
the Company shall cease and Merger Sub shall continue as the surviving
corporation (the "Surviving Corporation") in the Merger. The Merger shall
have the effects set forth in Section 302A.641 of the MBCA.
1.2 EFFECTIVENESS OF MERGER. As soon as is practicable after the
satisfaction or waiver of the conditions to the obligations of the parties
to consummate the Merger, the parties shall execute and deliver the Articles
of Merger and the Certificate of Merger, substantially in the form attached
hereto as Annex B, and file such Articles of Merger, including the Plan of
Merger attached thereto, and the Certificate of Merger with the Secretaries
of State of the State of Minnesota and the State of Delaware, as applicable,
and shall make all other filings or recordings required under the MBCA and
the General Corporation Law of the State of Delaware (the "DGCL"). The
Merger shall become effective at such time as the Articles of Merger and
Certificate of Merger are duly filed with the Minnesota and Delaware
Secretaries of State, or at such other time as Merger Sub and the Company
A-1
<PAGE>
shall agree should be specified in the Articles of Merger and Certificate of
Merger (the time the Merger becomes effective being referred to herein as
the "Effective Time" and the date of such effectiveness being referred to
herein as the "Effective Date").
1.3 CERTIFICATE OF INCORPORATION; BYLAWS; DIRECTORS AND OFFICERS. The
certificate of incorporation and bylaws of Merger Sub as in effect
immediately prior to the Effective Time shall become the certificate of
incorporation and bylaws of the Surviving Corporation until thereafter
amended as provided therein and under the DGCL. The directors of Merger Sub
immediately prior to the Effective Time shall be the initial directors of
the Surviving Corporation and shall serve until their successors have been
duly elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the Surviving Corporation's
certificate of incorporation and bylaws and the DGCL. The officers of Merger
Sub immediately prior to the Effective Time will be the initial officers of
the Surviving Corporation and shall serve until their successors have been
duly elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the Surviving Corporation's
certificate of incorporation and bylaws and the DGCL.
1.4 CONVERSION OF COMPANY COMMON STOCK.
(a) Except as otherwise provided in Section 1.6 and subject to Sections
1.4(c) and 1.4(d), at the Effective Time, each issued and outstanding share
of Company Common Stock shall be converted, at the election of the holder
thereof, into one of the following (as adjusted pursuant to Section 1.6, the
"Merger Consideration"):
(i) for each such share of Company Common Stock with respect to
which an election to receive stock has been effectively made and not
revoked or lost (a "Stock Election"), the right to receive 0.70
shares of the common stock, $.01 par value, of the Parent (the
"Parent Common Stock"), (such consideration, the "Stock
Consideration"); or
(ii) for each such share of Company Common Stock with respect to
which an election to receive cash has been effectively made and not
revoked or lost (a "Cash Election") and any other shares of Company
Common Stock as to which a Stock Election was not made, the right to
receive in cash, without interest, $1.75 (the "Cash Consideration").
(b) As a result of the Merger and without any action on the part of the
holder thereof, at the Effective Time, all shares of Company Common Stock
shall cease to be outstanding and shall be canceled and retired and shall
cease to exist, and each holder of shares of Company Common Stock shall
thereafter cease to have any rights with respect to such shares of Company
Common Stock, except the right to receive, without interest, the Merger
Consideration and, if applicable, cash for fractional shares of Company
Common Stock in accordance with Sections 1.7(c), upon the surrender of a
certificate or certificates representing such shares of Company Common Stock
(a "Company Certificate").
(c) Notwithstanding anything contained in this Section 1.4 to the
contrary, each share of Company Common Stock issued and held in the
Company's treasury or which is then owned beneficially or of record by
Parent, Merger Sub or any direct or indirect subsidiary of Parent or Merger
Sub immediately prior to the Effective Time shall, by virtue of the Merger,
cease to be outstanding and shall be canceled and retired without payment of
any consideration therefor.
(d) Notwithstanding anything in this Section 1.4 to the contrary, shares
of Company Common Stock that are issued and outstanding immediately prior to
the Effective Time and that are held by shareholders who have not voted such
shares in favor of the Merger and who have properly exercised their
dissenters' rights for such shares in the manner provided in the MBCA (the
"Dissenting Shares") shall not be converted into or be exchangeable for the
right to receive the Merger Consideration, unless and until such holder
shall have failed to perfect or shall have effectively withdrawn or lost his
right to payment in respect of his dissenters' rights, as the case may be.
If such holder shall have so
A-2
<PAGE>
failed to perfect or shall have effectively withdrawn or lost such right,
such holder's shares shall thereupon be deemed to have been converted into
and to have become exchangeable for, at the Effective Time, the right to
receive the Merger Consideration, without any interest thereon. The Company
shall give the Parent prompt notice of any Dissenting Shares (and shall also
give the Parent prompt notice of any withdrawals of such demands for
dissenters' rights) and the Parent shall have the right to direct all
negotiations and proceedings with respect to any such demands. Neither the
Company nor the Surviving Corporation of the Merger shall, except with the
prior written consent of the Parent, voluntarily make any payment with
respect to, or settle or offer to settle, any such demand for dissenters'
rights.
(e) At the Effective Time, each outstanding option or right to purchase
shares of Company Common Stock that is or will be vested at or prior to July
2, 1997 (without acceleration) (a "Company Option") shall be canceled,
converted or cashed out as set forth below. Each Company Option that has an
exercise price of equal to or greater than the product of 0.7 times the
average of the closing sale price on the Nasdaq National Market of the
Parent Common Stock over the ten trading days prior to the Effective Date
(an "Out of the Money Option") shall be canceled on the Effective Date. All
other Company Options shall, at the election of the holder of the Company
Option, either be assumed by Parent in such a manner that such Company
Options shall be converted into options to purchase shares of Parent Common
Stock or exercised and the holder paid a cash amount (net of any withholding
tax) equal to the excess of the Cash Consideration over the per share
exercise price of such option, each as provided below. Following the
Effective Date, each Company Option with respect to which an election to
convert to an option to purchase Parent Common Stock has been effectively
made and not revoked (an "Option Conversion Election") shall be exercisable
upon the same terms and conditions as then are applicable to such Company
Option, except that (i) each such Company Option shall be exercisable for
that number of shares of Parent Common Stock equal to the product of (x) the
number of shares of Company Common Stock for which such Company Option was
exercisable and (y) 0.7 and (ii) the exercise price of such option shall be
equal to the exercise price of such Company Option as of the Effective Date
divided by 0.7. It is the intention of the parties that, to the extent that
any such Company Option constituted an "incentive stock option" (within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), immediately prior to the Effective Time, such option shall continue
to qualify as an incentive stock option to the maximum extent permitted by
Section 422 of the Code and that the assumption of the Company Options by
the Parent as provided in this Section 1.4(e) satisfy the conditions of
Section 424(a) of the Code. From and after the date of this Agreement, no
additional options to purchase shares of Company Common Stock shall be
granted under any of the Company's stock option plans or otherwise. Company
Options other than Out of the Money Options or Company Options with respect
to which an Option Conversion Election has been received that are
outstanding at the Effective Time shall be converted into the right to
receive in settlement thereof, for each share of Company Common Stock
subject to each such option an amount (subject to any applicable withholding
tax) in cash equal to the Cash Consideration minus the per share exercise or
purchase price of such Company Option as of the Effective Date. Except as
provided in this Section 1.4(e) of that certain letter to be delivered by
the Company to Parent on or before March 7, 1997 (the "Company Disclosure
Letter") or otherwise agreed to by the parties, (i) the provisions of any
other plan, program or arrangement providing for the issuance or grant of
any other interest in respect of the capital stock of the Company or any
Subsidiary of the Company shall become null and void on the Effective Date
and (ii) the Company shall use all reasonable efforts to ensure that
following the Effective Time no holder of options or rights or any
participant in any plan, program or arrangement shall have any right
thereunder to acquire any equity securities of the Company, the Surviving
Corporation, the Parent or any direct or indirect subsidiary thereof.
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1.5 COMPANY COMMON STOCK ELECTIONS.
(a) From the date of mailing of the Proxy Statement (as defined in
Section 5.1 hereof) through the Election Deadline (as defined below), each
holder of record of shares of Company Common Stock (other than holders of
Dissenting Shares) shall have the right, subject to the proration provisions
of Section 1.6, to submit an Election Form (as defined in Section 1.5(c))
specifying whether such person desires to have the shares of Company Common
Stock held by such person converted into the right to receive Parent Common
Stock pursuant to the Stock Election or into the right to receive cash
pursuant to the Cash Election.
(b) Promptly after the Effective Time, (i) Parent shall deposit (or
cause to be deposited) with a bank or trust company to be designated by
Parent and reasonably acceptable to the Company (the "Exchange Agent"), for
the benefit of the holders of shares of Company Common Stock, for payment in
accordance with this Article 1, cash in an amount sufficient to pay the
aggregate Cash Consideration and (ii) Parent shall deposit (or cause to be
deposited) with the Exchange Agent, for the benefit of the holders of shares
of Company Common Stock who made a Stock Election, certificates representing
the shares of Parent Common Stock ("Parent Certificates") for exchange in
accordance with this Article 1 (the cash and shares deposited pursuant to
clauses (i) and (ii) of this Section 1.5(b) being hereinafter referred to as
the "Exchange Fund"). Parent Common Stock into which Company Common Stock
shall be converted pursuant to the Merger shall be deemed to have been
issued at the Effective Time.
(c) Parent and the Company shall prepare a form (the "Election Form"),
pursuant to which each holder of Company Common Stock may make a Stock
Election or Cash Election (individually or collectively, an "Election"). The
Election Form shall be mailed to holders of record of Company Common Stock
on the record date for the Special Meeting (as defined in Section 5.1),
together with the Proxy Statement (as defined in Section 5.1). Persons who
become holders of Company Common Stock after the record date for the Special
Meeting will be able to obtain Election Forms from the Exchange Agent prior
to the Election Deadline upon request. The "Election Deadline" means 5:00
p.m. local time in the city in which the Exchange Agent is located, on the
fifth business day prior to the date of the Special Meeting; except that, if
the Special Meeting is postponed or adjourned without adoption of this
Agreement and approval of the Merger, the "Election Deadline" will mean 5:00
p.m. local time in the city in which the Exchange Agent is located, on the
fifth business day prior to the date of the postponed or adjourned meeting
at which this Agreement is adopted and the Merger is approved. To be
effective, an Election Form must be properly completed, signed (with the
signature thereon guaranteed if required by the Election Form), and
submitted to the Exchange Agent, along with the Company Certificates as to
which the holder is making the Election (or a guarantee of delivery of such
certificates in the form customarily used in transactions of this nature
from a member of any national securities exchange or the National
Association of Securities Dealers, Inc. or a commercial bank or trust
company in the United States, provided that such certificates are in fact
delivered by the time set forth in such guarantee of delivery), no later
than the Election Deadline. Failure to deliver shares of Company Common
Stock covered by such a guaranty of delivery within five business days after
the Election Deadline shall be deemed to invalidate any otherwise properly
made Election. Any Election relating to shares of Company Common Stock with
respect to which the holder thereof has filed and not withdrawn as of the
Effective Time a written demand for payment of the fair value of Company
Common Stock in accordance with the dissenters' rights under MBCA shall be
deemed to have been automatically revoked as of the Election Deadline.
(d) Notwithstanding anything herein to the contrary, a combined Election
Form containing a single Election (a "Combined Election Form") may be
submitted by two or more holders of shares of Company Common Stock either of
whom may be deemed constructively to own the other's shares of Company
Common Stock by reason of the ownership attribution rules of Section 318 of
the Code. Any Combined Election Form and any change or revocation in such
Combined Election Form must
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be signed by or on behalf of all holders of the Company Common Stock covered
thereby. For purposes of this Article 1, all shares of Company Common Stock
covered by a single Combined Election Form held by holders of Company Common
Stock submitting such Combined Election Form will be treated as being held
by a single holder of Company Common Stock.
(e) Any holder of Company Common Stock may at any time on or before the
Election Deadline change such holder's Election by written notice received
by the Exchange Agent on or before the Election Deadline accompanied by a
properly completed, revised Election Form.
(f) Any holder of Company Common Stock may at any time on or before the
Election Deadline revoke such holder's Election by written notice received
by the Exchange Agent on or before the Election Deadline or by withdrawal on
or before the Election Deadline of such holder's certificates for Company
Common Stock or of the guaranty of delivery of such certificates, previously
deposited with the Exchange Agent. Within five business days of receipt of
the revocation, the Exchange Agent will mail to the holder the certificates
previously deposited with the Exchange Agent.
(g) As used in this Agreement, "holders" of Company Common Stock shall
mean record holders of shares of Company Common Stock. Record holders who
hold such shares only as nominees, trustees or in other representative
capacities ("Representatives") may submit a separate Election Form for each
beneficial owner for whom any such record holder is a nominee; PROVIDED,
HOWEVER, that, at the request of Parent, such Representative shall certify
to the satisfaction of Parent that such record holder holds such shares as
nominee, trustee or in another representative capacity for the beneficial
owner thereof and that each such Election Form covers all the shares of
Company Common Stock held by such Representative for a particular beneficial
owner. For purposes of this Agreement, each beneficial owner for which an
Election Form is submitted will be treated as a separate holder of shares.
(h) Parent and Company shall have the right (which right may be
delegated to the Exchange Agent in whole or in part) jointly to make rules
not inconsistent with the terms of this Agreement governing the validity of
the Election Forms, the manner and extent to which Elections are to be taken
into account in making the determinations prescribed by Section 1.6, the
issuance and delivery of Parent Certificates into which Company Common Stock
is converted in the Merger, and the payment for shares of Company Common
Stock converted into the right to receive cash in the Merger. All such rules
and determinations thereunder shall be final and binding on all holders of
shares of Company Common Stock.
1.6 PRORATION.
(a) Subject to clause (c) below, in the event that Stock Elections
received from holders of the Company Common Stock require the conversion
into Parent Common Stock of more than 50% of the shares of Company Common
Stock outstanding on the Effective Date then each holder of Company Common
Stock that has made a Stock Election shall receive cash and Parent Common
Stock in the following manner:
(i) A stock proration factor (the "Stock Proration Factor") shall be
determined by dividing (y) 50% of the number of shares of Company
Common Stock outstanding on the Effective Date by (z) the total
number of shares of Company Common Stock with respect to which
effective Stock Elections were made.
(ii) The number of shares of Company Common Stock covered by each
Stock Election to be converted into Parent Common Stock shall be
determined by multiplying the Stock Proration Factor by the total
number of shares of Company Common Stock covered by such Stock
Election, rounded to the next lowest whole number.
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(iii) Shares of Company Common Stock covered by a Stock Election and
not converted into Parent Common Stock shall be converted into
the right to receive the Cash Consideration.
(b) Subject to clause (c) below, in the event that Stock Elections
received from the holders of Company Common Stock would require the
conversion into Parent Common Stock of less than 50% of the shares of
Company Common Stock outstanding on the Effective Date, then each holder of
Company Common Stock that has not made a Stock Election and holds more than
143 shares of Company Common Stock (a "Prorated Holder") will receive Parent
Common Stock and cash in the following manner:
(i) A number of additional shares of Company Common Stock (the
"Additional Shares") to be converted into Parent Common Stock
shall be determined by taking the difference between (y) 50% of
the number of shares of Company Common Stock outstanding on the
Effective Date, less (z) the number of shares of Company Common
Stock subject to effective Stock Elections.
(ii) Each Prorated Holder shall be assigned a proration factor (the
"Additional Shares Proration Factor") determined by dividing the
number of shares of Company Common Stock held by such holder by
the total number of shares of Company Common Stock held by all
Prorated Holders in the aggregate.
(iii) The number of shares of Company Common Stock held by each
Prorated Holder to be converted into Parent Common Stock shall be
determined by multiplying the Additional Shares by the Additional
Shares Proration Factor applicable to such Holder, and rounding
the result down to the next lowest whole number.
(iv) Shares of Company Common Stock held by Prorated Holders which
are not converted into Parent Common Stock shall be converted
into the right to receive cash at the rate of $1.75 per share of
Company Common Stock.
(c) Notwithstanding clauses (a) and (b) above, in the event that Stock
Elections received from the holders of Company Common Stock and the
adjustments required by clauses (a) and (b) above require the issuance of a
number of shares of Parent Common Stock which, when valued at the closing
sale price of Parent Common Stock on the day preceding the Effective Date,
represent less than 40% of value of the total Merger Consideration at the
Effective Date, then the adjustments required by clauses (a) and (b) above
shall not be made and, in lieu thereof, each Company shareholder who has
made a Stock Election shall receive Parent Company Stock in exchange for all
of the Company Common Stock held by that shareholder and each holder of
Company Common Stock that has not made a Stock Election shall receive cash
and Parent Common Stock in the following manner:
(i) The total Merger Consideration shall be determined on the
Effective Date as though holders of Company Common Stock had made
Stock Elections for exactly 50% and Cash Elections for exactly
50% of the shares of Company Common Stock outstanding on the
Effective Date (the "Adjusted Consideration").
(ii) The total number of shares of Company Common Stock that will be
deemed to have made valid Stock Elections will equal (i) 40% of
the Adjusted Consideration divided by (ii) the product of (a) the
closing price of the Parent Common Stock on the day preceding the
Effective Date and (b) 0.7 (the "Total Adjusted Company Shares").
(iii) The number of Total Adjusted Company Shares that will be
allocated to those holders of Company Common Stock who have not
made a Stock Election will equal the Total Adjusted Company
Shares less the actual number of shares of Company Common Stock
for which a valid Stock Election was made (the "Additional
Company Shares").
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(iv) A stock proration factor (the "Proration Factor") shall be
determined by dividing the number of Additional Company Shares by
the number of shares of Company Common Stock for which a valid
Stock Election has not been made.
(v) The number of shares of Company Common Stock held by each
shareholder who has not made a Stock Election that will be deemed
to be subject to a Stock Election will equal the total number of
shares of Company Common Stock held by such holder multiplied by
the Proration Factor, rounded up to the next highest whole number
(the "Deemed Stock Election Shares"). Shares of Company Common
Stock held by each shareholder that are not converted into Deemed
Stock Election Shares will be converted into cash.
(vi) In the event Company shareholders exercise dissenters' rights
under the MBCA, the Company shall deem those holders as having
made valid Cash Elections (for purposes of clause (i) above) to
assure that sufficient shares of Parent Common Stock are issued
to represent 40% of the total Merger Consideration at the
Effective Date.
1.7 DIVIDENDS, FRACTIONAL SHARES, ETC.
(a) Notwithstanding anything herein to the Contrary, no dividends or
other distributions declared after the Effective Time on Parent Common Stock
shall be paid with respect to any shares of Company Common Stock represented
by a Company Certificate until such Company Certificate is surrendered for
exchange as provided herein. Subject to applicable laws, following surrender
of any such Company Certificate, there shall be paid to the holder of the
Parent Certificate issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of dividends or other distributions with
a record date after the Effective Time theretofore payable with respect to
such whole shares of Parent Common Stock and not paid, less the amount of
any withholding taxes that may be required thereon, and (ii) at the
appropriate payment date, the amount of dividends or other distributions
with a record date after the Effective Time but prior to surrender of a
Company Certificate and a payment date subsequent to surrender payable with
respect to such whole shares of Parent Common Stock, less the amount of any
withholding taxes that may be required thereon.
(b) At or after the Effective Time, there shall be no transfers on the
stock transfer books of the Company of the shares of Company Common Stock
that were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Company Certificates are presented to the Parent, such
certificates shall be canceled and exchanged for certificates for the
consideration, if any, deliverable in respect thereof pursuant to this
Agreement in accordance with the procedures set forth in this Article 1.
(c) No fractional shares of Parent Common Stock shall be issued pursuant
to the Merger. In lieu of the issuance of any fractional share of Parent
Common Stock pursuant to the Merger, cash adjustments will be paid to
holders in respect of any fractional share of Parent Common Stock that would
otherwise be issuable, and the amount of such cash adjustment shall be equal
to the product of such fractional amount and the Cash Consideration.
(d) Any portion of the Exchange Fund (including the proceeds of any
investments thereof and any shares of Parent Common Stock) that remains
unclaimed by the former holders of Company Common Stock six months after the
Effective Time shall be delivered to the Parent. Any holder of Company
Common Stock who has not theretofore complied with this Article 1 shall
thereafter look only to the Parent for payment of the applicable Merger
Consideration, cash in lieu of fractional shares and unpaid dividends and
distributions on the Parent Common Stock deliverable in respect of each
share of Company Common Stock such holder holds as determined pursuant to
this Agreement, in each case without any interest thereon.
