<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended April 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From ____________ to ___________
Commission file number 0-22532
ULTIMATE ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-0585211
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
321A WEST 84TH AVENUE, THORNTON, COLORADO 80221
(Address of principal executive offices, zip code)
(303) 412-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
--- ---
The number of outstanding shares of Common Stock as of June 13, 1997 was
6,995,000.
<PAGE>
ULTIMATE ELECTRONICS, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited): Page No.
Condensed Balance Sheets as of April 30, 1997 and
January 31, 1997............................................ 3
Statements of Operations for the three months ended April
30, 1997 and April 30, 1996................................. 4
Condensed Statements of Cash Flows for the three months
ended April 30, 1997 and April 30, 1996..................... 5
Notes to Condensed Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 10
Item 2. Changes in Securities........................................ 10
Item 3. Defaults Upon Senior Securities.............................. 10
Item 4. Submission of Matters to a Vote of Security Holders.......... 10
Item 5. Other Information............................................ 10
Item 6. Exhibits and Reports on Form 8-K............................. 10
2
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PART I. FINANCIAL INFORMATION
ITEM 1.
ULTIMATE ELECTRONICS, INC.
CONDENSED BALANCE SHEETS
(amounts in thousands)
(Unaudited)
April 30, January 31,
1997 1997
-------- --------
ASSETS:
Current assets:
Cash and cash equivalents $ 4,138 $ 764
Accounts receivable 13,089 13,788
Merchandise inventories 39,249 41,414
Other assets 771 642
-------- --------
Total current assets 57,247 56,608
Property and equipment, net 44,560 44,632
Property under capital leases, including
related parties, net 952 1,019
Other assets 996 1,051
-------- --------
Total assets $103,755 $103,310
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 21,475 $ 21,651
Other liabilities 5,342 7,089
-------- --------
Total current liabilities 26,817 28,740
Note payable 19,897 17,237
Bonds payable 13,000 13,000
Term loans 858 928
Capital lease obligations, including
related parties 931 1,007
Deferred tax liability 860 695
Commitments
Stockholders' equity:
Preferred stock, par value $.01 per share
Authorized shares - 10,000,000
No shares issued and outstanding -- --
Common stock, par value $.01 per share
Authorized shares - 10,000,000
Issued and outstanding shares, 6,995,000
at April 30, 1997 and January 31, 1997 70 70
Additional paid-in capital 31,009 31,009
Retained earnings 10,313 10,624
-------- --------
Total stockholders' equity 41,392 41,703
-------- --------
Total liabilities and stockholders' equity $103,755 $103,310
-------- --------
-------- --------
See accompanying notes.
3
<PAGE>
ULTIMATE ELECTRONICS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(amounts in thousands, except per share data)
Three Months Ended
April 30,
-----------------------
1997 1996
------- -------
Net sales $55,508 $59,615
Cost of goods sold 41,058 44,714
------- -------
Gross profit 14,450 14,901
Selling, general and administrative expenses 14,160 15,194
------- -------
Income (loss) from operations 290 (293)
Interest expense, net 783 743
------- -------
Income (loss) before taxes (493) (1,036)
Provision (benefit) for income taxes (182) (383)
------- -------
Net income (loss) $ (311) $ (653)
------- -------
------- -------
Earnings (loss) per share of common stock $ (.04) $ (.09)
Weighted average shares outstanding 6,995 6,995
See accompanying notes.
4
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ULTIMATE ELECTRONICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
Three Months Ended
April 30,
-----------------------
1997 1996
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities $ 1,887 $ (78)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,040) (2,663)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from note payable 2,660 2,000
Proceeds from term loans -- 225
Principal payments on term loans and capital lease
obligations (133) (109)
------- -------
Net cash provided by financing activities 2,527 2,116
------- -------
Net increase (decrease) in cash and cash equivalents 3,374 (625)
Cash and cash equivalents at beginning of period 764 979
------- -------
Cash and cash equivalents at end of period $ 4,138 $ 354
------- -------
------- -------
See accompanying notes.
