<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 27, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number: 1-9595
BEST BUY CO., INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0907483
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7075 Flying Cloud Drive 55344
Eden Prairie, Minnesota (Zip Code)
(Address of principal executive offices)
(612) 947-2000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
--- ---
At November 27, 1999, there were 204,411,000 shares of common stock, $.10 par
value, outstanding.
<PAGE>
BEST BUY CO., INC.
FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 27, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
Part I. Financial Information
<S> <C>
Item 1. Consolidated Financial Statements:
a) Consolidated balance sheets as of 3-4
November 27, 1999, February 27, 1999 and
November 28, 1998
b) Consolidated statements of earnings 5
for the three and nine months ended November 27, 1999
and November 28, 1998
c) Consolidated statement of changes in 6
shareholders' equity for the nine months
ended November 27, 1999
d) Consolidated statements of cash flows 7
for the nine months ended November 27, 1999
and November 28,1998
e) Notes to consolidated financial statements 8-10
Item 2. Management's Discussion and Analysis of 11-15
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures 16
About Market Risk
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
BEST BUY CO., INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
($ in 000)
<TABLE>
<CAPTION>
November 27, November 28,
1999 February 27, 1998
(Unaudited) 1999 (Unaudited)
----------- ------------ -----------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 514,797 $ 785,777 $ 409,373
Receivables 383,461 132,401 278,468
Recoverable costs from developed properties 87,377 73,956 75,329
Merchandise inventories 2,082,543 1,046,366 1,684,928
Other current assets 40,601 33,900 31,878
----------- ------------ -----------
Total current assets 3,108,779 2,072,400 2,479,976
PROPERTY AND EQUIPMENT
Land and buildings 51,905 23,158 22,946
Leasehold improvements 221,434 174,495 164,140
Furniture, fixtures and equipment 679,391 505,232 455,084
Property under capital leases 29,079 29,079 29,079
----------- ------------ -----------
981,809 731,964 671,249
Less accumulated depreciation and amortization 372,722 308,324 297,822
----------- ------------ -----------
Net property and equipment 609,087 423,640 373,427
OTHER ASSETS 54,187 35,583 22,114
----------- ------------ -----------
TOTAL ASSETS $3,772,053 $ 2,531,623 $ 2,875,517
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
BEST BUY CO., INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
($ in 000)
<TABLE>
<CAPTION>
November 27, November 28,
1999 February 27, 1998
(Unaudited) 1999 (Unaudited)
----------- ------------ -----------
<S> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable $2,070,254 $1,011,746 $1,534,021
Accrued compensation and related expenses 78,691 86,667 59,270
Accrued liabilities 359,062 282,711 265,657
Current portion of long-term debt 9,046 30,088 32,132
----------- ------------ -----------
Total current liabilities 2,517,053 1,411,212 1,891,080
LONG-TERM LIABILITIES 72,932 55,957 59,794
LONG-TERM DEBT 23,679 30,509 31,830
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 204,411,000,
203,621,000 and 201,764,000 shares,
respectively 20,441 10,181 10,088
Additional paid-in capital 473,296 542,377 510,145
Retained earnings 664,652 481,387 372,580
----------- ------------ -----------
Total shareholders' equity 1,158,389 1,033,945 892,813
----------- ------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,772,053 $2,531,623 $2,875,517
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF EARNINGS
($ in 000, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
November 27, November 28, November 27, November 28,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 3,107,337 $ 2,492,467 $ 8,179,408 $ 6,608,616
Cost of goods sold 2,516,970 2,048,252 6,596,519 5,409,472
------------ ------------ ------------ ------------
Gross profit 590,367 444,215 1,582,889 1,199,144
Selling, general and administrative
expenses 467,779 353,985 1,298,994 1,017,693
------------ ------------ ------------ ------------
Operating income 122,588 90,230 283,895 181,451
Net interest income (expense) 4,451 (3,190) 13,140 (6,695)
------------ ------------ ------------ ------------
Earnings before income tax expense 127,039 87,040 297,035 174,756
Income tax expense 48,650 33,497 113,770 67,281
