SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA ($ in thousands, except per share amounts)
FISCAL PERIOD(1) 1997 1996 1995 1994(2) 1993
- ----------------------------------------------------------------------------------------------------------------------------
STATEMENT OF EARNINGS DATA
Revenues $ 7,770,683 $ 7,217,448 $ 5,079,557 $ 3,006,534 $ 1,619,978
Gross profit 1,058,881 936,571 690,393 456,925 284,034
Selling, general and
administrative expenses 1,005,675 813,988 568,466 379,747 248,126
Operating income 53,206 122,583 121,927 77,178 35,908
Earnings before cumulative
effect of accounting change 1,748 48,019 57,651 41,710 19,855
Net earnings 1,748 48,019 57,651 41,285 19,855
PER SHARE DATA
Earnings before cumulative
effect of accounting change $ .04 $ 1.10 $ 1.33 $ 1.01 $ .57
Net earnings .04 1.10 1.33 1.00 .57
Common stock price: High 26 1/4 29 5/8 45 1/4 31 7/16 15 23/32
Low 7 7/8 12 3/4 22 1/8 10 27/32 4 23/32
Weighted average
shares outstanding (000s) 43,582 43,640 43,471 41,336 34,776
OPERATING AND OTHER DATA
Comparable store sales change(3) (5%) 6% 20% 27% 19%
Number of stores (end of period) 272 251 204 151 111
Average revenues per store(4) $ 29,300 $ 31,100 $ 28,400 $ 22,600 $ 17,600
Gross profit percentage 13.6% 13.0% 13.6% 15.2% 17.5%
Selling, general and administrative
expense percentage 12.9% 11.3% 11.2% 12.6% 15.3%
Operating income percentage .7% 1.7% 2.4% 2.6% 2.2%
Inventory turns(5) 4.6x 4.8x 4.7x 5.0x 4.8x
BALANCE SHEET DATA (at period end)
Working capital $ 567,456 $ 586,841 $ 609,049 $ 362,582 $ 118,921
Total assets 1,734,307 1,890,832 1,507,125 952,494 439,142
Long-term debt, including current portion 238,016 229,855 240,965 219,710 53,870
Convertible preferred securities 230,000 230,000 230,000
Shareholders' equity 438,315 431,614 376,122 311,444 182,283
- --------------------------------------------------------------------------------------------------------------------------
This table should be read in conjunction with the Management's Discussion and
Analysis of Results of Operations and Financial Condition and the Consolidated
Financial Statements and Notes thereto.
(1) Fiscal 1996 contained 53 weeks. All other periods
presented contained 52 weeks.
(2) During fiscal 1994, the Company adopted FAS 109,
resulting in a cumulative effect adjustment of ($425)
or ($.01) per share.
(3) Comparable stores are stores open at least 14 full months.
(4) Average revenues per store are based upon total revenues for the period
divided by the weighted average number of stores open during such period.
(5) Inventory turns are calculated based upon a rolling
12-month average of inventory balances.
Best Buy Co., Inc. 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
In fiscal 1997, Best Buy made progress on initiatives to build a base it expects
will provide future profitability. Unfortunately, a difficult environment in the
retail consumer electronics and personal computer segments significantly
impacted the Company's financial performance for the year, overshadowing the
benefit of gross margin improvement. A lack of new products and technology with
widespread consumer appeal in the consumer electronics industry, combined with a
sharp decline in personal computer selling prices during the peak holiday
season, applied pressure on revenues and profit margins. The resulting slower
rate of total sales growth, due to a 5% comparable store sales decline in fiscal
1997, also caused an increase in the Company's operating expense ratio, further
impacting profits. Earnings for the fiscal year were $1.7 million, compared to
$48.0 million in fiscal 1996 and $57.7 million in fiscal 1995. Earnings per
share were $.04, $1.10 and $1.33, in fiscal 1997, 1996 and 1995, respectively.
REVENUES
The following table presents selected revenue data for each of the last three
fiscal years ($ in thousands).
1997 1996 1995
- -----------------------------------------------------------------------------------------
Revenues $ 7,770,683 $ 7,217,448 $ 5,079,557
Percentage increase in revenues 8% 42% 69%
Comparable store sales change (5%) 6% 20%
Average revenues per store $ 29,300 $ 31,100 $ 28,400
Sales of $7.771 billion for fiscal 1997 were 8% above last year's $7.217
billion, principally due to the addition of 21 new stores during the year, as
well as a full year of operations at the 47 stores opened in fiscal 1996.
Although total sales increased, comparable store sales declined 5% for the year
due to significant reductions in the average selling price of personal
computers, particularly during the seasonally higher volume second half of the
year, and continued weakness in the consumer electronics and recorded music
industries. In fiscal 1997, the Company slowed its rate of expansion, opening
fewer than half the number of stores than each of the previous two years. Slower
industry growth and competition applied pressure on profitability, reducing the
Company's ability to continue the recent pace of store openings. New store
openings in fiscal 1997 included the new markets of Philadelphia, Pennsylvania;
Tampa, Florida; Fresno and Santa Rosa, California; Memphis, Tennessee; and
Tucson, Arizona. The Company also remodeled or relocated 10 stores to larger
facilities. Sales in fiscal 1996 were 42% above fiscal 1995 sales of $5.080
billion and comparable store sales increased 6%. The increase in sales in fiscal
1996 was mainly due to the opening of 47 new stores and a full year of
operations at the 53 new stores opened in fiscal 1995. The combined 100 stores
opened in fiscal 1996 and 1995 greatly expanded the Company's presence
nationwide, with the entrance into the markets of Cincinnati and Cleveland,
Ohio; Miami, Florida; Los Angeles, California; Baltimore, Maryland; Washington,
D.C.; and the Carolinas.
The following table sets forth the Company's retail store sales mix by major
product category for each of the past three fiscal years.
