<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 26, 1994
REGISTRATION NO. 33-55701
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
<TABLE>
<S> <C>
BEST BUY CO., INC. BEST BUY CAPITAL, L.P.
(Exact name of registrant as (Exact name of registrant as
specified in its charter) specified in its charter)
</TABLE>
----------------
<TABLE>
<S> <C>
MINNESOTA DELAWARE
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
41-0907483 41-1790489
(I.R.S. Employer (I.R.S. Employer
Identification Number) Identification Number)
</TABLE>
----------------
RICHARD M. SCHULZE
CHIEF EXECUTIVE OFFICER
BEST BUY CO., INC.
7075 FLYING CLOUD DRIVE
EDEN PRAIRIE, MN 55344
(612) 947-2000
(Name, address, including zip code, and telephone number, including area code,
of registrants' principal executive offices and agent for service)
----------------
COPIES TO:
<TABLE>
<S> <C>
ROBERT T. MONTAGUE ROBERT E. BUCKHOLZ, JR.
Robins, Kaplan, Miller & Ciresi Sullivan & Cromwell
2800 LaSalle Plaza 125 Broad Street
800 LaSalle Avenue New York, NY 10004
Minneapolis, MN 55402 (212) 558-4000
(612) 349-8500
</TABLE>
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
--------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 26, 1994
4,000,000 PREFERRED SECURITIES
BEST BUY CAPITAL
% CONVERTIBLE MONTHLY INCOME PREFERRED SECURITIES
("CONVERTIBLE MIPS"*)
(LIQUIDATION PREFERENCE $50 PER SECURITY)
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY, AND CONVERTIBLE INTO
COMMON STOCK OF,
BEST BUY CO., INC.
---------
[LOGO]
The 4,000,000 % Convertible Monthly Income Preferred Securities (the
"Preferred Securities") representing the limited partnership interests offered
hereby are being issued by Best Buy Capital, L.P. ("Best Buy Capital"), a
Delaware limited partnership. All of the partnership interests in Best Buy
Capital, other than the limited partnership interests represented by the
Preferred Securities, are owned by Best Buy Co., Inc., a Minnesota corporation
("Best Buy" or the "Company"), which is the general partner in Best Buy Capital
(in such capacity, the "General Partner"). Best Buy Capital exists for the sole
purpose of issuing its partnership interests and investing the proceeds thereof
in debt securities of Best Buy. The proceeds from the offering of the Preferred
Securities will be used by Best Buy Capital to purchase from Best Buy its %
Convertible Subordinated Debentures due 2024 (the "Subordinated Debentures")
having the terms described herein. The limited partnership interests represented
by the Preferred Securities will have a preference with respect to cash
distributions and amounts payable on liquidation over the General Partner's
interest in Best Buy Capital.
Holders of the Preferred Securities will be entitled to receive cumulative
cash distributions from Best Buy Capital, at an annual rate of % of the
liquidation preference of $50 per Preferred Security, accruing from the date of
original issuance and payable monthly in arrears on the last day of each
calendar month of each year, commencing , 1994 ("dividends"). See
"Description of Securities Offered - Preferred Securities - Dividends."
(CONTINUED ON NEXT PAGE)
------------------
SEE "INVESTMENT CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN MATERIAL RISKS
TO BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE PREFERRED SECURITIES,
INCLUDING THE PERIOD AND CIRCUMSTANCES DURING AND UNDER WHICH PAYMENTS ON THE
PREFERRED SECURITIES AND THE SUBORDINATED DEBENTURES MAY BE DEFERRED AND THE
RELATED FEDERAL INCOME TAX CONSEQUENCES.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE COMMISSION(1) BEST BUY CAPITAL(2)(3)
--------------- ------------------- ----------------------
<S> <C> <C> <C>
Per Preferred Security.................................... $ (2) $
Total(4).................................................. $ (2) $
<FN>
- ----------------
(1) Best Buy Capital and Best Buy have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) In view of the fact that the proceeds of the sale of the Preferred
Securities will ultimately be used by Best Buy Capital to purchase
convertible subordinated debentures of Best Buy, the Underwriting Agreement
provides that Best Buy will pay to the Underwriters, as compensation
("Underwriters' Compensation"), $ per Preferred Security (or $ in
the aggregate). See "Underwriting."
(3) Expenses of the offering which are payable by Best Buy are estimated to be
$550,000.
(4) Best Buy Capital and Best Buy have granted the Underwriters an option for
30 days to purchase up to an additional 600,000 Preferred Securities at the
initial public offering price per Preferred Security solely to cover
over-allotments. Best Buy will pay to the Underwriters, as Underwriters'
Compensation, $ per Preferred Security purchased pursuant to this
option. If such option is exercised in full, the total initial public
offering price, underwriting commission and proceeds to Best Buy Capital
will be $ , $ and $ , respectively. See "Under-
writing."
</TABLE>
----------------
The Preferred Securities offered hereby are offered severally by the
Underwriters, as specified herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part. It is expected
that delivery of the Preferred Securities will be made only in book-entry form
through the facilities of The Depository Trust Company on or about
, 1994.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
INCORPORATED
WILLIAM BLAIR & COMPANY
---------
The date of this Prospectus is , 1994.
<PAGE>
[PHOTOS]
During the past year, Best Buy
has been developing a strategy to
further enhance its store format.
This strategy, known as "Concept
III," features a larger,
redesigned store format created
to produce a more informative and
exciting shopping experience.
Interactive Answer Centers,
featuring touch screen monitors,
will be stationed throughout the
store to provide audio and video
presentations enabling users to
compare products and better
understand their features.
Best Buy's largest product
category is home office,
which includes personal
computers. In addition to
offering a wide selection of
name brand computers and
related peripheral
equipment, the stores offer
a wide assortment of
computer software and
related services, such as
computer training,
configuration, maintenance
and upgrades.
<PAGE>
[PHOTOS]
The Concept III stores
will feature hands-on
demonstrations where
customers can try the
latest video games in
the "Fun & Games" area
or see for themselves
how sound quality is
enhanced by different
configurations of audio
components in a
television "surround
sound" system.
The entertainment
software area will
have approximately
100 private listening
stations to sample
featured compact
discs. The audio area
will have a speaker
room with a 100 disc
CD changer and a
simulated, life-size
car where customers
can compare speaker
quality while
listening to their
choice of music.
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
In the event of the liquidation of Best Buy Capital, holders of Preferred
Securities will be entitled to receive for each Preferred Security a liquidation
preference of $50 plus accumulated and unpaid dividends to the date of payment,
subject to certain limitations. See "Description of Securities Offered -
Preferred Securities - Liquidation Rights."
Each Preferred Security is convertible in the manner described herein at the
option of the holder, at any time prior to the Conversion Expiration Date (as
hereinafter defined), into shares of Best Buy Common Stock, par value $.10 per
share ("Best Buy Common Stock"), at the rate of shares of Best Buy Common
Stock for each Preferred Security (equivalent to a conversion price of $ per
share of Best Buy Common Stock), subject to adjustment in certain circumstances.
See "Description of Securities Offered - Preferred Securities - Conversion
Rights." The last reported sale price of Best Buy Common Stock, which is listed
under the symbol "BBY" on the New York Stock Exchange ("NYSE"), on October 25,
1994 was $38 1/8 per share. See "Market Prices of Best Buy Common Stock." On and
after , 1997, Best Buy Capital may, at its option, cause the
conversion rights of holders of the Preferred Securities to expire. Best Buy
Capital may exercise this option only if for 20 trading days within any period
of 30 consecutive trading days, including the last trading day of such period,
the Current Market Price (as defined herein) of Best Buy Common Stock exceeds
120% of the conversion price of the Preferred Securities, subject to adjustment
in certain circumstances. In order to exercise its conversion expiration option,
Best Buy Capital must issue a press release announcing the date upon which
conversion rights will expire (the "Conversion Expiration Date"), prior to the
opening of business on the second trading day after a period in which the
condition in the preceding sentence has been met. The Conversion Expiration Date
shall be a date not less than 30 and not more than 60 days following the date of
the press release described above. See "Description of Securities Offered -
Preferred Securities - Conversion Rights."
The Preferred Securities are also subject to exchange in the manner
described herein, in whole but not in part, into depositary shares (the
"Depositary Shares"), each representing ownership of 1/100th of a share of
Series A Cumulative Convertible Preferred Stock, par value $1.00 per share, of
Best Buy ("Best Buy Series A Preferred Stock"), deposited with the Depositary
(as defined herein) upon a vote of the holders of a majority of the aggregate
liquidation preference of all outstanding Preferred Securities following the
failure of holders of Preferred Securities to receive dividends in full for 15
consecutive months. Each Depositary Share will entitle the holder thereof to all
proportional rights and preferences of the Best Buy Series A Preferred Stock
(including dividend, voting, conversion and liquidation rights and preferences).
The Best Buy Series A Preferred Stock will have dividend and conversion features
substantially similar to those of the Preferred Securities (adjusted
proportionately per Depositary Share) but will not be subject to mandatory
redemption. See "Description of Securities Offered - Preferred Securities -
Optional Exchange for Depositary Shares," "- Description of Best Buy Series A
Preferred Stock" and "- Description of Depositary Shares."
In the event that, at any time after the Conversion Expiration Date, less
than 5% of the Preferred Securities remain outstanding, such Preferred
Securities shall be redeemable at the option of Best Buy Capital, in whole but
not in part, at a redemption price equal to the liquidation preference for such
Preferred Securities plus accumulated and unpaid dividends (whether or not
earned or declared). The Preferred Securities have no maturity date, although
they are subject to mandatory redemption upon the repayment at maturity or as a
result of acceleration of the Subordinated Debentures. See "Description of
Securities Offered - Preferred Securities - Redemption."
Best Buy will irrevocably and unconditionally guarantee, on a subordinated
basis and to the extent set forth herein, the payment of dividends by Best Buy
Capital on the Preferred Securities (but only if and to the extent declared from
funds of Best Buy Capital legally available therefor), the redemption price
(including all accumulated and unpaid dividends) payable with respect to the
Preferred Securities and payments on liquidation with respect to the Preferred
Securities (but only to the extent of the assets of Best Buy Capital available
for distribution to holders of the Preferred Securities) (the "Guarantee"). The
Guarantee will be unsecured and will be subordinate to all liabilities of Best
Buy and will rank PARI PASSU
- --------------
* An application has been filed by Goldman, Sachs & Co. with the United States
Patent and Trademark Office for the registration of the MIPS servicemark.
2
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
(equally) with the most senior preferred or preference stock now or hereafter
issued by Best Buy. Given such subordination, if Best Buy is unable to make
timely payments on the Subordinated Debentures, there is a substantial
likelihood that it would also be unable to make timely payments on the
Guarantee. See "Description of Securities Offered - Description of the
Guarantee."
Best Buy Capital's ability to pay amounts due on the Preferred Securities is
solely dependent upon Best Buy's ability to make payments on the Subordinated
Debentures. Interest payment periods on the Subordinated Debentures are monthly
but may be extended by Best Buy for up to 60 months (a "deferral of interest
payments"), in which event monthly dividend payments on the Preferred Securities
by Best Buy Capital would be deferred (but would continue to compound monthly).
Prior to the end of any such deferral of interest payments, Best Buy may further
defer interest payments, provided that all such deferrals may not exceed 60
months in the aggregate, and provided further that no such deferral may extend
the stated maturity date of the Subordinated Debentures. After Best Buy has paid
all accrued and unpaid interest (including compound interest) following a
deferral of interest payments, it may again defer interest payments for up to 60
months, subject to the preceding sentence. At the end of such deferral of
interest payments, Best Buy is required to pay all accrued and unpaid interest
(including compound interest) and upon such repayment Best Buy Capital would be
able to pay all accumulated and unpaid dividends on the Preferred Securities
(including Additional Dividends, as defined herein). If Best Buy does not make
interest payments on the Subordinated Debentures, Best Buy Capital would not be
able to declare or pay dividends on the Preferred Securities. The Guarantee is a
full and unconditional guarantee from the time of its issuance, but does not
apply to any payment of dividends unless and until such dividends are declared.
The failure of holders of the Preferred Securities to receive dividends in full
for 15 consecutive months would trigger the right of such holders to obtain
Depositary Shares representing Best Buy Series A Preferred Stock in the manner
described herein. See "Description of Securities Offered - Preferred Securities
- - Dividends," "- Description of the Guarantee" and "- Description of the
Subordinated Debentures."
The Subordinated Debentures are subordinated in right of payment to all
Senior Indebtedness (as defined under "Description of Securities Offered -
Description of the Subordinated Debentures - Subordination") of Best Buy. As of
August 27, 1994, Best Buy had approximately $392 million of indebtedness
constituting Senior Indebtedness and no indebtedness or other obligations that
would rank equally with the Subordinated Debentures.
The Preferred Securities have been approved for listing on the NYSE, subject
to notice of issuance, under the symbol "BBY pfM."
The Preferred Securities will be represented by a global certificate or
certificates registered in the name of The Depository Trust Company ("DTC") or
its nominee. Beneficial interests in the Preferred Securities will be shown on,
and transfers thereof will be effected only through, records maintained by the
participants in DTC. Except as described herein, Preferred Securities in
certificated form will not be issued in exchange for the global certificate or
certificates. See "Description of Securities Offered-Preferred Securities -
Book-Entry-Only Issuance - The Depository Trust Company."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE PREFERRED
SECURITIES OFFERED HEREBY AND BEST BUY COMMON STOCK AT LEVELS ABOVE THOSE WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON
THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
3
<PAGE>
AVAILABLE INFORMATION
Best Buy is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and other information filed by Best Buy may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
located at 7 World Trade Center, 7th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials may be obtained upon written request from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, such material may also be inspected and
copied at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New
York, New York 10005.
Best Buy and Best Buy Capital have filed with the Commission a registration
statement on Form S-3 (herein, together with all amendments and exhibits,
referred to as the "Registration Statement") under the Securities Act of 1933,
as amended. This Prospectus does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. For further information,
reference is hereby made to the Registration Statement.
No separate financial statements of Best Buy Capital have been included
herein. Best Buy and Best Buy Capital do not consider that such financial
statements would be material to holders of Preferred Securities because Best Buy
Capital is a newly organized special purpose entity, has no operating history
and no independent operations and is not engaged in, and does not propose to
engage in, any activity other than as described under "Best Buy Capital."
Further, Best Buy believes that financial statements of Best Buy Capital are not
material to the holders of the Preferred Securities since the Preferred
Securities have been structured to provide a guarantee by Best Buy of the
Preferred Securities such that the holders of the Preferred Securities with
respect to the payment of dividends and amounts upon liquidation, dissolution
and winding-up are at least in the same position vis-a-vis the assets of Best
Buy as a preferred stockholder of Best Buy. See "Best Buy Capital" and
"Description of Securities Offered - Preferred Securities," "- Description of
the Guarantee" and "- Description of the Subordinated Debentures." Best Buy
beneficially owns directly or indirectly all of Best Buy Capital's partnership
interests (other than the Preferred Securities).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 1-9595) pursuant
to the Exchange Act are incorporated herein by reference:
1. Best Buy's Annual Report on Form 10-K for the fiscal year ended
February 26, 1994, filed pursuant to Section 13(a) of the Exchange Act.
2. Best Buy's Quarterly Reports on Form 10-Q for the quarters ended May
28, 1994, and August 27, 1994.
3. All other reports filed by Best Buy pursuant to Section 13(a) or
15(d) of the Exchange Act since February 26, 1994, consisting of its Current
Reports on Form 8-K, dated April 4, 1994, and August 16, 1994.
4. All other documents filed by Best Buy pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the Offering.
5. The description of Best Buy's Common Stock contained in its
Registration Statement on Form 8-A filed with the Commission pursuant to
Section 12 of the Exchange Act.
Best Buy will provide without charge to each person, including any
beneficial owner of Preferred Securities to whom a copy of this Prospectus is
delivered, upon the written or oral request of any such person, a copy of any or
all of the documents incorporated herein by reference, other than exhibits to
such information (unless such exhibits are specifically incorporated by
reference in such documents). Requests should be directed to Best Buy Co., Inc.,
7075 Flying Cloud Drive, Eden Prairie, Minnesota 55344, Attn: Corporate
Communications, telephone (612) 947-2000.
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONNECTION WITH, THE MORE DETAILED INFORMATION AND THE COMPANY'S FINANCIAL
STATEMENTS INCLUDING THE NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS.
EXCEPT AS OTHERWISE INDICATED HEREIN, THE INFORMATION IN THIS PROSPECTUS ASSUMES
NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "UNDERWRITING."
THE COMPANY
Best Buy is one of the nation's fastest growing specialty retailers. The
Company offers a wide selection of name brand consumer electronics, home office
equipment, entertainment software and appliances. In 1989, the Company
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. Consumer
electronics retailing had traditionally relied on a showroom format presenting
display models on the sales floor and storing the boxed merchandise in a back
room, thus enabling a salesperson to direct the customer to products yielding
the greatest commission. The Company found 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 manner. With its innovative retail format,
the Company has achieved significant success, as evidenced by comparable store
sales increases in excess of industry averages, moving it into a leading
position nationally in all of its principal product categories. Since the
beginning of fiscal 1993, the Company has added 104 stores and four distribution
centers, and now operates 177 stores, principally in the central United States.
In fiscal 1994, the Company expanded the geographic area it serves by entering
the Atlanta, Detroit and Phoenix markets. In the current fiscal year, the
Company is continuing its expansion to the coasts by entering Los Angeles,
Baltimore/Washington, D.C. and other new markets in Florida, Kentucky, Nevada,
North Carolina, Ohio and South Carolina. The Company anticipates operating 204
stores by the end of the current fiscal year and opening approximately 50
additional stores in fiscal 1996.
During the past year, the Company has been developing 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 has developed interactive Answer Centers
featuring touch screen monitors from which customers and sales personnel can
immediately access product information. These Answer Centers, to be stationed
throughout the store, will utilize proprietary technology providing audio and
video presentations designed, by the Company, to enable users to compare
products and better understand the features and benefits of product options. The
enhanced store format will also feature 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. Finally, these larger stores, generally 45,000
square feet with some as large as 58,000 square feet, will accommodate a larger
product selection intended to be as good as or better than the largest selection
offered by most of Best Buy's competitors in each of its principal product
categories. By the end of this fiscal year, approximately 10% of the Company's
stores will incorporate all of the Concept III enhancements, with most of the
remaining stores anticipated to be converted over the next three to four years.
By reacting quickly to changing consumer preferences, Best Buy has captured
a leading, and in some cases dominant, share in the markets it serves. The
success of the Company's retail format and the increase in the number of stores
operated has resulted in revenue growth of 223% and an increase in earnings of
334% over the last two fiscal years. In fiscal 1994, the Company's revenues
increased 86% to $3.0 billion, while comparable store sales increased 27%.
Fiscal 1994 earnings increased 110% to $41.7 million, before an accounting
change for income taxes. The Company expects that the implementation of its
Concept III strategy will enable it to maintain its market leadership position
as well as increase its market share.
5
<PAGE>
BEST BUY CAPITAL
Best Buy Capital is a special purpose limited partnership formed under the
laws of the State of Delaware. All of its partnership interests (other than the
Preferred Securities and the interests of any Special General Partner, as
defined herein) are and will be beneficially owned directly or indirectly by
Best Buy. Best Buy is the sole general partner of Best Buy Capital. Best Buy
Capital exists for the sole purpose of issuing its Preferred Securities and
investing the proceeds thereof, together with substantially all the capital
contributed by Best Buy as general partner, in the Subordinated Debentures, and
may engage in no other activities now or in the future. Best Buy will contribute
capital to the extent required to maintain a general partnership interest equal
to at least 21% of Best Buy Capital. The payment by Best Buy Capital of
dividends due on the Preferred Securities is solely dependent on its receipt of
interest payments on the Subordinated Debentures. To the extent that aggregate
interest payments on the Subordinated Debentures exceed aggregate dividends on
the Preferred Securities and such dividends have been paid in full, Best Buy
Capital may at times have excess funds, which shall be distributed to Best Buy.
SEE "INVESTMENT CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN MATERIAL RISKS
TO BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE PREFERRED SECURITIES,
INCLUDING THE PERIOD AND CIRCUMSTANCES DURING AND UNDER WHICH PAYMENTS ON THE
PREFERRED SECURITIES AND THE SUBORDINATED DEBENTURES MAY BE DEFERRED AND THE
RELATED FEDERAL INCOME TAX CONSEQUENCES.
STRUCTURAL OVERVIEW
[CHART]
1. BEST BUY CAPITAL. The issuer of the Preferred Securities is a special
purpose Delaware limited partnership formed by Best Buy for the sole purpose of
issuing the Preferred Securities (which will constitute all of its limited
partnership interests) and lending the proceeds thereof to Best Buy. Best Buy
will own 100% of the general partnership interests in Best Buy Capital. Best Buy
Capital will not be taxed as a corporation for federal income tax purposes.
2. PREFERRED SECURITIES. The Preferred Securities issued by Best Buy
Capital are limited partnership interests that are convertible into Best Buy
Common Stock. For tax purposes, Preferred Security
6
<PAGE>
holders are deemed to receive interest income to the extent of interest paid on
the Subordinated Debentures, and distributions on Preferred Securities are not
eligible for the dividends received deduction for federal income tax purposes.
3. PREFERRED SECURITIES PROCEEDS LOANED TO BEST BUY. Proceeds of Preferred
Securities are used by Best Buy Capital to purchase from Best Buy Subordinated
Debentures with a maturity of 30 years and the same economic terms as the
Preferred Securities. Best Buy may elect to defer interest payments on the
Subordinated Debentures for up to 60 months, but only if Best Buy neither
declares nor pays any dividends on its capital stock during such deferral
period. If Best Buy defers interest payments on the Subordinated Debentures,
Best Buy Capital will not be able to pay dividends on the Preferred Securities.
4. REPAYMENT OF SUBORDINATED DEBENTURES. Best Buy repays the Subordinated
Debentures in cash or upon the conversion of the obligations into Best Buy
Common Stock.
5. GUARANTEE. Best Buy will guarantee, on an unsecured and subordinated
basis (a) the payment of dividends (but only if and to the extent declared from
funds legally available therefor), (b) redemption price payable with respect to
the Preferred Securities (but only to the extent of funds of Best Buy Capital
legally available therefor) and (c) payments on liquidation with respect to the
Preferred Securities (but only to the extent of assets of Best Buy Capital
available for distribution to holders of Preferred Securities).
THE OFFERING
<TABLE>
<S> <C>
Securities Offered........... 4,000,000 of Best Buy Capital's % Convertible Monthly
Income Preferred Securities, liquidation preference of $50
per security. Additionally, Best Buy Capital and Best Buy
have granted the Underwriters an option for 30 days to
purchase up to an additional 600,000 Preferred Securities at
the initial public offering price solely to cover
over-allotments, if any.
Dividends.................... Dividends on the Preferred Securities will be cumulative
from the date of original issuance of the Preferred
Securities and will be payable at the annual rate of %
of the liquidation preference of $50 per Preferred Security.
Dividends will be paid monthly in arrears on the last day of
each calendar month, commencing , 1994. The
proceeds from the offering of the Preferred Securities will
be invested in the Subordinated Debentures. Interest payment
periods on the Subordinated Debentures are monthly but may
be extended from time to time by Best Buy for up to 60
months, in which event Best Buy Capital would be unable to
make monthly dividend payments on the Preferred Securities
during the period of any such extension. During such period,
interest on the Subordinated Debentures will compound
monthly and Additional Dividends (as defined below) will
continue to accumulate on the Preferred Securities.
Selection of such an extended interest payment period is
referred to herein as a "deferral of interest payments."
"Additional Dividends," as used herein, means amounts
payable upon any dividend arrearages on the Preferred
Securities in order to provide, in effect, monthly
compounding on such dividend arrearages. See "Dividend
Deferral Provisions" below. The failure of holders of the
Preferred Securities to receive dividends in full (including
arrearages) for 15 consecutive months would trigger the
right of such holders to obtain depositary shares (the
"Depositary Shares"), each representing 1/100th of a
</TABLE>
7
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<S> <C>
share of Best Buy Series A Cumulative Convertible Preferred
Stock, par value $1.00 per share ("Best Buy Series A
Preferred Stock"), upon the affirmative vote or written
consent of the holders of a majority of the aggregate
liquidation preference of the outstanding Preferred
Securities, as described below under "Optional Exchange for
Depositary Shares." See "Investment Considerations - Option
to Defer Payment of Dividends," "Investment Considerations -
Tax Consequences of Deferral of Interest Payments on
Subordinated Debentures," "Description of Securities Offered
- Description of the Subordinated Debentures - Option to
Defer Interest Payments" and "Description of Securities
Offered - Preferred Securities - Optional Exchange for
Depositary Shares."
Dividend Deferral Best Buy has the right, at any time and from time to time,
Provisions.................. to defer interest payments on the Subordinated Debentures,
and monthly dividends on the Preferred Securities would be
deferred by Best Buy Capital (but would continue to accrue
Additional Dividends) during any such deferral of interest
payments. Best Buy shall have the right during any such
deferral of interest payments to make partial payments of
interest and at the end of such periods may pay all interest
then accrued and unpaid (together with compound interest).
Upon a partial payment of interest by Best Buy, Best Buy
Capital may pay partial pro rata dividends to holders of
Preferred Securities, and upon the payment of all accrued
and unpaid interest on the Subordinated Debentures, may pay
in full all accumulated and unpaid dividends (including
Additional Dividends). Prior to the end of such deferral of
interest payments, Best Buy may further defer interest
payments, provided that all such deferrals may not exceed 60
months in the aggregate nor extend beyond the stated
maturity of the Subordinated Debentures. After Best Buy has
paid all accrued and unpaid interest (including compound
interest) following a deferral of interest payments, it may
again defer interest payments for up to 60 months, subject
to the preceding sentence. Best Buy Capital will give
written notice of Best Buy's deferral of interest payments
to the holders of Preferred Securities no later than the
last date on which it would be required to notify the NYSE
of the record or payment date of the related dividend, which
is currently 10 days prior to such record or payment date.
See "Investment Considerations - Option to Defer Payment of
Dividends," "Description of Securities Offered - Preferred
Securities - Dividends" and "Description of Securities
Offered - Description of the Subordinated Debentures -
Option to Defer Interest Payments." Should a deferral of
interest payments occur, Best Buy Capital, except in very
limited circumstances, will continue to accrue income for
United States income tax purposes which will be allocated,
but not distributed to holders of Preferred Securities in
advance of any corresponding cash distribution. See
"Investment Considerations - Tax Consequences of Deferral of
Interest Payments on Subordinated Debentures" and "Certain
Federal Income Tax Considerations - Original Issue
Discount."
Liquidation Preference....... $50 per Preferred Security, plus an amount equal to any
accumulated and unpaid dividends (whether or not earned or
declared).
</TABLE>
8
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Conversion into Best Buy
Common Stock................ Each Preferred Security is convertible in the manner
described below at the option of the holder, at any time
prior to the Conversion Expiration Date (as defined below),
into shares of Best Buy Common Stock, par value $.10 per
share (the "Best Buy Common Stock"), at the rate of
shares of Best Buy Common Stock for each Preferred Security
(equivalent to a conversion price of $ per share of
Best Buy Common Stock), subject to adjustment in certain
circumstances. A holder of a Preferred Security wishing to
exercise its conversion right shall surrender such Preferred
Security, together with an irrevocable conversion notice, to
a conversion agent acting on behalf of the holders of
Preferred Securities (the "Conversion Agent"), which shall
exchange the Preferred Security for a portion of the
Subordinated Debentures held by Best Buy Capital and
immediately convert such Subordinated Debentures into Best
Buy Common Stock. On and after , 1997, and
provided that Best Buy Capital is current in the payment of
dividends on the Preferred Securities, Best Buy Capital may,
at its option, cause the conversion rights of holders of the
Preferred Securities to expire. Best Buy Capital may
exercise this option only if for 20 trading days within any
period of 30 consecutive trading days, including the last
trading day of such period, the Current Market Price (as
herein defined) of Best Buy Common Stock exceeds 120% of the
conversion price of the Preferred Securities, subject to
adjustment in certain circumstances. In order to exercise
its conversion expiration option, Best Buy Capital must
issue a press release for publication on the Dow Jones News
Service announcing the date upon which conversion rights
will expire (the "Conversion Expiration Date") prior to the
opening of business on the second trading day after a period
in which the condition in the preceding sentence has been
met. The press release shall announce the Conversion
Expiration Date and provide the current conversion price and
current market price of the Preferred Securities, in each
case as of the close of business on the trading day next
preceding the date of the press release. Written notice will
be given by first-class mail to each holder of Preferred
Securities not more than four business days after issuance
of the press release. The Conversion Expiration Date shall
be a date not less than 30 and not more than 60 days
following the date of such press release or, if Best Buy
Capital has not exercised its conversion expiration option,
the earlier of the date of an Exchange Election referred to
below under "Optional Exchange for Depositary Shares" or two
business days prior to the scheduled date for the mandatory
redemption of the Preferred Securities. See "Description of
Securities Offered - Preferred Securities - Conversion
Rights."
Redemption................... If at any time following the Conversion Expiration Date,
less than 5% of the Preferred Securities remain outstanding,
such Preferred Securities shall be redeemable at the option
of Best Buy Capital, as a whole but not in part, at a
redemption price of $50 per Preferred Security together with
accumulated and unpaid dividends (whether or not earned or
declared) (the "Redemption Price"). The Preferred Securities
have no maturity date, although they are subject to
mandatory redemption upon the repayment at maturity (on
</TABLE>
9
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<S> <C>
, 2024) or as a result of acceleration of the Subordinated
Debentures. See "Description of Securities Offered -
Description of the Subordinated Debentures - Events of
Default." The Preferred Securities are not otherwise
redeemable for any reason, including in the event that Best
Buy Capital should become subject to federal or state
taxation. To the extent that such taxation or other events
cause Best Buy Capital to have insufficient funds to pay
full dividends on the Preferred Securities, the holders will
have available to them the exchange option described below.
Optional Exchange for
Depositary Shares........... Upon the failure of holders of the Preferred Securities to
receive, for 15 consecutive months, the full amount of
dividend payments (including any arrearages), the holders of
a majority of the aggregate liquidation preference of
Preferred Securities then outstanding, voting as a class at
a special partnership meeting called for such purpose or by
written consent, may, at their option, direct the Conversion
Agent to exchange all (but not less than all) Preferred
Securities for Subordinated Debentures held by Best Buy
Capital, and to immediately exchange the Subordinated
Debentures on behalf of such holders for Depositary Shares,
each representing a 1/100th interest in a share of Best Buy
Series A Preferred Stock at the Exchange Price (as defined
under "Description of Securities Offered - Preferred
Securities - Dividends"). Each Depositary Share will entitle
the holder thereof to all proportional rights and
preferences of the Best Buy Series A Preferred Stock
(including dividend, voting, conversion and liquidation
rights and preferences). The Best Buy Series A Preferred
Stock will have dividend, conversion and other terms
substantially similar to the terms of the Preferred
Securities (adjusted proportionately per Depositary Share),
except that, among other things, the holders of Best Buy
Series A Preferred Stock will have the right to elect two
additional directors of Best Buy whenever dividends on the
Best Buy Series A Preferred Stock are in arrears for 18
months (including for this purpose any arrearage with
respect to the Preferred Securities) and the Best Buy Series
A Preferred Stock will not be subject to mandatory
redemption. A holder of Preferred Securities should not
recognize gain or loss upon the exchange, through the
Conversion Agent, of Preferred Securities for a
proportionate share of the Subordinated Debentures held by
Best Buy Capital. Except to the extent attributable to
accrued but unpaid interest on the Subordinated Debentures,
a holder should not recognize gain or loss upon the
exchange, through the Conversion Agent, of Subordinated
Debentures for Depository Shares. See "Certain Federal
Income Tax Considerations - Exchange of Preferred Securities
for Best Buy Stock." If the Preferred Securities are
exchanged for Depositary Shares, Best Buy will use its best
efforts to have the Depositary Shares listed on the NYSE or
other exchange on which the Preferred Securities may then be
listed. See "Description of Securities Offered - Description
of the Best Buy Series A Preferred Stock" and "Description
of Securities Offered - Description of Depositary Shares"
for a description of the principal terms of the Best Buy
Series A Preferred Stock and the Depositary Shares,
respectively.