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(e) In the event that any Company Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such Company Certificate to be lost, stolen or destroyed
and, if required by Parent, the posting by such person of a bond in such
reasonable amount as Parent may direct as indemnity against any claim that
may be made against it with respect to such Company Certificate, the
Exchange Agent will issue in exchange for such lost, stolen or destroyed
Company Certificate the applicable Merger Consideration, cash in lieu of
fractional shares, and unpaid dividends and distributions on shares of
Parent Common Stock deliverable in respect thereof pursuant to this
Agreement and the Merger.
(f) None of Parent, Merger Sub, the Company or the Exchange Agent shall
be liable to any holder of Company Common Stock in respect of any cash
delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law. If any Company Certificates shall not have
been surrendered prior to seven years after the Effective Time (or
immediately prior to such earlier date on which any payment pursuant to this
Article 1 would otherwise escheat to or become the property of any
Governmental Entity), the payment in respect of such Company Certificate
shall, to the extent permitted by applicable law, become the property of the
Parent, free and clear of all claims or interest of any person previously
entitled thereto.
(g) The right of any holder of Company Common Stock to receive the
Merger Consideration shall be subject to and reduced by the amount of any
required tax withholding obligation.
(h) Each of Parent, Merger Sub and the Company shall use all reasonable
efforts to take all actions that are necessary or appropriate in order to
effect the Merger under the MBCA as promptly as commercially practicable.
If, at any time after the Effective Time, any further action is necessary or
desirable to carry out the purposes of this Agreement and to vest the
Surviving Corporation with full right, title and possession to all assets,
property, rights, privileges, powers and franchises of either Merger Sub or
the Company, the officers and directors of the Surviving Corporation are
fully authorized in the name of their corporation or otherwise to take, and
shall take, all such lawful and necessary action.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Merger Sub as
follows:
2.1 ORGANIZATION. Each of the Company and each corporation or business
enterprise in which the Company has an ownership interest (collectively, the
"Subsidiaries") is a corporation duly incorporated, validly existing and in
good standing under the laws of the jurisdiction in which it is incorporated
and has the corporate power to own its property and to carry on its business
as now being conducted. Each of the Company and the Subsidiaries is duly
qualified and/or licensed, as may be required, and in good standing in each
of the jurisdictions in which the nature of the business conducted by it or
the character of the property owned, leased or used by it makes such
qualification and/or licensing necessary, except in such jurisdictions where
the failure to be so qualified and/or licensed would not, individually or in
the aggregate, have a material adverse effect on the prospects, condition
(financial or otherwise), business, operations, or assets of the Company and
the Subsidiaries, taken as a whole, or otherwise be reasonably likely to
require the expenditure of $25,000 or more (a "Company Material Adverse
Effect"). The Company has delivered to Parent complete and correct copies of
its articles of incorporation and bylaws and the articles of incorporation
and bylaws of the Subsidiaries, in each case as amended to the date of this
Agreement.
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2.2 CAPITAL STOCK OF THE COMPANY.
(a) As of the date of this Agreement, the authorized capital stock of
the Company consists of 20,000,000 shares of Company Common Stock, of which
2,798,613 are issued and outstanding, and 6,000,000 shares of preferred
stock, par value $0.001 per share, none of which are issued and outstanding.
In addition, 610,000 shares of Company Common Stock have been reserved for
issuance pursuant to the Company's stock option plan, of which options to
purchase 367,313 shares of Company Common Stock have been granted. As of
February 28, 1997, up to 25,535 shares of Company Common Stock will be
purchasable under the Company's stock purchase plan (the "Employee Stock
Purchase Plan") and no additional shares of Company Common Stock shall
become vested or otherwise be purchasable under either the Company stock
option plan or the stock purchase plan from and after the date hereof.
Except as set forth above, at the close of business on the date hereof, no
shares of capital stock or other voting securities of the Company were
issued, reserved for issuance or outstanding. The Company has not issued any
stock appreciation rights. The Company has not issued any bonds, debentures,
notes or other indebtedness of the Company that, by the terms thereof, grant
the holder thereof, the right to vote (or are convertible into, or
exchangeable for, securities having the right to vote) on any matters on
which shareholders of the Company may vote. There are no shares of Company
Common Stock held in the treasury of the Company. The issued and outstanding
shares of Company Common Stock have been and are duly authorized, validly
issued, fully paid and nonassessable and free of preemptive rights. The
Company has not, subsequent to December 31, 1996, declared or paid any
dividend, or declared or made any distribution on, or authorized the
creation or issuance of, or issued, or authorized or effected any split-up
or any other recapitalization of, any of its capital stock, or directly or
indirectly redeemed, purchased or otherwise acquired any of its outstanding
capital stock. The Company has not heretofore agreed to take any such
action, will not take such action during the period between the date of this
Agreement and the Effective Time, and there are no outstanding contractual
obligations of the Company to repurchase, redeem or otherwise acquire any
outstanding shares of capital stock of the Company, excluding obligations
under the Company's employee benefits plans as listed on Section 2.2(a) of
the Company Disclosure Letter.
(b) Section 2.2(b) of the Company Disclosure Letter lists all
outstanding options, warrants or other rights to subscribe for, purchase or
acquire or receive from the Company any capital stock of the Company or
securities convertible into or exchangeable for capital stock of the
Company, including with respect thereto, all prices, conversion ratios and
vesting schedules.
2.3 AUTHORITY RELATIVE TO THIS AGREEMENT; NONCONTRAVENTION.
(a) The Company has the requisite corporate power and authority to enter
into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement by the Company, the performance by
the Company of its obligations hereunder and the consummation by the Company
of the transactions contemplated herein have been duly authorized by the
Board of Directors, and no other corporate proceedings on the part of the
Company or any of the Subsidiaries are necessary to authorize the execution
and delivery of this Agreement, the performance by the Company of its
obligations hereunder and the consummation by the Company of the
transactions contemplated hereby, except for (i) the approval of the
Company's shareholders as contemplated hereby and (ii) the approval by the
Board of Directors, if necessary, of any further actions to be taken by the
Company in connection with the Company Options as contemplated in Section
1.4(e) or the Company's other employee benefit plans. Such approval of the
Company's shareholders requires an affirmative vote in favor of the Merger
by the holders of only a majority of the outstanding shares of Company
Common Stock. This Agreement has been duly executed and delivered by the
Company and constitutes a valid and binding obligation of the Company,
enforceable against it in accordance with its terms, except to the extent
that such enforceability may be limited by applicable bankruptcy,
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insolvency, fraudulent transfer, reorganization or other laws affecting the
enforcement of creditors' rights generally or by general equitable
principles.
(b) Except as set forth in Section 2.3(b) of the Company Disclosure
Letter, the execution and delivery of this Agreement by the Company, the
consummation by the Company of the transactions contemplated herein and the
compliance by the Company with any of the provisions hereof will not: (i)
conflict with or result in any breach of the Articles of Incorporation or
Bylaws of the Company or of any of the Subsidiaries, (ii) result in a
violation or breach of any provisions of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration
under, or result in the creation of any lien, security interest, charge, or
encumbrance upon any of the properties or assets of the Company or any
Subsidiaries under, or result in the loss of a material benefit under, any
of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, contract, lease, agreement or other
instrument or obligation of any kind to which the Company or any of the
Subsidiaries is a party or by which the Company or any of the Subsidiaries
or any of their respective properties or assets, may be bound or any permit,
concession, franchise or license applicable to any of them or their
properties or assets or (iii) subject to compliance with the statutes and
regulations referred to in subsection (c) below, conflict with or violate
any judgment, ruling, order, writ, injunction, decree, law, statute, rule or
regulation applicable to the Company or any of the Subsidiaries or any of
their respective properties or assets, except for any such conflict, breach,
violation, default, termination, acceleration, lien, security interest,
charge, encumbrance or loss of benefit described in clauses (ii) and (iii)
above that would not, individually or in the aggregate, result in a Company
Material Adverse Effect.
(c) Except for compliance with the provisions of the MBCA, the
Securities Exchange Act of 1934, as amended (the "'34 Act"), the Securities
Act of 1933, as amended (the "'33 Act"), the rules and regulations of the
Securities and Exchange Commission (the "SEC"), the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (the "HSR Act"), the Nasdaq SmallCap
Market and the "blue sky" laws of various states and foreign laws, no action
by any governmental authority is necessary for the Company's execution and
delivery of this Agreement or the consummation by the Company of the
transactions contemplated hereby.
(d) Except as set forth in Section 2.3(d) of the Company Disclosure
Letter, no consents, approvals, orders, registrations, declarations, filings
or authorizations are required for or in connection with the execution and
delivery of this Agreement or the consummation by the Company of the
transactions contemplated on its part hereby.
2.4 SEC REPORTS AND FINANCIAL STATEMENTS. Since December 31, 1993, the
Company has filed with the SEC all forms, reports, schedules, registration
statements, definitive proxy statements and other documents (the "Company
SEC Reports") required to be filed by the Company with the SEC. As of their
respective dates, the Company SEC Reports complied with the applicable
requirements of the '33 Act, the '34 Act and the rules and regulations
promulgated thereunder (the "Rules and Regulations") applicable to such
Company SEC Reports, and, except to the extent that information contained in
any Company SEC Reports has been revised or superseded by a later Company
SEC Report filed and publicly available prior to the date of this Agreement
(a "Filed SEC Document"), none of the Company SEC Reports, or Filed SEC
Documents, as of the date they were filed, contained any untrue statement of
a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The financial
statements of the Company included in the Company SEC Reports comply with
applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with
generally accepted accounting principles ("GAAP") (except, in the case of
unaudited statements, as permitted by Regulation S-X) applied on a
consistent basis during the periods involved and fairly
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present the consolidated financial position of the Company and its
consolidated subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). Except as set forth in the Filed SEC Documents or in Section
2.4 of the Company Disclosure Letter, neither the Company nor any of the
Subsidiaries has any liabilities, debts or obligations of any nature
(whether accrued, absolute, contingent or otherwise) that are required by
GAAP to be set forth on a consolidated balance sheet of the Company and its
consolidated subsidiaries or in the notes thereto or that would,
individually or in the aggregate, result in a Company Material Adverse
Effect. None of the Subsidiaries is required to file any forms, reports or
other documents with the SEC pursuant to Sections 12 or 15 of the '34 Act.
2.5 CERTAIN CHANGES. Except as disclosed in the Filed SEC Documents or
in Section 2.5 of the Company Disclosure Letter, since December 31, 1996,
the Company has conducted its business only in the ordinary course and: (i)
there has not been any Company Material Adverse Effect, (ii) the Company has
not become a party to any agreement or amendment to an existing agreement
that would be required to be filed by the Company as an exhibit to any
filing made or required to be made under the '34 Act, (iii) there has not
been any change by the Company or the Subsidiaries in accounting principles
or methods except insofar as may be required by GAAP and (iv) there has not
been (A) any granting by the Company or any of the Subsidiaries to any
executive officer of the Company or any of the Subsidiaries of any increase
in compensation, (B) any granting by the Company or any of the Subsidiaries
to any such executive officer of any increase in severance or termination
pay, except as was required under employment, severance or termination
agreements in effect as of the date of the most recent audited financial
statements included in the Filed SEC Documents, (C) any entry by the Company
or any of the Subsidiaries into any employment, severance or termination
with any such executive officer, (D), except as contemplated hereby, any
acceleration of the vesting or exercise of any Company Option, or (E) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to any of the Company's
capital stock.
2.6 LITIGATION. Except as disclosed in the Filed SEC Documents or in
Section 2.6 of the Company Disclosure Letter, there is no suit, action or
legal, administrative, arbitration or other proceeding or governmental
investigation pending or threatened, to which the Company or any of the
Subsidiaries is a party or by which any of them is or would be affected (and
the Company is not aware of any basis for such action, suit or proceeding
that has a reasonable likelihood of being brought) which, considered
individually or in the aggregate, if determined adversely to the Company, is
likely to: (i) have a Company Material Adverse Effect, (ii) impair the
ability of the Company to perform its obligations under this Agreement, or
(iii) to prevent the consummation of any of the transactions contemplated by
this Agreement, nor is there any judgment, decree, injunction, rule or order
of any Governmental Entity or arbitrator outstanding against the Company or
any of the Subsidiaries having, or which would reasonably be expected to
have, in the future, any such effect. No product liability or other similar
tort claims have been made or, to the Company's knowledge, threatened
against the Company or any of the Subsidiaries relating to products sold or
leased or services performed by the Company or any of the Subsidiaries that
would reasonably be expected to form the basis for a cause of action for
product liability against the Company that, if determined adversely to the
Company, would reasonably be expected to have a Company Material Adverse
Effect.
2.7 DISCLOSURE IN REGISTRATION STATEMENT AND PROXY STATEMENT. None of
the information that has been or will be supplied in writing by the Company
specifically for inclusion or incorporation by reference in the Registration
Statement and Proxy Statement (each as defined in Section 5.1) will, at the
time such Registration Statement and Proxy Statement are mailed to the
shareholders of the Company and at the time such Registration Statement is
filed with the SEC, include an untrue
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statement of a material fact or omit to state a material fact necessary to
make the statements therein, in light of the circumstances in which they are
made, not misleading.
2.8 BROKER'S OR FINDER'S FEES. Except as disclosed in Section 2.8 of
the Company Disclosure Letter, no agent, broker, person or firm acting on
behalf of the Company or under its authority is or will be entitled to any
advisory, commission, broker's or finder's fee from the Company in
connection with any of the transactions contemplated herein, and the fees
and expenses of all such persons so disclosed shall be paid by the Company.
The estimated fees and expenses incurred and to be incurred by the Company
in connection with this Agreement and the transactions contemplated by this
Agreement (including the fees of Greene, Holcomb & Lannin ("GH&L") and the
fees of the Company's legal counsel) are set forth in Section 2.8 of the
Company Disclosure Letter.
2.9 BOARD RECOMMENDATION; COMPANY ACTION; REQUISITE VOTE OF THE
COMPANY'S SHAREHOLDERS.
(a) The Board of Directors has, subject to its continuing duties to the
shareholders of the Company and by resolutions duly adopted by the unanimous
vote of the directors of such board at a meeting duly called and held on
February 27, 1997, determined that the Merger, in accordance with the terms
of this Agreement, is fair to and in the best interests of the Company and
its shareholders, approved and adopted this Agreement, the Merger and the
other transactions contemplated hereby, and recommended that the
shareholders of the Company approve and adopt this Agreement and the Merger.
In connection with such approval, the Board of Directors received from GH&L
an opinion to the effect that the consideration to be received by the
holders of the Company Common Stock pursuant to the Merger is fair to the
holders of Company Common Stock from a financial point of view (a copy of
which opinion has been furnished to Parent).
(b) The affirmative vote of shareholders of the Company required for
approval and adoption of this Agreement, the transactions contemplated
hereby and the Merger is no greater than a majority of the outstanding
Company Common Stock and such vote is the only vote of shareholders required
in respect thereof.
2.10 SUBSIDIARIES. Section 2.10 of the Company Disclosure Letter lists
each Subsidiary. Except as disclosed in the Filed SEC Documents or Section
2.10 of the Company Disclosure Letter, all the outstanding shares of capital
stock of each Subsidiary have been validly issued and are fully paid and
nonassessable and are owned by the Company, by another Subsidiary or by the
Company and another such Subsidiary, free and clear of all pledges, claims,
liens, charges, encumbrances and security interests of any kind or nature
whatsoever (collectively, "Liens"). Except for the capital stock of the
Subsidiaries and except for the ownership interests set forth in the Filed
SEC Documents or Section 2.10 of the Company Disclosure Letter, the Company
does not own, directly or indirectly, any capital stock or other ownership
interest in any corporation, partnership, joint venture or other entity.
2.11 ABSENCE OF CHANGES IN BENEFITS. Except as disclosed in the Filed
SEC Documents or Section 2.11 of the Company Disclosure Letter, since
December 31, 1996, there has not been any adoption or amendment by the
Company or any Subsidiary of any Benefit Plan or agreement (as hereinafter
defined). Except as disclosed in the Filed SEC Documents or Section 2.11 of
the Company Disclosure Letter and except for obligations existing as a
matter of law, there exist no employment, consulting, severance, termination
or indemnification agreements, arrangements or understandings between the
Company or any of the Subsidiaries and any current or former employee,
officer or director of the Company or any of the Subsidiaries. Except for
Company Options, none of the Benefit Plans provide benefits to any advisor
or consultant to the Company or any of the Subsidiaries who is not a current
or former employee, officer or director of the Company or any of the
Subsidiaries.
2.12 STATE TAKEOVER STATUTES. The independent committee of the Board
of Directors has approved the Merger and this Agreement and such approval is
sufficient to remove the prohibition to the transactions contemplated hereby
that would otherwise arise from Sections 302A.673 and
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302A.675 of the MBCA. Provided that Parent, Merger Sub and any other persons
or entities acting together with Parent and Merger Sub pursuant to any
agreement or understanding do not acquire beneficial ownership directly or
indirectly of 20% or more of the Company Common Stock at any time prior to
the Merger, the provisions of Section 302A.671 of the MBCA will not apply to
the transactions contemplated by this Agreement.
2.13 COMPLIANCE WITH LAWS. Except as disclosed in Section 2.13 of the
Company Disclosure Letter, neither the Company nor any of the Subsidiaries
has violated or failed to comply with any statute, law, ordinance,
regulation, rule, judgment, decree or order of any Governmental Entity
applicable to its business or operations. The Company and the Subsidiaries
have not received any written communication from a Governmental Entity that
alleges that any of them is not in compliance in any material respect with
any applicable law. The Company and the Subsidiaries are not required to
make, and the Company has no reasonable expectation that the Company or any
of the Subsidiaries will be required to make any expenditures that would,
individually or in the aggregate, exceed $25,000 to achieve or maintain
compliance with applicable law.
2.14 ENVIRONMENTAL MATTERS. (a) Except as disclosed in Section 2.14 of
the Company Disclosure Letter or the Filed SEC Documents, neither the
Company nor any of the Subsidiaries has: (x) knowledge of the disposal of
any Hazardous Substances (as defined below) on, under, from or at any of the
Company's or any of the Subsidiaries' properties or any other properties
presently or formerly owned or operated by the Company or any of the
Subsidiaries (hereinafter, the "Properties"), in violation of any applicable
Environmental Laws (as defined below), (y) any knowledge of the presence of
any Hazardous Substances on, under or at any of the Properties or any other
property but arising from the Properties, in violation of any applicable
Environmental Laws, or (z) except as disclosed in Section 2.14(a) of the
Company Disclosure Letter, received any written notice (A) from a
Governmental Entity that the Company or any of the Subsidiaries is in
violation of, or has failed to obtain any necessary permit or authorization
under, any Environmental Laws, (B) of the institution or pendency of any
suit, action, claim, proceeding or investigation by any Governmental Entity
or any third party in connection with any such violation or in connection
with a release or threatened release of Hazardous Substances at the
Properties (whether due to past or present operations or other factors or
conditions) or any other properties for which the Company or any of the
Subsidiaries may be responsible, (C) requiring the response to or
remediation of a release or threatened release of Hazardous Substances at or
arising from any of the Properties or any other properties or (D) demanding
payment by the Company or any of the Subsidiaries for response to or
remediation of a release or threatened release of Hazardous Substances at or
arising from any of the Properties or any other properties. In addition, (i)
the Company and the Subsidiaries have conducted their business in compliance
with all Environmental Laws; (ii) neither the Company nor any of the
Subsidiaries is in violation of or has violated any Environmental Law; (iii)
no Environmental Laws require any investigation, work, repairs,
construction, remediation, expenditures or response costs of any kind or
nature (collectively, "Environmental Obligation") with respect to the
Properties or any of the actions, omissions or business endeavors of the
Company or any of the Subsidiaries, nor has the Company or any of the
Subsidiaries agreed or committed to any Environmental Obligation; and (iv)
neither the Company nor any of the Subsidiaries nor, to the knowledge of the
Company, any other person, including any previous or other owner, operator,
tenant, occupant or user of any real property owned, leased, operated or
otherwise occupied by the Company or any of the Subsidiaries at any time,
has released, discharged or disposed of any Hazardous Substance on, under,
in or about any of the Properties (A) in any quantity or concentration
exceeding any limitation, standard or prohibition under any Environmental
Law or (B) in such a manner or extent as to require or result in any
Environmental Obligation with respect to such property under any
Environmental Law.
