<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended April 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From _______________ to _______________
Commission file number 0-22532
ULTIMATE ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-0585211
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
321 WEST 84TH AVENUE, SUITE A, THORNTON, COLORADO 80221
(Address of principal executive offices, zip code)
(303) 412-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
The number of outstanding shares of common stock as of May 24, 1999 was
8,163,862.
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ULTIMATE ELECTRONICS, INC.
FORM 10-Q
INDEX
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<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Page No.
<S> <C>
Condensed Consolidated Balance Sheets as of April 30, 1999
(unaudited) and January 31, 1999 . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three months
ended April 30, 1999 and April 30, 1998 (unaudited). . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the three
months ended April 30, 1999 and April 30, 1998 (unaudited) . . . 5
Notes to Condensed Consolidated Financial Statements
(unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . .10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . .10
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . .10
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . .10
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . .10
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . .10
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .10
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ULTIMATE ELECTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
April 30, January 31,
1999 1999
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(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 2,627 $ 4,421
Accounts receivable 15,443 17,814
Merchandise inventories 51,092 46,908
Other assets 1,248 1,087
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Total current assets 70,410 70,230
Property and equipment, net 45,789 46,636
Property under capital leases, including related parties, net 1,644 1,729
Goodwill, net 2,232 2,300
Other assets 988 1,009
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Total assets $ 121,063 $ 121,904
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LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 29,580 $ 29,888
Other current liabilities 12,033 13,602
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Total current liabilities 41,613 43,490
Revolving line of credit 13,875 13,188
Bonds payable 13,000 13,000
Term loans 249 330
Capital lease obligations, including related parties 1,825 1,841
Deferred tax liability 2,381 2,380
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, 8,163,862 and 8,160,796
at April 30, 1999 and January 31, 1999 82 81
Additional paid-in capital 33,918 33,912
Retained earnings 14,120 13,682
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Total stockholders' equity 48,120 47,675
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Total liabilities and stockholders' equity $ 121,063 $ 121,904
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</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
3
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ULTIMATE ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
----------------------------
1999 1998
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<S> <C> <C>
Sales
Cost of goods sold $ 80,303 $ 70,882
56,788 52,622
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Gross profit 23,515 18,260
Selling, general and administrative expenses 22,126 20,698
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Income (loss) from operations 1,389 (2,438)
Interest expense, net 681 1,071
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Income (loss) before income taxes 708 (3,509)
Income tax expense (benefit) 269 (1,298)
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Net income (loss) $ 439 $ (2,211)
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Earnings (loss) per share - Basic $ . 05 $ (. 27)
Earnings (loss) per share - Diluted $ . 05 $ (. 27)
Weighted average shares outstanding - Basic 8,163 8,140
Weighted average shares outstanding - Diluted 8,766 8,140
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
4
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ULTIMATE ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
----------------------------
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $ (1,619) $ (3,948)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (709) (318)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit 687 3,510
Principal payments on term loans and capital lease obligations (159) (144)
Proceeds from exercise of stock options 6 -
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Net cash provided by financing activities 534 3,366
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Net decrease in cash and cash equivalents (1,794) (900)
Cash and cash equivalents at beginning of period 4,421 2,006
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Cash and cash equivalents at end of period $ 2,627 $ 1,106
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</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
5
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ULTIMATE ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 1999
1. ACCOUNTING POLICIES
The Company's unaudited condensed consolidated financial statements have
been prepared by the Company in accordance with generally accepted
accounting principles for interim financial reporting and the regulations
of the Securities and Exchange Commission for quarterly reporting.
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of the Company, the statements include all adjustments,
consisting only of normal recurring adjustments, which are necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods. Operating results for the three month
period ended April 30, 1999 are not necessarily indicative of the results
that may be expected for the year ending January 31, 2000. Seasonal
fluctuations in sales of the Company's products result primarily from the
purchasing patterns of individual consumers during the Christmas holiday
season. These patterns tend to moderately concentrate sales in the latter
half of the year, particularly in the fourth quarter. For further
information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report to Stockholders for the year ended
January 31, 1999.
2. PRINCIPLES OF CONSOLIDATION
The unaudited condensed consolidated financial statements include the
accounts of all subsidiaries. All intercompany accounts and transactions
have been eliminated upon consolidation.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and
results of operations and the financial statements and accompanying
notes contain statements that are not historical facts but are
forward-looking statements that involve risks and uncertainties that
could cause future results to vary materially from projected results.
Such statements address activities, events or developments that the
Company expects, believes, projects, intends, estimates, plans or
anticipates will, should, could or may occur, including reference to
future profitability and steps being taken to achieve that result.
