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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 27, 1999.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
Commission File Number: 1-9595
BEST BUY CO., INC.
(Exact Name of Registrant as Specified in its Charter)
MINNESOTA 41-0907483
(State of Incorporation) (I.R.S. Employer
Identification Number)
7075 FLYING CLOUD DRIVE
EDEN PRAIRIE, MINNESOTA 55344
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 612-947-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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The aggregate market value of voting stock held by non-affiliates of the
Registrant on April 30, 1999, was approximately $5,527,000,000. On that date,
there were 204,643,509 shares of Common Stock issued and outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
February 27, 1999 ("Annual Report") are incorporated by reference into Part II.
Portions of the Registrant's Proxy Statement dated May 21, 1999 for the regular
meeting of shareholders to be held June 24, 1999 ("Proxy Statement") are
incorporated by reference into Part III.
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The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information about their companies. With the exception of historical
information, the matters discussed in this Annual Report on Form 10-K are
forward-looking statements and may be identified by the use of words such as
"believe," "expect," "anticipate," "plan," "estimate," "intend" and
"potential." Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions. A variety of factors could cause the Company's actual results to
differ materially from the anticipated results expressed in such
forward-looking statements, including, among other things, general economic
conditions, sales volumes, profit margins, the Company's and its suppliers'
Year 2000 readiness, and the impact of labor markets and new product
introductions on the Company's overall profitability. Readers are encouraged
to review the Company's Current Report on Form 8-K filed on May 15, 1998,
that describes additional important factors that could cause actual results
to differ materially from those contemplated by the statements made herein.
PART I
ITEM 1. BUSINESS
General
Best Buy Co., Inc. (the "Company" or "Best Buy"), is the nation's
largest volume specialty retailer of name brand consumer electronics, home
office equipment, entertainment software and appliances. The Company started in
1966 as an audio component systems retailer, and in the early 1980s, with the
introduction of the video cassette recorder, expanded into video products. In
1983, the Company changed its marketing strategy to use mass merchandising
techniques for a wider variety of products, and began to operate its stores with
a "superstore" format. In 1989, Best Buy dramatically changed its method of
retailing by introducing its Concept II store format, a self-service,
non-commissioned, discount style sales environment designed to give the customer
more control over the purchasing process. The Company determined that an
increasing number of customers had become knowledgeable enough to select
products without the assistance of a commissioned salesperson and preferred to
make purchases in a more convenient and customer friendly environment.
In fiscal 1995, the Company developed a strategy to further enhance its
store format. The strategy, known as Concept III, incorporates a larger store
format created to produce a more informative and exciting shopping experience
for the customer. Through focus group interviews and other research, the Company
determined that customers wanted more product information and a larger product
selection. In order to meet these evolving consumer preferences, the Company
developed an enhanced store format which features more hands-on and interactive
product demonstrations. In fiscal 1999, the Company introduced its Concept IV
store format. This new format features improved merchandising, signage and
customer service and is expected to better address consumers' needs as the
consumer electronics industry, in particular, progresses into new digital
products. Concept IV reinforces the Company's retailing strategy as the
destination for new technology in a fun, informative and no pressure shopping
environment. With its innovative retail format, the Company has moved into a
leading position nationally in all of its principal product categories except
appliances, where it ranks third.
In fiscal 1999, the Company increased its store count by 10%, with the
addition of 28 new stores and, as of February 27, 1999, was operating 311 stores
in 36 states. The Company accelerated its expansion in fiscal 1999 after
initiatives to improve operations resulted in an enhanced operating model. The
Company anticipates opening approximately 45 stores in fiscal 2000, and expects
to be operating 356 stores by the end of fiscal 2000.
Business Strategy
The Company's business strategy is to offer consumers an enjoyable and
convenient shopping experience while maximizing the Company's profitability.
Best Buy believes it offers consumers meaningful advantages in store
environment, product value, selection and service. An objective of this strategy
has been to achieve a dominant market share in the markets Best Buy serves. The
Company currently holds a leading, and in some cases dominant, share in its
mature markets. The Company's store format features interactive displays, and
for certain product categories, a high level of customer assistance, all
designed to enhance the customer's shopping experience. As part of its overall
strategy, the Company:
- Generally offers a retail format similar to a self service
discount store for many products that consumers are familiar
with and provides a higher level of customer service and
product explanation for more technically complex and
integrated products.
- Provides a selection of brand name products comparable to
retailers that specialize in the Company's principal product
categories and seeks to ensure a high level of product
availability for customers.
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- Seeks to provide customers with the best product value
available in the market area through active comparison
shopping programs, daily price changes, lowest price
guarantees and special promotions, including interest-free
financing, performance service plans generally priced below
competitors, and home delivery.
- Provides a variety of services not offered by certain
competitors, including convenient financing programs, product
delivery and installation and post-sale services including
repair and warranty services and computer upgrades.
- Locates stores at sites that are easily accessible from major
highways and thoroughfares and seeks to create sufficient
concentrations of stores in major markets to maximize the
leverage on fixed costs including advertising and operations
management.
- Controls costs and enhances operating efficiency by centrally
controlling all buying, merchandising and 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 generally familiar with
certain products the Company sells and are accustomed to discount shopping
formats, they increasingly resist efforts to direct their choice of product
and appreciate controlling the purchase decision. For products that are
relatively easy for consumers to understand and purchase, the Company employs
a self-service, discount style store format, featuring easy to locate product
groupings, emphasizing customer choice and product information. These
products include entertainment software and less complex consumer electronics
products such as boom boxes, VCRs and smaller sized television sets. For
other, more complex products such as personal computers, digital versatile
disc (DVD), digital phones and digital cameras, the Company provides
dedicated and specially trained sales assistance. Sales staff in these
product categories help customers understand the features and benefits of new
technology and can assist customers in the purchase of accessories and
registration for service with providers.
Best Buy continuously evaluates the retail environment and regularly
uses focus groups and customer surveys to assess customer preferences. Through
these processes, Best Buy concluded that customers want access to more product
information in order to be more confident about their buying decisions. Most
stores contain a demonstration area for home theater systems; a simulated,
life-size car display; and audio speaker areas. These demonstration areas allow
customers to experience and compare product performance firsthand. Most of the
stores also feature a "high touch" sales area where specially trained
salespeople assist customers with more complex products such as digital cameras,
digital phones and personal digital assistants. Best Buy believes that these
demonstration and display areas further differentiate it from competing
retailers and should also provide an advantage for the Company relative to
competitors such as catalog and Internet retailers. Most Best Buy stores feature
a configure to order process for personal computers that enables more
knowledgeable computer buyers to tailor order a computer system.
The Company also sells music software and DVD videos on its E-commerce
site, www.bestbuy.com. While E-commerce does not currently represent a
significant portion of the Company's business, the Company believes expansion of
its on-line sales initiative represents a significant growth opportunity and in
April 1999 named a president of its E-commerce Division to lead the continued
development and expansion of the Company's Internet initiative. The Company
plans to introduce other products in its principal product categories on its
E-commerce site in the coming year. Management believes that its retail stores
and E-commerce strategy should complement each other, allowing consumers to
purchase products in the shopping environment they prefer. The Company believes
that its marketplace visibility and significant size in the retailing of its
products should provide a competitive advantage over other Internet retailers.
The Company's existing name recognition and weekly print and television
advertising are examples of some of the efficiencies the Company has over new
entrants in E-commerce. Additionally, the ability to provide convenient product
service and repair creates an opportunity to differentiate the Company from
other Internet retailers.
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The Company's stores are in large, open buildings with high ceilings.
Best Buy's stores average approximately 44,000 square feet. The stores feature
interactive displays and skilled employee demonstrations; most stores feature
large viewing areas for big screen and projection televisions and interactive
speaker environments. The Company expects to open approximately 45 new stores in
fiscal 2000, including the testing of four 30,000 square foot stores designed
for smaller markets with populations up to 200,000.
Best Buy's merchandising strategy differs from many other retailers
selling comparable merchandise. Best Buy's merchandise is displayed at eye level
next to signs identifying the products' major features, with the boxed products
available near the display model. The Company's 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 for many of the products the Company sells
allows the customer to carry merchandise directly to the check-out lanes, pay
for it and leave the store, avoiding the time-consuming process used at
traditional superstores.
The Company believes that its advertising strategy continues to
contribute to its increasing market share and brand image. Best Buy spends
almost 3% of store sales on advertising, including the weekly distribution of
about 36 million newspaper inserts. The Company has vertically integrated
advertising and promotion capabilities and operates its own in-house advertising
agency. This capability allows the Company to respond rapidly to competitors in
a cost effective manner. In many of its markets, the Company is able to secure
and deliver merchandise to its stores and to create, produce and run an
advertisement all within a period of less than one week.
Print advertising generally consists of four-color weekly inserts,
generally 24 to 28 pages, that emphasize a variety of product categories and
feature extensive name brand selection with a wide range of price points. The
Company also produces all of its television commercials, each with a specific
marketing message. Television commercials account for about one-third of total
advertising expenditures. The Company also utilizes a national brand image
program to move Best Buy's image beyond that of a low price specialty retailer
by promoting the customer's shopping experience and the Company's responsiveness
to consumers' needs. The Company believes that building customer brand loyalty
is a significant element in its business strategy. 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, other discount stores, and Internet retailers which generally
do not provide such services. Virtually all products sold by the Company, with
the exception of entertainment software, carry manufacturers' warranties. The
Company generally offers to service and repair all of the products it sells and
has been designated by substantially all of its major suppliers as an authorized
service center. In addition, the Company makes its in-store technical support
staff available to assist customers with the custom configuration of personal
computers and peripheral products. The Company also delivers major appliances
and large electronics products and installs car stereos and vehicle security
systems. In fiscal 2000, the Company is dedicating significant resources to
expanding and improving its services capabilities. The Company is undertaking
efforts to reduce product repair times and increase its product installation
capabilities in customers' homes.
Product Selection and Merchandising
Best Buy provides a broad selection of name brand models within each
product line in order to provide customers with a meaningful assortment. The
Company currently offers approximately 5,300 products, exclusive of
entertainment software titles and accessories, in its four principal product
categories. In addition, the Company offers a selection of accessories
supporting its principal product categories, which typically yield a higher
margin than most of the Company's other products. The Company believes that this
assortment of accessories builds customer traffic for its other products.
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The home office category, Best Buy's largest product category, includes
personal computers and related peripheral equipment, telephones, digital and
cellular phones, answering machines, fax machines, copiers and calculators.
Approximately half of the revenues in this category are derived from sales of
personal computers. The retail market for personal computers is promotional and
competitive, with competition primarily from retail stores and factory to
customer direct channels of distribution. The Company's operating results can be
affected by significant changes in promotional activity as well as consumer
demand for and availability of personal computers and the timing of computer
model transitions by manufacturers. The timing of significant new software
releases can also impact sales of personal computers. Although the Company has
not yet experienced an impact on sales, consumer demand for personal computers
may also be affected by year 2000 computer systems concerns. The Company
believes that it is well positioned to withstand competition in the retail
market for personal computer products, traditionally low margin items, due to
its experience in the market and its significantly improved ability to manage
inventories in this category. The Company also believes that its broad product
lines, including those that generate higher gross profit margins, and its
relatively low cost structure contribute to its ability to compete in this
category. In addition, the Company believes that the related services it offers,
such as in-store computer configuration, maintenance and upgrades, are distinct
advantages compared to Internet discount and factory direct computer retailers.
Changing technology and hardware requirements necessary to support new software,
including on-line services, are expected to continue to be primary factors in
the growth in sales of personal computers and related products in the future.
Unit sales volume growth of personal computers has been driven by improvements
in technology and declines in retail selling prices of approximately 15% per
year. The increasing popularity of the Internet and the number of second time
buyers have also been factors in the unit growth of personal computers. While
the sales of personal computers generates relatively low gross profit margins,
the Company's selling strategies have enabled it to generate higher total
transaction profit margins through the sale of the accessories and services that
complete a home computer system. The Company's home office products category
includes brand names such as AT&T, Apple, Canon, Compaq, CTX, Epson, Fujitsu,
Hewlett Packard, IBM, Motorola, NEC, Packard Bell, Panasonic, Samsung, Sharp,
Sony, and Toshiba.
Best Buy's second largest product category is consumer electronics,
consisting of video and audio equipment. Video products include televisions, DVD
players, Web TV, video cassette recorders, camcorders and Digital Satellite
Systems (DSS). Audio products include audio components, audio systems, shelf
systems, portable audio equipment, car stereos and security systems. The Company
continues to expand its product selection in consumer electronics by offering
higher end products and components that have greater appeal to audio and video
enthusiasts. The introduction of digital television (DTV) in fiscal 1999, DVD
and MiniDisc in fiscal 1998, and DSS in fiscal 1997 continue the migration of
the consumer electronics category into digital technology. The replacement of
existing analog technology with digital products represents a significant sales
growth opportunity for the Company, although the transition could impact sales
of current products. The Company sells consumer electronics with brand names
such as Advent, Aiwa, Bose, Clarion, Direct TV, Funai, JBL, JVC, Kenwood, KLH,
Magnavox, RCA, Rockford Fosgate, Samsung, Sanyo, Sony, Technics, Toshiba, Web TV
and Yamaha.
Best Buy's entertainment software category includes compact discs, DVD
movies, pre-recorded audio and video cassettes, computer software and video game
hardware and software. The Company is one of the few large consumer electronics
retailers that sells a broad selection of entertainment software in all of its
stores. The Company offers from approximately 10,000 to as many as 27,000 titles
in its largest stores. Best Buy customizes a portion of the music software
assortment for particular stores based upon the demographics of the market. The
increase in sales of DVD players in fiscal 1999 and significant expansion of the
number of movie titles available in DVD format, as well as high demand for
recorded music and video game software and peripherals led to growth in the
entertainment software category. The number of DVD movie titles increased to
1,500 at the end of fiscal 1999. The Company continues to allocate additional
space in the stores to accommodate the wider selection. The video game hardware
and software products has continued to grow in fiscal 1999 with the popularity
of Nintendo 64 and Sony Playstation formats.
The major appliance category includes microwave ovens, washing
machines, dryers, air conditioners, dishwashers, refrigerators, freezers, ranges
and vacuum cleaners. This category includes brand names such as Amana, Bisell,
Eureka, Fantom Technologies, Frigidaire, General Electric, GE Profile,
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Hoover, Hotpoint, Maytag, Panasonic, Roper, Royal Appliance, Samsung, Sanyo,
Sharp, Tappan, Whirlpool and White-Westinghouse. Sales in this category are
impacted by new housing activity as well as a reduction in the number of
retailers selling major appliances.
In addition to products in its four main categories, the Company sells
cameras and other photographic equipment and ready to assemble furniture
designed for use with computer and audio/video equipment. Sales of new digital
cameras have contributed to growth in this category. The Company also sells
performance service plans (PSPs) on behalf of an unrelated third party. These
PSPs cover product repair and/or replacement for a specified period of time
following the purchase of a product, generally following the expiration of the
manufacturers warranty.
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
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February 27, 1999 February 28, 1998 March 1, 1997
----------------- ----------------- -------------
<S> <C> <C> <C>
Home Office 36% 38% 39%
Consumer Electronics:
Video 16 15 17
Audio 11 11 12
Entertainment Software 20 20 18
Appliances 8 9 9
Other (1) 9 7 5
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Total 100% 100% 100%
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</TABLE>
(1) Includes, among other things, performance service plans, photographic
equipment, blank audio and video tapes, furniture and accessories.
