BEST BUY CO INC, 10-K405/A, 1995-05-30

BEST BUY CO INC
10-K405/A, 1995-05-30
RADIO, TV & CONSUMER ELECTRONICS STORES

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<PAGE>

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

FORM 10-K/A-1

(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 25, 1995
OR
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 Charter)
MINNESOTA 41-0907483
(State of Incorporation) (I.R.S. Employer
Identification Number)
7075 Flying Cloud Drive
EDEN PRAIRIE, MINNESOTA 55344
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 612-947-2000

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange on
Title of each class which registered
COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE
8-5/8% SENIOR SUBORDINATED NOTES,
DUE 2000 NEW YORK STOCK EXCHANGE
9% SUBORDINATED EXTENDIBLE NOTES,
DUE 1997 NEW YORK STOCK EXCHANGE
6-1/2% CONVERTIBLE MONTHLY INCOME
PREFERRED SECURITIES 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 X No
--- ---

The aggregate market value of voting stock held by non-affiliates of the
Registrant on May 3, 1995, was approximately $884,961,396. On that date, there
were 42,566,390 shares of Common Stock issued and outstanding.

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. X
---
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
February 25, 1995 ("Annual Report") are incorporated by reference into Part II.

Portions of the Registrant's Proxy Statement dated May 17, 1995 for the regular
meeting of shareholders to be held June 21, 1995 ("Proxy Statement") are
incorporated by reference into Part III.
<PAGE>

PART III

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 of the Registrant as set forth under Item 8
of this Report.

2. Financial Statement Schedules:

No schedules have been included since they are either not applicable or
the information is included elsewhere herein.

-2-

<PAGE>

3. Exhibits:
Method
of
Number Description filing
------ ----------- ------

3.1 Amended and Restated Articles of (2)
Incorporation, as amended, of Best Buy

3.2 Certificate of Designation with respect (1)
to Best Buy Series A Cumulative
Convertible Preferred Stock, filed
November 1, 1994

3.3 Amended and Restated By-Laws, as (1,3,4)
amended, of Best Buy

4.1 Form of Indenture between Best Buy and (5)
First Trust Company, Inc., relating to
$30,000,000 Subordinated Extendible
Notes due 1997, dated as of July 1, 1987

4.2 Note Purchase Agreement with Principal (6)
Mutual Life Insurance Company, dated as
of July 30, 1992

4.3 Credit Agreement dated July 29, 1994 (7)
between Best Buy and First Bank National
Association

4.4 First Amendment to the Credit Agreement (1)
between Best Buy and First Bank National
Association, dated October 5, 1994

4.5 Second Amendment to the Credit Agreement (1)
between Best Buy and First Bank National
Association, dated October 26, 1994

4.6 Indenture between Best Buy and (2)
Mercantile Bank of St. Louis N.A.
relating to $150,000,000 8-5/8% Senior
Subordinated Notes due 2000, dated as of
October 12, 1993

4.7 Amended and Restated Agreement of (1)
Limited Partnership of Best Buy
Capital, L.P., dated as of November 3,
1994

4.8 Indenture between Best Buy, Best Buy (1)
Capital, L.P., and Harris Trust and
Savings Bank relating to $288,227,848
6-1/2% Convertible Subordinated
Debentures due 2024, dated as of
November 3, 1994

-3-

<PAGE>

4.9 Guarantee Agreement related to 6-1/2% (1)
Convertible Monthly Income Preferred
Securities of Best Buy Capital, L.P.,
dated November 3, 1994

4.10 Deposit Agreement with respect to Best (1)
Buy Series A Cumulative Convertible
Preferred Stock, dated November 3, 1994

10.1 1987 Employee Non-Qualified Stock Option (2)
Plan, as amended

10.2 Amended 1987 Directors' Non-Qualified (1)
Stock Option Plan, as amended

10.3 1994 Full-Time Employee Non-Qualified (2)
Option Stock Plan

10.4 Resolutions of the Board of Directors (1)
dated April 10, 1995 implementing the
fiscal 1996 bonus program for senior
officers

11.1 Computation of Earnings Per Share (1)

13.1 1995 Annual Report to Shareholders (8)

21.1 Subsidiaries of the Registrant (1)

23.1 Consent of Ernst & Young LLP (1)

23.2 Consent of Deloitte & Touche LLP (1)

27.1 Financial Data Schedule (1)

-4-

<PAGE>

(1) Exhibits so marked were filed with the Securities and Exchange
Commission on May 24, 1995 as exhibits to the Form 10-K of Best Buy
Co., Inc. and are incorporated herein by reference and made a part
hereof.

(2) Exhibits so marked were filed with the Securities and Exchange
Commission on May 20, 1994 as exhibits to the Form 10-K of Best Buy
Co., Inc. and are incorporated herein by reference and made a part
hereof.

(3) Exhibit so marked was filed with the Securities and Exchange
Commission on November 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 of
hereof.

(4) Exhibit so marked was filed with the Securities and Exchange
Commission on January 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.

(5) Exhibit so marked was filed with the Securities and Exchange
Commission on June 19, 1987, as an exhibit to the registration
statement on form S-1 (Registration No. 33-15201) of Best Buy Co.,
Inc., and are incorporated herein by reference and made a part
hereof.

(6) Exhibits so marked were filed with the Securities and Exchange
Commission on October 12, 1992, as exhibits to Form 10-Q of Best Buy
Co., Inc., and are incorporated herein by reference and made a part
hereof.

(7) Exhibit so marked was filed with the Securities and Exchange
Commission on September 30, 1994, as an exhibit to Form 10-Q of Best
Buy Co., Inc. and is incorporated herein by reference and made a
part hereof.

(8) Document is filed herewith.

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 percent 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

A Current Report on Form 8-K was filed on December 7, 1994, reporting the
lawsuit against the Company alleging various federal securities law
violations.

-5-

<PAGE>

SIGNATURES

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

BEST BUY CO., INC.
(Registrant)

By: /s/ RICHARD M. SCHULZE
----------------------
Richard M. Schulze
Chief Executive Officer

Dated: May 30, 1995

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on May 30, 1995.

