UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
FORM 10-K

(Mark One)	

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 2, 2002.	
 
OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 
Commission File Number: 1-9595

 

BEST BUY CO., INC.
(Exact Name of Registrant as Specified in its Charter)

Minnesota	 	41-0907483	
(State or other jurisdiction of incorporation or organization)	 	(I.R.S. Employer Identification No.)	
 	 	 	
7075 Flying Cloud Drive	 	 	
Eden Prairie, Minnesota	 	55344	
(Address of principal executive offices)	 	(Zip Code)	
 	 	 	
Registrant’s telephone number (including area code): 952-947-2000	
 
Securities registered pursuant to Section 12(b) of the Act:

Title of each class	 	Name of each exchange on which registered	
Common Stock, par value $.10 per share	 	New York Stock Exchange	
 
Securities registered pursuant to Section 12(g) of the Act: None

 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý   No  o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
The aggregate market value of voting stock held by non-affiliates of the Registrant on May 3, 2002, was approximately $12.700 billion, based on the closing price of $48.07 per share of Common Stock (adjusted for a three-for-two stock split on May 10, 2002) as reported on the New York Stock Exchange-Composite Index. (Voting stock held by the Registrant’s directors and executive officers is excluded). On that date, there were 320,568,397 shares of Common Stock, as adjusted for the stock split, issued and outstanding.

 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Registrant’s Annual Report to Shareholders for the year ended March 2, 2002 (“Annual Report”), are incorporated by reference into Parts I and II.
 
Portions of the Registrant’s Proxy Statement dated June 5, 2002, for the regular meeting of shareholders to be held on June 25, 2002 (“Proxy Statement”), are incorporated by reference into Part III.
 
Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended, provide a “safe harbor” for forward–looking statements to encourage companies to provide prospective information about their companies. With the exception of historical information, the matters discussed in this annual report are forward–looking statements and may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “intend” and “potential.” Such statements reflect our current view with respect to future events and are subject to certain risks, uncertainties and assumptions. A variety of factors could cause our actual results to differ materially from the anticipated results expressed in such forward–looking statements, including, among other things, general economic conditions, acquisitions and development of new businesses, product availability, sales volumes, profit margins, weather, foreign currency fluctuation, availability of suitable real estate locations, and the impact of labor markets and new product introductions on our overall profitability. Readers should review our Current Report on Form 8-K filed May 16, 2001, which describes additional important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements made in this annual report on Form 10-K.
 
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PART I
 
ITEM 1. BUSINESS
 
Overview
We are North America’s No. 1 specialty retailer of consumer electronics, personal computers, entertainment software and appliances with revenues for our fiscal year ended March 2, 2002, of $19.6 billion. We operate retail stores and commercial Web sites under the brand names Best Buy (BestBuy.com), Media Play (MediaPlay.com), On Cue (OnCue.com), Sam Goody (SamGoody.com), Suncoast (Suncoast.com), Magnolia Hi-Fi (MagnoliaHiFi.com) and Future Shop (FutureShop.ca).
 
We began in 1966 as an audio components retailer, and in the early 1980s, with the introduction of the videocassette recorder, expanded into video products. In 1983, we revised our marketing strategy and began using mass-merchandising techniques, which included offering a wider variety of products and operating stores under a “superstore” concept. In 1989, we dramatically changed our method of retailing by introducing a self-service, noncommissioned, discount–style store concept designed to give the customer more control over the purchasing process. The Best Buy store concept, now employed in 481 stores across the United States, has continued to evolve to include more interactive displays and, for certain products, a higher level of customer service, with the latest version including a more effective labor model and improved merchandising. In fiscal 2000, we introduced a small–market Best Buy store concept that serves communities of generally less than 200,000 people and offers merchandise in the same product categories as larger stores, with a product assortment tailored to each respective community. In fiscal 2001, we re-launched Best Buy stores online shopping site, BestBuy.com. Our clicks-and-mortar strategy is designed to empower consumers to research and purchase products seamlessly across the Best Buy retail environment — online or in retail stores. The online site offers products in all of Best Buy stores’ principal product categories except appliances.
 
In 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 150 stores nationwide. However, prior to pursuing an aggressive growth strategy, we believe we must refine the store concept and broaden the scope of products and services currently offered at Magnolia Hi-Fi. Musicland is one of the largest national retailers of movies, prerecorded music, video games and other entertainment–related products with 1,321 stores in 49 states, the District of Columbia, the Commonwealth of Puerto Rico and the Virgin Islands. 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, net of cash acquired, including transaction costs. Future Shop, which currently operates 95 stores, is Canada’s largest consumer electronics retailer and offers product categories similar to that at Best Buy stores. We acquired Future Shop to further our expansion plans, leverage our expertise in consumer electronics retailing and increase shareholder value. The acquisition marked our initial expansion into international operations. Additional information regarding our acquisitions is included in note 2 of the 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.
 
Our vision is to make life fun and easy. 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. We believe our stores offer consumers meaningful advantages in store environment, product value, selection and service, all of which further our objective of achieving a significant market share in the markets we serve. The acquisitions of Musicland, Magnolia Hi-Fi and Future Shop give us access to new distribution channels, more customer visits and the ability to leverage Best Buy stores’ core competencies with their operations. We also expect additional benefits 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 Musicland segment is primarily a mall-based retailer of movies, prerecorded music, video games and other 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 the number of stores open at the end of the fiscal 2002:
 
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 	 	Total Stores
End of
Fiscal 2001	 	Stores
Acquired
Fiscal 2002	 	Stores 
 Opened 
Fiscal 2002	 	Stores
Closed
Fiscal 2002	 	Total Stores
End of
 Fiscal 2002	 	
Best Buy:	 	 	 	 	 	 	 	 	 	 	 	
Best Buy Stores	 	419	 	—	 	62	 	—	 	481	 	
Magnolia Hi-Fi	 	13	 	—	 	—	 	—	 	13	 	
Musicland	 	1,309	 	—	 	51	 	39	 	1,321	 	
International*	 	—	 	91	 	4	 	—	 	95	 	
Total	 	1,741	 	91	 	117	 	39	 	1,910	 	

* 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 Best Buy stores opened in fiscal 2003 are expected to incorporate the features of this latest store format.
 
The following table reconciles Best Buy stores open at the beginning and end of each of the last five fiscal years:

Fiscal Year	 	Stores
Opened	 	Stores
Closed	 	Total Stores At
End of Fiscal Year	 	
Balance Forward	 	n.a.	 	n.a.	 	272	 	
1998	 	13	 	1	 	284	 	
1999	 	28	 	1	 	311	 	
2000	 	47	 	1	 	357	 	
2001	 	62	 	—	 	419	 	
2002	 	62	 	—	 	481	 	
 
Merchandise
Best Buy stores generally offer merchandise in five product categories: consumer electronics, home office, entertainment software, appliances and “other” products. Consumer electronics, Best Buy’s largest category, based on revenues, consists of 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 includes desktop and notebook computers and related peripheral equipment, telephones, wireless communication devices and personal digital assistants. Entertainment software products include compact discs, video game hardware and software, DVD and VHS movies, and computer software. The appliance category includes major appliances such as washers, dryers, ranges, refrigerators, freezers and dishwashers, as well as vacuums, microwaves and housewares. The “other” product category includes extended service contracts, blank recording media, furniture, and other miscellaneous products such as batteries, business cases and storage products.
 
The following table presents Best Buy stores’ sales, by category, as a percentage of total Best Buy stores’ sales:
 
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Product Category	 	Percentage of
Total Sales
Fiscal 2002	 	Percentage of
Total Sales
Fiscal 2001	 	Percentage of
Total Sales
Fiscal 2000	 	
Consumer Electronics	 	33	%	33	%	30	%	
Home Office	 	31	%	34	%	35	%	
Entertainment Software	 	22	%	19	%	19	%	
Appliances	 	6	%	7	%	8	%	
Other	 	8	%	7	%	8	%	
 
Operations
Best Buy stores follow standardized and detailed operating procedures called Standard Operating Platform (SOP). The SOP 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 vice presidents. Regional vice presidents have responsibility for a number of districts within their respective region. District managers monitor store operations closely and meet regularly with store managers to discuss 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. Advertising, merchandise buying and pricing, and inventory policies for Best Buy stores are centrally controlled.
 
Best Buy stores are open seven days a week for approximately 73 hours a week. A store is typically staffed by one manager and four to five assistant managers. The average staff ranges from 65 to 150 people, depending on store size and sales volume.
 
Distribution
Generally, merchandise is shipped to Best Buy 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 the 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 growing 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:

Fiscal Year	 	Stores
Opened	 	Stores
Closed	 	Total Stores At
End of Fiscal Year	 	
Balance Forward*	 	n.a.	 	n.a.	 	13	 	
2002	 	—	 	—	 	13	 	

*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:

Product Category	 	Percentage of
Total Sales
Fiscal 2002	 	
Consumer Electronics	 	80	%	
Home Office	 	4	%	
Accessories	 	6	%	
Other	 	10	%	
 
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 warehouse personnel. Advertising, merchandise buying and pricing, and inventory policies for Magnolia Hi-Fi stores are centrally controlled.
 
Distribution
Magnolia Hi-Fi’s merchandise inventory is received and warehoused at its distribution center in Washington as well as a regional 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 location. 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 typically greater during the second half of the fiscal year, which includes the holiday selling season.
 
Competition
Magnolia Hi-Fi competes with a variety of national, 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 competencies, effectively position Magnolia Hi-Fi to meet 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 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 Financial Condition beginning on page 24 of our Annual Report, contained in exhibit 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 concepts:
 
Sam Goody - Sam Goody stores are predominantly located in malls and 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 square 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 - Suncoast stores are mall-based and average 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 Sam Goody name as the result of brand recognition research we conducted during fiscal 2002.
 
Media Play - Media Play is a superstore format retailer located in metropolitan markets. Media Play stores are operated primarily 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:

Fiscal Year	 	Stores
Opened	 	Stores
Closed	 	Total Stores At
End of Fiscal Year	 	
Balance Forward*	 	n.a.	 	n.a.	 	1,309	 	
2002	 	51	 	39	 	1,321	 	

*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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Product Category	 	Percentage of
Total Sales
Fiscal 2002	 	
Music	 	41	%	
Movies	 	35	%	
Gaming	 	6	%	
Other	 	18	%	
 
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. 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 compete 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’ 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:

Fiscal Year	 	Stores
Opened	 	Stores
Closed	 	Total Stores At
End of Fiscal Year	 	
Balance Forward*	 	n.a.	 	n.a.	 	91	 	
2002	 	4	 	—	 	95	 	

*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:

Product Category	 	Percentage of 
 Total Sales 
 Fiscal 2002*	 	
Home Office	 	39	%	
Consumer Electronics	 	34	%	
Entertainment Software	 	17	%	
Appliances	 	4	%	
Other	 	6	%	

* 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 open seven days a week for approximately 60 to 75 hours a week. A typical store is staffed by a general manager, several department sales managers, a customer service manager and 35 to 45 associate staff, depending on store size and sales volume.
 
Distribution
The majority of Future 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 fulfilled by the distribution centers or by a contracted third-party distributor. Future Shop 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. 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 second half of the fiscal year, which includes the holiday selling season.
 
Competition
Future Shop’s industry is highly competitive. Future Shop competes against a variety of Canadian 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 United States. 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, Canadian consumers are increasingly downloading entertainment and computer software directly via the Internet.
 
We believe Future Shop’s low price leadership, large product assortment and focus on customer service in combination with the leveraging of Best Buy stores’ core competencies, effectively position Future Shop to meet current and future competitive conditions.
 
Our Employees
At the end of fiscal 2002, we employed approximately 94,000 full-time, part-time and seasonal employees across all of our operating segments.  There are currently no collective bargaining agreements covering any of our employees with the exception of unions that represent hourly employees at 13 Musicland stores. We have not experienced a strike or work stoppage and we believe that we have favorable employee 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 are included on page 60 of our Annual Report, contained in Exhibit 13.1 to this report, and are incorporated herein by reference.
 
Best Buy Segment
 
Best Buy Stores
At the end of fiscal 2002, we operated 481 Best Buy stores totaling approximately 21.6 million retail square feet.
 
Best Buy stores are serviced by the following major distribution centers:

Location	 	Square
Footage	 	Owned
or Leased	 	
Findlay, Ohio	 	1,024,000	 	Leased	 	
Staunton, Virginia	 	725,000	 	Leased	 	
Dublin, Georgia	 	742,000	 	Owned	 	
Dinuba, California	 	644,000	 	Owned	 	
Ardmore, Oklahoma	 	440,000	 	Leased	 	
Bloomington, Minnesota	 	425,000	 	Leased	 	
Edina, Minnesota (entertainment software)	 	245,000	 	Leased	 	
 
In addition, Best Buy stores lease space in 20 satellite warehouses in major metropolitan markets for home delivery of major appliances and large–screen televisions. Best Buy stores utilize approximately 2.5 million square feet in these warehouses. In fiscal 2004, we expect to open an additional distribution center in upstate New York.
 
Best Buy Co., Inc.’s principal corporate offices are in two owned facilities aggregating 540,000 square feet in Eden Prairie, Minnesota. In addition to owning these two facilities, we lease an additional 550,000 square feet of office space in close proximity to the main corporate office facility. In fiscal 2002, construction commenced on a new corporate campus in Richfield, Minnesota. The new corporate campus, which will replace existing owned and leased corporate office facilities, is expected to be completed in fiscal 2003.
 
Magnolia Hi-Fi
At the end of fiscal 2002, we operated 13 Magnolia Hi-Fi stores totaling approximately 133,000 retail square feet.
 
Magnolia Hi-Fi leases an 80,000 square-foot distribution, warehouse and office facility in Kent, Washington, of which approximately 54,000 square feet are used for distribution and warehouse operations, with the remainder dedicated to a service department and corporate administrative functions. In addition, Magnolia Hi-Fi utilizes a 13,000 square-foot leased regional warehouse in Hayward, California.
 
Musicland Segment
At the end of fiscal 2002, we operated 1,321 Musicland stores totaling approximately 8.8 million retail square feet.
 
Musicland’s stores are serviced by a 715,000 square-foot owned distribution facility in Franklin, Indiana.
 
Musicland’s corporate offices are located in a 94,000 square-foot owned facility in Minnetonka, Minnesota. Musicland will be headquartered in Richfield, Minnesota upon the expected completion of the new corporate campus in fiscal 2003.
 
International Segment
At the end of fiscal 2002, we operated 95 Future Shop stores totaling approximately 1.9 million square feet.
 
Future Shop leases two distribution centers located in Delta, British Columbia and Brampton, Ontario. Substantially all of Future Shop’s merchandise, other than appliances, is distributed from these two distribution centers, which total 288,000 square feet and 418,000 square feet, respectively. Appliance sales in western Canada are fulfilled by the distribution center in British Columbia; however, Future Shop contracts with a third-party distributor to warehouse and ship appliance inventory in other parts of Canada, primarily Ontario and Alberta.
 
Future Shop’s corporate offices are located in a 141,000 square-foot leased facility in Burnaby, British Columbia.
 
Operating Leases
Essentially all retail stores and most distribution facilities are leased. Terms of the lease agreements generally range from three to 20 years. Most of the leases contain renewal options and escalation clauses. Additional information regarding operating leases is
 
10

 
included in note 5 of the Notes to Consolidated Financial Statements beginning on page 49 of our Annual Report, contained in exhibit 13.1 to this report, and is incorporated herein by reference.
 
ITEM 3. LEGAL PROCEEDINGS
 
We are involved in various legal proceedings arising during the normal course of conducting business. The resolution of those proceedings is not expected to have a material impact on our results of operations and financial condition.
 
Our Executive Officers are as follows:

Name	 	Age	 	Position With the Company	 	Years
With the
Company	 	
Richard M. Schulze	 	61	 	Founder, Chairman and Chief Executive Officer	 	36	 	
Bradbury H. Anderson	 	52	 	Vice Chairman	 	29	 	
Allen U. Lenzmeier	 	58	 	President and Chief Operating Officer	 	18	 	
Brian J. Dunn	 	42	 	Executive Vice President — Retail Sales	 	17	 	
Michael A. Linton	 	45	 	Executive Vice President and Chief Marketing Officer	 	3	 	
Marc D. Gordon	 	41	 	Executive Vice President and Chief Information Officer	 	4	 	
Darren R. Jackson	 	37	 	Executive Vice President — Finance and Treasury, and Chief Financial Officer	 	2	 	
Michael P. Keskey	 	47	 	President — Best Buy Stores	 	14	 	
Michael London	 	53	 	Executive Vice President and General Merchandise Manager	 	6	 	
George Z. Lopuch	 	51	 	Executive Vice President — Strategic Planning	 	5	 	
Philip J. Schoonover	 	42	 	Executive Vice President — Business Development	 	8	 	
John C. Walden	 	42	 	Executive Vice President — Human Capital and Leadership	 	3	 	
 
Richard M. Schulze has been an officer and director from our inception in 1966 and currently is Chairman of the Board and Chief Executive Officer. Effective June 30, 2002, Mr. Schulze will relinquish the duties of Chief Executive Officer while continuing to serve as Chairman of the Board. Mr. Schulze is also a trustee of the University of St. Thomas, a member of the Board of Overseers at the Carlson School of Management at the University of Minnesota and a director of Twin Cities Public Television, Inc.
 
Bradbury H. Anderson is currently our Vice Chairman, having previously served as President and Chief Operating Officer since April 1991. Mr. Anderson has been a director since 1986. Effective June 30, 2002, Mr. Anderson will assume the responsibilities of Chief Executive Officer. Mr. Anderson has been employed in various capacities with us since 1973.
 
Allen U. Lenzmeier was named President and Chief Operating Officer in March 2002. Mr. Lenzmeier has been a director since 2001. Mr. Lenzmeier joined us in 1984 as Vice President of Finance and Operations. He was named Senior Vice President in 1986, promoted to Chief Financial Officer and Executive Vice President in 1991, and then promoted to President of Best Buy Retail Stores in 2001. He is a national trustee for the Boys and Girls Clubs of the Twin Cities and serves on the Business Advisory Council at Minnesota State University.
 
Brian J. Dunn was named Executive Vice President — Retail Sales in March 2002. Mr. Dunn joined us in 1985 and has held positions as senior vice president, regional vice president, regional manger, district manager and store manager.
 
Marc D. Gordon was named Executive Vice President and Chief Information Officer in 2001. He is responsible for information systems, logistics and the legal department. Mr. Gordon joined us in 1998 and served as Senior Vice President - Information Systems and Chief Information Officer. Prior to that, Mr. Gordon had experience in the retail information systems area, most recently for West Marine Products, a West Coast–based specialty retailer/wholesaler of marine products. Mr. Gordon also served as senior manager with Accenture, a principal with a Boston management consulting firm and vice president of information systems with Timberland Company.
 
Darren R. Jackson was named Executive Vice President — Finance and Treasury, and Chief Financial Officer in April 2002. Mr. Jackson joined us in 2000 as Senior Vice President - Finance and Treasurer and was promoted to Chief Financial Officer in 2001. Prior to that, Mr. Jackson served as chief financial officer of the Full-line Store Division at Nordstrom, Inc. and as chief financial officer of Carson Pirie Scott & Co. Inc. A certified public accountant, Mr. Jackson has 13 years of experience in the retailing industry.
 
11

 
Michael P. Keskey was promoted to President of Best Buy Stores in February 2002. Mr. Keskey was promoted to Executive Vice President — Retail Sales in 2001. Prior to that, he had served as Senior Vice President — Retail Sales since 1997. Mr. Keskey joined us in 1988 and has held positions as Vice President — Sales, regional manager, district manager and store manager.
 
Michael A. Linton was promoted to Executive Vice President and Chief Marketing Officer in March 2002. Mr. Linton joined us in 1999 as Senior Vice President — Strategic Marketing. Prior to that, Mr. Linton held positions as vice president of marketing at Remington Products Corporation, vice president and general manager of a product category at James River Corporation and a general manager at Progressive Insurance. Mr. Linton began his career at The Proctor & Gamble Company in brand management.
 
Michael London was promoted to Executive Vice President and General Merchandise Manager in 2001. Prior to that, he served as Senior Vice President - General Merchandise. Mr. London joined us in 1996 as Vice President - General Merchandise. Prior to joining us, Mr. London was a senior vice president of NordicTrack, a division of the CML Group, Inc., and executive vice president for Central Tractor Farm & Country.
 
George Z. Lopuch was named Executive Vice President - Strategic Planning in 2001. Mr. Lopuch joined us in 1998 as Senior Vice President - Corporate Strategic Planning. Prior to that, Mr. Lopuch was a senior vice president of corporate strategic planning and research at SuperValu, Inc.
 
Philip J. Schoonover was named Executive Vice President — Business Development in February 2002. He was promoted to Executive Vice President of Digital Technology Solutions in February 2001 after having served for five years as Senior Vice President - Merchandising. Prior to joining us in 1995, Mr. Schoonover was an executive vice president for TOPS Appliance City.
 
John C. Walden was named Executive Vice President of Human Capital and Leadership in February 2002. Mr. Walden served as President of our Internet division, BestBuy.com, from 1999 to 2002. Prior to joining us Mr. Walden served as chief operating officer of Peapod, Inc., an Internet retailer of groceries. Mr. Walden has also held executive positions with Ameritech Corporation and Storage Technology Corporation, and practiced corporate and securities law with Sidley, Austin, Brown and Wood LLP.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None.
 
PART II
 
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
The information set forth under the caption “Common Stock Prices” on page 33 of the Annual Report is incorporated herein by reference.
 
ITEM 6. SELECTED FINANCIAL DATA
 
The information set forth under the caption “10-Year Financial Highlights” on pages 18 and 19 of the Annual Report for the years 1998 through 2002 is incorporated herein by reference.
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 
The information given under the caption “Management’s Discussion and Analysis of Results of Operations and Financial Condition” on pages 20 through 33 of the Annual Report is incorporated herein by reference.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Our debt is not subject to material interest rate volatility risk. The rates on a substantial portion of our debt may be reset, but not more than one percentage point higher than the current rates. If the rates on the debt were to be reset one percentage point higher, annual interest expense would increase by approximately $8 million. We do not manage the risk through the use of derivative instruments.
 
We have market risk arising from changes in foreign currency exchange rates as a result of our acquisition of Future Shop, in Canada, in November fiscal 2002. At this time, we do not manage the risk through the use of derivative instruments. A 10% adverse change would not have a significant impact on our results of operations or financial position.
 
12

 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The financial statements required by this Item, listed below, are included in the Annual Report, contained in exhibit 13.1 to this report, on the pages indicated below and are expressly incorporated herein by this reference.

 	Page No .	
Consolidated balance sheets as of March 2, 2002 and March 3, 2001	34-35	
For the fiscal years ended March 2, 2002; March 3, 2001 and Feb. 26, 2000	 	
Consolidated statements of earnings	36	
Consolidated statements of cash flows	37	
Consolidated statements of changes in shareholders’ equity	38	
Notes to consolidated financial statements	39-54	
Independent auditor’s report	55	
 
Condensed Consolidating Financial Information
In fiscal 2002, we completed two private offerings of 20-year convertible debentures. The convertible debentures are guaranteed by Best Buy Stores, L.P., our wholly-owned subsidiary.  At March 2, 2002, a total of approximately $743 million related to these debentures was outstanding.
 
Additional information regarding the convertible debentures is included in note 3 of the Notes to Consolidated Financial Statements beginning on page 43 of the Annual Report, contained in exhibit 13.1 to this report, and is incorporated herein by reference.
 
The following tables present condensed consolidating balance sheets for the fiscal years ended March 2, 2002 and March 3, 2001, and condensed consolidating statements of earnings and cash flows for the fiscal years ended March 2, 2002; March 3, 2001 and February 26, 2000:
 
Condensed Consolidating Balance Sheets
As of March 2, 2002
 
$ in millions

 	 	Best Buy 
Co., Inc.	 	Guarantor 
Subsidiary	 	Non-Guarantor 
Subsidiaries	 	Eliminations	 	Consolidated	 	
Assets	 	 	 	 	 	 	 	 	 	 	 	
Current Assets	 	 	 	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	1,823	 	$	29	 	$	3	 	$	—	 	$	1,855	 	
Receivables	 	207	 	—	 	42	 	(2	)	247	 	
Recoverable costs from developed properties	 	79	 	—	 	—	 	—	 	79	 	
Merchandise inventories	 	—	 	1,711	 	549	 	(2	)	2,258	 	
Intercompany receivable	 	1,071	 	—	 	—	 	(1,071	)	—	 	
Intercompany note receivable	 	500	 	—	 	—	 	(500	)	—	 	
Other current assets	 	488	 	—	 	65	 	(381	)	172	 	
Total current assets	 	4,168	 	1,740	 	659	 	(1,956	)	4,611	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Net Property and Equipment	 	577	 	934	 	386	 	—	 	1,897	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Goodwill, Net	 	—	 	—	 	773	 	—	 	773	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Other Assets	 	69	 	11	 	14	 	—	 	94	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Investments in Subsidiaries	 	1,045	 	—	 	—	 	(1,045	)	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Total Assets	 	$	5,859	 	$	2,685	 	$	1,832	 	$	(3,001	)	$	7,375	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities and Shareholders’ Equity	 	 	 	 	 	 	 	 	 	 	 	
Current Liabilities	 	 	 	 	 	 	 	 	 	 	 	
Accounts payable	 	$	2,037	 	$	—	 	$	416	 	$	(4	)	$	2,449	 	
Accrued compensation and related expenses	 	81	 	71	 	101	 	—	 	253	 	
Accrued liabilities	 	157	 	384	 	229	 	—	 	770	 	
Accrued income taxes	 	—	 	445	 	187	 	(381	)	251	 	
Current portion of long-term debt	 	2	 	—	 	5	 	—	 	7	 	
Intercompany payable	 	—	 	280	 	791	 	(1,071	)	—	 	
Intercompany note payable	 	—	 	500	 	—	 	(500	)	—	 	
Total current liabilities	 	2,277	 	1,680	 	1,729	 	(1,956	)	3,730	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Long-Term Liabilities	 	261	 	44	 	6	 	—	 	311	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Long-Term Debt	 	800	 	—	 	13	 	—	 	813	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Shareholders’ Equity	 	2,521	 	961	 	84	 	(1,045	)	2,521	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Total Liabilities and Shareholders’ Equity	 	$	5,859	 	$	2,685	 	$	1,832	 	$	(3,001	)	$	7,375	 	
 
13

 
Condensed Consolidating Balance Sheets
As of March 3, 2001
 
$ in millions

 	 	Best Buy 
Co., Inc.	 	Guarantor 
Subsidiary	 	Non-Guarantor 
Subsidiaries	 	Eliminations	 	Consolidated	 	
Assets	 	 	 	 	 	 	 	 	 	 	 	
Current Assets	 	 	 	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	716	 	$	27	 	$	4	 	$	—	 	$	747	 	
Receivables	 	198	 	—	 	11	 	—	 	209	 	
Recoverable costs from developed properties	 	104	 	—	 	—	 	—	 	104	 	
Merchandise inventories	 	48	 	1,313	 	406	 	—	 	1,767	 	
Intercompany receivable	 	574	 	—	 	189	 	(763	)	—	 	
Intercompany note receivable	 	500	 	14	 	—	 	(514	)	—	 	
Other current assets	 	202	 	—	 	49	 	(149	)	102	 	
Total current assets	 	2,342	 	1,354	 	659	 	(1,426	)	2,929	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Net Property and Equipment	 	305	 	862	 	277	 	—	 	1,444	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Goodwill, Net	 	—	 	—	 	385	 	—	 	385	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Other Assets	 	48	 	12	 	22	 	—	 	82	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Investments in Subsidiaries	 	1,013	 	—	 	—	 	(1,013	)	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Total Assets	 	$	3,708	 	$	2,228	 	$	1,343	 	$	(2,439	)	$	4,840	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities and Shareholders’ Equity	 	 	 	 	 	 	 	 	 	 	 	
Current Liabilities	 	 	 	 	 	 	 	 	 	 	 	
Accounts payable	 	$	1,467	 	$	—	 	$	306	 	$	—	 	$	1,773	 	
Accrued compensation and related expenses	 	119	 	—	 	35	 	—	 	154	 	
Accrued liabilities	 	177	 	238	 	131	 	—	 	546	 	
Accrued income taxes	 	—	 	170	 	106	 	(149	)	127	 	
Current portion of long-term debt	 	4	 	—	 	111	 	—	 	115	 	
Intercompany payable	 	—	 	763	 	—	 	(763	)	—	 	
Intercompany note payable	 	14	 	500	 	—	 	(514	)	—	 	
Total current liabilities	 	1,781	 	1,671	 	689	 	(1,426	)	2,715	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Long-Term Liabilities	 	83	 	37	 	2	 	—	 	122	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Long-Term Debt	 	22	 	—	 	159	 	—	 	181	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Shareholders’ Equity	 	1,822	 	520	 	493	 	(1,013	)	1,822	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Total Liabilities and Shareholders’ Equity	 	$	3,708	 	$	2,228	 	$	1,343	 	$	(2,439	)	$	4,840	 	
 
14

 
Condensed Consolidating Statements of Earnings
For the Fiscal Year Ended March 2, 2002
 
$ in millions

 	 	Best Buy 
Co., Inc.	 	Guarantor 
Subsidiary	 	Non-Guarantor 
Subsidiaries	 	Eliminations	 	Consolidated	 	
Revenues	 	$	3	 	$	31,381	 	$	3,117	 	$	(14,904	)	$	19,597	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Cost of goods sold	 	1	 	27,805	 	1,919	 	(14,558	)	15,167	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Gross profit	 	2	 	3,576	 	1,198	 	(346	)	4,430	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Selling, general and administrative expenses	 	86	 	2,827	 	925	 	(345	)	3,493	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Operating (loss) income	 	(84	)	749	 	273	 	(1	)	937	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income (expense)	 	79	 	(63	)	(17	)	—	 	(1	)	
 	 	 	 	 	 	 	 	 	 	 	 	
Equity in earnings of subsidiaries	 	574	 	—	 	—	 	(574	)	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Earnings (loss) before income tax expense	 	569	 	686	 	256	 	(575	)	936	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Income tax (benefit) expense	 	(1	)	268	 	100	 	(1	)	366	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Net earnings (loss)	 	$	570	 	$	418	 	$	156	 	$	(574	)	$	570	 	
 
Condensed Consolidating Statements of Earnings
For the Fiscal Year Ended March 3, 2001
 
$ in millions

 	 	Best Buy 
Co., Inc.	 	Guarantor 
Subsidiary	 	Non-Guarantor 
Subsidiaries	 	Eliminations	 	Consolidated	 	
Revenues	 	$	394	 	$	14,696	 	$	463	 	$	(226)	 	$	15,327	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Cost of goods sold	 	178	 	11,911	 	201	 	(22	)	12,268	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Gross profit	 	216	 	2,785	 	262	 	(204	)	3,059	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Selling, general and administrative expenses	 	41	 	2,427	 	191	 	(204	)	2,455	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Operating income	 	175	 	358	 	71	 	—	 	604	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income (expense)	 	139	 	(117	)	15	 	—	 	37	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Equity in earnings of subsidiaries	 	202	 	—	 	—	 	(202	)	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Earnings (loss) before income tax expense	 	516	 	241	 	86	 	(202	)	641	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Income tax expense	 	120	 	92	 	33	 	—	 	245	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Net earnings (loss)	 	$	396	 	$	149	 	$	53	 	$	(202	)	$	396	 	
 
15

 
Condensed Consolidating Statements of Earnings
For the Fiscal Year Ended February 26, 2000
 
$ in millions

 	 	Best Buy 
Co., Inc.	 	Guarantor 
Subsidiary	 	Non-Guarantor 
Subsidiaries	 	Eliminations	 	Consolidated	 	
Revenues	 	$	365	 	$	12,129	 	$	188	 	$	(188	)	$	12,494	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Cost of goods sold	 	189	 	9,912	 	16	 	(16	)	10,101	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Gross profit	 	176	 	2,217	 	172	 	(172	)	2,393	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Selling, general and administrative expenses	 	78	 	1,938	 	10	 	(172	)	1,854	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Operating income	 	98	 	279	 	162	 	—	 	539	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income (expense)	 	107	 	(96	)	13	 	—	 	24	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Equity in earnings of subsidiaries	 	221	 	—	 	 	 	(221	)	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Earnings (loss) before income tax expense	 	426	 	183	 	175	 	(221	)	563	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Income tax expense	 	79	 	70	 	67	 	—	 	216	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Net earnings (loss)	 	$	347	 	$	113	 	$	108	 	$	(221	)	$	347	 	
 
Condensed Consolidated Statements of Cash Flows
For the Fiscal Year Ended March 2, 2002
 
$ in millions

 	 	Best Buy 
Co., Inc.	 	Guarantor 
Subsidiary	 	Non-Guarantor 
Subsidiaries	 	Eliminations	 	Consolidated	 	
Total cash provided by operating activities	 	$	570	 	$	710	 	$	298	 	$	—	 	$	1,578	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Investing activities	 	 	 	 	 	 	 	 	 	 	 	
Additions to property and equipment	 	(302	)	(239	)	(86	)	—	 	(627	)	
Acquisitions of businesses, net of cash acquired	 	—	 	—	 	(368	)	—	 	(368	)	
Other, net	 	24	 	—	 	6	 	—	 	30	 	
Total cash used in investing activities	 	(278	)	(239	)	(448	)	—	 	(965	)	
 	 	 	 	 	 	 	 	 	 	 	 	
Financing activities	 	 	 	 	 	 	 	 	 	 	 	
Long-term debt payments	 	(7	)	—	 	(272	)	—	 	(279	)	
Issuance of common stock	 	48	 	—	 	—	 	—	 	48	 	
Net proceeds from issuance of long-term debt	 	726	 	—	 	—	 	—	 	726	 	
Change in intercompany receivable/payable	 	48	 	(469	)	421	 	—	 	—	 	
Total cash provided by (used in) financing activities	 	815	 	(469	) 	149	 	—	 	495	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Increase (decrease) in cash and cash equivalents	 	1,107	 	2	 	(1	)	—	 	1,108	 	
Cash and cash equivalents at beginning of year	 	716	 	27	 	4	 	—	 	747	 	
Cash and cash equivalents at end of year	 	$	1,823	 	$	29	 	$	3	 	$	—	 	$	1,855	 	
 
16

 
Condensed Consolidated Statements of Cash Flows
For the Fiscal Year Ended March 3, 2001
 
$ in millions

 	 	Best Buy
Co., Inc.	 	Guarantor 
Subsidiary	 	Non-Guarantor 
Subsidiaries	 	Eliminations	 	Consolidated	 	
Total cash provided by operating activities	 	$	495	 	$	264	 	$	49	 	$	—	 	$	808	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Investing activities	 	 	 	 	 	 	 	 	 	 	 	
Additions to property and equipment	 	(143	)	(491	)	(24	)	—	 	(658	)	
Acquisitions of businesses, net of cash acquired	 	—	 	—	 	(326	)	—	 	(326	)	
Investment in subsidiaries	 	(513	)	 	 	 	 	513	 	—	 	
Other, net	 	(47	)	(1	)	2	 	—	 	(46	)	
Total cash used in investing activities	 	(703	)	(492	)	(348	)	513	 	(1,030	)	
 	 	 	 	 	 	 	 	 	 	 	 	
Financing activities	 	 	 	 	 	 	 	 	 	 	 	
Long-term debt payments	 	(15	)	—	 	(2	)	—	 	(17	)	
Issuance of common stock	 	235	 	—	 	—	 	—	 	235	 	
Investment by parent	 	—	 	—	 	513	 	(513	) 	—	 	
Change in intercompany receivable/payable	 	(2	)	210	 	(208	)	—	 	—	 	
Total cash provided by (used in) financing activities	 	$	218	 	210	 	303	 	(513	) 	218	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Increase (decrease) in cash and cash equivalents	 	10	 	(18	)	4	 	—	 	(4	)	
Cash and cash equivalents at beginning of year	 	706	 	45	 	—	 	—	 	751	 	
Cash and cash equivalents at end of year	 	$	716	 	$	27	 	$	4	 	$	—	 	$	747	 	
 
Condensed Consolidated Statements of Cash Flows
For the Fiscal Year Ended February 26, 2000
 
$ in millions

 	 	Best Buy 
Co., Inc.	 	Guarantor 
Subsidiary	 	Non-Guarantor 
Subsidiaries	 	Eliminations	 	Consolidated	 	
Total cash provided by (used in) operating activities	 	$	834	 	$	(54	)	$	(4	)	$	—	 	$	776	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Investing activities	 	 	 	 	 	 	 	 	 	 	 	
Additions to property and equipment	 	(97	)	(263	)	(1	)	—	 	(361	)	
Other, net	 	(30	)	(11	)	(14	)	—	 	(55	)	
Total cash used in investing activities	 	(127	)	(274	)	(15	)	—	 	(416	)	
 	 	 	 	 	 	 	 	 	 	 	 	
Financing activities	 	 	 	 	 	 	 	 	 	 	 	
Long-term debt payments	 	(20	)	(10	)	—	 	—	 	(30	)	
Issuance of common stock	 	32	 	—	 	—	 	—	 	32	 	
Change in intercompany receivable/payable	 	(368	)	349	 	19	 	—	 	—	 	
Repurchase of common stock	 	(397	)	—	 	—	 	—	 	(397	)	
Total cash (used in) provided by financing activities	 	(753	)	339	 	19	 	—	 	(395	)	
 	 	 	 	 	 	 	 	 	 	 	 	
(Decrease) increase in cash and cash equivalents	 	(46	)	11	 	—	 	—	 	(35	)	
Cash and cash equivalents at beginning of year	 	752	 	34	 	—	 	—	 	786	 	
Cash and cash equivalents at end of year	 	$	706	 	$	45	 	$	—	 	$	—	 	$	751	 	
 
17

 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
The information provided under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Nominees and Directors” on pages 6 through 10 of the Proxy Statement is incorporated herein by reference.
 
