-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, C9TNxzTedFydZXnLxohuMTPFa61zZCMvfUTi5uiMQqDbZW8MFhQ3nQ+92/UU3/U4 1fFOv8YFf+VASmpZQvzfYQ== 0000912057-95-004278.txt : 19950531 0000912057-95-004278.hdr.sgml : 19950531 ACCESSION NUMBER: 0000912057-95-004278 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950225 FILED AS OF DATE: 19950530 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEST BUY CO INC CENTRAL INDEX KEY: 0000764478 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RADIO TV & CONSUMER ELECTRONICS STORES [5731] IRS NUMBER: 410907483 STATE OF INCORPORATION: MN FISCAL YEAR END: 0303 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-09595 FILM NUMBER: 95543409 BUSINESS ADDRESS: STREET 1: 4400 W 78TH ST CITY: BLOOMINGTON STATE: MN ZIP: 55435 BUSINESS PHONE: 6129472000 MAIL ADDRESS: STREET 1: 4400 W 78TH ST CITY: BLOOMINGTON STATE: MN ZIP: 55435 FORMER COMPANY: FORMER CONFORMED NAME: BEST BUYS CO INC DATE OF NAME CHANGE: 19900809 10-K405/A 1 10-K405/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A-1 (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 25, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-9595 BEST BUY CO., INC. (Exact Name of Registrant as Specified in Charter) MINNESOTA 41-0907483 (State of Incorporation) (I.R.S. Employer Identification Number) 7075 Flying Cloud Drive EDEN PRAIRIE, MINNESOTA 55344 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 612-947-2000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE 8-5/8% SENIOR SUBORDINATED NOTES, DUE 2000 NEW YORK STOCK EXCHANGE 9% SUBORDINATED EXTENDIBLE NOTES, DUE 1997 NEW YORK STOCK EXCHANGE 6-1/2% CONVERTIBLE MONTHLY INCOME PREFERRED SECURITIES NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: NONE 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 such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The aggregate market value of voting stock held by non-affiliates of the Registrant on May 3, 1995, was approximately $884,961,396. On that date, there were 42,566,390 shares of Common Stock issued and outstanding. 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. X --- DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the year ended February 25, 1995 ("Annual Report") are incorporated by reference into Part II. Portions of the Registrant's Proxy Statement dated May 17, 1995 for the regular meeting of shareholders to be held June 21, 1995 ("Proxy Statement") are incorporated by reference into Part III. PART III ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Financial Statements. All financial statements of the Registrant as set forth under Item 8 of this Report. 2. Financial Statement Schedules: No schedules have been included since they are either not applicable or the information is included elsewhere herein. -2- 3. Exhibits: Method of Number Description filing ------ ----------- ------ 3.1 Amended and Restated Articles of (2) Incorporation, as amended, of Best Buy 3.2 Certificate of Designation with respect (1) to Best Buy Series A Cumulative Convertible Preferred Stock, filed November 1, 1994 3.3 Amended and Restated By-Laws, as (1,3,4) amended, of Best Buy 4.1 Form of Indenture between Best Buy and (5) First Trust Company, Inc., relating to $30,000,000 Subordinated Extendible Notes due 1997, dated as of July 1, 1987 4.2 Note Purchase Agreement with Principal (6) Mutual Life Insurance Company, dated as of July 30, 1992 4.3 Credit Agreement dated July 29, 1994 (7) between Best Buy and First Bank National Association 4.4 First Amendment to the Credit Agreement (1) between Best Buy and First Bank National Association, dated October 5, 1994 4.5 Second Amendment to the Credit Agreement (1) between Best Buy and First Bank National Association, dated October 26, 1994 4.6 Indenture between Best Buy and (2) Mercantile Bank of St. Louis N.A. relating to $150,000,000 8-5/8% Senior Subordinated Notes due 2000, dated as of October 12, 1993 4.7 Amended and Restated Agreement of (1) Limited Partnership of Best Buy Capital, L.P., dated as of November 3, 1994 4.8 Indenture between Best Buy, Best Buy (1) Capital, L.P., and Harris Trust and Savings Bank relating to $288,227,848 6-1/2% Convertible Subordinated Debentures due 2024, dated as of November 3, 1994 -3- 4.9 Guarantee Agreement related to 6-1/2% (1) Convertible Monthly Income Preferred Securities of Best Buy Capital, L.P., dated November 3, 1994 4.10 Deposit Agreement with respect to Best (1) Buy Series A Cumulative Convertible Preferred Stock, dated November 3, 1994 10.1 1987 Employee Non-Qualified Stock Option (2) Plan, as amended 10.2 Amended 1987 Directors' Non-Qualified (1) Stock Option Plan, as amended 10.3 1994 Full-Time Employee Non-Qualified (2) Option Stock Plan 10.4 Resolutions of the Board of Directors (1) dated April 10, 1995 implementing the fiscal 1996 bonus program for senior officers 11.1 Computation of Earnings Per Share (1) 13.1 1995 Annual Report to Shareholders (8) 21.1 Subsidiaries of the Registrant (1) 23.1 Consent of Ernst & Young LLP (1) 23.2 Consent of Deloitte & Touche LLP (1) 27.1 Financial Data Schedule (1) -4- (1) Exhibits so marked were filed with the Securities and Exchange Commission on May 24, 1995 as exhibits to the Form 10-K of Best Buy Co., Inc. and are incorporated herein by reference and made a part hereof. (2) Exhibits so marked were filed with the Securities and Exchange Commission on May 20, 1994 as exhibits to the Form 10-K of Best Buy Co., Inc. and are incorporated herein by reference and made a part hereof. (3) Exhibit so marked was filed with the Securities and Exchange Commission on November 12, 1991, as an exhibit to the Registration Statement on Form