(b) No Environmental Law imposes any obligation upon the Company or the
Subsidiaries arising out of or as a condition to any transaction
contemplated by this Agreement, including, without
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limitation, any requirement to modify or to transfer any permit or license,
any requirement to file any notice or other submission with any Governmental
Entity, the placement of any notice, acknowledgment or covenant in any land
records, or the modification of or provision of notice under any agreement,
consent order or consent decree. No Lien has been placed upon any of the
Company's or the Subsidiaries' Properties under any Environmental Law.
(c) For purposes of this Agreement, the term "Environmental Laws" shall
mean any and all federal, state and local statutes, laws, regulations,
ordinances, rules, judgments, orders, decrees, permits, concessions, grants,
franchises, licenses, agreements or other governmental restrictions relating
to the protection of human health, safety or the environment or to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, chemicals, or industrial toxic or hazardous substances or
wastes into the environment including, without limitation, ambient air,
surface water, ground water or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling or pollutants, contaminants, chemicals, or industrial,
toxic or hazardous substances or wastes, which statutes and regulations
shall include, without limitation, the Comprehensive Environmental Response
Compensation and Liability Act, as amended, 42 U.S.C. Section9601 ET SEQ.,
the Resource Conservation and Recovery Act, as amended, 42 U.S.C.
Section9601 ET SEQ., the Federal Water and Pollution Control Act, as
amended, 33 U.S.C. Section1251 ET SEQ., the Federal Clean Air Act, as
amended, 42 U.S.C. Section7401 ET SEQ., the Emergency Planning and Community
Right to Know Act, as amended, 42 U.S.C. Section110101 ET SEQ., the Toxic
Substances Control Act, as amended, 154 U.S.C. SectionSection2601-2629, the
Safe Drinking Water Act, as amended 42 U.S.C. SectionSection300f-300j, and
any and all applicable state law counterparts, and the regulations issued
under each of such federal or state statutes. For purposes of this
Agreement, the term "Hazardous Substance" shall mean any toxic or hazardous
materials, wastes or substances, defined as, or included in the definition
of, "hazardous wastes," "hazardous materials" or "toxic substances" under
any Environmental Law, including asbestos, buried contaminants, regulated
chemicals, flammable explosives, radioactive materials, polychlorinated
biphenyls, petroleum and petroleum products.
2.15 CONTRACTS; DEBT INSTRUMENTS.
(a) The contracts and agreements disclosed in the Filed SEC Documents or
in Section 2.15(a) of the Company Disclosure Letter, constitute all of the
contracts or agreements to which the Company or any of the Subsidiaries is a
party that either (i) are material to the business, properties, assets,
condition (financial or otherwise) results of operations or prospects of the
Company and the Subsidiaries, taken as a whole, or (ii) were entered into by
the Company or any of the Subsidiaries other than in the ordinary course of
business of such entity. Except as set forth in Section 2.15(a) of the
Company Disclosure Letter or as disclosed in the Filed SEC Documents, each
agreement, contract, lease, license, commitment or instrument of the Company
disclosed in the Filed SEC Documents or Section 2.15(a) of the Company
Disclosure Letter (the "Contracts") is in full force and effect and is a
legal, valid and binding agreement of the Company or the applicable
Subsidiary and, to the knowledge of the Company, of each other party
thereto, enforceable, in accordance with its terms, except to the extent
that its enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance or similar laws affecting the rights
of creditors' generally and subject to general principles of equity. Neither
the Company nor any of the Subsidiaries is in violation of or in default
under (nor does there exist any condition which upon the passage of time or
the giving of notice would cause such a violation of or default under) any
Contract or other agreement to which any of them is a party or by which any
of them is or any of their properties or assets is bound.
(b) Set forth in Section 2.15(b) of the Company Disclosure Letter is (i)
a list of all loan or credit agreements, notes, bonds, indentures and other
agreements and instruments (whether or not in writing and including, without
limitation, cash or other advances made by the Company) pursuant to which
any Indebtedness of the Company or any of the Subsidiaries to any person (or
group of related persons) in an aggregate principal amount in excess of
$10,000 is outstanding or may be incurred, and
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(ii) the respective principal amounts currently outstanding thereunder. For
purposes of this Agreement, "Indebtedness" shall mean, with respect to any
person, without duplication, (A) all obligations of such person for borrowed
money, or with respect to deposits or advances of any kind to such person,
(B) all obligations of such person evidenced by bonds, debentures, notes or
similar instruments, (C) all obligations of such person upon which interest
charges are customarily paid, (D) all obligations of such person under
conditional sale or other title retention agreements relating to property
purchased by such person, (E) all obligations of such person issued or
assumed as the deferred purchase price of property or services (excluding
obligations of such person to creditors for raw materials, inventory,
services and supplies incurred in the ordinary course of such person's
business), (F) all capitalized lease obligations of such person, (G) all
obligations of others secured by any lien on property or assets owned or
acquired by such person, whether or not the obligations secured thereby have
been assumed, (H) all obligations of such person under interest rate or
currency hedging transactions (valued at the termination value thereof), (I)
all letters of credit issued for the account of such person and (J) all
guarantees and arrangements having the economic effect of a guarantee of
such person of any Indebtedness of any other person.
(c) Except as set forth in Section 2.15(c) of the Company Disclosure
Letter or in the Filed SEC Documents, neither the Company nor any of the
Subsidiaries is a party to or bound by any material written or oral (i)
employment agreement or employment contract that is not terminable at will
by the Company, without any adverse effect (financial or otherwise) on the
Company or any Subsidiary, (ii) covenant not to compete or (iii) agreement,
contract or other arrangement with (A) any shareholder of the Company, (B)
any affiliate of the Company or any affiliate of any shareholder of the
Company or (C) any officer, director or employee of the Company (other than
employment agreements covered by clause (i) above) or of any shareholder of
the Company or of any affiliate of the Company.
(d) Except as set forth in Section 2.15(d) of the Company Disclosure
Letter, the Company is not a party to or bound by any material written or
oral mortgage, pledge, security agreement, deed of trust or other document
granting a Lien (including, but not limited to, Liens upon properties
acquired under conditional sales, capital leases or other title retention or
security devices).
2.16 PROPERTIES.
(a) Each of the Company and the Subsidiaries has sufficient title to, or
valid leasehold interests in, all of its properties and assets except for
such as are no longer used or useful in the conduct of its businesses. All
such assets and properties, other than assets and properties in which the
Company or any of the Subsidiaries has leasehold interests, are free and
clear of all Liens other than those set forth in Section 2.16 of the Company
Disclosure Letter.
(b) Except for noncompliance with respect to personal property leases
that do not, individually or in the aggregate, cause a Company Material
Adverse Effect, each of the Company and the Subsidiaries has complied in all
material respects with the terms of all leases to which it is a party and
under which real property leases it is in occupancy, and all such leases are
in full force and effect. Each of the Company and the Subsidiaries enjoys
peaceful and undisturbed possession under all such leases, except where the
failure to enjoy peaceful and undisturbed possession with respect to
personal property leases would not, individually or in the aggregate, have a
Company Material Adverse Effect.
2.17 INTELLECTUAL PROPERTY. The Company and the Subsidiaries own, or
are validly licensed or otherwise have the right to use, all patents, patent
rights, trademarks, trademark rights, trade names, trade name rights,
service marks, service mark rights, copyrights, trade secrets, and other
proprietary intellectual property rights and computer programs, software and
data (collectively, the "Intellectual Property") that are used in or
necessary to the conduct of the Company and the Subsidiaries. Other than as
disclosed in Section 2.17 of the Company Disclosure Letter, there are not
and have not been any legal or other proceedings involving the Company or
any Subsidiary concerning any of the
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Intellectual Property, nor to the Company's knowledge has any such action or
proceeding been threatened; to the Company's knowledge, the Company's use of
the Intellectual Property and the conduct of its business as it is presently
conducted does not conflict with, infringe upon or violate any Intellectual
Property or other rights of any other person, firm or corporation; there are
no outstanding nor, to the Company's knowledge, threatened, disputes or
disagreements with respect to any Intellectual Property. This Agreement and
the consummation of the transactions contemplated hereby will not conflict
with, alter or impair any such rights or cause a breach, termination or
default (with or without any action on behalf of any person) under any
agreement or understanding with respect to any Intellectual Property. All
Intellectual Property listed in Section 2.17 of the Company Disclosure
Letter is, to the best of the Company's knowledge, free and clear of the
claims of others and of all Liens. To the best of the Company's knowledge,
the conduct of the business of the Company and the Subsidiaries as presently
conducted does not, and in the conduct of such business as proposed to be
conducted, violate, conflict with or infringe the Intellectual Property of
any other person. There are no infringement or other claims notified to or
pending or, to the best of the Company's knowledge, threatened against the
Company or any of the Subsidiaries.
2.18 LABOR MATTERS. There are no collective bargaining or other labor
union agreements to which the Company or any of the Subsidiaries is a party
or by which any of them is bound. Neither the Company nor any of the
Subsidiaries has been subject to any labor union organizing activity, or had
any actual or threatened employee strikes, work stoppages, slowdowns or
lockouts.
2.19 INSURANCE. Section 2.19 of the Company Disclosure Letter sets
forth a complete and accurate list and description, including annual
premiums and deductibles, of all policies of fire, liability, product
liability, workmen's compensation, health and other forms of insurance
presently in effect with respect to the business of the Company and the
Subsidiaries. All such policies are valid, outstanding and enforceable
policies and provide insurance coverage for the properties, assets and
operations of the Company and the Subsidiaries, of the kinds, in the amounts
and against the risks (i) required to comply with laws and (ii) as
management of the Company deems to be adequate. No notice of cancellation or
termination has been received with respect to any such policy. The
activities and operations of the Company have been conducted in a manner so
as to conform in all material respects to all applicable provisions of such
insurance policies.
2.20 NONCOMPETITION. The Company and the Subsidiaries are not, and
after the Effective Time neither the Surviving Corporation nor Parent (by
reason of any agreement to which the Surviving Corporation is a party) will
be, subject to any noncompetition or similar restriction on their respective
businesses or activities or those of their affiliates.
2.21 TAXES.
(a) For purposes of this Agreement, (A) "Tax" or "Taxes" means all
Federal, state, local, foreign and other taxes, assessments, duties or
similar charges of any kind, including all payroll, employment and other
withholding taxes, and including any interest, penalties and additions
imposed with respect to such amounts; (B) "Taxing Authority" shall mean any
governmental or any quasi-governmental body exercising any taxing authority
or any other authority exercising Tax regulatory authority; and (C) "Return"
or "Returns" shall mean all returns, declarations of estimated tax payments,
reports, estimates, information returns and statements with respect to
Taxes, including any related or supporting information with respect to any
of the foregoing, filed or required to be filed with any Taxing Authority.
(b) (A) The Company and each of the Subsidiaries, and any consolidated,
combined, unitary or affiliated group of which the Company or any of the
Subsidiaries is or has ever been a member (an "Affiliated Group"), has
timely filed with the appropriate Taxing Authority all Returns required to
be filed on or prior to the date hereof and each such Return was complete
and correct in all material respects at the time of filing and (B) all Taxes
including Taxes for which no Returns are required to be
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filed (i) of the Company, and each of the Subsidiaries and any Affiliated
Group, (ii) for which the Company or any of the Subsidiaries is or could
otherwise be held liable, or (iii) which are or could otherwise become
chargeable as an encumbrance upon any property or assets of the Company or
any of its the Subsidiaries (the Taxes referred to in this Section being
"Covered Taxes"), have been duly and timely paid.
(c) The Company has delivered or made available to the Parent and Merger
Sub (A) complete and correct copies of all Returns filed by the Company,
each of the Subsidiaries, and each Affiliated Group for taxable periods
ending after June 30, 1992 and for all other taxable periods for which the
applicable statute of limitations has not yet run and (B) complete and
correct copies of all ruling requests, private letter rulings, revenue agent
reports, information document requests and responses thereto, notices of
proposed deficiencies, deficiency notices, applications for changes in
method of accounting, protests, petitions, closing agreements, settlement
agreements, and any similar documents submitted by, received by or agreed to
by or on behalf of the Company, any of the Subsidiaries or any Affiliated
Group and relating to Covered Taxes.
(d) Except in financial statements or except as set forth in Section
2.21 of the Company Disclosure Letter, no liens for Taxes exist with respect
to any of the assets or properties of any of the Subsidiaries or the
Company. Except as set forth in Section 2.21 of the Company Disclosure
Letter, the Federal income Tax Returns of the Company, each of the
Subsidiaries and each Affiliated Group has been examined by the Internal
Revenue Service, or the statute of limitations with respect to the relevant
Tax liability has expired, for all taxable periods through and including the
taxable year ended on June 30, 1992. All other Returns with respect to
income, profits, corporate franchise, receipts, sales, use, excise,
property, net worth, and capital Taxes, and with respect to all other
material Taxes, have been examined by the appropriate Taxing Authority, or
the statute of limitations with respect to the relevant Tax liability has
expired, for all taxable periods through and including the taxable period
listed with respect to each such jurisdiction in Section 2.21 of the Company
Disclosure Letter. Each deficiency resulting from any audit or examination
relating to Covered Taxes by any Taxing Authority has been paid and no
material issues were raised in writing (or otherwise to the actual knowledge
of the Company) by the relevant Taxing Authority during any such audit or
examination that will apply to taxable periods other than the taxable period
to which such audit or examination related. Except as set forth in Section
2.21 of the Company Disclosure Letter, (A) no Returns with respect to
Federal income Taxes or other income Taxes of the Company of any of the
Subsidiaries are currently under audit or examination by the Internal
Revenue Service or any other Taxing Authority, (B) except for an audit of
sales tax returns by the State of Minnesota taxing authorities, no audit or
examination relating to Covered Taxes is currently being conducted by the
Internal Revenue Service or any other Taxing Authority and (C) neither the
Internal Revenue Service nor any other Taxing Authority has given notice
(either orally or in writing) that it will commence any such audit or
examination.
(e) Except as set forth in Section 2.21 of the Company Disclosure
Letter, (A) no person has made with respect to the Company or any of the
Subsidiaries, or with respect to any property held by the Company or any of
the Subsidiaries, any consent under Section 341 of the Code, (B) no property
of the Company or any of the Subsidiaries is "tax-exempt use property"
within the meaning of Section 168(h) of the Code, (C) neither the Company
nor any of the Subsidiaries is a party to any lease made pursuant to Section
168(f)(8) of the Internal Revenue Code of 1954, as amended and in effect
prior to the date of enactment of the Tax Equity and Fiscal Responsibility
Act of 1982, (D) none of the assets of the Company or any of the
Subsidiaries is subject to a lease under Section 7701(h) of the Code or
under any predecessor, (E) none of the Company or any of the Subsidiaries
has made any payments, is obligated to make any payments, or is a party to
any agreement that under certain circumstances could obligate it to make any
payments that will not be deductible under Section 280G of the Code, and (F)
none of the Company, any of the Subsidiaries or any other Affiliate of the
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Company has made any election under Section 13261(g)(2) or Section
13261(g)(3) of the Revenue Reconciliation Act of 1993.
(f) Except as set forth in Section 2.21 of the Company Disclosure
Letter, there is no agreement or other document extending, or having the
effect of extending, the period of assessment or collection of any Covered
Taxes and no power of attorney with respect to any Covered Taxes has been
executed or filed with the Internal Revenue Service or any other Taxing
Authority.
(g) Section 2.21 of the Company Disclosure Letter lists each affiliated,
consolidated, combined, unitary or aggregate group for purposes of filing
Returns or paying Taxes of which the Company or any of the Subsidiaries is
or has been a member, the jurisdiction in which such affiliated,
consolidated, combined, unitary or aggregate group has or has been required
to file a Return that includes the Company, any of the Subsidiaries, or the
income, assets or activities of the Company or any of the Subsidiaries, and
the corporation and/or other person that is or was responsible for filing
such Returns.
(h) Except as set forth in Section 2.21 of the Company Disclosure
Letter, none of the Company, any of the Subsidiaries or any Affiliated Group
is a party to or is bound by any agreement, arrangement or practice with
respect to Taxes. The Company has delivered to the Parent and Merger Sub
complete and accurate copies of any such written agreement, arrangement or
practice, and complete and accurate descriptions of any such oral agreement,
arrangement or practice.
(i) None of the Company or any of the Subsidiaries will be required to
include in a taxable period on or after the Effective Date taxable income
(i) attributable to income that economically accrued in a taxable period
ending on or before the Effective Date, including, without limitation, as a
result of the installment method of accounting, the completed contract
method of accounting, the long-term contract method of accounting or the
cash method of accounting, or (ii) by reason of Section 481 of the Code or
comparable provisions of state, local or foreign law.
(j) Section 2.21 of the Company Disclosure Letter sets forth as of June
30, 1996, with respect to the Company and the Subsidiaries (1) the tax basis
of the Company and the Subsidiaries in their assets; and (2) the amount of
any net operating loss, net capital loss, unused investment or other credit,
unused foreign tax, or excess charitable contribution, including a
description of any material limitations affecting the use thereof (including
but not limited to limitations under Sections 382 and 383 of the Code) and a
description of the methodology used in computing such limitations.
(k) Section 2.21 of the Company Disclosure Letter lists each state,
county, local, municipal or foreign jurisdiction in which the Company or any
of the Subsidiaries files, has filed since December 31, 1991, is required to
file or has been required to file a Return since December 31, 1991, or is or
has been liable for Tax on a "nexus" basis since December 31, 1991. No claim
has ever been made by any other jurisdiction that the Company or any of the
Subsidiaries is or may be subject to tax by that jurisdiction.
2.22 ERISA.
(a) Section 2.22 of the Company Disclosure Letter contains a list and
brief description of each "employee pension benefit plan" (as defined in
Section 3(2) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")) (hereinafter a "Pension Plan"), "employee welfare benefit
plan" (as defined in Section 3(1) of ERISA, hereinafter a "Welfare Plan")
and each other plan, arrangement or policy (written or oral) relating to
stock options, stock purchases, compensation, deferred compensation,
severance, fringe benefits or other employee benefits, in each case
maintained or contributed to, or required to be maintained or contributed
to, by the Company and the Subsidiaries or any other person or entity that,
together with the Company, is treated as a single employer under Section
414(b), (c), (m) or (o) of the Code (each, together with the Company, a
"Commonly Controlled Entity") for the benefit of any present or former
officers, employees, agents,
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directors or independent contractors of the Company or any of the
Subsidiaries (all the foregoing being herein called "Benefit Plans"). The
Company has delivered to Merger Sub and the Parent true, complete and
correct copies of (1) each Benefit Plan (or, in the case of any unwritten
Benefit Plans, descriptions thereof), (2) the most recent annual report on
Form 5500 filed with the Internal Revenue Service with respect to each
Benefit Plan (if any such report was required by applicable law), (3) the
most recent summary plan description (or similar document) for each Benefit
Plan for which such a summary plan description is required by applicable law
or was otherwise provided to plan participants or beneficiaries and (4) each
trust agreement and insurance or annuity contract relating to any Benefit
Plan. To the knowledge of Company, each such Form 5500 and each such summary
plan description (or similar document) was and is as of the date hereof
true, complete and correct in all material respects.
(b) Each Benefit Plan has been administered in accordance with its terms
except in ways that would not individually or in the aggregate have a
Company Material Adverse Effect. The Company, the Subsidiaries and all the
Benefit Plans are in compliance in all material respects with the applicable
provisions of ERISA, the Code, and all other applicable laws. All reports,
returns and similar documents with respect to the Benefit Plans required to
be filed with any governmental agency or distributed to any Benefit Plan
participant have been duly and timely filed or distributed and, to the
knowledge of Company, all reports, returns and similar documents actually
filed or distributed were true, complete and correct in all material
respects. There are no investigations by any governmental agency,
termination proceedings or other claims (except claims for benefits payable
in the normal operation of the Benefit Plans), suits or proceedings against
or involving any Benefit Plan or asserting any rights to or claims for
benefits under any Benefit Plan that could give rise to any material
liability, and there are not any facts that could give rise to any material
liability in the event of any such investigation, claim, suit or proceeding.
