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TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended January 31, 2002

or

For the transition period from                              to                             

Commission file number 0-22532

ULTIMATE ELECTRONICS, INC.
(Exact Name of Registrant as Specified in its Charter)

Registrant's telephone number, including area code: (303) 412-2500

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value Per Share

        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 ý    No o

        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. o

        The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $197,012,783 as of March 1, 2002

        The number of shares of Common Stock outstanding as of March 1, 2002 was 11,245,545.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's Definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the 2002 Annual Meeting of Stockholders are incorporated by reference in Part III of this Report on Form 10-K

TABLE OF CONTENTS

PART I

ITEM 1: BUSINESS

Overview

        Ultimate Electronics is a leading specialty retailer of consumer electronics and home entertainment products in the Rocky Mountain, Midwest and Southwest regions of the United States. We focus on mid- to high-end audio, video, television and mobile electronics products sold by a highly trained, knowledgeable, commissioned sales force. We offer over 4,000 stock keeping units (SKU's) at a wide range of price points representing approximately 150 brands, including a broad presentation of the most popular names and a large selection of limited-distribution, upscale brands and lines. We emphasize products with the latest technology by dedicating significant resources to their promotion, advertising, merchandising and related product training. We believe our commitment to technologically advanced products, combined with our highly trained sales force, allows us to capitalize on the growing demand for consumer electronics products, which is being driven by digital technologies.

        We showcase our consumer electronics products in an upscale, demonstration-oriented store format (generally between 30,000 and 34,000 square feet), which enables customers to sample and compare features and functions of the many products we offer. We also provide a complete menu of value-added services, including home installation by our own technicians. We believe our differentiating characteristics, together with our parity pricing strategy and satisfaction guarantees, often make us the preferred retailer for consumer electronics.

        We operate 46 stores in Arizona, Colorado, Idaho, Iowa, Minnesota, Missouri, Nevada, New Mexico, Oklahoma, South Dakota and Utah. We opened 10 stores in fiscal 2002 and plan to continue our store expansion program by opening 10 to 12 new stores during each of fiscal 2003 and 2004.

Business Strategy

        Our objective is to enhance our position as a leading specialty retailer of consumer electronics and home entertainment products. Key elements of this strategy include:

        Offering an Extensive Selection of Products at a Wide Range of Price Points, with the Focus on Mid- to High-End Audio and Video Products.    Our broad merchandise mix of widely distributed brands includes a significant variety of high-end SKU's that are not generally available at our major competitors. In addition, a significant portion of the approximately 150 brands that we offer are mid- to high-end names, such as Boston Acoustics, Denon, Krell, Martin Logan, Mitsubishi and Sony ES, and have limited distribution through select retailers. We believe that customers make better informed buying decisions when they are presented with a broad selection of competitively priced products and are educated at our stores about the features and benefits of the products. Through our Simple Solution program, we highlight our broad selection to our customers and simplify the purchase decision for them by offering complete system packages. In addition, our parity pricing strategy and satisfaction guarantees are designed to remove pricing and other concerns from the purchase decision and allow the customer and the sales staff to focus on product features, quality and our unique menu of services.

        Being a Leader in Offering the Best Selection of New Technology.    We are recognized by consumers and vendors as a leader in presenting the best selection of the latest technology. We devote significant resources to marketing and substantial floor space to displaying new technologies to achieve increased market share of the newest and most sought after consumer electronics products. For example, we sold the first HDTV for residential use in the United States in July 1998, and we are currently taking a leadership position in marketing and displaying LCD and plasma televisions. We believe that showcasing the latest technology differentiates us from less specialized competitors and stimulates the sales of other products and services. We provide our sales associates with specialized training so that

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they can present the advantages of new technology to our customers. We also frequently hold special events at our stores to introduce and promote new products.

        Training and Developing a Premier Sales and Installation Team.    We conduct an extensive ongoing training program designed to ensure that our sales associates are equipped with the most up-to-date sales techniques and product knowledge. We believe that the quality and knowledge of our sales associates and installation technicians is critical to our success and represents a significant competitive advantage. We also believe that our ongoing, specialized training creates a superior customer experience that stimulates sales of our products.

        Providing "Red Carpet" Customer Service.    We support our product sales by providing many important customer services, including home delivery and set-up, home theater and audio design and installation, home satellite installation, mobile electronics installation and regional service centers that offer in-home and carry-in repair services. We also provide in-store product instruction and, upon request, will provide follow-up instruction at a customer's home. In addition, we offer a 30-day money-back satisfaction guarantee on most products and an in-stock guarantee on advertised products.

        Providing an Upscale, Demonstration-Oriented Store Format.    We have developed an upscale, demonstration-oriented store format that showcases our merchandise and encourages customers to fully experience our products. We believe that this format assists our customers in understanding the benefits of upscale products and new technologies. Our stores have acoustically designed home audio and car stereo demonstration rooms, fully furnished home theater rooms and automobiles equipped with the latest in car stereo and car security products. Carpeted and hardwood floors, soft lighting and high quality merchandise fixtures further enhance the appeal of our stores.

Growth Strategy

        In addition to our business strategy that is focused on generating comparable store sales increases, we intend to grow our business by opening additional stores in existing markets, entering new markets that meet our criteria and relocating or expanding existing stores to enhance sales and profitability.

        Capturing Large Market Opportunity in Consumer Electronics.    We have identified a national opportunity of more than 250 potential sites in new and existing markets that meet our criteria for potential store development. We have a proven ability to open new stores in our existing markets as well as to successfully enter new markets with the simultaneous opening of multiple stores. We believe that we are well positioned to execute a disciplined growth strategy over the next several years. We also believe that we have the necessary distribution and management information systems, as well as management experience and depth, to support our targeted expansion plans. Our store development strategy is predicated on a detailed market analysis that includes a comparison of the demographics of our existing customers with the demographics of the target market and a review of competitors' positions in the market and economic data. Based on this market analysis, we believe that there are significant opportunities for new store growth both in new and existing markets.

        Opening Stores in New Markets.    During fiscal 2001 and 2002, we entered three new markets. During fiscal 2001 and 2002, we entered the Phoenix metropolitan area with eight stores. During fiscal 2002, we entered the Oklahoma City market with two stores and the St. Louis market with four stores. Stores in these markets have performed well and have further confirmed the portability of our concept outside of our historical core markets. We plan to open two additional stores in the St. Louis market during fiscal 2003. We also plan on expanding into the Dallas/Fort Worth market, with eight to 10 stores scheduled for opening in fiscal 2003. We intend to continue to expand into select metropolitan areas in the Midwest and Southwest regions.

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        Expanding Our Presence in Existing Markets.    We believe that there are opportunities to increase our presence in a number of our existing markets, either through opening new stores or through relocating or expanding existing stores. We periodically analyze the competitor, demographic and economic data in our existing markets in order to take advantage of additional growth opportunities. We intend to open or relocate new stores within existing markets in order to increase market share and leverage our advertising, distribution and other fixed expenses to create operating efficiencies. Since 1994, we have successfully relocated and expanded eight smaller stores to conform to the size and format of our current prototype. We anticipate relocating or expanding many of our 14 smaller stores in the future, particularly the older stores in the Minneapolis/St. Paul market.

Store Operations

        Stores.    We operate 46 stores, including 11 stores in Colorado under the trade name SoundTrack, 27 stores in Arizona, Idaho, Iowa, Missouri, 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. Of these 46 stores, 32 are large format stores and the balance are smaller stores.