S-3 (Registration No. 33-43065) of Best Buy Co., Inc., and is incorporated herein by reference and made a part of hereof. (4) Exhibit so marked was filed with the Securities and Exchange Commission on January 13, 1992, as an exhibit to Form 10-Q of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof. (5) Exhibit so marked was filed with the Securities and Exchange Commission on June 19, 1987, as an exhibit to the registration statement on form S-1 (Registration No. 33-15201) of Best Buy Co., Inc., and are incorporated herein by reference and made a part hereof. (6) Exhibits so marked were filed with the Securities and Exchange Commission on October 12, 1992, as exhibits to Form 10-Q of Best Buy Co., Inc., and are incorporated herein by reference and made a part hereof. (7) Exhibit so marked was filed with the Securities and Exchange Commission on September 30, 1994, as an exhibit to Form 10-Q of Best Buy Co., Inc. and is incorporated herein by reference and made a part hereof. (8) Document is filed herewith. Pursuant to Item 601(b)(4)(iii) of Regulation S-K under the Securities Act of 1933, the Registrant has not filed as exhibits to the Form 10-K certain instruments with respect to long-term debt under which the amount of securities authorized does not exceed 10 percent of the total assets of the Registrant. The Registrant hereby agrees to furnish copies of all such instruments to the Commission upon request. (b) Reports on Form 8-K A Current Report on Form 8-K was filed on December 7, 1994, reporting the lawsuit against the Company alleging various federal securities law violations. -5- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized. BEST BUY CO., INC. (Registrant) By: /s/ RICHARD M. SCHULZE ---------------------- Richard M. Schulze Chief Executive Officer Dated: May 30, 1995 Pursuant to the requirements of the Securities Exchange Act of 1934, this Amendment has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on May 30, 1995. /s/ Richard M. Schulze Chairman, Chief Executive Officer - ------------------------------ and Director (principal executive Richard M. Schulze officer) /s/ Bradbury H. Anderson President, Chief Operating Officer - ------------------------------ and Director Bradbury H. Anderson /s/ Allen U. Lenzmeier Executive Vice President and Chief - ------------------------------ Financial Officer (principal Allen U. Lenzmeier financial officer) /s/ Robert C. Fox Sr. Vice President - Finance and - ------------------------------ Treasurer (principal accounting Robert C. Fox officer) /s/ Elliot S. Kaplan - ------------------------------ Director Elliot S. Kaplan /s/ Frank D. Trestman - ------------------------------ Director Frank D. Trestman - ------------------------------ Director Culver Davis, Jr. - ------------------------------ Director David Stanley - ------------------------------ Director James C. Wetherbe -6- EX-13.1 2 EXHIBIT 13.1
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA - ------------------------------------------------------------------------------------------------------------------------------ ($ in thousands, except per share amounts) FISCAL PERIOD 1995 1994(1) 1993 1992 1991(2) - ------------------------------------------------------------------------------------------------------------------------------ STATEMENT OF EARNINGS DATA Revenues $5,079,557 $3,006,534 $1,619,978 $ 929,692 $ 664,823 Gross profit 690,393 456,925 284,034 181,062 141,657 Selling, general, and administrative expenses 568,466 379,747 248,126 162,286 130,681 Operating income 121,927 77,178 35,908 18,776 10,976 Earnings before cumulative effect of accounting change 57,651 41,710 19,855 9,601 4,540 Net earnings (loss) 57,651 41,285 19,855 9,601 (9,457) PER SHARE DATA Earnings before cumulative effect of accounting change $ 1.33 $ 1.01 $ .57 $ .33 $ .18 Net earnings (loss) 1.33 1.00 .57 .33 (.38) Common stock price: High 45 1/4 31 7/16 15 23/32 11 25/32 3 21/32 Low 22 1/8 10 27/32 4 23/32 2 21/32 1 1/2 Weighted average shares outstanding (000s) 43,471 41,336 34,776 28,848 24,852 OPERATING AND OTHER DATA Comparable store sales increase(3) 19.9% 26.9% 19.4% 14.0% 1.0% Number of stores (end of period) 204 151 111 73 56 Average revenues per store(4) $ 28,400 $ 22,600 $ 17,600 $ 14,300 $ 12,400 Gross profit percentage 13.6% 15.2% 17.5% 19.5% 21.3% Selling, general, and administrative expense percentage 11.2% 12.6% 15.3% 17.5% 19.7% Operating income percentage 2.4% 2.6% 2.2% 2.0% 1.6% Inventory turns(5) 4.7x 5.0x 4.8x 5.1x 4.5x BALANCE SHEET DATA (at period end) Working capital $ 609,049 $ 362,582 $ 118,921 $ 126,817 $ 64,623 Total assets 1,507,125 952,494 439,142 337,218 185,528 Long-term debt, including current portion 240,965 219,710 53,870 52,980 35,695 Convertible preferred securities 230,000 Shareholders' equity 376,122 311,444 182,283 157,568 56,741 - ------------------------------------------------------------------------------------------------------------------------------ This table should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes thereto. (1) During fiscal 1994, the Company adopted FAS 109, resulting in a cumulative effect adjustment of ($425) or ($.01) per share. (2) During fiscal 1991, the Company changed its method of accounting for extended service plans, resulting in a cumulative effect adjustment of ($13,997), or ($.56) per share. (3) Comparable stores are stores open at least 14 full months. (4) Average revenues per store are based upon total revenues for the period divided by the weighted average number of stores open during such period. (5) Inventory turns are calculated based upon a rolling 12 month average of inventory balances.
