As of March 3, 2001, the Company operated 419 Best Buy storesretail environment — online or in 41 states.retail stores. The stores average 45,400 square feet and produce average annual salesonline site offers products in all of nearly $39 million. Best Buy stores collectively had 19.0 million retail square feet, or 68% of the Company's total retail square footage.stores’ principal product categories except appliances.

 Starting in fiscal 2003, the Company plans to begin international expansion with the first Best Buy stores opening in Canada prior to the calendar 2002 holiday season. The Canadian marketplace is attractive because of the sizeable population, high median incomes, strong annual spending in consumer electronics and limited competition in the Company's business sector. Canadian Best Buy stores will vary in size depending on the needs of the location. It is expected that approximately 60 to 65 Best Buy stores will be opened throughout Canada in the next three to four years.

    The Company acquired Musicland Stores Corporation (Musicland) inIn the fourth quarter of fiscal 2001, we acquired the common stock of Magnolia Hi-Fi, Inc. for $88 million in cash, including transaction costs, and the common stock of Musicland Stores Corporation for $425 million, including transaction costs, plus long-term debt valued at $271 million. Magnolia Hi-Fi is a Seattle-based, high-end retailer of audio and video products that operates 13 stores in Washington, Oregon and California. We believe Magnolia Hi-Fi has expansion potential of up to continue its revenue150 stores nationwide. However, prior to pursuing an aggressive growth beyond fiscal 2005, whenstrategy, we believe we must refine the Company expects to complete its Best Buy store expansion inconcept and broaden the United States.scope of products and services currently offered at Magnolia Hi-Fi. Musicland which is also based in Minneapolis, is one of the largest national retailers of pre-recordedmovies, prerecorded music, videos, books, computer software, video games and other entertainment-related products. The mall-based music and video stores include the Sam Goody and Suncoast brands. In addition, Musicland operates rural On Cue stores and metropolitan, large-format Media Play stores. At fiscal year-end, Musicland operated approximately 1,300entertainment–related products with 1,321 stores in 49 states, the District of Columbia, the Commonwealth of Puerto Rico and the Virgin Islands, with 8.8Islands. Our intention is to enhance the Musicland business by improving the customer experience and diversifying the revenue mix, thereby boosting sales productivity and profitability. We also view Musicland’s small-market stores as an attractive growth opportunity. In the third quarter of fiscal 2002, we acquired the common stock of Future Shop Ltd. for $368 million, total retail square feet.

    The Musicland acquisition adds more than 300 million additional customer visits per year, as well as access to severalnet of cash acquired, including transaction costs. Future Shop, which currently operates 95 stores, is Canada’s largest consumer market segments typically underserved by Best Buy stores: women, young adultselectronics retailer and rural consumers. The Musicland acquisition also significantly increased the Company's market share in sales of pre-recorded music and movies and further positioned the Company to lead the anticipated migration to digitaloffers product and connectivity services.

    Sam Goody is a mall-based specialty music retailer offering a broad product selection in a youthful, consumer-friendly shopping environment. Sam Goody stores specialize in music entertainment products, including compact discs, DVD's, videos, audiocassettes, music and movie videos, sheet music, music-inspired apparel, posters and other music-related accessories. The stores are predominantly located in malls and average approximately 4,500 square feet, although they range in size from 1,000 to 30,000 square feet. The larger stores generally are located in more prominent mall or downtown locations and carry a broader inventory of catalog product, including substantial classical and jazz music offerings as well as deep video assortments. In many cases, Sam Goody is the exclusive music retailer in the mall. As of March 3, 2001, the Company operated approximately 630 Sam Goody stores in 48 states, the District of Columbia, the Commonwealth of Puerto Rico and the Virgin Islands. The total retail square footage of these Sam Goody stores was approximately 3.0 million square feet, or 11% of the Company's total retail square footage. The average annual sales per Sam Goody store are approximately $1.2 million.

    Suncoast is a mall-based video retailer, emphasizing a broad product selection and elite customer service in a Hollywood-inspired atmosphere. Suncoast stores average approximately 2,400 square feet and feature newly released and classic movies, special interest videos and episodes from popular TV shows. Complementary products include apparel, posters and other products inspired by new releases, as well as blank videotapes, storage cases and other video-related accessories. Suncoast offers movies in both VHS format and DVD format. At March 3, 2001, there were approximately 400 Suncoast stores in 47 states, the District of Columbia and the Commonwealth of Puerto Rico. The total square footage of Suncoast stores was approximately 1.0 million square feet, or 4% of the Company's total retail square footage. The average annual sales per Suncoast store are approximately $1.0 million.

    On Cue stores are located in small or rural cities, generally with 10,000 to 30,000 people, providing a wide assortment of entertainment products at competitive prices. On Cue stores average approximately 6,000 square feet and offer customers a convenient local store to shop for music, books,

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videos, computer software, electronics, video games and related products. On Cue customers have access to more than 6,000 music and video titles as well as a comprehensive selection of book titles through a special order program. The in-store boutique, "Jam Central," features a selection of musical instruments including keyboards, guitars, microphones, amplifiers, starter drum sets and sheet music, as well as accessories. As of March 3, 2001, the Company operated approximately 200 On Cue stores in 31 states with total retail square footage of approximately 1.3 million square feet, or 5% of the Company's total retail square footage. The average annual sales per On Cue store are approximately $800,000.

    Media Play is a superstore retailer located in major metropolitan markets offering a large assortment of home entertainment products at competitive prices. The family-oriented Media Play stores are operated primarily in freestanding and strip mall locations in urban and suburban areas. The average store measures approximately 46,000 square feet and carries a broad assortment of movies, music, books, computer software, video games, electronics, computer software, musical instruments and toys. The "M.P. Kids" department houses a play area for children and a wide array of children's movies, books and educational toys. "Game Zone" allows a customer to try out new or used video games and sell or trade their used video games. The "Jam Central" area iscategories similar to that foundat Best Buy stores. We acquired Future Shop to further our expansion plans, leverage our expertise in On Cue stores. At March 3, 2001, Media Play operated approximately 80 storesconsumer electronics retailing and increase shareholder value. The acquisition marked our initial expansion into international operations. Additional information regarding our acquisitions is included in 20 states with total square footage of approximately 3.6 million, or 12%note 2 of the Company's total retail square footage. The average annual sales per Media Play store are approximately $7.1 million.Notes to Consolidated Financial Statements on page 41 of our Annual Report, contained in exhibit 13.1 to this report, and is incorporated herein by reference.

 On Dec. 15, 2000, the Company acquired Magnolia Hi-Fi, Inc. (Magnolia Hi-Fi), a retailer of high-end consumer electronics which was founded in Seattle in 1954. As of March 3, 2001, the company operated 13 stores in Washington, Oregon and California that average 10,200 square feet with average annual sales per store of $8.4 million. Magnolia Hi-Fi stores provide audio and video home theater systems for homes, automobiles and businesses. The stores offer top-of-the-line consumer electronics brands through a commissioned sales force. Magnolia Hi-Fi operates a state-of-the-art design center as well as an in-house repair/installation department.