        While our 32 larger stores vary in size from 30,000 to 52,000 square feet, our current prototype large format store generally ranges from 30,000 to 34,000 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 and extra space for deliverable products such as big screen televisions. These large format stores feature an extensive selection of over 4,000 SKU's with products in the following categories:

• conventional and projection televisions

• HDTVs and DTVs
• home theater systems
• direct broadcast satellite
• VCR
• DVD
• digital cameras

• camcorders
• video game hardware and software
• home audio
• portable audio
• car stereo
• blank media

• car security
• mobile video systems
• wireless communications
• home office/computer
• home theater furniture
• audio and video accessories
• home networking devices

        Our large format stores emphasize mid- to high-end products and feature multiple home audio and car demonstration rooms, multiple home theater settings, extensive portable electronics displays and an area displaying over 50 projection televisions. Each of these stores has displays designed to provide the customer with a full spectrum of our products upon entering the store, including the best selection of the latest technology such as LCD and plasma televisions. At these locations, we offer home installation of audio, video and satellite products, a customized car on our showroom floor to demonstrate our expertise in upscale car audio and installation and a separate demonstration area that features the latest in mobile video.

        Our 14 smaller stores average approximately 18,000 square feet, with approximately 60% to 65% of the square footage devoted to selling space. In certain smaller markets, we may open stores as small as 20,000 square feet. These stores generally contain the same products and services available at our large format stores except that they typically contain fewer large screen televisions and fewer demonstration rooms for home and mobile electronics. We may relocate or expand a number of our existing smaller stores as opportunities become available.

        Site Selection.    We typically locate our prototype stores in power centers or freestanding locations near shopping malls and other major retail shopping areas. We select locations for future stores based on our evaluation of individual site economics, market conditions and our customer demographics.

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With the help of an independent site selection consultant, we evaluate a number of criteria, including the following:

•

sales volume potential;



•

distance from our current distribution center;



•

existing and potential competition in the market, including their size, strength and merchandising philosophy;



•

marketing and advertising costs; and



•

size, demographic makeup and growth potential of the market.

        In choosing specific sites in a new or existing market, we apply site selection criteria taking into account numerous factors, including the following:

•

store locations of our competition;



•

local demographics;



•

proximity to our existing or proposed store locations;



•

real estate occupancy expenses and tenant build-out costs;



•

store visibility;



•

traffic patterns; and



•

overall retail activity.

        Store Economics.    We believe that we benefit from attractive store level economics. Our average investment for the 15 large format stores we opened in the past two years was approximately $3.3 million including leasehold improvements, fixtures and equipment, inventory (net of payables) and preopening expenses. Our large format stores have typically been profitable on a store operating basis within their first 12 months of operation and, on average, return our investment in 30 months or less.

        The cost of our new large format stores is anticipated to average approximately $3.3 million per store, which includes leasehold improvements, fixtures and equipment, inventory (net of payables) and preopening expenses. Leasehold improvements, fixtures and equipment are expected to average approximately $2.2 million per store, depending on tenant allowances. Preopening expenses for these stores are expected to average approximately $350,000, and include costs for advertising prior to opening and recruitment and training of new employees. The inventory requirement for our new stores is expected to average approximately $1.5 million, of which $750,000 is typically financed through trade credit from our vendors. For relocations of existing stores, preopening costs are expected to average approximately $150,000 and will be higher if we terminate existing store leases prior to their maturity.

        Training.    We provide new sales associates with a minimum of three weeks of intensive classroom training. Our sales associates also receive additional weekly training at the store, weekly self-study programs and testing. Our training program begins with an orientation by one or more of our executive officers and continues with instruction in areas such as technical knowledge by product category, selling techniques and our policies and procedures. We provide ongoing sales and product training through a customized series of DVD based training videos. We test our associates' retention upon completion of each video. In addition, we conduct role playing exercises to allow sales associates to practice new selling techniques and their product knowledge prior to customer contact. We have similar programs for our installation, delivery and support staff.

        Store Management and Personnel.    An average large format store is generally staffed with a store manager, two sales managers (one for home electronics and one for mobile electronics), 30 to 35 sales

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associates, an installation supervisor, six to eight installers, an operations manager and eight support personnel, including four warehouse employees and four customer service representatives. All of our store managers have been promoted from within the company. Our store managers have an average tenure with us of over seven years, including over three years as a store manager. The staffing of our smaller stores generally follows the same format as our larger stores but with fewer employees in each area and no operations manager.

        Store Personnel Compensation.    Our compensation plan is designed to incentivize our sales associates to sell more than one product to a customer. Our sales associates are compensated based on a flexible incentive pay plan with commissions determined on the basis of sales, gross margins and attachment selling. Installers are also paid on a commission basis. Store managers receive a base salary, monthly and annual bonuses and opportunities for commissions. Sales managers similarly receive a small base salary, bonuses and earned commissions. Bonuses are calculated on a store-by-store basis. Our support staff is typically paid an hourly wage plus bonuses and may also earn commissions. We provide opportunities for advancement through participation in Ultimate University, an in-depth training program designed to prepare selected candidates for future management positions.

        Services.    We support our product sales by providing many important customer services, including the following:

• in-store product instruction
• home delivery and set-up
• multi-room audio and video installation
• home satellite installation

• home networking installation
• home theater design and installation
• home instruction upon request

• mobile electronics installation
• regional service centers

• home security installation

        We provide our customers with expedited service through our Fast Trak service program. Virtually all merchandise purchased from us may be taken to any of our stores for repair, whether or not the product is currently under the manufacturer's warranty or an extended warranty contract. Our large service facilities, located in metropolitan Denver and Minneapolis, provide backup for our regional service centers. In order to provide maximum service to our customers, we have regional service centers in: Albuquerque, New Mexico; Boise, Idaho; Denver, Colorado; Des Moines, Iowa; Las Vegas, Nevada; Minneapolis, Minnesota; Phoenix, Arizona; Salt Lake City, Utah; St. Louis, Missouri; and Tulsa, Oklahoma. We employ approximately 180 employees in connection with our service business. Each service department is staffed with product specialists capable of making complex repairs. In addition, we operate a fleet of approximately 240 customer service vehicles to provide in-home repair and delivery, installation and setup of home satellites, home theater components and televisions.

        We offer private label and manufacturer sponsored credit cards, which are financed, operated and serviced by third party finance companies on a non-recourse basis. We have entered into agreements with finance companies whereby they retain all credit risk associated with these credit cards. These arrangements permit us to provide our customers with financing promotions, including interest-free financing and deferred payments, without using our working capital. During fiscal 2002, approximately 32% of our total sales were to customers who financed their purchases using our private label or manufacturer sponsored credit cards.

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Merchandising and Inventory

        Products.    We offer our customers a comprehensive selection of high quality, brand name television, audio, video, mobile electronics and home office products. We emphasize depth of product selection within key product categories as follows:

        We offer customers a wide range of price points within each product category, with the greatest depth in mid- to high-end products. Within our product categories, we carry and actively promote new

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models as they become available. We do not carry home appliances or music, video or computer software.

        We assist our customers in making larger and more complex consumer electronics purchases with our Simple Solution program. Our Simple Solution program provides customers with complete packages that make home theater, car audio and computer purchase decisions simpler. This program also offers the consumer an excellent value when compared with purchasing the same components separately. Our Simple Solution product packages generally range across several price points in each product category. We negotiate special purchases from manufacturers for our Simple Solution program to provide lower prices to our customers while achieving attractive gross margins on the products.

        The following table shows the approximate percent of sales for each major product category for the last three fiscal years.

