<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
MUSICLAND STORES CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------------------
4) Date Filed:
------------------------------------------------------------------------
<PAGE>
[LOGO]
10400 Yellow Circle Drive
Minnetonka, Minnesota 55343
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held May 7, 1996
------------------------
NOTICE IS HEREBY GIVEN that the 1996 Annual Meeting of Shareholders of
Musicland Stores Corporation (the "Company") will be held:
TIME: 11:00 a.m. (Central Daylight Time) on Tuesday, May 7, 1996
PLACE: Company headquarters, 10400 Yellow Circle Drive, Minnetonka,
Minnesota
for the following purposes:
1. To elect three Class I directors to the Company's Board of Directors to
serve for three-year terms or until their respective successors are
elected and qualify;
2. To ratify the appointment of Arthur Andersen LLP, independent public
accountants, as independent auditors of the Company for the 1996 fiscal
year; and
3. To transact such other business as may properly come before the Annual
Meeting.
Only shareholders of record at the close of business on March 8, 1996 are
entitled to notice of and to vote at this Annual Meeting or any adjournment
thereof. A complete list of the shareholders entitled to vote will be available
during the period of ten days prior to the date of the Annual Meeting for
examination by any shareholder, for any purpose germane to the Annual Meeting,
during ordinary business hours at 10400 Yellow Circle Drive, Minnetonka,
Minnesota.
You are requested by your Board of Directors to complete, date and sign the
enclosed Proxy and to return it promptly in the envelope provided. All
shareholders are cordially invited to attend the Annual Meeting, and, if you do
attend, you may revoke your proxy and vote in person. However, signing and
promptly returning the Proxy will assure your representation at the Annual
Meeting.
By Order of the Board of Directors
HEIDI M. HOARD
SECRETARY
Minnetonka, Minnesota
April 15, 1996
<PAGE>
MUSICLAND STORES CORPORATION
10400 Yellow Circle Drive
Minnetonka, Minnesota 55343
------------------------
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
To Be Held May 7, 1996
------------------------
SOLICITATION OF PROXIES
This Proxy Statement is furnished to the shareholders of Musicland Stores
Corporation, a Delaware corporation (the "Company"), in connection with the
solicitation by the Company's Board of Directors of Proxies for use at the 1996
Annual Meeting of Shareholders (the "Annual Meeting") to be held at 11:00 a.m.
(Central Daylight Time) on Tuesday, May 7, 1996, at the Company's headquarters
at 10400 Yellow Circle Drive, Minnetonka, Minnesota, or any adjournment thereof.
The shares represented by any Proxy given pursuant to this solicitation will
be voted at the Annual Meeting and, if a choice is specified on the Proxy, will
be voted in accordance with such specification. In the event no choice is
specified on the Proxy, the shares represented by such Proxy will be voted FOR
the nominees for directors set forth herein and FOR the ratification of the
appointment of Arthur Andersen LLP as independent auditors. If any other matters
properly come before the Annual Meeting, or if any of the persons named to serve
as directors or as auditors should decline or be unable to serve, the persons
named in the Proxy will vote on the same in accordance with their discretion.
Proxies including broker non-votes with respect to any matter brought to a vote
will not be counted as shares voted on the particular matter as to which the
broker non-vote is indicated. Therefore, broker non-votes will have no effect
when determining whether the requisite vote has been obtained to pass a
particular matter. However, proxies indicating "abstain" or "withhold authority"
with respect to any matter brought to a vote will be counted as shares voted on
the particular matter as to which the abstention or withhold authority is
indicated and will have the effect of voting against the matter.
A Proxy may be revoked by the person giving it before it is voted by (i)
delivering to the Secretary of the Company, at the address listed at the
beginning of this Proxy Statement, a written notice of revocation which must be
signed in exactly the same manner as the Proxy, (ii) filing with the Secretary
of the Company a duly executed Proxy which bears a later date, or (iii)
delivering the written, signed revocation to the election inspectors at the
Annual Meeting. Revocations and subsequent Proxies will be honored only if
received at the Company's offices on or before May 6, 1996 or delivered to the
election inspectors at the Annual Meeting prior to the convening thereof.
Presence at the Annual Meeting alone will not revoke the Proxy.