1997 1996 1995
- ---------------------------------------------------------------
Home Office 39% 41% 37%
Consumer Electronics - Video 17% 18% 20%
Consumer Electronics - Audio 12% 13% 14%
Entertainment Software* 18% 17% 18%
Appliances 9% 7% 8%
Other 5% 4% 3%
- ---------------------------------------------------------------
Total 100% 100% 100%
*Fiscal 1996 and 1995 restated to include video game products, previously
included in Other.
A general absence in recent years of widely accepted new products in the
consumer electronics category and a continued increase in the channels of
distribution led to a continued softening of sales in this category in fiscal
1997. Comparable store sales in this category declined for the second
consecutive year as price declines and soft demand impacted year over year
sales. Digital Satellite Systems (DSS) provided some renewed interest in the
video category in fiscal 1997, although its impact was not sufficient to
mitigate weakness in more traditional video products. Digital Versatile Disc
(DVD) is being introduced in the first quarter of fiscal 1998. This technology
is the most significant advance in this category in the past several years, and
along with other new technology in development such as digital, High Definition
Television (HDTV), represents opportunity to generate new interest in this
category in the years ahead. However, the higher introductory price points for
DVD and a limited number of software titles are likely to lead to only a modest
contribution to total sales in fiscal 1998.
Pressure on selling prices due to model transition in personal computers
resulted in rapidly falling prices to the consumer during the high-volume
holiday season. Due to this transition, combined with the impact of lower-priced
entry-level models, the average selling price of computers at year end was
nearly 20% below fiscal 1996 year-end levels. Despite increases in volume of
other peripheral products in the home office category, comparable store sales in
this category declined,
Best Buy Co., Inc. 10
mainly due to the lower selling prices, as well as difficult comparisons with
sales volumes reported in the highly promotional environment of fiscal 1996.
The appliance category increased from 7% of total Company sales in fiscal 1996
to 9% in fiscal 1997, as a result of a considerable increase in the Company's
assortment of major appliances. The addition of the Amana, General Electric,
Hotpoint, Maytag and Tappan name-brand products and a revitalized presentation
of the appliance department with high-end small appliances and electrics
enhanced the appearance and appeal of Best Buy's product offering in this
category. The entertainment software category showed mixed results, as the
recorded music industry had a weak year, generally due to the lack of acceptance
of new titles by consumers. Video games and computer software performed better
than the prior year, as new video game formats and new computer software titles
were introduced. A change in the Company's marketing strategy and an increase in
the focus of sales presentation at the retail stores resulted in an increase in
the sale of the Company's Performance Service Plans (PSPs) from less than 1% of
total store sales in fiscal 1996 to 1.9% in fiscal 1997.
Management expects that because the Company's most significant categories are
expected to remain soft in fiscal 1998, comparable store sales are likely to
decline again for the year. Due to more difficult comparisons with the first
half of fiscal 1997, the declines are expected to be more pronounced in the
first half of the year and moderate in the second half. As a result of the
higher comparable store sales decline and seasonally slower volumes, the Company
anticipates reporting a loss in the first half of the year; however, improved
earnings are expected for the year as a whole.
COMPONENTS OF OPERATING INCOME
The following table sets forth selected operating ratios as a percentage of
sales for the last three fiscal years.
1997 1996 1995
- -------------------------------------------------------
Gross profit margin 13.6% 13.0% 13.6%
Selling, general and
administrative expenses 12.9% 11.3% 11.2%
Operating income .7% 1.7% 2.4%
The gross profit margin for fiscal 1997 was 13.6%, compared to 13.0% in fiscal
1996, as the Company began to benefit from a change in sales mix through
increased margin contributions from sales of PSPs and major appliances. Both of
these products carry profit margins above the Company's overall average. In the
fourth quarter of fiscal 1996 the Company began insuring its PSPs with an
unrelated third party. This change resulted in the Company recognizing the
revenues and profits from the sale of PSPs at the time the plan was sold. Prior
to that time, revenues and profits from these plans were recognized over the
lives of the contracts. An extremely competitive environment in the personal
computer market put pressure on profit margins through the holiday selling
season. In anticipation of the January 1997 introduction of MMX-TM- technology,
retailers reduced selling prices on the existing technology products as it
became evident that the new technology was going to be priced lower than
originally expected. This reduction in selling prices resulted in the Company
recording a $15 million pre-tax charge to earnings in the third quarter,
principally to adjust carrying values of personal computer inventories to
expected net realizable values. In the fourth quarter, in an effort to more
productively deploy retail selling space, the Company made a decision to reduce
its assortment of recorded music, resulting in a $10 million addition to the
markdown reserve. Gross profit margins were also adversely impacted by the costs
of consumer financing offers due to the promotional environment during much of
the year. However, a reduction in the level of financing promotions in the
fourth quarter of fiscal 1997 offset some of the impact on profit margins for
the year as a whole. Improved control over inventory shrink also helped improve
profit margins as compared to fiscal 1996.
The improvement in gross profit margins in fiscal 1997 ended the trend in margin
declines experienced over the last several years. Prior to 1997, the margin
declines had been principally caused by the higher levels of contribution in the
Company's sales mix from the lower-margin personal computer category and an
increasingly intense promotional environment in the categories in which the
Company competes.
Management believes that while industry consolidation of specialty retailers is
expected to continue, competition from alternative sources of retailing such as
mail order and Internet retailers, as well as mass merchandise retailers, will
result in an ongoing competitive environment. In fiscal 1998, the Company
intends to focus on continued gross profit improvement. Management expects to
continue to build on the progress made in fiscal 1997 with respect to sales of
PSPs and major appliances. The Company also intends to more selectively utilize
consumer financing offers, reducing its promotional costs. In addition,
management believes there is opportunity to improve profit margins through
increased dedication of selling space to products which generate the highest
overall gross profit margins, while continuing to offer consumers a meaningful
assortment of products in each of the Company's categories. The Company has
engaged Andersen Consulting LLP to assist with the implementation of systems and
methodologies to improve inventory management, assortment planning, strategic
sourcing and advertising effectiveness.
