Senior Subordinated
Notes
The Company’s Musicland subsidiary had $110,500 of Senior Subordinated
Notes due in 2003 (2003 Notes) and $160,600 of Senior Subordinated Notes
due in 2008 (2008 Notes) outstanding, which were assumed and recorded at
their fair value as part of the Musicland acquisition. Fair value was
based upon the present value of the amounts expected to be paid. Both
notes contained change-in-control provisions that required the Company to
offer to repurchase the notes within 30 to 60 days after the Company’s
acquisition of Musicland. The offer to repurchase both notes was made on
February 12, 2001, at 101.0% of the aggregate principal amount of the
notes plus accrued interest. The offer expired on March 16, 2001, at which
time $93,900 of the 2003 Notes had been tendered. Accordingly, these 2003
Notes have been classified to the current portion of long-term debt in the
Company’s balance sheet. Amounts tendered under the 2008 Notes were not
significant. The Company also has options to redeem the remaining notes
outstanding prior to maturity. The 2003 Notes may be redeemed at 101.1% of
par until June 15, 2001, and at par thereafter. The 2008 Notes may be
redeemed at 104.9% of par beginning March 15, 2003, and thereafter at
prices declining annually to 100.0% of par on and after March 15, 2006.
On October 5, 1998, the Company prepaid its $150,000, 8.6% Senior
Subordinated Notes due October 1, 2000, at 102.5% of their par value. The
prepayment premium of $3,800 and the write-off of the remaining deferred
debt offering costs of approximately $1,100 were included in interest
expense in fiscal 1999.
Credit Agreement
The Company has a credit agreement (the Agreement) that provides a bank
revolving credit facility (the Facility) under which the Company can
borrow up to $100,000. The Agreement expires on June 30, 2002. 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 minimum net worth. The Agreement also requires that
the Company has no outstanding principal balance for a period not less
than 30 consecutive days, net of cash and cash equivalents. There were no
borrowings under the Facility during fiscal 2001 or 2000.
Inventory Financing
The Company has a $200,000 inventory financing credit line, which
increases to $325,000 on a seasonal basis. Borrowings are collateralized
by a security interest in certain merchandise inventories approximating
the outstanding borrowings. The terms of this arrangement allow the
Company to extend the due dates of invoices beyond their normal terms. The
amounts extended generally bear interest at a rate approximating the prime
rate. No amounts were extended under this line in fiscal 2001 or 2000. The
line has provisions that give the financing source a portion of the cash
discounts provided by the manufacturers.
4. Convertible Preferred Securities of Subsidiary
In November 1994, the Company and Best Buy Capital, L.P., a
special-purpose limited partnership in which the Company was the sole
general partner, completed the public offering of 4.6 million convertible
monthly income preferred securities with a liquidation preference of $50
per security. The securities were convertible into shares of the Company’s
common stock at the rate of 4.444 shares per security (equivalent to a
conversion price of $11.25 per share). In April 1998, substantially all of
the preferred securities were converted into approximately 20.4 million
shares of common stock. The remaining preferred securities were redeemed
in June 1998 for cash in the amount of $671.
5. Shareholders’ Equity
Stock Options
The Company currently sponsors non-qualified stock option plans for
employees and the Board of Directors. These plans provide for the issuance
of up to 48.8 million shares of common stock. 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. The
options vest over a four-year period and expire over a range of five to 10
years. In addition, two plans expired in fiscal 1998 that still have
outstanding options. At March 3, 2001, options to purchase 17.6 million
shares were outstanding under all of these plans.
In connection with the Musicland acquisition, outstanding stock options
held by certain employees of Musicland were converted into options
exercisable into the Company’s shares of common stock. These options
were fully vested at the time of conversion and expire based on the
remaining option term of up to 10 years. These options did not reduce the
shares available for grant under any of the Company’s other option
plans. The acquisition was accounted for as a purchase and, accordingly,
the fair value of these options was included as a component of the
purchase price using the Black-Scholes option pricing model. 
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