-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HxLpfI6thtIqmrGKLJo0wUbWyA2kyJj2YKcM5IzwMBM6SGBqeZip64rqTheJHF+L EBXtjqSDsb5uh0F+ZmXidg== 0000912057-97-018902.txt : 19970529 0000912057-97-018902.hdr.sgml : 19970529 ACCESSION NUMBER: 0000912057-97-018902 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970528 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09595 FILM NUMBER: 97615422 BUSINESS ADDRESS: STREET 1: 7075 FLYING CLOUD DR CITY: EDIN PRARIE STATE: MN ZIP: 55344 BUSINESS PHONE: 6129472000 MAIL ADDRESS: STREET 1: P O BOX 9312 CITY: MINNEAPOLIS STATE: MN ZIP: 55440-9312 FORMER COMPANY: FORMER CONFORMED NAME: BEST BUYS CO INC DATE OF NAME CHANGE: 19900809 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 1, 1997. 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 19, 1997, was approximately $461,378,308. On that date, there were 43,805,384 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 March 1, 1997 ("Annual Report") are incorporated by reference into Part II. Portions of the Registrant's Proxy Statement dated May 14, 1997 for the regular meeting of shareholders to be held June 25, 1997 ("Proxy Statement") are incorporated by reference into Part III. PART I Item 1. BUSINESS General Best Buy Co., Inc. (the "Company" or "Best Buy"), is the nation's largest volume specialty retailer of name brand consumer electronics, home office equipment, entertainment software and appliances. The Company commenced business in 1966 as an audio component systems retailer, and in the early 1980s, with the introduction of the video cassette recorder, expanded into video products. In 1983, the Company changed its marketing strategy to use mass merchandising techniques for a wider variety of products, and began to operate its stores with a "superstore" format. In 1989, Best Buy dramatically changed its method of retailing by introducing its "Concept II" store format, a self-service, non-commissioned, discount style sales environment designed to give the customer more control over the purchasing process. The Company determined that an increasing number of customers had become knowledgeable enough to select products without the assistance of a commissioned salesperson and preferred to make purchases in a more convenient and customer friendly environment. With its innovative retail format, the Company has moved into a leading position nationally in all of its principal product categories except appliances. In fiscal 1995, the Company developed a strategy to further enhance its store format. The strategy, known as "Concept III", features a larger, redesigned store format created to produce a more informative and exciting shopping experience for the customer. Through focus group interviews and other research, the Company determined that customers wanted more product information and a larger product selection. In order to meet these evolving consumer preferences, the Company developed an enhanced store format which features more hands-on demonstrations allowing customers to, among other things, experience audio and video products such as "surround sound" systems and sample featured compact discs at approximately 100 private listening stations. Additionally, these larger stores, generally 45,000 to 58,000 square feet, are designed to accommodate a larger product selection intended to be as good as or better than the selection offered by Best Buy's competitors in each of its principal product categories. Management continues to evaluate and refine the content and features of these Concept III stores to maximize the revenue and operating profit while providing customers with the most desirable shopping experience. As of March 1, 1997, 184 of 272 stores were the 45,000 or 58,000 square foot format generally incorporating the features of a "Concept III" store. To improve the productivity in its largest stores, the Company intends to test and evaluate new product lines. In the last two fiscal years the Company has increased its store count by 33%, adding 68 new stores and, as of March 1, 1997, -2- was operating 272 stores from coast to coast. The Company anticipates opening 13 new stores in fiscal 1998 and to be operating approximately 285 stores by the end of the fiscal year. Business Strategy The Company's business strategy is to offer consumers an enjoyable and convenient shopping experience while maximizing the Company's profitability. Best Buy believes it offers consumers meaningful advantages in store environment, product value, selection and service. An objective of this strategy has been to achieve a dominant share of the markets Best Buy serves. The Company currently holds a leading, and in some cases dominant, share in its mature markets. The Company's Concept III store format uses interactive displays to enhance the customer's shopping experience. As part of its overall strategy, the Company: - Offers a self-service, discount style store format, featuring easy to locate product groupings, emphasizing customer choice and product information and providing assistance from non-commissioned product specialists and, in Concept III stores, interactive product displays and information. - Provides a large selection of brand name products comparable to retailers that specialize in the Company's principal product categories and seeks to ensure a high level of product availability for customers. - Seeks to provide customers with the best product value available in the market area through active comparison shopping programs, daily price changes, lowest price guarantees and special promotions, including interest-free financing, performance service plans generally priced below competitors, and home delivery. - Provides a variety of services not offered by certain competitors, including convenient financing programs, product delivery and installation, computer training and post-sale services including repair and warranty services and computer upgrades. - Locates stores at sites that are easily accessible from major highways and thoroughfares and seeks to create sufficient concentrations of stores in major markets to maximize the leverage on fixed costs including advertising and operations management. - Controls costs and enhances operating efficiency by centrally controlling all buying, merchandising and -3- distribution, and vertically integrating certain support functions such as advertising. Best Buy's store format is a key component of its business strategy. The Company believes that because customers are familiar with most of the products the Company sells and are accustomed to discount shopping formats, they increasingly resist efforts to direct their choice of product and appreciate controlling the purchase decision. However, as new technology, such as digital technology, is introduced, particularly in consumer electronics and communications products, the Company intends to offer consumers a higher level of service to help them better understand the features and benefits of the advanced technology. Best Buy continuously evaluates the retail environment and regularly uses focus groups to assess customer preferences. Through these processes, Best Buy concluded that customers want access to more product information in order to be more confident about their buying decisions. As a result, Best Buy's Concept III store format features interactive product displays and information including, in selected locations, Answer Center kiosks enabling customers to immediately access product information from touch screen monitors that display informative and entertaining full motion videos. All Concept III stores contain a demonstration area for television "surround sound" systems so that customers can hear for themselves how different configurations of audio components enhance sound quality; a simulated, life-size car display that demonstrates differences in car stereo sound resulting from different speaker configurations; speaker rooms featuring a wide variety of music allowing customers to compare speaker quality while listening to their choice of music; approximately 100 private listening posts where customers can sample featured music software. Best Buy believes that these features further differentiate it from competing retailers and should also provide an advantage for the Company relative to competitors such as catalog and on-line services and television shopping networks. The Company's stores are in large, open buildings with high ceilings. Best Buy's stores average approximately 43,000 square feet. The Concept III stores feature specialty areas such as larger viewing rooms for large screen and projection televisions and larger speaker rooms. The Company expects that all of the new stores opened will be the 45,000 square foot format to best leverage the cost of operations and maximize productivity. Best Buy's merchandising strategy differs from many other retailers selling comparable merchandise. Best Buy's merchandise is displayed at eye level next to signs identifying the products' major features, with the boxed products available above or below the display model. The Company's salaried product specialists, who are knowledgeable about the operation and features of the merchandise on display, are dedicated to a particular product area for customers who desire assistance. This convenient, self service -4- format allows the customer to carry merchandise directly to the check-out lanes, pay for it and leave the store thus avoiding the time-consuming process used at traditional superstores and catalog showrooms. Certain of the Company's competitors with the traditional superstore format use commissioned sales staffs and generally only have display models on the selling floor with boxed merchandise stored in a back room. This traditional superstore design allows sales personnel to direct the customer to products selected by the salesperson. At these stores, a salesperson is able to promote products yielding the greatest sales commissions. In addition, unlike Best Buy, these traditional superstores generally apply pressure to the consumer to promote the sale of extended service plans and have trained their sales staffs to maximize the sale of these plans. The Company offers performance service plans, generally at lower prices than its competitors, and intends to place increased emphasis on the no pressure presentation of these plans to consumers in fiscal 1998. The Company believes that its advertising strategy continues to contribute to its increasing market share and brand image. Best Buy spends over 3% of store sales on advertising, including the distribution of about 31 million newspaper inserts weekly. The Company has vertically integrated advertising and promotion capabilities and operates its own in-house advertising agency. This capability allows the Company to respond rapidly to competitors in a cost effective manner. In many of its markets, the Company is able to secure and deliver merchandise to its stores and to create, produce and run an advertisement all within a period of less than one week. Print advertising generally consists of four-color weekly inserts, generally of 16 to 20 pages, that emphasize a variety of product categories and feature extensive name brand selection and price range. The Company also produces all of its television commercials, each with a specific marketing message. Television commercials account for approximately 31% of total advertising expenditures. The Company is reimbursed by vendors for a substantial portion of advertising expenditures through cooperative advertising arrangements. In fiscal 1998, the Company will introduce a national brand image program that is expected to move Best Buy's image beyond that of a low price specialty retailer by promoting the customer's shopping experience. Product service and repair are important aspects of Best Buy's marketing strategy, providing the opportunity to differentiate itself from warehouse clubs and other discount stores which generally do not provide such services. Virtually all products sold by the Company, with the exception of software, carry manufacturers' warranties. The Company generally offers to service and repair all of the products it sells, except major appliances in certain markets, and has been designated by substantially all of its major suppliers as an authorized service center. In addition, the Company conducts computer software training classes at selected -5- stores and makes its in-store technical support staff available to assist customers with the custom configuration of personal computers and peripheral products. The Company also delivers and installs major appliances and large electronics products and installs car stereos and security systems. Product Selection and Merchandising Best Buy provides a broad selection of name brand models within each product line in order to provide customers with greater choice. The Company currently offers approximately 6,200 products, exclusive of entertainment software titles and accessories, in its four principal product categories. In addition, the Company offers a selection of accessories supporting its principal product categories, which typically yield a higher margin than most of the Company's other products. The Company believes that this assortment of accessories builds customer traffic for its other products. The home office category, Best Buy's largest product category, includes personal computers and related peripheral equipment, telephones, cellular phones, answering machines, fax machines, copiers and calculators. The Company was among the first consumer electronics retailers to carry an extensive assortment of personal computer products and related software. Sales in this category are largely comprised of the sale of personal computers. The retail market for personal computers continues to be promotional and competitive. The Company's operating results can be affected by significant changes in promotional activity as well as product demand for and availability of personal computers and the timing of computer model transitions by manufacturers. The Company believes that it is well positioned to withstand increased competition in the retail market for personal computer products, traditionally low margin items, due to its early entry and experience in the market, its broad product lines, including those that generate higher profit margins, and its relatively low cost structure. In addition, the Company believes that the related services it offers, such as computer training, configuration, maintenance and upgrade, are distinct advantages compared to other discount and mail order computer retailers. The Company also believes that changing technology and hardware requirements necessary to support new software, including on-line services, will continue to be a primary factor in the growth in sales of personal computers and related products in the future. The Company's home office products category includes brand names such as Acer, Apple, AT&T, Canon, Compaq, Epson, Hewlett Packard, IBM, Motorola, NEC, Packard Bell, Panasonic, Sharp and Toshiba. The Company had also offered a broad assortment of office products and school supplies such as paper, pens, and other consumables to complement home office equipment. In the third quarter of fiscal 1997, the Company decided to narrow the office supply product assortment to more closely reflect the shopping patterns of the home user rather than small business. -6- Best Buy's second largest product category is consumer electronics, consisting of video and audio equipment. Video products include televisions, video cassette recorders, camcorders and satellite dishes that receive direct broadcast satellite television. Audio products include audio components, audio systems, portable audio equipment, car stereos and security systems. The Company continues to expand its product selection in consumer electronics by offering higher end products and components that have greater appeal to audio and video enthusiasts. In March 1997, the Company was the first