Best Buy Co., Inc. 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Selling, general and administrative (SG&A) expenses were 12.9% of sales in
fiscal 1997, compared to 11.3% in fiscal 1996. The decline in comparable store
sales and average revenues per store resulted in a loss of leverage on the fixed
components of the Company's operating costs such as facilities, distribution and
support functions. Additionally, as the Company has added larger stores in
generally more expensive markets in the past several years, operating costs as a
percentage of sales have increased. The competitive and promotional environment
in fiscal 1997 also contributed to higher net advertising costs as compared to
the prior year. The nature of the higher operating costs experienced in fiscal
1997 also contributed to the year-over-year increase in SG&A comparing fiscal
1996 to fiscal 1995. Management expects that, due to the expected continued
comparable store sales declines, the SG&A ratio will increase as compared to
fiscal 1997.
Interest expense in fiscal 1997 increased over fiscal 1996 due to generally
higher levels of investment in completed properties during most of the year.
Interest expense in fiscal 1996 increased over fiscal 1995 due to a full year of
interest expense on the convertible preferred securities issued in November 1994
and higher levels of investment in inventory and store development.
The Company's effective tax rate was approximately 39% in each of the last three
fiscal years, as the loss of the benefit from the jobs tax credit, which expired
in December 1994, was offset by slightly lower state income taxes due to the mix
of states in which the Company does business.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1997, the Company curtailed the pace of expansion to a level that
could be reasonably supported by internally generated funds. The rapid pace of
growth and store openings in the two previous years was funded with funds
generated from the public securities and bank debt markets. The funds from a
securities offering in November 1994 and the Company's bank-financed master
lease facility provided the majority of the financing to rapidly open stores and
increase distribution capacity. Due to the reduced profits available to support
a high level of store growth, the Company substantially reduced the number of
new store openings in fiscal 1997.
The following table indicates the number of stores, by prototype, operated by
the Company at the end of the last three fiscal years.
STORE PROTOTYPE 1997 1996 1995
- ------------------------------------------------------------------
28,000 square feet 54 61 67
36,000 square feet 34 36 48
45,000 square feet 132 112 75
58,000 square feet 52 42 14
- ------------------------------------------------------------------
Total number of stores at year en 272 251 204
Average store size (in square feet) 42,800 41,400 37,700
Cash flow from operations in fiscal 1997, before changes in working capital, was
impacted by the decline in earnings. After adjusting for the $25 million in
non-cash inventory charges, cash flow from operations, before working capital
changes, was $94 million, compared to $104 million in fiscal 1996 and $97
million in fiscal 1995. Changes in the components of working capital, after
adjusting for markdown reserves, included a $44 million decrease in inventories
in fiscal 1997, despite the addition of 21 new stores, due to improved inventory
management. Inventories increased $293 million in fiscal 1996 and $270 million
in fiscal 1995 due to the higher levels of business expansion in those years.
Working capital financing provided by accounts payable and financing
arrangements was reduced by $152 million in fiscal 1997 and increased by $291
million and $178 million in fiscal 1996 and 1995, respectively, reflecting the
change in activity levels at each of the respective year ends. Accounts
receivable, which consists principally of credit card and vendor-related
receivables, decreased in fiscal 1997, due to lower activity levels at year end
as compared to the prior fiscal year end. Receivables from sales on the
Company's private-label credit card are sold to unrelated third-party financial
institutions, without recourse, and the Company does not carry any risk of loss
due to default on these receivables. Deferred revenues decreased in fiscal 1997
as revenues from sales of PSPs prior to the fourth quarter of fiscal 1996 were
recognized. The deferred tax assets related to the deferred revenues are also
being reduced as the revenue is recognized. Management believes that the
remaining net deferred tax assets will be realized through future taxable
income.
Cash used in investing activities was $20 million in fiscal 1997, compared to
$159 million in fiscal 1996 and $192 million in fiscal 1995. Due to the slower
rate of growth in fiscal 1997, capital spending was $88 million, compared to
approximately $120 million in each of the two previous years. Cash flows from
property development were a positive $73 million in fiscal 1997 as the Company
generated over $100 million in proceeds from the sale of 12 retail locations and
a distribution
Best Buy Co., Inc. 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
center, and property development slowed significantly as compared to the two
prior years. At fiscal 1997 year end, the Company owned five completed retail
locations and three locations that were under development for opening in fiscal
1998. All of these locations are expected to be sold in fiscal 1998. Proceeds
from the sale of developed properties were nearly $90 million in fiscal 1996 and
$43 million in fiscal 1995. Management expects that capital spending and
investment in property development will decline further in fiscal 1998 as the
number of store openings is reduced.
In fiscal 1997, the Company completed several intermediate-term equipment
financings generating approximately $21 million. The Company also refinanced the
$8.7 million contract for deed on its corporate headquarters facility with a $12
million, 15-year mortgage loan. The $230 million public offering of the
Company's convertible preferred securities in fiscal 1995 generated funds to
support property development and store openings in fiscal 1995 and 1996. These
securities pay monthly distributions at an annual rate of 6.5% per year and are
convertible into the Company's common stock. In fiscal 1995, the Company also
entered into a master lease agreement, which provided approximately $125 million
in real-estate financing for retail store and distribution center development.
That financing has since been reduced to $116 million through the sale of
property. The bank credit facility supporting the master lease facility
currently matures in September 1998.