Store Locations and Expansion
The Company's expansion strategy generally has been to enter major metropolitan
areas with the simultaneous opening of several stores and then to expand into
contiguous non-metropolitan markets. Currently, approximately one-third of the
Company's stores are in non-metropolitan markets. The entry into a new market is
preceded by a detailed market analysis which includes a review of competitors,
demographics and economic data. Best Buy's store location strategy enables it to
increase the effectiveness of advertising expenditures and to create a high
level of consumer awareness. In addition, the clustering of stores allows the
Company to maintain more effective management control, enhance asset
utilization, and utilize its distribution facilities more efficiently.
When entering a major metropolitan market, the Company establishes a district
office, service center and major appliance warehouse. Each new store requires
approximately $3.4 million of working capital, depending on the size of the
store, for merchandise inventory (net of vendor financing), leasehold
improvements, fixtures and equipment. Pre-opening costs of approximately
$400,000 per store, incurred in hiring, relocating and training new employees
and in merchandising the store, are expensed as incurred.
The Company opened 28 stores in fiscal 1999 including entry into the
New England market and the markets of Nashville, TN; Syracuse, NY; Charleston,
SC; and Wausau, WI. The Company expects to open approximately 45 stores in
fiscal 2000, including entry into the markets of San Francisco, San Diego and
Sacramento, CA; Northern Florida; Upstate New York; and Richmond and Norfolk,
VA. The remaining stores will be opened mainly in existing markets. The Company
also plans to remodel or relocate approximately 20 stores to larger facilities.
Included in its expansion plans, the Company will test four 30,000 square-foot
small market format stores in markets with populations up to 200,000. In May
1999, the Company opened a new distribution center in Dinuba, California,
replacing its leased facility in Ontario, California. The Company believes it
has the necessary distribution capacity and management information systems as
well as management experience and depth to support its fiscal 2000 expansion
plans.
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The following table presents the number and location of stores operated by the
Company at the end of each of the last three fiscal years and anticipated stores
at fiscal 2000 year end.
<TABLE>
<CAPTION>
Anticipated Planned
at Fiscal For Number of Stores at Fiscal Year End
2000 Fiscal -----------------------------------
Year End 2000 1999 1998 1997
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<S> <C> <C> <C> <C> <C>
California 40 11 29 24 22
Texas 40 4 36 35 34
Illinois 32 -- 32 32 32
Florida 26 5 21 19 17
Ohio 20 1 19 19 18
Michigan 17 -- 17 17 16
Minnesota 16 2 14 14 15
Georgia 12 2 10 10 10
Virginia 12 5 7 7 7
Wisconsin 12 -- 12 11 11
Maryland 11 1 10 9 9
Pennsylvania 11 1 10 9 4
North Carolina 10 1 9 7 7
Arizona 9 1 8 8 8
Missouri 9 -- 9 10 10
Colorado 8 -- 8 8 8
Indiana 8 -- 8 8 8
Massachusetts 8 4 4 - --
Tennessee 6 -- 6 1 1
Iowa 5 -- 5 5 5
Kansas 5 -- 5 5 5
South Carolina 5 -- 5 4 4
New Hampshire 4 1 3 -- --
New Jersey 4 -- 4 4 3
Arkansas 3 -- 3 3 3
Kentucky 3 1 2 2 2
Nebraska 3 -- 3 3 3
Nevada 3 1 2 2 2
Oklahoma 3 -- 3 3 3
New York 2 1 1 -- --
Alabama 1 -- 1 1 1
Delaware 1 -- 1 1 1
Maine 1 -- 1 -- --
New Mexico 1 -- 1 1 1
North Dakota 1 -- 1 1 1
South Dakota 1 -- 1 1 1
Rhode Island 1 1 -- -- --
To be Determined 2 2 -- -- --
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Total 356 45 311 284 272
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</TABLE>
Suppliers, Purchasing and Distribution
The Company's marketing strategy depends, in part, upon its ability to
offer a meaningful selection of name brand products to its customers and is,
therefore, dependent upon satisfactory and stable supplier relationships. In
fiscal 1999, Best Buy's 20 largest suppliers accounted for over half of the
merchandise purchased by the Company, with five suppliers, Compaq,
Hewlett-Packard, IBM, Panasonic, and Sony representing approximately 30% of the
Company's total purchases. The loss of or disruption in supply,
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including disruptions in supply due to manufacturers' product quality issues,
from any one of these major suppliers could have a material adverse effect on
the Company's sales. Certain suppliers have, at times, limited or
discontinued their supply of products to the Company. Best Buy generally does
not have long-term written contracts with its major suppliers and does not
have any indication that any current suppliers will discontinue selling
merchandise to the Company. Any of these manufacturers may also decide to
sell their products direct to consumers through the Internet. The Company has
not experienced difficulty in maintaining satisfactory sources of supply, and
management expects that adequate sources of supply will continue to exist for
the types of merchandise sold in its stores.
Best Buy's centralized buying staff purchases substantially all of the
Company's merchandise. The buying staff within the Company's Merchandising
Department is responsible for product acquisition, promotion planning and
product pricing. An inventory management staff in the Merchandising Department
is responsible for overall inventory management including allocations of
inventory and replenishment of store inventory. Generally, with the exception of
certain entertainment software, there are no agreements with suppliers for the
return of unsold inventory. Merchandise remaining at the time of new product
introduction is generally sold on a close-out basis and may be subject to a
reduction in selling price to levels at or below the Company's cost.
The Company has made product availability a high priority and continues
to make investments in facilities, personnel and systems to assure that its
in-stock position will be among the highest in the industry. The Company
utilizes an automatic replenishment system for restocking its stores.
Replenishment of store inventories is based on inventory levels, historical and
projected sales trends, promotions and seasonality. The Company utilizes an
extensive merchandise planning and daily inventory monitoring system to manage
inventory turns. The Company engaged an outside consulting firm in fiscal 1998
and 1999 to assist in the design and implementation of systems and practices to
improve the Company's assortment planning, inventory management, product
sourcing and advertising effectiveness and realized significant benefits from
improvements in these areas.
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, Ohio, Oklahoma and Virginia. In addition, the Company
operates a dedicated distribution center for entertainment software in
Minnesota. Major appliances are shipped to satellite warehouses in each of the
Company's major markets. In order to meet release dates for selected
entertainment software titles and certain computer products and to improve
inventory management, certain merchandise is shipped directly to the stores from
manufacturers and distributors. The Company is, however, dependent upon the
distribution centers for inventory storage and shipment of most merchandise to
stores. The Company primarily uses contract carriers to ship merchandise from
its distribution centers to its stores. The Company believes that its
distribution centers can most effectively service stores within a 600 to 700
mile radius and that its current distribution centers will accommodate the
Company's expansion plans for the next year. The Company plans to continue
investing in new systems and purchasing material handling equipment to reduce
labor costs, improve accuracy in filling orders and enhance space utilization.
Management Information Systems
Best Buy has developed proprietary software that provides daily
information on sales, gross margins and inventory levels by store and by
stockkeeping unit. These systems allow the Company to compare current
performance against historical performance and the current year's budget. Best
Buy uses point-of-sale bar code scanning from which sales information is polled
at the end of each day. The Company uses Electronic Data Interchange (EDI) 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 indicators.
Best Buy continuously assesses its information systems needs to support the
Company's growth, improve decision making and increase efficiency. Major
components of the Company's systems development plan for fiscal 2000 include
support of its E-commerce initiative, development of
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systems to support the Company's technical services operations and continued
improvement in its inventory management systems. The Company also intends to
evaluate its enterprise reporting systems in fiscal 2000. See "Item 7.
Management's Discussion and Analysis of Results of Operations and Financial
Condition" for a discussion of the effect of Year 2000 issues on management
information systems.
Store Operations
Best Buy has developed a standardized and detailed system for operating
its stores. The system includes procedures for inventory management, transaction
processing, customer relations, store administration and merchandise display.
The Company's store operations are organized into divisions. Each division is
divided into regions and is under the supervision of a senior vice president who
oversees store performance through several regional managers, each of whom has
responsibility for a number of districts within the region. District managers
monitor store operations closely and meet regularly with store managers to
discuss merchandising and new product introductions, sales promotions, customer
feedback and requests and store operating performance. Similar meetings are
conducted at the corporate level with divisional and regional management. A
senior vice president of retail operations has overall responsibility for retail
store processing and operations. Each district also has a loss prevention
manager, with product security controllers employed at each store to control
inventory shrinkage. Advertising, pricing and inventory policies are controlled
at corporate headquarters. The Company's training, consumer affairs, human
resources and store merchandising functions are also centralized at corporate
headquarters.
The Company's stores are open seven days and six evenings a week. A
store is typically staffed by one manager, four assistant managers and an
average staff ranging from 70 to 150 persons depending on store size.
Approximately 60% of a store's staff, which includes product specialists and a
support staff of cashiers and customer service and stock handling employees, is
employed on a part-time basis. Store managers are paid a salary and have the
opportunity to earn bonuses if their stores exceed sales and gross margin
quotas, meet certain budget criteria in controlling expenses and achieve certain
administrative goals.
The Company has an employee development department which provides
managers with a variety of tools to teach employees the core skills they need to
meet their performance objectives. In the stores, Sales, Inventory, Operations
and Merchandising managers undergo comprehensive training in their specialty
areas, which include store operations, selling, managerial, training and
communications skills. The retail selling and sales support teams receive a
thorough orientation to the Company's industry and its business objectives.
Sales personnel are trained to ask specific questions of customers to determine
their needs and to present products, accessories and services that meet those
expressed needs. Stores hold monthly "team meetings" to review store
performance, Company focus and changes and modifications in operating
procedures. Specialized product training is also conducted at these monthly
meetings. The Company's policy is to staff store management positions with
personnel promoted from within each store and to staff new stores from its pool
of trained managers. However, as Best Buy continues to expand into new markets,
it also recruits local management personnel who have valuable knowledge about
the new market. The Company has an extensive store management development
program to help support the increased rate of store growth. Managers are
generally expected to train for a year prior to assuming full management
responsibility.
Credit Policy
Approximately 36% of store revenues are paid for in cash, with the
remainder paid for by either major credit cards or the Best Buy private label
credit card. The Company utilizes special financing offers to stimulate sales.
Generally, these financing offers allow customers to purchase certain products
with repayment terms ranging from 90 days to one year without a finance charge.
The longer financing offers, generally those beyond six months, typically
require minimum monthly payments to avoid the finance charge. The special
financing offers are only provided to customers who qualify for Best Buy's
private label credit card. The private label credit card allows these customers
to obtain financing on purchases of merchandise at Best Buy stores through
arrangements between the Company and independent financial institutions and
consumer credit programs. The Company is generally able to qualify a new
customer for credit on the spot,
-9-
<PAGE>
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
Consumer electronics retailers realized significant sales increases in
1999 driven by strong consumer spending, continued demand for personal computers
and rapid consumer acceptance of new digital technology products such as DVD,
digital phones and digital cameras. Meanwhile, the closing of competitors such
as Sun TV and Appliance, Lechmere stores and selected Montgomery Ward Stores,
store closings by other national and regional chains and Comp USA's acquisition
of Computer City in fiscal 1999 have resulted in a concentration of sales among
the top retailers in the industry. While the store based retailers continue to
consolidate, alternative channels of distribution such as E-commerce and mail
order shopping services are expanding. Retailing in each of the Company's
product categories remains highly competitive and these new channels of
distribution, while not yet providing significant competition to the Company,
could become significant over time. Management believes, however, that the
Company's own E-commerce initiative coupled with product knowledge, brand
imaging, expertise and services capabilities of its retail stores effectively
position the Company to meet the increased competition from E-commerce and mail
order retailers.
More effective advertising, a more customer-focused product assortment,
improved product in-stock levels and better customer service have contributed to
market share gains over the past year. Management believes that its store format
and brand positioning distinguish the Company from most of its competitors by
positioning the Company as the destination for new technology in a fun,
informative and no-pressure shopping environment. The Company competes by
aggressively advertising and emphasizing a broad product assortment, low prices,
financing alternatives and service.
The Company competes against consumer electronics retailers such as
Circuit City and Radio Shack; computer superstores such as Comp USA; home office
retailers such as Office Depot, Office Max and Staples; mass merchants such as
Sears, Wal-Mart and Target; and entertainment software superstores owned by
Musicland and Tower Records. The Company also competes against independent
dealers, discount stores, wholesale clubs and mail order and E-commerce
retailers.
Employees
As of February 27, 1999, the Company had approximately 45,000
employees, of whom approximately 23,000 were part-time or seasonal employees.
There are currently no collective bargaining agreements covering any of the
Company's employees. The Company has not experienced a strike or work stoppage,
and management believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company's stores, most of which are leased, include sales space,
inventory storage, management offices and employee areas. All of the leases
provide for a fixed minimum rent with scheduled escalation dates and amounts.
Leases for six of the stores have percentage rent provisions that range from
.75% to 4% of gross sales at each location in excess of certain specified sales
amounts and, in some cases, subject to a maximum annual rent. The initial terms
of the leases range from 5 to 20 years and generally allow the Company to renew
the leases for up to three additional five-year terms. The terms of a majority
of the leases, including renewal options, extend beyond the year 2020. At
February 27, 1999, the Company owned three of its operating retail store
locations. Management expects to sell and lease back these properties in fiscal
2000.
-10-
<PAGE>
At February 27 1999, the Company utilized over 3.4 million square feet
of distribution facilities including distribution centers in Bloomington,
Minnesota; Ardmore, Oklahoma; Staunton, Virginia; Ontario, California; and
Findlay, Ohio, and a software distribution center in Edina, Minnesota. The
Company also operates leased satellite warehouses for major appliances in its
major markets. The Company's corporate offices are located in a 350,000
square foot facility it owns in Eden Prairie, Minnesota. The Company also
leases 260,000 square feet of office space in close proximity to its main
corporate offices and will be adding additional space in fiscal 2000 to
accommodate its expanding corporate support. In May 1999 the Company opened a
new distribution center in Dinuba, California, replacing the Ontario,
California distribution center and adding approximately 350,000 additional
square feet.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings arising during the
normal course of conducting business. The resolution of those proceedings is not
expected to have a material impact on the Company's financial condition.
THE EXECUTIVE OFFICERS OF THE REGISTRANT ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years
with the
Name Age Position With Company Company
---- --- --------------------- --------
<S> <C> <C> <C>
Richard M. Schulze 58 Chairman, Chief Executive Officer and Director 32
Bradbury H. Anderson 49 President, Chief Operating Officer and Director 25
Allen U. Lenzmeier 55 Executive Vice President and Chief Financial Officer 14
Wade R. Fenn 40 Executive Vice President - Marketing 18
Gary L. Arnold 47 Senior Vice President - Merchandising 4
Nancy C. Bologna 46 Senior Vice President - People & Learning --
Julie M. Engel 38 Senior Vice President - Advertising 17
Robert C. Fox 48 Senior Vice President - Finance and Treasurer 13
Kevin P. Freeland 41 Senior Vice President - Inventory Management 3
Marc D. Gordon 38 Senior Vice President - Information Systems & CIO 1
Wayne R. Inouye 46 Senior Vice President - Merchandising 3
Michael P. Keskey 44 Senior Vice President - Sales 10
Michael A. Linton 43 Senior Vice President - Strategic Marketing --
Michael London 50 Senior Vice President - Merchandising 2
George Z. Lopuch 49 Senior Vice President - Corporate Strategic Planning 1
Joseph T. Pelano 51 Senior Vice President - Operations 10
Lowell W. Peters 58 Senior Vice President - Services 1
Charles A. Scheiderer 49 Senior Vice President - Logistics 4
Philip J. Schoonover 39 Senior Vice President - Merchandising 4
John C. Walden 39 President - E-commerce Division --
Kenneth R. Weller 50 Senior Vice President - Sales 5
</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.