This proxy statement and the accompanying form of Proxy are being sent to
shareholders beginning on or about April 15, 1996 along with the Company's 1995
Annual Report to Shareholders. Such Annual Report is not to be regarded as part
of the proxy solicitation materials.
VOTING SECURITIES AND VOTING RIGHTS
The Board of Directors has fixed March 8, 1996 as the record date (the
"Record Date") for the determination of the shareholders entitled to notice of
and to vote at the Annual Meeting. At the close of business on the Record Date
there were outstanding 34,296,956 shares of the Company's common stock, $.01 par
value (the "Common Stock"), which is the only class of equity securities of the
Company currently outstanding.
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Each share of Common Stock is entitled to one vote. There are no cumulative
voting rights with respect to the election of directors. The presence, in person
or by Proxy, of the holders of a majority of the outstanding shares of Common
Stock is necessary to constitute a quorum at the Annual Meeting. Any holder of
shares represented by a Proxy which has been returned properly signed by the
shareholder of record will be considered present for the purpose of determining
whether a quorum exists even if such Proxy contains abstentions or broker
non-votes.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The Company's Restated Certificate of Incorporation provides that the Board
of Directors shall consist of not more than nine nor fewer than five directors.
The Board of Directors has established the number of directors to serve on the
Board as eight. The directors are divided into three classes, designated as
Class I, Class II and Class III, respectively, with staggered three-year terms
of office. At each annual meeting of shareholders, directors who are elected to
succeed the class of directors whose terms expire at that meeting will be
elected for three-year terms. Vacancies and newly created directorships
resulting from an increase in the number of directors may be filled by a
majority of the directors then in office, and the directors so chosen hold
office until the next election of the class to which such directors belong. All
current directors were previously elected by the Company's shareholders except
Josiah O. Low, III and William A. Hodder, who were elected by action of the
Board of Directors.
At this Annual Meeting, three Class I directors will be elected to hold
office for a term expiring at the annual meeting of shareholders to be held in
1999, or until their successors have been elected and qualify, or until their
death, resignation or removal, if earlier. Directors will be elected by a
plurality of the votes cast, in person or by Proxy, at the Annual Meeting.
The three directors in Class I whose terms are expiring, Kenneth F. Gorman,
Lloyd P. Johnson and Josiah O. Low, III, have been nominated by the Board of
Directors for reelection. Each of the nominees has consented to serve as
director, if elected, and the Board of Directors has no reason to believe that
any of the nominees will be unable to serve. The Board of Directors recommends a
vote FOR the election of these nominees. In the absence of instructions to the
contrary, shares represented by all Proxies will be voted for the election of
all such nominees. If for any reason any nominee is unable to serve, the Board
of Directors may designate a substitute nominee, in which event the shares
represented by the Proxies will be voted for such substitute nominee, unless an
instruction to the contrary is indicated on the Proxy.
All directors of the Company also serve on the Board of Directors of The
Musicland Group, Inc. ("MGI"), the Company's operating subsidiary.
The following biographical information has been furnished by the nominees
and continuing directors:
NOMINEES FOR ELECTION
KENNETH F. GORMAN, age 56
Mr. Gorman has been a director of the Company since November 1988. He has
been in the merchant banking and private investment fields since 1987 as an
owner and Managing Director of Apollo Partners L.L.C. From 1970 until 1987 he
was in the communications/entertainment business as a director and Executive
Vice President of Viacom International Inc. Mr. Gorman is also a director of
Apollo Radio Limited, Doane Farm Management Co., IDC Services, Inc., and
International Post Limited.
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LLOYD P. JOHNSON, age 65
Mr. Johnson has been a director of the Company since January 1993. He has
been in the banking business since 1954. In 1985 he joined Norwest Corporation,
a bank holding company, as its Chief Executive Officer, President and Chairman
of the Board. He relinquished the position of President in 1989 and the position
of Chief Executive Officer in 1992 and retired as Chairman of Board in May 1995.
Prior to joining Norwest Corporation, he was Vice Chairman of Security Pacific
National Bank. In addition to Norwest Corporation, he is a director of Cargill,
Incorporated, Valmont Industries, Inc. and Minnesota Mutual Life Insurance
Company.
