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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED JANUARY 31, 2000
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-22532
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ULTIMATE ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 84-0585211
(State or other jurisdiction of incorporation or (I.R.S. employer identification no.)
organization)
321 WEST 84TH AVENUE, SUITE A, THORNTON, COLORADO 80260
(Address of principal executive offices) (Zip code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (303) 412-2500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE PER SHARE
Title of Class
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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 / /
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. / /
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the Registrant as of April 27, 2000 was approximately
$228,379,796. The number of outstanding shares of Common Stock as of April 27,
2000 was 10,729,599.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Annual Report to Stockholders for the fiscal year ended
January 31, 2000 are incorporated by reference into Parts II, III and IV of this
report. Portions of the Registrant's definitive Proxy Statement for the 2000
Annual Meeting of Stockholders to be held June 22, 2000 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 consumer electronics and home entertainment in Colorado, Idaho, Iowa,
Minnesota, Nevada, New Mexico, Oklahoma, South Dakota and Utah. The Company
operates thirty-one stores, including ten stores in Colorado under the trade
name SoundTrack, thirteen stores in Idaho, Iowa, Nevada, New Mexico, Oklahoma,
South Dakota and Utah under the trade name Ultimate Electronics and eight stores
in Minnesota under the trade name Audio King. Founded in 1968, the Company grew
to nine stores by 1993 and became a public company on October 15, 1993.
The Company strives to appeal to a wide range of customers with an emphasis
on selling mid to high-end products sold by a highly trained, knowledgeable,
full-time sales force in a full service retail environment. The Company believes
its stores enable it to differentiate itself from its national, regional and
local competitors by:
- focusing on audio, video, television and mobile electronics products;
- offering over 125 brands, including a majority of the most popular names
and a large selection of limited-distribution, upscale brands and lines;
- emphasizing products with the latest technology by dedicating significant
resources to their promotion, advertising, merchandising and related
product training;
- offering Simple Solution packages created by the Company for home theater,
mobile electronics and home computing to make purchasing consumer
electronics systems simple;
- utilizing an upscale, demonstration-oriented store format with an emphasis
on presentation of large screen televisions, home theater systems and
mobile electronics;
- featuring highly trained, knowledgeable, full-time sales associates and
installation technicians; and
- providing a complete menu of value-added services including home
installation by the Company's own technicians.
The Company believes that its differentiating characteristics, together with
its policy of offering the same price as its competitors on identical
merchandise, makes the Company an attractive alternative to volume driven
appliance/electronics superstores, as well as to other national, regional and
local merchants. In addition, the Company's commitment to technologically
advanced products, combined with its highly-trained sales force, positions the
Company to take advantage of the evolution in consumer electronics products that
is being led by digital technology.
For the year ended January 31, 2000, sales were $385.0 million, a 17%
increase from sales of $328.9 million for the prior year. Comparable store sales
increased 16% for the year ended January 31, 2000 compared to a 2% increase in
comparable store sales for the year ended January 31, 1999. Gross margins for
the year were 30.0%, compared to 29.0% for the prior year. The gross margin
increase experienced in fiscal 2000 was primarily due to the following:
- increased sales of new digital technology products;
- increased inventory turns to 5.2 compared to 4.9 in the prior year;
- a 116% increase in DVD sales at slightly higher margins; and
- increased sales of accessories and furniture.
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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 the
Company's business strategy include:
FOCUSING ON AUDIO, VIDEO, TELEVISION AND MOBILE ELECTRONICS PRODUCTS. The
Company focuses primarily on audio, video, television and mobile electronics
products, and provides its customers with a comprehensive and informative
experience when making the decision to purchase consumer electronics products.
The Company believes that this specialized focus enhances the reputation of its
stores as being a premier place to purchase products in these core categories.
OFFERING AN EXTENSIVE SELECTION OF MID TO HIGH-END AUDIO AND VIDEO
PRODUCTS. The Company offers over 4,000 items, representing over 125 brand
names across a broad selection of audio and video products. A significant
portion of these brands, such as Boston Acoustics, Denon, Krell, Martin Logan,
Mitsubishi and Sony ES, are only available through select retailers. The Company
believes its extensive selection helps customers make a better informed buying
decision.
BEING A LEADER IN OFFERING NEW TECHNOLOGY. The Company strives to be
recognized by consumers and vendors as a leader in presenting the latest
technology. The Company devotes significant resources to marketing and
substantial floor space and inventory to displaying new technologies. For
example, as a result of this focus, the Company was able to sell and deliver the
first high definition television for residential use in the United States in
July 1998. The Company believes that showcasing the latest technology
differentiates it from less specialized competitors and stimulates the sales of
its other products and services.
OFFERING SIMPLE SOLUTION PRODUCT PACKAGES. The Company assists its
customers in making larger and more complex consumer electronics purchases with
its Simple Solution program. This program, which provides complete system
packages to the Company's customers, makes home theater, car audio and computer
purchase decisions simpler, and offers the consumer an excellent value when
compared to purchasing the same components separately.
PROVIDING AN UPSCALE, DEMONSTRATION-ORIENTED STORE FORMAT. The Company has
developed an upscale, demonstration-oriented store format that showcases its
merchandise and encourages its customers to fully experience its products. The
Company believes that this format assists its customers in understanding the
benefits of upscale products and new technology.
TRAINING AND DEVELOPING A PREMIER SALES AND INSTALLATION TEAM. The Company
believes that the quality and knowledge of our sales associates and installation
technicians is critical to the Company's success and represents a significant
competitive advantage. The Company also believes that its specialized training
leads to a superior customer experience that stimulates sales of its products.
The Company ensures that its sales associates receive comprehensive ongoing
technical product and sales training prior to the Company's introduction of
significant new products, which helps the Company maintain its new technology
product leadership. The Company's installation technicians also receive
comprehensive technical product and installation training.
PROVIDING "RED CARPET" CUSTOMER SERVICE. The Company has always been
committed to providing excellent customer service. The Company supports its
product sales by providing many important customer services, including home
delivery and setup, home theater and audio design and installation, extended
service contracts and regional service centers that offer in-home and carry-in
repair services. The Company believes that its in-home installation service,
provided by its own employees, is a competitive advantage.
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PROMOTING ITS MERCHANDISE THROUGH DIFFERENTIATED MARKETING AND
ADVERTISING. The Company recently redesigned its marketing program to create
awareness of its comprehensive selection of mid to high-end brand name
merchandise sold at competitive prices. The Company's advertising strategy
primarily uses newspaper, radio and targeted direct mail media. The cornerstone
of the Company's direct mail campaign is a 70 to 80 page full color catalog
published four times a year that emphasizes the breadth of its selection and new
technology.
OFFERING COMPETITIVE PRICING AND SATISFACTION GUARANTEE. The Company's goal
is to advertise and sell products at the same price as its competitors. The
Company reinforces this strategy in its advertising and with its "30-day
satisfaction guarantee" backed by its "60-day price guarantee." The Company's
price guarantee and satisfaction guarantee are designed to remove pricing and
suitability concerns from the purchase decision and allow the customer and the
sales staff to focus on product features, performance and quality.
EXPANSION STRATEGY
The Company intends to expand into select metropolitan areas in the Rocky
Mountain, Midwest and Southwest regions with 30,000 to 36,000 square foot
stores. In certain smaller markets, the store size may be as small as 20,000
square feet. With the exception of the Thornton facility, all current stores are
leased. The Company opened its 31st store, a new 38,000 square foot store in
Davenport, Iowa on December 3, 1999. For fiscal 2001, the Company expects to
open five new stores, primarily in the Phoenix, Arizona area. The Company
currently anticipates opening two of the Phoenix stores late in the second
quarter of fiscal 2001 and two additional Phoenix stores early in the holiday
selling season of fiscal 2001. The Company expects to open eight to twelve
additional stores in fiscal 2002. Leases and/or contracts for two of these
stores have been signed.
The Company continues to analyze new store opportunities in existing markets
to replace or expand some of its smaller locations. In November 1999, the
Company expanded a Minneapolis, Minnesota store from 9,700 to 17,300 square
feet. In December 1999, the Company relocated and expanded its Sioux Falls,
South Dakota store from 3,200 to 22,200 square feet. In the second quarter of
fiscal 2001, the Company plans to relocate a 9,300 square foot store located in
the Minneapolis/St. Paul area to a 35,000 square foot store. The Company's Fort
Collins, Colorado store is also expected to be expanded from 16,600 to 22,000
square feet in fiscal 2001. The Company also expects to relocate and expand its
Arvada, Colorado store within the next 12 months and will be analyzing
opportunities in the Minneapolis/St. Paul area over the next few years to
relocate and/or expand a number of those locations.
The cost of these future stores is anticipated to average $3.0 million per
store. Leasehold improvements, fixtures and equipment are expected to average
$1.9 million, depending on tenant allowances. 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. Preopening
expenses for new stores are expected to average $350,000, 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 are expected to average $150,000 and will be higher if the
Company is required to terminate existing store leases prior to their maturity.
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 freestanding 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.
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MERCHANDISING
PRODUCTS. The Company offers its customers a comprehensive selection of
high quality, brand name audio, video, television and mobile electronics
products as well as a limited selection of home office products. This selection
consists of over 4,000 SKU's, representing approximately 125 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. During
the second quarter of fiscal 1999, the Company significantly reduced its
computer assortment, concentrating on a limited number of computer packages
emphasizing Sony personal computers and Canon printers.
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.
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FISCAL YEAR ENDED
JANUARY 31,
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PRODUCT CATEGORY 2000 1999 1998
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Television/Satellite..................................... 31% 31% 30%
Audio.................................................... 24% 24% 23%
Video.................................................... 17% 15% 14%
Mobile................................................... 12% 13% 11%
Home Office.............................................. 6% 7% 13%
Other.................................................... 10% 10% 9%
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Audio includes home audio products as well as portable audio. Mobile
includes car audio, car security and wireless communications. Video includes
VCR, Camcorders and DVD players. Other includes installation services, repair
services, net commissions on extended service contracts and furniture.
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
offering 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 that 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, 2000, the Company's ten largest
suppliers accounted for approximately 70% of the merchandise purchased by the
Company. Two of the Company's suppliers, Sony
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and Panasonic, 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 currently operates thirty-one stores, comprised of ten
SoundTrack stores in Colorado, thirteen Ultimate Electronics stores in Idaho,
Iowa, Nevada, New Mexico, Oklahoma, South Dakota and Utah and eight Audio King
stores in Minnesota. Of these thirty-one stores, eighteen are larger format
stores and the balance are smaller format stores.
While the Company's eighteen larger stores vary in size from 22,000 to
51,700 square feet, the Company's current prototype store generally ranges from
30,000 to 36,000 square feet, with approximately 55% to 60% of the square
footage devoted to selling space. The remaining space is dedicated to a car
audio installation facility, a store warehouse, general office space and, in
selected stores, a service facility. This store format emphasizes mid to
high-end products, and features multiple home audio and car demonstration rooms,
multiple home theater settings, extensive portable electronics displays and an
area displaying 35 to 45 projection televisions. Each of these stores has
displays designed to provide the customer with a full spectrum of the Company's
products, installation of mobile electronics, a home theater planning center and
two automobiles equipped with the latest in car audio and video, car security
and navigational products.
Twelve of the Company's stores range in size from 9,300 to 20,700 square
feet, with approximately 60% to 65% of the square footage devoted to selling
space. These stores generally contain the same products and services available
at the Company's large format stores except that they typically contain fewer
large screen televisions and fewer demonstration rooms for home and mobile
electronics. The Company may relocate and/or expand a number of these stores as
opportunities become available. The Company currently plans to relocate and/or
expand at least three of these stores by the end of fiscal 2002. The Company
also operates a 3,200 square foot mall-based store that it acquired as part of
the 1997 merger with Audio King.
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 75 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 and is
upgraded with enhancements nearly every year. In addition, the system runs on
Unix-based Hewlett-Packard computer hardware, which will be upgraded to
accommodate future growth. This system's software was successfully upgraded in
1999 to be Year 2000 compliant and to support 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. New signage can be generated on a daily basis.