        We offer extended warranty contracts to our customers for most categories of our products. The extended warranty contracts cover parts and labor for service periods not covered by the manufacturer's warranty on such products. An unaffiliated third party is warrantor for these contracts and pays for the repair service. We sell all of these extended service contracts on behalf of the warrantor on a non-recourse basis. The warrantor purchases insurance for each contract that is sold, which allows the warrantor to fulfill its obligations under the extended warranty contract. The warrantor has named us as an additional insured. We are deemed to be the obligor under the extended warranty contracts entered into prior to February 1, 2000, and we recognize revenues over the term of these obligor contracts. For contracts entered into after February 1, 2000, we are a non-obligor, and therefore, we recognize commissions from the sale of these non-obligor contracts as revenues at the time of sale to customers.

        Pricing.    We emphasize competitive pricing on all items and reinforce this strategy with extensive advertising of our 60 day price guarantee and our 30 day satisfaction guarantee. Our 60 day price guarantee allows our customers to receive 110% of the difference between the original purchase price and any verified locally available lower price for the identical product under the same purchase conditions. This guarantee applies to all products, excluding computer products and digital cameras, which are covered by a 30 day price guarantee. Our 30 day satisfaction guarantee allows our customers to return most products within 30 days for a full refund. Computer products and digital cameras have a 14 day satisfaction guarantee. Camcorders, car multimedia and radar detectors have a 14 day money-back or 30 day exchange guarantee. Our price guarantee and our 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 functionality, performance and quality. In addition, we offer an in-stock guarantee on advertised products.

        Purchasing.    We purchase substantially all of our products directly from the manufacturers. Each of our buyers has responsibility for specified product categories. Buyers are assisted by a management information system that provides them with our current inventory quantity, price and sales information by item, thus allowing them to react quickly to market changes.

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        We are one of the largest members of the Progressive Retailers' Organization, a volume-buying group. Membership in this organization helps us to obtain additional volume rebates, special buys and access to closeout and final production items. We believe that based on our current size, we could obtain independently most of the benefits provided by membership in the Progressive Retailers' Organization.

        During fiscal 2002, our 10 largest suppliers accounted for approximately 75% of the merchandise we purchased. Three of our suppliers, Sony, Mitsubishi and Panasonic, each accounted for 10% or more of our merchandise mix. The master agreements under which we operate with each of our suppliers are normally terminable upon 30 to 60 days' notice by either party. As is customary in the industry, we do not have commitments of longer than one year with the majority of our product suppliers. We believe that our relationships with our large vendors are excellent and that our focused merchandising and high degree of customer service makes us an important distribution channel, particularly for the introduction of new products.

        Distribution.    We currently distribute most of our merchandise to our stores from a 226,000 square foot warehouse and distribution center located in Thornton, Colorado, a suburb of Denver. All of our stores in Colorado are located within 75 miles of this center. For stores more than 75 miles from this facility, we use contract carriers for distribution. Our warehouse and distribution center reduces our inventory requirements at individual stores, while preserving the benefits of volume purchasing and facilitating centralized inventory and accounting controls.

Advertising and Marketing

        Our marketing program is designed to create public awareness of our comprehensive selection of mid-to high-end brands at competitive prices. Our advertising strategy primarily uses newspaper, radio and targeted direct mail media. We present a blend of aggressive promotional price points on products sold by our competitors as well as an extensive selection of mid- to high-end products that may not be offered by our competitors. We primarily advertise through newspaper in every market we serve, producing 24- to 32-page full color weekly inserts. We also conduct a direct mail campaign, the cornerstone of which is a 108- to 120-page full color catalog, which is published four times a year and emphasizes the breadth of our selection and new technology. The catalog educates our customers on the features and benefits of the latest consumer electronics products and advertises the full array of products and services available at our stores. We mail our catalog to 950,000 to 1.2 million current and 600,000 to 1.0 million prospective customers in our markets. We build top-of-mind awareness through an ongoing radio advertising campaign that specifically targets our core customers. We also hold special events at our stores to introduce or promote new products. We produce prominent and colorful in-store signage that describes differentiating product features, new technology and promotional information.

        The specific allocation of advertising dollars among the various types of advertising media is reviewed from time to time by management and, if necessary, adjusted to reflect our assessment of advertising results and market conditions.

        Our web site, www.ultimateelectronics.com, is designed to provide a company overview and stockholder information. We have not made the investment to enable us to conduct sales through our web site, primarily because a significant number of our major and high-end manufacturers currently restrict the sale of their products via the Internet.

Management Information System

        During fiscal 2002, we implemented a warehouse management system to manage our warehouse and distribution center in Thornton, Colorado. This system was interfaced with our existing management information system, which is an on-line system that connects all of our facilities and allows

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sales associates to determine the location of our inventory at any time and our merchandising department to change pricing immediately in response to competitor pricing.

        In fiscal 2002, we began implementing Oracle's e-business suite of products to manage our administrative applications and Tomax's retail suite of applications to create a new infrastructure for managing our operations. We believe this combined solution will provide us with a powerful web-enabled solution for supporting the critical functions of our business. This project is designed to upgrade the majority of our internal software systems, thereby increasing productivity and supporting the further expansion of our company. By implementing this fully integrated, end-to-end solution, we plan to provide comprehensive, easy-to-use applications for our sales associates and enhance our customer's shopping experience. We have already completed the first phase of the project, which included installation of Oracle's financial modules. We are proceeding with the implementation of the remaining portions of our new management information system and expect to complete the process in the first half of fiscal 2004.

Competition

        We operate 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. We face competition from large national chains, numerous smaller specialty stores and consumer electronics departments of many department, discount and home improvement stores. We consider our primary competitors to include consumer electronics retailers such as Best Buy, Circuit City and Sears as well as mass merchants such as Wal-Mart, Sam's Club, Costco and Target and specialty retailers such as Tweeter Home Entertainment. We compete with Circuit City in every market except Sioux Falls, South Dakota; Rochester, Minnesota; and our three stores in Iowa. We compete with Best Buy in every market except Utah and Idaho. Best Buy has announced plans to enter those markets this year. We will be competing with Best Buy, Circuit City and Tweeter Home Entertainment when we enter the Dallas/Fort Worth market later this year. Our primary competitors have financial and other resources greater than ours. Our operating results may be adversely affected by such increased competition. In addition, if such competitors seek to gain or retain market share by reducing prices, we may be required to reduce our prices, thereby reducing gross margins and profits. Also, as we expand into markets where our name may not be recognized, our success will depend in part on our ability to compete with established and future competitors in such markets.

        We also compete with retailers of consumer electronics who market their merchandise on the Internet. We believe that competition from the Internet will increase in the future.

Intellectual Property

        We believe our trademark and service mark portfolio includes marks that have developed public recognition and are of significant value. ULTIMATE ELECTRONICS (Stylized), AFFORDABLE PORTABLE (Stylized), AUDIO KING and FAST TRAK are all federally registered on the Principal Register of the U.S. Patent and Trademark Office in the name of Ultimate Electronics, Inc. These registrations have received incontestable status. The marks BIG NAMES. LITTLE PRICES. GUARANTEED., SIMPLE SOLUTION and SOUNDTRACK are also federally registered on the Principal Register of the U.S. Patent and Trademark Office in the name of Ultimate Electronics, Inc. Further, we have an application pending before the U.S. Patent and Trademark Office for ULTIMATE ELECTRONICS EXPRESS and a Colorado State registration for the mark THE ULTIMATE SOUNDTRACK. We control the nature and quality of the goods and services offered under our portfolio of marks to maintain our proprietary intellectual property rights in the portfolio. We are not aware of any adverse claims concerning our trademarks and service marks.

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Employees

        As of March 1, 2002, we employed approximately 3,000 persons, approximately 2,640 of whom were store, customer delivery or service employees and approximately 360 of whom were main warehouse or corporate personnel. We consider our employee relations to be good. Most employees, other than corporate and store support personnel, are paid pursuant to a flexible pay plan. We believe that we provide working conditions and wages that compare favorably with those of other retail companies within our industry. None of our employees are covered by collective bargaining agreements.

