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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-- EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-- EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 of (I.R.S. Employer Identification No.)
incorporation or organization)
10400 YELLOW CIRCLE DRIVE,
MINNETONKA, MINNESOTA 55343
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 931-8000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
----------------------------------- -----------------------------------
Common stock, $.01 par value 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 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 ___
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. ___
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant on March 15, 1996 was $103,183,757, based on the closing price of
$3 3/8 per common share on the New York Stock Exchange on such date (only
members of the Management Investors Group are considered affiliates for this
calculation).
The number of shares outstanding of the Registrant's common stock on March
15, 1996 was 34,296,956.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
stockholders to be held May 7, 1996 (the "Proxy Statement") are incorporated by
reference into Part III.
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Exhibit Index on sequential pages through .
This Document consists of pages.
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PART I
ITEM 1. BUSINESS
GENERAL
The Company operates principally in the United States and is engaged in one
industry segment as a specialty retailer of home entertainment products,
including prerecorded music, prerecorded video cassettes, books, computer
software and related accessories. The Company's two principal business
categories are non-mall based full-media superstores operating under the names
Media Play and On Cue and mall based music and video sell-through stores
operating under the names Sam Goody, Musicland and Suncoast Motion Picture
Company ("Suncoast"). The Company is the leading specialty retailer of
prerecorded music in the United States and is the only full-media specialty
retailer of books, computer software, prerecorded music and video products. At
December 31, 1995, the Company operated 1,496 stores in 49 states, the District
of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands and the United
Kingdom.
During the past several years, the Company has pursued an aggressive
expansion strategy. For the years ended December 31, 1995, 1994 and 1993, the
Company had net increases of 110, 135 and 116 stores, respectively. In 1995, the
Company opened 175 stores and closed 65 stores. The number and total square
footage of non-mall stores has increased significantly since their introduction
in 1992. At December 31, 1995, the Company operated 242 non-mall stores with
total square footage of 5.3 million, or 54% of total store square footage, and
1,232 mall stores with total square footage of 4.5 million, or 45% of total
store square footage. For the year ended December 31, 1995, the Company had
consolidated revenues of $1.7 billion, including $0.5 billion from non-mall
stores and $1.2 billion from mall stores.
In order to support this expansion, the Company opened a new 715,000 square
foot distribution center in Franklin, Indiana in March 1995. This distribution
center has more than double the combined capacity of the Company's distribution
center in Minneapolis, Minnesota and the former facility in Edison, New Jersey,
which was closed in May 1995. The new location provides a strategic geographic
advantage which promotes easy access to the Company's vendor base and is close
to a majority concentration of the Company's stores.
The Company plans to slow expansion in 1996 and focus on improving
performance in its existing stores. The new stores expected to be opened in 1996
will include approximately 10 Media Play stores, 10 On Cue stores, 4 music
stores and 10 Suncoast stores. The Company plans to close approximately 50
non-productive mall based music stores in 1996, the majority of which are at or
near the end of their lease terms. In addition, 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 reflect 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. Assets from closed stores will be
redeployed either to new stores or to existing stores that are more profitable.
Musicland Stores Corporation ("MSC") was incorporated in Delaware in 1988
and acquired The Musicland Group, Inc. ("MGI") on August 25, 1988. MGI was
incorporated in Delaware in 1977 as a successor corporation to a number of
companies that participated in the music business as early as 1956. The
principal asset of Musicland Stores Corporation is 100% of the outstanding
common stock of MGI, and, since its formation, MSC has engaged in no independent
business operations. MSC and MGI, together with MGI's subsidiaries, are
collectively referred to herein as the "Company."
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NON-MALL STORES
MEDIA PLAY STORES. Media Play stores are full-media, low-price superstores
in freestanding and strip mall locations averaging 49,000 square feet in size.
These family oriented stores offer a broad merchandise assortment appealing to
all ages, with up to 60,000 prerecorded music titles, 80,000 book titles, 15,000
prerecorded video titles, 2,000 computer software programs, 1,500 magazine
titles and 200 titles of comic books, complemented by other media and related
products including video games, greeting cards and licensed music, movie and
sports apparel. Stores carry up to 175,000 SKU's of merchandise.
Media Play stores provide a pleasing and exciting shopping environment
featuring easy access to all merchandise categories, lounge areas for relaxed
browsing, convenient customer service areas, live performances and other
entertainment activities, children's play areas, coffee bars and popcorn stands.
More aggressive marketing efforts are planned for 1996 that will include
in-store events for new releases, celebrity visits, children's reading clubs,
poetry groups, new video release screenings and in-store trials of new software.
The first Media Play store opened in Rockford, Illinois in November 1992.
The Company opened 43 Media Play stores in 1995 and had 89 Media Play stores in
22 states in operation at December 31, 1995. The total square footage of Media
Play stores was approximately 4.4 million, or 44% of the Company's total store
square footage at December 31, 1995. The Company plans to open approximately 10
Media Play stores in 1996. As part of the Company's effort to improve store
productivity, these new stores will be smaller in size, averaging approximately
44,000 square feet.
ON CUE STORES. On Cue stores are full-media stores for smaller markets of
between 10,000 and 30,000 people and average 6,300 square feet in size. The
stores emphasize competitive prices on new releases and everyday low prices on
catalog titles. On Cue stores are promoted through highway billboards, direct
mail, cable television and local radio. Customer loyalty is rewarded through
such programs as in-store sweepstakes and unadvertised in-store specials. The
stores offer prerecorded music, books, prerecorded video, computer software,
accessories and entertainment related licensed products, such as apparel. Most
stores carry approximately 28,000 SKU's of merchandise. On Cue customers have
access to over 100,000 home entertainment titles through the Company's special
order program.
The first On Cue store opened in February 1992. The Company opened 76 On Cue
stores in 1995 and operated 153 On Cue stores in 28 states at December 31, 1995.
The total square footage of On Cue stores was approximately 1.0 million, or 10%
of the Company's total store square footage at December 31, 1995. The Company
plans to open 10 On Cue stores in 1996.
MALL STORES
MUSIC STORES. The mall based music stores are operated principally under
the names Sam Goody and Musicland. At December 31, 1995, there were 820 music
stores in 49 states, the District of Columbia, the Commonwealth of Puerto Rico
and the Virgin Islands. These stores offer a full line of music, video and home
entertainment products through stores averaging 4,200 square feet and ranging
from 1,000 square feet to 30,000 square feet in size. The total square footage
of music stores was approximately 3.5 million, or 35% of the Company's total
store square footage at December 31, 1995.
The Company's mall based music stores have been experiencing increased
competition from non-mall discount stores and consumer electronics superstores
that have recently added or expanded prerecorded music and video sell-through as
product categories. These non-mall competitors are expanding into new markets
and offer low prices on prerecorded music and video products.
The Company has initiated several strategies to strengthen the mall based
music stores. In recent years, the Company has focused on opening larger combo
stores principally in malls and downtown locations. The combo stores combine a
full line of both music and video products and offer computer
2
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and entertainment software. When compared to traditional mall based music
stores, "combo" stores are larger and more prominent in the mall and carry a
broader inventory of catalog product, including substantial classical offerings
and sell-through video, to appeal to the high volume purchaser.
In 1995, several new in-store presentation and assortment programs were
introduced to better tailor merchandise for local preferences and the number of
in-store listening posts was increased to improve customer service. In 1996,
more competitive everyday prices will be offered on certain catalog titles along
with an intensified focus on customer service. The Company plans to build
excitement through focused marketing programs. More than 500,000 mall based
music store customers participate in the REPLAY frequent shopper program
designed to promote customer loyalty. In addition, the Company owns "REQUEST," a
music and video entertainment news magazine, which is distributed in the music
stores and at limited magazine stand outlets. The magazine has an audited
monthly circulation of 966,000 and an estimated monthly readership of 2.5
million.
Growth of the mall based music division has been curtailed in order to focus
on streamlining the existing store base and improving profitability. In 1995,
the Company opened 15 new stores and closed 64 stores. Additionally, the names
of certain Musicland stores were changed to Sam Goody. In 1996, the Company
plans to open 4 new music stores and close approximately 50 non-productive
stores, the majority of which are at or near the end of their lease terms.
SUNCOAST MOTION PICTURE COMPANY STORES. The mall based Suncoast stores
primarily offer sell-through video and average 2,450 square feet in size. The
typical Suncoast store features 8,500 titles of prerecorded video cassettes
along with movie and video related apparel and gift products, other accessories,
blank video tapes, laser disks and special order prerecorded video cassettes.
Most of the movies are priced at less than $20 and more than half sell for less
than $15. Each store also offers a wide assortment of feature films and videos
for less than $10. Suncoast's marketing programs include sweepstakes, instant
rebates, phone card promotions and exclusive merchandise events featuring recent
video releases. Suncoast has been testing a customer loyalty program,
"Producers' Club," in certain of its stores.
At December 31, 1995, there were 412 Suncoast stores in 46 states, the
District of Columbia and the Commonwealth of Puerto Rico. In 1995, the Company
opened 34 new Suncoast stores. The total square footage of Suncoast stores was
approximately 1.0 million, or 10% of the Company's total store square footage at
December 31, 1995. The Company plans to open approximately 10 Suncoast stores in
1996.
INTERNATIONAL STORES
The Company operates music stores in the United Kingdom under the name Sam
Goody. The first two stores in the United Kingdom were opened in 1990. In 1995,
the Company opened seven new stores and closed one store. At December 31, 1995,
the Company had 21 stores in operation averaging approximately 2,400 square feet
in size. The Company plans to open three stores in the United Kingdom in 1996.
3
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PRODUCTS
The following table shows the sales and percentage of total sales
attributable to each product group.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
1995 1994 1993
----------------------- ----------------------- -----------------------
SALES % SALES % SALES %
---------- ----------- ---------- ----------- ---------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Prerecorded music:
Compact discs............................ $ 610.1 35.4% $ 534.2 36.1% $ 408.1 34.5%
Audio cassettes and other................ 284.9 16.5 314.7 21.3 327.5 27.7
---------- ----- ---------- ----- ---------- -----
Total.................................. 895.0 51.9 848.9 57.4 735.6 62.2
Prerecorded video cassettes................ 505.9 29.4 413.5 28.0 312.8 26.5
Books...................................... 106.6 6.2 56.5 3.8 15.0 1.3
Computer software, accessories and
apparel................................... 215.1 12.5 159.9 10.8 118.3 10.0
---------- ----- ---------- ----- ---------- -----
Total................................ $ 1,722.6 100.0% $ 1,478.8 100.0% $ 1,181.7 100.0%
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
</TABLE>
PRERECORDED MUSIC. The Company's non-mall based Media Play and On Cue
stores and mall based music stores offer assortments of compact discs and
prerecorded audio cassettes purchased from all major manufacturers. Media Play
and On Cue stores carry up to 60,000 and 13,000 titles of prerecorded music,
respectively. Music stores, other than combo stores, carry from 5,000 to 20,000
titles, while combo stores carry from 15,000 to 40,000 titles, depending upon
store size and location. These titles include "hits," which are the best selling
newer releases, and "catalog" items, which are older but still popular releases
that customers purchase to build their collections. The compact disc product
category has grown significantly over the last few years, as household
penetration of compact disc players has risen, while sales of prerecorded audio
cassettes have declined. According to an industry source, an estimated 48% of
homes in the United States owned compact disc players at the end of 1995.
PRERECORDED VIDEO CASSETTES. The demand for movies and other prerecorded
video cassettes has increased in direct response to the penetration of video
cassette recorders into most homes in the United States, the lowering of prices
and the growing consumer acceptance of owning videos. Prerecorded video
cassettes are for sale at all of the Suncoast, Media Play and On Cue stores and
at substantially all of the music stores. Suncoast stores carry 5,000 to 15,000
title selections. Media Play stores and On Cue stores typically carry up to
15,000 and 3,500 titles of prerecorded video cassettes, respectively. Music
stores, other than combo stores, carry approximately 2,000 title selections
while combo stores carry 5,000 to 14,000 title selections. Management, based on
industry information, believes the demand for video cassettes will continue to
increase, causing sales of prerecorded video cassettes to be a growing component
of the Company's total revenues.
Merchandising of digital video discs ("DVD"), a new video technology, is
expected to begin in late 1996. DVD offers the consumer laser technology in a
smaller disc format with superior picture quality and audio fidelity. The
Company believes that in the next few years, sales of DVD players will begin to
replace sales of laserdisc players and VCR's as the new technology becomes
widely available. Management expects to capitalize on the release of DVD players
by offering software as soon as it is available.
BOOKS. The Company began selling books with the introduction of Media Play
and On Cue stores in 1992. The Company believes that the market for sales of
books in retail outlets presents a growth opportunity for the Company. Media
Play and On Cue stores typically carry up to 80,000 and 12,000 titles of books,
respectively.
COMPUTER SOFTWARE, ACCESSORIES AND APPAREL. This product category includes
computer and entertainment software, brand name blank audio and video tapes,
storage containers, carrying cases
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and guitar and piano sheet music, as well as entertainment related apparel,
posters and various other items. Movie and artist related accessories and
apparel are highly influenced by the trends and fads surrounding popular movies,
actors and artists. The Company's stores also carry a limited variety of
portable electronic equipment such as audio cassette players, radios and stereo
audio cassette/radios, generally sold at retail prices of approximately $200 or
less.
SUPPLIERS
Substantially all of the home entertainment products (other than books) sold
by the Company are purchased directly from manufacturers. The Company purchases
inventory for its stores from approximately 2,500 suppliers. Approximately 46%
of purchases in 1995 were made from the six largest suppliers. The Company has
no long-term contracts with its suppliers and transacts business principally on
an order-by-order basis as is typical throughout the industry. The Company has
not experienced difficulty obtaining satisfactory sources of supply and believes
that adequate sources of supply will continue to exist.
MARKETING
The Company uses a high level of advertising and promotions in marketing its
products. The Company's major suppliers offer cooperative advertising support
and provide funds for the placement and position of product. A significant
portion of the Company's total advertising costs have been funded by suppliers
through these programs. The Company advertises principally through newspaper
inserts. Because of the high concentration of its mall stores in major
metropolitan areas such as New York, Chicago and Los Angeles, the Company has
been able to expand its radio and local television advertising in those areas.
The national distribution of the Company's mall stores has made it practical to
advertise in certain national magazines and on nationally syndicated radio
programs and cable television, including MTV.
STORE OPERATIONS
Media Play stores typically are managed by a general manager, an operations
manager and four to six department managers. On Cue, music and Suncoast stores
are managed by a store manager and one to three assistant managers. Most stores
are open up to 80 hours per week, seven days a week. The Company does not extend
credit to customers, but most major credit cards are accepted.
COMPETITION
The retail sale of prerecorded music and video, books, computer software and
related accessories is highly competitive. 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. Some or all of these home entertainment products can also be
purchased or rented through other mall retail chains, warehouse clubs,
individual stores, video rental stores, grocery, convenience and drug stores,
television mail order offers and mail order clubs. The Company believes that its
ability to compete successfully depends on its ability to secure and maintain
attractive and convenient locations, manage merchandise efficiently, offer broad
product selections at competitive prices, provide effective management and
control operating costs.
SEASONALITY
Approximately 40% of the Company's annual revenues are realized during the
fourth quarter and all of the net earnings occur in the fourth quarter.
Quarterly results are affected by the timing of holidays, new store openings and
sales performance of existing stores. See Note 15 of Notes to Consolidated
Financial Statements.
TRADEMARKS AND SERVICE MARKS
The Company operates its stores under various names, including "Media Play,"
"On Cue," "Sam Goody," "Musicland," and "Suncoast Motion Picture Company," which
have become important to the
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Company's business as a result of its advertising and promotional activities.
These names, along with a number of others, including "Request," "REPLAY,"
"Readwell's," "Excelsior" and "Channel 1000," have been or are being registered
with the U.S. Patent and Trademark Office. The Company intends to continue to
use these names and marks and may use new names for specific stores depending on
the type of store and its location.
PERSONNEL
As of January 24, 1996, the Company employed approximately 17,000 employees,
excluding temporary employees. Hourly employees in the Company's Minneapolis
distribution center and at 18 of its stores are represented by unions. All other
facilities are non-union and the Company believes that its employee relations
are good.
ITEM 2. PROPERTIES
CORPORATE HEADQUARTERS AND DISTRIBUTION FACILITIES. The Company has its
corporate headquarters and a distribution facility in Minneapolis, Minnesota.
These facilities, which are owned by the Company, consist of two sites, one with
office space of approximately 94,000 square feet on approximately 5.4 acres of
land and a second with approximately 400,000 square feet of distribution space
and approximately 113,000 square feet of office space on approximately 20.7
acres of land. The Company's primary distribution facility, a 715,000 square
foot distribution facility located in Franklin, Indiana, is under an operating
lease that expires in 1999 with a one year renewal option. The lease contains
purchase options at the end of the original and renewal periods.
STORE LEASES. All stores are under operating leases with various remaining
terms through the year 2017. The leases have terms ranging from 3 to 25 years.
Leases typically provide for a fixed minimum rental, payable monthly, plus a
percentage of gross receipts in excess of certain sales levels. The following
table lists the number of leases due to expire in each fiscal year, excluding
renewal options.
<TABLE>
<S> <C> <C> <C>
1996................... 74 2001................... 185
1997................... 89 2002................... 109
1998................... 134 2003................... 145
1999................... 194 2004................... 131
2000................... 200 2005 and thereafter.... 235
</TABLE>
The Company expects that, as these current leases expire, in most cases it
should be able to obtain either renewal leases, if desired, or new leases at
equivalent or better locations.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of management, all
such matters are without merit or involve such amounts that unfavorable
disposition will not have a material impact on the financial position or results
of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders by MSC during the
fourth quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of MSC is traded on the New York Stock Exchange under the
symbol MLG. For common stock price information, see Note 15 of Notes to
Consolidated Financial Statements. As of March 8, 1996, MSC had approximately
540 holders of record of its common stock.
MSC has never paid cash dividends on its capital stock and does not plan to
pay cash dividends in the foreseeable future. The current policy of the Board of
Directors of MSC is to reinvest earnings in the operation and expansion of the
business of the Company. The terms of the Company's credit agreement and the
indenture for the 9% senior subordinated notes restrict the amount of cash
dividends that may be paid by MSC. See Note 3 of Notes to Consolidated Financial
Statements.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the periods
indicated. This information should be read in conjunction with the Consolidated
Financial Statements and related notes contained in Item 14 herein and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" contained in Item 7 herein. The goodwill write-down in 1995, the
public offerings of subordinated notes and common stock and early redemption of
debt in 1993 and initial public offering of common stock and early redemption of
debt and senior preferred stock in 1992 affect comparability of the Selected
Financial Data. See Notes 2 and 9 of Notes to Consolidated Financial Statements.
No cash dividends have ever been declared on the common stock of MSC.
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SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND STORE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
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1995 1994 1993 1992 1991
------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Sales............................................. $ 1,722,572 $ 1,478,842 $ 1,181,658 $ 1,020,508 $ 932,231
Gross profit...................................... 606,070 542,199 470,951 414,167 372,591
Selling, general and administrative expenses...... 525,213 450,919 365,311 319,713 287,010
Depreciation and amortization..................... 45,531 37,243 29,057 24,715 23,293
Goodwill write-down............................... 138,000 -- -- -- --
------------- ------------- ------------- ------------- -----------
Operating income (loss)........................... (102,674) 54,037 76,583 69,739 62,288
Interest expense.................................. 27,881 19,555 19,831 24,418 42,400
------------- ------------- ------------- ------------- -----------
Earnings (loss) before income taxes and
extraordinary charges............................ (130,555) 34,482 56,752 45,321 19,888
Income taxes...................................... 5,195 17,100 25,400 21,100 10,850
Senior preferred stock dividends.................. -- -- -- 703 1,326
------------- ------------- ------------- ------------- -----------
Earnings (loss) before extraordinary charges
(1).............................................. $ (135,750) $ 17,382 $ 31,352 $ 23,518 $ 7,712
------------- ------------- ------------- ------------- -----------
------------- ------------- ------------- ------------- -----------
Earnings (loss) per common share (1).............. $ (4.00) $ 0.51 $ 1.03 $ 0.83 $ 0.38
------------- ------------- ------------- ------------- -----------
------------- ------------- ------------- ------------- -----------
Weighted average number of common shares
outstanding...................................... 33,898 34,238 30,548 28,398 20,045
------------- ------------- ------------- ------------- -----------
------------- ------------- ------------- ------------- -----------
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
1995 1994 1993 1992 1991
------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......................... $ (7,719) $ (27,690) $ 21,628 $ (68,455) $ (81,437)
Total assets...................................... 996,957 1,079,632 905,682 689,349 629,334
Long-term debt, including current maturities...... 110,000 110,000 135,000 103,541 233,541
Redeemable senior preferred stock................. -- -- -- -- 11,885
Stockholders' equity.............................. 195,811 340,276 322,594 223,646 71,940
Book value per common share (2)................... 5.71 9.94 9.42 7.42 3.59
STORE DATA:
Total store square footage (in millions).......... 9.9 7.2 4.9 3.8 3.4
Store count at end of year:
Media Play stores............................... 89 46 13 1 --
On Cue stores................................... 153 77 32 13 --
Music stores.................................... 820 869 875 861 816
Suncoast stores................................. 412 378 320 252 220
Readwell's store................................ 1 1 1 -- --
United Kingdom stores........................... 21 15 10 8 5
------------- ------------- ------------- ------------- -----------
Total......................................... 1,496 1,386 1,251 1,135 1,041
------------- ------------- ------------- ------------- -----------
------------- ------------- ------------- ------------- -----------
</TABLE>
- - ------------------------
(1) Amounts for the years ended December 31, 1993 and 1992 are before
extraordinary charges from early redemption of debt, net of income tax
benefit, of $3,900, or $0.13 per share, and $8,440, or $0.30 per share,
respectively. Net earnings applicable to common stockholders for the years
ended December 31, 1993 and 1992 were $27,452, or $0.90 per share, and
$15,078, or $0.53 per share, respectively.
(2) Based on the number of common shares outstanding at year end.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
GENERAL. The Company is engaged in one industry segment as a specialty
retailer of home entertainment products through divisions operating principally
in two business categories: non-mall based full-media, low-price superstores
under the names Media Play and On Cue and mall based music and video
sell-through stores under the names Sam Goody, Musicland and Suncoast. The
following table presents sales, percentage increases, comparable store sales
increases, the number of stores open at year end and total store square footage
at year end for the two principal business categories and in total for the
Company for the last three years.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
------------ ------------ ------------
(DOLLARS AND SQUARE FOOTAGE IN MILLIONS)
<S> <C> <C> <C>
SALES:
Non-mall................................................... $ 516.7 $ 247.9 $ 54.4
Mall....................................................... 1,187.0 1,217.0 1,116.9
Total (1)................................................ 1,722.6 1,478.8 1,181.7
PERCENTAGE CHANGE FROM PRIOR YEAR:
Non-mall................................................... 108.5% 355.6% 981.9%
Mall....................................................... (2.5) 9.0 11.0
Total (1)................................................ 16.5 25.1 15.8
COMPARABLE STORE SALES CHANGE FROM PRIOR YEAR:
Non-mall................................................... 4.8% 33.3% 27.6%
Mall....................................................... (4.9) 3.1 4.5
Total (1)................................................ (3.2) 4.6 4.6
NUMBER OF STORES OPEN AT YEAR END:
Non-mall................................................... 242 123 45
Mall....................................................... 1,232 1,247 1,195
Total (1)................................................ 1,496 1,386 1,251
TOTAL STORE SQUARE FOOTAGE AT YEAR END:
Non-mall................................................... 5.3 2.7 0.8
Mall....................................................... 4.5 4.4 4.1
Total (1)................................................ 9.9 7.2 4.9
</TABLE>
- - ------------------------
(1) The totals include other divisions which individually are not significant.
SALES. The superstore expansion accounted for most of the increase in total
sales in 1995. The number of non-mall stores nearly doubled in 1995, increasing
from 123 stores at December 31, 1994 to 242 stores at December 31, 1995.
Non-mall stores have grown to 54% of the Company's total store square footage at
December 31, 1995. Comparable store sales in 1995 were adversely impacted by
weak sales during the fourth quarter coupled with aggressive price competition.
Sales of music product were particularly soft due to a lack of strong releases
in the latter part of the year. Comparable store sales of mall stores in 1995
were negatively impacted by increased competition from non-mall stores and weak
music sales.
New store openings and increases in total store square footage contributed
to most of the sales growth in 1994. The superstore comparable store sales
growth in 1994 was driven by the maturation of stores in the superstore
divisions. The growth of comparable store sales in the mall-based divisions
resulted primarily from the lowering of prices and increased promotional pricing
as part of the Company's strategy to protect and build market share in the
mall-based stores.
9
<PAGE>
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.
COMPONENTS OF EARNINGS. The following table sets forth certain operating
results as a percentage of sales for the last three years.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Gross profit............................ 35.2% 36.7% 39.9%
Selling, general and administrative
expenses............................... 30.5 30.5 30.9
Operating income before depreciation,
amortization and goodwill write-down... 4.7 6.2 8.9
Operating income (loss)................. (6.0) 3.7 6.5
</TABLE>
GROSS PROFIT. The increase in sales from the low-price non-mall stores
relative to total Company sales accounted for substantially all of the decrease
in the gross profit rate in 1995 and approximately half of the decrease in the
gross profit rate in 1994. The balance of the gross profit rate decrease in 1994
was primarily attributable to the increased promotional pricing in mall stores,
most of which occurred during the fourth quarter. The Company also experienced
distribution capacity constraints during the 1994 Christmas season which
required some inventory to be purchased at a higher cost from one stop
distributors who deliver directly to the stores.