Immediately following the 1997 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 one or more of the Company's
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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. Sales consultants regularly attend in-house
training sessions conducted by dedicated in-house trainers and manufacturers'
representatives. They 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 have 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, Davenport, Las Vegas, Minneapolis, Salt
Lake City and Tulsa. Two of the Company's service facilities, located at its
distribution centers in Thornton and Minneapolis, provide backup for the
Company's other regional service centers. The Company employs over 150 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 170 customer service vehicles to provide
in-home repair and delivery, installation and setup of home satellites, home
theater components and televisions.
The Company sells third-party ("Obligor") 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 noncancelable. These contracts are also administered by an
unaffiliated third party (the "Administrator"). The Administrator is required by
its agreement with the Company to maintain insurance to protect the Company in
the event that the Obligor fails to fulfill its obligations under the extended
service contracts.
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 whereby the Finance Company retains 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 the Company's working
capital. During fiscal 2000, approximately 24% 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 principal competitive factors in the consumer electronics industry are
breadth of product selection, price, store location and customer service. The
Company faces competition from large national chains, numerous smaller specialty
stores and consumer electronics departments of many department, discount, and
home improvement stores. 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, Wal-Mart and Target. The Company competes with
Circuit City in every market except Iowa, Sioux Falls, South Dakota and
Rochester, Minnesota. The Company competes with Best Buy in every market except
Utah and Idaho. The Company
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will be competing with both Best Buy and Circuit City when it enters the Phoenix
market and expects to compete with both of them in each of its other markets at
some point in the future. The Company's primary competitors have greater
financial and other resources than the Company. There can be no assurance that
the Company's operating results will not be adversely affected in fiscal 2001
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 future competitors in such markets.
EMPLOYEES
As of January 31, 2000, the Company employed approximately 1,900 persons,
approximately 1,600 of whom were store, customer delivery or service employees
and approximately 300 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-,
SoundTrack-Registered Trademark-, Audio King-Registered Trademark-, Fast
Trak-Registered Trademark-, Big Names. Little Prices.
Guaranteed-Registered Trademark- and Simple Solution-SM- are service marks of
the Company.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company's
expenses in fiscal 2000 in connection with remediating its systems were
immaterial. The Company is not aware of any material problems resulting from
Year 2000 issues, either with its products, its internal systems, or the
products and services of third parties. The Company will continue to monitor its
mission critical computer applications and those of its suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Form 10-K includes statements that are not purely historical facts and
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 from the Company's projections, forecasts,
estimates and expectations include, but are not limited to, statements about
business strategy, expansion strategy, 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 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 and those listed below. Forward-looking statements may
concern, among other things:
- our growth strategy and plans regarding opening new stores and entering
new markets;
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- our intention to relocate and/or expand existing stores;
- expected capital and other expenditures to open new and relocated and/or
expanded existing stores;
- our current and future plans with respect to our web site, including
investigation of Internet sales;
- growth trends and projected sales in the consumer electronics business;
- technological and market developments in the consumer electronics
business, including trends with respect to digital products like DVD, HDTV
and other new products;
- our relationships with key suppliers; and
- our expectations regarding competition, including competition on the
Internet.
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 financial condition, results of operations or
prospects 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. References to the "Company," "we" and "our" refer to Ultimate
Electronics, Inc.
OUR SUCCESS DEPENDS IN LARGE PART ON OUR ABILITY TO OPEN AND PROFITABLY OPERATE
NEW OR RELOCATED AND/OR EXPANDED STORES IN EXISTING AND NEW GEOGRAPHIC MARKETS
We may not be able to open, relocate and/or expand all of the stores
discussed in our growth strategy and any new stores that we open, relocate
and/or expand may not be profitable, either of which would have a material
adverse impact on our financial results. Opening a new store typically requires
six to nine months of construction and preopening activity. The opening of
additional stores in new geographic markets could present competitive and
merchandising challenges significantly different from those we currently face or
previously have faced within our existing geographic markets. In addition, we
will incur higher costs related to advertising, administration and distribution
as we enter new markets, and our large store format may not be as successful in
new markets. Also, opening new stores in markets where we already have existing
stores could result in decreased sales at our other stores in that market. If we
do not open a significant number of new stores in new markets as anticipated,
our sales and earnings will be significantly negatively impacted and we will not
be able to achieve our current business plan.
There are a number of other factors that could affect our ability to open
and operate new stores consistent with our business plan. These factors also
affect the ability of any newly opened or acquired stores to achieve sales and
profitability levels comparable with our existing stores, or to become
profitable at all. These factors include:
- competition in our targeted markets;
- the lack of consumer demand for our products at levels that can support
acceptable profit margins;
- the inability to identify and acquire suitable sites and to negotiate
acceptable leases for such sites due to the large size of our stores or
other factors;
- difficulties associated with the hiring, training and retention of skilled
personnel, including store managers;
- problems in adaptation of our distribution and other operational and
management systems to an expanded network of stores;
- higher costs for print, television and radio advertising;
- the availability of adequate financial resources;
- the inability and unwillingness of vendors to supply product on a timely
basis at competitive prices;
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- difficulty in obtaining governmental and other third-party consents,
permits and licenses needed to operate such additional sites;
- challenges associated with the financing, consummation and integration of
any acquisitions; and
- the ability to secure our existing brands in new markets.
Our growth plans will require us to expend significant management time and
effort and additional resources to ensure the continuing adequacy of our
financial controls, operating procedures, information systems, product
purchasing and distribution systems and employee training programs. We also need
to attract and retain additional qualified personnel, including new store
managers, for new stores. We currently seek to transfer existing managers and
other personnel to our new stores who are familiar with our procedures but who
may not be familiar with the new market. If we are unable to take these steps,
our business will be adversely affected. We believe that our current
distribution center will be able to support the majority of our expansion
efforts over the next two years. However, we may need to expand or add to our
current facility in the future to fully accommodate our growth.
We estimate that the average cash investment, including preopening costs,
costs of tenant improvements and inventory (net of payables), required to open a
store to be approximately $3.0 million. However, the actual cost of opening any
particular store may be significantly greater than this current estimate. We may
need to seek additional debt and/or equity financing in order to fund our
continued expansion beyond fiscal 2001, depending on the number of stores we
actually open and the actual preopening costs. Any such debt or equity financing
may not be available on terms acceptable to us, if at all.
WE FACE SIGNIFICANT COMPETITION FROM NATIONAL, REGIONAL AND LOCAL CONSUMER
ELECTRONICS RETAILERS AND MAY EXPERIENCE HEIGHTENED COMPETITION FROM INTERNET
RETAILERS
The retail consumer electronics industry is highly competitive. We currently
compete against a diverse group of retailers, including several national,
regional and local merchants and appliance/electronics superstores, such as
Circuit City and Best Buy, which sell, among other products, audio and video
consumer electronics products similar and often identical to those we sell. Each
of our stores competes directly with either a Circuit City or a Best Buy, and
the majority of our stores compete with both. We also compete in particular
markets with a substantial number of retailers that specialize in one or more
types of consumer electronics products that we sell. Some of our competitors
have financial resources that are substantially greater than ours and may be
able to purchase inventory at lower costs, initiate and sustain predatory price
competition and better sustain economic downturns. In addition, other
appliance/electronic superstores, warehouse clubs, home improvement retailers
and mass merchants selling consumer electronics, such as Sears, Wal-mart and
Target, are continuing to expand their geographic markets, and such expansion
may increase price competition and reduce gross margins within those markets.
A number of different competitive factors could have a material adverse
effect on our results of operations and financial condition, including:
- expansion by existing competitors;
- entry by new competitors into markets in which Ultimate Electronics is
currently operating;
- competitive pricing strategies by competitors;
- increased sales by our competitors of upscale products;
- larger size and greater operational efficiencies of competitors; and
- adoption by existing competitors of promotional pricing, innovative store
formats or improved retail sales methods.
9
<PAGE>
We also compete with retailers of consumer electronics on the Internet.
Internet sales of consumer electronics, excluding computers, are currently
estimated by Forrester Research to reach 10% of industry sales by 2003. We
expect that competition from the Internet will increase in the future as a
result of, among other things, the following factors:
- customers can more easily conduct price comparisons on the Internet, which
could result in decreased margins to us;
- Internet sales by our competitors could enhance price competition;
- the inapplicability of sales tax to Internet sales provides Internet sales
with a competitive advantage and that makes them attractive to consumers;
- lower-end products are currently more susceptible to Internet sales; and
- high-end manufacturers who do not allow their products to be sold over the
Internet may change their strategies, an action that could significantly
impact our margins on those high margin products and which would be beyond
our control.
Although we currently operate an information-based web site on the Internet,
we have not yet invested in the capability to engage in sales directly from the
site. Most of the high-end manufacturers of products we sell currently do not
allow their products to be sold over the Internet. In conjunction with our
manufacturers and their strategies, we continue to actively investigate adding a
sales function to our site. If we make an investment to sell over the Internet,
such investment could be very costly and our sales site may not attract
sufficient profitable sales to justify our investment.
BECAUSE WE EXPERIENCE SEASONAL FLUCTUATIONS IN OUR SALES, OUR QUARTERLY RESULTS
WILL FLUCTUATE AND OUR ANNUAL RESULTS COULD BE BELOW EXPECTATIONS
Seasonal consumer shopping patterns affect our business. Our fourth fiscal
quarter includes the holiday shopping period and has historically contributed,
and is expected to continue to represent, a substantial portion of our sales,
income from operations and net income for our entire fiscal year. Any factors
negatively affecting Ultimate Electronics during the fourth quarter of any year,
including adverse weather or unfavorable economic conditions, would have a
material adverse effect on our results of operations for the entire year. More
generally, our quarterly results of operations and financial condition may
fluctuate based upon such factors as:
- the timing of new store openings and store relocations;
- the amount of store preopening expenses;
- the amount of grand opening expenses incurred in new markets;
- the mix of consumer electronics products sold in our stores;
- timing of availability of new products;
- profitability of sales of particular products; and
- actions by our competitors, including grand opening and store closing
sales by competitors.
OUR COMPARABLE STORE SALES RESULTS WILL FLUCTUATE AND THIS MAY CAUSE OUR STOCK
PRICE TO FLUCTUATE
A number of factors have historically affected, and will continue to affect,
our comparable store sales results including among other factors:
- changes in competition;
- general regional and national economic conditions;
10
<PAGE>
- new product introductions;
- consumer trends;
- changes in our product mix;
- weather conditions in our regions;
- timing of promotional events; and
- our ability to execute our business strategy effectively.
We do not expect comparable store sales to increase at recent historical
rates, and comparable store sales may be negative in the future. Our historical
results have fluctuated significantly from quarter to quarter. Changes in our
quarterly and annual comparable store sales results could cause the price of our
common stock to fluctuate substantially.
OUR LIMITED GEOGRAPHICAL DISPERSION MAY REDUCE OUR ABILITY TO WEATHER ADVERSE
MARKET EVENTS
Ultimate Electronics currently operates 31 stores in nine states in the
Rocky Mountain, Midwest and Southwest regions of the United States. We are
vulnerable to adverse market events in these locations including weather-related
conditions, regional competition and unfavorable economic conditions.
A DISRUPTION IN OUR RELATIONSHIP WITH, OR IN THE OPERATIONS OF, ANY OF OUR KEY
SUPPLIERS COULD CAUSE OUR SALES TO DECLINE
The success of our business and growth strategy depends to a significant
degree upon our suppliers, particularly our brand name suppliers of audio and
video equipment such as Sony, Mitsubishi, Panasonic, JVC, Yamaha and RCA. We
rely on a number of suppliers for limited distribution upscale items. We also
rely on our suppliers for cooperative advertising support. Ultimate Electronics
does not have any long-term supply agreements or exclusive arrangements with any
vendors. We typically order our inventory through the issuance of individual
purchase orders to vendors. In addition, we rely heavily on a relatively small
number of suppliers. The loss of any of these key vendors or the failure by us
to establish and maintain relationships with these or other vendors could have a
material adverse effect on our results of operations and financial condition.
Our ability to establish additional stores in existing markets and to penetrate
new markets depends to a significant extent on the willingness and ability of
our vendors to supply those additional stores, and vendors may not be willing or
able to do so. As we continue to open or acquire new stores, the inability or
unwillingness of suppliers to supply some or all of their products to us at
acceptable prices in one or more markets could have a material adverse effect on
our results of operations and financial condition.