Business Strategy

    The Company'sOur vision is to be at the intersection of technologymake life fun and life. The Company'seasy. Our business strategy is to bring technology and consumers together in a retail environment that focuses on educating consumers on the features and benefits of technology and entertainment while maximizing overall profitability. The Company believes that Best BuyWe believe our stores offer consumers meaningful advantages in store environment, product value, selection and service. Anservice, all of which further our objective of this strategy has been to achieveachieving a significant market share in the markets it serves. The latest Best Buy store format features interactive displays and, for certain product categories, a high level of customer assistance, both designed to enhance the customer's shopping experience.

    As part of the Best Buy stores' overall business strategy, Best Buy:

•

Generally offers a retail format similar to a self-service discount store for many products with which consumers are familiar and provides a higher level of customer service and product information for more technically complex and integrated products.



•

Offers consumers the ability to subscribe to services such as Internet access, satellite television and wireless communications.



•

Provides a selection of brand name products comparable to that of retailers specializing in the Company's principal product categories and seeks to ensure a high level of product availability for customers.

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•

Works to provide customers with the best product value available in the market area through active comparison shopping programs, daily price changes, lowest-price guarantees and special promotions, including interest-free financing and home delivery.



•

Provides a variety of services not offered by certain competitors, including convenient financing programs, product delivery and installation, and post-sale services including repair and warranty services as the well as computer upgrades.



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Locates stores at sites that are easily accessible from major highways and thoroughfares and seeks to create sufficient concentrations of stores in major markets to maximize leverage on fixed costs, such as advertising and operations management.



•

Offers an online shopping site, which features in-depth product information, to enhance the customer purchasing experience.



•

Controls costs and enhances operating efficiency by centrally managing all buying, merchandising and distribution, and vertically integrating certain support functions such as advertising.

    Best Buy's store format is a key component of its business strategy. The Company believes that because consumers are generally familiar with certain products Best Buy sells and are accustomed to discount shopping formats, they resist efforts to direct their choice of product and appreciate controlling the purchase decision. For products that are relatively easy for consumers to understand and purchase, Best Buy stores employ a self-service, discount-style store format, featuring easy-to-locate product groupings, emphasizing customer choice and product information. These products include entertainment software and less complex consumer electronics products such as VCRs and small televisions. For other, more complex and integrated products such as personal computers, digital and big-screen televisions, home theater, digital phones and digital cameras, Best Buy dedicates specially trained sales assistance. Sales staff in these product categories help customers understand the features and benefits of new technology and can assist customers in the purchase of accessories and registration for service with providers.

    Most Best Buy stores contain a demonstration area for home theater systems, big-screen televisions and audio speakers. These demonstration areas allow customers to experience and compare product performance firsthand. Best Buy believes that these demonstration and display areas further differentiate it from competing retailers and create an advantage over competitors that operate exclusively through catalogs or the Internet. In addition, all Best Buy stores feature a configure-to-order process for personal computers that enables computer buyers to custom-order a computer system from such vendors as Compaq and Hewlett-Packard.

    Best Buy spends approximately 3% of store sales on advertising, including the weekly distribution of approximately 48 million newspaper inserts. The Company is reimbursed by vendors for a substantial portion of advertising expenditures through cooperative advertising arrangements. Best Buy has vertically integrated advertising and promotion capabilities, and operates an in-house advertising agency. This capability permits the rapid response to competitor promotions in a cost-effective manner. In many markets, Best Buy is able to secure and deliver merchandise to stores and to create, produce and run an insert all within a period of less than one week.

    Best Buy's print advertising generally consists of four-color weekly inserts, typically 24 to 32 pages, that emphasize a variety of product categories and feature an extensive name-brand selection with a wide range of price points. In addition, the Company utilizes television advertising to support a national brand image campaign that positions Best Buy stores as the destination for new technology products that enhance customers' time by making it more productive and more fun. The Company believes that building customer brand loyalty is a significant element of its business strategy.

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    Product service and repair are important aspects of Best Buy's brand strategy, providing the opportunity to differentiate its stores from the retailers that do not offer such services. Best Buy stores generally offer to service and repair all of the products it sells, with the exception of entertainment software. Best Buy has been designated by substantially all major suppliers as an authorized servicer. In addition, Best Buy makes in-store technical support staff available to assist customers with the custom configuration of personal computers and peripheral products. Best Buy offers home delivery of major appliances and large electronics products. In addition, Best Buy installs car stereos, vehicle security systems and certain major appliances.

    In fiscal 2001, the Company re-launched its commercial Web site, BestBuy.com, which sells products over the Internet in Best Buy's principal product categories except appliances. The Company views the site as part of a fully integrated "clicks-and-mortar" strategy, offering a consistent and synchronized experience across both stores and Internet channels while tapping the unique advantages of each. Consumers can choose to pick-up or return their online purchases at one of the Best Buy stores, and inside Best Buy stores they can use WebStations™ to expand the product assortment available to them. The "clicks-and-mortar" strategy also leverages the Company's existing nationwide Best Buy store network with Best Buy's brand awareness, substantial advertising and promotional activities, warranty and repair capabilities, and supply chain, warehousing and logistics network. While customer-fulfillment through its Web site does not currently represent a significant portion of Best Buy's business, management believes that the development of a comprehensive Internet business represents a significant growth opportunity and that its clicks-and-mortar strategy gives the Company a competitive advantage over Internet retailers. In addition, the Company believes that the product information provided to consumers on the BestBuy.com Web site has the ability to increase overall in-store traffic.

    The Company recognized that forming strategic alliances with service providers would be an integral component of its strategy to provide full service to consumers and increase profitability. In March 2000, the Company announced a strategic alliance with Microsoft Corporation (Microsoft) that encompassed significant co-marketing activities between the Microsoft Network of Internet Services (MSN™), BestBuy.com and Best Buy's retail stores via direct marketing and advertising inserts, among other things. Microsoft is providing technology support to Best Buy and BestBuy.com and supported BestBuy.com with prominent placement across Microsoft properties such as MSNBC, MSN, Hotmail, Expedia and Carpoint. In exchange for its role in generating new subscribers for MSN, the Company shares in the profits derived from those subscribers. In connection with the alliance, Microsoft purchased approximately 3.9 million shares of the Company's common stock for $200 million.

we serve. The acquisitions of Musicland, and Magnolia Hi-Fi and Future Shop give the Companyus access to new distribution channels, new customersmore customer visits and the ability to leverage Best Buy stores’ core competencies towith their operations. AdditionalWe also expect additional benefits are expected to accrue from the cross merchandising of products and information sharing across our distribution channels.

Operating Segments

We currently operate three segments: Best Buy, Musicland and International. Best Buy is primarily a specialty retailer of consumer electronics, home office equipment, entertainment software and appliances. Also included in the Best Buy segment is Seattle-based Magnolia Hi-Fi, a high-end retailer of audio and video products. The post-acquisition strategy includes increasing productivityMusicland segment is primarily a mall-based retailer of movies, prerecorded music, video games and re-positioning Musiclandother entertainment-related products. The International segment consists of Future Shop, a specialty retailer of consumer electronics, home office equipment, entertainment software and appliances with operations in Canada.

