Ultimate Electronics filed for Chapter 11 bankruptcy protection Jan. 11 in a deal that gives Mark Wattles, founder/CEO of Hollywood Entertainment, control of the specialty A/V chain.
Under terms of the arrangement, which was filed last week in U.S. Bankruptcy Court for the District of Delaware, Wattles will gain 31.4 percent ownership in Ultimate and will contribute $5.6 million in debtor-in-possession financing. In addition, Wells Fargo Retail Finance, Ultimate's major lender, will provide up to $113 million in debtor-in-possession financing to keep the company operating while it restructures.
As a part of the transaction, William Pearse, founder and chairman of Ultimate Electronics, has resigned from the company, and all of its directors have resigned from the board. Wattles succeeded Pearse as the new chairman, and will be entitled to name a majority to the new board. David Workman continues as president/CEO, and David Carter remains chief operating officer.
“After weighing all available alternatives, we believe this is the best solution for Ultimate to remain a viable business going forward,” Workman said in a statement. “We welcome the significant retail experience and resources that Mr. Wattles brings to our current situation. We look forward to working with him as we position the company for future profitability.”
Wattles, whose other retail chain, Hollywood Video, is the object of a nearly $1 billion bidding war by rivals Movie Gallery and Blockbuster, put his Ultimate plans in play earlier this month by purchasing 1.5 million shares of its stock for $2 million, giving him a 10 percent stake in the company. Under terms of the agreement, he will acquire an additional 6.9 million shares for $4.4 million with an option to purchase another 1.9 million shares within two years from Pearse.
“As a retailer, I've always admired the Ultimate Electronics and Soundtrack chains,” Wattles said. “I'm excited to be a part of this company's future and am committed to seeing it return to the growth company it was.”
Ultimate said it expects to remain completely operational during the Chapter 11 reorganization. Manufacturers and suppliers will be paid under normal terms for goods and services provided during the restructuring, Workman assured vendors in an open letter, and all of its stores and e-commerce site are open for business. Ultimate has also requested permission from the Bankruptcy Court to continue to honor its customer service policies, including returns, exchanges, rebates, warranties, gift cards and extended finance programs, and to continue to pay employees and provide current benefits.
Ultimate's largest unsecured creditors include Monster Cable, which has $11 million in claims; Vertis, $3 million; Klipsch, $1.5 million; Denon, $1.4 million; Sharp, $1.3 million; and Yamaha, $1.2 million. Sony and Apple are also owed over $1 million each.
In an open letter to customers, Workman assured shoppers that the company is not going out of business, and that bankruptcy protection “enables us to continue to operate the business as usual while we make the necessary changes to ensure our long-term viability.”
“This was a difficult decision for us to make,” he wrote, “but we believe it is the right solution …We are a proud company with a rich history, and are committed to taking the difficult but necessary steps to ensure our future.”
The bankruptcy filing came one day after Ultimate reported disappointing sales for the holiday selling season. Total revenue fell 8 percent in November to $69.2 million, and 18 percent in December to $85.7 million, while same-store store sales slid 6 percent in November and 18 percent in December.
In a statement, the company reported that January results “continue to show an increasingly negative trend” as a result of strained inventory levels stemming from its “serious liquidity problems.”
The Chapter 11 filing caps a downward slide that 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. Analysts have also suggested that Ultimate's superstore-size footprint was unnecessarily large given its limited core assortment of upper mid-priced A/V products.
Ironically, Ultimate reported improving third-quarter financials last 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. Nevertheless, the cash-strapped retailer defaulted on its loans and had its credit cut off by vendors late last year, leading the way to bankruptcy protection.