JOSIAH O. LOW, III, age 56
Mr. Low was elected a director of the Company on July 31, 1995. He has been
an investment banker with Donaldson, Lufkin & Jenrette Securities Corporation
since 1985, where he is currently a Managing Director. Previously he spent 24
years with Merrill Lynch, Pierce, Fenner and Smith. Mr. Low is also a director
of Centex Development Corporation, St. Laurent Paperboard Inc. and Midcom Inc.
CONTINUING CLASS II DIRECTORS (TERMS EXPIRING IN 1997)
KEITH A. BENSON, age 51
Mr. Benson served as a director of the Company from August 1988 until
December 1989 and was again elected a director in January 1992. Mr. Benson was
elected President of the Music Stores Division effective August 1, 1994. From
May 1, 1992 through July 1994, he filled the position of Vice Chairman and Chief
Financial Officer for both the Company and MGI. Prior to that he was Executive
Vice President and Chief Financial Officer from 1988 through April 1992. Mr.
Benson joined MGI in 1980 as its Controller and also served successively as its
Senior Vice President and Chief Financial Officer, Senior Vice President and
Chief Financial Officer for the Retail Division and Senior Vice President of
Finance and Administration for the Retail Division. Previously he was with The
May Company and Dayton Hudson Corporation. Mr. Benson is also a director of
Munsingwear, Inc.
TOM F. WEYL, age 52
Mr. Weyl has been a director of the Company since December 1992. He is the
President/Chief Creative Officer at Martin/Williams Advertising, Minneapolis and
has been with that company since 1973. Mr. Weyl is a past Chairman of the Board
of Directors of the Twin Cities Council of the American Association of
Advertising Agencies.
CONTINUING CLASS III DIRECTORS (TERMS EXPIRING IN 1998)
JACK W. EUGSTER, age 50
Mr. Eugster has been a director of the Company since August 1988. He has
been the Chairman of the Board, President and Chief Executive Officer of MGI
since August 1986 and has served the Company in the same capacity since its
acquisition of MGI in August 1988. Mr. Eugster joined MGI in 1980 as Executive
Vice President and has held the positions of General Manager, President and
Chairman of the Retail Division. Previously he was with The Gap Stores and
Target Stores. Mr. Eugster is also a director of Damark International, Inc.,
Donaldson Company, Inc., MidAmerican Energy Company, ShopKo Stores, Inc. and
Jostens, Inc. He is a past president of the National Association of Recording
Merchandisers and a past chairman of the Country Music Association.
WILLIAM A. HODDER, age 64
Mr. Hodder was elected a director of the Company on July 31, 1995. He is the
Chairman and Chief Executive Officer of Donaldson Company, Inc., a manufacturer
of filtration devices. Mr. Hodder joined Donaldson Company in 1973 as its
President. Previously he spent seven years in retailing with Dayton
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Hudson Corporation including such positions as Senior Vice President and
Corporate Group Executive, President of Target Stores and Vice President of
Organization Planning and Development. In addition to Donaldson Company, Inc.,
Mr. Hodder is a director of Norwest Corporation, ReliaStar Financial
Corporation, SUPERVALU INC. and Tennant Company.
MICHAEL W. WRIGHT, age 57
Mr. Wright has been a director of the Company since January 1989. He has
been in the food distribution and retail business since 1977 when he joined
SUPERVALU INC. as Senior Vice President. He was elected President and Chief
Operating Officer of SUPERVALU INC. in 1978 and became its Chief Executive
Officer in June 1981. He assumed the additional responsibilities of Chairman of
the Board in October 1982. In addition to SUPERVALU INC., Mr. Wright is a
director of Cargill, Incorporated, Honeywell Inc., Norwest Corporation and
ShopKo Stores, Inc. He also serves as a director of the Food Marketing
Institute, the International Center for Companies of the Food Trade Industry and
the National American Wholesale Grocers Association. He is a member of the
executive committee and a past chairman of the Minnesota Business Partnership
and a past chairman of the Federal Reserve Bank of Minneapolis.
COMPENSATION OF DIRECTORS
In 1995, all non-employee directors of the Company received as compensation
for their services to the Company and MGI, in addition to reimbursement for
out-of-pocket expenses in connection with attending Board and committee
meetings, an annual fee of $12,000, payable in quarterly installments, and a
meeting fee of $1,000 for regularly scheduled meeting days and $500 for any
short board or committee meetings, held in person or by telephone, not on the
date of a regularly scheduled meeting. Beginning January 1, 1996, the annual fee
was increased to $14,000 and the regular meeting fee was increased to $1,250.