Seasonality

        Our business is affected by seasonal consumer buying patterns. As is the case with many other retailers, our sales and profits have been greatest in the fourth quarter (which includes the holiday selling season). Due to the importance of the holiday selling season, any factors negatively impacting the holiday selling season could have a material adverse impact on the our financial condition and results of operations.

Corporate Information

        Ultimate Electronics, Inc. is a Delaware corporation formed in 1993 as the successor to Pearse Electronics. We opened our first store in 1968. We grew to nine stores in Colorado by fiscal 1994 and then adopted an expansion strategy to enter new markets in the Rocky Mountain, Midwest and Southwest regions. By the end of fiscal 1997, we had grown to 18 stores. In June 1997, we acquired Audio King Corporation, a consumer electronics specialty retailer with 11 retail stores in Minnesota, Iowa and South Dakota. We then opened one store in fiscal 1998, one store in fiscal 2000, five stores in fiscal 2001 and ten stores in fiscal 2002.

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RISK FACTORS

        Our business is subject to the risks set forth below. If any of the following risks, or other risks not presently known to us or that we currently believe not to be significant, develop into actual events, then our business, financial condition, results of operations or prospects could be materially adversely affected.

Risk Factors Related to Our Business

Our Success Depends in Large Part on Our Ability to Open and Profitably Operate New Stores in Existing and New Geographic Markets

        We plan to open 10 to 12 new stores in fiscal 2003 and to continue our expansion by opening approximately 10 to 12 new stores in fiscal 2004. We may not be able to open all of these stores, and any new stores that we open may not be profitable, either of which could have a material adverse impact on our financial results. We have not yet selected all sites for stores that we plan to open in fiscal 2004.

        There are a number of factors that could affect our ability to open and operate new stores consistent with our business plan. These factors include, but are not limited to:

•

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 adapting our distribution and other operational and management systems to an expanded network of stores;



•

higher costs for print, radio and television advertising;



•

the availability of adequate financial resources;



•

the inability or unwillingness of vendors to supply product on a timely basis at competitive prices;



•

failure to open enough stores in new markets to achieve sufficient market presence; and



•

difficulty in obtaining governmental and other third-party consents, permits and licenses needed to operate additional sites.

        These factors may also affect the ability of any newly opened stores to achieve sales and profitability levels comparable with our existing stores or to become profitable at all.

We May Not Be Able to Achieve and Manage Planned Expansion

        We face many business risks associated with rapidly growing companies, including the risk that our existing management, information systems and financial controls will be inadequate to support our planned expansion. 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, warehousing and distribution systems and employee training programs. We cannot predict whether we will be able to effectively manage these increased demands or respond on a timely basis to the changing demands that our planned expansion

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will impose on our management, information systems and financial controls. If we fail to continue to improve our management, information systems and financial controls or encounter unexpected difficulties during expansion, our business, financial condition, operating results or cash flows could be materially adversely affected.

        Furthermore, we may seek to acquire businesses that are complementary to ours. To do so successfully, we would need to identify suitable acquisition candidates, obtain financing on acceptable terms, and negotiate acceptable acquisition terms. Even if we are successful in completing acquisitions, they may have a material adverse effect on our operating results, particularly in the fiscal quarters immediately following the completion of an acquisition, while the acquired business is being integrated into our operations. We do not currently have any definitive agreements, arrangements or understandings regarding any particular acquisition.

We May Be Unable to Fund Our Significant Future Capital Needs, and We May Need Additional Funding Sooner than Anticipated

        We will need substantial capital to finance our expansion plans, including funds for capital expenditures, preopening costs and potential initial operating losses related to new store openings. We may not be able to obtain additional financing on acceptable terms. If adequate funds are not available, we will have to curtail projected growth, which could materially adversely affect our business, financial condition, operating results or cash flows.

        We estimate that capital expenditures during fiscal 2003 will be approximately $40 million and that capital expenditures during future years may exceed this amount. Although we expect that the funds available under our line of credit and cash flows from operations will be sufficient to fund our capital requirements at least through fiscal 2003, this may not be the case. We may be required to seek additional capital earlier than anticipated if:

•

future actual cash flows from operations fail to meet our expectations;



•

costs and capital expenditures related to new store openings exceed anticipated amounts;



•

we are required to reduce prices to respond to competitive pressures; or



•

we secure a greater number of attractive development sites than currently anticipated.

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. General economic, political and market conditions, such as recessions, may adversely affect our business results and the market price of our common stock. The terrorist attacks on New York City and Washington, D.C. on September 11, 2001, had a negative effect on an already slowing economy and on consumer confidence. This adversely affected our business in the second half of fiscal 2002. There is no assurance that the economy or consumer confidence will improve or that these factors will not continue to have an adverse effect on our operating results and financial conditions.

We Face Significant Competition from National, Regional and Local Consumer Electronics Retailers

        The retail consumer electronics industry is highly competitive. We currently compete against a diverse group of retailers, including several national retailers, such as Best Buy, Circuit City and Sears, and regional and local merchants, who sell, among other products, audio and video consumer electronics products similar and often identical to those we sell. Each of our stores competes directly

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with either a Best Buy or a Circuit City, and over three-quarters 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, appliance/electronic superstores, warehouse clubs, home improvement retailers and mass merchants selling consumer electronics, such as Wal-Mart, Sam's Club, Costco and Target, are continuing to expand their selection of consumer electronics products, and such expansion may increase price competition and reduce gross margins within our markets. We also compete with retailers of consumer electronics who market products through store catalogs and the Internet, which may increase price competition for certain of our products.

        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 we are is currently operating;



•

pricing strategies by competitors;



•

increased sales of, or marketing emphasis on, upscale or technologically advanced products by our competitors;



•

larger size and greater operational efficiencies of competitors; and



•

adoption by existing competitors of innovative store formats or improved retail sales methods.

If New Products are Not Introduced or Consumers Do Not Accept New Products, Our Sales May Decline

        Our historical growth rate has been directly related to our ability to be a leader in sales of new technology products. 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, and are subject to the actions and cooperation of third parties such as television broadcasters and movie distributors, all of which could impact our ability to continue to deliver new consumer electronic technologies to our customers. The HDTV market, for example, could be adversely affected by a significant delay in the broadcast of HD signal. It is possible that products such as HDTV or other new products will never achieve widespread consumer acceptance. 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.

Any Failure of Our Information Technology Infrastructure Could Harm Our Business

        The capacity, reliability and security of our information technology hardware and software infrastructure and our ability to expand and update this infrastructure in response to our growth and changing needs are important to the operation of our business. In connection with our growth, we are continually updating our information technology infrastructure. We are currently implementing Oracle's e-business suite of products to manage our administrative applications and Tomax's retail suite of applications to create a new infrastructure for managing our operations. This project is designed to upgrade the majority of our internal software systems, thereby increasing productivity and supporting the further expansion of our company. We expect to incur significant costs and expend significant management and other resources in implementing these programs. We are systematically implementing portions of our new management information system and expect to complete the process in the first

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half of fiscal 2004. Any failure to successfully integrate and operate this system could adversely impact our business.

Our Limited Geographical Dispersion May Reduce Our Ability to Manage Adverse Market Events

        We currently operate 46 stores in 11 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, Pioneer, Monster Cable and RCA. We rely on a number of suppliers for limited distribution upscale items. We also rely on our suppliers for cooperative advertising support. We do not have 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. Our top 10 suppliers represented 75% of our purchases in fiscal 2002. 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 successfully enter new markets depends to a significant extent on the willingness and the ability of our vendors to supply those additional stores. If vendors are unwilling or unable to supply some or all of their products to us at acceptable prices in one or more markets, our results of operations and financial condition could be adversely affected.