ITEM 11. EXECUTIVE COMPENSATION
 
The information set forth under the caption “Executive Compensation” on pages 12 through 22 of the Proxy Statement is incorporated herein by reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
The information provided under the caption “Security Ownership of Certain Beneficial Owners and Management” on pages 6 through 10 of the Proxy Statement is incorporated herein by reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
The information found under the captions “Nominees and Directors” and “Certain Transactions” on pages 9 through 11 of the Proxy Statement is incorporated herein by reference.
 
PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
(a)                                   The following documents are filed as part of this report:
 
1.                                        Financial Statements:
 
All financial statements as set forth under Item 8 of this Report.
 
2.                                        Supplementary Financial Statement Schedules:
 
Schedule II - Valuation and Qualifying Accounts
 
18

 
3.                                        Exhibits:

Number	 	Description	 	Method of Filing	 	
3.1	 	Amended and Restated Articles of Incorporation, as amended	 	(3	)	
3.2	 	Amended and Restated By-Laws, as amended	 	(1,2,4,5,6,15	)	
4.1	 	Credit Agreement with U.S. Bank National Association dated March 21, 2002	 	(1	)	
4.2	 	Indenture by and among Best Buy Co., Inc. the subsidiary guarantors named therein and Wells Fargo Bank Minnesota, National Association, dated June 27, 2001	 	(16	)	
4.3	 	Indenture by and among Best Buy Co., Inc., Best Buy Stores, L.P. and Wells Fargo Bank Minnesota, National Association, dated January 15, 2002	 	(17	)	
10.1	 	1987 Employee Non-Qualified Stock Option Plan, as amended	 	(10	)	
10.2	 	1987 Directors’ Non-Qualified Stock Option Plan, as amended	 	(11	)	
10.3	 	1994 Full-Time Employee Non-Qualified Stock Option Plan, as amended	 	(11	)	
10.4	 	1997 Employee Non-Qualified Stock Option Plan, as amended	 	(9	)	
10.5	 	1997 Directors’ Non-Qualified Stock Option Plan, as amended	 	(12	)	
10.6	 	Best Buy Co., Inc. Deferred Compensation Plan, as amended	 	(14	)	
10.7	 	Resolutions of the Board of Directors adopting the EVA® Incentive Program for senior officers	 	(7	)	
10.8	 	2000 Restricted Stock Award Plan, as amended	 	(1	)	
10.9	 	The Assumed Musicland 1988 Stock Option Plan of Best Buy Co., Inc.	 	(13	)	
10.10	 	The Assumed Musicland 1992 Stock Option Plan of Best Buy Co., Inc.	 	(13	)	
10.11	 	The Assumed Musicland 1994 Stock Option Plan of Best Buy Co., Inc.	 	(13	)	
10.12	 	The Assumed Musicland 1998 Stock Incentive Plan of Best Buy Co., Inc.	 	(13	)	
12.1	 	Statements re: Computations of Ratios	 	(1	)	
13.1	 	2002 Annual Report to Shareholders	 	(1	)	
21.1	 	Subsidiaries of the Registrant	 	(1	)	
23.1	 	Consent of Ernst & Young LLP	 	(1	)	

(1)                                   Document is filed herewith.
 
(2)                                   Exhibit so marked was filed with the Securities and Exchange Commission (SEC) on May 23, 1995, as an exhibit to the Form 10-K of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.
 
(3)                                   Exhibit so marked was filed with the SEC on May 20, 1994, as an exhibit to the Form 10-K of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.
 
(4)                                   Exhibit so marked was filed with the SEC on Nov. 12, 1991, as an exhibit to the Registration Statement on Form S-3 (Registration No. 33-43065) of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.
 
(5)                                   Exhibit so marked was filed with the SEC on Jan. 13, 1992, as an exhibit to Form 10-Q of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.
 
(6)                                   Exhibit so marked was filed with the SEC on May 28, 1997, as an exhibit to the Form 10-K of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.
 
(7)                                   Exhibit so marked was filed with the SEC on April 29, 1999, as an exhibit to the preliminary Proxy Statement of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.
 
(8)                                   Exhibit so marked was filed with the SEC on October 12, 1999, as an exhibit to Form 10-Q of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.
 
(9)                                   Exhibit so marked was filed on August 20, 1998, as an exhibit to the Registration Statement on Form S-8 (Registration No. 333-61897) of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.
 
(10)                             Exhibit so marked was filed with the SEC on May 29, 1996, as an exhibit to the Form 10-K of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.
 
(11)                             Exhibit so marked was filed with the SEC on May 27, 1999, as an exhibit to the Form 10-K of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.
 
(12)                             Exhibit so marked was filed with the SEC on January 11, 2000, as an exhibit to the Form 10-Q of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.
 
(13)                             Exhibit so marked was filed with the SEC on February 23, 2001, as an exhibit to the Form S-8 (Registration No. 333-56146) of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.
 
(14)                             Exhibit so marked was filed with the SEC on May 24, 2000, as an exhibit to the Form 10-K of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.
 
(15)                             Exhibit so marked was filed with the SEC on June 1, 2001, as an exhibit to the Form 10-K of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.
 
(16)                             Exhibit so marked was filed with the SEC on September 24, 2001, as an exhibit to the Registration Statement on Form S-3 (Registration No. 333-70060) of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.
 
(17)                             Exhibit so marked was filed with the SEC on February 28, 2002, as an exhibit to the Registration Statement on Form S-3 (Registration No. 333-83562) of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.
 
19

 
Pursuant to Item 601(b)(4)(iii) of Regulation S-K under the Securities Act of 1933, the Registrant has not filed as exhibits to the Form 10-K certain instruments with respect to long-term debt under which the amount of securities authorized does not exceed 10% of the total assets of the Registrant. The Registrant hereby agrees to furnish copies of all such instruments to the Commission upon request.
 
(b)                                  Reports on Form 8-K:
 
(1)                                   Announcement of the issuance of two press releases in connection with fiscal December 2002 sales results, updated expectations for fourth quarter fiscal 2002 financial results and initial guidance for fiscal 2003 financial results, filed on January 9, 2002.
 
(2)                                   Announcement of executive management changes, filed on February 27, 2002.
 
(3)                                   Announcement of issuance of press release regarding financial outlook for the fourth quarter fiscal 2002, filed on February 28, 2002.
 
20

 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 	"%34 "59 #/ ￠).#	 	
 	(Registrant)	 	
 	By:	/s/ Richard M. Schulze	 	
 	 	Chairman and Chief Executive Officer	

Dated: May 30, 2002
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on May 30, 2002.

 	 	Chairman, Chief Executive Officer and Director
(principal executive officer)	
/s/ Richard M. Schulze			
Richard M. Schulze	 	 	
 	 	 	
 	 	Executive Vice President—Finance and Treasury, and Chief Financial Officer (principal financial and accounting officer)	
/s/ Darren R. Jackson			
Darren R. Jackson	 	 	
 	 	 	
/s/ Bradbury H. Anderson	 	Director	
Bradbury H. Anderson	 	 	
 	 	 	
/s/ Robert T. Blanchard	 	Director	
Robert T. Blanchard	 	 	
 	 	 	
 	 	Director	
Jack W. Eugster	 	 	
 	 	 	
/s/ Kathy J. Higgins Victor	 	Director	
Kathy J. Higgins Victor	 	 	
 	 	 	
/s/ Elliot S. Kaplan	 	Director	
Elliot S. Kaplan	 	 	
 	 	 	
/s/ Allen U. Lenzmeier	 	Director	
Allen U. Lenzmeier	 	 	
 	 	 	
/s/ Mark C. Thompson	 	Director	
Mark C. Thompson	 	 	
 	 	 	
/s/ Frank D. Trestman	 	Director	
Frank D. Trestman	 	 	
 	 	 	
/s/ Hatim A. Tyabji	 	Director	
Hatim A. Tyabji	 	 	
 	 	 	
/s/ James C. Wetherbe	 	Director	
James C. Wetherbe	 	

21

 
Schedule II
Valuation and Qualifying Accounts
($ in millions)

 	 	Balance at
Beginning
of Period	 	Charged to
Expenses Or
Other Accounts	 	Other*	 	Balance At
End of period	 	
Fiscal Year Ended March 2, 2002	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	
Allowance for doubtful accounts	 	$	1	 	$	7	 	$	(5	)	$	3	 	
 	 	 	 	 	 	 	 	 	 	
Fiscal Year Ended March 3, 2001	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	
Allowance for doubtful accounts	 	$	1	 	$	5	 	$	(5	)	$	1	 	
 	 	 	 	 	 	 	 	 	 	
Fiscal Year Ended February 26, 2000	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	
Allowance for doubtful accounts	 	$	1	 	$	2	 	$	(2	)	$	1	 	

* Other includes bad debt write-offs and recoveries, as well as reserves associated with acquired companies.
 
22

Exhibit 3.2
 
AMENDMENT
TO THE BY-LAWS
OF
BEST BUY CO., INC.
 
ARTICLE IV
OFFICERS
 
Section 1
ELECTION, TERM;
NUMBER .
 
The officers of the corporation shall be elected or appointed by the Board of Directors.  Officers of the corporation shall consist of officers having responsibilities with respect to the corporation and all of its subsidiaries, as well as officers having responsibility only with respect to one or more designated operating units or functions within the corporation.  The officers of the corporation shall consist of a Chairman of the Board, a Vice Chairman of the Board, a Chief Executive Officer; a President and Chief Operating Officer; a Chief Financial Officer; a Treasurer; a Secretary and such other officer or officers as are elected or appointed by the Board of Directors.  A person may hold more than one office.  The officers shall perform such duties and have such responsibilities as provided for in these By-laws or as otherwise determined by the Board of Directors.  The terms of office with respect to each officer shall be prescribed by the Board at the time of election of the officers and absent the specifications of a term, the term shall be determined to be at the pleasure of the Board of Directors.
 
Section 2
CHAIRMAN OF THE BOARD .
 
The Chairman of the Board shall preside at all meetings of shareholders and directors and represent the corporation as an official spokesman.
 
Section 3
VICE CHAIRMAN .
 
The Vice Chairman shall perform the duties and exercise the powers of the Chairman of the Board in his absence or upon his incapacity.
 
Section 4
CHIEF EXECUTIVE OFFICER .
 
The Chief Executive Officer shall be responsible for the strategic management and planning of the business of the corporation, in addition to the duties and powers prescribed by the Board of Directors or by Chapter 302A.

 
Section 5
PRESIDENT AND CHIEF OPERATING OFFICER .
 
The  President and Chief Operating Officer shall perform the duties and exercise the powers of the Chief Executive Officer in his absence or upon his incapacity and shall have responsibility for managing the day-to-day operations of the business of the corporation, in addition to such duties and powers prescribed by the Board of Directors.
 
Section 6
OPERATING UNIT OR FUNCTION PRESIDENTS .
 
Presidents of the corporation’s operating units or functions, if any, as designated by the Board of Directors, shall have responsibility for managing the day-to-day operations of the business of their respective operating units or functional areas of responsibility and shall perform such other duties as the Board of Directors may from time to time prescribe or as may be delegated by the Chief Executive Officer or the Chief Operating Officer.
 
Section 7
VICE PRESIDENTS .
 
The Vice Presidents, if any, in the order designated by the Board of Directors, shall perform such duties as the Board of Directors may from time to time prescribe or as may be delegated by the Chief Executive Officer or the Chief Operating Officer.
 
Section 8
CHIEF FINANCIAL OFFICER .
 
The Chief Financial Officer of the corporation shall be responsible for the strategic management and planning of the corporation’s finances, in addition to the duties and powers prescribed by the Board of Directors or by Chapter 302A.
 
Section 9
TREASURER.
 
The Treasurer of the corporation shall have responsibility for managing the day-to-day finances of the corporation, in addition to such other duties and powers prescribed by the Board of Directors.
 
Section 10
SECRETARY .
 
The Secretary and, in his absence, the Assistant Secretary, if any, shall attend all meetings of the Board of Directors, committees thereof, if any, and all meetings of the shareholders and record all votes and minutes of all proceedings in a book kept for that purpose.  The Secretary and, in his absence, the Assistant Secretary, shall give or cause to be given notice of all meetings of the shareholders and of the Board of Directors and of committees, if any, and shall perform such other duties as may be prescribed by the Board of Directors or delegated to such officer by the Chief Executive Officer, the Chief Operating Officer or the Chief Financial Officer.  The Secretary and, in his absence, the Assistant Secretary, shall cause and affix the seal of the corporation, to the extent the corporation shall have one, to any instrument requiring the same.
 
Section 11
VACANCIES .
 
If any office becomes vacant by reason of death, resignation, retirement, disqualification, removal, or other cause, the directors then in office, although less than a quorum, may by a majority vote, choose a successor or successors who shall hold office for the unexpired term in respect of which such vacancy occurred.
 
Section 12
DELEGATION.
 
Unless prohibited by a resolution approved by the affirmative vote of the Board of Directors, an officer of the corporation may delegate some or all of the duties and powers of an office to other persons, provided that such delegation is in writing.

 	 	/s/ Elliot S. Kaplan	 	
 	 	Secretary	
 
2

Exhibit 4.1
 
AMENDED AND RESTATED CREDIT AGREEMENT
 
AMENDED AND RESTATED CREDIT AGREEMENT dated as of March 21, 2002 by and between BEST BUY CO., INC. (the “Company”), a Minnesota corporation, the lenders from time to time party hereto (such lenders being hereinafter sometimes referred to collectively as the “Banks” and individually as a “Bank”), and U.S. BANK NATIONAL ASSOCIATION , as agent for the Banks (in such capacity, the “Agent”).
 
RECITALS
 
A.            The Company, the banks party thereto and U.S. Bank National Association as agent for such banks are parties to the Existing Credit Agreement (as defined below).
 
B.            The Company, the Banks and the Agent have determined to amend and restate the Existing Credit Agreement pursuant to the terms and conditions of this Agreement.
 
Accordingly, the parties hereto hereby agree as follows:
 
ARTICLE I
DEFINITIONS
 
Section 1.1               Certain Defined Terms .  As used herein and, unless otherwise defined therein, in each Exhibit and Schedule, the following terms shall have the following respective meanings (such meanings to be equally applicable to both the singular and plural form of the terms defined, as the context may require):
 
“ Adjusted Eurodollar Rate” :  with respect to each Interest Period applicable to a Eurodollar Advance, the rate (rounded upward, if necessary, to the next higher one hundredth of one percent) determined by dividing the Eurodollar Rate for such Interest Period by 1.00 minus the Eurodollar Reserve Percentage.
 
“ Advance” :  a Prime Rate Advance or a Eurodollar Advance.
 
“ Affiliate” :  when used with respect to a specified Person, another Person that directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the Person specified.  For purposes hereof, “control” shall have the meaning given such term in Rule 12b-2 under the Securities Exchange Act of 1934, and “controlled” shall have a correlative meaning.
 
“ Aggregate Commitment Amount ”:  as of any date of determination, the sum of the Commitment Amounts of all of the Banks.
 
“ Agreement” :  this Amended and Restated Credit Agreement, as amended, supplemented, restated or otherwise modified and as in effect from time to time.
 
“ Applicable Facility Fee Percentage ” means, for any period, the percentage set forth below determined by reference to (x) the rating of the Company’s long-term, senior unsecured Indebtedness from S&P or (y) the rating of the Company’s long-term, senior unsecured Indebtedness from Moody’s, in each case, as in effect from time to time on the last day of such period:

 

Company’s
Long-Term Senior
Unsecured Debt Rating
S&P or Moody’s (“Level”)	 	Applicable Facility Fee
Percentage	 	
Level 1
BBB+ or better, or Baa1 or better	 	0.175	%	
Level 2
BBB or Baa2	 	0.250	%	
Level 3
BBB- or Baa3	 	0.325	%	
Level 4
Worse than BBB- or worse than Baa3	 	0.400	%	
 
provided that if, at any date of determination, no rating is available from S&P, Moody’s or any other nationally recognized statistical rating organization designated by the Company and approved in writing by the Majority Banks, the Applicable Facility Fee Percentage will be based upon Level 4 and provided further that (i) upon the occurrence of a ratings differential between S&P and Moody’s that corresponds to a differential of one Level, the Applicable Facility Fee Percentage shall be based upon the Level corresponding to the higher rating and (ii) upon the occurrence of a ratings differential between S&P and Moody’s that corresponds to a differential of two or more Levels, the Applicable Facility Fee Percentage shall be based upon the Level that is one Level above the Level corresponding to the lower rating.
 
“ Applicable Margin ” means, for each Prime Rate Advance and for each Eurodollar Advance (for the Interest Period applicable to such Eurodollar Advance), a percentage per annum equal to the percentage set forth below determined by reference to (x) the rating of the Company’s long-term, senior unsecured Indebtedness from S&P or (y) the rating of the Company’s long-term, senior unsecured Indebtedness from Moody’s, in each case, for Eurodollar Advances, as in effect on the first day of the applicable Interest Period, and for Prime Rate Advances, as in effect from time to time:

Company’s
Long-Term Senior
Unsecured Debt Rating
S&P or Moody’s (“Level”)	 	Eurodollar Advances	 	Prime Rate
Advances	 	
Level 1
BBB+ or better, or Baa1 or better	 	0.500	%	0.000	%	
Level 2
BBB or Baa2	 	0.550	%	0.000	%	
Level 3
BBB- or Baa3	 	0.700	%	0.000	%	
Level 4
Worse than BBB- or worse than Baa3	 	0.950	%	0.000	%	
 
provided that if, at any date of determination, no rating is available from S&P, Moody’s or any other nationally recognized statistical rating organization designated by the Company and approved in writing by the Majority Banks, the Applicable Margin will be based upon Level 4 and provided further that (i) upon the occurrence of a ratings differential between S&P and Moody’s that corresponds to a differential of one Level, the Applicable Margin shall be based upon the Level corresponding to the higher rating and (ii) upon the occurrence of a ratings differential between S&P and Moody’s that corresponds to a differential of two or more Levels, the Applicable Margin shall be based upon the Level that is one Level above the Level corresponding to the lower rating.
 
Applicable Utilization Fee Percentage :  With respect to any calendar quarter, the following percentage as in effect on the last day of such quarter: (a) with respect to any calendar quarter during which the average daily Used Amount was less than or equal to 25% of the Aggregate Commitment Amount in effect on the last day of such quarter, 0.000% per annum, (b) with respect to any calendar quarter during which the average daily
 
2

 
Used Amount was greater than 25%, but less than or equal to 50%, of the Aggregate Commitment Amount in effect on the last day of such quarter, 0.125% per annum, and (c) with respect to any calendar quarter during which the average daily Used Amount was greater than 50% of the Aggregate Commitment Amount in effect on the last day of such quarter, 0.250% per annum.
 
“ Board” :  the Board of Governors of the Federal Reserve System of the United States.
 
“ Borrowing Date” :  each Business Day or Eurodollar Business Day on which the Banks are to make Loans to the Company pursuant to Section 2.1.
 
“ Business Day” :  any day (other than a Saturday, Sunday or legal holiday) on which banks are permitted to be open for business in all of the cities where any Bank has its principal office in the United States of America.
 
“ Capital Expenditures” :  with respect to any Person for any specified period, the aggregate of all gross expenditures during such period for any fixed assets, or for improvements, replacements, substitutions or additions therefor or thereto, which are reflected as additions to property and equipment on statements of cash flows of such Person in accordance with GAAP, excluding such expenditures in connection with acquisitions.
 
“ Cash Flow Leverage Ratio” :  at any date of determination, the ratio of (a) the Interest-bearing Indebtedness of the Company and its Subsidiaries, plus eight times Rental and Lease Expense for the Measurement Period ended on such date, to (b) the sum for the Measurement Period ending on such date of (i) Earnings Before Interest, Income Taxes and Depreciation and (ii) Rental and Lease Expense, in all cases determined in accordance with GAAP and as set forth in the Company’s financial statements delivered hereunder.
 
“ Change of Contro l”: The occurrence of, during any period of up to twelve consecutive months, whether commencing before or after the Signing Date, individuals who at the beginning of such twelve-month period were directors of the Company, ceasing for any reason (other than by reason of death, disability or scheduled retirement) to constitute a majority of the Board of Directors of the Company, unless such directors were replaced by new directors whose election to the Board of Directors of the Company, or whose nomination for election by the stockholders of the Company, was approved by a majority of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved.
 
“ Code” :  the Internal Revenue Code of 1986, as amended or any successor thereto.
 
“ Commitment” :  as to any Bank, the obligation of such Bank to make Loans pursuant to Sections 2.1 and 2.12 and, as to U.S. Bank, its obligation to issue, extend or renew Letters of Credit pursuant to Section 2.8.
 
“ Commitment Amount” :  as to any Bank, the amount set opposite such Bank’s name as its “Commitment Amount” in Schedule 1.1(a), as the same may be reduced from time to time pursuant to Section 2.14.
 
“ Compliance Certificate” :  a certificate in the form of Exhibit A.
 
“ Consolidated Net Worth” :  as of any date of determination, the sum of the amounts set forth on the consolidated balance sheet of the Company as the sum of the common stock, preferred stock, additional paid-in capital and retained earnings of the Company (excluding treasury stock).
 
“ Defaulting Bank ”:  at any time, any Bank that, at such time (a) has failed to make a Loan or any Advances thereunder required pursuant to the terms of this Agreement, including the funding of any participation in accordance with the terms of this Agreement, (b) has failed to pay to the Agent or any Bank an amount owed by such Bank pursuant to the terms of this Agreement, or (c) has been deemed insolvent or has become subject to a bankruptcy, receivership or insolvency proceeding, or to a receiver, trustee or similar official.
 
“ Documentary Letter of Credit” :  a letter of credit which requires that the drafts thereunder be accompanied by a document of title covering or securing title to the goods acquired with the proceeds of such drafts.
 
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“ ERISA” :  the Employee Retirement Income Security Act of 1974, as amended.
 
“ ERISA Affiliate” :  any trade or business (whether or not incorporated) that is a member of a group of which the Company is a member and which is treated as a single employer under Section 414 of the Code.
 
“ Earnings Before Interest, Income Taxes and Depreciation” :  for any period of determination, the consolidated net income of the Company and its Subsidiaries before deductions for income taxes, Net Interest Expense, and provisions for depreciation and amortization of goodwill and intangibles accounted for in calculating consolidated net income, all as determined in accordance with GAAP, excluding therefrom (a) nonoperating gains (including, without limitation, extraordinary or unusual gains, gains from discontinuance of operations, gains arising from the sale of assets and other nonrecurring gains) of the Company and its Subsidiaries during the applicable period and (b) similar nonoperating losses (including, without limitation, losses arising from the sale of assets and other nonrecurring losses) of the Company and its Subsidiaries during such period.
 
“ Effective Date” :  the date on or after the execution and delivery of this Agreement by the Company, the Banks and the Agent on which all of the conditions precedent set forth in Section 3.1 shall have been satisfied or waived in writing by the Banks.
 
“ Eurodollar Advance” :  a portion of the Loans, with respect to which the interest rate is determined by reference to the Adjusted Eurodollar Rate.
 
“ Eurodollar Business Day” :  a Business Day which is also a day for trading by and between banks in United States dollar deposits in the interbank eurodollar market and a day on which banks are open for business in New York, New York and London.
 
“ Eurodollar Rate” : with respect to each Interest Period applicable to a Eurodollar Advance, the average offered rate for deposits in United States dollars (rounded upward, if necessary, to the nearest 1/16 of 1%) for delivery of such deposits on the first day of such Interest Period, for the number of days in such Interest Period, which appears on the Telerate page 3750 as of 11:00 a.m., London time (or such other time as of which such rate appears) two Eurodollar Business Days prior to the first day of such Interest Period, or the rate for such deposits determined by the Agent at such time based on such other published service of general application as shall be selected by the Agent for such purpose (including without limitation the Reuters Screen LIBO page); provided, that in lieu of determining the rate in the foregoing manner, the Agent may determine the rate based on rates at which United States dollar deposits are offered to the Agent in the interbank Eurodollar market at such time for delivery in Immediately Available Funds on the first day of such Interest Period in an amount approximately equal to the Advance by the Agent to which such Interest Period is to apply (rounded upward, if necessary, to the nearest 1/16 of 1%).  “Reuters Screen LIBO page” means the display designated as page “LIBO” on the Reuters Monitor Money Rate Screen (or such other page as may replace the LIBO page on such service for the purpose of displaying London interbank offered rates of major banks for United States dollar deposits), and “Telerate page 3750” means the display designated as such on Telerate System Incorporated (or such other page as may replace page 3750 or that service for the purpose of displaying London interbank offered rates of major banks for U.S. Dollar deposits).
 
“ Eurodollar Reserve Percentage” :  as of any day, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System, with deposits comparable in amount to those held by the Agent, in respect of “Eurocurrency Liabilities” (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate of Eurodollar Advances is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of a Bank to United States residents). The rate of interest applicable to any outstanding Eurodollar Advances shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Percentage.
 
“ Event of Default” :  any event described in Section 6.1.
 
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“ Existing Credit Agreement” :  the Credit Agreement dated as of August 9, 1999 by and among the Company, the banks party thereto and U.S. Bank, as agent for such banks, as the same has been amended, supplemented or otherwise modified and is in effect immediately prior to the Effective Date.
 
“ Facility Fees ”:  as defined in Section 2.17.
 
“ Federal Funds Rate” :  for any period of determination, a fluctuating interest rate per annum (based on a 360 day year) equal for each day during such period to the weighted average of the rates of interest charged on overnight federal funds transactions, with member banks of the Federal Reserve System only, as reasonably determined by the Agent.
 
“ Future Shop Indebtedness ”: as defined in Section 5.13(k).
 
“ GAAP ”:  generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the Signing Date.
 
“ Governmental Authority” :  any federal, state, local or foreign court or governmental agency, authority, department, board, instrumentality or regulatory body.
 
“ Guarantee” :  with respect to any Person at the time of any determination, without duplication, any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other Person (the “primary obligor”) in any manner, whether directly or otherwise:  (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any direct or indirect security therefor, (b) to purchase property, securities, or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness, (c) to maintain working capital, equity capital, or other financial statement condition of the primary obligor so as to enable the primary obligor to pay such Indebtedness or otherwise to protect the owner thereof against loss in respect thereof, or (d) entered into for the purpose of assuring in any manner the owner of such Indebtedness of the payment of such Indebtedness or to protect the owner against loss in respect thereof; provided , that the term “Guarantee” shall not include endorsements for collection or deposit in the ordinary course of business.
 
“ Guaranty” :  an amended and restated guaranty (or, with respect to any Restricted Subsidiary for which a Guaranty is required to be executed and delivered to the Agent pursuant to Section 5.25, a guaranty), substantially in the form of Exhibit B, of the Obligations, executed and delivered to the Agent in connection with this Agreement.
 
“ Guarantors ”: Stores, L.P., Investment Co., Property Co., each other Restricted Subsidiary set forth on Schedule 4.19(b) as of the Effective Date and each Restricted Subsidiary for which a Guaranty has been executed and delivered to the Agent pursuant to Section 5.25.
 
“ Holding Account” :  an interest-bearing account established by the Agent, which shall be under the Agent’s sole dominion and control, for the benefit of U.S. Bank, as the issuer of the Letters of Credit, and the Banks, into which the Company shall, as required hereunder, deposit funds, and from which the Agent may disburse funds, to pay the obligations of the Company to reimburse U.S. Bank for any amount drawn on any Letter of Credit, and to pay any other obligation of the Company to the Banks arising in connection with any Letter of Credit.
 
“ Immediately Available Funds” :  funds with good value on the day and in the city in which payment is received.
 
“ Indebtedness” :  with respect to any Person at the time of any determination, without duplication, all obligations, contingent or otherwise, of such Person which in conformity with GAAP should be classified upon the balance sheet of such Person as liabilities, but in any event shall include:  (a) all obligations of such Person for
 
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borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid or accrued, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property purchased by such Person, (e) all obligations of such Person issued or assumed as the deferred purchase price of property or services, (f) all obligations of others secured by any Lien on property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (g) all capitalized lease obligations of such Person, (h) all obligations of such Person in respect of interest rate protection agreements, (i) all obligations of such Person, actual or contingent, as an account party in respect of letters of credit or bankers’ acceptances, (j) all obligations of any partnership or joint venture as to which such Person is or may become personally liable, and (k) all Guarantees by such Person of Indebtedness of others.
 
“ Initial Convertible Debentures ”: $336,703,120 initial aggregate principal amount of the Company’s Convertible Senior Debentures due June 27, 2021, as issued pursuant to (a) a Purchase Agreement and a Registration Rights Agreement, each dated June 27, 2001 and each among the Company, Stores, L.P., Credit Suisse First Boston Corporation and Merrill, Lynch, Pierce, Fenner & Smith Incorporated (b) an Indenture dated June 27, 2001 among the Company, Stores, L.P. and Wells Fargo Bank Minnesota, National Association, as Trustee.
 
“ Interest-bearing Indebtedness” : at the time of any determination, all Indebtedness of the Company and its Subsidiaries (a) for borrowed money or (b) to third party financers to finance the purchase of inventory, to the extent not paid before interest begins to accrue.
 
“ Interest Coverage Ratio” : for any Measurement Period, the ratio of (a) the sum of the Company’s  (i) net income, plus (ii) Net Interest Expense, (iii) income tax expense; (iv) depreciation; (v) Rental and Lease Expense to (b) the sum of (y) Net Interest Expense, plus (z) Rental and Lease Expense.
 
“ Interest Expense” : for any period of determination, the aggregate consolidated amount, without duplication, of interest paid, accrued (including without limitation, payment in kind interest) or scheduled to be paid in respect of any consolidated Indebtedness of the Company and its Subsidiaries, including (a) all but the principal component of payments in respect of conditional sale contracts, capitalized leases and other title retention agreements, and (b) net costs (income) under interest rate protection agreements, in each case determined in accordance with GAAP.
 
“ Interest Income” : for any period of determination, the aggregate consolidated amount, without duplication, of interest received, accrued (including without limitation, payment in kind interest) or scheduled to be received by the Company and its Subsidiaries, including (a) all but the principal component of payments in respect of conditional sale contracts, capitalized leases and other title retention agreements, and (b) net income (costs) under interest rate protection agreements, in each case determined in accordance with GAAP.
 
“ Interest Period” :  with respect to each Eurodollar Advance, the period commencing on the date of such Advance and ending one, two, three or six months thereafter, as the Company may elect in the applicable Notice of Borrowing, Continuation or Conversion; provided , that:
 
(a)           Any Interest Period which would otherwise end on a day which is not a Eurodollar Business Day shall be extended to the next succeeding Eurodollar Business Day unless such Interest Period is one month or longer and such Eurodollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Eurodollar Business Day;
 
(b)           Any Interest Period of one month or longer which begins on the last Eurodollar Business Day of a calendar month (or a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Eurodollar Business Day of a calendar month;
 
(c)           No Interest Period may end after the date set forth in clause (a) of the definition of “Termination Date” set forth in this Section 1.1; and
 
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(d)           For purposes of determining an Interest Period, a month means a period starting on one day in a calendar month and ending on the numerically corresponding day in the next calendar month; provided, however, that if there is no numerically corresponding day in the month in which such an Interest Period is to end or if such an Interest Period begins on the last Eurodollar Business Day of a calendar month, then such Interest Period shall end on the last Eurodollar Business Day of the calendar month in which such Interest Period is to end.
 
“ Investment Co. ”:  BBC Investment Co., a Nevada Corporation.
 
“ Letter of Credit” :  an irrevocable letter of credit issued by U.S. Bank for the account of the Company pursuant to Section 2.8, which shall not be a Documentary Letter of Credit and shall not include letters of credit issued by U.S. Bank pursuant to that certain Letter of Credit Agreement dated as of February 1, 1989, as heretofore and hereafter amended, and that certain Covenant Rider dated as of October 30, 1992, as heretofore and hereafter amended, between U.S. Bank and the Company.
 
“ Letter of Credit Fee” :  as defined in Section 2.18.
 
“ Letter of Credit Loan” :  a Loan made by a Bank to or for the account of the Company pursuant to Section 2.12.
 
“ Letter of Credit Usage” :  as of any date, the amount equal to the sum of (a) the amount of all Unpaid Draws plus (b) the amount available to be drawn under all outstanding Letters of Credit.
 
“ Lien” :  with respect to any Person, any security interest, mortgage, pledge, lien, charge, encumbrance, title retention agreement or analogous instrument or device (including but not limited to the interest of each lessor under any capitalized lease), in, of or on any assets or properties of such Person, now owned or hereafter acquired, whether arising by agreement or operation of law.
 
“ Loan” :  a loan made by a Bank to or for the account of the Company pursuant to Section 2.1 or a Letter of Credit Loan.
 
“ Loan Documents” :  this Agreement, the Notes, the Letters of Credit, the Guaranties and all other agreements, documents, certificates and instruments delivered pursuant hereto or in connection herewith, in each case as amended, supplemented, restated or otherwise modified and in effect from time to time.
 
“ Majority Banks” :  at any time, Banks, other than Defaulting Banks, whose Pro Rata Shares (determined under clause (b) of the definition thereof set forth in this Section 1.1 if any Loans are outstanding, and otherwise under clause (a) of such definition) aggregate more than 51%.
 
“ Material Adverse Effect” :  with respect to any Person, (a) a materially adverse effect on the business, assets, operations, or financial condition of such Person and its Subsidiaries taken as a whole, (b) material impairment of the ability of such Person to perform any material obligation under any Loan Document to which such Person is or becomes a party or (c) material impairment of any of the material rights of, or benefits available to, the Agent or the Banks under any Loan Document.
 
“ Measurement Period” :  each period of four fiscal quarters ending on the last day of a fiscal quarter of the Company.
 
“ Moody’s ”: Moody’s Investors Service, Inc.
 
“ Multiemployer Plan” :  as such term is defined in Section 4001(a)(3) of ERISA, which is maintained (on the Signing Date, within the five years preceding the Signing Date, or at any time after the Signing Date) for employees of Company or any ERISA Affiliate.
 
“ Net Interest Expense” : for any period of determination, Interest Expense minus Interest Income.
 
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“ Notice of Borrowing, Continuation or Conversion” :  the written notice in the form reasonably satisfactory to the Agent, delivered in accordance with, and within the period specified in, Section 2.2 or 2.4, as applicable.
 
“ Obligations” :  (a) the Company’s obligations in respect of the due and punctual payment of principal and interest on the Loans when and as due, whether at maturity, by acceleration, or otherwise, (b) the Company’s obligations to reimburse U.S. Bank in the amount of each draw under a Letter of Credit on the date of such draw, and to make deposits into the Holding Account in respect of Letters of Credit pursuant to Sections 2.6, 2.14 or 6.2, (c) all fees, expenses, indemnities, reimbursements and other obligations, monetary or otherwise, owed to the Agent and the Banks under this Agreement or any other Loan Document and (d) all Rate Protection Obligations.
 
“ PBGC” :  the Pension Benefit Guaranty Corporation created by Section 4002(a) of ERISA or any Governmental Authority succeeding to the functions thereof.
 
“ Person” :  any natural person, corporation, partnership, limited liability company, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity.
 
“ Plan” :  each employee benefit plan (whether in existence on the Signing Date or thereafter instituted), as such term is defined in Section 3 of ERISA, maintained for the benefit of employees, officers or directors of Company or of any ERISA Affiliate.
 
“ Prime Rate” :  the greater of (a) the rate of interest from time to time publicly announced by U.S. Bank as its “prime rate” or (b) the Federal Funds Rate plus 1.5%.  U.S. Bank may lend to its customers at rates that are at, above or below the Prime Rate.  For purposes of determining any interest rate hereunder or under the Notes which is based on the Prime Rate, such interest rate shall change as and when the Prime Rate shall change.
 
“ Prime Rate Advance” :  a portion of the Loans with respect to which the interest rate is determined by reference to the Prime Rate.
 
“ Prohibited Transaction” :  as such term is defined in Section 4975 of the Code or Section 406 of ERISA.
 
“ Pro Rata Share” :  with respect to each Bank, in each case expressed as a percentage:
 
(a)           as such term pertains to such Bank’s obligation to make Loans, right to receive Utilization Fees and Letter of Credit Fees, and obligation to reimburse the Agent pursuant to Section 7.9, the percentage set forth opposite such Bank’s name as its “Commitment Percentage” in Schedule 1.1(a), and
 
(b)           as such term pertains to such Bank’s right to receive payment of interest on and principal of its outstanding Loans and for all other purposes, the fraction which the amount of the unpaid principal balance of its outstanding Loans is to the aggregate unpaid principal balance of all outstanding Loans.
 
“ Property Co. ”:  BBC Property Co., a Minnesota corporation.
 
“ Rate Protection Agreement ”:  Any interest rate swap, cap or option agreement, or any other agreement pursuant to which the Company hedges interest rate risk with respect to a portion of the Obligations, entered into by the Company with a Rate Protection Provider.
 
“ Rate Protection Obligations ”:  The liabilities, indebtedness and obligations of the Company, if any, to any Rate Protection Provider under a Rate Protection Agreement.
 
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“ Rate Protection Provider ”:  Any Bank, or any Affiliate of any Bank, that is the Company’s counterparty under any Rate Protection Agreement.
 
“ Regulation D” :  Regulation D of the Board as from time to time in effect and all official rulings and interpretations thereunder and thereof.
 
“ Regulation U” :  Regulation U of the Board as from time to time in effect and all official rulings and interpretations thereunder and thereof.
 
“ Regulation X” :  Regulation X of the Board as from time to time in effect and all official rulings and interpretations thereunder and thereof.
 
“ Regulatory Change” :  with respect to any Bank, any change after the Signing Date in federal, state or foreign laws or regulations or the adoption or making after such date of any interpretations, directives or requests, in either case applying to a class of banks including such Bank under any federal, state or foreign laws or regulations (whether or not having the force of law) by any court or Governmental Authority charged with the interpretation or administration thereof.
 
“ Rental and Lease Expense” :  for any period of determination, the aggregate consolidated amount, without duplication of all amounts paid or accrued by the Company or any Subsidiary under all capital leases and other leases of real or personal property, including net costs (income) under interest rate protection agreements with respect to such amounts, but excluding any portion of such amounts included in calculating Net Interest Expense of the Company for such period, in each case determined in accordance with GAAP.
 