</TABLE>
10
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Guarantee.................... Pursuant to a Guarantee Agreement (the "Guarantee"), Best
Buy will irrevocably and unconditionally agree, on a
subordinated basis, to pay in full (a) the dividends
(including any Additional Dividends thereon) by Best Buy
Capital on the Preferred Securities, if and to the extent
declared from funds of Best Buy Capital legally available
therefor, (b) the redemption price (including all
accumulated and unpaid dividends) of the Preferred
Securities, to the extent of funds of Best Buy Capital
legally available therefor, and (c) payments on liquidation
with respect to the Preferred Securities, to the extent of
the assets of Best Buy Capital available for distribution to
holders of the Preferred Securities. A holder of Preferred
Securities may enforce Best Buy's obligations under the
Guarantee directly against Best Buy, and Best Buy waives any
right or remedy to require that an action be brought against
Best Buy Capital or any other person before proceeding
against Best Buy. The Guarantee will be unsecured and will
be subordinated to all liabilities of Best Buy and will rank
PARI PASSU (equally) with the most senior preferred shares
hereafter issued by Best Buy and PARI PASSU with any
guarantee now or hereafter entered into by Best Buy in
respect of any preferred or preference stock of any
affiliate of Best Buy. On the bankruptcy, liquidation or
winding-up of Best Buy, its obligations under the Guarantee
will rank junior to all its other liabilities and,
therefore, funds may not be available for payment under the
Guarantee. See "Investment Considerations - Subordinate
Obligations Under Guarantee and Subordinated Debentures,"
"Investment Considerations - Dependence on Subordinated
Debenture Payments" and "Description of Securities Offered -
Description of the Guarantee."
Voting Rights................ Generally, holders of the Preferred Securities will not have
any voting rights. However, upon an Event of Default under
the Subordinated Debentures (as described under "Description
of Securities Offered - Description of the Subordinated
Debentures - Events of Default"), a failure by Best Buy
Capital to pay dividends in full (including any arrearages)
on the Preferred Securities for 15 consecutive months (other
than as a result of a deferral by Best Buy of interest
payments on the Subordinated Debentures as described under
"Subordinated Debentures" below) or a default by Best Buy
under the Guarantee, the holders of the Preferred Securities
will be entitled to appoint and authorize a Special General
Partner to enforce Best Buy Capital's rights under the
Subordinated Debentures, enforce Best Buy's obligations
under the Guarantee and declare and pay dividends on the
Preferred Securities to the extent funds are legally
available therefor. In addition, if for any reason
(including a deferral by Best Buy of interest payments on
the Subordinated Debentures) holders of Preferred Securities
fail to receive, for 15 consecutive months, the full amount
of dividend payments (including any arrearages), the holders
of the Preferred Securities will be entitled to call a
special partnership meeting for the purpose of deciding
whether to exchange all Preferred Securities then
outstanding for Depositary Shares, as described above under
"Optional Exchange for Depositary Shares." See "Description
of Securities Offered - Preferred Securities - Dividends."
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11
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Use of Proceeds.............. The proceeds to be received by Best Buy Capital from the
sale of the Preferred Securities will be invested in the
Subordinated Debentures of Best Buy, which, after paying the
expenses associated with this Offering, will use such funds
to support its expansion plans and for working capital and
other general corporate purposes. See "Use of Proceeds."
Subordinated Debentures...... The Subordinated Debentures will have a maturity of 30 years
and will bear interest at the rate of % per annum,
payable monthly in arrears. Best Buy has the right to select
an interest payment period or periods longer than one month
(during which period or periods interest will compound
monthly), provided that any such deferral of interest
payments does not exceed 60 months and provided further that
a deferral of interest payments may not extend the stated
maturity of the Subordinated Debentures. Accordingly,
dividend payments on the Preferred Securities may not be
deferred beyond the stated maturity of the Subordinated
Debentures. If Best Buy defers interest payments longer than
one month, it will be prohibited from paying dividends on
any of its capital stock and making certain other restricted
payments until monthly interest payments are resumed and all
accumulated and unpaid interest (including any interest
payable to effect monthly compounding) on the Subordinated
Debentures is brought current. Best Buy will have the right
to make partial payments of such interest during a deferral
of interest payments. The failure by Best Buy to make
interest payments during a deferral of interest payments
would not constitute a default or an event of default under
Best Buy's currently outstanding indebtedness. The
Subordinated Debentures are convertible into shares of Best
Buy Common Stock at the option of the holders thereof and
exchangeable for Depositary Shares representing Best Buy
Series A Preferred Stock as described above under "Optional
Exchange for Depositary Shares." Best Buy Capital will
covenant not to convert Subordinated Debentures except
pursuant to a notice of conversion delivered to the
Conversion Agent by a holder of Preferred Securities. The
payment of the principal and interest on the Subordinated
Debentures will be subordinated in right of payment to all
Senior Indebtedness (as defined under "Description of
Securities Offered - Description of the Subordinated
Debentures - Subordination") of Best Buy. As of August 27,
1994, Best Buy had $392 million of indebtedness constituting
Senior Indebtedness and no indebtedness or other obligations
that would rank equally with the Subordinated Debentures.
See "Investment Considerations - Subordinate Obligations
Under Guarantee and Subordinated Debentures," "Investment
Considerations - Dependence on Subordinated Debenture
Payments." While the Preferred Securities are outstanding,
Best Buy Capital will not have the ability to amend the
Indenture or the terms of the Subordinated Debentures in a
way that adversely affects the holders of the Preferred
Securities, or to waive an event of default under the
Indenture without the consent of holders of 66 2/3% in
aggregate liquidation preference of the Preferred Securities
then outstanding. See "Description of Securities Offered -
Description of the Subordinated Debentures - Modification of
Indenture."
</TABLE>
12
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SUMMARY FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL PERIODS ENDED(1) SIX MONTHS ENDED
---------------------------------------------------------------- --------------------------
MARCH 3, MARCH 2, FEBRUARY 29, FEBRUARY 27, FEBRUARY 26, AUGUST 28, AUGUST 27,
1990 1991(2) 1992 1993 1994(3) 1993 1994
---------- ---------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenues................... $ 512,850 $ 664,823 $ 929,692 $1,619,978 $3,006,534 $ 1,004,899 $ 1,782,575
Gross profit............... 120,341 141,657 181,062 284,034 456,925 168,674 251,136
Operating income........... 13,147 10,976 18,776 35,908 77,178 16,764 29,345
Earnings before cumulative
effect of accounting
change.................... 5,683 4,540 9,601 19,855 41,710 9,110 11,841
Net earnings (loss)........ 5,683 (9,457) 9,601 19,855 41,285 8,685 11,841
Per share amounts:
Earnings before
cumulative effect of
accounting change....... .23 .18 .33 .57 1.01 .23 .27
Net earnings (loss)...... .23 (.38) .33 .57 1.00 .22 .27
OPERATING DATA:
Comparable store sales
increase (4).............. 0.3% 1.0% 14.0% 19.4% 26.9% 21.4% 26.4%
Number of stores (end of
period)................... 49 56 73 111 151 124 168
Average revenues per store
(5)....................... $ 11,500 $ 12,400 $ 14,300 $ 17,600 $ 22,600 $ 19,200 $ 25,200
Gross profit percentage.... 23.5% 21.3% 19.5% 17.5% 15.2% 16.8% 14.1%
Selling, general and
administrative expenses
percentage................ 20.9% 19.7% 17.5% 15.3% 12.6% 15.1% 12.4%
Operating income
percentage................ 2.6% 1.6% 2.0% 2.2% 2.6% 1.7% 1.6%
Inventory turns (6)........ 3.7x 4.5x 5.1x 4.8x 5.0x 5.0x 4.7x
Ratio of earnings to
combined fixed charges and
preferred dividends (7)... 2.27x 1.79x 2.46x 3.35x 3.87x 2.84x 1.89x
</TABLE>
<TABLE>
<CAPTION>
AUGUST 27, 1994
---------------------------
ACTUAL AS ADJUSTED(8)
---------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................................................... $ 318,487 $ 518,487
Property and equipment, net....................................................... 235,126 235,126
Total assets...................................................................... 1,270,905 1,375,905
Long-term debt, including current portion......................................... 220,157 220,157
Total liabilities................................................................. 943,259 848,259
Convertible preferred securities of subsidiary.................................... -- 200,000
Shareholders' equity.............................................................. 327,646 327,646
<FN>
- ------------------
(1) The fiscal period ended March 3, 1990 had approximately 11 months because
the Company changed its fiscal year to a 52/53 week period ending on the
Saturday closest to the last day in February of each year.
(2) During fiscal 1991, the Company changed its method of accounting for
extended service plans, resulting in a cumulative effect adjustment of
($14.0 million), or ($.56) per share. Profit recognized from the sale of
extended service plans under this accounting method was $10.8 million (on a
pro forma basis), $12.3 million, $11.8 million, $12.0 million and $12.5
million in fiscal years 1990 through 1994, respectively, and was $6.1
million and $7.4 million for the six months ended August 28, 1993 and
August 27, 1994, respectively. This profit is before any allocation of
selling, general and administrative expenses, except for direct selling
expenses, primarily commissions.
(3) During fiscal 1994, the Company changed its method of accounting for
incomes taxes resulting in a cumulative effect adjustment of ($425,000), or
($.01) per share. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 7 to the Financial
Statements.
(4) Comparable stores are stores open at least 14 full months.
(5) Average revenues per store are based upon total revenues for the trailing
12-month period divided by the weighted average number of stores open
during such 12-month period.
(6) Inventory turns are calculated based upon a rolling 12-month average of
inventory balances.
(7) For purposes of determining the ratio of earnings to combined fixed charges
and preferred dividends, earnings are defined as income before income taxes
plus fixed charges other than capitalized interest. Fixed charges consist
of interest costs (including the amortization of deferred debt issuance
costs and capitalized interest), the portion of rental expense that is
representative of an interest factor and preferred dividends.
(8) Adjusted to give effect to the sale of 4,000,000 Preferred Securities in
connection with this offering, before deducting the estimated offering
expenses and Underwriters' Compensation.
</TABLE>
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INVESTMENT CONSIDERATIONS
PROSPECTIVE PURCHASERS OF PREFERRED SECURITIES SHOULD CAREFULLY REVIEW THE
INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS AND SHOULD PARTICULARLY
CONSIDER THE FOLLOWING MATTERS:
SUBORDINATE OBLIGATIONS UNDER GUARANTEE AND SUBORDINATED DEBENTURES
Best Buy's obligations under the Subordinated Debentures are subordinate and
junior in right of payment to all Senior Indebtedness of Best Buy. Best Buy's
obligations under the Guarantee are subordinate to all liabilities of Best Buy
and will rank PARI PASSU (equally) with the most senior preferred shares
hereafter issued by Best Buy and PARI PASSU with any guarantee now or hereafter
entered into by Best Buy in respect of any preferred or preference stock of any
affiliate of Best Buy. There are no terms in the Preferred Securities, the
Subordinated Debentures or the Guarantee that limit Best Buy's ability to incur
additional indebtedness, including indebtedness that ranks senior to the
Subordinated Debentures and the Guarantee, or the ability of its subsidiaries to
incur additional indebtedness. The Guarantee guarantees payment to the holders
of the Preferred Securities of accumulated and unpaid monthly dividends, amounts
payable on redemption, and amounts payable on liquidation of Best Buy Capital.
In each case, however, such amount is guaranteed only to the extent that Best
Buy Capital has funds on hand legally available therefor and payment thereof
does not otherwise violate applicable law. If Best Buy were to default on its
obligation to pay interest or amounts payable on redemption or maturity of the
Subordinated Debentures, Best Buy Capital would lack legally available funds for
the payment of dividends or amounts payable on redemption of the Preferred
Securities, and in such event holders of the Preferred Securities would not be
able to rely upon the Guarantee for payment of such amounts. On the bankruptcy,
liquidation or winding-up of Best Buy, its obligations under the Guarantee will
rank junior to all its liabilities and, therefore, funds may not be available
for payment under the Guarantee. See "Description of Securities Offered -
Description of the Guarantee" and "Description of Securities Offered -
Description of the Subordinated Debentures - Subordination."
DEPENDENCE ON SUBORDINATED DEBENTURE PAYMENTS
Best Buy Capital's ability to pay amounts due on the Preferred Securities is
solely dependent upon Best Buy's ability to make payments on the Subordinated
Debentures as and when required. Since Best Buy is also the Guarantor of the
Preferred Securities, in the event that Best Buy Capital is unable to make
payments on the Preferred Securities as and when required, there is a
substantial likelihood that Best Buy will be unable to make payments on the
Guarantee as and when required.
OPTION TO DEFER PAYMENT OF DIVIDENDS
Best Buy has the right to extend interest payment periods on the
Subordinated Debentures for up to 60 months, and, as a consequence, monthly
dividends on the Preferred Securities would be deferred (but Additional
Dividends will continue to accumulate monthly) by Best Buy Capital during any
such deferral of interest payments. In the event that Best Buy exercises this
right, neither Best Buy nor any majority-owned subsidiary of Best Buy shall
declare or pay any dividend on, or redeem, purchase, otherwise acquire or make a
liquidation payment with respect to, any of its common or preferred stock or
make any guarantee payment with respect to the foregoing (other than payments
under the Guarantee or dividend or guarantee payments to Best Buy from a
majority-owned subsidiary), during any such deferral period and until all
dividend arrearages have been paid in full. No deferral of interest payments may
extend the stated maturity of the Subordinated Debentures. See "Description of
Securities Offered - Description of the Subordinated Debentures - Option to
Defer Interest Payments."
TAX CONSEQUENCES OF DEFERRAL OF INTEREST PAYMENTS ON SUBORDINATED DEBENTURES
Should a deferral of interest payments occur, Best Buy Capital, except in
very limited circumstances, will continue to accrue income for United States
federal income tax purposes which will be allocated, but not distributed, to
holders of record of Preferred Securities. As a result, such holders will
include such interest in gross income for United States federal income tax
purposes in advance of the receipt of cash and will not receive the cash related
to such income if such a holder disposes of its Preferred Securities prior to
the record date for payment of dividends. See "Certain Federal Income Tax
Considerations - Original Issue Discount."
14
<PAGE>
TAX CONSEQUENCES OF AN EXCHANGE FOR DEPOSITARY SHARES
In the event such a deferral continues for more than 15 months, the holders
of a majority of the aggregate liquidation preference of the Preferred
Securities then outstanding may cause the exchange of all of the Preferred
Securities for Depositary Shares representing interests in Best Buy Series A
Preferred Stock at the Exchange Price. For a discussion of the taxation of such
an exchange to holders, including the possibility that holders who exchange
their Preferred Securities for Depositary Shares may be subject to additional
income tax to the extent accrued but unpaid interest on the Subordinated
Debentures is converted into accumulated and unpaid dividends on the Best Buy
Series A Preferred Stock represented by Depositary Shares received in exchange
for the Preferred Securities, see "Certain Federal Income Tax Considerations -
Exchange of Preferred Securities for Best Buy Stock."
EXPIRATION OF CONVERSION RIGHTS
On and after , 1997, Best Buy Capital may, subject to certain
conditions, at its option, cause the conversion rights of holders of Preferred
Securities to expire, provided that Best Buy Capital is current in the payment
of dividends on the Preferred Securities and the Current Market Price (as
defined herein) of Best Buy Common Stock exceeds 120% of the conversion price of
the Preferred Securities for a specified period. See "Description of Securities
Offered - Preferred Securities - Expiration of Conversion Rights."
POTENTIAL COVENANT RESTRICTIONS
Certain covenants under one or more outstanding debt instruments of Best Buy
may restrict the amount of dividends that may be declared by Best Buy Capital on
the Preferred Securities and, if issued, by Best Buy on the Depositary Shares
representing the Best Buy Series A Preferred Stock. Monthly dividends declared
by Best Buy Capital, which are guaranteed by Best Buy will, until paid,
constitute debt of Best Buy, the incurrence of which is subject to a limitation
on consolidated debt of Best Buy under one of its indentures. In general, under
this covenant, Best Buy may not incur debt unless it maintains a consolidated
cash flow ratio of 2:1. In the event of an exchange of the Preferred Securities
for Depositary shares representing the Best Buy Series A Preferred Stock, the
payment of dividends by Best Buy on the Best Buy Series A Preferred Stock will
be subject to a separate limitation on restricted payments by the Company and
its subsidiaries. In general, this covenant limits restricted payments to a
stated proportion of the consolidated net income of Best Buy plus the aggregate
net proceeds from the issuance of capital stock of Best Buy. The issuance of the
Preferred Securities will not increase the amount available under the
restriction. For a discussion of these limitations, see "Description of
Securities Offered - Preferred Securities - Dividends" and "Description of
Securities Offered - Description of Best Buy Series A Preferred Stock."
UNCERTAINTY OF DEDUCTIBILITY OF INTEREST ON THE SUBORDINATED DEBENTURES
The offering of the Preferred Securities and the issuance of the related
Subordinated Debentures is a relatively novel type of financing transaction. The
Company's ability to deduct the interest paid on the Subordinated Debentures
depends upon whether the Subordinated Debentures are characterized as debt
instruments for federal income tax purposes, taking all the relevant facts and
circumstances into account. The Company believes that the Subordinated
Debentures are debt instruments for federal income tax purposes and that
interest on the Subordinated Debentures will, therefore, be deductible by the
Company. There is no clear authority on the appropriate characterization for
federal income tax purposes of instruments such as the Subordinated Debentures
when they are issued in connection with an offering of securities such as the
Preferred Securities. If the interest on the Subordinated Debentures is not
deductible by the Company, the Company would have significant additional income
tax liabilities.
COMPETITION
Retailing in each of the principal product categories offered by Best Buy is
highly competitive. Best Buy competes in most of its markets against Sears and
Montgomery Ward and in an increasing number of markets against Circuit City and
Incredible Universe (owned by Tandy Corp.). It also competes against computer
superstores such as Computer City (owned by Tandy Corp.) and CompUSA and
entertainment software superstores operated by Musicland, Tower Records and
Blockbuster Entertainment.
15
<PAGE>
Certain of these competitors have significantly greater financial resources than
Best Buy. The Company also competes against independent dealers, discount
stores, wholesale clubs, office products superstores and mass merchandisers. The
Company anticipates increased competition with national competitors in several
of the Company's new and current markets. See "Business - Competition."
QUARTERLY FLUCTUATIONS AND SEASONALITY
Similar to most retailers, Best Buy's business is seasonal, with revenues
and earnings being generally lower during the first half of each fiscal year and
greater during the second half of the fiscal year, which includes the year-end
holiday season. In addition, Best Buy's working capital needs are seasonal, with
the Company's greatest working capital requirements occurring during the second
half of each fiscal year. Accordingly, the Company's operating results may be
affected by holiday spending patterns, as well as the timing of new store
openings and general economic conditions.
16
<PAGE>
USE OF PROCEEDS
Best Buy Capital will invest the proceeds from the Offering in the
Subordinated Debentures. Best Buy, after payment of the Underwriters'
Compensation (as defined under "Underwriting") and other expenses of the
Offering, will use the net proceeds of $ ($ if the Underwriters'
over-allotment option is exercised in full) from the sale of the Subordinated
Debentures to Best Buy Capital to support its expansion plans, including to fund
initial new store inventories, to acquire store fixtures and make leasehold
improvements, to remodel and expand existing stores, to pay the cost of land
acquisition and construction pending sale and leaseback of the property, and to
continue to improve its management information systems, as well as for other
general corporate purposes. See "Business - Store Locations and Expansion" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." Pending application for the
foregoing purposes, the net proceeds will be used to reduce short-term
borrowings and the excess, if any, will be invested in short-term, investment
grade or government securities.
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
Best Buy at August 27, 1994, and as adjusted to reflect the Offering, assuming
no exercise of the Underwriters' over-allotment option. The table should be read
in conjunction with the financial statements of Best Buy elsewhere in this
Prospectus and those incorporated by reference herein. See "Use of Proceeds,"
"Selected Financial and Operating Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and "Description of
Securities Offered - Preferred Securities."
<TABLE>
<CAPTION>
AUGUST 27, 1994
-------------------------
ACTUAL AS ADJUSTED
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt (including current portion of long-term debt).......................... $ 104,144 $ 9,144
----------- ------------
----------- ------------
Long-term debt:
Capitalized lease obligations (5.3% to 10.5%)........................................ $ 15,097 $ 15,097
Equipment loans (5.3% to 11.5%)...................................................... 24,012 24,012
Subordinated notes (8.6% to 9.9%).................................................... 171,904 171,904
----------- ------------
Total long-term debt............................................................... 211,013 211,013
Convertible preferred securities of subsidiary......................................... -- 200,000
Shareholders' equity:
Preferred Stock, $1.00 par value per share; 400,000 shares authorized; none
outstanding......................................................................... -- --
Common Stock, $.10 par value per share; 120,000,000 shares authorized; 42,067,290
shares outstanding (1).............................................................. 4,207 4,207
Additional paid-in capital........................................................... 226,330 226,330
Retained earnings.................................................................... 97,109 97,109
----------- ------------
Total shareholders' equity......................................................... 327,646 327,646
----------- ------------
Total capitalization............................................................. $ 538,659 $ 738,659
----------- ------------
----------- ------------
<FN>
- --------------
(1) Does not include 7,755,851 shares reserved for issuance pursuant to the
Company's stock option plans as of August 27, 1994, or 26,100 shares
reserved for issuance pursuant to outstanding stock options not granted
under such plans.
</TABLE>
17
<PAGE>
MARKET PRICES OF BEST BUY COMMON STOCK
Best Buy Common Stock is traded on the NYSE under the symbol "BBY." At
August 27, 1994, there were 1,401 holders of record of Best Buy Common Stock and
42,067,290 shares outstanding. The following table sets forth the high and low
sale prices, as adjusted for stock splits, for Best Buy Common Stock, as
reported by the NYSE, for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1993:
1st Quarter ended May 30, 1992........................................................... $ 9 11/32 $ 5 7/32
2nd Quarter ended August 29, 1992......................................................... 6 3/8 4 23/32
3rd Quarter ended November 28, 1992...................................................... 11 27/32 5 1/2
4th Quarter ended February 27, 1993...................................................... 15 23/32 10 25/32
FISCAL 1994:
1st Quarter ended May 29, 1993........................................................... $ 16 5/32 $ 11 7/32
2nd Quarter ended August 28, 1993......................................................... 16 1/2 10 27/32
3rd Quarter ended November 27, 1993...................................................... 31 7/16 16 3/32
4th Quarter ended February 26, 1994...................................................... 27 11/16 18 13/16
FISCAL 1995:
1st Quarter ended May 28, 1994........................................................... $ 37 1/2 $ 25 3/4
2nd Quarter ended August 27, 1994......................................................... 36 5/8 22 1/8
3rd Quarter (through October 25, 1994)................................................... 41 5/8 34 1/2
</TABLE>
The stock market generally and the stocks of companies in the retailing
industry in particular have, from time to time, experienced substantial price
and volume fluctuations. These fluctuations may be unrelated to the operating
performance of particular companies. Various factors and events, such as
announcements by Best Buy or its competitors of monthly sales figures and
comparable store sales results, expansion plans, the loss of a major supplier or
other factors, may also contribute to stock price volatility. Most retailers,
including Best Buy, derive a significant portion of their revenues and earnings
during the year-end holiday season, and the price of the Best Buy Common Stock
may be subject to fluctuation based upon general expectations for holiday
spending levels and patterns.
DIVIDEND POLICY
Best Buy historically 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. Best Buy's bank line of credit and certain financing
agreements restrict its ability to pay dividends on its Common Stock. See Notes
3 and 4 to the Financial Statements. Best Buy and its majority-owned
subsidiaries would also be prohibited from paying dividends on Best Buy Common
Stock at any time during a deferral of interest payments with respect to the
Subordinated Debentures, when there is an Event of Default (as defined under
"Description of Securities Offered - Description of the Subordinated Debentures
- - Events of Default") under the Subordinated Debentures or when Best Buy has
failed to make a payment required under the Guarantee. See "Description of
Securities Offered - Description of the Guarantee - Certain Covenants of Best
Buy."
18
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following table presents selected financial, operating and balance sheet
data for each of the five fiscal periods set forth below which are derived from
the Company's audited financial statements. The financial data for the six
months ended August 28, 1993 and August 27, 1994 have been derived from the
Company's unaudited financial statements, which, in the opinion of management,
include all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation of the results of operations and financial position for the
periods and as of the dates presented. The results of operations for the six
months ended August 27, 1994 are not necessarily indicative of results to be
anticipated for the entire fiscal year. The table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and the notes thereto contained
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL PERIODS ENDED (1) SIX MONTHS ENDED
------------------------------------------------------------------ -------------------------
MARCH 3, MARCH 2, FEBRUARY 29, FEBRUARY 27, FEBRUARY 26, AUGUST 28, AUGUST 27,
1990 1991(2) 1992 1993 1994(3) 1993 1994
--------- --------- ------------ ------------ ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenues......................... $512,850 $664,823 $929,692 $1,619,978 $3,006,534 $1,004,899 $1,782,575
Cost of goods sold............... 392,509 523,166 748,630 1,335,944 2,549,609 836,225 1,531,439
--------- --------- ------------ ------------ ------------ ----------- -----------
Gross profit..................... 120,341 141,657 181,062 284,034 456,925 168,674 251,136
Selling, general and
administrative
expenses........................ 107,194 130,681 162,286 248,126 379,747 151,910 221,791
--------- --------- ------------ ------------ ------------ ----------- -----------
Operating income................. 13,147 10,976 18,776 35,908 77,178 16,764 29,345
Interest expense, net............ 3,674 3,586 3,415 3,883 8,800 1,949 9,775
--------- --------- ------------ ------------ ------------ ----------- -----------
Earnings before taxes and
cumulative effect of accounting
change.......................... 9,473 7,390 15,361 32,025 68,378 14,815 19,570
Income taxes..................... 3,790 2,850 5,760 12,170 26,668 5,705 7,729
--------- --------- ------------ ------------ ------------ ----------- -----------
Earnings before cumulative effect
of accounting change............ 5,683 4,540 9,601 19,855 41,710 9,110 11,841
Cumulative effect of accounting
change.......................... -- (13,997) -- -- (425) (425) --
--------- --------- ------------ ------------ ------------ ----------- -----------
Net earnings (loss).............. $ 5,683 $ (9,457) $ 9,601 $ 19,855 $ 41,285 $ 8,685 $ 11,841
--------- --------- ------------ ------------ ------------ ----------- -----------
--------- --------- ------------ ------------ ------------ ----------- -----------
Per share amounts:
Earnings before cumulative
effect of accounting change... $ .23 $ .18 $ .33 $ .57 $ 1.01 $ .23 $ .27
Cumulative effect of accounting
change........................ -- (.56) -- -- (.01) (.01) --
--------- --------- ------------ ------------ ------------ ----------- -----------
Net earnings (loss)............ $ .23 $ (.38) $ .33 $ .57 $ 1.00 $ .22 $ .27
--------- --------- ------------ ------------ ------------ ----------- -----------
--------- --------- ------------ ------------ ------------ ----------- -----------
Primary weighted average shares
outstanding (000s).............. 24,798 24,852 28,848 34,776 41,336 39,292 43,226
OPERATING DATA:
Comparable store sales increase
(4)............................. 0.3% 1.0% 14.0% 19.4% 26.9% 21.4% 26.4%
Number of stores (end of
period)......................... 49 56 73 111 151 124 168
Average revenues per store (5)... $ 11,500 $ 12,400 $ 14,300 $ 17,600 $ 22,600 $ 19,200 $ 25,200
Gross profit percentage.......... 23.5% 21.3% 19.5% 17.5% 15.2% 16.8% 14.1%
Selling, general and
administrative expenses
percentage...................... 20.9% 19.7% 17.5% 15.3% 12.6% 15.1% 12.4%
Operating income percentage...... 2.6% 1.6% 2.0% 2.2% 2.6% 1.7% 1.6%
Inventory turns (6).............. 3.7x 4.5x 5.1x 4.8x 5.0x 5.0x 4.7x
Ratio of earnings to combined
fixed charges and preferred
dividends (7)................... 2.27x 1.79x 2.46x 3.35x 3.87x 2.84x 1.89x
BALANCE SHEET DATA (END OF PERIOD):
Merchandise inventories.......... $ 92,991 $ 95,684 $135,838 $ 249,991 $ 637,950 $ 468,963 $ 863,500
Working capital.................. 78,398 64,623 126,817 118,921 362,582 241,251 318,487
Property and equipment, net...... 27,359 39,572 58,250 126,442 172,724 101,695 235,126
Total assets..................... 156,787 185,528 337,218 439,142 952,494 672,647 1,270,905
Long-term debt, including current
portion......................... 35,283 35,695 52,980 53,870 219,710 57,233 220,157
Total liabilities................ 90,637 128,787 179,650 256,859 641,050 395,165 943,259
Shareholders' equity............. 66,150 56,741 157,568 182,283 311,444 277,482 327,646
<FN>
- ------------------
(1) The fiscal period ended March 3, 1990 had approximately 11 months because
Best Buy changed its fiscal year to a 52/53 week period ending on the
Saturday closest to the last day in February each year.
(2) During fiscal 1991, Best Buy changed its method of accounting for extended
service plans, resulting in a cumulative effect adjustment of ($14.0
million), or ($.56) per share. Profit recognized from the sale of extended
service plans under this accounting method was $10.8 million (on a pro
forma basis), $12.3 million, $11.8 million, $12.0 million and $12.5 million
in fiscal years 1990 through 1994, respectively, and was $6.1 million and
$7.4 million for the six months ended August 28, 1993 and August 27, 1994,
respectively. This profit is before any allocation of selling, general and
administrative expenses, except for direct selling expenses, primarily
commissions.
(3) During fiscal 1994, the Company changed its method of accounting for
incomes taxes resulting in a cumulative effect adjustment of ($425,000), or
($.01) per share. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 7 to the Financial
Statements.
(4) Comparable stores are stores open at least 14 full months.
(5) Average revenues per store are based upon total revenues for the trailing
12-month period divided by the weighted average number of stores open
during such 12-month period.
(6) Inventory turns are calculated based upon a rolling 12-month average of
inventory balances.
(7) For purposes of determining the ratio of earnings to combined fixed charges
and preferred dividends, earnings are defined as income before income taxes
plus fixed charges other than capitalized interest. Fixed charges consist
of interest costs (including the amortization of deferred debt issuance
costs and capitalized interest), the portion of rental expense that is
representative of an interest factor and preferred dividends.
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's Financial Statements
and notes thereto included elsewhere in this Prospectus.
RESULTS OF OPERATIONS
SIX MONTHS ENDED AUGUST 28, 1993 AND AUGUST 27, 1994
Earnings for the first six months of fiscal 1995 were $11.8 million, or $.27
per share, compared to $9.1 million, or $.23 per share, in the first six months
of fiscal 1994. Earnings for the six month period in fiscal 1994 are before the
cumulative effect of a change in accounting for income taxes which reduced
earnings by $425,000 ($.01 per share). This earnings increase of 30% over the
prior year included an improvement in operating income of 75% which was offset
by interest expense on short-and long-term borrowings used to finance store
growth and increased inventory levels.
Revenues for the first six months of fiscal 1995 of $1.8 billion were 77%
above the first half of last year. The increased revenues were the result of the
opening of 44 stores during the past twelve months and a comparable store sales
increase of 26% in the current year. The new stores opened in the past year
included entry into the major markets of Detroit, Atlanta and Phoenix in the
second half of fiscal 1994, the entry into new markets in Florida, Ohio and the
Carolinas in the current fiscal year and the addition of stores in existing
markets. Comparable store sales increases in the current fiscal year are on top
of a 21% increase in the first half of last year. Management believes that the
Company's improving merchandise in-stock position, which has contributed to the
increases in revenues, will continue to be an important factor in revenue
growth. However, in light of the strong comparable store sales increases
reported in the second half of last year and the strong sales results posted in
the major metropolitan markets entered last year, it is expected that the
comparable store sales increases for the remainder of the current fiscal year
could be less than those experienced to date.
Gross profit margin was 14.1% for the first six months of fiscal 1995
compared to 16.8% for the comparable period last year. Competition in most of
the Company's product lines and promotional pricing has led to the change in
gross profit margin. Competition has increased in the past year as the Company
has entered new, more competitive markets and new competitors have entered
existing markets. Gross profit margins in the second quarter were consistent
with the margins reported in the first quarter of this fiscal year and the last
quarter of fiscal 1994, suggesting that margins have begun to stabilize.
Management does expect, however, that margins in the second half of fiscal 1995
could be slightly lower than the first half as the impact of promotional pricing
associated with the entry into new major markets and the traditional decline in
margins during the holiday selling season is realized.