BRADBURY H. ANDERSON has been the Company's President and Chief
Operating Officer since April 1991. He has been employed in various other
capacities with the Company since 1973, including retail salesperson, store
manager and sales manager. Mr. Anderson has been a Director of the Company since
1986.
ALLEN U. LENZMEIER has been Executive Vice President & CFO since April
1991 after having served as Senior Vice President - Finance and Operations and
Treasurer of the Company from 1986. Mr. Lenzmeier joined the Company in 1984 and
has also served as Vice President - Finance and Operations and Treasurer.
WADE R. FENN has been Executive Vice President - Marketing since August
1995, having served as a Senior Vice President - Sales since 1991 and a Regional
Vice President of the Company from 1987. Mr. Fenn joined the Company in 1980 as
a salesperson and has also been employed by the Company as a store and district
manager.
-11-
<PAGE>
GARY L. ARNOLD joined the Company in 1994 as Merchandise Manager of
Music and was promoted to Vice President in 1996. Mr. Arnold was promoted to his
current position of Senior Vice President - Merchandising in May 1998.
NANCY C. BOLOGNA was promoted to her present position in May 1999.
Ms. Bologna joined the company in February 1999 as Vice President -
Organizational Effectiveness. Prior to joining Best Buy, Ms. Bologna worked
as an Executive Development Consultant with KRW International, an executive
development firm, and also as a clinical psychologist and administrator for
Park Nicollet Clinic.
JULIE M. ENGEL was promoted to her present position in April 1995. Ms.
Engel joined the Company in July 1981 as Advertising Manager, was promoted to
Advertising Director in 1984 and became Vice-President - Advertising in April
1987.
ROBERT C. FOX has been Senior Vice President - Finance and Treasurer
since April 1994, after having served as Vice President - Accounting since 1987
and Treasurer since 1993. Mr. Fox joined the Company in 1985 as Controller.
KEVIN P. FREELAND was promoted to his present position in April 1997,
after having served as Vice President - Inventory Management since 1995. Prior
to joining Best Buy, Mr. Freeland spent more than eight years with Payless Shoe
Source, where he held various positions in merchandise management, most recently
as Vice President of Merchandise Distribution.
MARC D. GORDON joined the Company in April 1998 as Senior Vice
President - Information Systems & Chief Information Officer. Prior to joining
Best Buy, Mr. Gordon had experience in the retail information systems area most
recently as CIO for West Marine Products, a West Coast-based specialty
retailer/wholesaler of marine products. Other positions have included senior
manager with Andersen Consulting, a principal with a Boston IS consulting firm
and Vice President of Information Systems with the Timberland Company.
WAYNE R. INOUYE joined the Company in September 1995 as Senior Vice
President - Merchandising. Prior to joining Best Buy, Mr. Inouye was with The
Good Guys! for 10 years, most recently as Vice President of Merchandising.
MICHAEL P. KESKEY was promoted to his present position in April 1997,
having served as Vice President - Sales since 1996. Mr. Keskey joined the
Company in 1988 and has held positions as a Store Manager, District Manager and
Regional Manager.
MICHAEL A. LINTON joined the Company in January of 1999 as Senior Vice
President - Strategic Marketing. Mr. Linton has more than 19 years experience,
most recently as Vice President of Marketing at Remington Products Corporation.
Prior to that, he served as Vice President and General Manager of a product
category at James River Corporation.
MICHAEL LONDON was promoted to his present position in May 1998. Mr.
London joined the Company in July 1996 as Vice President - General Merchandise.
Prior to joining Best Buy, Mr. London served as Senior Vice President of Retail
and Commercial Sales for Nordic Track and Executive Vice President for Central
Tractor Farm & Country. Prior to that, Mr. London spent 22 years with Lechmere
most recently as Senior Vice President - General Marketing Manager.
GEORGE Z. LOPUCH joined the Company in March 1998 as Senior Vice
President - Corporate Strategic Planning. Mr. Lopuch brings to Best Buy more
than 18 years of retail industry experience. Most recently he served as Senior
Vice President of Corporate Strategic Planning and Research at SuperValu, Inc.
JOSEPH T. PELANO, JR was promoted to his present position in
April 1997, having served as Vice President - Retail Store Operations since
1996. Mr. Pelano joined the Company in 1989 as Regional Operations Manager.
LOWELL W. PETERS joined the Company in September 1997 as Senior Vice
President - Services. Prior to joining Best Buy, Mr. Peters spent 34 years with
Sears, where he held various positions in their service organization, most
recently as Vice President Parts, Product Services.
-12-
<PAGE>
CHARLES A. SCHEIDERER was promoted to his current position in April
1998, having served as Vice President - Distribution and Logistics since July of
1997 and as General Manager of Distribution in 1994.
PHILIP J. SCHOONOVER joined Best Buy in May 1995 and was promoted to
Senior Vice President - Merchandising. Prior to joining Best Buy, Mr. Schoonover
was the Executive Vice President for TOPS Appliance City where he worked for
five years.
JOHN C. WALDEN joined the Company in May 1999 as President of the
Company's E-commerce Division. Mr. Walden has more than 17 years of experience,
most recently as Chief Operating Officer of Peapod, Inc., an Internet retailer
of groceries. Mr. Walden has held executive positions with Ameritech Corporation
and Storage Technology Corporation.
KENNETH R. WELLER joined the Company in May 1993. Since 1986, he was
Vice President of Sales with The Good Guys!, a San Francisco-based consumer
electronics retailer where he had worked since 1982.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information set forth under the caption "Common Stock Prices" on
page 28 of the Annual Report is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Consolidated
Financial and Operating Data" on pages 20 and 21 of the Annual Report is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The information set forth under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition" on pages 22 through
28 of the Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's operations are not currently subject to market risks for
interest rates, foreign currency rates, commodity prices or other market
price risks of a material nature.
-13-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item, listed below, are
contained in the Annual Report on the pages thereof indicated, and are expressly
incorporated herein by this reference.
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Consolidated balance sheets as of February 27, 1999
and February 28, 1998 29
For the fiscal years ended February 27, 1999,
February 28, 1998 and March 1, 1997
Consolidated statements of earnings 30
Consolidated statements of cash flows 31
Consolidated statements of changes in shareholders' equity 32
Independent auditor's report 32
Notes to consolidated financial statements 33-39
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Security Ownership of
Certain Beneficial Owners and Management" and "Nominees and Directors" on pages
4 through 8 of the Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" on
pages 9 through 17 of the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" on pages 4 through 6 of the Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the captions "Nominees and Directors"
and "Certain Transactions" on pages 7 and 8 of the Proxy Statement is
incorporated herein by reference.
-14-
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements:
All financial statements of the Registrant as set forth under
Item 8 of this Report.
2. Financial Statement Schedules:
No schedules have been included since they are either not
applicable or the information is included elsewhere herein.
3. Exhibits:
<TABLE>
<CAPTION>
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation, as amended (3)
3.3 Amended and Restated By-Laws, as amended (2,4,5,7)
4.1 Note Purchase Agreement with Principal Mutual Life Insurance Company, (6)
dated as of July 30, 1992
4.2 Credit Agreement with US Bank National Association dated May 22, 1998 (10)
10.1 1987 Employee Non-Qualified Stock Option Plan, as amended (12)
10.2 1987 Directors' Non-Qualified Stock Option Plan, as amended (1)
10.3 Best Buy Co., Inc. Deferred Compensation Plan (9)
10.4 Resolutions of the Board of Directors dated April 16, 1999 adopting (8)
the EVA-Registered Trademark- Incentive Program for senior officers
10.5 1997 Employee Non-Qualified Stock Option Plan, as amended (11)
10.6 1997 Directors' Non-Qualified Stock Option Plan, as amended (1)
10.7 1994 Full-Time Employee Non-Qualified Stock Option Plan, as amended (1)
13.1 1999 Annual Report to Shareholders (1)
21.1 Subsidiaries of the Registrant (1)
23.1 Consent of Ernst & Young LLP (1)
27.1 1999 Fiscal Year End Financial Data Schedule (1)
</TABLE>
-15-
<PAGE>
(1) Document is filed herewith.
(2) Exhibit so marked was filed with the Securities and Exchange
Commission on May 23, 1995, as exhibit to the Form 10-K of
Best Buy Co., Inc. and is incorporated herein by reference
and made a part hereof.
(3) Exhibit so marked was filed with the Securities and Exchange
Commission on May 20, 1994, as exhibit to the Form 10-K of
Best Buy Co., Inc. and is incorporated herein by reference
and made a part hereof.
(4) Exhibit so marked was filed with the Securities and Exchange
Commission on November 12, 1991, as an exhibit to the
Registration Statement on Form S-3 (Registration No. 33-43065)
of Best Buy Co., Inc., and is incorporated herein by reference
and made a part of hereof.
(5) Exhibit so marked was filed with the Securities and Exchange
Commission on January 13, 1992, as an exhibit to Form 10-Q of
Best Buy Co., Inc., and is incorporated herein by reference
and made a part hereof.
(6) Exhibit so marked was filed with the Securities and Exchange
Commission on October 12, 1992, as an exhibit to Form 10-Q of
Best Buy Co., Inc., and is incorporated herein by reference
and made a part hereof.
(7) Exhibit so marked was filed with the Securities and Exchange
Commission on May 28, 1997, as an exhibit to the Form 10-K of
Best Buy Co., Inc., and is incorporated herein by reference
and made a part hereof.
(8) Exhibit so marked was filed with the Securities and Exchange
Commission on April 29, 1999, as an exhibit to the preliminary
Proxy Statement of Best Buy Co., Inc., and is incorporated
herein by reference and made a part hereof.
(9) Exhibit so marked was filed on April 3, 1998, as an exhibit to
the Registration Statement on Form S-8 (Registration No.
333-49371) of Best Buy Co., Inc., and is incorporated herein
by reference and made a part hereof.
(10) Exhibit so marked was filed with the Securities and Exchange
Commission on July 10, 1998, as an exhibit to Form 10-Q of
Best Buy Co., Inc., and is incorporated herein by reference
and made a part hereof.
(11) Exhibit so marked was filed on August 20, 1998, as an exhibit
to the Registration Statement on Form S-8 (Registration No.
333-61897) of Best Buy Co., Inc. and is incorporated herein by
reference and made a part hereof.
(12) Exhibit so marked was filed with the Securities and
Exchange Commission on May 29, 1996, as an exhibit to the
Form 10-K of Best Buy Co., Inc., and is incorporated herein
by reference and made a part hereof.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K under the Securities
Act of 1933, the Registrant has not filed as exhibits to the Form 10-K
certain instruments with respect to long-term debt under which the
amount of securities authorized does not exceed 10 percent of the total
assets of the Registrant. The Registrant hereby agrees to furnish
copies of all such instruments to the Commission upon request.
(b) Reports on Form 8-K
A Form 8-K announcing a two-for-one stock split was filed February 22,
1999.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BEST BUY CO., INC.
(Registrant)
By: /s/ Richard M. Schulze
------------------------------------------
Chairman and Chief Executive Officer
Dated: May 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on May 26, 1999.
/s/ Richard M. Schulze Chairman, Chief Executive Officer
- --------------------------- and Director (principal executive
Richard M. Schulze officer)
/s/ Bradbury H. Anderson President, Chief Operating Officer
- --------------------------- and Director
Bradbury H. Anderson
/s/ Allen U. Lenzmeier Executive Vice President and Chief
- --------------------------- Financial Officer (principal
Allen U. Lenzmeier financial officer)
/s/ Robert C. Fox Sr. Vice President - Finance and
- --------------------------- Treasurer (principal accounting
Robert C. Fox officer)
/s/ Culver Davis, Jr. Director
- ---------------------------
Culver Davis, Jr.
/s/ Yvonne R. Jackson Director
- ---------------------------
Yvonne R. Jackson
/s/ Elliot S. Kaplan Director
- ---------------------------
Elliot S. Kaplan
/s/ David H. Starr Director
- ---------------------------
David H. Starr
/s/ Frank D. Trestman Director
- ---------------------------
Frank D. Trestman
/s/ Hatim A. Tyabji Director
- ---------------------------
Hatim A. Tyabji
/s/ James C. Wetherbe Director
- ---------------------------
James C. Wetherbe
<PAGE>
Exhibit 10.2
BEST BUY CO., INC.
1987
DIRECTORS' NON-QUALIFIED STOCK OPTION PLAN
A. PURPOSE.
The purpose of this Directors' Non-Qualified Stock Option Plan ("Plan")
is to further the growth and general prosperity of Best Buy Co., Inc.
("Company") by enabling current directors of the Company, who have been or are
serving on the Board of Directors and upon whose judgment, initiative and effort
the Company was or is largely dependent for the successful conduct of its
business, to acquire shares of the common stock of the Company under the terms
and conditions and in the manner contemplated by this Plan, thereby increasing
their personal involvement in the Company. Options granted under the Plan are
intended to be options which do not meet the requirements of Section 422A of the
Internal Revenue Code of 1986, as amended.
B. ADMINISTRATION.
This Plan shall be administered by the Compensation Committee of the
Company's Board of Directors (the "Committee"). Subject to such orders and
resolutions not inconsistent with the provisions of this Plan as may from time
to time be issued or adopted by the Board of Directors, the Committee shall have
full power and authority to interpret the Plan.
All decisions and determinations made by the Committee pursuant to the
provisions of the Plan and applicable orders and resolutions of the Board of
Directors shall be final. Each option granted shall be evidenced by a written
agreement containing such terms and conditions as may be approved by the
Committee and which shall not be inconsistent with the Plan and the orders and
resolutions of the Board of Directors with respect thereto.
C. ELIGIBILITY, PARTICIPATION AND GRANTS.
Options shall be granted under the Plan to current members of the
Company's Board of Directors. The Committee shall grant to each director (i)
on such date as he or she first becomes a director of the Company, an option
to purchase 5,000 shares, and (ii) annually, at the first regular meeting of
the Board of Directors, an option to purchase 5,000 shares.
D. SHARES SUBJECT TO THE PLAN.
Subject to adjustment as provided below, an aggregate of 900,000 shares
of $0.10 par value common stock of the Company shall be subject to this Plan
from authorized but unissued shares of the Company. Such number and kind of
shares shall be appropriately adjusted in the event of any one or more stock
splits, reverse stock splits or stock dividends hereafter paid or declared with
respect to such stock. If, prior to the termination of the Plan, shares issued
pursuant hereto shall have been repurchased by the Company pursuant to this
Plan, such repurchased shares shall again become available for issuance under
the Plan.