“ Reportable Event” :  as such term is defined in Section 4043 of ERISA and the regulations issued under such Section, with respect to a Plan, excluding, however, such events as to which the PBGC by regulation has waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided , that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waivers in accordance with Section 412(d) of the Code.
 
“ Restricted Payments” :  with respect to any Person, collectively, all dividends or other distributions of any nature (cash, securities (other than common stock of such Person), assets or otherwise) declared or paid, and all payments made (including the purchase price of any equity securities repurchased by such Person), by such Person on any class of equity securities (including, without limitation, warrants, options or rights therefor) issued by such Person or any of its Subsidiaries, whether such securities are authorized or outstanding on the Signing Date or at any time thereafter.
 
“ Restricted Subsidiary ”:  With respect to any fiscal year of the Company, any Subsidiary which accounted for an amount equal to or greater than twenty (20%) percent of the consolidated aggregate revenues of the Company for such fiscal year, provided that, if, in any fiscal year of the Company, the  Subsidiaries (other than Stores, L.P.), on a collective basis, accounted for more than fifty (50%) of the consolidated aggregate revenues of the Company for such fiscal year, then the percentage amount stated in the clause preceding the proviso clause of this definition shall be automatically and permanently reduced to five (5%).
 
“ Revolving Notes” :  as defined in Section 2.3.
 
“ S&P ” means Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.
 
“ Signing Date” :  the Business Day on which counterparts of this Agreement, duly executed by the Company, the Banks and the Agent, have been delivered to the Agent.
 
“ Stores, L.P. ”: Best Buy Stores, L.P., a Delaware limited partnership.
 
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“ Subordinated Convertible Debentures ”: $402,500,000 aggregate principal amount of the Company’s Convertible Subordinated Debentures Due January 15, 2022, as issued pursuant to: (a) a Purchase Agreement dated January 10, 2002 among the Company, Stores, L.P. and Credit Suisse First Boston Corporation, (b) a Registration Rights Agreement dated January 15, 2002 among the Company, Stores, L.P. and Credit Suisse First Boston Corporation, and (c) an Indenture dated January 15, 2002 among the Company, Stores, L.P., and Wells Fargo Bank Minnesota, National Association, as Trustee.
 
“ Subordinated Indebtedness” : The Subordinated Convertible Debentures and any other Indebtedness of the Company incurred after the Signing Date which is subordinated to the obligations of the Company to the Majority Banks hereunder and under the Notes in a manner and to an extent which the Banks have reasonably determined to be satisfactory by a writing sent to the Company.
 
“ Subsidiary” :  with respect to any Person, any corporation, partnership, trust or other Person of which more than 50% of the outstanding capital stock (or similar interests)  having ordinary voting power to elect a majority of the board of directors of such corporation (or similar governing body) (irrespective of whether or not, at the time, capital stock of or other similar interests shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by such Person, by such Person and one or more other Subsidiaries of such Person.
 
“ Termination Date” :  the earliest to occur of (a) March 21, 2005 , (b) the date on which the Commitments are terminated pursuant to Section 2.14 or (c) the date on which the Commitments are terminated pursuant to Section 6.2.
 
“ Total Outstandings” :  as of any date of determination, the sum of (a) the aggregate unpaid principal balance of Loans outstanding on such date, plus (b) the Letter of Credit Usage.
 
“ Unfunded Liabilities” :  (a) in the case of Plans subject to Title IV of ERISA (other than Multiemployer Plans), the amount (if any) by which the present value of all vested nonforfeitable benefits under such Plan exceeds the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation report prepared by the actuary for such Plan, and (b) in the case of Multiemployer Plans, the withdrawal liability of the Company and the ERISA Affiliates.
 
“ Unmatured Event of Default” :  any event which, with the giving of notice (whether such notice is required under Section 6.1, or under some other provision of this Agreement, or otherwise) or lapse of time, or both, would constitute an Event of Default.
 
“ Unpaid Draw” :  the obligation of the Company to reimburse U.S. Bank for a draw under a Letter of Credit, to the extent not reimbursed by the Company in accordance with Section 2.11.
 
“ Unused Commitment Amount” :  at the time of any determination, the Aggregate Commitment Amount less the Used Amount.
 
“ U.S. Bank” :  U.S. Bank National Association, a national banking association, in its individual capacity.
 
“ Used Amount” :  at any time of determination, Total Outstandings outstanding on such date.
 
“ Utilization Fees ”:  as defined in Section 2.16.
 
Section 1.2             Accounting Terms and Calculations .  Except as may be expressly provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in conformity with GAAP.  To the extent any change in GAAP after the Signing Date affects any computation or determination required to be made pursuant to this Agreement, such computation or determination shall be made as if such change in GAAP had not occurred unless the Company and the Banks agree in writing on an adjustment to such computation or determination to account for such change in GAAP.
 
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Section 1.3             Computation of Time Periods .  In this Agreement, in the computation of a period of time from a specified date to a later specified date, unless otherwise stated the word “from” means “from and including” and the word “to” or “until” each means “to but excluding”.
 
Section 1.4             Principles of Construction .  In this Agreement, the singular includes the plural and the plural the singular; words imparting any gender include the other genders; references to “Section”, “Exhibit”, “Schedule” and like references shall be to sections of, and exhibits and schedules to, this Agreement unless otherwise specifically provided; the words “hereof”, “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement; references to “writing” include printing, typing, lithography and other means of reproducing words in a visible form; references to agreements and other contractual instruments shall be deemed to include all subsequent amendments thereto or changes therein entered into in accordance with their respective terms; and references to Persons include their permitted successors and assigns.  Unless the context in which used herein otherwise clearly requires, “or” has the inclusive meaning represented by the phrase “and/or.”
 
ARTICLE II
TERMS OF THE CREDIT FACILITY
 
Part A — Terms of Lending
 
Section 2.1             The Commitments .  On the terms and subject to the conditions hereof, each Bank severally agrees to make Loans to the Company on a revolving basis at any time and from time to time from the Effective Date to the Termination Date, during which period the Company may borrow, repay and reborrow in accordance with the provisions hereof, provided , that no Loan will be made in any amount which after giving effect thereto, would cause the Total Outstandings to exceed the Aggregate Commitment Amount, provided , further , that no Bank shall be required to make any Loan if, after giving effect thereto, the sum of the outstanding principal balance of such Bank’s Revolving Note plus such Bank’s Pro Rata Share of the sum of the Letter of Credit Usage would exceed such Bank’s Commitment Amount.  Loans hereunder shall be made by the Banks ratably based on their respective Pro Rata Shares.  Loans may be obtained and maintained, at the election of the Company but subject to the limitations hereof, as Prime Rate Advances or as Eurodollar Advances.Section 2.5
 
Section 2.2             Procedure for Loans .  Any request by the Company to borrow hereunder shall be made to the Agent by telephone, promptly confirmed by giving the Agent a Notice of Borrowing, Continuation or Conversion, and must be received by the Agent not later than 12:00 noon (Minneapolis time) three Eurodollar Business Days prior to the requested Borrowing Date if the Loans are requested as Eurodollar Advances and not later than 12:00 noon (Minneapolis time) on the requested Borrowing Date if the Loans are requested as Prime Rate Advances.  Each request to borrow hereunder shall be irrevocable and shall be deemed a representation by the Company that on the requested Borrowing Date and after giving effect to the requested Loans the applicable conditions specified in Section 2.1 and Article III have been and will be satisfied.  Each request to borrow hereunder shall specify (a) the requested Borrowing Date, (b) the aggregate amount of Loans to be made on such date, which shall be in a minimum amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof, to the extent such Loans are to be funded as Eurodollar Advances, or $2,000,000 or an integral multiple of $500,000 in excess thereof to the extent such Loans are to be funded as Prime Rate Advances,  (c) whether such Loans are to be made as Prime Rate Advances or as Eurodollar Advances, and (d) in the case of Eurodollar Advances, the duration of the initial Interest Period applicable thereto. Without in any way limiting the Company’s obligation to confirm in writing any telephone request to borrow hereunder, the Agent may rely on any such request which it believes in good faith to be genuine; and the Company hereby waives any claim against the Agent or the Banks based on a dispute with the Agent’s record of the terms of such telephone request.  The Agent shall promptly notify each other Bank of the receipt of such request, the matters specified therein, and of such Bank’s Pro Rata Share of the requested Loans.  On the requested Borrowing Date, each Bank shall provide its share of any requested Loans at the principal office of the Agent in Minneapolis, Minnesota not later than 2:30 P.M. (Minneapolis time).  Unless the Agent determines that any applicable condition specified in Article III has not been satisfied, the Agent will make available to the Company at the Agent’s principal office in Minneapolis, Minnesota in Immediately Available Funds not later than 4:00 P.M. (Minneapolis time) on the requested Borrowing Date the amount of the requested Loans.  If
 
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the Agent has made a Loan on behalf of a Bank but has not received the amount of such Loan (or a Federal Reserve Bank reference number for the wire transfer of the amount of such Loan) from such Bank by 4:00 P.M. (Minneapolis time) on the requested Borrowing Date, such Bank shall pay interest to the Agent on the amount so advanced at the Federal Funds Rate from the date of such Loan to the date funds are received by the Agent from such Bank, such interest to be payable with such remittance from such Bank of the principal amount of such Loan (provided, however, that the Agent shall not make any Loans on behalf of a Bank if the Agent has received prior notice from such Bank that it will not make such Loan).  If the Agent does not receive payment from such Bank by the next Business Day after the date of any Loan, the Agent shall be entitled to recover such Loan, with interest thereon at the rate then applicable to the such Loan, on demand, from the Company, without prejudice to the Agent’s and the Company’s rights against such Bank.  If such Bank pays the Agent the amount herein required with interest at the Federal Funds Rate before the Agent has recovered from the Company, such Bank shall be entitled to the interest payable by the Company with respect to the Loan in question accruing from the date the Agent made such Loan.
 
Section 2.3             Notes .  The Loans made by each Bank shall be evidenced by a single promissory note of the Company payable to the order of such Bank in the form of Exhibit C, in a principal amount equal to the amount of such Bank’s Commitment originally in effect (each, together with any such promissory note hereafter executed and delivered to a Bank to evidence the Loans, a “Revolving Note” and, collectively, the “Revolving Notes”).  Each Bank shall enter in its ledgers and records the amount of each Loan, the various Advances made, converted or continued and the payments made thereon, and each Bank is authorized by the Company to enter on a schedule attached to its Revolving Note(s) a record of such Loans, Advances and payments; provided , however that the failure by any Bank to make any such entry or any error in making such entry shall not limit or otherwise affect the obligation of the Company hereunder and on the Revolving Notes, and, in all events, the principal amount owing by the Company in respect of each Revolving Note shall be the aggregate amount of all Loans made by the Bank to which such Revolving Note is payable less all payments of principal thereof made by the Company.
 
Section 2.4             Conversions and Continuations .  On the terms and subject to the limitations hereof, the Company shall have the option at any time and from time to time to convert all or any portion of the Loans into Prime Rate Advances or Eurodollar Advances, or to continue a Eurodollar Advance as such (in a minimum amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof, with respect to any conversion into or continuation as Eurodollar Advances, or $2,000,000 or an integral multiple of $500,000 in excess thereof, with respect to any conversion into Prime Rate Advances); provided , however that (i) a Eurodollar Advance may be converted or continued only on the last day of the Interest Period applicable thereto, and (ii) at the option of the Majority Banks, no Advance may be converted into or continued as a Eurodollar Advance if an Unmatured Event of Default or Event of Default has occurred and is continuing on the proposed date of continuation or conversion. The Company shall give the Agent a Notice of Borrowing, Continuation or Conversion with respect to the continuation or conversion of any Advance so as to be received by the Agent not later than 12:00 noon (Minneapolis time) three Eurodollar Business Days prior to requested date of conversion or continuation in the case of the continuation of, or conversion to, Eurodollar Advances and not later than 12:00 noon (Minneapolis time) on the date of any requested conversion to Prime Rate Advances.  Each such notice shall specify (a) the amount to be continued or converted, (b) the date for the continuation or conversion (which must be (i) the last day of the preceding Interest Period and a Eurodollar Business Day in the case of conversions to or continuations of Eurodollar Advances, and (ii) a Business Day in the case of conversions to Prime Rate Advances), and (c) in the case of conversions to or continuations of Eurodollar Advances, the Interest Period applicable thereto.  Any notice given by the Company under this Section 2.4 shall be irrevocable.  If the Company shall fail to notify the Agent of the continuation of any Eurodollar Advances or of the conversion of Eurodollar Advances within the time required by this Section 2.4, such Advances shall, on the last day of the Interest Period applicable thereto, at the option of the Agent (a) be automatically be converted into Prime Rate Advances of the same principal amount or (b) be automatically be converted into Eurodollar Advances having an Interest Period of one month.  All conversions to and continuations of Advances shall be made uniformly and ratably among the Banks.
 
Section 2.5             Interest Rates, Interest Payments and Default Interest .  Interest shall accrue and be payable as follows:
 
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(a)           Subject to paragraph (c) below, each Eurodollar Advance shall bear interest on the unpaid principal amount thereof during the Interest Period applicable thereto at a rate per annum equal to the sum of (i) the Adjusted Eurodollar Rate for such Interest Period plus (ii) the Applicable Margin.
 
(b)           Subject to paragraph (c) below, each Prime Rate Advance shall bear interest on the unpaid principal amount thereof at a floating rate per annum equal to the sum of (i) the Prime Rate plus (ii) the Applicable Margin.
 
(c)           Upon and during the continuation of any Event of Default, each Advance shall, at the option of the Majority Banks (or, in the case of any Event of Default under Sections 6.1(a), (e), (f) or (g), automatically upon and during the continuation of any such Event of Default), bear interest until paid in full (or until the corresponding Event of Default is waived in writing by the Majority Banks), whether at the date scheduled therefor or earlier upon acceleration, shall bear interest as follows: (i) during the balance of any Interest Period applicable to such Advance, at a rate per annum equal to the sum of the rate applicable to such Advance during such Interest Period plus 2.0%, and (ii) otherwise, at a rate per annum equal to the sum of the Prime Rate plus the Applicable Margin plus 2.00%.
 
(d)           Interest accrued to the day of payment shall be payable (A) with respect to each Eurodollar Advance having an Interest Period of three months or less, on the last day of the Interest Period applicable thereto; (B) with respect to any Eurodollar Advance having an Interest Period greater than three months, on the last day of the Interest Period applicable thereto and on each day that would have been the last day of the Interest Period for such Advance had successive Interest Periods of three months duration been applicable to such Advance; (C) with respect to any Prime Rate Advance, on the first day of each month; and (D) with respect to all Loans, on the Termination Date; provided that interest under Section 2.5(c) shall be payable on demand.
 
(e)           Interest payments received by the Agent shall be applied to accrued, unpaid interest on the Revolving Notes, as applicable, as may then be due and payable.
 
Section 2.6             Repayment; Mandatory Prepayments; Deposits Into Holding Account .
 
(a)           Principal of all Loans, together with all accrued, unpaid interest thereon, shall be due and payable on the Termination Date.  Upon issuance of any Letters of Credit having an expiration date after the Termination Date, the Company shall deposit into the Holding Account an amount sufficient to cause the amount deposited in the Holding Account to equal the aggregate undrawn face amount of all outstanding Letters of Credit.  At any time after such deposit is made and all outstanding Obligations, other than Obligations with respect to outstanding Letters of Credit, have been paid in full, if an outstanding Letter of Credit expires or is reduced without the full amount thereof having been drawn, the Agent shall withdraw from the Holding Account and deliver to the Company an amount equal to the amount by which the amount on deposit in the Holding Account exceeds the aggregate undrawn face amount of outstanding Letters of Credit (after giving effect to such expiration or reduction).
 
(b)           Between December 1 of each year and March 31 of the following year, the Company shall reduce the outstanding principal balance of the Loans for a period of not less than 30 consecutive days to $0.00.
 
(c)           If at any time the Total Outstandings exceed the Aggregate Commitment Amount, the Company shall prepay the Loans in the amount of such excess.
 
Section 2.7             Optional Prepayments .   The Company may prepay Prime Rate Advances, in whole or in part, at any time, without premium or penalty.  Each partial prepayment shall be in an aggregate amount for all the Banks of $2,000,000 or an integral multiple of $500,000 in excess thereof, and shall be distributed to the Banks in accordance with their respective Pro Rata Shares.  Except upon an acceleration following an Event of Default or upon termination of the Commitments in whole under Section 2.14, the Company may pay Eurodollar Advances only on the last day of the Interest Period applicable thereto. Amounts paid (unless following an
 
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acceleration or upon termination of the Commitments in whole) or prepaid under this Section 2.7 may be reborrowed upon the terms and subject to the conditions and limitations of this Agreement.  All principal paid or prepaid under Section 2.6, this Section 2.7 or Section 2.14 shall be applied to the outstanding principal balance of each Bank’s Revolving Note (in accordance with such Bank’s Pro Rata Share).
 
Part B —  Terms of the Letter of Credit Facility
 
Section 2.8             Letters of Credit .  The letters of credit issued by the Agent for the account of the Company pursuant to the Existing Credit Agreement shall be “Letters of Credit” hereunder from and after the Effective Date, and the rights and obligations of the Agent, the Banks and the Company with respect to such letters of credit shall be those set forth therein and, to the extent not inconsistent therewith, those set forth herein with respect to Letters of Credit.  Upon the terms and subject to the conditions of this Agreement, the Agent agrees to issue, extend or renew Letters of Credit for the account of the Company from time to time between the Effective Date and the Termination Date in such amounts as the Company shall request; provided that no Letter of Credit will be issued, extended or renewed in any amount which, after giving effect to such issuance, extension or renewal would cause (i) Total Outstandings to exceed the Aggregate Commitment Amount, or (ii) the Letter of Credit Usage to exceed $50,000,000.
 
Section 2.9             Procedures for Letters of Credit .  Each request for the issuance, extension or renewal of a Letter of Credit shall be made by the Company in writing and received by U.S. Bank by 1:00 p.m. (Minneapolis time) (a) not later than one Business Day preceding the requested date of issuance, extension or renewal in the case of the issuance of new Letters of Credit (which shall also be a Business Day) or the extension or renewal of previously-issued Letters of Credit which are not automatically renewable and (b) not later than five Business Days preceding the last day to give a notice of non-renewal in the case of the renewal of Letters of Credit that are automatically renewable unless a notice of non-renewal is given.  Each request for the issuance, extension or renewal of a Letter of Credit shall be deemed a representation by the Company that on the date of issuance, extension or renewal of such Letter of Credit and after giving effect thereto the conditions specified in Article III have been and will be satisfied.  The Agent may require that such request be made on such letter of credit application and reimbursement agreement form as the Agent may from time to time specify.  The Agent shall notify the other Banks by 1:00 P.M. (Minneapolis time) on the date the Agent issues, extends or renews any Letter of Credit, of the issuance, extension or renewal of each Letter of Credit, and each Bank’s Pro Rata Share thereof, and the Agent will promptly provide to the other Banks a copy of each Letter of Credit issued, extended or renewed hereunder.
 
Section 2.10           Terms of Letters of Credit .  Letters of Credit shall be issued in support of obligations of the Company incurred in the ordinary course of its business.  No Letter of Credit may have an expiration date more than one year after the date of its issuance.
 
Section 2.11           Agreement to Repay Letter of Credit Draws .  If the Agent has decided that it will a pay a draw made on any Letter of Credit, it will notify the Company of that fact.  The Company shall reimburse the Agent in an amount equal to the amount of such draw by 11:00 A.M. (Minneapolis time) on the day on which such draw is to be paid in Immediately Available Funds.  To the extent funds are available in the Holding Account, the Agent may, in its discretion (but subject to the next sentence), withdraw the amount of such draw from the Holding Account and apply such amount to the Company’s reimbursement obligations in respect of such draw.  To the extent the amount of funds available in the Holding Account equals or exceeds the Letter of Credit Usage as of the date of such draw, the Agent shall withdraw the amount of such draw from the Holding Account and apply such amount to the Company’s reimbursement obligations in respect of such draw.
 
Section 2.12           Loans to Cover Unpaid Draws .  Whenever there is an Unpaid Draw pursuant to Section 2.11, the Agent shall promptly give the other Banks notice to that effect, specifying the amount thereof, in which event each Bank is authorized (and the Company does here so authorize each Bank) to, and shall, make a Loan (as a Prime Rate Advance) to the Company in an amount equal to  such Bank’s Pro Rata Share of the amount of the Unpaid Draw.  Each Bank shall make such Loan, regardless of noncompliance with the applicable conditions precedent specified in Article III hereof and regardless of whether an Event of Default then exists or the
 
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Commitments have been terminated, and provide the Agent with the proceeds of such Loan in Immediately Available Funds, at the office of the Agent, not later than 4:00 P.M. (Minneapolis time) on the day on which such Bank received such notice.  The Agent shall apply the proceeds of such Loans directly to reimburse itself for such Unpaid Draw.  If any portion of any such amount paid to the Agent should be recovered by or on behalf of the Company from the Agent in bankruptcy, by assignment for the benefit of creditors or otherwise, the loss of the amount so recovered shall be ratably shared between and among the Banks in the manner contemplated by Section 7.10.  If at the time the Banks make funds available to the Agent pursuant to the provisions of this Section 2.12 the applicable conditions precedent specified in Article III shall not have been satisfied, the Company shall pay to the Agent for the account of the Banks interest on the funds so advanced at a floating rate per annum equal to the Prime Rate plus the Applicable Margin plus two percent (2.00%).  If for any reason any Bank is unable to make a Loan to the Company to reimburse the Agent for an Unpaid Draw, then such Bank shall immediately purchase from the Agent a risk participation in such Unpaid Draw, at par, in an amount equal to such Bank’s Pro Rata Share of the Unpaid Draw, which risk participation shall, for all purposes hereunder except Sections 2.1 and 2.2, be deemed a Loan made by such Bank hereunder.
 
Section 2.13           Obligations Absolute .  The obligations of the Company to repay the Agent for the amount of any draw on a Letter of Credit pursuant to Section 2.11 and to repay any Letter of Credit Loans shall be absolute, unconditional and irrevocable, shall continue for so long as any Letter of Credit, Unpaid Draw or Letter of Credit Loan is outstanding notwithstanding any termination of this Agreement, and shall be paid strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including without limitation the following circumstances:
 
(a)           any lack of validity or enforceability of any Letter of Credit;
 
(b)           the existence of any claim, setoff, defense or other right which the Company may have or claim at any time against any beneficiary, transferee or holder of any Letter of Credit (or any Person for whom any such beneficiary, transferee or holder may be acting), the Agent, U.S. Bank or any Bank or any other Person, whether in connection with a Letter of Credit, this Agreement, the transactions contemplated hereby, or any unrelated transaction; or
 
(c)           any statement or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever.
 
Neither the Agent, U.S. Bank, any other Bank nor the officers, directors, agents or employees of any thereof shall be liable or responsible for, and the obligations of the Company to U.S. Bank and the Banks shall not be impaired by:
 
(i)            the use which may be made of any Letter of Credit or for any acts or omissions of any beneficiary, transferee or holder thereof in connection therewith;
 
(ii)           the validity, sufficiency or genuineness of documents, or of any endorsements thereon, even if such documents or endorsements should, in fact, prove to be in any or all respects invalid, insufficient, fraudulent or forged;
 
(iii)          the acceptance by U.S. Bank of documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary; or
 
(iv)          any other circumstances whatsoever in making or failing to make payment under any Letter of Credit.
 
Notwithstanding the foregoing, the Company shall have a claim against U.S. Bank, and U.S. Bank shall be liable to the Company, to the extent, but only to the extent, of any direct, as opposed to consequential, damages
 
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suffered by the Company which the Company proves were caused by U.S. Bank’s willful misconduct or gross negligence in determining whether documents presented under any Letter of Credit comply with the terms thereof.
 
Part C  —  General
 
Section 2.14           Optional Reduction or Termination of Commitments .  The Company may, at any time, upon not less than five Business Days’ prior written notice to the Agent, reduce the Commitments, ratably, with any such reduction in a minimum aggregate amount for all the Banks of $5,000,000, or an integral multiple thereof, or terminate the Commitments in their entirety; provided , however , that (a) the Company may not at any time reduce the Aggregate Commitment Amount below the Letter of Credit Usage as of the date of such reduction unless the Company reduces the Aggregate Commitment Amount to zero and deposits with U.S. Bank in the Holding Account an amount equal to the Letter of Credit Usage as of such date; and (b) the Company may not reduce the Commitments if the payment required by the next sentence as a result of such reduction would result in any outstanding Eurodollar Advances being repaid, in whole or in part, prior to the last day of the Interest Period applicable to such Advances.  Upon any reduction in the Commitments pursuant to this Section 2.14, the Company shall pay to the Agent for the account of the Banks the amount, if any, by which the Total Outstandings exceed the Aggregate Commitment Amount after giving effect to such reduction.  Upon termination of the Commitments pursuant to this Section, the Company shall pay to the Agent for the account of the Banks the full amount of all outstanding Loans, all accrued and unpaid interest thereon, all unpaid Utilization Fees accrued to the date of such termination, any indemnities payable pursuant to Section 2.26 and all other unpaid obligations of the Company to the Banks and the Agent hereunder, and shall deposit with U.S. Bank in the Holding Account an amount equal to the Letter of Credit Usage as of such date.
 
Section 2.15           Agent’s Fees .  The Company shall pay to the Agent fees in accordance with the terms of a letter agreement between the Company and the Agent concerning such fees.  The Agent may separately agree with any Bank to pay a portion of such fees to such Bank, but shall not be obligated to pay such portion to such Bank unless and until the same is received from the Company.
 
Section 2.16           Utilization Fees .  The Company shall pay to the Agent, for the ratable account of the Banks, for the period from the Effective Date to and including the Termination Date, fees (the “Utilization Fees”) in an amount equal to the Applicable Utilization Fee Percentage per annum of the Aggregate Commitment Amount, in each case as in effect on the last day of each calendar quarter or the Termination Date (without giving effect to the termination of the Commitments on such date), as applicable.  Such Utilization Fees are payable calendar quarterly in arrears on the first day of the following calendar quarter and on the Termination Date.
 
Section 2.17           Facility Fees .  The Company shall pay to the Agent, for the account of each Bank, for the period from the Effective Date to and including the Termination Date, a facility fee (the “Facility Fee”) in an amount equal to the Applicable Facility Fee Percentage per annum of such Bank’s Commitment Amount (whether used or unused), in each case as in effect on the last day of each calendar quarter or the Termination Date (without giving effect to the termination of the Commitments on such date).   Such Facility Fees are payable calendar quarterly in arrears on the first day of the following calendar quarter and on the Termination Date.
 
Section 2.18           Letter of Credit Fees .  For each Letter of Credit issued, extended or renewed, the Company shall pay to the Agent for the ratable account of the Banks, in advance on the date of issuance, extension or renewal, a fee (a “Letter of Credit Fee”) in an amount equal to the Applicable Margin for Eurodollar Rate Advances, as in effect on the date of issuance, extension or renewal, of the original face amount of the Letter of Credit for the period from the date of issuance, extension or renewal to the scheduled expiration date of such Letter of Credit. The Company shall also pay to U.S. Bank, for its own account, on demand (a) a “fronting fee” upon issuance of each Letter of Credit issued in the amount of 0.125% times the amount available to be drawn upon such Letter of Credit and (b) all issuance, amendment, drawing and other fees regularly charged by U.S. Bank to its letter of credit customers and all out–of–pocket expenses incurred by U.S. Bank in connection with the issuance, amendment, administration or payment of any Letter of Credit.
 
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Section 2.19           Computation .  Utilization Fees, Facility Fees, Letter of Credit Fees and interest on Eurodollar Advances shall be computed on the basis of actual days elapsed (or, in the case of Letter of Credit Fees which are paid in advance, actual days to elapse) and a year of 360 days, or in the case of interest on Prime Rate Advances, a year of 365 or 366 days, as applicable.
 
Section 2.20           Payments .  Payments and prepayments of principal of, and interest on, the Notes and all fees, expenses and other obligations under this Agreement payable to the Agent or the Banks shall be made without setoff or counterclaim in Immediately Available Funds not later than 12:00 noon (Minneapolis time) (except as otherwise provided herein) on the dates called for under this Agreement to the Agent at its main office in Minneapolis, Minnesota.  Payments payable to U.S. Bank for its own account in respect of Letters of Credit under this Agreement shall be made without setoff or counterclaim in Immediately Available Funds not later than 12:00 noon (Minneapolis time) (except as otherwise provided herein) on the dates called for in this Agreement to U.S. Bank at its main office in Minneapolis, Minnesota.  Funds received after such time shall be deemed to have been received on the next Business Day.  The Agent will promptly distribute in like funds to each Bank its Pro Rata Share of each payment of principal or interest applied to the Revolving Notes, and each payment of Utilization Fees, Facility Fees, Letter of Credit Fees or other amounts received by the Agent for the account of the Banks.  If the Agent does not make any such distribution (or provide Federal Reserve Bank reference numbers for the wire transfer of the amount thereof) by 3:00 P.M. (Minneapolis time) on the date such payment of principal, interest or other amounts is received or deemed received under this Section 2.20, the Agent will pay interest to each Bank entitled to receive a portion of such distribution on the amount distributable to it at the Federal Funds Rate from the date such payment was received or deemed received until the date such distribution is made, such interest to be payable with such distribution.  Whenever any payment to be made hereunder or on the Notes shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time, in the case of a payment of principal, shall be included in the computation of any interest on such principal.
 
Section 2.21           Use of Loan Proceeds .  The proceeds of the Loans shall be used for the general corporate purposes of the Company and its Subsidiaries in a manner not in conflict with any of the covenants in this Agreement.
 
Section 2.22           Interest Rate Not Ascertainable, Etc .  If, on or prior to the date for determining the Adjusted Eurodollar Rate in respect of the Interest Period, any Bank reasonably determines (which determination shall be conclusive and binding, absent error) that:
 
(a)           deposits in dollars (in the applicable amount) are not being made available to such Bank in the relevant market for such Interest Period, or
 
(b)           the Adjusted Eurodollar Rate will not adequately and fairly reflect the cost to such Bank of funding or maintaining Eurodollar Advances for such Interest Period,
 
such Bank shall forthwith give notice to the Agent and the Company and the other Banks of such determination, whereupon the obligation of such Bank to make or continue, or to convert any Advances to, Eurodollar Advances shall be suspended until such Bank notifies the Company and the Agent that the circumstances giving rise to such suspension no longer exist.  While any such suspension continues, all further Advances by such Bank shall be made as Prime Rate Advances.  No such suspension shall affect the interest rate then in effect during the applicable Interest Period for any Eurodollar Advance outstanding at the time such suspension is imposed.
 
Section 2.23           Increased Cost .  If, after the date hereof, any Regulatory Change:
 
(a)           shall subject any Bank (or its applicable lending office) to any tax, duty or other charge with respect to its Eurodollar Advances, its Note(s), its obligation to make Eurodollar Advances, its issuance of Letters of Credit or its obligation to make Letter of Credit Loans, or shall change the basis of taxation of payment to any Bank (or its applicable lending office) of the principal of or interest on its Eurodollar Advances, or any other amounts due under this Agreement in respect of its Eurodollar Advances, its obligation to make Eurodollar Advances, its obligation to issue Letters of Credit or its obligation to make Letter of Credit Loans (except for changes in the rate of tax on the overall net income of
 
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such Bank or its applicable lending office imposed by the jurisdiction in which such Bank’s principal office or applicable lending office is located); or
 
(b)           shall impose, modify or deem applicable any reserve, special deposit, capital requirement or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding with respect to any Eurodollar Advance any such requirement to the extent included in calculating the applicable Adjusted Eurodollar Rate) against assets of, deposits with or for the account of, or credit extended by, any Bank’s applicable lending office or shall impose on any Bank (or its applicable lending office) or on the interbank eurodollar market any other condition affecting its Eurodollar Advances, its Note(s), its obligation to make Eurodollar Advances, its obligation to issue Letters of Credit or its obligations to make Letter of Credit Loans;
 
and the result of any of the foregoing is to increase the cost to such Bank (or its applicable lending office) of making or maintaining any Eurodollar Advance, issuing or maintaining Letters of Credit or making Letter of Credit Loans, or to reduce the amount of any sum received or receivable by such Bank (or its applicable lending office) under this Agreement or under its Note(s), then, within 30 days after demand by such Bank (with a copy to the Agent), the Company shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction.  Each Bank will promptly notify the Company and the Agent of any Regulatory Change of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section 2.23 and will designate a different applicable lending office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank.  A certificate of any Bank claiming compensation under this Section 2.23, setting forth the additional amount or amounts to be paid to it hereunder and stating in reasonable detail the basis for the charge and the method of computation, shall be conclusive in the absence of error.  In determining such amount, any Bank may use any reasonable averaging and attribution methods.  The Company shall not be obligated to pay any such amount that is attributable to the period ending 91 days prior to the date of the first notice delivered by any Bank under the third preceding sentence  with respect to any Regulatory Change (the “Section 2.23 Excluded Period”), except to the extent any amount is attributable to the Section 2.23 Excluded Period as a result of the retroactive application of the applicable Regulatory Change.  Failure on the part of any Bank to demand compensation for any increased costs or reduction in amounts received or receivable with respect to any Interest Period or other applicable period shall not constitute a waiver of such Bank’s rights to demand compensation for any increased costs or reduction in amounts received or receivable in any subsequent Interest Period or other applicable period.
 
Section 2.24           Illegality .  If, after the date of this Agreement, any Regulatory Change shall make it unlawful or impossible for such Bank to make, maintain or fund any Eurodollar Advances, such Bank shall notify the Company and the Agent, whereupon the obligation of such Bank to make or continue, or to convert any Advances to, Eurodollar Advances shall be suspended until such Bank notifies the Company and the Agent that the circumstances giving rise to such suspension no longer exist.  Before giving any such notice, such Bank shall designate a different applicable lending office if such designation will avoid the need for giving such notice and will not, in the  judgment of such Bank, be otherwise disadvantageous to such Bank.  If such Bank determines that it may not lawfully continue to maintain any Eurodollar Advances to the end of the applicable Interest Periods, all of the affected Advances shall be automatically converted to Prime Rate Advances as of the date of such Bank’s notice, and upon such conversion the Company shall indemnify such Bank in accordance with Section 2.26.
 
Section 2.25           Capital Adequacy .  In the event that any Bank shall have reasonably determined that any Regulatory Change has or shall have the effect of reducing the rate of return on such Bank’s capital or the capital of its parent corporation as a consequence of its Commitment, the Advances and/or the Letters of Credit or its obligations to make Loans to cover Unpaid Draws to a level below that which such Bank or its parent corporation could have achieved but for such Regulatory Change (taking into account such Bank’s policies and the policies of its parent corporation with respect to capital adequacy), then the Company shall, within ten days after written notice and demand from such Bank (with a copy to the Agent), pay to such Bank additional amounts sufficient to compensate such Bank or its parent corporation for such reduction; provided , that the Company shall not be obligated to pay any such additional amount (i) unless such Bank shall first have notified the Company in writing that it intends to seek such compensation pursuant to this Section 2.25 and (ii) that is attributable to the period ending 91 days prior to the date of such notice with respect to any Regulatory Change (the “Section 2.25 Excluded
 
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Period”), except to the extent any amount is attributable to the Section 2.25 Excluded Period as a result of the retroactive application of the applicable Regulatory Change.  Any determination by such Bank under this Section and any certificate as to the amount of such reduction given to the Company by such Bank shall be final, conclusive and binding for all purposes, absent error.
 
Section 2.26           Funding Losses .  The Company shall compensate each Bank, upon its written request, for all losses, expenses and liabilities (including, without limitation, any interest paid by such Bank to lenders of funds borrowed by it to make or carry Eurodollar Advances to the extent not recovered by such Bank in connection with the re-employment of such funds and including loss of anticipated profits) which such Bank may sustain:  (a) if for any reason, other than a default by such Bank, a funding of a Eurodollar Advance does not occur on the date specified therefor in the Company’s request or notice as to such Advance under Section 2.2 or 2.4, or (b) if, for whatever reason (including, but not limited to, acceleration of the maturity of Advances following an Event of Default), any repayment or prepayment of a Eurodollar Advance, or a conversion pursuant to Section 2.24, occurs on any day other than the last day of the Interest Period applicable thereto.  A Bank’s request for compensation shall set forth the basis for the amount requested and shall be final, conclusive and binding, absent error.
 
Section 2.27           Discretion of Banks as to Manner of Funding .  Each Bank shall be entitled to fund and maintain its funding of Eurodollar Advances in any manner it may elect, it being understood, however, that for the purposes of this Agreement all determinations hereunder (including, but not limited to, determinations under Section 2.26, but excluding determinations of the Eurodollar Rate that the Agent may elect to make from the Telerate or Reuters screen) shall be made as if such Bank had actually funded and maintained each Eurodollar Advance during the Interest Period for such Advance through the purchase of deposits having a maturity corresponding to the last day of the applicable Interest Period and an interest rate equal to the Eurodollar Rate.
 
Section 2.28           Setoff .  Whenever an Event of Default shall have occurred and be continuing, the Company hereby irrevocably authorizes each Bank to set off the Obligations owed to it (including, without limitation, any participation in the Obligations of other Banks purchased pursuant to Section 7.10 or 7.11) against all deposits and credits of the Company with, and any and all claims of the Company against, such Bank.  Such right shall exist whether or not the Agent shall have made any demand hereunder or under any other Loan Document, whether or not such indebtedness, or any part thereof, or deposits and credits held for the account of the Company is or are matured or unmatured, and regardless of the existence or adequacy of any collateral, guaranty or any other security, right or remedy available to the Banks.  Each Bank agrees that, as promptly as is reasonably possible after the exercise of any such setoff right, it shall notify the Agent and the Company of its exercise of such setoff right; provided , however , that the failure of any Bank to provide such notice shall not effect the validity of the exercise of such setoff rights.  Nothing in this Agreement shall be deemed a waiver or prohibition of or restriction on any rights of banker’s lien, setoff and counterclaim available to any Bank pursuant to law.
 