The Company expects that the gross profit rate will continue to decline in
1996 as revenues from non-mall stores increase as a percentage of total sales
and the Company places increased emphasis on promotional pricing and low-price
marketing strategies. The gross profit decline is expected to be partially
offset by lower operating expenses in the non-mall stores, principally related
to occupancy costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of sales of 30.5% in 1995 remained flat
compared to 1994 because of the weak comparable store sales growth and the
impact of $13 million of store opening expenses. The 1995 expense includes a net
reduction to expense of $3.4 million related to two nonrecurring items. The
Company recorded income of $8.8 million from the termination of certain service
and business development agreements and a charge of $5.4 million for the closing
of an additional 35 mall based music stores. Expenses in 1995 also included
approximately $1.4 million related to costs associated with the opening of the
new distribution center in Franklin, Indiana opened in March 1995.
Selling, general and administrative expenses as a percentage of sales
decreased to 30.5% in 1994 from 30.9% in 1993. This improvement was attributable
to the lower cost structure of non-mall stores, principally related to occupancy
costs. The 1994 expense includes store opening expenses of approximately $11
million and a charge of approximately $3 million for the additional cost of
closing facilities and changing the name of certain Musicland stores to Sam
Goody.
The Company expects to obtain cost reductions with the Franklin distribution
center, which has more than double the combined capacity of the Company's
distribution center in Minneapolis, Minnesota and the former facility in Edison,
New Jersey, which was closed in May 1995. These cost reductions may be offset by
contingent rentals on the Franklin distribution facility, which fluctuate based
upon changes in certain interest rates and the Company's credit rating. The
Company also anticipates further improvements in expenses as a percentage of
sales from the lower cost structure of the non-mall stores as the existing
stores mature and realize comparable store sales growth.
10
<PAGE>
GOODWILL WRITE-DOWN AND ADOPTION OF NEW ACCOUNTING STANDARD. During the
third quarter of 1995, the Company adopted Financial Accounting Standards Board
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("Statement No. 121"), issued in March
1995. In August 1995, in connection with the adoption of Statement No. 121, the
Company recorded a goodwill write-down of $138 million, or $4.07 per share for
the year ended December 31, 1995. This write-down reduced goodwill amortization
by $1.4 million, or $0.04 per share, in 1995, and will reduce future goodwill
amortization by $4.2 million, or $0.13 per share, annually.
Most of the goodwill was established in conjunction with the 1988 leveraged
buyout of The Musicland Group, Inc. by Musicland Stores Corporation. At that
time, nearly all of the Company's stores were mall based music stores. The
carrying values of long-lived assets, primarily goodwill and property, of the
music division were reviewed for recoverability and possible impairment because
of recent developments. Since the beginning of 1995, the music division has been
experiencing sales declines. These sales declines coincide with general declines
in customer traffic in malls and an increase in traffic at high-volume,
low-price superstores. While the mall based music stores have responded with
increased promotional pricing and lower prices, they are at a competitive
disadvantage to non-mall stores because of their higher cost structure,
principally related to occupancy costs. The Company updated its operating
projections for the music division during the third quarter of 1995 to reflect
the continued weak retail environment and competitive pricing. The sum of the
projected undiscounted future cash flows over the remaining goodwill
amortization period was less than the carrying amount of goodwill, which
indicated impairment had occurred. The amount of goodwill impairment was
determined from a range of values of the music division developed from the
operating projections and future discounted cash flows. See Note 2 of Notes to
Consolidated Financial Statements.
INTEREST EXPENSE. The components of interest expense for the last three
years are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Interest on revolver.................... $ 17.0 $ 7.4 $ 4.6
Interest on term loan................... -- 1.1 2.6
Interest on subordinated debt........... 9.9 9.9 11.3
Other interest, net..................... 1.0 1.2 1.3
----- ----- -----
$ 27.9 $ 19.6 $ 19.8
----- ----- -----
----- ----- -----
</TABLE>
Higher average outstanding borrowings on the revolver increased interest
expense by $7.9 million in 1995 and $1.5 million in 1994. The remainder of the
increase in revolver interest expense was caused by higher interest rates. For
the years ended December 31, 1995, 1994 and 1993, the weighted average revolver
borrowings were $254.0 million, $128.6 million and $97.3 million, respectively,
and the weighted average interest rates on the revolver were 7.1%, 6.4% and
5.3%, respectively. Interest expense on the term loan, which was repaid in
October 1994, decreased primarily as a result of reductions in the principal
balance. Interest on subordinated debt was higher in 1993 because of the
issuance of $110 million of 9% subordinated notes and the redemption of $53.5
million of 14 3/4% subordinated debentures in 1993. Other interest expense
consists primarily of amortization of debt issuance costs.
In the first quarter 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. The lower credit rating
will increase the interest rate on the Company's revolver borrowings by 0.625%.
This downgrade occurred as a result of recent developments that include the weak
retailing environment coupled with the Company's increased capital requirements
because of the aggressive expansion of non-mall stores. See "Liquidity and
Capital Resources."
11
<PAGE>
INCOME TAXES. The Company's effective income tax rates of (4.0%) in 1995,
49.6% in 1994 and 44.8% in 1993 vary from the Federal statutory rate due to
goodwill amortization and write-down, both of which are nondeductible, 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. See Note 15 of Notes to Consolidated Financial Statements for quarterly
financial data.
RECENTLY ISSUED ACCOUNTING STANDARDS. Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement No.
123"), issued in October 1995 and effective for fiscal years beginning after
December 15, 1995, encourages, but does not require, a fair value based method
of accounting for employee stock options or similar equity instruments. It also
allows an entity to elect to continue to measure compensation cost under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), but requires pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting had been
applied. The Company expects to adopt Statement No. 123 in 1996. While the
Company is still evaluating Statement No. 123, it currently expects to elect to
continue to measure compensation cost under APB No. 25 and comply with the pro
forma disclosure requirements. If this election is made, this statement will
have no impact on results of operations or financial position of the Company
because the plans of the Company are fixed stock option plans. Options granted
under such plans have no intrinsic value at the grant date under APB No. 25.
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 reflect 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 will include the write-down of
leasehold improvements and certain equipment, estimated cash payments to
landlords for the early termination of operating leases and estimated legal and
consulting fees.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are for working capital, new
store expansion and improvements to existing stores. The majority of the
Company's financing for operations, expansion and working capital is provided by
internally generated cash and borrowings under the revolving credit facility
pursuant to the terms of its credit agreement. Because of the seasonality of the
retail industry, the Company's cash needs fluctuate throughout the year and
typically peak in November as inventory levels build in anticipation of the
Christmas selling season. The Company's cash position is generally highest at
the end of December following the Christmas season. The Company's practice has
been to use the excess cash generated from operations in the fourth quarter to
repay all or a portion of the outstanding borrowings under its revolving credit
facility. The amount of revolver borrowings, if any, outstanding at year end
depends upon the level of store expansion and sales performance during the
Christmas season.
The Company's 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 net worth and debt to total capitalization. In February 1995, the
credit agreement was amended to revise certain financial covenants and provide
the Company with additional flexibility. The debt agreement for the subordinated
notes also contains covenants. The Company was in compliance with all such
covenants at December 31, 1995.
In April 1996, the Company obtained an amendment to its credit agreement
that modifies certain existing covenants and approves 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 inventory ratios and
to reduce outstanding borrowings under the facility to $25 million for one day
12
<PAGE>
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. As a result of this amendment and because of the lowering of the Company's
credit ratings in the first quarter of 1996, the annual facility fee rate will
increase from 0.30% to 0.50% and the margin added to variable interest rates on
revolver borrowings will increase by 0.93%. The Company believes that it will be
in compliance with all covenants of the credit agreement, as amended, at the end
of the first quarter of 1996.
OPERATING ACTIVITIES. Net cash provided by (used in) operating activities
was ($56.2) million in 1995, $71.5 million in 1994 and $61.7 million in 1993.
The use of cash in 1995 was impacted by early payments made to certain vendors
near the end of the year to obtain discounts. These payments caused the amount
of checks issued but not presented to the Company's banks for payment at year
end to exceed the Company's year end bank balances by $69.3 million. When netted
with checks drawn in excess of bank balances, cash provided by operations during
1995 was $7.2 million. The reduction in cash provided by operating activities in
1995 was attributable to the inventory purchased for store expansion and weak
sales in the latter part of 1995. The Company reduced inventory levels at the
end of 1995 in response to the weak retailing environment.
The $9.8 million increase in cash provided by operating activities in 1994
over 1993 resulted primarily from the increase in the amount of change in
accounts payable, net of inventories, of $20.9 million in 1994. The Company
typically receives extended payment terms on seasonal purchases for the
Christmas season and on purchases for new store openings. This results in
accounts payable balances that are significantly higher at year end than at
other times of the year. The inventory increases are primarily the result of
store expansion and the shift to non-mall stores which have higher inventory
levels than mall stores.
INVESTING ACTIVITIES. Capital expenditures and store data for the last
three years are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Capital expenditures, net of
sale/leasebacks and other property
sales (in millions).................... $ 87.0 $ 109.6 $ 77.1
Store openings.......................... 175 175 153
Store closings.......................... (65) (40) (37)
--------- --------- ---------
Net increase in store count............. 110 135 116
--------- --------- ---------
--------- --------- ---------
</TABLE>
Most of the Company's capital expenditures are for store expansion. The
level of capital expenditures over the last three years reflects the Company's
aggressive expansion strategy and shift in focus to the more capital intensive
Media Play stores. More than half of the capital expenditures in 1995 and 1994
were for new Media Play stores. The Company typically receives financing from
landlords in the form of contributions and rent abatements for a portion of the
capital expenditures. The Company financed a portion of the Media Play capital
expenditures in 1995 and 1994 with proceeds from sale/ leaseback transactions
totalling $26.2 million in 1995 and $10.0 million in 1994. The balance of the
financing for capital expenditures was provided by internally generated cash and
borrowings under the revolving credit facility.
The new Franklin distribution facility and most of the related equipment,
which together had an original cost of approximately $30 million, were financed
under an operating lease. The lease contains a residual value guarantee in an
amount not to exceed $24.9 million at the end of the original four year lease
term and $25.7 million at the end of the one year renewal term. The lease also
contains purchase options at the end of the original and renewal periods. The
Company entered into a similar operating lease agreement to finance a portion of
its capital expenditures for new Media Play stores in 1996. The Company expects
that it will be able to obtain adequate financing to meet its obligations under
these lease agreements.
13
<PAGE>
The Company has aggressively expanded during the past three years. In
recognition of the current retailing environment, which began to weaken during
1995, the Company plans to reduce capital spending to approximately $25 million
in 1996. The Company anticipates that these capital expenditures will be
financed by internally generated cash, borrowings under the revolving credit
facility 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. Assets from closed stores will be redeployed
either to new stores or to existing stores that are more profitable.
FINANCING ACTIVITIES. The Company's financing activities principally
consist of borrowings and repayments under its long-term revolving credit
facility. The revolver balance outstanding at year end is dependent upon the
amount of cash generated from the Christmas season and the level of store
expansion. Because of the weak retailing environment in the latter part of 1995
which continued through the Christmas season, $53.0 million of borrowings
remained outstanding under the revolving credit facility at December 31, 1995.
In prior years, sufficient cash was generated from the Christmas season to fully
pay down the revolver at year end; however, the revolver is generally not
subject to repayment until expiration of the revolving credit facility in
October 1999.
During the third quarter of 1995, the Company loaned $10.0 million to its
401(k) trust to finance the purchase of 1,042,900 shares of common stock of the
Company in the open market. The stock will be used for a "KSOP" plan, which
combines features of a 401(k) plan and an employee stock ownership plan. See
Note 6 of Notes to Consolidated Financial Statements.
In October 1994, the Company replaced its $175 million revolving credit
facility and term loan with a new $350 million revolving credit facility with
similar terms and conditions. The new revolving credit facility allows the
Company to borrow up to $350 million (subject to certain limitations) and
expires on October 7, 1999. Borrowings under the new revolver were used to repay
all outstanding borrowings under the former revolver and to make the final $25
million principal payment on the term loan that was due on December 31, 1994.
The Company financed a significant portion of capital expenditures in 1994
with $70.7 million in net proceeds from a common stock offering completed in
December 1993. In June 1993, the Company completed an offering of $110 million
of 9% senior subordinated notes ("9% Notes"). The 9% Notes are due in June 2003.
A significant portion of the proceeds from this offering were used in September
1993 to redeem $53.5 million of 14 3/4% junior subordinated debentures. The
remaining proceeds were used principally to finance capital expenditures for
store expansion.
INFLATION AND ECONOMIC TRENDS
Although its operations are affected by general economic trends, the Company
does not believe that inflation has had a material effect on the results of its
operations during the past three fiscal years.
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, effects of weather and overall
economic conditions, including inflation and consumer confidence.
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and related notes are included in Item
14 of this report. See Index to Consolidated Financial Statements contained in
Item 14 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by these items of Part III will be set forth in the
Proxy Statement under similar captions and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) CONSOLIDATED FINANCIAL STATEMENTS
See Index to Consolidated Financial Statements and Schedules on page
18.
(2) FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules have been omitted because they are not
required or are not applicable or because the information required to
be set forth therein either is not material or is included in the
Consolidated Financial Statements or notes thereto.
(3) EXHIBITS
See Exhibit Index on pages 34 through 36.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fourth
quarter of the year ended December 31, 1995.
(C) EXHIBITS
See Exhibit Index on pages 34 through 36.
(D) OTHER FINANCIAL STATEMENTS
Not applicable.
15
<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 report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MUSICLAND STORES CORPORATION
(Registrant)
By: /s/ JACK W. EUGSTER
----------------------------------------
Jack W. Eugster,
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: April 11, 1996
---------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- - ------------------------------------ ------------------------ ----------------
<C> <S> <C>
Chairman of the Board,
/s/ JACK W. EUGSTER President, Chief
- - ------------------------------------ Executive Officer and April 11, 1996
Jack W. Eugster Director (principal
executive officer)
Executive Vice President
/s/ REID JOHNSON and Chief Financial
- - ------------------------------------ Officer (principal April 11, 1996
Reid Johnson financial and
accounting officer)
/s/ KEITH A. BENSON
- - ------------------------------------ Director April 11, 1996
Keith A. Benson
/s/ KENNETH F. GORMAN
- - ------------------------------------ Director April 11, 1996
Kenneth F. Gorman
/s/ WILLIAM A. HODDER
- - ------------------------------------ Director April 11, 1996
William A. Hodder
/s/ LLOYD P. JOHNSON
- - ------------------------------------ Director April 11, 1996
Lloyd P. Johnson
/s/ JOSIAH O. LOW, III
- - ------------------------------------ Director April 11, 1996
Josiah O. Low III
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- - ------------------------------------ ------------------------ ----------------
<C> <S> <C>
/s/ TOM F. WEYL
- - ------------------------------------ Director April 11, 1996
Tom F. Weyl
/s/ MICHAEL W. WRIGHT
- - ------------------------------------ Director April 11, 1996
Michael W. Wright
</TABLE>
17
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................. 19
Consolidated Statements of Earnings................................... 20
Consolidated Balance Sheets........................................... 21
Consolidated Statements of Cash Flows................................. 22
Consolidated Statements of Stockholders' Equity....................... 23
Notes to Consolidated Financial Statements............................ 24
</TABLE>
18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Musicland Stores Corporation:
We have audited the accompanying consolidated balance sheets of Musicland
Stores Corporation (a Delaware Corporation) and Subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of earnings, cash flows
and stockholders' equity for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Musicland Stores Corporation
and Subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
April 10, 1996
19
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Sales................................................................ $ 1,722,572 $ 1,478,842 $ 1,181,658
Cost of sales........................................................ 1,116,502 936,643 710,707
------------- ------------- -------------
Gross profit....................................................... 606,070 542,199 470,951
Selling, general and administrative expenses......................... 525,213 450,919 365,311
Depreciation and amortization........................................ 45,531 37,243 29,057
Goodwill write-down.................................................. 138,000 -- --
------------- ------------- -------------
Operating income (loss)............................................ (102,674) 54,037 76,583
Interest expense..................................................... 27,881 19,555 19,831
------------- ------------- -------------
Earnings (loss) before income taxes and extraordinary charges...... (130,555) 34,482 56,752
Income taxes......................................................... 5,195 17,100 25,400
------------- ------------- -------------
Earnings (loss) before extraordinary charges....................... (135,750) 17,382 31,352
Extraordinary charges from early redemption of debt, net of income
tax benefit......................................................... -- -- 3,900
------------- ------------- -------------
Net earnings (loss)................................................ $ (135,750) $ 17,382 $ 27,452
------------- ------------- -------------
------------- ------------- -------------
Earnings (loss) per common share:
Earnings (loss) before extraordinary charge........................ $ (4.00) $ 0.51 $ 1.03
Extraordinary charge............................................... -- -- 0.13
------------- ------------- -------------
Net earnings (loss) per common share............................... $ (4.00) $ 0.51 $ 0.90
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of common shares outstanding................. 33,898 34,238 30,548
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
20
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 1,971 $ 38,578
Inventories........................................................................ 533,694 491,828
Deferred income taxes.............................................................. 17,400 15,600
Other current assets............................................................... 20,840 9,574
------------ -------------
Total current assets............................................................. 573,905 555,580
Property, at cost.................................................................... 446,100 374,620
Accumulated depreciation and amortization............................................ (127,783) (98,586)
------------ -------------
Property, net...................................................................... 318,317 276,034
Goodwill............................................................................. 98,258 242,051
Other assets......................................................................... 6,477 5,967
------------ -------------
Total Assets..................................................................... $ 996,957 $ 1,079,632
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks drawn in excess of bank balances............................................ $ 69,321 $ 5,886
Revolver........................................................................... 53,000 --
Accounts payable................................................................... 403,848 457,236
Other current liabilities.......................................................... 108,455 120,148
------------ -------------
Total current liabilities........................................................ 634,624 583,270
Long-term debt....................................................................... 110,000 110,000
Other long-term liabilities.......................................................... 52,622 40,586
Deferred income taxes................................................................ 3,900 5,500
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock ($.01 par value; authorized: 5,000,000 shares; issued and
outstanding: none)................................................................ -- --
Common stock ($.01 par value; authorized: 75,000,000 shares; issued and
outstanding: December 31, 1995, 34,296,956 shares; December 31, 1994, 34,246,856
shares)........................................................................... 343 342
Additional paid-in capital......................................................... 254,350 254,068
Retained earnings (accumulated deficit)............................................ (44,911) 90,839
Deferred compensation.............................................................. (8,998) --
Common stock subscriptions......................................................... (4,973) (4,973)
------------ -------------
Total stockholders' equity....................................................... 195,811 340,276
------------ -------------
Total Liabilities and Stockholders' Equity....................................... $ 996,957 $ 1,079,632
------------ -------------
------------ -------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
21
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
------------ ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings (loss).................................................... $ (135,750) $ 17,382 $ 27,452
Adjustments to reconcile net earnings (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization........................................ 45,531 37,243 29,057
Goodwill write-down.................................................. 138,000 -- --
Loss on disposal of property......................................... 7,587 3,475 3,844
Amortization of debt issuance and other costs........................ 516 872 1,117
Other amortization................................................... 364 1 33
Extraordinary charge exclusive of income taxes....................... -- -- 6,486
Deferred income taxes................................................ (3,400) (6,100) (2,000)
Changes in operating assets and liabilities:
Inventories.......................................................... (41,866) (155,026) (86,166)
Other current assets................................................. (11,172) (1,991) (2,364)
Accounts payable..................................................... (53,388) 154,196 64,459
Other current liabilities............................................ (11,445) 16,829 16,888
Other assets......................................................... (1,079) (1,333) (435)
Other long-term liabilities.......................................... 9,875 5,914 3,291
------------ ------------ -----------
Net cash provided by (used in) operating activities................ (56,227) 71,462 61,662
------------ ------------ -----------
INVESTING ACTIVITIES:
Capital expenditures................................................... (113,983) (119,608) (77,139)
Sale/leasebacks and other property sales............................... 26,969 10,000 --
------------ ------------ -----------
Net cash used in investing activities.............................. (87,014) (109,608) (77,139)
------------ ------------ -----------
FINANCING ACTIVITIES:
Increase in checks drawn in excess of bank balances.................... 63,435 5,886 --
Borrowings under revolver.............................................. 53,000 -- --
Net proceeds from issuance of long-term debt........................... -- -- 107,281
Principal payments on long-term debt................................... -- (25,000) (25,000)
Redemption of long-term debt........................................... -- -- (58,074)
Loan to KSOP........................................................... (9,997) -- --
Net proceeds from sale of common stock................................. 196 72 70,952
------------ ------------ -----------
Net cash provided by (used in) financing activities................ 106,634 (19,042) 95,159
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................... (36,607) (57,188) 79,682
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................... 38,578 95,766 16,084
------------ ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR................................. $ 1,971 $ 38,578 $ 95,766
------------ ------------ -----------
------------ ------------ -----------
CASH PAID DURING THE YEAR FOR:
Interest............................................................... $ 27,268 $ 19,666 $ 20,414
Income taxes........................................................... 17,884 29,394 18,110
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
22
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
------------------ PAID-IN (ACCUMULATED DEFERRED COMMON STOCK STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) COMPENSATION SUBSCRIPTIONS EQUITY
-------- ------- ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
January 1, 1993............... 30,133 $ 301 $ 182,313 $ 46,005 $ -- $ (4,973) $ 223,646
Net earnings.................. 27,452 27,452
Other, including exercise of
stock options and related tax
benefit...................... 97 1 835 836
Sale of common stock in public
offering, net of offering
costs........................ 4,000 40 70,620 70,660
-------- ------- ----------- ------------- ------------- ------------- -------------
December 31, 1993............. 34,230 342 253,768 73,457 -- (4,973) 322,594
Net earnings.................. 17,382 17,382
Other, including exercise of
stock options and related tax
benefit...................... 17 -- 300 300
-------- ------- ----------- ------------- ------------- ------------- -------------
December 31, 1994............. 34,247 342 254,068 90,839 -- (4,973) 340,276
Net loss...................... (135,750) (135,750)
Other, including exercise of
stock options and related tax
benefit...................... 50 1 282 283
Loan to KSOP.................. (9,997) (9,997)
Amortization of deferred
compensation................. 999 999
-------- ------- ----------- ------------- ------------- ------------- -------------
December 31, 1995............. 34,297 $ 343 $ 254,350 $ (44,911) $ (8,998) $ (4,973) $ 195,811
-------- ------- ----------- ------------- ------------- ------------- -------------
-------- ------- ----------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
23
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Musicland Stores Corporation ("MSC") and its wholly-owned
subsidiary, The Musicland Group, Inc. ("MGI") and MGI's wholly-owned
subsidiaries, after elimination of all material intercompany balances and
transactions. MSC and MGI are collectively referred to as the "Company." The
Company's foreign operations in the United Kingdom and resulting foreign
currency translation adjustments have not been material. The preparation of the
accompanying financial statements required management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
BUSINESS. The Company operates principally in the United States and is
engaged in one industry segment as a specialty retailer of home entertainment
products, including prerecorded music, prerecorded video cassettes, books,
computer software and related accessories. The retail sale of home entertainment
products is highly competitive. The Company's two principal business categories
are non-mall based full-media superstores and mall based music and video
sell-through stores. At December 31, 1995, 82% of the store count consisted of
mall stores, but 54% of the total store square footage was in non-mall stores.
The Company operated 1,496 stores in 49 states, the District of Columbia, the
Commonwealth of Puerto Rico, the Virgin Islands and the United Kingdom at
December 31, 1995.
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 1995 (See Note 2). In
April 1996, the Company obtained an amendment to its credit agreement that
modifies certain existing covenants, approves a restructuring charge of up to
$35,000 (See Note 16) and adds new financial covenants (See Note 3).
CASH EQUIVALENTS. Cash equivalents consist principally of short-term
investments with original maturities of three months or less and are recorded at
cost, which approximates market value.
CASH MANAGEMENT. The Company's cash management system provides for the
reimbursement of all major bank disbursement accounts on a daily basis. Checks
issued but not presented for payment to the bank are reflected as checks drawn
in excess of bank balances in the accompanying financial statements. Prior year
amounts have been reclassified to conform to the current year presentation.
INVENTORIES. Inventories are valued at the lower of cost or market. Cost is
determined using the retail inventory method, on the first-in, first-out (FIFO)
basis.
PROPERTY. Property consists principally of store leasehold improvements,
fixtures and other equipment and is stated at cost. Leasehold improvements are
amortized on a straight-line basis over an estimated useful life of ten years,
which is generally equal to or less than the lease term. Store fixtures and
other equipment are depreciated on a straight-line basis over their estimated
useful lives. When assets are sold or retired, the costs and related accumulated
depreciation are removed from the accounts and the resulting gain or loss is
included in income. Depreciation and amortization expense for property was
$39,653, $29,816 and $21,407 for the years ended December 31, 1995, 1994 and
1993, respectively.
24
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL. Goodwill represents the cost in excess of fair value of net
assets of businesses acquired and primarily resulted from the acquisition of MGI
by MSC in 1988. The carrying amount of goodwill is evaluated if facts and
circumstances indicate that it may be impaired. If an evaluation is required,
the estimated future undiscounted cash flows of the entity acquired over the
remaining amortization period would be compared to the carrying amount of
goodwill to determine if a write-down is required. In August 1995, the Company
recorded a write-down of $138,000. Prior to the write-down, goodwill was
amortized using the straight-line method over a forty year period. Subsequent to
the write-down, goodwill is amortized using the straight-line method over the
remaining life of 33 years. Accumulated amortization at December 31, 1995 and
1994 was $1,002 and $45,431, respectively.