------------ ------------ ------------ ------------
Net earnings $ 78,389 $ 53,543 $ 183,265 $ 107,475
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic earnings per share $ .38 $ .27 $ .90 $ .54
Diluted earnings per share $ .37 $ .25 $ .86 $ .52
Basic weighted average common
shares outstanding (000's) 204,784 201,612 204,618 198,070
Diluted weighted average common
shares outstanding (000's) 212,760 210,046 213,430 209,346
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
BEST BUY CO., INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED NOVEMBER 27, 1999
($ in 000)
(Unaudited)
<TABLE>
<CAPTION>
Additional
Common paid-in Retained
stock capital earnings
--------- --------- ---------
<S> <C> <C> <C>
Balance, February 27, 1999 $ 10,181 $ 542,377 $ 481,387
Stock options exercised 357 30,140 --
Tax benefit from stock options exercised -- 69,386 --
Two-for-one stock split 10,190 (10,190) --
Repurchase of common stock (287) (158,417) --
Net earnings, nine months ended
November 27, 1999 -- -- 183,265
--------- --------- ---------
Balance, November 27, 1999 $ 20,441 $ 473,296 $ 664,652
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
November 27, November 28,
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 183,265 $ 107,475
Depreciation, amortization and other non-cash charges 71,134 56,394
------------ ------------
254,399 163,869
Changes in operating assets and liabilities:
Receivables (251,060) (182,766)
Merchandise inventories (1,036,177) (624,140)
Other assets (7,562) (3,525)
Accounts payable 1,058,508 771,369
Other liabilities 153,542 82,183
------------ ------------
Total cash provided by operating activities 171,650 206,990
------------ ------------
INVESTING ACTIVITIES
Additions to property and equipment (255,624) (95,040)
Increase in recoverable costs from developed properties (13,421) (67,114)
Increase in other assets (16,841) (3,245)
------------ ------------
Total cash used in investing activities (285,886) (165,399)
------------ ------------
FINANCING ACTIVITIES
Repurchase of common stock (158,704) (2,462)
Common stock issued 29,832 12,148
Long-term debt payments (27,872) (162,031)
------------ ------------
Total cash used in financing activities (156,744) (152,345)
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (270,980) (110,754)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 785,777 520,127
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 514,797 $ 409,373
------------ ------------
------------ ------------
</TABLE>
Amounts in this statement are presented on a cash basis and therefore may differ
from those shown in other sections of this quarterly report.
<TABLE>
<CAPTION>
Supplemental cash flow information:
Cash paid during the period for:
<S> <C> <C>
Interest: $ 3,879 $ 23,822
Income taxes: $ 47,595 $ 60,728
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
BEST BUY CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The consolidated balance sheets as of November 27, 1999, and November
28, 1998, the related consolidated statements of earnings for the three
and nine months then ended, consolidated cash flows for the nine months
then ended and the consolidated statement of changes in shareholders'
equity for the nine months ended November 27, 1999, are unaudited; in
the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been included and were
normal and recurring in nature. The Company's business is seasonal in
nature and interim results are not necessarily indicative of results
for a full year. These interim financial statements and the related
notes should be read in conjunction with the financial statements and
notes included in the Company's Annual Report to Shareholders for the
fiscal year ended February 27, 1999, and incorporated by reference into
the Company's Annual Report on Form 10-K. Certain prior year amounts
have been reclassified to conform to the current year presentation.
2. CHANGE IN ACCOUNTING POLICY - PERFORMANCE SERVICE PLANS:
The Company sells performance service plans (PSPs) on behalf of an
unrelated third party. In December 1999, the staff of the Securities
and Exchange Commission (SEC Staff) announced its position with respect
to the accounting for revenues from insured extended service
contracts, such as PSPs. The SEC Staff indicated that in those
states where a retailer is deemed to be the obligor, net revenues
from the sales of service contracts should be recognized over the
life of the underlying contract rather than at the time of the sale.
