<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended November 28, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from________ to___________
Commission File Number: 1-9595
BEST BUY CO., INC.
(Exact Name of Registrant as Specified in its Charter)
Minnesota 41-0907483
(State of Incorporation) (IRS Employer Identification
Number)
7075 Flying Cloud Drive 55344
Eden Prairie, Minnesota (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (612)947-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
--- ---
At November 28, 1998, there were 100,882,000 shares of common
stock, $.10 par value, outstanding.
<PAGE>
BEST BUY CO., INC.
FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 28, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Consolidated Financial Statements:
a) Consolidated balance sheets as of 3-4
November 28, 1998, February 28, 1998 and
November 29, 1997
b) Consolidated statements of earnings 5
for the three and nine months ended
November 28, 1998 and November 29, 1997
c) Consolidated statement of changes in 6
shareholders' equity for the nine months
ended November 28, 1998
d) Consolidated statements of cash flows 7
for the nine months ended November 28, 1998
and November 29, 1997
e) Notes to consolidated financial statements 8-9
Item 2. Management's Discussion and Analysis of 10-13
Financial Condition and Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
BEST BUY CO., INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
($ in 000, except per share amounts)
<TABLE>
<CAPTION>
November 28, February 28, November 29,
1998 1998 1997
(Unaudited) (Unaudited)
---------------- --------------- ----------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 409,373 $ 520,127 $ 122,060
Receivables 278,468 95,702 197,192
Recoverable costs from developed
properties 75,329 8,215 36,883
Merchandise inventories 1,684,928 1,060,788 1,679,721
Refundable and deferred income taxes 11,925 16,650 10,058
Prepaid expenses 11,630 8,795 13,537
------------ ------------- -------------
Total current assets 2,471,653 1,710,277 2,059,451
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 22,946 19,977 18,006
Leasehold improvements 164,140 160,202 157,177
Furniture, fixtures, and equipment 455,084 372,314 360,967
Property under capital leases 29,079 29,079 29,079
------------ ------------- -------------
671,249 581,572 565,229
Less accumulated depreciation and
amortization 297,822 248,648 238,269
------------ ------------- -------------
Net property and equipment 373,427 332,924 326,960
OTHER ASSETS 12,172 13,145 14,635
------------ ------------- -------------
TOTAL ASSETS $2,857,252 $2,056,346 $2,401,046
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
See notes to consolidated financial statements.
3
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BEST BUY CO., INC.
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
($ in 000, except per share amounts)
<TABLE>
<CAPTION>
November 28, February 28, November 29,
1998 1998 1997
(Unaudited) (Unaudited)
-------------- -------------- -----------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $1,482,839 $ 727,087 $ 1,164,128
Obligations under financing arrangements 51,182 35,565 50,238
Accrued compensation and related expenses 59,270 48,772 37,688
Accrued liabilities 235,673 188,352 170,221
Deferred service plan revenue 8,253 18,975 21,596
Current portion of long-term debt 32,132 14,925 18,287
------------ -------------- ----------------
Total current liabilities 1,869,349 1,033,676 1,462,158
DEFERRED INCOME TAXES 6,823 7,095 3,578
OTHER LONG-TERM LIABILITIES 27,629 17,578 18,862
LONG-TERM DEBT 31,830 210,397 211,624
CONVERTIBLE PREFERRED SECURITIES OF
SUBSIDIARY - 229,854 230,000
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value:
Authorized - 400,000 shares;
Issued and outstanding - none - - -
Common stock, $.10 par value:
Authorized - 400,000,000 shares;
Issued and outstanding - 100,882,000,
89,252,000, and 87,812,000 shares,
respectively 10,088 4,463 4,391
Additional paid-in capital 510,145 266,144 247,320
Retained earnings 401,388 287,139 223,113
------------ -------------- ----------------
Total shareholders' equity 921,621 557,746 474,824
------------ -------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,857,252 $2,056,346 $2,401,046
------------ -------------- ----------------
------------ -------------- ----------------
</TABLE>
See notes to consolidated financial statements.
