<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A-1
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended January 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission file number 0-22532
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ULTIMATE ELECTRONICS, INC.
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(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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (303) 412-2500
----------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE PER SHARE
- -------------------------------------------------------------------------------
Title of Class
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 2, 1997 was approximately $13,642,938. The number of
outstanding shares of Common Stock as of April 2, 1997 was 6,995,000.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Annual Report to Stockholders for the fiscal year ended January
31, 1997 are incorporated by reference into Parts II, III and IV of this report.
Portions of the Registrant's definitive Proxy Statement for the 1997 Annual
Meeting of Stockholders to be held June 10, 1997 are incorporated by reference
into Part III of this report.
<PAGE>
ITEM 2. PROPERTIES
As of January 31, 1997, the Company 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. The following table
sets forth data regarding the Company's store locations.
YEAR APPROXIMATE APPROXIMATE LEASE
ORIGINALLY TOTAL RETAIL SELLING EXPIRATION
CURRENT STORE LOCATIONS OPENED SQUARE FEET SQUARE FEET DATE(1)
- ----------------------- ---------- ------------ -------------- ----------
COLORADO:
6490 Wadsworth Blvd.
Arvada, CO (2) 1968 14,500 9,500 2006
15022 E. Mississippi Ave.
Aurora, CO (2) (3) 1983 10,900 6,500 1997
1955 28th Street
Boulder, CO 1985 34,700 20,300 2047
1230 N. Academy Blvd.
Colorado Springs, CO 1989 14,900 9,800 1999
1370 S. Colorado Blvd.
Denver, CO 1976 31,600 16,700 2004
4606 S. Mason St.
Fort Collins, CO 1990 16,600 8,400 2005
8262 S. University Blvd.
Littleton, CO (3) 1986 16,600 9,900 2007
8196 W. Bowles Ave.
Littleton, CO 1984 39,100 22,600 2027
321 W. 84th Ave.
Thornton, CO 1985 40,300 25,900 N/A
IDAHO:
1085 N. Milwaukee Ave.
Boise, ID 1995 37,100 (4) 19,500 2025
NEVADA:
2555 E. Tropicana Ave.
Las Vegas, NV 1995 37,300 (4) 17,900 2025
741 S. Rainbow Blvd.
Las Vegas, NV 1994 31,500 17,600 2014
NEW MEXICO:
3821 Menaul Blvd., N.E.
Albuquerque, NM 1994 37,100 (4) 17,700 2014
OKLAHOMA:
10021 E. 71st St.
Tulsa, OK 1995 51,700 (4) 30,400 2025
UTAH:
879 W. Hill Field Rd.
Layton, UT 1995 33,800 18,600 2025
6284 S. State St.
Murray, UT 1994 32,200 18,000 2024
1375 S. State St.
Orem, UT 1993 32,900 17,100 2010
1130 E. Brickyard Rd.
Salt Lake City, UT 1993 33,400 (4) 18,200 2013
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(1) Including renewal options.
(2) These stores are expected to be relocated during fiscal 1998.
(3) The store at 8262 S. University Blvd may be closed if the Company is able
to sublease the space since the Company believes that the customer base
for this area may be better served from the larger format store that will
replace the Company's Aurora store.
(4) Includes regional service center.
<PAGE>
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, par value $.01 per share ("Common Stock") is
quoted on the Nasdaq National Market System ("Nasdaq") under the symbol "ULTE."
The table below sets forth the high and low closing bids of the Common Stock on
Nasdaq for the periods indicated, as reported in published financial sources:
<TABLE>
<CAPTION>
ULTIMATE
------------------------
HIGH LOW
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<S> <C> <C>
FISCAL YEAR ENDING JANUARY 31, 1996:
First Quarter.............................................................. $ 12 1/4 $ 7
Second Quarter............................................................. 12 8 1/2
Third Quarter.............................................................. 13 3/8 8 3/4
Fourth Quarter............................................................. 9 1/2 5 1/2
FISCAL YEAR ENDING JANUARY 31, 1997:
First Quarter.............................................................. 6 3/4 4 1/2
Second Quarter............................................................. 5 3/8 3 1/2
Third Quarter.............................................................. 5 3 1/8
Fourth Quarter............................................................. 4 2 5/8
FISCAL YEAR ENDING JANUARY 31, 1998:
First Quarter (through April 9, 1997)...................................... 3 3/4 2 5/8
</TABLE>
On April 9, 1997, the closing price per share of Ultimate Stock was
$3.625 and there were approximately 2,860 beneficial holders of Common Stock.