DEBT ISSUANCE COSTS. Debt issuance costs are amortized over the terms of
the related financing using the interest method.
STORE OPENING AND ADVERTISING COSTS. Costs associated with store openings
are amortized over expected sales to the end of the fiscal year in which the
store opens. Advertising costs are charged to expense as they are incurred.
INCOME TAXES. The provision for deferred income taxes represents the tax
effects of differences in the timing of income and expense recognition for tax
and financial reporting purposes under the liability method of accounting.
EARNINGS (LOSS) PER COMMON SHARE. Earnings (loss) per common share amounts
are computed by dividing net earnings by the weighted average number of common
shares outstanding. For purposes of earnings per share computations, shares of
common stock under the Company's employee stock ownership plan are not
considered outstanding until they are committed to be released. Common stock
equivalents related to stock options which would have a dilutive effect based
upon current market prices had no material effect on net earnings (loss) per
common share in each of the years presented.
RECENTLY ISSUED ACCOUNTING STANDARDS. Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement No.
123"), issued in October 1995 and effective for fiscal years beginning after
December 15, 1995, encourages, but does not require, a fair value based method
of accounting for employee stock options or similar equity instruments. It also
allows an entity to elect to continue to measure compensation cost under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), but requires pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting had been
applied. The Company expects to adopt Statement No. 123 in 1996. While the
Company is still evaluating Statement No. 123, it currently expects to elect to
continue to measure compensation cost under APB No. 25 and comply with the pro
forma disclosure requirements. If the Company makes this election, this
statement will have no impact on the Company's results of operations or
financial position because the Company's plans are fixed stock option plans.
Options granted under such plans have no intrinsic value at the grant date under
APB No. 25.
2. WRITE-DOWN OF GOODWILL
During the third quarter of 1995, the Company adopted Financial Accounting
Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("Statement No. 121"),
issued in March 1995. Goodwill primarily resulted from the acquisition of MGI by
MSC in a leveraged buyout in 1988, when nearly all of the Company's stores
25
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. WRITE-DOWN OF GOODWILL (CONTINUED)
were mall based music stores. In connection with the adoption of Statement No.
121, the carrying values of long-lived assets, primarily goodwill and property,
of the music division were reviewed for recoverability and possible impairment
because of recent developments.
Since the beginning of 1995, the music division has been experiencing sales
declines. These sales declines are occurring in connection with a consumer shift
away from mall based stores to non-mall superstores that offer low prices. While
the Company's mall based music stores have responded with increased promotional
pricing and lower prices, they are at a competitive disadvantage to non-mall
stores because of their higher cost structure, principally related to occupancy
costs. The Company updated its operating projections for the music division
during the third quarter of 1995 to reflect the continued weak retail
environment and competitive pricing. The sum of the projected undiscounted
future cash flows over the remaining goodwill amortization period of 33 years
was less than the carrying amount of goodwill, which indicated impairment had
occurred. An estimated fair value of the music division was determined from a
range of valuations based on the operating projections and future discounted
cash flows. Based on this estimated fair value, a goodwill write-down of
$138,000 was recorded in August 1995.
3. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
The Company's bank credit agreement provides for a $350,000 revolving credit
facility through October 1999 at variable interest rates. The revolving credit
facility enables the Company to borrow from 50% to 60% of inventory. The Company
is required to pay a facility fee at an annual rate of 0.15% to 0.50% on the
maximum credit amount available. The annual facility fee rate is currently 0.30%
and is subject to adjustment based on the Company's credit rating. The Company
has pledged the common stock of certain of the Company's wholly owned
subsidiaries as collateral for borrowings under the credit agreement
During the years ended December 31, 1995, 1994 and 1993, the highest
balances outstanding under the revolving credit facility were $350,000, $216,000
and $171,000, respectively, and the average daily balances were $254,000,
$128,600 and $97,300, respectively. The weighted average interest rates on the
revolver during such periods, based on the average daily balances, were 7.13%,
6.38% and 5.26%, respectively.
Long-term debt consists of 9% senior subordinated notes maturing in 2003.
The senior subordinated notes are unsecured and are subordinate to borrowings
under the credit agreement, with interest payable semi-annually.
The Company's 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 net worth and debt to total capitalization. In February 1995, the
credit agreement was amended to revise certain financial covenants and provide
the Company with additional flexibility. The debt agreement for the senior
subordinated notes also contains covenants. The Company was in compliance with
all such covenants at December 31, 1995.
In April 1996, the Company obtained an amendment to its credit agreement
that modifies certain existing covenants and approves 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. As a
result of this amendment and because of the lowering of the Company's credit
ratings in the first quarter of 1996, the annual facility fee rate
26
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT (CONTINUED)
will increase from 0.30% to 0.50% and the margin added to variable interest
rates on revolver borrowings will increase by 0.93%. The Company believes that
it will be in compliance with all covenants of the credit agreement, as amended,
at the end of the first quarter of 1996.
4. OTHER LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
--------- ---------
<S> <C> <C>
OTHER CURRENT LIABILITIES CONSIST OF THE FOLLOWING:
Income taxes................................................ $ 10,351 $ 20,033
Payroll and related taxes and benefits...................... 18,183 19,426
Gift certificates payable................................... 28,716 22,822
Sales taxes payable......................................... 19,694 20,024
Accrued store expenses and other............................ 31,511 37,843
--------- ---------
Total..................................................... $ 108,455 $ 120,148
--------- ---------
--------- ---------
OTHER LONG-TERM LIABILITIES CONSIST OF THE FOLLOWING:
Straight-line recognition of leases with scheduled rent
increases.................................................. $ 35,915 $ 27,632
Deferred rent credits....................................... 11,882 7,316
Other....................................................... 4,825 5,638
--------- ---------
Total..................................................... $ 52,622 $ 40,586
--------- ---------
--------- ---------
</TABLE>
27
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
5. INCOME TAXES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
INCOME TAXES CONSIST OF:
Current:
Federal................................................... $ 7,395 $ 18,900 $ 22,100
State, local and other.................................... 1,200 4,300 5,300
--------- --------- ---------
8,595 23,200 27,400
--------- --------- ---------
Deferred:
Federal................................................... (3,200) (5,000) (1,600)
State, local and other.................................... (200) (1,100) (400)
--------- --------- ---------
(3,400) (6,100) (2,000)
--------- --------- ---------
Total................................................... $ 5,195 $ 17,100 $ 25,400
--------- --------- ---------
--------- --------- ---------
THE COMPANY'S EFFECTIVE INCOME TAX RATE DIFFERED FROM THE
FEDERAL STATUTORY RATE AS FOLLOWS:
Federal statutory tax rate.................................. 35.0% 35.0% 35.0%
Goodwill amortization and write-down (38.5) 7.3 4.4
State and local income taxes, net of Federal benefit........ (0.5) 6.0 5.5
Other items, net*........................................... 0.0 1.3 (0.1)
--------- --------- ---------
Effective income tax rate................................. (4.0)% 49.6% 44.8%
--------- --------- ---------
--------- --------- ---------
</TABLE>
- - ------------------------
* None of which individually exceeds 5% of Federal tax at the statutory rate on
earnings before income taxes.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
-------- --------
<S> <C> <C>
THE COMPONENTS OF THE NET DEFERRED TAX ASSET AND LIABILITY
ARE AS FOLLOWS:
Net deferred tax asset:
Capitalized inventory costs............................... $ 5,877 $ 5,914
Inventory valuation....................................... 5,012 3,942
Compensation related...................................... 2,264 1,771
Facility closings......................................... 2,251 2,174
Other accruals............................................ 1,562 1,304
Other, net................................................ 434 495
-------- --------
Total current deferred income taxes..................... $ 17,400 $ 15,600
-------- --------
-------- --------
Net deferred tax liability
Depreciation.............................................. $(22,796) $(20,105)
Rent expense.............................................. 19,572 14,666
Amortization of intangible assets......................... (2,034) (1,732)
Net pension liability..................................... 807 725
Other, net................................................ 551 946
-------- --------
Total long-term deferred income taxes................... $ (3,900) $ (5,500)
-------- --------
-------- --------
</TABLE>
Based on the Company's history of operating earnings, management believes
that future operating earnings will be sufficient to fully realize the deferred
tax assets.
28
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. EMPLOYEE BENEFIT PLANS
The Company has a non-contributory, defined benefit pension plan covering
certain employees. Retirement benefits are a function of both years of service
and the level of compensation. The Company's funding policy is to make an annual
contribution equal to or exceeding the minimum required by the Employee
Retirement Income Security Act of 1974. Effective December 31, 1991,
participation in the pension plan was frozen for employees hired on or after
July 1, 1990. The Company established a defined contribution plan in 1992 for
those employees.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
-------- --------
<S> <C> <C>
PENSION DATA HAVE BEEN COMPUTED BASED ON THE FOLLOWING
ASSUMPTIONS:
Discount rate for benefit obligations....................... 7.50% 8.50%
Rate of increase for future compensation levels............. 5.50 5.50
Expected long-term rate of return on plan assets............ 8.50 8.75
THE FUNDED STATUS OF THE PENSION PLAN AND THE RELATED
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS WERE
AS FOLLOWS:
Funded assets at fair value (primarily listed stocks and
U.S. bonds)................................................ $ 9,289 $ 7,888
Projected benefit obligation:
Vested benefits............................................. (9,141) (7,134)
Non-vested benefits......................................... (142) (218)
-------- --------
Accumulated benefit obligation.............................. (9,283) (7,352)
Projected future salary increases........................... (47) (211)
-------- --------
Projected benefit obligation................................ (9,330) (7,563)
-------- --------
Assets in excess of (less than) projected benefit
obligation................................................. (41) 325
Net unamortized gains....................................... (1,983) (2,142)
-------- --------
Net pension liability....................................... $(2,024) $(1,817)
-------- --------
-------- --------
</TABLE>
The decrease in the discount rate at December 31, 1995 increased the
accumulated benefit obligation by $1,482 and increased the projected benefit
obligation by $1,490.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1995 1994 1993
------- ------- -----
<S> <C> <C> <C>
THE COMPONENTS OF NET PENSION EXPENSE WERE AS
FOLLOWS:
Service cost for benefits earned.................. $ 260 $ 407 $ 429
Interest cost on projected benefit obligation..... 631 648 615
Actual return on plan assets...................... (1,814) 512 (620)
Net amortization and deferred amounts............. 1,130 (1,225) (94)
------- ------- -----
Net pension expense............................. $ 207 $ 342 $ 330
------- ------- -----
------- ------- -----
</TABLE>
The Company has a 401(k) plan, which is based on contributions made through
payroll deductions and partially matched by the Company, covering substantially
all employees. Beginning in 1996, the Company's matching contribution to the
401(k) plan will be paid in stock of MSC under an employee stock ownership plan
("KSOP"). In 1995, to establish the KSOP, the Company made a loan to the KSOP
trust for the purchase of 1,042,900 shares of the Company's common stock in the
open market. In exchange, the Company received a note, the balance of which is
recorded as deferred
29
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
compensation and is reflected as a reduction of stockholders' equity. The
Company recognizes compensation expense during the period the match is earned
equal to the expected market value of the shares to be released to settle the
match liability. At December 31, 1995, the number of KSOP shares committed to be
released and held in suspense was 104,290 and 938,610, respectively. The market
value of the shares held in suspense at December 31, 1995 was $3,989.
Expenses for the 401(k) and defined contribution plans for the years ended
December 31, 1995, 1994 and 1993 totalled $570, $591 and $556, respectively.
Expenses for postemployment benefits were not material. The Company does not
offer or provide postretirement benefits other than pensions to its employees.
7. STOCK PLANS
The Company's 1994, 1992 and 1988 Stock Option Plans authorize the grant of
stock options and stock appreciation rights to officers and other key employees.
The Company's Directors Stock Option Plan authorizes the grant of stock options
to its directors who are not employees of the Company or its affiliates. The
number of shares of common stock that may be issued to employees and directors
under each of these plans is 950,000 shares, 1,500,000 shares, 1,000,000 shares
and 200,000 shares, respectively. The stock options become exercisable over a
period not to exceed ten years after the date they are granted. Exercise prices
are based upon the stock's market price at the grant date. No stock appreciation
rights were outstanding as of December 31, 1995.
<TABLE>
<CAPTION>
NUMBER OF SHARES
--------------------
EMPLOYEE DIRECTORS
STOCK STOCK
OPTION OPTION OPTION PRICE
PLANS PLAN RANGE PER SHARE
--------- --------- ---------------
<S> <C> <C> <C>
INFORMATION WITH RESPECT TO STOCK OPTIONS IS AS
FOLLOWS:
Balance, January 1, 1993.......................... 1,329,800 10,000 $ 2.50 - $14.50
Granted........................................... 357,900 30,000 12.38 - 21.75
Exercised......................................... (96,400) -- 2.50 - 4.50
Cancelled......................................... (3,050) -- 14.50
--------- ---------
Balance, December 31, 1993........................ 1,588,250 40,000 2.50 - 21.75
Granted........................................... 215,000 -- 13.50 - 16.00
Exercised......................................... (17,206) -- 2.50 - 14.50
Cancelled......................................... (77,128) -- 4.50 - 21.75
--------- ---------
Balance, December 31, 1994........................ 1,708,916 40,000 2.50 - 21.75
Granted........................................... 393,350 5,000 6.63 - 9.88
Exercised......................................... (50,100) -- 2.50 - 4.50
Cancelled......................................... (204,182) -- 4.50 - 21.75
--------- ---------
Balance, December 31, 1995........................ 1,847,984 45,000 2.50 - 21.75
--------- ---------
--------- ---------
Options exercisable at December 31, 1995.......... 800,838 40,000 2.50 - 14.50
--------- ---------
--------- ---------
Shares available for future grants................ 1,425,060 35,000
--------- ---------
--------- ---------
</TABLE>
30
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
8. COMMON STOCK SUBSCRIPTIONS
Certain members of management of the Company own 1,991,308 shares of common
stock with restrictions ("Restricted Stock") at $0.0025 per share. The
Restricted Stock is not transferable until the Company is paid the balance of
the subscription price of $2.4975 or $4.4975 per share. The amount of
subscriptions due from the holders of Restricted Stock upon transfer is
reflected as a reduction of stockholders' equity.
9. PUBLIC OFFERINGS AND EARLY REDEMPTION OF DEBT
On December 1, 1993, the Company completed a public offering of 8,591,353
shares of common stock, of which 4,000,000 shares were sold by the Company and
4,591,353 shares were sold by existing stockholders of the Company, at $18.50
per share. The proceeds to the Company from the offering were $70,660, net of
offering costs.
On June 17, 1993, the Company completed an offering of $110,000 of 9% senior
subordinated notes from which net proceeds to the Company, after offering costs,
were $107,281. A significant portion of the proceeds were used to redeem on
September 30, 1993, $53,541 principal amount of 14 3/4% junior subordinated
debentures. An extraordinary charge of $3,900 (net of related income tax benefit
of $2,586, using a combined Federal statutory tax rate plus state and local
taxes of approximately 39.9%) was recorded in connection with this early
redemption of debt.
10. PREFERRED STOCK PURCHASE RIGHTS
In March 1995, the Company's Board of Directors adopted a stockholder rights
plan and declared a dividend of one preferred share purchase right ("Right") per
share for each outstanding share of common stock. The Rights will be distributed
20 days after a person or group (an "Acquiring Person") either acquires
beneficial ownership of, or commences a tender or exchange offer for, 17.5% or
more of the Company's outstanding common stock.
Each Right then may be exercised to purchase one one-hundredth of a share of
Series A Junior Participating Preferred Stock, $0.01 par value (the "Preferred
Shares"), at an exercise price of $70.00 per one-hundredth Preferred Share.
Thereafter, upon the occurrence of certain events, the Rights entitle holders
other than the Acquiring Person to acquire common stock having a value of twice
the exercise price of the Rights. Alternatively, upon the occurrence of certain
other events, the rights would entitle holders other than the Acquiring Person
to acquire common stock of the Acquiring Person having a value of twice the
exercise price of the Rights.
The Rights may be redeemed by the Company at a redemption price of $.001 per
Right at any time until the 20th day after a public announcement of an
acquisition of 17.5% or more of the common stock of the Company. The Rights
expire on March 20, 2005.
11. COMMITMENTS
The Company leases all of its retail stores under operating leases for terms
ranging from three to twenty-five years. In most instances, the Company pays, in
addition to minimum rent, real estate taxes, utilities, common area maintenance
costs and percentage rentals which are based upon sales volume. Certain store
leases contain provisions restricting assignment, merger, change of control or
transfer. The Company's operating lease for its distribution facility in
Franklin, Indiana contains an original term of 4 years, a one year renewal
option and purchase options at the end of the original and
31
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
11. COMMITMENTS (CONTINUED)
renewal periods. The lease contains a residual value guarantee in an amount not
to exceed $24,900 at the end of the original lease term and $25,650 at the end
of the renewal term. The Company also leases certain store fixtures and
equipment, computers, and automobiles under operating leases.
<TABLE>
<S> <C>
AT DECEMBER 31, 1995, FUTURE ANNUAL MINIMUM RENTALS FOR
NONCANCELLABLE OPERATING LEASES WITH REMAINING TERMS GREATER
THAN ONE YEAR ARE:
1996....................................................... $ 164,040
1997....................................................... 163,585
1998....................................................... 157,569
1999....................................................... 168,706
2000....................................................... 129,052
Thereafter................................................. 602,133
----------
Total.................................................... $1,385,085
----------
----------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
TOTAL RENT EXPENSE CONSISTS OF THE FOLLOWING:
Minimum cash rents.......................................... $148,736 $120,118 $ 98,412
Straight-line recognition of leases with scheduled rent
increases.................................................. 7,304 4,892 5,013
Percentage rents............................................ 2,000 3,408 3,764
-------- -------- --------
Total rent expense........................................ $158,040 $128,418 $107,189
-------- -------- --------
-------- -------- --------
</TABLE>
12. RELATED PARTY TRANSACTIONS
Donaldson, Lufkin & Jenrette, Inc. ("DLJ") and certain of its affiliates
owned approximately 7.5% of the Company's common stock at December 31, 1995,
including approximately 0.6% owned by DLJ employees. Of the common stock owned
by DLJ and its affiliates, approximately 5% of the Company's outstanding common
stock is held directly with the remainder held by a voting trust. In 1993, DLJ
and certain of its affiliates sold 2,191,353 shares and received $38,984, net of
underwriting discount, in the Company's public stock offering. Donaldson, Lufkin
& Jenrette Securities Corporation, a wholly-owned subsidiary of DLJ, received
compensation as underwriter of approximately $1,769 in connection with the
public stock offering and approximately $1,600 in connection with the public
offering of senior subordinated notes. DLJ acts as a market maker in the
Company's senior subordinated notes.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets at December
31, 1995 and 1994 for cash and cash equivalents, other current assets, checks
drawn in excess of bank balances, accounts payable and other current liabilities
approximate fair value because of the immediate or short-term maturity of these
financial instruments. The fair value of the senior subordinated notes at
December 31, 1995 and 1994, based on the last quoted price on those dates, was
$66,000 and $91,850, respectively. The fair value of the revolver at December
31, 1995, based on current market rates, was $45,050.
32
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
14. LITIGATION
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of management, all
such matters are without merit or involve such amounts that unfavorable
disposition will not have a material impact on the financial position or results
of operations of the Company.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
EARNINGS COMMON STOCK PRICE
NET (LOSS) PER
GROSS EARNINGS COMMON ---------------------
SALES PROFIT (LOSS) SHARE HIGH LOW
---------- -------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1995:
First............... $ 346,360 $122,244 $ (6,314) $(0.18) $ 10 3/4 $ 6 3/4
Second.............. 331,720 123,372 (7,531) (0.22) 10 5/8 8 7/8
Third............... 357,585 131,317 (144,550) (4.28) 11 8 1/4
Fourth.............. 686,907 229,137 22,645 0.68 10 3 3/4
---------- -------- --------- -----------
Total............. $1,722,572 $606,070 $(135,750) $(4.00)
---------- -------- --------- -----------
---------- -------- --------- -----------
1994:
First............... $ 269,435 $104,457 $ (2,108) $(0.06) $ 22 1/2 $ 17 3/4
Second.............. 273,059 106,773 (2,198) (0.06) 22 14 3/4
Third............... 302,479 117,324 (2,554) (0.07) 18 1/2 14 1/4
Fourth.............. 633,869 213,645 24,242 0.71 16 3/8 8 3/4
---------- -------- --------- -----------
Total............. $1,478,842 $542,199 $ 17,382 $ 0.51
---------- -------- --------- -----------
---------- -------- --------- -----------
</TABLE>
Approximately 40% of the Company's annual revenues are realized during the
fourth quarter and all of the net earnings occur in the fourth quarter.
Quarterly results are affected by the timing of holidays, new store openings and
sales performance of existing stores. Due to changes in the number of common
shares outstanding during 1994, quarterly earnings per share do not add to the
total for the year.
16. 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 reflect 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 will include the write-down of leasehold improvements and
certain equipment, estimated cash payments to landlords for the early
termination of operating leases and estimated legal and consulting fees.
33
<PAGE>
EXHIBIT INDEX
The following documents are filed as part of this Annual Report on Form 10-K
for the year ended December 31, 1995.
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- - ----------- --------------------------------------------------------------------------------------- -----------
<C> <C> <S> <C>
3.1 -- Restated Certificate of Incorporation of MSC, as amended [i]
3.2 -- By-laws of MSC, as amended [ii]
4.1 -- Senior Subordinated Note Indenture, including form of Note, dated as of June 15, 1993
among MGI, MSC and Harris Trust and Savings Bank, as Trustee [iii]
4.2(a) -- Credit Agreement dated as of October 7, 1994 (the "Credit Agreement") among MGI, MSC,
the banks listed therein and Morgan Guaranty Trust Company of New York, as agent [iv]
4.2(b) -- Amendment No. 1 dated as of February 28, 1995 to the Credit Agreement [viii]
4.3 -- Rights Agreement dated as of March 14, 1995, between MSC and Norwest Bank Minnesota,
National Association, as Rights Agent. [v]
9. -- Voting Trust Agreement among DLJ, certain of its affiliates, the Equitable Investors
and Meridian Trust Company [i]
10.1(a) -- Lease Agreement dated March 31, 1994 between Shawmut Bank Connecticut, N.A. as Owner
Trustee and Musicland Retail, Inc., as Lessee [viii]
10.1(b) -- Participation Agreement dated March 31, 1994 among Musicland Retail, Inc., as Lessee,
Shawmut Bank Connecticut, N.A. as Owner Trustee, Kleinwort Benson Limited, as Owner
Participant, Lender and Agent and The Long-Term Credit Bank of Japan, Ltd. Chicago
Branch, Credit Lyonnais Cayman Island Branch, The Fuji Bank, Limited, as Lenders [viii]
10.1(c) -- Guaranty of MGI dated March 31, 1994 [viii]
10.2(a) -- Master Lease dated May 12, 1995 between Media Play Trust, as Landlord, and Media Play,
Inc., as Tenant [ix]
10.2(b) -- Participation Agreement dated May 12, 1995 among Natwest Leasing Corporation, as Owner
Participant, Media Play Trust, As Trust, Yasuda Bank and Trust Company (U.S.A.), as
Owner Trustee, National Westminster Bank PLC, as Agent and Lender, Media Play, Inc.,
as Tenant and the Long-Term Credit Bank of Japan, Ltd. Chicago Branch and The Yasuda
Trust & Banking Company, Ltd., Chicago Branch, as Other Lenders [ix]
10.2(c) -- Lease Guaranty dated May 12, 1995 between MGI, as Guarantor, and Media Play Trust, as
Landlord [ix]
*10.3(a) -- Subscription Agreement among MSC and the Management Investors [vi]
*10.3(b) -- Form of amendment to Management Subscription Agreement [i]
*10.4 -- Form of Registration Rights Agreement among MSC, DLJ and the Management Investors [vii]
*10.5(a) -- Employment Agreement with Mr. Eugster [vi]
*10.5(b) -- Form of amendment to Employment Agreement with Mr. Eugster [i]
*10.5(c) -- Amendment No. 2 to Employment Agreement with Mr. Eugster --
*10.6 -- Form of Employment Agreement with Messrs. Benson and Ross [vi]
*10.7(a) -- Form of Employment Agreement with Messrs. Bausman, Gaines and Henderson [vi]
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- - ----------- --------------------------------------------------------------------------------------- -----------
*10.7(b) -- Form of amendment to Employment Agreements with Messrs. Bausman, Gaines and Henderson [i]
<C> <C> <S> <C>
*10.7(c) -- Amendment No. 2 to Employment Agreement with Mr. Bausman --
*10.7(d) -- Amendment No. 2 to Employment Agreement with Mr. Gaines --
*10.7(e) -- Amendment No. 2 to Employment Agreement with Mr. Henderson --
*10.8(a) -- Change of Control Agreement with Mr. Eugster [vi]
*10.8(b) -- Form of amendment to Change of Control Agreement with Mr. Eugster [i]
*10.8(c) -- Amendment No. 2 to Change of Control Agreement with Mr. Eugster --
*10.9 -- Management Incentive Plan dated as of January 1, 1995 --
*10.10 -- 1988 Stock Option Plan, as amended [i]
*10.11 -- Stock Option Plan for Unaffiliated Directors of MSC, as amended [i]
*10.12 -- 1992 Stock Option Plan [i]
*10.13 -- Musicland Stores Corporation 1994 Employee Stock Option Plan [viii]
*10.14 -- Employment Letter Agreement with Mr. Johnson [viii]
*10.15 -- Change of Control Agreement with Mr. Johnson --
*10.16 -- Executive Deferred Compensation Plan for Mr. Johnson --
*10.17 -- Change of Control Agreement with Mr. Gaines --
11. -- Statement re computation of per share earnings [x]
21. -- Subsidiaries of MSC [ii]
23. -- Consent of Arthur Andersen LLP --
99. -- Form 11-K for The Musicland Group's Capital Accumulation Plan [xi]
</TABLE>
- - ------------------------
[i] Incorporated by reference to MSC's Form S-1 Registration Statement covering
common stock initially filed with the Commission on July 6, 1990
(Commission File No. 33-35774).