At March 1, 1997, the Company's revolving credit facility provided for unsecured
borrowings of up to $250 million, which increased on a seasonal basis to $550
million, as limited to certain percentages of inventories. The facility requires
that borrowings are limited to $50 million for a period of 45 days following the
holiday season. This facility matures in June 1998. In addition, the credit
facility, as well as the credit facility supporting the master lease, contain
financial covenants regarding, among other things, the maintenance of certain
operating ratios. In the third quarter of fiscal 1997, the Company violated the
interest coverage ratio covenant as a result of the inventory write-down and
weak operating performance. This violation was waived by the participants in the
credit facilities and the covenant was amended through the second quarter of
fiscal 1998, at which time the covenant reverts to its original level. The
Company intends to reduce the level of commitment to approximately $365 million
on a seasonal basis due to lower expected borrowing resulting from slower growth
and improved inventory management. In addition to the working capital credit
facility, the Company has an inventory financing facility provided by a
commercial credit facility that provides for financing of up to $200 million,
increasing to $325 million on a seasonal basis.
For fiscal 1998, the Company currently plans to open 13 new stores, including
entry into the new markets of Pittsburgh, Pennsylvania; Palm Desert, California;
and Knoxville, Tennessee. Since the introduction of the Company's Concept III
store format, new stores and remodeled or relocated stores have been either the
45,000 or 58,000 square-foot prototype. In fiscal 1998, all stores opened will
be the 45,000 square-foot prototype. The Company also expects to remodel or
relocate five existing stores to the 45,000 square foot prototype. The Company
intends to use the larger existing stores to test new products and merchandising
strategies. Each new store requires approximately $3 million in working capital
for merchandise inventory (net of vendor financing), fixtures and leasehold
improvements. Management expects that capital spending for fiscal 1998 will
approximate $65 million, exclusive of property development. Net cash flows from
property development are expected to be positive, as currently owned properties
are expected to be sold and the investment in new stores declines. Management
also intends to continue to reduce the size of the master lease through the sale
of property to third parties. The timing of property sales and ability to
complete sale/leaseback transactions are dependent upon the market for retail
real estate.
Management believes that, as a result of lower levels of investment in property
development and improvement in inventory management resulting in faster
inventory turns, the Company's working capital borrowing requirements will be
lower in fiscal 1998 than in fiscal 1997. The ability of the Company to meet the
covenants required by its credit facilities is dependent upon future operating
results. While there can be no assurance that the Company will be able to
achieve the required performance necessary to remain in compliance, management
believes that sufficient alternative sources of working capital financing are
available to support the Company's planned operations for fiscal 1998.
Best Buy Co., Inc. 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
QUARTERLY RESULTS AND SEASONALITY
Similar to most retailers, the Company's business is seasonal. Revenues and
earnings are lower during the first half of each fiscal year and are greater
during the second half, which includes the year-end holiday selling season. The
timing of new store openings and general economic conditions may affect future
quarterly results of the Company.
The following table sets forth the Company's unaudited quarterly operating
results for each quarter of fiscal 1997 and 1996. Results for the quarter ended
Nov. 30, 1996, include a $15 million pre-tax charge related to the write-down of
certain inventories, primarily personal computers, to expected net realizable
values. Results for the quarter ended March 1, 1997, include a $10 million
pre-tax charge mainly as a result of the Company's decision to reduce its
assortment of recorded music. Results subsequent to Nov. 25, 1995, reflect the
benefit from the Company's change to a third party to insure its Performance
Service Plans.
($ in thousands, except per share amounts)
Fiscal 1997 JUNE 1 AUG. 31 NOV. 30 MARCH 1
1996 1996 1996 1997
- ------------------------------------------------------------------------------------------
Revenues $1,637,184 $1,778,640 $2,007,324 $2,347,535
Gross profit 232,650 251,666 248,768 325,797
Operating income (loss) 12,952 19,684 (3,110) 23,680
Net earnings (loss) 409 3,788 (10,973) 8,524
Net earnings (loss) per share .01 .09 (.25) .20
Fiscal 1996 May 27 Aug. 26 Nov. 25 March 2
1995 1995 1995 1996
- ------------------------------------------------------------------------------------------
Revenues $1,274,696 $1,437,911 $1,929,277 $2,575,564
Gross profit 182,288 196,621 242,883 314,779
Operating income 16,363 19,203 42,588 44,429
Net earnings 4,672 5,714 17,802 19,831
Net earnings per share .11 .13 .41 .46
COMMON STOCK PRICES
QUARTER 1st 2nd 3rd 4th
- ------------------------------------------------------------------------
Fiscal 1997
High $23 $26 1/4 $23 3/4 $14 3/8
Low 16 3/8 17 3/8 12 1/8 7 7/8
Fiscal 1996
High $27 3/8 $29 $29 5/8 $22 3/8
Low 20 1/4 22 3/4 20 3/4 12 3/4
Best Buy's common stock is traded on the New York Stock Exchange, symbol BBY. As
of March 31, 1997, there were 2,716 holders of record of Best Buy common stock.
The Company has not paid cash dividends on its common stock and does not
presently intend to pay any dividends on its common stock for the foreseeable
future.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information about their companies. With the exception of historical information,
the matters discussed in the Annual Report are forward-looking statements that
involve risks and uncertainties. Such risks and uncertainties include, among
other things, the Company's ability to comply with covenants in its borrowing
facilities and the availability of sufficient funds to provide working capital
financing. Reference is made to the Company's Current Report on Form 8-K,
wherein the Company has identified additional important factors that could cause
actual results to differ materially from those contemplated by the statements
made herein.