4
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BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF EARNINGS
($ in 000, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
November 28, November 29, November 28, November 29,
1998 1997 1998 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $2,493,843 $2,106,361 $6,619,631 $5,506,116
Cost of goods sold 2,048,252 1,768,471 5,409,472 4,631,435
----------- ---------- ----------- -----------
Gross profit 445,591 337,890 1,210,159 874,681
Selling, general and administrative
expenses 353,985 284,971 1,017,693 796,620
----------- ---------- ----------- -----------
Operating income 91,606 52,919 192,466 78,061
Interest expense, net 3,190 9,601 6,695 28,171
----------- ---------- ----------- -----------
Earnings before income taxes 88,416 43,318 185,771 49,890
Income taxes 34,027 16,900 71,522 19,463
----------- ---------- ----------- -----------
Net earnings $ 54,389 $ 26,418 $ 114,249 $ 30,427
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Net earnings per share
Basic $ .54 $ .30 $ 1.15 $ .35
Diluted $ .52 $ .29 $ 1.10 $ .34
Weighted number of shares (000)
Basic 100,806 87,695 99,035 87,477
Diluted 105,023 100,763 104,673 89,064
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
BEST BUY CO., INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED NOVEMBER 28, 1998
($ in 000)
(Unaudited)
<TABLE>
<CAPTION>
Additional
Common paid-in Retained
stock capital earnings
---------- ---------- ---------
<S> <C> <C> <C>
Balance, February 28, 1998 $ 4,463 $266,144 $287,139
Conversion of preferred securities, net 509 221,896 -
Stock options exercised 106 12,571 -
Tax benefit from stock options
exercised - 17,006 -
Repurchase and retirement of common stock (6) (2,456) -
Two-for-one stock split 5,016 (5,016) -
Net earnings, nine months ended
November 28, 1998 - - 114,249
-------- -------- ---------
Balance, November 28, 1998 $10,088 $510,145 $401,388
-------- -------- ---------
-------- -------- ---------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
November 28, November 29,
1998 1997
-------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 114,249 $ 30,427
Depreciation, amortization and other non-cash charges 56,394 52,628
------------- ------------
170,643 83,055
Changes in operating assets and liabilities:
Receivables (182,766) (117,611)
Merchandise inventories (624,140) (547,662)
Refundable income taxes and prepaid expenses 7,722 8,116
Accounts payable 755,752 676,326
Other current liabilities 57,819 51,635
Deferred revenue and other liabilities 6,343 (12,354)
------------- ------------
Total cash provided by operating
activities 191,373 141,505
INVESTING ACTIVITIES:
Additions to property and equipment (95,040) (47,955)
(Increase) Decrease in recoverable costs from developed
properties (67,114) 16,602
(Increase) Decrease in other assets (3,245) 3,004
------------- ------------
Total cash used in investing activities (165,399) (28,349)
FINANCING ACTIVITIES:
Increase (Decrease) in obligations under
financing arrangements 15,617 (77,272)
Long-term debt borrowings - 10,000
Long-term debt payments (162,031) (18,105)
Common stock issued 12,148 4,473
Repurchase of common stock (2,462) -
------------- ------------
Total cash used in financing activities (136,728) (80,904)
------------- ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (110,754) 32,252
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 520,127 89,808
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 409,373 $ 122,060
------------- ------------
------------- ------------
Amounts in this statement are presented on a cash basis and therefore may differ
from those shown in other sections of this quarterly report.
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 23,822 $ 30,723
Income taxes $ 60,728 $ 1,807
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
BEST BUY CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The consolidated balance sheets as of November 28, 1998, and November 29,
1997, the related consolidated statements of earnings for the three and
nine months ended November 28, 1998 and November 29, 1997, the consolidated
statements of cash flows for the nine months ended November 28, 1998 and
November 29, 1997 and the consolidated statement of changes in
shareholders' equity for the nine months ended November 28, 1998, 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. The Company's business is seasonal in
nature and interim results are not necessarily indicative of results for a
full year. These interim 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
28, 1998. The February 28, 1998 consolidated balance sheet is derived from
the audited financial statements. Certain prior year amounts have been
reclassified to conform to current year presentation.
2. INCOME TAXES:
Income taxes are provided on an interim basis based upon management's
estimate of the annual effective tax rate. The footnotes in the Company's
most recent annual report stated that the Internal Revenue Service (IRS)
had taken a position that interest on securities such as the Company's
convertible preferred securities was not deductible for federal income tax
purposes. The IRS has subsequently retracted its position with regard to
the Company's securities.