national retailer to launch the new Digital Versatile Disk (DVD) hardware and related software. The higher introductory price points for DVD and limited number of software titles are likely to lead to only a modest contribution to total sales in fiscal 1998. However, the Company anticipates that with the availability of better picture and sound quality through direct broadcast satellite and digital technology, it will have more opportunities to sell higher end equipment such as home theaters, "surround sound" systems and in-wall components in the future. The Company sells consumer electronics with brand names such as Aiwa, Bose, Cambridge Soundworks, Eosone, General Electric, Infinity, JBL, JVC, Magnavox, Panasonic, Pioneer, RCA, Sanyo, Samsung, Sharp, Sony, Technics and Toshiba. Best Buy's entertainment software category includes compact discs, pre-recorded audio and video cassettes, computer software and video game hardware and software. The Company is one of the few large consumer electronics retailers that sells a broad selection of entertainment software in all of its stores. The Company intends to offer from 25,000 to approximately 50,000 titles in its stores and had offered as many as 80,000 titles in its largest Concept III stores in fiscal 1997. Due to the slow rate of inventory turn of some of the deep catalogue recorded music titles, the Company decided to narrow its assortment of recorded music in fiscal 1998 to improve inventory productivity. This reduction in titles will occur primarily in the 45,000 and 58,000 square foot stores. Best Buy will continue to customize a portion of the music software assortment for particular stores. The video game hardware and software products include popular games by manufactures such as Sony and Nintendo. Activity in this category is impacted by changes in technology such as, for example, the introduction of the Sony Playstation and Nintendo 64 formats in the second half of fiscal 1997. The major appliance category includes microwave ovens, washing machines, dryers, air conditioners, dishwashers, refrigerators, freezers, ranges and vacuum cleaners. Products in this category include brand names such as Amana, Eureka, Frigidaire, General Electric, GE Profile, Hoover, Hotpoint, Maytag, Roper, Sharp, Tappan, and White-Westinghouse. The Company also carries an assortment of fully featured, high end small electrics from manufacturers such as Braun, Cuisinart, DeLonghi, Oster and Waring Professional. The appliance department was further enhanced in fiscal 1997 by the addition of designer cookware and kitchen -7- gadgets. The appliance department is merchandised to give consumers a presentation that looks and feels like a kitchen rather than simply rows of appliances. The Company also sells cameras and other photographic equipment and ready to assemble furniture designed for use with computer and audio/video equipment. The Company intends to test market new products in its larger stores in fiscal 1998. While some of the products to be tested may not fit in the Company's four major product categories, they will be items that appeal to the demographics of the Company's existing customer base. Additionally, as a result of the increasing lack of differentiation between certain products in the consumer electronics and personal computer categories, the Company expects to reduce the depth of its product offerings in fiscal 1998. Management believes it is no longer necessary to offer consumers a larger number of competing products at the same price point. The Company plans to evaluate the individual product profitability of items offered and narrow its selection to those items generating an adequate profit margin while still offering consumers a meaningful selection of products at each price point. The following table sets forth the approximate percentages of store sales from each of Best Buy's principal product lines. Fiscal Years Ended ----------------------------------------------------- February 25, 1995 March 2, 1996 March 1, 1997 ----------------- ------------- ------------- Home Office 37% 41% 39% Consumer Electronics: Video 20 18 17 Audio 14 13 12 Entertainment Software (1) 18 17 18 Major Appliances 8 7 9 Other (2) 3 4 5 ---- ---- ---- Total 100% 100% 100% ---- ---- ---- ---- ---- ---- (1) Fiscal 1996 and 1995 restated to include video game products, previously included in Other. (2) Includes photographic equipment, blank audio and video tapes, furniture and accessories and performance service plans. Store Locations and Expansion The Company's expansion strategy generally has been to enter major metropolitan areas with the simultaneous opening of several stores and then to expand into contiguous non-metropolitan markets. Currently, approximately one-third of the Company's stores are in non-metropolitan markets. The entry into a new market is preceded by a detailed market analysis which includes a review of competitors, demographics and economic data. Best Buy's store location strategy enables it to increase the effectiveness of advertising expenditures and to create a high level of consumer awareness. In addition, the clustering of stores allows the -8- Company to maintain more effective management control, enhance asset utilization, and utilize its distribution facilities more efficiently. When entering a major metropolitan market, the Company establishes a district office, service center and major appliance warehouse. Each new store requires approximately $3 million of working capital, depending on the size of the store, for merchandise inventory (net of vendor financing), leasehold improvements, fixtures and equipment. Pre-opening costs of approximately $300,000 per store are incurred in hiring and training new employees and in advertising and are expensed in the year the store is opened. During fiscal 1997, the Company opened 21 stores, an 8% increase in its store base. The Company also expanded or relocated 10 stores to larger facilities. Due to an anticipated industry wide softness in the growth of the Company's product categories, Best Buy is slowing its store expansion program in fiscal 1998. The Company expects to open 13 new stores in fiscal 1998, which includes entry into the new markets of Pittsburgh, Pennsylvania; Knoxville, Tennessee; and Palm Desert, California. The remainder of the new stores will be opened in existing markets. To further implement the Concept III store format, the Company also plans to expand or relocate another five stores in fiscal 1998. The Company believes it has the necessary distribution capacity and management information systems as well as management experience and depth to support its fiscal 1998 expansion plans. -9- The following table presents the number and location of stores operated by the Company at the end of each of the last three fiscal years and anticipated stores at fiscal 1998 year end. Planned Anticipated Number of Stores at Fiscal Year End For at Fiscal ----------------------------------- Fiscal 1998 1995 1996 1997 1998 Year End ---- ---- ---- ---- -------- Texas 32 34 34 1 35 Illinois 31 32 32 -- 32 California 7 19 22 1 23 Florida 3 12 17 3 20 Ohio 12 18 18 1 19 Michigan 14 16 16 1 17 Minnesota 15 15 15 -- 15 Wisconsin 11 11 11 -- 11 Georgia 9 10 10 -- 10 Missouri 10 10 10 -- 10 Maryland 4 8 9 -- 9 Arizona 7 7 8 -- 8 Colorado 6 7 8 -- 8 Indiana 8 8 8 -- 8 Pennsylvania -- -- 4 4 8 North Carolina 3 7 7 -- 7 Virginia 5 6 7 -- 7 Iowa 5 5 5 -- 5 Kansas 5 5 5 -- 5 New Jersey -- -- 3 1 4 South Carolina 3 4 4 -- 4 Arkansas 3 3 3 -- 3 Nebraska 3 3 3 -- 3 Oklahoma 3 3 3 -- 3 Kentucky 1 2 2 -- 2 Nevada 1 1 2 -- 2 Tennessee -- -- 1 1 2 Alabama -- 1 1 -- 1 Delaware -- 1 1 -- 1 New Mexico 1 1 1 -- 1 North Dakota 1 1 1 -- 1 South Dakota 1 1 1 -- 1 ---- ---- ---- ---- ---- Total 204 251 272 13 285 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Suppliers, Purchasing and Distribution The Company's marketing strategy depends, in part, upon its ability to offer a meaningful selection of name brand products to its customers and is, therefore, dependent upon satisfactory and stable supplier relationships. In fiscal 1997, Best Buy's 20 largest suppliers accounted for approximately 58% of the merchandise purchased by the Company, with five suppliers, Acer, Compaq Computer Corp., Hewlett-Packard, Packard Bell, and Sony representing approximately 29% of the Company's total purchases. The loss of or disruption of supply, including disruptions in supply due to manufacturers' product quality issues, from any one of these major suppliers could have a material adverse effect on the Company's sales. Certain suppliers have, at times, limited or discontinued their supply of products to the Company. Best Buy -10- generally does not have long-term written contracts with its major suppliers and does not currently have any indication that any current suppliers will discontinue selling merchandise to the Company. The Company has not experienced difficulty in maintaining satisfactory sources of supply, and management expects that adequate sources of supply will continue to exist for the types of merchandise sold in its stores. Best Buy's centralized buying staff purchases substantially all of the Company's merchandise. The buying staff within the Company's Marketing Department is responsible for product acquisition, promotion planning and product pricing. An inventory management staff in the Marketing Department is responsible for overall inventory management including allocations of inventory and replenishment of store inventory. Generally, with the exception of certain entertainment software, there are no agreements with suppliers for the return of unsold inventory. Merchandise remaining at the time of new product introduction is generally sold on a close-out basis and may be subject to a reduction in selling price to levels at or below the Company's cost. Revenues from the sale of close-out merchandise have been insignificant. The Company has made product availability a high priority and continues to make investments in facilities, personnel and systems to assure that its in-stock position will be among the highest in the industry. The Company utilizes an automatic replenishment system for restocking its stores and is able to deliver products to its stores as required. Replenishment of store inventories is based on inventory levels, historical and projected sales trends, promotions and seasonality. The Company utilizes an extensive merchandise planning and daily inventory monitoring system to manage inventory turns. The Company has engaged Andersen Consulting LLP in fiscal 1998 to assist in the design and implementation of systems and practices to improve the Company's assortment planning, inventory management, product sourcing and advertising effectiveness. The majority of the Company's merchandise, except for major appliances, is shipped directly from manufacturers to the Company's distribution centers in California, Ohio, Minnesota, Oklahoma and Virginia. In addition, the Company operates a dedicated distribution center for entertainment software in Minnesota. Major appliances are shipped to satellite warehouses in each of the Company's major markets. Beginning in fiscal 1997, the Company expanded its appliance distribution capacity to support the additional product assortment. This capacity will be further expanded in fiscal 1998. In order to meet release dates for selected computer products and entertainment software titles, certain merchandise is shipped directly to the stores from manufacturers and distributors. The Company is, however, dependent upon the distribution centers for inventory storage and shipment of most merchandise to stores. The Company primarily uses contract carriers to ship merchandise from its distribution centers to its -11- stores. The Company believes that its distribution centers can most effectively service stores within a 600 to 700 mile radius and that its six distribution centers will accommodate the Company's expansion plans for the next year. The Company plans to continue investing in new systems and purchasing material handling equipment to reduce labor costs, improve accuracy in filling orders and enhance space utilization. Management Information Systems Best Buy has developed proprietary software that provides daily information on sales, gross margins and inventory levels by store and by stockkeeping unit. These systems allow the Company to compare current performance against historical performance and the current year's budget. Best Buy uses point-of-sale bar code scanning from which sales information is polled at the end of each day. The Company uses EDI (Electronic Data Interchange) with selected suppliers for the more efficient transmittal of purchase orders, shipping notices and invoices. The Company believes that the systems it has developed have the ability to continue to improve customer service, operational efficiency, and management's ability to monitor critical performance factors. Best Buy is continuing to make investments in designing new systems, modifying existing systems and increasing processing capacity, particularly with respect to inventory management. Store Operations Best Buy has developed a standardized and detailed system for operating its stores. The system includes procedures for inventory management, transaction processing, customer relations, store administration and merchandise display. The Company's store operations are organized into divisions. Each division is divided into regions and is under the supervision of a senior vice president who oversees store performance through several regional managers, each of whom has responsibility for a number of districts within the region. District managers monitor store operations closely and meet regularly with store managers to discuss merchandising and new product introductions, sales promotions, customer feedback and requests and store operating performance. Similar meetings are conducted at the corporate level with divisional and regional management. A senior vice president of retail operations has overall responsibility for retail store processing and operations. Each district also has a loss prevention manager, with product security controllers employed at each store to control inventory shrinkage. Advertising, pricing and inventory policies are controlled at corporate headquarters. The Company's training, consumer affairs, human resources and store merchandising functions are also centralized at corporate headquarters. The Company's stores are open seven days and six evenings a week. A store is typically staffed by one manager, four assistant -12- managers, and an average staff ranging from 70 to 140 persons depending on store size. Approximately 60% of a store's staff, which includes product specialists and a support staff of cashiers and customer service and stock handling employees, is employed on a part-time basis. Store managers are paid a salary and have the opportunity to earn bonuses if their stores exceed sales and gross margin quotas, meet certain budget criteria in controlling expenses, and achieve certain administrative goals. The Company has an employee development department which provides managers with a variety of tools to teach employees the core skills they need to meet their performance objectives. In the stores, Sales, Inventory, Operations and Merchandising managers undergo comprehensive training in their specialty areas, which include store operations, selling, managerial, training and communications skills. The retail selling and sales support teams receive a thorough orientation to the Company's industry and its business objectives. Sales personnel are trained to ask specific questions of customers to determine their needs and to present products, accessories and services that meet those expressed needs. Stores hold monthly "team meetings" to review store performance, Company focus and changes and modifications in operating procedures. Specialized product training is also conducted at these monthly meetings. The Company's