5 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Best Buy made significant progress as an emerging national retailer in the fiscal year ended February 25, 1995 by opening 53 new stores in nine new states, including expansion for the first time to the East and West coasts. The Company also introduced a larger, redesigned store, known as Concept III. In addition to the new stores, the Company remodeled or relocated 30 stores in fiscal 1995 to accommodate expanded product offerings and the Concept III features. Revenues of $5.080 billion in fiscal 1995 were 69% higher than fiscal 1994 and were driven by the new stores, a comparable store sales increase of 20% and a full year of operations at the 40 stores opened in the prior year. Fiscal 1994 revenues of $3.007 billion represented an 86% increase over the $1.620 billion reported in fiscal 1993. Earnings of $57.7 million in fiscal 1995 were 38% higher than earnings reported in fiscal 1994, before the cumulative effect of an accounting change in that year. The impact on earnings of the increased revenues was reduced by the effects of increasing price competition and costs associated with the expansion effort undertaken during the year. Higher interest expense on borrowings used to support store expansion and increased inventory levels also impacted the growth in fiscal 1995 earnings. Earnings of $41.7 million in fiscal 1994, before the change in accounting, rose 110% over fiscal 1993 earnings of $19.9 million. Earnings per share were $1.33 in fiscal 1995, $1.01 in fiscal 1994 and $.57 in fiscal 1993. REVENUES The following table presents selected revenue and store data for each of the last three fiscal years. ($ in thousands)
1995 1994 1993 - ------------------------------------------------------------------------ Revenues $5,079,557 $3,006,534 $1,619,978 Percentage increase in revenues 69% 86% 74% Comparable store sales increase 20% 27% 19% Average revenues per store $ 28,400 $ 22,600 $ 17,600 Number of stores open at end of year 204 151 111
The significant revenue growth experienced over the last several years continued in fiscal 1995 as the Company expanded the number of markets it serves and increased the average size of the stores it operates. Best Buy established strategic positions in fiscal 1995 on the West Coast by opening seven stores in the greater Los Angeles area and in the East with nine new stores in the Baltimore/Washington, D.C. market. The Company also opened ten stores in new markets in Ohio and another 27 stores including new markets in the Southeastern U.S. In addition to the new stores, the Company remodeled and expanded 18 stores and relocated another 12 stores to larger locations. Revenues from the new and remodeled/relocated stores in fiscal 1995, which were generally larger than the majority of the existing stores, along with the higher sales levels at existing stores resulted in a 26% increase in average revenues per store in fiscal 1995. Strong consumer spending in hard goods products prevailed through most of the year and combined with advancing technology in the computer category, to produce a comparable store sales increase of 20% for the year. Comparable store sales of computers increased 33% over the prior year and annual sales in the home office product category, which includes computers, grew to $1.9 billion or 37% of total sales in fiscal 1995. Entertainment software sales, which include compact discs, computer software and prerecorded cassettes and video tapes, increased by 107% to $729 million and represented 14% of total Company sales in fiscal 1995. The 86% increase in revenues in fiscal 1994 over fiscal 1993 was due to the addition of 40 new stores, including entries into Atlanta, Detroit and Phoenix, a full year of operations at the 38 stores opened in fiscal 1993 and a comparable store sales increase of 27%. The addition of name brands such as Apple, Compaq, Hewlett Packard and Toshiba to the Company's computer product category and the introduction of a new private label credit card program in June 1993 contributed to a 69% increase in comparable store sales of computers in fiscal 1994. Management believes that Company's private label credit card program has contributed to revenue growth by providing customers with convenient financing options. At February 25, 1995 there were approximately two million Best Buy credit card holders. The continued availability of financing programs is important to maintaining what the Company believes is a competitive advantage over certain of its warehouse format competitors. 6 Revenues from extended service plans were less than 1% of revenues in fiscal 1995 and 1994 and 1.3% of revenues in 1993. The Company's non-commissioned retail format, which has reduced emphasis on the sale of these plans, and the Company's value pricing of these plans has contributed to the decrease in significance of the revenues from these plans. Profit from extended service plans, before allocation of any selling, general and administrative expenses, was $13.0 million in fiscal 1995 compared with $12.5 million in 1994 and $12.0 million in 1993. The Company's Concept III store format, introduced in fiscal 1995, is designed to provide an interactive shopping experience with a greater assortment of products. The new and relocated/remodeled stores in fiscal 1995 were generally 45,000 square feet in size compared to principally 28,000 and 36,000 square foot stores at the end of fiscal 1994. In certain locations with a higher population density, the Company opened 58,000 square foot stores. These larger stores will enable the Company to provide customers with an even larger selection of products. The Concept III stores are able to present over 65,000 compact disc and prerecorded cassette titles, 12,000 prerecorded videos and 2,000 computer software titles, an assortment the Company believes is among the largest offered by any retailer. The Concept III stores will also utilize the additional space to expand the selection of higher profit margin accessory items and can accommodate broader product lines to include higher end products for the enthusiast. The Company has also introduced interactive information kiosks in certain of the Concept III stores, designed to provide customers with detailed information about product features and benefits using full motion videos and touch screen technology. Management continues to evaluate and refine the content and features of these Concept III stores to maximize their revenue and operating profit while providing customers with the most desirable shopping experience. The Company plans to open 47 new stores in fiscal 1996 and relocate or expand approximately 20 stores to larger facilities. The compounding effect of the high rates of comparable store sales growth experienced over the past four years, an expected slowing economy and the absence of significant new product introductions, will likely result in single digit same store sales growth in fiscal 1996, a rate that more closely reflects industry trends. Management expects that sales of computers and entertainment software will continue to have a significant impact on revenue growth from existing stores. Revenue growth in these two categories is dependent on the manufacturers' ability to meet consumer demand for new product technology and new entertainment software titles. In addition, revenue growth may be impacted by future increases in consumer interest rates and changes in consumers' expectations about the economy in general. COMPONENTS OF OPERATING INCOME The following table sets forth selected operating ratios for each of the last three fiscal years.
1995 1994 1993 - ------------------------------------------------------------------------ Gross profit 13.6% 15.2% 17.5% Selling, general and administrative expenses 11.2% 12.6% 15.3% Operating income 2.4% 2.6% 2.2% Earnings before accounting change 1.1% 1.4% 1.2% - ------------------------------------------------------------------------
Promotional pricing associated with the expansion into the new markets entered in fiscal 1995 and the continued increase in competition in existing markets contributed to the change in profit margins. The Company's retail strategy has been to be a price leader and maximize market share in the markets in which it operates. The increasing contribution of the lower margin computer product category to the total sales mix has also impacted margins over the last two years. The retail market for computers and related products is highly competitive and the Company competes not only with full service retailers but with discount warehouse style stores and mail order distributors. Technological advancements in the computer category have placed additional pressure on margins due to frequent changeover of models and features. The entertainment software category is also very competitive and the Company believes that its combination of low price and extensive selection affords the opportunity to gain market share and increase customer traffic. Competition in most of the markets in which the Company operates has increased as new competitors have entered the Company's existing markets and the Company has expanded into new, more competitive markets. Management expects that price competition in most product categories will remain strong in the coming fiscal year. Competition is expected to 7 increase in certain markets as competitors enter new markets currently served by the Company. The Company intends to use its market share position to focus on improving margins in fiscal 1996. An increased emphasis on customer service, assortment of accessory products and more fully featured products for the enthusiast are anticipated to impact margins. Management also expects that increasing sales volume will enable the Company to improve the pricing it obtains from vendors. Selling, general and administrative expenses declined to 11.2% of sales, compared to 12.6% and 15.3% in 