(c) None of the Benefit Plans or any plan under which the Company or any
Commonly Controlled Entity has or could have any liability (i) constitutes a
"multiemployer plan," as defined in Section 3(37) of ERISA; (ii) is subject
to Title IV of ERISA, Section 302 of ERISA or Section 412 of the Code; or
(iii) has given, or could give, rise to a liability under Title IV of ERISA.
(d) All contributions to, and payments from, the Benefit Plans that may
have been required to be made in accordance with the terms of the Benefit
Plans have been timely made. All such contributions to, and payments from,
the Benefit Plans, except those payments to be made from a trust qualified
under Section 401(a) of the Code, for any period ending before the Effective
Date that are not yet, but will be, required to be made, will be properly
accrued and reflected in the Company's financial statements.
(e) Each Benefit Plan that is a Pension Plan (hereinafter a "Company
Pension Plan") that is intended to be a tax-qualified plan has been the
subject of a determination letter from the Internal Revenue Service to the
effect that such Company Pension Plan is qualified and exempt from Federal
income taxes under Sections 401(a) and 501(a), respectively, of the Code; no
such determination letter has been revoked, and, to the knowledge of the
Company, revocation has not been threatened; no event has occurred and no
circumstances exist that would adversely affect the tax-qualification of
such Company Pension Plan; and such Company Pension Plan has not been
amended since the effective date of its most recent determination letter in
any respect that might adversely affect its qualification, materially
increase its cost or require security under Section 307 of ERISA. The
Company has delivered to Merger Sub and the Parent a copy of the most recent
determination letter received with respect to each Company Pension Plan for
which such a letter has been issued, as well as a copy of any pending
application for a determination letter. The Company has also provided Merger
Sub and the Parent with a list of all Company Pension Plan amendments as to
which a favorable determination letter has not yet been received. No event
has occurred that could subject any Company Pension Plan to tax under
Section 511 of the Code.
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(f) Section 2.22 of the Company Disclosure Letter discloses whether: (1)
any "prohibited transaction" (as defined in Section 4975 of the Code or
Section 406 of ERISA) has occurred that involves the assets of any Benefit
Plan; (2) any prohibited transaction has occurred that could subject the
Company, any of the Subsidiaries, any of their employees, or, to the
knowledge of the Company, a trustee, administrator or other fiduciary of any
trust created under any Benefit Plan to the tax or sanctions on prohibited
transactions imposed by Section 4975 of the Code or Title I of ERISA; and
(3) the Company, any of the Subsidiaries or any trustee, administrator or
other fiduciary of any Benefit Plan or any agent of any of the foregoing has
engaged in any transaction or acted in a manner that could, or has failed to
act so as to, subject the Company, any such Subsidiary or any trustee,
administrator or other fiduciary to any liability for breach of fiduciary
duty under ERISA or any other applicable law.
(g) No Commonly Controlled Entity has acted in a manner that could, or
failed to act so as to, result in fines, penalties, taxes or related charges
under (x) Section 502(c), (i) or (1) of ERISA, (y) Chapter 43 of the Code.
(h) The list of Welfare Plans in Section 2.22 of the Company Disclosure
Letter discloses whether each Welfare Plan is (i) unfunded, (ii) funded
through a "welfare benefit fund," as such term is defined in Section 419(e)
of the Code, or other funding mechanism or (iii) insured. Each such Welfare
Plan may be amended or terminated without material liability to the Company
at any time after the Effective Date. The Company and the Subsidiaries
comply with the applicable requirements of Section 4980B(f) of the Code with
respect to each Benefit Plan that is a group health plan, as such term is
defined in Section 5000(b)(1) of the Code, except for any noncompliance that
would not, individually or in the aggregate, result in a Company Material
Adverse Effect.
(i) Except as disclosed in Section 2.22 of the Company Disclosure
Letter, no employee, officer or director of the Company or any of the
Subsidiaries will be entitled to any additional benefits or any acceleration
of the time of payment or vesting of any benefits under any Benefit Plan as
a result of the transactions contemplated by this Agreement.
(j) No compensation payable by the Company or any of the Subsidiaries to
any of their employees, officers or directors under any existing contract,
Benefit Plan or other employment arrangement or understanding (including by
reason of the transactions contemplated hereby) will be subject to
disallowance under Section 162(m) of the Code.
(k) Any amount that could be received (whether in cash or property or
the vesting of property) as a result of any of the transactions contemplated
by this Agreement by any employee, officer or director of Company or any of
its affiliates who is a "disqualified individual" (as such term is defined
in proposed Treasury Regulation Section 1.280G-1) under any employment,
severance or termination agreement, other compensation arrangement or
Benefit Plan currently in effect would not be characterized as an "excess
parachute payment" (as such term is defined in Section 280G(b)(l) of the
Code). Section 2.22 of the Company Disclosure Letter sets forth (i) the
maximum amount that could be paid to each executive officer of Company as a
result of the transactions contemplated by this Agreement under all
employment, severance and termination agreements, other compensation
arrangements and Benefit Plans currently in effect and (ii) the "base
amount" (as such term is defined in Section 280G(b)(3) of the Code) for each
such executive officer calculated as of the date of this Agreement.
2.23 VOTING AGREEMENTS. The Voting Agreements constitute a legal and
binding obligation of each of the Principal Shareholders, as applicable,
enforceable against them in accordance with the terms of such Voting
Agreements.
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2.24 TRUE STATEMENTS. The statements contained in this Agreement and
in the Company Disclosure Letter are true and correct in all material
respects. The statements contained in the Company Disclosure Letter will be
deemed to constitute representations and warranties of Company under this
Agreement to the same extent as if set forth herein. None of the foregoing
representations and warranties contains any untrue statement of a material
fact or omits to state any material fact required to be stated in order to
make such representation true and correct in all material respects.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to the Company as follows:
3.1 ORGANIZATION. Each of Parent and Merger Sub is a corporation duly
incorporated, validly existing and in good standing under the laws of the
jurisdiction in which it is incorporated and has the corporate power to own
its property and to carry on its business as now being conducted. Each of
Parent and Merger Sub is duly qualified and/or licensed, as may be required,
and in good standing in each of the jurisdictions in which the nature of the
business conducted by it or the character of the property owned, leased or
used by it makes such qualification and/or licensing necessary, except in
such jurisdictions where the failure to be so qualified and/or licensed
would not individually or in the aggregate have a material adverse effect on
the financial condition, business, operations or assets of Parent and Merger
Sub and the direct or indirect subsidiaries of Parent considered as a single
enterprise, or otherwise be reasonably likely to require the expenditure of
$250,000 or more in the aggregate, (a "Parent Material Adverse Effect").
Parent has delivered to the Company complete and correct copies of its
certificate of incorporation and by laws and the certificate of
incorporation and bylaws of Merger Sub, in each case as amended to the date
of this Agreement.
3.2 AUTHORITY RELATIVE TO THIS AGREEMENT; NONCONTRAVENTION.
(a) Each of Parent and Merger Sub has the requisite corporate power to
enter into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement by Parent and Merger Sub, the
performance by Parent and Merger Sub of their respective obligations
hereunder and the consummation by Parent and Merger Sub of the transactions
contemplated herein have been duly authorized by the respective boards of
directors of Parent and Merger Sub, and no other corporate proceedings on
the part of Parent or the Merger Subs are necessary to authorize the
execution and delivery of this Agreement, the performance by Parent and
Merger Sub of their respective obligations hereunder and the consummation by
Parent and Merger Sub of the transactions contemplated hereby. This
Agreement has been duly executed and delivered by Parent and Merger Sub and
constitutes a valid and binding obligation of Parent and Merger Sub,
enforceable against each of them in accordance with its terms, except to the
extent that such enforceability may be limited by applicable bankruptcy,
insolvency, fraudulent transfer, reorganization or other laws affecting the
enforcement of creditors' rights generally or by general equitable
principles.
(b) Except as set forth in Section 3.2(b) of the that certain letter of
even date herewith from the Parent to the Company (the "Parent Disclosure
Letter"), neither the execution and delivery of this Agreement by Parent or
Merger Sub, nor the consummation by Parent or Merger Sub of the transactions
contemplated herein nor compliance by Parent or Merger Sub with any of the
provisions hereof will: (i) conflict with or result in any breach of the
certificate or incorporation or bylaws of Parent or Merger Sub, (ii) result
in a violation or breach of any provisions of, or constitute a default (or
an event which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration
under, or result in the creation of any material lien, security interest,
charge or
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encumbrance upon any of the material properties or assets of Parent or any
of the Parent Subsidiaries under any of the terms, conditions or provisions
of any material note, bond, mortgage, indenture, deed of trust, license,
contract, lease, agreement or other instrument or obligation of any kind to
which Parent or any of the Parent Subsidiaries is a party or by which Parent
or any of the Parent Subsidiaries or any of their respective material
properties or assets may be bound, or (iii) subject to compliance with the
statutes and regulations referred to in subsection (c) below, violate any
judgment, ruling, order, writ, injunction, decree, law, statute, rule or
regulation applicable to Parent or Merger Sub or any of their respective
properties or assets other than any such event described in items (ii) or
(iii) that would result in a material adverse change in Parent such that it
would be required by GAAP to be disclosed in Parent's financial statements.
(c) Except for compliance with the provisions of the DGCL, the HSR Act,
the '33 Act and the '34 Act, the rules and regulations of the Nasdaq
National Market, and the "blue sky" laws of various states and foreign laws,
no action by any governmental authority is necessary for Parent's or Merger
Sub's execution and delivery of this Agreement or the consummation by Parent
or Merger Sub of the transactions contemplated hereby, except where the
failure to obtain or take such action would not cause a Parent Material
Adverse Effect in excess of $500,000.
(d) Except for any action contemplated by subsections (a) and (c) above,
and except for any consents, approvals and authorizations set forth in
Section 3.2(d) of the Parent Disclosure Letter, no consents, approvals or
authorizations with respect to Parent or Merger Sub are required for or in
connection with the consummation by Parent or Merger Sub of the transactions
contemplated on their part hereby, other than consents, approvals and
authorizations the failure of which to obtain would not result in a Parent
Material Adverse Effect in excess of $500,000.
3.3 CAPITAL STOCK OF THE PARENT AND MERGER SUB. As of October 31,
1996, the authorized capital stock of Parent consisted of (a) 10,000,000
shares of Common Stock with a par value of $.01 per share, of which there
were 6,995,000 shares issued and outstanding and no shares held in Parent's
treasury and (b) 10,000,000 shares of Preferred Stock with a par value of
$.01 per share, of which there were 250,000 shares designated Series A
Junior Participating Preferred Stock, none of which is issued and
outstanding. All shares of capital stock of Merger Sub are owned by Parent.
All issued and outstanding shares of Parent Common Stock and Merger Sub
common stock are, and the shares of Parent Common Stock to be issued and
delivered in the Merger pursuant to Article 1 hereof shall be, at the time
of issuance and delivery, validly issued, fully paid, nonassessable and free
of preemptive rights. Except as disclosed in Section 3.3 of the Parent
Disclosure Letter, in the financial statements, or notes thereto, included
in Parent's annual report on Form 10-K for the year ended January 31, 1996,
the Parent SEC Reports or any Parent Filed SEC Document, there are not as of
the date of this Agreement any outstanding or authorized subscriptions,
options, warrants, calls, rights, commitments, restrictions, arrangements or
any other agreements of any character that, directly or indirectly, (i)
obligate Parent to issue any shares of capital stock or any securities
convertible into, or exercisable or exchangeable for, or evidencing the
right to subscribe for, any shares of capital stock, or (ii) call for or
relate to the sale, pledge, transfer or other disposition or encumbrance by
Parent of any shares of its capital stock, except for obligations that would
not result in a Parent Material Adverse Effect in excess of $500,000.
3.4 SEC REPORTS AND FINANCIAL STATEMENTS. Since December 31, 1993,
Parent has filed with the SEC all forms, reports, schedules, registration
statements, definitive proxy statements and other documents (the "Parent SEC
Reports") required to be filed by Parent with the SEC. As of their
respective dates, the Parent SEC Reports complied with the applicable
requirements of the '33 Act, the '34 Act and the Rules and Regulations
applicable to such Parent SEC Reports and, except to the extent that
information contained in any Parent SEC Reports has been revised or
superseded by a later Parent SEC Report filed and publicly available prior
to the date of this Agreement (a "Parent Filed SEC Document"), none of the
Parent SEC Reports, or Parent Filed SEC Documents, as of the
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date they were filed, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of Parent included in the Parent SEC Reports comply with
applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with GAAP
(except, in the case of unaudited statements, as permitted by Regulation
S-X) applied on a consistent basis during the periods involved and fairly
present the consolidated financial position of Parent and its consolidated
subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case
of unaudited statements, to normal year-end audit adjustments). Except as
set forth in the Parent Filed SEC Documents or in Section 3.5 of the Company
Disclosure Letter, neither the Parent nor any of the Subsidiaries has any
liabilities, debts or obligations of any nature (whether accrued, absolute,
contingent or otherwise) required by GAAP to be set forth on a consolidated
balance sheet of Parent and its consolidated subsidiaries or in the notes
thereto, except such liabilities, debts or obligations that would not,
individually or in the aggregate, result in a Parent Material Adverse Effect
in excess of $500,000. None of the Subsidiaries is required to file any
forms, reports or other documents with the SEC pursuant to Sections 12 or 15
of the '34 Act.
3.5 CERTAIN CHANGES. Except as disclosed in the Parent SEC Reports or
Parent Filed SEC Documents or in Section 3.5 of Parent Disclosure Letter,
since October 31, 1996, Parent has conducted its business only in the
ordinary course and: (i) there has not been any Parent Material Adverse
Effect in excess of $500,000, (ii) there has not been any change by Parent
or Merger Sub in accounting principles or methods except insofar as may be
required by GAAP, (iii) except for payments or obligations that would not
exceed $500,000 in the aggregate, there has not been (A) any granting by
Parent or Merger Sub to any executive officer of Parent or Merger Sub of any
increase in compensation, (B) any granting by Parent or Merger Sub to any
such executive officer of any increase in severance or termination pay,
except as was required under employment, severance or termination agreements
in effect as of the date of the most recent audited financial statements
included in the filed SEC Documents, or (C) any entry by Parent or Merger
Sub into any employment, severance or termination with any such executive
officer, and (iv) there has not been any declaration, setting aside or
payment of any dividend or other distribution (whether in cash, stock or
property) with respect to any of Parent's capital stock.
3.6 LITIGATION. Except as disclosed in the Parent SEC Reports or
Parent Filed SEC Documents or in Section 3.6 of Parent Disclosure Letter,
there is no suit, action or legal, administrative, arbitration or other
proceeding or governmental investigation pending or threatened, to which
Parent or Merger Sub is a party or by which either of them is or would be
affected (and Parent is not aware of any basis for such action, suit or
proceeding that has a reasonable likelihood of being brought) which,
considered individually or in the aggregate, if determined adversely to
Parent, is likely to: (i) have a Parent Material Adverse Effect in excess of
$500,000, (ii) impair the ability of Parent to perform its obligations under
this Agreement, or (iii) to prevent the consummation of any of the
transactions contemplated by this Agreement, nor is there any judgment,
decree, injunction, rule or order of any Governmental Entity or arbitrator
outstanding against Parent or Merger Sub having, or which would reasonably
be expected to have, in the future, any such effect. No product liability or
other similar tort claims have been made or, to Parent's knowledge,
threatened against Parent or Merger Sub relating to products sold or leased
or services performed by Parent or Merger Sub which would reasonably be
expected to form the basis for a cause of action for product liability
against Parent that, if determined adversely to Parent, would reasonably be
expected to have a Parent Material Adverse Effect.
3.7 COMPLIANCE WITH LAWS. Except as disclosed in Section 3.7 of Parent
Disclosure Letter or as disclosed in the Parent SEC Reports or Parent Filed
SEC Documents, neither Parent nor Merger Sub has violated or failed to
comply with any statute, law, ordinance, regulation, rule, judgment, decree
or
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order of any Governmental Entity applicable to its business or operations,
except for violations and failures to comply that would not, individually or
in the aggregate, reasonably be expected to result in a Parent Material
Adverse Effect in excess of $500,000. Parent and Merger Sub have not
received any written communication from a Governmental Entity that alleges
that either of them is not in compliance in any material respect with any
applicable law except for noncompliances that would not, individually or in
the aggregate, result in a Parent Material Adverse Effect. Parent and Merger
Sub are not required to make, and Parent has no reasonable expectation that
Parent or Merger Sub will be required to make any expenditures in excess of
$500,000 to achieve or maintain compliance with applicable law.
3.8 DISCLOSURE IN REGISTRATION STATEMENT AND PROXY STATEMENT. None of
the information that has been or will be supplied in writing by Parent or
Merger Sub specifically for inclusion or incorporation by reference in the
Registration Statement and Proxy Statement (each as defined in Section 5.1)
will, at the time such Registration Statement and Proxy Statement is mailed
to the shareholders of the Company or at the time such Registration
Statement is filed with the SEC, include an untrue statement of a material
fact or omit to state a material fact necessary to make the statements
therein, in light of the circumstances in which they are made, not
misleading.