The designation of a retailer as the obligor varies depending in
large part on applicable state regulations. The Company had, until
the third quarter of fiscal 2000, recognized the net commission
revenue from the sale of all insured PSPs at the time of sale.
Effective as of the beginning of the third quarter of fiscal 2000, the
Company has changed its accounting policy with respect to the
recognition of revenues from the sale of obligor service contracts.
Pursuant to the Company's new policy, the Company recognizes revenues,
net of direct selling expenses (consisting primarily of a lump sum
payment due to the administrator at the time of sale), ratably over the
terms of the contracts sold, generally two to five years. Previously,
the Company recognized all revenues, net of direct selling expenses,
for the sale of obligor service contracts at the time of sale. That
accounting policy was adopted in fiscal 1996, the year the Company
began selling insured PSPs. The Company has and will continue to
recognize net commission revenues from the sale of non-obligor service
contracts at the time of sale. The Company has given retroactive effect
to this new accounting policy by restating its previously published
financial statements beginning with fiscal 1996. The impact of the
restatement on the consolidated statements of operations for the three
and nine month periods ended November 28, 1998, is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
As Previously As Previously
Reported As Restated Reported As Restated
November 28, November 28, November 28, November 28,
1998 1998 1998 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $2,493,843 $2,492,467 $6,619,631 $6,608,616
Cost of goods sold 2,048,252 2,048,252 5,409,472 5,409,472
------------ ------------ ------------ ------------
Gross profit 445,591 444,215 1,210,159 1,199,144
Selling, general and
administrative expenses 353,985 353,985 1,017,693 1,017,693
------------ ------------ ------------ ------------
Operating income 91,606 90,230 192,466 181,451
Income tax expense 34,027 33,497 71,522 67,281
Net earnings 54,389 53,543 114,249 107,475
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic earnings per share $.27 $.27 $.58 $.54
Diluted earnings per share $.26 $.25 $.55 $.52
</TABLE>
8
<PAGE>
In addition, the restatement also resulted in changes to the
consolidated balance sheets as of February 27, 1999 and November 28,
1998, the statement of earnings for the nine-month period ended
November 28, 1998, and certain classifications within the statements of
cash flows for the nine-month period ended November 28, 1998. As of
the beginning of fiscal 2000, the restatement resulted in a net
reduction in retained earnings of approximately $30 million. The
revenue deferred under the new policy will be recognized over the
lives of the related contracts.
3. INCOME TAXES:
Income taxes are provided on an interim basis based upon management's
estimate of the annual effective tax rate.
4. EARNINGS PER SHARE:
The following table presents a reconciliation of the numerators and
denominators of basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
November 27, November 28, November 27, November 28,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator (000's):
Net earnings $ 78,389 $ 53,543 $ 183,265 $ 107,475
Interest on preferred securities, net of tax - - - 770
------------ ------------ ------------ ------------
Net earnings assuming dilution $ 78,389 $ 53,543 $ 183,265 $ 108,245
Denominator (000's):
Weighted average common shares
outstanding 204,784 201,612 204,618 198,070
Effect of dilutive securities:
Employee stock options 7,976 8,434 8,812 5,690
Preferred securities - - - 5,586
------------ ------------ ------------ ------------
Weighted average common shares
outstanding assuming dilution 212,760 210,046 213,430 209,346
Basic earnings per share $ .38 $ .27 $ .90 $ .54
Diluted earnings per share $ .37 $ .25 $ .86 $ .52
</TABLE>
Net earnings reflect the change in accounting for PSPs described in
Note 2 and have been restated as necessary.
In March 1999, the Company effected a two-for-one stock split in the
form of a stock dividend. All share and per share information reflects
the stock split.
5. CREDIT FACILITY:
In August 1999, the Company entered into an unsecured $100 million
revolving credit facility, replacing the $220 million facility that was
scheduled to mature in June 2000. The Company was able to reduce the
size of the facility due to improved operating performance and better
inventory management. In addition, the new facility makes certain
financial covenants less restrictive thereby providing the Company with
additional flexibility. The current facility is scheduled to mature in
August 2002.
