<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 1-11014
MUSICLAND STORES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 41-1623376
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
10400 Yellow Circle Drive, Minnetonka, MN 55343
(Address of principal executive offices) (Zip Code)
(612) 931-8000
(Registrant's telephone number, including area code)
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 for 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 number of shares outstanding of the Registrant's common stock as of July
31, 1996 was 34,301,956 shares.
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements.
Consolidated Statements of Earnings 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Report of Independent Public Accountants 8
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition. 9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K. 15
Signature 16
2
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MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $372,410 $331,720 $755,980 $678,080
Cost of sales 245,828 208,348 499,565 432,464
-------- -------- -------- --------
Gross profit 126,582 123,372 256,415 245,616
Selling, general and administrative expenses 135,814 119,475 275,303 238,420
Depreciation and amortization 11,175 11,396 22,734 22,162
Restructuring charge -- -- 35,000 --
-------- -------- -------- --------
Operating loss (20,407) (7,499) (76,622) (14,966)
Interest expense 8,362 7,124 15,034 11,917
-------- -------- -------- --------
Loss before income taxes (28,769) (14,623) (91,656) (26,883)
Income taxes (10,150) (7,092) (32,550) (13,038)
-------- -------- -------- --------
Net loss $(18,619) $ (7,531) $(59,106) $(13,845)
-------- -------- -------- --------
-------- -------- -------- --------
Loss per common share $ (0.56) $ (0.22) $ (1.77) $ (0.40)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of common
shares outstanding 33,402 34,264 33,387 34,258
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
--------------------- ------------
1996 1995 1995
--------- ---------- ------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 5,485 $ 1,246 $ 1,971
Inventories 529,699 487,128 533,694
Deferred income taxes 30,900 14,470 17,400
Other current assets 33,705 19,945 20,840
---------- ---------- ---------
Total current assets 599,789 522,789 573,905
Property, at cost 428,418 417,048 446,100
Accumulated depreciation and amortization (140,793) (112,372) (127,783)
---------- ---------- ---------
Property, net 287,625 304,676 318,317
Goodwill 96,755 238,457 98,258
Deferred income taxes -- 630 --
Other assets 6,353 6,187 6,477
---------- ---------- ---------
Total Assets $ 990,522 $1,072,739 $ 996,957
---------- ---------- ---------
---------- ---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks drawn in excess of bank balances $ -- $ 23,657 $ 69,321
Short-term notes payable -- 500 --
Revolver 316,000 266,000 53,000
Accounts payable 287,527 247,844 403,848
Restructuring reserve 15,605 -- --
Other current liabilities 63,242 52,279 108,455
---------- ---------- ---------
Total current liabilities 682,374 590,280 634,624
Long-term debt 110,000 110,000 110,000
Other long-term liabilities 55,582 45,903 52,622
Deferred income taxes 5,800 -- 3,900
Stockholders' equity:
Preferred stock ($.01 par value; shares authorized: 5,000,000;
shares issued and outstanding: none) -- -- --
Common stock ($.01 par value; shares authorized: 75,000,000;
shares issued and outstanding: June 30, 1996, 34,301,956;
June 30, 1995, 34,266,456; December 31, 1995, 34,296,956) 343 343 343
Additional paid-in capital 254,411 254,192 254,350
Retained earnings (accumulated deficit) (104,017) 76,994 (44,911)
Deferred compensation (8,998) -- (8,998)
Common stock subscriptions (4,973) (4,973) (4,973)
---------- ---------- ---------
Total stockholders' equity 136,766 326,556 195,811
---------- ---------- ---------
Total Liabilities and Stockholders' Equity $ 990,522 $1,072,739 $ 996,957
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
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MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (59,106) $ (13,845)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 23,043 22,410
Restructuring charge 35,000 --
Disposal of property 1,633 3,084
Deferred income taxes (11,600) (5,000)
Changes in operating assets and liabilities:
Inventories 3,994 4,700
Other current assets (12,895) (10,338)
Accounts payable (116,321) (209,392)
Restructuring reserve (3,741) --
Other current liabilities (45,135) (67,869)
Other assets (210) (498)
Other long-term liabilities 3,024 4,799
--------- ---------
Net cash used in operating activities (182,314) (271,949)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (7,864) (49,733)
--------- ---------
FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in excess of bank balances (69,321) 17,771
Increase in short-term notes payable -- 500
Borrowings under revolver 263,000 266,000
Proceeds from sale of common stock 13 79
--------- ---------
Net cash provided by financing activities 193,692 284,350