Factors that could cause actual results to differ materially from the
Company's projections, forecasts, estimates and expectations include,
but are not limited to, statements about business strategy, expansion
strategy and competition; 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 the distribution strategy
of the Company's vendors, changes in vendor support for advertising
and promotional programs, changes in the Company's merchandise sales
mix, the results of financing efforts, fluctuations in consumer
demand, the risks associated with Year 2000 issues as well as general
economic conditions. Please refer to a discussion of these and other
factors in the Company's Annual Report on Form 10-K for the year ended
January 31, 1999 and other filings with the Securities and Exchange
Commission. The Company disclaims any intent or obligation to update
publicly these forward-looking statements, whether as a result of new
information, future events or otherwise.
RESULTS OF OPERATIONS
Sales for the three months ended April 30, 1999 increased 13% to $80.3
million from $70.9 million for the three months ended April 30, 1998.
Comparable store sales increased 14% for the three months ended April
30, 1999. As announced on May 21, 1998, the Company significantly
reduced its computer assortment. Excluding the computer category,
comparable store sales were up 20% for the quarter ending April 30,
1999.
Gross profit for the three months ended April 30, 1999 increased 29%
to $23.5 million (29.3% of sales) from $18.3 million (25.8% of sales)
for the three months ended April 30, 1998. This increase was a direct
result of the improved sales amounts compared to the prior year as
well as the continued focus on sales of higher margin products in the
Company's core categories of audio, television and mobile electronics.
The prior year margin was negatively impacted by $700,000 in increased
inventory reserves associated with the decision to reduce the
Company's computer assortment.
Selling, general and administrative expenses for the three months
ended April 30, 1999 increased 7% to $22.1 million (27.6% of sales)
from $20.7 million (29.2% of sales) for the three months ended April
30, 1998. The decrease in selling, general, and administrative
expenses as a percentage of sales was primarily due to the leveraging
of the Company's fixed expenses against the 14% comparable store sales
increase that the Company achieved in the first quarter of the current
year as well as the cost control measures implemented after the first
quarter of the prior year.
As a result of the foregoing, the Company recorded income from
operations of $1.4 million (1.7% of sales) for the three months ended
April 30, 1999, compared to a loss from operations of $2.4 million
(3.4% of sales) for the three months ended April 30, 1998.
Interest expense decreased to $681,000 for the three months ended
April 30, 1999 from $1.1 million for the three months ended April 30,
1998. This decrease was due primarily to lower average amounts
outstanding under the Company's revolving line of credit as well as a
reduction in the interest rate associated with the change in the line
of credit from Norwest Bank to Foothill Capital Corporation.
7
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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
currently operates a total of 30 stores in nine states.
In March 1995, the Company received proceeds of $12.3 million (net of
the underwriting discount and other associated costs) from the sale of
$13.0 million aggregate principal amount of 10.25% First Mortgage
Bonds. The Company is required to redeem $3.25 million aggregate
principal amount of its 10.25% First Mortgage Bonds annually (reduced
to the extent of the bonds previously purchased or redeemed by the
Company) 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 Company's Thornton
facility.
Net cash used in operations was $1.6 million for the three months
ended April 30, 1999 compared to net cash used in operations of $3.9
million for the three months ended April 30, 1998.
The Company's primary capital requirements are directly related to
expenditures for new store openings and the remodeling and upgrading
of existing store locations.
The Company intends to expand into select metropolitan areas in the
Rocky Mountain, Midwest and Southwest regions with 24,000 to 32,000
square foot stores. With the exception of the Thornton facility, all
stores are leased. The Company has begun analyzing new store
opportunities in existing markets to replace some of the Company's
smaller locations. The Company expects to relocate and expand two to
five of its locations within the next two 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 late in fiscal 2000 and
beyond. The cost of these future stores is anticipated to be between
$1.0 million and $1.5 million (excluding preopening expenses),
depending on tenant allowances. Preopening expenses are expected to
average $250,000, and include such items as advertising prior to
opening, recruitment and training of new employees and other costs of
opening stores. In the event of relocations of existing stores,
preopening costs may be significantly higher due to early termination
of the existing store leases. The inventory requirement for the
Company's new stores is expected to average approximately $1.5
million, approximately $750,000 of which is financed through trade
credit.
On September 30, 1998, the Company executed a three-year $40 million
credit agreement with Foothill Capital Corporation (a wholly owned
subsidiary of Norwest Bank). This facility replaced the Company's $35
million line of credit with Norwest Bank Colorado, N.A. Borrowings
under the Company's current revolving line of credit are limited to
the lesser of $40 million or 80% of eligible inventory and a portion
of accounts receivable. Borrowings bear interest, payable monthly,
based on a blend of LIBOR plus 2.0% and Norwest Bank's prime rate
minus 0.375%. Borrowings under this credit facility in the amount of
$13.9 million were outstanding as of April 30, 1999. Borrowings are
secured by inventories, accounts receivable, equipment and
intangibles. The Company was in compliance with all borrowing
covenants at April 30, 1999.
