IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

x : In re: : Chapter 11 : ULTIMATE ELECTRONICS, INC., et al., : Case No. 05-______(_____) : Debtors. : Jointly Administered : : Hearing Date: x Objection Due:

MOTION FOR ADMINISTRATIVE ORDER PURSUANT TO 11 U.S.C. §§ 105(a) AND 331 ESTABLISHING PROCEDURES FOR INTERIM COMPENSATION AND REIMBURSEMENT OF EXPENSES OF PROFESSIONALS

Ultimate Electronics, Inc. ("Ultimate Electronics") and six (6) of its subsidiaries and affiliates (the "Affiliate Debtors"), debtors and debt- ors-in-possession in the above-captioned cases (Ultimate Electronics and the

Affiliate Debtors collectively, the "Debtors"), hereby move (the "Motion") this Court for entry of an administrative order, under 11 U.S.C. §§ 105 and 331, establishing procedures for interim compensation and reimbursement of expenses of profession- als. In support of this Motion, the Debtors rely on the Affidavit of David A. Carter in Support of Chapter 11 Petitions and First Day Orders, sworn to on January 11,

2005. In further support of this Motion, the Debtors respectfully represent as follows:

BACKGROUND

A. The Chapter 11 Filings

1. On January 11, 2005 (the "Petition Date"), the Debtors filed voluntary petitions in this Court for reorganization relief under chapter 11 of the

Bankruptcy Code. The Debtors continue to operate their businesses and manage their properties as debtors-in-possession pursuant to sections 1107(a) and 1108 of the

Bankruptcy Code. The Debtors have moved this Court for an order for joint admin- istration of these chapter 11 cases.

2. No creditor's committee has yet been appointed in these cases.

No trustee or examiner has been appointed.

3. This Court has jurisdiction over this Motion pursuant to 28

U.S.C. §§ 157 and 1334. Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409.

This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2).

4. The statutory predicates for the relief requested herein are sections 105(a) and 331 of the Bankruptcy Code.

B. Current Business Operations of the Debtors and Events Leading to Chapter 11 Filing

5. Ultimate Electronics is a leading specialty retailer of high-end home entertainment and consumer electronics with sixty-five (65) stores. In addi- tion, the Debtors operate Fast Trak, Inc., an independent electronics repair company based in Colorado. The Debtors employ more than 3,300 full and part-time employ-

2 ees. For the year ended January 31, 2004, the Debtors had sales of $712 million and administered approximately $329 million of assets at book value.

6. In fiscal 2001, the Debtors embarked on an aggressive expansion strategy opening 34 new stores over a three year period. This expansion severely stretched the Debtors' financial and operational resources. Moreover, the new stores did not perform up to expectations. Indeed, sales have continued to decline since the completion of the expansion program. Most recently, sales declines during the third and fourth quarter of fiscal 2004 caused some vendors to reduce credit lines or shorten payments terms and have led to additional reserves in the

Debtors' credit facility. The sales declines and resulting reduction in credit support has created severe liquidity difficulties for the Debtors.

7. Accordingly, the Debtors explored various strategic alterna- tives. The Debtors ultimately decided that an equity infusion to be provided by an entity owned by Mr. Mark Wattles and a new credit facility to be provided by Wells

Fargo in which Mr. Wattles would be a "silent" minority participant, provided the best alterative to the Debtors to enable them to address their operational and finan- cial needs and to thereby maximize value for their constituents.

8. The Debtors believe that Mr. Wattles' substantial commit- ment, both in his time, talent and resources, is a positive and compelling statement both to the Debtors' constituents and for the Debtors' future prospects. However,

3 much work is left to be done. The Debtors now have adequate liquidity with which

to take stock of their businesses in a rational and deliberate manner and to formulate

a business plan upon which to develop their exit strategy. The chapter 11 filing was

necessary to permit the funding described above, to provide the Debtors with a

breathing spell from the demands being placed on them as a result of their lack of

liquidity and to enable them to rationally address their other operational and financial

challenges.

9. Notwithstanding these circumstances, the Debtors remain a

leading retailer of high-end consumer electronics, furnishings and installation

services for the car and home. The Debtors intend to use the breathing spell afforded

under chapter 11 and the reinvigoration of the enterprise occasioned by Mr. Wattles

involvement to re-examine all aspects of their operations and to improve their cost

structure and return to profitability. The Debtors have begun to evaluate all of their

business segments including their underperforming stores and will be quickly turning

to address those issues in a manner that is expected to offer the best return for their

stakeholders.

RELIEF REQUESTED

10. Contemporaneously with the filing of this Motion, the Debtors are seeking approval of the employment of (a) Skadden, Arps, Slate, Meagher &

Flom LLP and its affiliated law practice entities as restructuring and bankruptcy

4 counsel; (b) FTI Consulting, Inc. as financial advisor; and (c) Hogan & Hartson

L.L.P. as Special Corporate Counsel to the Debtors. The Debtors anticipate that they may retain other professionals and special counsel in these cases as well. A statutory committee of unsecured creditors (the "Committee") may be appointed in these cases and likely will retain counsel, and possibly other professionals, to assist it.