Best Buy Co., Inc. 14
CONSOLIDATED BALANCE SHEETS ($ in thousands, except per share amounts)
ASSETS MARCH 1 March 2
1997 1996
------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 89,808 $ 86,445
Receivables 79,581 121,438
Recoverable costs from
developed properties 53,485 126,237
Merchandise inventories 1,132,059 1,201,142
Refundable and deferred income taxes 25,560 21,531
Prepaid expenses 4,542 3,750
-------------------------------
Total current assets 1,385,035 1,560,543
PROPERTY AND EQUIPMENT
Land and buildings 18,000 16,423
Leasehold improvements 148,168 131,289
Furniture, fixtures and equipment 324,333 266,582
Property under capital leases 29,326 29,421
-------------------------------
519,827 443,715
Less accumulated depreciation
and amortization 188,194 132,676
-------------------------------
Net property and equipment 331,633 311,039
OTHER ASSETS
Other assets 17,639 12,046
Deferred income taxes 7,204
------------------------------
Total other assets 17,639 19,250
------------------------------
TOTAL ASSETS $ 1,734,307 $ 1,890,832
-----------------------------
-----------------------------
LIABILITIES AND MARCH 1 March 2
SHAREHOLDERS' EQUITY 1997 1996
- -------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 487,802 $ 673,852
Obligations under
financing arrangements 127,510 93,951
Accrued salaries and related expenses 33,663 26,890
Accrued liabilities 122,611 124,596
Deferred service plan revenue 24,602 30,845
Current portion of long-term debt 21,391 23,568
---------------------------------
Total current liabilities 817,579 973,702
DEFERRED INCOME TAXES 3,578
DEFERRED REVENUE AND
OTHER LIABILITIES 28,210 49,229
LONG-TERM DEBT 216,625 206,287
CONVERTIBLE PREFERRED
SECURITIES OF SUBSIDIARY 230,000 230,000
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value:
Authorized - 400,000 shares;
Issued and outstanding - none
Common stock, $.10 par value:
Authorized - 120,000,000 shares;
Issued and outstanding 43,287,000
and 42,842,000 shares, respectively 4,329 4,284
Additional paid-in capital 241,300 236,392
Retained earnings 192,686 190,938
---------------------------------
Total shareholders' equity 438,315 431,614
---------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,734,307 $1,890,832
---------------------------------
---------------------------------
See notes to consolidated financial statements.
Best Buy Co., Inc. 15
CONSOLIDATED STATEMENTS OF EARNINGS ($ in thousands, except per share amounts)
FOR THE FISCAL YEARS ENDED MARCH 1 March 2 Feb. 25
1997 1996 1995
- -------------------------------------------------------------------------------------------------------
Revenues $7,770,683 $ 7,217,448 $ 5,079,557
Cost of goods sold 6,711,802 6,280,877 4,389,164
-------------------------------------------
Gross profit 1,058,881 936,571 690,393
Selling, general and administrative expenses 1,005,675 813,988 568,466
-------------------------------------------
Operating income 53,206 122,583 121,927
Interest expense, net 50,338 43,594 27,876
-------------------------------------------
Earnings before income taxes 2,868 78,989 94,051
Income taxes 1,120 30,970 36,400
Net Earnings $1,748 $48,019 $57,651
-------------------------------------------
-------------------------------------------
Earnings Per Share $.04 $1.10 $1.33
-------------------------------------------
-------------------------------------------
Weighted Average Common Shares Outstanding (000S) 43,582 43,640 43,471
-------------------------------------------
-------------------------------------------
See notes to consolidated financial statements.
Best Buy Co., Inc. 16
CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands)
FOR THE FISCAL YEARS ENDED MARCH 1 March 2 Feb. 25
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 1,748 $ 48,019 $ 57,651
Charges to earnings not affecting cash:
Depreciation and amortization 66,844 54,862 38,570
Loss on disposal of property and equipment 468 1,267 760
----------------------------------------------
69,060 104,148 96,981
Changes in operating assets and liabilities:
Receivables 41,857 (36,998) (31,496)
Merchandise inventories 69,083 (293,465) (269,727)
Income taxes and prepaid expenses 8,174 (16,273) (5,929)
Accounts payable (186,050) 278,515 106,920
Other current liabilities 4,788 50,599 46,117
Deferred revenue and other liabilities (27,262) 12,994 19,723
----------------------------------------------
Total cash (used in) provided by operating activities (20,350) 99,520 (37,411)
----------------------------------------------
INVESTING ACTIVITIES
Additions to property and equipment (87,593) (126,201) (118,118)
Decrease (increase) in recoverable costs from developed properties 72,752 (40,015) (86,222)
(Increase) decrease in other assets (5,593) 7,712 (11,676)
Proceeds from sale/leasebacks 24,060
----------------------------------------------
Total cash used in investing activities (20,434) (158,504) (191,956)
----------------------------------------------
FINANCING ACTIVITIES
Increase in obligations under financing arrangements 33,559 12,196 70,599
Long-term debt borrowings 33,542 21,429
Long-term debt payments (25,694) (14,600) (10,199)
Common stock issued 2,740 3,133 2,366
Proceeds from issuance of convertible preferred securities 230,000
----------------------------------------------
Total cash provided by financing activities 44,147 729 314,195
----------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,363 (58,255) 84,828
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 86,445 144,700 59,872
----------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 89,808 $ 86,445 $ 144,700
----------------------------------------------
----------------------------------------------
See notes to consolidated financial statements.
17
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ($ in thousands)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
- --------------------------------------------------------------------------------
BALANCES AT
FEB. 26, 1994 $ 2,087 $ 224,089 $ 85,268
Stock options exercised 45 2,321
Tax benefit from
stock options exercised 4,661
Effect of 2-for-1 stock split 2,089 (2,089)
Net earnings 57,651
-----------------------------------------
BALANCES AT
FEB. 25, 1995 4,221 228,982 142,919
Stock options exercised 63 3,070
Tax benefit from
stock options exercised 4,340
Net earnings 48,019
-----------------------------------------
BALANCES AT
MARCH 2, 1996 4,284 236,392 190,938
Stock options exercised 45 2,695
Tax benefit from
stock options exercised 2,213
Net earnings 1,748
-----------------------------------------
BALANCES AT
MARCH 1, 1997 $ 4,329 $ 241,300 $ 192,686
-----------------------------------------
-----------------------------------------
See notes to consolidated financial statements.
INDEPENDENT AUDITOR'S REPORT
Shareholders and Board of Directors
Best Buy Co., Inc.