IF WE ARE UNABLE TO TIMELY RESPOND TO CHANGES IN CONSUMER DEMAND AND
PREFERENCES, WE MAY LOSE CUSTOMERS AND OUR SALES MAY DECLINE
Our success depends on our ability to anticipate and respond in a timely
manner to consumer demand and preferences regarding audio and video consumer
electronics products and changes in such demand and preferences. Any sustained
failure by us to identify and respond to changes in consumer demand and
preferences would have a material adverse effect on our results of operations
and financial condition.
IF NEW PRODUCTS ARE NOT INTRODUCED OR CONSUMERS DO NOT ACCEPT NEW PRODUCTS, OUR
SALES MAY DECLINE
We depend to a large extent on the periodic introduction and availability of
new products and technologies. Many products that incorporate the newest
technologies, such as DVD and HDTV, are subject to significant technological
changes and pricing limitations. They are also subject to the actions and
cooperation of third parties such as television broadcasters and movie
distributors. It is possible that these
11
<PAGE>
products or other new products, including new digital formats, will never
achieve widespread consumer acceptance. Furthermore, the introduction or
expected introduction of new products or technologies may depress sales of
existing products and technologies, without a comparable increase in sales of
new products in the same period due to uncertainty regarding consumer acceptance
of the new products. Significant deviation from the projected demand for
products we sell may have a material adverse effect on our results of operations
and financial condition, either from lost sales or lower margins due to the need
to mark down excess inventory.
Our historical growth rate has been directly related to our ability to be a
leader in sales of new technology products. In the future, other retailers may
increase their focus on newer technologies. In addition, there may not be
significant technologically advanced products.
A DECLINE IN GENERAL ECONOMIC CONDITIONS COULD LEAD TO REDUCED CONSUMER DEMAND
FOR THE PRODUCTS WE SELL
Consumer spending patterns, particularly discretionary spending for products
such as consumer electronics, are affected by, among other things, prevailing
economic conditions, wage rates, inflation, new housing starts, consumer
confidence and consumer perception of economic conditions. A general slowdown in
the U.S. economy or an uncertain economic outlook would adversely affect
consumer spending habits.
CHANGES IN TRADE REGULATIONS, CURRENCY FLUCTUATIONS AND OTHER FACTORS BEYOND OUR
CONTROL WOULD IMPACT INVENTORY PURCHASED FROM FOREIGN VENDORS
We purchase a significant portion of our inventory from overseas vendors,
particularly vendors headquartered in Japan. Changes in trade regulations,
currency fluctuations or other factors may increase the cost of items we
purchase from foreign vendors or create shortages of such items, which could in
turn have a material adverse effect on our results of operations and financial
condition. Conversely, significant reductions in the cost of such items in U.S.
dollars may cause a significant reduction in retail price levels of those
products, thereby resulting in a material adverse effect on our sales, margins
or competitive position.
OUR BUYING POWER IS SOMEWHAT DEPENDENT UPON MEMBERSHIP IN A BUYING GROUP
We are the largest member of the Progressive Retailers Organization, a
volume buying group comprised of consumer electronics retailers located
throughout the country. This organization provides its members with market
information and negotiates purchase terms with vendors on behalf of its members.
Any future termination of our membership in this group could have an adverse
effect on our results of operations and financial condition. In addition,
rebates paid to us by product manufacturers through this group depend not only
on our sales volumes but on the sales volumes achieved by the group's other
members, and therefore decreased sales performance by us or these other members
could reduce the amounts of such rebates payable to us. Any such reduction could
in turn have an adverse effect on our results of operations and financial
condition.
THE LOSS OF THE SERVICES OF OUR CHAIRMAN, CHIEF EXECUTIVE OFFICER, PRESIDENT OR
OTHER KEY EMPLOYEES COULD JEOPARDIZE OUR ABILITY TO MAINTAIN OUR COMPETITIVE
POSITION
We believe that our success depends on the continued service of our key
executive management personnel. Loss of the services of William J. Pearse, our
Chairman, J. Edward McEntire, our Chief Executive Officer, and David J. Workman,
our President and Chief Operating Officer, or other key employees could
jeopardize our ability to maintain our competitive position in the industry. We
do not currently have employment agreements with any of our executives or key
person life insurance for any of our officers or directors.
12
<PAGE>
Our success also depends to a large extent on our ability to recruit, train
and retain qualified personnel throughout our organization and in our stores and
distribution facilities. As is typical in our industry, from time to time we
have had difficulty recruiting sufficient qualified personnel.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WHICH COULD IMPAIR
OUR NAME AND REPUTATION
Ultimate Electronics-Registered Trademark-, Audio King-Registered
Trademark-, Fast Trak-Registered Trademark-, SoundTrack-Registered Trademark-
and Big Names. Little Prices. Guaranteed.-Registered Trademark- are federally
registered trademarks and service marks owned by Ultimate Electronics, Inc.,
Simple Solution-SM- and Ultimate Electronics Express-SM- are also service marks
owned by Ultimate Electronics, Inc. for which there are pending applications for
federal registration. The Ultimate SoundTrack is a registered trademark in the
State of Colorado and Audio King and Fast Trak are registered trademarks in the
State of Minnesota that are owned by Ultimate Electronics, Inc. We actively
protect our rights associated with our portfolio of marks to ensure that the
quality associated with them and the value of our proprietary rights are
maintained. Our marks, however, may not be effective to protect our intellectual
property rights, and infringement or invalidity claims may be asserted by third
parties in the future. Any such assertions, if proven to be true, could have a
material adverse effect on our operational results and financial condition.
OUR CHARTER, BYLAWS AND ANTI-TAKEOVER PROTECTIONS COULD DELAY OR PREVENT AN
ACQUISITION OR SALE OF ULTIMATE ELECTRONICS
Our corporate charter and bylaws, as well as certain provisions of the
Delaware General Corporation Law, contain provisions which may deter, discourage
or make more difficult a change in control, even if such a change in control
would be in the interest of a significant number of our stockholders or if such
change in control would provide such stockholders with a substantial premium for
their shares over then current market prices. In particular:
- our charter authorizes the board of directors to issue one or more classes
of preferred stock having such designations, rights and preferences as
they determine, which issuances may have a material adverse effect on the
rights of holders of common stock;
- our stockholders have no right to take action by written consent;
- our stockholders may not call special meetings of stockholders;
- our charter and bylaws provide for the staggered election of directors to
serve for three-year terms, subject to removal only for cause;
- our bylaws contain advance notice provisions for presentation of new
business and nominations of directors at meetings of stockholders; and
- our bylaws may be amended only by the board of directors or by a majority
vote of the shares represented and entitled to vote at an annual or a
special meeting of stockholders.
In addition, Section 203 of the Delaware General Corporation Law prohibits us
from engaging in a business combination with an interested stockholder for a
period of three years after such person becomes an interested stockholder,
unless various conditions are satisfied. See "Description of Capital Stock."
In addition, under the terms of Ultimate Electronics' Stockholder Rights
Plan, in general, if a person or group acquires more than 15% of the outstanding
shares of common stock (an "Acquiring Person"), all of or our other stockholders
would have the right to purchase securities from Ultimate Electronics at a
discount to such securities' fair market value, thus causing substantial
dilution to the holdings of the Acquiring Person. The Stockholder Rights Plan
may inhibit a change in control and, therefore, could materially adversely
affect the stockholders' ability to realize a premium over the then-prevailing
market price for the common stock in connection with such a transaction.
13
<PAGE>
OUR COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
TO STOCKHOLDERS
Our common stock trading price has been and is likely to continue to be
highly volatile and subject to wide fluctuations in response to a variety of
internal and external factors, some of which are beyond our control, including:
- actual or anticipated variations in our quarterly operating results;
- incurrence of unanticipated trade or contractual obligations, including
claims under indemnification obligations or contracts;
- announcement of new technologies or of new products or services;
- changes in financial estimates or changes in recommendations by securities
analysts;
- additions or departures of key personnel; and
- changes in economic performance and/or market valuations of other consumer
electronics retailers.
The stock market has experienced significant price and volume fluctuations
over the past several years that have often been unrelated or disproportionate
to the operating performance of particular companies. The trading prices of many
companies' stocks, including ours, have traded from time to time at or near
historical highs. These trading prices may not be sustained. Broad market
factors may have a material adverse effect on our stock price, regardless of our
actual operating performance.
14
<PAGE>
ITEM 2. PROPERTIES
As of January 31, 2000, the Company operates ten stores in Colorado, eight
stores in Minnesota, four stores in Utah, two stores in Las Vegas, Nevada, three
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 LATEST YEAR APPROXIMATE APPROXIMATE LEASE
ORIGINALLY REMODELED OR TOTAL RETAIL SELLING EXPIRATION
CURRENT STORE LOCATIONS OPENED RELOCATED SQUARE FEET SQUARE FEET DATE(1)
- ----------------------- ---------- ------------ ----------- -------------- ----------
<S> <C> <C> <C> <C> <C>
COLORADO:
6490 Wadsworth Blvd.
Arvada, CO 1968 1991(2) 14,500 9,500 2006
1955 28th Street
Boulder, CO 1985 1996 34,700 20,300 2047
1230 N. Academy Blvd.
Colorado Springs, CO 1989 N/A 14,900 9,800 2001
1370 S. Colorado Blvd.
Denver, CO 1976 1994 31,600 16,700 2009
9657 E. County Line Rd.
Englewood, CO 1983 1997 41,300 23,000 2027
4606 S. Mason St.
Fort Collins, CO 1990 (3) 16,600 8,400 2005
14391 W. Colfax Ave.
Lakewood, CO 1997 N/A 40,400 23,000 2028
8262 S. University Blvd.
Littleton, CO 1986 1998 16,600 9,900 2007
8196 W. Bowles Ave.
Littleton, CO 1984 1996 39,100 22,600 2027
321 W. 84th Ave.
Thornton, CO 1985 1996 40,300 25,900 N/A
IDAHO:
1085 N. Milwaukee Ave.
Boise, ID 1995 N/A 37,800(4) 19,500 2025
IOWA:
4701 1st Ave. Southeast
Cedar Rapids, IA 1995 1997 15,400 10,300 2035
4100 Merle Hay Rd.
Des Moines, IA 1994 1997 20,700(4) 12,200 2019
3800 E. 53rd Ave.
Davenport, IA 1999 N/A 38,000(4) 21,400 2029
CONTINUED ON PAGE 16
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
YEAR LATEST YEAR APPROXIMATE APPROXIMATE LEASE
ORIGINALLY REMODELED OR TOTAL RETAIL SELLING EXPIRATION
CURRENT STORE LOCATIONS OPENED RELOCATED SQUARE FEET SQUARE FEET DATE(1)
- ----------------------- ---------- ------------ ----------- -------------- ----------
<S> <C> <C> <C> <C> <C>
MINNESOTA:
5939 John Martin Dr.
Brooklyn Center, MN 1980 1997 15,000 9,200 2023
14232 Burnhaven Dr.
Burnsville, MN 1979 1999 17,300 10,100 2017
1868 Beam Ave.
Maplewood, MN 1989 (5) 9,300 5,600 1999
12350 Wayzata Blvd.
Minnetonka, MN 1977 1997 15,000 9,100 2023
103 Apache Mall
Rochester, MN 1986 N/A 3,900 2,700 2000
1723 W. County Rd. B-2
Roseville, MN 1977 1997 17,400 11,300 2035
7435 France Ave. South
Edina, MN 1974 1997 28,200 17,900 2025
2716 Division St.
St. Cloud, MN 1987 N/A 10,000 7,100 2011
NEVADA:
2555 E. Tropicana Ave.
Las Vegas, NV 1995 N/A 37,300(4) 17,900 2035
741 S. Rainbow Blvd.
Las Vegas, NV 1994 N/A 31,500 17,600 2024
NEW MEXICO:
3821 Menaul Blvd., N.E.
Albuquerque, NM 1994 N/A 37,100(4) 17,700 2014
OKLAHOMA:
10021 E. 71st St.
Tulsa, OK 1995 N/A 50,500(4) 30,400 2026
SOUTH DAKOTA:
3800 South Louise Ave.
Sioux Falls, SD 1999 N/A 22,200 14,400 2015
UTAH:
879 W. Hill Field Rd.
Layton, UT 1995 N/A 34,400 18,600 2025
6284 S. State St.
Murray, UT 1994 N/A 32,200 18,000 2024
1375 S. State St.
Orem, UT 1993 N/A 32,900 17,100 2010
1130 E. Brickyard Rd.
Salt Lake City, UT 1993 N/A 33,400 18,200 2013
</TABLE>
- ------------------------
(1) Including renewal options.