<PAGE>
Any shares which, after the effective date of this Plan, shall become
subject to valid outstanding options under this Plan may, to the extent of the
release of any such shares from option by termination or expiration of option(s)
without valid exercise, be made the subject of additional options under this
Plan.
E. NO ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
Except as expressly provided herein, in the event of a merger,
consolidation, reorganization, stock dividend, stock split, or other change in
corporate structure or capitalization affecting the common shares of the
Company, there shall be no change in the number of shares subject to options to
be granted thereafter pursuant to the Plan.
F. TERMS AND CONDITIONS OF OPTIONS.
The Committee shall have the power, subject to the limitations
contained in this Plan, to prescribe any terms and conditions in respect of the
granting or exercise of any option under this Plan and, in particular, shall
prescribe the following terms and conditions:
(1) Each option shall state the number of shares to which it pertains.
(2) The price at which shares shall be sold to directors hereunder (the
"Exercise Price") shall be the average of the closing price for the
Company's stock, as quoted on the New York Stock Exchange, on the date
immediately preceding the date of grant and the closing price for the stock
on the date of grant. Payment of the Exercise Price shall be made at the
time the shares are sold hereunder by check payable to the Company, or by
surrender of outstanding shares of common stock of the Company which have a
Fair Market Value on the date of surrender equal to the Exercise Price of
the shares as to which the option is being exercised, or by a combination
thereof. For purposes of this Plan only, "Fair Market Value" shall mean the
last reported sale price of the Company's common stock on the date of
grant, as quoted on by the New York Stock Exchange. If the Company's common
stock ceases to be listed for trading on the New York Stock Exchange, "Fair
Market Value" shall mean the value determined in good faith by the
Company's Board of Directors.
(3) An option shall be exercisable in whole or in part (but not as to less
than twenty-five percent of the original aggregate amount of shares of
common stock made subject to the option) with respect to the shares
included therein until the earlier of (a) the close of business on the
tenth day prior to the proposed effective date of any merger or
consolidation of the Company with any other corporation or entity as a
result of which the holders of the common stock of the Company will own
less than a majority voting control of the surviving corporation; any sale
of substantially all of the assets of the Company or any sale of common
stock of the Company to a person not a stockholder on the date of issuance
of the option who thereby acquires majority voting control of the
<PAGE>
Company, subject to any such transaction actually being consummated, or (b)
4:00 p.m., local standard time, in Minneapolis, Minnesota, on the date five
(5) years after the date the option was granted. The Company shall give
written notice to the optionee not less than 30 days prior to the proposed
effective date of any of the transactions described in (a) above.
(4) An option shall be exercised when written notice of such exercise has
been given to the Company at its principal business office by the person
entitled to exercise the option and full payment for the shares with
respect to which the option is exercised has been received by the Company.
Until the stock certificates are issued, no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to
optioned shares, notwithstanding the exercise of the option.
G. OPTIONS NOT TRANSFERABLE.
Options under the Plan may not be sold, pledged, assigned or
transferred in any manner, whether by operation of law or otherwise, except by
will, the laws of descent or a qualified domestic relations order.
H. AMENDMENT OR TERMINATION OF THE PLAN.
The Board of Directors of the Company may amend this Plan from time
to time as it may deem advisable and may at any time terminate the Plan,
provided that any such termination of the Plan shall not adversely affect
options already granted and such options shall remain in full force and effect
as if the Plan had not been terminated.
I. AGREEMENT AND REPRESENTATIONS OF PARTICIPANTS.
As a condition precedent to the exercise of any option or portion
thereof, the Company may require the person exercising such option to represent
and warrant at the time of any such exercise that the shares are being purchased
only for investment and without any present intention to sell or distribute such
shares if, in the opinion of counsel for the Company, such a representation is
required under the Securities Act of 1933 or any other applicable law,
regulation or rule of any governmental agency.
In the event legal counselto the Company renders an opinion to
the Company that shares for options exercised pursuant to this Plan cannot be
issued to the optionee because such action would violate any applicable federal
or state securities laws, then in that event the optionee agrees that the
Company shall not be required to issue said shares to the optionee and shall
have no liability to the optionee other than the return to optionee of amounts
tendered to the Company upon exercise of the option.
J. EFFECTIVE DATE AND TERMINATION OF THE PLAN.
<PAGE>
The Plan shall become effective as of May 1, 1987 if approved
thereafter by the Stockholders of the Company. The Plan shall terminate on the
earliest of:
(1) The date when all the common shares available under the Plan shall have
been acquired through the exercise of options granted under the Plan; or
(2) Ten (10) years after the date of approval of the Plan by the
Stockholders of the Company; or
(3) Such other earlier date as the Board of Directors of the Company may
determine.
K. FORM OF OPTION.
Options shall be issued in substantially the same form as Exhibit "A"
attached hereto or in such other form as the Compensation Committee or the Board
may approve.
<PAGE>
Exhibit 10.6
BEST BUY CO., INC.
FIRST AMENDED AND RESTATED
1997
DIRECTORS' NON-QUALIFIED STOCK OPTION PLAN
A. PURPOSE.
The purpose of this Directors' Non-Qualified Stock Option Plan ("Plan")
is to further the growth and general prosperity of Best Buy Co., Inc. (the
"Company"), and its directly and indirectly wholly-owned subsidiaries
(collectively, the "Companies") by enabling current directors of the Company,
who have been or are serving on the Company's Board of Directors (the "Board")
and upon whose judgment, initiative and effort the Companies were or are largely
dependent for the successful conduct of their business, to acquire shares of the
common stock of the Company under the terms and conditions and in the manner
contemplated by this Plan, thereby increasing their personal involvement in the
Companies. Options granted under the Plan are intended to be options which do
not meet the requirements of Section 422A of the Internal Revenue Code of 1986,
as amended (the "Code").
B. ADMINISTRATION.
This Plan shall be administered by the Compensation and Human
Resources Committee (the "Committee") of the Board. Subject to such orders
and resolutions not inconsistent with the provisions of this Plan as may from
time to time be issued or adopted by the Board, the Committee shall have full
power and authority to interpret the Plan.
All decisions and determinations made by the Committee pursuant to the
provisions of the Plan and applicable orders and resolutions of the Board shall
be final. Each option granted shall be evidenced by a written agreement
containing such terms and conditions as may be approved by the Committee and
which shall not be inconsistent with the Plan and the orders and resolutions of
the Board with respect thereto.
C. ELIGIBILITY, PARTICIPATION AND GRANTS.
Options shall be granted under the Plan to current members of the
Board. The Committee shall grant to each director options to purchase shares in
such amounts as the Committee shall from time to time determine.
D. SHARES SUBJECT TO THE PLAN.
Subject to adjustment as provided below, an aggregate of 700,000
shares of $0.10 par value common stock of the Company shall be subject to this
Plan from authorized but unissued shares of the Company. Such number and kind of
shares shall be appropriately adjusted in the event of any one or more stock
splits, reverse stock splits or stock dividends hereafter paid or declared with
respect to such stock. If, prior to the termination of the Plan, shares issued
<PAGE>
pursuant hereto shall have been repurchased by the Company pursuant to this
Plan, such repurchased shares shall again become available for issuance under
the Plan.
Any shares which, after the effective date of this Plan, shall become
subject to valid outstanding options under this Plan may, to the extent of the
release of any such shares from option by termination or expiration of option(s)
without valid exercise, be made the subject of additional options under this
Plan.
E. NO ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
Except as expressly provided herein, in the event of a merger,
consolidation, reorganization, stock dividend, stock split, or other change in
corporate structure or capitalization affecting the common stock of the Company,
there shall be no change in the number of shares subject to options to be
granted thereafter pursuant to the Plan; provided, however, that in such event,
an appropriate adjustment may be made in the number and kind of shares subject
to and the exercise prices of outstanding options granted under the Plan as
determined by the Committee.
F. TERMS AND CONDITIONS OF OPTIONS.
The Committee shall have the power, subject to the limitations
contained in this Plan, to prescribe any terms and conditions in respect of the
granting or exercise of any option under this Plan and, in particular, shall
prescribe the following terms and conditions:
(1) Each option shall state the number of shares to which it pertains.
(2) The price at which shares shall be sold to participants hereunder (the
"Exercise Price") shall be the Fair Market Value of the Company's common
stock on the date of grant. Payment of the Exercise Price shall be made (a)
if payment is made by check payable to the Company, at the time the shares
are sold hereunder, or (b) if payment is made pursuant to an irrevocable
election to surrender outstanding shares of common stock of the Company
which have a Fair Market Value on the date of surrender equal to the
Exercise Price of the shares as to which the option is being exercised, no
later than the settlement date for the shares sold in the market to cover
the Exercise Price, or (c) by a combination thereof, UNLESS an option is
exercised in connection with a deferral election pursuant to the Deferred
Compensation Plan, defined below, in which case payment of the Exercise
Price shall be made as provided in Section M herein.
(3) An option shall be exercisable in whole or in part (but not as to less
than twenty-five percent of the original aggregate amount of shares of
common stock made subject to the option UNLESS the optionee is precluded,
pursuant to the Deferred Compensation Plan, defined below, from exercising
the minimum portion of the option because the optionee is unable to deliver
enough shares of common stock to cover the full Exercise Price therefor, in
which case the optionee may exercise the option as to less than
<PAGE>
twenty-five percent of the original aggregate amount of shares of common
stock made subject to the option) with respect to the shares included
therein until the earlier of (a) the close of business on the tenth day
prior to the proposed effective date of any merger or consolidation of the
Company with any other corporation or entity as a result of which the
holders of the common stock of the Company will own less than a majority
voting control of the surviving corporation; any sale of substantially all
of the assets of the Companies or any sale of common stock of the Company
to a person not a shareholder on the date of issuance of the option who
thereby acquires majority voting control of the Company, subject to any
such transaction actually being consummated, or (b) the close of business
on the date ten (10) years after the date the option was granted. The
Company shall give written notice to the optionee not less than 30 days
prior to the proposed effective date of any of the transactions described
in (a) above.
(4) An option shall be exercised when written notice of such exercise has
been given to the Company at its principal business office by the person
entitled to exercise the option and full payment for the shares with
respect to which the option is exercised has been received by the Company.
Until the stock certificates are issued, no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to
optioned shares, notwithstanding the exercise of the option.
G. OPTIONS NOT TRANSFERABLE.
Options under the Plan may not be sold, pledged, assigned or
transferred in any manner, whether by operation of law or otherwise, except by
will, the laws of descent or a qualified domestic relations order.
H. AMENDMENT OR TERMINATION OF THE PLAN.
The Board may amend this Plan from time to time as it may deem
advisable and may at any time terminate the Plan, provided that any such
termination of the Plan shall not adversely affect options already granted and
such options shall remain in full force and effect as if the Plan had not been
terminated.
I. AGREEMENT AND REPRESENTATIONS OF PARTICIPANTS.
As a condition precedent to the exercise of any option or portion
thereof, the Company may require the person exercising such option to represent
and warrant at the time of any such exercise that the shares are being purchased
only for investment and without any present intention to sell or distribute such
shares if, in the opinion of counsel for the Company, such a representation is
required under the Securities Act of 1933 or any other applicable law,
regulation or rule of any governmental agency.
In the event legal counsel to the Company renders an opinion to the
Company that shares for options exercised pursuant to this Plan cannot be issued
to the optionee because such action would violate any applicable federal or
state securities laws, then in that event the optionee
<PAGE>
agrees that the Company shall not be required to issue said shares to the
optionee and shall have no liability to the optionee other than the return to
optionee of amounts tendered to the Company upon exercise of the option.
J. EFFECTIVE DATE AND TERMINATION OF THE PLAN.
The Plan shall become effective as of April 18, 1997 if approved
thereafter by the Company's shareholders. The Plan shall terminate on the
earliest of:
(1) The date when all the shares available under the Plan shall have been
acquired through the exercise of options granted under the Plan; or
(2) Ten (10) years after the date of approval of the Plan by the Company's
shareholders; or
(3) Such other earlier date as the Board may determine.
K. FAIR MARKET VALUE.
"Fair Market Value" shall mean the last reported sale price of the
Company's common stock on the date of grant, as quoted on by the New York Stock
Exchange. If the Company's common stock ceases to be listed for trading on the
New York Stock Exchange, "Fair Market Value" shall mean the value determined in
good faith by the Board.
L. COMPLIANCE WITH RULE 16B-3 AND SECTION 162(M).
Transactions under the Plan are intended to comply with all
applicable conditions of Rule 16b-3 under the Securities Exchange Act of 1934,
as amended, and avoid loss of the deduction referred to in paragraph (1) of
Section 162(m) of the Code. Anything in the Plan to the contrary
notwithstanding, to the extent any provision of the Plan or action by the
Committee fails to so comply or avoid the loss of such deduction, it shall be
deemed null and void, to the extent permitted by law and deemed advisable by the
Committee.
M. DEFERRAL OF OPTION GAIN.
<PAGE>
Participants in the Company's Deferred Compensation Plan, effective as
of April 1, 1998 (the "Deferred Compensation Plan"), may be able to defer the
gain, if any, upon exercise of options granted hereunder pursuant to and in
accordance with the terms of the Deferred Compensation Plan. The Deferred
Compensation Plan provides, among other things, that to defer any gain with
respect to an option, the Exercise Price must be satisfied utilizing shares of
the Company's common stock held at least six months prior to exercise. In the
event any deferral election is made with respect to an option, if the optionee
is unable to deliver the requisite number of shares of the Company's common
stock to cover the full Exercise Price prior to the expiration of such option,
the portion of the option that corresponds to the portion of the full Exercise
Price not covered shall be forfeited.
N. FORM OF OPTION.
Options shall be issued in substantially the same form as the
Committee or the Board may approve.
<PAGE>
Exhibit 10.7
BEST BUY CO., INC.
1994
FULL-TIME EMPLOYEE NON-QUALIFIED
STOCK OPTION PLAN
1998 AMENDMENT AND RESTATEMENT
A. PURPOSE.
The purpose of this Full-Time Employee Non-Qualified Stock Option Plan
("Plan") is to further the growth and general prosperity of Best Buy Co., Inc.
(the "Company"), and its directly and indirectly wholly-owned subsidiaries
(collectively, the "Companies") by enabling full-time employees of the Companies
to acquire shares of the common stock of the Company under the terms and
conditions and in the manner contemplated by this Plan, thereby increasing their
personal interest in the success of the Companies and enabling the Companies to
obtain and retain the services of such employees. Options granted under the Plan
are intended to be options which do not meet the requirements of Section 422A of
the Internal Revenue Code of 1986, as amended.
B. ADMINISTRATION.
This Plan shall be administered by the Compensation and Human Resources
Committee (the "Committee") of the Company's Board of Directors (the "Board").
Options may not be granted to any person while serving on the Committee unless
approved by a majority of the disinterested members of the Board. Subject to
such orders and resolutions not inconsistent with the provisions of this Plan as
may from time to time be issued or adopted by the Board, the Committee shall
have full power and authority to interpret the Plan and, to the extent
contemplated herein, shall exercise the discretion granted to it regarding
participation in the Plan and the number of shares to be optioned and sold to
each participant.
All decisions, determinations and selections made by the Committee
pursuant to the provisions of the Plan and applicable orders and resolutions of
the Board shall be final. Each option granted shall be evidenced by a written
agreement containing such terms and conditions as may be approved by the
Committee and which shall not be inconsistent with the Plan and the orders and
resolutions of the Board with respect thereto.