/s/ Richard M. Schulze Chairman, Chief Executive Officer
- ------------------------------ and Director (principal executive
Richard M. Schulze officer)

/s/ Bradbury H. Anderson President, Chief Operating Officer
- ------------------------------ and Director
Bradbury H. Anderson

/s/ Allen U. Lenzmeier Executive Vice President and Chief
- ------------------------------ Financial Officer (principal
Allen U. Lenzmeier financial officer)

/s/ Robert C. Fox Sr. Vice President - Finance and
- ------------------------------ Treasurer (principal accounting
Robert C. Fox officer)

/s/ Elliot S. Kaplan
- ------------------------------ Director
Elliot S. Kaplan

/s/ Frank D. Trestman
- ------------------------------ Director
Frank D. Trestman

- ------------------------------ Director
Culver Davis, Jr.

- ------------------------------ Director
David Stanley

- ------------------------------ Director
James C. Wetherbe

-6-

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
- ------------------------------------------------------------------------------------------------------------------------------
($ in thousands, except per share amounts)

FISCAL PERIOD 1995 1994(1) 1993 1992 1991(2)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA

Revenues $5,079,557 $3,006,534 $1,619,978 $ 929,692 $ 664,823

Gross profit 690,393 456,925 284,034 181,062 141,657

Selling, general, and
administrative expenses 568,466 379,747 248,126 162,286 130,681

Operating income 121,927 77,178 35,908 18,776 10,976

Earnings before cumulative
effect of accounting change 57,651 41,710 19,855 9,601 4,540

Net earnings (loss) 57,651 41,285 19,855 9,601 (9,457)

PER SHARE DATA

Earnings before cumulative
effect of accounting change $ 1.33 $ 1.01 $ .57 $ .33 $ .18

Net earnings (loss) 1.33 1.00 .57 .33 (.38)

Common stock price: High 45 1/4 31 7/16 15 23/32 11 25/32 3 21/32
Low 22 1/8 10 27/32 4 23/32 2 21/32 1 1/2

Weighted average
shares outstanding (000s) 43,471 41,336 34,776 28,848 24,852

OPERATING AND OTHER DATA

Comparable store sales increase(3) 19.9% 26.9% 19.4% 14.0% 1.0%

Number of stores (end of period) 204 151 111 73 56

Average revenues per store(4) $ 28,400 $ 22,600 $ 17,600 $ 14,300 $ 12,400

Gross profit percentage 13.6% 15.2% 17.5% 19.5% 21.3%

Selling, general, and administrative
expense percentage 11.2% 12.6% 15.3% 17.5% 19.7%

Operating income percentage 2.4% 2.6% 2.2% 2.0% 1.6%

Inventory turns(5) 4.7x 5.0x 4.8x 5.1x 4.5x

BALANCE SHEET DATA (at period end)

Working capital $ 609,049 $ 362,582 $ 118,921 $ 126,817 $ 64,623

Total assets 1,507,125 952,494 439,142 337,218 185,528

Long-term debt, including current portion 240,965 219,710 53,870 52,980 35,695

Convertible preferred securities 230,000

Shareholders' equity 376,122 311,444 182,283 157,568 56,741
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
This table should be read in conjunction with the Management's Discussion and
Analysis of Financial Condition and Results of Operations and the Consolidated
Financial Statements and Notes thereto.

(1) During fiscal 1994, the Company adopted FAS 109, resulting in a cumulative
effect adjustment of ($425) or ($.01) per share.

(2) During fiscal 1991, the Company changed its method of accounting for
extended service plans, resulting in a cumulative effect adjustment of
($13,997), or ($.56) per share.

(3) Comparable stores are stores open at least 14 full months.

(4) Average revenues per store are based upon total revenues for the period
divided by the weighted average number of stores open during such period.

(5) Inventory turns are calculated based upon a rolling 12 month average of
inventory balances.
</TABLE>

5
<PAGE>

MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------

RESULTS OF OPERATIONS

Best Buy made significant progress as an emerging national retailer in the
fiscal year ended February 25, 1995 by opening 53 new stores in nine new states,
including expansion for the first time to the East and West coasts. The Company
also introduced a larger, redesigned store, known as Concept III. In addition to
the new stores, the Company remodeled or relocated 30 stores in fiscal 1995 to
accommodate expanded product offerings and the Concept III features. Revenues of
$5.080 billion in fiscal 1995 were 69% higher than fiscal 1994 and were driven
by the new stores, a comparable store sales increase of 20% and a full year of
operations at the 40 stores opened in the prior year. Fiscal 1994 revenues of
$3.007 billion represented an 86% increase over the $1.620 billion reported in
fiscal 1993.

Earnings of $57.7 million in fiscal 1995 were 38% higher than earnings reported
in fiscal 1994, before the cumulative effect of an accounting change in that
year. The impact on earnings of the increased revenues was reduced by the
effects of increasing price competition and costs associated with the expansion
effort undertaken during the year. Higher interest expense on borrowings used to
support store expansion and increased inventory levels also impacted the growth
in fiscal 1995 earnings. Earnings of $41.7 million in fiscal 1994, before the
change in accounting, rose 110% over fiscal 1993 earnings of $19.9 million.
Earnings per share were $1.33 in fiscal 1995, $1.01 in fiscal 1994 and $.57 in
fiscal 1993.

REVENUES
The following table presents selected revenue and store data for each of the
last three fiscal years. ($ in thousands)

1995 1994 1993
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $5,079,557 $3,006,534 $1,619,978

Percentage increase
in revenues 69% 86% 74%

Comparable store
sales increase 20% 27% 19%

Average revenues
per store $ 28,400 $ 22,600 $ 17,600

Number of stores
open at end of year 204 151 111

</TABLE>

The significant revenue growth experienced over the last several years continued
in fiscal 1995 as the Company expanded the number of markets it serves and
increased the average size of the stores it operates. Best Buy established
strategic positions in fiscal 1995 on the West Coast by opening seven stores in
the greater Los Angeles area and in the East with nine new stores in the
Baltimore/Washington, D.C. market. The Company also opened ten stores in new
markets in Ohio and another 27 stores including new markets in the Southeastern
U.S. In addition to the new stores, the Company remodeled and expanded 18 stores
and relocated another 12 stores to larger locations. Revenues from the new and
remodeled/relocated stores in fiscal 1995, which were generally larger than the
majority of the existing stores, along with the higher sales levels at existing
stores resulted in a 26% increase in average revenues per store in fiscal 1995.
Strong consumer spending in hard goods products prevailed through most of the
year and combined with advancing technology in the computer category, to produce
a comparable store sales increase of 20% for the year. Comparable store sales of
computers increased 33% over the prior year and annual sales in the home office
product category, which includes computers, grew to $1.9 billion or 37% of total
sales in fiscal 1995. Entertainment software sales, which include compact discs,
computer software and prerecorded cassettes and video tapes, increased by 107%
to $729 million and represented 14% of total Company sales in fiscal 1995.