Section 2.29           Taxes .
 
(a)   Any and all payments by the Company hereunder or under the Notes shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges of withholdings, and all liabilities with respect thereto, excluding , in the case of each Bank and the Agent, taxes imposed on its overall net income, and franchise taxes imposed on it in lieu of net income taxes (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities in respect of payments hereunder or under the Notes being hereinafter referred to as “ Taxes” ).
 
(b)   The Company shall indemnify each Bank and the Agent for the full amount of Taxes imposed on or paid by such Bank or the Agent and any penalties, interest and expenses with respect thereto. Payments on this indemnification shall be made within 30 days from the date such Bank or the Agent makes written demand therefor.
 
(c)   Within 30 days after the date of any payment of Taxes, the Company shall furnish to the Agent, at its address referred to on the signature page hereof a certified copy of a receipt evidencing payment thereof.  In the case of any payment hereunder or under the Revolving Notes by or on behalf of the Company through an account or branch outside the United States or by or on behalf of the Company by
 
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a payor that is not a United States person, if the Company determines that no Taxes are payable in respect thereof, the Company shall furnish or shall cause such payor to furnish, to the Agent, at such address, an opinion of counsel acceptable to the Agent stating that such payment is exempt from Taxes. For purposes of this subsection (d) and subsection (e), the terms “ United States” and “ United States person” shall have the meanings specified in Section 7701 of the Internal Revenue Code.
 
(d)   Banks to Submit Forms .  Each Bank, as of the date it becomes a party hereto, represents to the Company and the Agent that it is either (i) a corporation organized under the laws of the United States or any State thereof or (ii) is entitled to complete exemption from United States withholding tax imposed on or with respect to any payments, including fees, to be made pursuant to this Agreement (x) under an applicable provision of a tax convention to which the United States is a party or (y) because it is acting through a branch, agency or office in the United States and any payment to be received by it hereunder is effectively connected with a trade or business in the United States.  Each Bank that is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) shall submit to the Company and the Agent, on or before the day on which such Bank becomes a Bank, a duly completed and signed copy of either Form W-8BEN or Form W-8ECI of the United States Internal Revenue Service.  Form W-8BEN shall include the Foreign Bank’s United States taxpayer identification number if required under the current regulations to claim exemption from withholding pursuant to a tax convention.  Thereafter and from time to time, each such Bank shall submit to the Company and the Agent such additional duly completed and signed copies of one or the other of such Forms (or such successor Forms as shall be adopted from time to time by the relevant United States taxing authorities) as may be (i) reasonably requested by the Company or the Agent and (ii) required and permitted under then-current United States law or regulations to avoid United States withholding taxes on payments in respect of all payments to be received by such Bank hereunder.  Upon the request of the Company or the Agent, each Bank that is a United States person (as such term is defined in Section 7701(a)(30) of the Code) shall submit to the Company and the Agent a certificate on Internal Revenue Service Form W-9 or such substitute form as is reasonably satisfactory to the Company and the Agent to the effect that it is such a United States person.
 
(e)   Inability of a Bank .  If the Company shall be required by law or regulation to make any deduction, withholding or backup withholding of any taxes, levies, imposts, duties, fees, liabilities or similar charges of the United States of America, any possession or territory of the United States of America (including the Commonwealth of Puerto Rico) or any area subject to the jurisdiction of the United States of America (“ U.S. Taxes ”) from any payments to a Bank pursuant to any Loan Document in respect of the Obligations payable to such Bank then or thereafter outstanding, the Company shall make such withholdings or deductions and pay the full amount withheld or deducted to the relevant taxation authority or other authority in accordance with applicable law.
 
(f)            Substitution of Bank .  In the event the Company is required pursuant to this Section 2.29 to pay any additional amount to any Bank, such Bank shall, if no Event of Default or Unmatured Event of Default has occurred and is continuing, upon the request of the Company to such Bank and the Agent, assign, pursuant to and in accordance with the provisions of Section 8.5(c), all of its rights and obligations under this Agreement and under the Loan Documents to another Bank or an assignee selected by the Company and reasonably satisfactory to the Agent, in consideration for (i) the payment by such assignee to the assigning Bank of the principal of, and interest accrued and unpaid to the date of such assignment on, the Revolving Note of such Bank, (ii) the payment by the Company to the assigning Bank of any and all other amounts owing to such Bank under any provision of this Agreement accrued and unpaid to the date of such assignment and (iii) the Company’s release of the assigning Bank from any further obligation or liability under this Agreement.  Notwithstanding anything to the contrary in this Section 2.29(f), in no event shall the replacement of any Bank result in a decrease in the aggregate Commitment Amounts without the written consent of the Majority Banks.
 
Section 2.30           Release of Existing Guaranties .  Upon the Effective Date, the Agent will execute and deliver to the Company a written release of each guarantor (other than the Guarantors) of the Company’s obligations under the Existing Credit Agreement, in the form prescribed by the Agent.  Each Bank which is party to the Existing Credit Agreement hereby consents to such execution and delivery by the Agent.
 
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ARTICLE III
CONDITIONS PRECEDENT
 
Section 3.1             Conditions Precedent to Initial Loan .  The obligation of the Banks to make the initial Loans hereunder, and the obligation of U.S. Bank to issue the initial Letter of Credit hereunder, shall be subject to the prior or simultaneous fulfillment of each of the following conditions:
 
(a)           the Agent shall have received the following:
 
(i)            Revolving Notes payable to the Banks, duly executed by the Company, complying with the requirements of Section 2.3;
 
(ii)           Amended and Restated Guaranties of the initial Guarantors, duly executed by such Guarantor;
 
(iii)          copies of the articles or certificate of incorporation or organization, including all amendments thereto, of the Company and the initial Guarantors, certified as of a date acceptable to the Agent by the appropriate governmental official of the jurisdiction of its incorporation or organization;
 
(iv)          long-form certificates of good standing of the Company and the initial Guarantors, as of a date acceptable to the Agent, from such governmental official;
 
(v)           certificates of the Secretary or an Assistant Secretary of the Company and the initial Guarantors, dated the Effective Date, certifying (A) that attached thereto is a true and complete copy of the organizational documents of the Company or such Guarantor as in effect on such date, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors, sole shareholder or other governing body of the Company or such Guarantor, authorizing the execution, delivery and performance of the Loan Documents to which it is a party and, in the case of the Company, the borrowings thereunder, and certifying that such resolutions have not been modified, rescinded or amended and are in full force and effect, (C) that the articles or certificate of incorporation or organization of the Company or such Guarantor have not been amended since the date of the last amendment thereto shown on the certificate of good standing furnished pursuant to Section 3.1(a)(iv), and (D) as to the authority, incumbency and specimen signature of each officer executing any Loan Document or any other document delivered in connection herewith or therewith on behalf of the Company or such Guarantor;
 
(vi)          the favorable written opinion of Robins, Kaplan, Miller & Ciresi, counsel for the Company and its Subsidiaries, addressed to the Banks, as to the matters and to the effect set forth in Exhibit D;
 
(vii)         a copy of a letter from the Company to the accounting firm that audited the financial statements referred to in Section 4.5, informing such accounting firm that the Banks are extending credit in reliance on such statements; and
 
(viii)        a certificate of the appropriate financial officer of the Company to the effect that, as of the Effective Date, the representations and warranties of the Company set forth herein and of each initial Guarantor set forth in its Guaranty are true and correct, and that no Event of Default or Unmatured Event of Default has occurred or will exist.
 
(b)           the Agent and the Banks shall have received all fees and other amounts due and payable by the Company to the Agent and the Banks under, or as contemplated by, this Agreement or any other Loan Document on or prior to the Effective Date, including, but not limited to, the reasonable fees and expenses of counsel to the Agent payable pursuant to Section 8.3; and
 
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(c)           the Company shall have performed and complied with all agreements, terms and conditions contained in this Agreement required to be performed or complied with by the Company prior to or simultaneously with the Effective Date.
 
Section 3.2             Conditions Precedent to Each Loan .  The obligation of the Banks to make all Loans (including the initial Loan) other than Letter of Credit Loans, to continue any Eurodollar Advances as such or to convert any outstanding Advances to Eurodollar Advances, and the obligation of U.S. Bank to issue, extend or renew Letters of Credit, shall be subject to the fulfillment of the following conditions:
 
(a)           the representations and warranties of the Company contained in Article IV and of each Guarantor contained in its Guaranty shall be true and correct on and as of the date on which each Loan is requested to be made, on which each Advance is requested to be continued or converted or on which each Letter of Credit is requested to be issued, extended or renewed with the same force and effect as if made on and as of such date, and the giving of the relevant Notice of Borrowing, Continuation or Conversion or the making of the relevant request for the issuance, extension or renewal of a Letter of Credit shall constitute a representation and warranty to such effect;
 
(b)           no Event of Default or Unmatured Event of Default shall have occurred and be continuing on the Borrowing Date or would exist after giving effect to the making of the requested Loan, the requested continuation or conversion of an Advance or the issuance, extension or renewal of the requested Letter of Credit; and
 
(c)           the Agent shall have received a timely and properly completed Notice of Borrowing, Continuation or Conversion, as required under Section 2.2 or Section 2.5, or U.S. Bank shall have received a timely and properly completed written request for the issuance, extension or renewal of a Letter of Credit, as required under Section 2.9.
 
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
 
To induce the Banks to enter into this Agreement, to grant their respective Commitments and to make Loans thereunder, and to induce U.S. Bank to issue Letters of Credit hereunder, the Company hereby represents and warrants to the Banks that:
 
Section 4.1             Organization, Standing, Etc.   The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to carry on its business as now conducted, to enter into this Agreement and to perform its obligations under each Loan Document to which it is a party.  Each Subsidiary of the Company is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and has all requisite power and authority to carry on its business as now conducted.  The Company and each Subsidiary (a) holds all certificates of authority, licenses and permits necessary to carry on its business as presently conducted in each jurisdiction in which it is carrying on such business, except where the failure to hold such certificates, licenses or permits would not have a Material Adverse Effect, and (b) is duly qualified and in good standing as a foreign corporation in each jurisdiction in which the character of the properties owned, leased or operated by it or the business conducted by it makes such qualification necessary and the failure so to qualify would permanently preclude it from enforcing its rights with respect to any assets or expose it to any liability, which in either case could have a Material Adverse Effect.
 
Section 4.2             Authorization and Validity .  The execution, delivery and performance by the Company of each Loan Document to which it is a party have been duly authorized by all necessary corporate action, and this Agreement and each other Loan Document to which the Company is a party constitutes the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with its respective terms, subject to limitations as to enforceability which might result from bankruptcy, insolvency, moratorium and other similar laws affecting creditors’ rights generally and general principles of equity.  The execution, delivery and performance by each Guarantor of its Guaranty have been duly authorized by all necessary organizational action, and each Guaranty constitutes the legal, valid and binding obligations of the Guarantor party to it, enforceable
 
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against such Guarantor in accordance with its respective terms, subject to limitations as to enforceability which might result from bankruptcy, insolvency, moratorium and other similar laws affecting creditors’ rights generally and general principles of equity.
 
Section 4.3             Compliance With Law and Other Agreements .  The execution, delivery and performance by the Company and each Guarantor of each Loan Document to which it is a party will not (a) violate any provision of any law, statute, rule or regulation or any order, writ, judgment, injunction, decree, determination or award of any Governmental Authority applicable to the Company or any Subsidiary, (b) violate or contravene any provision of the organizational documents of the Company or any Subsidiary, or (c) result in a breach of or constitute a default under any indenture, loan or credit agreement or any other agreement, lease or instrument to which the Company or any Subsidiary is a party or by which the Company, any Subsidiary or any of their properties may be bound, or result in the creation of any Lien thereunder.  Neither the Company nor any Subsidiary is in default under or in violation of any law, statute, rule or regulation, order, writ, judgment, injunction, decree, determination or award of any Governmental Authority applicable to it or any indenture, loan or credit agreement or other agreement, lease or instrument to which it is a party or by which it or any of its properties may be bound in any case in which the consequences of such default or violation would have a Material Adverse Effect.
 
Section 4.4             Governmental Consent .  No order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any Governmental Authority is required on the part of the Company or any Subsidiary to authorize, or is required in connection with, the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, the Loan Documents.
 
Section 4.5             Financial Statements and No Material Adverse Change .  The Company’s audited financial statements as of March 3, 2001, and its consolidated unaudited financial statements as of December 1, 2001, as heretofore furnished to the Banks, have been prepared in conformity with GAAP on a consistent basis (except for year-end audit adjustments as to the unaudited statements) and fairly present the consolidated financial condition of the Company as at such dates and the results of its operations and cash flow for the respective periods then ended.  As of the dates of such financial statements, neither the Company nor any Subsidiary had any material obligation, contingent liability, liability for taxes or long-term lease obligations or unusual forward or long-term commitment which is not either reflected in such financial statements or in the notes thereto.  Since the date of the Company’s most recent audited financial statements delivered to the Banks, no Material Adverse Effect has occurred with respect to the Company or any Subsidiary.
 
Section 4.6             Litigation .  There are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company, any Subsidiary or any of their properties before any arbitrator or any Governmental Authority which has had, or, if determined adversely to the Company or such Subsidiary, would likely have, a Material Adverse Effect.
 
Section 4.7             ERISA .  Each Plan complies with all material applicable requirements of ERISA and the Code and with all material applicable rulings and regulations issued under the provisions of ERISA and the Code setting forth those requirements.  No Reportable Event has occurred and is continuing with respect to any Plan.  All of the minimum funding standards applicable to such Plans have been satisfied and there exists no event or condition which would permit the institution of proceedings to terminate any Plan under Section 4042 of ERISA.  The current value of the Plans’ benefits guaranteed under Title IV of ERISA does not exceed the current value of the Plans’ assets allocable to such benefits.  As of the Signing Date, neither the Company nor any ERISA Affiliate is a party to or has any liability to any Multiemployer Plan.
 
Section 4.8             Environmental, Health and Safety Laws .  There does not exist any violation by the Company or any Subsidiary of any applicable federal, state or local law, rule or regulation or order of any government, governmental department, board, agency or other instrumentality relating to environmental, pollution, health or safety matters which could have a Material Adverse Effect.  Neither the Company nor any Subsidiary has received any notice to the effect that any part of its operations or properties is not in material compliance with any such law, rule, regulation or order or notice that it or its property is the subject of any governmental investigation evaluating whether any remedial action is needed to respond to any release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could reasonably be expected to have a Material Adverse Effect on  the Company.
 
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Section 4.9             Federal Reserve Regulations .  Neither the Company nor any Subsidiary is engaged principally or as one of its important activities in the business of extending credit for the purpose of purchasing or carrying margin stock and no part of the proceeds of any Loan will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, (a) to purchase or carry margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock or to refund indebtedness originally incurred for such purpose or (b) for any purpose which entails a violation of, or which is inconsistent with, the provisions of Regulations U or X.  The value of all margin stock owned by the Company and its Subsidiaries does not constitute more than 25% of the value of the consolidated assets of the Company.
 
Section 4.10           Title to Property; Possession Under Leases .  Each of the Company and its Subsidiaries has good title, free of all Liens other than those permitted by Section 5.12 hereof, to all of the properties and assets reflected in the most recent financial statements delivered to the Banks hereunder as being owned by it and all assets acquired subsequent to the date of such financial statements, except for assets disposed of in the ordinary course of business.  To the knowledge of the Company, there are no actual, threatened or alleged defaults with respect to any leases of any real or personal property under which the Company or any of its Subsidiaries is lessor, in each case which actual, threatened or alleged defaults could have a Material Adverse Effect.
 
Section 4.11           Taxes .  The Company and its Subsidiaries have filed all federal, state, local and foreign tax returns required to be filed by them and have paid or made provision for the payment of all taxes due and payable pursuant to such returns and pursuant to any assessments made against them or any of their property and all other taxes, fees and other charges imposed on them or any of their property by any Governmental Authority (other than taxes, fees or charges the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside on the books of the Company or such Subsidiary in conformity with GAAP).  No tax Liens have been filed and no material claims are being asserted with respect to any such taxes, fees or charges.  The charges, accruals and reserves on the books of the Company and each Subsidiary in respect of taxes and other governmental charges are adequate and the Company knows of no proposed material tax assessment against it or any Subsidiary or any basis therefor.  The United States income tax returns of the Company and its Subsidiaries have been audited by the Internal Revenue Service, or the period for audit thereof has expired, for all fiscal years of the Company ending on or before March 31, 1996.
 
Section 4.12           Trademarks, Patents .  Each of the Company and its Subsidiaries possesses or has the right to use all of the patents, trademarks, trade names, service marks and copyrights, and applications therefor, and all technology, know-how, processes, methods and designs used in or necessary for the conduct of its business, without known conflict with the rights of others except conflicts that would not be likely to have a Material Adverse Effect on the Company.
 
Section 4.13           Business and Properties of Company and its Subsidiaries .  Since the date of the most recent financial statements delivered to the Banks hereunder, the business, properties and other assets of the Company and its Subsidiaries have not been materially and adversely affected in any way as the result of any fire or other casualty, strike, lockout, or other labor trouble, embargo, sabotage, confiscation, condemnation, riot, civil disturbance, activity of armed forces or act of God.
 
Section 4.14           Securities Laws .  Neither the Company nor any Subsidiary has issued any unregistered securities in violation of the registration requirements of Section 5 of the Securities Act of 1933, as amended, or any other federal, state or foreign law, nor is the Company or any Subsidiary violating any rule, regulation or requirement under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or other federal, state or foreign law in any material respect.
 
Section 4.15           Investment Company Act .  The Company is not an “investment company” or a company “controlled” by an investment company within the meaning of the Investment Company Act of 1940, as amended.
 
Section 4.16           Public Utility Holding Company Act .  The Company is not a “holding company” or a “subsidiary company” of a holding company or an “affiliate” of a holding company or of a subsidiary company of a holding company within the meaning of the Public Utility Holding Company Act of 1940, as amended.
 
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Section 4.17           Retirement Benefits .  Except as required under Section 4980B of the Code, Section 601 of ERISA or applicable state law, neither the Company nor any Subsidiary is obligated to provide post-retirement medical or insurance benefits with respect to employees or former employees.
 
Section 4.18           Indebtedness .  The Company and its Subsidiaries have no outstanding Indebtedness except Indebtedness permitted pursuant to Section 5.13.
 
Section 4.19           Subsidiaries .  Schedule 4.19(a) sets forth the Company’s organizational chart as of the Effective Date, including the legal name and the jurisdiction of incorporation of each of the Company’s Subsidiaries as of the Signing Date.  Schedule 4.19(b) identifies all Restricted Subsidiaries as of the Company’s fiscal year ended March 3, 2001 and, with respect to each such Restricted Subsidiary sets forth (i) the jurisdiction of incorporation of such Restricted Subsidiary, (ii) the authorized and outstanding capital stock of such Restricted Subsidiary by class and number and (iii) the name of each Person owning the capital stock of such Restricted Subsidiary.  There are no warrants, options or other rights to purchase any capital stock in any Restricted Subsidiary.
 
Section 4.20           Full Disclosure .  Subject to the following sentence, neither the financial statements delivered to the Banks hereunder nor any other certificate, written statement, exhibit or report furnished by or on behalf of the Company in connection with or pursuant to this Agreement contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements contained therein not misleading.  Certificates or statements furnished by or on behalf of the Company to the Agent or any Bank consisting of projections or forecasts of future results or events have been prepared in good faith and are based on good faith estimates and assumptions of the management of the Company, and the Company has no reason to believe that such projections or forecasts are not reasonable.
 
ARTICLE V
COVENANTS
 
Until the Commitments shall have expired or been terminated and all of the Obligations shall have been paid in full, unless the Majority Banks shall otherwise consent in writing, the Company will:
 
Section 5.1             Financial Statements .  Furnish to the Agent, with a copy for each Bank:
 
(a)           as soon as available and in any event within 90 days after the end of each fiscal year of the Company, a copy of the consolidated financial statements of the Company consisting of at least statements of income, a reconciliation of changes in equity accounts and cash flow statements for such fiscal year and balance sheets as at the end of such fiscal year, setting forth in each case in comparative form corresponding figures from the preceding year audit, certified without qualification as to scope, as to the going concern nature of the Company or as to any other matter deemed material by the Majority Banks, by Ernst & Young or other independent certified public accountants of recognized national standing selected by the Company and acceptable to the Agent, together with (i) to the extent not previously delivered to such accounting firm under the terms hereof, a letter from the Company to such accounting firm advising such accounting firm that the Banks are extending credit in reliance on such financial statements and (ii) a statement of the accounting firm performing such audit to the effect that in the course of performing its examination nothing came to its attention that caused it to believe that the Company was not in compliance with Sections 5.21, 5.22 and 5.23;
 
(b)           as soon as available and in any event within (i) in the case of the last fiscal quarter of each year, 60 days and (ii) in all other cases, 45 days, after the end of each fiscal quarter, a copy of the unaudited consolidated financial statements of the Company consisting of at least statements of income for said fiscal quarter and for the period from the beginning of the fiscal year to the end of such fiscal quarter, cash flow statements for such fiscal quarter and for the period from the beginning of the fiscal year to the end of such fiscal quarter and balance sheets as at the end of such fiscal quarter, setting forth, in each case, comparative figures for the corresponding period of the preceding fiscal year and forecasted figures for such period, certified by the chief financial officer of the Company or his designee as being true and prepared in accordance with GAAP, except for year-end audit adjustments and the absence of footnotes;
 
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(c)           promptly after the sending or filing thereof, copies of all regular and periodic financial reports which the Company or any Subsidiary shall file with the Securities and Exchange Commission or any national securities exchange;
 
(d)           as soon as practicable and in any event on or before the last  Business Day of the second month of each fiscal year of the Company, projections, in reasonable detail, on a quarterly basis for such fiscal year, including projected earnings statements and cash flow statements for each month during such fiscal year and the period from the beginning of such fiscal year through the end of such month, and accompanying balance sheets as of the end of such month, signed by the chief financial officer of the Company or his designee;
 
(e)           together with the financial statements delivered for each fiscal quarter pursuant to Section 5.1(b), the Company’s quarterly sales release for such quarter; and
 
(f)            such other information respecting the financial condition and results of operations of the Company as the Agent or any Bank may from time to time reasonably request.
 
(g)           as soon as available and in any event within (i) in the case of the last fiscal quarter of each year, 60 days and (ii) in all other cases, 45 days after the end of each fiscal quarter, and together with the financial statements required pursuant to Section 5.1(b), a properly completed Compliance Certificate, signed by an appropriate financial officer of the Company.
 
Section 5.2             Corporate Existence .  Except as permitted by Section 5.11, maintain, and cause each Subsidiary to maintain, its corporate existence in good standing under the laws of its jurisdiction of incorporation and its qualification to transact business in each jurisdiction where failure so to qualify would permanently preclude the Company or such Subsidiary from enforcing its rights with respect to any material asset or would expose the Company or such Subsidiary to any material liability, and do or cause to be done, and cause each Subsidiary to do or cause to be done, all things necessary to obtain, preserve, renew, extend and keep in full force and effect the rights, licenses, permits, franchises and authorizations material to the conduct of its business.
 
Section 5.3             Compliance with Laws, etc.   Comply, and cause each Subsidiary to comply, in all material respects with all applicable laws, rules, regulations and orders of any Governmental Authority applicable to the Company or such Subsidiary, whether now in effect or hereafter enacted, the failure to comply with which has had or would likely have a Material Adverse Effect on the Company.
 
Section 5.4             Insurance .  Keep, and cause each Subsidiary to keep, its insurable properties adequately insured at all times by financially sound and reputable insurers; maintain, and cause each Subsidiary to maintain, such other insurance, in such amounts and against such risks, as is customary with companies in the same or similar businesses, including (i) public liability insurance against such tort claims which may be asserted against it, and (ii) fire and other risks insured against by extended coverage; and maintain, and cause each Subsidiary to maintain, such other insurance as may be required by law or agreement.
 
Section 5.5             Payment of Indebtedness, Taxes and Claims .  Pay, and cause each of its Subsidiaries to pay, its Indebtedness and other obligations promptly and in accordance with their terms; file, and cause each of its Subsidiaries to file, all tax returns and reports which are required by law to be filed by it; pay, and cause each of its Subsidiaries to pay, before they become delinquent, all taxes, assessments and governmental charges and levies imposed upon it or its property and all claims or demands of any kind (including but not limited to those of suppliers, mechanics, carriers, warehousemen, landlords and other like Persons) which, if unpaid, might result in the creation of a Lien upon its property; provided that the foregoing items need not be paid if they are being contested in good faith by appropriate proceedings, and as long as the Company’s or such Subsidiary’s title to its property is not materially adversely affected, its use of such property in the ordinary course of its business is not materially interfered with and adequate reserves with respect thereto have been set aside on the Company’s or such Subsidiary’s books in conformity with GAAP.
 
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Section 5.6             Books and Records; Inspections; Audits .  Keep, and cause each Subsidiary to keep, proper books and records of account in which full, true and correct entries will be made of all its dealings, business and affairs in accordance with GAAP consistently applied and consistent with the principles applied in the preparation of the financial statements referred to in Section 4.5; permit, and cause each Subsidiary to permit, any Person designated by any Bank to visit and inspect any of its properties, corporate books and financial records and to copy and make extracts therefrom and to discuss its affairs and finances with its officers and independent certified public accountants, all at such times as such Bank shall reasonably request.
 
Section 5.7             Maintenance of Properties .  Maintain, and cause each Subsidiary to maintain, its properties used or useful in the conduct of its business in good condition, repair and working order, and supplied with all necessary equipment, and make all necessary repairs, renewals, replacements, betterments and improvements thereto, all as may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times.
 
Section 5.8             ERISA .  Establish, maintain and operate each Plan in compliance with all material applicable requirements of ERISA and of the Code and with all material applicable rulings and regulations issued under the provisions of ERISA and of the Code, and will not, and will not permit any ERISA Affiliate to, (a) engage in any transaction in connection with which the Company or any ERISA Affiliate would be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code, in either case in an amount exceeding $100,000, (b) fail to make full payment when due of all amounts which, under the provisions of any Plan, the Company or any ERISA Affiliate is required to pay as contributions thereto, or permit to exist any accumulated funding deficiency (as such term is defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, with respect to any Plan in an aggregate amount exceeding $1,000,000 or (c) fail to make any payments in an aggregate amount exceeding $1,000,000 to any Multiemployer Plan that the Company or any ERISA Affiliate may be required to make under any agreement relating to such Multiemployer Plan or any law pertaining thereto.
 
Section 5.8             Litigation and Other Notices .  Furnish to the Agent, with a copy for each Bank, written notice of the following promptly after any officer of the Company or any Subsidiary becomes aware of the same:
 
(a)           any Event of Default or Unmatured Event of Default, specifying the nature and extent thereof and the corrective action (if any) proposed to be taken with respect thereto;
 
(b)           the filing or commencement of, or receipt of notice of intention of any person to file or commence, any action, suit or proceeding, whether at law or in equity or by or before any Governmental Authority, against the Company or any Subsidiary which has had or would likely have a Material Adverse Effect on the Company;
 
(c)           any development affecting or relating to the Company or any Subsidiary, including without limitation any development in litigation, that in the reasonable judgment of the Company has had, or would likely have, a Material Adverse Effect on the Company;
 
(d)           the issuance by any Governmental Authority of any injunction, order, decision or other restraint prohibiting, or having the effect of prohibiting, the Loans or Letters of Credit, or the initiation of any litigation or similar proceeding seeking any such injunction, order or other restraint;
 
(e)           the occurrence of any Reportable Event with respect to any Plan and the action which is proposed to be taken with respect thereto, together with a copy of the notice of such Reportable Event to the PBGC;
 
(f)            any violation as to any environmental matter by the Company or any Subsidiary or the commencement of any judicial or administrative proceeding relating to health, safety or environmental matters (i) in which an adverse determination or result could result in the revocation of or have a material adverse effect on any operating permits, air emission permits, water discharge permits,
 
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hazardous waste permits or other permits held by the Company or any Subsidiary which are material to the operations of the Company or such Subsidiary, or (ii) which will or threatens to impose a material liability on the Company or such Subsidiary to any Person or which will require a material expenditure by the Company or such Subsidiary to cure any alleged problem or violation; or
 
(g)           the issuance by any Governmental Authority of any injunction, order or decision, or the entry by the Company or any Subsidiary into an agreement with any Governmental Agency, materially restricting the business of the Company or any Subsidiary or concerning any material business practice of the Company or any Subsidiary.
 
Section 5.10           Supplemental Disclosure .  From time to time as may be necessary (in the event that such information is not otherwise delivered by the Company to the Banks pursuant to this Agreement), as promptly as is reasonable under the circumstances after any executive officer of the Company or any Subsidiary has knowledge with respect thereto, and at least quarterly, supplement or amend and deliver to the Agent, with a copy for each Bank, each Schedule or representation herein with respect to any matter hereafter arising which, if existing or occurring at the Signing Date, would have been required to be set forth or described in such Schedule or as an exception to such representation or which is necessary to correct any information in such Schedule or representation which has been rendered inaccurate thereby.  No supplement to any Schedule or representation provided by the Company hereunder shall amend this Agreement (including, without limitation, the applicable Schedule) unless such amendment is agreed to by the requisite Banks as provided in Section 8.1(a).
 
Section 5.11           Restrictions on Fundamental Changes .  Not, and not permit any Subsidiary to engage in any business activities or operations if, as a result thereof, the general nature of the business of the Company or the Company and its Subsidiaries taken as a whole would be substantially changed from that conducted on the Signing Date.  So long as no Unmatured Event of Default or Event of Default is continuing the Company is and continues to be in compliance with the requirements of Sections 5.21, 5.22 and 5.23 before and after any of the transactions hereinafter described, the Company or any Subsidiary may (i) upon not less than 10 Business Days’ prior written notice to the Agent and the Banks, merge or consolidate with any other Person, so long as the Company or such Subsidiary is the survivor; (ii) sell, lease or otherwise dispose of (or enter into any commitment to convey, sell, lease, transfer or otherwise dispose of) all or any part of its business or assets; (iii) acquire by purchase or otherwise all of the business or property of, or stock or other evidence of beneficial ownership of, any Person or (iv) create or acquire any new Subsidiaries.
 
Section 5.12           Liens .  Not, and not permit any Subsidiary to, create, incur, assume or suffer to be created, incurred or exist any Lien, or enter into or make any commitment to enter into any arrangement for the acquisition of any property through conditional sale, lease-purchase, or other title retention agreements with respect to property now owned or hereafter acquired by the Company or any Subsidiary, except:
 
(a)           Liens existing on the Signing Date and described in Schedule 5.12(a), and Liens on the same property securing any Indebtedness the proceeds of which are used solely to refinance the Indebtedness secured by such existing Liens;
 
(b)           deposits or pledges to secure payment of workers’ compensation, unemployment insurance, old age pensions or other social security obligations, incurred in the ordinary course of business of the Company;
 
(c)           Liens for taxes, fees, assessments and governmental charges not delinquent or which are being contested in good faith by appropriate proceedings and for which whatever reserves required by GAAP have been established;
 
(d)           Liens consisting of easements, rights-of-way, zoning restrictions, restrictions on the use of real property, and defects and irregularities in the title thereto, landlords’ liens and other similar liens and encumbrances none of which interfere materially with the use of the property covered thereby in the ordinary course of the business of the Company or such Subsidiary and which do not materially detract from the value of such properties;
 
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(e)           Liens created or assumed in connection with the acquisition of real or personal property by the Company or any Subsidiary, provided that such Liens attach only to the property acquired and secure only Indebtedness incurred solely to finance the acquisition of such property, and Liens on the same property securing any Indebtedness the proceeds of which are used solely to refinance such Indebtedness;
 
(f)            subject to the limitation set forth in Section 5.13(e), Liens on inventory of the Company or any Subsidiary and proceeds thereof pursuant to agreements with the suppliers of inventory or inventory lenders to the Company or such Subsidiary, provided that such Liens attach only to inventory financed pursuant to such agreements and secure only Indebtedness incurred solely to finance the acquisition of such inventory by the Company or such Subsidiary;
 
(g)           Liens on real property (but not any equipment other than building fixtures), provided that such Liens secure only Indebtedness incurred solely to finance, or reimburse the Company for the cost of, Capital Expenditures for the acquisition or construction of such real property; and;
 
(h)           Liens existing on the Effective Date and securing the Future Shop Indebtedness, provided that such Liens have been terminated and released on or prior June 30, 2002.
 
Section 5.13           Indebtedness .  Not, and not permit any Subsidiary to, incur, create, issue, assume or remain liable for any Indebtedness, except:
 
(a)           the Obligations;
 
(b)           other Indebtedness existing on the Signing Date and described in Schedule 5.13, and Indebtedness the proceeds of which are used solely to refinance such Indebtedness;
 
(c)           Subordinated Indebtedness, including the Subordinated Convertible Debentures;
 
(d)           Indebtedness secured by Liens permitted under Section 5.12(e) or Section 5.12(g);
 
(e)           Indebtedness secured by Liens permitted under Section 5.12(f), provided the amount of such Indebtedness at any time outstanding does not exceed thirty-five percent of the lower of cost (determined on an average cost basis) or market value of the Company’s inventory;
 
(f)            Indebtedness in respect of Documentary Letters of Credit incurred in the ordinary course of business;
 
(g)           Indebtedness of the Company in an amount not to exceed $200,000,000;
 
(h)           current liabilities, other than for borrowed money, incurred in the ordinary course of business;
 
(i)            Indebtedness incurred after the date hereof in order to finance the acquisition of new corporate headquarters facilities; provided that (i) such Indebtedness shall not exceed a loan-to-value ratio (ie, the original principal balance of such Indebtedness over the appraised fair market value of such new corporate headquarters facilities) of 80% and (ii) any documents evidencing such Indebtedness (A) shall have terms and covenants less restrictive than those set forth herein, and (B) the documents shall be otherwise reasonably acceptable to the Agent.
 
(j)            The Initial Convertible Debentures.
 
(k)           The Indebtedness described on Schedule 5.13(k) (the “Future Shop Indebtedness”).
 
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Section 5.14           [INTENTIONALLY OMITTED]
 
Section 5.15           Guarantees .  Not, and not permit any Subsidiary to, be or become liable  on any Guarantee, except Guarantees of the Indebtedness permitted by Section 5.13; provided , that, in each of the forgoing cases (a) to the extent that the Indebtedness so guaranteed is subordinated to the Obligations, such Guarantee shall be similarly subordinated to the Obligations, and any Guarantees thereof, and (b) the Company may not amend or cancel, or permit or consent to the amendment or cancellation of, the subordination provisions thereof.
 
Section 5.16           Restricted Payments .  Not make Restricted Payments unless  both before and after giving effect thereto, no Event of Default or Unmatured Event of Default will have occurred or be continuing.
 
Section 5.17           [INTENTIONALLY OMITTED]
 
Section 5.18           Federal Reserve Regulations .  Not use any part of the proceeds of any Loan directly or indirectly (a) to purchase or carry margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock or to refund Indebtedness originally incurred for such purpose or (b) for any purpose which entails a violation of, or which is inconsistent with, the provisions of Regulations U or X.
 
Section 5.19           Environmental Matters .  Observe and comply with, and cause each Subsidiary to observe and comply with, all laws, rules, regulations and orders of any government or government agency relating to health, safety, pollution, hazardous materials or other environmental matters to the extent non-compliance could result in a Material Adverse Effect on the Company.
 
Section 5.20           Payment of Subordinated Indebtedness .  Not, and not permit any Subsidiary to:  make any prepayment of principal of, or acquire, redeem or otherwise retire any Subordinated Indebtedness, if an Event of Default or Unmatured Event of Default has occurred and is continuing or will exist as a result of such prepayment or if such prepayment, acquisition, redemption or retirement would be inconsistent with the subordination provisions thereof; make any payment of principal or interest on any Subordinated Indebtedness if an Event of Default or Unmatured Event of Default exists or otherwise in any manner inconsistent with the subordination provisions thereof; amend or cancel or consent to or permit the amendment or cancellation of, or the subordination provisions thereof; take or omit to take any action whereby the subordination of such Indebtedness or any part thereof to the Notes might be terminated, impaired or adversely affected; or omit to give the Banks prompt written notice of any notice received from any holder of Subordinated Indebtedness of any default under any agreement or instrument relating to any Subordinated Indebtedness by reason whereof such Subordinated Indebtedness might become or be declared to be due or payable.
 
Section 5.21           Minimum Consolidated Net Worth .  Not at any time permit Consolidated Net Worth to be less than $2,000,000,000 minus the aggregate amount (not to exceed $1,000,000,000) paid by the Company in cash after the Effective Date to repurchase shares of its common stock pursuant to the Company’s stock repurchase programs.
 
Section 5.22           Cash Flow Leverage Ratio .  Not permit the Cash Flow Leverage Ratio (a) at the end of any fiscal year of the Company to exceed 3.00 to 1.00 and (b) at the end of each fiscal quarter (other than the last fiscal quarter) during any such fiscal year to exceed 3.25 to 1.00.
 
Section 5.23           Interest Coverage Ratio .  Not permit the Interest Coverage Ratio, as at the end of any fiscal quarter for the Measurement Period ending on that date, to be less than 3.00 to 1.00.
 
Section 5.24           Negative Pledges .  Not, and not permit any Subsidiary to, enter into any agreement, bond, note or other instrument for the benefit of any Person other than the Agent and the Banks that would (a) prohibit the Company or such Subsidiary from granting, or otherwise limit the ability of the Company or such Subsidiary to grant, any Lien on any of its property to the Agent, for the benefit of the Banks, or to lenders providing credit facilities to replace the Commitments or refinance the Obligations, except limitations created in agreements creating Liens on, and applicable only to, property on which a Lien is granted by the Company as permitted in Sections 5.12(e), (f) or (g), or (b) require the Company or such Subsidiary to grant a Lien to any other
 
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Person if the Company or such Subsidiary grants Liens to the Agent, for the benefit of the Banks, or to lenders providing credit facilities to replace the Commitments or refinance the Obligations.
 