policy is to staff store management positions with personnel promoted from within each store and to staff new stores from its pool of trained managers. However, as Best Buy expands into new markets, it also recruits local management personnel who have valuable knowledge about the new market. Credit Policy Approximately 32% of store revenues are paid for in cash, with the remainder paid for by either major credit cards or the Best Buy private label credit card. In recent years, the Company has utilized special financing offers to stimulate sales. Generally, these financing offers allowed customers to defer all payments interest-free for 90 days or six months, depending on the price of the product, or to defer payments for approximately one year or longer on the purchase of selected products. Late in fiscal 1997, the Company determined that the longer term financing offers had become increasingly expensive and were not as effective as they had been in generating incremental profitable business. In the fourth quarter, the Company generally changed its strategy to offer the promotions with shorter terms and monthly payments and limited the offers to those products that generated sufficient profit margin to warrant the cost of the offer. The special financing offers are only provided to customers who qualify for Best Buy's private label credit card. The private label credit card allows these customers to obtain financing on purchases of merchandise at Best Buy stores through arrangements between the Company and independent banks and consumer credit programs. The Company is generally able to qualify a new customer for credit on the spot, typically in less than five -13- minutes. Receivables from private label credit card sales are sold, without recourse to the Company, to unaffiliated third party institutions. The Company receives payment from these institutions within 2 to 3 days following the sale. Competition Retailing in each of the Company's product categories is highly competitive. The overall consumer electronics business has slowed in the last year and the concentration of sales among the top retailers in the industry has increased significantly. The industry's consolidation has been evidenced in recent years by the liquidation and consolidation of a number of competitors, including the closing of Tandy Corp.'s Incredible Universe stores and selected Computer City stores, stores operated by Musicland and the increased rate of consolidation and store closures by other national and regional chains in fiscal 1997. The flat industry sales are due to market saturation for many consumer electronics products and the general absence of new products in that market. The growth of sales nationally in the home office product category has begun to slow and the Company competes with an increasing number of retailers and alternative channels of distribution. In addition, the Company believes that consumers continue to become more knowledgeable and value conscious, thereby putting pressure on profit margins. Management believes that its store format distinguishes the Company from most of its competitors by offering customers a friendlier and less pressured shopping experience. In addition, the Company competes by aggressively advertising and emphasizing a meaningful product selection, low prices, financing alternatives and service. Best Buy competes in most of its markets against Circuit City, Sears and Montgomery Ward and in selected markets against computer superstores such as the remaining Computer City stores and CompUSA and entertainment software superstores operated by Musicland and Tower Records. Certain of these competitors have significantly greater financial resources than the Company. The Company also competes against independent dealers, discount stores, wholesale clubs, office products superstores and mass merchandisers. Employees As of March 1, 1997, the Company employed approximately 36,300 persons, of whom approximately 19,000 were part-time or seasonal employees. The Company has never experienced a strike or work stoppage, and management believes that its employee relations are good. There are currently no collective bargaining agreements covering any of the Company's employees. -14- Item 2. PROPERTIES The Company's stores, most of which are leased, include sales space, inventory storage, management offices and employee areas. All of the leases provide for a fixed minimum rent with scheduled escalation dates and amounts. Leases for eight of the stores have a percentage rent provision equal to from .75% to 4% of gross sales at each location in excess of certain specified sales amounts. Currently, percentage rent is paid for only three stores. The initial terms of the leases range from 5 to 20 years and generally allow the Company to renew for up to three additional five-year terms. The terms of a majority of the leases, including renewal options, extend beyond the year 2020. At March 1, 1997 the Company owned five of its operating retail store locations and three locations under development. Management expects to sell and lease back these properties in fiscal 1998. The Company leases over 3 million square feet of distribution facilities including brown goods centers in Bloomington, Minnesota; Ardmore, Oklahoma; Staunton, Virginia; Ontario, California; and Findlay, Ohio, and a software distribution center in Edina, Minnesota. The Company also operates leased satellite warehouses for major appliances in its major markets. The Company's corporate offices are located in a 290,000 square foot facility it owns in Eden Prairie, Minnesota. Item 3. LEGAL PROCEEDINGS The Company is involved in various legal proceedings arising during the normal course of conducting business. The resolution of those proceedings is not expected to have a material impact on the Company's financial condition. -15- THE EXECUTIVE OFFICERS OF THE REGISTRANT ARE AS FOLLOWS:
YEARS WITH THE NAME AGE POSITION WITH COMPANY COMPANY ---- --- --------------------- ------- Richard M. Schulze 56 Chairman, Chief Executive Officer and Director 30 Bradbury H. Anderson 47 President, Chief Operating Officer and Director 23 Allen U. Lenzmeier 53 Executive Vice President and Chief Financial Officer 12 Wade R. Fenn 38 Executive Vice President - Marketing 16 Julie M. Engel 36 Senior Vice President - Advertising 15 Robert C. Fox 46 Senior Vice President - Finance and Treasurer 11 Kevin P. Freeland 39 Senior Vice President - Inventory Management 1 Wayne R. Inouye 44 Senior Vice President - Marketing, Computers and Home Office 1 Michael P. Keskey 42 Senior Vice President - Sales 9 James P. Mixon 52 Senior Vice President - Logistics 3 Joseph T. Pelano 49 Senior Vice President - Retail Store Operations 8 Philip J. Schoonover 37 Senior Vice President - Marketing, Consumer Electronics and Appliances 2 Kenneth R. Weller 48 Senior Vice President - Sales 3
_____________________________ RICHARD M. SCHULZE is a founder of the Company. He has served as an officer and director of the Company from its inception in 1966 and currently serves as its Chairman and Chief Executive Officer. BRADBURY H. ANDERSON has been the Company's President and Chief Operating Officer since April 1991. He has been employed in various other capacities with the Company since 1973, including retail salesperson, store manager and sales manager. Mr. Anderson has been a Director of the Company since 1986. ALLEN U. LENZMEIER was promoted to his present position in April 1991 after having served as Senior Vice President - Finance and Operations and Treasurer of the Company from 1986. Mr. Lenzmeier joined the Company in 1984 and has also served as Vice President - Finance and Operations and Treasurer. WADE R. FENN was promoted to his present position in August 1995, having served as a Sr. Vice President - Sales since 1991 and a Regional Vice President of the Company from 1987. Mr. Fenn joined the Company in 1980 as a salesperson and has also been employed by the Company as a store and district manager. JULIE M. ENGEL was promoted to her present position in April 1995. Ms. Engel joined the Company in July 1981 as Advertising Manager, was promoted to Advertising Director in 1984 and became Vice-President - Advertising in April 1987. ROBERT C. FOX was promoted to his present position in April 1994, after having served as Vice President-Accounting since 1987 and Treasurer since 1993. Mr. Fox joined the Company in 1985 as Controller. -16- KEVIN R. FREELAND was promoted to his present position in April 1997, after having served as Vice President - Inventory Management since 1995. Prior to joining Best Buy, Mr. Freeland spent more than eight years with Payless Shoe Source, where he held various positions in merchandise management, most recently as Vice President of Merchandise Distribution. WAYNE R. INOUYE joined the Company in September 1995 as Senior Vice President - Marketing for Computers and Home Office. Prior to joining the Company, Mr. Inouye was with The Good Guys! for 10 years, most recently as Vice President of Merchandising. MICHAEL P. KESKEY was promoted to his present position in April 1997, having served as Vice President - Sales since 1996. Mr. Keskey joined the Company in 1988 and has held positions as a Store Manager, District Manager and Regional Manager. JAMES P. MIXON joined Best Buy in April 1994 as Senior Vice President-Logistics. Prior to joining the Company, Mr. Mixon held various distribution management positions with several national retailers, most recently with Marshalls Stores, Inc. JOSEPH T. PELANO was promoted to his present position in April 1997, having served as Vice President - Retail Store Operations since 1996. Mr. Pelano joined the Company in 1989 as Regional Operations Manager. PHILIP J. SCHOONOVER joined Best Buy in May 1995 and was promoted to Senior Vice President - Marketing for Consumer Electronics and Appliances. Mr. Schoonover's background includes more than eight years as Vice President of Sales for the eastern region of Sony Corp. of America. Prior to joining the Company, he was Executive Vice President for TOPS Appliance City for five years. KENNETH R. WELLER joined the Company in May 1993. Since 1986, he was Vice President of Sales with The Good Guys!, a San Francisco-based consumer electronics retailer where he had worked since 1982. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -17- PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information set forth under the caption "Common Stock Prices" on page 14 of the Annual Report is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information set forth under the caption "Selected Consolidated Financial and Operating Data" on page 9 of the Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The information set forth under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 10 through 14 of the Annual Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required by this Item, listed below, are contained in the Annual Report on the pages thereof indicated, and are expressly incorporated herein by this reference. Page No. ------- Consolidated balance sheets as of March 1, 1997 and March 2, 1996 15 For the fiscal years ended March 1, 1997, March 2, 1996, and February 25, 1995 Consolidated statements of earnings 16 Consolidated statements of cash flows 17 Consolidated statements of shareholders' equity 18 Independent auditor's report 18 Notes to consolidated financial statements 19-23 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -18- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Nominees and Directors" on pages 4 through 7 of the Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the caption "Executive Compensation" on pages 8 through 15 of the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" on pages 4 through 6 of the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the captions "Nominees and Directors" and "Certain Transactions" on pages 6 through 7 of the Proxy Statement is incorporated herein by reference. 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. -19- 3. Exhibits: Method of Number Description filing - ------ ----------- ------ 3.1 Amended and Restated Articles of (3) Incorporation, as amended 3.2 Certificate of Designation with respect (2) to Best Buy Series A Cumulative Convertible Preferred Stock, filed November 1, 1994 3.3 Amended and Restated By-Laws, as amended (2,4,5) 3.4 Resolution of the Board of Directors (1) dated February 13, 1997 amending the Amended and Restated By-Laws 4.1 Form of Indenture between Best Buy Co., (6) Inc. and 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 (7) Mutual Life Insurance Company, dated as of July 30, 1992 4.3 Amended and Restated Credit Agreement (8) dated August 25, 1995 with First Bank National Association ("the Credit Agreement") 4.4 First Amendment to the Credit Agreement (9) with First Bank National Association, dated March 1, 1996 4.5 Second Amendment to the Credit Agreement (1) with First Bank National Association, dated December 24, 1996 4.6 Indenture between Best Buy Co., Inc. and (3) 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 Limited (2) Partnership of Best Buy Capital, L.P., dated as of November 3, 1994 -20- 4.8 Indenture between Best Buy, Best Buy Capital, (2) 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 4.9 Guarantee Agreement related to 6-1/2% (2) Convertible Monthly Income Preferred Securities of Best Buy Capital, L.P., dated November 3, 1994 4.10 Deposit Agreement with respect to Best Buy (2) Series A Cumulative Convertible Preferred Stock, dated November 3, 1994 10.1 1987 Employee Non-Qualified Stock Option Plan, (9) as amended 10.2 1987 Directors' Non-Qualified Stock Option (2) Plan, as amended 10.3 1994 Full-Time Employee Non-Qualified Stock (9) Option Plan 10.4 Resolutions of the Board of Directors dated (9) April 19, 1996 establishing the bonus program for senior officers 10.5 1997 Employee Non-Qualified Stock Option Plan (10) 10.6 1997 Directors' Non-Qualified Stock Option (10) Plan 10.7 Amended and Restated 1994 Full-Time Employee (10) Non-Qualified Stock Option Plan 11.1 Computation of Earnings Per Share (1) 13.1 1997 Annual Report to Shareholders (1) 21.1 Subsidiaries of the Registrant (1) 23.1 Consent of Ernst & Young LLP (1) 27.1 Financial Data Schedule (1) -21- (1) Document is filed herewith. (2) Exhibits so marked were filed with the Securities and Exchange Commission on May 23, 1995, as exhibits to the Form 10-K of Best Buy Co., Inc. and are incorporated herein by reference and made a part hereof. (3) 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. (4) 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. (5) 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. (6) 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. (7) 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. (8) Exhibit so marked was filed with the Securities and Exchange Commission on October 10, 1995, as an exhibit to Form 10-Q of Best Buy Co., Inc. and is incorporated herein by reference and made a part hereof. (9) Exhibits so marked were filed with the Securities and Exchange Commission on May 29, 1996, as exhibits to the Form 10-K of Best Buy Co., Inc. and are incorporated herein by reference and made a part hereof. (10) Exhibits so marked were filed with the Securities and Exchange Commission on May 12, 1997, as exhibits to the definitive Proxy Statement of Best Buy Co., Inc. and are incorporated herein by reference and made a part hereof. -22- 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 None. -23- 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 on its behalf by the undersigned, thereunto duly authorized. BEST BUY CO., INC. (Registrant) By: /s/ Richard M. Schulze -------------------------- Chief Executive Officer Dated: May 28, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on May 28, 1997. /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 /s/ Culver Davis, Jr. Director - -------------------------- Culver Davis, Jr. /s/ David Stanley Director - -------------------------- David