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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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
For the fiscal year ended January 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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
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State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
321A WEST 84TH AVENUE, THORNTON, COLORADO 80221
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(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (303) 412-2500
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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
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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 and non-voting stock held by
non-affiliates of the Registrant as of April 30, 1998 was approximately
$19,344,819. The number of outstanding shares of Common Stock as of April 30,
1998 was 8,139,548.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Annual Report to Stockholders for the fiscal year ended January
31, 1998 are incorporated by reference into Parts II, III and IV of this report.
Portions of the Registrant's definitive Proxy Statement for the 1998 Annual
Meeting of Stockholders to be held June 17, 1998 are incorporated by reference
into Part III of this report.
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PART I
ITEM 1. BUSINESS
Ultimate Electronics, Inc. (the "Company") is a leading specialty retailer of
home entertainment and consumer electronics in Colorado, Idaho, Iowa, Minnesota,
Nevada, New Mexico, Oklahoma, South Dakota and Utah. The Company operates
thirty stores, including ten stores in Colorado under the trade name SoundTrack,
eleven stores in Idaho, Iowa, Nevada, New Mexico, Oklahoma, and Utah under the
trade name Ultimate Electronics and nine store in Minnesota and South Dakota
under the trade name Audio King. On June 27, 1997, the Company completed a
merger in which the Company acquired all of the outstanding shares of Audio King
Corporation ("Audio King"). Audio King, a consumer specialty electronics
company, operated 11 retail stores, eight in Minnesota, two in Iowa and one in
South Dakota. The results of operations since the acquisition date are included
in the consolidated financial statements. In addition to the Audio King
acquisition, the Company since 1993 has opened ten new 31,000 to 52,000 square
foot stores and relocated and expanded five of its existing Colorado stores to
this larger format. The remaining 15 stores range in size from 3,200 to 28,000
square feet and include four stores in Colorado, two stores in Iowa, eight
stores in Minnesota and one store in South Dakota. In November 1997, the
Company completed the remodel of two Audio King stores and grand opened the
stores under the name Ultimate Electronics and also completed changes to four of
the Minneapolis Audio King stores to allow for increased selection in those
stores in the key area of larger format television as well as other product
categories.
The Company strives to appeal to a wide range of customers with an emphasis on
selling mid to upscale products. The Company believes its stores enable it to
differentiate itself from its competitors by providing a comprehensive selection
of name brand consumer electronics, with an emphasis on limited distribution
upscale brands, as well as by offering an extensive range of customer services
and by displaying multiple home theater and audio demonstration rooms. The
Company believes that these factors, together with its open and uncrowded
merchandise displays and its policy of matching the lowest prices of its
competitors, make it an attractive alternative to appliance/electronics
superstores and mass merchants selling consumer electronics.
For the year ended January 31, 1998, sales were $306.3 million, a 17% increase
from sales of $261.2 million for the prior year. The increase in sales during
fiscal 1998 was due primarily to the acquisition of Audio King. Comparable
store sales decreased 6% for the year ended January 31, 1998 compared to a
decrease of 16% in comparable store sales for the year ended January 31, 1997.
The Company believes the decrease in comparable store sales over the past two
years was due primarily to a sluggish retail environment for consumer
electronics products and increased competition in the Company's markets.
BUSINESS STRATEGY
The Company's strategy is to position itself as the upscale, full service
consumer electronics alternative to its competitors and to satisfy consumer
demand for increasingly sophisticated consumer electronics products,
particularly in the core categories of audio and video. Key elements of its
business strategy include:
EXTENSIVE PRODUCT SELECTION. The Company is committed to offering an extensive
selection of high quality, brand name home entertainment and consumer
electronics products. The Company offers over 6,000 stock keeping units
("SKU's") representing approximately 200 brand names, a significant portion of
which are limited distribution brands that are only available through selected
retailers. As a result, the Company carries a larger selection of
full-featured, high quality products than is generally available at the
Company's competitors. Each product category includes a wide range of price
points.
EXCELLENT CUSTOMER SERVICE. Since inception, the Company has been committed to
providing excellent customer service through well-trained sales consultants and
an extensive range of customer services. The Company provides its new sales
consultants with more than two weeks of intensive classroom training and
continues with on-the-job instruction in product and vendor knowledge, sales
techniques and customer service. The Company has regional service centers in
Albuquerque, Boise, Denver, Des Moines, Las Vegas, Minneapolis, Salt Lake City
and Tulsa enabling it to provide fast and efficient service. The Company also
provides a 30-day money-back satisfaction
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guarantee, an in-stock guarantee on advertised items, home delivery and setup,
home theater and audio installation and design, home satellite installation,
mobile electronics installation and extended service contracts.
ADVERTISING AND MARKETING. The Company's advertising strategy stresses
nationally recognized brands at competitive prices primarily through newspaper,
radio and direct mail media. The Company is a significant newspaper advertiser
in the markets it serves, producing all of its print advertising through its
in-house advertising department. The Company also employs an outside
advertising agency that produces and places the Company's radio commercials.
The Company's marketing programs are designed to create an awareness of the
Company's comprehensive selection of high quality, brand name merchandise, as
well as its competitive pricing. The Company typically advertises a broader
selection of audio and video products than its competitors and presents a blend
of aggressive promotional starting price points on competing products with
higher price points on more fully featured products. The Company has spent
substantial funds on advertising and marketing in various forms of media to
establish name recognition for its new stores.
UPSCALE STORE FORMAT. The Company has developed a store format to emphasize and
merchandise mid to upscale products. Each store has displays designed to
provide the customer with a full spectrum of the Company's products upon
entering a store. These displays allow customers to make extensive side-by-side
product comparisons. The Company's new and recently relocated stores have
substantially larger selling space, providing customers with an uncluttered
presentation of the latest technology and featuring multiple demonstration rooms
dedicated to home theater and mobile electronics products.
COMPETITIVE PRICING. The Company emphasizes competitive product pricing and
reinforces this strategy with extensive advertising and a "60-day price
guarantee." The Company monitors pricing at competing stores on a weekly basis
through pricing surveys and adjusts its prices by market as necessary. The
Company believes that competitive pricing enables it to attract new customers as
well as to maintain customer loyalty.
EXPANSION STRATEGY
The Company intends to continue its expansion into select metropolitan areas in
the Rocky Mountain, Midwest and Southwest regions with its larger format stores.
Currently, the Company does not anticipate adding any new stores during fiscal
1999. The Company expects to relocate or consolidate and expand two to five of
its locations within the next three years along with the possibility of adding
new stores.
The Company's expansion strategy focuses on identification of attractive
metropolitan areas in the Rocky Mountain, Midwest and Southwest regions based on
an evaluation of local market opportunities, as well as the size, strength and
merchandising philosophy of potential competitors. The Company obtains
demographic analyses of major metropolitan areas to determine new store
locations and potential sales volumes, as well as the optimum number of stores
to open in a specific market. The Company's specific location strategy focuses
on power centers or free-standing locations near shopping malls. In choosing
sites within a market, the Company applies standard site selection criteria
which take into account numerous factors including local demographics, traffic
patterns, highway visibility and overall retail activity.
Capital expenditures for new stores and to relocate and expand existing stores
in the future are expected to average approximately $2.0 million per store,
excluding preopening costs ranging from $100,000 to $300,000. Preopening costs
include such items as advertising prior to opening, recruitment and training of
new employees, and any costs of early termination of store leases. The Company
expenses preopening costs as incurred prior to the relocation or opening of a
new store. The initial inventory requirement for the Company's larger format
stores averages approximately $2.0 million per store, approximately $1.0 million
of which is financed through trade credit.
MERCHANDISING
PRODUCTS. The Company offers its customers a comprehensive selection of high
quality, brand name television, video, home audio, mobile electronics and home
office products. This selection consists of over 6,000 SKU's,
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representing approximately 200 brand names. The Company offers customers a wide
range of price points within each product category, with the greatest depth in
middle to higher priced items. Within its product categories, the Company
carries and actively promotes new models as they become available. The Company
does not carry home appliances or software.
The following table, which is derived from the Company's internal sales records,
indicates the percentage of sales in each major product group for the Company's
last three fiscal years. The percentages include installation and other
services in these categories. Historical percentages may not be indicative of
the Company's future product mix.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
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1998 1997 1996
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PRODUCT CATEGORY
<S> <C> <C> <C>
Television/Satellite 28% 29% 27%
Audio 23% 22% 23%
Home Office 12% 16% 16%
Video 14% 13% 15%
Mobile 14% 12% 11%
Other 9% 8% 8%
</TABLE>
PRICING. The Company emphasizes competitive pricing on high visibility items
and reinforces this strategy with extensive advertising. The Company monitors
pricing at competing stores on a weekly basis through pricing surveys and
adjusts its prices by market as necessary. The Company's commitment to offer
competitive prices is supported by its "60-day price guarantee", under which the
Company refunds 110% of the difference between the original purchase price and
any locally available lower price for the same item under the same purchase
conditions. Sales and other special events, which the Company conducts from
time to time, may have lower than normal prices on selected products and product
categories.