3. EARNINGS PER SHARE:
The Company applies the requirements of Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings per Share." Prior year earnings per
share have been restated as necessary. This restatement did not have an
impact on earnings per share. The following is a reconciliation of the
numerators and denominators of basic and diluted earnings per share.
Amounts in the following table, except per share data, are in thousands.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- --------------------------------
November 28, November 29, November 28, November 29,
1998 1997 1998 1997
------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
Numerator:
Net earnings $ 54,389 $ 26,418 $ 114,249 $ 30,427
Interest on preferred securities,
net of tax - 2,395 770 -
---------- ---------- -------------- ----------
Net earnings assuming dilution $ 54,389 $ 28,813 $ 115,019 $ 30,427
---------- ---------- -------------- ----------
---------- ---------- -------------- ----------
Denominator:
Average common shares outstanding 100,806 87,695 99,035 87,477
Effect of dilutive securities:
Employee stock options 4,217 2,847 2,845 1,587
Preferred securities - 10,221 2,793 -
---------- ---------- -------------- ----------
Average common shares outstanding
assuming dilution 105,023 100,763 104,673 89,064
---------- ---------- -------------- ----------
---------- ---------- -------------- ----------
Basic earnings per share $ .54 $ .30 $ 1.15 $ .35
Diluted earnings per share $ .52 $ .29 $ 1.10 $ .34
</TABLE>
8
<PAGE>
In May 1998, the Company effected a two-for-one stock split in the form
of a stock dividend. All common share and per share information
reflects the stock split.
4. CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY:
In April 1998, over 99% of the Company's 6.5% Convertible Monthly Income
Preferred Securities were converted into approximately 10.2 million
post-split shares of common stock, increasing shareholders' equity by over
$222 million net of $6.8 million in deferred offering costs. The remaining
outstanding preferred securities were redeemed for cash of $50 per security
in June 1998 at a cost of $671,000.
5. CREDIT FACILITY:
In May 1998, the Company entered into a new, unsecured $220 million
revolving credit facility, replacing the $365 million facility which was
scheduled to mature in June 1998. The new facility matures on June 30, 2000
and can be extended for one year upon meeting certain requirements.
6. SENIOR SUBORDINATED NOTES:
On October 5, 1998, the Company redeemed its $150 million, 8-5/8% Senior
Subordinated Notes due 2000, at 102.5% of their par value. The early
redemption premium and the write-off of the remaining unamortized deferred
offering costs were included in interest expense in the third quarter.
7. PRE-OPENING COSTS:
During the first quarter of fiscal 1999, the Company adopted Statement of
Position (SOP) 98-5, "Reporting on the Cost of Start-Up Activities." The
SOP requires the cost of start-up activities, including store pre-opening
costs, to be expensed in the period incurred. The Company historically
deferred and amortized those costs over interim periods in the year the
store opened. Selling, general and administrative expenses in the third
quarter of fiscal year 1999 were impacted by pre-opening costs of $6
million associated with 23 new store openings as compared to $1.2 million
that was amortized in the third quarter of last year. Other than the impact
reported for the third quarter, the adoption did not materially impact the
Company's quarterly results.
8. SHARE REPURCHASE PROGRAM:
In October 1998, the Company's Board of Directors approved the purchase of
up to $100 million of the Company's common stock from time to time through
open market purchases over the following twelve months. As of November 28,
1998, 62,500 shares have been purchased at a cost of approximately $2.5
million.
9
<PAGE>
BEST BUY CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net earnings for the third quarter of fiscal 1999 were a record $54.4
million, or $.52 per share on a diluted basis, compared to net earnings of
$26.4 million, or $.29 per share, in the comparable period last year. For the
first nine months of the current fiscal year, net earnings were a record
$114.2 million, or $1.10 per share on a diluted basis, compared to net
earnings of $30.4 million, or $.34 per share, for the same period last year.
The record results were due to strong sales of technology products and market
share gains combined with continued improvement in gross profit margins and
lower interest expense. Partially offsetting these gains was higher selling,
general and administrative expenses as a result of strategic initiatives to
improve operating performance, higher levels of compensation and increased
business volume.