The Company believes that its cash flow from operations and borrowings
under its current credit facility will be sufficient to fund the
Company's operations and debt repayment for fiscal 2000. To fund the
capital requirements for its anticipated expansion plans beyond fiscal
2000, the Company may be required to seek additional financing, which
may take the form of expansion of its existing credit facility, or
possibly additional debt or equity financings. There can be no
assurance that the Company will be able to obtain such funds on
favorable terms, if at all.
8
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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.
YEAR 2000
Until recently, most computer programs were written to store only two
digits of date-related information in order to more efficiently
handle and sort 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 1999, the Company reviewed all
applications and equipment to evaluate the Company's exposure to the
Year 2000 Issue. The required modifications to existing systems were
identified, and plans were developed for upgrades or remediation. The
Company anticipates that all upgrades and remediation will be
completed by October 31, 1999.
The Company's primary information system software is provided by Tyler
Retail Systems, Inc. ("Tyler") of Clearwater, Florida. This software
operates the vast majority of the Company's systems and has been
evaluated for Year 2000 compliance. Tyler has assured the Company
that with the current software and the pending upgrade, the Company's
system will be Year 2000 compliant by October 31, 1999. The Company
began the upgrade process in the first quarter of fiscal 2000. The
Company believes that no other significant modifications to the Tyler
software will be necessary. The Company's system review also
identified that some older hardware and software were not Year 2000
compliant. These items were few in number and are being replaced on
an accelerated basis to ensure Year 2000 compliance by August 31,
1999. In the opinion of the Company, costs of these upgrades will not
be material to the financial condition or operation of the Company.
The Company is also in communication with third parties with whom it
does significant business in order to assess their Year 2000
compliance and minimize the potential for adverse consequences, if
any, that could result form failure of such entities to address this
issue. Year 2000 issues do present risks that are outside of the
control of the Company, including, but not limited to, the failure of
utility companies to provide electricity, the failure of
telecommunication companies to provide voice and data transfer
services, the failure of financial services companies to process
transactions or transfer funds and the failure of third-party vendors
or suppliers to become Year 2000 compliant. In the event of the
failure of the Company or Tyler to become timely Year 2000 compliant,
the Company has not identified a near-term economically feasible
alternative for operations support, and would be required to resort to
manual or other processing methods. With regard to any Year 2000
failure by third-party product suppliers, the Company plans to pursue
alternative suppliers for Year 2000 compliant products, however it
anticipates its competitors will be similarly impacted in any such
event. The Company can make no assurances that Year 2000 issues will
not have an adverse effect on the Company's business, financial
condition, or future operations. The information provided in this
disclosure constitutes a "Year 2000 Readiness Disclosure" under the
Year 2000 Information and Readiness Disclosure Act of 1998.
9
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ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
OUTSTANDING DEBT OF THE COMPANY. As of April 30, 1999, the Company
had outstanding debt of approximately $27.1 million, $13.0 million of
which bears interest at an annual fixed rate of 10.25%. A
hypothetical 10.0% decrease in interest rates would not have a
material impact on the Company. Increases in interest rates could,
however, increase interest expense associated with future borrowings
by the Company, if any. For example, the Company frequently effects
borrowings under its $40.0 million revolving line of credit for
general corporate purposes, capital expenditures and other purposes
related to expansion of the Company's capacity. Borrowings under the
$40.0 million line of credit bear interest based on a blend of LIBOR
plus 2.0% and Norwest Bank's prime rate minus 0.375%. Borrowings
under this credit facility in the amount of $13.9 million were
outstanding as of April 30, 1999. The Company has not hedged against
interest rate changes.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company is a party to certain legal proceedings
arising in the ordinary course of its business. Management believes
that any resulting liability, individually or in the aggregate, will
either be covered by insurance or will not have a material adverse
effect on the Company's financial condition.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Documents filed with this report:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ultimate Electronics, Inc.
Date: May 26, 1999 By: /s/ Alan E. Kessock
------------------------- ------------------------------
Alan E. Kessock
Vice President, Chief Financial Officer,
Secretary and a Director (Principal
Financial and Accounting Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> APR-30-1999
<CASH> 2,627
<SECURITIES> 0
<RECEIVABLES> 15,800
<ALLOWANCES> 357
<INVENTORY> 51,092
<CURRENT-ASSETS> 70,410
<PP&E> 66,468
<DEPRECIATION> 20,679
<TOTAL-ASSETS> 121,063
<CURRENT-LIABILITIES> 41,613
<BONDS> 28,999
0
0
<COMMON> 82
<OTHER-SE> 48,038
<TOTAL-LIABILITY-AND-EQUITY> 121,063
<SALES> 80,303
<TOTAL-REVENUES> 80,303
<CGS> 56,788
<TOTAL-COSTS> 56,788
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 681
<INCOME-PRETAX> 708
<INCOME-TAX> 269
<INCOME-CONTINUING> 439
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 439
<EPS-BASIC> .05
<EPS-DILUTED> .05
</TABLE>