The non-employee directors are currently Messrs. Gorman, Hodder, Johnson, Low,
Weyl and Wright.
STOCK OPTION PLAN FOR UNAFFILIATED DIRECTORS
"Unaffiliated Directors," defined as those members of the Board of Directors
who are not employed by the Company or MGI, or by Donaldson, Lufkin & Jenrette,
Inc., any affiliates thereof, or any successor institutional equity investor,
participate in the Stock Option Plan for Unaffiliated Directors of Musicland
Stores Corporation (the "Directors Plan"). Currently, newly elected Unaffiliated
Directors will receive an initial grant of a stock option to purchase 5,000
shares of Common Stock. At any time that all prior grants under the Directors
Plan become fully vested, an Unaffiliated Director will receive a new grant of
an option to purchase 5,000 shares. The exercise price of all options granted
under the Directors Plan is the fair market value on the day of grant. All
grants have a term of ten years and are fully exercisable six months after the
date of the grant but vest at the rate of 20% per year over a period of five
years. All unvested portions of an option, whether exercised or not, are
immediately forfeited upon termination of service as a director for any reason,
and in the case of exercised unvested options, at the Company's option, the
participant agrees to sell such shares back to the Company at the exercise
price. Stock options granted under the Directors Plan are not transferable other
than by will or by the laws of descent and distribution. Currently, Messrs.
Gorman, Johnson, Weyl and Wright each has an option to purchase 10,000 shares of
Common Stock at exercise prices that range from $11.50 to $12.50 per share, and
Mr. Hodder has an option to purchase 5,000 shares at an exercise price of
$9.375.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During the fiscal year ended December 31, 1995 ("Fiscal Year 1995"), the
Board of Directors held seven meetings. All of the directors attended more than
75% of the meetings of the Board and the committees on which they served.
The Board of Directors has three standing committees, the Executive
Committee, the Compensation Committee and the Audit Committee. There is no
nominating committee.
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The Executive Committee, which is currently composed of Messrs. Eugster
(Chairman) and Wright, exercises the powers of the Board of Directors during
intervals between Board meetings and acts as an advisory body to the Board by
reviewing various matters prior to their submission to the Board. The Executive
Committee did not meet in Fiscal Year 1995.
The Compensation Committee reviews and makes recommendations to the Board of
Directors regarding salaries, compensation, incentive bonuses and benefits of
executive officers and other key employees of the Company and grants all stock
options to employees under the Company's employee stock option plans. The
Compensation Committee is currently composed of Messrs. Wright (Chairman),
Hodder, Low and Weyl. The Compensation Committee met twice in Fiscal Year 1995.
See "Report of the Compensation Committee on Executive Compensation."
The Audit Committee (i) reviews the internal and external financial
reporting of the Company, (ii) reviews and discusses with the Company's
independent auditors the scope of the independent audit and (iii) considers
comments by the auditors regarding internal controls and accounting procedures
and management's response to those comments. The Audit Committee also recommends
the appointment of the independent auditors for the Company. The Audit Committee
currently consists of Messrs. Gorman (Chairman) and Johnson and met twice in
Fiscal Year 1995.
PROPOSAL NO. 2
RATIFICATION OF APPOINTMENT OF AUDITORS
The Company's independent auditors for Fiscal Year 1995 were Arthur Andersen
LLP, independent public accountants. The Audit Committee of the Board of
Directors has considered the qualifications and experience of Arthur Andersen
LLP, and, based upon recommendation of the Audit Committee, the Board of
Directors has appointed them as independent auditors of the Company for the
current fiscal year which ends December 31, 1996 ("Fiscal Year 1996"). Although
the submission of this matter to the shareholders is not required by law, the
Board of Directors desires to obtain the shareholders' ratification of such
appointment. A resolution ratifying the appointment will be offered at the
Annual Meeting. If the resolution is not adopted, the adverse vote will be
considered as a direction to the Board to select other auditors for the
following year. However, because of the difficulty and expense of making any
substitutions of auditors for the fiscal year already in progress, it is
contemplated that the appointment for Fiscal Year 1996 will stand unless the
Board finds other good reason for making a change.