Revenues from the sale of extended service plans were 1% or less of total
sales in the first six months of both fiscal 1994 and 1995. Profit from extended
service plans in the first half of 1995, before the allocation of selling,
general and administrative ("SG&A") expenses, other than direct selling
expenses, was $7.4 million compared to $6.1 million in the comparable period of
fiscal 1994.
SG&A expenses were 12.4% of sales for the first six months of fiscal 1995,
representing an improvement of 2.7% of sales compared to the 15.1% reported for
the same period last year. The improvement in this ratio indicates that the
earnings generated by the Company's revenue growth from new stores and
comparable store sales increases continue to outpace the growth in operating
costs. Greater efficiencies in advertising expenditures were achieved as more
stores were added to existing markets, revenues per store increased and the
Company reduced the size of some of its weekly newspaper inserts. SG&A expenses
were impacted in the second quarter of the current year by the costs associated
with opening two new distribution facilities and preparing to open a greater
number of stores as compared to the prior year.
20
<PAGE>
Net interest expense for the first six months of the current fiscal year
increased by $7.8 million compared to the prior year due to interest on the $150
million Senior Subordinated Notes issued in October 1993 and a higher level of
bank borrowings used to support the growth in inventories. Additionally, the
proceeds of the Company's $86 million common stock offering and a $44 million
sale/leaseback transaction in the first quarter of last year were temporarily
invested in short-term investments resulting in higher levels of investment
income in the first half of last year. The Company's effective tax rate for
fiscal 1995 is 39.5%, up slightly from the rate in fiscal 1994 mainly due to a
lower level of tax exempt interest income.
FISCAL YEARS ENDED FEBRUARY 29, 1992, FEBRUARY 27, 1993 AND FEBRUARY 26, 1994
In the past two fiscal years, Best Buy has more than doubled the number of
retail locations it operates, revenues have increased by 223% and earnings have
increased by 334%. The fiscal year ended February 26, 1994 was highlighted by
the opening of 40 new stores, including entries into the major markets of
Atlanta, Detroit and Phoenix. These new stores, combined with a full year of
operations at the 38 stores opened in the prior year and substantial increases
in computer sales, were the most significant factors in generating revenues of
$3.0 billion in fiscal 1994, an increase of 86% compared to $1.6 billion in
fiscal 1993. Revenues in fiscal 1993 were 74% above the $930 million reported in
fiscal 1992.
Operating income as a percentage of sales increased in fiscal 1994 to 2.6%
compared to 2.2% in fiscal 1993 and 2.0% in fiscal 1992. The increase in
revenues and leveraging of the Company's SG&A expenses more than offset lower
gross profit margins. Earnings more than doubled for the third year in a row,
increasing 110% in fiscal 1994 to $41.7 million. Fiscal 1993 earnings of $19.9
million were 107% higher than the $9.6 million reported in fiscal 1992. Earnings
per share, which reflect a three-for-two stock split in fiscal 1994 and a
subsequent two-for-one stock split in April 1994, rose 77% to $1.01 as compared
to $.57 in fiscal 1993 and $.33 in fiscal 1992. The earnings noted for fiscal
1994 are before a cumulative effect adjustment related to adopting the
provisions of FAS 109 "Accounting for Income Taxes."
REVENUES
The following table presents the Company's revenues, percentage increases in
revenues, comparable store sales increases, average revenues per store and
number of stores open for each of the last three fiscal years.
<TABLE>
<CAPTION>
1992 1993 1994
------------- --------------- ---------------
($ AMOUNTS IN 000)
<S> <C> <C> <C>
Revenues........................................................ $ 929,692 $ 1,619,978 $ 3,006,534
Percentage increase in revenues................................. 40% 74% 86%
Comparable store sales increase................................. 14% 19% 27%
Average revenues per store...................................... $ 14,300 $ 17,600 $ 22,600
Number of stores open at end of year............................ 73 111 151
</TABLE>
Sales levels achieved at stores in the new markets Best Buy entered in
fiscal 1994 have been higher on average than the Company's existing markets,
which is particularly significant in light of well established competition in
the new markets. Increasing consumer confidence, improving economic conditions,
increasing market share and expanded product lines contributed to the year over
year increases in sales at existing stores. Strong comparable store sales gains
were achieved for the third year in a row despite a very competitive retail
environment. The comparable store sales growth in fiscal 1994 was driven by a
significant increase in sales of computers which experienced a comparable store
sales increase of 69% over fiscal 1993. Sales of home office products, which
include computers and related equipment, increased to $1.0 billion compared to
$434 million in fiscal 1993 and $203 million in fiscal 1992. In fiscal 1994, the
Company significantly expanded its selection of computer products to include
such name brands as Apple, Compaq, Hewlett Packard and Toshiba. The home office
product category was 35% of total Company sales in fiscal 1994, up from 27% in
fiscal 1993. Sales in the entertainment software category, which includes
compact discs, computer software and prerecorded
21
<PAGE>
cassettes and videos, increased to 12% of total sales in fiscal 1994 from 9% in
fiscal 1993. Management expects that the growth in the home office and
entertainment software categories will continue to exceed the growth in other
categories and that computers will represent an increasing percentage of total
Company sales.
The 74% increase in revenues in fiscal 1993 compared to fiscal 1992 was the
result of the addition of 38 stores and a comparable store sales increase of
19%. The Company opened 14 stores in the Chicago market in fiscal 1993 and added
another 10 stores to this market in fiscal 1994.
The conversion of stores to the Concept II store format was completed in
fiscal 1994 with the conversion of the remaining 23 traditional stores. All 151
stores operated by the Company at the end of fiscal 1994 used the
non-commissioned format the Company introduced in fiscal 1990. In addition,
during fiscal 1994, the Company increased its prototype store sizes to 36,000
and 45,000 square feet, compared to mainly 28,000 square foot stores in prior
years. This increased space has enabled the Company to offer a greater product
selection and generate higher sales volume per store. In particular, the
additional space has been used to accommodate the growing home office and
entertainment software product categories.
In June 1993, the Company introduced its private label credit card program
and expanded its offerings of consumer financing alternatives. These financing
options include combinations of no interest and deferred payments, depending on
the length of the financing term. At February 26, 1994, there were over 700,000
cardholders with available credit exceeding $1.5 billion. Management believes
that the availability of these financing offers and the increased store size
have contributed to the comparable store sales increases and the success of the
new stores.
Revenues from extended service plans declined to .7% of total revenues in
fiscal 1994 compared to 1.3% in fiscal 1993 and 2.2% in fiscal 1992. The decline
is due not only to increasing product sales but to the Company's decision to
reduce its emphasis on the sale of these plans. The Company also sells these
plans at prices substantially below its competitors and has occasionally
included these plans as promotional items with selected product sales.
The Company's expansion plan for fiscal 1995 includes the opening of 53 new
stores. New markets to be entered are primarily in the eastern and southeastern
United States, along with Los Angeles and Las Vegas. In addition to the new
markets that the Company will be entering, approximately 15 of the new stores
will be added to existing markets to maximize the return on advertising costs
and other fixed costs of operation. The prototype store size for most of the
stores to be opened in fiscal 1995 is approximately 45,000 square feet.
Management expects that changing technology, in particular in the home office
market for multimedia computer systems and software, coupled with new product
introductions, including direct broadcast satellite systems, will be factors in
increasing sales volume at existing and future stores.
COMPONENTS OF EARNINGS
The following table sets forth selected operating results as a percentage of
revenues for each of the last three fiscal years.
<TABLE>
<CAPTION>
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
Gross profit............................................................... 19.5% 17.5% 15.2%
Selling, general and administrative expenses............................... 17.5 15.3 12.6
Operating income........................................................... 2.0 2.2 2.6
Earnings before accounting change.......................................... 1.0 1.2 1.4
</TABLE>
Gross profit margin over the past three fiscal years has been impacted by
promotional pricing associated with the entry into several new competitive
markets, the change in sales mix towards lower margin computer products, the
reduced emphasis on the sale of higher margin extended service plans and the
increased competition in most of the Company's product categories. While
competition in the new markets entered during fiscal 1994 and 1993 resulted in
lower product margins, sales in these
22
<PAGE>
markets have exceeded initial expectations as the Company believes its retail
format and marketing programs have quickly provided it with significant market
share. An increase in inventory shrink also impacted profit margins in fiscal
1994. Profit from extended service plans, before allocation of any SG&A
expenses, was $12.5 million in fiscal 1994, up from $12.0 million in fiscal 1993
and $12.3 million in fiscal 1992.
Management expects that competition in all product categories will remain
strong in the coming year and pressure on margins will continue although the
annual rate of decline is expected to slow. Management believes that its full
service capabilities, financing alternatives and low operating expenses are
distinct advantages over other retailers which will result in increasing market
share. Management also anticipates that the increased sales volume will enable
the Company to purchase merchandise at more favorable prices, somewhat
mitigating the impact of price competition.
SG&A expenses declined to 12.6% of sales in fiscal 1994, compared to 15.3%
and 17.5% in fiscal 1993 and 1992, respectively. The decline in this ratio has
more than offset the reduction in gross profit margin. As the Company added
stores and generated increased sales volume per store, the ability to leverage
those fixed costs of operations has increased. The addition of stores within
markets also increases the cost effectiveness of the Company's advertising
expenditures. Sales per employee have increased over each of the last three
years as the corporate and support functions handle increased volumes without
proportionally increasing costs. The transition to a non-commissioned sales
environment has also reduced the operating expense ratio. Pre-opening costs
totaled $7.3 million in fiscal 1994 compared to $6.2 million in fiscal 1993 and
$2.3 million in fiscal 1992. Management expects that SG&A expenses will continue
to decline as a percentage of sales.
Interest expense in fiscal 1994 increased over the prior two years as a
result of the financing used for store development and higher inventories to
support the sales growth. Interest on the Company's senior subordinated notes,
issued in October 1993, was the principal reason for the higher interest expense
in 1994.
The Company's effective tax rate in fiscal 1994 increased to 39.0%
principally as a result of the increase in the federal statutory rate to 35%.
Changes in the mix of states in which the Company does business and the level of
tax-exempt investment income have also impacted the Company's effective tax rate
in the last three years. The Company adopted the provisions of FAS 109
'Accounting for Income Taxes,' effective as of the beginning of fiscal 1994. The
effect of the adoption was a charge to net earnings of $425,000, or $.01 per
share. At February 26,1994, the Company had deferred tax assets of $20 million
which are expected to be recovered through future taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Best Buy has financed its growth over the last two fiscal years primarily
through the use of capital raised in the public markets. Funds from operations
and other financing transactions have also been used to support the significant
growth. Since November 1991, the Company has raised approximately $175 million
through the issuance of Common Stock, including $86 million in net proceeds of a
7.02 million share public offering in May 1993. The Company's issuance of $150
million senior subordinated notes in October 1993 resulted in proceeds to the
Company of $146 million, after underwriting costs. The sale and leaseback of 17
stores in April 1993 also generated $44 million in cash.
Proceeds from these financing transactions were used for the development of
stores and to increase inventories to the level required to support the higher
sales volumes reported in the last two fiscal years. In the past two years the
Company more than doubled the number of stores it operates, opening 38 new
stores in fiscal 1993, followed by 40 stores in fiscal 1994. Capital
expenditures of $101 million in fiscal 1994 and $75 million in fiscal 1993
included new store site acquisition and development costs of approximately $50
million. In addition to new stores, the Company undertook remodeling and
expansion projects to complete the conversion of its stores to the Concept II
store format in fiscal 1994. These renovations provide the additional space
necessary for the increasing
23
<PAGE>
selection of computers and entertainment software. In those locations where
expansion was not practical, the Company relocated stores to a larger location.
Management expects this trend of relocation of selected stores to higher sales
volume locations and expansion of selling space at existing stores to continue
in locations where economic conditions warrant.
At August 27, 1994, the Company had working capital of $318 million compared
to $363 million at the end of the prior fiscal year. The change in working
capital is the result of the use of working capital, on a short-term basis, to
finance current year store development. During the last six months, inventories
increased $226 million as a result of the opening of 17 new stores and the
Company's new distribution centers in Minnesota and Virginia and the expansion
of the Oklahoma distribution facility, as well as a greater emphasis on
achieving an improved merchandise in-stock position. Management believes that
the increased inventories in the stores have contributed to the comparable store
sales growth. Inventory turns of 4.7 times for the trailing 12 months are
expected to increase to approximately 5.0 times by the end of fiscal 1995 as
seasonally higher sales volume and the opening of additional stores improve this
ratio. The growth in inventories was financed principally through vendor
financing and borrowings under the Company's revolving credit facility.
Management expects that the seasonal increase in inventories and the opening of
additional stores and a California distribution center in the third quarter will
result in increasing levels of inventory through that period. The stores opened
in the first half of the year and those scheduled to be opened in the second
half are larger stores, generally 45,000 or 58,000 square feet, and feature a
larger selection of products, resulting in higher inventory levels in the
stores. In addition to the new stores, the Company is expanding or relocating
approximately 30 stores to the larger store format in the current year.
In July 1994, the Company entered into a new revolving credit facility which
increased the seasonal borrowing availability to $400 million. The facility
expires in June 1996 and provides for a one year extension at the option of the
participating lenders. Borrowings under the facility are subject to a limitation
of $50 million once each year for approximately one month. In August 1994, the
Company entered into a master lease program under which the lessor will develop,
and the Company will lease, approximately 16 newly constructed stores and the
Virginia distribution center and related equipment. In addition, the Company
owns certain retail locations, the majority of which are subject to commitments
for sale/leaseback that will generate in excess of $40 million in the third
quarter. As the Company's policy is to lease rather than own its retail
locations, it intends to enter into sale/leasebacks for those remaining
locations not currently subject to commitments. In August 1994, the Company also
completed the financing on the $4.5 million expansion of the Oklahoma
distribution center.
The Company expects that capital spending for the remainder of the fiscal
year, net of amounts expected to be recovered through sale/leasebacks, will
approximate $50 million. The Company's introduction of its new, larger store
format is expected to result in the continuation of the Company's practice of
expanding or relocating stores where appropriate.
Management believes that the proceeds from the sale of the Subordinated
Debentures to Best Buy Capital, together with working capital from the Company's
new revolving credit facility, vendor financing and long-term financing for real
estate development, will be adequate to support the Company's operations and
planned growth for the immediate future.
INFLATION
The Company does not believe that inflation has had a material effect on its
results of operations. Prices for many of its products have decreased due to
technological advances and increased competition. Products which have increased
in cost have generally done so in line with the overall inflation rate and the
Company believes it has been successful in improving its purchased cost of most
products due to larger volume purchases from a reduced number of suppliers.
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-
24
<PAGE>
end holiday selling season. The timing of new store openings and general
economic conditions may affect future quarterly results of the Company. The
Company's unaudited quarterly operating results for each quarter of fiscal 1994
and the first two quarters of fiscal 1995 were as follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1995
---------------------------------------------------- ----------------------
MAY 29, AUGUST 28, NOVEMBER 27, FEBRUARY 26, MAY 28, AUGUST 27,
1993(1) 1993 1993 1994 1994 1994
--------- ----------- -------------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues.......................... $ 441,919 $ 562,980 $ 808,476 $1,193,159 $ 849,403 $ 933,172
Gross profit...................... 74,476 94,198 121,108 167,143 118,952 132,184
Operating income.................. 3,674 13,090 20,849 39,565 11,686 17,659
Net earnings...................... 1,091 7,594 11,161 21,439 4,241 7,600
Net earnings per share............ .03 .18 .26 .50 .10 .18
<FN>
- ------------------
(1) Includes the cumulative effect of a change in accounting for income taxes
that reduced net earnings by $425 ($.01 per share).
</TABLE>
25
<PAGE>
BUSINESS
GENERAL
Best Buy is one of the nation's fastest growing specialty retailers. The
Company offers a wide selection 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 manner. With its
innovative retail format, the Company has achieved significant success, moving
it into a leading position nationally in all of its principal product
categories. Since the beginning of fiscal 1993, the Company has added 104
stores, primarily in the central United States, and has added four new
distribution centers. The Company anticipates opening a total of 53 stores in
fiscal 1995, including new markets primarily in the east and southeast, as well
as Los Angeles and Las Vegas. By the end of this fiscal year, the Company
expects to operate 204 stores.
During the past year, the Company has been developing 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 has developed interactive Answer Centers
featuring touch screen monitors from which customers and sales personnel can
immediately access product information. These Answer Centers, to be stationed
throughout the store, will utilize proprietary technology providing audio and
video presentations designed, by the Company, to enable users to compare
products and better understand the features and benefits of product options. The
enhanced store format will also feature 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. Finally, these larger stores, generally 45,000
square feet with some as large as 58,000 square feet, will accommodate a larger
product selection intended to be as good as or better than the largest selection
offered by most of Best Buy's competitors in each of its principal product
categories. By the end of this fiscal year, approximately 10% of the Company's
stores will incorporate all of the Concept III enhancements, with most of the
remaining stores anticipated to be converted over the next three to four years.
BUSINESS STRATEGY
The Company's business strategy is to offer consumers an enjoyable and
convenient shopping experience while maximizing its profitability. Best Buy
believes it offers consumers meaningful advantages in store environment, product
value, selection and service. An objective of this strategy is to achieve a
dominant share of the markets Best Buy serves and the Company currently holds a
leading, and in some cases dominant, share in its markets. The Company's
recently introduced Concept III store format will feature an expanded product
selection and will use interactive technology 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 the Concept III stores, touch screen Answer Centers
designed to give customers easy access to product information in both
audio and video format.
26
<PAGE>
- Provides a large selection of brand name products comparable to retailers
that specialize in each of the Company's four 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, reasonably priced extended warranties and free
home delivery.
- Provides a variety of meaningful services not offered by certain
competitors, including convenient financing programs, product delivery and
installation, computer training and post-sale repair and warranty services
including computer upgrades.
- Establishes 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 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 consumer
electronics products and are accustomed to discount shopping formats, they
increasingly resist efforts to direct their choice of product and appreciate
controlling the purchase decision. In addition, the Company believes that its
competitors' use of directional, commissioned sales staffs and showrooms are
inefficient methods of completing a sale.
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 purchase decisions. As a result, Best Buy's new
Concept III store format features Answer Centers enabling customers to access
product information from touch screen monitors that display informative and
entertaining full motion videos. The videos will allow customers to experience
and compare product features. Initially, approximately 12 of these Answer
Centers will be stationed throughout each Concept III store. The Answer Centers
will also enable store personnel to provide information on product availability
and specifications to customers desiring sales assistance. The new store format
will also feature more hands-on demonstrations of products. For example, each of
the Concept III stores will have a demonstration area for television "surround
sound" systems so that customers can see for themselves how different
configurations of audio components will enhance sound quality. Each Concept III
store will also have a simulated, life-size car display that will demonstrate
differences in car stereo sound resulting from different speaker configurations,
a speaker room with a 100 disc CD changer 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 and a "Fun &
Games" area where customers and their children can try the latest video games.
Best Buy believes that these enhancements to its existing store format will
further differentiate it from competing retailers and will also provide an
advantage for the Company relative to potential future competitors such as
catalog and on-line services and television shopping networks.
The Company's stores are in large, open buildings with high ceilings. Most
of Best Buy's existing stores contain approximately 28,000 to 45,000 square
feet. Concept III stores will feature specialty areas such as larger viewing
rooms for large screen and projection televisions, larger speaker rooms, a
separate department for movie videos, a working kitchen for appliance
demonstrations and an expanded and consolidated accessories department. To
accommodate its expanding product selection, as well as these specialty
features, the majority of the stores which the Company plans to open in fiscal
1995 will have approximately 45,000 square feet, with stores in selected
locations having approximately 58,000 square feet.
Best Buy's merchandising strategy differs from most other retailers selling
comparable merchandise. Best Buy's merchandise is displayed at eye level next to
signs identifying the products' major
27
<PAGE>
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 format allows the customer to carry merchandise directly to the
check-out lanes, pay for it and leave the store. This system avoids the
time-consuming process used at traditional superstores and catalog showrooms.
Many of the Company's competitors with the traditional superstore format use
commissioned sales staffs and have only 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. In this situation, a salesperson typically will promote products
yielding the greatest sales commissions. In addition, unlike Best Buy, these
traditional superstores generally stress the sale of extended service plans and
have trained their sales staffs to maximize the sale of these plans. The Company
offers extended service plans, generally at lower prices than its competitors.
The Company believes that its advertising strategy has greatly contributed
to its overall success. Best Buy spends approximately 3% of store sales on
advertising, including the distribution of about 18 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 consists of four-color weekly inserts of up 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 and
radio commercials, each with a specific marketing message. Television
commercials and radio spots account for approximately 35% of total advertising
expenditures. The Company is reimbursed by vendors for a substantial portion of
advertising expenditures through cooperative advertising arrangements.
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 provide no such service. Virtually all
products sold by the Company carry manufacturers' warranties. The Company offers
to service and repair almost all of the products it sells, except major
appliances in certain markets, and has been designated by most of its suppliers
as an authorized service center. The Company contracts with outside factory
service organizations to service and repair major appliances and is expanding
its own in-home appliance repair service. In addition, the Company conducts
computer software training classes at selected stores and makes its 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, cellular phones 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 4,000 products, exclusive of entertainment software titles
and accessories, in its four principal product categories. In addition, the
Company has recently expanded its selection of accessories, which typically
yield a higher margin than most of the Company's other products. The Company
believes that this expanded assortment of accessories will also build customer
traffic for its other products. The Company also aggressively promotes and
displays a large selection of lower priced, high volume items, such as blank
audio and video tapes, portable audio equipment and photographic equipment.
The home office category, now 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. The Company
believes that it
28
<PAGE>
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 the changing technology and consumer demand for
access to on-line information will continue to generate increased demand for
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.
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 the popular new 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 has recently expanded its product selection in consumer
electronics by offering higher end products and components that have greater
appeal to audio and video enthusiasts. Further, the Company anticipates that
with the availability of better picture and sound quality through direct
broadcast satellite, it will have more opportunities to sell higher end
equipment such as home theaters, surroundsound systems and in-wall components.
The Company sells consumer electronics with brand names such as Aiwa, Bose,
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 and computer 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 generally offers
between 25,000 and 55,000 titles in its stores and intends to offer
approximately 80,000 titles in its largest Concept III stores. In addition, Best
Buy utilizes local personnel to customize a portion of the music software
assortment for a particular store. The Company believes that it has
substantially increased customer traffic by offering this wide and customized
assortment of entertainment software.
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 Eureka,
Frigidaire, Hoover, Maytag, Sharp, Whirlpool and White-Westinghouse.
The following table sets forth the approximate percentages of store sales
from each of Best Buy's principal product lines.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------------------------------------------- SIX MONTHS ENDED
FEBRUARY 29, 1992 FEBRUARY 27, 1993 FEBRUARY 26, 1994 AUGUST 27, 1994
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Home Office...................... 22% 27% 35% 35%
Consumer Electronics:
Video.......................... 28 26 22 21
Audio.......................... 22 20 16 14
Entertainment Software........... 7 9 12 14
Major Appliances................. 13 11 9 10
Extended Service Plans........... 2 1 1 1
Other (1)........................ 6 6 5 5
--- --- --- ---
Total........................ 100% 100% 100% 100%
--- --- --- ---
--- --- --- ---
<FN>
- --------------
(1) Primarily photographic equipment, blank audio and video tapes, video games,
furniture and accessories.
</TABLE>
29
<PAGE>
STORE LOCATIONS AND EXPANSION
The Company's 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
maximize the effectiveness of advertising expenditures and to create a high
level of consumer awareness. In addition, the clustering of stores allows the
Company to maintain more effective management control, enhance asset
utilization, and utilize its distribution facilities more efficiently.
When entering a new metropolitan market, the Company establishes a district
office, service center and major appliance warehouse. Each new store requires
approximately $3.0 to $3.6 million of working capital, depending on the size of
the store, for merchandise inventory (net of vendor financing), leasehold
improvements, fixtures and equipment. Additional pre-opening costs are incurred
in hiring and training new employees and in advertising. Pre-opening costs of
approximately $200,000 per store are expensed in the year the store is opened.
Best Buy is continuing its national market expansion strategy. The Company
believes it has the necessary distribution and management information systems as
well as management experience and depth to support its expansion plans. During
the last fiscal year, the Company opened 40 stores, a 36% increase in its store
base. The Company intends to open a total of 53 stores during the current fiscal
year, including entry into the major markets of Baltimore/Washington, D.C.,
Charlotte, Cleveland, Las Vegas, Los Angeles and Orlando. In addition, the
Company intends to remodel or relocate approximately 30 of its stores during the
current fiscal year, generally increasing the size of these stores to
approximately 45,000 or 58,000 square feet. In fiscal 1996, the Company
anticipates opening approximately 50 additional stores.
30
<PAGE>
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 the number of
stores the Company expects to open during the current fiscal year.
<TABLE>
<CAPTION>
NUMBER OF STORES NUMBER OF STORES ESTIMATED NUMBER
AT FISCAL YEAR END PLANNED TO BE OF STORES TO BE
--------------------- OPENED IN FISCAL OPEN AT END OF
1992 1993 1994 1995 FISCAL 1995
----- ----- ----- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Illinois................................ 7 20 30 2 32
Texas................................... 15 26 28 4 32
Minnesota............................... 14 14 15 1 16
Michigan................................ -- -- 10 4 14
Ohio.................................... -- -- 2 10 12
Wisconsin............................... 11 11 11 -- 11
Missouri................................ 10 10 10 -- 10
Georgia................................. -- -- 7 2 9
Arizona................................. -- -- 6 1 7
California.............................. -- -- -- 7 7
Indiana................................. -- 7 7 -- 7
Colorado................................ 5 6 6 -- 6
Iowa.................................... 5 5 5 -- 5
Kansas.................................. 3 3 4 1 5
Virginia................................ -- -- -- 5 5
Maryland................................ -- -- -- 4 4
Arkansas................................ -- 1 2 1 3
Florida................................. -- -- -- 3 3
Nebraska................................ 2 3 3 -- 3
North Carolina.......................... -- -- -- 3 3
Oklahoma................................ -- 3 3 -- 3
South Carolina.......................... -- -- -- 3 3
Kentucky................................ -- -- -- 1 1
Nevada.................................. -- -- -- 1 1
New Mexico.............................. -- 1 1 -- 1
South Dakota............................ 1 1 1 -- 1
--
----- ----- ----- ---
Total................................. 73 111 151 53 204
--
--
----- ----- ----- ---
----- ----- ----- ---
</TABLE>
SUPPLIERS, PURCHASING AND DISTRIBUTION
The Company's marketing strategy depends, in part, upon its ability to offer
a wide selection of name brand products to its customers and is, therefore,
dependent upon satisfactory and stable supplier relationships. In fiscal 1994,
Best Buy's 25 largest suppliers accounted for approximately 70% of the
merchandise purchased by the Company, with five suppliers, Hewlett-Packard, IBM,
Packard Bell, RCA and Sony, accounting for approximately 29% of the Company's
total purchases. The loss of or disruption of supply from any one of these major
suppliers could have a material adverse effect on the Company's sales. While
certain suppliers have at times limited or discontinued their supply of products
to the Company, the Company's operations have not been materially adversely
impacted by any limitation on or loss of supply. Best Buy has no written
contracts with its suppliers but has not received any indication that any
suppliers will discontinue selling merchandise to the Company. The Company has
not experienced difficulty in maintaining satisfactory sources of supply, and
management believes 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 is responsible for overall inventory
management, including promotion planning, pricing 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. When vendors introduce new product
31
<PAGE>
models and reduce their prices on current models, the Company has historically
received credits from the vendors sufficient to compensate the Company for its
reduced selling prices. Historically, revenues from the sale of close-out
merchandise have been insignificant.
The Company has made product availability a high priority and has made
significant 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 majority of the Company's merchandise, except for major appliances, is
shipped directly from manufacturers to the Company's distribution centers in
California, Minnesota, Oklahoma and Virginia. During the last twelve months, the
Company increased its permanent distribution space for hard goods from
approximately 500,000 square feet to over 1,800,000 square feet. In addition,
the Company recently opened a dedicated distribution center for entertainment
software in Minnesota and will be installing a state-of-the-art sortation system
for music software during the next year. Major appliances are shipped to
satellite warehouses in each of the Company's major markets. In order to respond
to increased customer demand for certain computer and entertainment software
products, the Company has increased the volume of merchandise shipped directly
to the stores from manufacturers and distributors. The Company is, however,
still dependent upon the distribution centers for inventory storage and shipment
of merchandise to stores. The Company primarily uses contract carriers to ship
merchandise from its distribution centers to its stores. The Company believes
that its distribution centers can most effectively service stores within a 600
to 700 mile radius and that its five distribution centers can accommodate the
Company's expansion plans for the next year. The Company plans to continue
investing in developing 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 invested significant resources to develop 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. The systems have been designed to integrate all major aspects of the
Company's business including sales, warehousing, distribution, purchasing,
inventory control, merchandise planning and replenishment, as well as various
financial systems. Best Buy uses point-of-sale bar code scanning from which
sales information is polled at the end of each day. The Company's MIS group, in
conjunction with the advertising department, has also developed the proprietary
technology to be used in the touch screen Answer Centers. 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. The systems have been designed to support
the growth and expansion of the Company for the foreseeable future. Best Buy is
continuing to make investments in designing new systems, modifying existing
systems and increasing processing capacity, particularly with respect to
distribution, inventory management and store operations.
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 three regions. Each region is
divided into districts and is under the supervision of a senior vice president
who oversees the operation 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
32
<PAGE>
regularly with store managers to discuss merchandising and new product
introductions, sales promotions, customer feedback and requests, store operating
performance and other matters. Similar meetings are conducted at the corporate
level with regional management. 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, two or three assistant 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 extensive in-house education program to train new
employees, keep current employees informed of changes and modifications to its
operating procedures and demonstrate new products. The training program includes
classes for employees and the use of detailed store manuals and training video
tapes produced in-house. Best Buy also provides its store personnel with
in-store training in the demonstration and operation of the Company's
merchandise, which is enhanced using tests that are administered through the
Company's mainframe computer system. The Company also conducts an 11-week course
of classroom instruction combined with on-the-job training for future management
candidates. 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
The Company has significantly expanded the use of special financing offers
and considers them an important part of its marketing strategy. Generally, the
special financing offers allow customers to defer all payments interest-free for
90 days or six months, depending on the price of the product, or to defer
interest payments for one year on the purchase of selected products.
Approximately 35% of store revenues are paid for in cash, with the remaining 65%
paid for by either major credit cards or the Best Buy private label credit card.
The special financing offers are 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 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.
While overall consumer electronics sales have grown relatively slowly in recent
years, the concentration of sales among the top retailers in the industry has
increased significantly. The industry's consolidation has been evidenced in the
last two years by the liquidation of Highland Superstores, the closing of 97
Silo stores in many of the markets where the Company competes and the closing of
110 McDuff/Video Concepts (owned by Tandy Corp.) stores in states such as Texas,
Colorado and Missouri. The relatively slow sales growth is due to market
saturation for many consumer electronics products and the general absence of new
products in the market. In addition, the Company believes that consumers have
become more knowledgeable and value conscious, thereby putting pressure on
profit margins. Management believes
33
<PAGE>
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
product selection, low prices and service.
Best Buy competes in most of its markets against Sears and Montgomery Ward
and in an increasing number of markets against Circuit City and Incredible
Universe (owned by Tandy Corp.). It also competes against computer superstores
such as Computer City (owned by Tandy Corp.) and CompUSA and entertainment
software superstores operated by Musicland, Tower Records and Blockbuster
Entertainment. 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. Over half of the Company's stores compete in markets with Circuit
City. This percentage will increase in fiscal 1995 with the Company's entry into
markets in the eastern, southeastern and western United States and with Circuit
City's entry into the Minneapolis/St. Paul and Kansas City markets.
EMPLOYEES
As of August 27, 1994, the Company employed approximately 18,700 persons, of
whom 9,500 were part-time 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.
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 11 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 six stores. The initial
terms of the leases range from 5 to 25 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.
The Company leases a 425,000 square foot distribution center in Bloomington,
Minnesota, and a 440,000 square foot distribution center in Ardmore, Oklahoma.
