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Ultimate Is Facing Chapter 11 Bankruptcy

12/20/2004 02:00:00 AM Eastern

Weakening fourth-quarter sales, pending loan defaults and a demand by lenders for “significant” additional reserves may force Ultimate Electronics to seek bankruptcy protection under Chapter 11 before February.

In its third-quarter 10-Q — which was delayed after lenders raised their reserve requirements — Ultimate said it will likely have insufficient liquidity to fund operations beyond Jan. 31, if not sooner, raising “substantial doubt about its ability to continue as a going concern.”

The A/V specialty chain is currently holding discussions with “numerous parties” as it considers options such as renegotiating leases, closing stores, entering into strategic alliances or business combinations, and selling off assets.

Lenders informed Ultimate on Dec. 10 that, effective immediately, they required additional reserves against availability of funds under a revolving credit facility, and would further increase their reserve demands through Jan. 31, 2005. Last summer the retailer raised its credit facility from $80 million to $100 million and assumed a $13 million term loan for additional liquidity after vendors reduced their credit lines or shortened payment terms.

Since Dec. 10, virtually all of Ultimate's major vendors eliminated credit lines and are requiring advanced payment, with some reportedly diverting holiday shipments to other area dealers.

Despite an uptick in Thanksgiving weekend sales, Ultimate said fourth-quarter revenue has been weak to date, which it anticipates will trigger a violation of one or more of its credit facility covenants. The company said it intends to seek a waiver from its lenders, without which it will default on the facility and the entire $81.3 million balance will become immediately due.

News of its Ultimate's situation sent CE retail stocks skidding on Dec. 13, with shares of Tweeter down nearly 16 percent, Best Buy down 1.2 percent and Ultimate down 55 percent at the market's close, although its shares rebounded 22 percent the following day.

The chain's troubles can be traced back four years, as a strategy of aggressive expansion saw the Rocky Mountain retailer extend its franchise into such new markets as St. Louis; Las Vegas; Oklahoma City; Kansas City, Mo.; Phoenix; and Dallas-Ft. Worth. As the company more than doubled its store count to 65 units in 14 states, it became hamstrung by a strained talent pool and infrastructure, a disruptive MIS changeover, unfavorable lease terms, a soft economy, and increased competition as Best Buy and Wal-Mart traded up their mix to better CE goods.

Ironically, Ultimate reported improving third-quarter financials earlier this month and analysts generally lauded the retailer's turnaround efforts, which have included cost reductions, assortment changes, a new marketing mix and advances into the homebuilder channel. Over the quarter, Ultimate cut its loss from operations by nearly half, gross profit gained over 1.5 percentage points, and expenses as a percentage of sales fell to 38.3 percent from 39.4 percent a year ago.

During a conference call earlier this month, before its lenders tightened the screws, president/CEO Dave Workman said that Ultimate has “all the pieces in place for a successful holiday season,” and chief financial officer David Carter assured analysts that the company continued to maintain a “very good relationship” with its vendors. “They remain cautious but still supportive,” he said.

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