11. By this Motion, the Debtors request the entry of an order authorizing and establishing procedures for the compensation and reimbursement of court-approved professionals (the "Professionals") on a monthly basis, on terms comparable to those procedures established in other large chapter 11 cases filed in this and other Districts. Such an order will streamline the professional compensation process and enable the Court and all other parties to monitor the professional fees incurred in these chapter 11 cases more effectively.

BASIS FOR RELIEF

12. As detailed below, the proposed procedures set forth herein will permit each Professional to file with the Court a monthly application for interim approval and allowance of fees for services rendered and expenses incurred by each

Professional during the immediately preceding month (the "Compensation Period").

13. The Debtors propose specifically that the monthly payment of compensation and reimbursement of expenses of the Professionals be structured as follows:

5 (a) No earlier than the 25th day of each month following the month for which compensation is sought (the "Monthly Fee Application

Date"), each Professional will file a monthly fee application (the "Monthly

Fee Application") with the Court and shall serve the same on the following parties (collectively, the "Notice Parties"): (i) the Debtors at Ultimate

Electronics, Inc., 321 W. 84th Avenue, Suite A, Thornton, CO 80260 (Attn:

David A. Carter); (ii) counsel to the Debtors, Skadden, Arps, Slate, Meagher

& Flom LLP, 333 West Wacker Drive, Suite 2100, Chicago, IL 60606 (Attn:

J. Eric Ivester); (iii) counsel to the Debtors' postpetition lenders, Bingham

McCutchen LLP, 150 Federal Street, Boston, MA 02110-1726 (Attn: Robert

Barry) and Baker Botts L.L.P., 2001 Ross Avenue, Dallas, TX 75201-2980

(Attn: Jack Kenzie); (iv) counsel to any official committee appointed in these cases; and (v) the United States Trustee. The first Monthly Fee Application shall be filed on or about February 25, 2005 for the period ending January 31,

2005.

(b) Each Notice Party will have twenty (20) days after service of a

Monthly Fee Application to object (the "Objection Deadline") to such application. Upon the expiration of the Objection Deadline, each Profes- sional may file a certificate of no objection or a certificate of partial objection with the Court, whichever is applicable, after which the Debtors are directed

6 to pay each Professional an amount (the "Actual Interim Payment") equal to the lesser of (i) 80% of the fees and 100% of the expenses requested in the

Monthly Fee Application (the "Maximum Payment") or (ii) 80% of the fees and 100% of the expenses not subject to an objection.

(c) If any Notice Party objects to a Professional's Monthly Fee

Application, the objecting party must file a written objection (each, an

"Objection") with the Court and serve such Objection on the Professional and each of the Notice Parties so that such Objection is received on or before the

Objection Deadline. Thereafter the objecting party and the Professional may attempt to resolve the Objection on a consensual basis. If the parties are unable to reach a resolution of the Objection within 20 days after service of the Objection, then the Professional may either (i) file a response to the

Objection with the Court, together with a request for payment of the differ- ence, if any, between the Maximum Payment and the Actual Interim Payment made to the affected Professional (the "Incremental Amount"), or (ii) forgo payment of the Incremental Amount until the next interim or final fee appli- cation hearing, at which time the Court will consider and dispose of the

Objection, if requested by the parties.

(d) Beginning with the period ending March 31, 2005, at three- month intervals or at such other intervals convenient to the Court (the "In-

7 terim Fee Period"), each of the Professionals must file with the Court an interim fee application (the "Interim Fee Application") for compensation and reimbursement of expenses sought in the Monthly Fee Applications filed during such period. Each Professional shall serve (i) its Interim Fee Applica- tion on the Notice Parties and (ii) notice of its Interim Fee Application

(which identifies the Professional seeking compensation, discloses the period for which the payment of fees and reimbursement of expenses are being sought and describes the amount of the fees and expenses sought) on all parties that have entered their appearance under Rule 2002 of the Federal

Rules of Bankruptcy Procedure. The Interim Fee Application must include a summary of the Monthly Fee Applications that are the subject of the request, but need not include the narrative discussion generally included in monthly fee applications. Each Professional must file its Interim Fee Application within forty-five (45) days after the end of the Interim Fee Period for which the request seeks allowance of fees and reimbursement of expenses. The first

Interim Fee Application should cover the Interim Fee Period from the Peti- tion Date through and including March 31, 2005. Any Professional that fails to file an Interim Fee Application when due will be ineligible to receive further interim payments of fees or expenses with respect to any subsequent

8 Interim Fee Period until such time as an Interim Fee Application is filed and served by the Professional.

(e) The Debtors shall request that the Court schedule a hearing on the Interim Fee Applications at least once every six months, or at such other intervals as the Court deems appropriate. The Court, in its discretion, may approve an uncontested Interim Fee Application without the need for a hearing, upon the Professional's filing of a certificate of no objection. Upon allowance by the Court of a Professional's Interim Fee Application, the

Debtors shall promptly pay such Professional all requested fees (including the

20% holdback) and costs not previously paid.