(2) The Company expects to relocate and expand this store in fiscal 2002.
16
<PAGE>
(3) The Company expects to expand this store in fiscal 2001.
(4) Includes regional service center.
(5) This store is expected to be relocated to a 35,600 square foot store in
Woodbury, MN in June 2000.
Construction of the Company's main warehouse, business office, service
center and store location in Thornton, Colorado, financed by the proceeds from
the sale of $13.0 million aggregate principal amount of 10.25% first mortgage
bonds, was completed in April 1996. The bonds were fully redeemed on March 31,
2000 with a portion of the proceeds of the October 1999 common stock offering.
The Thornton facility, in addition to the retail store noted in the table above,
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 that it
uses as a training center, office space and service center for the greater
Minneapolis/St. Paul area and warehouse space for its delivery department. The
Company leases an 8,500 square foot service center in Salt Lake City, Utah. The
Company has entered into leases of property in the Phoenix, AZ metropolitan area
and Colorado Springs, CO and has begun construction on these sites. These stores
are expected to open later in fiscal 2001. The Company will also relocate the
Maplewood, MN store to Woodbury, MN in fiscal 2001. Additionally, the Company
leases its store locations in Colorado Springs, Colorado and Fort Collins,
Colorado from an affiliated party. The Company is also in the process of
negotiating leases to relocate stores and is analyzing 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").
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
None.
PART II
Certain information required by Part II is incorporated by reference into
this Report from the Company's 2000 Annual Report to Stockholders (the "2000
Annual Report to Stockholders"), which report is attached hereto as Exhibit 13.
Only those sections of the 2000 Annual Report to Stockholders that specifically
address the items set forth herein are incorporated by reference.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The sections labeled "Stock Listing," "Price Per Share Information" and
"Dividend Policy" appearing on the inside back cover of the 2000 Annual Report
to Stockholders are incorporated herein by reference. As of April 27, 2000,
there were approximately 440 holders of record of the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
The section labeled "Selected Financial Data" appearing in the 2000 Annual
Report to Stockholders is incorporated herein by reference.
17
<PAGE>
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 in the 2000 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
OUTSTANDING DEBT OF THE COMPANY. As of January 31, 2000, the Company had
outstanding debt of approximately $11.7 million, 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 borrows under its $40 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 million revolving line of credit bear interest based on a blend of
LIBOR plus 2% and Norwest Bank's prime rate minus 0.375%. The Company had no
outstanding borrowings under this credit facility at January 31, 2000. The
Company has not hedged against interest rate changes.
The following discusses the Company's exposure to market risk related to
changes in interest rates and other general market risks. All of the Company's
investment decisions are supervised or managed by its executive committee. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors, including but not limited to, changes in interest rates and other
general market risks, and those set forth in "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" appearing elsewhere
in this Form 10-K. Also, see Note 1 to the consolidated financial statements set
forth herein for a further discussion of the Company's cash, cash equivalents,
and investments available for sale.
CASH AND CASH EQUIVALENTS. As of January 31, 2000, the Company had
$17.3 million in cash and cash equivalents, which was not restricted, and
consisted of: (i) approximately $9.4 million invested in overnight treasury
repurchase agreements with an average interest rate of approximately 5.0%; and
(ii) approximately $7.9 million in various non-interest bearing accounts.
Management considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. All cash and cash
equivalent investments are readily convertible to known amounts of cash, and so
near their maturity they present insignificant risk of changes in value because
of changes in interest rates. The Company does not expect any material loss with
respect to its cash and cash equivalents as a result of interest rate changes,
and the estimated fair value of its cash and cash equivalents approximates
original cost.
INVESTMENTS AVAILABLE FOR SALE. As of January 31, 2000, the Company had
investments available for sale, which had an original cost and fair market value
of approximately $12.0 million. The investments available for sale consist of
U.S. government treasury discount notes with an interest rate of 5.6%. The U.S.
government treasury discount notes matured on March 29, 2000. The Company's
investment portfolio is subject to interest rate risk and will fall in value if
interest rates increase. The Company does not expect any material loss with
respect to its investments available for sale as a result of interest rate
changes, and the estimated fair value of its investments available for sale
approximates original cost.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent auditors and financial statements included in the
Company's 2000 Annual Report to Stockholders are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE>
PART III
Certain information required by Part III is omitted from this Report. The
Company 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 in the Proxy Statement
is incorporated into Part III of this Report by reference. Only those
sections of the Proxy Statement that 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 from 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 from the
section labeled "Compensation of Directors" and "Executive Compensation"
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 from 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 from the
section labeled "Certain Relationships and Related Transactions" in the Proxy
Statement.
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 included in the
Company's 2000 Annual Report to Stockholders are incorporated by
reference into Item 8:
- Consolidated Statements of Income for the fiscal years ended
January 31, 2000, 1999 and 1998.
- Consolidated Balance Sheets at January 31, 2000 and 1999.
- Consolidated Statements of Stockholders' Equity for the fiscal years
ended January 31, 2000, 1999 and 1998.
- Consolidated Statements of Cash Flows for the fiscal years ended
January 31, 2000, 1999 and 1998.
- Notes to Consolidated Financial Statements.
2. FINANCIAL STATEMENT SCHEDULES: The following financial statement
schedule for the fiscal years ended January 31, 2000, 1999 and 1998 is
filed as part of this Form 10-K:
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION
- -------- -----------
<C> <S>
II Valuation and Qualifying Accounts
</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.
19
<PAGE>
3. EXHIBITS: The following exhibits are filed pursuant to Item 601 of
Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION OF EXHIBITS
- --------- -----------------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the
Company.(3)
3.2 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)
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION OF EXHIBITS
- --------- -----------------------
<C> <S>
10.22 Fourth Amendment to Credit Agreement between Ultimate
Electronics, Inc. and Norwest Bank Colorado, National
Association and Norwest Business Credit, Inc., dated
June 12, 1998.(11)
10.23 Fifth Amendment to Credit Agreement between Ultimate
Electronics, Inc. and Norwest Bank Colorado, National
Association and Norwest Business Credit, Inc., dated
June 30, 1998.(12)
10.24 Credit Agreement between Ultimate Electronics, Inc. and
Foothill Capital Corporation, dated September 30, 1998.(13)
10.25 First Amendment to Credit Agreement between Ultimate
Electronics, Inc. and Foothill Capital Corporation, dated
September 24, 1999.(14)
10.26 Second Amendment to Credit Agreement between Ultimate
Electronics, Inc. and Foothill Capital Corporation, dated
February 22, 2000.(1)
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 Company's 2000 Annual Report to Stockholders.(1)
23.1 Consent of Independent Auditors.(1)
27 Financial Data Schedule(1)
</TABLE>
(b) Reports on Form 8-K:
Report on Form 8-K dated November 9, 1999, reporting on Item 5 the exercise
by the underwriters in the Company's public offering of the over-allotment
option granted in connection with the offering.
- ------------------------
(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.
(11) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the period ended April 30, 1998.
(12) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the period ended July 31, 1998.
(13) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the period ended October 31, 1998.
(14) Incorporated by reference to Amendment No. 1 to the Registrant's
Registration Statement on Form S-3 (File No. 333-87341), filed with the
Commission on September 29, 1999.
21
<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, 2000.
<TABLE>
<S> <C> <C>
ULTIMATE ELECTRONICS, INC.
By: /s/ J. EDWARD MCENTIRE
-----------------------------------------
J. Edward McEntire
CHIEF EXECUTIVE OFFICER
</TABLE>
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.
<TABLE>
<S> <C> <C>
By: /s/ WILLIAM J. PEARSE Date: May 1, 2000
-----------------------------------------
William J. Pearse
CHAIRMAN OF THE BOARD AND A DIRECTOR
By: /s/ J. EDWARD MCENTIRE Date: May 1, 2000
-----------------------------------------
J. Edward McEntire
CHIEF EXECUTIVE OFFICER AND A DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)
By: /s/ DAVID J. WORKMAN Date: May 1, 2000
-----------------------------------------
David J. Workman
PRESIDENT, CHIEF OPERATING OFFICER AND A
DIRECTOR
By: /s/ ALAN E. KESSOCK Date: May 1, 2000
-----------------------------------------
Alan E. Kessock
SENIOR VICE PRESIDENT, CHIEF FINANCIAL
OFFICER, SECRETARY AND A DIRECTOR
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
By: /s/ ROBERT W. BEALE Date: May 1, 2000
-----------------------------------------
Robert W. Beale
DIRECTOR
By: /s/ RANDALL F. BELLOWS Date: May 1, 2000
-----------------------------------------
Randall F. Bellows
DIRECTOR
</TABLE>
ULTIMATE ELECTRONICS, INC.
22
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED BALANCE AT
BEGINNING TO COSTS AND DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) PERIOD
- ----------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Year ended January 31, 2000
Deducted from asset accounts:
Allowance for doubtful accounts.............. $ 310 $ 420 $ 284(1) $ 446
Reserve for cash and cooperative advertising
discounts.................................. 49 116 129(1) 36
Allowance for obsolete inventory............. 1,509 548 1,137(2) 920
------ ------ ------ ------
Total...................................... $1,868 $1,084 $1,550 $1,402
====== ====== ====== ======
Year ended January 31, 1999
Deducted from asset accounts:
Allowance for doubtful accounts.............. $ 260 $ 364 $ 314(1) $ 310
Reserve for cash and cooperative advertising
discounts.................................. 55 58 64(1) 49
Allowance for obsolete inventory............. 436 1,975 902(2) 1,509
------ ------ ------ ------
Total...................................... $ 751 $2,397 $1,280 $1,868
====== ====== ====== ======
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
====== ====== ====== ======
</TABLE>
- ------------------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Write-offs of obsolete inventory.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION OF EXHIBITS
- --------- -----------------------
<C> <S>
10.26 Second Amendment to Credit Agreement between Ultimate
Electronics, Inc. and Foothill Capital Corporation, dated
February 22, 2000.
13 Company's 2000 Annual Report to Stockholders.
23.1 Consent of Independent Auditors.
27 Financial Data Schedule.
</TABLE>
<PAGE>
SECOND AMENDMENT TO THE AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT
This Second Amendment To The Amended And Restated Loan And Security
Agreement (the "Amendment") is entered into as of the 22nd day of February, 2000
by and among ULTIMATE ELECTRONICS, INC., a Delaware corporation, ULTIMATE
AKQUISITION CORP., a Delaware corporation and FAST TRAK, INC., a Minnesota
corporation (collectively, "Borrower"), whose chief executive office is located
at 321 West 84th Avenue, Suite A, Thornton, Colorado 80221 and FOOTHILL CAPITAL
CORPORATION, a California corporation ("Foothill"), with a place of business
located at 11111 Santa Monica Boulevard, Suite 1500, Los Angeles, California
90025-3333, in light of the following facts:
FACTS
FACT ONE: Foothill and Borrower have previously entered into that certain
Amended And Restated Loan And Security Agreement, dated November 24, 1998 (the
"Agreement").
FACT TWO: Foothill and Borrower desire to amend the Agreement as provided
herein. Terms defined in the Agreement which are used herein shall have the same
meanings as set forth in the Agreement, unless otherwise specified.