PURCHASING. Substantially all of the Company's products are purchased directly
from manufacturers. Each of the Company's buyers has responsibility for
specified product categories. Buyers are assisted by a management information
system which provides them with current inventory quantity, price and sales
information by SKU, thus allowing them to react quickly to market changes. The
Company works closely with its manufacturers and forecasts purchases on a
non-binding basis up to one year in advance.
The Company is a member of a volume buying group, Progressive Retailers'
Organization, consisting of other companies similar to the Company with respect
to the type of merchandise sold. Membership in this organization has enabled
the Company to obtain volume rebates, special buys and access to close-out and
final production items. As a result, the Company believes it is able to obtain
competitive pricing and terms.
During the fiscal year ended January 31, 1998, the Company's ten largest
suppliers accounted for approximately 67% of the merchandise purchased by the
Company. Two of the Company's suppliers, Sony and Mitsubishi, each accounted
for more than 10% of its merchandise mix. The master agreements under which the
Company operates with each of its suppliers are normally terminable upon 30 to
60 days notice by either party. The Company does not have commitments of longer
than one year with the majority of its product suppliers, as is customary in the
industry.
STORE OPERATIONS
STORES. The Company's 15 larger format stores each occupy 31,000 to 52,000
square feet, with 16,700 to 30,400 square feet of selling space. The Company
has developed this store format to emphasize and merchandise mid to upscale
products. Each store has displays designed to provide the customer with a full
spectrum of the Company's products upon entering a store. These stores have
additional home audio and car stereo demonstration rooms, additional home
theater rooms, expanded portable electronics displays and expanded computer and
home office
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displays as compared to the smaller store format. In addition, the new stores
offer home installation, home satellite installation, a home planning center,
home theater furniture, and an expanded area for large-screen televisions. The
remaining space is dedicated to a designated play area for children, a car
installation facility, a service facility, a store warehouse and general office
space.
The Company's 13 smaller format stores range in size from 9,300 to 28,200 square
feet (5,600 to 17,900 square feet of selling space). The selling space in the
stores typically contains two audio and two car stereo demonstration rooms, one
home entertainment theater and an automobile equipped with the latest in car
audio and car security products. The Company also operates two mall based
stores that are each 3,200 square feet (both stores have off-site install and
storage).
DISTRIBUTION. The Company currently distributes products to all of its stores
from a 175,000 square foot warehouse located in Thornton, Colorado, a suburb of
Denver. All of the Company's stores in Colorado are located within
approximately 60 miles of this warehouse. For stores over 100 miles away from
Denver, the Company uses contract carriers for distribution from its warehouse.
MANAGEMENT INFORMATION SYSTEMS. The Company's management information system,
using proven third party software, was installed in August 1990. During the
fall of 1994, the Company increased its system capabilities significantly with
the installation of Unix-based Hewlett Packard computer hardware. The Company
believes that this system will support its anticipated growth. This on-line
system connects all of the Company's facilities through digital phone lines
which allows sales consultants to determine the location of all of the Company's
inventory at any time. Pricing can be changed immediately in each geographical
market by the Company's buyers and store management to react to competitor
pricing. New signage can be generated on a daily basis. Immediately following
the merger with Audio King, all of Audio Kings' store systems and inventory were
integrated into the Company's management information system.
CUSTOMER SERVICE
Since its inception, the Company has been committed to providing excellent
customer service through well-trained sales consultants and a broad range of
customer services.
SALES CONSULTANTS. The Company provides its sales consultants with a minimum of
two weeks of intensive classroom training which begins with an orientation from
the Company's executive officers and continues with instruction in areas such as
technical knowledge by product category and vendor, policies and procedures of
the Company and various other sales techniques. On an ongoing basis, sales
consultants attend in-house training sessions conducted by dedicated in-house
trainers and manufacturers' representatives and also receive sales, product and
other information in daily store meetings. Certain sales consultants specialize
in particular product categories to provide customers with greater technical
assistance.
The Company's sales consultants are compensated pursuant to a flexible incentive
pay plan with commissions determined on the basis of sales and gross margins.
The Company also motivates its sales consultants by providing opportunities for
advancement within the Company. All of the Company's store management has been
promoted from within the Company.
SERVICES. The Company supports its product sales by providing many important
customer services, including home delivery and setup, home theater and audio
installation and design, home satellite installation, mobile electronics
installation, extended service contracts and regional service centers that offer
in-home and carry-in repair services. The Company also provides in-store
product instruction and will provide follow-up instruction at a customer's home
upon request.
Virtually all merchandise purchased from the Company may be taken to any of the
Company's stores for repair, whether or not the product is under the
manufacturer's warranty or an extended service contract. In order to provide
maximum service to its customers, the Company has regional service centers in
Albuquerque, Boise, Denver, Des Moines, Las Vegas, Minneapolis, Salt Lake City
and Tulsa. Two of the Company's service facilities, located at its
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distribution centers in Thornton and Minneapolis, provide backup for the
Company's other regional service centers. The Company employs over 150
full-time employees in connection with its service business. Each service
department is staffed with product specialists capable of making complex
repairs. In addition, the Company operates a fleet of approximately 60 customer
service vehicles to provide in-home repair and delivery, installation and setup
of home satellites, home theater components and televisions.
The Company offers extended service contracts to its customers for most
categories of its products. The extended service contracts cover services or
time periods not covered by the manufacturer's warranty on such products and are
non-cancellable. These contracts are administered for the Company by an
unaffiliated third party (the "Warrantor") which pays for the repair service.
The Warrantor is required by its agreement with the Company to maintain
insurance to protect the Company in the event that the Warrantor fails to
fulfill its obligations under the extended service contracts and the Company is
a named loss-payee under the agreement. The Company sells the extended service
contracts to the Warrantor on a non-recourse basis. Gross margins from the sale
of extended service contracts are higher than the average gross margins of the
Company's other products.
The Company has a private label credit card which is financed, operated and
serviced by a third party (the "Finance Company"). The Company entered into an
agreement with the Finance Company which provides that the Finance Company will
retain all credit risk associated with the private label credit card. In
addition, certain manufacturers sponsor their own private label credit cards.
These arrangements permit the Company to provide its customers with financing
promotions, including interest-free and deferred payments, without using its
working capital. During fiscal 1998, approximately 29% of the Company's sales
were purchased through these private label and manufacturer sponsored credit
cards.
COMPETITION
The Company operates in a highly competitive and price sensitive industry. The
Company faces competition from mass merchants, department stores, specialty
stores, appliance/electronics stores and smaller independent merchants. The
Company considers its primary competitors to include consumer electronics
retailers such as Best Buy and Circuit City as well as mass merchants such as
Sears and Montgomery Ward. The Company's primary competitors have greater
financial and other resources than the Company. Many of these competitors have
recently entered the Company's markets and continue to add stores. For fiscal
1998, the Company's operating results were adversely affected by such increased
competition and there can be no assurance that the Company's operating results
will not be adversely affected in fiscal 1999 and beyond by such increased
competition. In addition, if such competitors seek to gain or retain market
share by reducing prices, the Company may be required to reduce its prices,
thereby reducing gross margins and profits. In addition, as the Company expands
into markets where the Company's name may not be recognized, its success will
depend in part on its ability to compete with established and any future
competitors in such markets.
EMPLOYEES
As of January 31, 1998, the Company employed approximately 1,600 persons,
approximately 1,410 of whom were store, customer delivery or service employees
and approximately 190 of whom were main warehouse or corporate personnel. The
Company considers its employee relations to be good. Most employees, other than
corporate and store support personnel, are paid pursuant to a flexible pay plan.
The Company believes that it provides working conditions and wages that compare
favorably with those of other companies within the industry. The Company's
employees do not have a collective bargaining agreement.
SERVICE MARKS
Ultimate Electronics-Registered Trademark-, Audio King-Registered Trademark-
and Fast Trak-Registered Trademark- are registered service marks and
SoundTrack-SM- is a service mark of the Company.
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"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Statements which are not historical facts contained in this report are forward
looking statements that involve risks and uncertainties that could cause actual
results to differ from projected results. Factors that could cause actual
results to differ materially include, among others, the merger with Audio King,
risks regarding increases in promotional activities of competitors, 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, general economic conditions, fluctuations in consumer demand, the results
of financing efforts and other risk factors detailed in the Company's Securities
and Exchange Commission filings.