6. SHARE REPURCHASE PROGRAMS:
In October 1998, the Company's Board of Directors approved the purchase
of up to $100 million of the Company's common stock from time to time
through open market purchases over the following twelve months. This
repurchase program was completed in the second quarter of fiscal 2000
with a total of 1.8 million shares purchased.
9
<PAGE>
In September 1999, the Company's Board of Directors approved the
purchase of up to $200 million of the Company's common stock from time
to time through open market purchases. This repurchase program has no
stated expiration date. As of November 27, 1999, 1.1 million shares
have been purchased at a cost of approximately $61 million.
10
<PAGE>
BEST BUY CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net earnings for the third quarter of fiscal 2000 were a record $78.4 million,
or $.37 per share on a diluted basis, compared to net earnings of $53.5 million,
or $.25 per share, for the comparable period last year. For the first nine
months of the current fiscal year, net earnings were a record $183.3 million, or
$.86 per share on a diluted basis, compared to $107.5 million, or $.52 per
share, for the same period last year. A combination of new products, strong
consumer demand and improved execution of selling strategies at the Company's
retail stores has generated market share gains and improved gross profit margins
resulting in record quarterly and year-to-date financial performance. Quarterly
net earnings have exceeded those of the comparable quarter of the prior year by
30% or more for the past ten consecutive quarters.
Results of operations reflect a change in accounting and restatement of
previously reported amounts where necessary to reflect recent SEC Staff
guidance on accounting for extended service contracts, as more fully
described in Note 2 to the accompanying financial statements. Net earnings
for the third quarter of fiscal 2000 were $.38 per share before being reduced
by $2.0 million, or $.01 per share, to reflect the change. The combined
reduction to retained earnings through February 27, 1999, totals
approximately $30 million. For the nine-month period, net earnings were
reduced by $3.4 million, or $.01 per share. For the prior year's third
quarter and year-to-date periods, results were restated and reduced earnings
by $846,000 and $6.8 million, or $.01 and $.03 per share, respectively.
Revenues in the third quarter increased 25% to $3.107 billion compared to
$2.492 billion in the third quarter last year. Revenues in the first nine
months increased 24% to $8.179 billion compared to $6.609 billion last year.
Comparable store sales increases of 9.2% for the third quarter and 11.1%
year-to-date and a net increase of 42 new stores in the past twelve months
drove the revenue increases. All major product categories generated
comparable store sales increases for the eighth consecutive quarter. Sales of
digital technology products such as Digital Versatile Disc (DVD), Digital
Broadcast Satellite (DBS), digital cameras and camcorders, as well as strong
sales of video games fueled the comparable store sales gains. Management
believes that the comparable store sales gains illustrate the Company's
ability to successfully bring new products and selling strategies to market
and capture market share. Management expects that comparable store sales
increases could moderate in the future, as the compounding effect of the
sales gains over the past two years makes future increases more difficult.
As of November 27, 1999, the Company operated 354 stores compared to 312 stores
one year ago. In the third quarter, the Company opened 22 new stores, including
entry into the markets of Norfolk and Richmond, Virginia; Albany and Rochester,
New York; Jacksonville and Tallahassee, Florida; and San Diego, California.
Included in the 22 new store openings were three small market stores designed to
serve markets with populations under 200,000. All new stores opened during the
quarter were Concept IV stores which feature improved merchandising, signage and
customer service and are expected to better address customers' needs as the
industry continues to progress into new digital products. The Company also
relocated six stores and expanded two stores to the Concept IV format during
the third quarter. In fiscal 2001, the Company plans to open approximately 60
new stores including entry into the New York metropolitan market.
The Company continues to invest in building the systems infrastructure and
content base to support its developing e-commerce business, BestBuy.com. The
Company has filled most of the critical leadership roles for BestBuy.com and has
finalized agreements with nearly all major vendors to offer an expanded product
assortment on-line. The Company's objective is to begin rolling out its expanded
online product assortment in the first quarter of fiscal 2001.