Stanley /s/ James C. Wetherbe Director - -------------------------- James C. Wetherbe -24- EX-3.4 2 RESOLUTION OF THE BOARD OF DIRECTORS EXHIBIT 3.4 SECRETARY'S CERTIFICATE I, Elliot S. Kaplan, the Secretary of Best Buy Co., Inc., a Minnesota corporation (the "Corporation"), do hereby certify that the following resolution was duly adopted by the Board of Directors of the Corporation at a meeting held February 13, 1997, and that said resolution is still in full force and effect: RESOLVED: [T]he Board of Directors of this Corporation does hereby amend Section 1 of Article III of the Amended and Restated By-Laws of the Corporation, to read as follows: Section 1 ELECTION OF DIRECTORS --------- The business and affairs of this corporation shall be managed by or under the direction of its Board of Directors which shall be comprised of up to nine (9) directors, five (5) of whom shall be Class 1 Directors, and four (4) of whom shall be Class 2 Directors. Each Director shall be elected to serve for a term of two (2) years and until his/her successor shall have been duly elected and qualified. Class 1 Directors shall be elected in even numbered years and Class 2 Directors shall be elected in odd numbers years. Except as to the year in which elected, the powers privileges, duties and responsibilities of each Class 1 and Class 2 Director shall be alike in every respect. Dated: May 20, 1997 /s/ Elliot S. Kaplan ---------------------------------------- Elliot S. Kaplan Secretary EX-4.5 3 EXHIBIT 4.5 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is dated as of December 24, 1996, and is between BEST BUY CO., INC., a Minnesota corporation (the "Company"), the lenders party to the Credit Agreement, as hereinafter defined (such lenders being hereinafter sometimes referred to, collectively, as the "Banks"), and FIRST BANK NATIONAL ASSOCIATION, as agent for the Banks (in such capacity, the "Agent"). WITNESSETH THAT: WHEREAS, the Company, the Banks and the Agent are parties to an Amended and Restated Credit Agreement dated as of August 25, 1995, as amended by a First Amendment to Credit Agreement dated as of March 1, 1996 (as so amended, the "Credit Agreement"); and WHEREAS, the Company, the Banks and the Agent have agreed to amend the Credit Agreement as provided herein. NOW, THEREFORE, the parties hereto agree as follows: 1. CERTAIN DEFINED TERMS. Each capitalized term used herein without being defined that is defined in the Credit Agreement shall have the meaning given to it in the Credit Agreement. 2. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is amended as follows: (a) Section 1.01 is amended to add the following definitions in the appropriate alphabetical order: "ADDITIONAL MARGIN": as of any date of determination, the applicable percentage based on the Interest Coverage Ratio for the period of twelve consecutive months ending on the applicable "Margin Measurement Date" (as defined below), as set forth below: Applicable Letter of - -------------------------------------------------------------------------------- Interest Coverage Ratio Applicable Margin Credit Fee Percentage - ----------------------- ----------------- --------------------- Greater than 1.45 : 1.00 0 0 1.401 : 1.00-1.45 : 1.00 0.25% 0.125% 1.351 : 1.00-1.40 : 1.00 0.50% 0.25% 1.35 : 1.00 or less 0.75% 0.375% With respect to each date of determination during any period beginning on the tenth day of any month and continuing through the ninth day of the following month (e.g., February 10 - March 9), the Margin Measurement Date shall be the last day of the second fiscal month preceding the month in which such period begins (e.g., January3). To the extent the financial statements required under Section 5.01(b) as of, and for the period ending on, any Margin Measurement Date, and the accompanying Compliance Certificate, are not delivered to the Agent within thirty (30) days after such Margin Measurement 1 Date, the Interest Coverage Ratio as of such Margin Measurement Date shall, for purposes of this definition, be deemed to be less than 1.35 : 1.00. "BB PROPERTY": BB Property Company, a Nebraska general partnership. "BB PROPERTY LEASE AGREEMENT": the Lease Agreement dated as of April 15, 1993 between BB Property and the Company, as the same may be amended, restated, supplemented or otherwise modified and in effect from time to time, and any other agreement between BB Property and the Company relating to the Lease of any real property. "BB PROPERTY LEASE DOCUMENTS": the BB Property Lease Agreement, together with any agreement, document or instrument entered into in connection with any credit extended to BB Property and secured by such Lease Agreement, other agreement or the properties covered thereby, including, without limitation, the Note Purchase Agreement dated as of April 15, 1993 among BB Property, the Company and Teachers Insurance and Annuity Association of America, and the "Deed of Trust" and the "Assignment" (as defined in such Note Purchase Agreement). "CONQUEST DOCUMENTS": the Agreement for Lease, the Master Lease Agreement, any agreement, document or instrument executed or delivered in connection therewith, any "Credit Agreement" (as defined in the Master Lease Agreement), any other agreement relating to Indebtedness of BBC or Conquest secured by or otherwise related to the Agreement to Lease, the Master Lease Agreement or any property covered thereby, and any agreement, document or instrument executed or delivered in connection with any such Credit Agreement or other agreement. "DESIGNATION PERIOD": as such term is defined in Section 2.16. (b) Section 1.01 is further amended to restate the following definitions as follows: "APPLICABLE LETTER OF CREDIT FEE PERCENTAGE": as of any date of determination, (a) with respect to Letters of Credit having a scheduled expiration date not more than six months after the date of issuance, the applicable percentage based on the Performance Level, as set forth below: PERFORMANCE LEVEL APPLICABLE PERCENTAGE I 0.75% II 0.75% III 1.25% IV 1.75% and (b) with respect to Letters of Credit having a scheduled expiration date more than six months after the date of issuance, the applicable percentage based on the Performance Level, as set forth above, plus one-quarter of one percent (0.25%), in each case PLUS the Additional Margin. "APPLICABLE MARGIN": as of any date of determination, the applicable percentage based on the Performance Level, as set forth below: 2 Performance Eurodollar Swing-Line Reference LEVEL RATE ADVANCES LOANSRATE ADVANCES I 0.75% -0.75% -0.50% II 1.00% -0.75% -0.50% III 1.50% -0.375% 0 IV 2.00% 0 0.50% in each case PLUS the Additional Margin. The Applicable Margin for any Eurodollar Advance during any Interest Period applicable thereto shall be the Applicable Margin in effect on the first day of such Interest Period; PROVIDED, that the Applicable Margin for any such Interest Period shall be adjusted to account for any change in the Additional Margin on and as of the effective date of such change. "BORROWING BASE": as of a date of determination, the 71 43/100% of the following amount MINUS (A) the amount of any unsecured Indebtedness incurred by the Company pursuant to Section 5.13(g) and (B) $30,000,000: 55% of the lower of: (a) cost (as determined on a first-in, first-out basis) of Eligible Inventory LESS (i) the amount of Indebtedness of the Company or any Subsidiary secured by Liens on inventory and (ii) the amount accrued for losses due to missing inventory (shrink accrual) or (b) market value of Eligible Inventory LESS (i) the amount of Indebtedness of the Company or any Subsidiary secured by Liens on inventory and (ii) the amount accrued for losses due to missing inventory (shrink accrual). "DESIGNATED AMOUNT": with respect to any Bank for any Designation Period, such Bank's Pro Rata Share of the amount of the Aggregate Seasonal Commitment Amount designated by the Company as available pursuant to Section 2.16. (c) Section 2.06(c) is amended to delete clause (ii) thereof and substitute the following therefor: (ii) otherwise, at a rate per annum equal to the sum of the Reference Rate PLUS the Applicable Margin PLUS 2.00%. (d) Section 2.16 is restated in its entirety to read as follows: Section 2.16 DESIGNATION OF AVAILABLE AMOUNT OF SEASONAL COMMITMENT. Not less than five nor more than ten days prior to the first Business Day of each month from July through December of each year, the Company may by written notice to the Agent designate all or any portion of the Aggregate Seasonal Commitment Amount as available for the period from the first Business Day of the following month until the day before the first Business Day of the second following month (each such period, a "Designation Period"). If the Company shall fail to make such designation as provided in the preceding sentence, the Designated Amount of each Bank for the following Designation Period shall be the same as the Designated Amount for the preceding Designation Period or, in the case of the first Designation Period occurring during each year, shall be zero, subject to adjustment 3 pursuant to the second paragraph of this Section 2.16. The Agent shall notify each Bank in writing, within one Business Day after its receipt of any such designation, of such designation and such Bank's Designated Amount for the following Designation Period. The Agent shall also notify each Bank in writing, within one Business Day after the expiration of the time for the Company to make a designation under this Section2.16 for any Designation Period, if no such designation has been made. Notwithstanding the foregoing, the Company may increase the Aggregate Designated Amount for any particular Designation Period during such Designation Period by requesting Loans pursuant to Section 2.02 and/or Letters of Credit pursuant to Section 2.09 that would cause Total Outstandings to exceed the Aggregate Available Amount, but not the Aggregate Commitment Amount. Each Bank shall make its Loan in its Pro Rata Share of the requested Loans in accordance with the provisions of Section 2.02 so long as all other terms of lending under this Agreement have been satisfied. In each such case the Company shall specify in its request to borrow the aggregate amount by which the requested Loans will cause the Total Outstandings to exceed the Aggregate Available Amount (and thus the amount by which the Aggregate Designated Amount shall be increased) for such Designation Period and the Agent shall include such information in the notification provided to each Bank pursuant to Section 2.02. The Company shall pay to the Agent, for the account of the Banks, for the period from and including the first calendar day of the Designation Period in which the requested Loans are made through the last calendar day thereof, a fee in an amount equal to three-eights of one percent (0.375%) per annum of the aggregate amount by which such requested Loans will cause the Total Outstandings to exceed the Aggregate Available Amount (and thus the amount by which the Aggregate Designated Amount will be increased). Such fee shall be in lieu of the Commitment Fee under Section 2.18 otherwise applicable to such excess amount during such Designation Period and shall be payable quarterly in arrears on the first day of the following calendar quarter and on the Termination Date. The Designated Amount of each Bank shall be increased by its Pro Rata Share of the amount by which the Aggregate Designated Amount shall be increased pursuant to this Section. (e) Section 5.24 is restated in its entirety to read as follows: Section 5.24 INTEREST COVERAGE RATIO. Not permit the Interest Coverage Ratio to be less than (a) for the Measurement Periods ending on or about February 28, 1997, May 31, 1997 and August 31, 1997, 1.30 to 1.00, and (b) for all other Measurement Periods, 1.70 to 1.00. (f) Section 6.01 is amended to delete the period at the end of subsection (k) thereof and substitute "; or " therefor, and to add the following after such subsection (k): (l) BB Property, any lender to BB Property, or any trustee, agent or other representative of any lender to, or the holders of any securities issued by, BB Property, shall exercise, give any required formal written notice of intent to exercise, or otherwise express in writing any present or unconditional intent to exercise, any remedy it may have with respect to 4 any default occurring under any of the BB Property Lease Documents, unless all remedies exercised, or that are the subject of such written notice, if exercised, would not materially affect the Company's or any Subsidiary's operations at any leased property or require the Company or any Subsidiary to pay any lease payment prior to its scheduled due date or make any termination or other extraordinary payment; or (m) the Company's independent certified public accountants shall qualify their opinion with respect to the Company's financial statements in any respect as a result of any default or event that could, with the passage of time, the giving of notice or otherwise, become a default under any Conquest Document or BB Property Lease Document, or any such default or event asserted to have occurred thereunder (whether or not such default or event has actually occurred); or (n) lessors under leases of real property with an aggregate fair market value (determined under the most recent available appraisals thereof) in excess of $ 10,000,000 to which the Company or any Subsidiary is a party, any lender to any such lessor(s), or any trustee, agent or other representatives of any lender to, or the holders of any securities issued by, any such lessor(s), shall exercise, give any required formal written notice of intent to exercise, or otherwise express in writing any present or unconditional intent to exercise, any remedy they may have against the Company, any Subsidiary or any leased property that involves (i) payment by the Company or any Subsidiary of an amount in excess of $5,000,000 or (ii) any material interference with the Company's or any Subsidiary's operations at any leased property; or (o) (i) Conquest, any lender to Conquest or BBC, or any trustee, agent or other representative of any lender to, or the holders of any securities issued by, Conquest or BBC, shall exercise, give any required formal written notice of intent to exercise, or otherwise express in writing any present or unconditional intent to exercise, any remedy it may have with respect to any default occurring under any of the Conquest Documents unless all remedies exercised, or that are the subject of such written notice, if exercised, would not materially affect the Company's or any Subsidiary's operations at any leased property or require the Company or any Subsidiary to pay any lease payment prior to its scheduled due date or make any termination or other extraordinary payment; (ii) any litigation shall be commenced with respect to the question of whether the Company's failure to comply with Section 5.24 of this Agreement for the period ending November 30, 1996 constitutes a default under any of the Conquest Documents, or (iii) any amendment to any of the Conquest Documents shall be entered into that has the effect, directly or indirectly, of effectively ending the term of the "Credit Agreement" (as defined in the Master Lease Agreement) in effect on November 30, 1996 prior to September30, 1998. (g) Exhibits A and B to the Credit Agreement are replaced in their entirety with Exhibits A and B hereto. Section 3. DEFAULT WAIVER. 5 3.1 INTEREST COVERAGE ON DEFAULT. Under Section 5.24 of the Credit Agreement as in effect prior to this Amendment, the Company agreed to maintain an Interest Coverage Ratio for each Measurement Period of not less than 1.70 to 1.00. 