As provided for under the Private Securities Litigation Reform Act of 1995, the
Company wishes to caution investors that the following important factors, among
others, in some cases have affected and in the future could affect the Company's
actual results of operations and cause such results to differ materially from
those anticipated in forward-looking statements made in this document and
elsewhere by or on behalf of the Company:
a) Competition. The Company encounters intense competition in all
product categories and competes with national and other companies. Most of the
companies with which the Company competes have greater capital and other
resources.
b) Dependence on Key Suppliers. The Company is dependent on certain
suppliers for delivery of products that contribute significantly to the
Company's sales. While the Company believes that alternative suppliers are
available, the loss of a key supplier could have an adverse effect on the
Company's business.
c) Industry Factors. The presence or lack of new products or product
features as well as the expectation of new products in the product categories
that the Company sells has an impact on the Company's business, as well as the
product mix of actual merchandise sold.
d) Economic and Market Conditions. The Company's business is affected by
changes in general economic conditions such as consumer attitudes towards the
economy in general, consumer credit availability, interest rates and inflation.
e) Litigation. Adverse results in significant litigation matters would
affect the Company's earnings to the extent that insurance is not present or
available.
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ITEM 2. PROPERTIES
As of January 31, 1998, the Company operates ten stores in Colorado, eight
stores in Minnesota, four stores in Utah, two stores in Las Vegas, Nevada, two
stores in Iowa, and one store each in Albuquerque, New Mexico, Boise, Idaho,
Tulsa, Oklahoma and Sioux Falls, South Dakota. Each store, other than the store
located in Thornton, Colorado, is leased. The following table sets forth data
regarding the Company's store locations.
<TABLE>
<CAPTION>
YEAR APPROXIMATE APPROXIMATE LEASE
ORIGINALLY TOTAL RETAIL SELLING EXPIRATION
CURRENT STORE LOCATIONS OPENED SQUARE FEET SQUARE FEET DATE (1)
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<C> <C> <C> <C> <C>
COLORADO:
6490 Wadsworth Blvd.
Arvada, CO (2) 1968 14,500 9,500 2006
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
9657 E. County Line Rd.
Englewood, CO 1983 41,300 23,000 2004
4606 S. Mason St.
Fort Collins, CO 1990 16,600 8,400 2005
14391 W. Colfax Ave.
Lakewood, CO 1997 40,400 23,000 2005
8262 S. University Blvd.
Littleton, CO 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 (2) 19,500 2025
IOWA:
4701 1st Ave. Southeast
Cedar Rapids, IA 1995 15,400 10,300 2015
4100 Merle Hay Rd.
Des Moines, IA 1994 20,700 (2) 12,200 2009
MINNESOTA:
5939 John Martin Dr.
Brooklyn Center, MN 1980 15,000 9,200 2008
14232 Burnhaven Dr.
Burnsville, MN 1979 9,700 6,600 2007
1868 Beam Ave.
Maplewood, MN 1989 9,300 5,600 1999
12350 Wayzata Blvd.
Minnetonka, MN 1977 15,000 9,100 2008
103 Apache Mall
Rochester, MN 1986 3,200 2,700 1998
1723 W. County Rd. B-2
Roseville, MN 1977 17,400 11,300 2015
7435 France Ave. South
Edina, MN 1974 28,200 17,900 2015
2716 Division St.
St. Cloud, MN 1987 10,000 7,100 2001
CONTINUED ON PAGE 8
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<CAPTION>
YEAR APPROXIMATE APPROXIMATE LEASE
ORIGINALLY TOTAL RETAIL SELLING EXPIRATION
CURRENT STORE LOCATIONS OPENED SQUARE FEET SQUARE FEET DATE (1)
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<C> <C> <C> <C> <C>
NEVADA:
2555 E. Tropicana Ave.
Las Vegas, NV 1995 37,300 (2) 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 (2) 17,700 2014
OKLAHOMA:
10021 E. 71st St.
Tulsa, OK 1995 51,700 (2) 30,400 2025
SOUTH DAKOTA:
701 Empire Mall
Sioux Falls, SD 1986 3,200 2,400 1999
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 18,200 2013
</TABLE>
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(1) Including renewal options.
(2) Includes regional service center.
Construction of the Company's main warehouse, business office, service center
and store location in Thornton, Colorado was completed in early fiscal 1997.
This facility, in addition to the retail store, is comprised of 175,000 square
feet of warehouse space, 30,000 square feet for the Company's business offices,
21,000 square feet devoted to a service department and 18,000 square feet for a
training and employee facility. The Company leases a 45,000 square foot
facility in Minneapolis, Minnesota which it uses as a training center, service
center for the greater Minneapolis/St. Paul area and office space for its
delivery department. The Company also leases an 8,500 square foot service
center in Salt Lake City, Utah. Additionally, the Company leases its store
locations in Colorado Springs, Colorado and Fort Collins, Colorado from an
affiliated party (see "Certain Relationships and Related Transactions"). The
Company is also in the process of negotiating leases to relocate stores and,
from time to time, analyzes lease opportunities in new markets (see "Business -
Expansion Strategy" and "Management's Discussion and Analysis of Financial
Conditions and Results of Operations - Liquidity and Capital Resources").
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ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings. The Company is,
however, involved in various routine claims and legal actions which arise in the
ordinary course of business. Management of the Company intends to vigorously
defend these claims and believes that the ultimate disposition of these matters
will not have a material adverse effect on the Company's financial condition,
results of operations or cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Certain information required by Part II is omitted from this Report in that the
Registrant will file the 1998 Annual Report to Stockholders (the "1998 Annual
Report to Stockholders"), which report is attached hereto as Exhibit 13, and
certain information included therein is incorporated herein by reference. Only
those sections of the 1998 Annual Report to Stockholders which specifically
address the items set forth herein are incorporated by reference.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The section labeled "Stockholder Information" appearing on the inside back cover
of the 1998 Annual Report to Stockholders is incorporated herein by reference.
As of April 30, 1998, there were approximately 3,106 beneficial holders of the
Company's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The section labeled "Selected Financial Data" appearing on pages 13 and 14 of
the 1998 Annual Report to Stockholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The section labeled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing on pages 15 through 17 of the 1998 Annual
Report to Stockholders is incorporated herein by reference.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent auditors and financial statements included on pages 18
through 30 of the Company's 1998 Annual Report to Stockholders are incorporated
herein by reference.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in that the
Registrant will file a definitive proxy statement pursuant to Regulation 14A
(the "Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference. Only those sections of the Proxy Statement which
specifically address the items set forth herein are incorporated by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
section labeled "Directors and Executive Officers" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
section labeled "Compensation of Directors and Executive Officers" excluding the
"Board Compensation Committee Report on Executive Compensation" and the
"Performance Graph" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
section labeled "Principal Stockholders" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section labeled "Certain Relationships and Related Transactions" in the Proxy
Statement.
10
<PAGE>
PART IV
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: The following financial statements of the
Company included in the Registrant's 1998 Annual Report to
Stockholders are incorporated by reference to Item 8:
- Consolidated Statements of Income for the fiscal years ended
January 31, 1998, 1997 and 1996.
- Consolidated Balance Sheets at January 31, 1998 and 1997.
- Consolidated Statements of Stockholders' Equity for the fiscal
years ended January 31, 1998, 1997 and 1996.
- Consolidated Statements of Cash Flows for the fiscal years ended
January 31, 1998, 1997 and 1996.
- Notes to Consolidated Financial Statements.
2. FINANCIAL STATEMENT SCHEDULES: The following financial statement
schedule for the fiscal years ended January 31, 1998, 1997 and 1996 is
filed as part of this Form 10-K:
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION PAGE
-------- ----------- ----
<S> <C> <C>
II Valuation and Qualifying Accounts 15
</TABLE>
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.
11
<PAGE>
3. EXHIBITS: The following exhibits are filed pursuant to Item 601 of
Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION OF EXHIBITS
<S> <C>
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. (8)
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. (9)
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. (9)
10.21 Third Amendment to Credit Agreement between Ultimate Electronics,
Inc. and Norwest Bank Colorado, National Association and Norwest
Business Credit, Inc., dated June 27, 1997. (10)
10.30 Ultimate Electronics, Inc. Form of Change of Control Agreement
dated June 27, 1997 with each of William J. Pearse, J. Edward
McEntire, David J. Workman, Alan E. Kessock and Neal A.
Bobrick. (10)
13 Pages 13 through 30 of the Company's 1998 Annual Report to
Stockholders. (1)
23.1 Consent of Independent Auditors. (1)
27 Financial Data Schedule (1)
</TABLE>
12
<PAGE>
(b) Reports on Form 8-K:
On June 9, 1997, the Company filed a current report on Form 8-K reporting
under Item 5 its operating results for the quarter ended April 30, 1997 and
the signing of a merger agreement to acquire Audio King.