We have audited the accompanying consolidated balance sheets of Best Buy Co.,
Inc. as of March 1, 1997, and March 2, 1996, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for each of the
three years in the period ended March 1, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Best Buy Co., Inc.
at March 1, 1997, and March 2, 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 1, 1997, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Minneapolis, Minnesota
April 8, 1997
Best Buy Co., Inc. 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands, except per share
amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS:
The Company sells personal computers and other home office products, consumer
electronics, entertainment software, major appliances and related accessories
through its retail stores.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of Best Buy Co., Inc.
and its subsidiaries. Significant intercompany accounts and transactions have
been eliminated.
CASH AND CASH EQUIVALENTS:
The Company considers all short-term investments with a maturity of three months
or less when purchased to be cash equivalents.
RECOVERABLE COSTS FROM DEVELOPED PROPERTIES:
The costs of acquisition and development of properties which the Company intends
to sell and lease back or recover from landlords within one year are included in
current assets.
MERCHANDISE INVENTORIES:
Merchandise inventories are recorded at the lower of average cost or market.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation, including
amortization of property under capital leases, is computed on the straight-line
method over the estimated useful lives of the assets or, in the case of
leasehold improvements, over the shorter of the estimated useful lives or lease
terms.
In fiscal 1996, the Company adopted SFAS 121 "Accounting for the Impairment of
Long-Lived Assets," which requires losses on impairment of long-lived assets
used in operations to be recorded when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amounts. The adoption had no impact on the financial
statements.
PRE-OPENING COSTS:
Costs incurred in connection with the opening of new stores are expensed in the
year the store is opened. Pre-opening costs were $5,809, $10,738 and $13,971 in
fiscal 1997, 1996 and 1995, respectively.
DEFERRED SERVICE PLAN REVENUE:
Beginning in the fourth quarter of fiscal 1996, the Company began selling
Performance Service Plans on behalf of an unrelated third party. The Company
recognizes commission revenue on the sale of the plans at the time of sale.
Revenue from the sale of the plans sold prior to Nov. 26, 1995, net of direct
selling expenses, is recognized straight-line over the life of the plan. Costs
related to servicing these plans are expensed as incurred.
EARNINGS PER SHARE:
Earnings per share is computed based on the weighted average number of common
shares outstanding during each period, adjusted for 410,900, 1,020,000 and
1,458,000 incremental shares assumed issued on the exercise of stock options in
fiscal 1997, 1996 and 1995, respectively. All common share and per share
information has been adjusted for a two-for-one stock split in April 1994. Fully
diluted earnings per share assumes that the convertible preferred securities
were converted into common stock and the interest expense thereon, net of
related taxes, is added back to net income. References to earnings per share
relate to fully diluted earnings per share.
STOCK OPTIONS:
The Company applies APB 25, "Accounting for Stock Issued to Employees" in
accounting for stock options and presents in Note 5 pro forma net earnings as if
the accounting prescribed by SFAS123 "Accounting for Stock-Based Compensation"
had been applied.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the balance sheet and statement of earnings, as
well as the disclosure of contingent liabilities. Actual results could differ
from these estimates.
FISCAL YEAR:
The Company's fiscal year ends on the Saturday nearest the end of February.
Fiscal 1997 and 1995 contained 52 weeks, and fiscal 1996 contained 53 weeks.
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to current year
presentation.
Best Buy Co., Inc. 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands, except per share
amounts)
2. OBLIGATIONS UNDER FINANCING ARRANGEMENTS
The Company has a $200,000 inventory financing credit line, which increases to
$325,000 on a seasonal basis. Borrowings are collateralized by a security
interest in certain merchandise inventories approximating the outstanding
borrowings. The line has provisions that give the financing source a portion of
the cash discounts provided by the manufacturers.
3. BORROWINGS
MARCH 1 March 2
1997 1996
- --------------------------------------------------------------------------------
Senior subordinated notes $ 150,000 $ 150,000
Subordinated notes 21,904 21,904
Equipment financing loans 39,649 29,982
Obligations under capital leases 14,463 19,269
Corporate headquarters financing 12,000 8,700
-------------------------------
238,016 229,855
Current portion of long-term debt 21,391 23,568
-------------------------------
$ 216,625 $ 206,287
-------------------------------
-------------------------------
CREDIT AGREEMENT:
The Company has a credit agreement (the "Agreement") that contains a revolving
credit facility under which the Company can borrow up to $550,000.
The Agreement provides that up to $250,000 of the facility is available at all
times, and an additional $300,000 is available from July 1 to Dec. 31. The
Agreement expires in June 1998.
Borrowings under the facility are unsecured. Interest on borrowings is at rates
specified in the Agreement, as elected by the Company. The Company also pays
certain commitment and agent fees.
The Agreement contains covenants that require maintenance of certain financial
ratios and place limits on owned real estate and capital expenditures. The
Agreement also provides that once a year, for a period of not less than 45 days
thereafter, the aggregate principal amount outstanding is limited to $50,000.
There were no balances outstanding under the facility at March 1, 1997, or March
2, 1996. The weighted average interest rate under the Company's current and
prior credit agreements was 6.86%, 7.11% and 6.21% for the fiscal years ended
1997, 1996 and 1995, respectively.
SENIOR SUBORDINATED NOTES:
The Company has outstanding $150,000 of senior subordinated notes. The notes
mature on Oct. 1, 2000, and bear interest at 8.63%. The Company may, at its
option, redeem the notes prior to maturity at 102.50% and 101.25% of par in 1998
and 1999, respectively. The Company may be required to offer early redemption in
the event of a change in control, as defined.
The notes are unsecured and subordinate to the prior payment of all senior debt,
which approximates $249,000 at March 1, 1997. The indenture also contains
provisions, which limit the amount of additional borrowings the Company may
incur and limit the Company's ability to pay dividends and make other restricted
payments.
SUBORDINATED NOTES:
The Company has an $18,000 unsecured, subordinated note outstanding which bears
interest at 9.95% and matures on July 30, 1999. In addition, the Company has
$3,904 of unsecured, subordinated notes due June 15, 1997, which bear interest
at 9.00%.