Section 5.25           Guaranties of Restricted Subsidiaries .  With respect to each Subsidiary that becomes a Restricted Subsidiary after the Effective Date: (a) the Company will furnish to the Banks written notice within 10 Business Days after such Subsidiary becomes a Restricted Subsidiary and (b) the Company will, within 10 Business Days of any written request therefor by the Agent at the direction of the Majority Banks (i) cause such Subsidiary to duly execute and deliver to the Agent a Guaranty properly completed for such Subsidiary and in sufficient counterparts for the Agent and the Banks and (ii) furnish to the Agent documents of the type specified in Sections 3.1(a)(iii), (iv) and (v) properly completed for such Subsidiary and dated a date reasonably acceptable to the Agent.  Nothing in this Agreement shall obligate the Agent or the Banks to release or terminate a Guaranty of any Guarantor which ceases to be a Restricted Subsidiary.
 
ARTICLE VI
EVENTS OF DEFAULT AND REMEDIES
 
Section 6.1             Events of Default .  The occurrence of any one or more of the following events shall constitute an Event of Default:
 
(a)           the Company shall fail to make when due, whether by acceleration of maturity, required prepayment or otherwise, any payment of principal of or interest on the Notes, any reimbursement obligation in respect of a draw under a Letter of Credit or any other Obligation required to be paid to the Agent or any Bank pursuant to this Agreement or any other Loan Document, or fails to make, when due, any deposit into the Holding Account required hereunder; or
 
(b)           any representation or warranty made by or on behalf of the Company or any Subsidiary in this Agreement or any other Loan Document or in any certificate, statement, report or document herewith or hereafter furnished to the Agent or any Bank pursuant to this Agreement or any other Loan Document shall prove to have been false or misleading in any material respect on the date as of which the facts set forth are stated or certified; or
 
(c)           the Company shall fail to preserve its corporate existence under the laws of the jurisdiction of its incorporation or shall fail to comply with any term, covenant or agreement contained in Sections 5.11, 5.12, 5.13, 5.15, 5.16, 5.17, 5.18, 5.20, 5.21, 5.22, 5.23, 5.24, or 5.25; or
 
(d)           the Company shall fail to comply with any other agreement, covenant, condition, provision or term contained in this Agreement (other than those herein above set forth in this Section 6.1) or any other Loan Document and such failure to comply shall continue for 30 days after whichever of the following dates is the earliest:  (i) the date the Company gives notice of such failure to the Agent, (ii) the date the Company should have given notice of such failure to the Agent pursuant to Section 5.9, or (iii) the date the Agent gives notice of such failure to the Company; or
 
(e)           the Company or any Subsidiary shall become insolvent or shall generally not pay its debts as they mature or shall apply for, shall consent to, or shall acquiesce in the appointment of a custodian, trustee or receiver of the Company or any Subsidiary or for a substantial part of the property of any of them or, in the absence of such application, consent or acquiescence, a custodian, trustee or receiver shall be appointed for the Company or any Subsidiary or for a substantial part of the property of any of them or the Company or any Subsidiary shall make an assignment for the benefit of creditors; or
 
(f)            any bankruptcy, receivership, custodianship, reorganization, debt arrangement or other proceedings under any bankruptcy or insolvency law shall be instituted by or against the Company or any Subsidiary, and, if instituted against the Company or any Subsidiary, shall have been consented to or acquiesced in by the Company or such Subsidiary, as applicable, or shall not have been dismissed within 60 days, or an order for relief shall have been entered against the Company or such Subsidiary, as applicable; or
 
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(g)           any dissolution or liquidation proceeding shall be instituted by or against the Company or any Subsidiary and, if instituted against the Company or any Subsidiary, shall be consented to or acquiesced in by the Company or such Subsidiary or shall not have been dismissed within 60 days; or
 
(h)           one or more judgments for the payment of money in an aggregate amount in excess of $20,000,000 shall be rendered against the Company or any Subsidiary (unless such judgment is covered by insurance and the insurer has offered to defend such judgment or acknowledged, in writing, its liability with respect thereto) and the same shall remain undischarged for a period of 60 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to levy upon assets or properties of the Company or any Subsidiary to enforce any such judgment; or
 
(i)            the Company or any Subsidiary shall (i) fail to pay any principal or interest, regardless of amount, due in respect of Indebtedness in a principal amount aggregating in excess of $10,000,000, when and as the same shall become due and payable (after giving effect to any applicable grace period specified in the instrument evidencing or governing such Indebtedness), or (ii) fail to observe or perform any other term, covenant or provision contained in any instrument evidencing or governing such Indebtedness in a principal amount aggregating in excess of $10,000,000 (after giving effect to any applicable grace period specified in the instrument evidencing or governing such Indebtedness) if the effect of any such failure is to cause, or to permit the holder or holders of such Indebtedness or a trustee or other Person acting on behalf of such holder or holders to cause, such Indebtedness to become due prior to its stated maturity or to realize on any collateral given as security for such Indebtedness; provided , however , that any of the foregoing occurrences with respect to any Indebtedness arising from the purchase of goods or services by the Company that is being contested in good faith by appropriate proceedings shall not constitute an Event of Default as long as the Company’s or such Subsidiary’s title to any substantial part of its property is not materially adversely affected, its use of such property in the ordinary course of its business is not materially interfered with and adequate reserves with respect thereto have been set aside on its books in conformity with GAAP; or
 
(j)            any execution or attachment shall be issued whereby any substantial part of the property of the Company or any Subsidiary shall be taken or attempted to be taken and the same shall not have been vacated or stayed within 60 days after the issuance thereof; or
 
(k)           any of the following shall have occurred:
 
(i)            a Reportable Event as defined in Section 4043(b), subdivision (5), of ERISA shall have occurred with respect to any Plan subject to Title IV of ERISA (other than any Multiemployer Plan) unless a waiver of the failure to meet minimum funding standards under Section 412 of the Code shall have been timely applied for and shall not have been denied; or
 
(ii)           a Reportable Event as defined in Section 4043(b), subdivision (6), of ERISA shall have occurred with respect to any Plan subject to Title IV of ERISA (other than any Multiemployer Plan); or
 
(iii)          the Company or any ERISA Affiliate shall have engaged in any Prohibited Transaction and either (1) the Prohibited Transaction shall not have been corrected within the correction period applicable to it under Section 502(i) of ERISA or Section 4975(b) of the Code, or (2) an exemption shall not be applicable or have been obtained under Section 408 of ERISA or Section 4975 of the Code; or
 
(iv)          the PBGC shall have terminated any Plan other than any Multiemployer Plan under Title IV of ERISA or the Company or any ERISA Affiliate shall have received notice from the PBGC of the intention of the PBGC to terminate any such Plan or to appoint a Trustee to administer any such Plan, which notice shall not have been withdrawn within 14 days of the date thereof; or
 
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(v)           the Company or any ERISA Affiliate shall have voluntarily terminated any Plan subject to Title IV of ERISA (other than a Multiemployer Plan), pursuant to a distress termination under Title IV of ERISA; or
 
(vi)          the Company or any ERISA Affiliate, as an employer under a Multiemployer Plan, shall have made a complete or partial withdrawal from such Multiemployer Plan;
 
and, upon the occurrence of any of the foregoing, the aggregate amount of the Unfunded Liabilities of all Plans subject to Title IV of ERISA shall exceed in the aggregate $2,000,000 or the Company shall incur liability in excess of $2,000,000 in the aggregate;
 
(l)            lessors under leases of real property with an aggregate fair market value (determined under the most recent available appraisals thereof) in excess of $20,000,000 to which the Company or any Subsidiary is a party, any lender to any such lessor(s), or any trustee, agent or other representatives of any lender to, or the holders of any securities issued by, any such lessor(s), shall exercise, give any required formal written notice of intent to exercise, or otherwise express in writing any present or unconditional intent to exercise, any remedy they may have against the Company, any Subsidiary or any leased property that involves (i) payment by the Company or any Subsidiary of an amount in excess of $10,000,000 or (ii) any material interference with the Company’s or any Subsidiary’s operations at any leased property;
 
(m)          a Change of Control shall occur; or
 
(n)           The Company or any Subsidiary shall fail to pay any amount payable in respect of any Rate Protection Agreement when the same becomes due and payable (whether by scheduled payment, termination or likewise), and such failure shall continue after the applicable grace period, if any, specified in such agreement.
 
Section 6.2             Remedies .  If (x) any Event of Default described in Section 6.1(e), (f) or (g) shall occur, the Commitments shall automatically terminate, the Obligations shall automatically become immediately due and payable, the Company shall automatically become obligated to pay to U.S. Bank, for deposit in the Holding Account, an amount equal to the outstanding Letter of Credit Usage as of such date and the Agent, at the direction of the Majority Banks, may enforce all rights and exercise all remedies of the Agent or the Banks under the Loan Documents and under applicable law, or (y) any other Event of Default shall occur and be continuing, then, the Agent, at the direction of the Majority Banks, may at any time and from time to time do any or all of the following:  (i) declare the Commitments terminated, whereupon the Commitments shall be terminated, (ii) declare the Obligations to be forthwith due and payable, whereupon the Obligations shall immediately become due and payable, in each case without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, anything in this Agreement or the other Loan Documents to the contrary notwithstanding, (iii) demand that the Company pay to U.S. Bank for deposit in the Holding Account an amount equal to the outstanding Letter of Credit Usage as of the date of such demand, whereupon the Company shall pay such amount to U.S. Bank, and (iv) enforce all rights and exercise all remedies of the Agent or the Banks under the Loan Documents and under applicable law.
 
ARTICLE VII
THE AGENT
 
The following provisions shall govern the relationship of the Agent with the Banks.
 
Section 7.1             Appointment and Authorization .  Each Bank appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such respective powers under the Loan Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto.  Neither the Agent nor any of its directors, officers or employees shall be liable for any action taken or omitted to be taken by it under or in connection with the Loan Documents, except for its own gross negligence or willful misconduct.  The Agent shall act as an independent contractor in performing its obligations as Agent hereunder.  The duties of the
 
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Agent shall be mechanical and administrative in nature and nothing herein contained shall be deemed to create any fiduciary relationship among or between the Agent, the Company or the Banks.
 
Section 7.2             Note Holders .  The Agent may treat the payee of any Note as the holder of the Obligations evidenced thereby until written notice of transfer shall have been filed with it, signed by such payee and in form satisfactory to the Agent.
 
Section 7.3             Consultation With Counsel .  The Agent may consult with legal counsel selected by it and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel.
 
Section 7.4             Loan Documents .  The Agent shall not be responsible to any Bank for any recitals, statements, representations or warranties in any Loan Document and shall not be under a duty to examine or pass upon the validity, effectiveness, genuineness or value of any of the Loan Documents or any other instrument or document furnished pursuant thereto, and the Agent shall be entitled to assume that the same are valid, effective and genuine and what they purport to be.
 
Section 7.5             U.S. Bank and Affiliates .  With respect to its Commitment and the Loans made by it, U.S. Bank shall have the same rights and powers under the Loan Documents as any other Bank and may exercise the same as though it were not the Agent consistent with the terms thereof, and U.S. Bank and its affiliates may accept deposits from, lend money to, issue Documentary Letters of Credit for the account of and generally engage in any kind of business with the Company as if it were not the Agent.
 
Section 7.6             Action by Agent .  Except as may otherwise be expressly stated in this Agreement, the Agent shall be entitled to use its discretion with respect to exercising or refraining from exercising any rights which may be vested in it by, or with respect to taking or refraining from taking any action or actions which it may be able to take under or in respect of, the Loan Documents.  The Agent shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Banks, and such instructions shall be binding upon all holders of Notes; provided , however , that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to the Loan Documents or applicable law.  The Agent shall incur no liability under or in respect of any of the Loan Documents by acting upon any notice, consent, certificate, warranty or other paper or instrument believed by it to be genuine or authentic or to be signed by the proper party or parties and to be consistent with the terms of this Agreement.
 
Section 7.7             Credit Analysis .  Each Bank has made, and shall continue to make, its own independent investigation or evaluation of the operations, business, property and condition, financial and otherwise, of the Company in connection with entering into this Agreement and has made its own appraisal of the creditworthiness of the Company.  Except as explicitly provided herein, the Agent has no duty or responsibility, either initially or on a continuing basis, to provide any Bank with any credit or other information with respect to such operations, business, property, condition or creditworthiness, whether such information comes into its possession on or before the first Event of Default or at any time thereafter.
 
Section 7.8             Notices of Event of Default, Etc.   In the event that any Bank shall have acquired actual knowledge of any Event of Default or Unmatured Event of Default, other than as a result of its receipt of financial statements delivered to it pursuant to Section 5.1, such Bank shall promptly give notice thereof to the Agent.  The Agent shall, promptly upon receipt of any such notice provide a copy thereof to the other Banks.  Upon receipt from any Bank of a request that the Agent give notice to the Company of the occurrence of an Event of Default or Unmatured Event of Default, the Agent shall promptly forward such request to the other Banks and will take such action and assert such rights under this Agreement and the other Loan Documents as the Majority Banks shall direct in writing  .
 
Section 7.9             Indemnification .  Each Bank agrees to indemnify the Agent, as Agent (to the extent not reimbursed by the Company), according to such Bank’s Pro Rata Share, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on or incurred by the Agent in any way relating to or arising out
 
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of the Loan Documents or any action taken or omitted by the Agent under the Loan Documents, provided that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent’s gross negligence or willful misconduct.  No payment by any Bank under this Section 7.9 shall relieve the Company of any of its obligations under this Agreement.
 
Section 7.10           Payments and Collections .  All funds received by the Agent in respect of any payments made by the Company on the Revolving Notes, Facility Fees, Utilization Fees or Letter of Credit Fees shall be distributed by the Agent among the Banks on the date received or deemed received pursuant to Section 2.20, in like currency and funds as received, ratably according to each Bank’s Pro Rata Share.  If the Agent does not make any distribution on the date any such payment is received or deemed received pursuant to Section 2.20, the Agent will pay interest to each Bank entitled to receive a portion of such distribution on the amount distributable to it at the Federal Funds Rate from such date until the date distribution is made, such interest to be payable with such distribution.  After any Event of Default has occurred, all funds received by the Agent, whether as payments by the Company or as realization on collateral or on any guaranties, shall (except as may otherwise be required by law) be distributed by the Agent in the following order:  (a) first to the Agent or any Bank who has incurred unreimbursed costs of collection with respect to any Indebtedness of the Company hereunder, ratably to the Agent and each Bank in the proportion that the costs incurred by the Agent or such Bank bear to the total of all such costs incurred by the Agent and all Banks; (b) next to U.S. Bank in payment of any Unpaid Draws outstanding, to satisfy any requirement that the Company make payments to U.S. Bank for deposit in the Holding Account to cover any outstanding Letters of Credit; (c) next to the Banks (in accordance with their respective Pro Rata Shares) for application on the Revolving Notes and any Rate Protection Obligations; and (d) last to the Banks (in accordance with their respective Pro Rata Shares) for any unpaid Utilization Fees, Facility Fees or Letter of Credit Fees owing by the Company hereunder.  To the extent the Agent or any Bank receives any payment on the Obligations, whether from the Company or otherwise, that is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then, to the extent of such recovery, the Obligations originally intended to be satisfied by such payment shall be revived and continued in full force and effect as if such payment had not been received, and each Bank shall purchase from the Agent or such Bank, for cash, at face value and without recourse, such participations in the revived Obligations as shall be necessary to cause such revived Obligations to be shared ratably among all of the Banks.  The Agent or such Bank, as the case may be, shall promptly notify the other Banks and, if applicable, the Agent, of any such recovery.
 
Section 7.11           Sharing of Payments .  If any Bank shall receive and retain any payment, voluntary or involuntary, whether by setoff, application of deposit balance or security, or otherwise, in respect of Indebtedness under this Agreement or the Notes in excess of such Bank’s share thereof as determined under this Agreement, then such Bank shall purchase from the other Banks for cash and at face value and without recourse, such participation in the Notes held by such other Banks as shall be necessary to cause such excess payment to be shared ratably as aforesaid with such other Banks; provided , that if such excess payment or part thereof is thereafter recovered from such purchasing Bank, the related purchases from the other Banks shall be rescinded ratably and the purchase price restored as to the portion of such excess payment so recovered, but without interest.
 
Section 7.12           Advice to Banks .  The Agent shall forward to the Banks copies of all notices, financial reports and other communications received hereunder from the Company by it as Agent, excluding, however, notices, reports and communications which by the terms hereof are to be furnished by the Company directly to each Bank.
 
Section 7.13           Successor Agent .  The Agent may resign at any time by giving ten days written notice thereof to the Banks and the Company.  The Majority Banks may remove the Agent at any time with or without cause by giving the Agent and the Company ten days written notice thereof.  Upon any such resignation or removal, the Majority Banks shall have the right to appoint a successor Agent, which successor Agent shall (unless an Event of Default has occurred and is continuing) be reasonably acceptable to the Company.  If no successor Agent shall have been so appointed and shall have accepted such appointment within 30 days after the retiring Agent’s giving of notice of its resignation or the removal of the retiring Agent, then the retiring Agent may, on behalf of the Banks, appoint an Agent which shall be a Bank or a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $100,000,000,
 
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which successor Agent shall (unless an Event of Default has occurred and is continuing) be reasonably acceptable to the Company.  Any such resignation or removal shall be effective upon the appointment of a successor Agent.  Upon the acceptance of any appointment as the Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations, under this Agreement and the other Loan Documents.  After the retiring Agent’s resignation or removal hereunder as the Agent, the provisions of this Article VII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was acting as the Agent under this Agreement and any other Loan Document.
 
Section 7.14           Defaulting Bank .
 
(a)   Remedies Against a Defaulting Bank .  In addition to the rights and remedies that may be available to the Agent or the Company under this Agreement or applicable law, if at any time a Bank is a Defaulting Bank such Defaulting Bank’s right to participate in the administration of the Loans, this Agreement and the other Loan Documents, including without limitation, any right to vote in respect of, to consent to or to direct any action or inaction of the Agent or to be taken into account in the calculation of the Majority Banks, shall be suspended while such Bank remains a Defaulting Bank.  If a Bank is a Defaulting Bank because it has failed to make timely payment to the Agent of any amount required to be paid to the Agent hereunder (without giving effect to any notice or cure periods), in addition to other rights and remedies which the Agent or the Company may have under the immediately preceding provisions or otherwise, the Agent shall be entitled (i) to collect interest from such Defaulting Bank on such delinquent payment for the period from the date on which the payment was due until the date on which the payment is made at the Federal Funds Rate, (ii) to withhold or setoff and to apply in satisfaction of the defaulted payment and any related interest, any amounts otherwise payable to such Defaulting Bank under this Agreement or any other Loan Document until such defaulted payment and related interest has been paid in full and such default no longer exists and (iii) to bring an action or suit against such Defaulting Bank in a court of competent jurisdiction to recover the defaulted amount and any related interest.  Any amounts received by the Agent in respect of a Defaulting Bank’s Loans shall not be paid to such Defaulting Bank and shall be held uninvested by the Agent and either applied against the purchase price of such Loans under the following subsection (b) or paid to such Defaulting Bank upon the default of such Defaulting Bank being cured.
 
(b)   Purchase from Defaulting Bank .  Any Bank that is not a Defaulting Bank shall have the right, but not the obligation, in its sole discretion, to acquire all of a Defaulting Bank’s Commitment.  If more than one Bank exercises such right, each such Bank shall have the right to acquire such proportion of such Defaulting Bank’s Commitment on a pro rata basis.  Upon any such purchase, the Defaulting Bank’s interest in its Loans and its rights hereunder (but not its liability in respect thereof or under the Loan Documents or this Agreement to the extent the same relate to the period prior to the effective date of the purchase) shall terminate on the date of purchase, and the Defaulting Bank shall promptly execute all documents reasonably requested to surrender and transfer such interest to the purchaser thereof subject to and in accordance with the requirements set forth in Section 8.5(c) including an Assignment in form acceptable to the Agent.  The purchase price for the Commitment of a Defaulting Bank shall be equal to the amount of the principal balance of the Loans outstanding and owed by the Company to the Defaulting Bank. The purchaser shall pay to the Defaulting Bank in Immediately Available Funds on the date of such purchase the principal of and accrued and unpaid interest and fees on the Loans made by such Defaulting Bank hereunder (it being understood that such accrued and unpaid interest and fees may be paid pro rata to the purchasing Bank and the Defaulting  Bank by the Agent at a subsequent date upon receipt of payment of such amounts from the Company).  Prior to payment of such purchase price to a Defaulting Bank, the Agent shall apply against such purchase price any amounts retained by the Agent pursuant to the last sentence of the immediately preceding subsection (a).  The Defaulting Bank shall be entitled to receive amounts owed to it by the Company under the Loan Documents which accrued prior to the date of the default by the Defaulting Bank, to the extent the same are received by the Agent from or on behalf of the Company.  There shall be no recourse against any Bank or the Agent for the payment of such sums except to the extent of the receipt of payments from any other party or in respect of the Loans.
 
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ARTICLE VIII
MISCELLANEOUS
 
Section 8.1             Amendments and Waivers; No Waiver of Rights and Remedies .
 
(a)           None of this Agreement, any Loan Document or any provision hereof or thereof may be amended, modified or waived unless the same shall be in writing signed by the Company and the Majority Banks; provided , that (i) no amendment, waiver or consent shall, unless in writing and signed by all the Banks, do any of the following: (A) reduce the amount of the principal of, or the amount of or rate of interest on, any Note or any Loan or any fees or other amount payable hereunder, (B) postpone any date fixed for any payment of principal of, or interest on, the Loans or any fees or other amounts payable hereunder, (C) amend the definitions of  “Pro Rata Share” or “Majority Banks”, (D) amend Section 3.1 or Section 3.2, (E) amend this Section 8.1(a), or (F) release any Guaranty; (ii) no amendment, waiver or consent shall, unless in writing and signed by Banks, other than Defaulting Banks, whose Pro Rata Shares (determined under clause (b) of the definition thereof if any Loans are outstanding and otherwise under clause (a) of such definition) aggregate 66 2/3% or more, amend Section 5.12(f) or Section 5.13(e) (except in a manner that would be more restrictive as to the Company or its Subsidiaries); (iii) no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the requisite Banks indicated above to take such action, affect the rights or duties of the Agent under this Agreement; (iv) no amendment may increase any Bank’s Commitment Amount unless it is in writing and signed by each Bank; and (v) no amendment, waiver or consent shall reduce the amount payable with respect to, or postpone any date fixed for any payment with respect to, any draw under any Letter of Credit, amend or modify Section 2.1, 2.7, 2.8, 2.9, 2.10, 2.11, 2.12 or 2.13, unless it is in writing and signed by U.S. Bank.  Any such amendment, modification or waiver or any other consent to any departure from any such provision by the Company shall in any event be effective only in the specific instance or for the specific purpose for which given.  No notice to, or demand on, the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances.
 
(b)           No failure or delay on the part of the Agent or any Bank in exercising, and no course of dealing with respect to, any right, power or privilege hereunder or under any other Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or privilege, or any abandonment or discontinuance of the enforcement thereof, preclude any other or further exercise thereof or the exercise of any other right, power or privilege.  The rights and remedies of the Agent and the Banks hereunder and under any other Loan Document are cumulative and not exclusive of any right or remedy which the Agent or any Bank otherwise has.
 
Section 8.2             Notices .  Except as otherwise specifically provided for herein, all notices, requests, demands, instructions, consents, directions and other communications provided for herein shall be in writing (including teletransmission communication) and (unless otherwise required by applicable law) shall be teletransmitted, mailed or delivered to the intended recipient at the “Address for Notices” specified below its name on the signature page(s) hereof or on a separate page immediately following such signature page(s); or at such other address as shall be designated by such party in a notice to the other parties.  All notices and other communications shall be effective when transmitted by telecopier, delivered to the telegraph or cable office or personally delivered or, in the case of a mailed notice or notice sent by overnight courier, upon receipt thereof as conclusively evidenced by the signed receipt therefor, in each case given or addressed as aforesaid, except that notices to the Agent, U.S. Bank or any Bank under the provisions of Article II shall not be effective until received by the Agent, U.S. Bank or such Bank.
 
Section 8.3             Costs and Expenses .  The Company agrees to pay on demand:  (a) all out-of-pocket costs, expenses and fees incurred by the Agent in connection with the negotiation, preparation, approval and execution and delivery of the Loan Documents, including, without limitation, the reasonable fees and expenses of Dorsey & Whitney LLP, special counsel to the Agent, in connection with the negotiation, preparation, execution and delivery of this Agreement and the other Loan Documents, the commitments relating thereto, the transactions contemplated hereby and thereby and the satisfaction and attempted satisfaction of conditions precedent hereunder, (b) the reasonable fees and expenses of counsel for the Agent in connection with any amendment, modification or waiver or proposed amendment, modification or waiver of any of the terms of this Agreement or any of the other
 
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Loan Documents and (c) all reasonable costs and expenses of the Agent and the Banks (including reasonable counsels’ fees) in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement and the other Loan Documents.
 
Section 8.4             Survival of Agreement .  All representations, warranties, covenants and agreements made by the Company or any of its Subsidiaries herein, in the other Loan Documents or in any certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be deemed to have been relied upon by the Banks and shall survive the making of the Loans by the Banks and the execution and delivery to the Banks by the Company of the Notes, regardless of any investigation made by or on behalf of the Banks, and shall continue in full force and effect as long as any Letter of Credit or Obligation is outstanding and undrawn or unpaid and so long as the Commitments have not expired or been terminated; provided , that the obligations and agreements of the Company under Sections 2.11, 2.13, 2.23, 2.25, 2.26, 2.29, 8.3, 8.6 and 8.15 shall survive payment in full of the Obligations, the expiration of or other discharge of U.S. Bank’s liability with respect to the Letters of Credit and the expiration or termination of the Commitments.  The obligations of the Banks under Section 2.12 shall remain in effect, notwithstanding the termination of the Commitments and the payment in full of the Obligations (other than contingent Obligations with respect to outstanding Letters of Credit), until the Letters of Credit have expired or U.S. Bank’s liability with respect thereto has otherwise been discharged; provided , that if the amount on deposit in the Holding Account at any time equals the aggregate undrawn face amount of all outstanding Letters of Credit, the obligations of the Banks under Section 2.12 shall terminate; provided , further , that the obligations of the Banks under Section 2.12 shall be reinstated if, and to the extent, U.S. Bank is required to return or repay any payment received by it in respect of any draw under a Letter of Credit, or U.S. Bank’s Lien on or right of setoff with respect to any amount on deposit into the Holding Account is avoided or enjoined, by reason of (i) any judgment, decree or order of any court or administrative body or (ii) any settlement or compromise of any claim for such return, avoidance or injunction effected by U.S. Bank.
 
Section 8.5             Binding Effect; Assignments and Participations .
 
(a)   This Agreement shall be binding upon and inure to the benefit of the Company, the Agent, the Banks, all future holders of the Notes, and their respective successors and assigns, except that the Company may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Bank.
 
(b)   Any Bank may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell to one or more banks or other entities (“ Participants ”) participating interests in a minimum aggregate amount of $5,000,000 in any Loan or other Obligation owing to such Bank, any Revolving Note held by such Bank, and any Commitment of such Bank, or any other interest of such Bank hereunder.  In the event of any such sale by a Bank of participating interests to a Participant, (i) such Bank’s obligations under this Agreement to the other parties to this Agreement shall remain unchanged, (ii) such Bank shall remain solely responsible for the performance thereof, (iii) such Bank shall remain the holder of any such Revolving Note for all purposes under this Agreement, (iv) the Company and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank’s rights and obligations under this Agreement and (v) the agreement pursuant to which such Participant acquires its participating interest herein shall provide that such Bank shall retain the sole right and responsibility to enforce the Obligations, including, without limitation the right to consent or agree to any amendment, modification, consent or waiver with respect to this Agreement or any other Loan Document, provided that such agreement may provide that such Bank will not consent or agree to any such amendment, modification, consent or waiver with respect to the matters set forth in Sections 8.1(a)(i)(A) or (B) without the prior consent of such Participant.  The Company agrees that if amounts outstanding under this Agreement, the Revolving Notes and the Loan Documents are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have, to the extent permitted by applicable law, the right of setoff in respect of its participating interest in amounts owing under this Agreement and any Revolving Note or other Loan Document to the same extent as if the amount of its participating interest were owing directly to it as a Bank under this Agreement or any Revolving Note or other Loan Document; provided , that such right of setoff shall be subject to the obligation of such Participant to share with the Banks, and the Banks agree to
 
38

 
share with such Participant, as provided in Section 2.23.  The Company also agrees that each Participant shall be entitled to the benefits of subsections 2.23, 2.24, 2.25, 2.26 and 8.3 with respect to its participation in the Commitments and Loans provided , that no Participant shall be entitled to receive any greater amount pursuant to such subsections than the transferor Bank would have been entitled to receive in respect of the amount of the participation transferred by such transferor Bank to such Participant had no such transfer occurred.
 
(c)   Each Bank may, from time to time, with the consent of the Agent, U.S. Bank and the Company (none of which consents shall be unreasonably withheld; and if an Event of Default shall have occurred and be continuing, then the consent of the Company shall not be required), assign to other lenders (“ Assignees ”) all or part of its rights or obligations hereunder or under any Loan Document in a minimum aggregate amount of $5,000,000 evidenced by any Revolving Note then held by that Bank (or, if less, the entire amount evidenced by the Revolving Notes then held by that Bank) together with equivalent proportions of its Commitment pursuant to written agreements executed by such assigning Bank, such Assignee(s), the Company, U.S. Bank and the Agent in substantially the form of Exhibit E, which agreements shall specify in each instance the portion of the Obligations evidenced by the Revolving Notes which is to be assigned to each Assignee and the portion of the Pro Rata Share and Commitment of such Bank to be assumed by each Assignee (each, an “Assignment Agreement”); provided , however , that the assigning Bank must pay to the Agent a processing and recordation fee of $3,500 .   Upon the execution of each Assignment Agreement by the assigning Bank, the relevant Assignee, the Company, U.S. Bank and the Agent, payment to the assigning Bank by such Assignee of the purchase price for the portion of the Obligations being acquired by it and receipt by the Company of a copy of the relevant Assignment Agreement, (x) such Assignee lender shall thereupon become a “Bank” for all purposes of this Agreement with a Pro Rata Share and a Commitment in the amount set forth in such Assignment Agreement and with all the rights, powers and obligations afforded a Bank under this Agreement, (y) such assigning Bank shall have no further liability for funding the portion of its Commitment assumed by such Assignee and (z) the address for notices to such Assignee shall be as specified in the Assignment Agreement executed by it.  Concurrently with the execution and delivery of each Assignment Agreement, the assigning Bank shall surrender to the Agent the Revolving Note portion of which is being assigned, and the Company shall execute and deliver a Revolving Note to the Assignee in the amount of its Commitment, and a new Revolving Note to the assigning Bank in the amount of  its Commitment, after giving effect to the reduction occasioned by such assignment, such Revolving Notes to constitute “Revolving Notes” for all purposes of this Agreement and of the other Loan Documents.
 
(d)   Notwithstanding any other provision in this Agreement, any Bank may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and any note held by it in favor of any federal reserve bank in accordance with Regulation A of the Board or U. S. Treasury Regulation 31 CFR § 203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law.
 
Section 8.6             Taxes .  The Company agrees to pay, and save the Agent and the Banks harmless from all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of this Agreement or the issuance of the Notes.
 
Section 8.7             Severability of Provisions .  Whenever possible, each provision of this Agreement and the other Loan Documents and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective and valid under applicable law, but, if any provision of this Agreement or any other Loan Document or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited or invalid in any jurisdiction under such applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement or the other Loan Documents and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto and shall not be effective to affect the enforceability of such provision in any other jurisdiction.
 
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Section 8.8             Governing Law and Construction .  THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES APPLICABLE TO NATIONAL BANKS .
 
Section 8.9             Consent to Jurisdiction .  THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY MINNESOTA STATE OR FEDERAL COURT SITTING IN MINNEAPOLIS, MINNESOTA OR ST. PAUL, MINNESOTA OVER ANY ACTION OR PROCEEDING COMMENCED BY THE AGENT OR ANY BANK ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND THE COMPANY HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH MINNESOTA STATE OR FEDERAL COURT.  THE COMPANY HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING.  THE COMPANY AGREES THAT A JUDGMENT, FINAL BY APPEAL OR EXPIRATION OF TIME TO APPEAL WITHOUT AN APPEAL BEING TAKEN, IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.  NOTHING IN THIS SECTION 8.9 SHALL AFFECT THE RIGHT OF THE AGENT OR ANY BANK TO BRING ANY ACTION OR PROCEEDING AGAINST THE COMPANY OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTIONS .
 
Section 8.10           Captions .  The captions or headings herein and any table of contents hereto are for convenience only and in no way define, limit or describe the scope or intent of any provision of this Agreement.
 
Section 8.11           Entire Agreement; No Third Party Beneficiaries .  This Agreement and the other Loan Documents embody the entire agreement and understanding between the Company, the Agent and the Banks with respect to the subject matter hereof and thereof. This Agreement supersedes all prior agreements and understandings relating to the subject matter hereof.  Nothing contained in this Agreement or in any other Loan Document, expressed or implied is intended to confer upon any Person other than the parties hereto and thereto any rights, remedies, obligations or liabilities hereunder or thereunder.
 
Section 8.12           Counterparts .  This Agreement may be executed in any number of counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract which shall become effective when the Agent shall have received counterparts hereof signed on behalf of the Company, the Agent and each Bank.
 
Section 8.13           Company Acknowledgments .  The Company hereby acknowledges that (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents, (b) neither the Agent nor any Bank has any fiduciary relationship to the Company, the relationship being solely that of borrower and lender, (c) no joint venture exists among or between the Company and the Agent or any Bank, and (d) the Agent and the Banks undertake no responsibility to the Company to review or inform the Company of any matter in connection with any phase of the business or operations of the Company and the Company shall rely entirely upon its own judgment with respect to its business, and any review, inspection or supervision of, or information supplied to the Company by the Agent or any Bank is for the protection of the Agent and the Banks and neither the Company nor any third party is entitled to rely thereon.
 
Section 8.14           Highest Lawful Rate .  Anything herein to the contrary notwithstanding, the Obligations shall be subject to the limitation that payments of interest thereon shall not be required, for any period for which interest is computed hereunder, to the extent that contracting for or receipt thereof would be contrary to provisions of any law applicable to any Bank limiting the highest rate of interest which may be lawfully contracted for, charged or received by such Bank.
 
Section 8.15           Indemnification .  The Company hereby agrees to defend, protect, indemnify and hold harmless the Agent, the Banks, their respective Affiliates, and their respective directors, officers, employees,
 
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attorneys and agents (each of the foregoing being an “Indemnitee” and all of the foregoing being collectively the “Indemnitees”) from and against any and all claims, actions, damages, liabilities, judgments, costs and expenses (including all reasonable fees and disbursements of counsel which may be incurred in the investigation or defense of any matter) imposed upon, incurred by or asserted against any Indemnitee, whether direct, indirect or consequential and whether based on any federal, state, local or foreign laws or regulations (including securities laws, environmental laws, commercial laws and regulations), under common law or on equitable cause, or on contract or otherwise:
 
(a)           by reason of, relating to or in connection with the issuance, extension, amendment or payment of any Letter of Credit, or any failure to do any of the foregoing;
 
(b)           by reason of, relating to or in connection with any action taken or not taken by the Company, its Subsidiaries and Affiliates, and their respective directors, officers, employees, attorneys or agents in connection with any Loan Document, including, without limitation, any use of any credit extended under the Loan Documents;
 
provided, however, that the Company shall not be liable to any Indemnitee for any portion of such claims, damages, liabilities and expenses resulting from such Indemnitee’s gross negligence or willful misconduct, or arising from claims made by the Agent or any Bank against the Agent or any other Bank, unless resulting from the Company’s negligence or willful misconduct.  In the event this indemnity is unenforceable as a matter of law as to a particular matter or consequence referred to herein, it shall be enforceable to the full extent permitted by law.  This indemnification applies, without limitation, to any act, omission, event or circumstance existing or occurring on or prior to the later of the Termination Date or the date of payment in full of the Obligations, including specifically Obligations arising under clause (b) of this Section.  The indemnification provisions set forth above shall be in addition to any liability the Company may otherwise have.  Without prejudice to the survival of any other obligation of the Company hereunder the indemnities and obligations of the Company contained in this Section shall survive the payment in full of the other Obligations.
 
Section 8.16           Waiver of Jury Trial .  EACH OF THE COMPANY , THE AGENT AND THE BANKS IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
 
Section 8.17           Effect of Existing Credit Agreement and Existing Revolving Notes .  This Agreement amends and replaces in its entirety and restates the Existing Credit Agreement and the Revolving Notes amend and replace in their entireties and restate the “Revolving Notes” issued under the Existing Credit Agreement (the “Existing Revolving Notes”) provided, however, that the obligations of the Company incurred under the Existing Credit Agreement and the Existing Revolving Notes shall continue under this Agreement and the Revolving Notes, respectively, and shall not in any circumstance be terminated, extinguished or discharged hereby but shall hereafter be governed by the terms of this Agreement and the Revolving Notes, respectively.
 
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.

 	BEST BUY CO., INC.	