NOW, THEREFORE, Foothill and Borrower hereby modify and amend the Agreement
as follows:
1. Section 2.8 of the Agreement is hereby amended in its entirety to read
as follows:
2.8 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. The receipt of any
Collections by Foothill (whether from transfers to Foothill by the depository
account banks or Concentration Account Banks or otherwise) immediately shall be
applied provisionally to reduce the Obligations outstanding under SECTION 2.1,
but shall not be considered a payment on account unless such Collection item is
a wire transfer of immediately available federal funds and is made to the
Foothill Account or unless and until such Collection item is honored when
presented for payment. From and after February 1, 2000, Foothill shall be
entitled to charge Borrower for one-half Business Days of "clearance" or "float"
at the rate set forth in SECTION 2.4(a)(i) or SECTION 2.4(c)(i), as applicable,
on all Collections that are received by Foothill (regardless of whether
forwarded by the depository account banks to Foothill, whether provisionally
applied to reduce the Obligations under SECTION 2.1, or otherwise). This
across-the-board one-half Business Day clearance or float charge on all
Collections is acknowledged by the parties to constitute an integral aspect of
the pricing of Foothill's financing of Borrower, and shall apply irrespective of
the characterization of whether receipts are owned by Borrower or Foothill, and
whether or not there are any outstanding Advances, the effect of such clearance
or float charge being the equivalent of charging one-half Business Days of
interest on such Collections. Should any Collection item not be honored when
presented for payment, then Borrower shall be deemed not
<PAGE>
to have made such payment, and interest shall be recalculated accordingly.
Anything to the contrary contained herein notwithstanding, any Collection item
shall be deemed received by Foothill only if it is received into the Foothill
Account on a Business Day on or before 11:00 a.m. California time. If any
Collection item is received into the Foothill Account on a non-Business Day or
after 11:00 a.m. California time on a Business Day, it shall be deemed to have
been received by Foothill as of the opening of business on the immediately
following Business Day."
2. In the event of a conflict between the terms and provisions of this
Amendment and the terms and provisions of the Agreement, the terms and
provisions of this Amendment shall govern. In all other respects, the Agreement,
as supplemented, amended and modified, shall remain in full force and effect.
IN WITNESS WHEREOF, Borrower and Foothill have executed this Amendment as
of the day and year first written above.
FOOTHILL CAPITAL CORPORATION ULTIMATE ELECTRONICS, INC.
By /s/ Robert Castine By /s/ Alan E. Kessock
------------------------- -------------------------
Robert Castine Print Name: Alan E. Kessock
Its Vice President Its Senior Vice President
ULTIMATE AKQUISITION CORP.
By /s/ Alan E. Kessock
-------------------------
Print Name Alan E. Kessock
Its Senior Vice President
FAST TRAK, INC.
By /s/ Alan E. Kessock
-------------------------
Print Name Alan E. Kessock
Its Senior Vice President
<PAGE>
SELECTED FINANCIAL DATA (1)
(in thousands, except per share and operating data)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------
2000 1999 1998 1997 1996
CONSOLIDATED INCOME STATEMENT DATA (2): ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales $ 384,983 $ 328,907 $ 298,231 $ 254,491 $ 243,859
Cost of goods sold 269,496 233,413 217,726 187,028 179,190
----------- ----------- ----------- ----------- -----------
Gross profit 115,487 95,494 80,505 67,463 64,669
Selling, general and administrative expenses 99,922 88,104 77,599 63,953 58,180
----------- ----------- ----------- ----------- -----------
Income from operations 15,565 7,390 2,906 3,510 6,489
Interest expense, net 2,087 3,957 3,985 3,210 1,866
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes and cumulative effect of change
in accounting method 13,478 3,433 (1,079) 300 4,623
Income tax expense (benefit) 5,051 1,273 (405) 112 1,697
----------- ----------- ----------- ----------- -----------
Income (loss) before cumulative effect of change in
accounting method 8,427 2,160 (674) 188 2,926
Cumulative effect of change in accounting for preopening
expenses, net of taxes (3) - - - - (988)
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 8,427 $ 2,160 $ (674) $ 188 $ 1,938
=========== =========== =========== =========== ===========
Earnings per share before cumulative effect of change in
accounting method (3) $ - $ - $ - $ - $ .50
Earnings (loss) per share - Basic $ .95 $ .27 $ (.09) $ .03 $ .33
Earnings (loss) per share - Diluted $ .88 $ .26 $ (.09) $ .03 $ .33
Pro forma earnings per share (3) $ - $ - $ - $ - $ .50
Weighted average shares outstanding - Basic 8,858 8,150 7,626 6,995 5,861
Weighted average shares outstanding - Diluted 9,553 8,317 7,626 7,125 5,906
OPERATING DATA (1):
Number of stores open at end of period 31 30 30 18 18
Inventory turns (4) 5.2 4.9 4.7 4.6 5.0
Average sales per store open during
the entire period presented (5) $12,563,000 $10,372,000 $12,914,000 $13,582,000 $14,247,000
Retail sales per weighted average
square foot of selling space $ 851 $ 711 $ 742 $ 884 $ 1,149
Comparable store sales growth (6) 16% 2% (6%) (16%) (2%)
CONSOLIDATED BALANCE SHEET DATA (1):
Working capital $ 50,926 $ 25,205 $ 4,334 $ 26,959 $ 30,345
Total assets 160,029 122,304 125,483 104,854 101,652
Long-term debt (7) 11,718 26,518 13,642 31,165 31,996
Capital lease obligations (7) 1,760 1,841 2,049 1,007 1,295
Total stockholders' equity 88,872 43,530 41,325 39,130 38,942
</TABLE>
This table should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the Financial
Statements and Notes thereto.
(1) All selected financial data for fiscal years 1996 through 1999 have been
restated. Please refer to the Company's 8-K filing dated February 11,
2000.
(2) 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.
(3) 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.
(4) Calculated based upon the average of end-of-month inventory levels.
(5) Excludes direct sales from the Company's insurance
replacement/commercial division.
(6) 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.
(7) Less current portions.
<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 sales.
<TABLE>
<CAPTION>
PERCENTAGE OF SALES
FOR THE YEARS ENDED
JANUARY 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of goods sold 70.0 71.0 73.0
------- ------- --------
Gross profit 30.0 29.0 27.0
Selling, general and
administrative
expenses 26.0 26.7 26.0
------- ------- --------
Income from
operations 4.0 2.3 1.0
Interest expense, net 0.5 1.2 1.3
------- ------- --------
Income (loss) before
taxes 3.5 1.1 (0.3)
Income tax expense
(benefit) 1.3 0.4 (0.1)
------- ------- --------
Net income (loss) 2.2% 0.7% (0.2)%
======= ======= ========
</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, 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 Electronics' common stock
valued at $2.6 million, assumed debt of $7.2 million, and other expenses and
severance costs of $1.4 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 $2.7
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.
FISCAL 2000 COMPARED TO FISCAL 1999
For the year ended January 31, 2000, sales were $385.0 million, a 17% increase
from sales of $328.9 million for the prior year. Comparable store sales
increased 16% for the year ended January 31, 2000.
Gross profit in fiscal 2000 increased 21% to $115.5 million (30.0% of sales)
from $95.5 million (29.0% of sales) in fiscal 1999. The improvement in gross
profit was due primarily to the following:
- - increased sales of new digital technology products;
- - increased inventory turns to 5.2 compared to 4.9 in the prior year;
- - a 116% increase in DVD sales at slightly higher margins; and
- - increased sales of accessories and furniture.
Selling, general and administrative expenses in fiscal 2000 increased 13% to
$99.9 million (26.0% of sales) from $88.1 million (26.7% of sales) in fiscal
1999. The decrease in selling, general and administrative expenses as a
percentage of sales resulted primarily from leveraging fixed expenses against
the 16% comparable store sales growth.
As a result of the foregoing, income from operations more than doubled in fiscal
2000, increasing to $15.6 million (4.0% of sales) from $7.4 million (2.3% of
sales) in fiscal 1999.
Net interest expense for fiscal 2000 decreased to $2.1 million from $4.0 million
in fiscal 1999. This decrease was primarily due to lower average amounts
outstanding under the Company's revolving line of credit. The Company used a
portion of the proceeds from its secondary stock offering completed in
October 1999 (the "1999 Offering") to pay off $6.8 million then outstanding
under its line of credit on October 22, 1999. In addition, interest expense was
offset by $0.4 million of interest income on the Company's investment portfolio
acquired with proceeds from the 1999 Offering.
The Company's effective tax rate of 37.5% in fiscal 2000 increased slightly from
the 37.2% effective tax rate in fiscal 1999 primarily due to increased permanent
differences.
FISCAL 1999 COMPARED TO FISCAL 1998
For the year ended January 31, 1999, sales were $328.9 million, a 10% increase
from sales of $298.2 million for the prior year. The increase in sales during
fiscal 1999 was due primarily to the effect of having the Audio King stores for
a full year along with an increase in sales for comparable stores. Comparable
store sales increased 2% for the year ended January 31, 1999. As announced on
May 21, 1998, the Company significantly reduced its computer assortment.
Excluding the computer category, comparable store sales were up 7% for fiscal
1999.
Gross profit in fiscal 1999 increased 19% to $95.5 million (29.0% of sales) from
$80.5 million (27.0% of sales) in fiscal 1998. The improvement in gross profit
was due primarily to the impact of the reduced computer assortment along with an
increase in sales of higher margin products in the Company's core categories of
audio, video, television and mobile electronics.
Selling, general and administrative expenses in fiscal 1999 increased 14% to
$88.1 million (26.7% of sales) from $77.6 million (26.0% of sales) in fiscal
1998. The percentage increase in selling, general and administrative expenses
was due primarily to higher fixed store expenses as a percentage of sales as
well as slightly higher net advertising expenses.
<PAGE>
As a result of the foregoing, income from operations more than doubled in fiscal
1999, increasing to $7.4 million (2.3% of sales) from $2.9 million (1.0% of
sales) in fiscal 1998.
Interest expense was $4.0 million for both fiscal 1999 and 1998.
The Company's effective tax rate of 37.2% in fiscal 1999 was the same as the
prior year.
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 debt
and issuances of common stock. The Company's primary cash requirements are
related to expenditures for new store openings and the relocation and/or
remodeling of existing store locations. This includes preopening expenses and
additional inventory for new or relocated stores, as well as working capital to
support the Company's inventory requirements and selling, general and
administrative expenses. The Company currently operates a total of 31 stores in
nine states.
Net cash provided by operating activities was $14.9 million for fiscal 2000
compared to net cash provided by operations of $17.9 million for fiscal 1999.
The decrease in cash provided by operations over the past year was primarily the
result of higher accounts receivable and merchandise inventory balances in the
current year.
Net cash used in investing activities was $23.9 million for fiscal 2000 compared
to net cash used in investing activities of $1.6 million in fiscal 1999
primarily due to $12.0 million in investment portfolio purchases as well as
increased capital expenditures for a new store opening and relocation and
expansion of an existing store in the current year.
Net cash provided by financing activities totaled $21.9 million in fiscal 2000
compared to net cash used by financing activities of $13.9 million in fiscal
1999 due primarily to the proceeds received from the 1999 Offering.
Capital expenditures for fiscal 2000 were $11.9 million compared to capital
expenditures of $1.6 million for fiscal 1999. The Company expects capital
expenditures of approximately $20.0 million in fiscal 2001, primarily for new
store openings and store relocations and expansions.
The Company intends to expand into select metropolitan areas in the Rocky
Mountain, Midwest and Southwest regions with 30,000 to 36,000 square foot
stores. In certain smaller markets, the store size may be as small as 20,000
square feet. With the exception of the Thornton facility, all current stores are
leased. The Company opened its 31st store, a new 38,000 square foot store in
Davenport, Iowa on December 3, 1999. For fiscal 2001, the Company expects to
open five new stores, primarily in the Phoenix, Arizona area. The Company
currently anticipates opening two of the Phoenix stores late in the second
quarter of fiscal 2001 and two additional Phoenix stores early in the holiday
selling season of fiscal 2001. The Company expects to open eight to twelve
additional stores in fiscal 2002. Leases and/or contracts for two of these
stores have been signed.