It is expected that a representative of Arthur Andersen LLP will be present
at the Annual Meeting to respond to appropriate questions and to make a
statement if the representative so desires.
Ratification requires the affirmative vote by holders of at least a majority
of the shares voting on such matter. The Board of Directors recommends a vote
FOR the ratification of the appointment of Arthur Andersen LLP as the Company's
independent auditors for Fiscal Year 1996.
COMMON STOCK OWNERSHIP OF
CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT
The following table provides information as to the beneficial ownership of
the Company's Common Stock as of March 8, 1996, or as of December 31, 1995 for
that information which is reported based upon Schedule 13G filings, by (i) each
person or group known by the Company to be the beneficial owner of more than 5%
of such Common Stock, (ii) each nominee and continuing director of the Company,
(iii) the Named Executive Officers (see "Summary Compensation Table"), and (iv)
all directors and executive officers as a group (14 persons). Beneficial
ownership has been determined for this purpose in accordance with Rule 13d-3 of
the Securities and Exchange Commission (the "SEC") under which a person is
deemed to be the beneficial owner of securities if he or she has or shares
voting power or dispositive power with respect to such securities or has the
right to acquire beneficial
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ownership of such securities within 60 days by exercise of an option or
otherwise. The persons named in the table have sole voting and dispositive
powers with respect to all shares of Common Stock unless otherwise noted in the
notes following the table.
<TABLE>
<CAPTION>
Name of Beneficial Owner, Amount and Nature of
Including Address Beneficial Ownership of Percent of
of Owners of More than 5% Common Stock Common Stock (1)
- ------------------------------------------------------------ ----------------------- ----------------
<S> <C> <C>
SC Fundamental Inc. (as general
partner) (2)............................................... 4,798,000(2) 14.0%
SC Fundamental Value BVI, Inc. (as managing general partner
of investment manager)
Gary N. Siegler and Peter M. Collery
(as controlling shareholders)
712 Fifth Avenue
New York, New York 10019
Management Investors Group (3) ............................. 4,575,598(3,4) 13.0%
10400 Yellow Circle Drive
Minnetonka, MN 55343
State of Wisconsin Investment Board (5) .................... 2,901,400 8.5%
P.O. Box 7842
Madison, WI 53707
Donaldson, Lufkin & Jenrette, Inc. (6) ..................... 2,397,634(6,7) 7.0%
The Equitable Companies Incorporated
(as parent)
277 Park Avenue
New York, NY 10172
Jack W. Eugster............................................. 1,656,056(8,9,10) 4.8%
Gary A. Ross................................................ 614,626(8,9) 1.8%
Keith A. Benson............................................. 570,726(8,9,10) 1.7%
Larry C. Gaines............................................. 226,539(8,9) *
Kenneth F. Gorman........................................... 80,000(9) *
Michael W. Wright........................................... 55,000(9) *
Josiah O. Low, III.......................................... 25,373 *
Tom F. Weyl................................................. 16,000(9) *
Lloyd P. Johnson............................................ 11,000(9) *
William A. Hodder........................................... 9,030(9) *
Reid Johnson................................................ 3,000 *
All directors and executive officers as a group (14
persons)................................................... 3,267,350(8,9,10) 9.3%
</TABLE>
- ------------------------
* Less than 1%
(1) Based on 34,296,956 shares outstanding on March 8, 1996
(2) Based on Amendment No. 7 to Schedule 13D, dated March 18, 1996, filed
jointly by SC Fundamental Inc. ("SC") as general partner of the SC
Fundamental Value Fund, L.P. ("Fund"), SC Fundamental Value BVI, Inc. ("BVI,
Inc.") as the managing general partner of the investment manager of SC
Fundamental BVI, Ltd., and Gary N. Siegler and Peter M. Collery, officers,
directors and controlling shareholders of SC and BVI, Inc., which shows
that, as of March 8, 1996, SC, Fund, Siegler and Collery share voting and
dispositive power of 2,930,060 shares and BVI, Inc., Siegler and Collery
share voting and dispositive power of 1,585,940 shares and Siegler has sole
voting and dispositive power of 282,000 shares.