- --------------
(1) Filed herewith.
(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.
(8) Exhibits filed with the Company's Form 10-K Annual Report for the fiscal
year ended January 31, 1997, and are incorporated herewith by reference.
(9) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the period ended April 30, 1997.
(10) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the period ended July 31, 1997.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Thornton, State of
Colorado, on this 1st day of May, 1998.
ULTIMATE ELECTRONICS, INC.
By: /s/ William J. Pearse
-------------------------------------
William J. Pearse
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
By: /s/ William J. Pearse Date: May 1, 1998
------------------------------------- -----------
William J. Pearse
Chairman of the Board and a Director
By: /s/ J. Edward McEntire Date: May 1, 1998
------------------------------------- -----------
J. Edward McEntire
Chief Executive Officer and a Director
(Principal Executive Officer)
By: /s/ David J. Workman Date: May 1, 1998
------------------------------------- -----------
David J. Workman
President, Chief Operating Officer
and a Director
By: /s/ Alan E. Kessock Date: May 1, 1998
------------------------------------- -----------
Alan E. Kessock
Vice President, Chief Financial
Officer, Secretary and a Director
(Principal Financial and Accounting
Officer)
By: /s/ Robert W. Beale Date: May 1, 1998
------------------------------------- -----------
Robert W. Beale
Director
By: /s/ Randall F. Bellows Date: May 1, 1998
------------------------------------- -----------
Randall F. Bellows
Director
14
<PAGE>
ULTIMATE ELECTRONICS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CHARGED
BALANCE AT TO COSTS BALANCE AT
BEGINNING OF AND DEDUCTIONS END OF
DESCRIPTION PERIOD EXPENSES (DESCRIBE) PERIOD
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended January 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts $ 180 $ 786 $ 706(1) $ 260
Reserve for cash and cooperative
advertising discounts 72 154 171(1) 55
Allowance for obsolete inventory 266 597 427(2) 436
----------------------------------------------------------------------
Total $ 518 $ 1,537 $ 1,304 $ 751
----------------------------------------------------------------------
----------------------------------------------------------------------
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
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
- ----------------------------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Write-offs of obsolete inventory.
15
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share and operating data)
The following selected financial data for the five fiscal years ended
January 31, 1998 is derived from the audited consolidated financial statements
of Ultimate Electronics, Inc. (the "Company"). Such consolidated financial
statements were audited by Ernst & Young LLP, independent auditors, whose report
with respect to fiscal years 1998, 1997 and 1996 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,
------------------------------------------------------------
CONSOLIDATED INCOME STATEMENT DATA (1): 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $ 306,306 $ 261,154 $ 251,807 $ 165,069 $ 88,158
Cost of goods sold 223,464 191,903 184,343 120,588 63,536
---------- ---------- ---------- ---------- ---------
Gross profit 82,842 69,251 67,464 44,481 24,622
Selling, general and administrative expenses 78,621 64,786 59,525 36,276 20,610
---------- ---------- ---------- ---------- ---------
Income from operations 4,221 4,465 7,939 8,205 4,012
Interest expense, net 3,985 3,210 1,866 407 374
---------- ---------- ---------- ---------- ---------
Income before taxes and cumulative effect of change in accounting
method 236 1,255 6,073 7,798 3,638
Income taxes 88 470 2,241 2,908 190
---------- ---------- ---------- ---------- ---------
Income before cumulative effect of change in accounting method 148 785 3,832 4,890 3,448
Cumulative effect of change in accounting for preopening expenses,
net of taxes (2) - - (988) - -
---------- ---------- ---------- ---------- ---------
Net income $ 148 $ 785 $ 2,844 $ 4,890 $ 3,448
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
Pro forma information:
Historical income before taxes and cumulative effect of change in
accounting method $ 7,798 $ 3,638
Income taxes or charge in lieu of income taxes for S corporation (3) 2,908 1,355
---------- ---------
Pro forma income before cumulative effect of change in
accounting method 4,890 2,283
Pro forma effect of change in accounting method, net of taxes (2) (678) (278)
---------- ---------
Pro forma net income $ 4,212 $ 2,005
---------- ---------
---------- ---------
Earnings per share before cumulative effect of change in accounting
method (2,4) $ - $ - $ 0.65 $ - $ -
Earnings per share (4) 0.02 0.11 0.48 0.88 -
Pro forma earnings per share (2,3,4) 0.76 0.48
Weighted average shares outstanding - Basic 7,626 6,995 5,861 5,500 4,101
Weighted average shares outstanding - Diluted 7,737 7,125 5,906 5,583 4,188
</TABLE>
<PAGE>
SELECTED FINANCIAL DATA (CONTINUED)
(in thousands, except per share and operating data)
<TABLE>
<CAPTION>
JANUARY 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA (1):
Number of stores open at end of period 30 18 18 14 11
Inventory turns (5) 4.9 4.7 5.1 5.5 6.1
Average sales per store open during the entire
period presented (6) $ 13,900,000 $ 13,906,000 $ 14,784,000 $ 12,808,000 $ 8,358,000
Retail sales per weighted average square foot
of selling space $ 745 $ 905 $ 1,185 $ 1,336 $ 1,067
Comparable store sales growth (7) (6%) (16%) (2%) 29% 24%
<CAPTION>
JANUARY 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA (1):
Working capital $ 5,578 $ 27,868 $ 30,995 $ 4,061 $ 15,694
Total assets 123,446 103,310 100,466 69,194 39,538
Long-term debt (8) 13,642 31,165 31,996 - -
Capital lease obligations (8) 2,050 1,007 1,295 3,120 2,930
Total stockholders' equity 44,721 41,703 40,918 25,611 20,721
</TABLE>
(1) On June 27, 1997, the Company completed a merger in which the Company
acquired all of the outstanding shares of Audio King Corporation. The
transaction was accounted for as a purchase, and as such, the results
of operations since the acquisition date are included in the
consolidated financial statements.
(2) During fiscal 1996, the Company 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.
(3) Prior to October 15, 1993, the Company was not subject to income taxes
because of its S corporation status. The income statement data for
fiscal 1994 includes certain pro forma adjustments to reflect a
provision for income taxes as if the Company had been paying federal
and state income taxes as a C corporation for the entire year.
(4) Basic and diluted earnings per share as calculated under Statement No.
128 are identical for all periods presented - therefore, all
references to earnings per share included in the selected financial
data refer to both basic and diluted.
(5) Calculated based upon the average end-of-month inventory levels.
(6) Excludes warehouse sales.
(7) 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.
(8) Less current portions.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following table is derived from the Company's consolidated 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,
--------------------------------------
1998 1997 1996
------------ ---------- ------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 73.0 73.5 73.2
------------ ---------- ------------
Gross profit 27.0 26.5 26.8
Selling, general and administrative expenses 25.6 24.8 23.6
------------ ---------- ------------
Income from operations 1.4 1.7 3.2
Interest expense, net 1.3 1.2 0.8
------------ ---------- ------------
Income before taxes and accounting change 0.1 0.5 2.4
Income taxes - 0.2 0.9
------------ ---------- ------------
Pro forma net income 0.1% 0.3% 1.5%
------------ ---------- ------------
------------ ---------- ------------
</TABLE>
MERGER WITH AUDIO KING CORPORATION
On June 27, 1997, the Company completed a merger in which the Company acquired
all of the outstanding shares of Audio King Corporation ("Audio King"). Audio
King, a consumer specialty electronics company, operated 11 retail stores;
eight in Minnesota, two in Iowa and one in South Dakota. The purchase price
consisted of $2.5 million in cash, 986,432 shares of Ultimate's common stock
valued at $2.6 million, assumed debt of $7.2 million, and other expenses and
severance costs of $1.2 million. The transaction was accounted for as a
purchase, whereby the purchase price has been allocated to the acquired assets
and liabilities based on estimated fair value at the acquisition date. The
transaction resulted in the Company recording goodwill in the amount of $2.5
million, which is being amortized over a 10 year life. The results of operations
since the acquisition date are included in the accompanying consolidated
financial statements (see also unaudited pro forma information in Note 11 to the
consolidated financial statements).
FISCAL 1998 COMPARED TO FISCAL 1997
For the year ended January 31, 1998, sales were $306.3 million, a 17% increase
from sales of $261.2 million for the prior year. The increase in sales during
fiscal 1998 was due primarily to the acquisition of Audio King. Comparable
store sales decreased 6% for the year ended January 31, 1998 compared to a
decrease of 16% in comparable store sales for the year ended January 31, 1997.