EQUIPMENT FINANCING LOANS:
The equipment financing loans require monthly or quarterly payments and have
maturity dates between March 1997 and April 2003. Interest rates on these loans
range from 5.25% to 9.18%. Furniture and fixtures with a book value of $31,000
are pledged against these loans.
OBLIGATIONS UNDER CAPITAL LEASES:
The present value of future minimum lease payments relating to certain equipment
and a distribution center has been capitalized. The capitalized cost was
approximately $29,000 both at March 1, 1997, and March 2, 1996. The net book
value of assets under capital leases was $14,000 and $18,000 at March 1, 1997,
and March 2, 1996, respectively. Assets acquired under capital leases were $313,
$3,490 and $10,025 in fiscal 1997, 1996 and 1995, respectively.
CORPORATE HEADQUARTERS FINANCING:
Prior to June 1996, the Company's corporate headquarters was financed by an
$8,700 contract for deed with interest at 9.88%. This obligation was repaid in
June 1996. During fiscal 1997, the Company obtained a $12,000, 15-year mortgage
on this facility at an interest rate of 8.40%.
Best Buy Co., Inc. 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands, except per share
amounts)
FUTURE MATURITIES OF DEBT:
FISCAL YEAR CAPITAL LEASES OTHER DEBT
- --------------------------------------------------------------------------------
1998 $ 4,688 $ 17,053
1999 2,031 10,728
2000 586 27,109
2001 7,631 155,036
2002 18 3,035
Thereafter 10,592
-----------------------------------
14,954 $223,553
------------
------------
Less amount representing interest 491
----------
Minimum lease payments $14,463
----------
----------
During fiscal 1997, 1996 and 1995, interest paid (net of amounts capitalized)
totaled $50,917, $44,808 and $25,708, respectively. The fair value of the
Company's senior subordinated notes was $141,563 at March 1, 1997, based on
quoted market prices. The fair value of all other financial instruments,
including those with quoted market prices, approximates carrying value.
4. CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY
In November 1994, the Company and Best Buy Capital, L.P. (Best Buy Capital), a
special-purpose limited partnership in which the Company is the sole general
partner, completed the public offering of 4,600,000 convertible monthly income
preferred securities with a liquidation preference of $50 per security. The
underwriting discount and expenses of the offering aggregated $7,680. The
proceeds of the offering were loaned to the Company in exchange for a
subordinated debenture with payment terms substantially similar to the preferred
securities. Distributions on the securities are payable monthly at the annual
rate of 6.50% of the liquidation preference and are included in interest expense
in the consolidated financial statements.
The securities are convertible into shares of the Company's Common Stock at the
rate of 1.111 shares per security (equivalent to a conversion price of $45 per
share). The preferred securities are subject to mandatory redemption in November
2024 at the liquidation preference price. The Company has the option to defer
distributions on the securities for up to 60 months. A deferral of distributions
may result in the conversion of the preferred securities into Series A Preferred
Stock of the Company. The Company has the right to cause the conversion rights
to expire any time after three years from the date of issuance in the event the
Company's common stock price exceeds $54 per share for 20 out of 30 consecutive
trading days.
5. SHAREHOLDERS' EQUITY
STOCK OPTIONS:
The Company sponsors two non-qualified stock option plans for employees and one
non-qualified plan for directors. These plans provide for the issuance of up to
9,650,000 shares. Options may be granted only to employees or directors at
option prices not less than the fair market value of the Company's common stock
on the date of the grant. At March 1, 1997, options to purchase 4,199,000 shares
are outstanding under these plans. In addition, at March 1, 1997, an option to
purchase 26,000 shares is outstanding to an employee, not pursuant to a plan.
In fiscal 1997, the Company adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123 for Stock-Based Compensation
(SFAS123). SFAS 123 encourages entities to adopt a fair value-based method of
accounting for employee stock compensation plans, but allows companies to
continue to account for those plans using the accounting prescribed by APB
Opinion 25, "Accounting for Stock Issued to Employees." The Company has elected
to continue to account for stock based compensation using APB 25, making pro
forma disclosures of net earnings and earnings per share as if the fair
value-based method had been applied.
Accordingly, no compensation expense has been recorded for the stock option
plans. Had compensation expense for the stock option plans been determined based
on the fair value at the date of grant for awards in fiscal 1997 and 1996,
consistent with the provisions of SFAS No. 123, the Company's net earnings and
earnings per share for the fiscal years shown below would have been reported as
follows.
1997 1996
- --------------------------------------------------------------------------------
Net earnings - as reported $1,748 $48,019
Net earnings (loss) - pro forma (1,196) 46,052
Earnings per share - as reported .04 1.10
Earnings (loss) per share - pro forma (.03) 1.08
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
1997 1996
- --------------------------------------------------------------------------------
Expected dividend yield 0% 0%
Expected stock price volatility 40% 40%
Risk-free interest rate 6.2% 6.9%
Expected life of options 4.3 years 4.2 years
Best Buy Co., Inc. 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands, except per share
amounts)
The pro forma effect on net income and earnings per share is not representative
of the pro forma net earnings in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1996.
The weighted average fair value for options granted during fiscal 1997 and
fiscal 1996 is $5.04 and $9.74 per share, respectively.
In February 1997, the Company canceled 1,639,000 options, representing
approximately half of the outstanding options granted to employees since April
1993, with exercise prices ranging from $11.20 to $38.19 and granted the same
number of new options with an exercise price of $8.62. Options issued to the
Company's CEO and president were not included in the repricing.
Option activity for the last three years is as follows:
WEIGHTED AVG.