In the current fiscal year, the Company has added a 700,000 square foot
distribution center in Staunton, Virginia, a 310,000 square foot distribution
center in Ontario, California, and a 240,000 square foot software distribution
center in Edina, Minnesota. The Company also operates leased satellite
warehouses for major appliances in all of its major markets and uses a satellite
warehouse operated by a third party in Kansas City. The Company's corporate
offices are located in a 260,000 square foot facility it owns in Eden Prairie,
Minnesota.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and Executive Officers of Best Buy are as follows:
<TABLE>
<CAPTION>
YEARS WITH
NAME AGE POSITION WITH COMPANY COMPANY
- -------------------------- ----------- ------------------------------------------------------------------- ---------------
<S> <C> <C> <C>
Richard M. Schulze 53 Founder, Chairman, Chief Executive Officer and Director (1) 28
Bradbury H. Anderson 45 President, Chief Operating Officer and Director (1) 21
Allen U. Lenzmeier 51 Executive Vice President and Chief Financial Officer 10
Lee H. Schoenfeld 42 Senior Vice President -- Marketing 16
Randall K. Zanatta 37 Senior Vice President -- Merchandising 14
Wade R. Fenn 36 Senior Vice President -- Sales 14
George S. Fouts 56 Senior Vice President -- Sales 8
Kenneth R. Weller 46 Senior Vice President -- Sales 1
Steven R. Anderson 47 Senior Vice President -- MIS and Chief Information Officer 7
Robert C. Fox 44 Senior Vice President -- Finance and Treasurer 9
James P. Mixon 50 Senior Vice President -- Distribution and Transportation *
Elliot S. Kaplan 57 Secretary and Director (3) 23
Frank D. Trestman 60 Director (2) (3) (4) 10
Culver Davis, Jr. 56 Director (3) (4) 8
David Stanley 59 Director (2) 4
James C. Wetherbe 46 Director (2) (4) 1
<FN>
- --------------
* Less than one year
(1) Member of Personnel Committee.
(2) Member of Compensation Committee.
(3) Member of Lease Committee.
(4) Member of Audit Committee.
</TABLE>
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. As of August 27, 1994, Mr. Schulze
beneficially owned 8,972,256 shares of the Company's Common Stock, or 21.1%,
consisting of 8,367,566 outstanding shares; 316,848 outstanding shares
registered in his name and held by him as custodian for the benefit of his
children (Mr. Schulze has disclaimed beneficial ownership of such shares); 6,217
shares registered in the name of Wilmington Trust Company, and held by it as
trustee of the Company's Retirement Savings Plan for the benefit of Mr. Schulze;
and options granted to Mr. Schulze, available to exercise within 60 days, to
purchase 281,625 shares.
BRADBURY H. ANDERSON has been the Company's President and Chief Operating
Officer since April 1991, having served as Executive Vice President Marketing of
the Company from February 1986. He has been employed in various other capacities
with the Company since 1973, including retail salesperson, store manager and
sales manager. Mr. Anderson has served as a director of the Company since August
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 its Vice President Finance and Operations and Treasurer.
LEE H. SCHOENFELD was promoted to his present position in July 1993. Mr.
Schoenfeld joined the Company in 1978 as a salesperson and has served most
recently as Vice President -- Marketing.
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RANDALL K. ZANATTA was promoted to his present position in April 1994. Mr.
Zanatta joined the Company in 1980 as a salesperson and was promoted to store
manager. He subsequently joined the Company's Marketing Department, becoming a
Vice President -- Marketing in 1986.
WADE R. FENN was promoted to his present position in April 1991, having
served as 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.
GEORGE S. FOUTS was promoted to his present position in April 1991, having
served as Regional Vice President of the Company from 1987. Mr. Fouts joined the
Company in 1986 as Sales Manager after being employed by RCA Corporation for
nineteen years, most recently as Vice President of RCA Sales Corporation.
KENNETH R. WELLER joined the Company in May 1993. Since 1986, he was Vice
President of Sales in The Good Guys!, a San Francisco-based consumer electronics
retailer where he had worked since 1982.
STEVEN R. ANDERSON was promoted to his present position in April 1994, after
having served as Vice President -- MIS since July 1990. Mr. Anderson joined the
Company in 1986 as Director of Management Information Systems.
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.
JAMES P. MIXON joined Best Buy in April 1994 as Senior Vice President --
Transportation and Distribution. Prior to joining the Company, Mr. Mixon held
various distribution management positions with several national retailers, most
recently with Marshalls Stores, Inc.
ELLIOT S. KAPLAN has served as a director and Secretary of the Company since
1971. Since 1961, Mr. Kaplan has been an attorney with the law firm of Robins,
Kaplan, Miller & Ciresi, which serves as general counsel to the Company. Mr.
Kaplan is also a director of American Business Information, Inc.
FRANK D. TRESTMAN has served as a director of the Company since December
1984. He is President of Trestman Enterprises, an investment and business
development firm. He had been a consultant to McKesson Corporation and is the
former Chairman of the Board and Chief Executive Officer of Mass Merchandisers,
Inc., a distributor of nonfood products to retailers in the grocery business and
a subsidiary of McKesson Corporation. Mr. Trestman is also a director of
Insignia Systems, Inc.
CULVER DAVIS, JR. has served as a director of the Company since August 1986.
He has been employed by CUB Foods, a warehouse style supermarket chain, since
1968, became its President and Chief Executive Officer in 1985, and since 1992
has been its Chairman and Chief Executive Officer.
DAVID STANLEY has been a director of the Company since August 1990. He is
Chairman of the Board of Directors and Chief Executive Officer of Payless
Cashways, Inc., a building materials specialty retailer, where he has been an
officer since 1980. Mr. Stanley is also a director of Piper Jaffray Inc. and
Digi International, Inc.
JAMES C. WETHERBE has served as a director of the Company since July 1993.
He has been a professor at the University of Minnesota since 1980 and is
currently Professor of Management Information Systems and Director of the
University of Minnesota MIS Research Center. In addition, he has been Fedex
Professor and Director of the Center for Cycle Time Research at the University
of Memphis since August 1993.
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<PAGE>
BEST BUY CAPITAL
Best Buy Capital is a special purpose limited partnership formed in
September 1994 under the laws of the State of Delaware. All of its partnership
interests (other than the Preferred Securities and any interests of any Special
General Partner) are and will be beneficially owned directly or indirectly by
Best Buy. Best Buy is the sole general partner in Best Buy Capital (in such
capacity, the "General Partner"). Best Buy Financial Corporation, a Delaware
corporation and a wholly-owned subsidiary of Best Buy ("Best Buy Financial"),
initially will be the sole limited partner in Best Buy Capital. Upon issuance of
the Preferred Securities, which securities represent limited partnership
interests in Best Buy Capital, the holders of such Preferred Securities will
become limited partners in Best Buy Capital and Best Buy Financial will withdraw
as a limited partner. The General Partner will agree to contribute capital to
the extent required to ensure that its capital contributions are equal to at
least 21% of all capital contributed to Best Buy Capital. The General Partner
will invest 99% of the total contributions in Best Buy Capital in the
Subordinated Debentures and the remaining 1% in Eligible Investments as provided
in the Amended and Restated Limited Partnership Agreement of Best Buy Capital
(the "Limited Partnership Agreement"). The payment by Best Buy Capital of
dividends on the Preferred Securities is solely dependent on its receipt of
interest payments on the Subordinated Debentures. To the extent that aggregate
interest payments on the Subordinated Debentures exceed aggregate dividends on
the Preferred Securities and such dividends have been paid in full, Best Buy
Capital may at times have excess funds, which shall be distributed to the
General Partner. Best Buy Capital will exist for a maximum term of 45 years,
unless earlier dissolved. The Limited Partnership Agreement provides that the
General Partner will have liability for the debts and obligations of Best Buy
Capital (including tax obligations other than withholding taxes, but excluding
obligations to holders of Preferred Securities in their capacities as holders,
such obligations being separately guaranteed pursuant to the Guarantee). Under
Delaware law, a limited partner in a Delaware limited partnership such as Best
Buy Capital (i.e., a holder of the Preferred Securities) will not be personally
liable for the debts, obligations and liabilities of such limited partnership,
whether arising in contract, tort or otherwise, solely by reason of being a
limited partner of such limited partnership (subject to any obligation such a
holder may have to repay any funds that may have been wrongfully distributed to
it). All of Best Buy Capital's business and affairs will be conducted by the
General Partner. The location of the principal executive offices of the General
Partner is 7075 Flying Cloud Drive, Eden Prairie, Minnesota 55344, telephone
number (612) 947-2000. Best Buy Capital exists for the purpose of issuing the
Preferred Securities and investing the proceeds thereof, together with
substantially all of the capital contributed by the General Partner, in the
Subordinated Debentures.
DESCRIPTION OF SECURITIES OFFERED
The securities offered hereby are % Convertible Monthly Income Preferred
Securities of Best Buy Capital with a liquidation preference of $50 per
security. The Preferred Securities are convertible at any time prior to the
Conversion Expiration Date, at the option of the holder and in the manner
described herein, into shares of Best Buy Common Stock at an initial conversion
rate of shares of Best Buy Common Stock for each Preferred Security
(equivalent to a conversion price of $ per share of Best Buy Common
Stock), subject to adjustment in certain circumstances. The Preferred Securities
are guaranteed, to the extent described herein, by Best Buy as to dividends, the
Redemption Price and cash and other distributions payable on liquidation. In
certain circumstances, the holders of a majority of the aggregate liquidation
preference of the Preferred Securities then outstanding can direct the
Conversion Agent to exchange all of the Preferred Securities for all of the
Subordinated Debentures and immediately thereafter to exchange the Subordinated
Debentures, on behalf of such holders, for Depositary Shares, each representing
a 1/100th interest in a share of Best Buy Series A Preferred Stock.
The following is a description of the material terms of the Preferred
Securities; the Best Buy Series A Preferred Stock and the Depositary Shares
representing such stock for which the Preferred Securities may be exchanged; the
Guarantee pursuant to which Best Buy will guarantee, to the extent described
therein, certain payments with respect to the Preferred Securities; the
Subordinated Debentures and the Indenture pursuant to which the Subordinated
Debentures will be issued (the "Indenture"); and the Best Buy Common Stock into
which the Preferred Securities may be converted.
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<PAGE>
PREFERRED SECURITIES
THE FOLLOWING SUMMARY OF THE PRINCIPAL TERMS AND PROVISIONS OF THE PREFERRED
SECURITIES DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT TO, AND QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO, THE LIMITED PARTNERSHIP AGREEMENT, A COPY OF THE
FORM OF WHICH IS FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS
PROSPECTUS IS A PART.
GENERAL
All of the partnership interests in Best Buy Capital other than the
Preferred Securities offered hereby (and any interests of any Special General
Partner) will be owned directly by Best Buy at all times while the Preferred
Securities are outstanding. The Limited Partnership Agreement authorizes and
creates the Preferred Securities, which represent limited partnership interests
in Best Buy Capital. The limited partnership interests represented by the
Preferred Securities will have a preference with respect to cash distributions
and amounts payable on liquidation and redemption over the other partnership
interests in Best Buy Capital. The Preferred Securities, as limited partnership
interests, do not have a par value. The Limited Partnership Agreement does not
permit the issuance of other partnership interests without the prior approval of
holders of not less than 66 2/3% of the aggregate liquidation preference of the
Preferred Securities then outstanding.
Holders of Preferred Securities will have no preemptive rights.
Holders of the Preferred Securities will not have the right to remove or
replace the General Partner.
DIVIDENDS
Holders of the Preferred Securities will be entitled to receive cumulative
cash distributions from Best Buy Capital, accruing from the date of original
issuance and payable monthly in arrears on the last day of each calendar month
of each year, commencing , 1994 ("dividends"). The dividends payable
on each Preferred Security will be fixed at a rate per annum of $ , or
% of the liquidation preference of $50. The amount of dividends payable for
any period will be computed on the basis of twelve 30-day months and a 360-day
year and, for any period shorter than a full month, will be computed on the
basis of the actual number of days elapsed in such period. Payment of dividends
is limited to the funds held by Best Buy Capital and legally available for
distribution. See "- Description of the Subordinated Debentures - Interest" and
"- Description of the Guarantee - General."
Dividends on the Preferred Securities must be declared monthly and paid on
the last day of each calendar month to the extent that Best Buy Capital has
funds legally available for the payment of such dividends and cash on hand
sufficient to make such payments. It is anticipated that Best Buy Capital's
funds will be limited principally to payments received under the Subordinated
Debentures in which Best Buy Capital will invest the proceeds from this
Offering. If Best Buy fails to make interest payments on the Subordinated
Debentures, Best Buy Capital would not have sufficient funds to pay dividends on
the Preferred Securities. The payment of dividends (if and to the extent
declared) is guaranteed by Best Buy as and to the extent set forth under
"Description of the Guarantee." The Guarantee is a full and unconditional
guarantee from the time of its issuance, but does not apply to any payment of
dividends unless and until such dividends are declared.
Best Buy has the right under the Subordinated Debentures to defer, from time
to time, interest payments on the Subordinated Debentures for up to 60 months.
Monthly dividends on the Preferred Securities would be deferred (but Additional
Dividends would continue to accumulate monthly) by Best Buy Capital during any
such deferral of interest payments. Best Buy Capital will give written notice of
Best Buy's deferral of interest payments to the holders of Preferred Securities
no later than the last date on which it would be required to notify the NYSE of
the record or payment date of the related dividend, which is currently 10 days
prior to such record or payment date. See "Investment Considerations - Option to
Defer Payment of Dividends," "Description of Securities Offered - Preferred
Securities - Additional Dividends" and "- Description of the Subordinated
Debentures - Option to Defer Interest Payments." Any failure by Best Buy to make
interest payments on the Subordinated Debentures in the absence of a deferral
would constitute an event of default under the Indenture. The failure of
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<PAGE>
holders of Preferred Securities to receive dividends on the Preferred Securities
in full (including arrearages) for 15 consecutive months (including any such
failure caused by a deferral of interest payments on the Subordinated
Debentures) would trigger the right of holders of a majority of the aggregate
liquidation preference of the Preferred Securities then outstanding, voting as a
class at a special partnership meeting called for such purpose or by written
consent, to direct the conversion and exchange agent for the Preferred
Securities (the "Conversion Agent") to exchange all of the Preferred Securities
then outstanding for Subordinated Debentures, and immediately thereafter, to
exchange such Subordinated Debentures, on behalf of the holders, for Depositary
Shares, each representing 1/100th of a share of Best Buy Series A Preferred
Stock, at the Exchange Price. "Exchange Price" means one Depositary Share for
each $50 principal amount of Subordinated Debentures (which rate of exchange is
equivalent to each of (i) one Depositary Share for each Preferred Security, (ii)
one share of Best Buy Series A Preferred Stock for each $5,000 principal amount
of Subordinated Debentures and (iii) one share of Best Buy Series A Preferred
Stock for each 100 Preferred Securities). See "- Optional Exchange for
Depositary Shares."
Dividends declared on the Preferred Securities will be payable to the
holders thereof as they appear on the books and records of Best Buy Capital on
the relevant record dates, which will be one Business Day (as defined below)
prior to the relevant payment dates. Subject to any applicable laws and
regulations and the Limited Partnership Agreement, each such payment will be
made as described under "- Book-Entry-Only Issuance - The Depository Trust
Company" below. In the event that any date on which dividends are payable on the
Preferred Securities is not a Business Day, then payment of the dividend payable
on such date will be made on the next succeeding day that is a Business Day (and
without any interest or other payment in respect of any such delay). If such
Business Day is in the next succeeding calendar year, however, the payment will
be made on the immediately preceding Business Day, in each case with the same
force and effect as if made on such date. A "Business Day" means any day other
than a day on which banking institutions in The City of New York or Chicago are
authorized or obligated by law or executive order to close.
Certain covenants under the indenture for Best Buy's 8 5/8% Senior
Subordinated Notes due 2000 may restrict the amount of dividends on the
Preferred Securities that may be declared by Best Buy Capital. Monthly dividends
declared by Best Buy Capital, which are guaranteed by Best Buy, will until paid
constitute debt of Best Buy for purposes of this indenture, the incurrence of
which is subject to a limitation on consolidated indebtedness of Best Buy. In
general, under this limitation Best Buy may not incur debt unless it maintains a
minimum ratio of consolidated cash flow available for fixed charges to the sum
of consolidated interest expense and one-third of operating lease payments
("consolidated cash flow ratio") on a pro forma basis of 2:1 for four full
fiscal quarters preceding the incurrence of such debt. Best Buy's consolidated
cash flow ratio for the four fiscal quarters ended August 27, 1994, was 2.92:1.
ADDITIONAL DIVIDENDS
Best Buy Capital shall be required to declare and pay additional dividends
on the Preferred Securities upon any dividend arrearages in respect of the
Preferred Securities in order to provide, in effect, monthly compounding on such
dividend arrearages. (The amounts payable to effect such monthly compounding on
dividend arrearages in respect of the Preferred Securities being referred to
herein as "Additional Dividends").
CERTAIN RESTRICTIONS ON BEST BUY CAPITAL
If accumulated and unpaid dividends have not been paid in full on the
Preferred Securities, Best Buy Capital may not:
(i) pay, or declare and set aside for payment, any dividends on any
other partnership interests; or
(ii) redeem, purchase, or otherwise acquire any other partnership
interests;
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<PAGE>
until, in each case, such time as all accumulated and unpaid dividends on all of
the Preferred Securities shall have been paid in full for all dividend periods
terminating on or prior to the date of such payment or the date of such
redemption, purchase, or acquisition, as the case may be.
If accumulated and unpaid dividends have been paid in full on the Preferred
Securities for all prior whole dividend periods, then holders of Preferred
Securities will not be entitled to receive or share in any dividends paid,
declared or set aside for payment on any other partnership interest in Best Buy
Capital.
CONVERSION RIGHTS
GENERAL. The Preferred Securities will be convertible at any time prior to
the Conversion Expiration Date, at the option of the holder thereof and in the
manner described below, into shares of Best Buy Common Stock at an initial
conversion rate of shares of Best Buy Common Stock for each Preferred
Security (equivalent to a conversion price of $ per share of Best Buy
Common Stock), subject to adjustment as described under "- Conversion Price
Adjustments" below. A holder of a Preferred Security wishing to exercise its
conversion right shall surrender such Preferred Security, together with an
irrevocable conversion notice, to the Conversion Agent which shall, on behalf of
such holder, exchange the Preferred Security for a portion of the Subordinated
Debentures and immediately convert such Subordinated Debentures into Best Buy
Common Stock. Holders may obtain copies of the required form of the conversion
notice from the Conversion Agent. Conversion rights will terminate at the close
of business on the Conversion Expiration Date.
Holders of Preferred Securities at the close of business on a dividend
payment record date will be entitled to receive the dividend payable on such
securities on the corresponding dividend payment date notwithstanding the
conversion of such Preferred Securities following such dividend payment record
date but prior to such dividend payment date. Except as provided in the
immediately preceding sentence, Best Buy Capital will make no payment or
allowance for accumulated and unpaid dividends, whether or not in arrears, on
converted Preferred Securities. Best Buy will make no payment or allowance for
dividends on the shares of Best Buy Common Stock issued upon such conversion.
Each conversion will be deemed to have been effected immediately prior to the
close of business on the day on which notice was received by Best Buy Capital.
No fractional shares of Best Buy Common Stock will be issued as a result of
conversion, but in lieu thereof such fractional interest will be paid in cash.
EXPIRATION OF CONVERSION RIGHTS. On and after , 1997, and
provided that Best Buy Capital is current in the payment of dividends on the
Preferred Securities, Best Buy Capital may, at its option, cause the conversion
rights of holders of Preferred Securities to expire. Best Buy Capital may
exercise this option only if for 20 trading days within any period of 30
consecutive trading days, including the last trading day of such period, the
Current Market Price of Best Buy Common Stock, exceeds 120% of the conversion
price of the Preferred Securities, subject to adjustment in certain
circumstances. In order to exercise its conversion expiration option, Best Buy
Capital must issue a press release for publication on the Dow Jones News Service
announcing the Conversion Expiration Date prior to the opening of business on
the second trading day after a period in which the condition in the preceding
sentence has been met, but in no event prior to , 1997. The press
release shall announce the Conversion Expiration Date and provide the current
conversion price and current market price of the Preferred Securities, in each
case as of the close of business on the trading day next preceding the date of
the press release.
Notice of the expiration of conversion rights will be given by first-class
mail to the holders of the Preferred Securities not more than four business days
after Best Buy Capital issues the press release. The Conversion Expiration Date
will be a date selected by Best Buy Capital not less than 30 nor more than 60
days after the date on which Best Buy Capital issues the press release
announcing its intention to terminate conversion rights of Preferred Security
holders. In the event that Best Buy Capital does not exercise its conversion
expiration option, the Conversion Expiration Date with respect to the Preferred
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Securities will be the earlier of the date of an Exchange Election referred to
below under "- Optional Exchange for Depositary Shares," and two business days
preceding the date set for mandatory redemption of the Preferred Securities.
The term "Current Market Price" of Best Buy Common Stock for any day means
the last reported sale price, regular way on such day, or, if no sale takes
place on such day, the average of the reported closing bid and asked prices on
such day, regular way, in either case as reported on the NYSE Consolidated
Transaction Tape, or, if the Best Buy Common Stock is not listed or admitted to
trading on the NYSE, on the principal national securities exchange on which the
Best Buy Common Stock is listed or admitted to trading, if the Best Buy Common
Stock is listed on a national securities exchange, or the National Market System
of the National Association of Securities Dealers, Inc., or, if the Best Buy
Common Stock is not quoted or admitted to trading on such quotation system, on
the principal quotation system on which the Best Buy Common Stock may be listed
or admitted to trading or quoted, or, if not listed or admitted to trading or
quoted on any national securities exchange or quotation system, the average of
the closing bid and asked prices of the Best Buy Common Stock in the
over-the-counter market on the day in question as reported by the National
Quotation Bureau Incorporated, or a similar generally accepted reporting
service, or, if not so available in such manner, as furnished by any NYSE member
firm selected from time to time by the Board of Directors of Best Buy for that
purpose or, if not so available in such manner, as otherwise determined in good
faith by the Board of Directors.
CONVERSION PRICE ADJUSTMENTS - GENERAL. The conversion price will be
subject to adjustment in certain events including, without duplication: (i) the
payment of dividends (and other distributions) payable in Best Buy Common Stock
on any class of capital stock of Best Buy; (ii) the issuance to all holders of
Best Buy Common Stock of rights or warrants entitling holders of such rights or
warrants to subscribe for or purchase Best Buy Common Stock at less than the
current market price; (iii) subdivisions and combinations of Best Buy Common
Stock; (iv) the payment of dividends (and other distributions) to all holders of
Best Buy Common Stock consisting of evidences of indebtedness of Best Buy,
securities or capital stock, cash, or assets (including securities, but
excluding those rights, warrants, dividends, and distributions referred to in
clause (iii) and dividends and distributions paid exclusively in cash); (v) the
payment of dividends (and other distributions) on Best Buy Common Stock paid
exclusively in cash, excluding (A) cash dividends that do not exceed the per
share amount of the immediately preceding regular cash dividend (as adjusted to
reflect any of the events referred to in clauses (i) through (vi) of this
sentence), or (B) cash dividends if the annualized per share amount thereof does
not exceed 15% of the last sale price of Best Buy Common Stock, as reported on
the NYSE Consolidated Transaction Tape, on the trading day immediately preceding
the date of declaration of such dividend; and (vi) payment in respect of a
tender or exchange offer (other than an odd-lot offer) by Best Buy or any
subsidiary of Best Buy for Best Buy Common Stock in excess of 10% of the current
market price of Best Buy Common Stock on the trading day next succeeding the
last date tenders or exchanges may be made pursuant to such tender or exchange
offer.
Best Buy from time to time may reduce the conversion price by any amount
selected by Best Buy for any period of at least 20 days, in which case Best Buy
shall give at least 15 days' notice of such reduction. Best Buy may, at its
option, make such reductions in the conversion price, in addition to those set
forth above, as the Board of Directors deems advisable to avoid or diminish any
income tax to holders of Best Buy Common Stock resulting from any dividend or
distribution of stock (or rights to acquire stock) or from any event treated as
such for income tax purposes. See "Certain Federal Income Tax Considerations -
Adjustment of Conversion Price."
No adjustment of the conversion price will be made upon the issuance of any
shares of Best Buy Common Stock pursuant to any present or future plan providing
for the reinvestment of dividends or interest payable on securities of Best Buy
and the investment of additional optional amounts in shares of Best Buy Common
Stock under any such plan, or the issuance of any shares of Best Buy Common
Stock or options or rights to purchase such shares pursuant to any present or
future employee benefit plan or program of Best Buy or pursuant to any option,
warrant, right, or exercisable, exchangeable or convertible security outstanding
as of the date the Preferred Securities were first designated. There shall
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<PAGE>
also be no adjustment of the conversion price in case of the issuance of any
Best Buy Common Stock (or securities convertible into or exchangeable for Best
Buy Common Stock), except as specifically described above. If any action would
require adjustment of the conversion price pursuant to more than one of the
anti-dilution provisions, only one adjustment shall be made and such adjustment
shall be the amount of adjustment that has the highest absolute value to holders
of the Preferred Securities. No adjustment in the conversion price will be
required unless such adjustment would require an increase or decrease of at
least 1% of the conversion price, but any adjustment that would otherwise be
required to be made shall be carried forward and taken into account in any
subsequent adjustment.
CONVERSION PRICE ADJUSTMENTS - MERGER, CONSOLIDATION OR SALE OF ASSETS OF
BEST BUY. In the event that Best Buy is a party to any transaction (including,
without limitation, a merger, consolidation, sale of all or substantially all of
the assets of Best Buy, recapitalization or reclassification of Best Buy Common
Stock or any compulsory share exchange (each of the foregoing being referred to
as a "Transaction")), in each case, as a result of which shares of Best Buy
Common Stock shall be converted into the right (i) in the case of any
Transaction other than a Transaction involving a Common Stock Fundamental Change
(as defined below), to receive securities, cash or other property, each
Preferred Security shall thereafter be convertible into the kind and amount of
securities, cash and other property receivable upon the consummation of such
Transaction by a holder of that number of shares of Best Buy Common Stock into
which a Preferred Security was convertible immediately prior to such
Transaction, or (ii) in the case of a Transaction involving a Common Stock
Fundamental Change, to receive common stock of the kind received by holders of
Best Buy Common Stock (but in each case after giving effect to any adjustment
discussed below relating to a Fundamental Change if such Transaction constitutes
a Fundamental Change). The holders of Preferred Securities will have no voting
rights with respect to any Transaction described in this section.
If any Fundamental Change occurs, then the conversion price in effect will
be adjusted immediately after such Fundamental Change as described below. In
addition, in the event of a Common Stock Fundamental Change, each Preferred
Security shall be convertible solely into common stock of the kind received by
holders of Best Buy Common Stock as a result of such Common Stock Fundamental
Change.
The conversion price in the case of any transaction involving a Fundamental
Change will be adjusted immediately after such Fundamental Change:
(i) in the case of a Non-Stock Fundamental Change (as defined below),
the conversion price of the Preferred Security will thereupon become the
lower of (A) the conversion price in effect immediately prior to such
Non-Stock Fundamental Change, but after giving effect to any other prior
adjustments, and (B) the result obtained by multiplying the greater of the
Applicable Price (as defined below) or the then applicable Reference Market
Price (as defined below) by a fraction of which the numerator will be $50
and the denominator will be an amount per Preferred Security determined by
the General Partner in its sole discretion, after consultation with an
investment banking firm, to be the equivalent of the hypothetical redemption
price that would have been applicable if the Preferred Securities had been
redeemable during such period; and
(ii) in the case of a Common Stock Fundamental Change, the conversion
price of the Preferred Securities in effect immediately prior to such Common
Stock Fundamental Change, but after giving effect to any other prior
adjustments, will thereupon be adjusted by multiplying such conversion price
by a fraction of which the numerator will be the Purchaser Stock Price (as
defined below) and the denominator will be the Applicable Price; provided,
however, that in the event of a Common Stock Fundamental Change in which (A)
100% of the value of the consideration received by a holder of Best Buy
Common Stock is common stock of the successor, acquiror, or other third
party (and cash, if any, is paid only with respect to any fractional
interests in such common stock resulting from such Common Stock Fundamental
Change) and (B) all of the Best Buy Common Stock will have been exchanged
for, converted into, or acquired for common stock (and cash with respect to
fractional interests) of the successor, acquiror, or other third party, the
conversion price of the
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Preferred Securities in effect immediately prior to such Common Stock
Fundamental Change will thereupon be adjusted by multiplying such conversion
price by a fraction of which the numerator will be one and the denominator
will be the number of shares of common stock of the successor, acquiror, or
other third party received by a holder of one share of Best Buy Common Stock
as a result of such Common Stock Fundamental Change.
In the absence of the Fundamental Change provisions, in the case of a
Transaction each Preferred Security would become convertible into the
securities, cash, or property receivable by a holder of the number of shares of
Best Buy Common Stock into which such Preferred Security was convertible
immediately prior to such Transaction. This change could substantially lessen or
eliminate the value of the conversion privilege associated with the Preferred
Securities. For example, if Best Buy were acquired in a cash merger, each
Preferred Security would become convertible solely into cash and would no longer
be convertible into securities whose value would vary depending on the future
prospects of Best Buy and other factors.
The foregoing conversion price adjustments are designed, in "Fundamental
Change" transactions where all or substantially all the Best Buy Common Stock is
converted into securities, cash, or property and not more than 50% of the value
received by the holders of Best Buy Common Stock consists of stock listed or
admitted for listing subject to notice of issuance on a national securities
exchange or quoted on the National Market System of the National Association of
Securities Dealers, Inc. (a "Non-Stock Fundamental Change," as defined below),
to increase the securities, cash, or property into which each Preferred Security
is convertible.
In a Non-Stock Fundamental Change transaction where the initial value
received per share of Best Buy Common Stock (measured as described in the
definition of Applicable Price below) is lower than the then applicable
conversion price of a Preferred Security but greater than or equal to the
"Reference Market Price" (initially $ but subject to adjustment in certain
events as described below), the conversion price will be adjusted as described
above with the effect that each Preferred Security will be convertible into
securities, cash or property of the same type received by the holders of Best
Buy Common Stock in the transaction but in an amount per Preferred Security
determined by Best Buy in its sole discretion, after consultation with an
investment banking firm, to be the equivalent of the hypothetical redemption
price that would have been applicable if the Preferred Securities had been
redeemable during such period.
In a Non-Stock Fundamental Change transaction where the initial value
received per share of Best Buy Common Stock (measured as described in the
definition of Applicable Price) is lower than both the Applicable Conversion
Price of a Preferred Security and the Reference Market Price, the conversion
price will be adjusted as described above but calculated as though such initial
value had been the Reference Market Price.
In a Fundamental Change transaction where all or substantially all the Best
Buy Common Stock is converted into securities, cash, or property and more than
50% of the value received by the holders of Best Buy Common Stock consists of
listed or National Market System traded common stock (a "Common Stock
Fundamental Change," as defined below), the foregoing adjustments are designed
to provide in effect that (a) where Best Buy Common Stock is converted partly
into such common stock and partly into other securities, cash, or property, each
Preferred Security will be convertible solely into a number of shares of such
common stock determined so that the initial value of such shares (measured as
described in the definition of "Purchaser Stock Price" below) equals the value
of the shares of Best Buy Common Stock into which such Preferred Security was
convertible immediately before the transaction (measured as aforesaid) and (b)
where Best Buy Common Stock is converted solely into such common stock, each
Preferred Security will be convertible into the same number of shares of such
common stock receivable by a holder of the number of shares of Best Buy Common
Stock into which such Preferred Security was convertible immediately before such
transaction.
The term "Applicable Price" means (i) in the case of a Non-Stock Fundamental
Change in which the holders of the Best Buy Common Stock receive only cash, the
amount of cash received by the holder of
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one share of Best Buy Common Stock and (ii) in the event of any other Non-Stock
Fundamental Change or any Common Stock Fundamental Change, the average of the
Closing Prices for the Best Buy Common Stock during the ten trading days prior
to and including the record date for the determination of the holders of Best
Buy Common Stock entitled to receive such securities, cash, or other property in
connection with such Non-Stock Fundamental Change or Common Stock Fundamental
Change or, if there is no such record date, the date upon which the holders of
the Best Buy Common Stock shall have the right to receive such securities, cash,
or other property (such record date or distribution date being hereinafter
referred to as the "Entitlement Date"), in each case as adjusted in good faith
by Best Buy to appropriately reflect any of the events referred to in clauses
(i) through (vi) of the first paragraph of this subsection.