The 86% increase in revenues in fiscal 1994 over fiscal 1993 was due to the
addition of 40 new stores, including entries into Atlanta, Detroit and Phoenix,
a full year of operations at the 38 stores opened in fiscal 1993 and a
comparable store sales increase of 27%. The addition of name brands such as
Apple, Compaq, Hewlett Packard and Toshiba to the Company's computer product
category and the introduction of a new private label credit card program in June
1993 contributed to a 69% increase in comparable store sales of computers in
fiscal 1994. Management believes that Company's private label credit card
program has contributed to revenue growth by providing customers with convenient
financing options. At February 25, 1995 there were approximately two million
Best Buy credit card holders. The continued availability of financing programs
is important to maintaining what the Company believes is a competitive advantage
over certain of its warehouse format competitors.

<PAGE>

Revenues from extended service plans were less than 1% of revenues in fiscal
1995 and 1994 and 1.3% of revenues in 1993. The Company's non-commissioned
retail format, which has reduced emphasis on the sale of these plans, and the
Company's value pricing of these plans has contributed to the decrease in
significance of the revenues from these plans. Profit from extended service
plans, before allocation of any selling, general and administrative expenses,
was $13.0 million in fiscal 1995 compared with $12.5 million in 1994 and $12.0
million in 1993.

The Company's Concept III store format, introduced in fiscal 1995, is designed
to provide an interactive shopping experience with a greater assortment of
products. The new and relocated/remodeled stores in fiscal 1995 were generally
45,000 square feet in size compared to principally 28,000 and 36,000 square foot
stores at the end of fiscal 1994. In certain locations with a higher population
density, the Company opened 58,000 square foot stores. These larger stores will
enable the Company to provide customers with an even larger selection of
products. The Concept III stores are able to present over 65,000 compact disc
and prerecorded cassette titles, 12,000 prerecorded videos and 2,000 computer
software titles, an assortment the Company believes is among the largest offered
by any retailer. The Concept III stores will also utilize the additional space
to expand the selection of higher profit margin accessory items and can
accommodate broader product lines to include higher end products for the
enthusiast. The Company has also introduced interactive information kiosks in
certain of the Concept III stores, designed to provide customers with detailed
information about product features and benefits using full motion videos and
touch screen technology. Management continues to evaluate and refine the content
and features of these Concept III stores to maximize their revenue and operating
profit while providing customers with the most desirable shopping experience.

The Company plans to open 47 new stores in fiscal 1996 and relocate or expand
approximately 20 stores to larger facilities. The compounding effect of the high
rates of comparable store sales growth experienced over the past four years, an
expected slowing economy and the absence of significant new product
introductions, will likely result in single digit same store sales growth in
fiscal 1996, a rate that more closely reflects industry trends. Management
expects that sales of computers and entertainment software will continue to have
a significant impact on revenue growth from existing stores. Revenue growth in
these two categories is dependent on the manufacturers' ability to meet consumer
demand for new product technology and new entertainment software titles. In
addition, revenue growth may be impacted by future increases in consumer
interest rates and changes in consumers' expectations about the economy in
general.

COMPONENTS OF OPERATING INCOME
The following table sets forth selected operating ratios for each of the last
three fiscal years.

1995 1994 1993
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Gross profit 13.6% 15.2% 17.5%

Selling, general and
administrative expenses 11.2% 12.6% 15.3%

Operating income 2.4% 2.6% 2.2%

Earnings before
accounting change 1.1% 1.4% 1.2%
- ------------------------------------------------------------------------

</TABLE>

Promotional pricing associated with the expansion into the new markets entered
in fiscal 1995 and the continued increase in competition in existing markets
contributed to the change in profit margins. The Company's retail strategy has
been to be a price leader and maximize market share in the markets in which it
operates. The increasing contribution of the lower margin computer product
category to the total sales mix has also impacted margins over the last two
years. The retail market for computers and related products is highly
competitive and the Company competes not only with full service retailers but
with discount warehouse style stores and mail order distributors. Technological
advancements in the computer category have placed additional pressure on margins
due to frequent changeover of models and features. The entertainment software
category is also very competitive and the Company believes that its combination
of low price and extensive selection affords the opportunity to gain market
share and increase customer traffic. Competition in most of the markets in which
the Company operates has increased as new competitors have entered the Company's
existing markets and the Company has expanded into new, more competitive
markets.

Management expects that price competition in most product categories will remain
strong in the coming fiscal year. Competition is expected to

<PAGE>

increase in certain markets as competitors enter new markets currently served by
the Company. The Company intends to use its market share position to focus on
improving margins in fiscal 1996. An increased emphasis on customer service,
assortment of accessory products and more fully featured products for the
enthusiast are anticipated to impact margins. Management also expects that
increasing sales volume will enable the Company to improve the pricing it
obtains from vendors.

Selling, general and administrative expenses declined to 11.2% of sales,
compared to 12.6% and 15.3% in 1994 and 1993, respectively. The improvement in
this ratio indicates that revenues have increased at a faster pace than the cost
of operations. The improvement in this ratio in fiscal 1995 is particularly
significant in light of the accomplishments during the year. Those
accomplishments included the opening of 83 new or relocated/remodeled stores,
commencement of operations in over 1.4 million additional square feet of
distribution space at four distribution centers and the development of a new
store format. The cost of these undertakings applied pressure on the Company's
earnings for the year. The Company was able to continue to improve its leverage
on costs such as advertising as stores were added to existing markets and higher
revenues per store were generated. With comparable store sales slowing, and
higher operating costs of new markets, the Company's opportunity to leverage
operating expenses will not be as great in the future, particularly in the first
half of fiscal 1996.

Interest expense in fiscal 1995 increased over fiscal 1994 and fiscal 1993 as a
result of business expansion over the past two years. Higher inventory levels
and interest costs related to stores owned by the Company were the principal
reasons for increased interest expense. Interest on bank borrowings also
increased due to generally higher interest rates. Current year interest expense
reflects a full year of interest on the $150 million of senior subordinated
notes issued in October 1993 and four months of interest on the $230 million of
convertible preferred securities issued in November 1994.