As a public company, the Company has never declared or paid any cash
dividends on the Common Stock. The Company 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. The
Company's current credit facility also restricts the Company's ability to pay
dividends.
2
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five fiscal years ended
January 31, 1997 is derived from the audited financial statements of the
Company. Such financial statements were audited by Ernst & Young LLP,
independent auditors, whose report with respect to fiscal years 1997, 1996 and
1995 appears elsewhere herein. The operating data for each fiscal year set forth
below are derived from unaudited financial information. The selected financial
data should be read in conjunction with the financial statements, the related
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
---------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- --------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<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>
3
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<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
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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.
4
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ITEM 7. 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 report.
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
5
<PAGE>
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 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.
6
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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 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
7
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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.
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.
8
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ULTIMATE ELECTRONICS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Ernst & Young LLP........................................................ 10
Statements of Income for the years ended January 31, 1997, 1996 and 1995........... 11
Balance Sheets at January 1997 and 1996............................................ 12
Statements of Stockholders' Equity for the years ended January 31, 1997, 1996 and
1995............................................................................. 13
Statements of Cash Flows for the years ended January 31, 1997, 1996 and 1995....... 14
Notes to Financial Statements...................................................... 15
</TABLE>
9
<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
10
<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.
11
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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.
12
<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.
13
<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.
14
<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.
15
<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.
16
<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
17
<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
18
<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.
19
<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>
20
<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>
21
<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>
22
<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>
23
<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.
24
<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 Company's shares to be issued, final approval by the
Company's bank, satisfaction of obligations under the Hart, Scott, Rodino
Antitrust Improvements Act and completion of due diligence by both parties.
25
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. FINANCIAL STATEMENTS
- Statements of Income for the fiscal years ended January 31, 1997,
1996 and 1995.
- Balance Sheets at January 31, 1997 and 1996.
- Statements of Stockholders' Equity for the fiscal years ended
January 31, 1997, 1996 and 1995.
- Statements of Cash Flows for the fiscal years ended January 31,
1997, 1996 and 1995.
- Notes to Financial Statements.
2. FINANCIAL STATEMENT SCHEDULES: The following financial statement
schedule for the fiscal years ended January 31, 1997, 1996 and 1995 is
filed as part of this Form 10-K:
SCHEDULE DESCRIPTION PAGE
-------- ----------- ----
II Valuation and Qualifying Accounts 14
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the
related instructions or are inapplicable and therefore have been
omitted.
26
<PAGE>
3. EXHIBITS: The following exhibits are filed pursuant to Item 601 of
Regulation S-K.