3.2 WAIVER. The Banks hereby waive compliance by the Company with the requirements described in Section 3.1 hereof for the period ending November 30, 1996. The Company agrees that the waiver set forth in this Section 3.2 shall be limited to the precise meaning of the words as written herein and shall not be deemed (a) to be a consent to any waiver or modification of any other term or condition of the Credit Agreement, or of the terms or conditions described in Section 3.1 hereof for any period ending on any date except November 30, 1996, or (b) to prejudice any right or remedy that the Agent or the Banks may now have or may in the future have under or in connection with the Credit Agreement. The Company acknowledges and agrees that the waivers set forth in this Section 3.2 are provided by the Banks as an accommodation to the Company. The waivers set forth herein shall not be deemed to be, a course of dealing with respect thereto upon which the Company may rely in the future, and the Company hereby expressly waives any claim to such effect. 4. EFFECTIVENESS OF AMENDMENT. This Amendment shall be deemed effective as of the date first above written, but only upon delivery to the Agent of this Amendment duly executed by the Company and the Majority Banks, and when each of the following conditions precedent has been satisfied: (a) no material action, suit or proceeding (including, without limitation, any inquiry or investigation) shall be pending or threatened with respect to the Company that could have a material adverse affect on the Company; (b) no material adverse change in the business assets, financial condition or prospects of the Company shall have occurred since March 2, 1996; (c) payment shall have been made to, and received by, the Agent of (i) an amendment fee in the amount of $275,000, for the account of the Banks in accordance with their respective Pro Rata Shares (determined under clause (a) of the definition thereof), and (ii) all amounts payable to the Agent under the Credit Agreement or this Amendment, including, without limitation, all expenses of the Agent and the fees and expenses of counsel to the Agent incurred on or prior to the effective date of this Amendment, in the amounts requested by the Agent; (d) the representations and warranties contained in Article IV of the Credit Agreement, as amended hereby, are correct on and as of the effective date of this Amendment as though made on and as of such date; and (e) after giving effect to the waiver set forth in Section 3.2 of this Amendment, no Event of Default or Unmatured Event of Default has occurred and is continuing, or would result from the execution and delivery of this Amendment or the consummation of the transactions contemplated hereby; and (f) except for the default under Section 18(c) of the BB Property Lease Agreement, no default or event that could, with the passage of time, the giving of notice or both, become a default exists under any material agreement (whether or not relating to Indebtedness) to which the Company or any Subsidiary is a party or by which the Company, any Subsidiary or any of their respective properties is bound. 6 5. ACKNOWLEDGEMENT. The Banks and the Company each acknowledge that, as amended hereby, the Credit Agreement, as amended by this Amendment, remains in full force and effect with respect to the Company, the Banks and the Agent. The Company confirms and acknowledges that it will continue to comply with the covenants set out in the Credit Agreement, as amended hereby, and that its representations and warranties set out in the Credit Agreement, as amended hereby, are true and correct as of the date of this Amendment. The Company further represents and warrants that (i) the execution, delivery and performance of this Amendment by the Company is within its corporate powers and has been duly authorized by all necessary corporate action, (ii) this Amendment has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms (subject to limitations as to enforceability which might result from bankruptcy, insolvency or other similar laws affecting creditors' rights generally) and (iii) no Events of Default or events which, with the giving of notice or passage of time, would be an Event of Default, exist under the Credit Agreement. 6. COUNTERPARTS. This Amendment may be signed by the parties hereto on different counterparts with the same effect as if the signatures hereto were on the same instrument. 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. BEST BUY CO., INC. By Robert C. Fox Its Senior Vice President - Finance FIRST BANK NATIONAL ASSOCIATION By Its Senior Vice President BANK ONE, DAYTON, NATIONAL ASSOCIATION By John B. Middelberg Its Vice President THE BANK OF TOKYO-MITSUBISHI LTD., CHICAGO BRANCH By J.R. Arnold Its Vice President FIRST UNION NATIONAL BANK OF NORTH CAROLINA By Its S-8 THE LONG TERM CREDIT BANK OF JAPAN, LTD. By Its THE BANK OF NOVA SCOTIA By J.H. Youssef Its Senior Manager Finance & Administration YASUDA TRUST AND BANKING CO., LTD. By Joseph C. Meek Its Deputy General Manager THE SUMITOMO BANK, LIMITED By John W. Howard, Jr Michael J. Phillippe Its Vice President Vice President & Manager MERCANTILE BANK OF ST. LOUIS NATIONAL ASSOCIATION By Its S-9 COMERICA BANK By Its WELLS FARGO BANK By Its BANK OF AMERICA ILLINOIS By Its BANQUE NATIONALE DE PARIS By Its THE DAI-ICHI KANGYO BANK, LTD., CHICAGO BRANCH By Seiichiro Ino Its Vice President THE SAKURA BANK, LIMITED By Shunji Sakurai Its Joint General Manager S-10 THE SANWA BANK, LIMITED, CHICAGO BRANCH By Gordon P. Holtley Its Vice President & Manager UNITED STATES NATIONAL BANK OF OREGON By Roger H. Weis Its Vice President S-11 EXHIBIT A FORM OF BORROWING BASE CERTIFICATE Company: Best Buy Co., Inc. Date Report # A. INVENTORY 1. Total Perpetual Inventory (FIFO) as of $ 2. Less: Ineligible Inventory a. Defective Center Inventory (Devo) $ b. Service Center Invetory $ c. Close-out Inventory $ 3. Total (2 a + b + c) $ 4. Eligible Inventory (Line 1 - Line 3) $ 5. Less: a. Secured Vendor Payables $ b. Floor Plan Liability $ c. Shrink Accrual $ 6. Total (5 a + b + c) $ 7. Eligible Inventory Net of Financing Obligations and Shrink Accrual (Line 4 -Line 6) $ 8. Eligible Loan Value @ 55% of Line 7 $ B. BORROWING BASE 1. Total Available Inventory (Line A.8) $ 2. Total Borrowing Base (71 43/100% of Line B.1) $ 3. Unsecured Indebtedness under Section 5.13(g) $ ----- 4. Conquest Reserve ($30,000,000) $30,000,000_ 5. Net Borrowing Base $ - ----- C. LOAN STATUS 1. Total Outstandings (includes Letter of Credit Usage) $ 2. Borrowing Base Excess (Deficiency) (Line B.5 - Line C.1) $ D. OTHER ASSETS 1. General Ledger Cash Balance $ 2. Total Accounts Receivable (including Credit Card Receivables) $ We certify that to our best knowledge and belief the information contained in this report is true and accurate. BEST BUY CO., INC. By Its EXHIBIT B FORM OF COMPLIANCE CERTIFICATE TO: First Bank National Association, as Agent THE UNDERSIGNED HEREBY CERTIFIES THAT: (1) I am the duly elected chief financial officer of Best Buy Co., Inc. (the "Company"), a Minnesota corporation, or have been designated by such chief financial officer to submit this Compliance Certificate on his behalf; (2) I have reviewed the terms of the Credit Agreement dated as of August 25, 1995, among the Company, the Banks party thereto, First Bank National Association, as Agent and The Bank of Nova Scotia, Bank One, Dayton, National Association, and Bank of America Illinois, as Co-Agents (as heretofore amended, referred to herein and in the attachment hereto as the "Credit Agreement"), and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of the Company during the accounting period covered by the attachment hereto; (3) The examinations described in paragraph (2) did not disclose, and I have no knowledge of, whether arising out of such examinations or otherwise, the existence of any condition or event which constitutes an Event of Default or Unmatured Event of Default (as such terms are defined in the Credit Agreement) during or at the end of the accounting period covered by the attachment hereto or as of the date of this Certificate, except as described below (or in a separate attachment to this Certificate). The exceptions, listing in detail the nature of the condition or event, the period during which it has existed and the action which Company has taken, is taking or proposes to take with respect to each such condition or event, are as follows: The foregoing certifications, together with the computations set forth in the attachment hereto and the financial statements delivered with this Certificate in support hereof, are made and delivered this day of , 199_, pursuant to Section 5.01(c) of the Credit Agreement. BEST BUY CO., INC. By Its ATTACHMENT TO COMPLIANCE CERTIFICATE AS OF , 19__, WHICH PERTAINS TO THE PERIOD FROM , 19__, TO , 19__ Terms defined in the Credit Agreement are used herein as defined therein and Section references herein refer to the Sections of the Credit Agreement. 1. MAXIMUM PERMISSIBLE SALE OR LEASE OF ASSETS: (prescribed by Section 5.11(c)) (a) Maximum aggregate book value of assets of the Company and Subsidiaries that may be disposed of during such fiscal year under Section 5.11(c): $ (b) Actual aggregate book value of all assets of the Company and Subsidiaries disposed of during the fiscal year encompassing the period covered hereby: $ 2. LIMITATION ON GENERAL CAPITAL EXPENDITURES: (prescribed by Section 5.17) (a) Maximum aggregate amount of General Capital Expenditures permitted under Section 5.17 for the fiscal year including the period covered hereby: $150,000,000 (b) Actual General Capital Expenditures on a year-to-date basis for the fiscal year including the period covered hereby: $ 3. CONSOLIDATED NET WORTH: (prescribed by Section 5.21) (a) Minimum Tangible Net Worth required under Section 5.21 for the period covered hereby: $ (b) Actual Tangible Net Worth: $ 4. LEVERAGE RATIO: (prescribed by Section 5.22; measured at fiscal year-end only) (a) (i) Indebtedness of the Company and Subsidiaries: $ MINUS (ii) Cash and Short-term Investments $ Total $ (b) Tangible Net Worth: $ (c) Maximum Leverage Ratio permitted under Section 5.22: 2.00 to 1.00 (d) Actual ratio ((a) to (b)): to 1.00 --- 5. INVENTORY TURNOVER RATIO: (prescribed by Section 5.23) (a) Minimum Inventory Turnover Ratio required under Section 5.23 for the Measurement Period covered hereby: 4.50 to 1.00 (b) Actual Inventory Turnover Ratio for the Measurement Period covered hereby: (i) Cost of inventory sold during Measurement Period: $ to (ii) Average Cost of inventory held at the end of each month during the Measurement Period: $ Ratio of (i) to (ii): to 1.00 6. INTEREST COVERAGE RATIO: (prescribed by Section 5.24) (a) Minimum Interest Coverage Ratio required under Section 5.24 for the Measurement Period covered hereby: to 1.00/(1) ------ (b) Actual Interest Coverage Ratio for the Measurement Period covered hereby: Ratio of: - --------------------------- (1) 1.30 to 1.00 for Measurement Periods ending February, May and in August, 1997; 1.70 to 1.00 for all other periods (i) Earnings Before Interest, Income Taxes and Depreciation $ PLUS Rental and Lease Expense $ PLUS MIPS Distributions deducted from Net Income but excluded from Interest Expense $ ------ Total: $ to (ii) Rental and Lease Expense $ PLUS Consolidated Net Interest Expense $ PLUS MIPS Distributions excluded from Interest Expense $ ------ Total: $ Ratio of (i) to (ii): to 1.00 7. LIMITATION ON OWNED LAND AND BUILDINGS (prescribed by Section 5.25) (a) Maximum amount of owned land and buildings permitted under Section 5.25: $150,000,000 (b) Actual amount of owned land and buildings as of measurement date: $ EX-11.1 4 EXHIBIT 11.1 EXHIBIT 11.1 BEST BUY CO., INC. ------------------ COMPUTATION OF NET EARNINGS PER COMMON SHARE --------------------------------------------
March 1, March 2, February 25, For the years ended: 1997 1996 1995 ----- ----- ----- Earnings: Net earnings available to common shares $ 1,748,000 $48,019,000 $57,651,000 ------------ ----------- ----------- Shares: Weighted average common 43,171,000 42,620,000 42,013,000 shares outstanding Adjustments: Assumed issuance of shares purchased under stock option plans 411,000 1,020,000 1,458,000 ------------ ----------- ----------- Total common equivalent shares 43,582,000 43,640,000 43,471,000 ------------ ----------- ----------- ------------ ----------- ----------- Earnings per share: Net earnings per common share $ .04 $ 1.10 $ 1.33 ------------ ----------- ----------- ------------ ----------- -----------
Note: The computation of earnings per common share assuming full dilution is substantially the same as set forth above or is anti-dilutive. EX-13.1 5 EXHIBIT 13.1
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA ($ in thousands, except per share amounts) FISCAL PERIOD(1) 1997 1996 1995 1994(2) 1993 - ---------------------------------------------------------------------------------------------------------------------------- STATEMENT OF EARNINGS DATA Revenues $ 7,770,683 $ 7,217,448 $ 5,079,557 $ 3,006,534 $ 1,619,978 Gross profit 1,058,881 936,571 690,393 456,925 284,034 Selling, general and administrative expenses 1,005,675 813,988 568,466 379,747 248,126 Operating income 53,206 122,583 121,927 77,178 35,908 Earnings before cumulative effect of accounting change 1,748 48,019 57,651 41,710 19,855 Net earnings 1,748 48,019 57,651 41,285 19,855 PER SHARE DATA Earnings before cumulative effect of accounting change $ .04 $ 1.10 $ 1.33 $ 1.01 $ .57 Net earnings .04 1.10 1.33 1.00 .57 Common stock price: High 26 1/4 29 5/8 45 1/4 31 7/16 15 23/32 Low 7 7/8 12 3/4 22 1/8 10 27/32 4 23/32 Weighted average shares outstanding (000s) 43,582 43,640 43,471 41,336 34,776 OPERATING AND OTHER DATA Comparable store sales change(3) (5%) 6% 20% 27% 19% Number of stores (end of period) 272 251 204 151 111 Average revenues per store(4) $ 29,300 $ 31,100 $ 28,400 $ 22,600 $ 17,600 Gross profit percentage 13.6% 13.0% 13.6% 15.2% 17.5% Selling, general and administrative expense percentage 12.9% 11.3% 11.2% 12.6% 15.3% Operating income percentage .7% 1.7% 2.4% 2.6% 2.2% Inventory turns(5) 4.6x 4.8x 4.7x 5.0x 4.8x BALANCE SHEET DATA (at period end) Working capital $ 567,456 $ 586,841 $ 609,049 $ 362,582 $ 118,921 Total assets 1,734,307 1,890,832 1,507,125 952,494 439,142 Long-term debt, including current portion 238,016 229,855 240,965 219,710 53,870 Convertible preferred securities 230,000 230,000 230,000 Shareholders' equity 438,315 431,614 376,122 311,444 182,283 - --------------------------------------------------------------------------------------------------------------------------
This table should be read in conjunction with the Management's Discussion and Analysis of Results of Operations and Financial Condition and the Consolidated Financial Statements and Notes thereto. (1) Fiscal 1996 contained 53 weeks. All other periods presented contained 52 weeks. (2) During fiscal 1994, the Company adopted FAS 109, resulting in a cumulative effect adjustment of ($425) or ($.01) 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. Best Buy Co., Inc. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS In fiscal 1997, Best Buy made progress on initiatives to build a base it expects will provide future profitability. Unfortunately, a difficult environment in the retail consumer electronics and personal computer segments significantly impacted the Company's financial performance for the year, overshadowing the benefit of gross margin improvement. A lack of new products and technology with widespread consumer appeal in the consumer electronics industry, combined with a sharp decline in personal computer selling prices during the peak holiday season, applied pressure on revenues and profit margins. The resulting slower rate of total sales growth, due to a 5% comparable store sales decline in fiscal 1997, also caused an increase in the Company's operating expense ratio, further impacting profits. Earnings for the fiscal year were $1.7 million, compared to $48.0 million in fiscal 1996 and $57.7 million in fiscal 1995. Earnings per share were $.04, $1.10 and $1.33, in fiscal 1997, 1996 and 1995, respectively. REVENUES The following table presents selected revenue data for each of the last three fiscal years ($ in thousands).