[ii] Incorporated by reference to MSC's Annual Report on Form 10-K for the year
ended December 31, 1992 filed with the Commission on March 2, 1993
(Commission File No. 1-11014).
[iii]Incorporated by reference to MGI's Registration Statement covering 9%
Senior Subordinated Notes initially filed with the Commission on May 19,
1993 (Commission File No. 33-62928).
[iv] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1994 filed with the Commission on
November 11, 1994 (Commission File No. 1-11014).
[v] Incorporated by reference to MSC's Form 8-A Exchange Act Registration
Statement covering Preferred Share Purchase Rights filed with the
Commission on March 16, 1995.
[vi] Incorporated by reference to MSC's Form S-1 Registration Statement covering
Senior Subordinated Notes initially filed with the Commission on May 20,
1988 (Commission File No. 33-22058).
[vii]Incorporated by reference to MSC's Annual Report on Form 10-K for the year
ended December 31, 1993 filed with the Commission on March 25, 1994
(Commission File No. 1-11014).
[viii]
Incorporated by reference to MSC's Annual Report on Form 10-K for the year
ended December 31, 1994 filed with the Commission on March 27, 1995
(Commission File No. 1-11014).
[ix] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the
quarter period ended June 30, 1995 filed with the Commission on August 11,
1995 (Commission File No. 1-11014).
35
<PAGE>
[x] Earnings per common share amounts are computed by dividing net earnings
applicable to common stockholders by the weighted average number of common
shares outstanding, after giving retroactive effect to the four-for-one
stock split that occurred in connection with the Company's initial public
offering in 1992. Common stock equivalents related to stock options which
would have a dilutive effect based upon the 1992 initial public offering
price or current market prices had no effect on net earnings per common
share in each of the years presented in the Company's Consolidated
Statements of Earnings and, accordingly, this exhibit is not applicable to
the Company.
[xi] To be filed by amendment.
* Indicates Management Contract or Compensatory Plan or Agreement required to
be filed as an Exhibit to this form.
36
<PAGE>
EXHIBIT 10.5(c)
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
WITH JACK W. EUGSTER
(formerly titled "Agreement")
AMENDMENT dated November 27, 1995 to the Employment Agreement ("the
Employment Agreement", formerly titled Agreement) dated as of August 25, 1988 by
and among The Musicland Group, Inc., a Delaware corporation (the "Company"),
Musicland Stores Corporations, a Delaware corporation (the "Parent") and Jack W.
Eugster (the "Executive").
WHEREAS, the Board of Directors, on behalf of the Company and the Parent,
and the Executive have determined it to be in their mutual best interests to
amend the Employment Agreement in certain respects:
NOW, THEREFORE, BE IT RESOLVED, that the Employment Agreement shall be
amended as follows:
1. Section 3, COMPENSATION, is amended by deleting the salary of "$315,000" in
subparagraph (a) and inserting in its place "$515,000.
2. Section 3, COMPENSATION, is further amended by adding to subparagraph
(b)(iii) the words "and other subsequent Stock Plans" after the word
"Plan."
3. Section 9, REDUCTION FOR EQUITY APPRECIATION, is hereby deleted in its
entirety and is no longer of any force or effect.
4. Section 19, NOTICES, is amended by deleting Jack W. Eugster's home address
of "6300 Knoll Drive, Edina, MN 55436" and inserting in its place
"2655 Kelly Avenue, Excelsior, MN 55331."
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment of
Employment Agreement as of the date set forth above.
THE MUSICLAND GROUP, INC.
By: /s/ Michael W. Wright
----------------------------------
Its: Chairman, Compensation Committee
----------------------------------
MUSICLAND STORES CORPORATION
By: /s/ Michael W. Wright
----------------------------------
Its: Chairman, Compensation Committee
----------------------------------
EXECUTIVE
/s/ Jack W. Eugster
-----------------------------------
Jack W. Eugster
<PAGE>
EXHIBIT 10.7(c)
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
WITH BRUCE B. BAUSMAN
(formerly titled "Agreement")
AMENDMENT dated November 27, 1995 to the Employment Agreement ("the
Employment Agreement", formerly titled Agreement) dated as of August 25, 1988 by
and among The Musicland Group, Inc., a Delaware corporation (the "Company"),
Musicland Stores Corporations, a Delaware corporation (the "Parent") and Bruce
B. Bausman (the "Executive").
WHEREAS, the Board of Directors, on behalf of the Company and the Parent,
and the Executive have determined it to be in their mutual best interests to
amend the Employment Agreement in certain respects:
NOW, THEREFORE, BE IT RESOLVED, that the Employment Agreement shall be
amended as follows:
1. Section 3, COMPENSATION, is amended by deleting the salary of "$130,000" in
subparagraph (a) and inserting in its place "$188,670."
2. Section 9, REDUCTION FOR EQUITY APPRECIATION, is hereby deleted in its
entirety and is no longer of any force or effect.
3. Section 19, NOTICES, is amended by deleting Bruce B. Bausman's home address
of "21800 Byron Circle South, Greenwood, MN 55331 and inserting in its
place "1381 County Road 2401, Silverthorn, CO 80498."
<PAGE>
EXHIBIT 10.7(c)
IN WITNESS WHEREOF, the undersigned have executed this Amendment of
Employment Agreement as of the date set forth above.
THE MUSICLAND GROUP, INC.
By: \S\ JACK W. EUGSTER
---------------------------
Its: Chairman
--------------------------
MUSICLAND STORES CORPORATION
By: \S\ JACK W. EUGSTER
---------------------------
Its: Chairman
-------------------------
EXECUTIVE
\S\ BRUCE B. BAUSMAN
------------------------------
Bruce B. Bausman
<PAGE>
EXHIBIT 10.7(d)
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
WITH LARRY C. GAINES
(formerly titled "Agreement")
AMENDMENT dated November 27, 1995 to the Employment Agreement ("the
Employment Agreement", formerly titled Agreement) dated as of August 25, 1988 by
and among The Musicland Group, Inc., a Delaware corporation (the "Company"),
Musicland Stores Corporations, a Delaware corporation (the "Parent") and Larry
C. Gaines (the "Executive").
WHEREAS, the Board of Directors, on behalf of the Company and the Parent,
and the Executive have determined it to be in their mutual best interests to
amend the Employment Agreement in certain respects:
NOW, THEREFORE, BE IT RESOLVED, that the Employment Agreement shall be
amended as follows:
1. Section 1, TERM OF EMPLOYMENT; OFFICE AND DUTIES, is amended by deleting
the title "Senior Vice President of Stores - Eastern and Central Division"
as it appears in subparagraph (a) thereof, and inserting in its place
"President, Media Play Division."
2. Section 3, COMPENSATION, is amended by deleting the salary of "$120,000" in
subparagraph (a) and inserting in its place "$257,400."
3. Section 9, REDUCTION FOR EQUITY APPRECIATION, is hereby deleted in its
entirety and is no longer of any force or effect.
4. Section 19, NOTICES, is amended by deleting Larry C. Gaines' home address
of "Three Hudson Court, West Windsor, NJ 08512" and inserting in its place
"5935 Boulder Bridge Lane, Shorewood, MN 55331."
<PAGE>
EXHIBIT 10.7(d)
IN WITNESS WHEREOF, the undersigned have executed this Amendment of
Employment Agreement as of the date set forth above.
THE MUSICLAND GROUP, INC.
By: \S\JACK W. EUGSTER
-------------------
Its: Chairman
MUSICLAND STORES CORPORATION
By: \S\JACK W. EUGSTER
----------------------
Its: Chairman
EXECUTIVE
\s\LARRY C. GAINES
-----------------------
Larry C. Gaines
<PAGE>
EXHIBIT 10.7(e)
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
WITH ROBERT A. HENDERSON
(formerly titled "Agreement")
AMENDMENT dated November 27, 1995 to the Employment Agreement ("the
Employment Agreement", formerly titled Agreement) dated as of August 25, 1988 by
and among The Musicland Group, Inc., a Delaware corporation (the "Company"),
Musicland Stores Corporations, a Delaware corporation (the "Parent") and Robert
A. Henderson (the "Executive").
WHEREAS, the Board of Directors, on behalf of the Company and the Parent,
and the Executive have determined it to be in their mutual best interests to
amend the Employment Agreement in certain respects:
NOW, THEREFORE, BE IT RESOLVED, that the Employment Agreement shall be
amended as follows:
1. Section 3, COMPENSATION, is amended by deleting the salary of "$115,000" in
subparagraph (a) and inserting in its place "$173,290."
2. Section 9, REDUCTION FOR EQUITY APPRECIATION, is hereby deleted in its
entirety and is no longer of any force or effect.
<PAGE>
EXHIBIT 10.7(e)
IN WITNESS WHEREOF, the undersigned have executed this Amendment of
Employment Agreement as of the date set forth above.
THE MUSICLAND GROUP, INC.
By: \S\ JACK W. EUGSTER
--------------------
Its: Chairman
-------------------
MUSICLAND STORES CORPORATION
By: \S\ JACK W. EUGSTER
--------------------
Its: Chairman
------------------
EXECUTIVE
\S\ ROBERt A. HENDERSON
-----------------------
Robert A. Henderson
<PAGE>
EXHIBIT 10.8(c)
SECOND AMENDMENT TO CHANGE OF CONTROL AGREEMENT
OF JACK W. EUGSTER
AMENDMENT dated as of November 27, 1995 to the Change of Control Agreement
(the "Change of Control Agreement" formerly called Employment Agreement) dated
as of August 25, 1988 and as amended January 22, 1992, by and among The
Musicland Group, Inc., a Delaware corporation (the "Company"), Musicland Stores
Corporation, a Delaware corporation (the "Parent") and Jack W. Eugster of
Excelsior, Minnesota (the "Executive").
WHEREAS, the Board of Directors, on behalf of the Company and the Parent,
and the Executive have determined it to be in their mutual best interests to
amend the Change of Control Agreement in certain respects;
NOW, THEREFORE, BE IT RESOLVED, that the Change of Control Agreement shall
be amended as follows:
1. Paragraph 1.02, "Change of Control"," subparagraph (a) is amended by
deleting "30%" and inserting in its place "20%."
2. Paragraph 1.02, "Change in Control" is amended by deleting subparagraph (b)
thereof and inserting in its place the following new subparagraph (b):
"(b) a majority of the directors of the Company or the Parent are persons
other than persons (i) for whose election proxies have been solicited
by the Board of Directors of the Company or the Parent, or (ii) who
are then serving as directors appointed by the Board of Directors of
the Company or the Parent to fill vacancies on the applicable Board of
Directors caused by death or resignation (but not by removal) or to
fill newly-created directorships, but excluding for purposes of this
clause (ii) any such individual whose initial assumption of office
occurs as a result of either an actual or threatened election contest
(as such terms are used in Rule 14a-11 of Regulation 14A promulgated
under the Securities Exchange Act of 1934) or other actual or
threatened solicitation of proxies or consents, or"
3. Paragraph 2.01 of Section 2, EMPLOYMENT; PERIOD OF EMPLOYMENT, is amended
by inserting, after the word, "subsidiary" the words "or affiliate".
4. Paragraph 4.01 of Section 4, COMPENSATION; COMPENSATION PLANS, PERQUISITES,
is amended by deleting the salary of $315,000" in clause (i) thereof and
inserting in its place "$515,000."
5. Paragraph 10.01 of Section 10, MINIMUM SEVERANCE PERIOD, is amended by
deleting subparagraph (ii)(C) of the definition of "Severance Period" in
its entirety and is no longer of any force or effect.
6. Section 11, REDUCTION FOR EQUITY APPRECIATION, is hereby deleted in its
entirety and is no longer of any force or effect.
<PAGE>
EXHIBIT 10.8(c)
7. Paragraph 12.02 of Section 12, JOINT AND SEVERAL LIABILITY; TRUST
AGREEMENT, relating to establishment of a trust, is amended by adding the
following words at the end of that paragraph:
"; provided, however, that Executive may request that such trust be
established at any time on or after the date a Change in Control occurs and
prior to the date all amounts to which Executive is or may become entitled
from such trust have been paid to Executive."
IN WITNESS WHEREOF, the undersigned have executed this Second Amendment of
Change of Control Agreement as of the date set forth above.
THE MUSICLAND GROUP, INC.
By: /s/ Michael W. Wright
----------------------------------
Its: Chairman, Compensation Committee
---------------------------------
MUSICLAND STORES CORPORATION
By: /s/ Michael W. Wright
----------------------------------
Its: Chairman, Compensation Committee
---------------------------------
EXECUTIVE
/s/ Jack W. Eugster
----------------------------------
Jack W. Eugster
<PAGE>
EXHIBIT 10.9
THE MUSICLAND GROUP
MANAGEMENT INCENTIVE PLAN
JANUARY 1, 1995
I. PURPOSE
The Management Incentive Plan (the "Plan") is designed to reward
participants who make significant contributions to the success of
The Musicland Group (the "Company"). The Plan recognizes the importance
of individual contributions to Company performance. Awards under this
Plan take into consideration such factors as the importance and impact
of each participant's accomplishments, the relative difficulty and the
degree of risk involved in those accomplishments, as well as Company
performance.
II. ADMINISTRATION
The Plan is administered by the Compensation Committee of the Company's
Board of Directors (the "Compensation Committee"). In the absence of a
designated Compensation Committee, the Board as a whole will act as the
Compensation Committee. The Chief Executive Officer of the Company
(the "CEO") shall make recommendations to the Compensation Committee
regarding participation, level of awards, changes to the Plan, annual
funding percentages, and other aspects of the Plan's administration.
The Compensation Committee has the authority to interpret the Plan, and,
subject to the Plan's provisions, to make and amend rules and to make all
other decisions necessary for the Plan's administration. Specifically,
the Compensation Committee has the authority to approve funding
percentages and to approve individual awards for participants whose base
salary is equal to or greater than an amount to be designated by the
Compensation Committee. The CEO has the authority to approve individual
awards for participants whose base salary is less than the designated
amount.
Each Plan Year will run from January 1 through the following December 31
(the "Plan Year").
III. PARTICIPATION
The CEO will recommend for approval by the Compensation Committee the
individuals who are eligible to participate in the Plan, and their level
of participation. All eligible participants will be given the funding
for their participation level and a copy of this Plan.
IV. INCENTIVE COMPENSATION MEASURES
Early each year the Compensation Committee will approve the business
goals on which incentive funds (the funding pool) will be made available
for awards to participants for such year, as well as a performance range
above and below such goals, and the amounts to be made available for such
awards at each level of business performance. The percentage funding is
a separate and distinct calculation from the determination of individual
awards (see V. below).
<PAGE>
1995 Management Incentive Plan
Actual business results for the year and their relation to such
pre-established ranges shall determine the amounts, if any, to be made
available for awards to designated participants. The actual business
results will be provided by the Chief Financial Officer. The
Compensation Committee may approve adjustments to actual business results
to reflect organizational, operational, or other changes which have
occurred during the year, e.g., acquisitions, dispositions, expansions,
contractions, material non-recurring items of income or loss, or events
which might create unwarranted hardships or windfalls to participants.
The Compensation Committee will also determine the discretionary
incentive funds, if any, to be made available for awards to participants
based on their individual performance, such awards not to be contingent
upon the attainment of business goals.
V. DISTRIBUTION OF THE FUNDING POOL
The Compensation Committee approves the percentage of the funding pool to
be distributed each year. Up to, but no more than, 100% of the funding
pool can be approved for distribution.
Individual awards for participants whose base salary is equal to or
greater than an amount to be designated by the Compensation Committee
will be recommended by the CEO to the Compensation Committee for final
approval. Individual awards for participants whose base salary is below
the designated amount will be approved by the CEO.
Individual awards will be determined on the basis of 1) actual Company
performance compared to target business goals and/or 2) individual
performance compared to the individual's objectives. Awards will be
directly related to each participant's contribution, considering such
factors as importance and impact of accomplishments as well as the
difficulty and degree of risk involved in those accomplishments.
Individual awards may be less or greater than the percent funding since
awards are directly related to individual contributions. Eligible salary
is the employee's cumulative base salary earned while a participant in
the Plan during the Plan Year. In determining the base salary earned
during the Plan Year any delay in the receipt of a salary increase from
the customary date of increase will be ignored, and the Participant will
be deemed to have received the increase on the customary date. No
minimum award amount is guaranteed, as the Plan is not intended to
provide awards for marginally satisfactory performance and the Plan makes
no guarantee that individual bonuses will be equal to the Plan funding
percentage.
VI. PAYMENT OF AWARDS
Awards will consist of two parts, a cash payment and a deferred award, as
follows:
A. Eighty percent (80%) of the award will be paid in cash, less
applicable tax and FICA withholding, during the quarter following
the close of the plan year. It will be paid as soon as 1) the Company
performance results are available, 2) individual achievements against
objectives have been determined and 3) all approvals have been
obtained.
Page 2 of 6
<PAGE>
B. Twenty percent (20%) of the award will be made in the of a growth
participation deferral which will increase or decrease in value over
a four year deferral period as described below, proportionately to
the increase or decrease in book value of The Musicland Group.
(Note, this deferral is not the same as ownership in TMG, Inc. but
will grow proportionally with the growth of the company.)
For example: a participant whose total bonus for the 1995 Plan Year
is $10,000 will receive in the first quarter of 1996 a cash payment of
$8,000 (less applicable tax and FICA withholding) and will receive a
deferral award with a total value of $2,000 as of 1-1-95 (the
beginning of the plan year).
All deferral awards must be held to maturity before payment is made in
accordance with the following schedule and rules:
1. MATURITY OF THE AWARD -- Twenty five percent of your deferral award
will mature in four equal annual increments with the first
increment maturing on the first anniversary date of the end of the
Plan Year for which the award is made and subsequent increments
maturing on the three succeeding anniversary dates (said four year
period being the "Deferral Period"). Each matured portion of the
deferred award will be paid out during the first quarter following
the date maturity is reached, as soon as the then current book
value has been calculated and approved.
For example: if a participant receives a deferred bonus award for
the Plan Year ending 12-31-95, the award will mature and be paid
out in increments of twenty five percent (25%) as follows:
% Matured and
Date Matured To Be Paid Out
------------ --------------
12-31-95 None
12-31-96 25% of the deferral award in 1st Q 1997
12-31-97 25% of the deferral award in 1st Q 1998
12-31-98 25% of the deferral award in 1st Q 1999
12-31-99 25% of the deferral award in 1st Q 2000
2. ELIGIBILITY OF RECEIPT -- If employment is terminated for any
reason during the Deferral Period (and even if the participant
is later re-employed prior to the end of the Deferral Period),
all non-matured portions of the original deferral amount at the
time of termination are forfeited; except that in the event
termination is due to retirement, disability, death, disposition
of a portion of the business or transfer to an ineligible position,
payout may continue according to the original schedule or may be
made on an accelerated basis, either at the discretion of the CEO.
In both cases the CEO shall determine the method of valuation of
such matured or non-matured portions of the deferral award prior to
pay out.
Page 3 of 6
<PAGE>
1995 Management Incentive Plan
3. CALCULATION OF EACH MATURED AWARD -- The then current value of
your deferral award will be determined on an annual basis during
Deferral Period based upon changes in the "book value" of the
Company from the end of the fiscal year immediately preceding the
Plan Year.
BOOK VALUE as used in this Plan for the calculation of the value
of your matured deferral payment is a separate and distinct concept
and will not necessarily be the same as a book value which could be
derived from the Company's financial records for other purposes.
For the purposes of this Plan, Book Value will increase with year
end net income and will decrease with year end net losses, paid out
dividends, or paid-in capital. Said Book value may be adjusted for
plan purposes to exclude any such dividends or paid in capital as
well as to reflect extraordinary events or extraneous accounting
adjustments. The Book Value at each year end will be determined by
the Chief Financial Officer, reviewed by the Company's outside
auditors and approved by the Board of Directors. Once the Book
Value has been approved by the Board of Directors, it cannot be
challenged. In the event of a public offering of common stock or a
re-capitalization, any non-matured portion of your deferral will be
re-valued so as to prevent a hardship or windfall to participants.
The amount of each matured increment will be calculated based on
the Company's increased or decreased book value at the end of each
year during the deferral period. For the purposes of determining
each deferral payout, we will establish a growth ratio by comparing
the then current book value with the book value of the company on
the beginning of the plan year. Twenty-five percent of your
original deferral times the growth ratio will be paid out during
the 1st quarter of the year following the date of maturity. This
calculation will occur four times during the deferral period as
each quarter of your performance deferral matures:
Calculation:
------------
Current Book Value
------------------
Original Deferral Amount Base Book Value X .25 = payout
For example: for Plan Year 1989 the deferred portion of a
participant's award is $2,000. For the year end 12-31-88, the Book
Value of the Company was 40MM. For the year end 12-31-90 (the
first time a portion of your award matures) the Book Value of the
Company is 50MM. The ratio of change in Book Value is 1.25 (50MM
divided by 40MM), and, therefore, the value of your original
deferral for purposes of calculating a payout on 12-31-90 is
$2,500. Your subsequent payout would be $625 (25% of $2,500).
Continuing the example, the Book Value of the Company at year end
12-31-91 is now 60MM. The ratio of change in Book Value is now
1.50 (60MM divided by 40MM) and therefore the value of your
original deferral is $3,000 and your payout would be $750. If the
Book Value at year end 12-31-91 has instead declined to 30MM, the
ratio of change would be .75 (30MM divided by 40MM), and the value
of your deferral would be $1,500 (or a $375 payout).
Page 4 of 6
<PAGE>
1995 Management Incentive Plan
4. Treatment of the 1992 IPO -- The 1992 public offering resulted in
an extraordinary change in the Company's book value. Consequently,
growth for all plan years will be calculated through 12/31/92
using interest and equity adjustments to factor out the effect of
the IPO. Growth subsequent to 1/1/93 will use the actual book
value reflecting the increased IPO equity.
5. There is no guarantee of the value of your deferral, as the value
will fluctuate in accordance with the Company's performance, or
even that any award will be paid since deferred compensation is
subordinate to the claims of creditors in the event of bankruptcy.
6. The Company reserves the right to cancel deferred payment awards at
any time after they have been granted and for any reason. At the
time of cancellation, the value of any non-matured deferral
increments will be updated based upon the Book Value of the Company
at that time (seasonally adjusted for a partial year). The current
value of the remaining increments, or the value of remaining
increments at the previous year end, whichever is higher, will then
be paid out whether such increments have matured or not.
7. All payments under the deferral program will be made in cash, less
applicable tax and FICA withholding, and will be considered income
in the year paid out. As an exception to the foregoing, and at the
Company's option, at the time of maturity any unpaid deferral
increments could be converted into an appropriate number of shares
of the publicly traded stock which would be issued to the
participant. The conversion formula for such an exchange would be
recommended by the Chief Financial Officer, reviewed by the
Company's outside auditors, and approved by the Board of Directors.
Once a conversion formula is approved, it cannot be challenged.
VII. AWARD CONDITIONS
A. Employees hired or promoted into eligible positions on or before
September 30 of the Plan Year will be eligible to participate in
the Plan. Employees hired or promoted into eligible positions
after September 30 may be eligible to participate upon approval
by the CEO. In both cases, participation in the Annual Plan will
be on a pro-rated basis, determined by the number of full weeks
of employment in an eligible position.
B. A participant who is promoted, at any time other than at the beginning
of a Plan Year, into a position which calls for a higher participation
level will be eligible to receive an award for that Plan Year which is
a combination of pro-rated awards calculated at the two participation
levels.
Page 5 of 6
<PAGE>
1995 Management Incentive Plan
C. A participant whose employment ends prior to December 31st of a Plan
Year due to retirement, disability, death, or disposition of part of
the business, or who is transferred to an ineligible position prior to
December 31st of a Plan Year, may be eligible for a pro-rated annual
award for that Plan year, determined by the number of full weeks of
employment in an eligible position, upon approval by the CEO.
D. A participant whose employment terminates prior to December 31st of a
Plan Year for reasons other than those listed in C above will not be
eligible for any award for that Plan Year.
E. A participant whose employment terminates after December 31st of a
Plan Year, but prior to the payment of awards, may be eligible for an
award for that Plan Year upon approval by the CEO.
F. A participant who is on an approved unpaid leave of absence during a
Plan Year may be eligible for a pro-rated award for that Plan Year
upon approval by the CEO. A participant who is on an approved paid
medical leave of absence during a Plan Year may be eligible for either
a pro-rated or full award for that Plan Year upon approval by the CEO.
G. If an increase in company book value occurs during any period when the
participant is on an approved leave of absence (paid or unpaid), such
increase (for purposes of calculating any portions of the matured
deferral) may be adjusted downward at the CEO's sole discretion.
H. Wherever in this Plan the CEO is given the authority to approve a
participant's eligibility for a full or partial award, or to approve
the pay out of any matured deferral increment, such approvals may be
made at his sole discretion.