The following table reconciles stores open at the end of fiscal 2001 to anthe number of stores open at the end of the fiscal 2002:

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* The International segment consists of Future Shop stores. Future Shop was acquired in the third quarter of fiscal 2002.

Additional information regarding our operating segments is presented in Management’s Discussion and Analysis of Results of Operations and Financial Condition beginning on page 20 of our Annual Report, contained in exhibit 13.1 to this report, and is incorporated herein by reference. In addition, selected operating segment financial data is included in note 8 of the Notes to Consolidated Financial Statements beginning on page 52 of our Annual Report, contained in exhibit 13.1 to this report, and is incorporated herein by reference.

Best Buy Segment

Additional information regarding our Best Buy operating segment is included in Management’s Discussion and Analysis of Results of Operations and Financial Condition beginning on page 20 of our Annual Report, contained in exhibit 13.1 to this report, and is incorporated herein by reference. In addition, selected Best Buy segment financial data is included in note 8 of the Notes to Consolidated Financial Statements beginning on page 52 of our Annual Report, contained in exhibit 13.1 to this report, and is incorporated herein by reference.

Best Buy Stores

Overview

At the end of fiscal 2002, we operated 481 Best Buy stores in 44 states. The stores average 44,900 retail square feet and produce average annual sales of approximately $38 million. Best Buy stores collectively represent 21.6 million retail square feet, or 67% of our total retail square footage. During fiscal 2002, we launched our latest store concept, which features flexible architecture, improved merchandising, faster checkout, better product adjacencies and a more efficient labor model. Most new concept, including an infusion of new digital products thatBest Buy stores opened in fiscal 2003 are expected to appeal toincorporate the Sam Goody customer. Initial initiatives include post-merger integration and the remerchandisingfeatures of Sam Goody stores.this latest store format.

 Musicland's business strategy is to offer a broad assortment of entertainment software, including both new releases and catalog products, in an exciting store format.

The Sam Goody, Media Play, On Cue and Suncoast brands target specific consumer segments. A key part of the strategy is customer loyalty, which Musicland helps build through customer newsletters, targeted direct mail campaigns, special events and promotional offers.

    Musicland's major suppliers offer cooperative advertising support and provide funds for the placement and position of product. The marketing programs are designed to build each store's brand image, encourage first-time visits and reinforce store loyalty among existing customers through a wide

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variety of traffic-driving special events and promotions. Marketing and advertising partnerships have been developed with vendors and nationally recognized corporations for cross promotions, events and sweepstakes that management believes are attractive to shoppers. For the sixth consecutive year, Musicland has run a nationally promoted band competition, "Bandemonium," which appeals to its target customers. In addition to the Sam Goody stores, sponsors of the Bandemonium event in fiscal 2001 included Pepsi, Gibson, Rayovac, Dentyne, Twentieth Century Fox and Sony Accessories.

    More than a million customers are members of Musicland's Replay program, a frequent shopper program designed to promote customer loyalty and encourage repeat visits through special offers and targeted marketing.Request, a cutting-edge music and video entertainment news magazine for Replay members, is also available in Sam Goody, Media Play, Suncoast and On Cue stores and also at limited magazine stands. The magazine has a pass-along readership estimated in the millions. TheRequest Web site, requestmagazine.com, offers an online version of the magazine, featuring music, DVD and game reviews as well as select content and interactive features for readers.

    The Company has begun testing new products at selected Sam Goody stores. The new products focus on devices that play music and movies as well as gaming hardware and software. The Company views these products as a natural extension for Sam Goody stores, which currently sell primarily music and movies. The Company expects to complete testing of the new products and to expand the product offerings to additional Sam Goody stores during fiscal 2002. The Company anticipates that these new products will drive traffic and generate incremental sales.

    Magnolia Hi-Fi's strategy is to provide superior customer service in the store, during installation and following installation. The stores are spacious, pleasant environments that allow a customer to experience the home theater product, including various scenarios for the audio and video components, prior to purchase. In addition, a design center located in Seattle is viewed by architects, builders, designers and homeowners as a resource for integrating audio and video in the home and business, which the Company believes is a competitive advantage.

Product Selection and Merchandising

Best Buy

table reconciles Best Buy stores open at the beginning and end of each of the last five fiscal years:

Merchandise

Best Buy stores generally offer customers a broad selection of name-brand models consisting of approximately 6,000 products, exclusive ofmerchandise in five product categories: consumer electronics, home office, entertainment software, titlesappliances and accessories, in four principal product categories. In addition, they offer a selection“other” products. Consumer electronics, Best Buy’s largest category, based on revenues, consists of accessories supporting those principal product categories.

video and audio equipment. Video products include television sets, DVD players, cameras, camcorders, VCRs and digital broadcast satellite systems. Audio products include car stereos, portable audio equipment, home theater audio systems, audio components, shelf systems and speakers. The home office category, Best Buy's largest category includes desktop and notebook computers and related peripheral equipment, telephones, digitalwireless communication devices and personal digital assistants, answering machines and calculators. Desktop computer sales have slowed as the percentage of households owning computers has risen. Revenue growth in this category is expected to be driven by increased demand for products providing mobile access to people and information along with the related sale of connectivity services. The Company signed up 1.3 million new ISP subscriptions in fiscal 2001 and plans to continue to be a leader in the sale of connectivity services. As of the fourth quarter of fiscal 2001, approximately 35% of the sales in this category were derived from sales of personal computers including desktops, notebooks and configure-to-order computers. The retail market for personal computers can be promotional and competitive, with competition primarily from retail stores and factory-to-customer direct channels of distribution. Operating results can be affected by significant changes in promotional activity, consumer demand, availability of personal computers and the timing of computer model transitions. The timing of significant newassistants. Entertainment software releases also can impact sales of personal computers. The Company believes it is well positioned to withstand competition in the retail market for personal computer products, traditionally low margin items, due to its experience in the market and its significantly improved ability to manage inventories in this category. The Company also

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believes that Best Buy's broad product lines, including those that generate higher gross profit margins, and its relatively low cost structure contribute to the Company's ability to compete in this category. In addition, the Company believes that the related services Best Buy offers, such as knowledgeable salespeople, in-store computer configuration, maintenance and upgrades, are distinct advantages compared to Internet, discount and factory direct computer retailers. Changing technology and hardware requirements necessary to support new software, including online services, are expected to continue to be primary factors in the growth in sales of personal computers and related products in the future. Personal computer unit sales growth has been driven by technology improvements, the increasing popularity of the Internet and declining retail selling prices. In fiscal 2000 and 2001, Internet service provider rebate offers to new subscribers on the purchase of their personal computers further stimulated computer sales. While the sales of personal computer hardware generate relatively low gross profit margins, Best Buy's selling strategies have enabled the Company to generate higher total transaction profit margins through the sale of accessories and services that complete a home computer system. Best Buy's list of home office brand names includes leading vendors such as AT&T, Belkin, Canon, Cingular, Compaq, Emachine, Epson, Handspring, Hewlett-Packard, Kodak, Lexmark, Motorola, Microsoft Service Network (MSN), Nokia, Olympus, Palm, Panasonic, Sony, Sprint, Toshiba and VoiceStream.