Revenues in the third quarter increased 18% to $2.494 billion compared to $2.106
billion in the third quarter last year. Revenues in the first nine months
increased 20% to $6.620 billion compared to $5.506 billion last year. The
revenue increases were driven by comparable store sales increases of 12.2% for
the quarter and 14.9% for the first nine months. Consumer demand for technology
products and market share gains during the periods were the primary reasons for
the comparable store sales increases as all major product categories had
comparable store sales increases. Sales of technology products such as digital
phones and cameras, direct broadcast satellite systems and Web TV continued to
benefit from the Company's selling strategy introduced in the third quarter last
year. This strategy provides customers with a higher level of assistance with
product demonstration and explanation. Additionally, sales of Digital Versatile
Disk (DVD) hardware and software contributed to the year over year sales gains
as declining price points for hardware and an increase in the number of movie
titles resulted in significant growth of this technology. In the home office
category, unit volumes of personal computers increased significantly as compared
to last year and more than offset an approximately 20% year-over-year decline in
average selling price. Increased advertising effectiveness and improved
inventory management that resulted in better product instock positions were also
factors contributing to the sales gains.
As of November 28, 1998, the Company operated 312 stores compared to 285 stores
one year ago, contributing to the increase in sales in the current year. In the
third quarter, the Company opened 23 new stores bringing the total store
openings for fiscal year 1999 to 28, including entries into the New England
market with eight stores; Nashville, TN with three stores; and one store each in
Syracuse, NY; Charleston, SC and Wausau, WI. The Company plans to open 40 to 45
new stores during the next fiscal year including entry into the Sacramento and
San Francisco, CA, Northern Florida, Upstate New York and Richmond and Norfolk,
VA markets.
Retail store sales mix by major product category for the three-month and
nine-month periods was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
11/28/98 11/29/97 11/28/98 11/29/97
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Home Office 38% 40% 37% 40%
Consumer Electronics
Video 17 16 16 15
Audio 10 10 10 11
Entertainment Software 19 18 19 18
Appliances 8 9 10 10
Other 8 7 8 6
----- ----- ----- -----
Total 100% 100% 100% 100%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
Gross profit margins increased to 17.9% and 18.3% of sales for the three- and
nine-month periods, respectively, this year compared to 16.0% and 15.9% for the
same periods last year. Increased gross profit margins were due to continued
progress on the Company's initiatives to generate more profitable assortments,
increased advertising effectiveness and improved inventory management. The
increase in sales of Performance Service Plans (PSPs)
10
<PAGE>
to 3.8% of sales for both the quarter and for the nine-month period of fiscal
1999 from 3.2% and 3.0% of sales, respectively, in the comparable periods
last year also contributed to the higher gross profit margins. These
increases were driven, in part, by the Company's sales strategy and higher
unit volumes of computers. Another significant factor in the gross profit
margin improvement was the sustained progress in reducing inventory shrink as
a result of better execution at the retail stores. Management expects that,
while gross profit margins will continue to be above prior year levels, the
increases will not be as significant due to benefits already realized from
progress on the Company's strategic initiatives. Gross profit margins in the
fourth quarter will be impacted by a traditionally lower margin product sales
mix and a lower level of PSP sales during the high volume holiday season.
Selling, general and administrative expenses (SG&A) were 14.2% and 15.4% of
sales for the three- and nine-month periods, respectively, this year compared
to 13.5% and 14.5% for last year's comparable periods. An increase in payroll
related expense compared to last year was primarily due to higher levels of
compensation resulting from labor-market conditions, hiring seasonal staff
earlier in the quarter to meet anticipated staffing needs as well as an
increase in overall financial performance-based compensation. Outside
services expenses increased due to the Company's continued programs to
improve operating performance, expand business initiatives and address year
2000 systems issues. The spending on outside services has contributed to
improved inventory management, better trained employees and more efficient
operations at the retail stores. The benefit of the increased investment in
SG&A is evidenced by the improvement in operating income which was 3.7% of
sales in the third quarter this year compared to 2.5% of sales in last year's
third quarter. Costs associated with the opening of 23 stores during the
third quarter, principally wages and travel costs, reduced operating income
by approximately $6 million. The overall decrease in SG&A as a percent of
sales in the third quarter as compared to the first six months of the fiscal
year, is due to the seasonally higher sales volumes which provided leverage
on fixed operating expenses.