5
<PAGE>
ULTIMATE ELECTRONICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 1997
1. ACCOUNTING POLICIES
The Company's unaudited interim financial statements have been prepared by
the Company in accordance with generally accepted accounting principles for
interim financial reporting and the regulations of the Securities and
Exchange Commission for quarterly reporting. Accordingly, they do not
include all information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
the Company, the statements include all adjustments, consisting only of
normal recurring adjustments, which are necessary for a fair presentation
of the financial position, results of operations and cash flows for the
interim periods. Operating results for the three month period ended April
30, 1997 are not necessarily indicative of the results that may be expected
for the year ending January 31, 1998. Seasonal fluctuations in sales of
the Company's products result primarily from the purchasing patterns of
individual consumers during the Christmas holiday season. These patterns
tend to moderately concentrate sales in the latter half of the year,
particularly in the fourth quarter. For further information, refer to the
financial statements and footnotes thereto included in the Company's Annual
Report to Stockholders for the year ended January 31, 1997.
2. EARNINGS PER SHARE OF COMMON STOCK
Earnings per share of common stock for the three months ended April 30,
1997 and 1996 are based on 6,995,000 outstanding shares of common stock.
Common equivalent shares from the potential exercise of stock options are
excluded from the computations as their effect is anti-dilutive.
3. ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, "Earnings Per Share," which is required to be adopted
on January 31, 1998. At that point, the Company will be required to change
the method currently used to compute earnings per share and to restate all
prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The
impact of Statement No. 128 on prior periods is not expected to be
material.
4. MERGER
On 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 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
Company's shares to be issued, final approval by the Company's bank,
satisfaction of obligations under the Hart, Scott, Rodino Antitrust
Improvement Act and completion of due diligence by both parties.
6
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations and the financial statements and accompanying notes contain
forward-looking information which is subject to risks and uncertainties,
including, but not limited to, increases in promotional activities of
competitors, further expansion by competitors into the Company's markets,
changes in consumer buying attitudes, the presence or absence of new products or
product features in the Company's merchandise categories, changes in vendor
support for advertising and promotional programs, changes in the Company's
merchandise sales mix and general economic conditions. Please refer to a
discussion of these and other factors in the Company's Annual Report on Form
10-K and other filings with the Securities and Exchange Commission. The Company
disclaims any intent or obligation to update publicly these forward-looking
statements, whether as a result of new information, future events or otherwise.
RESULTS OF OPERATIONS
Net sales for the three months ended April 30, 1997 decreased 7% to $55.5
million from $59.6 million for the three months ended April 30, 1996. Comparable
store sales decreased 15% for the three months ended April 30, 1997 compared to
a 9% decrease in comparable store sales for the three months ended April 30,
1996. The decrease in store sales was due in part to a continuing sluggish
retail environment for consumer electronics and increased competition in the
Company's markets.
Gross profit for the three months ended April 30, 1997 decreased 3% to $14.5
million (26.0% of net sales) from $14.9 million (25.0% of net sales) for the
three months ended April 30, 1996. The decrease in gross profit was directly
related to the decrease in sales. However, the Company was able to partially
offset the impact of the lower sales by increasing the gross profit percentage
in the current year period.
Selling, general and administrative expenses for the three months ended April
30, 1997 decreased to $14.2 million (25.5% of net sales) from $15.2 million
(25.5% of net sales) for the three months ended April 30, 1996. The $1.0
million decrease in expenses compared to the same period in the prior year was
primarily the result of lower sales commissions, bankcard fees and other sales
related costs associated with the lower sales volume, as well as reduced
advertising and preopening costs. Management has addressed the lower sales
trend during the current year by reducing variable costs where appropriate
throughout the Company.
As a result of the foregoing, the Company reported income from operations of
$290,000 or 0.5% of net sales for the three months ended April 30, 1997,
compared to a loss from operations of $293,000 or 0.5% of net sales for the
three months ended April 30, 1996.