--------- ---------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 3,514 (37,332)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,971 38,578
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,485 $ 1,246
--------- ---------
--------- ---------
CASH PAID DURING THE PERIOD FOR:
Interest $ 13,582 $ 10,805
Income taxes 9,931 18,654
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Musicland Stores Corporation ("MSC" or the "Company") and its wholly owned
subsidiary, The Musicland Group, Inc. ("MGI") and MGI's wholly owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
The accompanying interim consolidated financial statements of the
Company are unaudited; however, in the opinion of management, all adjustments
necessary for a fair presentation of such consolidated financial statements
have been reflected in the interim periods presented. Such adjustments
consisted only of normal recurring items. The Company's business is seasonal
and, accordingly, interim results are not indicative of results for a full
year. The significant accounting policies and certain financial information
which are normally included in financial statements prepared in accordance
with generally accepted accounting principles, but which are not required for
interim reporting purposes, have been condensed or omitted. The accompanying
consolidated financial statements of the Company should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K.
2. DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The Company's stores continue to face increased competition from
non-mall discount stores, consumer electronics superstores and other music,
video and book specialty retailers expanding into non-mall multimedia
superstores of their own. The low prices offered by these non-mall stores
create intense price competition and adversely affect the performance of both
the Company's non-mall and mall stores. The Company anticipates that the
challenging retail sales environment will continue into the foreseeable
future. These facts and circumstances led to an evaluation of the carrying
amount of goodwill for impairment which resulted in a write-down of $138,000
in the third quarter of 1995.
In April 1996, the Company obtained an amendment to its credit agreement
that modified certain existing covenants and approved a restructuring charge
of up to $35,000. The amendment adds financial covenants which require the
Company to meet certain debt and trade payables to eligible inventory ratios
and to reduce outstanding borrowings under the facility to $25,000 for one
day during the period from December 15, 1996 to February 15, 1997, and to
zero for one day during the period from December 15 to January 15 in each
subsequent year.
The Company was in compliance with all covenants of the credit
agreement, as amended, at the end of the second quarter of 1996. The
Company's stores operate in a retail environment in which many factors that
are difficult to predict and outside the Company's control can have a
significant impact on store and Company sales and profits. These factors
include the timing and strength of product releases, consumer spending
preferences, opening and closing of competitors' stores and competitors'
pricing. Any of these factors, alone or in combination, could affect the
Company's ability to meet its financial covenants. If the Company does not
meet its financial covenants, the Company would be in default and the banks
could demand repayment of all amounts owing under the revolver. There can be
no assurance that debt or equity to repay the revolver, if necessary, will
be available or can be arranged on similar terms.
6
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(DOLLARS IN THOUSANDS)
3. RESTRUCTURING CHARGE
During the first quarter of 1996, the Company began implementation of a
program designed to improve profitability and increase inventory turnover. A
pretax restructuring charge of $35,000 was recorded in the first quarter of
1996 to establish a reserve for the anticipated costs associated with the
closing of 56 underperforming stores and certain facilities. The planned
closings are expected to be completed within a year and include 36 mall
stores and 20 non-mall stores. The restructuring charge includes $17,800 for
anticipated non-cash write-downs of leasehold improvements and certain
equipment, net of unamortized lease credits, and $17,200 of anticipated cash
expenditures, primarily consisting of estimated payments to landlords for the
early termination of operating leases and estimated legal and consulting
fees. During the first half of 1996, $19,400 of the restructuring reserve had
been utilized, consisting of $15,700 of non-cash charges and $3,700 of cash
charges. A total of 31 stores have been closed through June 30, 1996,
including 19 mall stores and 12 non-mall stores. The Company expects to
close the majority of the remaining stores and certain facilities under the
restructuring program either late in the fourth quarter of 1996 or early in
the first quarter of 1997.