Net interest expense was $3.2 million in the third quarter and $6.7 million
for the year-to-date period, reflecting decreases of $6.4 million and $21.5
million, respectively, compared to the same periods last year. The decreases
were primarily due to the conversion of the Company's convertible preferred
securities into equity in the first quarter and the early redemption of the
Company's $150 million 8 5/8% Senior Subordinated Notes (Notes) on October 5,
1998 (see Note 6 in the Notes to Consolidated Financial Statements). The
remaining improvements in net interest expense are due to interest earned on
higher cash balances resulting from faster inventory turns and higher sales
volumes. In connection with the early redemption of the Notes, the Company
paid a prepayment premium and wrote-off the associated remaining deferred
debt offering costs which are included in interest expense and reduced third
quarter earnings before income taxes by approximately $4.9 million.
The Company's effective income tax rate for the quarter and first nine months of
the current fiscal year was 38.5% compared to 39.0% for the same periods last
year. The slight decline in the tax rate was due to the levels of tax exempt
interest income earned on higher cash balances.
FINANCIAL CONDITION
Working capital of $602 million at November 28, 1998, was essentially
unchanged from a year ago even after the $150 million redemption of the Notes
on October 5, 1998. Cash and cash equivalents increased by $287 million as a
result of improved inventory management and net earnings of nearly $180
million in the past twelve months. Merchandise inventories were unchanged
compared to last year, even with the operation of 27 additional stores. The
Company's net investment in inventory, inventory net of accounts payable,
decreased from $465 million at November 27, 1997 to $151 million at November
28, 1998 as result of faster inventory turns. Receivables increased by $81
million due primarily to higher business volumes. Recoverable costs from
developed properties increased by $38 million due to self development of new
stores and a new distribution facility. Accounts payable increased by $319
million because of the additional business volume and new stores and improved
inventory turns. Accruals for payroll related liabilities increased as
compared to last year's third quarter as a result of higher levels of
compensation. Accrued liabilities increased as a result of outside services
fees, the generally higher levels of business activity and increased income
taxes due to the significant increase in earnings as compared to last year.
11
<PAGE>
Capital spending in the first nine months of fiscal 1999 was $95 million
compared to $48 million for the same period last year. In addition to opening 28
new stores in fiscal 1999, the Company has begun development of the 40 to 45
stores scheduled to open in fiscal 2000. The Company is also constructing a new
distribution center in Dinuba, CA, which will replace a leased facility in
Ontario, CA. Additionally, the Company is increasing its investment in new
systems and technology to support business requirements. Management expects that
total capital spending for the fiscal year will be approximately $150 million,
exclusive of recoverable costs from developed properties.
In the first quarter of fiscal 1999, essentially all of the Company's
convertible preferred securities were converted into common stock, resulting in
the issuance of approximately 10.2 million common shares. This conversion
increased shareholders' equity by over $222 million, net of the remaining $6.8
million in deferred issuance costs. The remaining preferred securities were
redeemed in June 1998 for cash of $671,000. In October 1998, the Company
completed the redemption of its $150 million 8 5/8% Senior Subordinated Notes
due 2000.
In May 1998, the Company entered into a new, unsecured $220 million revolving
credit facility, replacing the $365 million facility that was scheduled to
mature in June 1998. The Company was able to reduce the size of the facility due
to improved operating performance and better inventory management. The new
facility is scheduled to mature on June 30, 2000 and can be extended for one
year if certain conditions are met. Management believes that funds from
operations, credit from normal vendor terms and the Company's new credit
facility will be sufficient to support the Company's operations and planned
expansion for the next year.
In October 1998, the Company's Board of Directors authorized the purchase of up
to $100 million of the Company's common stock. Through November 28, 1998, 62,500
shares at a cost of $2.5 million have been purchased.
YEAR 2000 READINESS
The Company understands the material nature of the business issues surrounding
computer processing of dates into and beyond the year 2000 (Y2K). Any computer
program or computer chip controlled device could harbor a year 2000 processing
issue. Typically, Y2K issues arise from systems or software processing only two
digits representing a date. The absence of century digits, ("19" for years
1900-1999, or "20" for years beginning in 2000) usually leads to false results
from computer controlled systems and is the most pervasive issue.
The Company recognized that the Y2K issues existed within its computer programs
and computer chip controlled devices and has taken corrective action. The
Company's actions to address Y2K issues began with the selection of a nationally
recognized, experienced computer hardware and consulting firm to assist in both
identifying and resolving these issues. The Company developed specific and
detailed plans to correct Y2K issues and, to date, has made significant progress
as follows.