VIII. GENERAL PROVISIONS
A. This Plan does not guarantee, explicitly or implicitly, the right to
continued employment for participants.
B. MIP awards will be pensionable earnings under the 1989 pension plan.
Legislation in effect at the time the award is approved will govern
how much of the MIP awards are pensionable or non-pensionable
earnings. Awards will be included in pensionable earnings in the year
they are paid.
C. This Plan can be terminated or its provisions changed at any time by
the Compensation Committee of the Board of Directors acting upon the
recommendation of the CEO.
Page 6 of 6
t:\users\persnl\kim\mip\tmg95.doc
1995 Management Incentive Plan
Page 6 of 6
<PAGE>
EXHIBIT 10.15
CHANGE OF CONTROL AGREEMENT
between
THE MUSICLAND GROUP, INC.,
MUSICLAND STORES CORPORATION
and
REID JOHNSON
dated as of November 27, 1995
<PAGE>
EXHIBIT 10.15
TABLE OF CONTENTS
Page
----
1. Operation of Agreement . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Employment; Period of Employment . . . . . . . . . . . . . . . . . . . 4
3. Position, Duties, Responsibilities . . . . . . . . . . . . . . . . . . 5
4. Compensation, Compensation Plans, Perquisites. . . . . . . . . . . . . 6
5. Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . 8
6. Retirement Program . . . . . . . . . . . . . . . . . . . . . . . . . . 9
7. Effect of Death or Disability. . . . . . . . . . . . . . . . . . . . . 9
8. Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
9. Offset of Compensation and Benefits from Subsequent Employment . . . . 15
10. Minimum Severance Payment. . . . . . . . . . . . . . . . . . . . . . . 16
11. Joint and Several Liability; Trust Agreement . . . . . . . . . . . . . 18
12. Discount Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
13. Potential Excise Taxes . . . . . . . . . . . . . . . . . . . . . . . . 19
14. Indemnification and Insurance; Legal Expenses. . . . . . . . . . . . . 21
15. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
16. General Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . 23
<PAGE>
EXHIBIT 10.15
CHANGE OF CONTROL AGREEMENT
CHANGE OF CONTROL AGREEMENT ("Agreement"), dated as of November 27,
1995 among THE MUSICLAND GROUP, INC., a Delaware corporation (the "Company"),
MUSICLAND STORES CORPORATION, a Delaware corporation (the "Parent") and REID
JOHNSON (the "Executive").
WITNESETH:
WHEREAS:
A. The Executive is one of the principal officers of the Company and
an integral part of its management.
B. The Company wishes to assure itself and the Executive of
continuity of management in the event of any actual or threatened Change in
Control of the Company as hereafter defined.
C. This Agreement is not intended to alter materially the
compensation and benefits that the Executive could reasonably expect in the
absence of a Change in Control of the Company or the Parent (as hereinafter
defined) and, accordingly, this Agreement, though taking effect upon execution
hereof, will be operative only upon a Change in Control and as set forth in
paragraph 1.01 of this Agreement.
NOW, THEREFORE, it is hereby agreed by and between the parties as
follows:
1. OPERATION OF AGREEMENT
1.01 (a) This Agreement shall be effective immediately but shall not
be operative unless and until there has been a Change in Control, as defined in
Paragraph 1.02, while the Executive is in the employ of the Company. For
purposes of this paragraph, such termination of employment of Eugster shall be
deemed to have occurred as of the date the notice of termination
<PAGE>
EXHIBIT 10.15
is delivered to the Company or Eugster, as the case may be, in accordance with
the terms of his employment agreement then operative and not the date stated in
such notice as the date of termination as defined therein. Upon the date of a
Change in Control, this Agreement shall become operative immediately.
1.02 "Change in Control" shall mean, except as provided in
subparagraph (e) below, a change in control of the Company or the Parent that
shall be deemed to have occurred if and when:
(a) while the Company or the Parent maintains a class or series of
equity securities that are registered under the Securities Exchange Act of 1934
and are publicly traded on a recognized securities exchange, any person (as such
term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934) shall become the beneficial owner, directly or indirectly, of 20% or more
of the common stock of the Company or the Parent, or
(b) a majority of the directors of the Company or the Parent are
persons other than persons (i) for whose election proxies have been solicited by
the Board of Directors of the Company or the Parent, or (ii) who are then
serving as directors appointed by the Board of Directors of the Company or the
Parent to fill vacancies on the applicable Board of Directors caused by death or
resignation (but not by removal) or to fill newly-created directorships, but
excluding for purposes of this clause (ii) any such individual whose initial
assumption of office occurs as a result of either an actual or threatened
election contest (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Securities Exchange Act of 1934) or other actual or
threatened solicitation of proxies or consents, or
(c) the Company's or the Parent's, or at least 70% of the Company's
or the Parent's, assets are sold and transferred to another corporation or other
enterprise that is not a
2
<PAGE>
EXHIBIT 10.15
subsidiary, direct or indirect, or other affiliate of the Company or the Parent,
if such other enterprise does not make arrangements with the Executive
satisfactory to the Executive for his employment by such other enterprise, or
(d) the Board of Directors of the Company or the Parent determines,
by a vote of a majority of its entire membership, that a tender offer initiated
by any person (as defined in subparagraph l.02(a) above) indicates an intention
on the part of such person to acquire control of the Company or the Parent and
there is a substantial likelihood that such tender offer will result in a Change
in Control. Should any tender offer for shares of the Company or the Parent be
initiated, the Board of Directors of the Company or the Parent, as the case may
be, shall vote upon whether, in the good faith judgment of the Board, a
substantial likelihood exists that such tender offer will result in a Change in
Control.
(e) No Change in Control shall be deemed to have occurred under
subparagraph 1.02(c) or (d) above if:
(i) the Company or the Parent is a debtor pursuant to a written loan
agreement of the person so described in such subparagraph and
(ii) either:
(A) the right to nominate or elect directors by such person
results from an event of default under a then operative provision of
such loan agreement, or
(B) the acquisition of securities described in such
subparagraphs by such person results from a foreclosure by such person
under a then operative provision of such loan agreement following an
event of default, or
(C) the acquisition of securities described in such
subparagraphs by such person is pursuant to a plan of reorganization
under the bankruptcy laws of the United States.
For a period of 60 days following the date on which a Change in Control occurs,
the Executive agrees to perform for the Company each and every one of his duties
in effect immediately prior to the Change in Control as described in paragraph
3.01.
3
<PAGE>
EXHIBIT 10.15
1.03 If there is a Change in Control of the type described in
paragraph l.02(c), the Executive may elect to terminate the Period of Employment
hereunder by giving written notice to the Company of his decision to terminate
pursuant to this paragraph 1.03 within 30 days following the applicable sale or
transfer, which termination shall be effective as of the 90th day following the
date such notice is given or such earlier date as the Company may specify in a
written notice given to the Executive. Any termination of the Period of
Employment pursuant to this paragraph 1.03 shall be deemed a termination without
Cause pursuant to the Executive's employment agreement dated as of July 25, 1994
(the "Prior Agreement"), as the same may have been amended to the date of such
termination and the obligation set forth therein shall be and remain those of
the Company (i.e., The Musicland Group, Inc.) and the Parent (i.e., Musicland
Stores Corporation) prior to such sale or transfer and shall not be otherwise
assignable.
2. EMPLOYMENT; PERIOD OF EMPLOYMENT.
2.01 The Company shall employ the Executive, and the Executive
shall serve the Company, for the period set forth in paragraph 2.02 (the "Period
of Employment"), in the position and with the duties and responsibilities set
forth in Section 3, and upon the other terms and conditions hereinafter stated.
Employment by a subsidiary or affiliate of the Company at the Company's request
and with the Executive's consent shall constitute employment by the Company
within the terms of this Agreement.
2.02 The Period of Employment shall commence on the date of a
Change in Control and, subject only to the provisions of Section 7 relating to
death or Disability and of paragraph 8.04 relating to termination for Cause,
shall continue until the close of business on the last business day of the 24th
calendar month following such Change in Control; provided, that on the last
business day of the 12th calendar month following such Change in Control and on
each
4
<PAGE>
EXHIBIT 10.15
anniversary of such date thereafter, the Period of Employment shall be
automatically extended by one additional year to the second subsequent such
anniversary, but in no event shall the Period of Employment extend beyond the
first day of the month next succeeding the month in which the Executive shall
attain his 65th birthday) unless prior to the last business day of the 6th
calendar month following such Change in Control, or any subsequent 12-month
anniversary of such date thereafter, the Company shall deliver to the Executive
or the Executive shall deliver to the Company written notice that the Period of
Employment will not be extended, in which case the Period of Employment will end
at the expiration of the then-existing Period of Employment hereunder, including
any previous extension, and shall not be further extended except by agreement by
the Company and the Executive.
3. POSITION, DUTIES, RESPONSIBILITIES
3.01 (a)It is contemplated that during the Period of Employment the
Executive shall serve in the position and have the duties and responsibilities
as Executive Vice President and Chief Financial Officer or such other senior
executive capacity with substantially the same nature and quality as those of
the position of Executive Vice President and Chief Financial Officer, as the
Company may from time to time determine.
(b) During the Period of Employment, the Executive
(i) shall hold a position of responsibility, importance and
scope at least equal to his position referred to in subparagraph
3.01(a),
(ii) shall, without compensation other than that herein provided,
serve as an officer and director of any subsidiary or affiliate,
provided the Executive has determined in his sole discretion that such
service does not entail undue risk to the Executive in light of the
financial condition of such subsidiary or affiliate and the extent of
officers' and directors' liability insurance applicable to such
service, and
(iii) shall devote substantially all of his time, best efforts
and undivided attention during normal business hours to the business
and affairs of the Company and its subsidiaries except for reasonable
vacations and except for illness or incapacity, but nothing in this
Agreement shall preclude the Executive from devoting reasonable
periods required for
5
<PAGE>
EXHIBIT 10.15
(A) serving as a director or member of a committee of
any organization or company involving no conflict of interest
with the Company,
(B) delivering lectures, fulfilling speaking engagements,
teaching at educational institutions,
(C) engaging in charitable and community activities,
and
(D) managing his personal investments;
provided that such activities do not materially interfere with the
performance of his duties hereunder.
3.02 The Executive's office shall be located in the Minneapolis,
Minnesota metropolitan area. He shall not be required, without his written
consent, to locate his office more than 20 miles distant by public highway from
his office immediately prior to the Change in Control or to be absent therefrom
on business more than 60 working days in any year or more than 14 consecutive
days at any one time.
4. COMPENSATION, COMPENSATION PLANS, PERQUISITES
4.01 For all services rendered during the Period of Employment, the
Executive shall receive:
(i) a salary, payable no less often than monthly, at the annual
rate of $286,000 or the rate of monthly salary of the Executive paid
prior to the Change in Control, whichever is higher, subject to such
periodic increases as shall be awarded in accordance with the
Company's regular administrative practices of salary increases
applicable to executives in effect prior to the Change in Control, and
(ii) an annual award under the Company's Management Incentive Plan,
or a plan with substantially equivalent incentives and benefits that
may be adopted by the Company, for each calendar year, or portion
thereof, during the Period of Employment, which shall be payable as
soon as practicable after the end of such calendar year and shall be
equal to a percentage of the annual salary payable to the Executive
for such calendar year determined on the basis of the monthly salary
payable to the Executive as of the beginning of such calendar year
under clause (i) of this paragraph (after adjustment to reflect any
increase therein awarded by the Company under clause (i)). Such
percentage shall be the lesser of (A) 35% or (B) the average of the
percentages, for each of the three preceding calendar years (or such
lesser number of years that the Executive has been a participant in
the plan), that result from dividing the Executive's annual award
under the Management Incentive Plan (or its successor) for such year
by the Executive's annual salary for that year.
6
<PAGE>
EXHIBIT 10.15
Increases in salary and annual awards under this Agreement or otherwise shall
not diminish any other obligation of the Company hereunder.
4.02 (a)During the Period of Employment, the Executive shall
continue to be a full participant in the performance awards and stock incentive
aspects of the Company's Long-Term Incentive Plan and any other long-term
incentive plans of the Company (provided that Executive was a participant in
such plan or plans immediately prior to the Change in Control), and shall also
be a participant in any and all other executive incentive plans in which
executives of the Company participate that are in effect for Executive
immediately prior to a Change in Control, or any amended or successor plans with
at least as favorable terms that may be substituted and that may hereafter be
adopted, including, without limitation, any plan relating to stock options,
stock appreciation rights, restricted stock and deferred stock awards, or
equivalent successor plans that may be adopted by the Company with at least the
same reward opportunities that have heretofore been provided and with such
improvements in such plans or other plans as may from time to time be made in
accordance with the present practices of the Company.
(b) Upon a Change in Control, the right to exercise any and all
stock options to purchase shares of the Company's or Parent's stock and any
stock appreciation rights held by the Executive shall, to the extent that such
options and rights shall not theretofore have been exercised, become fully
vested and exercisable immediately, all restrictions upon any restricted stock
previously granted to the Executive shall be deemed to have lapsed, the deferral
period and all conditions pertaining to any deferred stock awards previously
granted to the Executive shall be deemed to have expired or have been satisfied,
as the case may be, and the Executive shall be entitled to receive all such
shares of restricted or deferred stock. All restricted stock and all deferred
stock awards granted to the Executive on or after the date hereof shall be
awarded subject
7
<PAGE>
EXHIBIT 10.15
to the conditions described in the immediately preceding sentence. All options
issued or awarded to the Executive on or after the date hereof shall contain the
following provision:
Notwithstanding anything herein contained to the contrary, in the
event that a Change in Control, as defined in Paragraph l.02 of the
Optionee's Employment Agreement with the Company dated as of November
27, 1995 should occur and such Agreement becomes operative as provided
in Paragraph 1.01, this Option shall immediately thereafter become
exercisable in full.
4.03 During the Period of Employment the Executive shall be
entitled to perquisites and to fringe benefits in each case at least equal to
those attached to his office immediately prior to a Change in Control, as well
as to reimbursement, upon proper accounting of reasonable expenses and
disbursements incurred by him in the course of his duties.
4.04 The compensation provided for in this Section 4, together with
other matters therein set forth, is in addition to the benefits provided for in
Sections 5 and 6.
5. EMPLOYEE BENEFIT PLANS
5.01 The Executive shall be entitled to all payments, benefits and
service credit for benefits during the Period of Employment to which Company
officers are entitled, immediately prior to a Change in Control, as a result of
their employment under the terms of employee plans and practices of the Company,
other than the Retirement Program, for which specific provision is made in
Section 6, but including, without limitation,
(i) the Company's Capital Accumulation Plan,
(ii) its death benefit plans (consisting of its Group Life
Insurance Plan and accidental death and dismemberment insurance),
(iii) its disability benefit plans (consisting of its short-term
salary continuation, short-term disability and long-term disability
plans),
(iv) its senior officer medical, dental, health and welfare plans,
and
(v) other present or equivalent successor plans and practices of
the Company for which officers are eligible, and to all payments or
other benefits under any such plan or
8
<PAGE>
EXHIBIT 10.15
practice subsequent to the Period of Employment as a result of
participation in such plan or practice during the Period of Employment.
5.02 Nothing in this Agreement shall preclude the Company from
amending or terminating any particular employee benefit plan or practice,
provided that the Executive shall continue to be entitled during the Period of
Employment to perquisites as set forth in paragraph 4.03 and to benefits and
service credit for benefits under paragraph 5.01 at least as favorable to the
Executive as those to which he is entitled immediately prior to a Change in
Control. If and to the extent that such perquisites, benefits and service
credits are not payable or provided under any such plans or practices by reason
of such amendment or termination thereof, the Company itself shall pay or
provide therefor.
6. RETIREMENT PROGRAM. The term "Retirement Program" shall mean
the Company's Employees' Retirement Plan. Executive shall not be eligible for
benefits under the Retirement Program, except that the Executive shall be
eligible to participate in the Musicland Group's Capital Accumulation Plan upon
satisfying the eligibility requirements of that Plan and in any retirement plans
that may become applicable to Executives employed by the Company after the date
of this Agreement.
7. EFFECT OF DEATH OR DISABILITY
7.01 If the Executive should die during the Period of Employment,
his legal representative shall be entitled to the compensation provided for in
paragraph 4.01 for the month in which death shall have occurred, and the Period
of Employment shall end on the last day of such month without prejudice to any
other payments due in respect of the Executive's death.
7.02 (a) The word "Disability" shall mean an illness or accident
which prevents the Executive from performing his duties under this Agreement for
a period of six
9
<PAGE>
EXHIBIT 10.15
consecutive months. The Period of Employment shall end on the last day of such
six months' period but without prejudice to any payments due the Executive in
respect of Disability.
(b) In the event of the Executive's Disability during the Period of
Employment, the Executive shall be entitled to the compensation provided for in
paragraph 4.01 for the period of such Disability but not in excess of six
months.
(c) The amount of any payments due under this paragraph shall be
reduced by any payments to which the Executive may be entitled for the same
period because of disability under any disability or pension plan of the
Company.
8. TERMINATION
8.01 In the event of a Termination, as defined in paragraph 8.03,
during the Period of Employment, the provisions of this Section 8 shall apply.
8.02 In the event of a Termination, the Company shall, as
liquidated damages or severance pay, or both, pay to the Executive and provide
him, his dependents, beneficiaries and estate, in lieu of all other remedies,
damages or relief to which he might otherwise be entitled under this Agreement,
with the following:
(a) A lump sum equal to the total of the following future payments,
discounted to present value at the Discount Rate as defined in Section 12
applied to each such future payment, that would have been made for the remainder
of the Period of Employment, as if such Termination had not occurred:
(i) the salary provided in subparagraph 4.01(i) at the time of such
termination, at the times therein stated, for the month in which the
Termination shall have occurred and for each month thereafter during the
Period of Employment, less in respect of each such month the amounts, if
any, the Executive would have paid in cash in respect of employee benefits
provided for in subparagraphs 5.01 (ii), (iii) and (iv) if the Executive
were still employed, and
10
<PAGE>
EXHIBIT 10.15
(ii) the annual awards provided in subparagraph 4.01(ii), at the
times therein stated, for the year in which the Termination shall have
occurred and for each year thereafter during the Period of Employment;
provided that, for the purpose of calculating the lump sum due under this
subparagraph 8.02(a)(ii), the annual awards for the remainder of the Period
of Employment shall be calculated pursuant to subparagraph 4.01(ii) using
an annual salary at the time of such Termination.
(b) In full substitution for any awards under the Long Term
Incentive Plan, a lump sum equal to 35% of the annual rate of salary payable to
the Executive in accordance with subparagraph 4.01(i) at the time of such
Termination, for the year in which the Termination shall have occurred and for
each year thereafter during the Period of Employment, as if such Termination had
not occurred.
(c) All lump-sum payments to be made by the Company under this
Section 8 shall be made within 20 days after Termination.
(d) The Executive shall continue to be entitled to all employee
benefits provided for in subparagraphs 5.01(ii), (iii) and (iv), relating to
death benefit, disability benefit, and senior officer medical, dental, health
and welfare plans and all other present or equivalent successor plans and
practices of the Company for which officers are eligible, until the Executive
shall attain age 65, as if the Executive were still employed during such period
under this Agreement, with benefits based upon the compensation provided in
paragraph 4.01 at the time of such Termination as if the Executive continued to
be employed until age 65, and if and to the extent that such benefits shall not
be payable or provided under any such plan by reason of the Executive no longer
being an employee of the Company as a result of Termination, the Company itself
shall pay or provide therefor.
(e) The payments made and benefits provided to the Executive, his
beneficiaries, or estate pursuant to this paragraph 8.02 shall be in lieu of,
and not in addition to,
11
<PAGE>
EXHIBIT 10.15
any and all benefits to which the Executive is otherwise entitled upon
termination of employment with the Company, including, but not limited to, any
other Company policies, procedures, or practices, oral or written, now or
hereafter established, and shall be in lieu of all other remedies, damages, or
relief to which he might otherwise be entitled under this Agreement.
8.03 The word "Termination" shall mean:
(a) Termination by the Company of the Executive's employment for
any reason other than for Cause as defined in paragraph 8.04 or for Disability;
or
(b) Termination by the Executive of his employment upon the
occurrence of any of the following events:
(i) A significant change in the nature or scope of the authorities,
powers, functions, duties or responsibilities attached to the position
referred to in paragraph 3.01(a) or a position of comparable authorities,
powers, functions, duties or responsibilities to that of senior officers
generally or a reduction in compensation, which in either event is not
remedied within 30 days after receipt by the Company of written notice from
the Executive;
(ii) A breach by the Company of any provision of this Agreement not
embraced within the foregoing clause (i) which is not remedied within 30
days after receipt by the Company of written notice from the Executive;
(iii) The liquidation, dissolution, consolidation or merger of the
Company or transfer of 70% or more of its assets unless a successor or
successors (by merger, consolidation or otherwise) to which all or 70% or
more of its assets has been transferred shall have assumed all duties and
obligations of the Company under this Agreement;
provided that, in any event set forth in this subparagraph, the Executive shall
have elected to terminate his employment under this Agreement upon not less than
30 and not more than 90 days' advance written notice to the Board of Directors
of the Company, attention of the Chief Executive Officer, given, except in the
case of a continuing breach, within three calendar months after (A) expiration
of the 30-day cure period with respect to such event, or (B) the closing date of
such liquidation, dissolution, consolidation, merger or transfer of assets.
12
<PAGE>
EXHIBIT 10.15
An election by the Executive to terminate his employment under the
provisions of this subparagraph shall not be deemed a voluntary termination of
employment by the Executive for the purpose of this Agreement or any plan or
practice of the Company.
8.04 The Company shall have the right, by not less than 60 days'
notice in writing, to terminate for Cause the employment of the Executive and
the Period of Employment. The termination of the Executive's employment shall
be deemed to have been for Cause only
(i) if termination of his employment shall have been the result of
an act or acts of dishonesty by him or an act or acts resulting or intended
to result directly or indirectly in gain to or personal enrichment of the
Executive at the Company's expense; or
(ii) if there has been a deliberate and intentional refusal by the
Executive during the Period of Employment (except by reason of incapacity
due to illness or accident) to comply with the provisions of subparagraph
3.01(b), relating to the time and best efforts to be devoted to the affairs
of the Company, and such breach results in demonstrably material injury to
the Company, and the Executive shall have either failed to remedy such
alleged breach within 30 days from his receipt of written notice from the
Secretary of the Company demanding that he remedy such alleged breach, or
shall have failed to take all reasonable steps to that end during such 30-
day period and thereafter; or
(iii) if there has been a determination by the Chief Executive
Officer or an affirmative vote (as described below) of the Board of
Directors of the Company at a meeting called and held for that purpose and
at which the Executive is given an opportunity to be heard, that, in the
judgment of the Chief Executive Officer or the Board, the Executive has,
over an extended period of time, consistently failed to satisfactorily
perform the material duties of his office assigned to him and such failure
has had an adverse impact upon the Company; provided that such
determination may be made only after at least two formal reviews of the
Executive's performance by the Chief Executive Officer conducted at an
interval of at least six months at which the Executive shall be informed of
the most significant deficiencies in performance and during such interval
and a period of at least ninety days from and after the most recent such
review, the Executive shall have failed to correct or failed to take all
reasonable steps to correct such significant deficiencies;
provided that there shall have been delivered to the Executive with the above-
mentioned 60-day notice a certified copy of a resolution of the Board of
Directors of the Company adopted by the affirmative vote of at least a majority
of the entire membership (whether or not present) of the Board of Directors
(other than the Executive) of the Company at a meeting called and held for that
purpose and at which the Executive was given an opportunity to be heard, finding
that the
13
<PAGE>
EXHIBIT 10.15
Executive was guilty of conduct set forth in clause (i), (ii) or (iii) above,
specifying the particulars thereof in detail. For purposes of the minimum
number of directors required for the affirmative vote described in the next
preceding sentence, any fraction shall be rounded to the next higher whole
number of directors.
Anything herein to the contrary notwithstanding, the employment of the
Executive shall not be considered to have been terminated by the Company for
Cause if termination of his employment took place
(i) as the result of bad judgment or negligence on the part of the
Executive, or
(ii) as the result of an act or omission without intent of gaining
therefrom directly or indirectly a profit to which the Executive was
not legally entitled, or
(iii) because of an act or omission believed by the Executive in
good faith to have been in or not opposed to the interests of the
Company.
8.05 If the Executive's employment shall be terminated by the
Company during the Period of Employment and such termination is alleged to be
for Cause, or the Executive's right to terminate his employment under
subparagraph 8.03(b) shall be questioned by the Company, the Executive shall
have the right, in addition to all other rights and remedies provided by law, at
his election, either to seek arbitration in Minneapolis, Minnesota, under the
rules of The American Arbitration Association, by serving a notice to arbitrate
upon the Company, or to institute a judicial proceeding, in either case within
90 days after having received notice of termination of his employment or notice
in any form that the termination of his employment under subparagraph 8.03(b) is
subject to question or within such longer period as may reasonably be necessary
for the Executive to take action in the event that his illness or incapacity
should preclude his taking such action within such 90-day period.
14
<PAGE>
EXHIBIT 10.15
9. OFFSET OF COMPENSATION AND BENEFITS FROM SUBSEQUENT EMPLOYMENT
9.01 In the event of a termination of his employment, the Executive
shall not be required to minimize damages or severance payment under Sections 8
or 10 by seeking or accepting other employment or consulting position.