The Company believes the decrease in comparable store sales over the past two
years was due primarily to a sluggish retail environment for consumer
electronics and increased competition in the Company's markets.
Gross profit in fiscal 1998 increased 20% to $82.8 million (27.0% of net sales)
from $69.3 million (26.5% of net sales) in fiscal 1997. The slight increase in
the gross profit percentage was due to a larger mix of higher margin product
categories.
Selling, general and administrative expenses in fiscal 1998 increased 21% to
$78.6 million (25.6% of net sales) from $64.8 million (24.8% of net sales) in
fiscal 1997. The percentage increase in selling, general and administrative
expenses was due primarily to higher fixed store expenses as a percentage of
sales caused by lower comparable store sales, partially offset by the leverage
gained through the increase in sales generated from the Audio King merger.
As a result of the foregoing, income from operations in fiscal 1998 decreased 5%
to $4.2 million (1.4% of net sales) from $4.5 million (1.7% of net sales) in
fiscal 1997.
Interest expense for fiscal 1998 increased to $4.0 million from $3.2 million in
fiscal 1997 due to higher average amounts outstanding under the Company's
revolving line of credit that was used for the Audio King acquisition, the
remodeling of six Audio King stores and an additional store opening in Colorado
in fiscal 1998. The Company's effective tax rate of 37.2% in fiscal 1998
decreased slightly from the 37.4% tax rate in fiscal 1997.
<PAGE>
FISCAL 1997 COMPARED TO FISCAL 1996
For the year ended 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 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 from fiscal 1996 to fiscal 1997 was due primarily to a sluggish retail
environment for consumer electronics and increased competition in the Company'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.
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 the Company'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 for fiscal 1997 increased to $3.2 million from $1.9 million in
fiscal 1996 due to higher average amounts outstanding under the Company's
revolving line of credit that was used for new store expansion in fiscal 1997
and additional interest expense from the 10.25% First Mortgage Bonds due January
31, 2005 (the "Bonds") used for the construction of the Company's Thornton
Facility. The Company's effective tax rate of 37.4% in fiscal 1997 increased
slightly from the 36.9% tax rate in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of liquidity for funding expansion
and growth have been net cash from operations, revolving credit lines, term
loans and issuance of common stock. The Company's initial public offering in
October 1993 resulted in proceeds of $17.8 million (net of all offering costs).
The Company completed a second offering of its common stock in November 1995 and
received net proceeds of $12.5 million (net of all offering costs).
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 the Bonds. The proceeds of the Bond offering were
used to fund a substantial portion of the construction of the Company's Thornton
Facility. 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 not redeemable prior to March 31, 2000
and are secured by the Thornton Facility.
Net cash provided by operations was $9.4 million for fiscal 1998 compared to net
cash provided by operations of $8.1 million for fiscal 1997. The increase in
cash provided by operations over the past year was primarily the result of lower
merchandise inventory levels partially offset by increased accounts receivable
amounts (net of balances acquired).
During fiscal 1998, the Company acquired Audio King, increasing its operations
to 29 stores in nine states. In May 1997, the Company replaced its Aurora,
Colorado store with a larger format store in Englewood, Colorado. In August
1997, the Company opened a large format store in Lakewood, Colorado and in
November 1997, completed the remodel of two Audio King stores and grand opened
the stores under the name Ultimate Electronics. The Company also completed
remodels of four of the Minneapolis Audio King stores to allow for increased
selection in those stores in the key area of larger format television as well as
other product categories.
The Company's primary capital requirements are directly related to expenditures
for new store openings and the remodeling and upgrading of existing store
locations. With the exception of the Thornton Facility, all stores are leased.
In fiscal 1998, capital expenditures for new stores averaged $1.5 million per
store (excluding preopening expenses averaging $125,000 per store) and expansion
of existing stores averaged $200,000 per store.
The Company intends to continue its expansion into select metropolitan areas in
the Rocky Mountain, Midwest and Southwest regions with its larger format stores.
During fiscal 1999, the Company will be analyzing new store opportunities in
existing markets to replace the Company's smaller locations. The Company
expects to relocate and expand two to five of its locations within the next
three years along with the possibility of adding new stores. At the present
time, no firm commitments for relocated or new stores have been made. The
Company currently anticipates these events to occur after fiscal 1999. The size
of these future stores is anticipated to be approximately 24,000 to 36,000
square feet at a projected cost of $30 to $55 per square foot. The inventory
requirement for the Company's new larger format stores averages approximately
$2.0 million per store, approximately $1.0 million of which is financed through
trade credit.
The Company executed its revolving line of credit agreement with Norwest Bank
Colorado, N.A. on November 21, 1996. The agreement expires on September 30,
1998, at which time all outstanding principal borrowings become due. At January
31, 1998, amounts payable under the revolving line of credit agreement have been
classified in the accompanying consolidated balance sheet as short term;
however, management intends to renew or extend the existing credit agreement.
Borrowings
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 $35 million. Borrowings under this credit facility in the
amount of $26.6 million were outstanding as of January 31, 1998. Borrowings are
secured by accounts receivable, inventories and equipment. The Company was in
compliance with the financial covenants, under the credit agreement, for all
periods of fiscal year 1998.
The Company believes that its cash flow from operations and borrowings under
existing and new credit facilities will be sufficient to fund the Company's
operations for fiscal 1999 and debt repayment. The Company's existing credit
agreement expires on September 30, 1998. There can be no assurance that the
Company will be able to extend or renew its existing credit agreement on
favorable terms, if at all, or be able to access additional funding sources.
To fund the capital requirements for its anticipated expansion plans beyond
fiscal 1999, the Company may be required to seek additional financing, which may
take the form of expansion of its existing credit facility, if extended or
renewed, 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 many other retailers, the Company's sales and profits have been
greatest in the fourth quarter (which includes the holiday selling season).
Operating results are dependent upon a number of factors, including
discretionary consumer spending, which is 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.
IMPACT OF INFLATION
The Company believes, because of competition among manufacturers and
technological changes in the consumer electronics industry, inflation has not
had a significant effect on results of operations.
YEAR 2000 ISSUE
Until recently most computer programs were written to store only two digits of
date related information in order to more efficiently handle and store data. As
a result these programs were unable to properly distinguish between dates
occurring in the year 1900 and dates occurring in the year 2000. This is
referred to as the "Year 2000 Issue". During fiscal 1998, the Company has begun
to review all applications to evaluate the Company's exposure to the Year 2000
Issue. Management does not believe the Company will have to modify or replace
any significant portion of its computer applications in order for its computer
systems to function properly with respect to dates in the year 2000 and
thereafter. In addition, the Company is coordinating with significant third
party entities with which it does business to address potential year 2000 issues
in order to minimize the potential adverse consequences, if any, that could
result from failure of such entities to address this issue.
NEW ACCOUNTING PRONOUNCEMENTS
The Company will adopt Statements of Financial Accounting Standards (SFAS) No.