1997 1996 1995 - ----------------------------------------------------------------------------------------- Revenues $ 7,770,683 $ 7,217,448 $ 5,079,557 Percentage increase in revenues 8% 42% 69% Comparable store sales change (5%) 6% 20% Average revenues per store $ 29,300 $ 31,100 $ 28,400
Sales of $7.771 billion for fiscal 1997 were 8% above last year's $7.217 billion, principally due to the addition of 21 new stores during the year, as well as a full year of operations at the 47 stores opened in fiscal 1996. Although total sales increased, comparable store sales declined 5% for the year due to significant reductions in the average selling price of personal computers, particularly during the seasonally higher volume second half of the year, and continued weakness in the consumer electronics and recorded music industries. In fiscal 1997, the Company slowed its rate of expansion, opening fewer than half the number of stores than each of the previous two years. Slower industry growth and competition applied pressure on profitability, reducing the Company's ability to continue the recent pace of store openings. New store openings in fiscal 1997 included the new markets of Philadelphia, Pennsylvania; Tampa, Florida; Fresno and Santa Rosa, California; Memphis, Tennessee; and Tucson, Arizona. The Company also remodeled or relocated 10 stores to larger facilities. Sales in fiscal 1996 were 42% above fiscal 1995 sales of $5.080 billion and comparable store sales increased 6%. The increase in sales in fiscal 1996 was mainly due to the opening of 47 new stores and a full year of operations at the 53 new stores opened in fiscal 1995. The combined 100 stores opened in fiscal 1996 and 1995 greatly expanded the Company's presence nationwide, with the entrance into the markets of Cincinnati and Cleveland, Ohio; Miami, Florida; Los Angeles, California; Baltimore, Maryland; Washington, D.C.; and the Carolinas. The following table sets forth the Company's retail store sales mix by major product category for each of the past three fiscal years. 1997 1996 1995 - --------------------------------------------------------------- Home Office 39% 41% 37% Consumer Electronics - Video 17% 18% 20% Consumer Electronics - Audio 12% 13% 14% Entertainment Software* 18% 17% 18% Appliances 9% 7% 8% Other 5% 4% 3% - --------------------------------------------------------------- Total 100% 100% 100% *Fiscal 1996 and 1995 restated to include video game products, previously included in Other. A general absence in recent years of widely accepted new products in the consumer electronics category and a continued increase in the channels of distribution led to a continued softening of sales in this category in fiscal 1997. Comparable store sales in this category declined for the second consecutive year as price declines and soft demand impacted year over year sales. Digital Satellite Systems (DSS) provided some renewed interest in the video category in fiscal 1997, although its impact was not sufficient to mitigate weakness in more traditional video products. Digital Versatile Disc (DVD) is being introduced in the first quarter of fiscal 1998. This technology is the most significant advance in this category in the past several years, and along with other new technology in development such as digital, High Definition Television (HDTV), represents opportunity to generate new interest in this category in the years ahead. However, the higher introductory price points for DVD and a limited number of software titles are likely to lead to only a modest contribution to total sales in fiscal 1998. Pressure on selling prices due to model transition in personal computers resulted in rapidly falling prices to the consumer during the high-volume holiday season. Due to this transition, combined with the impact of lower-priced entry-level models, the average selling price of computers at year end was nearly 20% below fiscal 1996 year-end levels. Despite increases in volume of other peripheral products in the home office category, comparable store sales in this category declined, Best Buy Co., Inc. 10 mainly due to the lower selling prices, as well as difficult comparisons with sales volumes reported in the highly promotional environment of fiscal 1996. The appliance category increased from 7% of total Company sales in fiscal 1996 to 9% in fiscal 1997, as a result of a considerable increase in the Company's assortment of major appliances. The addition of the Amana, General Electric, Hotpoint, Maytag and Tappan name-brand products and a revitalized presentation of the appliance department with high-end small appliances and electrics enhanced the appearance and appeal of Best Buy's product offering in this category. The entertainment software category showed mixed results, as the recorded music industry had a weak year, generally due to the lack of acceptance of new titles by consumers. Video games and computer software performed better than the prior year, as new video game formats and new computer software titles were introduced. A change in the Company's marketing strategy and an increase in the focus of sales presentation at the retail stores resulted in an increase in the sale of the Company's Performance Service Plans (PSPs) from less than 1% of total store sales in fiscal 1996 to 1.9% in fiscal 1997. Management expects that because the Company's most significant categories are expected to remain soft in fiscal 1998, comparable store sales are likely to decline again for the year. Due to more difficult comparisons with the first half of fiscal 1997, the declines are expected to be more pronounced in the first half of the year and moderate in the second half. As a result of the higher comparable store sales decline and seasonally slower volumes, the Company anticipates reporting a loss in the first half of the year; however, improved earnings are expected for the year as a whole. COMPONENTS OF OPERATING INCOME The following table sets forth selected operating ratios as a percentage of sales for the last three fiscal years. 1997 1996 1995 - ------------------------------------------------------- Gross profit margin 13.6% 13.0% 13.6% Selling, general and administrative expenses 12.9% 11.3% 11.2% Operating income .7% 1.7% 2.4% The gross profit margin for fiscal 1997 was 13.6%, compared to 13.0% in fiscal 1996, as the Company began to benefit from a change in sales mix through increased margin contributions from sales of PSPs and major appliances. Both of these products carry profit margins above the Company's overall average. In the fourth quarter of fiscal 1996 the Company began insuring its PSPs with an unrelated third party. This change resulted in the Company recognizing the revenues and profits from the sale of PSPs at the time the plan was sold. Prior to that time, revenues and profits from these plans were recognized over the lives of the contracts. An extremely competitive environment in the personal computer market put pressure on profit margins through the holiday selling season. In anticipation of the January 1997 introduction of MMX-TM- technology, retailers reduced selling prices on the existing technology products as it became evident that the new technology was going to be priced lower than originally expected. This reduction in selling prices resulted in the Company recording a $15 million pre-tax charge to earnings in the third quarter, principally to adjust carrying values of personal computer inventories to expected net realizable values. In the fourth quarter, in an effort to more productively deploy retail selling space, the Company made a decision to reduce its assortment of recorded music, resulting in a $10 million addition to the markdown reserve. Gross profit margins were also adversely impacted by the costs of consumer financing offers due to the promotional environment during much of the year. However, a reduction in the level of financing promotions in the fourth quarter of fiscal 1997 offset some of the impact on profit margins for the year as a whole. Improved control over inventory shrink also helped improve profit margins as compared to fiscal 1996. The improvement in gross profit margins in fiscal 1997 ended the trend in margin declines experienced over the last several years. Prior to 1997, the margin declines had been principally caused by the higher levels of contribution in the Company's sales mix from the lower-margin personal computer category and an increasingly intense promotional environment in the categories in which the Company competes. Management believes that while industry consolidation of specialty retailers is expected to continue, competition from alternative sources of retailing such as mail order and Internet retailers, as well as mass merchandise retailers, will result in an ongoing competitive environment. In fiscal 1998, the Company intends to focus on continued gross profit improvement. Management expects to continue to build on the progress made in fiscal 1997 with respect to sales of PSPs and major appliances. The Company also intends to more selectively utilize consumer financing offers, reducing its promotional costs. In addition, management believes there is opportunity to improve profit margins through increased dedication of selling space to products which generate the highest overall gross profit margins, while continuing to offer consumers a meaningful assortment of products in each of the Company's categories. The Company has engaged Andersen Consulting LLP to assist with the implementation of systems and methodologies to improve inventory management, assortment planning, strategic sourcing and advertising effectiveness. Best Buy Co., Inc. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Selling, general and administrative (SG&A) expenses were 12.9% of sales in fiscal 1997, compared to 11.3% in fiscal 1996. The decline in comparable store sales and average revenues per store resulted in a loss of leverage on the fixed components of the Company's operating costs such as facilities, distribution and support functions. Additionally, as the Company has added larger stores in generally more expensive markets in the past several years, operating costs as a percentage of sales have increased. The competitive and promotional environment in fiscal 1997 also contributed to higher net advertising costs as compared to the prior year. The nature of the higher operating costs experienced in fiscal 1997 also contributed to the year-over-year increase in SG&A comparing fiscal 1996 to fiscal 1995. Management expects that, due to the expected continued comparable store sales declines, the SG&A ratio will increase as compared to fiscal 1997. Interest expense in fiscal 1997 increased over fiscal 1996 due to generally higher levels of investment in completed properties during most of the year. Interest expense in fiscal 1996 increased over fiscal 1995 due to a full year of interest expense on the convertible preferred securities issued in November 1994 and higher levels of investment in inventory and store development. The Company's effective tax rate was approximately 39% in each of the last three fiscal years, as the loss of the benefit from the jobs tax credit, which expired in December 1994, was offset by slightly lower state income taxes due to the mix of states in which the Company does business. LIQUIDITY AND CAPITAL RESOURCES In fiscal 1997, the Company curtailed the pace of expansion to a level that could be reasonably supported by internally generated funds. The rapid pace of growth and store openings in the two previous years was funded with funds generated from the public securities and bank debt markets. The funds from a securities offering in November 1994 and the Company's bank-financed master lease facility provided the majority of the financing to rapidly open stores and increase distribution capacity. Due to the reduced profits available to support a high level of store growth, the Company substantially reduced the number of new store openings in fiscal 1997. The following table indicates the number of stores, by prototype, operated by the Company at the end of the last three fiscal years. STORE PROTOTYPE 1997 1996 1995 - ------------------------------------------------------------------ 28,000 square feet 54 61 67 36,000 square feet 34 36 48 45,000 square feet 132 112 75 58,000 square feet 52 42 14 - ------------------------------------------------------------------ Total number of stores at year en 272 251 204 Average store size (in square feet) 42,800 41,400 37,700 Cash flow from operations in fiscal 1997, before changes in working capital, was impacted by the decline in earnings. After adjusting for the $25 million in non-cash inventory charges, cash flow from operations, before working capital changes, was $94 million, compared to $104 million in fiscal 1996 and $97 million in fiscal 1995. Changes in the components of working capital, after adjusting for markdown reserves, included a $44 million decrease in inventories in fiscal 1997, despite the addition of 21 new stores, due to improved inventory management. Inventories increased $293 million in fiscal 1996 and $270 million in fiscal 1995 due to the higher levels of business expansion in those years. Working capital financing provided by accounts payable and financing arrangements was reduced by $152 million in fiscal 1997 and increased by $291 million and $178 million in fiscal 1996 and 1995, respectively, reflecting the change in activity levels at each of the respective year ends. Accounts receivable, which consists principally of credit card and vendor-related receivables, decreased in fiscal 1997, due to lower activity levels at year end as compared to the prior fiscal year end. Receivables from sales on the Company's private-label credit card are sold to unrelated third-party financial institutions, without recourse, and the Company does not carry any risk of loss due to default on these receivables. Deferred revenues decreased in fiscal 1997 as revenues from sales of PSPs prior to the fourth quarter of fiscal 1996 were recognized. The deferred tax assets related to the deferred revenues are also being reduced as the revenue is recognized. Management believes that the remaining net deferred tax assets will be realized through future taxable income. Cash used in investing activities was $20 million in fiscal 1997, compared to $159 million in fiscal 1996 and $192 million in fiscal 1995. Due to the slower rate of growth in fiscal 1997, capital spending was $88 million, compared to approximately $120 million in each of the two previous years. Cash flows from property development were a positive $73 million in fiscal 1997 as the Company generated over $100 million in proceeds from the sale of 12 retail locations and a distribution Best Buy Co., Inc. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION center, and property development slowed significantly as compared to the two prior years. At fiscal 1997 year end, the Company owned five completed retail locations and three locations that were under development for opening in fiscal 1998. All of these locations are expected to be sold in fiscal 1998. Proceeds from the sale of developed properties were nearly $90 million in fiscal 1996 and $43 million in fiscal 1995. Management expects that capital spending and investment in property development will decline further in fiscal 1998 as the number of store openings is reduced. In fiscal 1997, the Company completed several intermediate-term equipment financings generating approximately $21 million. The Company also refinanced the $8.7 million contract for deed on its corporate headquarters facility with a $12 million, 15-year mortgage loan. The $230 million public offering of the Company's convertible preferred securities in fiscal 1995 generated funds to support property development and store openings in fiscal 1995 and 1996. These securities pay monthly distributions at an annual rate of 6.5% per year and are convertible into the Company's common stock. In fiscal 1995, the Company also entered into a master lease agreement, which provided approximately $125 million in real-estate financing for retail store and distribution center development. That financing has since been reduced to $116 million through the sale of property. The bank credit facility supporting the master lease facility currently matures in September 1998. At March 1, 1997, the Company's revolving credit facility provided for unsecured borrowings of up to $250 million, which increased on a seasonal basis to $550 million, as limited to certain percentages of inventories. The facility requires that borrowings are limited to $50 million for a period of 45 days following the holiday season. This facility matures in June 1998. In addition, the credit facility, as well as the credit facility supporting the master lease, contain financial covenants regarding, among other things, the maintenance of certain operating ratios. In the third quarter of fiscal 1997, the Company violated the interest coverage ratio covenant as a result of the inventory write-down and weak operating performance. This violation was waived by the participants in the credit facilities and the covenant was amended through the second quarter of fiscal 1998, at which time the covenant reverts to its original level. The Company intends to reduce the level of commitment to approximately $365 million on a seasonal basis due to lower expected borrowing resulting from slower growth and improved inventory management. In addition to the working capital credit facility, the Company has an inventory financing facility provided by a commercial credit facility that provides for financing of up to $200 million, increasing to $325 million on a seasonal basis. For fiscal 1998, the Company currently plans to open 13 new stores, including entry into the new markets of Pittsburgh, Pennsylvania; Palm Desert, California; and Knoxville, Tennessee. Since the introduction of the Company's Concept III store format, new stores and remodeled or relocated stores have been either the 45,000 or 58,000 square-foot prototype. In fiscal 1998, all stores opened will be the 45,000 square-foot prototype. The Company also expects to remodel or relocate five existing stores to the 45,000 square foot prototype. The Company intends to use the larger existing stores to test new products and merchandising strategies. Each new store requires approximately $3 million in working capital for merchandise inventory (net of vendor financing), fixtures and leasehold improvements. Management expects that capital spending for fiscal 1998 will approximate $65 million, exclusive of property development. Net cash flows from property development are expected to be positive, as currently owned properties are expected to be sold and the investment in new stores declines. Management also intends to continue to reduce the size of the master lease through the sale of property to third parties. The timing of property sales and ability to complete sale/leaseback transactions are dependent upon the market for retail real estate. Management believes that, as a result of lower levels of investment in property development and improvement in inventory management resulting in faster inventory turns, the Company's working capital borrowing requirements will be lower in fiscal 1998 than in fiscal 1997. The ability of the Company to meet the covenants required by its credit facilities is dependent upon future operating results. While there can be no assurance that the Company will be able to achieve the required performance necessary to remain in compliance, management believes that sufficient alternative sources of working capital financing are available to support the Company's planned operations for fiscal 1998. Best Buy Co., Inc. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 1997 and 1996. Results for the quarter ended Nov. 30, 1996, include a $15 million pre-tax charge related to the write-down of certain inventories, primarily personal computers, to expected net realizable values. Results for the quarter ended March 1, 1997, include a $10 million pre-tax charge mainly as a result of the Company's decision to reduce its assortment of recorded music. Results subsequent to Nov. 25, 1995, reflect the benefit from the Company's change to a third party to insure its Performance Service Plans. ($ in thousands, except per share amounts)
Fiscal 1997 JUNE 1 AUG. 31 NOV. 30 MARCH 1 1996 1996 1996 1997 - ------------------------------------------------------------------------------------------ Revenues $1,637,184 $1,778,640 $2,007,324 $2,347,535 Gross profit 232,650 251,666 248,768 325,797 Operating income (loss) 12,952 19,684 (3,110) 23,680 Net earnings (loss) 409 3,788 (10,973) 8,524 Net earnings (loss) per share .01 .09 (.25) .20 Fiscal 1996 May 27 Aug. 26 Nov. 25 March 2 1995 1995 1995 1996 - ------------------------------------------------------------------------------------------ Revenues $1,274,696 $1,437,911 $1,929,277 $2,575,564 Gross profit 182,288 196,621 242,883 314,779 Operating income 16,363 19,203 42,588 44,429 Net earnings 4,672 5,714 17,802 19,831 Net earnings per share .11 .13 .41 .46
COMMON STOCK PRICES QUARTER 1st 2nd 3rd 4th - ------------------------------------------------------------------------ Fiscal 1997 High $23 $26 1/4 $23 3/4 $14 3/8 Low 16 3/8 17 3/8 12 1/8 7 7/8 Fiscal 1996 High $27 3/8 $29 $29 5/8 $22 3/8 Low 20 1/4 22 3/4 20 3/4 12 3/4 Best Buy's common stock is traded on the New York Stock Exchange, symbol BBY. As of March 31, 1997, there were 2,716 holders of record of Best Buy common stock. The Company has not paid cash dividends on its common stock and does not presently intend to pay any dividends on its common stock for the foreseeable future. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies. With the exception of historical information, the matters discussed in the Annual Report are forward-looking statements that involve risks and uncertainties. Such risks and uncertainties include, among other things, the Company's ability to comply with covenants in its borrowing facilities and the availability of sufficient funds to provide working capital financing. Reference is made to the Company's Current Report on Form 8-K, wherein the Company has identified additional important factors that could cause actual results to differ materially from those contemplated by the statements made herein. Best Buy Co., Inc. 14 CONSOLIDATED BALANCE SHEETS ($ in thousands, except per share amounts) ASSETS MARCH 1 March 2 1997 1996 ------------------------------ CURRENT ASSETS Cash and cash equivalents $ 89,808 $ 86,445 Receivables 79,581 121,438 Recoverable costs from developed properties 53,485 126,237 Merchandise inventories 1,132,059 1,201,142 Refundable and deferred income taxes 25,560 21,531 Prepaid expenses 4,542 3,750 ------------------------------- Total current assets 1,385,035 1,560,543 PROPERTY AND EQUIPMENT Land and buildings 18,000 16,423 Leasehold improvements 148,168 131,289 Furniture, fixtures and equipment 324,333 266,582 Property under capital leases 29,326 29,421 ------------------------------- 519,827 443,715 Less accumulated depreciation and amortization 188,194 132,676 ------------------------------- Net property and equipment 331,633 311,039 OTHER ASSETS Other assets 17,639 12,046 Deferred income taxes 7,204 ------------------------------ Total other assets 17,639 19,250 ------------------------------ TOTAL ASSETS $ 1,734,307 $ 1,890,832 ----------------------------- ----------------------------- LIABILITIES AND MARCH 1 March 2 SHAREHOLDERS' EQUITY 1997 1996 - ------------------------------------------------------------------------------- CURRENT LIABILITIES Accounts payable $ 487,802 $ 673,852 Obligations under financing arrangements 127,510 93,951 Accrued salaries and related expenses 33,663 26,890 Accrued liabilities 122,611 124,596 Deferred service plan revenue 24,602 30,845 Current portion of long-term debt 21,391 23,568 --------------------------------- Total current liabilities 817,579 973,702 DEFERRED INCOME TAXES 3,578 DEFERRED REVENUE AND OTHER LIABILITIES 28,210 49,229 LONG-TERM DEBT 216,625 206,287 CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY 230,000 230,000 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 43,287,000 and 42,842,000 shares, respectively 4,329 4,284 Additional paid-in capital 241,300 236,392 Retained earnings 192,686 190,938 --------------------------------- Total shareholders' equity 438,315 431,614 --------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,734,307 $1,890,832 --------------------------------- --------------------------------- See notes to consolidated financial statements. Best Buy Co., Inc. 15 CONSOLIDATED STATEMENTS OF EARNINGS ($ in thousands, except per share amounts)
FOR THE FISCAL YEARS ENDED MARCH 1 March 2 Feb. 25 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- Revenues $7,770,683 $ 7,217,448 $ 5,079,557 Cost of goods sold 6,711,802 6,280,877 4,389,164 ------------------------------------------- Gross profit 1,058,881 936,571 690,393 Selling, general and administrative expenses 1,005,675 813,988 568,466 ------------------------------------------- Operating income 53,206 122,583 121,927 Interest expense, net 50,338 43,594 27,876 ------------------------------------------- Earnings before income taxes 2,868 78,989 94,051 Income taxes 1,120 30,970 36,400 Net Earnings $1,748 $48,019 $57,651 ------------------------------------------- ------------------------------------------- Earnings Per Share $.04 $1.10 $1.33 ------------------------------------------- ------------------------------------------- Weighted Average Common Shares Outstanding (000S) 43,582 43,640 43,471 ------------------------------------------- -------------------------------------------
See notes to consolidated financial statements. Best Buy Co., Inc. 16
CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands) FOR THE FISCAL YEARS ENDED MARCH 1 March 2 Feb. 25 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings $ 1,748 $ 48,019 $ 57,651 Charges to earnings not affecting cash: Depreciation and amortization 66,844 54,862 38,570 Loss on disposal of property and equipment 468 1,267 760 ---------------------------------------------- 69,060 104,148 96,981 Changes in operating assets and liabilities: Receivables 41,857 (36,998) (31,496) Merchandise inventories 69,083 (293,465) (269,727) Income taxes and prepaid expenses 8,174 (16,273) (5,929) Accounts payable (186,050) 278,515 106,920 Other current liabilities 4,788 50,599 46,117 Deferred revenue and other liabilities (27,262) 12,994 19,723 ---------------------------------------------- Total cash (used in) provided by operating activities (20,350) 99,520 (37,411) ---------------------------------------------- INVESTING ACTIVITIES Additions to property and equipment (87,593) (126,201) (118,118) Decrease (increase) in recoverable costs from developed properties 72,752 (40,015) (86,222) (Increase) decrease in other assets (5,593) 7,712 (11,676) Proceeds from sale/leasebacks 24,060 ---------------------------------------------- Total cash used in investing activities (20,434) (158,504) (191,956) ---------------------------------------------- FINANCING ACTIVITIES Increase in obligations under financing arrangements 33,559 12,196 70,599 Long-term debt borrowings 33,542 21,429 Long-term debt payments (25,694) (14,600) (10,199) Common stock issued 2,740 3,133 2,366 Proceeds from issuance of convertible preferred securities 230,000 ---------------------------------------------- Total cash provided by financing activities 44,147 729 314,195 ---------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,363 (58,255) 84,828 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 86,445 144,700 59,872 ---------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 89,808 $ 86,445 $ 144,700 ---------------------------------------------- ----------------------------------------------