4. INCOME TAXES
The effective income tax rates for the three month and six month periods
ended June 30, 1996 and 1995 vary from the federal statutory rate principally
as a result of nondeductible goodwill amortization and state income taxes.
5. LOSS PER COMMON SHARE
Loss per common share amounts are computed by dividing net loss by the
weighted average number of common shares outstanding. For purposes of loss
per share computations, shares of common stock under the Company's employee
stock ownership plan, established in the third quarter of 1995, are not
considered outstanding until they are committed to be released. Common stock
equivalents related to stock options are anti-dilutive due to the net loss in
each period.
7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Musicland Stores Corporation:
We have reviewed the accompanying consolidated balance sheets of Musicland
Stores Corporation (a Delaware corporation) and Subsidiaries as of June 30,
1996 and 1995, and the related consolidated statements of earnings for the
three-month and six-month periods ended June 30, 1996 and 1995, and the
consolidated statements of cash flows for the six-month periods ended June
30, 1996 and 1995. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Musicland Stores Corporation and
Subsidiaries as of December 31, 1995, and, in our report dated April 10,
1996, we expressed an unqualified opinion on that statement. In our opinion,
the information set forth in the accompanying consolidated balance sheet as
of December 31, 1995, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
July 26, 1996
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following table presents certain unaudited sales and store data for the
non-mall based full-media superstores (Media Play and On Cue), the mall based
music and video sell-through stores (Sam Goody, Musicland and Suncoast Motion
Picture Company) and in total for the Company for the three months and six
months ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------------------
PERCENT OF TOTAL
------------------
1996 1995 % CHANGE 1996 1995
-------- -------- -------- ------ ------
(DOLLARS AND SQUARE FOOTAGE IN MILLIONS)
<S> <C> <C> <C> <C> <C>
SALES:
Non-mall stores $ 133.3 $ 93.1 43.3% 35.8% 28.1%
Mall stores 235.6 235.0 0.2 63.3 70.8
Total (1) 372.4 331.7 12.3 100.0 100.0
COMPARABLE STORE SALES % CHANGE:
Non-mall stores 4.7% 19.1% N/A N/A N/A
Mall stores 0.6 (3.4) N/A N/A N/A
Total (1) 1.8 (0.5) N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------
PERCENT OF TOTAL
------------------
1996 1995 % CHANGE 1996 1995
-------- -------- -------- ------ ------
(DOLLARS AND SQUARE FOOTAGE IN MILLIONS)
<S> <C> <C> <C> <C> <C>
SALES:
Non-mall stores $ 267.2 $184.4 44.9% 35.3% 27.2%
Mall stores 481.9 486.7 (1.0) 63.7 71.8
Total (1) 756.0 678.1 11.5 100.0 100.0
COMPARABLE STORE SALES % CHANGE:
Non-mall stores (0.1)% 22.5% N/A N/A N/A
Mall stores (0.9) (1.4) N/A N/A N/A
Total (1) (0.6) 1.5 N/A N/A N/A
STORE COUNT AT END OF PERIOD:
Non-mall stores 243 173 40.5 16.4 12.2
Mall stores 1,214 1,233 (1.5) 82.1 86.7
Total (1) 1,479 1,422 4.0 100.0 100.0
STORE SQUARE FOOTAGE AT END OF PERIOD:
Non-mall stores 5.1 3.8 32.7 53.5 46.5
Mall stores 4.4 4.4 (0.3) 45.8 53.0
Total (1) 9.5 8.2 15.3 100.0 100.0
</TABLE>
- ---------------------------------------
(1) The totals include other divisions which individually are not significant.