9.02 If the Executive obtains other employment or a consulting
position subsequent to a Termination and prior to the end of the Period of
Employment, the Executive shall pay to the Company on a quarterly basis the
Subsequent Compensation, as defined below, that he receives for such other
employment through the last day of the Period of Employment, provided, however,
that the amount of such quarterly payments shall be reduced by any liability
with respect to such Subsequent Compensation that the Executive incurs for
income taxes (after taking into account any income tax benefit available as a
result of such quarterly payments) and payroll deductions required by law, and
provided further that no such payments shall be made unless the Executive
received a lump sum payment pursuant to and in accordance with subparagraphs
8.02(a) and (b). Subsequent Compensation for each calendar quarter during which
the Executive engages in such other employment or consulting position shall
equal the lesser of (i) the cash or other compensation that is payable to the
Executive for such employment or consulting position during that particular
quarter, or (ii) the figure obtained by multiplying the total amount of salary
plus annual and prorated performance awards used in calculating a lump sum
payment for the Executive under subparagraphs 8.02(a) and (b) (prior to
discounting to present value as of the Termination) by a fraction, the numerator
of which is 3 and the denominator of which is the number of months remaining in
the Period of Employment after Termination. Notwithstanding the foregoing, the
Executive shall not be required to minimize payments or benefits under this
Agreement by seeking or accepting other employment or a consulting position.
15
<PAGE>
EXHIBIT 10.15
9.03 The benefits to be provided by the Company under the provisions
of subparagraph 8.02(d) shall be reduced to the extent of the death, disability,
medical, dental, health and welfare benefits received by the Executive from any
other employment or consulting position he obtains subsequent to a Termination
and prior to his attaining age 65.
10. MINIMUM SEVERANCE PAYMENT
10.01 If the employment of the Executive shall be terminated by the
Company for any reason other than Cause at a time prior to the attainment by the
Executive of 65 years of age and when there are fewer than 12 months remaining
in the Period of Employment, the Company shall pay the Executive a lump sum
severance payment, in addition to any payment under Section 8, equal to the
total of the following future payments, discounted to present value at the
Discount Rate as defined in Section 12 applied to each such payment, for each
month of the Severance Period (as defined below): the sum of (i) the monthly
salary of the Executive in effect for the month immediately preceding the month
in which termination of his employment shall have taken place, (ii) the average
of the highest annual incentive awards paid to the Executive under the
Management Incentive Plan for any three calendar years (or the actual number of
years if fewer) during the last ten years of his employment by the Company (or
the actual number of years if fewer) divided by 12, and (iii) the average of the
highest incentive awards, if any, paid to the Executive under the Long-Term
Incentive Plan for any three performance periods (or the actual number of
performance periods if fewer) during the last ten years of his employment by the
Company (or the actual number of years if fewer) divided by 12. The Severance
Period shall (i) commence upon the first calendar month after the completion of
the Period of Employment, and (ii) end upon the earliest of (A) 12 calendar
months after the termination of his employment, or (B) the month in which the
Executive shall attain 65 years of age.
16
<PAGE>
EXHIBIT 10.15
The payments made and benefits provided to the Executive, his
beneficiaries, or estate pursuant to this paragraph 10.01 shall be in lieu of,
and not in addition to, any and all benefits to which the Executive is otherwise
entitled upon termination of employment with the Company, including, but not
limited to, any other Company policies, procedures, or practices, oral or
written, now or hereafter established, and shall be in lieu of all other
remedies, damages, or relief to which he might otherwise be entitled under this
Agreement.
10.02 If the Executive receives payment under paragraph 10.01 and
obtains other employment or consulting position within the Severance Period, the
Executive shall pay to the Company on a quarterly basis the Post-Severance
Compensation, as defined below, that he receives for such other employment or
consulting position through the last day of the Severance Period, provided,
however, that the amount of such quarterly payments shall be reduced by any
liability with respect to such Post-Severance Compensation that the Executive
incurs for income taxes (after taking into account any income tax benefit
available as a result of such quarterly payments) and payroll deductions
required by law. Post-Severance Compensation for each calendar quarter during
which the Executive engages in such other employment or consulting position
shall equal the lesser of (i) the cash or other compensation that is payable to
the Executive for such employment or consulting position during that particular
quarter, or (ii) the figure obtained by multiplying the total amount of salary
plus annual awards used in calculating a lump-sum payment for the Executive
under paragraph 10.01 (prior to discounting to present value as of the
termination) by a fraction the numerator of which is 3 and the denominator of
which is the number of months in the Severance Period. Notwithstanding the
foregoing, the Executive shall not be required to minimize payments or benefits
under this Agreement by seeking or accepting other employment or a consulting
position.
17
<PAGE>
EXHIBIT 10.15
11. JOINT AND SEVERAL LIABILITY; TRUST AGREEMENT
11.01 All duties, undertakings, obligations, and liabilities of the
Company or the Parent arising under this Agreement shall be the joint and
several liability of the Company and the Parent.
11.02 To assure the performance by the Company and the Parent of its
obligations under this Agreement in the event of a Change in Control, the
Company or the Parent shall, upon the request of the Executive immediately prior
to a Change in Control, or at any time on or after the date a Change in Control
occurs and prior to the date all amounts to which Executive is or may become
entitled hereunder have been paid to Executive, deposit in an irrevocable trust
with a trustee designated by the Executive, an amount of liquid assets equal to
the present value based on the Discount Rate defined in Section 12 of the
maximum amount of all lump sum amounts which could be paid to Executive in the
event of a Termination of the Executive (as defined in paragraph 8.03) following
a Change in Control. Such trust shall be established and funded only if and to
the extent that the establishment of such trust does not contravene the
provisions of any loan agreement under which the Company or the Parent is
obligated; provided, however, that the Company and Parent (as opposed to the
lender under any such loan agreement) may not seek to preclude the establishment
of such trust by initiating the entering into, renegotiating or amending of any
such loan agreement, a principal purpose of which entering into, renegotiation,
or amendment is such preclusion. The trust shall be reasonably satisfactory in
form and substance to the Executive, with no greater rights in the Executive
than an unsecured creditor of the Company and Parent. During the period
described in the first sentence of this paragraph, the Executive may also elect
that the Company or the Parent shall also deposit into such an irrevocable trust
an amount of liquid assets equal to the entire accrued benefit to which the
Executive is then entitled
18
<PAGE>
EXHIBIT 10.15
under the Executive Deferred Compensation Plan between the Executive and the
Parent and the Company effective January 1, 1995, as such plan may be amended
from time to time; provided, however, that the provisions of the Executive
Deferred Compensation Plan shall continue to apply to the portion of the trust
established under this sentence. To the extent there are not amounts in trust
sufficient to pay all amounts due to Executive under this Agreement, and under
the Executive Deferred Compensation Plan, if applicable, the Company and Parent
shall be and remain liable therefore.
12.DISCOUNT RATE
For purposes of determining the present value of any payment or
benefit under this Agreement, the term "Discount Rate" shall mean 10%; provided,
that if the average of the prime rate (or its equivalent) charged by Morgan
Guaranty Trust Company of New York during the 30 day Period which ends 15 days
after the date of the Executive's Termination is 8% or less, the Discount Rate
shall be 8%.
13.POTENTIAL EXCISE TAXES
In the event that any excise tax is payable by the Executive by reason
of section 4999 of the Internal Revenue Code of 1986, as that section may be
amended, or any successor or similar provision thereto, or comparable state or
local tax laws, as a direct or indirect result of the receipt of any payment,
right or benefit received after November 27, 1995 by the Executive from the
Company or from any interested person which is in the nature of compensation in
connection with his employment with the Company, Parent, or any subsidiary of
either of them, the Company shall pay to the Executive such additional
compensation as is necessary (after taking into account all Federal, state and
local taxes, including income and excise taxes, payable by the Executive as a
result of the receipt of such additional compensation) to place the Executive in
the same after-tax
19
<PAGE>
EXHIBIT 10.15
position he would have been in had no such excise tax (and any interest and
penalties thereon) been paid or incurred. The Company shall pay such additional
compensation upon the earlier of (A) the time at which the Company withholds
such excise tax from any payments to the Executive, or (B) 30 days after the
Executive notifies the Company that the Executive has filed a tax return which
takes the position that such excise tax is due and payable in reliance on a
written opinion of the Executive's tax counsel that it is more likely than not
that such excise tax is due and payable.
If the Executive makes any payment with respect to any such excise tax
as a result of an adjustment to the Executive's tax liability by any Federal,
state or local authority, the Company will pay such additional compensation
within 30 days after the Executive notifies the Company of such payment.
Without limiting the obligation of the Company hereunder, the Executive agrees,
in the event the Executive makes any payment pursuant to the preceding sentence,
to negotiate with the Company in good faith with respect to procedures
reasonably requested by the Company which would afford the Company the ability
to contest the imposition of such excise tax; provided, however, that the
Executive will not be required to afford the Company any right to contest the
applicability of any such excise tax to the extent that the Executive reasonably
determines that such contest is inconsistent with the overall tax interests of
the Executive.
The Company agrees to hold in confidence and not to disclose, without
the Executive's prior written consent, any information with regard to the
Executive's tax position which the Company obtains pursuant to this Section 13.
20
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EXHIBIT 10.15
14. INDEMNIFICATION AND INSURANCE; LEGAL EXPENSES
14.01 The Company will indemnify the Executive (and his legal
representatives or other successors) to the fullest extent permitted (including
payment of expenses in advance of final disposition of the proceeding) by the
laws of the State of Delaware, as in effect at the time of the subject act or
omission, or by the Restated Certificate of Incorporation and By-Laws of the
Company as in effect at such time or on the date of this Agreement, or by the
terms of any indemnification agreement between the Company and the Executive,
whichever affords or afforded greater protection to the Executive; and the
Executive shall be entitled to the protection of any insurance policies the
Company may elect to maintain generally for the benefit of its directors and
officers (and to the extent the Company maintains such an insurance policy or
policies, the Executive shall be covered by such policy or policies, in
accordance with its or their terms, to the maximum extent of the coverage
available for any Company officer or director), against all costs, charges and
expenses whatsoever incurred or sustained by him or his legal representatives in
connection with any action, suit or proceeding to which he (or his legal
representatives or other successors) may be made a party by reason of his being
or having been a director, officer or employee of the Company or any of its
subsidiaries or his serving or having served any other enterprise as a director,
officer or employee at the request of the Company, provided that the Company
shall cause to be maintained in effect for not less than six years from the date
of a Change in Control (to the extent available) policies of directors' and
officers' liability insurance of at least the same coverage as those maintained
by the Company at any time within 180 days after the date of this Agreement and
containing terms and conditions which are no less advantageous than such
policies.
21
<PAGE>
EXHIBIT 10.15
14.02 In the event of any litigation, arbitration or other
proceeding between the Company and the Executive with respect to the subject
matter of this Agreement or the enforcement of his rights hereunder, the Company
shall periodically reimburse the Executive, regardless of the outcome, for all
of his reasonable costs and expenses relating to such litigation, arbitration or
other proceeding, including, without limitation, his reasonable attorneys' fees
and expenses. In no event shall the Executive be required to reimburse the
Company for any of the costs or expenses relating to such litigation,
arbitration or other proceeding.
15. NOTICES
All notices, requests, demands and other communications provided for
by this Agreement shall be in writing and shall be sufficiently given if
personally delivered or if actually received by mail, return receipt requested
and postage prepaid, addressed to the party entitled thereto at the address
stated below or to such changed address as the addressee may have given by a
similar notice to the other:
To the Company: The Musicland Group, Inc.
7500 Excelsior Boulevard
Minneapolis, MN 55426
Attention: Chief Executive Officer
To the Executive: The Musicland Group, Inc.
7500 Excelsior Boulevard
Minneapolis, MN 55426
Attention: Reid Johnson
With an additional copy to: Reid Johnson
9166 Breckenridge Lane
----------------------
Eden Prairie, MN 55347
-----------------------
Receipt by mail shall be established by a duly executed return
receipt.
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EXHIBIT 10.15
16. GENERAL PROVISIONS
16.01 Whenever, under this Agreement, it is necessary to determine
whether one benefit is less than, equal to, or larger than another in value,
whether or not such benefits are provided under this Agreement, such
determination shall be made using mortality, interest and any other assumptions
no less favorable to the Executive than those normally used as of the date of
such determination in determining actuarial equivalents for the purpose of the
Retirement Program.
16.02 This Agreement shall not confer any right or impose any
obligation on the Executive to continue in the employ of the Company, or limit
the right of the Company or the Executive to terminate his employment, at any
time prior to a Change in Control.
16.03 The Company shall have no right of set-off or counterclaim in
respect of any claim, debt or obligation against any payments provided for in
this Agreement, except as otherwise provided in paragraphs 9.02 and 10.02.
16.04 No right to or interest in any payments shall be assignable
by the Executive; provided, however, that this provision shall not preclude him
from designating one or more beneficiaries to receive any amount that may be
payable after his death and shall not preclude his executor or administrator
from assigning any right hereunder to the person or persons entitled thereto.
16.05 No provision of this Agreement may be amended, modified or
waived unless such amendment, modification or waiver shall be agreed to in
writing signed by the Executive and by a duly authorized Company officer.
16.06 If any provision of this Agreement shall be determined to be
invalid or unenforceable by a court of competent jurisdiction, the remaining
provisions of this Agreement shall remain in full force and effect to the
fullest extent permitted by law.
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<PAGE>
EXHIBIT 10.15
16.07 When this Agreement becomes operative, the obligations of the
Company under paragraphs 11 (joint and several liability; trust agreement), 13
(potential excise taxes) and 14 (indemnification and insurance; legal expenses)
shall survive the termination for any reason of this Agreement (whether such
termination is by the Company, by the Executive, upon the expiration of this
Agreement or otherwise).
16.08 This Agreement shall be binding upon and inure to the benefit
of the Company and any successor of the Company including, without limitation,
any corporation or corporations acquiring directly or indirectly all or
substantially all of the assets of the Company, whether by merger,
consolidation, sale or otherwise (and such successor shall thereafter be deemed
"the Company" for the purposes of this Agreement), but shall not otherwise be
assignable by the Company.
16.09 The word "Executive" shall wherever appropriate include his
dependents, beneficiaries and legal representatives.
16.10 All payments required to be made by the Company hereunder to
the Executive or his estate or beneficiaries shall be subject to the withholding
of such amounts, if any, relating to tax and other payroll deductions as the
Company may reasonably determine it should withhold pursuant to any applicable
law or regulation.
16.11 The validity, interpretation, performance and enforcement of
this Agreement shall be governed by the laws of the State of Minnesota, without
giving effect to the principles of conflict of laws thereof.
24
<PAGE>
EXHIBIT 10.15
IN WITNESS WHEREOF, the parties hereto have executed this Change of Control
Agreement as of the day and year first above written to be effective and
operative as set forth in Section 1.01.
THE MUSICLAND GROUP, INC.
By:\S\ JACK W. EUGSTER
-------------------
Its: Chief Executive Officer
MUSICLAND STORES CORPORATION
By:\S\ JACK W. EUGSTER
-------------------
Its: Chief Executive Officer
REID JOHNSON
\S\ REID JOHNSON
-----------------
25
<PAGE>
EXHIBIT 10.16
EXECUTIVE DEFERRED COMPENSATION PLAN
The purpose of this DEFERRED COMPENSATION PLAN (the "Plan") is to govern
the terms and conditions by which The Musicland Group, Inc., a Delaware
corporation, and its parent, Musicland Stores Corporation, a Delaware
corporation, and all consolidated subsidiaries (collectively the "Company") will
allow Reid Johnson (the "Executive") to defer receipt of compensation.
RECITALS
WHEREAS, the Executive is a highly compensated employee employed by the
Company in a top management position;
WHEREAS, the Company recognizes the valuable services performed by the
Executive and wishes to encourage his retention;
WHEREAS, Executive wishes to defer some or all of his compensation;
WHEREAS, the Company is willing to pay such deferred compensation to the
Executive; and
WHEREAS, the Company and Executive intend that this Plan be considered an
unfunded arrangement which is maintained primarily to provide deferred
compensation benefits for the Executive for the purposes of the Employee
Retirement Income Act of 1974, as amended ("ERISA");
NOW, THEREFORE, in consideration of the premises and the mutual promises
and covenants contained herein, the parties do hereby agree as follows:
ARTICLE 1
DEFINITIONS AND ADMINISTRATION
SECTION 1.1 CERTAIN DEFINITIONS. For purposes of this Plan, the following
terms shall be defined as set forth below:
(a) "ACCRUED BENEFITS" means the sum of all Deferred Amounts credited
to the Executive's Deferral Account and due and owing to the Executive, or
his or her beneficiaries, pursuant to this Plan, adjusted for any
Investment Additions or Losses thereto, minus any distributions hereunder.
(b) "BOARD OF DIRECTORS" means the board of directors of Musicland
Stores Corporation.
(c) "CODE" means the Internal Revenue Code of 1986, as amended from
time to time.
1
<PAGE>
(d) "COMPENSATION" means total salary and bonuses of the Executive
paid or accrued by Musicland, exclusive of Accrued Benefits, stock options,
stock appreciation rights, restricted stock, and any employer contributions
or payments to any other trust, fund, agreement or plan providing
retirement, pension, profit sharing, health, welfare, death, insurance or
similar benefits.
(e) "DEFERRAL ACCOUNT" means book entries maintained by the Company
reflecting Deferred Amounts and Investment Additions or Losses thereon;
provided, however, that the existence of such book entries and the Deferral
Account shall not create and shall not be deemed to create a trust of any
kind, or a fiduciary relationship between the Company and the Executive,
his or her designated beneficiary, or other beneficiaries under this Plan.
If the Executive has elected differing deferral periods for portions of the
Deferred Amounts, the Company may, in its discretion, establish subaccounts
to reflect such differing deferral periods.
(f) "DEFERRED AMOUNTS" means the amounts of Compensation actually
deferred by an Executive pursuant to this Plan.
(g) "DISABILITY" means an Executive's physical or mental incapacity
resulting from personal injury, disease, illness or other condition, which
(i) prevents him or her from performing his or her duties for the Company,
as the same is determined in a uniform manner by the Committee after
reviewing any medical evidence or requiring any medical examinations which
the Committee considers necessary to its determination and (ii) results in
a termination of his or her employment with the Company.
(h) "EFFECTIVE DATE" means January 1, 1995.
(i) "ELECTION OF DEFERRAL" means a written notice filed by the
Executive with the Payroll Department of the Company in substantially the
form attached hereto as Exhibit 1 specifying the amount of Compensation to
be deferred.
(j) "FISCAL YEAR" means the taxable year of the Company (currently
January 1 - December 31).
(k) "INVESTMENT ADDITIONS OR LOSSES" means any earnings or losses on
Deferred Amounts calculated as set forth in Section 3.1 hereof.
(l) "PLAN" means this Agreement and any amendments or supplements
thereto.
(m) "SUBSIDIARY" means any corporation in an unbroken chain of
corporations beginning with Musicland Stores Corporation if each of the
corporations (other than the last corporation in the unbroken chain) owns
stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in the chain.
SECTION 1.2 ADMINISTRATION. The Plan shall be administered by the
Compensation Committee of the Board of Directors. The Compensation Committee
shall have the authority to adopt, alter and repeal such administrative rules,
guidelines
2
<PAGE>
and practices governing the Plan as it shall, from time to time, deem advisable;
to interpret the terms and provisions of the Plan; and to otherwise supervise
the administration of the Plan. All decisions made by the Committee pursuant to
the provisions of the Plan shall be final and binding on all persons, including
the Company and the Executive.
ARTICLE 2
DEFERRED COMPENSATION
SECTION 2.1 MAXIMUM ANNUAL DEFERRAL.
(a) Commencing on the Effective Date, and continuing through the date
on which the Executive's employment terminates for any reason, the
Executive and the Company agree that the Executive shall be entitled to
elect to defer into his Deferral Account up to the following percentages of
the Compensation that the Executive would otherwise be entitled to receive
from the Company in each Fiscal Year of the Company.
(i) Up to 100% of base salary, with a minimum deferral of
$5,000.
(ii) Up to 100% of that portion of the Management Incentive Plan
annual bonus (if any) which is not already deferred under the terms of the
Management Incentive Plan, with a minimum deferral of $5,000.
(b) The maximum percentages of Compensation that can be deferred as
set forth above are hereinafter referred to collectively as the "Maximum
Annual Deferral Sum." The amount actually selected for deferral pursuant
to an Election of Deferral is referred to as the "Annual Deferral Sum."
SECTION 2.2 ELECTION TO DEFER COMPENSATION.
(a) The Executive may elect an Annual Deferral Sum hereunder by
filing an Election of Deferral. The election to be effective for any
Fiscal Year must be received by the Payroll Department by the close of
business on the first business day following Christmas day of the preceding
year. Deferrals will commence pursuant to such election beginning with the
first pay period which begins after the filing of the Election of Deferral
and is paid in January.
(b) Each Election of Deferral shall be effective only for the Fiscal
Year to which the Election of Deferral pertains. A new Election of
Deferral must be filed in December for each succeeding Fiscal Year.
(c) The Deferred Amounts shall be credited to the Executive's
Deferral Account as of the dates such Deferred Amounts would, but for the
deferral, be payable to the Executive.
(d) An election to defer compensation, once made, may not be
discontinued during the Fiscal Year to which the Election of Deferral
applies unless an unforeseeable financial emergency (governed by Section
4.4 herein) occurs.
3
<PAGE>
ARTICLE 3
EARNINGS ON DEFERRED COMPENSATION
SECTION 3.1 INVESTMENT ADDITIONS OR LOSSES.
(a) The Company hereby agrees to credit or debit Deferred Amounts in
the Executive's Deferral Account on a quarterly basis with Investment
Additions or Losses, if any, based on the performance of the Wilshire 5000
Index, an investment vehicle selected by the Executive, and calculated as
follows. All Deferred Amounts as of January 1, 1995 will be converted into
a beginning balance of investment units equal to the result of dividing the
total Deferred Amounts by the value of the Wilshire 5000 Index on January
1, 1995. Thereafter, the number of investment units earned each quarter
will be equal to the result of dividing the Deferred Amounts deferred
during the quarter by the value of the Wilshire 5000 Index at the midpoint
of the quarter. These will be added to the investment units balance at the
end of each quarter. The investment units balance will be reduced by any
distributions from the Deferral Account with the amount of the reduction
equal to the result of dividing the total dollars distributed by the value
of the Wilshire 5000 Index on the date of distribution. At any given time
the dollar value of the Accrued Benefits in the Executive's Deferral
Account will be equal to the number of investment units in the account
times the value of the Wilshire 5000 Index on the date of value
determination.
(b) The Executive may select a different investment vehicle for any
quarter if the Company is notified of the selection in writing prior to the
beginning of the quarter. The quarterly performance of any investment
vehicle selected must be readily ascertainable by the Company. Executive
accepts all risk of loss in connection with the selection of an investment
vehicle.
(c) Investment Additions or Losses shall continue to accrue up to the
date the Deferral Account has been completely distributed.
(d) It will be in the Company's sole discretion to determine whether
to actually invest the Deferred Amounts or whether to phantom the
performance of the investment vehicle selected by the Executive. Any
investments actually made will belong solely to the Company.
ARTICLE 4
DISTRIBUTION OF DEFERRED COMPENSATION
SECTION 4.1 EVENTS TRIGGERING DISTRIBUTION. Distribution of Accrued
Benefits shall be made after the EARLIEST to occur of the following dates:
(a) The date of expiration of a fixed deferral period pursuant to
Section 4.2 below.
(b) The date of the Executive's death.
(c) The date of the Executive's termination of employment with the
Company due to Disability.
4
<PAGE>
(d) At the Company's sole election, the date of the Executive's
termination of employment with the Company for any other reason.
SECTION 4.2 FIXED DEFERRAL PERIOD ELECTION. At the time of filing an
Election of Deferral, the Executive must designate that the Annual Deferral Sum
be deferred for a specified period of time. The ending date of such deferral
period may not be earlier than the January 1st following the third anniversary
of the last day of the Fiscal Year for which the Election of Deferral has been
made. The period of time, once specified, may not be extended.
SECTION 4.3 MANNER OF DISTRIBUTION.
(a) The Accrued Benefits will be paid in a lump sum no later than
thirty (30) days following the earliest triggering event specified in
Section 4.1 above, unless (b) or (c) below applies.
(b) In the event the triggering event specified in Section 4.1(d) is
elected by the Company, the Company may further elect to pay out the
Accrued Benefits in a lump sum or in monthly installments over a period of
thirty-six months. The dollar amount of each installment shall be equal to
the investment units balance in the Deferral Account (or subaccount, as
applicable) divided by the number of months remaining in the thirty-sixth
month period times the value of the Wilshire 5000 Index on the date of
distribution.
(c) If, at the time of any lump sum distribution, the Company has a
reasonable expectation that the Executive will receive total compensation
from the Company exceeding the $1 million cap defined by Section 162(m) of
the Code (with or without such lump sum payment), then the Company may
either delay the lump sum distribution to the next succeeding Fiscal Year
or distribute the Accrued Benefits in two or more installments in such
amounts and at such times as the Company reasonably deems necessary to
insure maximum deductibility of such payments for the Company within the
constraints of Section 162(m).
(d) Any lump sum or installment payment made hereunder shall be
subject to all tax withholdings required by federal, state or local laws.
SECTION 4.4 EMERGENCY DISTRIBUTIONS. If the Executive incurs an
unforeseeable financial emergency prior to an event triggering distribution, the
Executive may request an early distribution of Accrued Benefits in an amount
reasonably necessary to satisfy the emergency need. An "unforeseeable financial
emergency" shall be determined by the Compensation Committee in its sole and
absolute discretion and is intended to be a severe and unexpected need for cash
resulting from an illness or injury of the Executive or a dependent, loss of
property due to a casualty, or other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the control of the Executive.