EXHIBIT # DESCRIPTION OF EXHIBITS
--------- -----------------------
3(i) Amended and Restated Certificate of Incorporation of the
Company. (3)
3(ii) Bylaws of the Company. (3)
4.1 Form of Indenture, dated as of March 23, 1995, between the
Registrant 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
the Company and Norwest Bank Minnesota, National Association,
as rights agent. (5)
4.3 Amendment No. 1, dated as of January 31, 1995, to the Rights
Agreement, dated as of January 31, 1995, by and between the
Company and Norwest Bank Minnesota, N.A., as rights agent. (6)
10.1 Lease Agreement, dated April 1, 1989, between the Registrant and
William J. and Barbara A. Pearse. (3)
10.2 Lease Agreement, dated October 13, 1989, between the Registrant
and William J. and Barbara A. Pearse. (3)
10.4 Form of Authorized Dealer Agreement between the Registrant and
Panasonic Communications and Systems Company, a Division of
Matsushita Electric Corporation of America. (3)
10.5 Form of Sony Corporation of America Consumer Sales Company Dealer
Agreement between the Registrant and Sony Consumer Sales Company,
a division of Sony Corporation of America. (3)
10.6 Form of Dealer Agreement between the Registrant and Mitsubishi
Electric Sales America, Inc. (3)
10.7 Form of Employee Stock Option Plan. (3)
10.8 Form of Non-employee Directors' Stock Option Plan. (4)
10.9 Ultimate Electronics, Inc. Rule 401(k) Benefit Plan. (3)
10.10 Form of Confidentiality and Non-Competition Agreement. (4)
10.12 Form of Deed of Trust, Assignment of Rents and Security Agreement
between the Registrant, as Grantor, and Colorado National Bank,
as beneficiary. (2)
10.13 Purchase and Sale Agreement, dated May 2, 1995, between the
Company and Cirque Property L.C. (6)
10.14 Commercial Promissory Note and Security Agreement between the
Company and Colorado National Leasing, Inc., dated November 1,
1995. (7)
10.15 Commercial Promissory Note and Security Agreement between the
Company and Colorado National Leasing, Inc., dated December 19,
1995. (7)
10.16 Commercial Promissory Note and Security Agreement between the
Company and Colorado National Leasing, Inc., dated January 22,
1996. (7)
10.17 Commercial Promissory Note and Security Agreement between the
Company and Colorado National Leasing, Inc., dated February 28,
1996. (7)
10.18 Credit Agreement between Ultimate Electronics, Inc. and Norwest
Bank Colorado, National Association and Norwest Business Credit,
Inc., dated November 21, 1996. (1)
11 Computation of Earnings Per Share. (1)
23.1 Consent of Independent Auditors.
27 Financial Data Schedule (1)
27
<PAGE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the period from
January 31, 1996 to January 31, 1997.
- -------------------
(1) Filed with Annual Report on Form 10-K for the fiscal year ended January
31, 1997, filed with the Commission on April 9, 1997.
(2) Incorporated by reference to Amendment No. 3 to the Registrant's
Registration Statement on Form S-1 (File No. 33-88740), filed with the
Commission on March 14, 1995.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-68314), filed with the Commission on September 2,
1993.
(4) Incorporated by reference to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (File No. 33-68314), filed with the
Commission on October 7, 1993.
(5) Incorporated by reference to the Registrant's Form 8-K filed with the
Commission on February 10, 1995.
(6) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the period ended April 30, 1995.
(7) Exhibits filed with the Company's Form 10-K Annual Report for the fiscal
year ended January 31, 1996, and are incorporated herewith by reference.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this amendment to this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Thornton, State of Colorado, on this 11th day of April, 1997.
ULTIMATE ELECTRONICS, INC.
By: /s/ Alan E. Kessock
-------------------------------------
Alan E. Kessock
Vice President, Chief Financial
Officer, Secretary and a Director
(Principal Financial and Accounting Officer)
29
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. EXHIBIT DESCRIPTION
- ------- -------------------
23.1 Consent of Independent Auditors
<PAGE>
EXHIBIT 23.1 - CONSENT OF INDEPENDENT AUDITORS
===============================================================================
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Ultimate Electronics, Inc. of our report dated March 7, 1997, included in
the 1997 Annual Report to Stockholders of Ultimate Electronics, Inc.
Our audits also included the financial statement schedule of Ultimate
Electronics, Inc. listed in Item 14(a). This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion
based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements as a whole, presents fairly in all material respects the
information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-94636, No. 33-92256 and No. 33-92258)
pertaining to the SoundTrack 401(k) Retirement Savings Plan, the Non-employee
Director Stock Option Plan and the Employee Stock Option Plan, respectively,
of Ultimate Electronics, Inc. of our report dated March 7, 1997 with respect
to the financial statements and schedule of Ultimate Electronics, Inc.
included or incorporated by reference in this Annual Report (Form 10-K) for
the year ended January 31, 1997.
Ernst & Young LLP
Denver, Colorado
April 8, 1997