The majority of the Company's business processing applications operate on
mainframe computer systems. Over five million lines of computer programming were
scanned and analyzed to identify Y2K issues in these systems. In the past year,
corrective programming logic to replace existing computer code for these Y2K
issues has been installed and this effort is over 90% complete. Testing of the
corrected logic is taking place as changes are made. This portion of the
Company's plan is scheduled to be substantially complete in early calendar year
1999 at a total cost of approximately $10 million in outside professional fees,
of which the majority has been or will be expensed in the current year. In
addition, the Company is dedicating a staff of its internal resources to address
Y2K issues.
The Company is also replacing or installing certain computer hardware and
software which will address new business applications as well as Y2K issues. The
timing of some of these projects has been accelerated to meet year 2000
compliance. The Company expects to fund both the capital and expensed elements
of resolving Y2K issues through funds generated from operations.
In addition to the mainframe system Y2K issues, the Company has substantially
completed efforts to identify non-mainframe computer systems and other potential
Y2K issues. These issues include the Company's communication systems and
operating systems at and between the Company's operating locations and support
facilities. The Company is also corresponding with its business partners and
service providers to assess their
12
<PAGE>
ability to support the Company's operations with respect to their individual Y2K
issues. These issues include data exchange with the Company as well as their
production and shipping processes. The issues that are identified as part of
this process have been prioritized in order of significance to the Company's
operations and corrective action is being taken as appropriate. This portion of
the Company's plan is expected to be completed at a total cost of approximately
$8 million.
The Company generally believes that its vendors who supply products to the
Company for resale are responsible for Y2K functionality of those products.
However, should product failures occur, the Company may be required to address
the administrative aspects of those failures such as handling product returns or
repairs.
Following the completion of the assessment of the remaining Y2K issues in the
fourth quarter of fiscal 1999, the Company will determine the likelihood of
successfully addressing the issues on a timely basis. While the Company believes
that it is pursuing the appropriate courses of action to ensure year 2000
readiness, there can be no assurance that the objective will be achieved either
internally or as it relates to business partners. For the Y2K issues which, if
not timely resolved, could have a significant impact on the Company's
operations, the Company intends to develop contingency plans to minimize the
impact of failure to achieve year 2000 compliance. Those contingency plans are
expected to be reasonably developed in early calendar year 1999.
SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 (THE "1995 ACT")
The Company filed a Current Report on Form 8-K on May 15, 1998, with the
Securities and Exchange Commission. The Report contains cautionary statements
identifying important factors that could cause the Company's actual results to
differ materially from those projected in forward looking statements made by the
Company herein. Forward looking statements made in this Quarterly Report on Form
10-Q, in particular as they relate to the Company's year 2000 readiness, are
made subject to the safe harbor provisions 1995 Act.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
a. Exhibits: Method of Filing
----------------
27.1 Financial Data Schedule Filed herewith
b. Reports on Form 8-K:
Share repurchase program, filed on
October 13, 1998
New director appointment, filed on
October 13, 1998
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BEST BUY CO., INC.
(Registrant)
Date: January 7, 1999 By: /s/ ALLEN U. LENZMEIER
------------------------------------
Allen U. Lenzmeier, Executive Vice
President & Chief Financial Officer
(principal financial officer)
By: /s/ ROBERT C. FOX
------------------------------------
Robert C. Fox, Senior Vice President-
Finance & Treasurer (principal
accounting officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATMENTS FOR THE PERIODS INDICATED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-27-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> NOV-28-1998
<CASH> 409,373
<SECURITIES> 0
<RECEIVABLES> 278,468
<ALLOWANCES> 0
<INVENTORY> 1,684,928
<CURRENT-ASSETS> 2,471,653
<PP&E> 671,249
<DEPRECIATION> 297,822
<TOTAL-ASSETS> 2,857,252
<CURRENT-LIABILITIES> 1,869,349
<BONDS> 31,830
0
0
<COMMON> 10,088
<OTHER-SE> 911,533
<TOTAL-LIABILITY-AND-EQUITY> 2,857,252
<SALES> 6,619,631
<TOTAL-REVENUES> 6,619,631
<CGS> 5,409,472
<TOTAL-COSTS> 5,409,472
<OTHER-EXPENSES> 1,017,693
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,695
<INCOME-PRETAX> 185,771
<INCOME-TAX> 71,522
<INCOME-CONTINUING> 114,249
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 114,249
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.10
</TABLE>