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 for 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.

Changes in Trade Regulations, Currency Fluctuations and Other Factors Beyond Our Control Could Impact Our Business

        A significant portion of our inventory is manufactured overseas. Changes in trade regulations, currency fluctuations or other factors may increase the cost of items we purchase or create shortages of such items, which in turn could 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, resulting in a material adverse effect on our sales, margins or competitive position.

Because of Our Small Store Base, Our Operating Results Could Be Materially Adversely Affected By the Negative Performance of a Small Number of Stores

        We currently operate 46 stores, 10 of which we opened in fiscal 2002. Due to our small store base, poor operating results at one or more stores could materially adversely affect our business, financial condition, operating results or cash flows. Our operating results achieved to date may not be indicative of our future operating results with a larger number of stores.

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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.

We Could Face Potential Labor Shortages

        Our success depends in large part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including store managers, sales associates, installers and support personnel, necessary to keep pace with our expansion schedule. Qualified individuals needed to fill these positions are in short supply in certain areas. The inability to recruit and retain such individuals may delay the planned openings of new stores or result in high employee turnover in existing stores, which could have a material adverse effect on our business, financial condition, operating results or cash flows. Additionally, competition for qualified employees could require us to pay higher wages to attract a sufficient number of qualified employees, which could result in higher labor costs.

We May Be Unable to Protect Our Intellectual Property Rights, Which Could Impair Our Name and Reputation

        We believe that our success and ability to compete depends, in part, upon consumer identification of the Ultimate Electronics, SoundTrack, Audio King and Fast Trak trademarks. We intend to vigorously protect our trademarks against infringement or misappropriation by others. A third party could, however, misappropriate our intellectual property in the future. Furthermore, the enforcement of our proprietary rights through litigation could result in costs to us that could have a material adverse effect on our financial condition. In addition, though we do not believe that we infringe the proprietary rights of third parties, infringement claims may be asserted against us in the future. An adverse determination or the costs of defending litigation based on such a claim could have a material adverse effect on our business 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 that 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 the then-prevailing market price for the common stock. 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;

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•

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 special meeting of stockholders.

        In addition, under the terms of our Stockholder Rights Plan, in general, if a person or group acquires more than 15% of the outstanding shares of common stock, all of our other stockholders would have the right to purchase securities from us at a discount to such securities' fair market value, thus causing substantial dilution to the holdings of that acquiring person or group. 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 our common stock in connection with such a transaction.

Risk Factors Related to Our Common Stock

Because We Experience Seasonal Fluctuations in Our Sales, Our Quarterly Results Will Fluctuate and Our Annual Results Could Be Below Expectations, Which May Adversely Affect Our Common Stock Price

        Seasonal consumer buying patterns affect our business. Our fourth fiscal quarter includes the holiday selling season and has historically contributed, and is expected to continue to contribute, a substantial portion of our sales, income from operations and net income for our entire fiscal year. The fourth quarter of fiscal 2002 contributed 37% of sales, 56% of income from operations and 57% of net income. As a result, any factors negatively affecting us 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:

•

comparable store sales and the success of new stores;



•

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 impact of new stores on existing stores;



•

weather conditions in our markets;



•

the mix of consumer electronics products sold in our stores;



•

the availability of new products; and



•

actions by our competitors, including grand opening and store closing sales by competitors.

        Fluctuations in our results of operation or financial condition may adversely affect our common stock price.

You Should Not Rely on Our Comparable Store Sales as an Indication of Our Future Results of Operations Because They Fluctuate Significantly and 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;

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•

new product introductions;



•

consumer trends;



•

changes in our merchandise mix;



•

the impact of new stores on existing stores;



•

weather conditions in our markets;



•

timing of promotional events; and



•

our ability to execute our business strategy effectively.

        We do not expect comparable store sales to increase at rates experienced in fiscal 2000 and 2001, and comparable store sales may be negative in the future. Our historical results have fluctuated significantly from quarter to quarter. For example, comparable store sales were up 10% during the last quarter of fiscal 2001, were flat during the first quarter of fiscal 2002 and were down 5% during the second quarter of fiscal 2002. Changes in our quarterly and annual comparable store sales results could cause the price of our common stock to fluctuate substantially. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Quarterly Results of Operations."

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;



•

fluctuations in our comparable store sales;



•

announcements about 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;



•

changes in economic performance or market valuations of other consumer electronics retailers; and



•

announcements by other consumer electronics retailers.

        The stock market has experienced significant price and volume fluctuations over the past several years, which have often been unrelated or disproportionate to the operating performance of particular companies. Broad market factors may have a material adverse effect on our stock price, regardless of our actual operating performance.

Our Management, Including a Principal Stockholder, Owns a Significant Portion of Our Common Stock and Will Be Able to Exercise Significant Influence Over Our Affairs

        William J. Pearse, our Chairman, beneficially owns approximately 16.0% of our outstanding common stock. In addition, our directors and executive officers as a group (including Mr. Pearse) beneficially own approximately 19.4% of our common stock. As a result of this share ownership, our management, and in particular Mr. Pearse, will be able to exert significant influence on corporate actions requiring stockholder approval, including the election of directors. This share ownership could delay or prevent a change in control. It could also prevent our stockholders from realizing a premium over the market price for our common stock or making a change in management.

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Future Sales of our Common Stock May Cause Our Stock Price to Decline

        All of our outstanding shares of common stock, other than shares owned by affiliates, are freely tradeable without restriction or further registration. Affiliates must comply with the volume and other requirements of Rule 144 in the sale of their shares. Sales of substantial amounts of common stock by our stockholders, including shares issued upon the exercise of outstanding options, or even the potential for such sales, may have a depressive effect on the market price of our common stock and could impair our ability to raise capital through the sale of our equity securities.

We May Issue Additional Shares and Dilute Your Ownership Percentage

        Some events over which you have no control could result in the issuance of additional shares of our common stock, which would dilute the ownership percentage of holders of our common stock. We may issue additional shares of common stock or shares of preferred stock to raise additional capital or finance acquisitions or upon the exercise or conversion of outstanding options. The rights of holders of common stock may be adversely affected by the rights of holders of any preferred stock that may be issued in the future that would be senior to the rights of the holders of the common stock.

FORWARD-LOOKING STATEMENTS

        This report and the documents incorporated by reference into this report include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We use words such as "may," "believe," "estimate," "expect," "plan," "intend," "project," "anticipate" and similar expressions to identify forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events, activities or developments. Our actual results could differ materially from those discussed in or implied by these forward-looking statements. Forward-looking statements include statements relating to, among other things:

•

our growth strategy and plans regarding opening new stores and entering new markets;



•

our intention to relocate or expand existing stores;



•

estimated capital expenditures and costs related to the opening of new stores or the relocation or expansion of existing stores;



•

the sufficiency of our cash flows from operations and borrowings under our revolving line of credit to fund our operations, debt repayment and expansion;



•

our relationships with key suppliers;



•

our expectations regarding implementation of our new management information system;



•

adequacy of our distribution and information systems and management experience and depth to support our expansion plans;



•

ability to obtain independently the benefits of being in a volume-buying group;



•

our expectations regarding competition and our competitive advantages;



•

outcome of litigation arising in the ordinary course of business; and



•

nonpayment of dividends.