1994 and 1993, respectively. The improvement in this ratio indicates that revenues have increased at a faster pace than the cost of operations. The improvement in this ratio in fiscal 1995 is particularly significant in light of the accomplishments during the year. Those accomplishments included the opening of 83 new or relocated/remodeled stores, commencement of operations in over 1.4 million additional square feet of distribution space at four distribution centers and the development of a new store format. The cost of these undertakings applied pressure on the Company's earnings for the year. The Company was able to continue to improve its leverage on costs such as advertising as stores were added to existing markets and higher revenues per store were generated. With comparable store sales slowing, and higher operating costs of new markets, the Company's opportunity to leverage operating expenses will not be as great in the future, particularly in the first half of fiscal 1996. Interest expense in fiscal 1995 increased over fiscal 1994 and fiscal 1993 as a result of business expansion over the past two years. Higher inventory levels and interest costs related to stores owned by the Company were the principal reasons for increased interest expense. Interest on bank borrowings also increased due to generally higher interest rates. Current year interest expense reflects a full year of interest on the $150 million of senior subordinated notes issued in October 1993 and four months of interest on the $230 million of convertible preferred securities issued in November 1994. The Company's effective tax rate of 38.7% in fiscal 1995 decreased slightly from the 39.0% in fiscal 1994 principally as a result of significantly higher jobs tax credits related to the increased number of employees hired in fiscal 1995. The tax laws providing for these credits expired at the end of 1994. Changes in the states in which the Company does business and the level of tax-exempt income has also impacted the Company's effective tax rate in the last three years. The Company adopted the provisions of FAS 109 "Accounting for Income Taxes," effective as of the beginning of fiscal 1994. The effect of the adoption was a charge to net earnings of $425,000 or $.01 per share. At February 25,1995 the Company had deferred tax assets of $24.2 million which are expected to be recovered through future taxable income. LIQUIDITY AND CAPITAL RESOURCES Best Buy strengthened its capital base in fiscal 1995 through a $230 million public offering of monthly income preferred securities and increased liquidity through an expansion of the Company's working capital credit facility from $125 million to $400 million. The convertible preferred securities, issued in November 1994, pay monthly distributions at the annual rate of 6.5% of the $50 liquidation preference and mature in November 2024. The Company also entered into a master lease facility which provided over $100 million in financing for retail store and distribution center development in fiscal 1995. Proceeds from these transactions and the proceeds of a $150 million senior subordinated note offering in October 1993 were used to support the Company's expansion and revenue growth in the current fiscal year. Cash flow from operations also improved in fiscal 1995 compared to 1994. In fiscal 1994, the $86 million in proceeds from a Common Stock offering, $44 million from the sale/leaseback of 17 stores, and the proceeds of the October 1993 senior subordinated note offering were used to provide the financing necessary for business expansion that year. In order to secure the desired store locations and assure timely completion of the store, the Company developed 27 of the new and relocated stores in fiscal 1995. Interim financing for this development was provided through working capital and the Company's master lease agreement. Upon completion of property development and opening of the retail stores, the Company generally enters into sale/leaseback transactions and recovers the cost of development. In addition to store development in fiscal 1995 the Company added over 1.4 million square feet of distribution capacity. The Company constructed a 700,000 square foot distribution center in Staunton, Virginia and leased a 310,000 square foot facility in Ontario, California to serve new markets. The Company also added a 240,000 8 square foot entertainment software distribution facility in Edina, Minnesota and expanded its existing facility in Ardmore, Oklahoma by 200,000 square feet. Current assets increased to $1.2 billion at February 25, 1995 compared to $765 million at February 26, 1994, primarily as a result of the increased inventory levels necessary to support the larger stores and higher sales volumes. The 53 new stores added approximately $200 million in inventory. Inventory turns were 4.7 times in fiscal 1995, down slightly from the prior year as a result of the start up of additional distribution facilities and increased inventories in the stores. Increases in trade payables and secured inventory financing arrangements at year end supported approximately 70% of the increase in inventory. Higher sales volumes in February 1995 as compared to February 1994 resulted in higher year-end receivables. The Company sells its receivables from sales on the Company's private label credit card, without recourse, to an unrelated third party. Spending related to development of certain operating retail locations and seven stores expected to be opened in fiscal 1996 also contributed to the increase in current assets over the prior fiscal year end. These costs are expected to be recovered through long-term financing in the next year. The Company currently has a revolving credit facility that provides for borrowings of $150 million throughout the year and an increase to $400 million on a seasonal basis from July through December. Borrowings under the facility are unsecured and are limited to certain percentages of inventories. The agreement requires that the maximum balance outstanding be reduced to $50 million for a period of 45 days, following the holiday season. This agreement expires in June 1996, and the Company has an option to request an extension of the facility for an additional year. The Company also has $180 million available under an inventory financing facility provided by a commercial credit corporation. Expansion plans for fiscal 1996 will mainly concentrate on developing the markets entered in fiscal 1995. The Company's plans include 47 new stores, the majority of which will be in existing markets, the relocation or remodeling of approximately 20 stores and the construction of an additional distribution center in Findlay, Ohio. The Company plans to add ten to twelve stores in the Los Angeles market to increase leverage on the advertising and distribution costs in place in that market. Fiscal 1996 store development plans also include the addition of stores in Baltimore/Washington, D.C., filling in of markets principally in Ohio and the Southeastern US and entry into Miami with seven stores. Conditions in certain markets will require that the Company acquire and develop the sites. The Company's practice is to lease, rather than own, its retail locations and it is expected that operating leases will be used for financing following construction. As of the end of fiscal 1995, the Company owned eight operating store locations as well as seven stores under development to be opened in the coming fiscal year. In addition to the stores under development at year-end, the Company expects that it will need to develop another 15 to 20 of the new and relocated stores to be opened in fiscal 1996. The new distribution center in Ohio is being developed by the Company and the development costs are expected to be recovered through a combination of sale/leaseback and other equipment financing. Each new store requires approximately $3.0 to $3.6 million in working capital for merchandise inventory (net of vendor financing), fixtures and leasehold improvements. Management expects that there will be adequate funds available to finance planned capital expenditures in fiscal 1996, net of amounts expected to be recovered through long-term real estate financing. Management believes that funds available from the Company's credit facility, vendors and real estate financing, along with cash on hand and anticipated cash flow from operations will be sufficient to support planned expansion and growth for the coming year. 9 QUARTERLY RESULTS AND SEASONALITY Similar to most retailers, the Company's business is seasonal. Revenues and earnings are lower during the first half of each fiscal year and are greater during the second half, which includes the year-end holiday selling season. The timing of new store openings and general economic conditions may affect future quarterly results of the Company. The following table sets forth the Company's unaudited quarterly operating results for each quarter of fiscal 1995 and 1994. ($ in thousands, except per share data)
FISCAL 1995 MAY 28 AUGUST 27 NOVEMBER 26 FEBRUARY 25 1994 1994 1994 1995 - -------------------------------------------------------------------------------------- Revenues $849,403 $933,172 $1,349,871 $1,947,111 Gross profit 118,952 132,184 183,709 255,548 Operating income 11,686 17,659 38,013 54,569 Net earnings 4,241 7,600 17,702 28,108 Net earnings per share .10 .18 .41 .63 FISCAL 1994 MAY 29 AUGUST 28 NOVEMBER 27 FEBRUARY 26 1993 1993 1993 1994 - -------------------------------------------------------------------------------------- Revenues $441,919 $562,980 $ 808,476 $1,193,159 Gross profit 74,476 94,198 121,108 167,143 Operating income 3,674 13,090 20,849 39,565 Net earnings 1,091 7,594 11,161 21,439 Net earnings per share .03 .18 .26 .50
The quarter ended May 29, 1993 includes the cumulative effect of a change in accounting for income taxes that reduced earnings by $425 ($.01 per share).