The Company's effective tax rate of 38.7% in fiscal 1995 decreased slightly from
the 39.0% in fiscal 1994 principally as a result of significantly higher jobs
tax credits related to the increased number of employees hired in fiscal 1995.
The tax laws providing for these credits expired at the end of 1994. Changes in
the states in which the Company does business and the level of tax-exempt
income has also impacted the Company's effective tax rate in the last three
years. The Company adopted the provisions of FAS 109 "Accounting for Income
Taxes," effective as of the beginning of fiscal 1994. The effect of the
adoption was a charge to net earnings of $425,000 or $.01 per share. At February
25,1995 the Company had deferred tax assets of $24.2 million which are expected
to be recovered through future taxable income.

LIQUIDITY AND CAPITAL RESOURCES
Best Buy strengthened its capital base in fiscal 1995 through a $230 million
public offering of monthly income preferred securities and increased liquidity
through an expansion of the Company's working capital credit facility from $125
million to $400 million. The convertible preferred securities, issued in
November 1994, pay monthly distributions at the annual rate of 6.5% of the $50
liquidation preference and mature in November 2024. The Company also entered
into a master lease facility which provided over $100 million in financing for
retail store and distribution center development in fiscal 1995. Proceeds from
these transactions and the proceeds of a $150 million senior subordinated note
offering in October 1993 were used to support the Company's expansion and
revenue growth in the current fiscal year. Cash flow from operations also
improved in fiscal 1995 compared to 1994. In fiscal 1994, the $86 million in
proceeds from a Common Stock offering, $44 million from the sale/leaseback of 17
stores, and the proceeds of the October 1993 senior subordinated note offering
were used to provide the financing necessary for business expansion that year.

In order to secure the desired store locations and assure timely completion of
the store, the Company developed 27 of the new and relocated stores in fiscal
1995. Interim financing for this development was provided through working
capital and the Company's master lease agreement. Upon completion of property
development and opening of the retail stores, the Company generally enters into
sale/leaseback transactions and recovers the cost of development. In addition to
store development in fiscal 1995 the Company added over 1.4 million square feet
of distribution capacity. The Company constructed a 700,000 square foot
distribution center in Staunton, Virginia and leased a 310,000 square foot
facility in Ontario, California to serve new markets. The Company also added a
240,000

<PAGE>

square foot entertainment software distribution facility in Edina, Minnesota and
expanded its existing facility in Ardmore, Oklahoma by 200,000 square feet.

Current assets increased to $1.2 billion at February 25, 1995 compared to $765
million at February 26, 1994, primarily as a result of the increased inventory
levels necessary to support the larger stores and higher sales volumes. The 53
new stores added approximately $200 million in inventory. Inventory turns were
4.7 times in fiscal 1995, down slightly from the prior year as a result of the
start up of additional distribution facilities and increased inventories in the
stores. Increases in trade payables and secured inventory financing arrangements
at year end supported approximately 70% of the increase in inventory. Higher
sales volumes in February 1995 as compared to February 1994 resulted in higher
year-end receivables. The Company sells its receivables from sales on the
Company's private label credit card, without recourse, to an unrelated third
party. Spending related to development of certain operating retail locations and
seven stores expected to be opened in fiscal 1996 also contributed to the
increase in current assets over the prior fiscal year end. These costs are
expected to be recovered through long-term financing in the next year.

The Company currently has a revolving credit facility that provides for
borrowings of $150 million throughout the year and an increase to $400 million
on a seasonal basis from July through December. Borrowings under the facility
are unsecured and are limited to certain percentages of inventories. The
agreement requires that the maximum balance outstanding be reduced to $50
million for a period of 45 days, following the holiday season. This agreement
expires in June 1996, and the Company has an option to request an extension of
the facility for an additional year. The Company also has $180 million available
under an inventory financing facility provided by a commercial credit
corporation.

Expansion plans for fiscal 1996 will mainly concentrate on developing the
markets entered in fiscal 1995. The Company's plans include 47 new stores, the
majority of which will be in existing markets, the relocation or remodeling of
approximately 20 stores and the construction of an additional distribution
center in Findlay, Ohio. The Company plans to add ten to twelve stores in the
Los Angeles market to increase leverage on the advertising and distribution
costs in place in that market. Fiscal 1996 store development plans also include
the addition of stores in Baltimore/Washington, D.C., filling in of markets
principally in Ohio and the Southeastern US and entry into Miami with seven
stores. Conditions in certain markets will require that the Company acquire and
develop the sites.

The Company's practice is to lease, rather than own, its retail locations and it
is expected that operating leases will be used for financing following
construction. As of the end of fiscal 1995, the Company owned eight operating
store locations as well as seven stores under development to be opened in the
coming fiscal year. In addition to the stores under development at year-end, the
Company expects that it will need to develop another 15 to 20 of the new and
relocated stores to be opened in fiscal 1996. The new distribution center in
Ohio is being developed by the Company and the development costs are expected to
be recovered through a combination of sale/leaseback and other equipment
financing. Each new store requires approximately $3.0 to $3.6 million in working
capital for merchandise inventory (net of vendor financing), fixtures and
leasehold improvements. Management expects that there will be adequate funds
available to finance planned capital expenditures in fiscal 1996, net of amounts
expected to be recovered through long-term real estate financing.

Management believes that funds available from the Company's credit facility,
vendors and real estate financing, along with cash on hand and anticipated cash
flow from operations will be sufficient to support planned expansion and growth
for the coming year.

<PAGE>

QUARTERLY RESULTS AND SEASONALITY

Similar to most retailers, the Company's business is seasonal. Revenues and
earnings are lower during the first half of each fiscal year and are greater
during the second half, which includes the year-end holiday selling season. The
timing of new store openings and general economic conditions may affect future
quarterly results of the Company.