Cash needs arising from foreseeable events such as the purchase of a house or
education expenses for children shall not be considered to be the result of an
unforeseeable financial emergency. An emergency withdrawal will not be allowed
to the extent that the financial hardship is or may be relieved: (i) through
reimbursement or compensation by insurance or other source; (ii) by liquidation
of the Executive's assets, to the extent the liquidation would not itself cause
severe financial hardship; or (iii) by cessation of deferrals under this Plan.
5
<PAGE>
SECTION 4.5 DISTRIBUTION OF TAXED AMOUNTS. If the Executive is required
by administrative ruling or court order to include in his gross income any
Deferred Amounts, the Company shall, as soon as practicable after receipt of
notification of such ruling or order, distribute to the Executive the amount so
required to be included in the Executive's gross income.
SECTION 4.6 OFFSET FOR OBLIGATIONS TO COMPANY. If, at such time as the
Executive becomes entitled to any distribution of Accrued Benefits hereunder,
the Executive has due any debt, obligation or other liability representing an
amount owing to the Company, the Company may offset the amount owing it against
the amount of benefits otherwise distributable hereunder.
SECTION 4.7 BENEFICIARY DESIGNATION.
(a) The Executive shall have the right, at any time, to submit in
substantially the form attached hereto as Exhibit 2, a written designation
of primary and secondary beneficiaries to whom payment under this Plan
shall be made in the event of the Executive's death prior to complete
distribution of the Accrued Benefits. To be effective, a beneficiary
designation must be filed prior to the Executive's death.
(b) The filing of a new beneficiary designation form will cancel all
beneficiary designations previously filed.
(c) The finalized divorce of an Executive subsequent to the date of
filing a beneficiary designation shall revoke such designation if the
previous spouse was designated as a beneficiary.
(d) The marriage (other than a common law marriage) of an Executive
subsequent to the date of filing a beneficiary designation shall revoke
such designation unless the new spouse had already been named a
beneficiary.
(e) If the Executive fails to make an effective beneficiary
designation, or if his designation is revoked by divorce or marriage or
otherwise without execution of a new designation, or if all designated
beneficiaries predecease the Executive or die prior to complete
distribution of the Accrued Benefits, then the remaining Accrued Benefits
shall be distributed to the Executive's estate.
(f) In the event of incapacity, Accrued Benefits may be distributed
to a legal representative.
ARTICLE 5
AMENDMENT AND DISCONTINUANCE
SECTION 5.1 AMENDMENT OF THE PLAN. At any regularly scheduled or special
meeting of the Compensation Committee, it may by majority vote amend the Plan,
in whole or in part, due to tax, accounting or insurance changes or whenever
such change is determined to be in the best interests of the Company. Such
changes may result in a termination or reduction of future benefits. Written
notice of any amendment shall be given the Executive.
6
<PAGE>
SECTION 5.2 DISCONTINUANCE OF THE PLAN.
(a) At any regularly scheduled or special meeting of the Board of
Directors, it may by majority vote of the board members terminate the Plan,
if in the Board's judgment the continuation of the Plan, the tax,
accounting and insurance or other effects thereof, or potential payouts
thereunder would not be in the best interests of the Company.
(b) The Company may terminate the Plan with respect to any Executive
only if it terminates all deferred compensation arrangements with respect
to all similarly situated executives.
(c) Upon termination of the Plan, deferrals of compensation shall
cease as of any future date determined by the Company.
ARTICLE 6
UNFUNDED STATUS OF THE PLAN
SECTION 6.1 UNFUNDED STATUS. This Plan is intended to constitute an
"unfunded" plan for incentive and deferred compensation. In its sole
discretion, the Committee may authorize the creation of trusts, purchase
insurance or make arrangements to meet the obligations created under the Plan
with respect to distributions hereunder, provided, however, that the existence
of such trusts or other arrangements is consistent with the unfunded status of
the Plan.
SECTION 6.2 NO TRUST CREATED Nothing contained in this Plan, and no
action taken pursuant to its provisions by any party hereto shall create, or be
construed to create, a trust of any kind, or a fiduciary relationship between
the Company and the Executive, his designated beneficiaries, other beneficiaries
of the Executive or any other persons.
ARTICLE 7
GENERAL CREDITOR STATUS; INSURANCE
SECTION 7.1 GENERAL CREDITOR STATUS OF EXECUTIVE. The payments to the
Executive or his designated beneficiaries or any other beneficiaries hereunder
shall be made from assets which shall continue, for all purposes, to be a part
of the general, unrestricted assets of the Company; no person shall have any
interest in any such assets by virtue of the provisions of this Plan. The
Company's obligation hereunder shall be an unfunded and unsecured promise to pay
money in the future. To the extent that any person acquires a right to receive
payments from the Company under the provisions hereof, such right shall be no
greater than the right of any unsecured general creditor of the Company; no such
person shall have nor require any legal or equitable right, interest or claim in
or to any property or assets of the Company.
7
<PAGE>
SECTION 7.2 INSURANCE AND INVESTMENTS.
(a) In the event that, in its discretion, the Company purchases an
insurance policy or policies insuring the life of the Executive (or any
other property) or making an investment, to allow the Company to recover
the cost of providing benefits, in whole or in part, hereunder, neither the
Executive, his designated beneficiaries nor any other beneficiaries shall
have any rights whatsoever therein or in the proceeds therefrom. The
Company shall be the sole owner and beneficiary of any such insurance
policies or investments and shall possess and may exercise all incidents of
ownership therein. No such policies, or investments or other property
shall be held in any trust for the Executive or any other persons nor as
collateral security for any obligation of the Company hereunder.
(b) The Executive agrees to fully cooperate with the Company to
enable it to purchase any such insurance or investments. Failure to
cooperate will make the Executive ineligible to participate in this Plan.
SECTION 7.3 BENEFITS NOT TRANSFERABLE. Neither the Executive, his
designated beneficiaries, nor any other beneficiaries under this Plan shall have
any power or right to transfer, assign, anticipate, hypothecate or otherwise
encumber any part or all of the amounts payable hereunder. No such amounts
shall be subject to seizure by any creditor of any such Executive or
beneficiary, by a proceeding at law or in equity, nor shall such amounts be
transferable by operation of law in the event of bankruptcy, insolvency or
death. Any such attempted assignment or transfer shall be void. The Executive
also shall have no right to borrow against Accrued Benefits.
ARTICLE 8
GENERAL PROVISIONS
SECTION 8.1 NO CONTRACT OF EMPLOYMENT. Nothing contained herein shall be
construed to be a contract of employment for any term of years, nor as
conferring upon the Executive the right to continue to be employed by the
Company in his present capacity, or in any capacity. It is expressly understood
by the parties hereto that this Plan relates solely to the payment of deferred
compensation for the Executive's service and is not intended to be an employment
contract.
SECTION 8.2 CLAIM FOR BENEFITS. A person who believes that he is being
denied a benefit to which he is entitled under the Plan (hereinafter referred to
as a "Claimant") may file a written request for such benefit setting forth his
claim, addressed to the Human Resources Department at the Company's then
principal place of business. Human Resources will either resolve the problem to
the claimant's satisfaction or the matter will be referred to the Compensation
Committee for a determination. If the claim is denied in whole or in part, the
Claimant shall receive a written opinion setting forth the reasons for the
denial. The determination of the Compensation Committee shall be final and
binding.
SECTION 8.3 GOVERNING LAW. This Plan, and the rights of the parties
hereunder, shall be governed by and construed in accordance with the laws of the
State of Minnesota.
8
<PAGE>
SECTION 8.4 SUCCESSORS. This Plan is binding on and shall inure to the
benefit of any successor to the Company.
SECTION 8.5 VALIDITY. In the event any provision of this Plan is held to
be invalid, void, or unenforceable, the same shall not affect, in any respect
whatsoever, the validity of any other provision of this Plan.
SECTION 8.6 NO REPRESENTATION. The Company makes no representation, and
this Plan shall not be construed as a representation, regarding the tax
treatment of Deferred Amounts. Under current laws, the Executive will be
responsible for paying FICA (including Medicare) withholdings on Deferred
Amounts at the time of deferral.
IN WITNESS WHEREOF, the undersigned have executed this plan as of the first
day of January 1995.
THE COMPANY THE EXECUTIVE
BY: \s\ Jack W. Eugster \s\ Reid Johnson
--------------------- ---------------------
JACK W. EUGSTER REID JOHNSON
ITS: CHAIRMAN AND CEO
9
<PAGE>
EXHIBIT 10.17
CHANGE OF CONTROL AGREEMENT
BETWEEN
THE MUSICLAND GROUP, INC.,
MUSICLAND STORES CORPORATION
AND
LARRY C. GAINES
DATED AS OF NOVEMBER 27, 1995
<PAGE>
EXHIBIT 10.17
TABLE OF CONTENTS
PAGE
1. Operation of Agreement. . . . . . . . . . . . . . . . . . . . . . . .1
2. Employment; Period of Employment. . . . . . . . . . . . . . . . . . .4
3. Position, Duties, Responsibilities. . . . . . . . . . . . . . . . . .5
4. Compensation, Compensation Plans, Perquisites . . . . . . . . . . . .6
5. Employee Benefit Plans. . . . . . . . . . . . . . . . . . . . . . . .8
6. Retirement Program. . . . . . . . . . . . . . . . . . . . . . . . . .9
7. Effect of Death or Disability . . . . . . . . . . . . . . . . . . . .9
8. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
9. Offset of Compensation and Benefits from Subsequent Employment. . . 15
10. Minimum Severance Payment . . . . . . . . . . . . . . . . . . . . . 16
11. Joint and Several Liability; Trust Agreement. . . . . . . . . . . . 18
12. Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
13. Potential Excise Taxes. . . . . . . . . . . . . . . . . . . . . . . 19
14. Indemnification and Insurance; Legal Expenses . . . . . . . . . . . 21
15. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
16. General Provisions. . . . . . . . . . . . . . . . . . . . . . . . . 23
<PAGE>
EXHIBIT 10.17
CHANGE OF CONTROL AGREEMENT
CHANGE OF CONTROL AGREEMENT ("Agreement"), dated as of November 27, 1995
among THE MUSICLAND GROUP, INC., a Delaware corporation (the "Company"),
MUSICLAND STORES CORPORATION, a Delaware corporation (the "Parent") and LARRY C.
GAINES (the "Executive").
WITNESSETH:
WHEREAS:
A. The Executive is one of the principal officers of the Company and
an integral part of its management.
B. The Company wishes to assure itself and the Executive of
continuity of management in the event of any actual or threatened Change in
Control of the Company as hereafter defined.
C. This Agreement is not intended to alter materially the
compensation and benefits that the Executive could reasonably expect in the
absence of a Change in Control of the Company or the Parent (as hereinafter
defined) and, accordingly, this Agreement, though taking effect upon execution
hereof, will be operative only upon a Change in Control and as set forth in
paragraph 1.01 of this Agreement.
NOW, THEREFORE, it is hereby agreed by and between the parties as
follows:
1. OPERATION OF AGREEMENT
1.01 (a) This Agreement shall be effective immediately but shall not
be operative unless and until there has been a Change in Control, as defined in
Paragraph 1.02, while
<PAGE>
EXHIBIT 10.17
the Executive is in the employ of the Company. For purposes of this paragraph,
such termination of employment of Eugster shall be deemed to have occurred as of
the date the notice of termination is delivered to the Company or Eugster, as
the case may be, in accordance with the terms of his employment agreement then
operative and not the date stated in such notice as the date of termination as
defined therein. Upon the date of a Change in Control and such termination of
the employment of Eugster, this Agreement shall become operative immediately.
1.02 "Change in Control" shall mean, except as provided in
subparagraph (e) below, a change in control of the Company or the Parent that
shall be deemed to have occurred if and when:
(a) while the Company or the Parent maintains a class or series of
equity securities that are registered under the Securities Exchange Act of 1934
and are publicly traded on a recognized securities exchange, any person (as such
term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934) shall become the beneficial owner, directly or indirectly, of 20% or more
of the common stock of the Company or the Parent, or
(b) a majority of the directors of the Company or the Parent are
persons other than persons (i) for whose election proxies have been solicited by
the Board of Directors of the Company or the Parent, or (ii) who are then
serving as directors appointed by the Board of Directors of the Company or the
Parent to fill vacancies on the applicable Board of Directors caused by death or
resignation (but not by removal) or to fill newly-created directorships, but
excluding for purposes of this clause (ii) any such individual whose initial
assumption of office occurs as a result of either an actual or threatened
election contest (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Securities Exchange Act of 1934) or other actual or
threatened solicitation of proxies or consents, or
2
<PAGE>
EXHIBIT 10.17
(c) the Company's or the Parent's, or at least 70% of the Company's
or the Parent's, assets are sold and transferred to another corporation or other
enterprise that is not a subsidiary, direct or indirect, or other affiliate of
the Company or the Parent, if such other enterprise does not make arrangements
with the Executive satisfactory to the Executive for his employment by such
other enterprise, or
(d) the Board of Directors of the Company or the Parent determines,
by a vote of a majority of its entire membership, that a tender offer initiated
by any person (as defined in subparagraph l.02(a) above) indicates an intention
on the part of such person to acquire control of the Company or the Parent and
there is a substantial likelihood that such tender offer will result in a Change
in Control. Should any tender offer for shares of the Company or the Parent be
initiated, the Board of Directors of the Company or the Parent, as the case may
be, shall vote upon whether, in the good faith judgment of the Board, a
substantial likelihood exists that such tender offer will result in a Change in
Control.
(e) No Change in Control shall be deemed to have occurred under
subparagraph 1.02(c) or (d) above if:
(i) the Company or the Parent is a debtor pursuant to a written loan
agreement of the person so described in such subparagraph and
(ii) either:
(A) the right to nominate or elect directors by such person
results from an event of default under a then operative provision of
such loan agreement, or
(B) the acquisition of securities described in such
subparagraphs by such person results from a foreclosure by such person
under a then operative provision of such loan agreement following an
event of default, or
(C) the acquisition of securities described in such
subparagraphs by such person is pursuant to a plan of reorganization
under the bankruptcy laws of the United States.
3
<PAGE>
EXHIBIT 10.17
For a period of 60 days following the date on which a Change in Control occurs,
the Executive agrees to perform for the Company each and every one of his duties
in effect immediately prior to the Change in Control as described in paragraph
3.01.
1.03 If there is a Change in Control of the type described in
paragraph l.02(c), the Executive may elect to terminate the Period of Employment
hereunder by giving written notice to the Company of his decision to terminate
pursuant to this paragraph 1.03 within 30 days following the applicable sale or
transfer, which termination shall be effective as of the 90th day following the
date such notice is given or such earlier date as the Company may specify in a
written notice given to the Executive. Any termination of the Period of
Employment pursuant to this paragraph 1.03 shall be deemed a termination without
Cause pursuant to Section 8(b) of the Executive's employment agreement dated as
of August 25, 1988 (the "Prior Agreement"), as the same may have been amended to
the date of such termination, with the consequences set forth in Sections
8(b)(i) through (vii) thereof (which shall, for purposes of this Paragraph, be
incorporated herein as though fully set forth) and the obligation set forth in
said Sections 8(b)(i) through (vii) shall be and remain those of the Company
(i.e., The Musicland Group, Inc.) and the Parent (i.e., Musicland Stores
Corporation) prior to such sale or transfer and shall not be otherwise
assignable.
2. EMPLOYMENT; PERIOD OF EMPLOYMENT.
2.01 The Company shall employ the Executive, and the Executive shall
serve the Company, for the period set forth in paragraph 2.02 (the "Period of
Employment"), in the position and with the duties and responsibilities set forth
in Section 3, and upon the other terms and conditions hereinafter stated.
Employment by a subsidiary or affiliate of the Company at the Company's request
and with the Executive's consent shall constitute employment by the Company
within the terms of this Agreement.
4
<PAGE>
EXHIBIT 10.17
2.02 The Period of Employment shall commence on the date of a
Change in Control and, subject only to the provisions of Section 7 relating to
death or Disability and of paragraph 8.04 relating to termination for Cause,
shall continue until the close of business on the last business day of the 24th
calendar month following such Change in Control; provided, that on the last
business day of the 12th calendar month following such Change in Control and on
each anniversary of such date thereafter, the Period of Employment shall be
automatically extended by one additional year to the second subsequent such
anniversary, but in no event shall the Period of Employment extend beyond the
first day of the month next succeeding the month in which the Executive shall
attain his 65th birthday) unless prior to the last business day of the 6th
calendar month following such Change in Control, or any subsequent 12-month
anniversary of such date thereafter, the Company shall deliver to the Executive
or the Executive shall deliver to the Company written notice that the Period of
Employment will not be extended, in which case the Period of Employment will end
at the expiration of the then-existing Period of Employment hereunder, including
any previous extension, and shall not be further extended except by agreement by
the Company and the Executive.
3. POSITION, DUTIES, RESPONSIBILITIES
3.01 (a) It is contemplated that during the Period of Employment
the Executive shall serve in the position and have the duties and
responsibilities as President, Media Play Division, or such other senior
executive capacity with substantially the same nature and quality as those of
the position of President, Media Play Division, as the Company may from time to
time determine.
(b) During the Period of Employment, the Executive
5
<PAGE>
EXHIBIT 10.17
(i) shall hold a position of responsibility, importance and scope
at least equal to his position referred to in subparagraph 3.01(a),
(ii) shall, without compensation other than that herein provided,
serve as an officer and director of any subsidiary or affiliate, provided
the Executive has determined in his sole discretion that such service does
not entail undue risk to the Executive in light of the financial condition
of such subsidiary or affiliate and the extent of officers' and directors'
liability insurance applicable to such service, and
(iii) shall devote substantially all of his time, best efforts and
undivided attention during normal business hours to the business and
affairs of the Company and its subsidiaries except for reasonable vacations
and except for illness or incapacity, but nothing in this Agreement shall
preclude the Executive from devoting reasonable periods required for
(A) serving as a director or member of a committee of any
organization or company involving no conflict of interest with the
Company,
(B) delivering lectures, fulfilling speaking engagements,
teaching at educational institutions,
(C) engaging in charitable and community activities, and
(D) managing his personal investments;
provided that such activities do not materially interfere with the
performance of his duties hereunder.
3.02 The Executive's office shall be located in the Minneapolis,
Minnesota metropolitan area. He shall not be required, without his written
consent, to locate his office more than 20 miles distant by public highway from
his office immediately prior to the Change in Control or to be absent therefrom
on business more than 60 working days in any year or more than 14 consecutive
days at any one time.
4. COMPENSATION, COMPENSATION PLANS, PERQUISITES
4.01 For all services rendered during the Period of Employment,
the Executive shall receive:
(i) a salary, payable no less often than monthly, at the annual
rate of $257,400 or the rate of monthly salary of the Executive paid prior
to the Change in Control, whichever is higher, subject to such periodic
increases as shall be awarded in accordance
6
<PAGE>
EXHIBIT 10.17
with the Company's regular administrative practices of salary increases
applicable to executives in effect prior to the Change in Control, and
(ii) an annual award under the Company's Management Incentive Plan,
or a plan with substantially equivalent incentives and benefits that may be
adopted by the Company, for each calendar year, or portion thereof, during
the Period of Employment, which shall be payable as soon as practicable
after the end of such calendar year and shall be equal to a percentage of
the annual salary payable to the Executive for such calendar year
determined on the basis of the monthly salary payable to the Executive as
of the beginning of such calendar year under clause (i) of this paragraph
(after adjustment to reflect any increase therein awarded by the Company
under clause (i)). Such percentage shall be the lesser of (A) 35% or (B)
the average of the percentages, for each of the three preceding calendar
years (or such lesser number of years that the Executive has been a
participant in the plan), that result from dividing the Executive's annual
award under the Management Incentive Plan (or its successor) for such year
by the Executive's annual salary for that year.
Increases in salary and annual awards under this Agreement or otherwise shall
not diminish any other obligation of the Company hereunder.
4.02 (a) During the Period of Employment, the Executive shall
continue to be a full participant in the performance awards and stock incentive
aspects of the Company's Long-Term Incentive Plan and any other long-term
incentive plans of the Company (provided that Executive was a participant in
such plan or plans immediately prior to the Change in Control), and shall also
be a participant in any and all other executive incentive plans in which
executives of the Company participate that are in effect for Executive
immediately prior to a Change in Control, or any amended or successor plans with
at least as favorable terms that may be substituted and that may hereafter be
adopted, including, without limitation, any plan relating to stock options,
stock appreciation rights, restricted stock and deferred stock awards, or
equivalent successor plans that may be adopted by the Company with at least the
same reward opportunities that have heretofore been provided and with such
improvements in such plans or other plans as may from time to time be made in
accordance with the present practices of the Company.
7
<PAGE>
EXHIBIT 10.17
(b) Upon a Change in Control, the right to exercise any and all
stock options to purchase shares of the Company's or Parent's stock and any
stock appreciation rights held by the Executive shall, to the extent that such
options and rights shall not theretofore have been exercised, become fully
vested and exercisable immediately, all restrictions upon any restricted stock
previously granted to the Executive shall be deemed to have lapsed, the deferral
period and all conditions pertaining to any deferred stock awards previously
granted to the Executive shall be deemed to have expired or have been satisfied,
as the case may be, and the Executive shall be entitled to receive all such
shares of restricted or deferred stock. All restricted stock and all deferred
stock awards granted to the Executive on or after the date hereof shall be
awarded subject to the conditions described in the immediately preceding
sentence. All options issued or awarded to the Executive on or after the date
hereof shall contain the following provision:
Notwithstanding anything herein contained to the contrary, in the
event that a Change in Control, as defined in Paragraph l.02 of the
Optionee's Employment Agreement with the Company dated as of November
27, 1995 should occur and such Agreement becomes operative as provided
in Paragraph 1.01, this Option shall immediately thereafter become
exercisable in full.
4.03 During the Period of Employment the Executive shall be
entitled to perquisites and to fringe benefits in each case at least equal to
those attached to his office immediately prior to a Change in Control, as well
as to reimbursement, upon proper accounting of reasonable expenses and
disbursements incurred by him in the course of his duties.
4.04 The compensation provided for in this Section 4, together
with other matters therein set forth, is in addition to the benefits provided
for in Sections 5 and 6.
8
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EXHIBIT 10.17
5. EMPLOYEE BENEFIT PLANS
5.01 The Executive shall be entitled to all payments, benefits and
service credit for benefits during the Period of Employment to which Company
officers are entitled, immediately prior to a Change in Control, as a result of
their employment under the terms of employee plans and practices of the Company,
other than the Retirement Program, for which specific provision is made in
Section 6, but including, without limitation,
(i) the Company's Capital Accumulation Plan,
(ii) its death benefit plans (consisting of its Group Life
Insurance Plan and accidental death and dismemberment insurance),
(iii) its disability benefit plans (consisting of its short-term
salary continuation, short-term disability and long-term disability plans),
(iv) its senior officer medical, dental, health and welfare plans,
and
(v) other present or equivalent successor plans and practices of
the Company for which officers are eligible, and to all payments or other
benefits under any such plan or practice subsequent to the Period of
Employment as a result of participation in such plan or practice during the
Period of Employment.
5.02 Nothing in this Agreement shall preclude the Company from
amending or terminating any particular employee benefit plan or practice,
provided that the Executive shall continue to be entitled during the Period of
Employment to perquisites as set forth in paragraph 4.03 and to benefits and
service credit for benefits under paragraph 5.01 at least as favorable to the
Executive as those to which he is entitled immediately prior to a Change in
Control. If and to the extent that such perquisites, benefits and service
credits are not payable or provided under any such plans or practices by reason
of such amendment or termination thereof, the Company itself shall pay or
provide therefor.
9
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EXHIBIT 10.17
6. RETIREMENT PROGRAM
6.01 The term "Retirement Program" shall mean the Company's
Employees' Retirement Plan and any other similar retirement plans that may be
applicable to the Executive.
6.02 During the Period of Employment the Executive shall be
entitled to payments and benefits at least equal to those that would be due to
him under the Retirement Program as in effect immediately prior to a Change in
Control, taking into account the compensation provided in paragraph 4.01 and any
increases granted by the Company, and service credit for benefits under any plan
in the Retirement Program during the Period of Employment and to all payments or
other benefits which would be due to him or on his account subsequent to the
Period of Employment as a result of participation in any such plan during the
Period of Employment.
6.03 Nothing in this Agreement shall preclude the amendment or
termination of the Retirement Program, or any plan constituting a part thereof,
provided that the Executive shall continue to be entitled to the level of
payments and benefits, the compensation upon which benefits are based and
service credits for benefits under any such plan at least as favorable as those
to which he would be entitled under the Retirement Program as in effect
immediately prior to the Change in Control. If and to the extent that such
benefits and service credits are not payable or provided under any such plans or
practices by reason of any amendment or termination thereof, the Company itself
shall pay or provide therefor.
7. EFFECT OF DEATH OR DISABILITY
7.01 If the Executive should die during the Period of Employment,
his legal representative shall be entitled to the compensation provided for in
paragraph 4.01 for the month in
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EXHIBIT 10.17
which death shall have occurred, and the Period of Employment shall end on the
last day of such month without prejudice to any other payments due in respect of
the Executive's death.
7.02 (a) The word "Disability" shall mean an illness or accident
which prevents the Executive from performing his duties under this Agreement for
a period of six consecutive months. The Period of Employment shall end on the
last day of such six months' period but without prejudice to any payments due
the Executive in respect of Disability.
(b) In the event of the Executive's Disability during the Period
of Employment, the Executive shall be entitled to the compensation provided for
in paragraph 4.01 for the period of such Disability but not in excess of six
months.