        These forward-looking statements are subject to numerous risks, uncertainties and assumptions about us, including the factors described under "Risk Factors." The forward-looking events we discuss in this report might not occur in light of these risks, uncertainties and assumptions. We undertake no obligation, and disclaim any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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ITEM 2: PROPERTIES

Properties

        We operate 46 stores in 11 states. Each store, other than the store located in Thornton, Colorado, is leased. We currently plan to open 10 to 12 stores in fiscal 2003, all of which are planned as larger format stores. We have signed leases for 11 of these store locations, nine of which are in the Dallas/Fort Worth market and two of which are in the St. Louis market. The following table sets forth data regarding our store locations and the 11 new store sites for which we have signed leases.

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*

Forecasted

        Our main warehouse and distribution center, business office and service center are located in one facility in Thornton, Colorado. In addition to the retail store in this facility noted in the table above, this facility is comprised of 226,000 square feet of warehouse space, 51,000 square feet of office space, 15,000 square feet devoted to a service department and 7,000 square feet for a training and employee facility. We lease a 62,000 square foot facility in Minneapolis, Minnesota, which we use for a training center, office space, a service center for the greater Minneapolis/St. Paul area and warehouse space for our delivery department. We lease a 26,000 square foot facility in Phoenix, Arizona that we use for a service center and warehouse space for our delivery department. We also lease a 22,000 square foot

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facility in St. Louis, Missouri that we use for the same purposes. In smaller markets, these areas are typically made part of a centrally located store.

ITEM 3: LEGAL PROCEEDINGS

        We are not a party to any material legal proceedings. We are, however, involved in various routine claims and legal actions that arise in the ordinary course of business. Our management intends to vigorously defend these claims and believes that the ultimate disposition of these matters will not have a material adverse effect on our financial condition, results of operations or cash flows

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted to a vote of security holders in the fourth quarter of fiscal 2002.

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PART II

ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        Our common stock is listed on the Nasdaq Stock Market^sm under the symbol "ULTE". As of March 22, 2002, there were 456 registered holders of our common stock.

        The range of high and low closing prices for our common stock as quoted on the Nasdaq Stock Market^sm for the past two fiscal years is provided below.

        As a public company, we have never declared or paid any cash dividends on our common stock. We currently intend to retain future earnings for use in the operation and expansion of our business and therefore do not anticipate paying cash dividends in the foreseeable future. Our current revolving credit facility also restricts our ability to pay dividends.

        The transfer agent for our common stock is Wells Fargo Bank Minnesota, N.A., 151 North Concord Exchange, South St. Paul, Minnesota 55075.

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ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA

        The following table contains our selected consolidated financial and operating data. Information for each fiscal year is derived from our historical audited financial statements. You should read this information together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and notes included elsewhere in this report.

(1)

All selected financial data for fiscal 1998 and 1999 has been restated to give retroactive effect for a change in accounting for extended warranty contracts. Effective as of the beginning of our fiscal quarter ended January 31, 2000, we changed our accounting policy 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." For contracts entered into prior to February 1, 2000, we recognize revenues over the term of the extended warranty contract. Previously, we recognized all extended warranty contract revenues on a gross basis at the time of sale.

(2)

On June 27, 1997, we completed a merger in which we 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)

Excludes direct sales from our specialty markets division and distribution center.

(4)

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 as well as stores in markets where we have not achieved greater than 75% of our expected market presence.

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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

        We opened our first store in 1968. We grew to nine stores in Colorado by fiscal 1994 and then adopted an expansion strategy to enter new markets in the Rocky Mountain, Midwest and Southwest regions. By the end of fiscal 1997, we had grown to 18 stores. In June 1997, we acquired Audio King Corporation, a consumer electronics specialty retailer with 11 retail stores in Minnesota, Iowa and South Dakota. We then opened one store in fiscal 1998, one store in fiscal 2000, five stores in fiscal 2001 and ten stores in fiscal 2002. We currently operate 46 stores in 11 states.

        We plan to open 10 to 12 stores in fiscal 2003. We have signed leases for 11 of these store locations, nine of which are in the Dallas/Fort Worth market and two of which are in the St. Louis market. We expect to open approximately 10 to 12 new stores in fiscal 2004.

        Our investment cost for large format stores opened in the last two fiscal years has been approximately $3.3 million per store, including leasehold improvements, fixtures and equipment, inventory (net of payables) and preopening expenses. Our large format stores have typically been profitable on a store operating basis within their first 12 months of operation and, on average, return our investment in 30 months or less. The timing of our new store openings and relocations will significantly impact our results of operations and financial condition in future periods.

Critical Accounting Policies

        Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions. We believe that, of the significant accounting policies described in Notes 1 and 2 to the consolidated financial statements, the following involve a higher degree of judgment and complexity, and are therefore considered critical.

Revenue Recognition

        Revenue is recognized at the time the customer takes possession of the merchandise or such merchandise is delivered to the customer. Sales, which includes net warranty revenue, consists of gross sales less discounts, price guarantees, returns and allowances. We grant credit to customers through independent, third-party finance companies, who assume the credit risk for the collection of the related accounts receivable. During fiscal 2002, approximately 32% of our total sales were to customers who financed their purchases using our private label and manufacturer sponsored credit cards. When we offer interest-free promotions, we normally pay a fee at the time of the transaction. This fee averages between 3.0% and 4.0% of the amount financed by the customer.

        We sell extended warranty contracts on behalf of a fully-insured unrelated party. The contracts extend beyond the normal manufacturer's warranty period, usually with terms of coverage (including the manufacturer's warranty period) between 12 and 60 months. The extended warranty contracts are administered by a third party and all performance obligations and risk of loss with respect to such contracts are the responsibility of such administrator and other parties. Effective February 1, 2000, we restructured our extended warranty master contract with the administrator. For extended warranty contracts entered into after February 1, 2000, we are a non-obligor and, therefore, we recognize commissions from the sale of these non-obligor contracts as revenues at the time of sale to customers. We are deemed to be the obligor under the extended warranty contracts entered into prior to February 1, 2000, and we recognize revenues over the term of these obligor contracts, generally 12 to 60 months. Revenues from extended warranty contracts entered into prior to February 1, 2000, will be amortized in decreasing amounts through fiscal 2005.

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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, we accrue rebates based upon specified percentages of inventory purchases and record such amounts as a reduction of advertising expense. Certain rebates are based on projected volumes of purchases from related vendors, reflecting product demand in each of our markets. Although our projections have historically been representative of actual purchases, changes in market or economic conditions in specific markets where we operate could have a material impact on the realization of the recorded rebate receivables and reductions of advertising expense. We also deduct amounts for cooperative advertising directly from payment to manufacturers for inventory purchases based on individual agreements with our manufacturers. Net advertising expense charged to operations was $9.0 million, $6.4 million and $4.8 million for fiscal years 2002, 2001 and 2000, respectively.

Inventories

        We state merchandise inventories at the lower of cost (weighted average cost) or market. Significant management judgement is required to determine the reserve for obsolete or excess inventory. Inventory on hand may exceed future demand because a product may either be discontinued or become technologically outdated earlier than anticipated. Inventories are presented net of an allowance for obsolescence of $1.2 million and $951,000 at January 31, 2002 and 2001, respectively.

Results of Operations

        The following table sets forth, for the periods indicated, the relative percentages that certain income and expense items bear to sales:

Fiscal 2002 Compared to Fiscal 2001

        Sales.    For the year ended January 31, 2002, sales were $580.2 million, a 20% increase from sales of $484.4 million for the prior year. The increase in sales during fiscal 2002 was primarily due to sales from the 10 new stores opened during the year. This increase was partially offset by a decrease in comparable store sales of 2% for the year due to a sluggish economy and weak consumer confidence. In the first three quarters of fiscal 2002, we experienced negative single digit comparable store sales, a trend that was further aggravated by the terrorist attacks on September 11, 2001. We generated a 2%

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comparable store sales growth in the fourth quarter due to improved consumer confidence and increased demand for digital products.