Interest expense increased to $783,000 for the three months ended April 30, 1997
from $743,000 for the three months ended April 30, 1996 primarily due to a
slightly higher interest rate on amounts outstanding under the Company's
revolving line of credit.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of liquidity have been net cash from
operations and from revolving credit lines and term loans. Over the last three
and one-half years, the Company has expanded its operations outside Colorado and
now operates stores in six states. The Company has funded this expansion in
part through two public offerings of its common stock.
In March 1995, the Company received proceeds of $12.3 million (net of the
underwriting discount and other associated costs) from the sale of $13.0 million
aggregate principal amount of 10.25% First Mortgage Bonds (the
7
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"Bond Offering"). The proceeds of the Bond Offering were used to fund a
substantial portion of the construction of the Company's new warehouse, office,
service and store facility in Thornton, Colorado (the "Thornton Facility").
Interest on the bonds accrues at the rate of 10.25% per year until maturity or
earlier redemption. The Company is required to redeem $3.25 million aggregate
principal amount of the bonds annually (reduced to the extent of the bonds
purchased or redeemed by the Company earlier) on January 31, 2002 and on
January 31 of each of the three years thereafter, at a redemption price equal to
par plus accrued interest to the date of redemption. The bonds are not
redeemable prior to March 31, 2000 and are secured by the Thornton Facility.
Net cash provided by operations was $1.9 million for the three months ended
April 30, 1997 compared to net cash used in operations of $78,000 for the three
months ended April 30, 1996. The improvement in operating cash flow compared to
the prior year period was primarily the result of the Company's efforts to
reduce inventory in the current year to levels consistent with the lower sales
volume.
The Company 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, the Company announced the
signing of a definitive merger agreement with Audio King Corporation ("Audio
King") pursuant to which the Company will acquire all of the shares of 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. In fiscal 1998, the Company expects to relocate or consolidate two of
its Colorado stores to its larger store format. In fiscal 1999, the Company
expects to expand or relocate and expand at least two of the Audio King stores
into the Company's larger store format.
The Company's primary capital requirements are directly related to expenditures
for new store openings and the remodeling and upgrading of existing store
locations. With the exception of 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. The initial inventory
requirement for the Company's new larger format stores averages approximately
$2.4 million per store, approximately $1.0 million of which is financed through
trade credit.
The Company 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 $19.9 million were outstanding as of April 30, 1997. Due to
lower than expected sales performance in the fourth quarter of fiscal 1997, the
Company was in violation of certain of its' financial covenants under the
current credit agreement and received a waiver from the 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 the
Company's' operations for fiscal 1998 will be sufficient to enable the Company
to be in compliance with the amended convenants 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. The Company 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.
The Company believes that its cash flow from operations and borrowings under
existing and new credit facilities will be sufficient to fund the Company's
operations, the purchase of Audio King and associated acquisition costs, and its
store relocation plans for fiscal 1998. There can be no assurance that the
Company will not experience significant delays, cost overruns or completion
problems in connection with the relocation of existing stores or the acquisition
of Audio King. Moreover, there can be no assurance that the capital requirements
for the Company's stores will not exceed the Company's current estimates. In
order to fund the capital requirements for its anticipated expansion plans
beyond fiscal 1998, the Company may be required to seek additional financing,
which may take the
8
<PAGE>
form of expansion of its existing credit facility or possibly additional debt
or equity financings. There can be no assurance that the Company will be able
to obtain such funds on favorable terms, if at all.
SEASONALITY
The Company's business is affected by seasonal consumer buying patterns. As is
the case with other retailers, the Company's sales and profits have been
greatest in the fourth quarter (which includes the Christmas selling season).