The following table sets forth the Company's unaudited quarterly operating
results for each quarter of fiscal 1995 and 1994. ($ in thousands, except per
share data)

FISCAL 1995
MAY 28 AUGUST 27 NOVEMBER 26 FEBRUARY 25
1994 1994 1994 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $849,403 $933,172 $1,349,871 $1,947,111

Gross profit 118,952 132,184 183,709 255,548

Operating
income 11,686 17,659 38,013 54,569

Net earnings 4,241 7,600 17,702 28,108

Net earnings
per share .10 .18 .41 .63

FISCAL 1994
MAY 29 AUGUST 28 NOVEMBER 27 FEBRUARY 26
1993 1993 1993 1994
- --------------------------------------------------------------------------------------

Revenues $441,919 $562,980 $ 808,476 $1,193,159

Gross profit 74,476 94,198 121,108 167,143

Operating
income 3,674 13,090 20,849 39,565

Net earnings 1,091 7,594 11,161 21,439

Net earnings
per share .03 .18 .26 .50

</TABLE>

The quarter ended May 29, 1993 includes the cumulative effect of a change in
accounting for income taxes that reduced earnings by $425 ($.01 per share).

COMMON STOCK PRICES

QUARTER 1ST 2ND 3RD 4TH
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1995

High $ 37 1/2 $ 36 5/8 $ 45 $ 45 1/4

Low 25 3/4 22 1/8 34 1/2 23 1/8

Fiscal 1994

High $ 16 5/32 $ 16 1/2 $ 31 7/16 $ 27 11/16

Low 11 7/32 10 27/32 16 3/32 18 13/16

</TABLE>

Best Buy's Common Stock is traded on the New York Stock Exchange, symbol BBY. As
of May 3, 1995, there were 2,109 holders of record of Best Buy Common Stock. The
Company has not paid cash dividends on its Common Stock and does not presently
intend to pay any dividends on its Common Stock for the foreseeable future.

<PAGE>

CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
($ in thousands, except per share amounts)

ASSETS

FEBRUARY 25 February 26
1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS

Cash and cash equivalents $ 144,700 $ 59,872

Receivables 84,440 52,944

Recoverable costs from
developed properties 86,222

Merchandise inventories 907,677 637,950

Deferred income taxes 15,022 13,088

Prepaid expenses 2,606 756
----------------------------------

Total current assets 1,240,667 764,610

PROPERTY AND EQUIPMENT

Land and buildings 13,524 37,660

Leasehold improvements 93,889 55,279

Furniture, fixtures and equipment 191,084 122,683

Property under capital leases 27,096 17,870
----------------------------------
325,593 233,492

Less accumulated depreciation
and amortization 88,116 60,768
----------------------------------
Net property and equipment 237,477 172,724

OTHER ASSETS

Deferred income taxes 9,223 7,078

Other assets 19,758 8,082
----------------------------------
Total other assets 28,981 15,160
----------------------------------
TOTAL ASSETS $ 1,507,125 $ 952,494
----------------------------------
----------------------------------

</TABLE>

See notes to consolidated financial statements.

LIABILITIES AND SHAREHOLDERS' EQUITY

FEBRUARY 25 February 26
1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES

Obligations under
financing arrangements $ 81,755 $ 11,156

Accounts payable 406,682 294,060

Accrued salaries and
related expenses 23,785 19,319

Accrued liabilities 65,757 37,754

Deferred service plan revenue
and warranty reserve 24,942 19,146

Accrued income taxes 14,979 11,694

Current portion of long-term debt 13,718 8,899
----------------------------------
Total current liabilities 631,618 402,028

DEFERRED SERVICE PLAN REVENUE
AND WARRANTY RESERVE, LONG-TERM 42,138 28,211

LONG-TERM DEBT 227,247 210,811

CONVERTIBLE PREFERRED
SECURITIES OF SUBSIDIARY 230,000

SHAREHOLDERS' EQUITY

Preferred stock, $1.00 par value:
Authorized - 400,000 shares;
Issued and outstanding - none

Common stock, $.10 par value:
Authorized - 120,000,000 shares;
Issued and outstanding 42,216,000
and 41,742,000 shares, respectively 4,221 2,087

Additional paid-in capital 228,982 224,089

Retained earnings 142,919 85,268
----------------------------------
Total shareholders' equity 376,122 311,444
----------------------------------

TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,507,125 $ 952,494
----------------------------------
----------------------------------

</TABLE>

<PAGE>

CONSOLIDATED STATEMENTS OF EARNINGS
- --------------------------------------------------------------------------------
($ in thousands, except per share amounts)

FOR THE FISCAL YEARS ENDED FEBRUARY 25 February 26 February 27
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 5,079,557 $ 3,006,534 $ 1,619,978

Cost of goods sold 4,389,164 2,549,609 1,335,944
-------------------------------------------

Gross profit 690,393 456,925 284,034

Selling, general and administrative expenses 568,466 379,747 248,126
-------------------------------------------

Operating income 121,927 77,178 35,908

Interest expense, net 27,876 8,800 3,883
-------------------------------------------

Earnings before income taxes and cumulative
effect of change in accounting principle 94,051 68,378 32,025

Income taxes 36,400 26,668 12,170
-------------------------------------------

Earnings before cumulative effect of change
in accounting principle 57,651 41,710 19,855

Cumulative effect of change in accounting for income taxes (425)
-------------------------------------------

NET EARNINGS $ 57,651 $ 41,285 $ 19,855
-------------------------------------------
-------------------------------------------

EARNINGS PER SHARE

Earnings before cumulative effect of change
in accounting principle $ 1.33 $ 1.01 $ .57

Cumulative effect of change in accounting for income taxes (.01)
-------------------------------------------

NET EARNINGS PER SHARE $ 1.33 $ 1.00 $ .57
-------------------------------------------
-------------------------------------------

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (000) 43,471 41,336 34,776
-------------------------------------------
-------------------------------------------

</TABLE>

See notes to consolidated financial statements.