130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segment
Reporting of an Enterprise and Related Information" in fiscal 1999. Although
the Company has not completed its review of these standards, management does not
believe these pronouncements will have a significant impact on the Company's
consolidated financial statements when implemented.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information about their companies. With the exception of historical
information, the matters discussed in the Annual Report are forward-looking
statements that involve risks and uncertainties. Such forward-looking
statements include statements regarding the expected increase in consumer
electronics spending and new product offerings; management plans to continue
emphasis on value added customer services, pursue core product categories and
continue marketing and expansion of the offering of more fully featured, higher
margin products to enhance differentiation and margins; positive market response
expected in fiscal 1999 of digital technologies across all product categories;
the ability of certain products to stimulate additional interest in the
Company's products; the sales opportunities that digital products are expected
to provide; expectations that the Company can increase its market share, that
demand will build for new "non-commodity" product offerings and core categories
and that digital television will be introduced in the Company's markets in
late 1998 and into 1999; the future focus of marketing efforts on mobile
installation services; the positioning of the Company to become a leader in
digital camcorders and digital cameras; the Company's intention to continue its
expansion and relocation of existing stores; the ability to renew or extend the
credit facility, to comply with credit agreement covenants for all periods of
fiscal 1999, and to access external funding sources; and the estimate of the
Company's exposure relating to the Year 2000 Issue. Reference is made to the
Company's Annual Report on Form 10-K wherein the Company has identified
important factors that could cause actual results to differ materially from
those contemplated by the statements made herein.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
--------------------------------
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
NET SALES $306,306 $261,154 $251,807
Cost of goods sold 223,464 191,903 184,343
--------- --------- ----------
GROSS PROFIT 82,842 69,251 67,464
Selling, general and administrative expenses 78,621 64,786 59,525
--------- --------- ----------
INCOME FROM OPERATIONS 4,221 4,465 7,939
Interest expense, net 3,985 3,210 1,866
--------- --------- ----------
Income before taxes and cumulative effect of change in accounting method 236 1,255 6,073
Income taxes 88 470 2,241
--------- --------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD 148 785 3,832
Cumulative effect of change in accounting for preopening expenses, net of taxes - - (988)
--------- --------- ----------
NET INCOME $ 148 $ 785 $ 2,844
--------- --------- ----------
--------- --------- ----------
EARNINGS PER SHARE (BASIC AND DILUTED) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD $ .65
Cumulative effect of change in accounting for preopening expenses, net of taxes (basic and diluted) (.17)
----------
EARNINGS PER SHARE - BASIC AND DILUTED $ .02 $ .11 $ .48
Weighted average shares outstanding - Basic 7,626 6,995 5,861
Weighted average shares outstanding - Diluted 7,737 7,125 5,906
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
JANUARY 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 2,006 $ 764
Accounts receivable 19,826 13,788
Merchandise inventories 43,908 41,414
Prepaid expenses and other 1,362 642
--------- ---------
TOTAL CURRENT ASSETS 67,102 56,608
Property and equipment, at cost:
Furniture, fixtures and equipment 23,907 18,462
Leasehold improvements 22,219 16,320
Autos and trucks 356 349
Land and buildings 17,773 17,773
Construction-in-progress 5 632
--------- ---------
64,260 53,536
Less accumulated depreciation 13,405 8,904
--------- ---------
50,855 44,632
Property under capital leases, including
related parties, net 2,068 1,019
Goodwill, net 2,385 -
Other assets 1,036 1,051
--------- ---------
TOTAL ASSETS $123,446 $103,310
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------
1998 1997
---------- ---------
<S> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES: $ 26,564 $ -
Revolving line of credit 25,550 21,651
Accounts payable 8,807 6,257
Accrued liabilities 286 262
Current portion of term loans
Current portion of capital lease obligations,
including related parties 317 287
Deferred tax liability - 283
---------- ---------
TOTAL CURRENT LIABILITIES 61,524 28,740
Revolving line of credit - 17,237
Term loans, less current portion 642 928
Bonds payable 13,000 13,000
Capital lease obligations, including related
parties, less current portion 2,049 1,007
Deferred tax liability 1,510 695
---------- ---------
TOTAL LIABILITIES 78,725 61,607
Commitments
STOCKHOLDERS' EQUITY :
Preferred stock, par value $.01 per share
Authorized shares - 10,000,000
No shares issued and outstanding - -
Common stock, par value $.01 per share
Authorized shares - 10,000,000
Issued and outstanding shares, 8,139,548 and
6,995,000 at January 31, 1998 and 1997 81 70
Additional paid-in capital 33,868 31,009
Retained earnings 10,772 10,624
---------- ---------
TOTAL STOCKHOLDERS' EQUITY 44,721 41,703
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $123,446 $103,310
---------- ---------
---------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(amounts 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, 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
Acquisition of Audio King, net of
registration fees 986,432 10 2,562 2,572
Exercise of stock options 158,116 1 297 298
Net income 148 148
------------- -------------- -------------- -------------- ------------
BALANCES, JANUARY 31, 1998 8,139,548 $ 81 $ 33,868 $ 10,772 $ 44,721
------------- -------------- -------------- -------------- ------------
------------- -------------- -------------- -------------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 148 $ 785 $ 2,844
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 5,550 4,449 3,425
Deferred tax expense 502 573 597
Changes in operating assets and liabilities:
Accounts receivable (4,705) 2,618 (5,649)
Merchandise inventories 6,178 (3,361) (9,127)
Prepaid expenses and other (328) 243 6
Other assets 1,104 44 (795)
Accounts payable and accrued liabilities 903 2,773 (2,982)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 9,352 8,124 (10,693)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,159) (7,314) (27,342)
Acquisition of Audio King, net of cash acquired (3,857) - -
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (10,016) (7,314) (27,342)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 321,689 72,227 61,600
Repayments under revolving credit agreement (319,532) (72,990) (55,100)
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 (549) (487) (2,012)
Proceeds from issuance of common stock, net - - 12,463
Proceeds from exercise of stock options 298 - -
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,906 (1,025) 36,776
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,242 (215) (1,259)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 764 979 2,238
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,006 $ 764 $ 979
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 3,892 $ 3,210 $ 2,033
Income taxes - 353 2,248
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND
Ultimate Electronics, Inc. is a consumer electronics retailer engaged in
selling a wide range of audio and video components and home office
equipment. As discussed further in Note 11, on June 27, 1997, the Company,
through its principal subsidiary Ultimate AKquisition Corp., completed a
merger, accounted for as a purchase, in which the Company acquired all of
the outstanding shares of Audio King Corporation. Audio King, a consumer
specialty electronics company, operated 11 retail stores; eight in
Minnesota, two in Iowa and one in South Dakota. The Company currently
operates thirty stores, including ten stores in Colorado under the trade
name SoundTrack, eleven stores in Idaho, Iowa, Nevada, New Mexico,
Oklahoma, and Utah under the trade name Ultimate Electronics and nine
stores in Minnesota and South Dakota under the trade name Audio King.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all
subsidiaries. All intercompany accounts and transactions have been
eliminated upon consolidation.
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>
<CAPTION>
<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, 1998, 1997 and 1996, the Company
capitalized interest of $52,000, $160,000, and $900,000 respectively,
associated with the construction of new stores, remodeled stores and the
Thornton Facility.
ACCRUED LIABILITIES (in thousands)
Accrued liabilities are comprised of the following:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Compensation $ 3,007 $ 1,993
Sales taxes 1,803 965
Customer deposits 2,363 1,635
Other 1,634 1,664
----------- -----------
Total $ 8,807 $ 6,257
----------- -----------
----------- -----------
</TABLE>
REVENUE RECOGNITION
Revenue is recognized at the time the customer takes possession of the
merchandise or such merchandise is delivered to the customer. Net sales,
which includes warranty revenue, consists of gross sales less discounts,
price guarantees, returns and allowances. The Company grants credit to
customers through independent, third-party finance companies, which
companies assume the credit risk for the collection of the related accounts
receivable. When free interest promotions are offered by the Company, a
fee is normally paid by the Company at the time of the transaction. This
fee ranges between 1% and 6% of the amount financed by the customer.
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 fiscal 1994
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.
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS AND COOPERATIVE REVENUE
In accordance with AICPA 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
$5,476,000, $5,485,000 and $3,924,000 for the years ended January 31, 1998,
1997 and 1996, respectively.
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.
EARNINGS PER SHARE OF COMMON STOCK
In 1997, the FASB issued Statement No. 128, "Earnings per Share" (SFAS
128). SFAS 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings
per share is very similar to the previously reported fully diluted earnings
per share. The calculation of weighted average shares outstanding -
diluted for the fiscal years ending January 31, 1998, 1997, and 1996
include 111,267, 130,472 and 45,321 outstanding shares to give effect to
the potential exercise of options under the Company's stock option plans,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash, accounts receivable,
revolving line of credit 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 96% of face value at January
31, 1998.
NEW ACCOUNTING STANDARDS
During 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. This
Statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. In addition, this Statement requires that an
enterprise classify items of other comprehensive income by their nature in
a financial statement and display the accumulated balance of other
comprehensive income separately from the retained earnings and additional
paid in capital in the equity section of a statement of financial position.
The Statement is effective for fiscal years beginning after December 15,
1997. Management believes there will be no impact on the Company's
financial position or results of operations as a result of adopting this
Statement.
During 1997, the FASB issued Statement No. 131, "Disclosures about Segment
Reporting of an Enterprise and Related Information", which establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosure about products and services, geographic
areas, and major customers. This Statement is effective for fiscal years
beginning after December 15, 1997. Management does not expect any
significant changes as a result of adopting this Statement.
2. PUBLIC STOCK OFFERINGS
On October 15, 1993, the Company completed an initial public offering (the
"Offering") for the sale of 2,300,000 shares of common stock (including
underwriters overallotment of 300,000 shares) at the Offering price of
$8.50 per share. The Company received proceeds from the Offering of
$17,805,000, net of all offering costs. 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 1,495,000 shares of common stock
(including underwriters overallotment of 195,000 shares) at the Second
Offering price of $9.00 per share. The Company received proceeds from the
Second Offering of $12,463,000, net of all offering costs. The proceeds
from the Second Offering were used by the Company to reduce amounts
outstanding under its revolving line of credit.