11
<PAGE>
Retail store sales mix by major product category for the three-month and
nine-month periods was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
November 27, November 28, November 27, November 28,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Home Office 36% 38% 36% 37%
Consumer Electronics
Audio 10 10 10 10
Video 17 17 17 16
Entertainment Software 19 19 18 19
Appliances 8 8 9 10
Other 10 8 10 8
---- ---- ---- ----
Total 100% 100% 100% 100%
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
In the home office category, sales of personal computers benefited throughout
the quarter from subsidy offers provided by Internet Service Providers (ISPs).
The offers provide customers with an instant rebate on the purchase of a
personal computer when the customer signs a contract to subscribe to Internet
service provided by the ISP. This rebate to the customer is funded by the ISP,
who also bears the risk of collection of the monthly subscriber fees paid by the
customer to the ISP. Nearly 500,000 customers have signed up for the ISP offers
since the offers began in July. Average selling prices of computers have
remained relatively flat for the last two quarters, but declined 20-25%
compared to the third quarter of fiscal 1999. The year-over-year decline in
average selling prices was offset by an increase in unit volume driven in
part by the ISP subsidy. The increased unit volume stimulated sales of
ancillary products and services such as accessories and PSPs.
Digital technology continued to be the driving force in consumer electronics
with digital product sales currently representing more than eight percent of
the Company's total sales for the quarter. Digital technology products such
as DVD hardware, digital satellite systems and digital camcorders made strong
contributions to the quarterly comparable store sales increase. While not yet
significant to total revenues, digital television sales increased as a result
of an expanded number of models available, lower price points and more
programming options. Sales of DBS systems are expected to increase in markets
where local programming is available as a result of recent federal
legislation permitting local broadcast signals to be offered over DBS
Systems. Sales of large screen televisions and home theater systems also
contributed to the overall sales increase.
In the entertainment software category, sales of compact discs and DVD movies
were particularly strong driven by solid in-stock levels and a consistent flow
of new music releases and new DVD movie releases including new Disney classics.
Strong sales of DVD players, with price points beginning under $200, continued
to positively impact DVD software sales. The Company believes it has the largest
assortment of DVD movies of any retailer and has increased the retail floor
space dedicated to DVD movies to accommodate more than 1,800 DVD movie titles,
an increase of 30% over last year. Sales of video games were strong, benefiting
from the launch of Sega's 128-bit Dreamcast system and the popularity of newly
released software titles.
Gross profit margin in the third quarter improved to 19.0% compared to 17.8%
in the third quarter of fiscal 1999. Gross profit margin for the nine-month
period improved 1.3% of sales to 19.4% compared to 18.1% in the same period
last year. These improvements reflect the ongoing benefit from the Company's
initiatives to generate more profitable product assortments, improve
inventory management and enhance advertising effectiveness. A more profitable
sales mix, as well as higher gross profit margins in most product categories,
were significant contributors to the year-over-year improvements. In
addition, increased sales of higher margin PSPs and accessories favorably
impacted margins in the quarter and year-to-date periods stimulated by higher
unit volume sales of personal computers and digital products. Sales of PSPs
accounted for 4.1% and 4.2% of sales for the third quarter and nine-month
periods of the current year, respectively, compared to 3.8% for both the
quarter and nine-month periods of the prior year. Management expects that
while gross profit margins will continue to improve over prior year levels,
the improvement will not be as significant due to benefits already realized
from progress on the Company's strategic initiatives. The gross profit margin
in the third quarter of this fiscal year improved by 3% of sales, over the
third quarter two years ago. Also, a traditionally lower margin product sales
mix and a lower level of PSP sales during the high-volume holiday season
12
<PAGE>
could result in a lower gross profit margin in the fourth quarter of the year
as compared to the first three quarters.
Selling, general and administrative (SG&A) expenses increased to 15.1% of
sales in the quarter compared to 14.2% in the third quarter last year.