ARTICLE 4
CONDUCT OF BUSINESS PENDING THE MERGER
4.1 CONDUCT OF BUSINESS. The Company covenants and agrees that, prior
to the Effective Time:
(a) the businesses of the Company and each of the Subsidiaries shall be
conducted in the ordinary and usual course of business and consistent with
past practices, and the Company and each of the Subsidiaries shall maintain
and preserve intact their respective business organizations, use their best
efforts to keep available the services of their respective officers and
employees and maintain significant beneficial business relationships with
suppliers, contractors, distributors, customers, licensors, licensees and
others having business relationships with it and, if the Company becomes
aware of any material deterioration in its or its Subsidiaries' relationship
with any customer, supplier or key employee, it will promptly bring such
information to the attention of the Parent and Merger Sub in writing and, if
requested by Parent or Merger Sub, will exert its best efforts to restore
the relationship;
(b) Without limiting the generality of the foregoing Section 4.1(a),
from and after the date hereof the Company shall not, directly or
indirectly, and shall not permit any of the Subsidiaries to, do any of the
following unless such action is in the ordinary and usual course of
business, consistent with past practice and has been budgeted for in the
budget delivered by the Company to Parent or unless Parent and Merger Sub
shall otherwise agree in advance in writing:
(i) sell, lease, transfer, dispose of, or mortgage or otherwise
encumber or subject to any Lien or otherwise dispose of, any of its
properties or assets, or enter into any material commitment or
transaction;
(ii) amend or propose to amend its articles of incorporation or
bylaws or, in the case of the Subsidiaries, their respective constituent
documents, or reincorporate in any jurisdiction;
(iii) split, combine or reclassify any outstanding shares of, or
interests in, its capital stock;
(iv) declare, set aside or pay any dividend or distribution, payable
in cash, stock, property or otherwise with respect to any of its capital
stock;
(v) except as contemplated in Section 1.4(c) and (e), redeem,
purchase or otherwise acquire or offer to redeem, purchase or otherwise
acquire any shares of capital stock of the
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Company or any of the Subsidiaries or any options, warrants or rights to
acquire capital stock of the Company or any of the Subsidiaries;
(vi) except for the Company Common Stock (a) issuable upon exercise
of options outstanding on the date hereof in accordance with the terms of
the applicable agreements, which agreements may be modified pursuant to
and consistent with Section 1.4(e), or (b) issuable through February 28,
1997 pursuant to the Company's Employee Stock Purchase Plan, issue, sell,
pledge, dispose of or encumber, or authorize, propose or agree to the
issuance, sale, pledge or disposition or encumbrance by the Company or
any of the Subsidiaries of, any shares of, or any options, warrants or
rights of any kind to acquire any shares of, or any securities
convertible into or exchangeable for any shares of, its capital stock of
any class, or any other securities in respect of, in lieu of, or in
substitution for any class of its capital stock outstanding on the date
hereof;
(vii) enter into any contracts, commitments or transactions
pertaining to its business;
(viii) incur any indebtedness, obligations or liability or make any
payment in respect thereof, including the making of any royalty or option
payment;
(ix) acquire or agree to acquire additional assets;
(x) sell, agree to sell or otherwise dispose of any of its assets;
(xi) make any payments of any type to any officer, director or
shareholder of the Company or any person not dealing at arms' length with
any of the foregoing;
(xii) modify the terms of any existing indebtedness for borrowed
money or incur any indebtedness for borrowed money or issue any debt
securities;
(xiii) assume, guarantee, endorse or otherwise as an accommodation
become responsible for, the obligations of any other person, enter into
any "keep well" or other agreement to maintain any financial statement
condition of another person or enter into any arrangement having the
economic effect of any of the foregoing or make any loans or advances or
capital contributions to, or investments in, any other person, except to
the Company or any of the Subsidiaries;
(xiv) authorize, recommend or propose any change in its
capitalization, or any release or relinquishment of any material contract
right or effect or permit any of the foregoing;
(xv) except as contemplated in Section 1.4(e), adopt or establish
any new employee benefit plan or amend any employee benefit plan or
increase the compensation or fringe benefits of any employee or pay any
benefit not consistent with any existing employee benefit plan;
(xvi) make, grant, pay or commit to pay any bonus or any wage
increase, salary increase or other compensation increase, whether in the
form of cash, options, stock, or otherwise, to any officer, director or
employee of the Company or any Subsidiary;
(xvii) enter into or amend any employment, consulting, severance or
indemnification agreement entered into or made by the Company or any of
the Subsidiaries with any of their respective directors, officers or
employees, or any collective bargaining agreement or other obligation to
any labor organization or employee incurred or entered into by the
Company or any of the Subsidiaries;
(xviii) fail to timely pay and discharge all federal and state taxes
and other accounts payable for which it is liable;
(xix) make any tax election or settle or compromise any liability
for taxes;
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(xx) make or commit to make capital expenditures acquisitions of
other businesses, capital assets, properties or intellectual property;
(xxi) make any material changes in its reporting for taxes or
accounting procedures other than as required by GAAP or applicable law;
(xxii) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), reflected or reserved against in, or contemplated by, the
most recent consolidated financial statements (and the notes thereto) of
the Company included in the Filed SEC Documents or incurred after the
date of such financial statements, settle any litigation or other legal
proceedings (notwithstanding the foregoing) or waive the benefits of, or
agree to modify in any manner, any confidentiality, standstill or similar
agreement to which the Company or any of the Subsidiaries is a party;
(xxiii) write off any accounts or notes receivable except in the
ordinary course of business;
(xxiv) acquire or agree to acquire: (x) by merging or consolidating
with, or by purchasing a substantial portion of the assets of, or by any
other manner, any business or any corporation, partnership, joint
venture, association or other business organization or division thereof
of or (y) any assets that are material, individually or in the aggregate,
to the Company and the Subsidiaries taken as a whole, except purchases of
inventory in the ordinary course of business consistent with past
practice;
(xxv) adopt any shareholder rights or similar plan or take any other
action with the intention of, or which may have the effect of,
discriminating against Parent as a shareholder of the Company (or any
successor);
(xxvi) take any action that would, or that could reasonably be
expected to, result in (i) any of the representations and warranties of
the Company set forth in this Agreement that are qualified as to
materiality becoming untrue, (ii) any of such representations and
warranties that are not so qualified becoming untrue or (iii) any of the
conditions to the Merger set forth in Article 6 not being satisfied;
(xxvii) take any other action or enter into any other transaction or
agreement, other than in the ordinary course of business; or
(xxviii) enter into, modify or authorize any contract, agreement,
commitment or arrangement to do any of the foregoing.
(c) The Company shall promptly advise Parent orally and in writing of
any change or event having, or which, insofar as can reasonably be foreseen,
would have, a material adverse effect on the Merger or a Company Material
Adverse Effect.
ARTICLE 5
ADDITIONAL AGREEMENTS
5.1 REGISTRATION STATEMENT; PROXY STATEMENT.
(a) As soon as practicable after the date hereof, the Company and Parent
shall prepare and file with the SEC a Registration Statement on Form S-4 or
such other form as may be permitted (the "Registration Statement") and the
related prospectus and proxy statement (the "Proxy Statement") relating to
the Merger as required by the '33 Act, '34 Act, and the Rules and
Regulations, the DGCL and the MBCA. The Company and Parent shall use their
best efforts to file the Registration Statement and Proxy Statement with the
SEC as soon as possible after delivery by the Company of all
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necessary information. The Company shall obtain and furnish to Parent as
soon as possible and in any event by March 31, 1997, any information
relating to the Company required to be included in the Proxy Statement or
Registration Statement and shall promptly obtain and furnish to Parent and
the SEC any other information requested by the SEC or any regulatory agency.
The Company and Parent shall respond promptly to any comments made by the
SEC with respect to the Registration Statement and Proxy Statement. The
Company shall cause the final Proxy Statement along with notice of a special
shareholder meeting to be mailed to the Company's shareholders within two
(2) business days of the effectiveness of the Registration Statement, and
shall use its best efforts to obtain the necessary approvals of the Merger
by its shareholders. If at any time prior to the approval of this Agreement
by the Company's shareholders there shall occur any event that should be set
forth in an amendment or supplement to the Proxy Statement, the Company will
promptly prepare and mail to its shareholders such an amendment or
supplement. The Company will not mail any Proxy Statement, or any amendment
or supplement thereto, to which Parent reasonably objects, unless otherwise
required by law.
(b) The Company, acting through its Board of Directors and with the
consent of Parent, shall duly call, give notice of, convene and hold a
special meeting (the "Special Meeting") of its shareholders, such meeting to
be held on or about the date which is 20 business days after mailing of the
notice of meeting or such earlier practicable date which may be permitted by
law, for the purpose of adopting this Agreement and approving the
transactions contemplated hereby.
(c) Subject to Section 5.9, the Company will, through its Board of
Directors, recommend to its shareholders approval of this Agreement and the
transactions contemplated by this Agreement.
5.2 OTHER FILINGS. As soon as practicable after the date hereof, the
Company and Parent shall promptly and properly prepare and file any other
schedules, statements, reports, or other documents required to be filed by
it under the "34 Act, the "33 Act or any other federal or state securities
laws relating to the Merger and the transactions contemplated herein (the
"Other Filings"). Each party shall notify the others promptly of the receipt
by such party of any comments or requests for additional information from
any governmental official with respect to any Other Filing made by such
party and will supply the others with copies of all correspondence between
such party and its representatives, on the one hand, and the appropriate
government official, on the other hand, with respect to the Other Filings
made by such party. Each of the Company and Parent shall, after consultation
with the other, respond promptly to any comments made by any governmental
official with respect to any Other Filing and any preliminary version
thereof made by such party.
5.3 STOCK OPTIONS. Prior to the Effective Time, the Board of Directors
(or, if appropriate, the committee administering the plans pursuant to which
the options under the Company Options were granted), shall adopt appropriate
resolutions and take such other actions, in each case subject to Parent's
prior approval after receiving written notice from the Company thereof, as
may be necessary to comply with Section 1.4(e).
5.4 CONSENTS AND APPROVALS. The Company, Parent and Merger Sub shall
cooperate with each other and: (i) promptly prepare and file all necessary
documentation, (ii) effect all necessary applications, notices, petitions
and filings and execute all agreements and documents, (iii) use all
reasonable efforts to obtain all necessary permits, consents, approvals and
authorizations of all governmental bodies (including, without limitation,
any filing with the Federal Trade Commission or the U.S. Department of
Justice under the HSR Act or any other applicable antitrust law or
regulation and any consent from Norwest Bank, N.A.), and (iv) use all
reasonable efforts to obtain all necessary permits, consents, approvals,
waivers and authorizations of all other parties, in the case of each of the
foregoing clauses (i), (ii) and (iii), necessary or advisable to consummate
the transactions contemplated by this Agreement required by the terms of any
note, bond, mortgage, indenture, deed of trust, license, franchise, permit,
concession, contract, lease or other instrument to which the Company,
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Merger Sub, Parent or any of their respective subsidiaries is a party or by
which any of them is bound; PROVIDED, HOWEVER, that no note, bond, mortgage,
indenture, deed of trust, license, franchise, permit, concession, contract,
lease or other instrument shall be amended or modified to increase
materially the amount payable thereunder or to be otherwise materially more
burdensome to the Company and the Subsidiaries considered as one enterprise
in order to obtain any permit, consent, approval or authorization without
first obtaining the written approval of Parent. Each of the Company and
Parent shall have the right to review and consult with the other regarding
all characterizations of the information relating to the transactions
contemplated by this Agreement that appear in any filing (including, without
limitation, the Proxy Statement) made in connection with the transactions
contemplated hereby. The Company, Parent and Merger Sub agree that they will
consult with each other with respect to the obtaining of all such necessary
permits, consents, approvals and authorizations of all third parties and
governmental bodies.
5.5 PUBLIC STATEMENTS. Parent and Merger Sub, on the one hand, and the
Company, on the other hand, will consult with each other before issuing, and
provide each other the opportunity to review and comment upon, any press
release or other public statements with respect to the transactions
contemplated by this Agreement, including the Merger, and shall not issue
any such press release or make any such public statement prior to such
consultation, except as may be required by applicable law, court process or
by obligations pursuant to any listing agreement with the Nasdaq National
Market or the Nasdaq Small Cap Market.
5.6 REASONABLE BEST EFFORTS. Subject to the terms and conditions
herein provided, each of the Company, Parent and Merger Sub agrees to use
reasonable best efforts to take, or cause to be taken, all action, and to
do, or cause to be done, all things reasonably necessary, proper or
advisable under applicable laws and regulations to consummate and make
effective, in the most expeditious manner practicable, the transactions
contemplated by this Agreement, including but not limited to: (i) obtaining
all consents, approvals and authorizations and the making of all necessary
filings and registrations required for or in connection with the
consummation by the parties hereto of the transactions contemplated by this
Agreement (including obtaining the consent of Norwest Bank, N.A.), (ii) the
defending of any lawsuits or other legal proceedings, whether judicial or
administrative, challenging this Agreement or the consummation of any of the
transactions contemplated by this Agreement, including seeking to have any
stay or temporary restraining order entered by any court or other
Governmental Entity vacated or reversed and (iii) the execution and delivery
of any additional instruments necessary to consummate the transactions
contemplated by, and to carry out fully the purposes of, this Agreement,
Parent and/or the Surviving Corporation shall cause the proper officers and
directors of the Company, Parent and Merger Sub hereto to take all such
action. In connection with and without limiting the foregoing, the Company
and its Board of Directors shall (A) use their respective reasonable best
efforts not to take any action that would have the effect of causing any
state takeover statute or similar statute or regulation to be or become
applicable to the Merger, this Agreement or any of the other transactions
contemplated by this Agreement and (B) if any state takeover statute or
similar statute or regulation becomes applicable to the Merger, this
Agreement, or any other transaction contemplated by this Agreement, use
their respective reasonable best efforts to ensure that the Merger and the
other transactions contemplated by this Agreement may be consummated as
promptly as practicable on the terms contemplated by this Agreement and
otherwise to minimize the effect of such statute or regulation on the Merger
and the other transactions contemplated by this Agreement. Notwithstanding
the foregoing, the Board of Directors shall not be prohibited from taking
any action permitted by Section 5.9. In the event any litigation is
commenced by any person involving the Company, Parent or Merger Sub and
relating to the transactions contemplated by this Agreement, including any
other proposal for a Takeover Proposal (as defined in Section 5.9), the
Company, Parent or Merger Sub shall have the right, at its own expense, to
participate therein.
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5.7 NOTIFICATION OF CERTAIN MATTERS. Each of the Company, Parent and
Merger Sub agrees to give prompt notice to each other of, and to use their
respective reasonable best efforts to prevent or promptly remedy, (i) the
occurrence or failure to occur, or the impending or threatened occurrence or
failure to occur, of any event which occurrence or failure to occur would be
likely to cause any of its representations or warranties in this Agreement
to be untrue or inaccurate in any respect at any time from the date hereof
through the Effective Time and (ii) any material failure on its part to
comply with or satisfy any covenant, condition or agreement to be complied
with or satisfied by it hereunder; PROVIDED, HOWEVER, that the delivery of
any notice pursuant to this Section 5.7 shall not limit or otherwise affect
the remedies available hereunder to the party receiving such notice.
5.8 ACCESS TO INFORMATION AND PERSONNEL; CONFIDENTIALITY.
(a) The Company shall, and shall cause the Subsidiaries and the
officers, directors, employees and agents of the Company and the
Subsidiaries to, afford the officers, employees and agents of Parent and
Merger Sub reasonable access at all reasonable times from the date hereof
through the Effective Date to its officers, employees, agents, properties,
facilities, books, records, contracts and other assets and shall furnish
Parent and Merger Sub all financial, operating and other data and
information as Parent and Merger Sub through their officers, employees or
agents, may reasonably request, in all cases with a view towards limiting
disruption of the Company's business. Parent and Merger Sub shall have the
right to make such due diligence investigations as Parent and Merger Sub
shall deem necessary or reasonable. Upon approval from an officer of the
Company, which approval shall not be unreasonably withheld, the Company and
Subsidiaries shall give the officers, employees and agents of Parent and
Merger Sub access to the Company's and Subsidiaries stores, store personnel
and other employees (including the opportunity to address such personnel and
employees individually or as groups) and to the Company's and the
Subsidiaries' computer, information and accounting systems.
(b) The provisions of the Confidentiality Agreement dated as of May 11,
1996, which agreement includes certain initialed changes and riders dated as
of May 14, 1996, as amended on February 7, 1997, between Parent and the
Company (the "Confidentiality Agreement"), are hereby terminated and
superseded in their entirety by this Agreement.
(c) No investigation by any party hereto shall affect any
representations or warranties of the parties herein or the conditions to the
obligations of the parties hereto.
5.9 NO SOLICITATION.
(a) The Company shall not, nor shall anyone acting on its behalf,
directly or indirectly: (i) solicit, initiate or participate in or encourage
any negotiations or discussions with respect to any Takeover Proposal (as
hereinafter defined), (ii) disclose any information not customarily
disclosed to any person concerning the Company's business and properties or
afford any person or entity access to its properties, books or records,
(iii) assist or cooperate with any person to make any proposal to consummate
a transaction of the type referred to in clause (i), or (iv) disclose the
existence or content of the discussions between the parties or the existence
of this Agreement; PROVIDED, HOWEVER, to the extent required by the
fiduciary obligations of the Board of Directors under applicable law (after
duly considering the written advice of outside counsel to the Company), the
Company may, in response to any unsolicited request therefor, furnish
information with respect to the Company to any person pursuant to a
customary confidentiality agreement (as determined by the Company's outside
counsel) with terms no more favorable to such person than the terms of the
Confidentiality Agreement, referred to in Section 5.8(b) above.
(b) The Company shall not, nor shall any person acting on its behalf,
directly or indirectly, participate in discussions or negotiations with any
person concerning a Takeover Proposal, nor shall the Board of Directors
approve, recommend, or enter into an agreement in connection with, or
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propose to approve, recommend, or enter into an agreement in connection
with, any Takeover Proposal; PROVIDED, HOWEVER, that the Board of Directors
of the Company, to the extent required by the fiduciary obligations thereof,
as determined in good faith by the Board of Directors (after duly
considering the written advice of outside counsel to the Company) may
participate in discussions or negotiations, approve, recommend or enter into
and agreement in connection with a Superior Proposal (as hereinafter
defined); PROVIDED, FURTHER, that the Company shall not enter into such
discussions or negotiations or approve, recommend or enter into any
agreement in connection with such Superior Proposal (or any other Takeover
Proposal) unless the Company simultaneously pays the Parent a termination
fee of $300,000, plus all of the Parent's costs and expenses incurred in
connection with the proposed transaction between the Company and the Parent,
plus interest on such fees, costs and expenses from the date payable until
paid at a rate of 12% calculated on a per annum basis (such fee, costs and
expenses, the "Termination Fee").
(c) The Company promptly shall advise the Parent orally and in writing
of any Takeover Proposal or any inquiry with respect to or which could lead
to any Takeover Proposal and the identity of the person making any such
Takeover Proposal or inquiry. The Company will keep the Parent fully
informed of the status and details of any such Takeover Proposal or inquiry.
(d) For purposes of this Agreement, "Superior Proposal" means a BONA
FIDE proposal made by a third party for a merger or other business
combination involving the Company or to acquire in any manner, directly or
indirectly, a material equity interest in, any voting securities of, or a
substantial portion of the assets of the Company or its Subsidiaries, on
terms which the Board of Directors determines in its good faith judgment to
be more favorable to the Company's shareholders than the proposed
transaction with the Parent (based on the written advice of the Company's
independent financial advisor that the value of the consideration provided
for in such proposal exceeds the value of the consideration offered by the
Parent) and for which financing, to the extent required, is then committed
or which, in the good faith judgment of the Board of Directors (based on the
written advice of the Company's independent financial advisor), is
reasonably capable of being financed by such third party.
(e) For purposes of this Agreement, "Takeover Proposal" means any
proposal or offer (whether or not in writing and whether or not delivered to
the shareholders of the Company generally) for a merger or other business
combination involving the Company or to acquire in any manner, directly or
indirectly, a material equity interest in, any voting securities of, or a
substantial portion of the assets of the Company or its Subsidiaries, other
than the proposed transaction between the Company and the Parent.
5.10 DIRECTOR AND OFFICER LIABILITY. For three years after the
Effective Time, Parent will indemnify and hold harmless the present and
former officers and directors of the Company (a) in respect of acts or
omissions occurring prior to the Effective Time to the extent provided under
the Parent's certificate of incorporation and bylaws in effect on the date
hereof and (b) to the extent provided in Parent's certificate of
incorporation and bylaws, from any damage, liability, payment or expense,
which shall include reasonable costs of investigation of any claim and
attorney's fees, incurred by such officers or directors in connection with
any claim arising from or related to the negotiation, execution, delivery or
performance of this Agreement by the Company. For three years after the
Effective Time, Parent will at it own expense provide officers and directors
liability insurance in respect of acts or omissions occurring prior to the
Effective Time covering each such person currently covered by the Company's
officers and directors' liability insurance policy on terms with respect to
coverage and amount no less favorable than those of such policy in effect on
the date hereof; PROVIDED, HOWEVER, that, subject to limitations in Parent's
certificate of incorporation and bylaws, in the event any claim or claims
are asserted or made within such three year period, all rights to
indemnification in respect of any such claim or claims shall continue until
final disposition of any and all such claims.
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5.11 SHAREHOLDER LITIGATION. The Company shall give Parent the
opportunity to participate in the defense or settlement of any shareholder
litigation against the Company and its directors and officers relating to
any of the transactions contemplated by this Agreement, PROVIDED, HOWEVER,
that no such settlement shall be agreed to without Parent's consent.
5.12 COMPANY EXPENSES. The Company shall not spend more than $215,000
in fees and costs associated with investment bankers in connection with the
Merger and related transactions, and shall use its best efforts to avoid
excessive fees in connection with the transactions contemplated hereby.
5.13 FINANCIAL STATEMENTS. The Company shall deliver to Parent and
Merger Sub copies of all financial statements of Company and the
Subsidiaries (all of which shall be in accordance with GAAP) that have been
or may be filed by Company from June 30, 1996, through the Effective Date
with the SEC or any other Governmental Entity. The Company shall furnish
Parent and Merger Sub copies of unaudited balance sheets and statements of
income of Company and the Subsidiaries for each month from and including the
month of this Agreement through the Effective Date, within 20 days of the
end of each such month.
5.14 FAIRNESS OPINION. As soon as possible and in no event later than
March 11, 1997, the Board of Directors shall obtain from GH&L a written
fairness opinion to the effect that the consideration to be received by the
holders of the Company Common Stock pursuant to the Merger is fair to the
holders of Company Common Stock from a financial point of view (a copy of
which opinion will be promptly furnished to Parent).
5.15 ACCESS TO EMPLOYEES. The Company and its Subsidiaries will use
their best efforts to arrange meetings between the Parent's executive
officers or designated representatives and the key employees of the Company
and Subsidiaries, provided that the Company shall be entitled to participate
in such meetings to the extent they wish, and will support the Parent's
efforts to maintain the services of those key employees and will
affirmatively encourage such key employees to remain with the Company or the
Subsidiaries (or, as appropriate, their successor(s)) subsequent to the date
of this Agreement.