C. ELIGIBILITY AND PARTICIPATION.
Options may be granted under the Plan to any full-time employee of the
Companies who is not an officer of the Companies. The Committee shall grant to
such participants options to purchase shares in such amounts as the Committee
shall from time to time determine.
<PAGE>
D. SHARES SUBJECT TO THE PLAN.
Subject to adjustment as provided in Section E. herein, an aggregate of
1,500,000 shares of $0.10 par value common stock of the Company shall be subject
to this Plan from authorized but unissued shares of the Company. Such number and
kind of shares shall be appropriately adjusted in the event of any one or more
stock splits, reverse stock splits or stock dividends hereafter paid or declared
with respect to such stock. If, prior to the termination of the Plan, shares
issued pursuant hereto shall have been repurchased by the Company pursuant to
this Plan, such repurchased shares shall again become available for issuance
under the Plan.
Any shares which, after the effective date of this Plan, shall become
subject to valid outstanding options under this Plan may, to the extent of the
release of any such shares from option by termination or expiration of option(s)
without valid exercise, be made the subject of additional options under this
Plan.
E. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
In the event of a merger, consolidation, reorganization, stock
dividend, stock split, or other change in corporate structure or capitalization
affecting the common stock of the Company, an appropriate adjustment may be made
in the number and kind of shares subject to and the exercise prices of options
granted under the Plan as determined by the Committee.
F. TERMS AND CONDITIONS OF OPTIONS.
The Committee shall have the power, subject to the limitations
contained in this Plan, to prescribe any terms and conditions in respect of the
granting or exercise of any option under this Plan and, in particular, shall
prescribe the following terms and conditions:
(1) Each option shall state the number of shares to which it
pertains.
(2) The price at which shares shall be sold to participants
hereunder (the "Exercise Price") shall be the Fair Market Value of the
Company's common stock on the date of grant. Payment of the Exercise
Price shall be made at the time the shares are sold hereunder by check
payable to the Company, or by surrender of outstanding shares of common
stock of the Company which have a Fair Market Value on the date of
surrender equal to the Exercise Price of the shares as to which the
option is being exercised, or by a combination thereof.
(3) An option shall be exercisable in whole or in part (but
not as to less than twenty-five percent of the original aggregate
amount of shares of common stock made subject to the option) with
respect to the shares included therein until the earlier of (a) the
close of business on the tenth day prior to the proposed effective date
of (i) any merger or consolidation of the Company with any other
corporation or entity as a result of which the holders of the common
stock of the Company will own less than a majority voting
<PAGE>
control of the surviving corporation; (ii) any sale of substantially
all of the assets of the Companies or (iii) any sale of common stock of
the Company to a person not a shareholder on the date of issuance of
the option who thereby acquires majority voting control of the Company,
subject to any such transaction actually being consummated, or (b) the
close of business on the date ten (10) years after the date the option
was granted. The Company shall give written notice to the optionee not
less than 30 days prior to the proposed effective date of any of the
transactions described in (a) above.
(4) Except in the event of disability, death or normal
retirement, an option shall be exercisable with respect to the shares
included therein not earlier than the date one (1) year following the
date of grant of the option, nor later than the date ten (10) years
following the date of grant of the option; provided, however, that
during the first year that the option may be exercised, the optionee
may exercise such optionee's right only to the extent of fifty percent
(50%) of the shares subject to such option; and provided further,
however, that in the event of a change in status of an employee from
full-time to part-time or seasonal, such employee shall continue to
have the right to exercise an option following such change in status
but only to the extent of the shares available for acquisition on the
date of such change in status (the "Change in Status Date").
(5) Except in the event of disability, death or normal
retirement, an option may be exercised only by the optionee while such
optionee is, and has continually been, since the date of the grant of
the option, an employee of any of the Companies; provided, however,
that a former employee shall continue to have the right to exercise an
option for a period of thirty (30) days following such termination to
the extent of the shares available for acquisition on the date of such
former employee's termination. If the continuous employment of an
optionee terminates by reason of disability, death or normal
retirement, an option granted hereunder held by the disabled, deceased
or retired employee may be exercised to the extent of all shares
subject to the option (or, with respect to a disabled, deceased or
retired part-time or seasonal employee, to the extent of the shares
available for acquisition on the Change in Status Date) within one (1)
year following the date of disability or death or five (5) years
following the date of normal retirement, but in no event later than ten
(10) years after the date of grant of such option, by the disabled or
retired employee or the person or persons to whom the participant's
rights under such option shall have passed by will or by the applicable
laws of descent and distribution. For purposes of this Plan only, (a)
an employee shall be deemed "disabled" if the employee is unable to
perform his or her usual duties for the Companies as a result of
physical or mental disability, and such inability to perform continues
or is expected to continue for at least twelve (12) consecutive months,
and (b) "normal retirement" shall mean retirement on or after age 60 so
long as the employee has served the Companies continuously for at least
the three (3) years immediately preceding retirement. Notwithstanding
the foregoing, the changes made in Sections F(4) and (5) pursuant to
the amendments hereto adopted on April 24, 1998 (relating to the
vesting of
<PAGE>
options in the event of normal retirement), shall be effective only for
options granted hereunder on and after April 24, 1998.
(6) An option shall be exercised when written notice of such
exercise has been given to the Company at its principal business office
by the person entitled to exercise the option and full payment for the
shares with respect to which the option is exercised has been received
by the Company. Until the stock certificates are issued, no right to
vote or receive dividends or any other rights as a shareholder shall
exist with respect to optioned shares, notwithstanding the exercise of
the option.
G. OPTIONS NOT TRANSFERRABLE.
Options under the Plan may not be sold, pledged, assigned or
transferred in any manner, whether by operation of law or otherwise except by
will or the laws of descent, and may be exercised during the lifetime of an
optionee only by such optionee.
H. AMENDMENT OR TERMINATION OF THE PLAN.
The Board may amend this Plan from time to time as it may deem
advisable and may at any time terminate the Plan, provided that any such
termination of the Plan shall not adversely affect options already granted and
such options shall remain in full force and effect as if the Plan had not been
terminated.
I. AGREEMENT AND REPRESENTATIONS OF OPTIONEES.
As a condition precedent to the exercise of any option or portion
thereof, the Company may require the person exercising such option to represent
and warrant at the time of any such exercise that the shares are being purchased
only for investment and without any present intention to sell or distribute such
shares if, in the opinion of counsel for the Company, such a representation is
required under the Securities Act of 1933 or any other applicable law,
regulation or rule of any governmental agency.
In the event legal counsel to the Company renders an opinion to the
Company that shares for options exercised pursuant to this Plan cannot be issued
to the optionee because such action would violate any applicable federal or
state securities laws, then in that event the optionee agrees that the Company
shall not be required to issue said shares to the optionee and shall have no
liability to the optionee other than the return to optionee of amounts tendered
to the Company upon exercise of the option.
J. EFFECTIVE DATE AND TERMINATION OF THE PLAN.
The Plan is effective as of April 4, 1994. The Plan shall terminate on
the earliest of:
<PAGE>
(1) The date when all the shares available under the Plan
shall have been acquired through the exercise of options granted under
the Plan; or
(2) Ten (10) years after the date of approval of the Plan by
the Shareholders of the Company; or
(3) Such other earlier date as the Board may determine.
K. WITHHOLDING TAXES.
The Companies shall have the right to take any action that may be
necessary in the opinion of the Companies to satisfy all obligations for the
payment of any federal, state or local taxes of any kind, including FICA taxes,
required by law to be withheld with respect to the exercise of an option granted
hereunder. If stock is withheld or surrendered to satisfy tax withholding, such
stock shall be the Fair Market Value of the Company's common stock on the date
of exercise.
L. FAIR MARKET VALUE.
"Fair Market Value" shall mean the last reported sale price of the
Company's common stock on the date of grant, as quoted on by the New York Stock
Exchange. If the Company's common stock ceases to be listed for trading on the
New York Stock Exchange, "Fair Market Value" shall mean the value determined in
good faith by the Board.
M. COMPLIANCE WITH RULE 16B-3 AND SECTION 162(M).
With respect to employees subject to Section 16 of the Securities
Exchange Act of 1934, as amended, or Section 162(m) of the Code, transactions
under the Plan are intended to comply with all applicable conditions of such
Rule 16b-3 and avoid loss of the deduction referred to in paragraph (1) of such
Section 162(m). Anything in the Plan to the contrary notwithstanding, to the
extent any provision of the Plan or action by the Committee fails to so comply
or avoid the loss of such deduction, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Committee.
N. FORM OF OPTION.
Options shall be issued in substantially the form as the Committee or
the Board may approve.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
---------------
FISCAL PERIOD(1) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA
Revenues $10,077,906 $8,358,212 $7,770,683 $7,217,448 $5,079,557
Gross profit 1,827,783 1,332,138 1,058,881 936,571 690,393
Selling, general and
administrative expenses 1,463,281 1,145,280 1,005,675 813,988 568,466
Operating income 364,502 186,858 53,206 122,583 121,927
Earnings before cumulative effect
of accounting change 224,437 94,453 1,748 48,019 57,651
Net earnings (loss) 224,437 94,453 1,748 48,019 57,651
PER SHARE DATA(2)
Earnings before cumulative effect
of accounting change $ 1.07 $ .52 $ .01 $ .28 $ .32
Net earnings (loss) 1.07 .52 .01 .28 .32
Common stock price: High 49 15 19/64 6 9/16 7 13/32 11 5/16
Low 14 3/4 2 5/32 1 31/32 3 3/16 5 17/32
OPERATING AND OTHER DATA
Comparable store sales change(3) 13.5% 2.0% (4.7%) 5.5% 19.9%
Number of stores (end of period) 311 284 272 251 204
Average revenues per store(4) $ 33,700 $ 29,700 $ 29,300 $ 31,100 $ 28,400
Gross profit percentage 18.1% 15.9% 13.6% 13.0% 13.6%
Selling, general and administrative
expense percentage 14.5% 13.7% 12.9% 11.3% 11.2%
Operating income percentage 3.6% 2.2% .7% 1.7% 2.4%
Inventory turns(5) 6.6x 5.6x 4.6x 4.8x 4.7x
BALANCE SHEET DATA (AT PERIOD END)
Working capital $ 676,184 $ 676,601 $ 567,456 $ 586,841 $ 609,049
Total assets 2,512,493 2,056,346 1,734,307 1,890,832 1,507,125
Long-term debt, including
current portion 60,597 225,322 238,016 229,855 240,965
Convertible preferred securities -- 229,854 230,000 230,000 230,000
Shareholders' equity 1,064,134 557,746 438,315 431,614 376,122
- -----------------------------------------------------------------------------------------------------------------------
---------------
</TABLE>
THIS TABLE SHOULD BE READ IN CONJUNCTION WITH MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, BEGINNING ON PAGE 22,
AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES, BEGINNING ON PAGE 29.
(1) FISCAL 1990 CONTAINED APPROXIMATELY 11 MONTHS BECAUSE THE COMPANY CHANGED
ITS FISCAL YEAR TO A 52/53 WEEK PERIOD ENDING ON THE SATURDAY NEAREST THE
END OF FEBRUARY. FISCAL 1996 CONTAINED 53 WEEKS. ALL OTHER PERIODS
PRESENTED CONTAINED 52 WEEKS.
(2) EARNINGS PER SHARE IS SHOWN ON A DILUTED BASIS AND REFLECTS TWO-FOR-ONE
STOCK SPLITS IN MARCH 1999, MAY 1998 AND APRIL 1994 AND A THREE-FOR-ONE
STOCK SPLIT IN SEPTEMBER 1993.
(3) COMPARABLE STORES ARE STORES OPEN AT LEAST 14 FULL MONTHS.
(4) AVERAGE REVENUES PER STORE ARE BASED UPON TOTAL REVENUES FOR THE PERIOD
DIVIDED BY THE WEIGHTED AVERAGE NUMBER OF STORES OPEN DURING SUCH PERIOD.
(5) INVENTORY TURNS ARE CALCULATED BASED UPON A MONTHLY AVERAGE OF INVENTORY
BALANCES.
(6) DURING FISCAL 1994, THE COMPANY ADOPTED SFAS NO. 109, "ACCOUNTING FOR
INCOME TAXES," RESULTING IN A CUMULATIVE EFFECT ADJUSTMENT OF ($425) OR
($.01) PER SHARE.
(7) DURING FISCAL 1991, THE COMPANY CHANGED ITS METHOD OF ACCOUNTING FOR
SERVICE PLANS, RESULTING IN A CUMULATIVE EFFECT ADJUSTMENT OF ($13,997) OR
($.15) PER SHARE.
BEST BUY CO., INC. 20
<PAGE>
<TABLE>
<CAPTION>
1994(6) 1993 1992 1991(7) 1990
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3,006,534 $ 1,619,978 $ 929,692 $ 664,823 $ 512,850
456,925 284,034 181,062 141,657 120,341
379,747 248,126 162,286 130,681 107,194
77,178 35,908 18,776 10,976 13,147
41,710 19,855 9,601 4,540 5,683
41,285 19,855 9,601 (9,457) 5,683
$ .26 $ .14 $ .08 $ .05 $ .06
.25 .14 .08 (.10) .06
7 55/64 3 59/64 2 61/64 59/64 47/64
2 23/32 1 11/64 43/64 3/8 15/32
26.9% 19.4% 14.0% 1.0% .3%
151 111 73 56 49
$ 22,600 $ 17,600 $ 14,300 $ 12,400 $ 11,500
15.2% 17.5% 19.5% 21.3% 23.5%
12.6% 15.3% 17.5% 19.7% 20.9%
2.6% 2.2% 2.0% 1.6% 2.6%
5.0x 4.8x 5.1x 4.5x 3.7x
$ 362,582 $ 118,921 $ 126,817 $ 64,623 $ 78,398
952,494 439,142 337,218 185,528 156,787
219,710 53,870 52,980 35,695 35,283
-- -- -- -- --
311,444 182,283 157,568 56,741 66,150
- ------------------------------------------------------------------------------------------
</TABLE>
FISCAL 1999 BEST BUY ANNUAL REPORT 21
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Fiscal 1999 was an outstanding year, as the Company surpassed $10 billion in
revenues and generated record earnings. For the fiscal year ended February 27,
1999, earnings were $224.4 million, compared to $94.5 million in fiscal 1998 and
$1.7 million in fiscal 1997. Earnings per share on a diluted basis were $1.07 in
fiscal 1999, $.52 in fiscal 1998 and $.01 in fiscal 1997, and reflect
two-for-one stock splits on March 18, 1999 and May 26, 1998. The record results
can be attributed to the success of initiatives to increase profitability
through improvements in inventory management, retail operations and marketing
execution. These improvements enabled the Company to effectively capitalize on
strong consumer spending in fiscal 1999, nearly doubling operating income over
fiscal 1998 to $365 million. In addition, in fiscal 1999, the Company reduced
its long-term debt by more than $380 million, contributing to a decrease in net
interest of $33 million as compared to the previous year.
The following table presents selected revenue data for each of the last three
fiscal years ($ in thousands).