9
<PAGE>
SALES. Sales growth in the superstore divisions accounted for the
increases in total sales in the second quarter and first half of 1996
compared to the same periods in 1995. Since June 30, 1995, the Company
opened 82 superstores and closed 12. The Company also opened 39 mall stores
and closed 58 stores during the same period. The comparable store sales
gains achieved in the second quarter were a result of increased promotional
activities in both the superstore and mall divisions. Comparable store sales
results in the second quarter and first half of 1996 were impacted by the
lack of strong product releases in music and video. Sales results in 1995
benefited from the very successful LION KING video released in the first
quarter and FORREST GUMP released in the second quarter. The Company's
stores continue to face increased competition from non-mall discount stores,
consumer electronics superstores and other music, video and book specialty
retailers expanding into non-mall multimedia superstores of their own. The
low prices offered by these non-mall stores create intense price competition
and adversely affect the performance of both the Company's non-mall and mall
stores. The Company anticipates that the challenging retail sales
environment will continue into the foreseeable future.
GROSS PROFIT. Gross profit as a percentage of sales was 34.0% in the
second quarter of 1996 compared with 37.2% in the second quarter of 1995, a
decrease of 3.2%. Increased promotions and an increase in inventory
shrinkage accounted for 2.5% of the decrease while the higher proportion of
sales from the low-price superstore divisions relative to total Company sales
accounted for the balance of the decline. For the first half, gross margin
fell to 33.9% in 1996 from 36.2% in 1995. The shift in sales mix to
superstores accounted for 0.8% of the decline while the lowering of prices in
mall stores and increased promotional pricing in both mall and non-mall
stores contributed to the balance of the decrease.
Sales growth in the non-mall divisions will further reduce gross margin
in 1996 as their revenues increase as a percentage of the Company's total
sales. This decrease is expected to be partially offset by lower operating
expenses in the non-mall stores, principally related to occupancy costs.
However, the full benefit of the lower cost structure of non-mall stores is
not realized until these stores mature.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Increases in selling,
general and administrative expenses and depreciation and amortization in the
second quarter and first half of 1996 compared with the same periods in 1995
were primarily due to the store expansion over the past twelve months.
Selling, general and administrative expenses as a percentage of sales were
36.5% in the second quarter of 1996 compared with 36.0% in the second quarter
of 1995 and for the first half were 36.4% in 1996 compared with 35.2% in
1995. Most of these rate increases were attributable to the increase in fixed
occupancy costs related to the store expansion over the past year. The shift
in the mix of stores to non-mall stores, which have a lower cost structure
than mall stores, principally related to occupancy costs, partially offset
the expense rate increase. However, the Company expects that fixed costs
associated with stores that have not achieved the sales level of a mature
store will continue to negatively impact earnings through the third quarter
of 1996.
RESTRUCTURING CHARGE. During the first quarter of 1996, the Company
began implementation of a program designed to improve profitability and
increase inventory turnover. A pretax restructuring charge of $35 million
was recorded in the first quarter of 1996 to establish a reserve for the
anticipated costs associated with the closing of 56 underperforming stores
and certain facilities. The planned closings are expected to be completed
within a year and include 36 mall stores and 20 non-mall stores. The
restructuring charge includes $17.8 million for anticipated non-cash
write-downs of leasehold improvements and certain equipment, net of
unamortized lease credits, and $17.2 million of anticipated cash
expenditures, primarily consisting of estimated payments to landlords for the
early termination of
10
<PAGE>
operating leases and estimated legal and consulting fees. During the first
half of 1996, a total of 31 stores were closed under this program consisting
of 19 mall stores and 12 non-mall stores. See "Liquidity and Capital
Resources."
INTEREST EXPENSE. Interest expense in the second quarter and first half
of 1996 increased $1.2 million and $3.1 million, respectively, over the same
periods in 1995. Interest expense increased $1.2 million in the first half
of 1996 due to an increase in the number of days revolver borrowings were
outstanding. The increase in the second quarter and the balance of the
increase in the first half were due to higher levels of revolver borrowings.