ARTICLE 6
CONDITIONS
6.1 CONDITIONS TO THE OBLIGATION OF THE COMPANY. The obligation of the
Company to effect the Merger is also subject to the fulfillment at or prior
to the Effective Time of the following conditions, unless such conditions
are waived in writing by the Company:
(a) this Agreement, the Merger and the consummation of the transactions
contemplated in this Agreement shall have been approved and adopted by the
requisite vote of the shareholders of the Company required by the MBCA;
(b) each of Parent and Merger Sub shall have performed each obligation
and agreement and complied with each covenant to be performed or complied
with by it hereunder at or prior to the Effective Time except for such
failures to comply which would not be reasonably likely to prevent the
consummation of the transactions contemplated hereby, and the Company shall
have received a certificate signed on behalf of the Parent by the chief
executive officer and chief financial officer of the Parent to such effect;
(c) the representations and warranties of Parent and Merger Sub in this
Agreement that are qualified as to materiality shall be true and correct and
the representations and warranties of Parent and Merger Sub set forth in
this Agreement that are not so qualified shall be true and correct in all
material respects in each case as of the date of this Agreement and as of
the Effective Date with the
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same force and effect as though made at such time, and the Company shall
have received a certificate signed on behalf of the Parent by the chief
executive officer and chief financial officer of the Parent to such effect;
(d) no preliminary or permanent injunction or other order, decree or
ruling issued by a court of competent jurisdiction or by a governmental,
regulatory or administrative agency or commission, nor any statute, rule,
regulation or executive order promulgated or enacted by any governmental
authority, shall be in effect that would make the acquisition of Company
Common Stock pursuant to the Merger or the holding directly or indirectly by
Parent of the shares of Common Stock of the Surviving Corporation illegal or
otherwise prevent the consummation of the Merger;
(e) the Parent and the Merger Sub shall each have delivered to the
Company a certificate of their Secretary, dated the Effective Date,
certifying as to: (i) a copy (to be attached to such certificate) of the
certificate of incorporation of the Parent and the Merger Sub, as
applicable, together with all amendments thereto, and a copy of the bylaws
of the Parent and the Merger Sub, as applicable, and further certifying that
no action has been taken to amend, modify or repeal such documents, the same
being in full force and effect in such form on the Effective Date, (ii) a
copy (to be attached to such certificate) of the resolutions of the board of
directors, in the case of the Parent, and the Board of Directors and
shareholders, in the case of the Merger Sub, authorizing the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated herein and further certifying that such
resolutions have not been amended, modified, revoked or rescinded as of the
date of such certificate and (iii) the incumbency and signature of the
officers of the Parent and the Merger Sub, as applicable, executing this
Agreement and any certificate, agreement or other documents to be delivered
by the Parent or the Merger Sub pursuant hereto, together with evidence of
the incumbency of such Secretary;
(f) the Parent shall have delivered to the Company the favorable opinion
of counsel to the Parent and the Merger Sub, dated the Effective Date, in
form and substance reasonably satisfactory to counsel to the Company, to the
following effect: (i) the organization, existence, and good standing of the
Parent and Merger Sub are as stated in this Agreement; (ii) the Parent and
the Merger Sub have full power and authority to execute and deliver this
Agreement and to perform this transactions contemplated by this Agreement;
(iii) this Agreement has been duly authorized by all requisite action of the
Board of Directors of the Parent and the Board of Directors and shareholder
of the Merger Sub, and constitutes a valid and legally binding agreement of
the Parent and Merger Sub, enforceable in accordance with its terms, subject
to, as to enforcement remedies, applicable bank regulatory law, bankruptcy,
insolvency, moratorium, reorganization, or similar laws affecting creditors'
rights generally and to general equitable principles; (iv) the execution and
performance by the Parent and the Merger Sub of this Agreement will not
violate their respective certificates of incorporation or bylaws; (v) the
Certificate of Merger has been duly executed by the Merger Sub and, upon
filing, will be sufficient to effect lawfully the Merger; (vi) to the
knowledge of such counsel, no consent, approval, authorization or order of
any court or governmental agency or body not previously obtained is required
for the consummation of the Agreement; (vii) the number of authorized Shares
of capital stock of the Parent are as set forth in the Proxy Statement;
(viii) to such counsel's knowledge, no preemptive rights, contractual or
otherwise, of securities holders of the Parent exist with respect to the
issuance or sale of the Parent Common Stock to be issued in connection with
the Merger; (ix) the shares of Company Common Stock pursuant to Article 1
hereof have been duly authorized and, upon delivery to the Company
shareholders in accordance with the terms of the Merger, will be validly
issued, fully paid and nonassessable; and (x) to the knowledge of counsel,
the Registration Statement has become and is effective under the 33 Act, and
to the best knowledge of such counsel, no stop orders suspending the
effectiveness of the Registration Statement have been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the 33 Act; and
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(g) the Company shall have received advice from its counsel or its
independent public accountants substantially to the effect that, for federal
income tax purposes; (i) the Merger will constitute a reorganization within
the meaning of Section 368(a) of the Code, (ii) no gain or loss will be
recognized by the holders of Company Common Stock upon receipt of Parent
Common Stock except for any cash received; (iii) the basis of Parent Common
Stock received by the shareholders of the Company will be the same as the
basis of Company Common Stock exchanged therefor; and (iv) the holding
period (for tax purposes) of the shares of Parent Common Stock received by
the shareholders of the Company will include the holding period of the
Company Common Stock, provided such shares of Company Common Stock were held
as a capital asset as of the Effective Time of the Merger.
6.2 CONDITIONS TO THE OBLIGATIONS OF PARENT AND MERGER SUB. The
obligations of Parent and Merger Sub to effect the Merger are also subject
to the fulfillment at or prior to the Effective Time of the following
conditions unless waived in writing by Parent and Merger Sub:
(a) this Agreement, the Merger and the consummation of the transactions
contemplated in this Agreement shall have been approved and adopted by the
requisite vote of the shareholders of the Company required by the MBCA;
(b) the Company shall have performed each obligation and agreement and
complied with each covenant to be performed and complied with by it
hereunder at or prior to the Effective Time, and Parent shall have received
a certificate signed on behalf of the Company by the chief executive officer
and the chief financial officer of the Company to such effect;
(c) subject to Section 6.2(d), the representations and warranties of the
Company set forth in this Agreement shall be true and correct as of the date
of this Agreement and as of the Effective Date, as though made on and as of
the Effective Date, and Parent shall have received a certificate signed on
behalf of the Company by the chief executive officer and the chief financial
officer of the Company to such effect with respect to the Company's
representations and warranties;
(d) there shall have been a breach of no more than three representations
or warranties (each numbered Section in Article 2 constituting a single
representation or warranty) and any such breach or breaches shall not,
individually or in the aggregate, reasonably be likely to have a Company
Material Adverse Effect in excess of $75,000;
(e) there shall not have been any material change in the inventory of
Company from the date hereof until the Effective Time, subject to sales and
historical "shrinkage;"
(f) each of the Executives shall have executed and delivered to the
Parent and Merger Sub his Employment Agreement;
(g) each of the Principal Shareholders shall have executed and delivered
to the Parent and Merger Sub his Voting Agreement, and such Voting Agreement
shall constitute a legal and binding obligation of each of the Principal
Shareholders, as applicable, enforceable against him in accordance with its
terms;
(h) the Company shall have delivered to Parent and Merger Sub all
necessary consents, waivers, authorizations and approvals, such that neither
the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will: (i) result in the acceleration,
termination, modification or cancellation of, or the creation in any party
of the right to accelerate, terminate, modify or cancel, any indenture,
contract, lease, sublease, loan, agreement, note or other similar obligation
or liability to which the Company or any of the Subsidiaries is a party or
is bound or to which any of their respective assets are subject, (ii)
conflict with, violate or result in a breach of any provision of the
articles of incorporation or bylaws of the Company or any of the
Subsidiaries, (iii) conflict with or violate any law, rule, regulation,
ordinance, order, writ, injunction or decree applicable to the Company or
any of the Subsidiaries or by which any of their respective properties or
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assets is bound or affected or (iv) conflict with or result in any breach of
or constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or result in the creation of any lien,
charge or encumbrance on any of the properties or assets of the Company or
any of the Subsidiaries pursuant to any of the terms, conditions or
provisions of any indenture, contract, lease, sublease, loan, agreement,
note, permit, license, franchise, agreement or other instrument, obligation
or liability to which the Company or any of the Subsidiaries is a party or
by which the Company or any of the Subsidiaries or any of their assets is
bound or affected, except for any of the events set froth in (i), (iii) and
(iv) above that would not, individually or in the aggregate, be reasonably
likely to result in a Company Material Adverse Effect;
(i) the Company shall have delivered to each of Parent and Merger Sub a
certificate of the Secretary of the Company dated the Effective Date,
certifying as to: (i) a copy (to be attached to such certificate) of the
Articles of Incorporation of the Company, together with all amendments
thereto, and a copy of the Bylaws of the Company and further certifying that
no action has been taken to amend, modify or repeal such documents, the same
being in full force and effect in such form on the Effective Date, (ii) a
copy (to be attached to such certificate) of the resolutions of the board of
directors and shareholders of the Company authorizing the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated herein and further certifying that such
resolutions have not been amended, modified, revoked or rescinded as of the
date of such certificate and (iii) the incumbency and signature of the
officers of the Company executing this Agreement on behalf of the Company
and any certificate, agreement or other documents to be delivered by the
Company pursuant hereto, together with evidence of the incumbency of such
Secretary;
(j) the Company shall have delivered to each of Parent and Merger Sub
the favorable opinion of counsel to the Company, dated the Effective Date,
in form and substance reasonably satisfactory to counsel to Parent and
Merger Sub, to the following effect: (i) the organization, existence, and
good standing of the Company and the Subsidiaries are as stated in this
Agreement; (ii) the Company has full power and authority to execute and
deliver this Agreement and the Company has full power and authority to
perform this Agreement; (iii) this Agreement has been duly authorized by all
requisite action of the Board of Directors and shareholders of the Company,
and constitutes a valid and legally binding agreement of the Company,
enforceable against the Company in accordance with its terms, subject to, as
to enforcement remedies, applicable bank regulatory law, bankruptcy,
insolvency, moratorium, reorganization, or similar laws affecting creditors'
rights generally and to general equitable principles; (iv) the execution and
performance by the Company of this Agreement will not violate the articles
of incorporation or bylaws and will not violate, result in a breach of or
constitute a default under, any lease, mortgage, agreement, instrument,
judgment, order or decree known to such counsel to which the Company or any
Subsidiary are parties or to which they or any of their properties may be
subject; (v) the Articles of Merger, including the Plan of Merger, have been
duly executed by the Company and, upon filing, will be sufficient to
lawfully effect the Merger; (vi) to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental
agency or body not previously obtained is required for the consummation of
the Agreement; and (vii) the Employment Agreements constitute a legal and
binding obligation of each of the Executives, as applicable, enforceable
against such Executive in accordance with its terms;
(k) subject to Sections 6.2(d) and (e), since the date of this
Agreement, there shall not have occurred a Company Material Adverse Effect;
(l) except for the filing of the Articles of Merger with the Secretary
of State of the State of Minnesota and the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware, all waivers,
consents, approvals and actions or non-actions of any governmental
authority, commission, board or other regulatory body required to consummate
the transactions contemplated
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by this Agreement shall have been obtained and shall not have been reversed,
stayed, enjoined, set aside, annulled or suspended;
(m) Parent shall have obtained the written consent of its banks for the
Merger and the consummation of the transactions contemplated hereby and for
the loan of $3,500,000 in connection with the Merger; and
(n) shareholders of the Company who hold, in the aggregate, 140,000 or
more shares of Company Common Stock shall not have exercised or taken the
steps required (as of such time) to exercise properly rights as dissenting
shareholders under the MBCA.
6.3 CONDITIONS TO THE OBLIGATIONS OF EACH OF PARENT, MERGER SUB AND THE
COMPANY. The obligations of each of Parent, Merger Sub and the Company to
effect the Merger are also subject to the fulfillment at or prior to the
Effective Time of the following conditions unless waived in writing by each
of the parties hereto:
(a) there shall not be threatened or pending any suit, action or
proceeding by any Governmental Entity or any other person, or before any
court or governmental authority, agency or tribunal, domestic or foreign, in
each case that has a reasonable likelihood of success, (i) enjoining the
acquisition by Parent or Merger Sub of any shares of Company Common Stock,
seeking to restrain or prohibit the consummation of the Merger or any of the
other transactions contemplated by this Agreement, or seeking to obtain from
the Company, Parent or Merger Sub any damages that are material in relation
to the Company and the Subsidiaries taken as a whole, (ii) prohibiting or
limiting the ownership or operation by the Company, Parent or any of their
respective subsidiaries of any material portion of the business or assets of
the Company, Parent or any of their respective subsidiaries, or to compel
the Company, Parent or any of their respective subsidiaries to dispose of or
hold separate any material portion of the business or assets of the Company,
Parent or any of their respective subsidiaries, as a result of the Merger or
any of the other transactions contemplated by this Agreement, (iii) imposing
limitations on the ability of Parent or Merger Sub to acquire or hold, or
exercise full rights of ownership of, any shares of Company Common Stock,
including, without limitation, the right to vote the Company Common Stock
purchased by it on all matters properly presented to the shareholders of the
Company or (iv) seeking to prohibit Parent or any of its subsidiaries from
effectively controlling in any material respect the business or operations
of the Company or the Subsidiaries; and
(b) the shares of Parent Common Stock to be delivered pursuant to the
Merger shall have been duly listed on the Nasdaq National Market, subject to
official notice of issuance.
ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER
7.1 TERMINATION. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval of this Agreement and
the transactions contemplated herein by the respective boards of directors
or shareholders of the parties hereto:
(a) by Parent, in the event the Company Disclosure Statement is not
delivered to Parent on or before March 7, 1997 (the "Disclosure Receipt"),
and by Parent on or before 5:00 p.m., Minnesota time, on March 17, 1997 if
the Disclosure Receipt does not satisfy Parent in all respects;
(b) by mutual written consent of Parent, Merger Sub and the Company;
(c) by any of Parent, Merger Sub or the Company if the Effective Time
shall not have occurred on or before August 15, 1997; PROVIDED, HOWEVER,
that the right to terminate this Agreement under this
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Section 7.1(b) shall not be available to any party whose material breach of
any obligation under this Agreement has been the cause of, or resulted in,
the failure of the Effective Time to occur on or before such date; PROVIDED,
FURTHER, that such time periods shall be tolled for any part thereof during
which any party shall be subject to a nonfinal order, decree, ruling or
action restraining, enjoining or otherwise prohibiting the consummation of
the Merger or any meeting of shareholders of the Company necessary to
authorize the Merger;
(d) by any of Parent, Merger Sub or the Company if a court of competent
jurisdiction or governmental, regulatory or administrative agency or
commission shall have issued an order, decree or ruling or taken any other
action (which order, decree or ruling each of the parties hereto shall use
all reasonable efforts to lift), in each case permanently restraining,
enjoining or otherwise prohibiting the transactions contemplated by this
Agreement and such order, decree, ruling or other action shall have become
final and nonappealable;
(e) by Parent or the Company if the Board of Directors of the Company
approves, recommends or enters into an agreement in connection with a
Superior Proposal; and
(e) by either Parent or the Company if, at the Company's Special
Meeting, as defined in Section 5.1 (including any adjournment or
postponement thereof), the requisite vote of the shareholders of the Company
is not obtained, except that the right to terminate this Agreement under
this Section 7.1(f) will not be available to any party whose failure to
perform any material obligation or to perform any material condition under
this Agreement has been the cause of, or resulted in, the failure to obtain
the requisite vote of the shareholders of the Company.
7.2 EFFECT OF TERMINATION. Upon the termination of this Agreement
pursuant to Section 7.1, this Agreement shall forthwith become null and void
except as set forth in Sections 2.8, 5.9(b) (with respect to the payment of
the Termination Fee only), 7.2, 7.3 and 8.5, which shall survive such
termination, without any liability or obligation on the part of Parent,
Merger Sub or the Company (other than pursuant to the foregoing specified
Sections) except to the extent that such termination results from the wilful
and material breach by a party of any of its representations, warranties,
covenants or agreements set forth in this Agreement.
7.3 FEES AND EXPENSES.
(a) If this Agreement is terminated pursuant to Section 7.1(e), the
Company shall promptly pay to Parent the Termination Fee.
(b) In the event that this Agreement is terminated pursuant to Section
7.1(a), (b) or (c) hereof, Parent shall pay two-thirds and the Company shall
pay one-third of (i) the fees paid to any governmental agency in connection
with all filings made pursuant to the HSR Act and (ii) the fees and expenses
of the financial printer incurred in connection with the preparation,
printing and distribution of the Registration Statement and Proxy Statement.
(c) Except as set forth in this Section 7.3, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses, whether or not
the Merger is consummated.
7.4 AMENDMENT. This Agreement may be amended by the parties hereto, at
any time before or after approval of this Agreement and the transactions
contemplated herein by the respective boards of directors or shareholders of
the parties hereto; PROVIDED, HOWEVER, that after any such approval by the
shareholders, no amendment shall be made that by law requires further
approval by such shareholders without the further approval of such
shareholders. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
7.5 WAIVER. Any failure of any of the parties to comply with any
obligation, covenant, agreement or condition herein may be waived at any
time prior to the Effective Time by any of the parties
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<PAGE>
entitled to the benefit thereof only by a written instrument signed by each
such party granting such waiver, but such waiver or failure to insist upon
strict compliance with such obligation, representation, warranty, covenant,
agreement or condition shall not operate as a waiver of or estoppel with
respect to, any subsequent or other failure.
ARTICLE 8
GENERAL PROVISIONS
8.1 NOTICES. All notices and other communications hereunder shall be
in writing and shall be deemed to have been duly given if delivered
personally, mailed by certified mail (return receipt requested) or sent by
cable, telegram or telecopier to the parties at the following addresses or
at such other addresses as shall be specified by the parties by like notice:
<TABLE>
<CAPTION>
<S> <C> <C>
(a) if to Parent or Merger Sub:
Ultimate Electronics, Inc.
321-A West 84th Avenue
Denver, Colorado 80221
Attn: Alan E. Kessock
Fax: (303) 412-2502
Phone: (303) 412-2500
with a copy to (which shall not constitute notice):
Davis, Graham & Stubbs LLP
370 Seventeenth Street, Suite 4700
Denver, Colorado 80202
Attn: J. Justyn Sirkin, Esq.
N. Anthony Jeffries, Esq.
Fax: (303) 893-1379
Phone: (303) 892-9400
(b) if to the Company:
Audio King Corporation
3501 South Highway 100
Minneapolis, Minnesota 55416
Attn: Robert Thiner
Fax: (612) 920-0505
Phone: (612) 920-0940
with a copy to (which shall not constitute notice):
Fredrikson & Byron, P.A.
1100 International Centre
900 Second Avenue South
Minneapolis, Minnesota 55402-3397
Attn: Robert K. Ranum, Esq.
Fax: (612) 347-7077
Phone: (612) 347-7067
</TABLE>
Notice so given shall (in the case of notice so given by mail) be deemed to be
given when received and (in the case of notice so given by cable, telegram,
telecopier, telex or personal delivery) on the date of actual transmission or
(as the case may be) personal delivery.
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<PAGE>
8.2 NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective
representations and warranties in the Agreement will terminate at the
Effective Time or upon termination of this Agreement pursuant to Section
7.1.
8.3 CLOSING. The closing of the transactions contemplated by this
Agreement shall take place at the offices of Davis, Graham & Stubbs LLP, 370
17th Street, Denver, Colorado, or such other place as the parties may agree,
as soon as practicable (but no later than the fifth business day after
satisfaction or waiver of the conditions set forth in Section 6.1) after the
satisfaction or waiver of the conditions set forth in Article 6.
8.4 TIME OF ESSENCE. With regard to all dates, time periods,
transactions, acts or conditions set forth or referred to in this Agreement,
time is of the essence.