    Best Buy's second-largest, but fastest-growing, product category is consumer electronics, consisting of video and audio equipment. The growth is driven by the continued expansion of digital technology products. Digital technology products improve the consumers' audio and video experience and enable them to connect and interact at home, work or on the road. Video products include home theater systems, television sets, DVD players, VCRs, camcorders, cameras and digital broadcast satellite systems (DBS). Audio products include audio components, audio systems, shelf systems, portable audio equipment, car stereos and other electronics. Best Buy continues to expand its product selection of consumer electronics by offering higher-end products and components that have greater appeal to audio and video enthusiasts. In recent years, the introduction of digital televisions, DVD players, digital cameras, digital camcorders and DBS systems continues the migration of the consumer electronics category into digital technology. The replacement of existing analog technology with digital products represents a significant sales growth opportunity for the Company; although as prices drop, quantities increase and new technology becomes more affordable, the transition could impact sales of current products. To date, however, increasingly affordable digital consumer electronics products have contributed to sales growth. Continued technology advancements are expected to result in the development and availability of new, more sophisticated digital products, continuing to fuel growth in this category. Best Buy sells consumer electronics with brand names such as Aiwa, Bose, Canon, DIRECTV, Funai, JBL, JVC, KLH, Minolta, Nikon, Panasonic, Philips, Pioneer, RCA, Rockford Fosgate, Samsung, Sanyo, Sharp, Sony, Technics, Toshiba, WebTV and Yamaha.

    Best Buy's entertainment software category includes compact discs, DVD and VHS movies, computer software, and video game hardware and software. Best Buy is one of the few large consumer electronics retailers that sells a broad selection of entertainment software. Best Buy customizes a portion of the entertainment software assortment for particular stores based upon the demographics of the market. Video game hardware, video game software and computer software sales are also impacted by the development of new technology. The addition of new video game hardware and software, from MicrosoftDVD and Nintendo Company, Ltd. combined with the popularity to date of the Sony Playstations are expected to positively impact sales in this category.

    Best Buy'sVHS movies, and computer software. The appliance category includes microwave ovens, dishwashers,major appliances such as washers, dryers, ranges, refrigerators, freezers ranges, washing machines, clothes dryers, air conditioners and vacuum cleaners. Thisdishwashers, as well as vacuums, microwaves and housewares. The “other” product category includes brand names such as Amana, Bisell, Braun, Cuisinart, Eureka, Fantom Technologies, Frigidaire, General Electric, Hoover, Kitchenaid, Krups, Maytag, Panasonic, Royal Appliance, Sharp, Sunbeam and Whirlpool. Sales in this category are impacted by new housing activity. An increase in large home

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improvement retailers and other large retailers selling major appliances makes this category highly competitive and promotional, despite the exit of a major competitor from the appliance category in fiscal 2001. While the appliance category represents less than 10% of total Company sales, the Company believes that it can grow its market share in this category. In addition to increasing its market share, the Company plans to work closely with suppliers to improve the overall profitability of the category. Historically, the high costs associated with the logistics, repair and installation of major appliances have put pressure on the category's financial performance.

    Best Buy's "other" category includes sales of Performance Service Plans (PSPs),extended service contracts, blank recording media, furniture, and other miscellaneous products such as batteries, business cases and blank audio and videotapes and compact disks. Best Buy sells PSPs on behalf of an unrelated third party. These contracts cover product repair and/or replacement for a specified period of time following the purchase of a product, extending and enhancing the manufacturer's warranty. PSP sales comprised 3.9% of Best Buy revenues in fiscal 2001 and are impacted by changes in unit volume of personal computers, appliances and otherstorage products.

The following table shows thepresents Best Buy stores’ sales, by category, as a percentage of total Best Buy store sales from each of Best Buy's principal product lines for each of the last three years.*

*

Prior year percentages have been adjusted to reflect current year categorization of products. The primary change, made in fiscal 2001, was to reclassify cameras and photographic equipment from the "Other" category to Consumer Electronics—Video.

Musiclandstores’ sales:

 Sam Goody stores primarily sell pre-recorded music and movies. Sam Goody's typical customer is in their 20s and tends to buy on impulse. The Company expects to add to the Sam Goody product mix devices that play music and movies, as well as gaming hardware and software, a natural extension of the current product lines. On Cue stores offer major-market selections of music, videos and books. The Company also expects to add consumer electronics and other fast-growing products to the On Cue mix. Suncoast stores offer popular video entertainment software in VHS format and the increasingly popular DVD format. Media Play stores offer a wide assortment of movies, music, books, video games, electronics, computer software, musical instruments and novelty items.

    Sam Goody stores typically carry 6,000 to 10,000 compact disc titles, depending upon store size and location. On Cue and Media Play stores carry up to 9,000 and 40,000 compact disc titles, respectively. These titles include "hits," which are the best selling newer releases, and "catalog" items, which are older but still popular titles that customers purchase to build their music collections. Most of the Musicland stores also carry DVD and VHS movies. Suncoast and Media Play stores carry up to 12,000 and 15,000 movie titles, respectively. Computer software and video games are available primarily in Media Play and On Cue stores.4

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 Magnolia Hi-Fi carries high-end brand products for the home and car with an emphasis on high-quality digital products. Brands carried include Alpine, Bose, Boston Acoustics, Definitive Technology, Denon, Kenwood, Klipsch, Krell, Martin-Logan, McIntosh, Mitsubishi, Panasonic, Sonus-Faber and Sony.

Operations

Store Locations and Expansion

    Best Buy, Musicland and Magnolia Hi-Fi store locations by state can be found on page 58 of the Annual Report, contained in Exhibit 13.1 to this report.

Best Buy

    The Company opened 62 Best Buy stores in fiscal 2001, including entries into the new markets of the New York City Area and Norfolk, Va. The Company expects to open approximately 60 Best Buy stores in fiscal 2002, including approximately 20 small-market format stores. The Company also plans to remodel or relocate approximately six Best Buy stores to larger facilities. The Company expects to open approximately 60 Best Buy stores per year through fiscal 2005, at which time the Company expects to have completed its Best Buy store expansion in the United States.

    Best Buy's expansion strategy generally has been to enter major metropolitan areas with the simultaneous opening of several stores and then to expand into contiguous non-metropolitan markets. In fiscal 2001, the Company continued to broaden its existing strategy and opened 11 small-market Best Buy stores bringing the total small-market format to 20 stores. As of March 3, 2001, approximately 75% of Best Buy stores were in the 50 largest metropolitan markets.