The term "Closing Price" means on any day the reported last sales price on
such day or in case no sale takes place on such day, the average of the reported
closing bid and asked prices in each case on the NYSE Consolidated Transaction
Tape or, if the stock is not listed or admitted to trading on such Exchange, on
the principal national securities exchange on which such stock is listed or
admitted to trading or if not listed or admitted to trading on any national
securities exchange, the average of the closing bid and asked prices as
furnished by any NYSE member firm, selected by the General Partner for that
purpose.
The term "Common Stock Fundamental Change" means any Fundamental Change in
which more than 50% of the value (as determined in good faith by the Board of
Directors of Best Buy) of the consideration received by holders of Best Buy
Common Stock consists of common stock that for each of the ten consecutive
trading days prior to the Entitlement Date has been admitted for listing or
admitted for listing subject to notice of issuance on a national securities
exchange or quoted on the National Market System of the National Association of
Securities Dealers, Inc.; provided, however, that a Fundamental Change shall not
be a Common Stock Fundamental Change unless either (i) Best Buy continues to
exist after the occurrence of such Fundamental Change and the outstanding
Preferred Securities continue to exist as outstanding Preferred Securities or
(ii) not later than the occurrence of such Fundamental Change, the outstanding
Preferred Securities are converted into or exchanged for shares of convertible
preferred stock of an entity succeeding to the business of Best Buy, which
convertible preferred stock has powers, preferences, and relative,
participating, optional, or other rights, and qualifications, limitations, and
restrictions, substantially similar to those of the Preferred Securities.
The term "Fundamental Change" means the occurrence of any transaction or
event in connection with a plan pursuant to which all or substantially all of
the Best Buy Common Stock shall be exchanged for, converted into, acquired for,
or constitute solely the right to receive securities, cash, or other property
(whether by means of an exchange offer, liquidation, tender offer,
consolidation, merger, combination, reclassification, recapitalization, or
otherwise), provided, that, in the case of a plan involving more than one such
transaction or event, for purposes of adjustment of the conversion price, such
Fundamental Change shall be deemed to have occurred when substantially all of
the Best Buy Common Stock shall be exchanged for, converted into, or acquired
for or constitute solely the right to receive securities, cash, or other
property, but the adjustment shall be based upon the highest weighted average
per share consideration that a holder of Best Buy Common Stock could have
received in such transaction or event as a result of which more than 50% of the
Best Buy Common Stock shall have been exchanged for, converted into, or acquired
for or constitute solely the right to receive securities, cash, or other
property.
The term "Non-Stock Fundamental Change" means any Fundamental Change other
than a Common Stock Fundamental Change.
The term "Purchaser Stock Price" means, with respect to any Common Stock
Fundamental Change, the average of the Closing Prices for the common stock
received in such Common Stock Fundamental Change for the ten consecutive trading
days prior to and including the Entitlement Date, as adjusted in good faith by
Best Buy to appropriately reflect any of the events referred to in clauses (i)
through (vi) of the first paragraph of this subsection.
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The term "Reference Market Price" shall initially mean $ (which is
an amount equal to 66 2/3% of the reported last sale price for the Best Buy
Common Stock on the NYSE Consolidated Transaction Tape on , 1994),
and in the event of any adjustment to the conversion price other than as a
result of a Non-Stock Fundamental Change, the Reference Market Price shall also
be adjusted so that the ratio of the Reference Market Price to the conversion
price after giving effect to any such adjustment shall always be the same as the
ratio of $ to the initial conversion price of the Preferred Securities.
OPTIONAL EXCHANGE FOR DEPOSITARY SHARES
Upon the occurrence of an Exchange Event (as defined below), the holders of
a majority of the aggregate liquidation preference of Preferred Securities then
outstanding, voting as a class at a special partnership meeting called for such
purpose or by written consent, may, at their option, direct the Conversion Agent
to exchange all (but not less than all) of the Preferred Securities for
Subordinated Debentures and to immediately exchange such Subordinated
Debentures, on behalf of such holders, for Depositary Shares, each representing
ownership of 1/100th of a share of Best Buy Series A Preferred Stock at the
Exchange Price. If the Preferred Securities are exchanged for Depositary Shares,
Best Buy will use its best efforts to have the Depositary Shares listed on the
NYSE or other exchange on which the Preferred Securities may then be listed.
Each Depositary Share will entitle the holder thereof to all proportional
rights and preferences of the Best Buy Series A Preferred Stock (including
dividend, voting, conversion, redemption and liquidation rights and
preferences). The Best Buy Series A Preferred Stock issued upon any such
exchange will have terms substantially similar to the terms of the Preferred
Securities (adjusted proportionately per Depositary Share), except that, among
other things, the holders of Best Buy Series A Preferred Stock will have the
right to elect two additional directors of Best Buy whenever dividends on the
Best Buy Series A Preferred Stock are in arrears for 18 months (including for
this purpose any arrearage with respect to the Preferred Securities) and will
not be subject to mandatory redemption. See "- Description of Best Buy Series A
Preferred Stock" and "- Description of Depositary Shares." The terms of the Best
Buy Series A Preferred Stock provide that all accumulated and unpaid dividends
(including any Additional Dividends) on the Preferred Securities that are not
paid at the time of making an Exchange Election shall be treated as accumulated
and unpaid dividends on the Best Buy Series A Preferred Stock. See "-
Description of Series A Preferred Stock." For a discussion of the taxation of
such an exchange to holders, including the possibility that holders who exchange
their Preferred Securities for Depositary Shares representing Best Buy Series A
Preferred Stock may be subject to additional income tax to the extent accrued
but unpaid interest on the Subordinated Debentures is converted into accumulated
and unpaid dividends on the Best Buy Series A Preferred Stock represented by the
Depositary Shares received in exchange for the Preferred Securities, see
"Certain Federal Income Tax Considerations - Exchange of Preferred Securities
for Depositary Shares."
The failure of holders of Preferred Securities to receive, for 15
consecutive months, the full amount of dividend payments (including arrearages)
on the Preferred Securities, will constitute an "Exchange Event". As soon as
practicable, but in no event later than 30 days after the occurrence of an
Exchange Event, the General Partner will, upon not less than 15 days' written
notice by first-class mail to the holders of Preferred Securities, convene a
meeting of such holders (an "Exchange Election Meeting") for the purpose of
acting on the matter of whether to cause the Conversion Agent to exchange all
Preferred Securities then outstanding for Depositary Shares representing Best
Buy Series A Preferred Stock in the manner described above. If the General
Partner fails to convene such Exchange Election Meeting within such 30-day
period, the holders of at least 10% of the outstanding Preferred Securities will
be entitled to convene such Exchange Election Meeting. Upon the affirmative vote
of the holders of Preferred Securities representing not less than a majority of
the aggregate liquidation preference of the Preferred Securities then
outstanding at an Exchange Election Meeting or, in the absence of such meeting,
upon receipt by Best Buy Capital of written consents signed by the holders of a
majority of the aggregate
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liquidation preference of the outstanding Preferred Securities, an election to
exchange all outstanding Preferred Securities on the basis described above (an
"Exchange Election") will be deemed to have been made.
Holders of Preferred Securities, by purchasing such Preferred Securities,
will be deemed to have agreed to be bound by these optional exchange provisions
in regard to the exchange of such Preferred Securities for Depositary Shares
representing Best Buy Series A Preferred Stock on the terms described above.
REDEMPTION
If at any time following the Conversion Expiration Date, less than 5% of the
Preferred Securities offered hereby remain outstanding, such Preferred
Securities shall be redeemable at the option of Best Buy Capital, in whole but
not in part, at a redemption price of $50 per Preferred Security together with
accumulated and unpaid dividends (whether or not earned or declared), including
any Additional Dividends (the "Redemption Price").
Upon repayment by Best Buy of the Subordinated Debentures, including as a
result of the acceleration of the Subordinated Debentures upon the occurrence of
an "Event of Default" described under "- Description of the Subordinated
Debentures - Events of Default," the Preferred Securities shall be subject to
mandatory redemption, in whole but not in part, by Best Buy Capital and the
proceeds from such repayment will be applied to redeem the Preferred Securities
at the Redemption Price. In the case of such acceleration, the Preferred
Securities will only be redeemed when repayment of the Subordinated Debentures
has actually been received by Best Buy Capital. The Preferred Securities are not
otherwise redeemable for any reason, including in the event that Best Buy
Capital should become subject to federal or state taxation. To the extent that
such taxation or other events cause Best Buy Capital to have insufficient funds
to pay full dividends on the Preferred Securities, the holders will have
available to them the exchange option described below.
LIQUIDATION RIGHTS
In the event of any voluntary or involuntary liquidation, dissolution, or
winding-up of Best Buy Capital, the holders of Preferred Securities at the time
outstanding will be entitled to receive a liquidation preference of $50 per
Preferred Security plus all accumulated and unpaid dividends (whether or not
earned or declared), including any Additional Dividends thereon, to the date of
payment (the "Liquidation Distribution") out of the assets of Best Buy Capital
legally available for distribution to partners prior to any distribution by Best
Buy Capital on its other partnership interests.
If, upon any liquidation of Best Buy Capital, the holders of Preferred
Securities are paid in full the aggregate Liquidation Distribution to which they
are entitled, then such holders will not be entitled to receive or share in any
other assets of Best Buy Capital thereafter available for distribution to any
other holders of partnership interests in Best Buy Capital.
Pursuant to the Limited Partnership Agreement, Best Buy Capital shall be
dissolved and its affairs shall be wound up upon the earliest to occur of: (i)
the expiration of the term of Best Buy Capital; (ii) any bankruptcy, dissolution
or insolvency of the General Partner; (iii) upon the entry of a decree of a
judicial dissolution; or (iv) upon the written consent of all partners of Best
Buy Capital.
MERGER, CONSOLIDATION OR SALE OF ASSETS OF BEST BUY CAPITAL
The General Partner is authorized and directed to conduct its affairs and to
operate Best Buy Capital in such a way that Best Buy Capital will not be deemed
to be an "investment company" required to be registered under the Investment
Company Act of 1940 (the "1940 Act") or taxed as a corporation for federal
income tax purposes and so that the Subordinated Debentures will be treated as
indebtedness of Best Buy for federal income tax purposes. In this connection,
the General Partner is authorized to take any action not inconsistent with
applicable law, the Certificate of Limited Partnership of Best Buy Capital or
the Limited Partnership Agreement that does not adversely affect the interests
of the holders of the Preferred Securities and that the General Partner
determines in its discretion to be necessary or desirable for such purposes.
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Best Buy Capital may not consolidate, merge with or into, or be replaced by,
or convey, transfer or lease its properties and assets substantially as an
entirety to any entity, except as described below. Best Buy Capital may, in
order to avoid federal income tax or 1940 Act consequences adverse to Best Buy
or Best Buy Capital or to the holders of the Preferred Securities, without the
consent of the holders of the Preferred Securities, consolidate, merge with or
into, or be replaced by a limited partnership or trust organized as such under
the laws of any state of the United States of America; PROVIDED, that (i) such
successor entity either (x) expressly assumes all of the obligations of Best Buy
Capital under the Preferred Securities or (y) substitutes for the Preferred
Securities other securities having substantially the same terms as the Preferred
Securities (the "Successor Securities") so long as the Successor Securities
rank, with respect to participation in the profits or assets of the successor
entity, at least as high as the Preferred Securities rank with respect to
participation in the profits or assets of Best Buy Capital, (ii) Best Buy
expressly acknowledges such successor entity as the holder of the Subordinated
Debentures, (iii) such merger, consolidation, or replacement does not cause the
Preferred Securities (or any Successor Securities) to be delisted by any
national securities exchange or other organization on which the Preferred
Securities are then listed, (iv) such merger, consolidation or replacement does
not cause the Preferred Securities (including any Successor Securities) to be
downgraded by any nationally recognized statistical rating organization, (v)
such merger, consolidation or replacement does not adversely affect the powers,
preferences and other special rights of the holders of the Preferred Securities
(including any Successor Securities) in any material respect (other than with
respect to any dilution of the holders' interest in the new entity), (vi) prior
to such merger, consolidation or replacement Best Buy has received an opinion of
nationally recognized independent counsel to Best Buy Capital experienced in
such matters to the effect that (x) such successor entity will be treated as a
partnership for federal income tax purposes, (y) following such merger,
consolidation or replacement, Best Buy and such successor entity will be in
compliance with the 1940 Act without registering thereunder as an investment
company and (z) such merger, consolidation or replacement will not adversely
affect the limited liability of the holders of the Preferred Securities.
VOTING RIGHTS
Except as provided below and under "- Description of the Guarantee -
Amendments and Assignment," "- Description of the Subordinated Debentures -
Modification of the Indenture" and as otherwise required by law and provided by
the Limited Partnership Agreement, the holders of the Preferred Securities will
have no voting rights.
If (i) Best Buy Capital fails to pay dividends in full (including any
arrearages) on the Preferred Securities for 15 consecutive months (other than as
a result of a determination by Best Buy to defer interest payments on the
Subordinated Debentures as described under "- Description of the Subordinated
Debentures - Option to Defer Interest Payments"); (ii) an Event of Default (as
defined under "- Description of the Subordinated Debentures - Events of
Default") occurs and is continuing with respect to the Subordinated Debentures;
or (iii) Best Buy is in default under any of its payment obligations under the
Guarantee (as described under "- Description of the Guarantee"), then the
holders of the Preferred Securities will be entitled to appoint and authorize a
special general partner (a "Special General Partner") to enforce Best Buy
Capital's rights under the Subordinated Debentures, enforce the rights of the
holders of Preferred Securities under the Guarantee and declare dividends on the
Preferred Securities. For purposes of determining whether Best Buy Capital has
failed to pay dividends in full for 15 consecutive months, dividends shall be
deemed to remain in arrears, notwithstanding any partial payments in respect
thereof, until all accumulated and unpaid dividends have been or
contemporaneously are paid. Not later than 30 days after such right to appoint a
Special General Partner arises and upon not less than 15 days' written notice by
first-class mail to the holders of Preferred Securities, the General Partner
will convene a meeting to elect a Special General Partner. If the General
Partner fails to convene such meeting within such 30-day period, the holders of
10% of the aggregate liquidation preference of the Preferred Securities then
outstanding will be entitled to convene such meeting. In the event that, at any
such meeting, holders of less than a majority in aggregate liquidation
preference of Preferred Securities entitled to vote for the appointment of a
Special General Partner vote
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for such appointment, no Special General Partner shall be appointed. Any Special
General Partner so appointed shall vacate office immediately if Best Buy Capital
(or Best Buy pursuant to the Guarantee) shall have paid in full all accumulated
and unpaid dividends (and any Additional Dividends) on the Preferred Securities
or such Event of Default or default, as the case may be, shall have been cured.
Notwithstanding the appointment of any such Special General Partner, Best Buy
will retain all rights as obligor under the Subordinated Debentures, including
the right to defer interest payments as provided under "- Description of the
Subordinated Debentures - Option to Defer Interest Payments," and any such
deferral would not constitute a default under the Indenture or enable a holder
of Preferred Securities to require the payment of a dividend that has not
theretofor been declared.
If any proposed amendment to the Limited Partnership Agreement provides for,
or the General Partner otherwise proposes to effect, (x) any action that would
materially adversely affect the powers, preferences or special rights of the
Preferred Securities, whether by way of amendment to the Limited Partnership
Agreement or otherwise (including, without limitation, the authorization or
issuance of any additional limited partnership interests in Best Buy Capital),
or (y) the dissolution, winding-up or termination of Best Buy Capital (other
than in connection with the exchange of Depositary Shares representing Best Buy
Series A Preferred Stock for Preferred Securities upon the occurrence of an
Exchange Event or as described under "- Merger, Consolidation or Sale of Assets
of Best Buy Capital"), then the holders of outstanding Preferred Securities will
be entitled to vote on such amendment or action of the General Partner (but not
on any other amendment or action), and such amendment or action shall not be
effective except with the approval of the holders of at least 66 2/3% or more of
the aggregate liquidation preference of the Preferred Securities then
outstanding; PROVIDED, however, that no such approval shall be required if the
dissolution, winding-up or termination of Best Buy Capital is proposed or
initiated pursuant to the Limited Partnership Agreement.
The rights attached to the Preferred Securities will be deemed to be
materially adversely affected by the creation or issue of, and a vote of the
holders of Preferred Securities will be required for the creation or issue of,
any partnership interests in Best Buy Capital other than the interests
represented by the Preferred Securities, the interests of the General Partner
and the interests of any Special General Partner.
So long as any Subordinated Debentures are held by Best Buy Capital, the
General Partner shall not (i) direct the time, method and place of conducting
any proceeding for any remedy available to the Special General Partner (as
defined under "- Description of the Subordinated Debentures"), or exercising any
trust or power conferred on the Special General Partner with respect to the
Subordinated Debentures, (ii) waive any past default, which is waivable under
the Indenture, (iii) exercise any right to rescind or annul a declaration that
the principal of all the Subordinated Debentures shall be due and payable, (iv)
consent to any amendment, modification or termination of the Subordinated
Debentures or of the Indenture without, in each case, obtaining the prior
approval of the holders of at least 66 2/3% or more of the aggregate liquidation
preference of the Preferred Securities then outstanding, PROVIDED, however, that
where a consent under the Subordinated Debentures would require the consent of
each holder affected thereby, no such consent shall be given by the General
Partner without the prior consent of each holder of the Preferred Securities.
The General Partner shall not revoke any action previously authorized or
approved by a vote of holders of Preferred Securities, without the approval of
holders of Preferred Securities representing 66 2/3% or more of the aggregate
liquidation preference of the Preferred Securities then outstanding. The General
Partner shall notify all holders of Preferred Securities of any notice of
default received from the Trustee with respect to the Subordinated Debentures.
Any required approval of holders of Preferred Securities may be given at a
meeting of such holders convened for such purpose or pursuant to written
consent. Best Buy Capital will cause a notice of any meeting at which holders of
Preferred Securities are entitled to vote, or of any matter upon which action by
written consent of such holders is to be taken, to be mailed to each holder of
record of Preferred Securities. Each such notice will include a statement
setting forth (i) the date of such meeting or the date by which such action is
to be taken, (ii) a description of any matter on which such holders are entitled
to vote or of such matter upon which written consent is sought and (iii)
instructions for the delivery of proxies or consents.
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BOOK-ENTRY-ONLY ISSUANCE - THE DEPOSITORY TRUST COMPANY
DTC will act as securities depository for the Preferred Securities. The
information in this section concerning DTC and DTC's book-entry system is based
upon information obtained from DTC. The Preferred Securities will be issued only
as fully-registered securities registered in the name of Cede & Co. (as nominee
for DTC). One or more fully-registered global Preferred Security certificates
will be issued, representing in the aggregate the total number of Preferred
Securities, and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations ("Direct Participants"). Access to
the DTC system is also available to others such as securities brokers and
dealers, banks and trust companies that clear through or maintain a custodial
relationship with a Direct Participant, either directly or indirectly ("Indirect
Participants").
Purchases of Preferred Securities within the DTC system must be made by or
through Direct Participants, which will receive a credit for the Preferred
Securities on DTC's records. The ownership interest of each actual purchaser of
a Preferred Security ("Beneficial Owner") is in turn to be recorded on the
Direct or Indirect Participants' records. Beneficial Owners will not receive
written confirmation from DTC of their purchases, but Beneficial Owners are
expected to receive written confirmations providing details of the transactions,
as well as periodic statements of their holdings, from the Direct or Indirect
Participants through which the Beneficial Owners purchased Preferred Securities.
Transfers of ownership interests in Preferred Securities are to be accomplished
by entries made on the books of Participants acting on behalf of Beneficial
Owners. Beneficial Owners will not receive certificates representing their
ownership interests in Preferred Securities, except upon a resignation of DTC,
upon the occurrence of an Event of Default under the Subordinated Debentures or
upon a decision by Best Buy Capital to discontinue the book-entry system for the
Preferred Securities.
DTC has no knowledge of the actual Beneficial Owners of the Preferred
Securities; DTC's records reflect only the identity of the Direct Participants
to whose accounts such Preferred Securities are credited, which may or may not
be the Beneficial Owners. The Participants will remain responsible for keeping
account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Redemption notices with respect to the Preferred Securities shall be sent to
Cede & Co.
Although voting with respect to the Preferred Securities is limited, in
those cases where a vote is required, neither DTC nor Cede & Co. will itself
consent or vote with respect to Preferred Securities. Under its usual
procedures, DTC would mail an Omnibus Proxy to Best Buy Capital as soon as
possible after the record date. The Omnibus Proxy assigns Cede & Co.'s
consenting or voting rights to those Direct Participants to whose accounts the
Preferred Securities are credited on the record date (identified in a listing
attached to the Omnibus Proxy).
Dividend payments on the Preferred Securities will be made to DTC. DTC's
practice is to credit Direct Participants' accounts on the relevant payment date
in accordance with their respective holdings shown on DTC's records unless DTC
has reason to believe that it will not receive payments on such
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payment date. Payments by Participants to Beneficial Owners will be governed by
standing instructions and customary practices and will be the responsibility of
such Participant and not of DTC, Best Buy Capital or Best Buy, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment of dividends to DTC is the responsibility of Best Buy Capital,
disbursement of such payments to Direct Participants is the responsibility of
DTC, and disbursement of such payments to the Beneficial Owners is the
responsibility of Direct and Indirect Participants.
Except as provided herein, a Beneficial Owner in a global Preferred Security
will not be entitled to receive physical delivery of Preferred Securities.
Accordingly, each Beneficial Owner must rely on the procedures of DTC to
exercise any rights under the Preferred Securities.
DTC may discontinue providing its services as securities depositary with
respect to the Preferred Securities at any time by giving reasonable notice to
Best Buy Capital. Under such circumstances, in the event that a successor
securities depositary is not obtained, certificates representing the Preferred
Securities will be printed and delivered. If an Event of Default occurs under
the Subordinated Debentures or if Best Buy Capital decides to discontinue use of
the system of book-entry transfers through DTC (or a successor depositary),
certificates representing the Preferred Securities will be printed and
delivered.
TRANSFER AGENT, REGISTRAR AND PAYING, CONVERSION AND EXCHANGE AGENT
Harris Trust and Savings Bank of Chicago will act as Transfer Agent,
Registrar and Paying, Conversion and Exchange Agent for the Preferred
Securities.
Registration of transfers of Preferred Securities will be affected without
charge by or on behalf of Best Buy Capital, but upon payment (with the giving of
such indemnity as Best Buy Capital may require) in respect of any tax or other
government charges which may be imposed in relation to it.
DESCRIPTION OF BEST BUY SERIES A PREFERRED STOCK
AS DESCRIBED UNDER "- PREFERRED SECURITIES - OPTIONAL EXCHANGE FOR
DEPOSITARY SHARES" ABOVE, THE PREFERRED SECURITIES MAY BE EXCHANGED IN CERTAIN
CIRCUMSTANCES (FOLLOWING A PRIOR EXCHANGE FOR SUBORDINATED DEBENTURES HELD BY
BEST BUY CAPITAL) FOR DEPOSITARY SHARES REPRESENTING BEST BUY SERIES A
CUMULATIVE CONVERTIBLE PREFERRED STOCK, PAR VALUE $1.00 PER SHARE (THE "BEST BUY
SERIES A PREFERRED STOCK"). THE FOLLOWING DESCRIPTION OF THE PRINCIPAL TERMS OF
THE BEST BUY SERIES A PREFERRED STOCK DOES NOT PURPORT TO BE COMPLETE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO BEST BUY'S AMENDED AND RESTATED
ARTICLES OF INCORPORATION, AS AMENDED (THE "RESTATED ARTICLES"), AND THE
CERTIFICATE OF DESIGNATION OF THE BEST BUY SERIES A PREFERRED STOCK (THE
"CERTIFICATE OF DESIGNATION"), WHICH ARE FILED AS EXHIBITS TO THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS IS A PART.
The Board of Directors of Best Buy has designated, and Best Buy will keep
available, 40,000 shares (46,000 shares if the Underwriters' over-allotment
option is exercised in full) of Best Buy Series A Preferred Stock for issuance
upon exchange of the Preferred Securities for Depositary Shares, each
representing 1/100th of a share of Best Buy Series A Preferred Stock (as
described under "- Preferred Securities - Optional Exchange for Depositary
Shares" above). At the time the Preferred Securities are issued, all corporate
action required in connection with the issuance of the Best Buy Series A
Preferred Stock and the deposit thereof with the Depositary (as hereinafter
defined) upon the making of an Exchange Election will have been taken. The terms
of the Best Buy Series A Preferred Stock - including as to dividends, conversion
and liquidation preference - are substantially similar to those of the Preferred
Securities (adjusted proportionately per Depositary Share) with the following
principal exceptions:
(a) Accumulated and unpaid dividends (including any Additional Dividends
thereon) on the Preferred Securities, if any, at the time of the making of
an Exchange Election will become accumulated and unpaid dividends on the
Best Buy Series A Preferred Stock;
(b) If dividends are not paid on the Best Buy Series A Preferred Stock
for 18 monthly dividend periods (including for this purpose any arrearage
with respect to the Preferred Securities), the number of directors of Best
Buy shall be increased by two persons and the holders of the Best Buy Series
A Preferred Stock will be entitled to elect the persons to fill such
positions;
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(c) Dividends on the Best Buy Series A Preferred Stock are not subject
to a deferral option, however, such dividends need not be declared even if
Best Buy has funds legally available therefor and cash on hand sufficient to
pay dividends. In the event that Best Buy fails to declare dividends on the
Best Buy Series A Preferred Stock, no dividends would be payable on any
other securities of Best Buy ranking PARI PASSU with or junior to the Best
Buy Series A Preferred Stock; and
(d) The Best Buy Series A Preferred Stock will not be subject to
mandatory redemption.
If at any time following the Conversion Expiration Date, less than 5% of the
shares of Best Buy Series A Preferred Stock issued following an Exchange
Election remain outstanding, such shares of Best Buy Series A Preferred Stock
shall be redeemable, in whole but not in part, at the option of Best Buy at a
redemption price of $5,000 per share (equivalent to a redemption price of $50
per Depositary Share) together with accumulated and unpaid dividends (whether or
not earned or declared).
The Best Buy Series A Preferred Stock will rank senior to the Best Buy
Common Stock with respect to the payment of dividends and amounts upon
liquidation, dissolution and winding-up. Dividends on the Best Buy Series A
Preferred Stock will, upon declaration, become contractual obligations of Best
Buy.
In the event of a voluntary or involuntary bankruptcy, liquidation,
dissolution or winding-up of Best Buy, the holders of Best Buy Series A
Preferred Stock are entitled to receive out of the net assets of Best Buy, but
before any distribution is made on any class of securities ranking junior to the
Best Buy Series A Preferred Stock, $50 per 1/100th share in cash plus
accumulated and unpaid dividends (whether or not earned or declared) to the date
of final distribution to such holders. After payment of the full amount of the
liquidation distribution to which they are entitled, the holders of shares of
Best Buy Series A Preferred Stock will not be entitled to any further
participation in any distribution of assets of Best Buy. In the event that the
assets available for distribution are insufficient to pay in full the
liquidation preference to the holders of the Best Buy Series A Preferred Stock
and any PARI PASSU preferred stock, the holders of such preferred stock will
share in the remaining assets, based on the proportion of their liquidation
preference to the entire amount of unpaid liquidation preference.
So long as the Subordinated Debentures are exchangeable for the Depositary
Shares representing the Best Buy Series A Preferred Stock, Best Buy may not
authorize or issue any other preferred stock ranking senior to the Best Buy
Series A Preferred Stock without the approval of the holders of not less than
66 2/3% of the aggregate liquidation preference of the Preferred Securities then
outstanding. However, no such vote shall be required for the issuance by Best
Buy of additional preferred stock ranking PARI PASSU or junior to the Best Buy
Series A Preferred Stock as to the payment of dividends and amounts upon
liquidation, dissolution and winding-up.
The amount of dividends that may be declared by Best Buy on the Best Buy
Series A Preferred Stock may be limited as a restricted payment under the
indenture for Best Buy's 8 5/8% Senior Subordinated Notes due 2000. Best Buy
would not be permitted to make any restricted payments if it did not maintain a
minimum consolidated cash flow ratio of 2:1, if an event of default existed
under the indenture, or if the aggregate of all restricted payments from the
date of the indenture exceeded a defined amount. In general, the amount
available under this restriction will be increased (or decreased) by an amount
equal to 50% of consolidated net income (or 100% of consolidated net loss)
before adjustment for extraordinary items and certain other accounting
adjustments and increased by the aggregate net proceeds from the issuance of
capital stock of Best Buy. The issuance of the Preferred Securities will not
increase the amount available under the restriction. At August 27, 1994, $16.6
million was available to pay dividends under such restriction.
DESCRIPTION OF DEPOSITARY SHARES
THE FOLLOWING SUMMARY OF THE TERMS OF THE DEPOSIT AGREEMENT (AS DEFINED
BELOW), DEPOSITARY SHARES AND DEPOSITARY RECEIPTS (AS DEFINED BELOW), DOES NOT
PURPORT TO BE COMPLETE AND IS SUBJECT TO, AND QUALIFIED IN ITS ENTIRETY BY, THE
PROVISIONS OF THE DEPOSIT AGREEMENT, A COPY OF THE FORM OF WHICH IS FILED AS AN
EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART.
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Best Buy will cause to be issued receipts ("Depositary Receipts") for
Depositary Shares, each of which will represent 1/100th of a share of Best Buy
Series A Preferred Stock. The shares of Best Buy Series A Preferred Stock
represented by Depositary Shares will be deposited under a Deposit Agreement
(the "Deposit Agreement") among Best Buy, Harris Trust and Savings Bank of
Chicago (the "Depositary") and the holders from time to time of the Depositary
Receipts. Subject to the terms of the Deposit Agreement, each owner of a
Depositary Share will be entitled, in proportion to the applicable fraction of a
share of Best Buy Series A Preferred Stock represented by such Depositary Share,
to all the rights and preferences of the Best Buy Series A Preferred Stock
represented thereby (including dividend, voting, conversion and liquidation
rights and preferences). The proportionate liquidation preference of each
Depositary Share will be $50 plus accumulated and unpaid dividends to the date
of payment, subject to certain limitations.
GENERAL
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the Deposit Agreement. Upon an Exchange Election by the holders of a
majority in aggregate liquidation preference of the Preferred Securities and
immediately following (i) the exchange by the Conversion Agent of all (but not
less than all) outstanding Preferred Securities for Subordinated Debentures,
(ii) the issuance of the Best Buy Series A Preferred Stock and (iii) the
delivery of such Best Buy Series A Preferred Stock to the Depositary, Best Buy
will cause the Depositary to issue, on behalf of Best Buy, the Depositary Shares
to the Conversion Agent, for the account of the holders, in exchange for such
Subordinated Debentures. Following an Exchange Election, copies of the forms of
Deposit Agreement and Depositary Receipt may be obtained from Best Buy or the
Depositary, upon request, at the principal office of the Depositary at which at
any particular time its depositary business may be administered (the
"Depositary's Office"), which on the date hereof is 111 W. Monroe, Chicago,
Illinois 60603.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Depositary will distribute all dividends or other cash distributions
received in respect of the Best Buy Series A Preferred Stock to the record
holders of Depositary Shares in such amounts of such dividend or distribution as
are applicable to the number of such Depositary Shares owned by such holders,
subject to certain obligations of holders to file proofs, certificates and other
information and to pay certain charges and expenses to the Depositary.
In the event of a distribution other than in cash, the Depositary will
distribute property received by it to the record holders of Depositary Shares
entitled thereto in such amounts, as nearly as practicable, of such property
(including securities) received by it as are applicable to the number of such
Depositary Shares owned by such holders, subject to certain obligations of
holders to file proofs, certificates and other information and to pay certain
charges and expenses to the Depositary, unless the Depositary determines that it
is not feasible to make such distribution, in which case the Depositary may,
with the approval of Best Buy, sell such property and distribute the net
proceeds from such sale to such holders.
WITHDRAWAL OF BEST BUY SERIES A PREFERRED STOCK
Upon surrender of Depositary Receipts representing at least 100 Depositary
Shares at the Depositary's Office, a holder is entitled to delivery at such
office, to or upon his order, of the number of whole shares of the Best Buy
Series A Preferred Stock and any money or other property represented by such
Depositary Shares. Holders of Depositary Shares will be entitled to receive
whole shares of the Best Buy Series A Preferred Stock on the basis of one share
of Best Buy Series A Preferred Stock for each 100 Depositary Shares, but holders
of such whole shares of Best Buy Series A Preferred Stock will not thereafter be
entitled to receive Depositary Shares therefor. If the Depositary Receipts
delivered by the holder evidence a number of Depositary Shares in excess of the
number of Depositary Shares representing the number of whole shares of Best Buy
Series A Preferred Stock to be withdrawn, the Depositary will deliver to such
holder at the same time a new Depositary Receipt evidencing such excess number
of Depositary Shares.