<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
($ in thousands)

Net earnings $ 57,651 $ 41,285 $ 19,855

Charges to earnings not affecting cash:

Depreciation and amortization 38,570 22,412 14,832

Loss on disposal of property and equipment 760 719 545

Cumulative effect of change in accounting for income taxes 425
-------------------------------------------
96,981 64,841 35,232

Changes in operating assets and liabilities:

Receivables (31,496) (14,976) (21,987)

Merchandise inventories (269,727) (387,959) (114,153)

Deferred income taxes and prepaid expenses (5,929) (5,234) (2,063)

Accounts payable 112,622 175,722 49,668

Other current liabilities 40,415 33,014 16,106

Deferred service plan revenues and warranty reserve 19,723 8,393 6,148
-------------------------------------------
Total cash used in operating activities (37,411) (126,199) (31,049)
-------------------------------------------

INVESTING ACTIVITIES

Additions to property and equipment (118,118) (101,412) (74,864)

Recoverable costs from developed properties (86,222)

Proceeds from sale/leasebacks 24,060 44,506

Increase in other assets (11,676) (6,592) (1,180)
-------------------------------------------
Total cash used in investing activities (191,956) (63,498) (76,044)
-------------------------------------------

FINANCING ACTIVITIES

Proceeds from issuance of convertible preferred securities 230,000

Increase in obligations under financing arrangements 70,599 6,285 697

Long-term debt borrowings 21,429 160,310 29,700

Long-term debt payments (10,199) (6,977) (37,515)

Common stock issued 2,366 86,513 4,860

(Payments) borrowings on revolving credit line, net (3,700) 3,700
-------------------------------------------
Total cash provided by financing activities 314,195 242,431 1,442
-------------------------------------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 84,828 52,734 (105,651)

CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 59,872 7,138 112,789
-------------------------------------------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 144,700 $ 59,872 $ 7,138
-------------------------------------------
-------------------------------------------

</TABLE>

See notes to consolidated financial statements.

<PAGE>

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
($ in thousands)

ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCES AT
FEBRUARY 29, 1992 $ 1,122 $ 132,318 $ 24,128

Stock options exercised 27 2,311

Tax benefit from
stock options exercised 2,522

Net earnings 19,855
-------------------------------------------

BALANCES AT
FEBRUARY 27, 1993 1,149 137,151 43,983

Sale of common stock 234 85,294

Stock options exercised 10 977

Tax benefit from
stock options exercised 1,363

Effect of 3-for-2 stock split 694 (696)

Net earnings 41,285
-------------------------------------------

BALANCES AT
FEBRUARY 26, 1994 2,087 224,089 85,268

Stock options exercised 45 2,321

Tax benefit from
stock options exercised 4,661

Effect of 2-for-1 stock split 2,089 (2,089)

Net earnings 57,651
-------------------------------------------

BALANCES AT
FEBRUARY 25, 1995 $4,221 $228,982 $142,919
-------------------------------------------
-------------------------------------------

</TABLE>

See notes to consolidated financial statements.

INDEPENDENT AUDITOR'S REPORT
- --------------------------------------------------------------------------------

Shareholders and Board of Directors
Best Buy Co., Inc.

We have audited the accompanying consolidated balance sheets of Best Buy Co.,
Inc. as of February 25, 1995, and the related consolidated statements of
earnings, shareholders' equity, and cash flows for the year then ended. 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 audit. The financial statements of Best Buy Co., Inc. for the years ended
February 26, 1994 and February 27, 1993 were audited by other auditors whose
report dated April 13, 1994 expressed an unqualified opinion on those
statements, and included an explanatory paragraph that described the accounting
change discussed in Note 8 to the consolidated financial statements.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 1995 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Best Buy Co.,
Inc., at February 25, 1995, and the consolidated results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.

As discussed in Note 8 to the consolidated financial statements, the Company
changed its method of accounting for income taxes during the year ended February
26, 1994.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
April 19, 1995

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
($ in thousands, except per share amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS:
The Company sells personal computer and other home office products, consumer
electronics, entertainment software, major appliances and related accessories
through its retail stores.

BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of Best Buy Co., Inc.
and its subsidiaries. Significant intercompany accounts and transactions have
been eliminated.

CASH AND CASH EQUIVALENTS:
The Company considers all short-term investments with a maturity of three months
or less when purchased to be cash equivalents.

RECOVERABLE COSTS FROM DEVELOPED PROPERTIES:
The costs of acquisition and development of properties which the Company intends
to sell and lease back or recover from landlords within one year are included in
current assets.

MERCHANDISE INVENTORIES:
Merchandise inventories are recorded at the lower of average cost or market.

PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation, including
amortization of property under capital leases, is computed on the straight-line
method over the estimated useful lives of the assets, or, in the case of
leasehold improvements, over the shorter of the estimated useful lives or lease
terms.

ACCOUNTS PAYABLE:
Under the Company's cash management system, checks issued but not cleared
through the bank account frequently result in a cash overdraft in the accounting
records. Overdraft balances of $78,140 and $90,119 at February 25, 1995, and
February 26, 1994, respectively, are included in accounts payable.

PRE-OPENING COSTS:
Costs incurred in connection with the opening of new stores are expensed
in the year the store is opened. Pre-opening costs were $13,971, $7,335 and
$6,231 in fiscal 1995, 1994, and 1993, respectively.

DEFERRED SERVICE PLAN REVENUE AND WARRANTY RESERVE:
Revenue from the sale of extended service contracts, net of direct selling
expenses, is recognized straight-line over the life of the contract. Costs
related to servicing the plans are expensed as incurred. Estimated costs of
promotional contracts, included with products at no cost to the consumer, are
accrued as warranty reserve at the time of product sale.

EARNINGS PER SHARE:
Earnings per share is computed based on the weighted average number of common
shares outstanding during each period, adjusted for 1,458,000, 1,300,000 and
902,000 incremental shares assumed issued on the exercise of stock options in
fiscal 1995, 1994 and 1993, respectively. All common share and per share
information has been adjusted for the three-for-two stock split in September
1993 and the two-for-one stock split in April 1994. Fully diluted earnings per
share assumes that the convertible preferred securities were converted into
common stock and the interest expense thereon, net of related taxes, is added
back to net income. References to earnings per share relate to fully diluted
earnings per share.

FISCAL YEAR:
The Company's fiscal year ends on the Saturday nearest the end of February. All
years presented contained 52 weeks.

RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to current year
presentation.

2. OBLIGATIONS UNDER FINANCING ARRANGEMENTS
The Company has a $180,000 inventory financing credit line. Borrowings are
collateralized by a security interest in certain merchandise inventories
approximating the outstanding borrowings. The line has provisions that give the
financing source a portion of the cash discounts provided by the manufacturers.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
($ in thousands, except per share amounts)

3. BORROWINGS

FEBRUARY 25 February 26
1995 1994
- -----------------------------------------------------------------------
<S> <C> <C>
Senior subordinated notes $ 150,000 $ 150,000

Subordinated notes 21,904 21,904

Equipment financing loans 39,622 25,306

Obligations under
capital leases 20,739 13,800

Contract for deed 8,700 8,700
---------------------------------
240,965 219,710
Current portion of
long term debt 13,718 8,899
---------------------------------
$ 227,247 $ 210,811
---------------------------------
---------------------------------

</TABLE>

CREDIT AGREEMENT:
The Company has a credit agreement (the "Agreement") that contains a revolving
credit facility under which the Company can borrow up to $400,000. The Agreement
provides that up to $150,000 of the facility is available at all times and an
additional $250,000 is available from July 1 to December 31. The Agreement
expires in June 1996, and the Company has the option to request an extension of
the Agreement for an additional year.