For the second quarter of 1996 and 1995 and the first half of 1996 and 1995,
the average daily revolver balances, based upon the number of days
outstanding, were $304.0 million, $235.9 million, $268.2 million and $201.9
million, respectively. The weighted average interest rates on the revolver,
based upon the average daily balances, were 7.7%, 7.2%, 7.4% and 7.3%,
respectively.
In the first half of 1996, Moody's Investor's Service, Inc. and Standard
& Poor's Corporation lowered the Company's corporate credit rating and the
rating of its $110 million senior subordinated notes. These downgrades
occurred as a result of a number of factors including the continued weak
retailing environment, increased competition from nontraditional music
retailers, declining mall traffic and fundamental changes in the way
recorded music is distributed, which, along with high fixed costs from
aggressive store expansion in previous years, have negatively impacted the
Company's financial performance and limited the Company's financial
flexibility. The Company has significantly reduced its capital expenditure
program in 1996. As a result of the lower credit ratings and an amendment to
the Company's credit agreement in April 1996, the annual facility fee rate
increased from 0.30% to 0.50% and the margin added to variable interest rates
on revolver borrowings increased by 0.93%. See "Liquidity and Capital
Resources."
INCOME TAXES. The effective income tax rates for the three months and
six months ended June 30, 1996 and 1995 vary from the federal statutory rate
principally as a result of nondeductible goodwill amortization and state
income taxes.
SEASONALITY. The Company's business is highly seasonal, with
approximately 40% of the annual revenues and all of the net earnings
generated in the fourth quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are borrowings under its
revolving credit facility pursuant to the terms of its credit agreement and
internally generated cash. The revolving credit facility permits borrowings
of up to $350 million (subject to certain limitations and except for the
period from March 29, 1996 through September 10, 1996, during which
borrowings are limited to $325 million) and expires in October 1999. At June
30, 1996, the maximum permitted borrowings under the revolver, based upon the
lesser of a percentage of inventory or the maximum available for the period,
were $325 million. The Company had borrowings under the revolver of $316
million at June 30, 1996. The credit agreement contains covenants that limit
additional indebtedness, liens, capital expenditures and cash dividends.
Additionally, the Company must meet financial covenants relating to fixed
charge coverage, consolidated tangible net worth and debt to total
capitalization.
In April 1996, the Company obtained an amendment to its credit agreement
that modified certain existing covenants and approved a restructuring charge
of up to $35 million. The amendment adds financial covenants which require
the Company to meet certain debt and trade payables to eligible
11
<PAGE>
inventory ratios and to reduce outstanding borrowings under the facility to
$25 million for one day during the period from December 15, 1996 to February
15, 1997, and to zero for one day during the period from December 15 to
January 15 in each subsequent year.
The Company was in compliance with all covenants of the credit
agreement, as amended, at the end of the second quarter of 1996. The
Company's stores operate in a retail environment in which many factors that
are difficult to predict and outside the Company's control can have a
significant impact on store and Company sales and profits. These factors
include timing and strength of product releases, consumer spending
preferences, opening and closing of competitors' stores and competitors'
pricing. Any of these factors, alone or in combination, could affect the
Company's ability to meet its financial covenants. If the Company does not
meet its financial covenants, the Company would be in default and the banks
could demand repayment of all amounts owing under the revolver. There can be
no assurance that debt or equity to repay the revolver, if necessary, will be
available or can be arranged on similar terms.
OPERATING ACTIVITIES. Net cash used in operating activities during the
six months ended June 30, 1996 and 1995 was $182.3 million and $271.9
million, respectively. The lower level of cash used in the first six months
of 1996 was primarily due to the early payments made to certain vendors near
the end of 1995 to obtain discounts. These payments caused the amount of
checks issued but not presented to banks for payment to exceed the Company's
bank balances at December 31, 1995 by $69.3 million. When the changes in
checks drawn in excess of bank balances are included, cash used in operating
activities during the six months ended June 30, 1996 and 1995 was $251.6
million and $254.2 million, respectively. The most significant operating
uses of cash related to payments after December 31, 1996 and 1995 for seasonal
merchandise purchases, as reflected by the aggregate net changes in
inventories, accounts payable and checks drawn in excess of bank balances
during these periods of $181.6 million and $186.9 million, respectively.