    The entry into a new market is preceded by a market analysis, including a review of competitors, demographics and economic data. The store location strategy enables Best Buy to increase the effectiveness of advertising expenditures and to create a high level of consumer awareness. In addition, the clustering of stores allows Best Buy to maintain more effective management control and utilize distribution facilities more efficiently. Currently, Best Buy stores cover approximately 70% of the United States population and serve 47 of the 50 largest metropolitan markets.

    When entering a major metropolitan market, Best Buy usually establishes a district office, service center and major appliance warehouse. New stores require working capital of approximately $4 million for merchandise inventory (net of vendor financing), leasehold improvements, fixtures and equipment. Pre-opening costs of approximately $550,000 per store, excluding advertising costs associated with the grand opening of a store, are incurred through hiring, relocating and training new employees, and in merchandising the store. These costs are expensed as incurred.

Musicland

    While the Company has not yet made a decision on the ultimate expansion strategy for the Musicland brands, it does not expect to open or close a significant number of Musicland stores in fiscal 2002. The Company's initial strategy will focus on remerchandising and expanding the sales base of Sam Goody stores.

Magnolia Hi-Fi

    The Company plans to grow the Magnolia Hi-Fi chain, beginning with several new stores in the San Francisco Bay area in fiscal 2002. The Company plans to manage the growth of this chain carefully to ensure that Magnolia Hi-Fi's entrepreneurial and quality-focused culture remains intact. Magnolia carries high-end products that have minimal overlap with Best Buy.

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Suppliers, Purchasing and Distribution

    Best Buy's marketing strategy depends, in part, upon the ability to offer customers a broad selection of name-brand products and is, therefore, dependent upon satisfactory and stable supplier relationships. In fiscal 2001, Best Buy's 20 largest suppliers accounted for over half of the merchandise Best Buy purchased, with five suppliers—Compaq, Hewlett-Packard, Panasonic, Sony and Toshiba—representing approximately 33% of total purchases for Best Buy stores. The loss of or disruption in supply, including disruptions in supply due to manufacturers' product quality or component parts availability issues, from any one of these major suppliers could have a material adverse effect on Best Buy sales. Higher than expected demand also places a strain on certain suppliers at times, resulting in suppliers limiting or temporarily discontinuing their supply of products to retailers, including Best Buy. For instance, when new products are introduced, manufacturers are at times unable to supply sufficient quantities to meet the high demand. Best Buy generally does not have long-term written contracts with its major suppliers and does not have any indication that any current suppliers will discontinue selling merchandise to them. The Company has not experienced significant difficulty in maintaining satisfactory sources of supply, and management generally expects that adequate sources of supply will continue to exist for the types of merchandise sold in the stores.

    Best Buy's centralized marketing staff purchases substantially all store merchandise. The buying staff is responsible for product assortment, promotion planning and product pricing. An inventory management staff is responsible for overall product acquisition and inventory management, including allocations and replenishment of store inventory. Except for certain entertainment software, there are generally no agreements with suppliers for the return of unsold inventory. Merchandise remaining at the time of new product introduction is generally sold on a close-out basis and may be subject to a reduction in selling price to levels at or below cost.

    Best Buy has made product availability to consumers a high priority. Accordingly, the Company is increasing its investments in systems to assure that in-stock positions at Best Buy's stores are among the highest in the industry. Best Buy uses an automatic replenishment system for restocking store inventories based on inventory levels, historical and projected sales trends, promotions and seasonality. Best Buy uses an extensive merchandise planning and daily inventory monitoring system to manage inventory and increase inventory turns.

    In fiscal 2001, the Company completed a new 700,000 square-foot distribution center in Dublin, Ga. Through the acquisition of Musicland, the Company also added a 715,000 square-foot distribution center in Franklin, Ind. The Company uses third-party distributors for fulfillment of a portion of the merchandise sold via the Company's Internet sites. The majority of Best Buy's merchandise, except for major appliances, is shipped directly from manufacturers to a distribution center. In addition, Best Buy operates a dedicated distribution center for entertainment software in Minnesota. Major appliances are shipped to satellite warehouses in each major market. In order to meet release dates for selected entertainment software titles and certain computer products, and to improve inventory management, certain merchandise is shipped directly to the stores from manufacturers and distributors. However, Best Buy is dependent upon the distribution centers for inventory storage and shipment of most merchandise to its stores. Management believes that distribution centers can most effectively service Best Buy stores within a 600- to 700-mile radius and that its current distribution centers, including the new center mentioned above, will accommodate expansion plans for the next several years. The Company plans to continue investing in new systems to reduce labor costs and improve accuracy in filling orders.

    Musicland purchases inventory for its stores directly from approximately 1,100 suppliers, exclusive of consignment arrangements. More than 60% of all purchases, net of returns, are made from Musicland's 10 largest suppliers. Musicland does not have any long-term contracts with its suppliers and transacts business principally on an order-by-order basis as is typical throughout the industry. The

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majority of Musicland's inventory is shipped directly to its Fanklin, Ind. distribution center. Similar to Best Buy, Musicland uses an automatic replenishment system for restocking store inventories. E-commerce product orders are also fulfilled at the Franklin distribution center.

Management Information Systems

    The Company's management information systems provide daily information on the Company's sales, gross margins, and inventory levels by store and by stockkeeping unit. These systems allow management to compare current performance against historical performance and the current year's budget. At the end of each day, the Company compiles sales information using point-of-sale bar code scanning. The Company uses Electronic Data Interchange (EDI) with selected suppliers for the more efficient transmittal of purchase orders, shipping notices and invoices. Management believes that the systems the Company has developed have the ability to continue to improve customer service, operational efficiency and management's ability to monitor critical performance indicators. The Company continuously assesses its information systems needs to increase efficiency, improve decision-making and support growth. A major component of the systems development plan for fiscal 2002 includes replacement of the Company's supply chain, financial and human resource systems. The Company is aware of the inherent risks associated with the replacement of these core systems and believes it is taking appropriate action to reduce these risks. The Company expects to implement the replacement systems in a phased approach through fiscal 2003. Additional systems initiatives for fiscal 2002 include improvements in store systems, support for development of systems to support the retail store and e-commerce integration initiatives and continued support for the e-commerce business.

Store Operations

    The Company has developed afollow standardized and detailed system for operating Best Buy storesprocedures called Standard Operating Platform (SOP). The systemSOP includes procedures for inventory management, transaction processing, customer relations, store administration, product sales and merchandise display.

Best Buy store operations are organized into three divisions. Each division is divided into regions and is under the supervision of a senior vice president who oversees store performance through regional managers, each of whom hasvice presidents. Regional vice presidents have responsibility for a number of districts within thetheir respective region. District managers monitor store operations closely and meet regularly with store managers to discuss SOP, merchandising, new product introductions, sales promotions, customer loyalty programs, employee satisfaction surveys and store operating performance. Similar meetings are conducted at the corporate level with divisional and regional management. A senior vice president of retail operations has overall responsibility for retail store processing and operations including labor management. Each district also has a loss prevention manager, with product security personnel employed at each store to control inventory shrinkage. Best Buy controls advertising,Advertising, merchandise buying and pricing, and inventory policies at corporate headquarters.for Best Buy stores are centrally controlled.