        Revenues from extended warranty contracts entered into prior to February 1, 2000, will be amortized in decreasing amounts through fiscal 2005.

        Gross Profit.    Costs of goods sold includes merchandise costs, buying costs and warehousing and distribution costs less vendor purchase discounts and volume rebates. Gross profit in fiscal 2002 increased 18% to $180.1 million (31.0% of sales) from $152.3 million (31.4% of sales) in fiscal 2001. The decrease in gross profit as a percentage of sales was due to higher than expected inventory shrinkage in the fourth quarter, reduced amortization of warranties sold prior to February 1, 2000, and the continued shift in merchandise mix to lower margin categories. This decrease was partially offset by higher margins in most product categories.

        Over the last three years, we have experienced a continued shift in our merchandise mix from higher margin products such as audio and mobile electronics to lower margin products such as television and DVD. For example, sales of audio products have decreased from 24% of total sales during fiscal 2000 to 20% of total sales in fiscal 2002, while sales of televisions have increased from 31% of total sales during fiscal 2000 to 38% of total sales in fiscal 2002. This shift in merchandise mix has negatively impacted our gross profit margins. At the same time, our gross margins in most product categories have increased, which has offset the decrease in our gross profit margins due to the shift in merchandise mix.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses include net advertising costs, occupancy costs, payroll, depreciation, computer costs and all other expenses necessary to operate our business. Selling, general and administrative expenses in fiscal 2002 increased 25% to $160.5 million (27.6% of sales) from $128.4 million (26.5% of sales) in fiscal 2001. The increase in selling, general and administrative expenses as a percentage of sales was primarily the result of increased occupancy costs for new stores, additions in personnel to facilitate our expansion, increased net advertising expenses incurred as we entered three new markets over the past two years and lower than planned comparable store sales growth for the year.

        Income from Operations.    As a result of the foregoing, income from operations decreased 18% to $19.6 million (3.4% of sales) from $23.9 million (4.9% of sales) in fiscal 2001.

        Interest Expense.    Net interest expense for fiscal 2002 increased to $321,000 from $144,000 in fiscal 2001. This increase was primarily due to higher average amounts outstanding under our revolving line of credit during fiscal 2002, partially offset by lower average interest rates during the year.

        Income Taxes.    Our effective tax rate was 38.0% in fiscal 2002 compared to 37.5% in fiscal 2001 primarily due to the state tax impact of new markets.

        Net Income.    Net income for fiscal 2002 was $12.0 million compared to $14.6 million for the prior year, for the reasons described above.

        At an assumed effective tax rate of 38.5%, the net income from extended warranty contracts entered into prior to February 1, 2000, will be approximately $967,000 in fiscal 2003, $565,000 in fiscal 2004 and $229,000 in fiscal 2005.

Fiscal 2001 Compared to Fiscal 2000

        Sales.    For the year ended January 31, 2001, sales were $484.4 million, a 26% increase from sales of $385.0 million for the prior year. The increase in sales during fiscal 2001 was due primarily to the five new stores opened during the year as well as the comparable store sales increase. Comparable

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store sales increased 13% for the year ended January 31, 2001 due to the introduction of new products such as DVD and HDTV, an increase in demand for digital products generally and a strong economy.

        Gross Profit.    Gross profit in fiscal 2001 increased 32% to $152.3 million (31.4% of sales) from $115.5 million (30.0% of sales) in fiscal 2000. The improvement in gross profit was due primarily to increased sales of new digital technology products; margin improvements in almost every product category, partially offset by a lower mix of higher margin categories such as audio and mobile electronics; increased sales of high margin installation services; and amortization of warranty income in the amount of $5.7 million (1.2% of sales).

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses in fiscal 2001 increased 29% to $128.4 million (26.5% of sales) from $99.9 million (26.0% of sales) in fiscal 2000. The percentage increase in selling, general and administrative expenses was directly related to selling costs associated with amortization of warranty income (0.5% of sales).

        Income From Operations.    As a result of the foregoing, income from operations increased 54% to $23.9 million (4.9% of sales) from $15.6 million (4.0% of sales) in fiscal 2000.

        Interest Expense.    Interest expense for fiscal 2001 decreased to $144,000 from $2.1 million in fiscal 2000. This decrease was primarily due to our redemption of our outstanding bonds in March 2000 (see "Liquidity and Capital Resources") along with lower average amounts outstanding under our revolving line of credit.

        Income Taxes.    Our effective tax rate of 37.5% in fiscal 2001 was the same as the prior year.

        Net Income.    Net income for fiscal 2001 was $14.6 million compared to $8.4 million for the prior year, for the reasons described above.

Quarterly Results of Operations

        The following table shows certain financial and operating data for each of the most recent eight quarters. The quarterly information is unaudited but has been prepared on the same basis as our audited financial statements included elsewhere in the report. In the view of management, this unaudited data includes all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the unaudited quarterly results when read in conjunction with our audited financial

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statements. The results of operations for any quarter are not necessarily indicative of the results for any future period.

        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. Our quarterly results of operations may fluctuate significantly as a result of a number of factors, including:

•

comparable store sales and the success of new stores;



•

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;



•

weather conditions in our markets;



•

the mix of consumer electronics products sold in our stores;



•

the availability of new products; and



•

actions by our competitors, including grand opening and store closing sales by competitors.

As we have opened additional stores within markets we already serve, sales at existing stores have been adversely affected. Such adverse effects may occur in the future.

In the past, we have experienced significant variability in preopening costs from quarter to quarter. These fluctuations are primarily a function of the timing of new store openings. We typically incur the most significant portion of preopening costs associated with a given store in the three months prior to its opening.

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Our business is affected by seasonal consumer buying patterns. As is the case with many other retailers, our sales and profits have been greatest in the fourth quarter (which includes the holiday selling season). Due to the importance of the holiday selling season, any factors negatively impacting the holiday selling season could have a material adverse impact on our financial condition and results of operations.

Liquidity and Capital Resources

        Historically, our primary sources of liquidity for funding our expansion have been net cash from operations, revolving credit lines, term debt and issuances of common stock. Our primary cash requirements are related to expenditures for new store openings and the relocation or remodeling of existing store locations. These expenditures include leasehold improvements, fixtures and equipment, preopening expenses, additional inventory requirements and selling, general and administrative expenses.

        Net cash provided by operating activities equaled $15.3 million for fiscal 2002 compared to net cash provided by operating activities of $1.0 million for fiscal 2001. The increase in cash provided by operating activities over the past year was primarily the result of higher accounts payable balances in fiscal 2002.

        Net cash used in investing activities was $47.3 million for fiscal 2002, primarily related to capital expenditures for new store openings, the installation of warehouse management software, the reconfiguration and expansion of our warehouse and distribution center and implementation of our new management information system. In February 2001, we completed a sale and leaseback transaction with a related party for our store in Colorado Springs, Colorado. See "Certain Relationships and Related Transactions." In October 2001, we increased the size of our main warehouse and distribution center in Thornton, Colorado by 50,000 square feet. For fiscal 2001, net cash used in investing activities was $13.1 million. We incurred capital expenditures of $25.1 million during fiscal 2001, primarily for new store openings and the relocation and expansion of an existing store, which was partially offset by receipt of $12.0 million in proceeds from the sale of an investment available for sale acquired with the proceeds from our public offering in fiscal 2000.