 	By	 /s/ Marc Gordon	 	 	 	
 	  Its	 VP — Finance	 	 	 	

 	U.S. BANK NATIONAL ASSOCIATION	

 	By	 /s/ Sam Pepper	 	 	 	
 	  Its	 Vice President	 	 	 	

 
 
Signature Page to Amended and Restated Credit Agreement
 
S-1

 

 	FIRST UNION NATIONAL BANK	

 	By	 /s/ Mark S. Supple	 	
 	  Its	 Vice President	 	

 
 
Signature Page to Amended and Restated Credit Agreement
 
S-2

 

 	BANK ONE, NA (MAIN CHICAGO OFFICE)	

 	By	 /s/ Vincent Henchek	 	
 	  Its	 Director	 	

 
 
Signature Page to Amended and Restated Credit Agreement
 
S-3

 

 	WELLS FARGO BANK, NATIONAL	
 	ASSOCIATION	

 	By	 /s/ Scott Bjelde	 	
 	  Its	 Vice President & Senior Banker	 	

 	By	 /s/ Molly S. Van Metre	 	
 	  Its	 Vice President & Senior Banker	 	

 
 
Signature Page to Amended and Restated Credit Agreement
 
S-4

 

 	THE BANK OF TOKYO-MITSUBISHI, LTD., CHICAGO BRANCH	

 	By	 /s/ Patrick McCue	 	
 	  Its	 Vice President & Manager	 	

 
 
Signature Page to Amended and Restated Credit Agreement
 
S-5

 

 	CREDIT SUISSE FIRST BOSTON,	
 	CAYMAN ISLANDS BRANCH	

 	By	 /s/ William S. Lutkins	 	
 	  Its	 Director	 	

 

Signature Page to Amended and Restated Credit Agreement
 
S-6

 

 	FLEET NATIONAL BANK	

 	By	 /s/ Kathleen Dimock	 	
 	  Its	 Director	 	

 

Signature Page to Amended and Restated Credit Agreement
 
S-7

 

 	THE BANK OF NOVA SCOTIA	

 	By	 /s/ M. D. Smith	 	
 	  Its	 Agent Operations	 	

 

Signature Page to Amended and Restated Credit Agreement
 
S-8

 

 	MERRILL LYNCH CAPITAL CORPORATION	

 	By	 /s/ Carol J. E. Feeley	 	
 	  Its	 Vice President Merrill Lynch Capital Corp.	 	

 
 
Signature Page to Amended and Restated Credit Agreement
 
S-9

 
ADDRESS FOR NOTICES

BEST BUY CO., INC.	
7075 Flying Cloud Drive	
Eden Prairie, MN 55344	
Attn: Ms. Judy A. Weigel	
Attn: Mr. Mark Gordon	
 	
U.S. BANK NATIONAL ASSOCIATION	
601 Second Avenue South	
Minneapolis, MN 55402	
Attn: Sam Pepper	
 	
FIRST UNION NATIONAL BANK	
1339 Chestnut Street	
Philadelphia, PA 19107	
Attn: Mark S. Supple	
 	
BANK ONE, NA (MAIN CHICAGO OFFICE)	
One Bank One Plaza	
Chicago, IL  60670	
Attention:  John D. Runger	
 	
WELLS FARGO BANK, NATIONAL ASSOCIATION	
Wells Fargo Center-MAC:N9305-031	
Sixth and Marquette	
Minneapolis, MN 55479	
Attn: Scott D. Bjelde	
 	
THE BANK OF TOKYO-MITSUBISHI,	
LTD., CHICAGO BRANCH	
601 Carlson Parkway, Suite 370	
Minnetonka, MN 55305	
Attn: Patrick McCue	
 	
CREDIT SUISSE FIRST BOSTON,	
CAYMAN ISLANDS BRANCH	
11 Madison Avenue	
New York, NY  10010-3629	
Attn:  Vitaly Butenko	
 	
MERRILL LYNCH CAPITAL CORPORATION	
4 World Financial Center	
New York, NY  10080	
Attn:  Paul Fox	
 	
FLEET NATIONAL BANK	
100 Federal Street, 8 th Floor	
Boston, MA  02110	
Attn:  Kathleen A. Dimock	
 	
THE BANK OF NOVA SCOTIA	
181 West Madison Street, Suite 3700	
Chicago, Illinois  60602	
Attn:  Keith Rauschenerger	

 
SCHEDULE 1.1(a)
BEST BUY CO., INC.
REVOLVING COMMITMENTS OF THE
BANK GROUP

Banks	 	Commitment
Percentages	 	Commitment
Amount	
 	 	 	 	 	 	 	
U.S. Bank National Association	 	20.00	%	$	40,000,000	 	
 	 	 	 	 	 	
Credit Suisse First Boston, Cayman Islands Branch	 	17.50	%	$	35,000,000	 	
 	 	 	 	 	 	
Bank One, NA (Main Chicago Office)	 	12.50	%	$	25,000,000	 	
 	 	 	 	 	 	
Wells Fargo Bank, National Association	 	12.50	%	$	25,000,000	 	
 	 	 	 	 	 	
First Union National Bank	 	12.50	%	$	25,000,000	 	
 	 	 	 	 	 	
Merrill Lynch Capital Corporation	 	7.50	%	$	15,000,000	 	
 	 	 	 	 	 	
The Bank of Tokyo-Mitsubishi, Ltd., Chicago Branch	 	7.50	%	$	15,000,000	 	
 	 	 	 	 	 	
Fleet National Bank	 	7.50	%	$	15,000,000	 	
 	 	 	 	 	 	
The Bank of Nova Scotia	 	2.50	%	$	5,000,000	 	
 	 	 	 	 	 	
Total	 	 	 	$	200,000,000	 	

 
Exhibit 10.8
PROSPECTUS
BEST BUY CO., INC.
 
1,000,000 Shares
Common Stock
($.10 par value)
 
BEST BUY CO., INC.
2000 Restricted Stock Award Plan, as Amended and Restated
 
Shares of Best Buy Co., Inc. (the “Company”) common stock, par value $0.10 per share (the “Common Stock”), covered by this Prospectus may be granted by the Company to certain employees, directors, consultants and independent contractors (collectively, the “Eligible Recipients”) of the Company or its directly and indirectly majority-owned subsidiaries (“Affiliates”) under the Company’s 2000 Restricted Stock Award Plan, as amended and restated (the “Plan”).  Each Eligible Recipient receiving a stock award (each, a “Participant”) will be granted Common Stock subject to the restrictions on transferability and the risk of forfeiture set forth in the award.
 
THIS PROSPECTUS MAY NOT BE USED FOR REOFFERS OR RESALES OF COMMON STOCK ACQUIRED HEREUNDER. ANY “AFFILIATE” OF THE COMPANY, AS DEFINED IN RULE 405 OF THE GENERAL RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION, MAY PUBLICLY REOFFER OR RESELL COMMON STOCK ACQUIRED ONLY PURSUANT TO AN AVAILABLE REGISTRATION STATEMENT OR IN ACCORDANCE WITH AN APPLICABLE EXEMPTION FROM REGISTRATION SUCH AS PROVIDED IN RULE 144 UNDER THE SECURITIES ACT OF 1933.
 
ELIGIBLE RECIPIENTS ARE ADVISED TO CONSULT WITH LEGAL COUNSEL CONCERNING THE SECURITIES AND TAX LAW IMPLICATIONS OF THEIR ACQUISITIONS OR DISPOSITIONS OF SHARES ACQUIRED PURSUANT TO THE PLAN.
 
THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
No person is authorized to give any information or to make any representation not contained in this Prospectus, and any information or representations not contained herein must not be relied upon as having been authorized by the Company.  This Prospectus does not constitute an offer of any securities other than the securities to which it relates or an offer to any person in any jurisdiction where such offer would be unlawful.  Neither the delivery of this Prospectus nor any sales made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or since the date of any documents incorporated herein by reference.
 
The date of this Prospectus is March 31, 2002

 
TABLE OF CONTENTS

AVAILABLE INFORMATION	 	
 	 	
PURPOSE AND ADMINISTRATION OF THE PLAN	 	
 	 	
DESCRIPTION OF STOCK AWARDS	 	
 	Stock Awards	
 	Period of Plan; Amendments	
 	Vesting	
 	Dividends and Distributions on Unvested Shares	
 	Termination of Employment or Other Service; Risk of Forfeiture	
 	Restrictions on Transfer	
 	Change of Control	
 	No Right to Continued Employment	
 	 	
FEDERAL INCOME TAX TREATMENT	 	
 	 	
LEGAL MATTERS	 	
 	 	
EXPERTS	 	

2

 
AVAILABLE INFORMATION
 
The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the “Exchange Act”) and in accordance therewith files reports and other information with the Securities and Exchange Commission (the “Commission”).  Reports, proxy statements and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.  Copies of such material also can be obtained from the Public Reference Section of the Commission in Washington, D.C. (at the address above) at prescribed rates.  The Commission also maintains a web site that contains reports, proxy and information statements and other information regarding registrants, such as the Company, that file electronically with the Commission.  The web site’s address is www.sec.gov.  In addition, reports, proxy statements and other information concerning the Company can be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New York, N.Y. 10005.
 
The Company has filed a registration statement on Form S-8 under the Securities Act of 1933 (the “Registration Statement”) to register the shares of Common Stock issuable upon an award of stock under the Plan. This Prospectus omits certain information which is contained in the Registration Statement. The information omitted may be obtained from the Commission’s office in Washington, D.C. (at the address above) upon payment of the fees prescribed by the rules and regulations of the Commission, or examined there or at the Commission’s web site without charge.
 
The following documents filed by the Company with the Commission are incorporated herein by reference:
 
(a)           The Company’s Annual Report on Form 10-K for the fiscal year ended March 3, 2001.
 
(b)       All other reports filed by the Company pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 for periods since March 3, 2001.
 
(c)           The description of the Common Stock of the Company contained in its registration statement on Form 8-A filed with the Commission pursuant to Section 12 of the Exchange Act .
 
All documents subsequently filed by the Company pursuant to Section 13(a), 13(c), 14 and 15(d) of the Exchange Act, prior to the filing of a post-effective amendment which indicates that all shares of Common Stock offered hereby have been issued or which deregisters all shares of Common Stock then remaining unissued, shall be deemed to be incorporated herein by reference and to be a part hereof from the date of filing of such documents.
 
The Company will provide without charge to each person participating in the Plan, upon the written or oral request of any such person, a copy of all documents containing the Plan information required by Part I of Form S-8 and a copy of any or all of the documents incorporated by reference in the Registration Statement (excluding exhibits to such documents unless specifically incorporated by reference).  Requests for such copies, or any additional information about the Plan or the administration thereof, should be directed to Human Resources - Benefits Department, Best Buy Co., Inc., 7075 Flying Cloud Drive, Eden Prairie, Minnesota, 55344, (952) 947-2360 or (800) 846-6673.
 
3

 
PURPOSE AND ADMINISTRATION OF THE PLAN
 
The purpose of the Plan is to advance the interests of the Company and its shareholders by enabling the Company and its Affiliates to attract and retain persons of ability to perform services for the Company and its Affiliates by providing an incentive to such individuals through equity participation in the Company and by rewarding such individuals who contribute to the achievement by the Company and its Affiliates of their respective economic objectives.   Grants of Common Stock also enable employees and others providing services to the Company and its Affiliates to increase their personal interest in the success of the Company.  In accordance with this belief, the Board of Directors of the Company adopted the Plan on April 28, 2000, and the Plan was duly approved by the shareholders of the Company on June 22, 2000.  One million shares of Common Stock were reserved for issuance pursuant to the Plan.  The number and kind of shares reserved for issuance will be appropriately adjusted in the event of any one or more stock splits, reverse stock splits or stock dividends paid or declared with respect to the Common Stock.  As of the date of this Prospectus, 150,849 shares of Common Stock had been issued pursuant to the Plan.
 
The Plan is administered by the Compensation and Human Resources Committee (the “Committee”) of the Company’s Board of Directors, whose members may not receive awards under the Plan unless the grant of such award is approved by a majority of the disinterested directors of the Company.  To the extent consistent with corporate law, the Committee may delegate to any officers of the Company its duties, power and authority under the Plan pursuant to any conditions or limitations it may establish, but only the Committee or the entire Board of Directors may exercise such duties, power and authority with respect to Eligible Recipients who are subject to Section 16 of the Exchange Act.
 
The Board of Directors is currently comprised of Bradbury H. Anderson, Robert T. Blanchard, Jack W. Eugster, Kathy J. Higgins Victor, Elliot S. Kaplan, Allen U. Lenzmeier, Richard M. Schulze, Mark C. Thompson, Frank D. Trestman, Hatim A. Tyabji and James C. Wetherbe.   Directors are elected on a staggered basis for a two-year term and until their successors are duly elected and qualified.  Directors may be removed from office with or without cause by the shareholders.
 
The members of the Compensation and Human Resources Committee are Frank D. Trestman, Kathy J. Higgins Victor and James C. Wetherbe.  Compensation and Human Resources Committee members receive no additional compensation for administering the Plan.
 
Under the Plan, stock awards may be granted to Eligible Recipients who, in the judgment of the Committee, have contributed, are contributing or are expected to contribute to the achievement of economic objectives of the Company or its Affiliates.  Subject to the terms of the Plan, the Committee has the authority to determine, on a case by case basis, the provisions of any stock award, including the Participants, the nature and extent of the award made to each Participant and the form of written agreement evidencing the award (the “Award Agreement”), the time at which awards are granted, and the restrictions to which the vesting of such stock awards may be subject.  The Committee’s determinations need not be uniform.  The determination of the Committee is conclusive, and no member of the Committee or the Board of Directors will be liable for any action made in good faith with respect to the Plan or any stock award granted under the Plan.  The Committee has the authority to amend or modify the terms of any outstanding stock award, but if the amendment or modification would adversely affect a Participant, the Committee must obtain such Participant’s consent.
 
The Plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974.
 
DESCRIPTION OF STOCK AWARDS
 
The Plan provides for the grant of shares of Common Stock.  The Plan is not qualified under Section 401(a) of the Internal Revenue Code.  Because tax results may vary due to individual circumstances, each Participant in the Plan is urged to consult his or her personal tax advisor with respect to the state and federal tax consequences of the grant and vesting of and declaration of dividends on shares of Common Stock issued pursuant to the Plan.
 
4

 
Stock Awards
 
Awards of Common Stock made to Eligible Recipients under the Plan will be subject to such terms and conditions, consistent with the provisions of the Plan, as may be determined by the Committee in its sole discretion. There is no limitation on the number of shares of Common Stock which may be awarded to any Eligible Recipient under the Plan.  As of the date of this Prospectus, Eligible Recipients had received awards of stock pursuant to the Plan.
 
Period of Plan; Amendments
 
Subject to earlier termination of the Plan, no awards of stock under the Plan may be granted after June 22, 2010. The Board of Directors of the Company may suspend or terminate the Plan or any portion thereof at any time, and may amend the Plan from time to time, but no amendment will be effective without shareholder approval if such approval is required by the Exchange Act or the rules of the stock exchange on which the Company’s securities are listed.  No termination, suspension or amendment of the Plan may adversely affect any outstanding award of Common Stock without the consent of the affected Participant.
 
Vesting
 
The Committee determines the vesting schedule of each stock award made pursuant to the Plan; provided, however, that no more than twenty-five percent (25%) of shares subject to a stock award may vest upon the grant of the award and, thereafter, no more than twenty-five percent (25%) of the shares subject to the award may vest on each of the subsequent three anniversary dates of the grant of the award.   At such time as shares subject to stock awards vest, the risk of forfeiture and restrictions on transfer thereof will terminate.  Subject to the provisions of the Plan, the Committee may impose such other restrictions or conditions on the vesting of a stock award as it deems appropriate.  With respect to shares that have vested, Participants will have all voting, dividend, liquidation and other rights that are afforded to the holders of shares of Common Stock issued other than pursuant to the Plan.
 
Dividends and Distributions on Unvested Shares
 
Subject to the discretion of the Committee, any dividends or distributions paid with respect to unvested shares of Common Stock will be subject to the same restrictions as the unvested shares with respect to which such dividends or distributions were paid or issued.  The Committee may withhold such payments with or without paying interest on any dividends or distributions so withheld.  Additionally, the Committee may require, subject to the consent of affected Participants, that such dividends and distributions be reinvested in unvested shares of Common Stock.  All stock dividends, stock rights, and stock issued upon split-ups or reclassifications shall be subject to the same restrictions as the unvested shares with respect to which such stock dividends, stock rights, or other issuances were declared or issued.
 
Termination of Employment or Other Service; Risk of Forfeiture
 
Except as otherwise provided in an Award Agreement, if a Participant’s employment or other service with the Company and all Affiliates is terminated because of death, disability or retirement, all shares of Common Stock subject to an award made pursuant to the Plan then held by such Participant shall become fully vested and the risk of forfeiture and restrictions on transfer of such shares shall terminate.  However, unless otherwise provided in an Award Agreement, if a Participant’s employment or other service with the Company and all Affiliates is terminated for any other reason, all unvested shares subject to an award made pursuant to the Plan then held by such Participant will be forfeited and cancelled.  The Committee may, however, at any time and in its sole discretion, cause such unvested shares to vest or continue to vest following such termination of employment or service.
 
Restrictions on Transfer
 
Except pursuant to the Participant’s will or the laws of descent and distribution or as otherwise expressly set forth in an Award Agreement, prior to the vesting of shares subject to an award made pursuant to the Plan, no right or interest of any Participant in such shares may be assigned, transferred, or encumbered in any way during the lifetime of the Participant.  Subject to the approval of the Committee, however, a Participant may make a gift of shares subject to an award made pursuant to the Plan to a spouse, child, stepchild, grandchild or legal dependent, or to a
 
5

 
trust for the benefit thereof.  In such event, the donee will be required to enter into an agreement with the Company confirming that such shares are subject to the same restrictions in the hands of the donee as they were in the hands of the donor.
 
To enforce these restrictions on transfer, the Committee may require a Participant to keep his or her stock certificates, together with duly endorsed stock powers, in the custody of the Company or its transfer agent.  In the alternative, evidence of stock ownership, together with such stock powers, may be required to be maintained in a non-certificated book-entry stock account with the Company’s transfer agent.  Stock certificates evidencing the shares awarded under the Plan may bear a legend referring to the terms, conditions and restrictions applicable to such shares.
 
In addition to the restrictions on transfer of shares contained in the Plan or in an Award Agreement, shares of Common Stock acquired pursuant to the Plan by executive officers or directors of the Company or persons otherwise in a position to control the Company may be resold only pursuant to the registration requirements of the Securities Act of 1933, as amended, Rule 144 thereunder, or another applicable exemption therefrom.  Sales of such shares are subject to the antifraud provisions of the federal and state securities laws.  Each Participant is advised to consult with legal counsel concerning the securities law implications of his or her disposition of shares pursuant to the Plan.
 
Change of Control
 
Subject to the discretion of the Committee or the terms of an Award Agreement, if a change of control of the Company occurs, all outstanding unvested shares of Common Stock subject to an award made pursuant to the Plan shall become fully vested and shall no longer be subject to the risk of forfeiture or restrictions on transfer of such shares.  However, if, with respect to any Participant, such acceleration of vesting would, when added to any other payments received by such person from the Company or its Affiliates, constitute a “parachute payment” under Section 280G(b)(2) of the Internal Revenue Code, then the number of shares for which vesting will accelerate will be reduced so that such acceleration will not result in the imposition of the excise tax under Section 4999 of the Internal Revenue Code.  This restriction will not apply if the Participant is subject to a separate agreement with the Company or its Affiliates that expressly addresses the potential application of Section 280G or 4999, in which event the applicable terms of such other agreement will govern.
 
As defined in the Plan, a “change of control” of the Company means:
 
(i)                                      the sale, lease, exchange or other transfer, directly or indirectly, of substantially all of the assets of the Company (in one transaction or in a series of related transactions) to a person or entity that is not controlled by the Company;
 
(ii)                                   the approval by the shareholders of the Company of any plan or proposal for the liquidation or dissolution of the Company;
 
(iii)                                a merger or consolidation to which the Company is a party if the shareholders of the Company immediately prior to the effective date of such merger or consolidation have “beneficial ownership” (as defined in Rule 13d-3 under the Exchange Act), immediately following the effective date of such merger or consolidation, of securities of the surviving corporation representing (A) more than 50%, but not more than 80%, of the combined voting power of the surviving corporation’s then outstanding securities ordinarily having the right to vote at elections of directors, unless such merger or consolidation has been approved in advance by the members of the Board of Directors who were directors of the Company at the time the Plan was adopted or were elected to or nominated for the Company’s Board of Directors with the approval thereof (the “Incumbent Directors”), or (B) 50% or less of the combined voting power of the surviving corporation’s then outstanding securities ordinarily having the right to vote at elections of directors (regardless of any approval by the Incumbent Directors);
 
(iv)                               any person becomes after the adoption of the Plan the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of (A) 20% or more, but not 50% or more, of the combined voting power of the Company’s outstanding securities ordinarily having the right to vote
 
6

 
at elections of directors, unless the transaction resulting in such ownership has been approved in advance by the Incumbent Directors, or (B) 50% or more of the combined voting power of the Company’s outstanding voting securities (regardless of approval by the Incumbent Directors); or
 
(v)                                  the Incumbent Directors cease for any reason to constitute at least a majority of the Board of Directors.
 
No Right to Continued Employment
 
Nothing in the Plan will interfere with or limit the right of the Company or its Affiliates to terminate the employment or service of any Eligible Recipient or Participant at any time.
 
7

 
FEDERAL INCOME TAX TREATMENT
 
A Participant will recognize taxable income at the time the award is granted to the extent that some of the shares subject to the award are immediately vested and are not subject to restrictions under Section 16(b) of the Exchange Act.  Thereafter, the Participant will recognize ordinary income as the restrictions on the other shares subject to the award lapse.  The amount of such ordinary income will be equal to the market value of the shares at the time of the grant or lapse.  However, the Participant may elect under Section 83(b) of the Internal Revenue Code to recognize ordinary income in an amount equal to the market value of the shares subject to the award at the time the award is granted.  In such event, upon a subsequent sale of the shares, the change in the market value of the shares would be treated as a capital gain or loss.  The Company or its applicable Affiliate will generally be allowed a corresponding income tax deduction as and when ordinary income is recognized by the Participant.
 
The Company or its applicable Affiliate is entitled to withhold and deduct from future wages of a Participant (or from other amounts that may be due and owing to a Participant from the Company or an Affiliate), or make other arrangements for the collection of, all legally required amounts necessary to satisfy any and all federal, state and local withholding and employment-related tax requirements attributable to an award of stock, including, without limitation, the grant, vesting of or payment of dividends with respect to such shares.  Alternatively, the Company may require the Participant to remit promptly the amount of such withholding to the Company before taking any action, including issuing any shares of Common Stock, with respect to a proposed award under the Plan.
 
LEGAL MATTERS
 
The validity of the issuance of the shares of Common Stock offered hereby will be passed upon for the Company by Robins, Kaplan, Miller & Ciresi L.L.P., Minneapolis, Minnesota. Elliot S. Kaplan, a member of Robins, Kaplan, Miller & Ciresi L.L.P., is the Secretary and a director of the Company. At March 31, 2002, attorneys at Robins, Kaplan, Miller & Ciresi L.L.P. beneficially owned 273,294 shares of Common Stock.
 
EXPERTS
 
Ernst & Young, independent auditors, have audited our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 3, 2001 as set forth in their report, which is incorporated by reference in this prospectus and elsewhere in the registration statement.  Our financial statements are incorporated by reference in reliance on Ernst & Young LLP’s report, given on their authority as experts in accounting and auditing.
 
8

Exhibit 12.1
 
Ratio of Earnings to Fixed Charges
($ in millions)

 	 	Mar. 2,
2002	 	Mar. 3,
2001	 	Feb. 26,
2000	 	Feb. 27,
1999	 	Feb. 28,
1998	 	
Ratio of Earnings to Fixed Charges:	 	 	 	 	 	 	 	 	 	 	 	
Earnings:	 	 	 	 	 	 	 	 	 	 	 	
Net earnings	 	$	570	 	$	396	 	$	347	 	$	216	 	$	82	 	
Income taxes	 	366	 	245	 	216	 	136	 	51	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Total earnings	 	936	 	641	 	563	 	352	 	133	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Fixed Charges:	 	 	 	 	 	 	 	 	 	 	 	
Interest portion of rental expense	 	157	 	90	 	68	 	56	 	49	 	
Interest expense	 	20	 	7	 	5	 	21	 	40	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Total fixed charges	 	177	 	97	 	73	 	77	 	89	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Less:	 	 	 	 	 	 	 	 	 	 	 	
Capitalized interest	 	(1	)	—	 	—	 	—	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Fixed charges in earnings	 	176	 	97	 	73	 	77	 	89	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Earnings available for fixed charges	 	1,112	 	738	 	636	 	429	 	222	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Ratio of earnings to fixed charges	 	6.35	 	7.62	 	8.62	 	5.56	 	2.51	 	

 
 
10-Year Financial Highlights

$ in millions, except per share amounts	 	 	 	 	 	 	 	 	 	 	 	
Fiscal Year (1)	 	2002 (2)	 	2001 (2)	 	2000	 	1999	 	1998	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Statement of Earnings Data	 	 	 	 	 	 	 	 	 	 	 	
Revenues	 	$	19,597	 	$	15,327	 	$	12,494	 	$	10,065	 	$	8,338	 	
Gross profit	 	4,430	 	3,059	 	2,393	 	1,815	 	1,312	 	
Selling, general and administrative expenses	 	3,493	 	2,455	 	1,854	 	1,464	 	1,146	 	
Operating income	 	937	 	604	 	539	 	351	 	166	 	
Net earnings (loss)	 	570	 	396	 	347	 	216	 	82	 	
Per Share Data (3)	 	 	 	 	 	 	 	 	 	 	 	
Net earnings (loss)	 	$	1.77	 	$	1.24	 	$	1.09	 	$	.69	 	$	.30	 	
Common stock price: 	High	 	51.47	 	59.25	 	53.67	 	32.67	 	10.20	 	
 	Low	 	22.42	 	14.00	 	27.00	 	9.83	 	1.44	 	
Operating Statistics	 	 	 	 	 	 	 	 	 	 	 	
Comparable store sales change (4)	 	1.9	%	4.9	%	11.1	%	13.5	%	2.0	%	
Inventory turns (5)	 	7.5	 	7.6	 	7.2	 	6.6	 	5.6	 	
Gross profit percentage	 	22.6	%	20.0	%	19.2	%	18.0	%	15.7	%	
Selling, general and administrative expense percentage	 	17.8	%	16.0	%	14.8	%	14.5	%	13.7	%	
Operating income percentage	 	4.8	%	3.9	%	4.3	%	3.5	%	2.0	%	
Average revenues per store (6)	 	$	38	 	$	39	 	$	37	 	$	34	 	$	30	 	
Year-End Data	 	 	 	 	 	 	 	 	 	 	 	
Working capital	 	$	881	 	$	214	 	$	453	 	$	662	 	$	666	 	
Total assets	 	7,375	 	4,840	 	2,995	 	2,532	 	2,070	 	
Long-term debt, including current portion	 	820	 	296	 	31	 	61	 	225	 	
Convertible preferred securities	 	—	 	—	 	—	 	—	 	230	 	
Shareholders’ equity	 	2,521	 	1,822	 	1,096	 	1,034	 	536	 	
Number of stores	 	 	 	 	 	 	 	 	 	 	 	
Best Buy	 	481	 	419	 	357	 	311	 	284	 	
Magnolia Hi-Fi	 	13	 	13	 	—	 	—	 	—	 	
Musicland	 	1,321	 	1,309	 	—	 	—	 	—	 	
International	 	95	 	—	 	—	 	—	 	—	 	
Total retail square footage (000s)	 	 	 	 	 	 	 	 	 	 	 	
Best Buy	 	21,599	 	19,010	 	16,205	 	14,017	 	12,694	 	
Magnolia Hi-Fi	 	133	 	133	 	—	 	—	 	—	 	
Musicland	 	8,806	 	8,772	 	—	 	—	 	—	 	
International	 	1,923	 	—	 	—	 	—	 	—	 	

Please read this table in conjunction with Management’s Discussion and Analysis of Results of Operations and Financial Condition, beginning on page 20, and the Consolidated Financial Statements and Notes, beginning on page 34.

(1)           Both fiscal 2001 and 1996 included 53 weeks. All other periods presented included 52 weeks.
(2)           During the third quarter of fiscal 2002, we acquired the common stock of Future Shop Ltd. During the fourth quarter of fiscal 2001, we acquired the common stock of Musicland Stores Corporation (Musicland) and Magnolia Hi-Fi, Inc. (Magnolia Hi-Fi). The results of operations of these businesses are included from their dates of acquisition.

18

 

$ in millions, except per share amounts	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	1997	 	1996	 	1995	 	1994	 	1993	 	10-Year Compound Annual Growth Rate	 	5-Year Compound Annual Growth Rate	 	
Statement of Earnings Data	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenues	$	7,758	 	$	7,215	 	$	5,080	 	$	3,007	 	$	1,620	 	35.6	%	20.4	%	
Gross profit	1,046	 	934	 	690	 	457	 	284	 	—	 	—	 	
Selling, general and administrative expenses	1,006	 	814	 	568	 	380	 	248	 	—	 	—	 	
Operating income	40	 	120	 	122	 	77	 	36	 	47.9	%	87.7	%	
Net earnings (loss)	(6	)	46	 	58	 	41	 	20	 	50.4	%	—	 	
Per Share Data (3)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net earnings (loss)	$	(.02	)	$	.18	 	$	.21	 	$	.17	 	$	.10	 	 	 	 	 	
Common stock price:	High	4.37	 	4.94	 	7.54	 	5.24	 	2.61	 	 	 	 	 	
 	Low	1.31	 	2.13	 	3.69	 	1.81	 	.78	 	 	 	 	 	
Operating Statistics	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Comparable store sales change (4)	(4.7	)%	5.5	%	19.9	%	26.9	%	19.4	%	 	 	 	 	
Inventory turns (5)	4.6	 	4.8	 	4.7	 	5.0	 	4.8	 	 	 	 	 	
Gross profit percentage	13.5	%	12.9	%	13.6	%	15.2	%	17.5	%	 	 	 	 	
Selling, general and administrative expense percentage	13.0	%	11.3	%	11.2	%	12.6	%	15.3	%	 	 	 	 	
Operating income percentage	.5	%	1.7	%	2.4	%	2.6	%	2.2	%	 	 	 	 	
Average revenues per store (6)	$	29	 	$	31	 	$	28	 	$	23	 	$	18	 	 	 	 	 	
Year-End Data	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Working capital	$	563	 	$	585	 	$	609	 	$	363	 	$	119	 	 	 	 	 	
Total assets	1,740	 	1,892	 	1,507	 	952	 	439	 	 	 	 	 	
Long-term debt, including current portion	238	 	230	 	241	 	220	 	54	 	 	 	 	 	
Convertible preferred securities	230	 	230	 	230	 	—	 	—	 	 	 	 	 	
Shareholders’ equity	429	 	430	 	376	 	311	 	182	 	 	 	 	 	
Number of stores	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Best Buy	272	 	251	 	204	 	151	 	111	 	 	 	 	 	
Magnolia Hi-Fi	—	 	—	 	—	 	—	 	—	 	 	 	 	 	
Musicland	—	 	—	 	—	 	—	 	—	 	 	 	 	 	
International	—	 	—	 	—	 	—	 	—	 	 	 	 	 	
Total retail square footage (000s)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Best Buy	12,026	 	10,771	 	8,041	 	5,072	 	3,250	 	 	 	 	 	
Magnolia Hi-Fi	—	 	—	 	—	 	—	 	—	 	 	 	 	 	
Musicland	—	 	—	 	—	 	—	 	—	 	 	 	 	 	
International	—	 	—	 	—	 	—	 	—	 	 	 	 	 	

(3)           Earnings per share is presented on a diluted basis and reflects a three-for-two stock split in May 2002; two-for-one stock splits in March 1999, May 1998 and April 1994; and a three-for-two stock split in September 1993.
 
(4)           Comparable stores are stores open at least 14 full months, include remodeled and expanded locations and, for all periods presented, reflect Best Buy stores only. Relocated stores are excluded from the comparable store sales calculation until at least 14 full months after reopening. Acquired stores will be included in the comparable store sales calculation beginning with the first full quarter following the first anniversary of the date of acquisition.
 
(5)           Inventory turns reflect Best Buy stores only and are calculated based upon a monthly average of inventory balances.
 
(6)           Average revenues per store reflect Best Buy stores only and are based upon total revenues for the period divided by the weighted average number of stores open during the fiscal year.
 
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Management’s Discussion and Analysis of Results of Operations and Financial Condition
 
Overview
 
Best Buy Co., Inc. is North America’s No.1 specialty retailer of consumer electronics, home office equipment, entertainment software and appliances. In November of fiscal 2002, we acquired Future Shop Ltd. (Future Shop). Future Shop currently operates 95 stores and is Canada’s largest specialty retailer of name-brand consumer electronics, home office equipment, entertainment software and appliances. During the fourth quarter of fiscal 2001, we acquired Musicland Stores Corporation (Musicland) and Magnolia Hi-Fi, Inc. (Magnolia Hi-Fi). Musicland is primarily a mall-based national retailer of prerecorded music, movies and other entertainment-related products with 1,321 stores. Magnolia Hi-Fi is a Seattle-based retailer of high-end consumer electronics with 13 stores. All three acquisitions were accounted for using the purchase method. Under this method, the net assets and results of operations of those businesses are included in our consolidated financial statements from their respective dates of acquisition. We currently operate three reportable segments: Best Buy, Musicland and International. The Best Buy segment aggregates all operations exclusive of Musicland and International operations. The International segment was established in the third quarter of fiscal 2002 in connection with our acquisition of Future Shop.
 
Our fiscal year ended March 2, 2002, contained 52 weeks. Fiscal 2001 and 2000 contained 53 weeks and 52 weeks, respectively.
 
Results of Operations
 
Consolidated
The following table presents selected consolidated financial data for each of the past three fiscal years ($ in millions, except per share amounts):

 	 	 	 	 	 	Pro forma	 	 	 	
 	 	2002	 	2001	 	2001 (1)	 	2000	 	
Revenues	 	$	19,597	 	$	15,327	 	$	17,621	 	$	12,494	 	
Revenues % change	 	28	%	23	%	—	 	24	%	
Comparable stores sales % gain (2)	 	1.9	%	4.9	%	4.9	%	11.1	%	
Gross profit as a % of revenues	 	22.6	%	20.0	%	21.8	%	19.2	%	
SG&A as a % of revenues	 	17.8	%	16.0	%	17.8	%	14.8	%	
Operating income	 	$	937	 	$	604	 	$	703	 	$	539	 	
Operating income as a % of revenues	 	4.8	%	3.9	%	4.0	%	4.3	%	
Net earnings	 	$	570	 	$	396	 	$	425	 	$	347	 	
Diluted earnings per share (3)	 	$	1.77	 	$	1.24	 	$	1.33	 	$	1.09	 	

(1)           Pro forma information reflects combined results of operations at Best Buy, Musicland and Future Shop. Musicland’s results of operations are presented as if it had been acquired at the beginning of fiscal 2001 and include amortization of goodwill. Future Shop’s results of operations are presented as if it had been acquired at the beginning of November in fiscal 2001 and do not include amortization of goodwill. Pro forma results are unaudited.
 
(2)           Comparable stores are stores open at least 14 full months, include remodeled and expanded locations and, for all periods presented, reflect Best Buy stores only. Relocated stores are excluded from the comparable store sales calculation until at least 14 full months after reopening. Acquired stores will be included in the comparable store sales calculation beginning with the first full quarter following the first anniversary of the date of acquisition.
 
(3)           The diluted earnings per share amounts above have been restated to reflect a three-for-two stock split effective on May 10, 2002.
 
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Net earnings for fiscal 2002 increased 44%, growing to a record $570 million, compared with $396 million in fiscal 2001 and $347 million in fiscal 2000. Earnings per diluted share increased to $1.77 in fiscal 2002, compared with $1.24 in fiscal 2001 and $1.09 in fiscal 2000.
 
Our net earnings increase was primarily driven by an improved gross profit rate, new store growth, expense controls and the inclusion of operations from acquired businesses. Revenues compared with the last fiscal year’s reported results grew 28%. Approximately half of the increase in revenues was due to new Best Buy stores opened in the past two fiscal years, including 62 new stores opened in fiscal 2002. The remainder of the increase was due to the inclusion of revenues from acquired businesses. The 1.9% increase in comparable Best Buy store sales was offset by the inclusion of an extra week of operations in fiscal 2001, which increased fiscal 2001revenues by approximately $280 million.
 
Our improved gross profit rate was due to increased sales of higher-margin digital products, improved supply chain management and more effective promotional strategies. In addition, the inclusion of Musicland’s higher-margin sales mix increased our gross profit rate by approximately 1.1% of revenues.
 
Our selling, general and administrative expenses (SG&A) rate was 17.8% of revenues, an increase of 1.8% of revenues over last fiscal year. The inclusion of Musicland’s higher expense structure increased our SG&A rate by approximately 1.4% of revenues. The remainder of the increase was primarily due to the impact of operating expenses increasing at a faster rate than comparable store sales, as well as increased performance-based compensation, higher depreciation expenses related to capital investments and increased charitable giving. The increase was partially offset by reduced outside consulting costs, improved productivity and comparison with prior fiscal year expenses, which included the launch of BestBuy.com ™ , our entry into the New York market and the write-off of certain e-commerce investments.
 
Fiscal 2001 revenues were $15.3 billion, compared with $12.5 billion in fiscal 2000. The majority of the increase in revenues, compared with the prior fiscal year, was due to the addition of 62 Best Buy stores, a full year of operations at the 47 Best Buy stores opened in fiscal 2000 and a 4.9% comparable store sales increase at Best Buy stores. The remainder of the increase resulted from the inclusion of revenues generated by Musicland and Magnolia Hi-Fi from their dates of acquisition and the inclusion of a 53rd week that added approximately $280 million in revenues. The Best Buy comparable store sales increase reflected the strength of the digital product cycle and benefits from our enhanced operating model that included an improved merchandise assortment, higher in-stock positions and more consistent store execution.
 
Gross profit in fiscal 2001 increased to 20.0% of revenues, compared with 19.2% of revenues in fiscal 2000, mainly due to improved product margins and a more profitable sales mix that resulted from increased sales of digital products and higher-end, more fully featured products. In addition, the inclusion of Musicland’s higher margin sales mix increased our gross profit rate by approximately 0.2% of revenues.
 