Best Buy stores are open seven days and six eveningsa week for approximately 73 hours a week. A store is typically staffed by one manager and four orto five assistant managers and anmanagers. The average staff rangingranges from 65 to 150 people, depending on store size. Approximately 60% of asize and sales volume.

Distribution

Generally, merchandise is shipped to Best Buy store's staff,stores from six distribution centers located in California, Georgia, Minnesota, Ohio, Oklahoma and Virginia. Best Buy stores also currently operate a dedicated distribution center for entertainment software in Minnesota. In fiscal 2004, we expect to open an additional general distribution center in upstate New York. The majority of Best Buy stores’ merchandise, except for major appliances and large-screen televisions, is shipped directly from manufacturers to a distribution center. Major appliances and large-screen televisions are shipped to satellite warehouses in each major market. Best Buy stores are dependent upon the distribution centers for inventory storage and shipment of most merchandise. However, in order to meet release dates for selected products and to improve inventory management, certain merchandise is shipped directly to the stores from manufacturers and distributors. We believe distribution centers can most effectively service Best Buy stores within a 600 to 700-mile radius and that our current distribution centers, and the planned addition of the New York distribution center in fiscal 2004, will accommodate expansion plans for the next several years. On average, Best Buy stores receive product shipments two or three times a week depending on sales volume. Generally, e-commerce merchandise sales are either picked up at Best Buy retail stores, or fulfilled through the distribution centers.

Seasonality

Similar to many retailers, Best Buy stores’ business is seasonal. Revenues and earnings are typically greater during the second half of the fiscal year, which includes product specialiststhe holiday selling season.

Competition

Best Buy stores’ industry is highly competitive. Best Buy stores compete nationally against other consumer electronics retailers, specialty home office retailers, mass merchants, home improvement superstores, entertainment software superstores, electronics boutiques and a support staffgrowing number of direct-to-consumer alternatives. Best Buy stores also compete against independent dealers, regional chain discount stores, wholesale clubs, mail-order and Internet retailers, video rental stores and other specialty retail stores. Mass merchandisers continue to increase their assortment of consumer electronics products—primarily those that are less complex to sell, install and operate. Similarly, large home improvement retailers are expanding their assortment of appliances. In addition, consumers are increasingly downloading entertainment and computer software directly via the Internet.

We believe Best Buy stores’ formats and brand marketing strategies distinguish them from most competitors by positioning Best Buy retail stores as the destination for new technology and entertainment products in a fun, informative and no-pressure shopping environment. Best Buy stores compete by aggressively advertising and emphasizing a broad product assortment, value pricing and financing alternatives. In addition, we believe our e-commerce operations, coupled with the knowledgeable sales associates and service capabilities of Best Buy retail stores, have effectively positioned us to compete successfully despite an increasingly competitive environment.

Magnolia Hi-Fi

Overview

In the fourth quarter of fiscal 2001, we acquired Magnolia Hi-Fi, a retailer of high-end consumer electronics, founded in Seattle in

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1954. At the end of fiscal 2002, Magnolia Hi-Fi operated 13 stores in Washington, Oregon and California that average 10,200 retail square feet and generate average annual sales per store of $7.6 million. Collectively, Magnolia Hi-Fi stores represent approximately 133,000 retail square feet, less than 1% of our total retail square footage.

The following table reconciles Magnolia Hi-Fi stores open at the beginning and end of each fiscal year since the date of acquisition:

*As of the date of acquisition, December 15, 2000.

Merchandise

Magnolia Hi-Fi stores offer audio and video systems for homes, automobiles and businesses, as well as certain consumer electronics and wireless communication devices. Magnolia Hi-Fi also operates a state-of-the-art design center, as well as in-house repair and installation departments. In addition, Magnolia Hi-Fi provides custom home and car installation services.

The following table presents Magnolia Hi-Fi sales, by category, as a percentage of total Magnolia Hi-Fi sales:

Operations

Magnolia Hi-Fi stores are typically managed by a store manager, an audio/video sales manager and a mobile electronics sales manager. Most Magnolia Hi–Fi stores are open seven days a week for 65 to 75 hours a week. Depending on an individual store’s volume, store staffing includes 10 to 28 commissioned sales personnel, two to six commissioned mobile electronic installers, and two to 11 digital product sales personnel, cashiers and customer servicewarehouse personnel. Advertising, merchandise buying and stock handling employees,pricing, and inventory policies for Magnolia Hi-Fi stores are centrally controlled.

Distribution

Magnolia Hi-Fi’s merchandise inventory is employed onreceived and warehoused at its distribution center in Washington as well as a part-time basis. Best Buyregional warehouse in California. All inventory is bar coded and scanned to ensure accurate inventory tracking. In addition, a computerized inventory replenishment program is used to maintain optimal inventory levels at each retail store managerslocation.Merchandise is delivered to retail stores an average of four times each week, via Magnolia Hi-Fi’s in-house distribution system.

Seasonality

Similar to many retailers, Magnolia Hi-Fi’s business is seasonal. Revenues and earnings are paid a salary and havetypically greater during the opportunity to earn bonuses if their stores exceed sales and gross margin goals, meet certain budget criteria in controlling expenses and achieve certain administrative targets.

second half of the fiscal year, which includes the holiday selling season.

 The Best Buy employee development department provides managers

Competition

Magnolia Hi-Fi competes with a variety of tools to teach employeesnational, regional and local retailers, including large consumer electronics superstores, mass merchants and small specialty stores.

Magnolia Hi-Fi has positioned itself between large mass merchants and high-end specialty boutiques. We believe Magnolia Hi-Fi’s superior-quality product offerings, its extensively trained sales staff and its focus on exceptional customer service both before and after the sale, in combination with the leveraging of Best Buy stores’ core skills they needcompetencies, effectively position Magnolia Hi-Fi to meet their performance objectives.current and future competitive challenges.

Musicland Segment

Overview

Musicland, which was acquired in the fourth quarter of fiscal 2001, is one of the largest national retailers of movies, prerecorded music, video games and other entertainment–related products. Its mall-based stores include the Sam Goody and Suncoast brands. In addition, Musicland operates small-market On Cue stores and metropolitan, large–format Media Play stores. At the end of fiscal 2002, Musicland operated 1,321 stores Sales, Inventory,in 49 states, the District of Columbia, the Commonwealth of Puerto Rico and the Virgin Islands, with 8.8 million total retail square feet, or approximately 27% of our total retail square footage. Additional information regarding our

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Musicland operating segment is included in Management’s Discussion and Analysis of Results of Operations and Merchandising managers undergo comprehensive trainingFinancial Condition beginning on page 24 of our Annual Report, contained in their specialty areas, which includeexhibit 13.1 to this report, and is incorporated herein by reference. In addition, selected Musicland segment financial data is included in note 8 of the Notes to Consolidated Financial Statements beginning on page 52 of our Annual Report, contained in exhibit 13.1 to this report and, is incorporated herein by reference.