The Company continues to analyze new store opportunities in existing markets to
replace or expand some of its smaller locations. In November 1999, the Company
expanded a Minneapolis, Minnesota store from 9,700 to 17,300 square feet. In
December 1999, the Company relocated and expanded its Sioux Falls, South Dakota
store from 3,200 to 22,200 square feet. In the second quarter of fiscal 2001,
the Company plans to relocate a 9,300 square foot store located in the
Minneapolis/St. Paul area to a 35,000 square foot store. The Company's Fort
Collins, Colorado store is also expected to be expanded from 16,600 to 22,000
square feet in fiscal 2001. The Company also expects to relocate and expand its
Arvada, Colorado store within the next 12 months and will be analyzing
opportunities in the Minneapolis/St. Paul area over the next few years to
relocate and/or expand a number of those locations.
The cost of these future stores is anticipated to average $3.0 million per
store. Leasehold improvements, fixtures and equipment are expected to average
$1.9 million, depending on tenant allowances. The inventory requirement for the
Company's new stores is expected to average approximately $1.5 million,
approximately $750,000 of which will be financed through trade credit.
Preopening expenses for new stores are expected to average $350,000, 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 are expected to average $150,000 and will be
higher if the Company is required to terminate existing store leases prior to
their maturity.
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 freestanding 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.
On September 30, 1998, the Company executed a three year $40 million credit
agreement, as amended, with Foothill Capital Corporation, a wholly owned
subsidiary of Norwest Bank. Borrowings under this revolving line of credit are
limited to the lesser of $40 million or 80% of eligible inventory and a portion
of accounts receivable. As of January 31, 2000, the entire facility was
available to the Company and no amounts were outstanding. Borrowings bear
interest, payable monthly, based on a blend of LIBOR plus 2% and Norwest Bank's
prime rate minus 0.375%. Inventories, accounts receivable, equipment and
intangibles secure the borrowings. The facility includes negative covenants that
limit the Company's ability to, without the bank's prior approval, and subject
to various exceptions, incur indebtedness, create liens, enter into mergers and
consolidations, pay dividends, repurchase the Company's capital stock, issue
guarantees,
<PAGE>
sell assets or engage in transactions with affiliates. The facility also
contains covenants requiring the Company to maintain specified levels of gross
margins, inventory, tangible net worth and capital expenditures. The Company was
in compliance with all borrowing covenants for all periods of fiscal 2000. In
October 1999, the Company used a portion of the proceeds from its common stock
offering to pay off all amounts then outstanding under this credit agreement,
which amounts may be reborrowed to finance the Company's growth.
On March 23, 1995, the Company completed the sale of $13,000,000 aggregate
principal amount of bonds payable (the "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 Bonds are redeemable by the Company
at any time at or 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.
The Company acquired $1,300,000 of the Bonds in the open market in a series of
transactions in fiscal 2000. The Bonds were acquired with proceeds from the
Company's October 1999 offering. At January 31, 2000, the Company recorded its
$13,000,000 Bonds net of the $1,300,000.
On March 31, 2000, the Company paid $13,111,000 to redeem its 10.25% Bonds in
full. The Bonds were redeemable by the Company at par at any time at or after
March 31, 2000. The Bonds were redeemed at a redemption price of 100% of the
principal amount and all accrued and unpaid interest as of such date, which
totaled $111,000. In addition, the Company will incur a $254,000 one-time charge
(net of tax) in the first quarter of fiscal 2001 to write-off the remaining
unamortized Bond offering costs. In connection with the Bond redemption, the
Company received $1,300,000 relating to its open market purchases of the Bonds.
The Company believes that its cash flows from operations and borrowings under
its credit facility will be sufficient to fund the Company's operations, debt
repayment and expansion through fiscal 2001. To fund the capital requirements
for its anticipated expansion plans beyond fiscal 2001, 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.
The Company may also re-mortgage its Thornton facility. 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). Due
to the importance of the holiday shopping season, any factors negatively
impacting the holiday selling season could have a material adverse impact on the
Company's financial condition and results of operations. Operating results are
dependent upon a number of factors, including discretionary consumer spending,
which is affected by local, regional and 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;
- - expenses related to relocation and expansion;
- - unexpected changes in volume-related rebates from manufacturers;
- - the success of new stores; and
- - the impact of new stores on existing stores
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 and
product availability.
IMPACT OF INFLATION
The Company believes, because of competition among manufacturers and the
technological changes in the consumer electronics industry, inflation has not
had a significant effect on results of operations during the last few years.
YEAR 2000 ISSUE
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company's
expenses in fiscal 2000 in connection with remediating its systems were
immaterial. The Company is not aware of any material problems resulting from
Year 2000 issues, either with its products, its internal systems, or the
products and services of third parties. The Company will continue to monitor its
mission critical computer applications and those of its suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133") "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at fair
value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in income unless
<PAGE>
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allow a derivative's gains and losses to offset related results on the
hedged item in the statement of operations, and requires a company to formally
document, designate, and assess effectiveness of transactions that receive hedge
accounting treatment. SFAS No. 133 is effective for the Company's fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect any changes or other financial reporting impacts to its consolidated
financial statements as a result of the adoption of SFAS No. 133.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT
Statements that 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 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 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.
<PAGE>
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
JANUARY 31,
-----------
2000 1999
-------- --------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 17,311 $ 4,421
Accounts receivable, net 20,420 17,814
Merchandise inventories 51,269 46,908
Investments available for sale 12,003 -
Deferred tax asset 658 400
Prepaid expenses and other 1,673 1,087
-------- --------
Total current assets 103,334 70,630
Property and equipment, at cost:
Furniture, fixtures & equipment 30,453 25,704
Leasehold improvements 25,728 21,920
Autos and trucks 432 454
Land and buildings 17,748 17,748
Construction-in-progress 2,870 18
-------- --------
77,231 65,844
Less accumulated depreciation 24,970 19,208
-------- --------
52,261 46,636
Property under capital leases, including related parties,
net 1,473 1,729
Goodwill, net 2,026 2,300
Other assets 935 1,009
-------- --------
Total assets $160,029 $122,304
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 27,626 $ 29,888
Accrued liabilities 21,322 12,532
Current portion of term loans 312 311
Current portion of capital lease obligations, including
related parties 82 208
Deferred revenue 3,066 2,486
-------- --------
Total current liabilities 52,408 45,425
Revolving line of credit - 13,188
Term loans, less current portion 18 330
Bonds payable 11,700 13,000
Capital lease obligations, including related parties, less
current portion 1,760 1,841
Deferred revenue, less current portion 5,111 4,146
Deferred tax liability 160 844
-------- --------
Total liabilities 18,749 33,349
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 - 15,000,000
Issued and outstanding shares, 10,705,318 and 8,160,796 at
January 31, 2000 and 1999 107 81
Additional paid-in capital 70,801 33,912
Retained earnings 17,964 9,537
-------- --------
Total stockholders' equity 88,872 43,530
-------- --------
Total liabilities and stockholders' equity $160,029 $122,304
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Sales $384,983 $328,907 $298,231
Cost of goods sold 269,496 233,413 217,726
-------- -------- --------
Gross profit 115,487 95,494 80,505
Selling, general and administrative expenses 99,922 88,104 77,599
-------- -------- --------
Income from operations 15,565 7,390 2,906
Interest expense, net 2,087 3,957 3,985
-------- -------- --------
Income (loss) before taxes 13,478 3,433 (1,079)
Income tax expense (benefit) 5,051 1,273 (405)
-------- -------- --------
Net income (loss) $ 8,427 $ 2,160 $ (674)
======== ======== ========
Earnings (loss) per share - Basic $ .95 $ .27 $ (.09)
Earnings (loss) per share - Diluted $ .88 $ .26 $ (.09)
Weighted average shares outstanding - Basic 8,858 8,150 7,626
Weighted average shares outstanding - Diluted 9,553 8,317 7,626
</TABLE>
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, 1997 6,995,000 $ 70 $31,009 $ 8,051 $39,130
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 loss (674) (674)
---------- ---- ------- ------- -------
BALANCES, JANUARY 31, 1998 8,139,548 81 33,868 7,377 41,326
Exercise of stock options 21,248 44 44
Net income 2,160 2,160
---------- ---- ------- ------- -------
BALANCES, JANUARY 31, 1999 8,160,796 81 33,912 9,537 43,530
Proceeds from issuance of common stock 2,337,500 24 35,964 35,988
Exercise of stock options 207,022 2 925 927
Net income 8,427 8,427
---------- ---- ------- ------- -------
BALANCES, JANUARY 31, 2000 10,705,318 $107 $70,801 $17,964 $88,872
========== ==== ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 8,427 $ 2,160 $ (674)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 6,835 6,390 5,550
Deferred taxes (942) 999 12
Changes in operating assets and liabilities:
Accounts receivable (2,606) 2,012 (4,705)
Merchandise inventories (4,361) (3,000) 6,178
Prepaid expenses and other current assets (586) 245 (328)
Other assets 74 (156) 1,104
Accounts payable, accrued and other liabilities 8,073 9,264 2,185
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,914 17,914 9,322
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (11,930) (1,564) (6,159)
Purchases of investments available for sale (12,003) - -
Acquisition of Audio King, net of cash acquired - - (3,857)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (23,933) (1,564) (10,016)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term revolving credit agreement 239,365 303,744 321,689
Repayments under long-term revolving credit agreement (252,553) (317,120) (319,532)
Proceeds from issuance of common stock 35,988 - -
Proceeds from exercise of stock options 927 44 298
Repurchase of long-term bonds payable (1,300) - -
Principal payments on term loans and capital lease
obligations (518) (603) (519)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 21,909 (13,935) 1,936
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 12,890 2,415 1,242
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,421 2,006 764
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,311 $ 4,421 $ 2,006
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 2,508 $ 4,144 $ 3,892
Income taxes 1,188 - -
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
ULTIMATE ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND
Ultimate Electronics, Inc. is a leading specialty retailer of home entertainment
and consumer electronics. As discussed further in Note 9, on June 27, 1997, the
Company, through its 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-one stores,
including ten stores in Colorado under the trade name SoundTrack, thirteen
stores in Idaho, Iowa, Nevada, New Mexico, Oklahoma, South Dakota and Utah under
the trade name Ultimate Electronics and eight stores in Minnesota 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.
INVESTMENTS - AVAILABLE FOR SALE
Investments available for sale consist of U.S. government treasury discount
notes reported at fair value. The historical cost of the U.S. government
treasury discount notes approximated fair value at January 31, 2000; therefore,
no unrealized gains/losses were reported as a separate component of
stockholders' equity. The U.S. government treasury discount notes matured on
March 29, 2000. There were no realized gains/losses on sales of investments
available for sale during the year ended January 31, 2000. Interest income from
investments available for sale for the year ended January 31, 2000 totaled
$116,000 and is included as component of net interest expense in the income
statement.
INVENTORIES
The Company states merchandise inventories at the lower of cost (weighted
average cost) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions, improvements and
major renewals are capitalized. Maintenance, repairs and minor renewals are
expensed as incurred.
DEPRECIATION AND AMORTIZATION
Depreciation is provided principally using the straight-line method based upon
the following useful lives:
<TABLE>
<S> <C>
Furniture, fixtures and
equipment 5 - 7 years
Leasehold improvements 7 - 20 years
Autos and trucks 5 years
Property under capital leases 5 - 15 years
Buildings 30 years
</TABLE>
ACCRUED LIABILITIES (in thousands)
Accrued liabilities are comprised of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Compensation $ 7,051 $ 4,643
Sales taxes 1,870 1,694
Customer deposits 4,127 2,564
Income taxes 4,808 1,507
Other 3,466 2,124
------- -------
Total $21,322 $12,532
======= =======
</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 net 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 7% of the
amount financed by the customer.
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 $4,778,000, $6,021,000 and $5,476,000 for
the years ended January 31, 2000, 1999 and 1998, respectively.
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BARTER/EXCHANGE TRANSACTION
The Company entered into barter/exchange agreements with an unrelated party in
November 1998 and April 1999, whereby the Company agreed to transfer inventory
with a net carrying value of $729,000 and $950,000, respectively, in exchange
for $500,000 and $550,000, respectively, of advertising credits. The Company
accounted for the transactions in accordance with EITF Issue No. 99-17,
"Accounting for Advertising Barter Transactions." The Company has $805,000 and
$500,000 in prepaid advertising credits recorded as current assets at
January 31, 2000 and 1999, respectively.