COMMON STOCK PRICES QUARTER 1ST 2ND 3RD 4TH - -------------------------------------------------------------------------------------- Fiscal 1995 High $ 37 1/2 $ 36 5/8 $ 45 $ 45 1/4 Low 25 3/4 22 1/8 34 1/2 23 1/8 Fiscal 1994 High $ 16 5/32 $ 16 1/2 $ 31 7/16 $ 27 11/16 Low 11 7/32 10 27/32 16 3/32 18 13/16
Best Buy's Common Stock is traded on the New York Stock Exchange, symbol BBY. As of May 3, 1995, there were 2,109 holders of record of Best Buy Common Stock. The Company has not paid cash dividends on its Common Stock and does not presently intend to pay any dividends on its Common Stock for the foreseeable future. 10 CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- ($ in thousands, except per share amounts)
ASSETS FEBRUARY 25 February 26 1995 1994 - -------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $ 144,700 $ 59,872 Receivables 84,440 52,944 Recoverable costs from developed properties 86,222 Merchandise inventories 907,677 637,950 Deferred income taxes 15,022 13,088 Prepaid expenses 2,606 756 ---------------------------------- Total current assets 1,240,667 764,610 PROPERTY AND EQUIPMENT Land and buildings 13,524 37,660 Leasehold improvements 93,889 55,279 Furniture, fixtures and equipment 191,084 122,683 Property under capital leases 27,096 17,870 ---------------------------------- 325,593 233,492 Less accumulated depreciation and amortization 88,116 60,768 ---------------------------------- Net property and equipment 237,477 172,724 OTHER ASSETS Deferred income taxes 9,223 7,078 Other assets 19,758 8,082 ---------------------------------- Total other assets 28,981 15,160 ---------------------------------- TOTAL ASSETS $ 1,507,125 $ 952,494 ---------------------------------- ----------------------------------
See notes to consolidated financial statements.
LIABILITIES AND SHAREHOLDERS' EQUITY FEBRUARY 25 February 26 1995 1994 - -------------------------------------------------------------------------------------- CURRENT LIABILITIES Obligations under financing arrangements $ 81,755 $ 11,156 Accounts payable 406,682 294,060 Accrued salaries and related expenses 23,785 19,319 Accrued liabilities 65,757 37,754 Deferred service plan revenue and warranty reserve 24,942 19,146 Accrued income taxes 14,979 11,694 Current portion of long-term debt 13,718 8,899 ---------------------------------- Total current liabilities 631,618 402,028 DEFERRED SERVICE PLAN REVENUE AND WARRANTY RESERVE, LONG-TERM 42,138 28,211 LONG-TERM DEBT 227,247 210,811 CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY 230,000 SHAREHOLDERS' EQUITY Preferred stock, $1.00 par value: Authorized - 400,000 shares; Issued and outstanding - none Common stock, $.10 par value: Authorized - 120,000,000 shares; Issued and outstanding 42,216,000 and 41,742,000 shares, respectively 4,221 2,087 Additional paid-in capital 228,982 224,089 Retained earnings 142,919 85,268 ---------------------------------- Total shareholders' equity 376,122 311,444 ---------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,507,125 $ 952,494 ---------------------------------- ----------------------------------
11 CONSOLIDATED STATEMENTS OF EARNINGS - -------------------------------------------------------------------------------- ($ in thousands, except per share amounts)
FOR THE FISCAL YEARS ENDED FEBRUARY 25 February 26 February 27 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------- Revenues $ 5,079,557 $ 3,006,534 $ 1,619,978 Cost of goods sold 4,389,164 2,549,609 1,335,944 ------------------------------------------- Gross profit 690,393 456,925 284,034 Selling, general and administrative expenses 568,466 379,747 248,126 ------------------------------------------- Operating income 121,927 77,178 35,908 Interest expense, net 27,876 8,800 3,883 ------------------------------------------- Earnings before income taxes and cumulative effect of change in accounting principle 94,051 68,378 32,025 Income taxes 36,400 26,668 12,170 ------------------------------------------- Earnings before cumulative effect of change in accounting principle 57,651 41,710 19,855 Cumulative effect of change in accounting for income taxes (425) ------------------------------------------- NET EARNINGS $ 57,651 $ 41,285 $ 19,855 ------------------------------------------- ------------------------------------------- EARNINGS PER SHARE Earnings before cumulative effect of change in accounting principle $ 1.33 $ 1.01 $ .57 Cumulative effect of change in accounting for income taxes (.01) ------------------------------------------- NET EARNINGS PER SHARE $ 1.33 $ 1.00 $ .57 ------------------------------------------- ------------------------------------------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (000) 43,471 41,336 34,776 ------------------------------------------- -------------------------------------------
See notes to consolidated financial statements. 12 CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- ($ in thousands)
FOR THE FISCAL YEARS ENDED FEBRUARY 25 February 26 February 27 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings $ 57,651 $ 41,285 $ 19,855 Charges to earnings not affecting cash: Depreciation and amortization 38,570 22,412 14,832 Loss on disposal of property and equipment 760 719 545 Cumulative effect of change in accounting for income taxes 425 ------------------------------------------- 96,981 64,841 35,232 Changes in operating assets and liabilities: Receivables (31,496) (14,976) (21,987) Merchandise inventories (269,727) (387,959) (114,153) Deferred income taxes and prepaid expenses (5,929) (5,234) (2,063) Accounts payable 112,622 175,722 49,668 Other current liabilities 40,415 33,014 16,106 Deferred service plan revenues and warranty reserve 19,723 8,393 6,148 ------------------------------------------- Total cash used in operating activities (37,411) (126,199) (31,049) ------------------------------------------- INVESTING ACTIVITIES Additions to property and equipment (118,118) (101,412) (74,864) Recoverable costs from developed properties (86,222) Proceeds from sale/leasebacks 24,060 44,506 Increase in other assets (11,676) (6,592) (1,180) ------------------------------------------- Total cash used in investing activities (191,956) (63,498) (76,044) ------------------------------------------- FINANCING ACTIVITIES Proceeds from issuance of convertible preferred securities 230,000 Increase in obligations under financing arrangements 70,599 6,285 697 Long-term debt borrowings 21,429 160,310 29,700 Long-term debt payments (10,199) (6,977) (37,515) Common stock issued 2,366 86,513 4,860 (Payments) borrowings on revolving credit line, net (3,700) 3,700 ------------------------------------------- Total cash provided by financing activities 314,195 242,431 1,442 ------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 84,828 52,734 (105,651) CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 59,872 7,138 112,789 ------------------------------------------- CASH & CASH EQUIVALENTS AT END OF PERIOD $ 144,700 $ 59,872 $ 7,138 ------------------------------------------- -------------------------------------------