The following is a general overview of Musicland’s four retail store operations, selling, managerial, trainingconcepts:

Sam Goody - Sam Goody stores are predominantly located in malls and communications skills.average approximately 4,800 retail square feet, although they range in size from 1,000 to 30,000 square feet. At the end of fiscal 2002, we operated 615 Sam Goody stores in 48 states, the District of Columbia, the Commonwealth of Puerto Rico and the Virgin Islands. The total retail sellingsquare footage of Sam Goody stores was approximately 3.0 million square feet, or 9% of our total retail square footage. Sam Goody stores average approximately $1.2 million in annual revenues per location.

Suncoast - Suncoaststores are mall-based and sales support teams receive a thorough orientationaverage approximately 2,400 retail square feet. At the end of fiscal 2002, there were 398 Suncoast stores in 47 states, the District of Columbia and the Commonwealth of Puerto Rico. The total retail square footage of Suncoast stores was approximately 1.0 million square feet, or 3% of our total retail square footage. Suncoast stores average approximately $1.1 million in annual revenues per location.

On Cue - On Cue stores are located in small or rural cities, generally with populations of 10,000 to 30,000, and average approximately 6,100 retail square feet. At the end of fiscal 2002, we operated 232 On Cue stores in 32 states with total retail square footage of approximately 1.4 million square feet, or 4% of our total retail square footage. On Cue stores average approximately $700,000 in annual revenues per location. In fiscal 2003, we announced plans to begin changing the name of On Cue stores to the industry and Best Buy business

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objectives. Sales personnel are trained to ask specific questionsSam Goody name as the result of customers to determine their needs and to present products, accessories and services that meet those expressed needs. Stores hold quarterly team meetings to review store performance, focus, and changes and modificationsbrand recognition research we conducted during fiscal 2002.

Media Play - Media Play is a superstore format retailer located in operating procedures. Best Buy also conducts specialized product training at these quarterly meetings. Best Buy staffs store management positions with both personnel promoted from within the stores and those recruited from outside of Best Buy. In connection with expansion into new markets, Best Buy recruits local management personnel who have valuable knowledge about the new market. The store management development program is designed to help support the increased rate of store growth by developing and integrating new managers who have generally completed a year of training prior to assuming full management responsibility. Continued investments in new technology support the Company's ongoing efforts to improve performance.

    Musiclandmetropolitan markets. Media Play stores are operated independently from Best Buyprimarily in freestanding and strip mall locations in urban and suburban areas and average approximately 45,000 retail square feet. At the end of fiscal 2002, we operated 76 Media Play stores in 19 states with total retail square footage of approximately 3.4 million, or 11% of our total retail square footage. Media Play stores average approximately $7.3 million in annual revenues per location.

The following table reconciles Musicland stores open at the beginning and end of each fiscal year since the date of acquisition:

*As of the date of acquisition, January 31, 2001.

Merchandise

The following is an overview of the merchandise offered at each of Musicland’s four retail store concepts:

Sam Goody - Sam Goody stores generally offer music entertainment products such as compact discs, DVD’s, audiocassettes, music and movie videos, sheet music, music-inspired apparel, posters and other music-related accessories. In fiscal 2002, we launched a new mix of products in Sam Goody stores. We doubled the assortment of DVD movies and introduced video gaming, categories that carry lower profit margins but are expected to generate higher sales growth. We also expanded our assortment of hardware products that play music and movies, a natural extension of Sam Goody’s principal product offerings.

Suncoast - Suncoast stores feature newly released and classic movies, special interest videos and video recordings of popular TV shows. Complementary products include apparel, posters and other products inspired by new releases, as well as blank videotapes, storage cases and other video-related accessories.

On Cue - On Cue stores provide a wide assortment of entertainment products including movies, music, books, computer software, electronics, video games and related products.

Media Play - Media Play offers a large assortment of entertainment products including movies, music, books, computer software, video games, electronics, musical instruments and toys.

The following table presents Musicland sales, by category, as a percentage of total Musicland sales:

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Operations

Sam Goody, Suncoast and On Cue stores are typically managed by a store manager and an assistant manager. Media Play stores are typically managed by a general manager, an assistant general manager and three to five department managers. Most Musicland stores are open from 65 to 80 hours per week, seven days a week, depending on mall hours. Store staffing levels fluctuate with the size of the store and anticipated sales volume.

    Magnolia Hi-Fi Advertising, merchandise buying and pricing, and inventory policies for Musicland stores are centrally controlled.

Distribution

The majority of Musicland’s inventory is shipped from its distribution center located in Indiana. From time to time, in order to meet release dates for selected products and to improve inventory management, certain merchandise is shipped directly to the stores from manufacturers and distributors.

Seasonality

Similar to many retailers, Musicland’s business is seasonal. Revenues and earnings are typically greater during the second half of the fiscal year, which includes the holiday selling season.

Competition

Musicland’s industry is highly competitive. Increased downloading of entertainment and computer software directly via the Internet, the progression of CD recording technology and slumping music sales have all led to more intense competitive conditions. The industry has begun to test various copy-protection techniques as a potential means to mitigate the impact of CD recording technology advancements. Musicland retail stores also operated independently fromcompete with specialty retail chains, mass merchants, bookstores and consumer electronics stores, as well as video rental stores, mail order clubs and various Internet-based retailers.

We believe that Musicland’s convenience-based strategy, service levels and broad product assortment, in combination with the leveraging of Best Buy stores. Thesestores’ core competencies and the re-merchandising strategy, position Musicland to meet current and future competitive challenges.

International Segment

Overview

At the end of fiscal 2002, we operated 95 Future Shop stores in 10 Canadian provinces. The stores average 20,200 retail square feet and produce average annual sales of approximately $15.3 million per store. Future Shop stores collectively represent 1.9 million retail square feet, or 6% of our total retail square footage. Reference is made to Part II, Item 7A., “Quantitative and Qualitative Disclosures About Market Risk,” of this report for a discussion regarding risks associated with foreign operations.

The International segment was established in connection with our acquisition of Future Shop in November of fiscal 2002. At the end of fiscal 2002, Future Shop operated 95 stores and was Canada’s largest consumer electronics retailer. Additional information regarding our International operating segment is included in Management’s Discussion and Analysis of Results of Operations and Financial Condition beginning on page 25 of our Annual Report, contained in exhibit 13.1 to this report, and is incorporated herein by reference. In addition, selected International segment financial data is included in note 8 of the Notes to Consolidated Financial Statements on page 52 of our Annual Report, contained in exhibit 13.1 to this report, and is incorporated herein by reference.

The following table reconciles Future Shop stores open at the beginning and end of each fiscal year since the date of acquisition:

*As of the date of acquisition, November 4, 2001.

Merchandise

Future Shop stores offer a large assortment of home office equipment, consumer electronics, entertainment software and appliances. Home office equipment includes products such as desktop and notebook computers and related peripheral equipment, telephones, wireless communication devices and personal digital assistants. Consumer electronics include products such as television sets, DVD players, cameras, camcorders, VCRs and digital broadcast satellite systems. Entertainment software includes products such as compact discs, video game hardware and software, DVD and VHS movies and computer software. Appliances include major

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appliances such as washers, dryers, ranges, refrigerators, freezers and dishwashers, as well as vacuums, microwaves and housewares.