3. REVOLVING LINE OF CREDIT AGREEMENT AND TERM LOANS
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
<PAGE>
3. REVOLVING LINE OF CREDIT AGREEMENT (CONTINUED)
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. However, management intends to renew or extend the
existing credit agreement. Borrowings bear interest, which are payable
monthly, based on a blend of LIBOR plus 3.05% (weighted average of 8.99% at
January 31, 1998) or the bank's prime rate plus .05% (8.5% at January 31,
1998). Amounts outstanding under the agreement were $26.6 million as of
January 31, 1998. 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 is required, among
other things, to maintain a current ratio, a minimum net worth and to meet
certain working capital and liabilities to tangible net worth ratios, and a
maximum ratio of funded debt to earnings before interest, taxes,
depreciation and amortization through the expiration of the agreement. The
Company was in compliance with the financial covenants, under the credit
agreement, for all periods of fiscal year 1998.
The Company has four Commercial Promissory Notes and Security agreements
with Colorado National Leasing, Inc. Borrowings under the loans, less
current portions, totaled $642,000 at January 31, 1998 and $928,000 at
January 31, 1997. Each loan is secured by warehouse equipment and office
furniture, and interest rates on the loans range from 8.52% to 8.57%. As
of January 31, 1998, the aggregate maturities of the term loans, including
the current portion, are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
<S> <C>
1999 $ 286,000
2000 311,000
2001 312,000
2002 19,000
-----------
$ 928,000
-----------
-----------
</TABLE>
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
expenses preopening costs as incurred rather than capitalizing such costs
and amortizing them over twelve months for a store and six months for a
remodeled store. The Company believes this method is preferable because it
results in a more conservative presentation of financial position and
results of operations and is a more prevalent practice among 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 net income before the
cumulative effect of the change in accounting method by $141,000 and
earnings per share by $.02 for fiscal year 1996.
6. STOCK OPTION AND STOCKHOLDER RIGHTS PLANS
STOCK OPTION PLAN
Under the terms of the Company's original stock option plan (the "Plan"),
the Company granted to officers, employees and consultants awards of
options to purchase shares of common stock and other types of awards. The
Plan provided for the authorization of 900,000 shares of common stock.
Under the terms of the nonemployee directors' stock option plan (the
"Directors' Plan"), the Company granted to nonemployee directors awards of
stock options. The Directors' Plan provided for the initial authorization
of 20,000 shares of common stock. Each nonemployee director received
options to purchase 2,000 shares of common stock effective February 1 of
each year, which options were exercisable one year from the date of grant.
On January 31, 1998, options to purchase 16,000 shares of common stock were
outstanding of which 12,000 are exercisable. 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.
<PAGE>
6. STOCK OPTION AND STOCKHOLDER RIGHTS PLANS (CONTINUED)
In June 1997, at the Company's Annual Meeting, the Company's shareholders
approved a new stock option plan known as the "Equity Incentive Plan" (the
"New Plan") which replaced both the original Plan and the Directors' Plan.
Grants issued under the Plan and the Directors' Plan continue to be
exercisable according to the prospectus of the plans but no additional
grants can be issued from those plans. The New Plan made available 750,000
shares to be awarded to employees and nonemployee directors. A
disinterested compensation committee of the Board of Directors continues to
determine 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. During fiscal 1998, 482,450 options were granted from the New Plan,
of which 180,250 grants were issued for converted Audio King employee
grants at the same conversion rate of the Audio King stock at the time of
the acquisition. The price of these converted options were between $1.07
and $2.69 of which 156,450 options were subsequently exercised during
fiscal 1998. The options available for grant at January 31, 1998 include
only the options available under the New Plan.
Changes in the Plan and the New Plan options outstanding (and option
exercise prices for such options) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Options outstanding at beginning of year 404,850 480,000 447,000
Granted ($1.07 to $12.875) 572,450 95,000 60,000
Canceled ($6.6875 to $12.875) 500 170,150 27,000
Exercised ($1.07 to $3.00) 158,116 - -
------- ------- -------
Options outstanding at end of year 818,684 404,850 480,000
------- ------- -------
------- ------- -------
Options exercisable at end of year 221,370 118,042 121,250
------- ------- -------
------- ------- -------
Options available for grant at end of year 267,550 495,150 220,000
------- ------- -------
------- ------- -------
</TABLE>
The weighted average exercise price of options outstanding at January 31,
1998, 1997 and 1996 was $3.09, $3.01, and $9.96, respectively. The
weighted average contractual life of the options outstanding at January 31,
1998, 1997, and 1996 was 6.5, 6.0, and 8.5 years, respectively.
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 5.73%; a dividend yield of 0%; volatility factors of the expected market
price of the Company's common stock for fiscal years 1998, 1997 and 1996,
respectively, of .609, .573 and .436, and a weighted-average expected life
of the options of 5 years. The weighted average fair value of stock
options granted during January 31, 1998, 1997 and 1996 was $1.85, $3.36 and
$6.30, respectively.
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>
YEAR ENDED JANUARY 31,
------------------------------------------
1998 1997 1996
------------ ---------- ------------
<S> <C> <C> <C>
Pro forma net income (loss) $ (245,000) $ 688,000 $ 2,805,000
Pro forma earnings (loss)
per share - Basic $ (0.03) $ 0.10 $ 0.47
</TABLE>
Because the Statement No. 123 method of accounting has not been applied to
options granted prior to February 1, 1995, the resulting pro forma net
income (loss) may not be representative of that to be expected in future
years.
<PAGE>
6. STOCK OPTION AND STOCKHOLDER RIGHTS PLANS (CONTINUED)
STOCKHOLDER RIGHTS PLAN
On January 31, 1995, the Company declared a dividend of one right to
purchase preferred stock (a "Right") for each outstanding share of common
stock to stockholders of record at the close of business on February 10,
1995. Each share of subsequently issued common stock will also incorporate
one Right. The Rights will expire on February 10, 2005. Each Right will
entitle stockholders, in certain circumstances, to buy one-hundredth of a
newly issued share of Series A Junior Participating Preferred Stock (the
"Junior Preferred Stock") of the Company at the initial purchase price of
$75.00 per share.
The Rights will be exercisable and transferable apart from the common stock
only if a person or group (other than certain exempt persons) acquires
beneficial ownership of 15% or more of the common stock or commences a
tender or exchange offer upon consummation of which such person of group
would beneficially own 15% or more of the common stock.
The Company will generally be entitled to redeem the Rights at $.001 per
Right at any time until a person or group (other than certain exempt
persons) has become the beneficial owner of 15% or more of the common
stock. Under the Rights "flip-in" feature, if any such person or group
becomes the beneficial owner of 15% or more of the common stock, then each
Right not owned by such person or group of certain related parties will
entitle its holder to purchase, at the Right's then current purchase price,
shares of common stock (or in certain circumstances as determined by the
Company's Board, cash, other property or other securities) having a value
of twice the Right's purchase price.
Under the Rights "flip-over" provision, if, after any other person or group
(other than certain exempt persons) becomes the beneficial owner of 15% or
more of the common stock, the Company is involved in a merger or other
business combination transaction with another person, or sells 25% or more
of its assets or earning power in one or more transactions, each Right
will entitle its holder to purchase, at the Right's then current purchase
price, shares of common stock of such other person having a value of twice
the Right's purchase price.
The Junior Preferred Stock will not be redeemable and, unless otherwise
provided in connection with the creation of a subsequent series of
preferred stock, will be subordinate to all other series of the Company's
preferred stock. Each share of Junior Preferred Stock will represent the
right to receive, when and if declared, a quarterly dividend at an annual
rate equal to the greater of $1.00 per share or 100 times the quarterly per
share cash dividends declared on the common stock during the immediately
preceding fiscal year. In addition, each share of Junior Preferred Stock
will represent the right to receive 100 times any noncash dividends (other
than dividends payable in common stock) declared on the common stock, in
like kind. In the event of the liquidation, dissolution, or winding up of
the Company, each share of Junior Preferred Stock will represent the right
to receive a liquidation payment in an amount equal to the greater of $1.00
per share or 100 times the liquidation payment made per share of common
stock.
Each share of Junior Preferred Stock will have 100 votes, voting together
with the common stock. In the event of any merger, consolidation, or other
transaction in which common shares are exchanged, each share of Junior
Preferred Stock represents the right to receive 100 times the amount
received per share of common stock. The rights of the Junior Preferred
Stock as to dividends, liquidation, voting rights and merger participation
are protected by anti-dilution provisions.