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VOTING THE BEST BUY SERIES A PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of the Best Buy
Series A Preferred Stock are entitled to vote, the Depositary will mail the
information contained in such notice of meeting to the record holders of the
Depositary Shares relating to Best Buy Series A Preferred Stock. Each record
holder of such Depositary Shares on the record date (which will be the same date
as the record date for the Best Buy Series A Preferred Stock) will be entitled
to instruct the Depositary as to the exercise of the voting rights pertaining to
the amount of Best Buy Series A Preferred Stock (or fraction thereof)
represented by such holder's Depositary Shares. The Depositary will endeavor,
insofar as practicable, to vote the amount of Best Buy Series A Preferred Stock
(or fractions thereof) represented by such Depositary Shares in accordance with
such instructions, and Best Buy will agree to take all reasonable action that
may be deemed necessary by the Depositary in order to enable the Depositary to
do so. The Depositary will abstain from voting shares of Best Buy Series A
Preferred Stock to the extent it does not receive specific instructions from the
holders of Depositary Shares representing those shares of Best Buy Series A
Preferred Stock.
CONVERSION OF BEST BUY SERIES A PREFERRED STOCK
The Depositary Receipts may be surrendered by holders thereof, at the
holders' option, at any time and from time to time, to the Depositary at the
Depositary's Office or at such other office or to such agents as the Depositary
may designate for such purpose with written instructions to the Depositary to
instruct Best Buy to cause conversion of the whole or fractional shares of Best
Buy Series A Preferred Stock represented by the Depositary Shares evidenced by
such Receipts into whole shares of Best Buy Common Stock, and Best Buy has
agreed that upon receipt of such instructions and any amounts payable in respect
thereof, it will cause the delivery of (i) a certificate or certificates
evidencing the number of whole shares of Best Buy Common Stock into which the
Best Buy Series A Preferred Stock represented by the Depositary Shares evidenced
by such Depositary Receipt or Receipts have been converted, and (ii) any money
or other property to which the holder is entitled. If the Depositary Shares
represented by a Depositary Receipt are to be converted in part only, a new
Depositary Receipt or Receipts will be issued for any Depositary Shares not to
be converted.
On and after ____________, 1997, and provided that Best Buy is current in
the payment of dividends on the Best Buy Series A Preferred Stock, Best Buy may,
at its option, cause the conversion rights of holders of Depositary Shares
representing Best Buy Series A Preferred Stock to expire. Best Buy may exercise
this option only if for 20 trading days within any period of 30 consecutive
trading days, including the last trading day of such period, the Current Market
Price of Best Buy Common Stock exceeds 120% of the conversion price of the
Depositary Shares, subject to adjustment in certain circumstances. In order to
exercise its conversion expiration option, Best Buy must issue a press release
announcing the Conversion Expiration Date and give notice by first-class mail to
holders of Depositary Shares in the manner provided for holders of Preferred
Securities under "- Description of Preferred Securities - Expiration of
Conversion Rights." The Conversion Expiration Date will be a date selected by
Best Buy which is not less than 30 and not more than 60 days after the date on
which Best Buy issues the press release announcing its intention to terminate
conversion rights of holders of Depositary Shares.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares and any
provision of the Deposit Agreement may at any time be amended by agreement
between Best Buy and the Depositary. However, any amendment that materially and
adversely alters the rights of the holders of Depositary Shares will not be
effective unless such amendment has been approved by the holders of at least
66 2/3% of the Depositary Shares then outstanding. Each holder of a Depositary
Share at the time any amendment becomes effective will be deemed to have
consented and agreed to such amendment.
The Deposit Agreement may be terminated by Best Buy or by the Depositary if
(i) all outstanding Depositary Shares have been redeemed, (ii) there has been a
final distribution in respect of the Best Buy
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Series A Preferred Stock in connection with any liquidation, dissolution or
winding up of Best Buy and such distribution has been distributed to the holders
of Depositary Receipts or (iii) each share of Best Buy Series A Preferred Stock
shall have been converted into shares of Best Buy Common Stock.
CHARGES OF DEPOSITARY
Best Buy will pay all transfer and other taxes and governmental charges
arising solely from the existence of the Depositary arrangements, the initial
deposit of the Best Buy Series A Preferred Stock, the redemption of shares of
Best Buy Series A Preferred Stock and the issuance of shares of Best Buy Common
Stock upon conversion. Best Buy will pay the fees and expenses of the Depositary
in connection with the performance of its duties under the Deposit Agreement.
Holders of Depositary Receipts will pay any other transfer or other taxes and
governmental charges. If, at the request of a holder of Depositary Receipts, the
Depositary incurs charges or other expenses for which it is not otherwise liable
under the Deposit Agreement, such holder will be liable for such charges and
expenses.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Depositary may resign at any time by delivering to Best Buy notice of
its election to do so, and Best Buy may at any time remove the Depositary, any
such resignation or removal to take effect upon the appointment of a successor
Depositary, which successor Depositary must be appointed within 60 days after
delivery of the notice of resignation or removal and must be a bank or trust
company having its principal office in the United States and having a combined
capital and surplus of at least $50 million.
MISCELLANEOUS
The Depositary will, with the approval of Best Buy, appoint a Registrar for
registration of the Receipts or Depositary Shares in accordance with any
requirements of any applicable stock exchange in which the Receipts or the
Depositary Shares are listed. The Registrar will maintain books at the
Depositary's Office for the registration and registration of transfer of
Depositary Receipts or at such other place as is approved by Best Buy and of
which the holders of Depositary Receipts are given reasonable notice.
Best Buy will deliver to the Depositary and the Depositary will forward to
holders of Depositary Shares all notices and reports required by law, the rules
of any national securities exchange upon which the Best Buy Series A Preferred
Stock, the Depositary Shares or the Depositary Receipts are listed or by Best
Buy's Amended and Restated Articles of Incorporation (including the Certificate
of Designation) or By-laws to be furnished by Best Buy to holders of Best Buy
Series A Preferred Stock.
Neither the Depositary nor Best Buy will be liable if either is by law or
certain other circumstances beyond its control prevented from or delayed in
performing its obligations under the Deposit Agreement. Neither the Depositary
nor any agent of the Depositary nor Best Buy assumes any obligation or will be
subject to any liability under the Deposit Agreement to holders of Depositary
Receipts other than to use its best judgment and act in good faith in the
performance of such duties as are specifically set forth in the Deposit
Agreement. Neither Best Buy nor the Depositary will be obligated to appear in,
prosecute or defend any legal proceeding in respect of any Depositary Shares or
any Best Buy Series A Preferred Stock unless satisfactory indemnity is
furnished. Best Buy and the Depositary may rely on advice of counsel or
accountants, or information provided by persons presenting Best Buy Series A
Preferred Stock for deposit, holders of Depositary Shares or other persons
believed to be authorized or competent and on documents believed to be genuine.
DESCRIPTION OF THE GUARANTEE
THE FOLLOWING IS A DESCRIPTION OF THE PRINCIPAL TERMS AND PROVISIONS OF THE
GUARANTEE AGREEMENT (THE "GUARANTEE"), WHICH WILL BE EXECUTED AND DELIVERED BY
BEST BUY FOR THE BENEFIT OF THE HOLDERS FROM TIME TO TIME OF THE PREFERRED
SECURITIES. THE FOLLOWING DESCRIPTION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH AGREEMENT, A COPY OF THE FORM OF WHICH IS FILED AS AN EXHIBIT TO THE
REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART.
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GENERAL
Pursuant to the Guarantee, Best Buy will irrevocably and unconditionally
agree, on a subordinated basis and to the extent set forth therein, to pay in
full to the holders of the Preferred Securities, the Guarantee Payments (as
defined below) (except to the extent previously paid by Best Buy Capital), as
and when due, regardless of any defense, right of set-off or counterclaim that
Best Buy Capital may have or assert. The following payments, to the extent not
paid by Best Buy Capital, are the "Guarantee Payments": (a) any accumulated and
unpaid dividends (including any Additional Dividends thereon) that have been
theretofore declared on the Preferred Securities from monies legally available
therefor; (b) the Redemption Price payable with respect to Preferred Securities
called for redemption by Best Buy Capital out of funds legally available
therefor; and (c) upon a liquidation of Best Buy Capital, the lesser of (i) the
Liquidation Distribution and (ii) the amount of assets of Best Buy Capital
available for distribution to holders of Preferred Securities in liquidation of
Best Buy Capital. Best Buy's obligation to make a Guarantee Payment may be
satisfied by Best Buy's direct payment of the required amounts to the holders of
Preferred Securities or by Best Buy's causing Best Buy Capital to pay such
amounts to such holders.
If Best Buy fails to make interest payments on the Subordinated Debentures
purchased by Best Buy Capital, Best Buy Capital will have insufficient funds to
pay dividends on the Preferred Securities. The Guarantee does not cover payment
of dividends when Best Buy Capital does not have sufficient funds to pay such
dividends.
Because the Guarantee is a guarantee of payment and not of collection,
holders of the Preferred Securities may proceed directly against Best Buy as
guarantor, rather than having to proceed against Best Buy Capital before
attempting to collect from Best Buy. A holder of Preferred Securities may
enforce such obligations directly against Best Buy, and Best Buy waives any
right or remedy to require that any action be brought against Best Buy Capital
or any other person or entity before proceeding against Best Buy. Such
obligations will not be discharged except by payment of the Guarantee Payments
in full.
CERTAIN COVENANTS OF BEST BUY
In the Guarantee, Best Buy will covenant and agree that, so long as any
Preferred Securities are outstanding, neither Best Buy nor any majority owned
subsidiary of Best Buy shall declare or pay any dividend or distribution on, or
redeem, purchase or otherwise acquire or make a liquidation payment with respect
to, any of its capital stock (other than as a result of a reclassification of
capital stock or the exchange or conversion of one class or series of capital
stock for another class or series of capital stock) or make any guarantee
payments with respect to the foregoing (other than payments under the Guarantee
or dividends or guarantee payments to Best Buy by a majority owned subsidiary),
if at such time Best Buy has exercised its option to defer interest payments on
the Subordinated Debentures and such deferral is continuing, Best Buy is in
default with respect to its payment or other obligations under the Guarantee or
there shall have occurred any event that, with the giving of notice or the lapse
of time or both, would constitute an Event of Default under the Subordinated
Debentures. Best Buy will covenant to take all actions necessary to ensure the
compliance of its subsidiaries with the above covenant.
Best Buy will also covenant that, so long as any Preferred Securities are
outstanding, it will (a) maintain direct 100% ownership of the partnership
interests in Best Buy Capital other than the Preferred Securities (except as
permitted in the Limited Partnership Agreement), (b) cause at least 21% of the
total value of Best Buy Capital and at least 21% of all interest in the capital,
income, gain, loss, deduction and credit of Best Buy Capital to be held by Best
Buy, as General Partner, (c) not voluntarily dissolve, wind-up or liquidate
itself or Best Buy Capital, (d) remain the General Partner and timely perform
all of its duties as General Partner of Best Buy Capital (including the duty to
cause Best Buy Capital to declare and pay dividends on the Preferred
Securities), unless a permitted successor General Partner is appointed, and (e)
subject to the terms of the Preferred Securities, use reasonable efforts to
cause Best Buy Capital to remain a Delaware limited partnership and otherwise
continue to be treated as a partnership for United States federal income tax
purposes.
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As a part of the Guarantee, Best Buy will agree that it will honor all
obligations described therein relating to the conversion or exchange of the
Preferred Securities into or for Best Buy Common Stock or Depositary Shares
representing Best Buy Series A Preferred Stock, as described in "- Preferred
Securities - Conversion Rights," and "- Optional Exchange for Depositary
Shares."
SUBORDINATION
Best Buy's obligations under the Guarantee to make Guarantee Payments will
constitute an unsecured obligation of Best Buy that will rank (i) subordinate
and junior in right of payment to all liabilities of Best Buy and the
Subordinated Debentures, and (ii) PARI PASSU (equally) with the most senior
preferred shares now or hereafter issued by Best Buy and with any guarantee now
or hereafter entered into by Best Buy in respect of any preferred or preference
stock of any affiliate of Best Buy and (iii) senior to Best Buy Common Stock and
any other class or series of capital stock issued by Best Buy or any of its
affiliates which by its express terms ranks junior in the payment of dividends
and amounts on liquidation, dissolution, and winding-up to the Preferred
Securities ("Junior Stock"). On the bankruptcy, liquidation or winding-up of
Best Buy, its obligations under the Guarantee will rank junior to all its other
liabilities and, therefore, funds may not be available for payment under the
Guarantee. As of August 27, 1994, Best Buy had approximately $392 million of
indebtedness or other obligations constituting Senior Indebtedness and no
indebtedness that would rank equally with the Guarantee.
AMENDMENTS AND ASSIGNMENT
The terms of the Guarantee may be amended only with the prior approval of
the holders of not less than 66 2/3% of the aggregate liquidation preference of
the Preferred Securities then outstanding. The manner of obtaining any such
approval of holders of the Preferred Securities will be as set forth in "-
Preferred Securities - Voting Rights." All provisions contained in the Guarantee
will bind the successors, assigns, receivers, trustees and representatives of
Best Buy and will inure to the benefit of the holders of the Preferred
Securities. Except in connection with any merger or consolidation of Best Buy
with or into another entity or any sale, transfer or lease of Best Buy's assets
to another entity complying with the provisions under "- Consolidation, Merger
or Sale of Assets" below, Best Buy may not assign its rights or delegate its
obligations under the Guarantee without the prior approval of the holders of not
less than 66 2/3% of the aggregate liquidation preference of the Preferred
Securities then outstanding.
TERMINATION
Best Buy's obligation to make Guarantee Payments under the Guarantee will
terminate as to each holder of Preferred Securities and be of no further force
and effect upon (a) full payment of the Redemption Price of such holder's
Preferred Securities, (b) full payment of the amounts payable to such holder
upon liquidation of Best Buy Capital, (c) the distribution of Best Buy Common
Stock to such holder in respect of the conversion of all of such holder's
Preferred Securities into Best Buy Common Stock or (d) the distribution of
Depositary Shares representing Best Buy Series A Preferred Stock to such holder
in respect of the exchange of the Subordinated Debentures for Best Buy Series A
Preferred Stock. Notwithstanding the foregoing, Best Buy's obligation to make
Guarantee Payments will continue to be effective or will be reinstated, as the
case may be, as to a holder if at any time such holder must restore payment of
any sums paid under the Preferred Securities or under the Guarantee for any
reason whatsoever. Best Buy will indemnify each holder and hold it harmless from
and against any loss it may suffer in such circumstances.
CONSOLIDATION, MERGER OR SALE OF ASSETS
The Guarantee provides that Best Buy may merge or consolidate with or into
another entity, may permit another entity to merge or consolidate with or into
Best Buy and may sell, transfer or lease all or substantially all of its assets
to another entity if (i) at such time no Event of Default (as defined in the
Indenture) shall have occurred and be continuing, or would occur as a result of
such merger, consolidation or sale, transfer or lease and (ii) the survivor of
such merger or consolidation or entity to which Best Buy's assets are sold,
transferred or leased is an entity organized under the laws of the United States
or any state thereof, becomes the General Partner, assumes all of Best Buy's
obligations under the Guarantee and has a net worth equal to at least 10% of the
total contributions to Best Buy Capital.
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GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of New York.
DESCRIPTION OF THE SUBORDINATED DEBENTURES
THE FOLLOWING SUMMARY OF PRINCIPAL TERMS AND PROVISIONS OF THE SUBORDINATED
DEBENTURES IN WHICH BEST BUY CAPITAL WILL INVEST THE PROCEEDS OF THE ISSUANCE
AND SALE OF THE PREFERRED SECURITIES AND SUBSTANTIALLY ALL OF THE CAPITAL
CONTRIBUTED TO BEST BUY CAPITAL BY THE GENERAL PARTNER (THE "GENERAL PARTNER
PAYMENT") DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE INDENTURE AMONG BEST BUY, BEST BUY CAPITAL AND HARRIS TRUST AND
SAVINGS BANK OF CHICAGO, AS TRUSTEE (THE "TRUSTEE"), A FORM OF WHICH HAS BEEN
FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A
PART. ALL OF THE SUBORDINATED DEBENTURES WILL BE ISSUED UNDER THE INDENTURE.
GENERAL
The Subordinated Debentures will be limited in aggregate principal amount to
the sum of the aggregate amount of the proceeds received by Best Buy Capital
from the Offering and the General Partner Payment less 1% of such sum.
The entire principal amount of the Subordinated Debentures will become due
and payable, together with any accrued and unpaid interest thereon, including
Additional Interest (as defined below), on the earliest of , 2024 or
the date upon which Best Buy Capital is dissolved, wound-up, liquidated or
terminated.
The Subordinated Debentures will be issued only in fully registered form,
without coupons, in denominations of $50 and any integral multiple thereof. No
service charge will be made for any registration of transfer or exchange of
Subordinated Debentures, but Best Buy may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
INTEREST
The Subordinated Debentures will bear interest at the rate of % per
annum from the original date of issuance, payable monthly in arrears on the last
day of each calendar month of each year (each an "Interest Payment Date"),
commencing , 1994. Interest will compound monthly and will accrue at
the annual rate of % on any interest installment not paid when due.
The amount of interest payable for any period will be computed on the basis
of twelve 30-day months and a 360-day year and, for any period shorter than a
full monthly interest period, will be computed on the basis of the actual number
of days elapsed in such period. In the event that any date on which interest is
payable on the Subordinated Debentures is not a Business Day, then a payment of
the interest payable on such date will be made on the next succeeding day which
is a Business Day (and without any interest or other payment in respect of any
such delay). If such Business Day is in the next succeeding calendar year,
however, such payment shall be made on the immediately preceding Business Day,
in each case with the same force and effect as if made on such date.
OPTION TO DEFER INTEREST PAYMENTS
Best Buy shall have the right at any time and from time to time during the
term of the Subordinated Debentures to defer interest payments for up to 60
months during which period interest will compound monthly (provided that a
deferral of interest payments may not extend the stated maturity of the
Subordinated Debentures) and during which Best Buy shall have the right to make
partial payments of interest or at the end of which period Best Buy must pay all
interest then accrued and unpaid (together with Additional Interest); PROVIDED
THAT, during any such deferral of interest payments neither Best Buy nor any
majority-owned subsidiary of Best Buy shall declare or pay any dividend on, or
redeem, purchase, acquire for value or make a liquidation payment with respect
to, any of its capital stock or make any guarantee payments with respect to the
foregoing (other than payments under the Guarantee or dividend payments to Best
Buy from a majority-owned subsidiary). Prior to the termination of any such
deferral of interest payments, Best Buy may further defer interest payments,
provided that such deferral
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of interest payments together with any extensions thereof may not exceed 60
months. The failure by Best Buy to make interest payments during a deferral of
interest payments would not constitute a default or an event of default under
Best Buy's currently outstanding indebtedness. Best Buy shall give Best Buy
Capital, as holder of the Subordinated Debentures, and the Trustee notice of its
deferral of interest payments no later than the last date on which Best Buy
Capital would be required to notify the NYSE of the record or payment date of
the related dividend, which currently is 10 days prior to such record or payment
date. Best Buy Capital shall give written notice of Best Buy's deferral of
interest payments to the holders of the Preferred Securities.
ADDITIONAL INTEREST
Best Buy shall be required to pay any interest upon interest that has not
been paid on the Subordinated Debentures monthly. Accordingly, in such
circumstance, Best Buy will pay interest upon interest in order to provide for
monthly compounding on the Subordinated Debentures (the amounts of interest
payable to effect monthly compounding on the Subordinated Debentures being
referred to herein as "Additional Interest").
MANDATORY REDEMPTION
If Best Buy Capital redeems Preferred Securities in accordance with the
terms thereof, Best Buy will redeem Subordinated Debentures in a principal
amount equal to the aggregate stated liquidation preference of the Preferred
Securities so redeemed, together with any accrued and unpaid interest thereon,
including Additional Interest, if any. Any payment pursuant to this provision
shall be made prior to 12:00 noon, New York City time, on the date of such
redemption or at such other time on such earlier date as the parties thereto
shall agree. The Subordinated Debentures are not entitled to the benefit of any
sinking fund or, except as set forth above, any other provision for mandatory
prepayment.
SUBORDINATION
The Indenture provides that the Subordinated Debentures are subordinate and
junior in right of payment to all Senior Indebtedness (as defined below) of Best
Buy.
Upon any payment or distribution of assets of the Company to creditors upon
any liquidation, dissolution, winding up, reorganization, assignment for the
benefit of creditors, marshalling of assets or liabilities or any bankruptcy,
insolvency or similar proceedings of the Company, the holders of Senior
Indebtedness will be entitled to receive payment in full of all amounts due on
or to become due on or in respect of all Senior Indebtedness, before the holders
of the Subordinated Debentures are entitled to receive any payment (including
any payment to holders of the Subordinated Debentures made in respect of any
other debt subordinated to the Subordinated Debentures) on account of the
principal of or interest on the Subordinated Debentures or on account of any
purchase, redemption or other acquisition of the Subordinated Debentures by the
Company.
The Company may not make any payments on the account of the Subordinated
Debentures or account of the purchase or redemption or other acquisition of the
Subordinated Debentures, if there has occurred and is continuing a default in
the payment of the principal of (or premium, if any) or interest on any Senior
Indebtedness (a "Senior Payment Default"). In addition, if any default (other
than a Senior Payment Default), or any event which after notice or lapse of time
(or both) would become a default, with respect to certain Senior Indebtedness,
permitting after notice or lapse of time (or both) the holders thereof (or a
trustee or agent on behalf of the holders thereof) to accelerate the maturity
thereof has occurred and is continuing (a "Senior Nonmonetary Default"), and the
Company and the Trustee have received written notice thereof from the holder of
such certain Senior Indebtedness, then the Company may not make any payments on
the account of the Subordinated Debentures or account of the purchase or
redemption or other acquisition of the Subordinated Debentures, for a period (a
"blockage period") commencing on the date the Company and the Trustee receive
such written notice and ending on the earlier of (i) 179 days after such date
and (ii) the date, if any, on which the Senior Indebtedness to which such
default relates is discharged or such default is waived in writing or otherwise
cured or ceases to exist and any acceleration of certain Senior Indebtedness to
which such Senior Nonmonetary Default relates is rescinded or annulled.
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In any event, not more than one blockage period may be commenced during any
period of 360 consecutive days, and there must be a period of at least 181
consecutive days in each period of 360 consecutive days when no blockage period
is in effect. Following the commencement of a blockage period, the holders of
such certain Senior Indebtedness will be precluded from commencing a subsequent
blockage period until the conditions set forth in the preceding sentence are
satisfied. No Senior Nonmonetary Default that existed or was continuing on the
date of commencement of any blockage period with respect to such certain Senior
Indebtedness initiating such blockage period will be, or can be, made the basis
for the commencement of a subsequent blockage period, unless such default has
been cured for a period of not less than 90 consecutive days.
By reason of such subordination, in the event of any proceeding of the type
described in the preceding paragraph involving Best Buy, creditors of Best Buy
who are holders of Senior Indebtedness and general unsecured creditors of Best
Buy may recover more, ratably, than the holder or holders of the Subordinated
Debentures.
The term "Senior Indebtedness" is defined to mean the principal of, premium,
if any, interest on, and any other payment due pursuant to any of the following,
whether Incurred (as defined in the Indenture) on or prior to the date of
execution of the Indenture or thereafter Incurred:
(a) all obligations of Best Buy for money borrowed (including
obligations under Best Buy's revolving bank credit facility);
(b) all obligations of Best Buy evidenced by notes, debentures, bonds or
other securities, including obligations Incurred in connection with the
acquisition of property, assets or businesses;
(c) all capitalized lease obligations of Best Buy;
(d) all reimbursement obligations of Best Buy with respect to letters of
credit, bankers acceptance or similar facilities issued for the account of
Best Buy;
(e) all obligations of Best Buy issued or assumed as the deferred
purchase price of property or services, including all obligations under
master lease transactions pursuant to which Best Buy or any of its
subsidiaries have agreed to be treated as owner of the subject property for
federal income tax purposes (but excluding trade accounts payable, accrued
liabilities resulting from the sale of extended service plans, or accrued
liabilities arising in the ordinary course of business);
(f) all payment obligations of Best Buy under interest rate swap or
similar agreements or foreign currency hedge, exchange or similar agreements
at the time of determination, including any such obligations Incurred by
Best Buy solely to act as a hedge against increases in interest rates that
may occur under the terms of other outstanding variable or floating rate
Indebtedness of Best Buy;
(g) all obligations of Best Buy under secured inventory financing credit
lines;
(h) all obligations of the type referred to in clauses (a) through (g)
above of another person and all dividends of another person, the payment of
which, in either case, Best Buy has assumed or guaranteed, or for which Best
Buy is responsible or liable, directly or indirectly, jointly or severally,
as obligor, guarantor or otherwise; and
(i) all amendments, modifications, renewals, extensions, refinancings,
replacements and refundings by Best Buy of any such Indebtedness (as defined
in the Indenture) referred to in clauses (a) through (h) above (and of any
such amended, modified, renewed, extended, refinanced, refunded or replaced
indebtedness or obligations);
PROVIDED, HOWEVER, that the following shall not constitute the Senior
Indebtedness: (a) any Indebtedness owed to a Subsidiary of Best Buy, (b) any
Indebtedness which by the terms of the instrument creating or evidencing the
same expressly provides that such Indebtedness is not superior in right of
payment to the Subordinated Debentures or (c) any Indebtedness Incurred in
violation of the Indenture. Such Senior
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Indebtedness shall continue to be Senior Indebtedness and entitled to the
benefits of the subordination provisions irrespective of any amendment,
modification or waiver of any term of such Senior Indebtedness.
As of August 27, 1994, Senior Indebtedness of Best Buy aggregated
approximately $392 million. The Indenture does not limit Best Buy's ability to
incur Senior Indebtedness.
CERTAIN COVENANTS OF BEST BUY
Best Buy will also covenant in the Indenture that neither it nor any
majority-owned subsidiary of Best Buy will declare or pay any dividend on, or
redeem, purchase, acquire for value or make a liquidation payment with respect
to, any of its capital stock or make any guarantee payments with respect to the
foregoing if at such time (i) there shall have occurred any event that, with the
giving of notice or the lapse of time or both would constitute an Event of
Default (as defined below) under the Subordinated Debentures, (ii) Best Buy
shall be in default with respect to its payment or other obligations under the
Guarantee or (iii) Best Buy shall have given notice of its selection of an
extended interest payment period as provided in the Subordinated Debentures and
such deferral of interest payments or any extension thereof shall be continuing.
Best Buy will also covenant (i) to remain the General Partner of Best Buy
Capital, provided that any permitted successor of Best Buy under the Limited
Partnership Agreement may succeed to Best Buy's duties as General Partner, (ii)
to cause at least 21% of the total value of Best Buy Capital and at least 21% of
all interests in the capital, income, gain, loss, deduction and credit of Best
Buy Capital to be held by Best Buy as General Partner, (iii) not to voluntarily
dissolve, wind-up or liquidate Best Buy Capital, (iv) to perform timely all of
its duties as General Partner (including the duty to pay dividends on the
Preferred Securities as described under "- Description of the Guarantee -
General"), (v) to maintain direct ownership of all partnership interests of Best
Buy Capital other than the Preferred Securities, (vi) to use its reasonable
efforts to cause Best Buy Capital to remain a limited partnership and otherwise
to continue to be treated as a partnership for United States federal income tax
purposes and (vii) to deliver Depositary Shares representing shares of Best Buy
Series A Preferred Stock or Best Buy Common Stock upon an election by the
holders of the Preferred Securities to exchange or convert the Subordinated
Debentures.
EVENTS OF DEFAULT
If one or more of the following events (each an "Event of Default") shall
occur and be continuing:
(a) failure to pay any principal of the Subordinated Debentures when
due;
(b) failure to pay any interest on the Subordinated Debentures,
including any Additional Interest, when due and such failure continues for a
period of 10 days; provided that a valid extension of the interest payment
period by Best Buy shall not constitute a default in the payment of interest
for this purpose;
(c) failure by Best Buy to deliver shares of Best Buy Series A Preferred
Stock or Best Buy Common Stock upon an election by holders of Preferred
Securities to exchange or convert such Preferred Securities;
(d) failure by Best Buy to perform in any material respect any other
covenant in the Indenture for the benefit of the holders of Subordinated
Debentures continued for a period of 60 days after written notice to Best
Buy from any holder of Subordinated Debentures or Preferred Securities;
(e) the dissolution, winding-up, liquidation or termination of Best Buy
Capital; or
(f) certain events of bankruptcy, insolvency or liquidation of Best
Buy;
then either the Trustee or the holders of at least 25% in aggregate principal
amount of the Subordinated Debentures then outstanding will have the right to
declare the principal of and the interest on the Subordinated Debentures
(including any Additional Interest) and any other amounts payable under the
Subordinated Debentures to be forthwith due and payable and to enforce the
holders' other rights as creditors with respect to the Subordinated Debentures;
PROVIDED, HOWEVER, that if upon an Event of
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Default, the Trustee or the holders of at least 25% in aggregate principal
amount of the Subordinated Debentures then outstanding fail to declare the
payment of all amounts on the Subordinated Debentures to be immediately due and
payable, the holders of at least 25% in aggregate liquidation preference of
Preferred Securities then outstanding, shall have such right; PROVIDED FURTHER,
HOWEVER, that after such acceleration, but before a judgment or decree based on
acceleration, the holders of a majority in aggregate principal amount of
outstanding Subordinated Debentures, or the holders of the Preferred Securities
if they accelerated such payment, may, under certain circumstances, rescind and
annul such acceleration if all Events of Default, other than the non-payment of
accelerated principal, have been cured or waived as provided in the Indenture.
For information as to waiver of defaults, see "Modification of the Indenture."
Best Buy Capital is the initial holder of the Subordinated Debentures. However,
while the Preferred Securities are outstanding, Best Buy Capital has agreed not
to waive an event of default under the Indenture without the consent of holders
of 66 2/3% in aggregate liquidation preference of the Preferred Securities then
outstanding. Additionally, under the terms of the Preferred Securities, the
holders of outstanding Preferred Securities will have the rights described above
under "- Preferred Securities - Voting Rights," including the right to appoint a
Special General Partner, which Special General Partner shall be authorized to
exercise the right of Best Buy Capital, as the holder of at least 25% aggregate
principal amount of the Subordinated Debentures, to accelerate the principal
amount of the Subordinated Debentures and accrued interest (including any
Additional Interest) thereon and to enforce the other rights of Holders of the
Subordinated Debentures as creditors under the Subordinated Debentures. A
default under any other indebtedness of Best Buy or Best Buy Capital would not
constitute an Event of Default under the Subordinated Debentures.
Subject to the provision of the Indenture relating to the duties of the
Trustee in case an Event of Default shall occur and be continuing, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any holders of Subordinated Debentures,
unless such holders shall have offered to the Trustee reasonable indemnity.
Subject to such provisions for the indemnification of the Trustee, the holders
of a majority in aggregate principal amount of the Subordinated Debentures then
outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee.
No holder of any Subordinated Debenture will have any right to institute any
proceeding with respect to the Indenture or for any remedy thereunder, unless
such holder shall have previously given to the Trustee written notice of a
continuing Event of Default and, if Best Buy Capital is not the sole holder of
Subordinated Debentures, unless also the holders of at least 25% in aggregate
principal amount of the Subordinated Debentures then outstanding shall have made
written request, and offered reasonable indemnity, to the Trustee to institute
such proceeding as trustee, and the Trustee shall not have received from the
holders of a majority in aggregate principal amount of the outstanding
Subordinated Debentures a direction inconsistent with such request and shall
have failed to institute such proceeding within 60 days. However, such
limitations do not apply to a suit instituted by a holder of a Subordinated
Debenture for enforcement of payment of the principal of or interest on such
Subordinated Debenture on or after the respective due dates expressed in such
Subordinated Debenture or of the right to convert such Subordinated Debenture in
accordance with the Indenture.
Best Buy will be required to furnish to the Trustee annually a statement as
to the performance by Best Buy of certain of its obligations under the Indenture
and as to any default of such performance.