Our SG&A rate increased to 16.0% of revenues in fiscal 2001, compared with 14.8% in fiscal 2000, primarily due to our increased investment in strategic initiatives and a more modest sales growth environment. In addition, the launch and operation of BestBuy.com, expenses related to our entry into the New York market and the write-off of certain e-commerce investments also impacted our SG&A rate in fiscal 2001.

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In addition to traditional financial measurements, we use Economic Value Added (EVA ® ) to measure our financial performance and manage our allocation of capital resources. Also, a portion of executive incentive compensation is related to the achievement of targeted levels of annual EVA improvement. EVA is a financial performance measurement that includes the economic cost of assets employed. We use EVA as one of several internal financial measures, and it is not intended to represent a measure of financial performance with respect to accounting principles generally accepted in the United States. Other organizations that use EVA as a measurement of financial performance may define and calculate EVA differently.
 
Segment Performance
 
Best Buy
The following table presents selected financial data for the Best Buy segment for each of the past three fiscal years ($ in millions):
 
Segment Performance Summary (1)

(unaudited)	 	2002	 	2001	 	2000	 	
Revenues	 	$	17,115	 	$	15,189	 	$	12,494	 	
Comparable stores sales % gain (2)	 	1.9	%	4.9	%	11.1	%	
Gross profit as a % of revenues	 	21.2	%	19.8	%	19.2	%	
SG&A as a % of revenues	 	16.0	%	15.8	%	14.8	%	
Operating income	 	$	886	 	$	611	 	$	539	 	
Operating income as a % of revenues	 	5.2	%	4.0	%	4.3	%	

(1)           Aggregate results of our businesses other than Musicland and International.
 
(2)           Includes only sales at Best Buy stores open at least 14 full months, and includes remodeled and expanded locations. Relocated stores are excluded from the comparable store sales calculation until they have been reopened for at least 14 full months.

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Best Buy revenues for fiscal 2002 increased 13% to $17.1 billion, compared with $15.2 billion in fiscal 2001.Approximately half of the increase in revenues was due to new Best Buy stores opened in the past two fiscal years, including 62 new stores in fiscal 2002. The 1.9% increase in comparable Best Buy store sales was offset by the inclusion of an extra week of operations in fiscal 2001, which increased fiscal 2001 revenues by approximately $280 million. The Best Buy comparable store sales increase was primarily the result of sales gains in the entertainment software and consumer electronics product categories, partially offset by sales declines in the home office and appliances categories.The introduction of new gaming platforms, increased availability of existing consoles and strong sales of DVD movies led to double-digit comparable store sales growth in the entertainment software category. The growth in the entertainment software category was partially offset by soft sales of prerecorded music resulting from the general absence of new releases with strong consumer appeal, an increase in the downloading of music via Internet sites and greater consumer awareness of CD recording technology. Within the consumer electronics category, digital products, including digital televisions, DVD hardware, digital cameras and digital camcorders, experienced the largest comparable store sales increases. Digital products comprised 17% of the sales mix in fiscal 2002, compared with 12% in the last fiscal year. Soft sales of desktop and configure-to-order computers as well as reduced prices for computer peripherals resulted in a comparable store sales decline in the home office product category. The decline was partially offset by increased sales of notebook computers and wireless communication devices. In the aggregate, sales of personal computers declined due to weaker consumer demand for desktop computers and challenging economic conditions. Appliance sales were soft primarily as a result of increased competition and a general slowdown in consumer demand throughout the industry. Overall, we believe our improved supply chain management and consistent store execution also contributed to increased revenues and market share gains.
 
Gross profit in fiscal 2002 increased to 21.2% of revenues, up from 19.8% of revenues last fiscal year. Approximately half of the increase was due to a more profitable sales mix; the remainder of the increase was due to reduced markdowns resulting from improved supply chain management and more effective promotional strategies, as well as lower costs associated with consumer financing offers. Sales in the higher-margin consumer electronics and entertainment software product categories increased faster than sales in the home office category, which includes lower-margin personal computers. We continued to benefit from expansion in the digital product category, as margin rates on digital products typically are higher than on analog products. Inventory turns for Best Buy stores declined slightly to 7.5 times in fiscal 2002, compared with last fiscal year’s 7.6 times, due to a sales mix shift from faster-turning computers to consumer electronics, improved in-stock positions and modest comparable store sales growth. Lower costs associated with consumer financing offers resulted from reduced interest rates and more favorable terms related to a new private-label credit card agreement.
 
Our SG&A rate increased to 16.0% of revenues in fiscal 2002, compared with 15.8% in the prior fiscal year. The increase was primarily due to expenses associated with less mature stores, the deleveraging effect of modest comparable store sales growth, increased performance-based compensation expense related to our 44% increase in net earnings and increased depreciation expense resulting from capital investments in new Best Buy stores and core financial and operating systems. We also increased our charitable giving in fiscal 2002. Our increased expenses were partially offset by reduced advertising expenditures as a percentage of revenues,
 
23

 
 
improved productivity and comparison with prior fiscal year expenses, which included the launch of BestBuy.com, our entry into the New York market and the write-off of certain e-commerce investments. In addition, our focus on controlling expenses, such as corporate hiring and outside consulting costs, positively impacted our SG&A rate. Overall, the results of operations at Magnolia Hi-Fi did not significantly impact the Best Buy segment’s financial results.
 
During fiscal 2002, we opened 62 new Best Buy stores, including 20 stores in our 30,000-square-foot format. The openings brought our total to 481 stores, compared with 419 stores at the end of fiscal 2001. In addition, we remodeled three Best Buy stores and expanded two Best Buy stores during fiscal 2002, compared with no remodeled stores and two expanded stores in fiscal 2001. Magnolia Hi-Fi continued to operate 13 stores, unchanged from fiscal 2001.
 
Musicland
The following table presents selected financial data for the Musicland segment for each of the past two fiscal years ($ in millions):

Segment Performance Summary	 	 	 	Pro forma	 	
(unaudited)	 	2002	 	2001 (1)	 	
Revenues	 	$	1,886	 	$	1,915	 	
Comparable stores sales % change (2)	 	(0.9%	)	(0.7%	)	
Gross profit as a % of revenues	 	35.0	%	36.9	%	
SG&A as a % of revenues	 	33.5	%	32.9	%	
Operating income	 	$	29	 	$	77	 	
Operating income as a % of revenues	 	1.6	%	4.0	%	

(1)           Pro forma results of operations at Musicland, including the amortization of goodwill, as though it had been acquired at the beginning of fiscal 2001.
 
(2)           Includes sales at Musicland stores open at least 12 months. Relocated stores are included in the comparable store sales calculation.
 
For fiscal 2002, Musicland revenues were $1.9 billion, slightly lower than last year’s pro forma results. Comparable store sales decreased 0.9% for the fiscal year primarily due to reduced mall traffic and softness in sales of prerecorded music and VHS movies. The comparable store sales decline was partially offset by increased sales of DVD movies and the introduction of new gaming hardware and software.
 
Musicland’s fiscal 2002 gross profit margin of 35.0% of revenues declined by 1.9% of revenues compared with last year’s pro forma results. The decline was primarily due to a change in the product mix, including soft sales of prerecorded music and increased sales of lower-margin DVD movies and gaming hardware and software.

24

 
The SG&A rate was 33.5% of revenues in fiscal 2002 compared with a pro forma rate of 32.9% last fiscal year. The SG&A rate increase was primarily the result of the deleveraging impact of the comparable store sales decline, higher distribution costs and increased expenses associated with the remerchandising of Sam Goody stores, partially offset by reduced advertising expenditures. In addition, both fiscal 2002 and pro forma 2001 included approximately $16 million of goodwill amortization. Goodwill amortization will cease at the beginning of fiscal 2003 with our adoption of SFAS No. 142, Goodwill and Other Intangible Assets.
 
International
The following table presents selected financial data for the International segment for each of the past two fiscal years ($ in millions):

Segment Performance Summary	 	 	 	Pro forma	 	
(unaudited)	 	2002 (1)	 	2001 (2)	 	
Revenues	 	$	596	 	$	543	 	
Comparable stores sales % gain (3)	 	17.4	%	—	 	
Gross profit as a % of revenues	 	23.4	%	24.3	%	
SG&A as a % of revenues	 	19.7	%	21.4	%	
Operating income	 	$	22	 	$	16	 	
Operating income as a % of revenues	 	3.7	%	2.9	%	

(1)           Results of operations at Future Shop since its acquisition at the beginning of November fiscal 2002.
 
(2)           Pro forma information presents the results of operations of Future Shop as though it had been acquired at the beginning of November fiscal 2001.
 
(3)           Includes sales at Future Shop stores open at least 14 full months, and includes remodeled and expanded locations. Relocated stores are excluded from the comparable store sales calculation until they have been reopened for at least 14 full months. The comparable store sales calculation excludes the impact of foreign currency exchange rate fluctuations.
 
Future Shop revenues were $596 million in fiscal 2002, a 10% increase compared with last year’s pro forma results. For the year, comparable store sales increased 17.4%, before the impact of foreign currency exchange rate fluctuations. The comparable store sales gains were driven by increased sales of entertainment software products and consumer electronics, which includes the rapidly expanding digital product category.
 
In fiscal 2002, Future Shop’s gross profit was 23.4% of revenues, a decrease of 0.9% of revenues compared with last year’s pro forma results. The decline was mainly due to a shift in the sales mix driven by increased sales of lower-margin entertainment software products. The impact of the sales mix shift was partially offset by lower costs associated with consumer financing offers due to lower interest rates and more favorable terms related to a new private-label credit card agreement.
 
For the year, the SG&A rate was 19.7% of revenues, compared with 21.4% of revenues last year, on a pro forma basis. Increased leverage resulting from strong comparable store sales gains and controlled expenses contributed to the SG&A rate decrease.

25

 
 
Consolidated Results
 
Net Interest (Expense) Income
Net interest expense was $1 million in fiscal 2002, compared with net interest income of $37 million last fiscal year. Fiscal 2002 included an $8 million pre-tax charge from the early retirement of debt acquired as part of the Musicland acquisition. The balance of the change in net interest resulted primarily from lower yields on short-term investments as the average interest rate declined by more than 2% compared with last fiscal year. The impact of lower short-term investment yields was partially offset by higher average cash balances resulting from strong operating cash flows and net proceeds from the issuance of convertible debentures.
 
Net interest income increased to $37 million in fiscal 2001 compared with $24 million in fiscal 2000. The increase was due to higher cash balances compared with the prior fiscal year. The higher cash balances were the result of cash flows generated from operations, including improved inventory management and a $200 million investment in Best Buy common stock by Microsoft Corporation as part of a strategic alliance.Interest expense on Musicland debt and lost interest income on the cash used to acquire Musicland and Magnolia Hi-Fi reduced net interest income by approximately $4 million.
 
Effective Income Tax Rate
Our effective income tax rate increased to 39.1%, up from 38.3% last fiscal year. The increase in the effective income tax rate was primarily due to the nondeductibility of goodwill amortization expense resulting from our acquisitions in the fourth quarter of fiscal 2001.
 
Our effective income tax rate in fiscal 2001 was 38.3%, unchanged from fiscal 2000. Historically, our effective tax rate has been impacted primarily by the taxability of investment income and state income taxes.
 
Liquidity and Capital Resources
 
Summary
We improved our financial position in fiscal 2002 while continuing to make significant investments in new growth initiatives, including the $377 million, or $368 million net of cash acquired, acquisition of Future Shop. Cash and cash equivalents increased to $1.9 billion at the end of fiscal 2002, compared with $747 million at the end of fiscal 2001. Working capital, the excess of current assets over current liabilities, increased to $881 million at the end of fiscal 2002, compared with $214 million at the end of fiscal 2001. In fiscal 2002, strong operating cash flows and net proceeds from the issuance of convertible debentures strengthened our liquidity position; however, our long-term debt-to-capitalization ratio increased to 24% at the end of fiscal 2002, compared with 9% at the end of fiscal 2001.
 
Cash Flows
Cash provided by operating activities was $1.6 billion in fiscal 2002, compared with $808 million in fiscal 2001 and $776 million in fiscal 2000. The increase in operating cash flows in fiscal 2002, compared with the prior fiscal year, was driven by increased net earnings and cash generated from changes in net operating assets and liabilities. The changes were related to increased accounts payable balances due to higher business volume and timing of invoice payments, as well as increased accrued income taxes. In addition, other liabilities increased due to business growth, advances received under vendor alliances, increased gift card liabilities and higher accrued performance-based compensation expenses resulting from our improvement in net earnings. The changes were partially offset by increased ending inventory, which resulted from the operations of 62 new Best Buy stores and improved in-stock levels.
 
Net cash used in investing activities in fiscal 2002 was $965 million, compared with $1.0 billion and $416 million

26

 
in fiscal 2001 and 2000, respectively. In fiscal 2002, cash was used for business acquisitions, construction of new retail locations, information systems improvements and other additions to property, plant and equipment, including construction of a new corporate headquarters and expansion of our distribution facilities. The primary purpose of the cash investment activity was to support our expansion plans, improve our operational efficiency and enhance shareholder value. Strong operating cash flows more than offset cash used to fund our business expansion plans, construct new stores and fund strategic initiatives.
 
In fiscal 2002 and 2001, net cash provided by financing activities was $495 million and $218 million, respectively, while $395 million was used in financing activities in fiscal 2000. We raised $726 million, net of offering expenses, through the issuance of convertible debentures in fiscal 2002. The proceeds of the issuance will be used for general corporate purposes. Favorable market conditions were also a factor in the decision to issue convertible debentures. In addition, we retired $266 million in Senior Subordinated Notes due 2003 and 2008 acquired as part of the Musicland acquisition. Fiscal 2001 included a $200 million investment by Microsoft Corporation in our common stock. For more information regarding the convertible debentures and retirement of debt, refer to note 3 of the Notes to Consolidated Financial Statements on page 43.
 
Sources of Liquidity
Funds generated by operations and existing cash and cash equivalents continue to be our most significant sources of liquidity. We currently believe funds generated from the expected results of operations and available cash and cash equivalents will be sufficient to finance anticipated expansion plans and strategic initiatives for the next fiscal year. In addition, our revolving credit facility is available for additional working capital needs or investment opportunities. Our liquidity is not currently dependent on the use of off-balance sheet financing arrangements other than operating leases.
 
We have a $200 million unsecured revolving credit facility scheduled to mature in March 2005 and, as a result of the Future Shop acquisition, a $44 million secured revolving credit facility that will expire in fiscal 2003. The $44 million facility increases to $53 million on a seasonal basis. We also have a $200 million inventory financing line. Borrowings under this line are collateralized by a security interest in certain merchandise inventories approximating the outstanding borrowings. We received no advances under the $200 million credit facility or the inventory financing line in fiscal 2002 or 2001. Future Shop had peak borrowings under the $44 million credit facility of $32 million and $39 million in fiscal 2002 and 2001, respectively.
 
Our credit ratings as of March 2, 2002, were as follows:

Rating Agency	 	Rating	 	Outlook	 	
Fitch	 	BBB	 	Stable	 	
Moody’s	 	Baa3	 	Stable	 	
Standard & Poor’s	 	BBB-	 	Negative	 	

Factors that can impact our credit rating include changes in the economic environment, conditions in the retail and consumer electronics industries, our financial position and changes in our business strategy. We do not currently foresee any reasonable circumstances under which our credit rating would be significantly downgraded. However, if a significant downgrade were to occur, it could adversely impact, among other things, our future borrowing costs, access to capital markets, vendor financing terms and future new store operating lease costs. In addition, the conversion rights of the holders of our convertible debentures could be accelerated if our credit rating were to be downgraded.

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Contractual Obligations and Available Commercial Commitments
The following table presents information regarding contractual obligations by fiscal year ($ in millions):
 
Contractual Obligations

 	 	Payments Due	 	
 	 	2003	 	2004	 	2005	 	2006	 	2007	 	Thereafter	 	
Operating leases	 	$	472	 	$	459	 	$	417	 	$	376	 	$	361	 	$	2,698	 	
Long-term debt	 	7	 	6	 	3	 	40	 	1	 	763	 	
Purchase commitments	 	120	 	5	 	—	 	—	 	—	 	—	 	
Total	 	$	599	 	$	470	 	$	420	 	$	416	 	$	362	 	$	3,461	 	

Note: For more information regarding operating leases, long-term debt and purchase commitments, refer to notes 3, 5 and 9, respectively, in the Notes to Financial Statements beginning on page 39.
 
The following table presents information regarding available commercial commitments and their expiration dates
by fiscal year ($ in millions):
 
Available Commercial Commitments

 	 	Expires	 	
 	 	Amount	 	2003	 	2004	 	2005	 	2006	 	Thereafter	 	
Lines of credit (1)	 	$	222	 	$	31	 	$	—	 	$	—	 	$	191	 	$	—	 	
Master lease agreement	 	23	 	—	 	—	 	—	 	23	 	—	 	
Inventory financing line	 	200	 	200	 	—	 	—	 	—	 	—	 	
Total	 	$	445	 	$	231	 	$	—	 	$	—	 	$	214	 	$	—	 	

(1)           Our $44 million revolving credit facility increases to $53 million on a seasonal basis. Nine million dollars of our $200 million line of credit were committed to stand-by letters of credit.

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Debt and Capital
In fiscal 2002, we completed two private offerings of convertible debentures due June 27, 2021, and Jan. 15, 2022, respectively, with a combined initial principal amount at maturity of $894 million. The proceeds from the offerings, net of offering expenses, were $726 million. We may redeem, and holders of the debentures may require us to purchase, all or part of the debentures on certain dates or upon the occurrence of certain events as specified in the respective agreements. In addition, in the event that certain conditions are satisfied, holders may surrender their debentures for conversion, which would increase the number of shares of our common stock outstanding and have a dilutive impact on our reported earnings per share.
 
For additional information regarding the convertible debentures, refer to note 3 of the Notes to Consolidated Financial Statements on page 43.
 
Our ability to access our credit facilities is subject to our compliance with the terms and conditions of the credit facilities, including financial covenants. The financial covenants require us to have minimum earnings before interest, taxes, depreciation and amortization (EBITDA), and a minimum net worth, as well as to maintain other financial ratios.  As of the end of fiscal 2002, we were in compliance with all such covenants. In addition, in the event we were to default on any of our other debt, it would constitute default under our credit facilities as well.
 
Our current practice is to lease rather than own real estate. For those sites developed using working capital, we generally sell and lease back those properties under long-term lease agreements. In fiscal 2002, recoverable costs from the developed properties decreased $25 million compared with the prior fiscal year as we sold properties to unrelated third parties and leased them back under operating leases. In addition, in fiscal 2002 we utilized a $60 million master lease facility to finance new store development. Expenditures for stores developed under this financing facility are recorded on the balance sheet as property under capital lease with a corresponding lease obligation liability. At the end of fiscal 2002, $39 million in capitalized leases related to new stores had been financed under the master lease agreement.
 
In fiscal 2000, our Board of Directors authorized the purchase of up to $400 million of our common stock from time to time through open-market purchases. The stock purchase program has no stated expiration date. Approximately 2.9 million shares were purchased under this plan during fiscal 2000 at a cost of $100 million. No additional purchases were made in fiscal 2002 or 2001.
 
Significant Accounting Policies
 
Revenue Recognition
We recognize revenues from the sale of merchandise at the time the merchandise is sold. Service revenues are recognized at the time the service is provided, the sale price is fixed or determinable, and collectibility is reasonably assured.
 
We sell extended service contracts, called Performance Service Plans, on behalf of an unrelated third party. In jurisdictions where we are not deemed to be the obligor on the contract at the time of sale, commissions are recognized in revenues at the time of sale. In jurisdictions where we are deemed to be the obligor on the contract at the time of sale, commissions are recognized in revenues ratably over the term of the service contract.

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Inventory Reserves
We maintain inventory at the lower of cost or market. Markdown reserves are established based primarily on forecasted consumer demand, inventory aging and technological obsolescence. If our estimates regarding consumer demand are inaccurate or changes in technology impact demand for certain products in an unforeseen manner, we could be exposed to losses in excess of our established reserves.
 
Independent physical inventory counts are taken on a regular basis at all locations that hold inventory to ensure the amounts reflected in our consolidated financial statements are properly stated. During the interim period between physical inventory counts, we accrue for anticipated physical inventory losses on a location-by-location basis, based on historical results and current trends. If our estimates regarding physical losses are inaccurate, we could be exposed to losses in excess of our established reserves.
 
Long-Lived Assets
Long-lived assets such as property, plant and equipment; goodwill; software; and investments are reviewed for impairment when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. We would recognize an impairment loss when estimated future undiscounted cash flows expected to result from the use of the asset and its value upon disposal are less than its carrying amount. If our estimates regarding future undiscounted cash flows or useful lives were to change, we could be exposed to losses that are material in nature.
 
Tax Contingencies
Domestic and foreign tax authorities frequently audit us. These audits include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with our various filing positions, we record reserves for probable exposures. To the extent we prevail in matters for which accruals have been established or are required to pay amounts in excess of our reserves, our effective tax rate in a given financial statement period may be materially impacted. As of the end of fiscal 2002, three and two of our open tax years were undergoing examination by the United States Internal Revenue Service and Revenue Canada, respectively.
 
New Accounting Pronouncements
A discussion of recently issued accounting pronouncements is described in note 1 of the Notes to Consolidated Financial Statements on page 39.
 
Outlook for Fiscal 2003
Looking forward to fiscal 2003, we are projecting earnings growth of approximately 18% to 21% from $1.77 per share in fiscal 2002 to approximately $2.10 to $2.17 per share in fiscal 2003. We expect the earnings growth to be driven by a 17% to 20% increase in revenues, maintaining the gross profit rate we delivered in fiscal 2002 and modestly reducing our SG&A rate. The projected earnings increase reflects a reduction in Musicland’s operating income from $29 million in fiscal 2002 to approximately break-even in fiscal 2003 due to continued transformation initiatives. The reduction in Musicland’s operating income is net of the $16 million decrease in Musicland’s goodwill amortization expense as a result of adopting SFAS No. 142, Goodwill and Other Intangible Assets , at the beginning of fiscal 2003. In addition, our projections assume that the U.S. economy will continue to gradually improve in fiscal 2003.
We expect total revenues to grow from $19.6 billion in fiscal 2002 to between $23.0 billion and $23.5 billion

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in fiscal 2003 due to new store growth, comparable store sales gains and the inclusion of a full year of Future Shop revenues. In fiscal 2003, comparable store sales are expected to increase by approximately 3% to 4%.
 
In fiscal 2003, our gross profit rate is expected to remain essentially even with the fiscal 2002 rate based on anticipated gross profit rate improvement at Best Buy stores and International, offset by a planned gross profit rate decline at Musicland. The anticipated gross profit rate improvement at Best Buy stores and International is based on a more profitable sales mix resulting from an increase in sales of higher-margin digital products. However, the rate of improvement is likely to be less than experienced in the prior fiscal year, as these and other products become more widely distributed through mass merchandisers and discount chains. Musicland’s planned gross profit rate decline in fiscal 2003 is due to the continued shift in the sales mix from higher-margin sales of prerecorded music to lower-margin sales of DVD movies and video gaming.
 
Our SG&A rate is expected to decrease modestly in fiscal 2003. The expected decrease is due to expense leverage, primarily in the second half of our fiscal year, as a result of the anticipated increase in comparable store sales and the expanding store base. The SG&A rate decline resulting from increased expense leverage will be partially offset by higher depreciation expenses related to our increased levels of capital spending in fiscal 2003 and higher medical coverage costs for our employees.
 
We anticipate net interest income for fiscal 2003 of approximately $6 million, consistent with fiscal 2002, excluding the $8 million pre-tax charge from the early retirement of debt incurred in the second quarter of fiscal 2002.
 
Our effective tax rate is expected to decrease modestly in fiscal 2003 as a result of the discontinued amortization of nondeductible goodwill.
 
We expect fiscal 2003 capital expenditures to be approximately $1 billion, exclusive of amounts expended on property development that will be recovered through the sale and lease back of the properties. The capital spending will support the opening of approximately 60 Best Buy stores in the United States and six to eight in Canada, 30 small-market Sam Goody stores, eight to nine Future Shop stores and six Magnolia Hi-Fi stores. About half of the new U.S. Best Buy stores are expected to be 45,000-square-foot, Concept 5 store formats, and the other half are expected to be 30,000-square-foot, smaller market Concept 5 store formats. In addition, fiscal 2003 capital spending will support the continued development of our information systems and infrastructure, the continued construction of our new corporate headquarters and the transformation and integration of Musicland and Future Shop stores.
 
Beginning in the first quarter of fiscal 2003, we will report two segments, Domestic and International. The Domestic segment will be comprised of operations at Best Buy’s U.S., Musicland and Magnolia Hi-Fi stores. The International segment will be comprised of Best Buy’s Canadian and Future Shop operations. The primary reasons for this change are the significant similarities of their respective products and markets, the leveraging of our buying and distribution functions and the merging of many of our operational functions into a shared services model in the first quarter of fiscal 2003.

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Quarterly Results and Seasonality
Similar to many retailers, our business is seasonal. Revenues and earnings are typically greater during the second half of the fiscal year, which includes the holiday selling season. The timing of new store openings, costs associated with acquisitions and development of new businesses, and general economic conditions also may affect our future quarterly results.
 
The following tables show selected unaudited quarterly operating results and high and low prices of our common stock for each quarter of fiscal 2002 and 2001.
 
($ in millions, except per share amounts)

Quarter (1)(2)	 	1st	 	2nd	 	3rd	 	4th	 	
 	 	 	 	 	 	 	 	 	 	
Fiscal 2002	 	 	 	 	 	 	 	 	 	
Revenues	 	$	3,697	 	$	4,164	 	$	4,756	 	$	6,980	 	
Comparable store sales change (3)	 	(3.1%	)	2.8	%	1.6	%	4.5	%	
Gross profit	 	$	846	 	$	948	 	$	1,028	 	$	1,608	 	
Operating income	 	90	 	148	 	129	 	570	 	
Net earnings	 	55	 	85	 	80	 	350	 	
Diluted earnings per share (4)	 	.17	 	.26	 	.25	 	1.08	 	
 	 	 	 	 	 	 	 	 	 	
Fiscal 2001	 	 	 	 	 	 	 	 	 	
Revenues	 	$	2,964	 	$	3,169	 	$	3,732	 	$	5,462	 	
Comparable store sales change (3)	 	9.5	%	5.1	%	5.9	%	1.8	%	
Gross profit	 	$	606	 	$	648	 	$	689	 	$	1,116	 	
Operating income	 	109	 	115	 	85	 	295	 	
Net earnings	 	72	 	77	 	57	 	190	 	
Diluted earnings per share (4)	 	.23	 	.24	 	.18	 	.60	 	

(1)           During the third quarter of fiscal 2002, we acquired the common stock of Future Shop Ltd.  Future Shop’s results of operations were included from the date of acquisition.
 
(2)           The fourth quarter of fiscal 2001 included 14 weeks. All other quarters included 13 weeks. Also, during the fourth quarter of fiscal 2001, we acquired the common stock of Musicland Stores Corporation and Magnolia Hi-Fi, Inc. The results of operations of those businesses were included from their dates of acquisition.
 
(3)           Best Buy stores only. The comparable store sales increase for the fourth quarter of fiscal 2002 was based upon the comparable 13-week period for the prior fiscal year. The comparable store sales increase for the fourth quarter of fiscal 2001 was based upon the comparable 14-week period for the prior fiscal year.
 
(4)           The diluted earnings per share amounts above have been restated to reflect a three-for-two stock split, effective on May 10, 2002.

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Common Stock Prices

Quarter	 	1st	 	2nd	 	3rd	 	4th	 	
 	 	 	 	 	 	 	 	 	 	
Fiscal 2002	 	 	 	 	 	 	 	 	 	
High	 	$	41.57	 	$	46.60	 	$	48.00	 	$	51.47	 	
Low	 	22.42	 	35.45	 	26.68	 	43.43	 	
 	 	 	 	 	 	 	 	 	 	
Fiscal 2001	 	 	 	 	 	 	 	 	 	
High	 	$	59.25	 	$	53.79	 	$	49.42	 	$	34.00	 	
Low	 	31.50	 	38.33	 	20.33	 	14.00	 	
 
Our common stock is traded on the New York Stock Exchange under the ticker symbol BBY. As of March  28, 2002, there were 2,013 holders of record of Best Buy common stock. We have not historically paid, and have no current plans to pay, cash dividends on our common stock. The stock prices above have been restated to reflect a three-for-two stock split, effective on May 10, 2002.
 
Forward-Looking Statements
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, provide a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their companies. With the exception of historical information, the matters discussed in this annual report are forward-looking statements and may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “intend” and “potential.” Such statements reflect our current view with respect to future events and are subject to certain risks, uncertainties and assumptions. A variety of factors could cause our actual results to differ materially from the anticipated results expressed in such forward-looking statements, including, among other things, general economic conditions, acquisitions and development of new businesses, product availability, sales volumes, profit margins, weather, foreign currency fluctuation, availability of suitable real estate locations, and the impact of labor markets and new product introductions on our overall profitability. Readers should review our Current Report on Form 8-K filed May 16, 2001, which describes additional important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements made in this annual report.

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Consolidated Balance Sheets

$ in millions, except per share amounts	 	 	 	 	 	
 	 	March 2,	 	March 3,	 	
Assets	 	2002	 	2001	 	
Current Assets	 	 	 	 	 	
Cash and cash equivalents	 	$	1,855	 	$	747	 	
Receivables	 	247	 	209	 	
Recoverable costs from developed properties	 	79	 	104	 	
Merchandise inventories	 	2,258	 	1,767	 	
Other current assets	 	172	 	102	 	
Total current assets	 	4,611	 	2,929	 	
Property and Equipment	 	 	 	 	 	
Land and buildings	 	242	 	171	 	
Leasehold improvements	 	680	 	557	 	
Fixtures and equipment	 	1,759	 	1,259	 	
Property under capital lease	 	39	 	—	 	
 	 	2,720	 	1,987	 	
Less accumulated depreciation and amortization	 	823	 	543	 	
Net property and equipment	 	1,897	 	1,444	 	
Goodwill, Net	 	773	 	385	 	
Other Assets	 	94	 	82	 	
Total Assets	 	$	7,375	 	$	4,840	 	
 
See Notes to Consolidated Financial Statements.

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$ in millions, except per share amounts	 	 	 	 	 	
 	 	March 2,	 	March 3,	 	
Liabilities and Shareholders’ Equity	 	2002	 	2001	 	
Current Liabilities	 	 	 	 	 	
Accounts payable	 	$	2,449	 	$	1,773	 	
Accrued compensation and related expenses	 	253	 	154	 	
Accrued liabilities	 	770	 	546	 	
Accrued income taxes	 	251	 	127	 	
Current portion of long-term debt	 	7	 	115	 	
Total current liabilities	 	3,730	 	2,715	 	
Long-Term Liabilities	 	311	 	122	 	
Long-Term Debt	 	813	 	181	 	
Shareholders’ Equity	 	 	 	 	 	
Preferred stock, $1.00 par value: Authorized — 400,000 shares;
Issued and outstanding — none	 	—	 	—	 	
Common stock, $.10 par value: Authorized — 1 billion shares;
Issued and outstanding — 319,128,000 and
312,207,000 shares, respectively	 	31	 	31	 	
Additional paid-in capital	 	702	 	567	 	
Retained earnings	 	1,794	 	1,224	 	
Accumulated other comprehensive loss	 	(6	)	—	 	
Total shareholders’ equity	 	2,521	 	1,822	 	
Total Liabilities and Shareholders’ Equity	 	$	7,375	 	$	4,840	 	
 
See Notes to Consolidated Financial Statements.

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Consolidated Statements of Earnings

$ in millions, except per share amounts	 	 	 	 	 	 	 	
 	 	March 2,	 	March 3,	 	Feb. 26,	 	
For the Fiscal Years Ended	 	2002	 	2001	 	2000	 	
Revenues	 	$	19,597	 	$	15,327	 	$	12,494	 	
Cost of goods sold	 	15,167	 	12,268	 	10,101	 	
Gross profit	 	4,430	 	3,059	 	2,393	 	
Selling, general and administrative expenses	 	3,493	 	2,455	 	1,854	 	
Operating income	 	937	 	604	 	539	 	
Net interest (expense) income	 	(1	)	37	 	24	 	
Earnings before income tax expense	 	936	 	641	 	563	 	
Income tax expense	 	366	 	245	 	216	 	
Net earnings	 	$	570	 	$	396	 	$	347	 	
 	 	 	 	 	 	 	 	
Basic earnings per share	 	$	1.80	 	$	1.28	 	$	1.13	 	
Diluted earnings per share	 	$	1.77	 	$	1.24	 	$	1.09	 	
Basic weighted average common
shares outstanding (in millions)	 	316.0	 	310.0	 	306.3	 	
Diluted weighted average common
shares outstanding (in millions)	 	322.5	 	319.0	 	318.9	 	
 
See Notes to Consolidated Financial Statements.

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Consolidated Statements of Cash Flows

$ in millions	 	 	 	 	 	 	 	
 	 	March 2,	 	March 3,	 	Feb. 26,	 	
For the Fiscal Years Ended	 	2002	 	2001	 	2000	 	
Operating Activities	 	 	 	 	 	 	 	
Net earnings	 	$	570	 	$	396	 	$	347	 	
Adjustments to reconcile net earnings to net cash
provided by operating activities:	 	 	 	 	 	 	 	
Depreciation	 	289	 	167	 	104	 	
Deferred income taxes	 	23	 	43	 	30	 	
Amortization of goodwill	 	20	 	2	 	—	 	
Other	 	46	 	18	 	4	 	
Changes in operating assets and liabilities,
net of acquired assets and liabilities:	 	 	 	 	 	 	 	
Receivables	 	(18	)	(7	)	(57	)	
Merchandise inventories	 	(330	)	(144	)	(137	)	
Other assets	 	(39	)	(16	)	(7	)	
Accounts payable	 	529	 	16	 	302	 	
Other liabilities	 	278	 	199	 	92	 	
Accrued income taxes	 	210	 	134	 	98	 	
Total cash provided by operating activities	 	1,578	 	808	 	776	 	
Investing Activities	 	 	 	 	 	 	 	
Additions to property and equipment	 	(627	)	(658	)	(361	)	
Acquisitions of businesses, net of cash acquired	 	(368	)	(326	)	—	 	
Decrease (increase) in recoverable costs from
developed properties	 	30	 	(31	)	(21	)	
Increase in other assets	 	—	 	(15	)	(34	)	
Total cash used in investing activities	 	(965	)	(1,030	)	(416	)	
Financing Activities	 	 	 	 	 	 	 	
Net proceeds from issuance of long-term debt	 	726	 	—	 	—	 	
Long-term debt payments	 	(279	)	(17	)	(30	)	
Issuance of common stock	 	48	 	235	 	32	 	
Repurchase of common stock	 	—	 	—	 	(397	)	
Total cash provided by (used in) financing activities	 	495	 	218	 	(395	)	
Increase (Decrease) in Cash and Cash Equivalents	 	1,108	 	(4	)	(35	)	
Cash and Cash Equivalents at Beginning of Year	 	747	 	751	 	786	 	
Cash and Cash Equivalents at End of Year	 	$	1,855	 	$	747	 	$	751	 	
 	 	 	 	 	 	 	 	
Supplemental Disclosure of Cash Flow Information	 	 	 	 	 	 	 	
Income tax paid	 	$	139	 	$	62	 	$	83	 	
Interest paid	 	25	 	7	 	5	 	
Capital lease obligations	 	39	 	—	 	—	 	
 
See Notes to Consolidated Financial Statements.

 
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Consolidated Statements of
Changes in Shareholders’ Equity

$ and shares in millions	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Common	 	Common	 	Additional
Paid-In	 	Retained	 	Accumulated
Other
Comprehensive	 	 	 	
 	 	Shares	 	Stock	 	Capital	 	Earnings	 	Loss	 	Total	 	
Balances at Feb. 27, 1999	 	305	 	$	30	 	$	523	 	$	481	 	$	—	 	$	1,034	 	
Stock options exercised	 	6	 	1	 	33	 	—	 	—	 	34	 	
Tax benefit from stock options exercised	 	—	 	—	 	79	 	—	 	—	 	79	 	
Repurchase of common stock	 	(10	)	(1	)	(397	)	—	 	—	 	(398	)	
Net earnings	 	—	 	—	 	—	 	347	 	—	 	347	 	
Balances at Feb. 26, 2000	 	301	 	30	 	238	 	828	 	—	 	1,096	 	
Stock options exercised	 	6	 	—	 	36	 	—	 	—	 	36	 	
Tax benefit from stock options exercised	 	—	 	—	 	93	 	—	 	—	 	93	 	
Stock issuance	 	5	 	1	 	200	 	—	 	—	 	201	 	
Net earnings	 	—	 	—	 	—	 	396	 	—	 	396	 	
Balances at March 3, 2001	 	312	 	31	 	567	 	1,224	 	—	 	1,822	 	
Stock options exercised	 	7	 	—	 	49	 	—	 	—	 	49	 	
Tax benefit from stock options exercised	 	—	 	—	 	86	 	—	 	—	 	86	 	
Translation adjustments and other	 	—	 	—	 	—	 	—	 	(6	)	(6	)	
Net earnings	 	—	 	—	 	—	 	570	 	—	 	570	 	
Balances at March 2, 2002	 	319	 	$	31	 	$	702	 	$	1,794	 	$	(6	)	$	2,521	 	
 
See Notes to Consolidated Financial Statements.