See notes to consolidated financial statements. 13 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------- ($ in thousands)
ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS - ----------------------------------------------------------------------------------------------------------- BALANCES AT FEBRUARY 29, 1992 $ 1,122 $ 132,318 $ 24,128 Stock options exercised 27 2,311 Tax benefit from stock options exercised 2,522 Net earnings 19,855 ------------------------------------------- BALANCES AT FEBRUARY 27, 1993 1,149 137,151 43,983 Sale of common stock 234 85,294 Stock options exercised 10 977 Tax benefit from stock options exercised 1,363 Effect of 3-for-2 stock split 694 (696) Net earnings 41,285 ------------------------------------------- BALANCES AT FEBRUARY 26, 1994 2,087 224,089 85,268 Stock options exercised 45 2,321 Tax benefit from stock options exercised 4,661 Effect of 2-for-1 stock split 2,089 (2,089) Net earnings 57,651 ------------------------------------------- BALANCES AT FEBRUARY 25, 1995 $4,221 $228,982 $142,919 ------------------------------------------- -------------------------------------------
See notes to consolidated financial statements. INDEPENDENT AUDITOR'S REPORT - -------------------------------------------------------------------------------- Shareholders and Board of Directors Best Buy Co., Inc. We have audited the accompanying consolidated balance sheets of Best Buy Co., Inc. as of February 25, 1995, and the related consolidated statements of earnings, shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Best Buy Co., Inc. for the years ended February 26, 1994 and February 27, 1993 were audited by other auditors whose report dated April 13, 1994 expressed an unqualified opinion on those statements, and included an explanatory paragraph that described the accounting change discussed in Note 8 to the consolidated financial statements. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, the 1995 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Best Buy Co., Inc., at February 25, 1995, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. As discussed in Note 8 to the consolidated financial statements, the Company changed its method of accounting for income taxes during the year ended February 26, 1994. /s/ Ernst & Young LLP Minneapolis, Minnesota April 19, 1995 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- ($ in thousands, except per share amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS: The Company sells personal computer and other home office products, consumer electronics, entertainment software, major appliances and related accessories through its retail stores. BASIS OF PRESENTATION: The consolidated financial statements include the accounts of Best Buy Co., Inc. and its subsidiaries. Significant intercompany accounts and transactions have been eliminated. CASH AND CASH EQUIVALENTS: The Company considers all short-term investments with a maturity of three months or less when purchased to be cash equivalents. RECOVERABLE COSTS FROM DEVELOPED PROPERTIES: The costs of acquisition and development of properties which the Company intends to sell and lease back or recover from landlords within one year are included in current assets. MERCHANDISE INVENTORIES: Merchandise inventories are recorded at the lower of average cost or market. PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost. Depreciation, including amortization of property under capital leases, is computed on the straight-line method over the estimated useful lives of the assets, or, in the case of leasehold improvements, over the shorter of the estimated useful lives or lease terms. ACCOUNTS PAYABLE: Under the Company's cash management system, checks issued but not cleared through the bank account frequently result in a cash overdraft in the accounting records. Overdraft balances of $78,140 and $90,119 at February 25, 1995, and February 26, 1994, respectively, are included in accounts payable. PRE-OPENING COSTS: Costs incurred in connection with the opening of new stores are expensed in the year the store is opened. Pre-opening costs were $13,971, $7,335 and $6,231 in fiscal 1995, 1994, and 1993, respectively. DEFERRED SERVICE PLAN REVENUE AND WARRANTY RESERVE: Revenue from the sale of extended service contracts, net of direct selling expenses, is recognized straight-line over the life of the contract. Costs related to servicing the plans are expensed as incurred. Estimated costs of promotional contracts, included with products at no cost to the consumer, are accrued as warranty reserve at the time of product sale. EARNINGS PER SHARE: Earnings per share is computed based on the weighted average number of common shares outstanding during each period, adjusted for 1,458,000, 1,300,000 and 902,000 incremental shares assumed issued on the exercise of stock options in fiscal 1995, 1994 and 1993, respectively. All common share and per share information has been adjusted for the three-for-two stock split in September 1993 and the two-for-one stock split in April 1994. Fully diluted earnings per share assumes that the convertible preferred securities were converted into common stock and the interest expense thereon, net of related taxes, is added back to net income. References to earnings per share relate to fully diluted earnings per share. FISCAL YEAR: The Company's fiscal year ends on the Saturday nearest the end of February. All years presented contained 52 weeks. RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform to current year presentation. 2. OBLIGATIONS UNDER FINANCING ARRANGEMENTS The Company has a $180,000 inventory financing credit line. Borrowings are collateralized by a security interest in certain merchandise inventories approximating the outstanding borrowings. The line has provisions that give the financing source a portion of the cash discounts provided by the manufacturers. 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- ($ in thousands, except per share amounts) 3. BORROWINGS
FEBRUARY 25 February 26 1995 1994 - ----------------------------------------------------------------------- Senior subordinated notes $ 150,000 $ 150,000 Subordinated notes 21,904 21,904 Equipment financing loans 39,622 25,306 Obligations under capital leases 20,739 13,800 Contract for deed 8,700 8,700 --------------------------------- 240,965 219,710 Current portion of long term debt 13,718 8,899 --------------------------------- $ 227,247 $ 210,811 --------------------------------- ---------------------------------