Overall inventory levels have increased at June 30, 1996 over June 30, 1995
as a result of the superstore expansion and the increase in number of full
line mall based music and video stores, or combo stores, all of which have
higher inventory levels than traditional mall stores. Inventories at June 30,
1996 decreased from December 31, 1995 due to the store closings in the first
half of 1996 and efforts to reduce inventory levels and improve
inventory turnover.
Changes in the deferred income tax balances and most of the increase in
other current assets during the first six months of 1996 and 1995 from the
year end balances were due to the tax provision (benefit) recorded on the
losses in each quarter. The utilization of the restructuring reserve
primarily related to the closing of stores and consisted of $15.7 million of
non-cash charges and $3.7 million of cash charges. Changes in other
operating assets and liabilities are primarily related to the seasonal nature
of the business and store expansion.
INVESTING ACTIVITIES. Most of the Company's capital expenditures are
for store expansion. The Company has aggressively expanded in recent years.
Because of the weak retailing environment, which has adversely impacted the
Company's performance in recent periods, the Company plans to reduce capital
spending to approximately $25 million in 1996 and to a similar level in 1997.
The Company anticipates that these capital expenditures will be financed by
borrowings under the revolving credit facility, internally generated cash
and, to a lesser extent, landlord contributions and rent abatements. The
Company plans to close approximately 50 nonproductive mall based music stores
in 1996, the majority of which are at or near the end of their lease terms.
In addition, the Company plans to close 56 stores within the next year as
part of its restructuring program, of which 19 mall stores and 12 non-mall
stores were closed through June 30, 1996. The Company expects to close the
majority of the remaining stores and certain facilities under the
restructuring program either late in the fourth quarter of 1996 or early in
the first quarter of 1997. Assets from closed stores will be redeployed
either to new stores or to existing stores that are more profitable.
12
<PAGE>
FINANCING ACTIVITIES. The Company's financing activities principally
consist of borrowings and repayments under its revolving credit facility.
The revolver balance is higher at June 30, 1996 compared to June 30, 1995 as
a result of the store expansion in 1995 and shift in focus to the more
capital intensive Media Play stores. The Company is obligated under
operating leases for its Franklin distribution facility and certain Media
Play stores for residual value guarantees of approximately $25 million and
$12 million, respectively, either at the end of the original four year lease
terms in 1999 and 2000, respectively, or at the end of the respective one
year renewal terms. The Company expects that it will be able to obtain
adequate financing to meet its obligations under these lease agreements.
FORWARD-LOOKING STATEMENTS
Forward-looking statements herein are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. There
are certain important factors that could cause results to differ materially
from those anticipated by some of the statements made herein. Investors are
cautioned that all forward-looking statements involve risks and uncertainty.
In addition to the factors discussed above, among the factors that could
cause actual results to differ materially are the following: strength of new
product offerings, pricing strategies of competitors, openings and closings
of competitors' stores, effects of weather and overall economic conditions,
including inflation, consumer confidence, spending habits and disposable
income.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its Annual Stockholders' meeting on May 7, 1996.
(c) (1) The stockholders voted for three directors for three-year
terms. The vote was as follows for each of the nominees:
Affirmative Voting Authority
Name Votes Withheld
----------------- ----------- ----------------
Kenneth F. Gorman 31,555,023 323,598
Lloyd P. Johnson 31,539,442 339,179
Josiah O. Low III 31,492,158 386,463
There were no abstentions and no broker non-votes.