(c) The amount of any payments due under this paragraph shall be
reduced by any payments to which the Executive may be entitled for the same
period because of disability under any disability or pension plan of the
Company.
8. TERMINATION
8.01 In the event of a Termination, as defined in paragraph 8.03,
during the Period of Employment, the provisions of this Section 8 shall apply.
8.02 In the event of a Termination, the Company shall, as
liquidated damages or severance pay, or both, pay to the Executive and provide
him, his dependents, beneficiaries and estate, in lieu of all other remedies,
damages or relief to which he might otherwise be entitled under this Agreement,
with the following:
(a) A lump sum equal to the total of the following future
payments, discounted to present value at the Discount Rate as defined in Section
12 applied to each such future payment,
11
<PAGE>
EXHIBIT 10.17
that would have been made for the remainder of the Period of Employment, as if
such Termination had not occurred:
(i) the salary provided in subparagraph 4.01(i) at the time of such
termination, at the times therein stated, for the month in which the
Termination shall have occurred and for each month thereafter during the
Period of Employment, less in respect of each such month the amounts, if
any, the Executive would have paid in cash in respect of employee benefits
provided for in subparagraphs 5.01 (ii), (iii) and (iv) if the Executive
were still employed, and
(ii) the annual awards provided in subparagraph 4.01(ii), at the times
therein stated, for the year in which the Termination shall have occurred
and for each year thereafter during the Period of Employment; provided
that, for the purpose of calculating the lump sum due under this
subparagraph 8.02(a)(ii), the annual awards for the remainder of the Period
of Employment shall be calculated pursuant to subparagraph 4.01(ii) using
an annual salary at the time of such Termination.
(b) In full substitution for any awards under the Long Term Incentive
Plan, a lump sum equal to 35% of the annual rate of salary payable to the
Executive in accordance with subparagraph 4.01(i) at the time of such
Termination, for the year in which the Termination shall have occurred and for
each year thereafter during the Period of Employment, as if such Termination had
not occurred.
(c) A lump sum equal to the present value of a straight life annuity
benefit commencing at the earliest date the Executive could have elected to
receive benefits under the Retirement Program if he had continued to be employed
during the remainder of the Period of Employment (using as the interest rate the
Discount Rate defined in Section 12 and the mortality table then in use under
the Retirement Program) to provide the excess of
(i) an aggregate benefit equal to the benefit that would have been
paid under the Retirement Program if he had continued to be employed during
the remainder of the Period of Employment and the Retirement Program had
continued during the remainder of the Period of Employment without change
from the date of this Agreement, taking into account amounts that would
have been due in order to conform to the requirements of paragraph 4.01
(calculated using the assumptions set forth in subparagraph 8.02(a)) and of
Section 6 if the Executive had remained employed by the Company to the end
of the Period
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<PAGE>
EXHIBIT 10.17
of Employment and had continued to be entitled to service credit for
benefits to the end of the Period of Employment, over
(ii) the aggregate benefit actually payable under the Retirement
Program (increased by any additional payments required to conform to
Section 6).
(d) All lump-sum payments to be made by the Company under this
Section 8 shall be made within 20 days after Termination.
(e) The Executive shall continue to be entitled to all employee
benefits provided for in subparagraphs 5.01(ii), (iii) and (iv), relating to
death benefit, disability benefit, and senior officer medical, dental, health
and welfare plans and all other present or equivalent successor plans and
practices of the Company for which officers are eligible, until the Executive
shall attain age 65, as if the Executive were still employed during such period
under this Agreement, with benefits based upon the compensation provided in
paragraph 4.01 at the time of such Termination as if the Executive continued to
be employed until age 65, and if and to the extent that such benefits shall not
be payable or provided under any such plan by reason of the Executive no longer
being an employee of the Company as a result of Termination, the Company itself
shall pay or provide therefor.
(f) The payments made and benefits provided to the Executive, his
beneficiaries, or estate pursuant to this paragraph 8.02 shall be in lieu of,
and not in addition to, any and all benefits to which the Executive is otherwise
entitled upon termination of employment with the Company, including, but not
limited to, any other Company policies, procedures, or practices, oral or
written, now or hereafter established, and shall be in lieu of all other
remedies, damages, or relief to which he might otherwise be entitled under this
Agreement.
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<PAGE>
EXHIBIT 10.17
8.03 The word "Termination" shall mean:
(a) Termination by the Company of the Executive's employment for any
reason other than for Cause as defined in paragraph 8.04 or for Disability; or
(b) Termination by the Executive of his employment upon the
occurrence of any of the following events:
(i) A significant change in the nature or scope of the authorities,
powers, functions, duties or responsibilities attached to the position
referred to in paragraph 3.01(a) or a position of comparable authorities,
powers, functions, duties or responsibilities to that of senior officers
generally or a reduction in compensation, which in either event is not
remedied within 30 days after receipt by the Company of written notice from
the Executive;
(ii) A breach by the Company of any provision of this Agreement not
embraced within the foregoing clauses (i) and (ii) which is not remedied
within 30 days after receipt by the Company of written notice from the
Executive;
(iii) The liquidation, dissolution, consolidation or merger of the
Company or transfer of 70% or more of its assets unless a successor or
successors (by merger, consolidation or otherwise) to which all or 70% or
more of its assets has been transferred shall have assumed all duties and
obligations of the Company under this Agreement;
provided that, in any event set forth in this subparagraph, the Executive shall
have elected to terminate his employment under this Agreement upon not less than
30 and not more than 90 days' advance written notice to the Board of Directors
of the Company, attention of the Chief Executive Officer, given, except in the
case of a continuing breach, within three calendar months after (A) expiration
of the 30-day cure period with respect to such event, or (B) the closing date of
such liquidation, dissolution, consolidation, merger or transfer of assets.
An election by the Executive to terminate his employment under the
provisions of this subparagraph shall not be deemed a voluntary termination of
employment by the Executive for the purpose of this Agreement or any plan or
practice of the Company.
14
<PAGE>
EXHIBIT 10.17
8.04 The Company shall have the right, by not less than 60 days'
notice in writing, to terminate for Cause the employment of the Executive and
the Period of Employment. The termination of the Executive's employment shall
be deemed to have been for Cause only
(i) if termination of his employment shall have been the result of an
act or acts of dishonesty by him or an act or acts resulting or intended to
result directly or indirectly in gain to or personal enrichment of the
Executive at the Company's expense; or
(ii) if there has been a deliberate and intentional refusal by the
Executive during the Period of Employment (except by reason of incapacity
due to illness or accident) to comply with the provisions of subparagraph
3.01(b), relating to the time and best efforts to be devoted to the affairs
of the Company, and such breach results in demonstrably material injury to
the Company, and the Executive shall have either failed to remedy such
alleged breach within 30 days from his receipt of written notice from the
Secretary of the Company demanding that he remedy such alleged breach, or
shall have failed to take all reasonable steps to that end during such 30-
day period and thereafter; or
(iii) if there has been a determination by the Chief Executive
Officer or an affirmative vote (as described below) of the Board of
Directors of the Company at a meeting called and held for that purpose and
at which the Executive is given an opportunity to be heard, that, in the
judgment of the Chief Executive Officer or the Board, the Executive has,
over an extended period of time, consistently failed to satisfactorily
perform the material duties of his office assigned to him and such failure
has had an adverse impact upon the Company; provided that such
determination may be made only after at least two formal reviews of the
Executive's performance by the Chief Executive Officer conducted at an
interval of at least six months at which the Executive shall be informed of
the most significant deficiencies in performance and during such interval
and a period of at least ninety days from and after the most recent such
review, the Executive shall have failed to correct or failed to take all
reasonable steps to correct such significant deficiencies;
provided that there shall have been delivered to the Executive with the above-
mentioned 60-day notice a certified copy of a resolution of the Board of
Directors of the Company adopted by the affirmative vote of at least a majority
of the entire membership (whether or not present) of the Board of Directors
(other than the Executive) of the Company at a meeting called and held for that
purpose and at which the Executive was given an opportunity to be heard, finding
that the Executive was guilty of conduct set forth in clause (i), (ii) or (iii)
above, specifying the particulars thereof in detail. For purposes of the
minimum number of directors required for the affirmative
15
<PAGE>
EXHIBIT 10.17
vote described in the next preceding sentence, any fraction shall be rounded to
the next higher whole number of directors.
Anything herein to the contrary notwithstanding, the employment of the
Executive shall not be considered to have been terminated by the Company for
Cause if termination of his employment took place
(i) as the result of bad judgment or negligence on the part of the
Executive, or
(ii) as the result of an act or omission without intent of gaining
therefrom directly or indirectly a profit to which the Executive was not
legally entitled, or
(iii) because of an act or omission believed by the Executive in
good faith to have been in or not opposed to the interests of the Company.
8.05 If the Executive's employment shall be terminated by the Company
during the Period of Employment and such termination is alleged to be for Cause,
or the Executive's right to terminate his employment under subparagraph 8.03(b)
shall be questioned by the Company, the Executive shall have the right, in
addition to all other rights and remedies provided by law, at his election,
either to seek arbitration in Minneapolis, Minnesota, under the rules of The
American Arbitration Association, by serving a notice to arbitrate upon the
Company, or to institute a judicial proceeding, in either case within 90 days
after having received notice of termination of his employment or notice in any
form that the termination of his employment under subparagraph 8.03(b) is
subject to question or within such longer period as may reasonably be necessary
for the Executive to take action in the event that his illness or incapacity
should preclude his taking such action within such 90-day period.
16
<PAGE>
EXHIBIT 10.17
9. OFFSET OF COMPENSATION AND BENEFITS FROM SUBSEQUENT EMPLOYMENT
9.01 In the event of a termination of his employment, the
Executive shall not be required to minimize damages or severance payment under
Sections 8 or 10 by seeking or accepting other employment or consulting
position.
9.02 If the Executive obtains other employment or a consulting
position subsequent to a Termination and prior to the end of the Period of
Employment, the Executive shall pay to the Company on a quarterly basis the
Subsequent Compensation, as defined below, that he receives for such other
employment through the last day of the Period of Employment, provided, however,
that the amount of such quarterly payments shall be reduced by any liability
with respect to such Subsequent Compensation that the Executive incurs for
income taxes (after taking into account any income tax benefit available as a
result of such quarterly payments) and payroll deductions required by law, and
provided further that no such payments shall be made unless the Executive
received a lump sum payment pursuant to and in accordance with subparagraphs
8.02(a) and (b). Subsequent Compensation for each calendar quarter during which
the Executive engages in such other employment or consulting position shall
equal the lesser of (i) the cash or other compensation that is payable to the
Executive for such employment or consulting position during that particular
quarter, or (ii) the figure obtained by multiplying the total amount of salary
plus annual and prorated performance awards used in calculating a lump sum
payment for the Executive under subparagraphs 8.02(a) and (b) (prior to
discounting to present value as of the Termination) by a fraction, the numerator
of which is 3 and the denominator of which is the number of months remaining in
the Period of Employment after Termination. Notwithstanding the foregoing, the
Executive shall not be required to minimize payments or benefits under this
Agreement by seeking or accepting other employment or a consulting position.
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<PAGE>
EXHIBIT 10.17
9.03 The benefits to be provided by the Company under the
provisions of subparagraph 8.02(e) shall be reduced to the extent of the death,
disability, medical, dental, health and welfare benefits received by the
Executive from any other employment or consulting position he obtains
subsequent to a Termination and prior to his attaining age 65.
10. MINIMUM SEVERANCE PAYMENT
10.01 If the employment of the Executive shall be terminated by
the Company for any reason other than Cause at a time prior to the attainment by
the Executive of 65 years of age and when there are fewer than 12 months
remaining in the Period of Employment, the Company shall pay the Executive a
lump sum severance payment, in addition to any payment under Section 8, equal to
the total of the following future payments, discounted to present value at the
Discount Rate as defined in Section 12 applied to each such payment, for each
month of the Severance Period (as defined below): the sum of (i) the monthly
salary of the Executive in effect for the month immediately preceding the month
in which termination of his employment shall have taken place, (ii) the average
of the highest annual incentive awards paid to the Executive under the
Management Incentive Plan for any three calendar years (or the actual number of
years if fewer) during the last ten years of his employment by the Company (or
the actual number of years if fewer) divided by 12, and (iii) the average of the
highest incentive awards, if any, paid to the Executive under the Long-Term
Incentive Plan for any three performance periods (or the actual number of
performance periods if fewer) during the last ten years of his employment by the
Company (or the actual number of years if fewer) divided by 12. The Severance
Period shall (i) commence upon the first calendar month after the completion of
the Period of Employment, and (ii) end upon the earliest of (A) 12 calendar
months after the termination of his employment, or (B) the month in which the
Executive shall attain 65 years of age.
18
<PAGE>
EXHIBIT 10.17
The payments made and benefits provided to the Executive, his
beneficiaries, or estate pursuant to this paragraph 10.01 shall be in lieu of,
and not in addition to, any and all benefits to which the Executive is otherwise
entitled upon termination of employment with the Company, including, but not
limited to, any other Company policies, procedures, or practices, oral or
written, now or hereafter established, and shall be in lieu of all other
remedies, damages, or relief to which he might otherwise be entitled under this
Agreement.
10.02 If the Executive receives payment under paragraph 10.01 and
obtains other employment or consulting position within the Severance Period, the
Executive shall pay to the Company on a quarterly basis the Post-Severance
Compensation, as defined below, that he receives for such other employment or
consulting position through the last day of the Severance Period, provided,
however, that the amount of such quarterly payments shall be reduced by any
liability with respect to such Post-Severance Compensation that the Executive
incurs for income taxes (after taking into account any income tax benefit
available as a result of such quarterly payments) and payroll deductions
required by law. Post-Severance Compensation for each calendar quarter during
which the Executive engages in such other employment or consulting position
shall equal the lesser of (i) the cash or other compensation that is payable to
the Executive for such employment or consulting position during that particular
quarter, or (ii) the figure obtained by multiplying the total amount of salary
plus annual awards used in calculating a lump-sum payment for the Executive
under paragraph 10.01 (prior to discounting to present value as of the
termination) by a fraction the numerator of which is 3 and the denominator of
which is the number of months in the Severance Period. Notwithstanding the
foregoing, the Executive shall not be required to minimize payments or benefits
under this Agreement by seeking or accepting other employment or a consulting
position.
19
<PAGE>
EXHIBIT 10.17
11. JOINT AND SEVERAL LIABILITY; TRUST AGREEMENT
11.01 All duties, undertakings, obligations, and liabilities of
the Company or the Parent arising under this Agreement shall be the joint and
several liability of the Company and the Parent.
11.02 To assure the performance by the Company and the Parent of
its obligations under this Agreement in the event of a Change in Control, the
Company or the Parent shall, upon the request of the Executive immediately prior
to a Change in Control, or at any time on or after the date a Change in Control
occurs and prior to the date all amounts to which Executive is or may become
entitled hereunder have been paid to Executive, deposit in an irrevocable trust
with a trustee designated by the Executive, an amount of liquid assets equal to
the present value based on the Discount Rate defined in Section 12 of the
maximum amount of all lump sum amounts which could be paid to Executive in the
event of a Termination of the Executive (as defined in paragraph 8.03) following
a Change in Control. Such trust shall be established and funded only if and to
the extent that the establishment of such trust does not contravene the
provisions of any loan agreement under which the Company or the Parent is
obligated; provided, however, that the Company and Parent (as opposed to the
lender under any such loan agreement) may not seek to preclude the establishment
of such trust by initiating the entering into, renegotiating or amending of any
such loan agreement, a principal purpose of which entering into, renegotiation,
or amendment is such preclusion. The trust shall be reasonably satisfactory in
form and substance to the Executive, with no greater rights in the Executive
than an unsecured creditor of the Company and Parent. To the extent there are
not amounts in trust sufficient to pay all amounts due to Executive under this
Agreement, the Company and Parent shall be and remain liable therefore.
20
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EXHIBIT 10.17
12. DISCOUNT RATE
For purposes of determining the present value of any payment or
benefit under this Agreement, the term "Discount Rate" shall mean 10%; provided,
that if the average of the prime rate (or its equivalent) charged by Morgan
Guaranty Trust Company of New York during the 30 day Period which ends 15 days
after the date of the Executive's Termination is 8% or less, the Discount Rate
shall be 8%.
13. POTENTIAL EXCISE TAXES
In the event that any excise tax is payable by the Executive by reason
of section 4999 of the Internal Revenue Code of 1986, as that section may be
amended, or any successor or similar provision thereto, or comparable state or
local tax laws, as a direct or indirect result of the receipt of any payment,
right or benefit received after November 27, 1995 by the Executive from the
Company or from any interested person which is in the nature of compensation in
connection with his employment with the Company, Parent, or any subsidiary of
either of them, the Company shall pay to the Executive such additional
compensation as is necessary (after taking into account all Federal, state and
local taxes, including income and excise taxes, payable by the Executive as a
result of the receipt of such additional compensation) to place the Executive in
the same after-tax position he would have been in had no such excise tax (and
any interest and penalties thereon) been paid or incurred. The Company shall
pay such additional compensation upon the earlier of (A) the time at which the
Company withholds such excise tax from any payments to the Executive, or (B) 30
days after the Executive notifies the Company that the Executive has filed a tax
return which takes the position that such excise tax is due and payable in
reliance on a written opinion of the Executive's tax counsel that it is more
likely than not that such excise tax is due and payable.
21
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EXHIBIT 10.17
If the Executive makes any payment with respect to any such excise tax
as a result of an adjustment to the Executive's tax liability by any Federal,
state or local authority, the Company will pay such additional compensation
within 30 days after the Executive notifies the Company of such payment.
Without limiting the obligation of the Company hereunder, the Executive agrees,
in the event the Executive makes any payment pursuant to the preceding sentence,
to negotiate with the Company in good faith with respect to procedures
reasonably requested by the Company which would afford the Company the ability
to contest the imposition of such excise tax; provided, however, that the
Executive will not be required to afford the Company any right to contest the
applicability of any such excise tax to the extent that the Executive reasonably
determines that such contest is inconsistent with the overall tax interests of
the Executive.
The Company agrees to hold in confidence and not to disclose, without
the Executive's prior written consent, any information with regard to the
Executive's tax position which the Company obtains pursuant to this Section 13.
14. INDEMNIFICATION AND INSURANCE; LEGAL EXPENSES
14.01 The Company will indemnify the Executive (and his legal
representatives or other successors) to the fullest extent permitted (including
payment of expenses in advance of final disposition of the proceeding) by the
laws of the State of Delaware, as in effect at the time of the subject act or
omission, or by the Restated Certificate of Incorporation and By-Laws of the
Company as in effect at such time or on the date of this Agreement, or by the
terms of any indemnification agreement between the Company and the Executive,
whichever affords or afforded greater protection to the Executive; and the
Executive shall be entitled to the protection of any insurance policies the
Company may elect to maintain generally for the benefit of its directors and
22
<PAGE>
EXHIBIT 10.17
officers (and to the extent the Company maintains such an insurance policy or
policies, the Executive shall be covered by such policy or policies, in
accordance with its or their terms, to the maximum extent of the coverage
available for any Company officer or director), against all costs, charges and
expenses whatsoever incurred or sustained by him or his legal representatives in
connection with any action, suit or proceeding to which he (or his legal
representatives or other successors) may be made a party by reason of his being
or having been a director, officer or employee of the Company or any of its
subsidiaries or his serving or having served any other enterprise as a director,
officer or employee at the request of the Company, provided that the Company
shall cause to be maintained in effect for not less than six years from the date
of a Change in Control (to the extent available) policies of directors' and
officers' liability insurance of at least the same coverage as those maintained
by the Company at any time within 180 days after the date of this Agreement and
containing terms and conditions which are no less advantageous than such
policies.
14.02 In the event of any litigation, arbitration or other
proceeding between the Company and the Executive with respect to the subject
matter of this Agreement or the enforcement of his rights hereunder, the Company
shall periodically reimburse the Executive, regardless of the outcome, for all
of his reasonable costs and expenses relating to such litigation, arbitration or
other proceeding, including, without limitation, his reasonable attorneys' fees
and expenses. In no event shall the Executive be required to reimburse the
Company for any of the costs or expenses relating to such litigation,
arbitration or other proceeding.
23
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EXHIBIT 10.17
15. NOTICES
All notices, requests, demands and other communications provided for
by this Agreement shall be in writing and shall be sufficiently given if
personally delivered or if actually received by mail, return receipt requested
and postage prepaid, addressed to the party entitled thereto at the address
stated below or to such changed address as the addressee may have given by a
similar notice to the other:
To the Company: The Musicland Group, Inc.
7500 Excelsior Boulevard
Minneapolis, MN 55426
Attention: Chief Executive Officer
To the Executive: The Musicland Group, Inc.
7500 Excelsior Boulevard
Minneapolis, MN 55426
Attention: Larry C. Gaines
With an additional copy to: Larry C. Gaines
5935 Boulder Bridge Lane
Shorewood, MN 55331
Receipt by mail shall be established by a duly executed return receipt.
16. GENERAL PROVISIONS
16.01 Whenever, under this Agreement, it is necessary to determine
whether one benefit is less than, equal to, or larger than another in value,
whether or not such benefits are provided under this Agreement, such
determination shall be made using mortality, interest and any other assumptions
no less favorable to the Executive than those normally used as of the date of
such determination in determining actuarial equivalents for the purpose of the
Retirement Program.
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EXHIBIT 10.17
16.02 This Agreement shall not confer any right or impose any
obligation on the Executive to continue in the employ of the Company, or limit
the right of the Company or the Executive to terminate his employment, at any
time prior to a Change in Control.
16.03 The Company shall have no right of set-off or counterclaim in
respect of any claim, debt or obligation against any payments provided for in
this Agreement, except as otherwise provided in paragraphs 9.02 and 10.02.
16.04 No right to or interest in any payments shall be assignable
by the Executive; provided, however, that this provision shall not preclude him
from designating one or more beneficiaries to receive any amount that may be
payable after his death and shall not preclude his executor or administrator
from assigning any right hereunder to the person or persons entitled thereto.
16.05 No provision of this Agreement may be amended, modified or
waived unless such amendment, modification or waiver shall be agreed to in
writing signed by the Executive and by a duly authorized Company officer.
16.06 If any provision of this Agreement shall be determined to be
invalid or unenforceable by a court of competent jurisdiction, the remaining
provisions of this Agreement shall remain in full force and effect to the
fullest extent permitted by law.
16.07 When this Agreement becomes operative, the obligations of the
Company under paragraphs 11 (joint and several liability; trust agreement), 13
(potential excise taxes) and 14 (indemnification and insurance; legal expenses)
shall survive the termination for any reason of this Agreement (whether such
termination is by the Company, by the Executive, upon the expiration of this
Agreement or otherwise).
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EXHIBIT 10.17
16.08 This Agreement shall be binding upon and inure to the benefit
of the Company and any successor of the Company including, without limitation,
any corporation or corporations acquiring directly or indirectly all or
substantially all of the assets of the Company, whether by merger,
consolidation, sale or otherwise (and except as provided in Section 1.03, such
successor shall thereafter be deemed "the Company" for the purposes of this
Agreement), but shall not otherwise be assignable by the Company.
16.09 The word "Executive" shall wherever appropriate include his
dependents, beneficiaries and legal representatives.
16.10 All payments required to be made by the Company hereunder to
the Executive or his estate or beneficiaries shall be subject to the withholding
of such amounts, if any, relating to tax and other payroll deductions as the
Company may reasonably determine it should withhold pursuant to any applicable
law or regulation.
16.11 The validity, interpretation, performance and enforcement of
this Agreement shall be governed by the laws of the State of Minnesota, without
giving effect to the principles of conflict of laws thereof.
16.12 The Prior Agreement, as defined in Paragraph 1.03 herein
shall terminate on the date this Agreement becomes operative pursuant to Section
l.
26
<PAGE>
EXHIBIT 10.17
IN WITNESS WHEREOF, the parties hereto have executed this Change of Control
Agreement as of the day and year first above written to be effective and
operative as set forth in Section 1.01.
THE MUSICLAND GROUP, INC.
By: \S\ JACK W. EUGSTER
---------------------------------------
Its: Chief Executive Officer
MUSICLAND STORES CORPORATION
By: \S\ JACK W. EUGSTER
---------------------------------------
Its: Chief Executive Officer
LARRY C. GAINES
\S\ LARRY C. GAINES
---------------------------------------
27
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated April 10, 1996, included in this form 10-K, into the
Company's previously filed Registration Statements, File Nos. 33-50520,
35-50522, 33-50524, 33-52322, 33-82130 and 33-99146.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
April 10, 1996
<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 DECEMBER 31, 1995, AND THE RELATED CONSOLIDATED
STATEMENT OF EARNINGS FOR THE YEAR THEN ENDED, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,971
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 533,694
<CURRENT-ASSETS> 573,905
<PP&E> 446,100
<DEPRECIATION> 127,783
<TOTAL-ASSETS> 996,957
<CURRENT-LIABILITIES> 634,624
<BONDS> 0
0
0
<COMMON> 343
<OTHER-SE> 195,468
<TOTAL-LIABILITY-AND-EQUITY> 996,957
<SALES> 1,722,572
<TOTAL-REVENUES> 1,722,572
<CGS> 1,116,502
<TOTAL-COSTS> 1,116,502
<OTHER-EXPENSES> 708,744
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,881
<INCOME-PRETAX> (130,555)
<INCOME-TAX> 5,195
<INCOME-CONTINUING> (135,750)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (135,750)
<EPS-PRIMARY> (4.00)
<EPS-DILUTED> 0
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