<TABLE>
<CAPTION>
-------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $10,077,906 $8,358,212 $7,770,683
Percentage increase in revenues 21% 8% 8%
Comparable store sales change 13.5% 2.0% (4.7%)
Average revenues per store $ 33,700 $ 29,700 $ 29,300
-------------
</TABLE>
Sales in fiscal 1999 increased 21% to $10.078 billion, compared to $8.358
billion in fiscal 1998, principally due to the 13.5% increase in comparable
store sales, the addition of 28 new stores and a full year of operations at the
13 stores opened in fiscal 1998. The comparable store sales gain was the result
of strong consumer spending, market share gains and improvements in the
Company's operating model. Double-digit comparable store sales gains occurred in
each quarter of fiscal 1999 as all major categories generated comparable store
sales increases. Increased affordability of products, including personal
computers and consumer electronics, contributed to the sales increase along with
strong consumer response to new technology such as Digital Versatile Disc (DVD),
digital phones and digital cameras. The Company gained market share in fiscal
1999 as a result of more effective advertising, better product in-stock
positions and a more customer-focused product assortment, as well as the
continued consolidation and closing of competing retailers. New stores opened in
fiscal 1999 included entry 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 other new stores were opened in existing
markets.
Fiscal 1998 sales were 8% higher than the $7.771 billion reported in fiscal
1997, as comparable store sales increased 2.0% and results for the year included
13 new stores and a full year of operations at the 21 stores opened in fiscal
1997. The comparable store sales gain was the result of increased consumer
demand, particularly in the second half of the year, as well as improved retail
selling strategies. Increased sales of entertainment software due to new
technology in video games and consumer demand for new titles in both recorded
music and computer software also contributed to the comparable store sales
increase in fiscal 1998.
The following table shows the Company's retail store sales mix by major product
category for each of the past three fiscal years.
<TABLE>
<CAPTION>
-------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Home Office 36% 38% 39%
Consumer Electronics - Video 16% 15% 17%
Consumer Electronics - Audio 11% 11% 12%
Entertainment Software 20% 20% 18%
Appliances 8% 9% 9%
Other 9% 7% 5%
- ---------------------------------------------------------------------------------------------------
Total 100% 100% 100%
-------------
</TABLE>
BEST BUY CO., INC. 22
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Sales in the home office product category continued to grow in fiscal 1999,
although the category declined from 38% of total sales in fiscal 1998 to 36% in
fiscal 1999. Sales of personal computers increased over the previous year as an
increase in units sold more than offset the 16% decline in average selling
price. The introduction of computer packages below $1,000 and the increasing
popularity of the Internet attracted new, as well as second-time, computer
buyers. More effective management of the transition to new models led to a
product offering that better satisfied consumer demand. Higher unit volumes,
combined with improved merchandising and selling strategies, resulted in higher
sales of the additional products and services that complement the sale of
computer hardware and generate additional profit from the computer sale
transaction. The Company's new configure-to-order process for personal computers
enabled expansion of the computer assortment to satisfy more knowledgeable
computer buyers. Increased sales of digital phones, pagers and other new
technology products were also factors in the overall increase in this category.
Sales of digital technology and products that enhance the consumer's home
theater experience drove the video and audio product categories' sales growth in
fiscal 1999. Sales of televisions, particularly big-screen televisions which
became more affordable in fiscal 1999 as unit prices decreased, generated
double-digit comparable store sales increases as consumers sought a richer
listening and viewing experience. Camcorder and digital satellite system sales
increased in fiscal 1999 driven by lower selling prices, product improvements
and sales assistance provided to the customer in the stores' "high touch" sales
area. Lower selling prices and an increased assortment of DVD movie titles
resulted in rapid consumer acceptance of DVD hardware. DVD represents one of the
initial products in consumer electronics to transition from analog to digital
technology. The Company introduced Digital Television (DTV) to its customers in
selected markets in fiscal 1999. DTV represents a significant opportunity for
future growth, although the high initial selling prices for this new technology
will likely result in only a minimal impact on total sales in fiscal 2000.
Sales of entertainment software, which includes recorded music and movies,
computer software and video games, maintained its sales growth rate with a 24%
increase in sales in fiscal 1999 as compared to fiscal 1998. Sales of recorded
music were driven by a higher demand for new releases. Sales of DVD movies and
video game software and equipment also contributed to the overall sales
increase. Strong new movie releases such as "Titanic" also contributed to the
sales gains. DVD software sales grew significantly in fiscal 1999 due to the
increase in DVD players sold and the growth in available DVD titles from 500 to
over 1,500. Video game software and peripherals sales increased as a result of
the continued growth of the Nintendo 64 and Sony Playstation formats. The
Company also began selling recorded music and DVD movies on its Internet
shopping site in fiscal 1999. While not generating significant sales volume,
management believes the Internet is another revenue growth opportunity.
The major appliance product category generated a double-digit comparable store
sales increase in fiscal 1999, performing better than the industry as a whole.
The addition of the Whirlpool appliance line in the second quarter of fiscal
1999 strengthened the Company's appliance assortment. A strong economy, faster
product turns and better service levels all contributed to increased sales.
FISCAL 1999 BEST BUY ANNUAL REPORT 23
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The "other" category includes sales of Performance Service Plans (PSPs), which
increased from 3.0% of sales in fiscal 1998 to 3.7% of sales in fiscal 1999 as a
result of the continued focus on the presentation of plans to customers and
higher product sales across all categories. Higher quality, more affordable
digital cameras, the expansion of the Company's ready-to-assemble furniture
assortment and better merchandising of consumables, such as blank tapes, also
contributed to the overall sales gains in this category.
COMPONENTS OF OPERATING INCOME
The following table shows selected operating ratios as a percentage of sales for
the last three fiscal years.
<TABLE>
<CAPTION>
-------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross profit margin 18.1% 15.9% 13.6%
Selling, general and administrative expenses 14.5% 13.7% 12.9%
Operating income 3.6% 2.2% .7%
-------------
</TABLE>
Gross profit margin was 18.1% of sales in fiscal 1999, an improvement of 2.2% of
sales from fiscal 1998. This increase was mainly due to the impact from
initiatives to generate a more profitable product assortment, faster turning
inventory and increased advertising effectiveness. For the second consecutive
year, inventory turns increased by one full turn, to 6.6 turns in fiscal 1999
compared to 5.6 turns in fiscal 1998 and 4.6 turns in fiscal 1997. This increase
in inventory turns resulted in fewer markdowns, particularly during product
model transitions. The increase in sales of higher margin PSPs also contributed
to the improvement in gross profit margin. Another factor in the gross profit
margin improvement was lower inventory shrink as a result of better execution at
the retail stores. The Company anticipates further improvement in the gross
profit margin rate in fiscal 2000 as it continues to realize benefits from its
strategic initiatives, although the rate of gross profit margin improvement will
be less than the significant increases in the past two years.
Gross profit margin of 15.9% in fiscal 1998 improved from 13.6% in fiscal 1997,
a gain that was driven by greatly improved inventory management, particularly in
the personal computer product category. A less promotionally driven sales
environment, lower inventory shrink and an increase in sales of PSPs also
contributed to the gross margin improvement.
Selling, general and administrative expenses (SG&A) increased to 14.5% of sales
in fiscal 1999 compared to 13.7% of sales in fiscal 1998, primarily as a result
of higher payroll-related expenses and an increase in professional services. The
increase in payroll-related expenses was primarily due to an increase in overall
financial performance-based compensation, higher levels of compensation
resulting from building a higher caliber staff at the retail stores and labor
market conditions. Additionally, a full year operation of the retail stores'
"high touch" area and expenses associated with an increased number of store
openings contributed to higher personnel costs. Professional services costs
increased due to the Company's initiatives to improve operating performance and
implement business process improvements. The Company also increased its spending
on outside consultants to help improve technical services operations and enhance
management training and development. The Company's spending on Year 2000 system
issues also increased in fiscal 1999. Management believes that the investment in
strategic initiatives has improved the Company's operating model and has
resulted in the gross profit margin gains. The returns from the increased
investment in SG&A are reflected in the improvement in operating income to 3.6%
of sales in fiscal 1999 from 2.2% in fiscal 1998.
SG&A is anticipated to increase in fiscal 2000 as the Company continues to
invest in new information systems, operational improvements, technical services
enhancements and its E-commerce initiative. The outside consultants that had
been assisting the Company with its retail and marketing initiatives over the
past three years have been engaged in a multi-year project to improve the
operations and financial performance of the Company's service division.
Management expects the additional investment in SG&A will be adequately funded
by the anticipated increase in gross profit margin.
BEST BUY CO., INC. 24
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The increase in the SG&A ratio in fiscal 1998 compared to fiscal 1997 also was
due primarily to higher levels of compensation and professional services.
Compensation increased due to a tight labor market and the introduction of the
dedicated staff in the "high touch" area of the stores. Professional service
expenses were incurred to improve marketing effectiveness and retail operations,
in addition to addressing Year 2000 system issues.
Net interest improved by $33 million in fiscal 1999 as compared to fiscal 1998,
in part due to the conversion of the Company's $230 million in preferred
securities into equity in the first quarter of fiscal 1999. Improvements in
inventory management and strong sales enabled the Company to build significant
cash balances and prepay its $150 million 8-5/8% Senior Subordinated Notes in
October 1998. The prepayment premium of $3.8 million and the write-off of the
remaining deferred debt offering costs of approximately $1.1 million are
included in interest expense. The conversion and retirement of these two
long-term financings reduces interest expense by about $28 million annually. In
addition, the higher cash balances generated increased interest income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's effective income tax rate in fiscal 1999 was 38.5%, basically
unchanged compared to 38.6% in fiscal 1998 and down from 39.0% in fiscal 1997.
The Company's effective tax rate is impacted by changes in the taxability of
investment income and state income tax rates.
The Company significantly improved its financial position and liquidity in
fiscal 1999 as a result of strong earnings growth and continued improvement in
inventory management. The Company used the cash generated from operations to
repay debt and fund capital spending while increasing cash and cash equivalents
by $266 million. The conversion of preferred securities into common stock
contributed to the Company surpassing $1 billion in shareholders' equity.
Inventories of just over $1 billion at the end of fiscal 1999 were essentially
unchanged from the previous year-end even with the operation of 28 new stores
and higher sales volumes, due to improved inventory management. Owned inventory
(inventory net of accounts payable) also improved as a result of faster
inventory turns.
Trade receivables, mainly credit card and vendor-related receivables, increased
$37 million due to an increase in volume in the fourth quarter of fiscal 1999,
as sales increased 21% over the previous year. Receivables from sales on the
Company's private label credit card are sold to third parties, without recourse,
and the Company does not bear any risk of loss with respect to these
receivables. Other assets increased as a result of insurance policies purchased
in connection with the Company's deferred compensation plan, established in
fiscal 1999.
Trade payables increased, as compared to the previous year-end, due to increased
business volume. Accrued liabilities increased compared to the previous year-end
as a result of expenses associated with higher performance-based compensation
related to the strong financial performance in fiscal 1999, the higher levels of
business activity and expenses for the Company's strategic initiatives.
The increase in long-term liabilities was principally the result of the excess
of rent expense for accounting purposes over cash paid and the newly established
deferred compensation plan. Deferred service plan revenue declined by $17
million as deferred revenues related to service plans sold prior to the fourth
quarter of fiscal 1996, when the Company began insuring these obligations, were
recognized. Revenues from PSP sales from that time forward are recognized when
a sale is consummated, rather than over the life of the contract. The remaining
$5.6 million of deferred revenue will be recognized in fiscal 2000.
FISCAL 1999 BEST BUY ANNUAL REPORT 25
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Capital spending in fiscal 1999 was $166 million, compared to $72 million in
fiscal 1998 and $88 million in fiscal 1997. The Company increased its expansion
program in fiscal 1999 after the initiatives to improve operations resulted in
an enhanced operating model. In addition to opening 28 new stores and remodeling
or relocating five new stores in fiscal 1999, the Company began development of
approximately 45 stores scheduled to open in fiscal 2000. The majority of the
stores opened in fiscal 1999 incorporated the features of the Company's new
Concept IV store format. This new format, while retaining the 45,000-square-foot
size, features improved merchandising, signage and customer service and is
expected to better address consumers needs as the industry progresses into new
digital products. The Company also continued to invest in its information
systems and distribution facilities to support growing business requirements.
The following table indicates the number of stores, by prototype, operated by
the Company at the end of the last three fiscal years.
<TABLE>
<CAPTION>
-------------
STORE PROTOTYPE 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<C> <C> <C> <C>
28,000 square feet 43 48 54
36,000 square feet 34 34 34
45,000 square feet 182 150 132
58,000 square feet 52 52 52
- ---------------------------------------------------------------------------------------------------
Total number of stores at year end 311 284 272
Average store size (in square feet) 43,700 43,200 42,800
-------------
</TABLE>
The Company's practice is to lease rather than own real estate; however, for
those sites developed using working capital, the Company sells and leases back
those properties under long-term leases. The costs of development are classified
as recoverable costs from developed properties and are included in current
assets. Based on the number of store openings in both fiscal 1999 and 2000,
recoverable costs from developed property increased by $66 million in fiscal
1999. The increase also includes the cost of new Dinuba, CA, distribution
facility that opened in April 1999.
Capital spending for fiscal 2000 is expected to exceed $300 million, exclusive
of amounts to be recovered through subsequent sales and leasebacks, to support
the Company's plans to open new stores and remodel or relocate selected stores
to its new Concept IV format. The new stores scheduled to open in fiscal 2000
include entry into the markets of San Francisco, San Diego and Sacramento, CA;
northern Florida; upstate New York; and Richmond and Norfolk, VA. The Company
also plans to remodel or relocate approximately 20 stores to larger facilities.
Included in its expansion plans, the Company will test four 30,000-square-foot
small market format stores in markets with populations between 100,000 and
200,000. These stores are expected to offer a narrowed assortment of the same
product categories as the larger stores. The Company will also be investing in
information systems to support the development of its E-commerce business and
improve its services division.
In the first quarter of fiscal 1999, essentially all of the Company's preferred
securities were converted into common stock, resulting in the issuance of
approximately 20.4 million common shares. This conversion increased
shareholders' equity by over $220 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 prepaid its $150
million 8-5/8% Senior Subordinated Notes, due in October 2000.
In October 1998, the Company's Board of Directors authorized the purchase of up
to $100 million of the Company's common stock. Through February 27, 1999,
125,000 shares at a cost of $2.5 million have been purchased.
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 in June 2000, can be extended for one year if
certain conditions are met and may be reduced at the Company's option.
Management believes that funds generated by the expected results of operations
and available cash and cash equivalents will be sufficient to finance the
Company's anticipated expansion plans for the upcoming year. The revolving
credit facility and the Company's inventory financing program are also available
for additional working capital needs or opportunities.
BEST BUY CO., INC. 26
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
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 Y2K processing issue.
Typically, Y2K issues arise from systems or software processing only two digits
representing a year. The absence of century digits (e.g., "19" for years
1900-1999, or "20" for years beginning in 2000) usually leads to false results
from computer-controlled systems. This is the most pervasive issue.
The Company recognized that 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 management believes, to date, the
Company has made significant progress.
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 95% complete. Corrected logic
was tested as changes were made. This portion of the Company's plan was
completed at a total cost of approximately $9 million in outside professional
fees, of which the majority were incurred in fiscal 1999. In addition, the
Company has dedicated a staff of its internal resources to address Y2K issues.