EARNINGS PER SHARE OF COMMON STOCK
The Company reports its earnings per share amounts in accordance with Statement
No. 128, Earnings per Share (SFAS 128). Basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share includes the dilutive effects of such equity instruments. The
calculation of weighted average shares outstanding - diluted for the fiscal
years ending January 31, 2000 and 1999 include 695,396 and 167,692 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, investments, accounts
receivable, note payable and other long-term debt, have fair values which
approximate their recorded values as the financial instruments are either short
term in nature or carry interest rates which approximate market rates except
bonds payable, which were trading at 99% of face value at January 31, 2000.
COMPREHENSIVE INCOME
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. The Company does not have any
components of comprehensive income as of January 31, 2000.
SEGMENT REPORTING
During 1997, the FASB issued Statement No. 131, "Disclosures about Segment
Reporting of an Enterprise and Related Information," which establishes standards
for the way 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.
The Company conducts business in one operating segment and determines its
operating segment based on the individual operations that the chief operating
decision maker reviews for purposes of assessing performance and making
operating decisions. These individual operations have been aggregated into one
segment because the Company believes doing so helps users understand the
Company's performance and assess its prospects. The combined operations have
similar economic characteristics and each operation has similar products,
services, customers and distribution methods.
NEW ACCOUNTING STANDARDS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ("SFAS No. 133") "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at fair
value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in income unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allow a derivative's gains and
losses to offset related results on the hedged item in the statement of
operations, and requires a company to formally document, designate, and assess
effectiveness of transactions that receive hedge accounting treatment. SFAS No.
133 is effective for the Company's fiscal quarters of fiscal years beginning
after June 15, 2000. The Company does not expect any changes or other financial
reporting impacts in its consolidated financial statements as a result of the
adoption of SFAS No. 133.
2. CHANGE IN ACCOUNTING FOR EXTENDED WARRANTY CONTRACTS
The Company sells extended warranty contracts (obligor contracts) on behalf of a
fully insured unrelated third 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. The extended warranty
contracts are administered by another third party (the Administrator) and
generally all performance obligations and risk of loss with respect to such
contracts are economically transferred to Administrator and other parties at the
time the contracts are sold.
Effective as of the beginning of its fiscal quarter ending January 31, 2000, the
Company changed its accounting with respect to the recognition of revenues from
the sale of obligor contracts as a result of a November 1999 clarification made
by the Securities and Exchange Commission related to the interpretation of FASB
Technical Bulletin No. 90-1, "Accounting for Separately Priced Extended Warranty
and Product Maintenance Contracts." The Company now recognizes revenues, net of
direct selling expenses, over the term of the obligor contract. Previously, the
Company recognized all extended warranty contract revenues on a gross basis at
the time of sale. The Company has given retroactive effect to this change by
restatement of its previously published financial statements beginning with
fiscal 1996. The impact of the restatement on the consolidated income statements
for
<PAGE>
2. CHANGE IN ACCOUNTING FOR EXTENDED WARRANTY CONTRACTS (CONTINUED)
the fiscal years ended January 31, 1999 and 1998, respectively, is as follows
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------
JANUARY 31, 1999 JANUARY 31, 1998
--------------------- ---------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Sales $337,454 $328,907 $306,306 $298,231
Cost of goods sold 239,854 233,413 223,464 217,726
Selling, general and
administrative
expenses 89,010 88,104 78,621 77,599
Income tax expense
(benefit) 1,723 1,273 88 (405)
Net income (loss) 2,910 2,160 148 (674)
Earnings (loss) per
share - Basic 0.36 0.27 0.02 (0.09)
Earnings (loss) per
share - Diluted 0.35 0.26 0.02 (0.09)
</TABLE>
In addition, the impact of the restatement also resulted in changes to the
consolidated balance sheet as of January 31, 1999, the consolidated statements
of stockholders' equity as of January 31, 1999, 1998 and 1997, the consolidated
statements of cash flows for the fiscal years ended January 31, 1999, 1998 and
1997, and certain footnotes to the consolidated financial statements.
Effective February 1, 2000, the Company restructured its extended warranty
master contract with the Administrator such that the extended warranty contracts
sold after February 1, 2000 will generally qualify as non-obligor contracts. The
Company will recognize revenues from the sale of non-obligor contracts, net of
direct selling expenses, at the time of sale to the customer.
3. PUBLIC STOCK OFFERINGS
On October 15, 1993, the Company completed an initial public 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 $17.8 million, net of all offering costs.
On November 1, 1995, the Company completed a second public offering for the sale
of 1,495,000 shares of common stock (including underwriters overallotment of
195,000 shares) at the offering price of $9.00 per share. The Company received
proceeds from the offering of $12.5 million, net of all offering costs.
On October 22, 1999, the Company completed a public offering for the sale of
2,000,000 shares of its common stock at the offering price of $16.50 per share.
The Company received proceeds of $30.7 million, net of all offering costs. On
November 9, 1999, the underwriters exercised their overallotment option related
to this offering. As a result, the Company issued an additional 337,500 shares
of its common stock at a price of $16.50 per share. The Company received
proceeds from the sale of these shares of $5.3 million, net of all offering
costs. The shares issued on exercise of the overallotment option brought the
total shares issued in the offering to 2,337,500 and the total proceeds received
by the Company to $36.0 million, net of all offering costs.
4. REVOLVING LINE OF CREDIT AGREEMENT AND TERM LOANS
On September 30, 1998, the Company executed a three year $40 million credit
agreement, as amended, with Foothill Capital Corporation, a wholly owned
subsidiary of Norwest Bank. Borrowings under this revolving line of credit are
limited to the lesser of $40 million or 80% of eligible inventory and a portion
of accounts receivable. As of January 31, 2000, the entire facility was
available to the Company and no amounts were outstanding. Borrowings bear
interest, payable monthly, based on a blend of LIBOR plus 2% and Norwest Bank's
prime rate minus 0.375%. Inventories, accounts receivable, equipment and
intangibles secure the borrowings. The facility includes negative covenants that
limit the Company's ability to, without the bank's prior approval, and subject
to various exceptions, incur indebtedness, create liens, enter into mergers and
consolidations, pay dividends, repurchase the Company's capital stock, issue
guarantees, sell assets or engage in transactions with affiliates. The facility
also contains covenants requiring the Company to maintain specified levels of
gross margins, inventory, tangible net worth and capital expenditures. The
Company was in compliance with all borrowing covenants for all periods of fiscal
year 2000. On October 22, 1999, the Company used a portion of the proceeds from
the 1999 Offering to pay off all amounts then outstanding under this credit
agreement, which amounts may be reborrowed to finance the Company's growth.
The Company has four Commercial Promissory Notes and Security Agreements with
Colorado National Leasing, Inc. Borrowings under the loans totaled $330,000 at
January 31, 2000, and $642,000 at January 31, 1999. 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, 2000, the aggregate maturities of the
term loans are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
- --------------------------------
<S> <C>
2001 $312,000
2002 18,000
--------
$330,000
========
</TABLE>
5. BONDS PAYABLE
On March 23, 1995, the Company completed the sale of $13,000,000 aggregate
principal amount of bonds payable (the "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 Bonds are redeemable by the Company
at any time at or 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.
The Company acquired $1,300,000 of the Bonds in the open market in a series of
transactions in fiscal 2000. The Bonds were acquired with proceeds from the
Company's October 1999 offering. At January 31, 2000, the Company recorded its
$13,000,000 Bonds net of the $1,300,000.
<PAGE>
5. BONDS PAYABLE (CONTINUED)
On March 31, 2000, the Company paid $13,111,000 to redeem its 10.25% Bonds in
full. The Bonds were redeemable by the Company at par at any time at or after
March 31, 2000. The Bonds were redeemed at a redemption price of 100% of the
principal amount and all accrued and unpaid interest as of such date, which
totaled $111,000. In addition, the Company will incur a $254,000 one-time charge
(net of tax) in the fiscal quarter of fiscal 2001 to write-off the remaining
unamortized Bond offering costs. In connection with the Bond redemption, the
Company received $1,300,000 relating to its open market purchases of the Bonds.
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 authorized
the issuance of 900,000 shares of common stock. Under the terms of the
non-employee directors' stock option plan (the "Directors' Plan"), the Company
granted awards of stock options to non-employee directors. The Directors' Plan
authorized the issuance of 20,000 shares of common stock.
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 "1997
Plan"). The 1997 Plan replaced both the Plan and the Directors' Plan. Grants
issued under the Plan and the Directors' Plan continue to be exercisable
according to their original terms but no additional grants can be made under
those plans. The 1997 Plan authorized the issuance of 750,000 shares to be
awarded to employees, non-employee directors and/or outside consultants. Each
non-employee director receives options to purchase 4,000 shares of common stock
effective February 1 of each year, which options are exercisable one year from
the date of grant. The Board of Directors continues to determine the persons to
whom employee awards are granted, the types of awards 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 2000, 104,000 options were
granted under the 1997 Plan. The options were granted at prices from $9.625 to
$19.3125. The options available for grant at January 31, 2000 include only the
options available under the 1997 Plan.
Changes in the options outstanding (and option exercise prices for such options)
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Options outstanding at
Beginning of year 948,517 833,984 420,850
Granted ($1.07 to
$19.3125) 104,000 139,700 572,450
Canceled ($1.07 to
$12.875) 7,700 3,919 1,200
Exercised ($1.07 to
$5.50) 207,020 21,248 158,116
------- ------- -------
Options outstanding at
end of year 837,797 948,517 833,984
======= ======= =======
Options exercisable at
end of year 399,307 390,384 237,370
======= ======= =======
Options available for
grant at end of year 32,250 127,850 267,550
======= ======= =======
</TABLE>
The weighted average exercise price of options outstanding at January 31, 2000,
1999 and 1998 was $5.09, $3.48, and $3.09, respectively. The weighted average
contractual life of the options outstanding at January 31, 2000, 1999 and 1998
was 7.0, 7.2 and 6.5 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 ranging from 5.25% to 6.13%; a dividend
yield of 0%; volatility factors of the market price of the Company's common
stock for fiscal years 2000, 1999 and 1998, respectively, of .804, .842 and
.609, and a weighted average expected life of the options of five years. The
weighted average fair value of stock options granted during January 31, 2000,
1999 and 1998 was $8.48, $3.47 and $1.85, respectively.
<PAGE>
6. STOCK OPTION AND STOCKHOLDER RIGHTS PLANS (CONTINUED)
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,
-------------------------------------
2000 1999 1998
---------- ---------- -----------
<S> <C> <C> <C>
Pro forma net income
(loss) $7,932,000 $1,438,000 $(1,067,000)
Pro forma earnings
(loss) per share -
Basic $ 0.90 $ 0.18 $ (0.14)
Diluted $ 0.83 $ 0.17 $ (0.14)
</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.
STOCKHOLDER RIGHTS PLAN
On January 31, 1995 the Company declared to stockholders of record at the close
of business on February 10, 1995 a dividend of one right to purchase preferred
stock (a "Right") for each outstanding share of common stock. Each share of
subsequently issued common stock also incorporates one Right. The Rights will
expire on February 10, 2005. Each Right entitles 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 are 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 is generally 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 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 non-cash 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 will represent 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.
<PAGE>
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, 2000, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- --------- --------
<S> <C> <C> <C>
JANUARY 31, 2000
Federal $5,492 $(855) $4,637
State 501 (87) 414
------ ----- ------
Total $5,993 $(942) $5,051
====== ===== ======
JANUARY 31, 1999
Federal $ 236 $ 878 $1,114
State 38 121 159
------ ----- ------
Total $ 274 $ 999 $1,273
====== ===== ======
JANUARY 31, 1998
Federal $ (366) $ 11 $ (355)
State (51) 1 (50)
------ ----- ------
Total $ (417) $ 12 $ (405)
====== ===== ======
</TABLE>
The following is a reconciliation of the provision (benefit) for income taxes to
the federal statutory rate for the years ended January 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Income taxes at the
federal statutory rate $4,583 $1,167 $ (367)
State income taxes,
net of federal benefit 468 106 (36)
Other - - (2)
------ ------ ------
Provision (benefit) for income
taxes $5,051 $1,273 $ (405)
====== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to a significant portion
of the deferred tax assets and liabilities at January 31, 2000 and 1999 are as
follows:
<TABLE>
<CAPTION>
JANUARY 31,
-----------
2000 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Deferred warranties $3,027 $2,460
Inventories 2,126 430
Accrued liabilities 582 440
Valuation reserves 506 670
Uniform capitalization 295 300
Capital leases 137 116
------ ------
6,673 4,416
Deferred tax liabilities:
Inventories (3,986) (2,360)
Depreciation and amortization (2,189) (2,500)
------ ------
(6,175) (4,860)
------ ------
Net deferred tax asset (liability) $ 498 $ (444)
====== ======
</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 $7,521,000, $7,226,000 and $6,132,000 for the years
ended January 31, 2000, 1999 and 1998, respectively.