Borrowings under the facility are unsecured. Interest on borrowings is at rates
specified in the Agreement, as elected by the Company. The Company also pays
certain commitment and agent fees.

The Agreement contains covenants that require maintenance of certain financial
ratios and place limits on owned real estate and capital expenditures. The
Agreement also provides that once a year, the Company must repay any amounts
outstanding, and for a period of not less than 45 days thereafter, the aggregate
principal amount outstanding is limited to $50,000. There were no balances
outstanding under the facility at February 25, 1995 and February 26, 1994. The
weighted average interest rate under the Company's current and prior credit
agreements was 6.21%, 4.44% and 5.10% for fiscal 1995, 1994 and 1993,
respectively.

SENIOR SUBORDINATED NOTES:
In October 1993, the Company issued $150,000 of senior subordinated notes. The
notes mature on October 1, 2000, and bear interest at 8.63%. The Company may, at
its option, redeem the notes prior to maturity at 102.50% and 101.25% of par in
1998 and 1999, respectively. The Company may be required to offer early
redemption in the event of a change in control, as defined.

The notes are unsecured and subordinate to the prior payment of all senior debt,
which approximates $196,000 at February 25, 1995. The indenture also contains
provisions, which limit the amount of additional borrowings the Company may
incur and limit the Company's ability to pay dividends and make other restricted
payments.

SUBORDINATED NOTES:
The Company has an $18,000 unsecured, subordinated note outstanding which bears
interest at 9.95% and matures on July 30, 1999. In addition, the Company has
$3,904 of unsecured, subordinated notes due June 15, 1997 which bear interest at
9.00%.

EQUIPMENT FINANCING LOANS:
The equipment financing loans require monthly or quarterly payments and have
maturity dates between June 1996 and December 1999. The interest rates on these
loans range from 7.54% to 11.15%. Furniture and fixtures with a book value of
$35,609 are pledged against these loans.

OBLIGATIONS UNDER CAPITAL LEASES:
The present value of future minimum lease payments relating to certain equipment
and a distribution center has been capitalized. The capitalized cost is $27,095
and $17,870 at February 25, 1995, and February 26, 1994, respectively. The net
book value of assets under capital leases was $20,176 and $13,439 at February
25, 1995 and February 26, 1994, respectively.

CONTRACT FOR DEED:
The Company purchased its corporate office building on a contract for deed. The
contract for deed calls for semiannual interest payments of $430 with payment of
the contract balance on June 12, 1996.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
($ in thousands, except per share amounts)

FUTURE MATURITIES OF DEBT:

Capital Other
Fiscal year Leases Debt
- ------------------------------------------------------------------------------
<S> <C> <C>
1996 $ 4,974 $ 9,640
1997 4,648 18,501
1998 3,472 13,154
1999 1,346 6,459
2000 513 22,472
Later years 7,559 150,000
-----------------------------
22,512 $ 220,226
---------
---------
Less amount representing interest 1,773
--------
Minimum lease payments $ 20,739
--------
--------
</TABLE>

During fiscal 1995, 1994 and 1993 interest paid (net of amounts capitalized)
totaled $25,708, $5,360 and $5,385, respectively. Assets acquired under capital
leases were $10,025, $3,807 and $8,705 in fiscal 1995, 1994 and 1993,
respectively. The fair value of the Company's senior subordinated notes was
$143,813 at February 25, 1995 based on quoted market prices. The fair value of
all other financial instruments, including those with quoted market prices,
approximates carrying value.

4. CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY

In November 1994, the Company and Best Buy Capital, L.P. (Best Buy Capital), a
special purpose limited partnership in which the Company is the sole general
partner, completed the public offering of 4,600,000 convertible monthly income
preferred securities with a liquidation preference of $50 per security. The
underwriting discount and expenses of the offering aggregated $7,680. The
proceeds of the offering were loaned to the Company in exchange for a
subordinated debenture with payment terms substantially similar to the preferred
securities. Distributions on the securities are payable monthly at the annual
rate of 6.50% of the liquidation preference and are included in interest expense
in the consolidated financial statements.

The securities are convertible into shares of the Company's Common Stock at the
rate of 1.111 shares per security (equivalent to a conversion price of $45 per
share). The preferred securities are subject to mandatory redemption in November
2024 at the liquidation preference price. The Company has the option to defer
distributions on the securities for up to 60 months. A deferral of distributions
may result in the conversion of the preferred securities into Series A Preferred
Stock of the Company. The Company has the right to cause the conversion rights
to expire any time after three years from the date of issuance in the event the
Company's Common Stock price exceeds $54 per share for 20 out of 30 consecutive
trading days.

5. SHAREHOLDERS' EQUITY

PUBLIC OFFERING:
In June 1993, the Company completed a public offering of 7,020,000 shares of
Common Stock, including the underwriters' over allotment, at $12.83 per share.
Net proceeds of the offering were $85,528 after deducting the underwriting
discount and offering expenses of $4,562.