CREDIT AGREEMENT: The Company has a credit agreement (the "Agreement") that contains a revolving credit facility under which the Company can borrow up to $400,000. The Agreement provides that up to $150,000 of the facility is available at all times and an additional $250,000 is available from July 1 to December 31. The Agreement expires in June 1996, and the Company has the option to request an extension of the Agreement for an additional year. Borrowings under the facility are unsecured. Interest on borrowings is at rates specified in the Agreement, as elected by the Company. The Company also pays certain commitment and agent fees. The Agreement contains covenants that require maintenance of certain financial ratios and place limits on owned real estate and capital expenditures. The Agreement also provides that once a year, the Company must repay any amounts outstanding, and for a period of not less than 45 days thereafter, the aggregate principal amount outstanding is limited to $50,000. There were no balances outstanding under the facility at February 25, 1995 and February 26, 1994. The weighted average interest rate under the Company's current and prior credit agreements was 6.21%, 4.44% and 5.10% for fiscal 1995, 1994 and 1993, respectively. SENIOR SUBORDINATED NOTES: In October 1993, the Company issued $150,000 of senior subordinated notes. The notes mature on October 1, 2000, and bear interest at 8.63%. The Company may, at its option, redeem the notes prior to maturity at 102.50% and 101.25% of par in 1998 and 1999, respectively. The Company may be required to offer early redemption in the event of a change in control, as defined. The notes are unsecured and subordinate to the prior payment of all senior debt, which approximates $196,000 at February 25, 1995. The indenture also contains provisions, which limit the amount of additional borrowings the Company may incur and limit the Company's ability to pay dividends and make other restricted payments. SUBORDINATED NOTES: The Company has an $18,000 unsecured, subordinated note outstanding which bears interest at 9.95% and matures on July 30, 1999. In addition, the Company has $3,904 of unsecured, subordinated notes due June 15, 1997 which bear interest at 9.00%. EQUIPMENT FINANCING LOANS: The equipment financing loans require monthly or quarterly payments and have maturity dates between June 1996 and December 1999. The interest rates on these loans range from 7.54% to 11.15%. Furniture and fixtures with a book value of $35,609 are pledged against these loans. OBLIGATIONS UNDER CAPITAL LEASES: The present value of future minimum lease payments relating to certain equipment and a distribution center has been capitalized. The capitalized cost is $27,095 and $17,870 at February 25, 1995, and February 26, 1994, respectively. The net book value of assets under capital leases was $20,176 and $13,439 at February 25, 1995 and February 26, 1994, respectively. CONTRACT FOR DEED: The Company purchased its corporate office building on a contract for deed. The contract for deed calls for semiannual interest payments of $430 with payment of the contract balance on June 12, 1996. 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- ($ in thousands, except per share amounts) FUTURE MATURITIES OF DEBT: Capital Other Fiscal year Leases Debt - ------------------------------------------------------------------------------ 1996 $ 4,974 $ 9,640 1997 4,648 18,501 1998 3,472 13,154 1999 1,346 6,459 2000 513 22,472 Later years 7,559 150,000 ----------------------------- 22,512 $ 220,226 --------- --------- Less amount representing interest 1,773 -------- Minimum lease payments $ 20,739 -------- --------
During fiscal 1995, 1994 and 1993 interest paid (net of amounts capitalized) totaled $25,708, $5,360 and $5,385, respectively. Assets acquired under capital leases were $10,025, $3,807 and $8,705 in fiscal 1995, 1994 and 1993, respectively. The fair value of the Company's senior subordinated notes was $143,813 at February 25, 1995 based on quoted market prices. The fair value of all other financial instruments, including those with quoted market prices, approximates carrying value. 4. CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY In November 1994, the Company and Best Buy Capital, L.P. (Best Buy Capital), a special purpose limited partnership in which the Company is the sole general partner, completed the public offering of 4,600,000 convertible monthly income preferred securities with a liquidation preference of $50 per security. The underwriting discount and expenses of the offering aggregated $7,680. The proceeds of the offering were loaned to the Company in exchange for a subordinated debenture with payment terms substantially similar to the preferred securities. Distributions on the securities are payable monthly at the annual rate of 6.50% of the liquidation preference and are included in interest expense in the consolidated financial statements. The securities are convertible into shares of the Company's Common Stock at the rate of 1.111 shares per security (equivalent to a conversion price of $45 per share). The preferred securities are subject to mandatory redemption in November 2024 at the liquidation preference price. The Company has the option to defer distributions on the securities for up to 60 months. A deferral of distributions may result in the conversion of the preferred securities into Series A Preferred Stock of the Company. The Company has the right to cause the conversion rights to expire any time after three years from the date of issuance in the event the Company's Common Stock price exceeds $54 per share for 20 out of 30 consecutive trading days. 5. SHAREHOLDERS' EQUITY PUBLIC OFFERING: In June 1993, the Company completed a public offering of 7,020,000 shares of Common Stock, including the underwriters' over allotment, at $12.83 per share. Net proceeds of the offering were $85,528 after deducting the underwriting discount and offering expenses of $4,562. STOCK OPTIONS: The Company sponsors two non-qualified stock option plans for employees and one non-qualified plan for directors. These plans provide for the issuance of up to 9,650,000 shares. Options may be granted only to employees or directors at option prices not less than the fair market value of the Company's Common Stock on the date of the grant. At February 25, 1995, options to purchase 3,744,000 shares are outstanding under these plans. In addition, at February 25, 1995, an option to purchase 26,000 shares is outstanding to an officer, not pursuant to a plan. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- ($ in thousands, except per share amounts) Option activity for each of the last three years is as follows:
Option Price Shares per Share - ----------------------------------------------------------------------------- OUTSTANDING FEBRUARY 29, 1992 2,091,000 $ 2.21 - 10.31 Granted 912,000 5.89 - 6.29 Exercised (837,000) 2.21 - 6.29 Cancelled (45,000) 2.21 - 6.29 --------- OUTSTANDING FEBRUARY 27, 1993 2,121,000 2.21 - 10.31 Granted 1,391,000 11.23 - 13.58 Exercised (240,000) 2.21 - 10.31 Cancelled (102,000) 2.21 - 12.00 --------- OUTSTANDING FEBRUARY 26, 1994 3,170,000 2.21 - 13.58 Granted 1,316,000 27.68 - 38.19 Exercised (472,000) 2.21 - 12.00 Cancelled (244,000) 2.21 - 32.40 --------- OUTSTANDING FEBRUARY 25, 1995 3,770,000 2.50 - 38.19 --------- --------- EXERCISABLE FEBRUARY 25, 1995 1,247,000 $ 2.50 - 32.40 --------- ---------