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Notes to Consolidated Financial Statements
 
$ in millions, except per share amounts
 
1. Summary of Significant Accounting Policies
 
Description of Business
Best Buy Co., Inc. is North America’s No.1 specialty retailer of name-brand consumer electronics, home office equipment, entertainment software and appliances. We operate three segments: Best Buy, Musicland and International. Best Buy is a specialty retailer of consumer electronics, home office equipment, entertainment software and appliances comprised of 481 stores in 44 states. Also included in the Best Buy segment is Seattle-based Magnolia Hi-Fi, a high-end retailer of audio and video products with 13 stores. Musicland, with more than 1,320 locations in the United States, Puerto Rico and the U.S. Virgin Islands, is primarily a mall-based retailer of prerecorded music, movies and other entertainment-related products. International is comprised of Future Shop, which currently operates 95 stores and is Canada’s largest consumer electronics retailer, offering products similar to Best Buy.
 
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. All subsidiaries are wholly owned.
 
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts in the consolidated balance sheets and statements of earnings, as well as the disclosure of contingent liabilities. Actual results could differ from these estimates and assumptions.
 
Fiscal Year
Our fiscal year ends on the Saturday nearest the end of February. Fiscal 2002 and 2000 each included 52 weeks, while fiscal 2001 included 53 weeks.
 
Cash and Cash Equivalents
We consider highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. These investments are carried at cost, which approximates market value.
 
Recoverable Costs From Developed Properties
The costs of acquisition and development of properties that we intend 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 cost or market. The primary methods used to determine cost are the average cost and retail inventory methods.
 
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using 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. When indicators of impairment exist, we evaluate long-lived assets for impairment using an undiscounted cash flow analysis.
Estimated useful lives by major asset category are as follows:

Asset	 	Life (in years)	 	
Buildings	 	30—40	 	
Leasehold improvements	 	10—20	 	
Fixtures and equipment	 	3—15	 	
Property under capital lease	 	5—20	 	

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$ in millions, except per share amounts
 
Goodwill
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for under the purchase method. We periodically review goodwill for impairment and assess whether significant events or changes in business circumstances indicate that the carrying value of the goodwill may not be recoverable. An impairment loss would be recorded in the period such determination is made. Accumulated amortization was $22 and $2 in fiscal 2002 and 2001, respectively. See note 2 for additional discussion regarding goodwill.
 
Revenue Recognition
We recognize revenues from the sale of merchandise at the time the merchandise is sold. We recognize service revenues at the time the service is provided, the sales price is fixed or determinable and collectibility is reasonably assured.
 
We sell extended service contracts, called Performance Service Plans, on behalf of an unrelated third party. In jurisdictions where we are not deemed to be the obligor on the contract at the time of sale, commissions are recognized in revenues at the time of sale. In jurisdictions where we are deemed to be the obligor on the contract at the time of sale, commissions are recognized in revenues ratably over the term of the service contract.
 
Sales Incentives
We periodically offer sales incentives that entitle our customers to receive a reduction in the price of a product or service. For sales incentives in which we are the obligor, the reduction in revenues is recognized at the time the product or service is sold.
 
Shipping and Handling Costs
Amounts billed to customers for shipping and handling are included in revenues. The related costs are included in cost of goods sold.
 
Foreign Currency
Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations and cash flows are translated using the average exchange rates throughout the period. The effect of exchange rate fluctuations on translation of assets and liabilities is recorded as a component of shareholders’ equity. Gains and losses from foreign currency transactions are included in selling, general and administrative expenses.
 
Comprehensive Income
Comprehensive income is net earnings, plus certain other items that are recorded directly to shareholders’ equity. The only significant item currently applicable to us is foreign currency translation adjustments, which were not significant.
 
Stock-Based Compensation
We account for employee stock-based compensation using the intrinsic value method as prescribed under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees , and related Interpretations. We also present pro forma net earnings and earnings per share in note 4 as if we had adopted Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation .
 
Pre-Opening Costs
Non-capital expenditures associated with opening new stores are expensed as incurred.
 
Advertising Costs
Advertising costs, which are included in selling, general and administrative expenses, are expensed the first time the advertisement runs. Gross advertising expenses, prior to reimbursement through cooperative advertising agreements, for fiscal 2002, 2001 and 2000 were $540, $479 and $374, respectively.

40

 
$ in millions, except per share amounts
 
Derivative Financial Instruments
SFAS No.133, Accounting for Derivative Instruments and Hedging Activities , requires that all derivatives be recorded on the balance sheet at fair value. At March 2, 2002, the fair value of existing interest-rate swaps was not significant.
 
Reclassifications
Certain previous year amounts have been reclassified to conform to the current year presentation. These reclassifications had no impact on net earnings or financial position.
 
New Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations , and No. 142, Goodwill and Other Intangible Assets , effective for fiscal years beginning after Dec.15, 2001. Under these new standards, all acquisitions subsequent to June 30, 2001, must be accounted for by the purchase method of accounting, and goodwill is no longer amortized over its useful life. Rather, goodwill will be subject to an annual impairment test based on its fair value. Separable intangible assets that are determined to have a finite life will continue to be amortized over their useful lives. We are currently evaluating these pronouncements to determine the impact, if any, they may have on our net earnings or financial position.
 
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , effective for fiscal years beginning after Dec.15, 2001. This statement develops one accounting model (based on the model in SFAS No. 121) for long-lived assets to be disposed of, expands the scope of discontinued operations and modifies the accounting for discontinued operations. The adoption of this new statement is not expected to have material impact on our net earnings or financial position.
 
2. Acquisitions
Effective Nov. 4, 2001, we acquired all of the common stock of Future Shop for $377, or $368 net of cash acquired, including transaction costs. We acquired Future Shop to further our expansion plans and increase shareholder value. The acquisition was accounted for using the purchase method in accordance with SFAS No. 141. Accordingly, the net assets were recorded at their estimated fair values, and operating results were included in our financial statements from the date of acquisition. The purchase price was allocated on a preliminary basis using information currently available. The allocation of the purchase price to the assets and liabilities acquired will be finalized in fiscal 2003. We will adjust the allocation of the purchase price after obtaining more information regarding asset valuations, liabilities assumed and revisions of preliminary estimates of fair values made at the date of purchase. The preliminary allocations resulted in goodwill of approximately $406, which is non-deductible for tax purposes. Under SFAS No.142, goodwill is not amortized.
 
The preliminary purchase price allocation was as follows:

Merchandise inventories	 	$	169	 	
Property and equipment	 	108	 	
Other assets	 	40	 	
Goodwill	 	406	 	
Current liabilities	 	(342	)	
Long-term debt, including current portion	 	(13	)	
 	 	$	368	 	
 
During the fourth quarter of fiscal 2001, we acquired the common stock of Magnolia Hi-Fi for $88 in cash, including transaction costs, and the common stock of Musicland for $425, including transaction costs, plus long-term debt valued at $271. The acquisitions were accounted for

41

 
$ in millions, except per share amounts
 
using the purchase method in accordance with APB Opinion No.16, Business Combinations, and No. 17, Intangible Assets. The allocation of the purchase prices to the assets and liabilities acquired was finalized in the fourth quarter of fiscal 2002 and resulted in goodwill of $395, of which $326 is non-deductible for tax purposes. The goodwill was being amortized on a straight-line basis over 20 years and is included in selling, general and administrative expenses. Goodwill amortization associated with the acquisitions of Magnolia Hi-Fi and Musicland will cease at the beginning of fiscal 2003 with the adoption of SFAS No. 142. Application of the nonamortization provision of the new standard is expected to result in an increase in our net earnings of approximately $18 per year.
 
The following unaudited pro forma data sets forth the consolidated results of operations as though Musicland and Future Shop had been acquired as of the beginning of fiscal 2001:

 	 	2002	 	2001	 	
Revenues	 	$	20,392	 	$	18,392	 	
Net earnings	 	570	 	428	 	
Basic earnings per share	 	1.80	 	1.38	 	
Diluted earnings per share	 	1.77	 	1.34	 	

Pro forma information related to the acquisition of Magnolia Hi-Fi is not presented, as the operating results of Magnolia Hi-Fi would not have had a material impact on our results of operations.
 
The pro forma results include goodwill amortization of $16, for Musicland only, and other adjustments, principally the loss of interest income on cash used to finance the acquisitions. The pro forma results for fiscal 2001 exclude costs expected to be incurred in connection with the integration and transformation of acquired businesses. The pro forma results are not necessarily indicative of what actually would have occurred had the acquisitions been completed as of the beginning of fiscal 2001, nor are they necessarily indicative of future consolidated results.

42

 
 
$ in millions, except per share amounts
 
3. Debt

 	 	March 2,	 	March 3,	 	
 	 	2002	 	2001	 	
Convertible debentures, unsecured, due 2021,
initial interest rate 2.75%	 	$	341	 	$	—	 	
Convertible subordinated debentures, unsecured, due 2022,
initial interest rate 2.25%	 	402	 	—	 	
Subordinated notes, face amount $110, unsecured, due 2003,
interest rate 9.0%, effective rate 8.9%	 	—	 	110	 	
Senior subordinated notes, face amount $150, unsecured, due 2008,
interest rate 9.9%, effective rate 8.5%	 	5	 	161	 	
Capital lease obligations, due 2006, interest rate 5.9%	 	39	 	—	 	
Mortgage and other debt, interest rates ranging from 4.0% to 9.2%	 	33	 	25	 	
Total debt	 	820	 	296	 	
Less: current portion	 	(7	)	(115	)	
Long-term debt	 	$	813	 	$	181	 	
 
The mortgage and other debt are secured by certain property and equipment with a net book value of $43 and $44 at March 2, 2002, and March 3, 2001, respectively.
 
Convertible Debentures
In January 2002, we sold, in a private offering, convertible subordinated debentures having an aggregate principal amount of $402.  The proceeds from the offering, net of $6 in offering expenses, were $396. The debentures mature in 20 years and are callable at our option on or after Jan. 15, 2007.  Holders may require us to purchase all or a portion of their debentures on Jan. 15, 2007; Jan. 15, 2012; and Jan. 15, 2017, at a purchase price equal to 100% of the principal amount of the debentures plus accrued and unpaid interest up to but not including the date of purchase.  The debentures will be convertible into shares of our common stock at a conversion rate of 14.4927 shares per $0.001 principal amount of debentures, equivalent to an initial conversion price of $69.00 per share, if the closing price of our common stock exceeds a specified price for a specified period of time, or otherwise upon the occurrence of certain events. The debentures have an initial interest rate of 2.25%. The interest rate may be reset, but will not fall below 2.25% or above 3.25%, on July 15, 2006; July 15, 2011; and July 15, 2016. The debentures are guaranteed on an unsecured and subordinated basis by Best Buy Stores, L.P., our wholly owned indirect subsidiary. On Feb. 28, 2002, we filed a Registration Statement on Form S-3 with the Securities and Exchange Commission to register the debentures, the guarantee and the underlying shares of common stock. As of May 1, 2002, the  Registration Statement had not yet been declared effective.

43

 
 
$ in millions, except per share amounts
 
In June 2001, we sold, in a private offering, convertible debentures having an initial aggregate principal amount at maturity of $492. The proceeds from the offering, net of $7 in offering expenses, were $330. The debentures mature in 20 years and are callable at our option on or after June 27, 2004. Holders may require us to purchase all or a portion of their debentures on June 27, 2004; June 27, 2009; and June 27, 2014, at a purchase price equal to the accreted value of the debentures plus accrued and unpaid cash interest up to but not including the date of purchase. The debentures will be convertible into shares of our common stock at a conversion rate of 11.8071 shares per $0.001 initial principal amount at maturity of debentures, equivalent to an initial conversion price of $57.91 per share, if the closing price of our common stock exceeds a specified price for a specified period of time, or otherwise upon the occurrence of certain events. The debentures have an initial yield to maturity of 2.75%, including a cash payment of 1.0% and an initial accretion rate of 1.75%. The yield to maturity may be reset, but may not fall below 2.75% or above 3.75%, on Dec. 27, 2003; Dec. 27, 2008; and Dec. 27, 2013. The debentures are guaranteed on an unsecured and unsubordinated basis by Best Buy Stores, L.P., our wholly owned indirect subsidiary. The debentures, the guarantee and the underlying shares of common stock were registered with the Securities and Exchange Commission  pursuant to a Registration Statement on Form S-3 that was declared effective on Oct. 9, 2001.
 
Senior Subordinated Notes
Our Musicland subsidiary had $110 of Senior Subordinated Notes due in 2003 (2003 Notes) and $161 of Senior Subordinated Notes due in 2008 (2008 Notes) outstanding, which were acquired 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 us to offer to repurchase the notes within 30 to 60 days after our acquisition of Musicland. Our offer to repurchase both notes was made on Feb. 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 $94 of the 2003 Notes had been tendered. In the second quarter of fiscal 2002, we retired the remainder of the 2003 notes and all but $5 of the 2008 notes.
 
Credit Agreement
We have two credit agreements that provide bank revolving credit facilities under which we can borrow up to $200 and $44, respectively. The $44 facility, which was acquired in connection with the Future Shop acquisition, increases to $53 on a seasonal basis. The $200 facility, entered into in March 2002 which replaced our $100 credit agreement, expires on March 21, 2005, and the $44 facility expires in fiscal 2003. Borrowings under the $200 facility are unsecured and bear interest at rates specified in the credit agreements, as we have elected. Borrowings under the $44 facility are secured by merchandise inventories. We also pay certain facility and agent fees.
 
The credit agreements contain covenants that require us to maintain certain financial ratios and minimum net worth. The $200 agreement also requires that we have no outstanding principal balance for a period not less than 30 consecutive days, net of cash and cash equivalents. We had no borrowings under the $100 facility during fiscal 2002 or 2001. Future Shop had peak borrowings under the $44 credit facility of $32 and $39 in fiscal 2002 and 2001, respectively.

44

 
$ in millions, except per share amounts
 
Master Lease
In the fourth quarter of fiscal 2001, we entered into a $60 master lease agreement for the purpose of constructing and leasing new retail locations. At the end of fiscal 2002, $39 in capitalized leases for new stores had been financed under the master lease agreement.
 
Inventory Financing
We have a $200 inventory financing line. Borrowings are collateralized by a security interest in certain merchandise inventories approximating the outstanding borrowings. The terms of this arrangement allow us 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 2002 or 2001.The line has provisions that give the financing source a portion of the cash discounts provided by the manufacturers.
 
Other
During fiscal 2002, 2001 and 2000, interest expense totaled $28, $7 and $5, respectively, and is included in net interest (expense) income. Fiscal 2002 interest expense includes an $8 pretax charge for the early retirement of debt. The fair value of long-term debt approximates $829, which was based primarily on quotes from external sources.
 
The future maturities of long-term debt, including capitalized leases, consist of the following:

Fiscal Year	 	 	 	
2003	 	$	7	 	
2004	 	6	 	
2005	 	3	 	
2006	 	40	 	
2007	 	1	 	
Thereafter	 	763	 	
 	 	$	820	 	
 
4. Shareholders’ Equity
 
Stock Options
We currently sponsor three non-qualified stock option plans for our employees and our Board of Directors. These plans provide for the issuance of up to 73.2 million shares of common stock. Options may be granted only to employees or directors at exercise prices not less than the fair market value of our 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, there are options outstanding under two non-qualified stock option plans that expired in fiscal 1998. At March 2, 2002, options to purchase 27.5 million shares were outstanding under all of these plans.
 
In connection with the Musicland acquisition, certain outstanding stock options held by employees of Musicland were converted into options exercisable into our 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 our 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.

45

 
 
$ in millions, except per share amounts
 
As permitted by SFAS No.123, we elected to account for our stock option plans under the provisions of APB Opinion No. 25. Accordingly, no compensation cost has generally been recognized for stock options granted. Had we adopted SFAS No.123, the pro forma effects on net earnings, basic earnings per share and diluted earnings per share for the last three fiscal years would have been as follows:

 	 	2002	 	2001	 	2000	 	
Net earnings	 	 	 	 	 	 	 	
As reported	 	$	570	 	$	396	 	$	347	 	
Pro forma	 	512	 	352	 	322	 	
Basic earnings per share	 	 	 	 	 	 	 	
As reported	 	$	1.80	 	$	1.28	 	$	1.13	 	
Pro forma	 	1.62	 	1.14	 	1.05	 	
Diluted earnings per share	 	 	 	 	 	 	 	
As reported	 	$	1.77	 	$	1.24	 	$	1.09	 	
Pro forma	 	1.61	 	1.11	 	1.01	 	
 
The fair value of each option was estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions:

 	 	2002	 	2001	 	2000	 	
Risk-free interest rate	 	4.9	%	6.1	%	6.4	%	
Expected dividend yield	 	0	%	0	%	0	%	
Expected stock price volatility	 	55	%	60	%	50	%	
Expected life of options	 	4.5 years	 	4.5 years	 	4.5 years	 	
 
The weighted average fair value of options granted during fiscal 2002, 2001 and 2000 used in computing pro forma compensation expense was $18.60, $23.06 and $17.06 per share, respectively.

46

 
$ in millions, except per share amounts

Option activity for the last three fiscal years was as follows:

 	 	 	 	Weighted Average	 	
 	 	 	 	Exercise Price	 	
 	 	Shares	 	per Share	 	
Outstanding on Feb. 27, 1999	 	28,708,000	 	$	6.31	 	
Granted	 	4,561,000	 	34.65	 	
Exercised	 	(6,259,000	)	5.17	 	
Canceled	 	(1,441,000	)	12.99	 	
Outstanding on Feb. 26, 2000	 	25,569,000	 	11.26	 	
Granted	 	8,070,000	 	45.53	 	
Assumed (1)	 	461,000	 	37.21	 	
Exercised	 	(5,720,000	)	6.11	 	
Canceled	 	(2,012,000	)	26.94	 	
Outstanding on March 3, 2001	 	26,368,000	 	22.13	 	
Granted	 	9,382,000	 	37.01	 	
Exercised	 	(6,846,000	)	6.88	 	
Canceled	 	(1,417,000	)	35.98	 	
Outstanding on March 2, 2002	 	27,487,000	 	30.29	 	

(1)           Represents Musicland options converted into Best Buy Co., Inc. options in connection with the acquisition.

47

 
 
$ in millions, except per share amounts
 
Exercisable options at the end of fiscal 2002, 2001 and 2000 were 9.9 million, 9.4 million and 6.9 million, respectively. The following table summarizes information concerning options outstanding and exercisable as of March 2, 2002:

 	 	 	 	Weighted	 	 	 	 	 	 	 	
 	 	 	 	Average	 	Weighted	 	 	 	Weighted	 	
 	 	 	 	Remaining	 	Average	 	 	 	Average	 	
Range of	 	Number	 	Contractual	 	Exercise	 	Number	 	Exercise	 	
Exercise Prices	 	Outstanding	 	Life (Years)	 	Price	 	Exercisable	 	Price	 	
$0 to $6.67	 	2,880,000	 	5.29	 	$	2.08	 	2,735,000	 	$	2.19	 	
$6.67 to $13.33	 	5,476,000	 	6.15	 	11.46	 	3,186,000	 	11.45	 	
$13.33 to $20.00	 	140,000	 	7.56	 	16.42	 	56,000	 	16.28	 	
$20.00 to $26.67	 	76,000	 	7.62	 	21.89	 	38,000	 	21.27	 	
$26.67 to $33.33	 	551,000	 	7.63	 	31.02	 	265,000	 	31.61	 	
$33.33 to $40.00	 	11,185,000	 	8.56	 	36.41	 	1,814,000	 	35.15	 	
$40.00 to $46.67	 	689,000	 	9.16	 	45.34	 	73,000	 	44.18	 	
$46.67 to $53.33	 	6,487,000	 	8.10	 	46.87	 	1,726,000	 	46.97	 	
$53.33 to $60.00	 	3,000	 	8.10	 	55.09	 	1,000	 	55.09	 	
$0 to $60.00	 	27,487,000	 	7.62	 	$	30.29	 	9,894,000	 	$	20.28	 	
 
Restricted Stock Plan
We adopted a restricted stock award plan in fiscal 2001. The plan authorizes us to issue up to 1.5 million shares of our common stock to our eligible employees, consultants and independent contractors, as well as to our Board of Directors. Restricted shares have the same rights as other shares of common stock, except they are not transferable until fully vested. Restrictions lapse over a vesting period of at least three years, during which no more than 25% may vest at the time of award and no more than 25% on each anniversary date thereafter. All shares still subject to restrictions are forfeited and returned to the plan if the plan participant’s relationship with us is terminated. The number of shares granted under this plan was not significant during fiscal 2002 or 2001.
 
Earnings per Share
Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive shares of common stock include stock options, convertible debentures assuming certain criteria are met (see note 3), and other stock-based awards granted under stock-based compensation plans. The shares related to the convertible debentures were not included in our diluted earnings per share computation as the criteria for conversion of the debentures were not met.
 
We completed a three-for-two stock split effected in the form of a 50% stock dividend distributed on May 10, 2002; and a two-for-one stock split effected in the form of a 100% stock dividend distributed on March18, 1999. All share and per share information reflects these stock splits.

48

 
$ in millions, except per share amounts

The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings per common share for fiscal 2002, 2001 and 2000:

 	 	2002	 	2001	 	2000	 	
Numerator:	 	 	 	 	 	 	 	
Net earnings	 	$570	 	$396	 	$347	 	
 	 	 	 	 	 	 	 	
Denominator (in millions):	 	 	 	 	 	 	 	
Weighted average common shares outstanding	 	316.0	 	310.0	 	306.3	 	
Effect of dilutive securities:	 	 	 	 	 	 	 	
Employee stock options	 	6.5	 	9.0	 	12.6	 	
Weighted average common shares
outstanding assuming dilution	 	322.5	 	319.0	 	318.9	 	
 	 	 	 	 	 	 	 	
Basic earnings per share	 	$1.80	 	$1.28	 	$1.13	 	
Diluted earnings per share	 	$1.77	 	$1.24	 	$1.09	 	
 
Repurchase of Common Stock
In September 1999, our Board of Directors authorized the purchase of up to $200 of our common stock. This program was completed with a total of 5.7 million shares purchased and retired.
 
In February 2000, our Board of Directors authorized the purchase of up to $400 of our common stock from time to time through open market purchases. This program has no stated expiration date. As of March 2, 2002, 2.9 million shares had been purchased and retired at a cost of $100. No shares were repurchased in fiscal 2002 or 2001.
 
5. Operating Lease Commitments
We currently lease portions of our corporate facilities and conduct essentially all of our retail and the majority of our distribution operations from leased locations. The terms of the lease agreements generally range from three to 20years. The leases require payment of real estate taxes, insurance and common area maintenance in addition to rent. Most of the leases contain renewal options and escalation clauses, and certain stores require contingent rents based on specified percentages of sales. In addition, certain store leases provide us an early cancellation option if sales for a designated period do not reach a specified level as defined in the lease. Other leases contain covenants related to maintenance of financial ratios. Also, we lease certain equipment under operating leases. Transaction costs associated with the sale and lease back of properties and any gain or loss are recognized over the terms of the lease agreements. Proceeds from the sale and lease back of properties are included in the net change in recoverable costs from developed properties.

 
49

 
 
$ in millions, except per share amounts

The composition of total rental expenses for all operating leases during the past three fiscal years, including leases of buildings and equipment, was as follows:

 	 	2002	 	2001	 	2000	 	
Minimum rentals	 	$	518	 	$	299	 	$	227	 	
Percentage rentals	 	2	 	1	 	1	 	
 	 	$	520	 	$	300	 	$	228	 	
 
Future minimum lease obligations by year (not including percentage rentals) for all operating leases at March  2, 2002, were as follows:

Fiscal Year	 	 	 	
2003	 	$	472	 	
2004	 	459	 	
2005	 	417	 	
2006	 	376	 	
2007	 	361	 	
Thereafter	 	2,698	 	

6. Benefit Plans
We sponsor retirement savings plans for employees meeting certain age and service requirements. The plans provide for Company-matching contributions, which are subject to annual approval by our Board of Directors. The total matching contributions were $11, $7 and $5 in fiscal 2002, 2001 and 2000, respectively.
 
We have a deferred compensation plan for certain management employees and directors. The liability for compensation deferred under this plan was $33 and $28 at March 2, 2002, and March 3, 2001, respectively, and is included in long-term liabilities. We have elected to match our liability under the plan through the purchase of life insurance. The cash value of the insurance, which includes funding for future deferrals, was $36 and $34 in fiscal 2002 and 2001, respectively, and is included in other assets. Both the asset and the liability are carried at fair value.

50

 
 
$ in millions, except per share amounts

7. Income Taxes
The following is a reconciliation of income tax expense to the federal statutory tax rate:

 	 	2002	 	2001	 	2000	 	
Federal income tax at the statutory rate	 	$	328	 	$	224	 	$	197	 	
State income taxes, net of federal benefit	 	35	 	27	 	23	 	
Tax-exempt interest income	 	(4	)	(9	)	(6	)	
Goodwill amortization	 	6	 	—	 	—	 	
Other	 	1	 	3	 	2	 	
Income tax expense	 	$	366	 	$	245	 	$	216	 	
Effective tax rate	 	39.1	%	38.3	%	38.3	%	
 
Income tax expense consists of the following:

 	 	2002	 	2001	 	2000	 	
Current:	 	 	 	 	 	 	 	
Federal	 	$	303	 	$	179	 	$	165	 	
State	 	39	 	23	 	21	 	
Foreign	 	1	 	—	 	—	 	
 	 	343	 	202	 	186	 	
Deferred:	 	 	 	 	 	 	 	
Federal	 	15	 	38	 	26	 	
State	 	2	 	5	 	4	 	
Foreign	 	6	 	—	 	—	 	
 	 	23	 	43	 	30	 	
Income tax expense	 	$	366	 	$	245	 	$	216	 	

51

 
$ in millions, except per share amounts

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 2,	 	March 3,	 	
 	 	2002	 	2001	 	
Accrued expenses	 	$	78	 	$	46	 	
Deferred revenues	 	12	 	13	 	
Compensation and benefits	 	47	 	31	 	
Inventory	 	4	 	8	 	
Other	 	34	 	20	 	
Total deferred tax assets	 	175	 	118	 	
Property and equipment	 	145	 	93	 	
Convertible debt	 	5	 	—	 	
Other	 	15	 	5	 	
Total deferred tax liabilities	 	165	 	98	 	
Net deferred tax assets	 	$	10	 	$	20	 	

 
8.  Segments
We have identified three reportable segments: Best Buy, Musicland and International. The Best Buy segment aggregates all of our operations exclusive of Musicland and International. The Best Buy segment is primarily a specialty retailer of consumer electronics, home office equipment, entertainment software and appliances. The Musicland segment is primarily a mall-based retailer of prerecorded music, movies and other entertainment-related products. Musicland was acquired in the fourth quarter of  fiscal 2001. The International segment was established in connection with the acquisition of Future Shop, a specialty retailer of consumer electronics, home office equipment, entertainment software and appliances with operations in Canada. Future Shop was acquired at the beginning of November in fiscal 2002. Musicland and International financial data is included from their respective dates of acquisition.

52

 
$ in millions, except per share amounts

The following tables present our revenues and operating income (loss) by reportable segment for each of the past three fiscal years:

 	 	2002	 	2001	 	2000	 	
Revenues	 	 	 	 	 	 	 	
Best Buy	 	$	17,115	 	$	15,189	 	$	12,494	 	
Musicland	 	1,886	 	138	 	—	 	
International	 	596	 	—	 	—	 	
Total revenues	 	$	19,597	 	$	15,327	 	$	12,494	 	
Operating Income (Loss)	 	 	 	 	 	 	 	
Best Buy	 	$	886	 	$	611	 	$	539	 	
Musicland	 	29	 	(7	)	—	 	
International	 	22	 	—	 	—	 	
Total operating income (loss)	 	937	 	604	 	539	 	
 	 	 	 	 	 	 	 	
Net interest (expense) income	 	(1	)	37	 	24	 	
Earnings before income tax expense	 	$	936	 	$	641	 	$	563	 	

53

 
$ in millions, except per share amounts

Supplemental Segment Information:

 	 	2002	 	2001	 	2000	 	
Assets	 	 	 	 	 	 	 	
Best Buy	 	$	5,672	 	$	3,812	 	$	2,995	 	
Musicland	 	993	 	1,028	 	—	 	
International	 	710	 	—	 	—	 	
Total assets	 	$	7,375	 	$	4,840	 	$	2,995	 	
Capital Expenditures	 	 	 	 	 	 	 	
Best Buy	 	$	562	 	$	657	 	$	361	 	
Musicland	 	47	 	1	 	—	 	
International	 	18	 	—	 	—	 	
Total capital expenditures	 	$	627	 	$	658	 	$	361	 	
Depreciation and Amortization	 	 	 	 	 	 	 	
Best Buy	 	$	238	 	$	164	 	$	104	 	
Musicland	 	63	 	5	 	—	 	
International	 	8	 	—	 	—	 	
Total depreciation and amortization	 	$	309	 	$	169	 	$	104	 	
 
9. Commitments and Contingencies
At the end of fiscal 2002, we had commitments for the purchase and construction of facilities valued at approximately $125.
 
We are involved in various legal proceedings arising during the normal course of conducting business.  Management believes that the resolution of these proceedings, either individually or in the aggregate, will not have a significant adverse impact on our consolidated financial statements.

54

 
 
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. and subsidiaries as of March 2, 2002, and March 3, 2001, and the related consolidated statements of earnings, changes in shareholders’ equity, and cash flows for each of the three years in the period ended March 2, 2002. 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 auditing standards generally accepted in the United States. 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. and subsidiaries at March 2, 2002, and March 3, 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 2, 2002, in conformity with accounting principles generally accepted in the United States.

 
Minneapolis, Minnesota
April 2, 2002

55

 

Company Store Counts

 	BBY = Best Buy	 	ML = Musicland	 	MH = Magnolia Hi-Fi	 	FS = Future Shop	 	

 	 	BBY	 	ML	 	MH	 	FS	 	Total	 	 	 	BBY	 	ML	 	MH	 	FS	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Alabama	 	4	 	18	 	—	 	—	 	22	 	New York	 	17	 	55	 	—	 	—	 	72	 	
Alaska	 	—	 	10	 	—	 	—	 	10	 	North Carolina	 	13	 	31	 	—	 	—	 	44	 	
Arizona	 	10	 	18	 	—	 	—	 	28	 	North Dakota	 	2	 	9	 	—	 	—	 	11	 	
Arkansas	 	4	 	13	 	—	 	—	 	17	 	Ohio	 	23	 	59	 	—	 	—	 	82	 	
California	 	55	 	139	 	2	 	—	 	196	 	Oklahoma	 	3	 	9	 	—	 	—	 	12	 	
Colorado	 	9	 	33	 	—	 	—	 	42	 	Oregon	 	4	 	20	 	3	 	—	 	27	 	
Connecticut	 	3	 	11	 	—	 	—	 	14	 	Pennsylvania	 	18	 	53	 	—	 	—	 	71	 	
District of Columbia	 	—	 	2	 	—	 	—	 	2	 	Puerto Rico	 	—	 	8	 	—	 	—	 	8	 	
Delaware	 	2	 	1	 	—	 	—	 	3	 	Rhode Island	 	1	 	1	 	—	 	—	 	2	 	
Florida	 	29	 	44	 	—	 	—	 	73	 	South Carolina	 	5	 	18	 	—	 	—	 	23	 	
Georgia	 	15	 	35	 	—	 	—	 	50	 	South Dakota	 	1	 	11	 	—	 	—	 	12	 	
Hawaii	 	—	 	6	 	—	 	—	 	6	 	Tennessee	 	7	 	29	 	—	 	—	 	36	 	
Idaho	 	—	 	11	 	—	 	—	 	11	 	Texas	 	48	 	78	 	—	 	—	 	126	 	
Illinois	 	34	 	65	 	—	 	—	 	99	 	Utah	 	—	 	17	 	—	 	—	 	17	 	
Indiana	 	12	 	44	 	—	 	—	 	56	 	Vermont	 	1	 	—	 	—	 	—	 	1	 	
Iowa	 	6	 	30	 	—	 	—	 	36	 	Virgin Islands	 	—	 	2	 	—	 	—	 	2	 	
Kansas	 	5	 	16	 	—	 	—	 	21	 	Virginia	 	16	 	28	 	—	 	—	 	44	 	
Kentucky	 	5	 	21	 	—	 	—	 	26	 	Washington	 	9	 	38	 	8	 	—	 	55	 	
Louisiana	 	5	 	24	 	—	 	—	 	29	 	West Virginia	 	—	 	8	 	—	 	—	 	8	 	
Maine	 	2	 	3	 	—	 	—	 	5	 	Wisconsin	 	12	 	36	 	—	 	—	 	48	 	
Maryland	 	12	 	29	 	—	 	—	 	41	 	Wyoming	 	—	 	1	 	—	 	—	 	1	 	
Massachusetts	 	10	 	20	 	—	 	—	 	30	 	 	 	 	 	 	 	 	 	 	 	 	 	
Michigan	 	22	 	51	 	—	 	—	 	73	 	British Columbia	 	—	 	—	 	—	 	19	 	19	 	
Minnesota	 	16	 	36	 	—	 	—	 	52	 	Alberta	 	—	 	—	 	—	 	13	 	13	 	
Mississippi	 	1	 	10	 	—	 	—	 	11	 	Saskatchewan	 	—	 	—	 	—	 	3	 	3	 	
Missouri	 	12	 	26	 	—	 	—	 	38	 	Manitoba	 	—	 	—	 	—	 	4	 	4	 	
Montana	 	2	 	8	 	—	 	—	 	10	 	Ontario	 	—	 	—	 	—	 	34	 	34	 	
Nebraska	 	3	 	10	 	—	 	—	 	13	 	Quebec	 	—	 	—	 	—	 	16	 	16	 	
Nevada	 	4	 	8	 	—	 	—	 	12	 	New Brunswick	 	—	 	—	 	—	 	2	 	2	 	
New Hampshire	 	5	 	5	 	—	 	—	 	10	 	Nova Scotia	 	—	 	—	 	—	 	2	 	2	 	
New Jersey	 	11	 	53	 	—	 	—	 	64	 	Newfoundland	 	—	 	—	 	—	 	1	 	1	 	
New Mexico	 	3	 	10	 	—	 	—	 	13	 	Prince Edward Is.	 	—	 	—	 	—	 	1	 	1	 	
 	 	 	 	 	 	 	 	 	 	 	 	Store totals	 	481	 	1,321	 	13	 	95 	 	1,910	 	

60

Exhibit 21.1
 
BEST BUY CO., INC.
SUBSIDIARIES OF THE REGISTRANT*

 	 	State or
Province of Formation	
BBC Insurance Agency, Inc.	 	Minnesota	
BBC Investment Co.	 	Nevada	
BBY Networks, Inc.	 	Minnesota	
BBC Property Co.	 	Minnesota	
Best Buy Stores, L.P.	 	Delaware	
Best Buy Purchasing LLC	 	Minnesota	
Nichols Distribution, LLC	 	Minnesota	
BestBuy.com, LLC.	 	Delaware	
Best Buy Concepts, Inc.	 	Nevada	
BBCAN Finance Company One, ULC	 	Nova Scotia	
BBCAN Finance Company Two, ULC	 	Nova Scotia	
BBCAN Financial Services, L.P.	 	Alberta	
Future Shop Acquisition Inc.	 	Nova Scotia	
Future Shop Ltd.  Future Shop Ltée	 	Nova Scotia	
Cicero Electronics Ltd.	 	Canadian Federal	
FutureGard Reinsurance Ltd.	 	Turks & Caicos	
Futureshop.com Ltd.	 	British Columbia	
BBCAN Intangibles, Limited Partnership	 	British Columbia	
BBCAN Listibles, Limited Partnership	 	British Columbia	
FutureShop, Inc.	 	Washington	
Vycom Partners LLP	 	Washington	
Future Shop (U.S.) L.P.	 	Washington	
Magnolia Hi-Fi, Inc.	 	Washington	
Musicland Stores Corporation	 	Delaware	
The Musicland Group, Inc.	 	Delaware	
Media Play, Inc.	 	Delaware	
MG Financial Services, Inc.	 	Delaware	
MLG Internet, Inc.	 	Delaware	
Musicland Retail, Inc.	 	Delaware	
On Cue, Inc.	 	Delaware	
Request Media, Inc.	 	Delaware	
Suncoast Motion Picture Company, Inc.	 	Delaware	
Suncoast Group, Inc.	 	Delaware	
Suncoast Retail, Inc.	 	Delaware	
TMG Caribbean, Inc.	 	Delaware	
TMG Virgin Islands, Inc.	 	Delaware	
Redline Entertainment, Inc.	 	Minnesota	
vpr Matrix, Inc.	 	Minnesota	
CP Gal Ritchfield, LLC	 	Delaware	

*                                          Indirect subsidiaries are indicated by indentation.
 
Exhibit 23.1
Consent of Independent Auditors

We consent to the incorporation by reference in the Annual Report (Form 10-K) of Best Buy Co., Inc. of our report dated April 2, 2002, included in the 2002 Annual Report to Shareholders of Best Buy Co., Inc.
 
Our audit also included the financial statement schedule of Best Buy Co., Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
We also consent to the incorporation by reference in the Registration Statements on Form S-3 pertaining to the Convertible Debentures due June 27, 2021 (No. 333-70060) and the 2.25% Convertible Subordinated Debentures due January 15, 2022 (No. 333-83562), the Registration Statements on Form S-8 pertaining to the Deferred Compensation Plan (Nos. 333-49371 and 333-80967), the 1997 Directors’ Non–Qualified Stock Option Plan (No. 333-39531), the 1997 Employee Non–Qualified Stock Option Plan (Nos. 333-39533 and 333-61897), the 1987 Employee Non-Qualified Stock Option Plan (No. 33-54875), the 1994 Full-Time Employee Non-Qualified Stock Option Plan (No. 33-54871), the 1987 Directors’ Non-Qualified Stock Option Plan (No. 33–54873), the 2000 Restricted Stock Award Plan (No. 333-46228), and The Assumed Musicland 1988 Stock Option Plan, The Assumed Musicland 1992 Stock Option Plan, The Assumed Musicland 1994 Stock Option Plan, and The Assumed Musicland 1998 Stock Incentive Plan (collectively, No. 333-56146) of our report dated April 2, 2002, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Best Buy Co., Inc.
 
/s/ Ernst & Young LLP
 
Minneapolis, Minnesota
May 28, 2002