If, for any reason, the Company's sales were to be substantially below
expectations during these months, the Company's annual results would be affected
in an adverse and disproportionate manner. Operating results are dependent upon
a number of factors, including discretionary consumer spending, which is in turn
affected by local, regional or national economic conditions affecting disposable
consumer income, such as employment, business conditions, interest rates and
taxation. The Company's quarterly results of operations may fluctuate
significantly as a result of a number of factors, including the timing of new or
relocated and expanded store openings and related expenses, the success of new
stores and the impact of new stores on existing stores, among others. As the
Company has opened additional stores or relocated and expanded stores within
markets it already serves, sales at existing stores have been adversely
affected. Such adverse effects may occur in the future. The Company's
quarterly operating results also may be affected by increases in merchandise
costs, price changes in response to competitive factors, new and increased
competition, product availability and the costs associated with the opening of
new stores.
9
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company is a party to certain legal proceedings
arising in the ordinary course of its business. Management believes
that any resulting liability, individually or in the aggregate, will
either be covered by insurance or will not have a material adverse
effect on the Company's financial condition.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None
TEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Documents filed with this report:
10.19 First Amendment to Credit Agreement between
Ultimate Electronics, Inc. and Norwest Bank
Colorado, National Association and Norwest
Business Credit, Inc. dated February 28, 1997.
10.20 Second Amendment to Credit Agreement between
Ultimate Electronics, Inc. and Norwest Bank
Colorado, National Association and Norwest
Business Credit, Inc. dated March 11, 1997.
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ultimate Electronics, Inc.
Date: June 13, 1997 By: /s/ Alan E. Kessock
-------------------- -----------------------------------
Alan E. Kessock
Vice President, Chief Financial
Officer, Secretary and a Director
(Principal Financial and Accounting
Officer)
11
<PAGE>
FIRST AMENDMENT
TO
CREDIT AGREEMENT
This First Amendment is made this 28th day of February, 1997, by and
between ULTIMATE ELECTRONICS, INC., a Delaware corporation (the "Borrower"),
NORWEST BANK COLORADO, NATIONAL ASSOCIATION (the "Lender") and NORWEST
BUSINESS CREDIT, INC, a Minnesota corporation, as administrative agent for
the Lender (the "Administrative Agent").
RECITALS
The Borrower, the Lender and the Administrative Agent entered into a
Credit Agreement dated as of November 21, 1996 (the "Credit Agreement").
The Borrower has requested that the Lender change certain affirmative
covenants in the Credit Agreement and the Lender is willing to do so on the
terms and subject to the conditions set forth herein.
NOW THEREFORE, in consideration of the premises and the mutual promises
herein contained, the parties hereto agree as follows:
1. Section 6.7 of the Credit Agreement is hereby amended by amending
subsection (d) thereof to read in its entirety as follows:
"(d) MONTHLY ACCOUNTS PAYABLE AGING. Within thirty (30) days after the
end of each fiscal year, deliver to the Administrative Agent a copy of a
summary for the Borrower's internally prepared monthly accounts payable
aging for the applicable month and such additional information as the
Administrative Agent may reasonably request from time to time, provided,
however, that if excess Borrowing Base availability is less than or equal
to $2,500,000, the Borrower shall deliver a complete copy of the
Borrower's internally prepared monthly accounts payable aging."
2. Section 6.7 of the Credit Agreement is hereby further amended by
amending subsection (e) thereof to read in its entirety as follows:
"(e) BORROWING BASE CERTIFICATE. Within thirty (30) days after the end of
each fiscal month, deliver to the Administrative Agent a Borrowing Base
Certificate and an Inventory Report (with such supporting schedules as
the Administrative Agent may request) signed by the chief financial
officer or other officer of the Borrower satisfactory to the
Administrative Agent, provided, however, that if excess Borrowing Base
availability is less than or equal to $2,500,000, the Borrower shall
deliver the Borrowing Base Certificate to
<PAGE>
the Administrative Agent on a weekly basis. Notwithstanding the foregoing,
the Borrower shall deliver a Borrowing Base Certificate more frequently
than otherwise provided herein at the request of the Administrative Agent."
3. Except as specifically amended hereby, the Credit Agreement shall
remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be duly executed as of the day and year first above written.
ULTIMATE ELECTRONICS, INC.