Although the change to the calendar year 2000 is responsible for the majority of
the Y2K issues, the Company's systems are fully functional in its current fiscal
year 2000.
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 Y2K
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 system Y2K issues and other
potential Y2K issues. These issues include the Company's communication systems
and operating systems at and between the Company's locations and support
facilities. The Company has corresponded with its business partners, including
merchandise suppliers and service providers to assess their 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 the partners'
production and shipping processes. The issues that were 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
$8 million, of which the majority will be incurred in fiscal 2000.
The Company generally believes that the vendors that supply products to the
Company for resale are responsible for the Y2K functionality of those products.
However, should product failures occur, the Company may be required to address
the administrative aspects of those failures such as handling product returns or
repairs.
While the Company believes that it is pursuing the appropriate courses of action
to ensure Y2K readiness, there can be no assurance that the objective will be
achieved either internally or as it relates to business partners. Also, the
Company can provide no assurance regarding potential impact on consumer spending
that may result from concerns regarding the Y2K functionality of products. For
the Y2K issues which, if not timely resolved, could have a significant impact on
the Company's operations, the Company is continuing to develop contingency plans
to minimize the impact of failure to achieve Y2K compliance. The Company has
also devoted significant attention to planning for what could be the result of
the most adverse consequence of Y2K issues. Management believes that adequate
contingency plans are being developed to minimize the financial impact to the
Company.
FISCAL 1999 BEST BUY ANNUAL REPORT 27
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
QUARTERLY RESULTS AND SEASONALITY
Similar to most retailers, the Company's business is seasonal. Revenues and
earnings are lower during the first half of each fiscal year and are greater
during the second half, which includes the holiday selling season. The timing of
new store openings and general economic conditions may affect future quarterly
results of the Company.
The following tables set forth the Company's unaudited quarterly operating
results and high and low common stock prices for each quarter of fiscal 1999 and
1998.
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; PER SHARE AMOUNTS HAVE BEEN ADJUSTED
FOR A TWO-FOR-ONE STOCK SPLIT IN MARCH 1999)
<TABLE>
<CAPTION>
QUARTER 1ST 2ND 3RD 4TH
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
FISCAL 1999
Revenues $1,943,664 $2,182,124 $ 2,493,843 $3,458,275
Gross profit 354,219 410,349 445,591 617,624
Operating income 28,065 72,795 91,606 172,036
Net earnings 15,725 44,135 54,389 110,188
Diluted earnings per share .08 .21 .26 .52
- -----------------------------------------------------------------------------------------------------------
FISCAL 1998
Revenues $1,606,551 $1,793,204 $2,106,361 $2,852,096
Gross profit 247,883 288,908 337,890 457,457
Operating income 5,216 19,926 52,919 108,797
Net earnings (loss) (2,639) 6,648 26,418 64,026
Diluted earnings (loss) per share (.02) .04 .14 .32
</TABLE>
Common Stock Prices
<TABLE>
<CAPTION>
QUARTER 1ST 2ND 3RD 4TH
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
FISCAL 1999
High $ 19 $ 27 13/32 $ 29 27/32 $ 49
Low 14 3/4 14 7/8 16 23 7/16
- -----------------------------------------------------------------------------------------------------------
FISCAL 1998
High $ 3 19/32 $ 4 3/8 $ 7 9/16 $ 15 19/64
Low 2 5/32 2 13/16 4 7/32 7 9/32
</TABLE>
Best Buy's common stock is traded on the New York Stock Exchange, symbol BBY. As
of March 31, 1999, there were 1,656 holders of record of Best Buy common stock.
The Company has not historically and does not intend to pay cash dividends on
its common stock.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information about their companies. With the exception of historical information,
the matters discussed in the Annual Report are forward-looking statements that
involve risks and uncertainties. Such risks and uncertainties include, among
other things, the Company's expectations regarding the economy, future sales
volumes, profit margins, its Year 2000 readiness, the impact of labor markets
and new product introductions on the Company's overall profitability. Readers
are encouraged to review the Company's Current Report on Form 8-K filed on May
15, 1998, that describes additional important factors that could cause actual
results to differ materially from those contemplated by the statements made
herein.
BEST BUY CO., INC. 28
<PAGE>
CONSOLIDATED BALANCE SHEETS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
--------------
FEB. 27 FEB. 28
ASSETS 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 785,777 $ 520,127
Receivables 132,401 95,702
Recoverable costs from developed properties 73,956 8,215
Merchandise inventories 1,046,366 1,060,788
Other current assets 24,591 25,445
-----------------------------------------
Total current assets 2,063,091 1,710,277
PROPERTY AND EQUIPMENT
Land and buildings 23,158 19,977
Leasehold improvements 174,495 160,202
Furniture, fixtures and equipment 505,232 372,314
Property under capital leases 29,079 29,079
-----------------------------------------
731,964 581,572
Less accumulated depreciation and amortization 308,324 248,648
-----------------------------------------
Net property and equipment 423,640 332,924
OTHER ASSETS 25,762 13,145
-----------------------------------------
TOTAL ASSETS $2,512,493 $2,056,346
=========================================
--------------
</TABLE>
<TABLE>
<CAPTION>
--------------
LIABILITIES AND FEB. 27 FEB. 28
SHAREHOLDERS' EQUITY 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $1,011,746 $ 762,652
Accrued compensation and related expenses 86,667 48,772
Accrued liabilities 211,555 182,719
Income taxes payable 46,851 24,608
Current portion of long-term debt 30,088 14,925
-----------------------------------------
Total current liabilities 1,386,907 1,033,676
LONG-TERM LIABILITIES 30,943 24,673
LONG-TERM DEBT 30,509 210,397
CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY -- 229,854
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 203,621,000
and 178,504,000 shares, respectively 10,181 4,463
Additional paid-in capital 542,377 266,144
Retained earnings 511,576 287,139
-----------------------------------------
Total shareholders' equity 1,064,134 557,746
-----------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,512,493 $2,056,346
=========================================
</TABLE>
--------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
FISCAL 1999 BEST BUY ANNUAL REPORT 29
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
--------------
FEB. 27 FEB. 28 MARCH 1
FOR THE FISCAL YEARS ENDED 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $10,077,906 $8,358,212 $7,770,683
COST OF GOODS SOLD 8,250,123 7,026,074 6,711,802
---------------------------------------------------------------
GROSS PROFIT 1,827,783 1,332,138 1,058,881
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,463,281 1,145,280 1,005,675
---------------------------------------------------------------
OPERATING INCOME 364,502 186,858 53,206
NET INTEREST INCOME (EXPENSE) 435 (33,005) (50,338)
---------------------------------------------------------------
EARNINGS BEFORE INCOME TAX EXPENSE 364,937 153,853 2,868
INCOME TAX EXPENSE 140,500 59,400 1,120
---------------------------------------------------------------
NET EARNINGS $ 224,437 $ 94,453 $ 1,748
===============================================================
BASIC EARNINGS PER SHARE $ 1.13 $ .54 $ .01
DILUTED EARNINGS PER SHARE $ 1.07 $ .52 $ .01
BASIC WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (000'S) 199,185 175,416 172,686
DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (000'S) 210,006 200,251 174,491
--------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BEST BUY CO., INC. 30
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
$ IN THOUSANDS
<TABLE>
<CAPTION>
--------------
FEB. 27 FEB. 28 MARCH 1
FOR THE FISCAL YEARS ENDED 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 224,437 $ 94,453 $ 1,748
Depreciation, amortization and
other non-cash charges 78,367 71,584 67,312
---------------------------------------------------
302,804 166,037 69,060
Changes in operating assets and liabilities:
Receivables (36,699) (16,121) 41,857
Merchandise inventories 14,422 71,271 69,083
Other current assets 854 4,657 8,174
Accounts payable 249,094 147,340 (152,491)
Other liabilities 109,713 43,500 (26,053)
Income taxes payable 22,243 33,759 3,579
---------------------------------------------------
Total cash provided by
operating activities 662,431 450,443 13,209
---------------------------------------------------
INVESTING ACTIVITIES
Additions to property and equipment (165,698) (72,063) (87,593)
(Increase) decrease in recoverable costs
from developed properties (65,741) 45,270 72,752
(Increase) decrease in other assets (18,128) 4,494 (5,593)
---------------------------------------------------
Total cash used in investing activities (249,567) (22,299) (20,434)
---------------------------------------------------
FINANCING ACTIVITIES
Long-term debt payments (165,396) (22,694) (25,694)
Long-term debt borrowings -- 10,000 33,542
Common stock issued 20,644 14,869 2,740
Repurchase of common stock (2,462) -- --
---------------------------------------------------
Total cash (used in) provided by
financing activities (147,214) 2,175 10,588
---------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 265,650 430,319 3,363
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 520,127 89,808 86,445
---------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 785,777 $ 520,127 $ 89,808
===================================================
--------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
FISCAL 1999 BEST BUY ANNUAL REPORT 31
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND INDEPENDENT AUDITOR'S REPORT
$ IN THOUSANDS
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCES AT
MARCH 2, 1996 $ 4,284 $ 236,392 $ 190,938
Stock options exercised 45 2,695 --
Tax benefit from stock options exercised -- 2,213 --
Net earnings -- -- 1,748
------------------------------------------------------------
BALANCES AT
MARCH 1, 1997 4,329 241,300 192,686
Stock options exercised 134 14,056 --
Tax benefit from stock options exercised -- 10,642 --
Conversion of preferred securities -- 146 --
Net earnings -- -- 94,453
------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
BALANCES AT
FEBRUARY 28, 1998 4,463 266,144 287,139
Stock options exercised 199 21,381 --
Tax benefit from stock options exercised -- 40,428 --
Conversion of preferred securities 509 221,896 --
May 1998 two-for-one stock split 5,016 (5,016) --
Repurchase of common stock (6) (2,456) --
Net earnings -- -- 224,437
------------------------------------------------------------
BALANCES AT
FEBRUARY 27, 1999 $ 10,181 $ 542,377 $ 511,576
============================================================
- -------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
INDEPENDENT AUDITOR'S REPORT
Shareholders and Board of Directors
Best Buy Co., Inc.
We have audited the accompanying consolidated balance sheets of Best Buy Co.,
Inc. as of February 27, 1999, and February 28, 1998, and the related
consolidated statements of earnings, changes in shareholders' equity, and cash
flows for each of the three years in the period ended February 27, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Best Buy Co., Inc.
at February 27, 1999, and February 28, 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
February 27, 1999, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 30, 1999
BEST BUY CO., INC. 32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS:
The Company operates in a single business segment, selling personal computers
and other home office products, consumer electronics, entertainment software,
major appliances and related accessories principally through its retail stores.
Accordingly, additional disclosures under Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and
Related Information," are not required.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of Best Buy Co., Inc.
and its subsidiaries. Significant intercompany accounts and transactions have
been eliminated.
CASH AND CASH EQUIVALENTS:
The Company considers short-term investments with a maturity of three months or
less when purchased to be cash equivalents. Cash equivalents are carried at
cost, which approximates market value.
RECOVERABLE COSTS FROM DEVELOPED PROPERTIES:
The costs of acquisition and development of properties which the Company intends
to sell and lease back or recover from landlords within one year are included in
current assets.
MERCHANDISE INVENTORIES:
Merchandise inventories are recorded at the lower of average cost or market.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation, including
amortization of property under capital leases, is computed on the straight-line
method over the estimated useful lives of the assets or, in the case of
leasehold improvements, over the shorter of the estimated useful lives or lease
terms. The Company evaluates potential losses on impairment of long-lived assets
used in operations on a location-by-location basis when indicators of impairment
are present. A loss is recorded when an asset's carrying value exceeds the
estimated undiscounted cash flows from the asset.
PRE-OPENING COSTS:
The Company adopted Statement of Position (SOP) 98-5, "Reporting on the Cost of
Start-Up Activities," during the first quarter of fiscal 1999. The SOP requires
the costs of start-up activities, including store 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. Annual results were not
materially impacted by the adoption.
ADVERTISING COSTS:
Advertising costs, included in selling, general and administrative expenses, are
expensed as incurred.
PERFORMANCE SERVICE PLANS:
The Company sells Performance Service Plans on behalf of an unrelated third
party. The Company recognizes commission revenue on the sale of the plans at the
time of sale. Revenue from the sale of the plans sold prior to November 26,
1995, net of direct selling expenses, is recognized straight-line over the life
of the plan. Costs related to servicing these plans are expensed as incurred.
FISCAL 1999 BEST BUY ANNUAL REPORT 33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
EARNINGS PER SHARE:
Basic earnings per share is computed based on the weighted average number of
common shares outstanding during each period. Diluted earnings per share
includes the incremental shares assumed issued on the exercise of stock options.
Convertible preferred securities were assumed to be converted into common stock
and any interest expense thereon, net of related taxes, was added back to net
earnings when such conversion resulted in dilution.
STOCK SPLITS:
The Company completed a two-for-one stock split effected in the form of a 100%
stock dividend distributed on May 26, 1998. In addition, on February 19, 1999,
the Company's Board of Directors authorized another two-for-one stock split
effected in the form of a 100% stock dividend distributed on March 18, 1999. All
share and per share information reflects these stock splits.
STOCK OPTIONS:
The Company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for stock options and
presents in Note 5 pro forma net earnings and earnings per share as if the
Company had adopted SFAS No. 123, "Accounting for Stock-Based Compensation."
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the consolidated balance sheet and statement of
earnings, as well as the disclosure of contingent liabilities. Actual results
could differ from these estimates and assumptions.
FISCAL YEAR:
The Company's fiscal year ends on the Saturday nearest the end of February.
RECLASSIFICATIONS:
Certain previous year amounts have been reclassified to conform to the current
year presentation. These reclassifications had no impact on net earnings or
total shareholders' equity.
2. WORKING CAPITAL FINANCING
CREDIT AGREEMENT:
The Company has a credit agreement (the Agreement) that provides a bank
revolving credit facility under which the Company can borrow up to $220,000. The
Agreement expires on June 30, 2000 and can be extended for one year upon meeting
certain requirements. Borrowings under the facility are unsecured. Interest on
borrowings is at rates specified in the Agreement, as elected by the Company.
The Company also pays certain commitment and agent fees.
The Agreement contains covenants that require maintenance of certain financial
ratios and place limits on owned real estate and capital expenditures. The
Agreement also requires that the Company reduce the outstanding principal
balance for a period not less than 30 consecutive days to not more than $50,000,
net of cash and cash equivalents. There were no borrowings under the facility
during fiscal 1999. The weighted average interest rates on borrowings under the
Company's prior credit agreements were 8.67% and 6.86% for fiscal 1998 and 1997,
respectively.
INVENTORY FINANCING:
The Company has a $200,000 inventory financing credit line, which increases to
$325,000 on a seasonal basis. Borrowings are collateralized by a security
interest in certain merchandise inventories approximating the outstanding
borrowings. The terms of this arrangement allow the Company to extend the due
dates of invoices beyond their normal terms. The amounts extended generally bear
interest at a rate approximating the prime rate. No amounts were extended under
this facility in fiscal 1999. The line has provisions that give the financing
source a portion of the cash discounts provided by the manufacturers.