STOCK OPTIONS:
The Company sponsors two non-qualified stock option plans for employees and one
non-qualified plan for directors. These plans provide for the issuance of up to
9,650,000 shares. Options may be granted only to employees or directors at
option prices not less than the fair market value of the Company's Common Stock
on the date of the grant. At February 25, 1995, options to purchase 3,744,000
shares are outstanding under these plans. In addition, at February 25, 1995, an
option to purchase 26,000 shares is outstanding to an officer, not pursuant to a
plan.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
($ in thousands, except per share amounts)

Option activity for each of the last three years is as follows:

Option Price
Shares per Share
- -----------------------------------------------------------------------------
<S> <C> <C>
OUTSTANDING FEBRUARY 29, 1992 2,091,000 $ 2.21 - 10.31
Granted 912,000 5.89 - 6.29
Exercised (837,000) 2.21 - 6.29
Cancelled (45,000) 2.21 - 6.29
---------
OUTSTANDING FEBRUARY 27, 1993 2,121,000 2.21 - 10.31
Granted 1,391,000 11.23 - 13.58
Exercised (240,000) 2.21 - 10.31
Cancelled (102,000) 2.21 - 12.00
---------
OUTSTANDING FEBRUARY 26, 1994 3,170,000 2.21 - 13.58
Granted 1,316,000 27.68 - 38.19
Exercised (472,000) 2.21 - 12.00
Cancelled (244,000) 2.21 - 32.40
---------
OUTSTANDING FEBRUARY 25, 1995 3,770,000 2.50 - 38.19
---------
---------

EXERCISABLE FEBRUARY 25, 1995 1,247,000 $ 2.50 - 32.40
---------
---------
</TABLE>

6. OPERATING LEASE COMMITMENTS & RELATED PARTY TRANSACTIONS

The Company conducts the majority of its retail and distribution operations from
leased locations. The Company completed the sale/leaseback of 11 stores in 1995
and 17 stores in 1994, with transaction costs and any gain or loss recognized
over the term of the lease agreement. Proceeds from the sale/leaseback of stores
owned at February 26, 1994 are shown as such in the accompanying fiscal 1995
statement of cash flows. Proceeds from the sale/leaseback of properties
developed in fiscal 1995 are included in the net change in recoverable costs
from developed properties. The Company also leases various equipment under
operating leases and, prior to January 1994, its corporate headquarters were
located in a leased facility. In addition, the Company leases 14 stores and a
distribution center, along with the related fixtures and equipment under a
master lease agreement. The initial terms of the leases under this agreement
range from one to five years, and rent is variable based on interest rate
options as selected by the Company. The leases require payment of real estate
taxes, insurance, and common area maintenance. Most of the leases contain
renewal options and escalation clauses, and several require contingent rents
based on specified percentages of sales. Certain leases also contain covenants
related to maintenance of financial ratios.

Future minimum lease obligations by year (not including percentage rentals) for
all operating leases at February 25, 1995, are as follows:

FISCAL YEAR
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . $85,221
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 82,891
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 81,059
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . 77,352
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 72,909
Later years. . . . . . . . . . . . . . . . . . . . . . . 653,698
</TABLE>

The composition of the total rental expenses for all operating leases during the
last three fiscal years, including leases of building and equipment, is as
follows:

1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $64,716 $37,673 $22,757
Percentage rentals 795 439 405
--------------------------------------
$65,511 $38,112 $23,162
--------------------------------------
--------------------------------------
</TABLE>

Five stores are leased from the Company's CEO and principal shareholder, his
spouse, or partnerships in which he is a partner. Rent expense under these
leases during the last three fiscal years was as follows:

1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $1,120 $1,049 $1,051
Percentage rentals 470 423 405
--------------------------------------
$1,590 $1,472 $1,456
--------------------------------------
--------------------------------------
</TABLE>

7. RETIREMENT SAVINGS PLAN

The Company has a retirement savings plan for employees meeting certain age and
service requirements.The plan provides for a Company matching contribution which
is subject to annual approval. This matching contribution was $1,376, $906 and
$697 during fiscal 1995, 1994 and 1993, respectively.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
($ In thousands, except per share amounts)

8. INCOME TAXES
In fiscal 1994, the Company adopted FASB Statement No. 109 "Accounting for
Income Taxes" (FAS 109) and changed its method of accounting for income taxes
from the deferred method to the liability method required by FAS 109. As
permitted by FAS 109, prior years' financial statements have not been restated.
The cumulative effect of the change as of February 28, 1993 was a charge to
earnings of $425.

FOLLOWING IS A RECONCILIATION OF THE PROVISION FOR INCOME TAXES TO THE FEDERAL
STATUTORY RATE:

1995 1994 1993
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at
the statutory rate $32,918 $23,932 $10,888

State income taxes,
net of federal benefit 4,759 3,320 1,412

Jobs tax credit (1,402) (293) (54)

Tax exempt investment
income (70) (341) (228)

Other 195 359 152

Effect of tax rate change
on deferred taxes (309)
----------------------------------------

Provision for
income taxes $36,400 $26,668 $12,170
----------------------------------------
----------------------------------------

Effective tax rate 38.7% 39.0% 38.0%
----------------------------------------
----------------------------------------

</TABLE>

The provision for income taxes consists of the following:

1995 1994 1993
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Current: Federal $32,435 $25,909 $12,129

State 8,044 5,882 2,628
----------------------------------------
40,479 31,791 14,757
----------------------------------------

Deferred: Federal (3,495) (4,620) (2,118)

State (584) (503) (469)
----------------------------------------
(4,079) (5,123) (2,587)
----------------------------------------
Provision for income taxes $36,400 $26,668 $12,170
----------------------------------------
----------------------------------------

</TABLE>

Deferred taxes under FAS 109 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:

FEBRUARY 25 February 26
1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C>
Deferred service plan revenue and warranty reserve $26,396 $18,625

Inventory 2,332 3,326

Compensation and benefits 2,218 1,547

Other-net 1,289 766
----------------------------
Total deferred tax assets 32,235 24,264
----------------------------
Property and equipment 7,287 3,988

Other-net 703 110
----------------------------
Total deferred tax liabilities 7,990 4,098
----------------------------
Net deferred tax assets $24,245 $20,166
----------------------------
----------------------------

</TABLE>

The deferred income tax benefit under the previous method of accounting for
income taxes for fiscal 1993 is comprised of the following:

<S> <C>
Deferred service plan revenue and warranty reserve $ (2,308)

Depreciation expense 826

Inventory cost capitalization (497)

Reserves for losses not currently deductible (558)

Other (50)
--------------
$ (2,587)
--------------
--------------

</TABLE>

The Company believes that the interest on the subordinated note referred to in
Note 4 is deductible and that Best Buy Capital will be treated as a partnership
for income tax purposes. Income taxes paid were $32,899, $25,442 and $7,174 in
fiscal 1995, 1994 and 1993, respectively.

9. LEGAL PROCEEDINGS

The Company is involved in various legal proceedings arising during the normal
course of conducting business. Management believes that the resolution of these
proceedings will not have any material adverse impact on the Company's financial
condition.