By: /s/ Alan E. Kessock
---------------------------------
Its: Vice President
---------------------------------
NORWEST BANK COLORADO, NATIONAL
ASSOCIATION
By: /s/ Karen Hardy
---------------------------------
Its: Vice President
---------------------------------
NORWEST BUSINESS CREDIT, INC.
By: /s/ Pamela Klempel
---------------------------------
Its: Assistant Vice President
---------------------------------
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<PAGE>
SECOND AMENDMENT
TO
CREDIT AGREEMENT
This Second Amendment is made this 11th day of March, 1997, by and
between ULTIMATE ELECTRONICS, INC., a Delaware corporation (the "Borrower"),
NORWEST BANK COLORADO, NATIONAL ASSOCIATION (the "Lender") and NORWEST
BUSINESS CREDIT, INC, a Minnesota corporation, as administrative agent for
the Lender (the "Administrative Agent").
RECITALS
The Borrower, the Lender and the Administrative Agent entered into a
Credit Agreement dated as of November 21, 1996, as amended (the "Credit
Agreement").
The Borrower has requested that the Lender change certain affirmative
covenants in the Credit Agreement and waive certain defaults. The Lender is
willing to do so on the terms and subject to the conditions set forth herein.
NOW THEREFORE, in consideration of the premises and the mutual promises
herein contained, the parties hereto agree as follows:
1. Section 6.13 of the Credit Agreement is hereby amended to read in
its entirety as follows:
"Section 6.13 FINANCIAL COVENANTS. Maintain the following:
(a) A ratio of current assets to the sum of current liabilities
plus the aggregate outstanding balance under the Loan of at least 1.10 to
1.00 computed monthly as at the end of each month. Current assets and current
liabilities shall be calculated in accordance with GAAP. For purposes of
this SECTION 6.13(a), prepaid expenses and stockholder receivables included
in the calculation of current assets shall not exceed $1,250,000.
(b) Maintain during each of the periods set forth below, a minimum
Net Worth calculated as at the end of each month in such period in an amount
which is greater than or equal to the amount set forth opposite such period;
PROVIDED THAT the minimum Net Worth that the Borrower is required to maintain
shall be increased by the sum of 100% of the net proceeds received by the
Borrower for the sale of any equity securities after the date of this
Agreement:
PERIOD MINIMUM NET WORTH
------ -----------------
February 28, 1997 to and including $41,000,000
November 30, 1997
<PAGE>
December 1, 1997 to and including $43,000,000
January 31, 1998
(c) Maintain on each of the dates set forth below a maximum ratio of
Funded Indebtness to EBITDA determined for the four fiscal quarters of the
Borrower ending on such date that is less than or equal to the ratio set
forth opposite such date:
Date Ratio
---- -----
April 30, 1997 4.0 to 1.0
July 31, 1997 4.0 to 1.0
October 31, 1997 3.5 to 1.0
January 31, 1998 3.0 to 1.0"
2. The Lender hereby waives any default or Event of Default of the
Borrower, occurring on or prior to January 31, 1997 under the Financial
Covenants in Section 6.13(b) and 6.13(c) of the Credit Agreement as of the
date any such default or Event of Default occurred.
3. Except as specifically amended hereby, the Credit Agreement shall
remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment
to be duly executed as the day and year first above written.
ULTIMATE ELECTRONICS, INC.
By: /s/ Alan E. Kessock
-------------------------------------
Its: Vice President
-------------------------------------
NORWEST BANK COLORADO, NATIONAL ASSOCIATION
By: /s/ Karen Hardy
-------------------------------------
Its: Vice President
-------------------------------------
NORWEST BUSINESS CREDIT, INC.
By: /s/ Pamela Klempel
-------------------------------------
Its: Assistant Vice President
-------------------------------------
-2-
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<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<CASH> 4,138
<SECURITIES> 0
<RECEIVABLES> 13,249
<ALLOWANCES> 160
<INVENTORY> 39,249
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<PP&E> 54,576
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<BONDS> 34,686
0
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<COMMON> 70
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<SALES> 55,508
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