(2) The appointment of Arthur Andersen LLP, independent public
accountants, as auditors of the Company for the year ending
December 31, 1996, was voted on and approved. There were
31,771,256 votes for, 82,377 votes against, 24,987
abstentions and no broker non-votes.
ITEM 5. OTHER INFORMATION.
Gilbert L. Wachsman was appointed to the position of Vice Chairman
on July 17, 1996. Mr. Wachsman will have responsibility for
Merchandising, Buying, Central Retail Inventory Management,
Advertising and Distribution. Mr. Wachsman had held the position of
Senior Vice President Hardlines for K-Mart Corporation since August
1995. Prior to that he had been a management consultant for five
years. Mr. Wachsman held various positions at Target Stores from 1974
to 1986, rising to the position of Senior Vice President
Marketing/Merchandising. Subsequently, he was President and Chief
Executive Officer at Child World, Inc. and Lieberman Enterprises, Inc.
Gary A. Ross was appointed President, Superstores Division
effective August 12, 1996, and will have responsibility for the
non-mall based full-media superstores, Media Play and On Cue. Since
1990 he had filled the position of President, Suncoast Division. He has
served in the positions of Executive Vice President of Marketing and
Merchandising, Senior Vice President of Marketing and Merchandising,
Senior Vice President of Marketing and Merchandising of the Retail
Division and Senior Vice President of Planning and Administration of
the Retail Division since joining the Company in 1984.
Keith A. Benson was appointed President, Mall Stores Division
effective August 12, 1996, and will have responsibility for the mall
based music and video sell-through stores, Sam Goody, Musicland and
Suncoast Motion Picture Company. Since August 1, 1994 he had held the
position of President, Music Stores Division. From May 1, 1992 through
July 1994, he filled the position of Vice Chairman and Chief Financial
Officer, and from 1988 through April 1992, he served as Executive Vice
President and Chief Financial Officer. Prior to 1988 Mr. Benson held
various key financial positions after joining the Company in 1980 as
its Controller.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
15. Letter re unaudited interim financial information ___
27. Financial Data Schedules ___
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter
ended June 30, 1996.
_________
Omitted from this Part II are items which are not applicable or to which the
answer is negative for the period covered.
15
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
MUSICLAND STORES CORPORATION
By: /s/ Reid Johnson
--------------------------
Reid Johnson
Executive Vice
President and Chief
Financial Officer
(authorized officer, principal
financial and accounting officer)
Date: August 13, 1996
------------------------
16
<PAGE>
EXHIBIT 15
LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION
To Musicland Stores Corporation:
We are aware that Musicland Stores Corporation has incorporated by reference
in its Registration Statements Nos. 33-50520, 33-50522, 33-50524, 33-82130
and 33-99146, its Form 10-Q for the quarter ended June 30, 1996, which
includes our report dated July 26, 1996, covering the unaudited interim
financial information contained therein. Pursuant to Regulation C of the
Securities Act of 1933, that report is not considered a part of those
registration statements prepared or certified by our firm or reports prepared
or certified by our firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
Arthur Andersen LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF MUSICLAND STORES CORPORATION AND SUBSIDIARIES
AS OF JUNE 30, 1996, AND THE RELATED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,485
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 529,699
<CURRENT-ASSETS> 599,789
<PP&E> 428,418
<DEPRECIATION> 140,793
<TOTAL-ASSETS> 990,522
<CURRENT-LIABILITIES> 682,374
<BONDS> 110,000
0
0
<COMMON> 343
<OTHER-SE> 136,423
<TOTAL-LIABILITY-AND-EQUITY> 990,522
<SALES> 755,980
<TOTAL-REVENUES> 755,980
<CGS> 499,565
<TOTAL-COSTS> 499,565
<OTHER-EXPENSES> 333,037<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,034
<INCOME-PRETAX> (91,656)
<INCOME-TAX> (32,550)
<INCOME-CONTINUING> (59,106)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (59,106)
<EPS-PRIMARY> (1.77)
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES RESTRUCTURING CHARGE OF $35,000.
</FN>
</TABLE>