Year-to-date, SG&A expenses increased to 15.9% of sales in the current year
compared to 15.4% in the same period last year. The increases were largely
due to three factors. Store labor expenses have increased as a result of
hiring a more highly skilled sales staff to support higher levels of sales of
complex products, including the new digital technology products that have
contributed to the sales and gross profit margin gains. The higher skilled
labor has also resulted in increased sales of the basket of products and
services that accompany a major product purchase. These labor costs, coupled
with a decline in average selling prices of products, particularly personal
computers, have led to a higher ratio of labor to revenues. Also, the
increased rate of store expansion and preparation for approximately 60 new
stores in fiscal 2001, compared to only 28 new stores in fiscal 1999, has led
to an increased number of managers in the Company's management development
program. Finally, personnel expenses and consulting costs have increased as a
result of the Company's programs to re-engineer systems and processes and
implement the technological infrastructure to provide long-term benefits and
position the Company for further growth. All of these expenses have been
funded through year-over-year increases in gross profit margins, as
illustrated by the decrease in SG&A expenses as a percent of gross profit
margin to 79.2% and 82.1% for the third quarter and nine-month periods of the
current year, respectively, as compared to 79.7% and 84.9% for the same
periods, respectively, in the prior fiscal year. Management currently expects
that SG&A spending will continue to increase on a year-over-year basis,
however seasonally higher sales volumes in the fourth quarter are expected to
result in a traditionally lower ratio of SG&A expenses as a percentage of
sales compared to the first three quarters of the year.
Net interest income was $4.5 million in the third quarter and $13.1 million
year-to-date compared to net interest expense of $3.2 million and $6.7 million
in the same periods, respectively, last year. These improvements were
principally due to the early retirement of the Company's $150 million 8-5/8%
Senior Subordinated Notes in the third quarter of fiscal 1999 and the conversion
into equity of the Company's $230 million in preferred securities in the first
quarter of fiscal 1999. Interest earned on higher cash balances resulting from
faster inventory turns and improved profitability also contributed to the
improvement.
The Company's effective income tax rate for the third quarter and first nine
months of the current fiscal year was 38.3%, compared to 38.5% for the same
periods last year. The Company's effective tax rate is primarily impacted by the
levels and taxability of investment income, as well as state income taxes.
In December 1999, the Company announced its plans to form a comprehensive
strategic alliance with Microsoft Corp. (Microsoft) that encompasses
development of broadband and narrowband technology, as well as in-store and
online efforts. The parties signed a letter of intent that provides for
significant joint marketing in Best Buy's retail stores, online and through
print/broadcast vehicles, profit sharing, the promotion of BestBuy.com
throughout Microsoft's properties, and technology assistance. In addition,
the agreement is expected to provide for the issuance of $200 million of Best
Buy stock to Microsoft in exchange for cash.
Also, in December 1999, BestBuy.com made a $10 million strategic equity
investment in Collabrative Media, Inc. dba etown.com, the
leading online information and shopping source for buyers of consumer
electronics products. In connection with the investment, the Company has
obtained non-exclusive license rights to etown.com's editorial content including
more than 4,200 product profiles and unbiased, expert product reviews and
side-by-side product comparisons. BestBuy.com intends to integrate selective
portions of this content into its new Internet shopping site.
13
<PAGE>
FINANCIAL CONDITION
Working capital of $592 million at November 27, 1999 was essentially
unchanged from $589 million one year ago. Cash and cash equivalents increased
by $105 million compared to one year ago even with the repurchase of
approximately $160 million of the Company's common stock and the investment
of over $330 million in new stores, systems, and corporate facilities in the
past 12 months. Merchandise inventories increased by approximately $400
million compared to the third quarter last year, a 24% increase consistent
with the rate of sales growth. Inventory turns continued to improve while
in-stock levels remained strong in preparation for the holiday selling
season. Rolling twelve-month inventory turns improved to 6.8 times from 6.2
times for the period one year ago. The Company's net investment in inventory
(i.e., inventory net of accounts payable) was $12 million at November 27,
1999, down from $151 million at November 28, 1998. The Company's cash
position and net investment in inventory are impacted by the timing of
payments to vendors and can vary significantly. Receivables increased by $105
million as compared to a year ago and $251 million compared to last fiscal
year end, primarily due to higher business volumes including amounts due from
the ISP subsidy providers. Recoverable costs from developed properties
increased by $12 million compared to last year, primarily due to the
development of new stores. Other assets and long-term liabilities both
increased due to the investments and deferrals related to the Company's
deferred compensation plan. Acquisition of leasehold rights also contributed
to the increase in other long-term assets. Accounts payable increased as
compared to a year ago as a result of the higher business volume and
increased inventory levels. Accruals for payroll related liabilities
increased as compared to last year's third quarter which is consistent with
the expanding employee base needed to support the Company's growth. Other
accrued liabilities increased compared to November 28, 1998, as a result of
the overall higher levels of business activity.