CONVERSION OF THE SUBORDINATED DEBENTURES
The Subordinated Debentures will be convertible into Best Buy Common Stock
at the option of the holders of the Subordinated Debentures at any time on or
before the close of business on the maturity date thereof at the initial
conversion price set forth on the cover page of this Prospectus subject to the
conversion price adjustments described under "- Preferred Securities -
Conversion Rights." Best Buy Capital will covenant not to convert Subordinated
Debentures except pursuant to a notice of conversion delivered to the Conversion
Agent by a holder of Preferred Securities. Upon surrender of Preferred
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Securities to the Conversion Agent for conversion, Best Buy Capital will
distribute $50 principal amount of the Subordinated Debentures to the Conversion
Agent on behalf of the holder of every Preferred Security so converted,
whereupon the Conversion Agent will convert such Subordinated Debentures to Best
Buy Common Stock on behalf of such holder. Best Buy's delivery to the holders of
the Subordinated Debentures (through the Conversion Agent) of the fixed number
of shares of Best Buy Common Stock into which the Subordinated Debentures are
convertible (together with the cash payment, if any, in lieu of fractional
shares) will be deemed to satisfy Best Buy's obligation to pay the principal
amount of the Subordinated Debentures, and the accrued and unpaid interest
attributable to the period from the last date to which interest has been paid or
duly provided for.
EXCHANGE OF THE SUBORDINATED DEBENTURES
The Subordinated Debentures will be exchangeable for Depository Shares
representing Best Buy Series A Preferred Stock upon an Exchange Event on or
before the close of business on the maturity date thereof at the rate of 1/100th
of a share of Best Buy Series A Preferred Stock for each $50 principal amount of
the Subordinated Debentures (equivalent to an exchange rate of one Depositary
Share for each $50 principal of amount of the Subordinated Debentures).
Accumulated and unpaid dividends (including Additional Dividends) on the
Preferred Securities will be treated as accumulated and unpaid dividends on the
Best Buy Series A Preferred Stock.
MODIFICATION OF THE INDENTURE
The Indenture may be amended by Best Buy, Best Buy Capital and the Trustee
with the consent of the holders of 66 2/3% in aggregate principal amount of the
outstanding Subordinated Debentures PROVIDED, that no such modification or
amendment may, without the consent of the holder of each outstanding
Subordinated Debenture affected thereby, (a) change the Maturity of the
principal of, or any installment of interest on, any Subordinated Debenture, (b)
reduce the principal amount of, or interest on, any Subordinated Debenture, (c)
change the place or currency of payment of principal of, or interest on, any
Subordinated Debenture, (d) impair the right to institute suit for the
enforcement of any payment on or with respect to any Subordinated Debenture, (e)
adversely affect the right to convert Subordinated Debentures, (f) modify the
subordination provisions in a manner adverse to the holders of the Subordinated
Debentures, (g) reduce the above-stated percentage of outstanding Subordinated
Debentures necessary to modify or amend the Indenture or (h) reduce the
percentage of aggregate principal amount of outstanding Subordinated Debentures
necessary for waiver of compliance with certain provisions of the Indenture or
for waiver of certain defaults; AND PROVIDED FURTHER that, so long as any of the
Preferred Securities remain outstanding, no such amendment may be made that
adversely affects the holders of Preferred Securities, and no termination of the
Indenture may occur, and no Event of Default or compliance with any covenant
under the Indenture may be waived by the holders of the Subordinated Debentures,
without the prior consent of the holders of at least 66 2/3% of the aggregate
liquidation preference of the Preferred Securities then outstanding unless and
until the Subordinated Debentures and all accrued and unpaid interest thereon
have been paid in full.
GOVERNING LAW
The Indenture and the Subordinated Debentures will be governed by, and
construed in accordance with, the laws of the State of New York.
INFORMATION CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the right of the Trustee
should it become a creditor of Best Buy, to obtain payment of claims in certain
cases, or to realize for its own account on certain property received in respect
of any such claim as security or otherwise. The Trustee will be permitted to
engage in certain other transactions; however, if it acquires any conflicting
interest and there is a default under the Subordinated Debentures, it must
eliminate such conflict or resign.
Best Buy and Best Buy Capital have agreed in the Indenture to indemnify and
hold harmless the Trustee against any losses or damages it may suffer as
Trustee.
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Harris Trust and Savings Bank of Chicago, the Trustee under the Indenture,
has from time to time engaged in transactions with, or performed services for,
Best Buy in the ordinary course of business.
DESCRIPTION OF BEST BUY CAPITAL STOCK
COMMON STOCK
Best Buy is authorized to issue 120,000,000 shares of Common Stock, $.10 par
value per share. Each share of Common Stock is entitled to participate pro rata
in distributions upon liquidation, subject to the rights of holders of Preferred
Stock, and to one vote on all matters submitted to a vote of shareholders. The
holders of Common Stock may receive cash dividends as declared by the Board of
Directors out of funds legally available therefor, subject to the rights of any
holders of Preferred Stock. See "Dividend Policy" for a description of certain
restrictions on the payment of cash dividends. The outstanding shares of Common
Stock are, and the shares offered hereby when issued will be, fully paid and
nonassessable. Holders of Common Stock have no preemptive or similar equity
preservation rights, and cumulative voting of shares in the election of
directors is prohibited. The holders of more than 50% of the outstanding shares
of Common Stock have the voting power to elect all directors and, except as is
discussed at "Certain Best Buy Charter and By-law Provisions," to approve
mergers, sales of assets and other corporate transactions.
The transfer agent and registrar for Best Buy's Common Stock is Harris Trust
and Savings Bank of Chicago.
PREFERRED STOCK
Best Buy is authorized to issue up to 400,000 shares of Preferred Stock,
$1.00 par value per share. The Company's Articles of Incorporation provide that
shares of Preferred Stock may be issued from time to time, in one or more
series, with such designations, relative rights, preferences, limitations,
dividend rights, redemption prices, liquidation prices, conversion rights,
sinking or purchase fund rights or other privileges as the Company's Board of
Directors may establish. Pursuant to this authority, the Board of Directors has
designated 46,000 shares of Preferred Stock as Series A Preferred Stock (the
"Series A Preferred Stock"). No other series of Preferred Stock has been
designated by the Board of Directors. For a description of the Series A
Preferred Stock, see "Description of Securities Offered - Description of Best
Buy Series A Preferred Stock."
The issuance of Preferred Stock could affect the rights of holders of Common
Stock. For example, issuance of the Preferred Stock could result in a class of
securities outstanding that will have preferences with respect to dividends and
in liquidation over the Common Stock and could (upon conversion or otherwise)
enjoy all of the rights appurtenant to Common Stock. There are no issued and
outstanding shares of Preferred Stock. Except as provided herein, there are no
agreements or understandings for the issuance of Preferred Stock, and the
Company has no present intent to issue Preferred Stock.
CERTAIN BEST BUY CHARTER AND BY-LAW PROVISIONS
Best Buy's Articles of Incorporation and By-laws contain certain
"anti-takeover" provisions that could have the effect of delaying or preventing
certain changes in control of the Company and thereby deprive shareholders of an
opportunity to sell their shares at a premium over prevailing market prices.
Best Buy's directors are elected for two-year, staggered terms, such that
only a portion of its directors are elected in any year. This provision of the
By-laws, together with a provision discussed below that is contained in the
Articles of Incorporation and governs removal of directors, could have the
effect of delaying for a period of one year or more a change in control of the
Company, by delaying a potential acquirer's ability to elect a majority of the
Board of Directors, depending upon the number of directors next up for election
following any such acquisition. Cumulative voting of shares in the election of
directors is prohibited by the Articles of Incorporation.
Best Buy's Articles of Incorporation (i) provide for a "supermajority" vote
requiring 80% shareholder approval of certain business combinations with
"related persons," unless the combination has been
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approved by a majority of the Board of Directors; (ii) provide that a "fair
price" be paid to all shareholders by requiring the approval of 66 2/3% of
shareholders not including a "related person" for certain business combinations
with the "related person" unless the transaction is approved by a majority of
the Board of Directors or each shareholder receives cash consideration equal to
the highest price paid by the "related person" in acquiring any shares of the
Company; (iii) give the directors the right to consider non-financial factors of
any proposed business combination; (iv) provide that the provisions described
above cannot be amended without an 80% vote (or 66 2/3% in the case of the "fair
price" amendment) of shareholders; (v) provide for removal of directors only for
cause or upon the vote of 80% of shares entitled to vote at an election of
directors; and (vi) forbid the payment of "greenmail," or the payment of a
premium to redeem stock in the Company accumulated by an investor at the expense
of other shareholders who are not afforded the same opportunity.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain federal income tax considerations
relevant to the purchase, ownership and disposition of the Preferred Securities.
This summary does not address all federal income tax aspects of investing in the
Preferred Securities, or the tax consequences to United States Holders who are
subject to special treatment under the federal income tax laws (for example,
banks, life insurance companies or dealers). This discussion is based upon
current provisions of the internal Revenue Code of 1986, as amended (the
"Code"), the Treasury Regulations promulgated thereunder, judicial decisions and
Internal Revenue Service ("IRS") rulings, all of which are subject to change,
which may alter the opinions expressed herein and adversely affect investors in
the Preferred Securities. Unless otherwise indicated, the information below is
directed at United States Holders (as defined below) who purchase Preferred
Securities at original issue for their initial offering price, and that hold
Preferred Securities as capital assets (generally property held for investment).
For purposes of this discussion, a "United States Holder" is a beneficial owner
of a Preferred Security who or that is (i) a citizen or resident of the United
States, (ii) a domestic corporation, or (iii) otherwise subject to United States
federal income taxation on a net income basis in respect of a Preferred
Security.
PROSPECTIVE PURCHASERS OF PREFERRED SECURITIES ARE ADVISED TO CONSULT THEIR
OWN TAX ADVISORS AS TO THE UNITED STATES OR OTHER TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP, AND DISPOSITION OF PREFERRED SECURITIES, INCLUDING THE
EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
The following summary represents the opinion of Robins, Kaplan, Miller &
Ciresi, special federal income tax counsel to Best Buy and Best Buy Capital,
insofar as such summary relates to matters of law and legal conclusions. An
opinion of counsel, however, is not binding on the IRS or the courts, and Best
Buy does not intend to seek a ruling from the IRS that the IRS agrees with the
tax consequences described below. Moreover, these transactions raise a number of
novel tax issues which have not been ruled on by the courts or IRS in similar
transactions. As a result, there can be no assurance that the IRS will not audit
these transactions and in such event, that it will agree with the conclusions
below and the positions taken by Best Buy and Best Buy Capital.
INCOME FROM PREFERRED SECURITIES
Robins, Kaplan, Miller & Ciresi is of the opinion that Best Buy Capital will
be classified as a partnership for federal income tax purposes and not as an
association taxable as a corporation. Each United States Holder of Preferred
Securities will be required to include in gross income its distributive share of
the net income of Best Buy Capital, which net income generally will be equal to
the amount of interest received or accrued on the Subordinated Debentures. Such
income will not exceed dividends received on a Preferred Security, except in the
limited circumstance of original issue discount. See " -Original Issue Discount"
below. Any amount so included in a United States Holder's gross income will
increase its tax basis in the Preferred Securities, and the amount of
distributions of cash or other property
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by Best Buy Capital to the United States Holder will reduce such United States
Holder's tax basis in the Preferred Securities. No portion of the amounts
received on the Preferred Securities will be eligible for the dividends received
deduction.
ORIGINAL ISSUE DISCOUNT
Under Treasury Regulations, the stated interest payments on the Subordinated
Debentures will be treated as "original issue discount" because of the option
that Best Buy has, under the terms of the Subordinated Debentures, to defer
interest payments for up to 60 months. Under the Code, United States Holders of
debt with original issue discount must include that discount in income on an
economic accrual basis and before the receipt of cash attributable to the
interest regardless of their method of tax accounting. Except to the extent Best
Buy exercises its option to defer interest payments, the characterization of the
stated interest on the Subordinated Debentures as original issue discount will
not affect the timing or amount of income reportable by United States Holders of
the Preferred Securities. In the event that interest payments are deferred, Best
Buy Capital will continue to accrue income equal to the amount of the interest
payment due at the end of the deferred interest payment period on an economic
accrual basis over the length of the deferred interest payment period.
Accrued income will be allocated, but not distributed, to United States
Holders of record on the Business Day preceding the last day of each calendar
month. As a result, United States Holders of record during a deferral of
interest payments will include interest in gross income in advance of the
receipt of cash, and any such United States Holder who disposes of Preferred
Securities prior to the record date for the payment of dividends following such
deferral of interest payments will include such United States Holder's allocable
share of such interest in gross income but will not receive any cash related
thereto. The tax basis of a Preferred Security will be increased by the amount
of any interest that is included in income without a corresponding receipt of
cash and will be decreased when and if such cash is subsequently received from
Best Buy Capital.
DISPOSITION OF PREFERRED SECURITIES
Generally, capital gain or loss will be recognized on a sale of Preferred
Securities, including a complete redemption for cash, equal to the difference
between the amount realized and the United States Holder's tax basis in the
Preferred Securities sold. Gain or loss recognized by a United States Holder on
the sale or exchange of a Preferred Security held for more than one year
generally will be taxable as long-term capital gain or loss. The adjusted tax
basis of the Preferred Securities sold will equal the amount paid for the
Preferred Securities, plus accrued but unpaid original issue discount, if any,
as described herein allocated to such United States Holder and reduced by any
cash or other property distributed to such United States Holder by Best Buy
Capital. A United States Holder acquiring Preferred Securities at different
prices may be required to maintain a single aggregate adjusted tax basis in
Preferred Securities, and, upon sale or other disposition of some of the
Preferred Securities, allocate a pro rata portion of such aggregate tax basis to
the Preferred Securities sold (rather than maintaining a separate tax basis in
each Preferred Security for purposes of computing gain or loss on a sale of that
Preferred Security).
EXCHANGE OF PREFERRED SECURITIES FOR BEST BUY STOCK
A United States Holder should not recognize gain or loss upon the exchange,
through the Conversion Agent, of Preferred Securities for a proportionate share
of the Subordinated Debentures held by Best Buy Capital. Except to the extent
attributable to accrued but unpaid interest on the Subordinated Debentures, a
United States Holder should not recognize gain or loss upon the conversion,
through the Conversion Agent, of Subordinated Debentures for Best Buy Common
Stock or Depository Shares representing Best Buy Series A Preferred Stock. A
United States Holder will recognize gain, however, upon the receipt of cash in
lieu of a fractional share of Best Buy Common Stock or Depository Shares
representing Best Buy Series A Preferred Stock equal to the amount of cash
received less the United States Holder's tax basis in such fractional share. A
United States Holder's tax basis in the Best Buy Common Stock or the Depository
Shares representing Best Buy Series A Preferred Stock received upon exchange and
conversion should generally be equal to the United States Holder's tax basis in
the
65
<PAGE>
Preferred Securities delivered to the Conversion Agent for exchange less the
basis allocated to any fractional share for which cash is received. A United
States Holder's holding period in the Best Buy Common Stock or the Depository
Shares representing Best Buy Series A Preferred Stock received upon exchange and
conversion should generally begin on the date the United States Holder acquired
the Preferred Securities delivered to the Conversion Agent for exchange.
ADJUSTMENT OF CONVERSION PRICE
Treasury Regulations promulgated under section 305 of the Code would treat
Best Buy Capital (and, thus, United States Holders of Preferred Securities) as
having received a constructive distribution from Best Buy in the event the
conversion ratio of the Subordinated Debentures were adjusted if (i) as a result
of such adjustment, the proportionate interest of Best Buy Capital in the assets
or earnings and profits of Best Buy were increased and (ii) the adjustment was
not made pursuant to a bona fide, reasonable antidilution formula. An adjustment
in the conversion ratio would not be considered made pursuant to such a formula
if the adjustment was made to compensate for certain taxable distributions with
respect to the stock into which the Subordinated Debentures are convertible.
Thus, under certain circumstances, a reduction in the conversion price for the
Subordinated Debentures is likely to be taxable to Best Buy Capital as a
dividend to the extent of the current or accumulated earnings and profits of
Best Buy. The United States Holders of the Preferred Securities would be
required to include their allocable share of such constructive dividend in gross
income but will not receive any cash related thereto. In addition, the failure
to fully adjust the conversion price of the Subordinated Debentures to reflect
distributions of stock dividends with respect to the Best Buy Common Stock may
result in a taxable dividend to the United States Holders of the Best Buy Common
Stock.
Similarly, under Section 305 of the Code, adjustments to the conversion
price of the Best Buy Series A Preferred Stock, which may occur under certain
circumstances, may result in deemed dividend income to United States Holders of
the Depository Shares representing Best Buy Series A Preferred Stock if such
adjustments are not made pursuant to a bona fide, reasonable antidilution
formula, and failure to make such adjustments to the conversion price of the
Best Buy Series A Preferred Stock may result in deemed dividend income to United
States Holders of the Best Buy Common Stock.
BEST BUY CAPITAL INFORMATION RETURNS AND AUDIT PROCEDURES
The General Partner in Best Buy Capital will furnish each United States
Holder with a Schedule K-1 each year setting forth such United States Holder's
allocable share of income for the prior calendar year. The General Partner is
required to furnish such Schedule K-1 as soon as practicable following the end
of the taxable year, but in any event prior to March 15th of each succeeding
year.
Any person who holds Preferred Securities as nominee for another person is
required to furnish to Best Buy Capital (a) the name, address and taxpayer
identification number of the beneficial owner and the nominee; (b) information
as to whether the beneficial owner is (i) a person that is not a United States
person, (ii) a foreign government, an international organization or any wholly
owned agency or instrumentality of either of the foregoing, or owned agency or
instrumentality of either of the foregoing, or (iii) a tax-exempt entity; (c)
the amount and description of Preferred Securities held, acquired or transferred
for the beneficial owner; and (d) certain information including the dates of
acquisitions and transfers, means of acquisitions and transfers, and acquisition
cost for purchases, as well as the amount of net proceeds from sales. Brokers
and financial institutions are required to furnish additional information,
including whether they are United States persons and certain information on
Preferred Securities they acquire, hold or transfer for their own accounts. A
penalty of $50 per failure (up to a maximum of $100,000 per calendar year) is
imposed by the Code for failure to report such information to Best Buy Capital.
The nominee is required to supply the beneficial owners of the Preferred
Securities with the information furnished to Best Buy Capital.
The General Partner, as the tax matters partner, will be responsible for
representing the United States Holders in any dispute with the IRS. The Code
provides for administrative examination of a partnership as if the partnership
were a separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years since the later of the
filing or the last date
66
<PAGE>
for filing of the partnership information returns. Any adverse determination
following an audit of the return of Best Buy Capital by the appropriate taxing
authorities could result in an adjustment of the returns of the United States
Holders, and, under certain circumstances, a United States Holder may be
precluded from separately litigating a proposed adjustment to the items of the
partnership. An adjustment could also result in an audit of a United States
Holder's return and adjustments of items not related to the income and losses of
Best Buy Capital.
FOREIGN HOLDERS
Ownership of Preferred Securities by nonresident aliens, foreign
corporations and other foreign persons raises tax considerations unique to such
persons and may have substantially adverse tax consequences to them. Therefore,
prospective investors who are foreign persons or which are foreign entities are
urged to consult with their U.S. tax advisors as to whether an investment in a
Preferred Security represents an appropriate investment in light of those unique
tax considerations and possible adverse tax consequences.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to payments on and
payments of the proceeds of the sale of Preferred Securities, Best Buy Series A
Preferred Stock or Best Buy Common Stock within the United States to
noncorporate United States Holders, and "backup withholding" at a rate of 31%
will apply to such payments if the United States Holder fails to provide an
accurate taxpayer identification number.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR
SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
67
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, Best Buy
Capital has agreed to sell to each of the Underwriters named below, and each of
such Underwriters, for whom Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner
& Smith Incorporated, Morgan Stanley & Co. Incorporated and William Blair &
Company are acting as representatives, has severally agreed to purchase from
Best Buy Capital, the respective number of Preferred Securities set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF PREFERRED
UNDERWRITER SECURITIES
- -------------------------------------------------------------------------------------------- --------------------
<S> <C>
Goldman, Sachs & Co. .......................................................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................................................
Morgan Stanley & Co. Incorporated...........................................................
William Blair & Company.....................................................................
----------
Total................................................................................... 4,000,000
----------
----------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all such Preferred Securities
offered hereby, if any are taken.
The Underwriters propose to offer the Preferred Securities in part directly
to the public at the initial public offering price set forth on the cover page
of this Prospectus, and in part to certain securities dealers at such price less
a concession of $ per Preferred Security. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per Preferred
Security to certain brokers and dealers. After the Preferred Securities are
released for sale to the public, the offering price and other selling terms may
from time to time be varied by the representatives.
In view of the fact that the proceeds from the sale of the Preferred
Securities will be used by Best Buy Capital to purchase the Subordinated
Debentures of Best Buy, the Underwriting Agreement provides that Best Buy will
pay as compensation to the Underwriters ("Underwriters' Compensation"), a
commission of $ per Preferred Security.
Best Buy and Best Buy Capital have granted the Underwriters an option
exercisable for 30 days after the date of this Prospectus to purchase up to an
aggregate of 600,000 additional Preferred Securities solely to cover
over-allotments, if any. If the Underwriters exercise their over-allotment
option, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof that the number of
Preferred Securities to be purchased by each of them, as shown in the foregoing
table, bears to the Preferred Securities offered.
Best Buy and Best Buy Capital have agreed not to offer, sell, contract to
sell, or otherwise dispose of any shares of Best Buy Common Stock, any other
capital stock of Best Buy, any other security convertible into or exercisable or
exchangeable for Best Buy Common Stock or any such other capital stock or debt
securities substantially similar to the Subordinated Debentures for a period of
180 days after the date of this Prospectus without the prior written consent of
the representatives, except for (a) the Preferred Securities offered hereby, (b)
Best Buy Common Stock or Best Buy Series A Preferred Stock issued or delivered
upon conversion or exchange of the Subordinated Debentures, (c) securities
issued or delivered upon conversion, exchange or exercise of any other
securities of Best Buy outstanding on the date of this Prospectus, (d)
securities issued pursuant to Best Buy's stock option or other benefit or
incentive plans maintained for its officers, directors or employees, (e)
securities issued in connection with mergers, acquisitions or similar
transactions or (f) partnership interests of Best Buy Capital issued to Best Buy
in connection with the sale of the over-allotment shares in order to maintain
Best Buy's 21% interest in the total capital of Best Buy Capital.
68
<PAGE>
Certain of the Underwriters are customers of, or engage in transactions
with, and from time to time have performed services for, Best Buy and its
subsidiaries and associated companies in the ordinary course of business.
Prior to this Offering, there has been no public market for the Preferred
Securities. The Preferred Securities have been approved for listing on the New
York Stock Exchange, subject to notice of issuance thereof, under the symbol
"BBY pfM." In order to meet one of the requirements for listing the Preferred
Securities on the New York Stock Exchange, the Underwriters have undertaken to
sell lots of 100 or more Preferred Securities to a minimum of 400 beneficial
holders.
Best Buy and Best Buy Capital have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
VALIDITY OF THE SECURITIES
The validity of the Preferred Securities, the Guarantee, the Best Buy Common
Stock and the Best Buy Series A Preferred Stock issuable upon conversion or
exchange of the Subordinated Debentures will be passed upon for Best Buy by
Robins, Kaplan, Miller & Ciresi, Minneapolis, Minnesota, and for the
Underwriters by Sullivan & Cromwell, New York, New York. Additionally, certain
matters as to United States taxation will be passed upon by Robins, Kaplan,
Miller & Ciresi. Sullivan & Cromwell may rely on Robins, Kaplan, Miller & Ciresi
as to all matters of Minnesota law, and Robins, Kaplan, Miller & Ciresi may rely
upon Sullivan & Cromwell as to all matters of New York law. Elliot S. Kaplan, a
member of Robins, Kaplan, Miller & Ciresi, is the Secretary and a Director of
the Company. At September 1, 1994, attorneys at Robins, Kaplan, Miller & Ciresi
beneficially owned 119,986 shares of the Best Buy Common Stock.
EXPERTS
The financial statements of the Company as of February 27, 1993, and
February 26, 1994, and for each of the fiscal years in the three-year period
ended February 26, 1994, included herein and incorporated by reference in this
Prospectus, and the financial statement schedules incorporated by reference
herein from the Company's Annual Report on Form 10-K, have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports included
herein and incorporated by reference (which reports express an unqualified
opinion and include an explanatory paragraph regarding a change in accounting
method for income taxes during the year ended February 26, 1994), and have been
included herein in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
In August 1994, the Company retained Ernst & Young LLP as its independent
auditors and dismissed Deloitte & Touche LLP. The decision to change accountants
was approved by the Audit Committee of the Company's Board of Directors. The
reports of Deloitte & Touche LLP for the past two fiscal years contained no
adverse opinion or disclaimer of opinion and were not qualified or modified with
respect to uncertainty, audit scope or accounting principle. During the past two
fiscal years and through the date of dismissal there were no disagreements with
Deloitte & Touche LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
69
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ----------------------------------------------------------------------------------------------------------- ---------
<S> <C>
1940 Act................................................................................................... 46
Additional Dividends....................................................................................... 39
Additional Interest........................................................................................ 58
Applicable Price........................................................................................... 43
Beneficial Owner........................................................................................... 49
Best Buy................................................................................................... 1
Best Buy Capital........................................................................................... 1
Best Buy Common Stock...................................................................................... 2
Best Buy Financial......................................................................................... 37
Best Buy Series A Preferred Stock.......................................................................... 2
blockage period............................................................................................ 58
Business Day............................................................................................... 39
Certificate of Designation................................................................................. 50
Closing Price.............................................................................................. 44
Code....................................................................................................... 64
Commission................................................................................................. 4
Common Stock Fundamental Change............................................................................ 44
Company.................................................................................................... 1
consolidated cash flow ratio............................................................................... 39
Conversion Agent........................................................................................... 9
Conversion Expiration Date................................................................................. 2
deferral of interest payments.............................................................................. 3
Deposit Agreement.......................................................................................... 52
Depositary................................................................................................. 52
Depositary Receipts........................................................................................ 52
Depositary Shares.......................................................................................... 2
Depositary's Office........................................................................................ 52
Direct Participants........................................................................................ 49
dividends.................................................................................................. 1
DTC........................................................................................................ 3
Entitlement Date........................................................................................... 44
Exchange Act............................................................................................... 4
Exchange Election.......................................................................................... 46
Exchange Election Meeting.................................................................................. 45
Exchange Event............................................................................................. 45
Exchange Price............................................................................................. 39
Event of Default........................................................................................... 60
Fundamental Change......................................................................................... 44
General Partner............................................................................................ 1
General Partner Payment.................................................................................... 57
Guarantee.................................................................................................. 2
Guarantee Payments......................................................................................... 55
Indenture.................................................................................................. 37
Indirect Participants...................................................................................... 49
Interest Payment Date...................................................................................... 57
IRS........................................................................................................ 64
Junior Stock............................................................................................... 56
Limited Partnership Agreement.............................................................................. 37
Liquidation Distribution................................................................................... 46
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Non-Stock Fundamental Change............................................................................... 44
NYSE....................................................................................................... 2
Participants............................................................................................... 49
Preferred Securities....................................................................................... 1
Purchaser Stock Price...................................................................................... 44
Redemption Price........................................................................................... 9
Reference Market Price..................................................................................... 45
Registration Statement..................................................................................... 4
Restated Articles.......................................................................................... 50
Senior Indebtedness........................................................................................ 59
Senior Nonmonetary Default................................................................................. 58
Senior Payment Default..................................................................................... 58
SG&A....................................................................................................... 20
Special General Partner.................................................................................... 47
Subordinated Debentures.................................................................................... 1
Successor Securities....................................................................................... 47
Transaction................................................................................................ 42
Trustee.................................................................................................... 57
Underwriters' Compensation................................................................................. 1
United States Holder....................................................................................... 64
</TABLE>
71
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets as of August 28, 1993, and August 27, 1994.................................................. F-2
Statements of Earnings for the six months ended August 28, 1993, and August 27, 1994....................... F-3
Statements of Cash Flows for the six months ended August 28, 1993, and August 27, 1994..................... F-4
Statement of Shareholders' Equity for the six months ended August 27, 1994................................. F-5
Notes to Interim Financial Statements...................................................................... F-6
ANNUAL FINANCIAL STATEMENTS
Independent Auditors' Report............................................................................... F-7
Balance Sheets as of February 27, 1993, and February 26, 1994.............................................. F-8
Statements of Earnings for the fiscal years ended February 29, 1992, February 27, 1993 and February 26,
1994...................................................................................................... F-9
Statements of Cash Flows for the fiscal years ended February 29, 1992, February 27, 1993 and February 26,
1994...................................................................................................... F-10
Statements of Shareholders' Equity for the fiscal years ended February 29, 1992, February 27, 1993 and
February 26, 1994......................................................................................... F-11
Notes to Annual Financial Statements....................................................................... F-12
</TABLE>
F-1
<PAGE>
BEST BUY CO., INC.
BALANCE SHEETS
(UNAUDITED)
($ IN 000, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
AUGUST 28, AUGUST 27,
1993 1994
----------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................................... $ 43,888 $ 47,427
Receivables......................................................................... 37,606 87,804
Merchandise inventories............................................................. 468,963 863,500
Deferred income taxes............................................................... 9,649 14,157
Prepaid expenses.................................................................... 1,415 5,958
----------- -------------
Total current assets.............................................................. 561,521 1,018,846
PROPERTY AND EQUIPMENT, at cost:
Land and buildings.................................................................. 7,392 75,982
Property under capital leases....................................................... 14,930 21,902
Leasehold improvements.............................................................. 35,821 69,079
Furniture, fixtures and equipment................................................... 94,443 145,449
----------- -------------
152,586 312,412
Less accumulated depreciation and amortization...................................... 50,891 77,286
----------- -------------
Net total property and equipment.................................................. 101,695 235,126
OTHER ASSETS:
Deferred income taxes............................................................... 6,385 8,105
Other assets........................................................................ 3,046 8,828
----------- -------------
Total other assets................................................................ 9,431 16,933
----------- -------------
TOTAL ASSETS.......................................................................... $ 672,647 $ 1,270,905
----------- -------------
----------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable, bank.................................................................. $ 95,000
Obligations under financing arrangements............................................ $ 27,873 23,713
Accounts payable.................................................................... 229,470 481,440
Accrued salaries and related expenses............................................... 12,963 19,181
Accrued liabilities................................................................. 23,166 47,524
Deferred service plan revenue and warranty reserve.................................. 16,750 20,774
Accrued income taxes................................................................ 3,722 3,583
Current portion of long-term debt................................................... 6,326 9,144
----------- -------------
Total current liabilities......................................................... 320,270 700,359
Deferred service plan revenue and warranty reserve.................................... 23,988 31,887
Long-Term Debt........................................................................ 50,907 211,013
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; authorized 400,000 shares; none issued
Common stock, $.10 par value; authorized 120,000,000 shares; issued and outstanding
41,630,000 and 42,067,000 shares, respectively..................................... 2,082 4,207
Additional paid-in capital.......................................................... 222,732 226,330
Retained earnings................................................................... 52,668 97,109
----------- -------------
Total shareholders' equity........................................................ 277,482 327,646
----------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................................ $ 672,647 $ 1,270,905
----------- -------------
----------- -------------
</TABLE>
See notes to interim financial statements.
F-2
<PAGE>
BEST BUY CO., INC.
STATEMENTS OF EARNINGS
(UNAUDITED)
($ IN 000, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
AUGUST 28, AUGUST 27,
1993 1994
------------- -------------
<S> <C> <C>
Revenues............................................................................ $ 1,004,899 $ 1,782,575
Cost of goods sold.................................................................. 836,225 1,531,439
------------- -------------
Gross profit........................................................................ 168,674 251,136
Selling, general and administrative expenses........................................ 151,910 221,791
------------- -------------
Operating income.................................................................... 16,764 29,345
Interest expense, net............................................................... 1,949 9,775
------------- -------------
Earnings before income taxes and cumulative effect of change in accounting
principle.......................................................................... 14,815 19,570
Income taxes........................................................................ 5,705 7,729
------------- -------------
Earnings before cumulative effect of change in accounting principle................. 9,110 11,841
Cumulative effect of change in accounting for income taxes.......................... (425)
------------- -------------
Net earnings........................................................................ $ 8,685 $ 11,841
------------- -------------
------------- -------------
Earnings per share:
Earnings before cumulative effect of change in accounting principle............... $ .23 $ .27
Cumulative effect of change in accounting for income taxes........................ (.01)
------------- -------------
Net earnings per share.............................................................. $ .22 $ .27
------------- -------------
------------- -------------
Weighted average common shares outstanding (000).................................... 39,292 43,226
------------- -------------
------------- -------------
</TABLE>
See notes to interim financial statements.