6. OPERATING LEASE COMMITMENTS & RELATED PARTY TRANSACTIONS The Company conducts the majority of its retail and distribution operations from leased locations. The Company completed the sale/leaseback of 11 stores in 1995 and 17 stores in 1994, with transaction costs and any gain or loss recognized over the term of the lease agreement. Proceeds from the sale/leaseback of stores owned at February 26, 1994 are shown as such in the accompanying fiscal 1995 statement of cash flows. Proceeds from the sale/leaseback of properties developed in fiscal 1995 are included in the net change in recoverable costs from developed properties. The Company also leases various equipment under operating leases and, prior to January 1994, its corporate headquarters were located in a leased facility. In addition, the Company leases 14 stores and a distribution center, along with the related fixtures and equipment under a master lease agreement. The initial terms of the leases under this agreement range from one to five years, and rent is variable based on interest rate options as selected by the Company. The leases require payment of real estate taxes, insurance, and common area maintenance. Most of the leases contain renewal options and escalation clauses, and several require contingent rents based on specified percentages of sales. Certain leases also contain covenants related to maintenance of financial ratios. Future minimum lease obligations by year (not including percentage rentals) for all operating leases at February 25, 1995, are as follows:
FISCAL YEAR 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . $85,221 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 82,891 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 81,059 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . 77,352 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 72,909 Later years. . . . . . . . . . . . . . . . . . . . . . . 653,698
The composition of the total rental expenses for all operating leases during the last three fiscal years, including leases of building and equipment, is as follows:
1995 1994 1993 - ------------------------------------------------------------------------------- Minimum rentals $64,716 $37,673 $22,757 Percentage rentals 795 439 405 -------------------------------------- $65,511 $38,112 $23,162 -------------------------------------- --------------------------------------
Five stores are leased from the Company's CEO and principal shareholder, his spouse, or partnerships in which he is a partner. Rent expense under these leases during the last three fiscal years was as follows:
1995 1994 1993 - ------------------------------------------------------------------------------- Minimum rentals $1,120 $1,049 $1,051 Percentage rentals 470 423 405 -------------------------------------- $1,590 $1,472 $1,456 -------------------------------------- --------------------------------------
7. RETIREMENT SAVINGS PLAN The Company has a retirement savings plan for employees meeting certain age and service requirements.The plan provides for a Company matching contribution which is subject to annual approval. This matching contribution was $1,376, $906 and $697 during fiscal 1995, 1994 and 1993, respectively. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- ($ In thousands, except per share amounts) 8. INCOME TAXES In fiscal 1994, the Company adopted FASB Statement No. 109 "Accounting for Income Taxes" (FAS 109) and changed its method of accounting for income taxes from the deferred method to the liability method required by FAS 109. As permitted by FAS 109, prior years' financial statements have not been restated. The cumulative effect of the change as of February 28, 1993 was a charge to earnings of $425. FOLLOWING IS A RECONCILIATION OF THE PROVISION FOR INCOME TAXES TO THE FEDERAL STATUTORY RATE:
1995 1994 1993 - ------------------------------------------------------------------------- Federal income tax at the statutory rate $32,918 $23,932 $10,888 State income taxes, net of federal benefit 4,759 3,320 1,412 Jobs tax credit (1,402) (293) (54) Tax exempt investment income (70) (341) (228) Other 195 359 152 Effect of tax rate change on deferred taxes (309) ---------------------------------------- Provision for income taxes $36,400 $26,668 $12,170 ---------------------------------------- ---------------------------------------- Effective tax rate 38.7% 39.0% 38.0% ---------------------------------------- ----------------------------------------
The provision for income taxes consists of the following:
1995 1994 1993 - ------------------------------------------------------------------------ Current: Federal $32,435 $25,909 $12,129 State 8,044 5,882 2,628 ---------------------------------------- 40,479 31,791 14,757 ---------------------------------------- Deferred: Federal (3,495) (4,620) (2,118) State (584) (503) (469) ---------------------------------------- (4,079) (5,123) (2,587) ---------------------------------------- Provision for income taxes $36,400 $26,668 $12,170 ---------------------------------------- ----------------------------------------
Deferred taxes under FAS 109 are the result of differences between the basis of assets and liabilities for financial reporting and income tax purposes. Significant deferred tax assets and liabilities consist of the following:
FEBRUARY 25 February 26 1995 1994 - -------------------------------------------------------------------------------------- Deferred service plan revenue and warranty reserve $26,396 $18,625 Inventory 2,332 3,326 Compensation and benefits 2,218 1,547 Other-net 1,289 766 ---------------------------- Total deferred tax assets 32,235 24,264 ---------------------------- Property and equipment 7,287 3,988 Other-net 703 110 ---------------------------- Total deferred tax liabilities 7,990 4,098 ---------------------------- Net deferred tax assets $24,245 $20,166 ---------------------------- ----------------------------
The deferred income tax benefit under the previous method of accounting for income taxes for fiscal 1993 is comprised of the following:
Deferred service plan revenue and warranty reserve $ (2,308) Depreciation expense 826 Inventory cost capitalization (497) Reserves for losses not currently deductible (558) Other (50) -------------- $ (2,587) -------------- --------------
The Company believes that the interest on the subordinated note referred to in Note 4 is deductible and that Best Buy Capital will be treated as a partnership for income tax purposes. Income taxes paid were $32,899, $25,442 and $7,174 in fiscal 1995, 1994 and 1993, respectively. 9. LEGAL PROCEEDINGS The Company is involved in various legal proceedings arising during the normal course of conducting business. Management believes that the resolution of these proceedings will not have any material adverse impact on the Company's financial condition. 19 -----END PRIVACY-ENHANCED MESSAGE-----