Capital spending in the first nine months of fiscal 2000 was $256 million
compared to $95 million for the same period last year as the Company invested in
44 new stores and 13 remodeled, expanded or relocated stores opened in fiscal
2000. Additionally, the Company expanded its corporate facilities to support the
growth of the business, the most significant investment being the purchase of an
additional office building to supplement the Company's existing corporate
office. The Company also continued to invest in new systems and technology to
better position the Company for continued growth and generate improvements in
its existing business. Management expects total capital spending for fiscal 2000
to be approximately $400 million, exclusive of the amounts expected to be
recovered through subsequent sales and leasebacks.
In October 1998, the Company's Board of Directors authorized the purchase of
up to $100 million of the Company's common stock over a twelve-month period.
This repurchase program was completed in the second quarter of fiscal 2000,
with a total of 1.8 million shares purchased. In September 1999, the Board
authorized the purchase of up to an additional $200 million of the Company's
common stock. During the third quarter, the Company repurchased 1.1 million
shares of stock at a cost of approximately $61 million under this plan,
bringing the total amount of stock repurchased in the current fiscal year
under both stock repurchase plans to approximately $160 million.
In August 1999, the Company entered into an unsecured $100 million revolving
credit facility, replacing the $220 million facility that was scheduled to
mature in June 2000. The Company was able to reduce the size of the facility due
to improved operating performance and better inventory management. In addition,
the new facility makes certain financial covenants less restrictive thereby
providing the Company with additional flexibility. The current facility is
scheduled to mature in August 2002.
Management believes that funds from the expected results of operations and
available cash and cash equivalents will be sufficient to support the Company's
anticipated expansion plans and strategic initiatives for the next year. The
revolving credit facility and the Company's inventory financing program are also
available for additional working capital needs or investment opportunities.
YEAR 2000
The Company recognized the material nature of the business issues surrounding
computer processing of dates into and beyond the year 2000 (Y2K) and began
taking corrective action in 1997. The Company's efforts included replacing and
testing Y2K affected mainframe computer code, identifying and resolving
non-mainframe computer hardware and software Y2K issues, assessing the Y2K
readiness of the Company's business partners and
14
<PAGE>
developing contingency plans. Management believes the Company has completed all
of the activities within its control to ensure that the Company's systems are
Y2K compliant.
The Company's Y2K readiness costs were approximately $18 million, including
$9 million in outside professional fees. Of the total costs, approximately $9
million were incurred in the current fiscal year. The Company funded both the
capital and expensed elements of resolving Y2K issues through funds generated
from operations.
The Company successfully completed its Y2K rollover without any major
problems or disruptions. All of the Company's stores, logistics operations,
service centers and corporate support areas were fully functional subsequent
to the Y2K rollover. The Company is not aware that any of its major business
partners have experienced significant Y2K issues. Additionally, the Company
generally believes that the vendors that supply products to the Company for
resale are responsible for the products' Y2K functionality. To date, the
Company's efforts in handling customer product returns and repairs at its
retail stores have not been significant.
Although the Company's Y2K rollover was successful, there are some remaining
Y2K-related risks. These risks include potential product supply issues and
other non-operational issues. Management believes appropriate action has been
taken to address these remaining Y2K issues and contingency plans are in
place to minimize the financial impact to the Company.