F-3
<PAGE>
BEST BUY CO., INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
($ IN 000)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
AUGUST 28, AUGUST 27,
1993 1994
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings........................................................................ $ 8,685 $ 11,841
Charges to earnings not affecting cash:
Depreciation and amortization..................................................... 9,369 16,632
(Gain) Loss on disposal of property and equipment................................. 414 (4)
Cumulative effect of change in accounting for income taxes........................ 425
------------ ------------
18,893 28,469
Changes in operating assets and liabilities:
Receivables....................................................................... 362 (22,879)
Merchandise inventories........................................................... (218,972) (225,550)
Prepaid income taxes and expenses................................................. (1,762) (7,298)
Accounts payable.................................................................. 111,132 187,380
Accrued salaries and related expenses............................................. 613 (138)
Other current liabilities......................................................... 2,122 1,659
Deferred service plan revenues and warranty reserve............................... 1,774 5,305
------------ ------------
Total cash used in operating activities......................................... (85,838) (33,052)
INVESTING ACTIVITIES:
Additions to property and equipment................................................. (28,711) (81,983)
Recoverable store development expenditures.......................................... (11,981)
Proceeds from sale/leaseback transactions........................................... 44,460 7,954
Sale of property and equipment...................................................... 46 53
Decrease in other assets............................................................ (1,556) (747)
------------ ------------
Total cash provided by (used in) investing activities............................. 14,239 (86,704)
FINANCING ACTIVITIES:
Common stock issued................................................................. 86,513 4,361
Borrowings on revolving credit line................................................. 59,300 322,800
Payments on revolving credit line................................................... (63,000) (227,800)
Borrowings on long-term debt........................................................ 5,311
Payments on long-term debt.......................................................... (2,777) (4,607)
Increase in obligations under financing arrangements................................ 23,002 12,557
------------ ------------
Total cash provided by financing activities....................................... 108,349 107,311
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... 36,750 (12,445)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...................................... 7,138 59,872
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................................ $ 43,888 $ 47,427
------------ ------------
------------ ------------
Supplemental cash flow information:
Non-cash investing and financing activities:
Leased asset additions............................................................ $ 829 $ 5,054
Cash paid during the period for:
Interest (net of amount capitalized).............................................. $ 1,975 $ 9,423
Income taxes...................................................................... $ 8,685 $ 15,093
</TABLE>
See notes to interim financial statements.
F-4
<PAGE>
BEST BUY CO., INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED AUGUST 27, 1994
(UNAUDITED)
($ IN 000)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID IN RETAINED
STOCK CAPITAL EARNINGS
------ ---------- --------
<S> <C> <C> <C>
Balance, February 26, 1994...................... $2,087 $ 224,089 $ 85,268
Stock options exercised......................... 31 4,330
Effect of two-for-one stock split............... 2,089 (2,089)
Net earnings for the six months ended August 27,
1994........................................... 11,841
------ ---------- --------
Balance, August 27, 1994........................ $4,207 $ 226,330 $ 97,109
------ ---------- --------
------ ---------- --------
</TABLE>
See notes to interim financial statements.
F-5
<PAGE>
BEST BUY CO., INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The balance sheets as of August 28, 1993, and August 27, 1994, the related
statements of earnings and cash flows for the six month periods ended August 28,
1993, and August 27, 1994, and the statement of changes in shareholders' equity
for the six months ended August 27, 1994, are unaudited; in the opinion of
management all adjustments necessary for a fair presentation of such financial
statements have been included and were normal and recurring in nature. Interim
results are not necessarily indicative of results for a full year. The financial
statements and notes thereto should be read in conjunction with the financial
statements and notes included in the Company's annual report to shareholders for
the fiscal year ended February 26, 1994.
2. INCOME TAXES:
Income taxes are provided based upon management's estimate of the annual
effective tax rate.
3. STOCK SPLIT:
The Company effected a two-for-one stock split in the form of a stock
dividend in April 1994. All common share and per share data reflect this stock
split.
4. BANK REVOLVING LINE OF CREDIT:
On July 29, 1994 the Company increased its bank line of credit to allow
seasonal borrowings of up to $400 million.
F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Best Buy Co., Inc.
Minneapolis, Minnesota
We have audited the accompanying balance sheets of Best Buy Co., Inc. (the
Company) as of February 27, 1993, and February 26, 1994, and the related
statements of earnings, shareholders' equity, and cash flows for the years ended
February 29, 1992, February 27, 1993, and February 26, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Best Buy Co., Inc., as of February 27, 1993
and February 26, 1994, and the results of its operations and cash flows for the
years ended February 29, 1992, February 27, 1993, and February 26, 1994, in
conformity with generally accepted accounting principles.
As discussed in Note 7 to the financial statements, the Company changed its
method of accounting for income taxes during the year ended February 26, 1994.
Deloitte & Touche LLP
Minneapolis, Minnesota
April 13, 1994
F-7
<PAGE>
BEST BUY CO., INC.
BALANCE SHEETS
($ IN 000, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
FEBRUARY FEBRUARY
27, 1993 26, 1994
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents......................... $ 7,138 $ 59,872
Receivables....................................... 37,968 52,944
Merchandise inventories........................... 249,991 637,950
Deferred income taxes............................. 9,497 13,088
Prepaid expenses.................................. 332 756
----------- -----------
Total current assets............................ 304,926 764,610
Property and Equipment:
Land and buildings................................ 45,676 37,660
Leasehold improvements............................ 33,222 55,279
Furniture, fixtures and equipment................. 76,806 122,683
Property under capital leases..................... 14,163 17,870
----------- -----------
169,867 233,492
Less accumulated depreciation and amortization.... 43,425 60,768
----------- -----------
Net property and equipment...................... 126,442 172,724
Other Assets:
Deferred income taxes............................. 6,284 7,078
Other assets...................................... 1,490 8,082
----------- -----------
Total other assets.............................. 7,774 15,160
----------- -----------
Total Assets.................................. $439,142 $952,494
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Note payable, bank................................ $ 3,700
Obligations under financing arrangements.......... 4,871 $ 11,156
Accounts payable.................................. 118,338 294,060
Accrued salaries and related expenses............. 12,350 19,319
Accrued liabilities............................... 18,221 37,754
Deferred service plan revenue and warranty
reserve.......................................... 16,240 19,146
Accrued income tax................................ 6,545 11,694
Current portion of long term debt................. 5,740 8,899
----------- -----------
Total current liabilities....................... 186,005 402,028
Deferred Service Plan Revenue and Warranty
Reserve............................................ 22,724 28,211
Long Term Debt...................................... 48,130 210,811
Commitments and Contingencies
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 34,486,000 and 41,742,000 shares,
respectively................................... 1,149 2,087
Additional paid-in capital........................ 137,151 224,089
Retained earnings................................. 43,983 85,268
----------- -----------
Total shareholders' equity...................... 182,283 311,444
----------- -----------
Total Liabilities and Shareholders' Equity.... $439,142 $952,494
----------- -----------
----------- -----------
</TABLE>
See notes to annual financial statements.
F-8
<PAGE>
BEST BUY CO., INC.
STATEMENTS OF EARNINGS
($ IN 000, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
---------------------------------------
FEBRUARY FEBRUARY FEBRUARY
29, 1992 27, 1993 26, 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues.............................. $929,692 $ 1,619,978 $ 3,006,534
Cost of goods sold.................... 748,630 1,335,944 2,549,609
----------- ----------- -----------
Gross profit.......................... 181,062 284,034 456,925
Selling, general and administrative
expenses............................. 162,286 248,126 379,747
----------- ----------- -----------
Operating income...................... 18,776 35,908 77,178
Interest expense, net................. 3,415 3,883 8,800
----------- ----------- -----------
Earnings before income taxes and
cumulative effect of change in
accounting principle................. 15,361 32,025 68,378
Income taxes.......................... 5,760 12,170 26,668
----------- ----------- -----------
Earnings before cumulative effect of
change in accounting principle....... 9,601 19,855 41,710
Cumulative effect of change in
accounting for income taxes.......... (425)
----------- ----------- -----------
Net earnings........................ $ 9,601 $ 19,855 $ 41,285
----------- ----------- -----------
----------- ----------- -----------
Earnings per share:
Earnings before cumulative effect of
change in accounting principle..... $ .33 $ .57 $ 1.01
Cumulative effect of change in
accounting for income taxes........ (.01)
----------- ----------- -----------
Net earnings per share............ $ .33 $ .57 $ 1.00
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares
outstanding (000).................... 28,848 34,776 41,336
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to annual financial statements.
F-9
<PAGE>
BEST BUY CO., INC.
STATEMENTS OF CASH FLOWS
($ IN 000)
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
----------------------------------------
FEBRUARY 29, FEBRUARY 27, FEBRUARY 26,
1992 1993 1994
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings........................................................... $ 9,601 $ 19,855 $ 41,285
Charges to earnings not affecting cash:
Depreciation and amortization........................................ 10,013 14,832 22,412
Loss on disposal of property and equipment........................... 437 545 719
Cumulative effect of change in accounting for income taxes........... 425
------------ ------------ ------------
20,051 35,232 64,841
Changes in operating assets and liabilities:
Receivables.......................................................... (7,265) (21,987) (14,976)
Merchandise inventories.............................................. (40,154) (114,153) (387,959)
Deferred income taxes and prepaid expenses........................... (225) (2,063) (5,234)
Accounts payable..................................................... 26,770 49,668 175,722
Other current liabilities............................................ 7,062 16,106 33,014
Deferred service plan revenues and warranty reserve.................. 16 6,148 8,393
------------ ------------ ------------
Total cash provided by (used in) operating activities.............. 6,255 (31,049) (126,199)
------------ ------------ ------------
INVESTING ACTIVITIES
Additions to property and equipment.................................... (25,279) (74,891) (101,412)
Sale of property and equipment......................................... 114 27 44,506
Decrease (increase) in other assets.................................... 358 (1,180) (6,592)
------------ ------------ ------------
Total cash used in investing activities............................ (24,807) (76,044) (63,498)
------------ ------------ ------------
FINANCING ACTIVITIES
Borrowings on revolving credit line.................................... 47,200 298,900 79,500
Payments on revolving credit line...................................... (47,200) (295,200) (83,200)
Long-term debt borrowings.............................................. 15,018 29,700 160,310
Long-term debt payments................................................ (1,696) (37,515) (6,977)
Common stock issued.................................................... 91,226 4,860 86,513
Increase (decrease) in obligations under financing arrangements........ (270) 697 6,285
------------ ------------ ------------
Total cash provided by financing activities........................ 104,278 1,442 242,431
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... 85,726 (105,651) 52,734
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................... 27,063 112,789 7,138
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $ 112,789 $ 7,138 $ 59,872
------------ ------------ ------------
------------ ------------ ------------
Supplemental cash flow information:
Non-cash investing and financing activities:
Capital lease additions.............................................. $ 3,963 $ 8,705 $ 3,807
Land and building acquired on contract for deed...................... $ 8,700
Cash paid during the period for:
Interest (net of amount capitalized)................................. $ 4,460 $ 5,385 $ 5,360
Income taxes......................................................... $ 4,753 $ 7,174 $ 25,442
</TABLE>
See notes to annual financial statements.
F-10
<PAGE>
BEST BUY CO., INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
($ IN 000)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
------ ---------- --------
<S> <C> <C> <C>
BALANCES AT MARCH 2, 1991....................... $ 829 $ 41,385 $ 14,527
Sale of common stock............................ 270 87,705
Stock options exercised......................... 23 1,937
Tax benefit from stock options exercised........ 1,291
Net earnings.................................... 9,601
------ ---------- --------
BALANCES AT FEBRUARY 29, 1992................... 1,122 132,318 24,128
Stock options exercised......................... 27 2,311
Tax benefit from stock options exercised........ 2,522
Net earnings.................................... 19,855
------ ---------- --------
BALANCES AT FEBRUARY 27, 1993................... 1,149 137,151 43,983
Sale of common stock............................ 234 85,294
Stock options exercised......................... 10 977
Tax benefit from stock options exercised........ 1,363
Effect of three-for-two stock split............. 694 (696)
Net earnings.................................... 41,285
------ ---------- --------
BALANCES AT FEBRUARY 26, 1994................... $2,087 $ 224,089 $ 85,268
------ ---------- --------
------ ---------- --------
</TABLE>
See notes to annual financial statements.
F-11
<PAGE>
BEST BUY CO., INC.
NOTES TO ANNUAL FINANCIAL STATEMENTS
($ IN 000, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS:
The Company sells consumer electronics, personal computer and other home
office products, major appliances, entertainment software, and related
accessories through its retail stores.
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.
MERCHANDISE INVENTORIES:
Merchandise inventories are recorded at the lower of average cost or market.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation, including
amortization of property under capital leases, is computed on the straight-line
method over the estimated useful lives of the assets, or, in the case of
leasehold improvements, over the shorter of the estimated useful lives or lease
terms.
ACCOUNTS PAYABLE:
Under the Company's cash management system, checks issued but not cleared
through the bank account frequently result in a cash overdraft in the accounting
records. Overdraft balances of $46,548 and $90,119 at February 27, 1993, and
February 26, 1994, respectively, are included in accounts payable.
PRE-OPENING COSTS:
Costs incurred in connection with the opening of new stores are expensed in
the year the store is opened. Pre-opening costs were $2,295, $6,231 and $7,335
in fiscal 1992, 1993, and 1994, respectively.
DEFERRED SERVICE PLAN REVENUE AND WARRANTY RESERVE:
Revenue from the sale of extended service contracts, net of direct selling
expenses, is recognized straight-line over the life of the contract. Costs
related to servicing the plans are expensed as incurred. Estimated costs of
promotional contracts, included with products at no cost to the consumer, are
accrued as warranty reserve at the time of product sale.
EARNINGS PER SHARE:
Earnings per share is computed on the basis of the weighted average number
of common shares outstanding during each period, adjusted for 1,458,000, 902,000
and 1,300,000 incremental shares assumed issued on the exercise of stock options
in fiscal 1992, 1993 and 1994, respectively. In September 1993, the Company
effected a three-for-two stock split in the form of a 50% stock dividend. In
April 1994, the Company effected a two-for-one stock split payable in the form
of a stock dividend. All common share and per share information has been
adjusted to reflect both splits.
FISCAL YEAR:
The Company's fiscal year ends on the Saturday nearest the end of February.
All years presented contained 52 weeks.
F-12
<PAGE>
BEST BUY CO., INC.
NOTES TO ANNUAL FINANCIAL STATEMENTS (CONTINUED)
($ IN 000, EXCEPT PER SHARE AMOUNTS)
2. OBLIGATIONS UNDER FINANCING ARRANGEMENTS:
The Company has two inventory financing credit lines, which total
approximately $175,000. Borrowings are collaterized by a security interest in
certain merchandise inventories approximating the outstanding borrowings. The
lines have provisions that give the financing sources a portion of the cash
discounts provided by the manufacturers.
3. BORROWINGS:
<TABLE>
<CAPTION>
FEBRUARY FEBRUARY
27, 1993 26, 1994
----------- -----------
<S> <C> <C>
Senior Subordinated Notes........................... $150,000
Subordinated Notes.................................. $21,904 21,904
Equipment financing loans........................... 19,957 25,306
Obligations under capital leases.................... 12,009 13,800
Contract for deed................................... 8,700
----------- -----------
53,870 219,710
Less:
Current portion of long term debt................... 5,740 8,899
----------- -----------
$48,130 $210,811
----------- -----------
----------- -----------
</TABLE>
CREDIT AGREEMENT:
The Company has a credit agreement (the "Agreement") that contains a
revolving credit facility under which the Company can borrow up to $125,000. The
Agreement provides that up to $40,000 of the facility is available at all times
and an additional $85,000 is available from August 1 to December 31. The
Agreement expires in June 1995, and the Company has the option to extend the
Agreement for an additional year.
Borrowings under the facility are unsecured. Interest on borrowings is at
the agent bank's reference rate or LIBOR plus a specified margin. The Company
also pays certain commitment and agent fees.
The Agreement contains covenants that require maintenance of certain
financial ratios and place limits on annual capital expenditures. The Agreement
also provides that once a year, the Company must repay any amounts outstanding,
and for a period of not less than 60 days thereafter, the aggregate principal
amount outstanding is limited to $10,000. There were no balances outstanding
under the facility at February 26, 1994. At February 27, 1993 there was $3,700
outstanding under the previous facility.
SENIOR SUBORDINATED NOTES:
In October 1993, the Company issued $150,000 of senior subordinated notes.
The notes mature on October 1, 2000, and bear interest at 8 5/8%. The Company
may, at its option, redeem the notes prior to maturity at 102.5% 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 $58,962 at February 26, 1994. The indenture also
contains provisions, which limit the amount of additional borrowings the Company
may incur and limit the Company's ability to pay dividends and make other
restricted payments.
F-13
<PAGE>
BEST BUY CO., INC.
NOTES TO ANNUAL FINANCIAL STATEMENTS (CONTINUED)
($ IN 000, EXCEPT PER SHARE AMOUNTS)
3. BORROWINGS: (CONTINUED)
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%.
EQUIPMENT FINANCING LOANS:
The equipment financing loans require monthly or quarterly payments and have
maturity dates between June 1996 and October 1998. The interest rates on these
loans range from 7.54% to 11.15%. Furniture and fixtures with a book value of
$23,704 are pledged against these loans.
CONTRACT FOR DEED:
The Company purchased its corporate office building on a contract for deed.
The contract for deed calls for semiannual interest payments of $430 with
payment of the contract balance on June 12, 1996.
OBLIGATIONS UNDER CAPITAL LEASES:
The present value of future minimum lease payments relating to certain
equipment and a distribution center has been capitalized. The capitalized cost
is $14,163 and $17,870 at February 27, 1993, and February 26, 1994,
respectively. The net book value of assets under capital leases was $12,060 and
$13,439 at February 27, 1993 and February 26, 1994, respectively.
FUTURE MATURITIES OF DEBT:
<TABLE>
<CAPTION>
CAPITAL OTHER
LEASES DEBT
------- --------
<S> <C> <C>
FISCAL YEAR
- -------------------------------------------------------------
1995......................................................... $ 3,138 $ 6,422
1996......................................................... 2,872 6,452
1997......................................................... 2,540 14,697
1998......................................................... 6,126 9,005
1999......................................................... 534 1,334
Later years.................................................. 104 168,000
------- --------
15,314 $205,910
--------
--------
Less amount representing interest............................ 1,514
-------
Minimum lease payments....................................... 13,800
Less current portion......................................... 2,477
-------
Long-term portion............................................ $11,323
-------
-------
</TABLE>
The fair value of the Company's financial instruments, including those with
quoted market prices, approximates carrying value.
F-14
<PAGE>
BEST BUY CO., INC.
NOTES TO ANNUAL FINANCIAL STATEMENTS (Continued)
($ in 000, except per share amounts)
4. OPERATING LEASE COMMITMENTS AND RELATED PARTY TRANSACTIONS:
The Company conducts the majority of its retail and distribution operations
from leased locations. The Company completed the sale/leaseback of 17 stores in
fiscal 1994, resulting in net proceeds of approximately $44,600, with no gain or
loss recognized. The Company also leases various equipment under operating
leases and, prior to January 1994, its corporate headquarters were located in
leased facilities. These leases require payment of real estate taxes, insurance,
and 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 with regard to maintenance of
financial ratios. Future minimum lease obligations by year (not including
percentage rentals) for these operating leases at February 26, 1994, are as
follows:
<TABLE>
<S> <C>
FISCAL YEAR
- ----------------------------------------------------------------------
1995.................................................................. $ 38,954
1996.................................................................. 40,457
1997.................................................................. 39,772
1998.................................................................. 38,625
1999.................................................................. 36,244
Later years........................................................... 311,310
</TABLE>
The composition of the total rental expenses for all operating leases during
the last three fiscal years, including leases of building and equipment, is as
follows:
<TABLE>
<CAPTION>
1992 1993 1994
------- ------- -------
<S> <C> <C> <C>
Minimum rentals...................................... $16,153 $22,757 $37,673
Percentage rentals................................... 388 405 439
------- ------- -------
$16,541 $23,162 $38,112
------- ------- -------
------- ------- -------
</TABLE>
Five stores are leased from the Company's CEO and principal shareholder, his
spouse, or partnerships in which he is a partner. Rent expense under these
leases during the last three fiscal years was as follows:
<TABLE>
<CAPTION>
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
Minimum rentals......................................... $1,049 $1,051 $1,049
Percentage rentals...................................... 388 405 423
------ ------ ------
$1,437 $1,456 $1,472
------ ------ ------
------ ------ ------
</TABLE>
5. 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 $531, $697
and $906 during fiscal 1992, 1993 and 1994, respectively.
6. SHAREHOLDERS' EQUITY:
PUBLIC OFFERINGS:
In June 1993, the Company completed a public offering of 7,020,000 shares of
Common Stock, including the underwriters' overallotment, at $12.83 per share.
Net proceeds of the offering were $85,528 after deducting the underwriting
discount and offering expenses of $4,562.
F-15
<PAGE>
BEST BUY CO., INC.
NOTES TO ANNUAL FINANCIAL STATEMENTS (CONTINUED)
($ IN 000, EXCEPT PER SHARE AMOUNTS)
6. SHAREHOLDERS' EQUITY: (CONTINUED)
In November 1991, the Company completed a public offering of 8,100,000
shares of Common Stock at $11.50 per share. Proceeds from this offering were
$87,975 after deducting the underwriting discount and offering expenses of
$5,175.
STOCK OPTIONS:
The Company sponsors two non-qualified stock option plans for directors and
key employees. These plans provide for the issuance of up to 8,150,000 shares.
Options may be granted only to employees or directors at option prices not less
than the fair market value of the Company's Common Stock on the date of the
grant. At February 26, 1994, options to purchase 3,144,000 shares are
outstanding under these plans. In addition, at February 26, 1994, an option to
purchase 26,000 shares is outstanding to an officer, not pursuant to a plan.
Option activity for each of the years in the period ended February 26, 1994,
is as follows:
<TABLE>
<CAPTION>
OPTION PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
Outstanding March 2, 1991............................ 2,271,000 $ 2.21 - 5.56
Granted............................................ 603,000 3.50 - 10.31
Exercised.......................................... (690,000) 2.21 - 3.76
Cancelled.......................................... (93,000) 2.75 - 5.56
---------
Outstanding February 29, 1992........................ 2,091,000 2.21 - 10.31
Granted............................................ 912,000 5.89 - 6.29
Exercised.......................................... (837,000) 2.21 - 6.29
Cancelled.......................................... (45,000) 2.21 - 6.29
---------
Outstanding February 27, 1993........................ 2,121,000 2.21 - 10.31
Granted............................................ 1,391,000 11.23 - 13.58
Exercised.......................................... (240,000) 2.21 - 10.31
Cancelled.......................................... (102,000) 2.21 - 12.00
---------
Outstanding February 26, 1994........................ 3,170,000 2.21 - 13.58
---------
---------
Exercisable February 26, 1994........................ 934,000 $ 2.21 - 13.58
---------
---------
</TABLE>
7. INCOME TAXES:
In fiscal 1994, the Company adopted FASB Statement No. 109 "Accounting for
Income Taxes" (FAS 109) and changed its method of accounting for income taxes
from the deferred method to the liability method required by FAS 109. As
permitted by FAS 109, prior years' financial statements have not been restated,
and the effect on pre-tax income in the current year is not significant. The
cumulative effect of the change as of February 28, 1993 was a charge to earnings
of $425.
F-16
<PAGE>
BEST BUY CO., INC.
NOTES TO ANNUAL FINANCIAL STATEMENTS (CONTINUED)
($ IN 000, EXCEPT PER SHARE AMOUNTS)
7. INCOME TAXES: (CONTINUED)
Deferred taxes under FAS 109 are the result of differences between the basis
of assets and liabilities for financial reporting and income tax purposes.
Significant deferred tax assets and liabilities as of February 26, 1994 consist
of the following:
<TABLE>
<S> <C>
Deferred service plan revenue and warranty reserve..................... $18,625
Inventory.............................................................. 3,326
Compensation and benefits.............................................. 1,547
Other -- net........................................................... 766
-------
Total deferred tax assets.......................................... 24,264
-------
Property and equipment................................................. 3,988
Other -- net........................................................... 110
-------
Total deferred tax liabilities..................................... 4,098
-------
Net deferred tax assets................................................ $20,166
-------
-------
</TABLE>
The deferred income tax expense (benefit) under the previous method of
accounting for income taxes for fiscal 1993 and 1992 is comprised of the
following:
<TABLE>
<CAPTION>
1992 1993
----- -------
<S> <C> <C>
Deferred service plan revenue and warranty reserve.............. $(161) $(2,308)
Depreciation expense............................................ 483 826
Inventory cost capitalization................................... (176) (497)
Reserves for losses not currently deductible.................... (50) (558)
Other........................................................... (93) (50)
----- -------
$ 3 $(2,587)
----- -------
----- -------
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1992 1993 1994
------ ------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $4,637 $12,129 $25,909
State............................................... 1,120 2,628 5,882
------ ------- -------
5,757 14,757 31,791
------ ------- -------
Deferred:
Federal............................................. 2 (2,118) (4,620)
State............................................... 1 (469) (503)
------ ------- -------
3 (2,587) (5,123)
------ ------- -------
Provision for income taxes............................ $5,760 $12,170 $26,668
------ ------- -------
------ ------- -------
</TABLE>
F-17
<PAGE>
BEST BUY CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
($ IN 000, EXCEPT PER SHARE AMOUNTS)
7. INCOME TAXES: (CONTINUED)
Following is a reconciliation of the provision for income taxes to the
Federal statutory rate:
<TABLE>
<CAPTION>
1992 1993 1994
------- -------- --------
<S> <C> <C> <C>
Federal income tax at the statutory rate........ $ 5,223 $ 10,888 $ 23,932
State income taxes, net of federal benefit...... 750 1,412 3,320
Effect of tax rate change on deferred taxes..... (309)
Tax exempt investment income.................... (281) (228) (341)
Other........................................... 68 98 66
------- -------- --------
Provision for income taxes...................... $ 5,760 $ 12,170 $ 26,668
------- -------- --------
------- -------- --------
Effective tax rate.............................. 37.5% 38.0% 39.0%
</TABLE>
8. LEGAL PROCEEDINGS:
The Company is involved in various legal proceedings arising during the
normal course of conducting business. Management believes that the resolution of
these proceedings will not have any material adverse impact on the Company's
financial condition.
F-18
<PAGE>
New Concept III store exterior
[Map] Best Buy
currently
operates 177
stores and is
now located in
22 states. The
Company
anticipates
operating 204
stores by the
end of the
current fiscal
year.
Prior to fiscal
1995
New states in fiscal
1995
- Cities currently
served
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF BEST BUY AND BEST
BUY CAPITAL SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information.............................. 4
Incorporation of Certain Documents by Reference.... 4
Prospectus Summary................................. 5
Investment Considerations.......................... 14
Use of Proceeds.................................... 17
Capitalization..................................... 17
Market Prices of Best Buy Common Stock............. 18
Dividend Policy.................................... 18
Selected Financial and Operating Data.............. 19
Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 20
Business........................................... 26
Management......................................... 35
Best Buy Capital................................... 37
Description of Securities Offered.................. 37
Description of Best Buy Capital Stock.............. 63
Certain Best Buy Charter and By-Law Provisions..... 63
Certain Federal Income Tax Considerations.......... 64
Underwriting....................................... 68
Validity of the Securities......................... 69
Experts............................................ 69
Index of Defined Terms............................. 70
Index to Financial Statements...................... F-1
</TABLE>
4,000,000 PREFERRED SECURITIES
BEST BUY CAPITAL
% CONVERTIBLE MONTHLY INCOME
PREFERRED SECURITIES
GUARANTEED TO THE EXTENT
SET FORTH HEREIN BY, AND CONVERTIBLE
INTO COMMON STOCK OF,
BEST BUY CO., INC.
---------
---------
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
Incorporated
WILLIAM BLAIR & COMPANY
REPRESENTATIVES OF THE UNDERWRITERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION METHOD OF FILING
- ------- ------------------------------------------------------------------------------------- ----------------
<C> <S> <C>
23.1 Consent of Deloitte & Touche LLP. Filed herewith
</TABLE>
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Best Buy Co.,
Inc. and Best Buy Capital, L.P. certify that they have reasonable grounds to
believe that they meet all of the requirements for filing on Form S-3 and have
duly caused this Amendment to Registration Statement to be signed on their
behalf by the undersigned, thereunto duly authorized, in the City of
Minneapolis, State of Minnesota, on the 25th day of October, 1994.
BEST BUY CO., INC.
By /s/ RICHARD M. SCHULZE
------------------------------------
Richard M. Schulze
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
BEST BUY CAPITAL, L.P.
By: Best Buy Co., Inc., its General
Partner
By /s/ RICHARD M. SCHULZE
------------------------------------
Richard M. Schulze
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following directors and
officers of Best Buy Co., Inc. in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------ ----------------------------------------- --------------------
<C> <S> <C>
/s/ RICHARD M. SCHULZE Chairman and Chief Executive Officer October 25, 1994
-------------------------------------- (principal executive officer) and
Richard M. Schulze Director
* Executive Vice President and Chief October 25, 1994
-------------------------------------- Financial Officer (principal financial
Allen U. Lenzmeier officer)
* Senior Vice President -- Finance and October 25, 1994
-------------------------------------- Treasurer (principal accounting officer)
Robert C. Fox
/s/ BRADBURY H. ANDERSON Director October 25, 1994
--------------------------------------
Bradbury H. Anderson
Director
--------------------------------------
Culver Davis, Jr.
/s/ ELLIOT S. KAPLAN Director October 25, 1994
--------------------------------------
Elliot S. Kaplan
Director
--------------------------------------
David Stanley
* Director October 25, 1994
--------------------------------------
Frank D. Trestman
Director
--------------------------------------
James C. Wetherbe
*By: /s/ RICHARD M. SCHULZE
-------------------------------------
Richard M. Schulze
ATTORNEY-IN-FACT
</TABLE>
II-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
METHOD OF
NUMBER DESCRIPTION FILING
- ------ ----------------------------------------------------------------------------------------------- --------------
<C> <S> <C>
23.1 Consent of Deloitte & Touche LLP. Filed herewith
</TABLE>
<PAGE>
[Photos]
During the past year, Best Buy has been developing a strategy to further enhance
its store format. This strategy, known as "Concept III," features a larger,
redesigned store format created to produce a more informative and exciting
shopping experience. Interactive Answer Centers, featuring touch screen
monitors, will be stationed throughout the store to provide audio and video
presentations enabling users to compare products and better understand their
features.
Best Buy's largest product category is home office, which includes personal
computers. In addition to offering a wide selection of name brand computers and
related peripheral equipment, the stores offer a wide assortment of computer
software and related services, such as computer training, configuration,
maintenance and upgrades.
<PAGE>
[Photos]
The Concept III stores will feature hands-on demonstrations where customers can
try the latest video games in the "Fun & Games" area or see for themselves how
sound quality is enhanced by different configurations of audio components in a
television "surround sound" system.
The entertainment software area will have approximately 100 private listening
stations to sample featured compact discs. The audio area will have a speaker
room with a 100 disc CD changer and a simulated, life-size car where customers
can compare speaker quality while listening to their choice of music.
<PAGE>
[Photo]
New Concept III store exterior
[Map]
Best Buy currently operates 176 stores and is now located in 22 states. The
Company anticipates operating 204 stores by the end of the current fiscal year.
[Shaded area] Prior to fiscal 1995
[Black area] New states in fiscal 1995
[Bullets] Cities currently served
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
Best Buy Co., Inc.
Minneapolis, Minnesota
We consent to the incorporation by reference in this Amendment No. 2 to
Registration Statement No. 33-55701 of Best Buy Co., Inc. on Form S-3 of the
reports of Deloitte & Touche dated April 13, 1994, appearing and incorporated by
reference in the Annual Report on Form 10-K of Best Buy Co., Inc. for the year
ended February 26, 1994 and to the use of our report dated April 13, 1994,
appearing in the prospectus, which is part of this Registration Statement. Such
reports express an unqualified opinion and include an explanatory paragraph
regarding a change in accounting method for income taxes during the year ended
February 26, 1994.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/_Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
October 25, 1994