        We expect capital expenditures of approximately $40 million in fiscal 2003, primarily for new store openings, a remodel of our Fort Collins, Colorado store and implementation of our new management information system. We have signed leases for 11 new store locations. The cost of new stores is anticipated to average approximately $3.3 million per store during fiscal 2003, which amount includes leasehold improvements, fixtures and equipment, inventory (net of payables) and preopening expenses. Leasehold improvements, fixtures and equipment are expected to average approximately $2.2 million per store, depending on tenant allowances. The inventory requirement for each new store is expected to average approximately $1.5 million, approximately $750,000 of which will be financed through trade credit from our vendors. Preopening expenses for new stores are expected to average approximately $350,000, and include costs for advertising prior to opening and recruitment and training of new employees. If we relocate existing stores, preopening costs are expected to average $150,000 and will be higher if we are required to terminate existing store leases prior to their maturity. We anticipate capital expenditures of approximately $6 million to complete the implementation of our new management information system.

        Net cash provided by financing activities totaled $31.7 million during fiscal 2002 compared to net cash used in financing activities of $2.3 million during fiscal 2001. Net cash provided by financing activities for fiscal 2002 related primarily to net borrowings under our revolving line of credit. Net cash used in financing activities for the prior year was primarily the result of repayment, in full, of our 10.25% bonds on March 31, 2000, partially offset by borrowings under our revolving line of credit.

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        On September 30, 1998, we executed a three-year $40 million credit agreement, as amended, with Foothill Capital Corporation, a wholly owned subsidiary of Wells Fargo Bank. Borrowings under this revolving line of credit were limited to the lesser of $40 million or 80% of eligible inventory and a portion of accounts receivable. This credit agreement was replaced on September 28, 2001 when we entered into a three-year $50 million credit agreement with Wells Fargo Finance, LLC. On December 12, 2001, we amended the agreement to increase the credit limit to $80 million. Borrowings under this revolving line of credit are limited to the lesser of (i) $80 million and (ii) 75% of eligible inventory plus the lesser of 75% of eligible accounts receivable and $2.5 million. Amounts borrowed bear interest, payable monthly, based on a blend of (i) LIBOR plus 1.75% to 2.25% and (ii) Wells Fargo Bank's prime rate minus 0.375%. Our weighted average interest rate was 4.1% at January 31, 2002. Inventories, accounts receivable, equipment and intangibles secure the borrowings. The facility includes negative covenants that places restrictions on our ability to incur indebtedness, create liens, enter into mergers and consolidations, pay dividends, repurchase our capital stock, issue guarantees, sell or otherwise dispose of assets and engage in transactions with affiliates without the written consent of the bank. The facility also contains covenants regarding our gross margins, inventory levels, tangible net worth and capital expenditures. Effective December 31, 2001, we amended the agreement with respect to the capital expenditures covenant. We are in compliance with all loan covenants. As of January 31, 2002, we had a borrowing base of $75 million, of which $35.2 million was outstanding.

        We believe that our cash flow from operations and borrowings under our revolving line of credit will be sufficient to fund our operations, debt repayment and expansion through fiscal 2003. To fund our capital requirements beyond that time, we may be required to seek additional financing, which could include an increase in our revolving line of credit or additional debt or equity financings. We may also remortgage our Thornton facility. We may not be able to obtain such funds on favorable terms, if at all.

        The following table reflects our contractual obligations and other commercial commitments as of January 31, 2002:

Contractual Obligations

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Other Commercial Commitments

(1)

The principal balance outstanding under our revolving line of credit was $35.2 million as of January 31, 2002. All amounts outstanding under our revolving line of credit will need to be repaid on September 30, 2004, unless our line of credit is renewed.

Impact of Inflation

        We believe that inflation has not had a significant effect on results of operations during the last few years. We cannot predict whether inflation will have an impact on our results of operations in the future.

Recently Issued Accounting Standards

Accounting for Derivative Instruments and Hedging Activities (SFAS 133)

        In June 1998, the Financial Accounting and Standards Board issued Statement 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by SFAS 138, which was adopted by us on February 1, 2001. SFAS 133 requires that all derivatives be recorded on the balance sheet at fair value. Changes in derivatives that are not hedges are adjusted to fair value through income. Changes in derivatives that meet SFAS 133 hedge criteria are either offset through income or recognized in other comprehensive income until the hedged item is recognized in earnings. Our adoption of SFAS 133 had no effect on our financial condition, results of operations, or cash flows because we do not own any derivative instruments.

Business Combinations (SFAS 141) and Goodwill and Other Intangible Assets (SFAS 142)

        In July 2001, the Financial Accounting Standards Board issued Statement No. 141, "Business Combinations" ("SFAS 141") and Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires companies to reflect intangible assets apart from goodwill and requires all business combinations subsequent to July 1, 2001 to be accounted for using the purchase method of accounting. SFAS 142 eliminates amortization of goodwill and indefinite lived intangible assets and requires us to perform an annual impairment test on all goodwill and indefinite lived intangible assets. We adopted these statements on February 1, 2002. Goodwill amortization expense was $275,000, $275,000 and $276,000 during fiscal years 2002, 2001 and 2000, respectively.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The following discusses our exposure to market risks related to changes in interest rates and other general market risks. All of our investment and financing decisions are supervised or managed by our executive officers.

        Cash and Cash Equivalents.    As of January 31, 2002, we had $2.7 million in non-restricted cash and cash equivalents held in various non-interest bearing accounts. We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

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        Outstanding Debt of the Company.    We are exposed to market risk due to changes in U.S. interest rates. We do not engage in financial transactions for trading or speculative purposes. We had an $80 million revolving line of credit on January 31, 2002. Amounts borrowed under the $80 million revolving line of credit bear interest based on a blend of (i) LIBOR plus 1.75% to 2.25% and (ii) Wells Fargo Bank's prime rate minus 0.375%. The principal balance under our revolving line of credit was $35.2 million as of January 31, 2002. An increase in the interest rate on our revolving line of credit of 44 basis points (a 10% change from the bank's reference rate as of January 31, 2002) would have no material effect on our operating results. We have not hedged against interest rate changes.

        All of our merchandise inventory purchases are domestically sourced and denominated in U.S. dollars.

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The following consolidated financial statements of Ultimate Electronics and Report of Independent Auditors are included in this Form 10-K.

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.

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PART III

        Certain information required by Part III is omitted from this Report. We 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 CERTAIN EXECUTIVE OFFICERS OF ULTIMATE ELECTRONICS, INC.

        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.

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PART IV

ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)

Documents filed as part of this report on Form 10-K or incorporated by reference.



(1)

The consolidated financial statements of the Company are listed on the "Index to Consolidated Financial Statements," on page F-1 to this report.



(2)

Financial Statement Schedules

Schedule II—Valuation and Qualifying Accounts

(3)

Exhibits—see (c) below.




(b)

Reports on Form 8-K:

None

(c)

Exhibits

        The following exhibits are filed pursuant to Item 601 of Regulation S-K:

35

*

Filed herewith.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed March 25, 2002 on its behalf by the undersigned, thereunto duly authorized.

POWER OF ATTORNEY

        KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Alan E. Kessock, J. Edward McEntire and David J. Workman and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorneys-in-fact and agents and each of them full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes and as he or they might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof.

        Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant, in the capacities and on the dates indicated.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

REPORT OF INDEPENDENT AUDITORS

The Stockholders and Board of Directors
Ultimate Electronics, Inc.:

We have audited the accompanying consolidated balance sheets of Ultimate Electronics, Inc. and subsidiaries ("the Company") as of January 31, 2002 and 2001, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended January 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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, 2002 and 2001, and the results of its consolidated operations and its consolidated cash flows for each of the three years in the period ended January 31, 2002 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/  ERNST & YOUNG LLP      

Denver, Colorado
March 11, 2002

F-2

CONSOLIDATED BALANCE SHEETS

(amounts in thousands)