The following table presents Future Shop sales, by category, as a percentage of total sales:

* Since date of acquisition on November 4, 2001

Operations

Future Shop stores use a standardized operating system. The operating system includes procedures for inventory management, transaction processing, customer relations, store administration, staff training and performance appraisal as well as merchandise display. Advertising, merchandise buying and pricing, and inventory policies for Future Shop stores are centrally controlled.

Future Shop’s store operations are organized into three divisions, each headed by a vice president. Each vice president has several regional managers who closely monitor store operations and meet regularly with store managers to review management and staff training programs, as well as customer feedback and requests, store operating performance and other matters. Meetings involving store management, product managers, advertising, financial and administrative staff, as well as senior regional and global headquarters personnel, are held quarterly to review operating results and to establish future objectives.

Future Shop stores are typically managed byopen seven days a store manager, an audio/video sales manager and a mobile electronics sales manager and one or more warehouse/receiving staff. Most Magnolia Hi-Fi stores are openweek for approximately 7060 to 75 hours a week, seven daysweek. A typical store is staffed by a week. Dependinggeneral manager, several department sales managers, a customer service manager and 35 to 45 associate staff, depending on an individual store's volume, store staffing includessize and additional 12 to 28 sales personnel and 2 to 10 mobile electronic installers.

Credit Policyvolume.

 Approximately one-third

Distribution

The majority of Best Buy customer purchasesFuture Shop’s merchandise, exclusive of appliances, is shipped directly from suppliers to distribution centers in British Columbia and Ontario. Future Shop uses contract carriers to ship merchandise from the distribution centers to retail stores. Appliance sales are paidfulfilled by the distribution centers or by a contracted third-party distributor. Future Shop stores are dependent upon the distribution centers for by cash or check, withinventory storage and shipment of most merchandise. However, in order to meet release dates for selected products, and to improve inventory management, certain merchandise is shipped directly to the remainder paid for by major credit cards orstores from manufacturers and distributors. While Future Shop stores typically receive product shipments twice a week, shipments are accelerated during high sales volume periods.

Seasonality

Similar to many retailers, Future Shop’s business is seasonal. Revenues and earnings are typically greater during the Best Buy private-label credit card. Best Buy uses special financing offers to stimulate sales. Generally, these financing offers allow customers to purchase certain products with repayment terms typically ranging from 90 days to 18 months without a finance charge. The longer financing offers, generally those beyond six months, typically require minimum monthly payments to avoidsecond half of the finance charge. The special financing offers are provided only to customers who qualify for Best Buy's private-label credit card. The private-label credit card allows these customers to obtain financing on purchases of merchandise at Best Buy stores through arrangementsfiscal year, which includes the Company has made with unaffiliated third-party institutions that have consumer credit programs. Best Buy is generally able to qualify a new customer for credit on the spot, typically in less than five minutes. Best Buy sells receivables from private-label credit card sales, without recourse, to unaffiliated third-party institutions. Best Buy receives payment from these institutions within three days following the sale. Sam Goody, Suncoast, On Cue and Media Play stores accept cash, checks and most major credit cards with approximately 60% of customer transactions paid in cash or check. Magnolia Hi-Fi stores also accept cash, checks and most major credit cards with approximately 22% of customer transactions paid in cash or check.holiday selling season.

Competition

    The Company'sFuture Shop’s industry is highly competitive. Alternative channelsFuture Shop competes against a variety of distribution such asCanadian retailers, including major department stores, independent consumer electronics and appliance dealers, mail order distributors, discount stores, warehouse clubs and superstores. In addition, Future Shop competes with Internet-based retailers in Canada and the Internet and factory direct shopping services are expanding, and massUnited States. Mass merchandisers continue to increase their assortment of consumer electronics products—primarily those that are less complex to sell, install and operate. ConsumersSimilarly, large home improvement retailers are expanding their assortment of appliances. In addition, Canadian consumers are increasingly downloading entertainment and computer software directly via the Internet. Additionally, while many retail stores have exited

We believe Future Shop’s low price leadership, large product assortment and focus on customer service in combination with the market, new competition is emerging as evidenced by the entranceleveraging of large home improvement retailers into the major appliance market. The Company believes that its e-commerce initiatives, coupled with product knowledge, brand imaging, expertise and the services capabilities of the retail stores, willBest Buy stores’ core competencies, effectively position the Company

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Future Shop to meet current and future competitive conditions.

Our Employees

At the increased competition from e-commerceend of fiscal 2002, we employed approximately 94,000 full-time, part-time and mail-order retailers as well as mass merchandisers.

    More effective advertising, a more customer-focused product assortment, improved product in-stock levels and better customer service have contributed to Best Buy market share gains over the past year. The Company believes that Best Buy's store formats and brand positioning distinguishes Best Buy from most competitors by positioning the stores as the destination for new technology and entertainment products in a fun, informative and no-pressure shopping environment. Best Buy competes by aggressively advertising and emphasizing a broad product assortment, value pricing, financing alternatives and service.

    The Company currently competes nationally against consumer electronics retailers such as Circuit City and RadioShack; computer superstores such as CompUSA; home office retailers such as Office Depot, Office Max and Staples; mass merchants such as Sears, Wal-Mart and Target; home improvement superstores such as Home Depot and Lowes; entertainment software superstores owned by Tower Records; boutiques such as Tweeter Home Entertainment Group and Ultimate Electronics; and a growing numberseasonal employees across all of direct-to-consumer alternatives. The Company also competes against independent dealers, regional chain discount stores, wholesale clubs, mail-order and Internet retailers, video rental stores and other specialty retail stores.

Employees

    As of March 3, 2001, the Company had approximately 75,000 employees, of whom approximately 42,000 were part-time or seasonal employees.our operating segments.  There are currently no collective bargaining agreements covering any of our employees with the Company's employees exceptexception of unions that unions represent hourly employees at fourteen13 Musicland stores. The Company hasWe have not experienced a strike or work stoppage and management believeswe believe that itswe have favorable employee relations are good.relations.

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ITEM 2. PROPERTIES

Stores, Distribution Centers and Corporate Facilities

Best Buy, Musicland, Future Shop and Magnolia Hi-Fi geographic store locations by state can be foundare included on page 5860 of theour Annual Report, contained in Exhibit 13.1 to this report.report, and are incorporated herein by reference.

Best Buy Segment

Best Buy Stores

At March 3, 2001, the Companyend of fiscal 2002, we operated 419481 Best Buy stores in 41 states totaling approximately 19.021.6 million retail square feet. The Company also operated approximately 1,300 Musicland stores. Essentially all Musicland stores are located in the United States with a total retail square footage of approximately 8.8 million. Musicland stores are primarily in malls and rural locations. The thirteen Magnolia Hi-Fi stores, totaling approximately 100,000 square feet, are located in Washington, Oregon and California.

Best Buy stores are serviced by the following major distribution centers:

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