(f) The pendency of an Objection to payment of compensation or reimbursement of expenses will not disqualify a Professional from the future payment of compensation or reimbursement of expenses.

(g) Neither the payment of nor the failure to pay, in whole or in part, monthly interim compensation and reimbursement of expenses, nor the filing of or failure to file an Objection, will bind any party in interest (includ- ing a party served with monthly statements pursuant to paragraph 13(a) hereof) or the Court with respect to the allowance of interim or final applica- tions for compensation and reimbursement of expenses of the Professionals.

9 (h) All fees and expenses paid to the Professionals are subject to

disgorgement until final allowance by the Court.

14. The Debtors further request that each member of the commit- tee(s) (if appointed) be permitted to submit statements of expenses and supporting vouchers to counsel for the committee(s), and counsel for the committee(s) will collect and file such requests for reimbursement in accordance with the foregoing procedures for monthly and interim compensation and reimbursement of the Profes- sionals.

APPLICABLE AUTHORITY

15. Section 331 of the Bankruptcy Code provides, in relevant part, as follows:

A trustee, an examiner, a debtor's attorney, or any professional person employed under section 327 or 1103 of this title may apply to the Court not more than once every 120 days after an order for relief in a case under this title, or more often if the Court permits, for such compensation for services rendered before the date of such an appli- cation or reimbursement for expenses incurred before such date as is provided under section 330 of this title . . . .

11 U.S.C. § 331.

16. Section 105(a) of the Bankruptcy Code provides, in relevant part, as follows:

The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title . . . shall be construed to preclude the Court from, sua sponte,

10 taking any action or making any determination necessary or appropri- ate to enforce or implement court orders or rules . . . .

11 U.S.C. § 105(a).

17. Procedures for interim compensation are often approved to

avoid having professionals fund a reorganization case. See In re International

Horizons, Inc., 10 B.R. 895, 897 (Bankr. N.D. Ga. 1981) (establishing procedures for

monthly interim compensations). Appropriate factors to consider include "the size of

[the] reorganization cases, the complexity of the issues included, and the time

required on the part of the attorneys for the debtors in providing services necessary to

achieve a successful reorganization of the debtors." Id. at 897. Here, the Debtors'

chapter 11 cases are both large and complex — and the chapter 11 Professionals

have devoted, and likely will continue to devote, significant amounts of time to

achieving a successful reorganization of the Debtors.

18. This Court first approved the foregoing procedures for

compensating and reimbursing court-approved professionals on an interim basis in In

re Mariner Post-Acute Network, Inc., Case Nos. 00-00113 - 00-00214 (MFW)

(Bankr. D. Del. Jan. 4, 2001). The Mariner procedures have been followed in many

subsequent chapter 11 cases in this district. See, e.g., In re Aurora Foods Inc., Case

No. 03-13744 (MFW) (Bankr. D. Del. Jan. 9, 2004); In re Rouge Industries, Inc.,

Case No. 03-13272 (MFW) (Bankr. D. Del. Dec. 12, 2003); In re The Thaxton

11 Group, Inc., Case No. 03-13183 (PJW) (Bankr. D. Del. Nov. 12, 2003); In re

Tokheim Corp. II, Case No. 02-13437 (RJN) (Bankr. D. Del. Jan. 6, 2003).

19. No previous request for the relief sought herein has been made to this Court or any other court.

12 WHEREFORE, the Debtors respectfully request that the Court enter an order (i) authorizing and establishing procedures for the compensation and reimbursement of court-approved professionals on a monthly basis as set forth above and (ii) granting such other and further relief as is just and proper.

Dated: Wilmington, Delaware SKADDEN ARPS SLATE MEAGHER January 11, 2005 & FLOM LLP J. Eric Ivester Felicia Gerber Perlman Kristin E. Rooney 333 West Wacker Drive, Suite 2100 Chicago, Illinois 60606-1285 Telephone: (312) 407-0700 Facsimile: (312) 407-0411

- and -

/s/ Gregg M. Galardi Gregg M. Galardi (I.D. No. 2991) Matthew P. Ward (I.D. No. 4471) One Rodney Square P.O. Box 636 Wilmington, Delaware 19899-0636 Telephone: (302) 651-3000 Facsimile: (302) 651-3001

Attorneys for the Debtors and Debtors-in-Possession

433656-Chicago S1A 13