BEST BUY CO., INC. 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
3. LONG-TERM DEBT
<TABLE>
<CAPTION>
--------------
FEB. 27 FEB. 28
1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Senior Subordinated Notes $ -- $ 150,000
Other 60,597 75,322
-----------------------------------------
60,597 225,322
Current portion of long-term debt 30,088 14,925
-----------------------------------------
$ 30,509 $ 210,397
=========================================
--------------
</TABLE>
SENIOR SUBORDINATED NOTES:
On October 5, 1998, the Company prepaid its $150,000, 8-5/8% Senior Subordinated
Notes due October 1, 2000, at 102.5% of their par value. The prepayment premium
of $3,750 and the write-off of the remaining deferred debt offering costs of
approximately $1,100 are included in interest expense in fiscal 1999.
OTHER:
At February 27, 1999, long-term debt consists of a subordinated note, capital
leases and other loans that bear interest at rates ranging from 5.25% to 9.95%.
The subordinated note is unsecured and matures in July 1999. The capital leases
and other loans are secured by certain property and equipment with a net book
value of $42,900 and $54,100 at February 27, 1999 and February 28, 1998,
respectively.
During fiscal 1999, 1998 and 1997, interest paid (net of amounts capitalized)
totaled $23,800, $37,700 and $50,900, respectively. The fair value of long-term
debt approximates carrying value.
<TABLE>
<CAPTION>
FUTURE MATURITIES OF LONG-TERM DEBT:
FISCAL YEAR CAPITAL LEASES OTHER
- --------------------------------------------------------------------------------------
<C> <C> <C>
2000 $ 693 $ 29,395
2001 7,542 8,167
2002 -- 4,251
2003 -- 1,445
2004 -- 895
Thereafter -- 8,251
-----------------------------------------
8,235 $ 52,404
=============
Less amount representing interest 42
--------------
Minimum lease payments $ 8,193
==============
</TABLE>
4. CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY
In November 1994, the Company and Best Buy Capital, L.P., a special-purpose
limited partnership in which the Company is the sole general partner, completed
the public offering of 4,600,000 convertible monthly income preferred securities
with a liquidation preference of $50 per security. The securities were
convertible into shares of the Company's common stock at the rate of 4.444
shares per security (equivalent to a conversion price of $11.25 per share). In
April 1998, substantially all of the preferred securities were converted into
approximately 20.4 million shares of common stock. The remaining preferred
securities were redeemed in June 1998 for cash of $671.
FISCAL 1999 BEST BUY ANNUAL REPORT 35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
5. SHAREHOLDERS' EQUITY
STOCK OPTIONS:
The Company currently sponsors two non-qualified stock option plans for
employees and one non-qualified stock option plan for directors. These plans
provide for the issuance of up to 48,800,000 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. In addition, two plans
expired in fiscal 1998 that still have outstanding options. At February 27,
1999, options to purchase 19,139,000 shares are outstanding under all of these
plans.
Pursuant to SFAS No. 123, the Company has elected to account for its stock
option plans under the provisions of APB Opinion No. 25. Accordingly, no
compensation cost has generally been recognized for stock options granted. Had
the Company adopted SFAS No. 123, the pro forma effects on net earnings, basic
earnings per share and diluted earnings per share would have been as follows:
<TABLE>
<CAPTION>
-------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET EARNINGS
AS REPORTED $ 224,437 $ 94,453 $ 1,748
PRO FORMA 209,412 88,614 (1,196)
BASIC EARNINGS PER SHARE
AS REPORTED $ 1.13 $ .54 $ .01
PRO FORMA 1.05 .51 (.01)
DILUTED EARNINGS PER SHARE
AS REPORTED $ 1.07 $ .52 $ .01
PRO FORMA 1.00 .49 (.01)
-------------
</TABLE>
The fair value of each option was estimated on the date of the grant using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
-------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RISK-FREE INTEREST RATE 5.6% 6.8% 6.2%
EXPECTED DIVIDEND YIELD 0% 0% 0%
EXPECTED STOCK PRICE VOLATILITY 50% 60% 40%
EXPECTED LIFE OF OPTIONS 4.9 years 4.2 years 4.3 years
-------------
</TABLE>
The pro forma effect on net earnings and earnings per share is not
representative of the pro forma net earnings in future years because it does not
take into consideration pro forma compensation expense related to grants made
prior to 1996.
The weighted average fair value of options granted during fiscal 1999, 1998 and
1997 used in computing pro forma compensation expense was $8.58, $1.74 and $1.26
per share, respectively.
In February 1997, the Company canceled 6,556,000 options, representing
approximately half of the outstanding options granted to employees since April
1993, with exercise prices ranging from $2.80 to $9.55 and granted the same
number of new options with an exercise price of $2.16. Options issued to the
Company's CEO and president were not included in the repricing.
BEST BUY CO., INC. 36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Option activity for the last three fiscal years is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
SHARES PER SHARE
- --------------------------------------------------------------------------------------
<S> <C> <C>
OUTSTANDING MARCH 2, 1996 17,080,000 $ 4.74
GRANTED 10,660,000 3.05
EXERCISED (1,784,000) 1.54
CANCELED (9,056,000) 5.61
--------------
OUTSTANDING MARCH 1, 1997 16,900,000 3.54
GRANTED 7,720,000 3.24
EXERCISED (5,356,000) 2.78
CANCELED (2,520,000) 3.44
--------------
OUTSTANDING FEBRUARY 28, 1998 16,744,000 3.66
GRANTED 9,423,000 17.27
EXERCISED (4,909,000) 4.56
CANCELED (2,119,000) 9.74
--------------
OUTSTANDING FEBRUARY 27, 1999 19,139,000 9.46
--------------
--------------
</TABLE>
Exercisable options at the end of fiscal 1999, 1998 and 1997 were 5,038,000,
4,716,000 and 5,860,000, respectively. The following table summarizes
information concerning options outstanding and exercisable as of February 27,
1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0 to $5 9,214,000 5.68 $ 2.91 3,746,000 $ 2.83
$5 to $10 1,559,000 1.76 5.90 1,132,000 5.91
$10 to $15 58,000 8.99 14.36 10,000 14.10
$15 to $20 8,162,000 9.16 17.21 150,000 17.39
$20 to $25 95,000 9.58 23.66 -- --
$25 to $30 21,000 9.69 25.31 -- --
$30 to $35 30,000 9.86 31.75 -- --
- -----------------------------------------------------------------------------------------
$0 to $35 19,139,000 6.88 $ 9.46 5,038,000 $ 3.98
</TABLE>
EARNINGS PER SHARE:
The following table presents a reconciliation of the numerators and denominators
of basic and diluted earnings per common share for fiscal 1999, 1998 and 1997:
----------
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NUMERATOR:
NET EARNINGS $ 224,437 $ 94,453 $ 1,748
INTEREST ON PREFERRED SECURITIES, NET OF TAX 771 9,179 --
- -------------------------------------------------------------------------------------------------
NET EARNINGS ASSUMING DILUTION $ 225,208 $ 103,632 $ 1,748
DENOMINATOR (000's):
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 199,185 175,416 172,686
EFFECT OF DILUTIVE SECURITIES:
EMPLOYEE STOCK OPTIONS 8,726 4,404 1,805
PREFERRED SECURITIES 2,095 20,431 --
- -------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
ASSUMING DILUTION 210,006 200,251 174,491
BASIC EARNINGS PER SHARE $ 1.13 $ .54 $ .01
DILUTED EARNINGS PER SHARE $ 1.07 $ .52 $ .01
----------
</TABLE>
FISCAL 1999 BEST BUY ANNUAL REPORT 37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
STOCK REPURCHASE:
On October 13, 1998, the Company announced a stock repurchase program, which
authorized the purchase of up to $100 million of the Company's common stock over
the next year. Under the program, the Company may purchase shares of common
stock from time to time through open market purchases. As of February 27, 1999,
125,000 shares were purchased and retired at a cost of $2,500.
6. OPERATING LEASE COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company conducts essentially all of its retail and distribution operations
from leased locations. Transaction costs associated with the sale and leaseback
of properties and any gain or loss are recognized over the terms of the lease
agreements. Proceeds from the sale and leaseback of properties are included in
the net change in recoverable costs from developed properties. The Company also
leases various equipment under operating leases. In addition, the Company had
leased 17 stores and a distribution center, along with the related fixtures and
equipment under a master lease agreement through February 1998. The leases on
these properties were terminated in fiscal 1998 and the properties were
re-leased under long-term leases. The Company purchased the fixtures and
equipment from the lessor. The leases require payment of real estate taxes,
insurance and common area maintenance. Most of the leases contain renewal
options and escalation clauses, and several require contingent rents based on
specified percentages of sales. Certain leases also contain covenants related to
maintenance of financial ratios.
The composition of total rental expenses for all operating leases during the
last three fiscal years, including leases of buildings and equipment, was as
follows:
<TABLE>
<CAPTION>
-------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MINIMUM RENTALS $ 186,100 $ 161,500 $ 139,200
PERCENTAGE RENTALS 500 400 500
--------------------------------------------------------------
$ 186,600 $ 161,900 $ 139,700
--------------------------------------------------------------
--------------------------------------------------------------
-------------
</TABLE>
As of February 27, 1999, three stores are leased from the Company's CEO and
principal shareholder, or partnerships in which he is a partner. Rent under
these leases during the last three fiscal years and one additional store, leased
from his spouse, for which the lease expired in January 1998, was as follows:
<TABLE>
<CAPTION>
-------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MINIMUM RENTALS $ 800 $ 900 $ 1,000
PERCENTAGE RENTALS 400 400 400
--------------------------------------------------------------
$ 1,200 $ 1,300 $ 1,400
--------------------------------------------------------------
--------------------------------------------------------------
-------------
</TABLE>
Future minimum lease obligations by year (not including percentage rentals) for
all operating leases at February 27, 1999, are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -------------------------------------------------------------------------------
<S> <C>
2000 $ 184,700
2001 182,900
2002 180,000
2003 171,700
2004 167,200
THEREAFTER 1,584,100
</TABLE>
7. BENEFIT PLANS
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 by the Company's Board of Directors. The
matching contribution was $3,100, $2,100 and $2,000 in fiscal 1999, 1998 and
1997, respectively.
In fiscal 1999, the Company established a deferred compensation plan for certain
management employees. The related liability for compensation deferred under this
plan was $8,400 at February 27, 1999, and is included in long-term liabilities.
The Company has elected to match its liability under the plan through the
purchase of life insurance. The cash value of the insurance, which includes
funding for future deferrals, was $14,200 and is included in other assets. Both
the asset and the liability are carried at market value.
BEST BUY CO., INC. 38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
8. INCOME TAXES
Following is a reconciliation of income tax expense to the federal statutory tax
rate:
<TABLE>
<CAPTION>
--------------
1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
FEDERAL INCOME TAX
AT THE STATUTORY RATE $ 127,728 $ 53,849 $ 1,004
STATE INCOME TAXES,
NET OF FEDERAL BENEFIT 14,670 5,763 116
TAX EXEMPT INTEREST (3,232) (1,038) --
OTHER 1,334 826 --
---------------------------------------------------
INCOME TAX EXPENSE $ 140,500 $ 59,400 $ 1,120
---------------------------------------------------
---------------------------------------------------
EFFECTIVE TAX RATE 38.5% 38.6% 39.0%
---------------------------------------------------
---------------------------------------------------
--------------
</TABLE>
Income tax expense consists of the following:
<TABLE>
<CAPTION>
--------------
1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT: FEDERAL $ 120,892 $ 50,950 $ (5,100)
STATE 15,252 5,487 (581)
---------------------------------------------------
136,144 56,437 (5,681)
---------------------------------------------------
DEFERRED: FEDERAL 3,868 2,687 6,103
STATE 488 276 698
---------------------------------------------------
4,356 2,963 6,801
---------------------------------------------------
INCOME TAX EXPENSE $ 140,500 $ 59,400 $ 1,120
---------------------------------------------------
---------------------------------------------------
--------------
</TABLE>
Deferred taxes are the result of differences between the basis of assets and
liabilities for financial reporting and income tax purposes. Significant
deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
--------------
FEB. 27 FEB. 28
1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
ACCRUED EXPENSES $ 15,690 $ 13,294
DEFERRED INCOME 4,154 9,125
COMPENSATION AND BENEFITS 8,052 2,554
OTHER 4,608 2,222
-----------------------------------------
TOTAL DEFERRED TAX ASSETS 32,504 27,195
-----------------------------------------
PROPERTY AND EQUIPMENT 10,973 17,067
INVENTORY 2,215 --
OTHER 3,603 573
-----------------------------------------
TOTAL DEFERRED TAX LIABILITIES 16,791 17,640
-----------------------------------------
NET DEFERRED TAX ASSETS $ 15,713 $ 9,555
-----------------------------------------
-----------------------------------------
--------------
</TABLE>
The Internal Revenue Service has changed its original position regarding the
deductibility of interest related to the Company's preferred securities referred
to in Note 4 and has determined that the interest is deductible for federal
income tax purposes.
Income taxes paid (received) were $84,000, $12,700 and ($8,600) in fiscal 1999,
1998 and 1997, respectively.
9. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings arising during the normal
course of conducting business. Management believes that the resolution of these
proceedings will not have any material adverse impact on the Company's
consolidated financial statements.
FISCAL 1999 BEST BUY ANNUAL REPORT 39
<PAGE>
EXHIBIT 21.1
BEST BUY CO., INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of Formation
------------------
<S> <C>
BBC Property Co. Minnesota
BBC Investment Co. Nevada
Best Buy Concepts, Inc. Nevada
Best Buy Stores, L.P. Delaware
Best Buy Online, Inc. Minnesota
</TABLE>
<PAGE>
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
on Form S-8 pertaining to the Deferred Compensation Plan (No. 333-49371), the
1997 Directors' Non-Qualified Stock Option Plan (No. 333-39531), the 1997
Employee Non-Qualified Stock Option Plan (Nos. 333-39533 and 333-61897), the
1987 Employee Non-Qualified Stock Option Plan (No. 33-54875), the 1994
Full-Time Employee Non-Qualified Stock Option Plan (No. 33-54871), and the
1987 Directors' Non-Qualified Stock Option Plan (No. 33-54873) of Best Buy
Co., Inc. of our report dated March 30, 1999, with respect to the
consolidated financial statements of Best Buy Co., Inc. incorporated by
reference in the Annual Report (Form 10-K) for the year ended February 27,
1999.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
May 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS INDICATED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-27-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> FEB-27-1999
<CASH> 785,777
<SECURITIES> 0
<RECEIVABLES> 132,401
<ALLOWANCES> 0
<INVENTORY> 1,046,366
<CURRENT-ASSETS> 2,063,091
<PP&E> 731,964
<DEPRECIATION> 308,324
<TOTAL-ASSETS> 2,512,493
<CURRENT-LIABILITIES> 1,386,907
<BONDS> 30,509
0
0
<COMMON> 10,181
<OTHER-SE> 1,053,953
<TOTAL-LIABILITY-AND-EQUITY> 2,512,493
<SALES> 10,077,906
<TOTAL-REVENUES> 10,077,906
<CGS> 8,250,123
<TOTAL-COSTS> 8,250,123
<OTHER-EXPENSES> 1,463,281
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (435)
<INCOME-PRETAX> 364,937
<INCOME-TAX> 140,500
<INCOME-CONTINUING> 224,437
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 224,437
<EPS-BASIC> 1.13
<EPS-DILUTED> 1.07
</TABLE>