7. PROVISION (BENEFIT) 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
(benefit) for income taxes as of January 31, 1998, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------------- ----------- ------------
<S> <C> <C> <C>
JANUARY 31, 1998
Federal $ (363) $ 439 $ 76
State (51) 63 12
------------- ----------- ------------
Total $ (414) $ 502 $ 88
------------- ----------- ------------
------------- ----------- ------------
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
------------- ----------- ------------
------------- ----------- ------------
</TABLE>
The following is a reconciliation of the provision (benefit) for income
taxes to the federal statutory rate for the years ended January 31, 1998,
1997 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-----------------------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Income taxes at the federal
statutory rate $ 80 $ 427 $ 2,065
State income taxes, net of
federal benefit 8 41 172
Other - 2 4
--------- -------- --------
Provision for income taxes $ 88 $ 470 $ 2,241
--------- -------- --------
--------- -------- --------
</TABLE>
<PAGE>
7. PROVISION (BENEFIT) 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, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities $ 380 $ 260
Valuation reserves 240 207
Uniform capitalization 80 80
Capital leases 80 90
---------- ----------
780 637
Deferred tax liabilities:
Volume/cash discounts (670) (560)
Purchase incentives (690) -
Co-op advertising - (270)
LIFO deferral - (40)
Depreciation and amortization (900) (745)
---------- ----------
(2,260) (1,615)
---------- ----------
Net deferred tax liability $ (1,480) $ (978)
---------- ----------
---------- ----------
</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 one to 30 years beyond the initial noncancelable lease
terms. Total rent expense charged to operations was $6,132,000, $4,119,000
and $3,186,000 for the years ended January 31, 1998, 1997 and 1996,
respectively.
In May 1995, the Company completed a sale/leaseback transaction with Cirque
Property L.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,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Buildings and improvements $ 2,877 $ 1,520
Computer equipment 711 711
---------- ----------
3,588 2,231
Less accumulated depreciation 1,520 1,212
---------- ----------
$ 2,068 $ 1,019
---------- ----------
---------- ----------
</TABLE>
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 were $257,000, $250,000 and $244,000 for the years ended
January 31, 1998, 1997 and 1996, respectively. The Company had a lease for
its office and service center with the two principal stockholders of the
Company which was terminated on January 31, 1996. Rental payments under
this lease were $401,000 for the year ended January 31, 1996. The
aggregate minimum annual rental commitments as of January 31, 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
FISCAL YEAR ENDED JANUARY 31, LEASES LEASES
----------------------------- -----------------------------
<S> <C> <C>
1999 $ 7,235 $ 602
2000 7,184 466
2001 7,266 333
2002 7,374 347
2003 7,143 352
2004 - 2017 69,867 2,979
-----------------------------
Total minimum lease payments $ 106,069 5,079
-----------
-----------
Less amount representing interest 2,713
-----------
Present value of net minimum lease
payments 2,366
Less portion due within one year 317
-----------
Long term capital lease obligations $ 2,049
-----------
-----------
</TABLE>
9. 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 and subject to limitations set annually
by the Internal Revenue Service. The Company's contributions were
$268,000, $235,000 and $173,000 for the years ended January 31, 1998, 1997
and 1996, respectively.
<PAGE>
10. QUARTERLY FINANCIAL DATA (unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------
APRIL JULY OCTOBER JANUARY
30, 31, 31, 31,
----------- ----------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
FISCAL 1998
Net sales $ 55,508 $ 61,944 $ 81,990 $ 106,864
Gross profit 14,450 16,914 22,850 28,628
Income from operations 290 299 927 2,705
Net income (loss) (311) (422) (115) 996
Earnings (loss) per share - Basic (.04) (.06) (.01) .12
Earnings (loss) per share - Diluted n/a n/a n/a .12
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 - Basic (.09) .03 .03 .15
Earnings (loss) per share - Diluted n/a .03 .03 .15
</TABLE>
11. MERGER
On June 27, 1997, the Company completed a merger in which the Company
acquired all of the outstanding shares of Audio King. Audio King, a
consumer specialty electronics company, operated 11 retail stores;
eight in Minnesota, two in Iowa and one in South Dakota. The purchase
price consisted of $2.5 million in cash, 986,432 shares of the
Company's common stock valued at $2.6 million, assumed debt of $7.2
million, and other expenses and severance costs of $1.2 million. The
transaction was accounted for as a purchase, whereby the purchase
price has been allocated to the acquired assets and liabilities based
on estimated fair value at the acquisition date. The transaction
resulted in the Company recording goodwill in the amount of $2.5
million, which is being amortized over a 10 year life. The results of
operations since the acquisition date are included in the consolidated
financial statements.
The following unaudited pro forma combined net sales, net income (loss) and
earnings (loss) per share data summarize the results of operations for the
years ended January 31, 1998 and 1997 as if Audio King had been acquired
February 1, 1996.
UNAUDITED PRO FORMA
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-----------------------
1998 1997
----------- ----------
<S> <C> <C>
Net sales $ 328,081 $ 327,713
----------- ----------
----------- ----------
Net income (loss) $ (820,315) $ 278,014
----------- ----------
----------- ----------
Earnings (loss) per share - Basic $ (.10) $ .03
----------- ----------
----------- ----------
</TABLE>
The unaudited pro forma combined financial results do not purport to
represent the actual results of operations which would have occurred had
such transactions been at the beginning of the period indicated or the
Company's results of operations for any future period. Anticipated
operational efficiencies from the integration of the acquisition are not
fully reflected in the above pro forma data and there can be no assurance
that such efficiencies will be achieved in the future.
The above pro forma data include adjustments to: eliminate Audio King
consulting, legal and accounting costs directly related to the acquisition;
eliminate duplicate managements' and buyers' salaries; adjust interest
expense for the cash outlay for the purchase of Audio King; eliminate
Audio King goodwill amortization and amortize the new goodwill; and reflect
the tax effects of the above adjustments.
<PAGE>
REPORT OF MANAGEMENT
FINANCIAL STATEMENTS
The management of the Company has prepared the accompanying consolidated
financial statements and is responsible for their integrity and objectivity.
The statements, which include amounts that are based on management's best
estimates and judgments, have been prepared in conformity with generally
accepted accounting principles and are free of material misstatement.
Management also prepared the other information in the annual report and is
responsible for its accuracy and consistency with the consolidated financial
statements.
INTERNAL CONTROL SYSTEM
The Company maintains a system of internal control over financial reporting that
is designed to provide reasonable assurance to the Company's management and
board of directors regarding the preparation of reliable published annual and
interim financial statements. The system contains self-monitoring mechanisms,
and actions are taken to correct deficiencies as they are identified. Even an
effective control system, no matter how well designed, has inherent limitations
- - including the possibility of the circumvention of overriding controls - and
therefore can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, internal
control system effectiveness may vary over time.
The Company assessed its internal control system as of January 31, 1998 in
relation to criteria for effective internal control over the preparation of its
published annual and interim financial statements described in "Internal Control
- - Integrated Framework" issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this assessment, the Company believes that,
as of January 31, 1998, its system of internal control over the preparation of
its published annual and interim financial statements met those criteria.
/s/ J. Edward McEntire
J. Edward McEntire
Chief Executive Officer
/s/ Alan E. Kessock
Alan E. Kessock
Vice President - Finance and Administration and Chief Financial Officer
March 11, 1998
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors of Ultimate Electronics, Inc.:
We have audited the accompanying consolidated balance sheets of Ultimate
Electronics, Inc. and subsidiary ("the Company") as of January 31, 1998 and
1997, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended January 31, 1998.
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 consolidated financial position of Ultimate
Electronics, Inc. and subsidiary at January 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 31, 1998, 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 11, 1998
<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 11, 1998,
included in the 1998 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 taken 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, No. 33-92258 and No.
333-43049) pertaining to the SoundTrack 401(k) Retirement Savings Plan, the
Non-employee Director Stock Option Plan, the Employee Stock Option Plan and
the Equity Incentive Plan, respectively, of Ultimate Electronics, Inc. of
our report dated March 11, 1998 with respect to the consolidated 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, 1998.
Ernst & Young LLP
Denver, Colorado
May 1, 1998
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-1-1997
<PERIOD-END> JAN-31-1998
<CASH> 2,006
<SECURITIES> 0
<RECEIVABLES> 20,086
<ALLOWANCES> 260
<INVENTORY> 43,908
<CURRENT-ASSETS> 67,102
<PP&E> 64,260
<DEPRECIATION> 13,405
<TOTAL-ASSETS> 123,446
<CURRENT-LIABILITIES> 61,524
<BONDS> 15,691
0
0
<COMMON> 81
<OTHER-SE> 44,640
<TOTAL-LIABILITY-AND-EQUITY> 44,721
<SALES> 306,306
<TOTAL-REVENUES> 306,306
<CGS> 223,464
<TOTAL-COSTS> 223,464
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,985
<INCOME-PRETAX> 236
<INCOME-TAX> 88
<INCOME-CONTINUING> 148
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 148
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