While the Company believes that it has pursued the appropriate course of action
to ensure Y2K readiness, there can be no assurance that this objective will be
achieved as it relates to its business partners or its remaining internal Y2K
issues.
SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 (THE "1995 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 this Quarterly Report on Form 10-Q 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 view 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, product availability, sales
volumes, profit margins 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.
15
<PAGE>
ITEM 3: 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
<TABLE>
<CAPTION>
a. Exhibits: Method of Filing
----------------
<S> <C>
10.1 1997 Directors' Non-Qualified Stock Option Plan;
1999-2 Amendment and Restatement Filed herewith
27.1 Financial Data Schedule Filed herewith
</TABLE>
b. Reports on Form 8-K:
Announcement of $200 million stock repurchase program filed on
September 23, 1999.
Announcement of new member of Company's Board of Directors
filed on September 27, 1999.
Announcement of new member of Company's Board of Directors
filed on November 19, 1999.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BEST BUY CO., INC.
(Registrant)
Date: January 11, 2000 By: /s/ Allen U. Lenzmeier
---------------------------------------
Allen U. Lenzmeier, Executive Vice
President & Chief Financial Officer
(principal financial officer)
By: /s/ Robert C. Fox
----------------------------------------
Robert C. Fox, Senior Vice President-
Finance & Treasurer (principal
accounting officer)
17
<PAGE>
BEST BUY CO., INC.
1997
DIRECTORS' NON-QUALIFIED STOCK OPTION PLAN
1999-2 AMENDMENT AND RESTATEMENT
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 2,800,000
shares of $0.10 par value common stock of the Company shall be subject to this
Plan from authorized but unissued shares of
<PAGE>
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. 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 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
-2-
<PAGE>
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; (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. Notwithstanding the foregoing, in
the event a director who is not an employee of the Companies resigns or
is removed from the Board prior to the end of the term to which he or
she has been elected or appointed (the "Term End"), all of the then
outstanding options granted pursuant hereto shall expire on and as of
the Term End; provided, however, that the foregoing shall not apply to
any resignation or removal due to health reasons.
(4) An option shall be exercised when notice of such exercise,
whether in writing or orally, has been given to the Company at its
principal business office or to its designated agent 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.
(5) Each optionee shall be obligated to maintain the
confidentiality of all of the confidential and proprietary information
of the Companies and, in the event of a breach by the optionee of such
obligation, all of the optionee's options granted pursuant to the Plan
and all rights thereunder shall immediately terminate. Notwithstanding
the foregoing, this Section F(5), adopted as of April 16, 1999, shall
be effective only for options granted hereunder on and after April 16,
1999.
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.
-3-
<PAGE>
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 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
-4-
<PAGE>
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.
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. To the extent that
the Deferred Compensation Plan permits a participant 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.
-5-
<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> 9-MOS
<FISCAL-YEAR-END> FEB-26-2000
<PERIOD-START> FEB-28-1999
<PERIOD-END> NOV-27-1999
<CASH> 514,797
<SECURITIES> 0
<RECEIVABLES> 383,461
<ALLOWANCES> 0
<INVENTORY> 2,082,543
<CURRENT-ASSETS> 3,108,779
<PP&E> 981,809
<DEPRECIATION> 372,722
<TOTAL-ASSETS> 3,772,053
<CURRENT-LIABILITIES> 2,517,053
<BONDS> 23,679
0
0
<COMMON> 20,441
<OTHER-SE> 1,137,948
<TOTAL-LIABILITY-AND-EQUITY> 3,772,053
<SALES> 8,179,408
<TOTAL-REVENUES> 8,179,408
<CGS> 6,596,519
<TOTAL-COSTS> 6,596,519
<OTHER-EXPENSES> 1,298,994
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (13,140)
<INCOME-PRETAX> 297,035
<INCOME-TAX> 113,770
<INCOME-CONTINUING> 183,265
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 183,265
<EPS-BASIC> .90
<EPS-DILUTED> .86
</TABLE>