CAPITAL LEASES, INCLUDING RELATED PARTY LEASES
(IN THOUSANDS)
The following property is held under capital leases:
<TABLE>
<CAPTION>
JANUARY 31,
-----------
2000 1999
-------- --------
<S> <C> <C>
Buildings and improvements $2,877 $2,877
Computer equipment 711 711
------ ------
3,588 3,588
Less accumulated depreciation 2,115 1,859
------ ------
$1,473 $1,729
====== ======
</TABLE>
The Company leases two retail stores with two principal stockholders of the
Company. The lease agreements for the two retail stores provided for annual rent
increases over the initial noncancelable lease terms. One of these stores, whose
lease term expired in fiscal 2000, has been renewed for two years. Total rental
payments to related parties under the leases were $265,000, $261,000 and
$257,000 for the years ended January 31, 2000, 1999 and 1998, respectively.
<PAGE>
8. LEASES (CONTINUED)
The aggregate minimum annual rental commitments as of January 31, 2000 are as
follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
FISCAL YEAR ENDED JANUARY 31, ---------- --------
<S> <C> <C>
2001 $ 9,204 $ 333
2002 9,696 347
2003 9,409 352
2004 9,498 356
2005 9,290 361
2006 - 2017 83,050 2,262
-------- --------
Total minimum lease payments $130,147 4,011
========
Less amount representing interest 2,169
Present value of net minimum lease
payments 1,842
Less portion due within one year 82
--------
Long term capital lease obligations $ 1,760
========
</TABLE>
9. CONSTRUCTION AND PURCHASE COMMITMENTS
The Company had purchase commitments and construction commitments of $1.7
million and $1.5 million, respectively, as of January 31, 2000 relating to new
store locations.
10. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Savings Plan for the benefit of substantially all
employees. The 401(k) Plan provides for both employee and employer
contributions. The Company matches 25% of the employee's contribution limited to
1.5% of the employee's annual compensation subject to limitations set annually
by the Internal Revenue Service. The Company's contributions were $275,000,
$274,000 and $268,000 for the years ended January 31, 2000, 1999 and 1998,
respectively.
11. MERGER
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, 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 Electronics' common stock
valued at $2.6 million, assumed debt of $7.2 million, and other expenses and
severance costs of $1.4 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 $2.7
million, which is being amortized over a 10 year life. Amortization expense for
fiscal years 2000, 1999 and 1998 was $276,000, $268,000 and $142,000,
respectively. Total accumulated amortization was $686,000 at January 31, 2000.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
---------- --------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
FISCAL 2000
Sales $ 78,398 $ 83,965 $ 91,899 $130,721
Gross profit 23,186 25,960 27,895 38,446
Income from operations 1,199 2,499 3,451 8,416
Net income 320 1,134 1,802 5,171
Earnings per share - Basic .04 .14 .21 .49
Earnings per share - Diluted .04 .13 .20 .46
FISCAL 1999
Sales $ 69,155 $ 69,605 $ 77,526 $112,621
Gross profit 17,899 21,647 24,001 31,947
Income (loss) from operations (2,649) 1,075 2,720 6,244
Net income (loss) (2,343) (38) 1,105 3,436
Earnings (loss) per share - Basic (.29) (.00) .14 .42
Earnings (loss) per share - Diluted (.29) (.00) .14 .40
</TABLE>
13. SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to January 31, 2000, the Company entered into several lease
agreements for retail store locations with aggregate minimum rental commitments
of $28.2 million covering the periods of fiscal 2001 to fiscal 2015. The Company
expects to classify each of these lease agreements as operating leases.
<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 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, 2000 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, 2000, 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
Senior Vice President - Finance and Administration, Chief Financial Officer and
Corporate Secretary
March 8, 2000
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, 2000 and
1999, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended January 31, 2000.
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 auditing standards generally accepted
in the United States. 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. at January 31, 2000 and 1999, and the results of its
consolidated operations and its consolidated cash flows for each of the
three years in the period ended January 31, 2000 in conformity with accounting
principles generally accepted in the United States.
The consolidated financial statements for each of the two years in the period
ended January 31, 1999 have been restated as described in Note 2.
/s/ Ernst & Young LLP
Denver, Colorado
March 8, 2000,
except Note 5, as to which
the date is March 31, 2000
<PAGE>
STORE LOCATIONS
<TABLE>
<S> <C> <C>
COLORADO
Arvada Davenport * NEVADA
6490 Wadsworth Blvd. 3800 E. 53rd Ave. Las Vegas
303-425-6700 319-359-4100 741 S. Rainbow Blvd.
702-258-8800
Boulder Des Moines * Las Vegas *
1955 28th Street 4100 Merle Hay Rd. 2555 E. Tropicana Ave.
303-442-3600 515-253-9200 702-456-8800
Colorado Springs * MINNESOTA NEW MEXICO
1230 North Academy Brooklyn Center Albuquerque *
719-591-1400 5939 John Martin Drive 3821 Menaul Blvd. NE
612-566-2360 505-884-3005
Denver Burnsville OKLAHOMA
1370 S. Colorado Blvd. 14232 Burnhaven Drive Tulsa *
303-759-5401 612-435-8933 10021 East 71st Street S.
918-250-3664
Englewood Edina SOUTH DAKOTA
9657 E. County Line Rd 7435 France Ave South Sioux Falls *
303-754-0450 612-830-0010 3800 S. Louise Ave.
605-361-0321
Fort Collins Maplewood UTAH
4606 S. Mason Street 1868 Beam Ave Layton
970-223-3666 651-770-0108 879 West Hillfield Rd.
801-543-3313
Highlands Ranch AS OF JUNE 2, 2000 THE MAPLEWOOD Murray
8262 S. University Ave. STORE WILL RELOCATE TO: 6284 South State Street
303-779-5003 8401 TAMARACK RD. 801-281-4259
WOODBURY, MN
Lakewood Minnetonka Orem
14391 W. Colfax Ave. 12350 Wayzata Blvd. 1375 South State Street
303-277-9299 612-546-4040 801-225-2211
Littleton Rochester Salt Lake City
8196 W. Bowles Ave. 103 Apache Mall 1130 E. Brickyard Rd.
303-979-8900 507-288-1563 801-466-7766
Thornton * Roseville UTAH REPAIR CENTER *
321 W. 84th Ave. 1723 West County Rd. B-2 45 West Senior Way
303-657-5880 651-636-3686 South Salt Lake City
801-463-1011
IDAHO St. Cloud
Boise * 2716 Division Street
1085 N. Milwaukee Ave. 320-253-5099
208-377-2780
IOWA FAST TRAK SERVICE *
Cedar Rapids * 3501 South Highway 100
4701 First Ave. SE St. Louis Park
319-393-7900 612-920-2900
</TABLE>
* Locations with repair services.
Ultimate Electronics-Registered Trademark-, SoundTrack-SM-,
Audio King-Registered Trademark-, Fast Trak-Registered Trademark- and
Simple Solution-TM- are service marks of the Company.
<PAGE>
STOCKHOLDER INFORMATION
STOCK LISTING
The common stock of Ultimate Electronics, Inc. is listed on The Nasdaq
Stock Market under the symbol ULTE.
PRICE PER SHARE INFORMATION
The high and low closing prices for the past two years were as follows.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
Quarter ended April 30, 1998 4 1/4 2 7/8
Quarter ended July 31, 1998 4 3/8 2 13/16
Quarter ended October 31, 1998 4 1/4 2 1/4
Quarter ended January 31, 1999 9 3/8 2 7/16
Quarter ended April 30, 1999 14 8 3/16
Quarter ended July 31, 1999 20 1/8 12 15/16
Quarter ended October 31, 1999 21 3/4 14
Quarter ended January 31, 2000 26 1/4 16 1/2
</TABLE>
DIVIDEND POLICY
The Company has paid no dividends on its common stock since its initial
public offering on October 15, 1993 and currently has no plans to pay
dividends.
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A.
161 North Concord Exchange
South St. Paul, Minnesota 55075
800-468-9716
AUDITORS
Ernst & Young LLP
370 17th Street, Suite 4300
Denver, Colorado 80202
GENERAL COUNSEL
Davis, Graham & Stubbs LLP
370 17th Street, Suite 4700
Denver, Colorado 80202
ANNUAL MEETING
The annual meeting of Stockholders is scheduled for June 22, 2000 at 8:30
a.m. at the Company's corporate office, 321 West 84th Ave., Suite A, Thornton,
Colorado 80260.
FORM 10-K
Copies of the Company's Annual Report on Form 10-K for the year ended January
31, 2000 may be obtained free of charge by writing to Ultimate Electronics,
Inc., Stockholders Relations, 321 West 84th Avenue, Suite A, Thornton,
Colorado 80260, 303-412-2500.
OFFICERS
William J. Pearse
CHAIRMAN OF THE BOARD
J. Edward McEntire
CHIEF EXECUTIVE OFFICER
David J. Workman
PRESIDENT AND
CHIEF OPERATING OFFICER
Neal A. Bobrick
SENIOR VICE PRESIDENT *
SALES AND STORE OPERATIONS
Alan E. Kessock
SENIOR VICE PRESIDENT -
FINANCE AND ADMINISTRATION
AND CHIEF FINANCIAL OFFICER
DIRECTORS
William J. Pearse
DIRECTOR AND CHAIRMAN
OF THE BOARD OF THE COMPANY
J. Edward McEntire
DIRECTOR AND CHIEF EXECUTIVE
OFFICER OF THE COMPANY
David J. Workman
DIRECTOR, PRESIDENT AND
CHIEF OPERATING OFFICER
OF THE COMPANY
Alan E. Kessock
DIRECTOR, SENIOR VICE PRESIDENT -
FINANCE AND ADMINISTRATION
AND CHIEF FINANCIAL OFFICER
OF THE COMPANY
Robert W. Beale
DIRECTOR OF THE COMPANY
CHIEF EXECUTIVE OFFICER OF
BEALE INTERNATIONAL, A
MANAGEMENT CONSULTING FIRM
Randall F. Bellows
DIRECTOR OF THE COMPANY
CO-FOUNDER OF COBE LABORATORIES,
NOW RETIRED
VISIT OUR WEB-SITE AT www.ultimateelectronics.com
<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 8, 2000, except
for Note 5, as to which the date is March 31, 2000, included in the 2000
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 8, 2000, except for Note 5, as to which the date is March
31, 2000, 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, 2000.
/s/ Ernst & Young LLP
Denver, Colorado
May 1, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 17,311
<SECURITIES> 0
<RECEIVABLES> 20,866
<ALLOWANCES> 446
<INVENTORY> 51,269
<CURRENT-ASSETS> 103,334
<PP&E> 77,231
<DEPRECIATION> 24,970
<TOTAL-ASSETS> 160,029
<CURRENT-LIABILITIES> 52,408
<BONDS> 11,718
0
0
<COMMON> 107
<OTHER-SE> 88,765
<TOTAL-LIABILITY-AND-EQUITY> 88,872
<SALES> 384,983
<TOTAL-REVENUES> 384,983
<CGS> 269,496
<TOTAL-COSTS> 269,496
<OTHER-EXPENSES> 99,922
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,087
<INCOME-PRETAX> 13,478
<INCOME-TAX> 5,051
<INCOME-CONTINUING> 13,478
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,427
<EPS-BASIC> 0.95
<EPS-DILUTED> 0.88
</TABLE>