8.5 INTERPRETATION AND GOVERNING LAW; JURISDICTION AND SERVICE OF
PROCESS. THIS AGREEMENT SHALL BE CONSTRUED AS THOUGH PREPARED BY BOTH
PARTIES HERETO AND SHALL BE CONSTRUED WITHOUT REGARD TO ANY PRESUMPTION OR
OTHER RULE REQUIRING CONSTRUCTION AGAINST THE PARTY CAUSING AN AGREEMENT TO
BE DRAFTED. CAPTIONS AT THE BEGINNING OF EACH SECTION AND EACH SUBSECTION
ARE SOLELY FOR THE CONVENIENCE OF THE PARTIES AND SHALL NOT MODIFY THE TEXT
OF THIS AGREEMENT. THIS AGREEMENT SHALL BE CONSTRUED AND GOVERNED BY THE
LAWS OF THE STATE OF COLORADO WITHOUT GIVING EFFECT TO THE PRINCIPLES OF
CONFLICTS OF LAWS. ANY ACTION OR PROCEEDING SEEKING TO ENFORCE ANY PROVISION
OF, OR BASED ON ANY RIGHT ARISING OUT OF, THIS AGREEMENT MUST BE BROUGHT
AGAINST EITHER PARTY IN THE COURTS OF THE STATE OF COLORADO OR THE STATE OF
DELAWARE OR IF IT HAS OR CAN OBTAIN JURISDICTION, IN THE UNITED STATES
DISTRICT COURT FOR EITHER STATE, AND EACH PARTY HEREBY CONSENTS TO THE
JURISDICTION OF SUCH COURTS (AND OF THE APPROPRIATE APPELLATE COURTS) IN ANY
SUCH ACTION OR PROCEEDING AND WAIVES ANY OBJECTION TO VENUE LAID THEREIN.
PROCESS IN ANY ACTION OR PROCEEDING REFERRED TO IN THIS SECTION MAY BE
SERVED ON ANY PARTY ANYWHERE IN THE WORLD, WHETHER WITHIN OR WITHOUT THE
STATE OF COLORADO, AND MAY ALSO BE SERVED UPON ANY PARTY IN THE MANNER
PROVIDED FOR GIVING NOTICES TO IT IN SECTION 8.1 ABOVE.
8.6 COUNTERPARTS; FACSIMILE TRANSMISSION OF SIGNATURES. This Agreement
may be executed in any number of counterparts and by different parties
hereto in separate counterparts, and delivered by means of facsimile
transmission or otherwise, each of which when so executed and delivered
shall be deemed to be an original and all of which when taken together shall
constitute but one and the same agreement. If any party hereto elects to
execute and deliver a counterpart signature page by means of facsimile
transmission, it shall deliver an original of such counterpart to each of
the other parties hereto within ten days of the date hereof, but in no event
will the failure to do so affect in any way the validity of the facsimile
signature or its delivery.
8.7 ASSIGNMENT. This Agreement and all of the provisions hereto shall
be binding upon and inure to the benefit of, and be enforceable by, the
parties hereto and their respective successors and permitted assigns, but
neither this Agreement nor any of the rights, interests or obligations set
forth herein shall be assigned by any party hereto without the prior written
consent of the other parties hereto and any purported assignment without
such consent shall be void; PROVIDED, HOWEVER, that Merger Sub may, without
such consent and at any time prior to the Effective Time, transfer all of
Merger Sub's rights, interests or obligations herein to Parent or any
affiliate of Parent; PROVIDED, FURTHER, that no assignment of any rights,
interests or obligations set forth herein shall release the assigning party
from its obligations hereunder.
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<PAGE>
8.8 SEVERABILITY. If any provision of this Agreement shall be held to
be illegal, invalid or unenforceable under any applicable law, then such
contravention or invalidity shall not invalidate the entire Agreement. The
parties shall endeavor in good-faith negotiations to replace the invalid,
illegal or unenforceable provisions with valid provisions the economic or
legal effect of which comes as close to that of the invalid, illegal or
unenforceable provisions.
8.9 ENTIRE AGREEMENT. This Agreement contains all of the terms of the
understandings of the parties hereto with respect to the Merger.
8.10 DEFINITIONS. For purposes of this Agreement:
(a) an "affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such first person;
(b) "knowledge," or any variation thereof, of Parent, Merger Sub or the
Company as used in this Agreement shall mean as to the facts or
circumstances represented: (i) actual knowledge of any of the officers of
the Parent, Merger Sub, the Company or any Subsidiary, as applicable, or
(ii) knowledge that any such person should have reasonably obtained in
conducting a reasonable inquiry as to the relevant business, operations,
properties, documents, agreements and records considering such person's
particular position and responsibilities with the Company, a Subsidiary,
Parent or Merger Sub, as the case may be;
(c) "Governmental Entity" shall mean any court, administrative agency or
commission or other federal, state or local governmental authority or
instrumentality, domestic or foreign; and
(d) "person" means an individual, corporation, partnership, joint
venture, association, trust, unincorporated organization or other entity.
8.11 INTERPRETATION. When a reference is made in this Agreement to a
Section or Annex such reference shall be to a Section of, or an Annex to,
this Agreement unless otherwise indicated. The table of contents and
headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
Whenever the words "include," "includes" or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation."
8.12 ENFORCEMENT. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions of this Agreement in any court
of the United States located in the State of Colorado or in Colorado state
court, this being in addition to any other remedy to which they are entitled
at law or in equity. In addition, each of the parties hereto (a) consents to
submit itself to the personal jurisdiction of any Federal court located in
the State of Colorado or in Colorado state court in the event any dispute
arises out of this Agreement or any of the transactions contemplated by this
Agreement (b) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from any such
court and (c) agrees that it will not bring any action relating to this
Agreement or any of the transactions contemplated by this Agreement in any
court other than a Federal or state court sitting in the State of Colorado
or in Colorado state court.
[The remainder of this page is intentionally blank]
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<PAGE>
AGREEMENT AND PLAN OF MERGER SIGNATURE PAGE
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Agreement to be executed as of the date first written above.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PARENT
By: /s/ ALAN E. KESSOCK
---------------------------------
Name: Alan E. Kessock
---------------------------------
Title: Vice President
---------------------------------
MERGER SUB
By: /s/ ALAN E. KESSOCK
---------------------------------
Name: Alan E. Kessock
---------------------------------
Title: Vice President
---------------------------------
COMPANY
By: /s/ HENRY G. THORNE
---------------------------------
Name: Henry G. Thorne
---------------------------------
Title: President
---------------------------------
</TABLE>
S-1
<PAGE>
[Letterhead]
ANNEX B
March 4, 1997
Special Committee
Board of Directors
Audio King Corporation
3501 South Highway 100
Minneapolis, MN 55416
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of Audio King Corporation Common Stock (the "AUDK
shareholders") of the consideration to be paid by Ultimate Electronics, Inc.
("ULTE") in connection with the proposed merger transaction whereby Audio King
Corporation ("AUDK") will be merged with and into a wholly owned subsidiary of
ULTE pursuant to an Agreement and Plan of Merger ("Agreement") dated March 4,
1997.
Pursuant to the terms of the Agreement, AUDK shareholders may elect to
receive either $1.75 in cash or 0.7 shares of ULTE common stock per AUDK share,
with restrictions on the amount of cash and stock available to be issued by
ULTE. In the event that more AUDK shareholders should elect to receive one form
of consideration, cash or stock, than is available, shareholders shall receive
prorated proportions of cash and stock. The terms of the Merger are set forth
more fully in the Agreement and Plan of Merger document.
Greene Holcomb & Lannin LLC ("GH&L"), as part of its investment banking
business, is engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, private placements and valuations for
corporate and other purposes. We are currently acting as financial advisor to
AUDK in connection with the Merger and will receive a fee for our services that
is contingent upon the consummation of the Merger. For our services in rendering
this opinion, AUDK will pay us a fee which is not contingent upon consummation
of the Merger. AUDK has also agreed to indemnify us against certain liabilities
in connection with our services as financial advisor to AUDK and in rendering
this opinion.
In arriving at our opinion, we have undertaken such review, analyses and
inquiries as we deemed necessary and appropriate under the circumstances. Among
other things, we have reviewed (i) drafts of the Agreement (which drafts, we
have assumed, will be identical, in all material respects, to the Agreement as
executed on or after the date hereof), (ii) certain publicly available financial
statements and other information of AUDK and ULTE, and (iii) certain internal
financial statements and other information of AUDK and ULTE, prepared by the
management of AUDK and ULTE, respectively, for financial planning purposes. We
have visited certain AUDK and ULTE facilities in Minnesota and Colorado and have
had discussions with members of the management of AUDK and ULTE concerning their
respective financial conditions, current operating results and business outlook.
We have analyzed the historical reported market prices and trading activity
of AUDK and ULTE Common Stock. We have compared certain financial and stock
market information of AUDK and ULTE to similar information for certain
comparable publicly traded companies. We have also reviewed, to the extent
publicly available, the terms of selected relevant mergers and acquisitions,
analyzed the general economic outlook of electronics retailing companies and
performed such other studies and analyses as we considered appropriate.
We have relied upon and assumed the accuracy, completeness and fairness of
the financial statements and other information provided to us by AUDK and ULTE
or otherwise made available to us, and have not attempted to independently
verify such information. We have assumed, in reliance upon the assurances
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<PAGE>
of the management of AUDK and ULTE, that the information provided to us by AUDK
and ULTE has been prepared on a reasonable basis, and, with respect to financial
planning data and other business outlook information, reflects the best
currently available estimates and judgments of their respective management, and
that neither AUDK nor ULTE management is aware of any information or facts that
would make the information provided to us incomplete or misleading. We have
assumed there have been no material changes in the assets, financial condition,
results of operation, business or prospects since the date of the last financial
statements of AUDK and ULTE made available to us. In arriving at our opinion, we
have not performed any appraisals or valuations of specific assets of AUDK or
ULTE and we express no opinion regarding the liquidation value of AUDK or ULTE.
This opinion is based upon the information made available to us, and the facts
and circumstances as they exist and are subject to evaluation on the date
hereof.
This opinion is intended for use by the Special Committee of the Board of
Directors of AUDK only and may be published in its entirety in the proxy
statement to be distributed to the holders of Common Stock of AUDK in connection
with the Merger (as so distributed, the "Proxy Statement"). Any summary of,
excerpt from or reference to this opinion in the Proxy Statement may only be
made with our prior written consent, which consent shall not be unreasonably
withheld. Except as set forth in the immediately preceding two sentences, this
opinion may not be used or referred to by AUDK or quoted or disclosed to any
person in any manner without our prior written consent. This opinion is not
intended to be and does not constitute a recommendation to any AUDK Shareholder
as to how such AUDK Shareholder should elect or vote with respect to the Merger.
Based upon and subject to the foregoing and based upon such other factors as
we consider relevant, it is our opinion that the Merger Consideration to be
received by the AUDK Shareholders pursuant to the Agreement is fair, from a
financial point of view, to the AUDK Shareholders as of the date hereof.
Sincerely,
GREENE HOLCOMB & LANNIN LLC
B-2
<PAGE>
ANNEX C
MINNESOTA STATUTES
302A.471. RIGHTS OF DISSENTING SHAREHOLDERS
SUBDIVISION 1. ACTIONS CREATING RIGHTS. A shareholder of a corporation may
dissent from, and obtain payment for the fair value of the shareholder's shares
in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects the
rights or preferences of the shares of the dissenting shareholder in that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the redemption
of the shares, including a provision respecting a sinking fund for the
redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the shares
to acquire shares, securities other than shares, or rights to purchase
shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a matter,
or to cumulate votes, except as the right may be excluded or limited through
the authorization or issuance of securities of an existing or new class or
series with similar or different voting rights; except that an amendment to
the articles of an issuing public corporation that provides that section
302A.671 does not apply to a control share acquisition does not give rise to
the right to obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or substantially
all of the property and assets of the corporation, but not including a
transaction permitted without shareholder approval in Section 302A.661,
subdivision 1, or a disposition in dissolution described in section 302A.725,
subdivision 2, or a disposition pursuant to an order of a court, or a
disposition for cash on terms requiring that all or substantially all of the net
proceeds of disposition be distributed to the shareholders in accordance with
their respective interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B, to
which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter 322B, to
which the corporation is a party as the corporation whose shares will be
acquired by the acquiring corporation, if the shares of the shareholder are
entitled to vote on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by the board
directs that dissenting shareholders may obtain payments for their shares.
SUBD. 2. BENEFICIAL OWNERS. (a) A shareholder shall not assert dissenters'
rights as to less than all of the shares registered in the name of the
shareholder, unless the shareholder dissents with respect to all the shares that
are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the shareholder has dissented
and the other shares were registered in the names of different shareholders.
(b) The beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of this
section and section 302A.473, if the beneficial owner submits to the corporation
at the time of or before the assertion of the rights a written consent of the
shareholder.
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<PAGE>
SUBD. 3. RIGHTS NOT TO APPLY. Unless the articles, the bylaws or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of the surviving corporation
in a merger, if the shares of the shareholder are not entitled to be voted on
the merger.
SUBD. 4. OTHER RIGHTS. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at law
or in equity to have a corporate action described in subdivision 1 set aside or
rescinded, except when the corporate action is fraudulent with regard to the
complaining shareholder or the corporation.
302A.473. PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS
SUBDIVISION 1. DEFINITIONS. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivision 1 or the
successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1, up to
and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
SUBD. 2. NOTICE OF ACTION. If a corporation calls a shareholder meeting at
which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
SUBD. 3. NOTICE OF DISSENT. If the proposed action must be approved by the
shareholders, a shareholder who wishes to exercise dissenters' rights must file
with the corporation before the vote on the proposed action a written notice of
intent to demand the fair value of the shares owned by the shareholder and must
not vote the shares in favor of the proposed action.
SUBD. 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision 3
and to all shareholders entitled to dissent if no shareholder vote was required,
a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief description
of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
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<PAGE>
SUBD. 5. PAYMENT; RETURN OF SHARES. (a) After the corporate action takes
effect, or after the corporation receives a valid demand for payment, whichever
is later, the corporation shall remit to each dissenting shareholder who has
complied with subdivisions 3 and 4, the amount the corporation estimates to be
the fair value of the shares, plus interest, accompanied by:
(1) The corporation's closing balance sheet and statement of income for
a fiscal year ending not more than 16 months before the effective date of
the corporate action, together with the latest available interim financial
statements;
(2) An estimate by the corporation of the fair value of the shares and a
brief description of the method used to reach the estimate; and
(3) A copy of section 302A.471 and this section, and a brief description
of the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person who
was not a beneficial owner on that date. If the dissenter has complied with
subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a), a statement of the reason for withholding
the remittance, and an offer to pay to the dissenter the amount listed in the
materials if the dissenter agrees to accept that amount in full satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and cancel all transfer
restrictions. However, the corporation may again give notice under subdivision 4
and require deposit or restrict transfer at a later time.
SUBD. 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to the
amount remitted by the corporation.
SUBD. 7. PETITION; DETERMINATION. If the corporation receives a demand under
subdivision 6, it shall, within 60 days after receiving the demand, either pay
to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of civil procedure. Nonresidents of this state may be served by registered
or certified mail or by publication as provided by law. Except as otherwise
provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding on
all shareholders, wherever located. A dissenter is entitled to judgment in cash
for the
C-3
<PAGE>
amount by which the fair value of the shares as determined by the court, plus
interest, exceeds the amount, if any, remitted under subdivision 5, but shall
not be liable to the corporation for the amount, if any remitted under
subdivision 5, but shall not be liable to the corporation for the amount, if
any, by which the amount, if any, remitted to the dissenter under subdivision 5
exceeds the fair value of the shares as determined by the court, plus interest.
SUBD. 8. COSTS; FEES; EXPENSES. (a) The court shall determine the costs and
expenses of a proceeding under subdivision 7, including the reasonable expenses
and compensation of any appraisers appointed by the court, and shall assess
those costs and expenses against the corporation, except that the court may
assess part or all of those costs and expenses against a dissenter whose action
in demanding payment under subdivision 6 is found to be arbitrary, vexatious, or
not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an attorney
for the dissenters out of the amount awarded to the dissenters, if any.
C-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Ultimate Bylaws and Ultimate Certificate DGCL provide that Ultimate
shall, to the full extent permitted by the DGCL, as amended from time to time,
indemnify all directors and officers of Ultimate. Section 145 of the DGCL
provides in part that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Similar indemnity is authorized for such persons against expenses (including
attorneys' fees) actually and reasonably incurred in defense or settlement of
any threatened, pending or completed action or suit by or in the right of the
corporation, if such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation, and
provided further that (unless a court of competent jurisdiction otherwise
provides) such person shall not have been adjudged liable to the corporation.
Any such indemnification may be made only as authorized in each specific case
upon a determination by Ultimate's stockholders or disinterested directors or by
independent legal counsel in a written opinion that indemnification is proper
because the indemnitee has met the applicable standard of conduct. Where an
officer or a director is successful on the merits or otherwise in the defense of
any action referred to above, the corporation must indemnify him against the
expenses which such officer or director actually or reasonably incurred.
Additionally, the Ultimate Certificate and Ultimate Bylaws provide for
mandatory indemnification of directors to the fullest extent permitted by
Delaware law. This provision does not eliminate the liability of a director (i)
for a breach of the director's duty of loyalty to Ultimate or its stockholders;
(ii) for acts or omissions by the director not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) for liability
arising under Section 174 of the DGCL (relating to the declaration of dividends
and purchase or redemption of shares in violation of the DGCL); or (iv) for any
transaction from which the director derived an improper personal benefit.
Ultimate has a directors and officers insurance policy with a $3 million
coverage limit per occurrence and in the aggregate per year.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
2 Agreement and Plan of Merger, dated March 4, 1997, by and among Ultimate, UAC and Audio King. (Filed as
Annex A to the Proxy Statement/Prospectus included in this Registration Statement)
3(i) Amended and Restated Certificate of Incorporation of Ultimate. (1)
3(ii) Bylaws of Ultimate. (1)
4.1 Form of Indenture, dated as of March 23, 1995, between Ultimate and Colorado National Bank, as Trustee
for the 10.25% First Mortgage Bonds Due 2005. (2)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
4.2 Rights Agreement, dated as of January 31, 1995, by and between Ultimate and Norwest Bank Minnesota,
National Association, as rights agent. (3)
4.3 Amendment No. 1, dated as of January 31, 1995, to the Rights Agreement, dated as of January 31, 1995, by
and between Ultimate and Norwest Bank Minnesota, National Association, as rights agent. (4)
5.1 Opinion of Davis, Graham & Stubbs LLP
5.2 Opinion of Greene Holcomb & Lannin LLC (Filed as Annex B to the Proxy Statement/ Prospectus included in
this Registration Statement).
9 Form of Voting Agreement, dated , 1997 between Ultimate and certain Audio King shareholders.
10.1 Lease Agreement, dated April 1, 1989, between Ultimate and William J. and Barbara A. Pearse. (1)
10.2 Lease Agreement, dated October 13, 1989, between Ultimate and William J. and Barbara A. Pearse. (1)
10.4 Form of Authorized Dealer Agreement between Ultimate and Panasonic Communications and Systems Company, a
Division of Matsushita Electric Corporation of America. (1)
10.5 Form of Sony Corporation of America Consumer Sales Company Dealer Agreement between Ultimate and Sony
Consumer Sales Company, a division of Sony Corporation of America. (1)
10.6 Form of Dealer Agreement between Ultimate and Mitsubishi Electric Sales America, Inc. (1)
10.7 Form of Employee Stock Option Plan. (1)
10.8 Form of Non-employee Directors' Stock Option Plan. (5)
10.9 Ultimate Rule 401(k) Benefit Plan. (1)
10.10 Form of Confidentiality and Non-Competition Agreement. (1)
10.12 Form of Deed of Trust, Assignment of Rents and Security Agreement between Ultimate, as Grantor, and
Colorado National Bank, as beneficiary. (2)
10.13 Purchase and Sale Agreement, dated May 2, 1995, between Ultimate and Cirque Property L.C. (4)
10.14 Commercial Promissory Note and Security Agreement between Ultimate and Colorado National Leasing, Inc.,
dated November 1, 1995. (6)
10.15 Commercial Promissory Note and Security Agreement between Ultimate and Colorado National Leasing, Inc.,
dated December 19, 1995. (6)
10.16 Commercial Promissory Note and Security Agreement between Ultimate and Colorado National Leasing, Inc.,
dated January 22, 1996. (6)
10.17 Commercial Promissory Note and Security Agreement between Ultimate and Colorado National Leasing, Inc.,
dated February 28, 1996. (6)
10.18 Credit Agreement between Ultimate and Norwest Bank Colorado, National Association and Norwest Business
Credit, Inc., dated November 21, 1996. (7)
11 Computation of earnings per share. (7)
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Greene Holcomb & Lannin LLC.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
23.4 Consent of Davis, Graham & Stubbs LLP (included in the opinion filed as Exhibit 5.1)
24. Power of Attorney (see page II-5).
</TABLE>
- ------------------------------
(1) Incorporated by reference to Ultimate's Registration Statement on Form S-1
(File No. 33-68314), filed with the Commission on September 2, 1993.