EXERCISE PRICE
SHARES PER SHARE
- --------------------------------------------------------------------------------
OUTSTANDING FEB. 26, 1994 3,170,000 $ 7.73
Granted 1,316,000 32.50
Exercised (472,000) 5.03
Canceled (244,000) 24.37
---------------
OUTSTANDING FEB. 25, 1995 3,770,000 15.64
Granted 1,472,000 23.20
Exercised (625,000) 4.99
Canceled (347,000) 26.26
---------------
OUTSTANDING MARCH 2, 1996 4,270,000 18.94
Granted 2,665,000 12.22
Exercised (446,000) 6.15
Canceled (2,264,000) 22.43
---------------
OUTSTANDING MARCH 1, 1997 4,225,000 14.17
---------------
---------------
EXERCISABLE MARCH 1, 1997 1,465,000 $14.69
---------------
---------------
The following table summarizes information concerning currently outstanding and
exercisable options:
WEIGHTED AVG. WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- --------------------------------------------------------------------------------
$0 TO $10 2,174,000 3.73 $ 8.07 535,000 $ 6.37
$10 TO $20 974,000 2.28 14.25 503,000 12.45
$20 TO $30 705,000 3.15 23.21 220,000 23.26
$30 to $40 372,000 2.10 32.51 207,000 32.50
- --------------------------------------------------------------------------------
$0 TO $40 4,225,000 3.16 $ 14.17 1,465,000 $ 14.69
6. OPERATING LEASE COMMITMENTS & RELATED PARTY TRANSACTIONS
The Company conducts the majority of its retail and distribution operations from
leased locations. Transaction costs associated with the sale and leaseback of
properties and any gain or loss are recognized over the term of the lease
agreement. Proceeds from the sale/leaseback of stores owned at Feb. 26, 1994,
are shown as such in the accompanying fiscal 1995 statement of cash flows.
Proceeds from the sale/leaseback of properties developed since Feb. 26, 1994,
are included in the net change in recoverable costs from developed properties.
The Company also leases various equipment under operating leases. In addition,
the Company leases 17 stores and a distribution center, along with the related
fixtures and equipment under a master lease agreement. The initial terms of the
leases under this agreement range from one to five years, and rent is variable
based on interest rate options as selected by the Company. The leases require
payment of real estate taxes, insurance and common area maintenance. Most of the
leases contain renewal options and escalation clauses, and several require
contingent rents based on specified percentages of sales. Certain leases also
contain covenants related to maintenance of financial ratios.
Future minimum lease obligations by year (not including percentage rentals) for
all operating leases at March 1, 1997, are as follows:
FISCAL YEAR
- --------------------------------------------------------------------------------
1998 $ 137,715
1999 133,910
2000 134,129
2001 132,594
2002 129,346
Later years 1,127,431
The composition of the total rental expenses for all operating leases during the
last three fiscal years, including leases of buildings and equipment, was as
follows:
1997 1996 1995
- --------------------------------------------------------------------------------
Minimum rentals $139,158 $105,349 $64,716
Percentage rentals 537 537 795
----------------------------------------
$139,695 $105,886 $65,511
----------------------------------------
----------------------------------------
Best Buy Co., Inc. 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands, except per share
amounts)
Four stores are currently leased from the Company's CEO and principal
shareholder, his spouse, or partnerships in which he is a partner. Rent expense
under these leases during the last three fiscal years and one store, for which
the lease expired in January 1996, was as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
Minimum rentals $988 $1,122 $1,120
Percentage rentals 388 388 470
----------------------------------------
$1,376 $1,510 $1,590
----------------------------------------
----------------------------------------
7. RETIREMENT SAVINGS PLAN
The Company has a retirement savings plan for employees meeting certain age and
service requirements. The plan provides for a Company-matching contribution,
which is subject to annual approval. This matching contribution was $2,035,
$1,701 and $1,376 during fiscal 1997, 1996 and 1995, respectively.
8. INCOME TAXES
Following is a reconciliation of the provision for income taxes to the federal
statutory rate:
1997 1996 1995
- --------------------------------------------------------------------------------
Federal income tax at
the statutory rate $1,004 $27,646 $32,918
State income taxes,
net of federal benefit 116 3,717 4,759
Jobs tax credit (574) (1,402)
Other 181 125
----------------------------------------
Provision for income taxes $1,120 $30,970 $36,400
----------------------------------------
----------------------------------------
Effective tax rate 39.0% 39.2% 38.7%
----------------------------------------
----------------------------------------
The provision for income taxes consists of the following:
1997 1996 1995
- --------------------------------------------------------------------------------
Current: Federal $(5,100) $27,401 $32,435
State (581) 6,693 8,044
----------------------------------------
(5,681) 34,094 40,479
----------------------------------------
Deferred: Federal 6,103 (2,904) (3,495)
State 698 (220) (584)
----------------------------------------
6,801 (3,124) (4,079)
----------------------------------------
Provision for income taxes $1,120 $30,970 $36,400
----------------------------------------
----------------------------------------
Deferred taxes are the result of differences between the basis of assets and
liabilities for financial reporting and income tax purposes. Significant
deferred tax assets and liabilities consist of the following:
MARCH 1 March 2
1997 1996
- --------------------------------------------------------------------------------
Deferred service plan revenue $18,811 $30,954
Accrued expenses 7,579 3,885
Compensation and benefits 3,375 2,751
Other - net 159 505
Inventory 4,108
------------------------------
Total deferred tax assets 29,924 42,203
------------------------------
Property and equipment 15,697 13,695
Other - net 3,356 1,139
------------------------------
Total deferred tax liabilities 19,053 14,834
------------------------------
Net deferred tax assets $10,871 $27,369
------------------------------
------------------------------
The Company believes that the interest on the subordinated debenture referred to
in Note 4 is deductible and that Best Buy Capital will be treated as a
partnership for income tax purposes. Income taxes (received) paid were $(8,599),
$45,888 and $32,899 in fiscal 1997, 1996 and 1995, respectively.
9. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings arising during the normal
course of conducting business. Management believes that the resolution of these
proceedings will not have any material adverse impact on the Company's financial
statements.
23