See notes to consolidated financial statements. 17 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ($ in thousands) ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS - -------------------------------------------------------------------------------- BALANCES AT FEB. 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 FEB. 25, 1995 4,221 228,982 142,919 Stock options exercised 63 3,070 Tax benefit from stock options exercised 4,340 Net earnings 48,019 ----------------------------------------- BALANCES AT MARCH 2, 1996 4,284 236,392 190,938 Stock options exercised 45 2,695 Tax benefit from stock options exercised 2,213 Net earnings 1,748 ----------------------------------------- BALANCES AT MARCH 1, 1997 $ 4,329 $ 241,300 $ 192,686 ----------------------------------------- ----------------------------------------- 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 March 1, 1997, and March 2, 1996, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended March 1, 1997. 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 audits. We conducted our audits 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 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 Best Buy Co., Inc. at March 1, 1997, and March 2, 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 1, 1997, in conformity with generally accepted accounting principles. Ernst & Young LLP Minneapolis, Minnesota April 8, 1997 Best Buy Co., Inc. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands, except per share amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS: The Company sells personal computers 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. In fiscal 1996, the Company adopted SFAS 121 "Accounting for the Impairment of Long-Lived Assets," which requires losses on impairment of long-lived assets used in operations to be recorded when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. The adoption had no impact on the financial statements. 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 $5,809, $10,738 and $13,971 in fiscal 1997, 1996 and 1995, respectively. DEFERRED SERVICE PLAN REVENUE: Beginning in the fourth quarter of fiscal 1996, the Company began selling Performance Service Plans on behalf of an unrelated third party. The Company recognizes commission revenue on the sale of the plans at the time of sale. Revenue from the sale of the plans sold prior to Nov. 26, 1995, net of direct selling expenses, is recognized straight-line over the life of the plan. Costs related to servicing these plans are expensed as incurred. EARNINGS PER SHARE: Earnings per share is computed based on the weighted average number of common shares outstanding during each period, adjusted for 410,900, 1,020,000 and 1,458,000 incremental shares assumed issued on the exercise of stock options in fiscal 1997, 1996 and 1995, respectively. All common share and per share information has been adjusted for a 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. STOCK OPTIONS: The Company applies APB 25, "Accounting for Stock Issued to Employees" in accounting for stock options and presents in Note 5 pro forma net earnings as if the accounting prescribed by SFAS123 "Accounting for Stock-Based Compensation" had been applied. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the balance sheet and statement of earnings, as well as the disclosure of contingent liabilities. Actual results could differ from these estimates. FISCAL YEAR: The Company's fiscal year ends on the Saturday nearest the end of February. Fiscal 1997 and 1995 contained 52 weeks, and fiscal 1996 contained 53 weeks. RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform to current year presentation. Best Buy Co., Inc. 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands, except per share amounts) 2. OBLIGATIONS UNDER FINANCING ARRANGEMENTS The Company has a $200,000 inventory financing credit line, which increases to $325,000 on a seasonal basis. 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. 3. BORROWINGS MARCH 1 March 2 1997 1996 - -------------------------------------------------------------------------------- Senior subordinated notes $ 150,000 $ 150,000 Subordinated notes 21,904 21,904 Equipment financing loans 39,649 29,982 Obligations under capital leases 14,463 19,269 Corporate headquarters financing 12,000 8,700 ------------------------------- 238,016 229,855 Current portion of long-term debt 21,391 23,568 ------------------------------- $ 216,625 $ 206,287 ------------------------------- ------------------------------- CREDIT AGREEMENT: The Company has a credit agreement (the "Agreement") that contains a revolving credit facility under which the Company can borrow up to $550,000. The Agreement provides that up to $250,000 of the facility is available at all times, and an additional $300,000 is available from July 1 to Dec. 31. The Agreement expires in June 1998. 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, 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 March 1, 1997, or March 2, 1996. The weighted average interest rate under the Company's current and prior credit agreements was 6.86%, 7.11% and 6.21% for the fiscal years ended 1997, 1996 and 1995, respectively. SENIOR SUBORDINATED NOTES: The Company has outstanding $150,000 of senior subordinated notes. The notes mature on Oct. 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 $249,000 at March 1, 1997. 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 March 1997 and April 2003. Interest rates on these loans range from 5.25% to 9.18%. Furniture and fixtures with a book value of $31,000 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 was approximately $29,000 both at March 1, 1997, and March 2, 1996. The net book value of assets under capital leases was $14,000 and $18,000 at March 1, 1997, and March 2, 1996, respectively. Assets acquired under capital leases were $313, $3,490 and $10,025 in fiscal 1997, 1996 and 1995, respectively. CORPORATE HEADQUARTERS FINANCING: Prior to June 1996, the Company's corporate headquarters was financed by an $8,700 contract for deed with interest at 9.88%. This obligation was repaid in June 1996. During fiscal 1997, the Company obtained a $12,000, 15-year mortgage on this facility at an interest rate of 8.40%. Best Buy Co., Inc. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands, except per share amounts) FUTURE MATURITIES OF DEBT: FISCAL YEAR CAPITAL LEASES OTHER DEBT - -------------------------------------------------------------------------------- 1998 $ 4,688 $ 17,053 1999 2,031 10,728 2000 586 27,109 2001 7,631 155,036 2002 18 3,035 Thereafter 10,592 ----------------------------------- 14,954 $223,553 ------------ ------------ Less amount representing interest 491 ---------- Minimum lease payments $14,463 ---------- ---------- During fiscal 1997, 1996 and 1995, interest paid (net of amounts capitalized) totaled $50,917, $44,808 and $25,708, respectively. The fair value of the Company's senior subordinated notes was $141,563 at March 1, 1997, 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 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 March 1, 1997, options to purchase 4,199,000 shares are outstanding under these plans. In addition, at March 1, 1997, an option to purchase 26,000 shares is outstanding to an employee, not pursuant to a plan. In fiscal 1997, the Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 for Stock-Based Compensation (SFAS123). SFAS 123 encourages entities to adopt a fair value-based method of accounting for employee stock compensation plans, but allows companies to continue to account for those plans using the accounting prescribed by APB Opinion 25, "Accounting for Stock Issued to Employees." The Company has elected to continue to account for stock based compensation using APB 25, making pro forma disclosures of net earnings and earnings per share as if the fair value-based method had been applied. Accordingly, no compensation expense has been recorded for the stock option plans. Had compensation expense for the stock option plans been determined based on the fair value at the date of grant for awards in fiscal 1997 and 1996, consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share for the fiscal years shown below would have been reported as follows. 1997 1996 - -------------------------------------------------------------------------------- Net earnings - as reported $1,748 $48,019 Net earnings (loss) - pro forma (1,196) 46,052 Earnings per share - as reported .04 1.10 Earnings (loss) per share - pro forma (.03) 1.08 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: 1997 1996 - -------------------------------------------------------------------------------- Expected dividend yield 0% 0% Expected stock price volatility 40% 40% Risk-free interest rate 6.2% 6.9% Expected life of options 4.3 years 4.2 years Best Buy Co., Inc. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands, except per share amounts) The pro forma effect on net income and earnings per share is not representative of the pro forma net earnings in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1996. The weighted average fair value for options granted during fiscal 1997 and fiscal 1996 is $5.04 and $9.74 per share, respectively. In February 1997, the Company canceled 1,639,000 options, representing approximately half of the outstanding options granted to employees since April 1993, with exercise prices ranging from $11.20 to $38.19 and granted the same number of new options with an exercise price of $8.62. Options issued to the Company's CEO and president were not included in the repricing. Option activity for the last three years is as follows: WEIGHTED AVG. EXERCISE PRICE SHARES PER SHARE - -------------------------------------------------------------------------------- OUTSTANDING FEB. 26, 1994 3,170,000 $ 7.73 Granted 1,316,000 32.50 Exercised (472,000) 5.03 Canceled (244,000) 24.37 --------------- OUTSTANDING FEB. 25, 1995 3,770,000 15.64 Granted 1,472,000 23.20 Exercised (625,000) 4.99 Canceled (347,000) 26.26 --------------- OUTSTANDING MARCH 2, 1996 4,270,000 18.94 Granted 2,665,000 12.22 Exercised (446,000) 6.15 Canceled (2,264,000) 22.43 --------------- OUTSTANDING MARCH 1, 1997 4,225,000 14.17 --------------- --------------- EXERCISABLE MARCH 1, 1997 1,465,000 $14.69 --------------- --------------- The following table summarizes information concerning currently outstanding and exercisable options: WEIGHTED AVG. WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE - -------------------------------------------------------------------------------- $0 TO $10 2,174,000 3.73 $ 8.07 535,000 $ 6.37 $10 TO $20 974,000 2.28 14.25 503,000 12.45 $20 TO $30 705,000 3.15 23.21 220,000 23.26 $30 to $40 372,000 2.10 32.51 207,000 32.50 - -------------------------------------------------------------------------------- $0 TO $40 4,225,000 3.16 $ 14.17 1,465,000 $ 14.69 6. OPERATING LEASE COMMITMENTS & RELATED PARTY TRANSACTIONS The Company conducts the majority of its retail and distribution operations from leased locations. Transaction costs associated with the sale and leaseback of properties and any gain or loss are recognized over the term of the lease agreement. Proceeds from the sale/leaseback of stores owned at Feb. 26, 1994, are shown as such in the accompanying fiscal 1995 statement of cash flows. Proceeds from the sale/leaseback of properties developed since Feb. 26, 1994, are included in the net change in recoverable costs from developed properties. The Company also leases various equipment under operating leases. In addition, the Company leases 17 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 March 1, 1997, are as follows: FISCAL YEAR - -------------------------------------------------------------------------------- 1998 $ 137,715 1999 133,910 2000 134,129 2001 132,594 2002 129,346 Later years 1,127,431 The composition of the total rental expenses for all operating leases during the last three fiscal years, including leases of buildings and equipment, was as follows: 1997 1996 1995 - -------------------------------------------------------------------------------- Minimum rentals $139,158 $105,349 $64,716 Percentage rentals 537 537 795 ---------------------------------------- $139,695 $105,886 $65,511 ---------------------------------------- ---------------------------------------- Best Buy Co., Inc. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands, except per share amounts) Four stores are currently 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 and one store, for which the lease expired in January 1996, was as follows: 1997 1996 1995 - -------------------------------------------------------------------------------- Minimum rentals $988 $1,122 $1,120 Percentage rentals 388 388 470 ---------------------------------------- $1,376 $1,510 $1,590 ---------------------------------------- ---------------------------------------- 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 $2,035, $1,701 and $1,376 during fiscal 1997, 1996 and 1995, respectively. 8. INCOME TAXES Following is a reconciliation of the provision for income taxes to the federal statutory rate: 1997 1996 1995 - -------------------------------------------------------------------------------- Federal income tax at the statutory rate $1,004 $27,646 $32,918 State income taxes, net of federal benefit 116 3,717 4,759 Jobs tax credit (574) (1,402) Other 181 125 ---------------------------------------- Provision for income taxes $1,120 $30,970 $36,400 ---------------------------------------- ---------------------------------------- Effective tax rate 39.0% 39.2% 38.7% ---------------------------------------- ---------------------------------------- The provision for income taxes consists of the following: 1997 1996 1995 - -------------------------------------------------------------------------------- Current: Federal $(5,100) $27,401 $32,435 State (581) 6,693 8,044 ---------------------------------------- (5,681) 34,094 40,479 ---------------------------------------- Deferred: Federal 6,103 (2,904) (3,495) State 698 (220) (584) ---------------------------------------- 6,801 (3,124) (4,079) ---------------------------------------- Provision for income taxes $1,120 $30,970 $36,400 ---------------------------------------- ---------------------------------------- Deferred taxes 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: MARCH 1 March 2 1997 1996 - -------------------------------------------------------------------------------- Deferred service plan revenue $18,811 $30,954 Accrued expenses 7,579 3,885 Compensation and benefits 3,375 2,751 Other - net 159 505 Inventory 4,108 ------------------------------ Total deferred tax assets 29,924 42,203 ------------------------------ Property and equipment 15,697 13,695 Other - net 3,356 1,139 ------------------------------ Total deferred tax liabilities 19,053 14,834 ------------------------------ Net deferred tax assets $10,871 $27,369 ------------------------------ ------------------------------ The Company believes that the interest on the subordinated debenture referred to in Note 4 is deductible and that Best Buy Capital will be treated as a partnership for income tax purposes. Income taxes (received) paid were $(8,599), $45,888 and $32,899 in fiscal 1997, 1996 and 1995, 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 statements. 23 EX-21.1 6 EXHIBIT 21.1 EXHIBIT 21.1 BEST BUY CO., INC. ------------------ SUBSIDIARIES OF THE REGISTRANT ------------------------------ Incorporated In --------------- BBC Property Co. Minnesota BBC Investment Co. Nevada Best Buy Concepts, Inc. Nevada Best Buy Stores, L.P. Delaware Best Buy Capital, L.P. Minnesota EX-23.1 7 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Form S-8 pertaining to the 1987 Employee Non-Qualified Stock Option Plan (Form 33-54871), the 1994 Full-Time Employee Non-Qualified Stock Option Plan (Form 33-54875), and the 1987 Directors' Non-Qualified Stock Option Plan (Form 33-54873) of Best Buy Co., Inc. of our report dated April 8, 1997, with respect to the consolidated financial statements of Best Buy Co., Inc. incorporated by reference in the Annual Report (Form 10-K) for the year ended March 1, 1997. Ernst & Young LLP Minneapolis, Minnesota May 27, 1997 EX-27.1 8 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS INDICATED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS MAR-01-1997 MAR-03-1996 MAR-01-1997 89,808 0 79,581 0 1,132,059 1,385,035 519,827 188,194 1,734,307 817,579 216,625 0 0 4,329 433,986 1,734,307 7,770,683 7,770,683 6,711,802 6,711,802 1,005,675 0 50,338 2,868 1,120 1,748 0 0 0 1,748 .04 .04
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