(2) Incorporated by reference to Amendment No. 3 to Ultimate's Registration
Statement on Form S-1 (File No. 33-88740), filed with the Commission on
March 14, 1995.
(3) Incorporated by reference to Ultimate's Form 8-K filed with the Commission
on February 10, 1995.
(4) Incorporated by reference to Ultimate's Quarterly Report on Form 10-Q for
the period ended April 30, 1995.
(5) Incorporated by reference to Amendment No. 1 to Ultimate's Registration
Statement on Form S-1 (File No. 33-68314), filed with the Commission on
October 7, 1993.
(6) Incorporated by reference to Ultimate's Annual Report on Form 10-K for the
fiscal year ended January 31, 1996.
(7) Incorporated by reference to Ultimate's Annual Report on Form 10-K for the
fiscal year ended January 31, 1997.
(b) Financial Statement Schedules None of the schedules for which provision
is made in the applicable accounting regulations of the Commission is required
under the related instructions or is applicable and therefore all schedules have
been omitted.
(c) Opinion of Financial Advisor
The opinion of Greene Holcomb & Lannin LLC is filed as Annex B to the Proxy
Statement/ Prospectus included in this Registration Statement.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in the volume of securities offered (if the total dollar
value of securities offered would not exceed that which was registered)
and any deviation from the low or high and of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the change in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof.
II-3
<PAGE>
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b)(1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Denver,
State of Colorado, on this 10th day of April, 1997.
<TABLE>
<S> <C> <C>
ULTIMATE ELECTRONICS, INC.
By: /s/ WILLIAM J. PEARSE
-----------------------------------------
William J. Pearse
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
herein constitutes and appoints William J. Pearse, David J. Workman and Alan E.
Kessock, and each of them, as his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Registration Statement (including post-effective amendments), including a
registration statement filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------------ --------------------------------------- ----------------------
<C> <S> <C>
/s/ WILLIAM J. PEARSE Chairman of the Board and Chief
-------------------------------------- Executive Officer (Principal April 10, 1997
William J. Pearse Executive Officer)
/s/ DAVID J. WORKMAN
-------------------------------------- President, Chief Operating Officer and April 10, 1997
David J. Workman a Director
Vice President, Chief Financial
/s/ ALAN E. KESSOCK Officer, Secretary and a Director
-------------------------------------- (Principal Financial and Accounting April 10, 1997
Alan E. Kessock Officer)
/s/ ROBERT W. BEALE
-------------------------------------- Director April 10, 1997
Robert W. Beale
/s/ RANDALL F. BELLOWS
-------------------------------------- Director April 10, 1997
Randall F. Bellows
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C>
PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
AUDIO KING CORPORATION The undersigned hereby appoints Randel S. Carlock and Henry G. Thorne
3501 S. HIGHWAY 100 and each of them, as Proxies, each with full power of substitution,
MINNEAPOLIS, MINNESOTA 55416 and hereby authorizes each of them to represent and to vote, as
- --------------------------------- designated below, all the shares of common stock, $.001 par value per
share, of Audio King Corporation ("Audio King") held of record by the
undersigned on , 1997, at the Special Meeting of
Shareholders to be held on , 1997 or at any adjournment or
postponement thereof.
</TABLE>
1. Proposal to approve and adopt the Agreement and Plan of Merger, dated March
4, 1997 by and among Audio King, Ultimate Electronics, Inc. a Delaware
corporation ("Ultimate"), and Ultimate AKquisition Corp. ("UAC"), a Delaware
corporation and wholly owned subsidiary of Ultimate, pursuant to which Audio
King will merge with and into UAC.
/ / FOR / / AGAINST / / ABSTAIN
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the special meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE MERGER
(PLEASE SIGN ON REVERSE SIDE)
<PAGE>
This proxy when properly executed will be voted in the manner directed herein by
the undersigned shareholder. If no direction is made, this proxy will be voted
FOR the Merger.
Please sign exactly as your name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney-in-fact, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by president or other authorized
officer. If a partnership, please sign in partnership name by authorized person.
<TABLE>
<S> <C>
DATED --------------------------------- , 1997
------------------------------------------------
SIGNATURE
------------------------------------------------
SIGNATURE IF HELD JOINTLY
PLEASE MARK, SIGN, DATE AND RETURN PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE.
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
2 Agreement and Plan of Merger, dated March 4, 1997, by and among Ultimate, UAC and Audio King. (Filed as
Annex A to the Proxy Statement/Prospectus included in this Registration Statement)
3(i) Amended and Restated Certificate of Incorporation of Ultimate. (1)
3(ii) Bylaws of Ultimate. (1)
4.1 Form of Indenture, dated as of March 23, 1995, between Ultimate and Colorado National Bank, as Trustee
for the 10.25% First Mortgage Bonds Due 2005. (2)
4.2 Rights Agreement, dated as of January 31, 1995, by and between Ultimate and Norwest Bank Minnesota,
National Association, as rights agent. (3)
4.3 Amendment No. 1, dated as of January 31, 1995, to the Rights Agreement, dated as of January 31, 1995, by
and between Ultimate and Norwest Bank Minnesota, National Association, as rights agent. (4)
5.1 Opinion of Davis, Graham & Stubbs LLP
5.2 Opinion of Greene Holcomb & Lannin LLC (Filed as Annex B to the Proxy Statement/ Prospectus included in
this Registration Statement).
9 Form of Voting Agreement, dated , 1997 between Ultimate and certain Audio King shareholders.
10.1 Lease Agreement, dated April 1, 1989, between Ultimate and William J. and Barbara A. Pearse. (1)
10.2 Lease Agreement, dated October 13, 1989, between Ultimate and William J. and Barbara A. Pearse. (1)
10.4 Form of Authorized Dealer Agreement between Ultimate and Panasonic Communications and Systems Company, a
Division of Matsushita Electric Corporation of America. (1)
10.5 Form of Sony Corporation of America Consumer Sales Company Dealer Agreement between Ultimate and Sony
Consumer Sales Company, a division of Sony Corporation of America. (1)
10.6 Form of Dealer Agreement between Ultimate and Mitsubishi Electric Sales America, Inc. (1)
10.7 Form of Employee Stock Option Plan. (1)
10.8 Form of Non-employee Directors' Stock Option Plan. (5)
10.9 Ultimate Rule 401(k) Benefit Plan. (1)
10.10 Form of Confidentiality and Non-Competition Agreement. (1)
10.12 Form of Deed of Trust, Assignment of Rents and Security Agreement between Ultimate, as Grantor, and
Colorado National Bank, as beneficiary. (2)
10.13 Purchase and Sale Agreement, dated May 2, 1995, between Ultimate and Cirque Property L.C. (4)
10.14 Commercial Promissory Note and Security Agreement between Ultimate and Colorado National Leasing, Inc.,
dated November 1, 1995. (6)
10.15 Commercial Promissory Note and Security Agreement between Ultimate and Colorado National Leasing, Inc.,
dated December 19, 1995. (6)
10.16 Commercial Promissory Note and Security Agreement between Ultimate and Colorado National Leasing, Inc.,
dated January 22, 1996. (6)
10.17 Commercial Promissory Note and Security Agreement between Ultimate and Colorado National Leasing, Inc.,
dated February 28, 1996. (6)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
10.18 Credit Agreement between Ultimate and Norwest Bank Colorado, National Association and Norwest Business
Credit, Inc., dated November 21, 1996. (7)
11 Computation of earnings per share. (7)
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Greene Holcomb & Lannin LLC.
23.4 Consent of Davis, Graham & Stubbs LLP (included in the opinion filed as Exhibit 5.1)
24. Power of Attorney (see page II-5).
</TABLE>
- ------------------------------
(1) Incorporated by reference to Ultimate's Registration Statement on Form S-1
(File No. 33-68314), filed with the Commission on September 2, 1993.
(2) Incorporated by reference to Amendment No. 3 to Ultimate's Registration
Statement on Form S-1 (File No. 33-88740), filed with the Commission on
March 14, 1995.
(3) Incorporated by reference to Ultimate's Form 8-K filed with the Commission
on February 10, 1995.
(4) Incorporated by reference to Ultimate's Quarterly Report on Form 10-Q for
the period ended April 30, 1995.
(5) Incorporated by reference to Amendment No. 1 to Ultimate's Registration
Statement on Form S-1 (File No. 33-68314), filed with the Commission on
October 7, 1993.
(6) Incorporated by reference to Ultimate's Annual Report on Form 10-K for the
fiscal year ended January 31, 1996.
(7) Incorporated by reference to Ultimate's Annual Report on Form 10-K for the
fiscal year ended January 31, 1997.
<PAGE>
EXHIBIT 5.1
[LETTERHEAD] OF DAVIS, GRAHAM & STUBBS LLP APPEARS HERE]
April 10, 1997
Ultimate Electronics, Inc.
321-A West 84th Avenue
Thornton, CO 80221
Re: Registration of up to 1,000,000 shares of common stock pursuant to a
Registration Statement on Form S-4.
Ladies and Gentlemen:
We are providing this opinion in connection with the registration by
Ultimate Electronics, Inc. (the "Company") of up to 1,000,000 shares of its
common stock, $.01 par value (the "Shares"), to be issued in connection with
the Merger (the "Merger") of Audio King Corporation, a Minnesota corporation,
with and into a wholly owned subsidiary of the Company as described in the
Proxy Statement/Prospectus constituting a part of the Registration Statement
on Form S-4 of the Company, as filed with the Securities and Exchange
Commission on April 11, 1997. In such connection, we have examined certain
corporate records and proceedings of the Company, including actions taken by
the Company in respect of the authorization and issuance of the Shares, and
such other matters as we deemed appropriate.
The following opinion is limited solely to applicable federal law of the
United States of America, the laws of the state of Colorado and the General
Corporation Law of the State of Delaware. While we are not licensed in the
State of Delaware, we have reviewed applicable provisions of the General
Corporation Law of Delaware as we have deemed appropriate in connection with
the opinion expressed herein. Except as described, we have neither
examined nor do we express any opinion with respect to Delaware law.
Based on the foregoing, we are of the opinion that the Shares have been
duly authorized and, when sold as contemplated pursuant to the Merger
Agreement as described in the Registration Statement, will be legally
issued, fully paid and non-assessable.
We hereby consent to the reference to this firm under the heading "Legal
Matters" in the Registration Statement, and in the Proxy Statement/Prospectus
constituting a part thereof, as the counsel who will pass upon the validity
of the Shares. In giving this consent, we do not thereby admit that we are in
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules of the Securities and
Exchange Commission thereunder.
Very truly yours,
/s/ Davis, Graham & Stubbs LLP
DAVIS, GRAHAM & STUBBS LLP
<PAGE>
Exhibit 9
FORM OF
VOTING AGREEMENT
THIS AGREEMENT (the "Agreement"), dated as of March ____, 1997, is made and
entered into by and among Ultimate Electronics, Inc., a Delaware corporation
("Ultimate"), and Messrs. Randel S. Carlock, Gary S. Kohler and Henry G.
Thorne (the "Shareholders").
RECITALS
1. Messrs. Carlock, Kohler and Thorne are each members of the Board of
Directors and shareholders of Audio King Corporation, a Minnesota corporation
("Audio King"). Annex A to this Agreement shows the number of shares of
common stock, par value $.001 per share, of Audio King (the "Audio King
Common Stock") owned, beneficially and of record, by each of the Shareholders
as of the date hereof (the "Shares") and the number of Shares that are
subject to this Agreement (the "Voting Shares").
2. Ultimate and Audio King have entered into an Agreement and Plan of
Merger, dated March 4, 1997 (the "Merger Agreement"), pursuant to which Audio
King will be merged with and into Ultimate or a wholly-owned subsidiary of
Ultimate (the "Merger"), and each share of Audio King Common Stock will be
exchanged for either 0.7 shares of Ultimate common stock, $.01 par value per
share, or $1.75.
3. Under the Merger Agreement, it is a condition to Ultimate's
obligation to consummate the Merger that each Shareholder shall have executed
and delivered to Ultimate this Agreement.
<PAGE>
NOW, THEREFORE, the parties hereto, in consideration of the mutual
representations, warranties, covenants, agreements, terms and conditions
contained herein and in the Merger Agreement, and intending to be legally
bound hereby, covenant and agree as follows:
1. SUPPORT FOR MERGER. Subject to Section 5.9 of the Merger
Agreement, each of the Shareholders individually covenants and agrees to
support the Merger, take all reasonable action to encourage the shareholders
of Audio King to vote in favor of the Merger, including without limitation,
recommending the Merger and soliciting proxies from shareholders, and to vote
all Voting Shares owned directly or indirectly by him (or with respect to
Voting Shares to which he has sole or shared dispositive power) FOR and in
favor of the Merger at any and all meetings of the shareholders of Audio King
at which the Merger is considered.
2. REVOCATION OF PROXIES; AGREEMENT TO VOTE. Each of the Shareholders
hereby revokes any and all previous proxies with respect to the Shares owned
by him and agrees not to grant any proxy to any person, other than with the
prior written consent of Ultimate. Effective upon the execution and delivery
of this Agreement, each such individual agrees to vote all Voting Shares at
any meeting of shareholders of Audio King, regular or special, or any
adjournment or adjournments thereof. This agreement to vote shall be deemed
irrevocable and coupled with an interest. This agreement to vote shall be
effective until the earlier of the Effective Time (as defined in the Merger
Agreement) or the termination of the Merger Agreement in accordance with its
terms.
3. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS. Each of the
Shareholders hereby represents and warrants to Ultimate, as to himself only,
as follows:
-2-
<PAGE>
(a) Except as set forth on Annex A, such Shareholder is the record
and beneficial owner of the Shares shown as owned by him on Annex A of this
Agreement, has good and marketable title to such Shares, has all necessary
power and authority to enter into this Agreement, and such Shares are free
and clear of any and all claims, liens, charges, encumbrances and security
interests other than as shown on Annex A. None of the Shares owned by him
are subject to any proxy, voting trust or other agreement or arrangement with
respect to the voting of such Shares, other than pursuant to this Agreement.
(b) This Agreement is the legal, valid and binding agreement of
such Shareholder, enforceable against him in accordance with its terms,
except as such validity, binding effect or enforceability may be limited by
bankruptcy, insolvency, or other similar laws relating to creditors' rights
generally and except that the availability of equitable remedies, including
specific performance, is subject to the discretion of the court before which
any proceeding therefor may be brought.
(c) The execution of this Agreement by such Shareholder does not,
and the performance by him of his obligations hereunder will not, constitute
a violation of, conflict with or result in a default under any contract,
commitment, agreement, understanding, arrangement, statute or restriction of
any kind to which he is a party or by which he or any of his property is
bound or any judgment, decree or order applicable to him.
(d) Neither the execution and delivery of this Agreement, nor the
performance by such Shareholder of his obligations hereunder will violate any
provision of law applicable to him, except for the requirements, if any, of
federal and state securities laws.
-3-
<PAGE>
(e) The Shares shown on said Annex A as owned by such Shareholder
are the only securities of Audio King owned by him, beneficially or of
record, other than options shown on Section 1.4(e) of the Company Disclosure
Letter (as defined in the Merger Agreement), and he owns no other options to
purchase or rights to subscribe for or otherwise acquire any securities of
Audio King.
4. COVENANT OF THE SHAREHOLDER. Each of the Shareholders hereby
covenants and agrees with Ultimate that until the Merger has been consummated
such Shareholder will not, without the prior written consent of Ultimate,
directly or indirectly, (i) grant any proxies or enter into any voting trust
or other agreement or arrangement with respect to the voting of any Shares,
(ii) acquire or sell, assign, transfer or otherwise dispose of any Shares,
(iii) enter into any contract, option or other arrangement or understanding
with respect to the direct or indirect acquisition or sale, assignment,
transfer or other disposition of any Shares, or (iv) subject to Section 5.9
of the Merger Agreement, directly or indirectly encourage, solicit, initiate
or participate in any way in discussions or negotiations with, or knowingly
provide any information to, any corporation, partnership, person or other
entity or group (other than Ultimate or any affiliate or associate of
Ultimate) concerning any transaction that is the subject of Section 5.9 of
the Merger Agreement.
5. REMEDIES. The parties hereto agree that if for any reason Ultimate or
any Shareholder or Shareholders shall have failed to perform its obligations
under this Agreement, then any party hereto seeking to enforce this Agreement
against such nonperforming party shall be entitled to specific performance and
injunctive and other equitable relief, and the
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<PAGE>
parties hereto further agree to waive any requirement for the securing or
posting of any bond in connection with the obtaining of any such injunctive
or other equitable relief. This provision is without prejudice to any other
rights that either party hereto may have against the other party hereto for
any failure to perform its obligations under this Agreement. The failure by
any of the Shareholders to perform his obligations hereunder shall in no way
affect the obligation of the other Shareholders to perform their respective
obligations hereunder.
6. MISCELLANEOUS.
(a) ASSIGNMENT. Neither this Agreement nor the rights and
obligations hereunder shall be assignable by the parties hereto. This
Agreement shall be binding upon each of the Shareholders and such
Shareholder's heirs, distributees, successors and assigns by will or by the
laws of descent.
(b) AMENDMENTS. This Agreement may not be modified, amended,
altered or supplemented, except upon the execution and delivery of a written
agreement executed by the parties hereto.
(c) TERMINATION. This Agreement shall terminate in its entirety
upon the earlier of the Effective Time (as defined in the Merger Agreement)
or the termination of the Merger Agreement in accordance with its terms.
(d) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAW OF THE STATE OF
DELAWARE WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF.
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<PAGE>
(e) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
----------------------------------------
Mr. Randel S. Carlock
----------------------------------------
Mr. Gary S. Kohler
----------------------------------------
Mr. Henry G. Thorne
ULTIMATE ELECTRONICS, INC.
By:
-------------------------------------
Name: Alan E. Kessock
Title: Vice President
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<PAGE>
ANNEX A
<TABLE>
PERCENTAGE PERCENTAGE
OF AUDIO KING OF AUDIO KING
COMMON VOTING COMMON
SHAREHOLDER SHARES STOCK SHARES STOCK
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Randel S. Carlock 292,603 (1) 10.5% 225,304 8.1%
Gary S. Kohler 393,334 (2) 14.1% 302,867 10.8%
Henry G. Thorne 36,996 (3) 1.3% 28,486 1%
</TABLE>
(1) Includes 15,000 shares held by the Carlock Family Foundation. Mr. Carlock,
in his capacity as a director of the Foundation, shares the voting and
dispositive power over the shares held by such Foundation.
(2) Represents 393,334 shares held of record by Okabena Partnership K, a
Minnesota partnership; Mr. Kohler, in his capacity as Vice President of
Okabena Company, shares voting and dispositive power over such shares.
(3) Includes 6,996 shares held in the Audio King 401(k) Plan.
-7-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected Ultimate
Financial Information" and "Experts" and to the use of our report dated March 7,
1997, included in the Proxy/Prospectus Statement of Ultimate Electronics, Inc.
that is made a part of the Registration Statement (Form S-4 No. 333- ) and
the Prospectus of Ultimate Electronics, Inc. for the registration of 1,000,000
shares of its common stock.
ERNST & YOUNG LLP
Denver, Colorado
April 10, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
April 9, 1997
<PAGE>
EXHIBIT 23.3
CONSENT
We issued an opinion ("Fairness Opinion") as to the fairness to Audio King
Corporation ("Audio King") shareholders of the consideration to be paid by
Ultimate Electronics, Inc. ("Ultimate") pursuant to the Agreement and Plan of
Merger among Audio King, Ultimate and Ultimate AKquisition Corp. dated March 4,
1997. We hereby consent to the filing of the Fairness Opinion as an Annex to
Ultimate's Registration Statement on Form S-4 ("Registration Statement") and the
summary of, excerpt from and reference to the Fairness Opinion in such
Registration Statement. We also consent to the references to our firm in the
Registration Statement and the related Prospectus.
GREENE HOLCOMB & LANNIN LLC
By: /s/ CHARLES B. LANNIN
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April 10, 1997