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(3) The Management Investors Group is currently a group of 25 persons,
including Messrs. Eugster, Ross, Benson and Gaines, who are either officers
or former officers of the Company or members of their families. The group
shares voting control of the shares indicated by virtue of being parties to
a voting agreement (the "Management Voting Agreement") more fully described
below.
(4) Includes 851,607 shares which may be acquired pursuant to the exercise of
vested stock options.
(5) Based on Schedule 13G, dated February 1, 1996, filed by the State of
Wisconsin Investment Board, a state agency, on behalf of a public pension
fund.
(6) Based on Amendment No. 3 to Schedule 13G, dated February 9, 1996 filed by
The Equitable Companies Incorporated ("Equitable"), as parent of Donaldson
Lufkin & Jenrette, Inc. ("DLJ"). Equitable reports 2,375,734 shares
beneficially owned by DLJ and its affiliates, 6,200 shares held for
investment purposes, with shared dispositive power only, by Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJSC"), 10,900 shares held by
Alliance Capital Management L.P. and 4,800 shares held by Wood, Struthers &
Winthrop Management Corp. on behalf of client discretionary investment
advisory accounts with shared voting but sole dispository power.
(7) Meridian Assets Management, Inc. ("Meridian") has sole voting power of
1,124,134 shares as voting trustee of shares owned by DLJ and certain of its
affiliates and employees (See "DLJ Voting Trust Agreement" below). 980,066
of these shares are included in the numbers reported by Equitable.
(8) Of the shares listed, the following are Restricted Shares: 632,068 shares
for Mr. Eugster; 243,104 shares each for Messrs. Ross and Benson; 72,916 for
Mr. Gaines; and 1,628,768 for all directors and executive officers as a
group (14 persons including Messrs. Eugster, Ross, Benson and Gaines). See
"Certain Transactions -- Restricted Shares."
(9) Includes shares of Common Stock which may now be acquired pursuant to the
exercise of stock options (but forfeitable in the case of the non-employee
directors) as follows: Mr. Eugster, 317,800 shares; Messrs. Ross and Benson,
124,134 shares each; Mr. Gaines, 74,967 shares; Messrs. Gorman, Wright,
Johnson and Weyl, 10,000 shares each; Mr. Hodder, 5,000 shares; and all
directors and executive officers as a group (14 persons including Messrs.
Eugster, Ross, Benson, Gaines, Gorman, Wright, Johnson, Weyl and Hodder),
795,370 shares.
(10) Includes 19,200 shares held by the children and 10,000 shares held by the
wife of Mr. Eugster who share the same household; includes 5,000 shares held
by the children of Mr. Benson who share the same household.
MANAGEMENT VOTING AGREEMENT
Under the Management Voting Agreement certain members of the Company's
management (the "Management Investors") have agreed to vote certain of their
shares as a block. Each vote will be determined by the holders of a majority of
the class of shares entitled to vote owned by the Management Investors. Other
than pursuant to Rule 144 under the Securities Act of 1933 or in a registered
offering, the Management Investors may not transfer any shares to any person who
does not become a party to the Management Voting Agreement. The Management
Voting Agreement also calls for a restrictive legend to be put on all
certificates held by the Management Investors. Management Investors who sell
shares pursuant to Rule 144 or pursuant to a registered offering and later
acquire a number of shares equal to or less than such sold shares must vote the
newly acquired shares in the same manner. The Management Voting Agreement may be
terminated at any time by the vote of at least 80% of all shares held by all
Management Investors and, unless so terminated, will expire on August 24, 1998.
DLJ VOTING TRUST AGREEMENT
On March 4, 1992, DLJ (including certain affiliates) entered into a voting
trust agreement (the "Voting Trust Agreement") under which Meridian is the
voting trustee. Pursuant to this agreement DLJ
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and certain of its affiliates have delivered to Meridian such number of shares
of Common Stock owned by them which is in excess of the number equal to 5% of
the aggregate number of outstanding shares of Common Stock. Subsequently, DLJ
transferred the ownership of certain shares in the voting trust to participants
in various DLJ compensation plans. Meridian has the sole power and discretion to
exercise the rights and powers of a stockholder with respect to the shares in
the voting trust, except that DLJ and certain of its affiliates are entitled to
receive dividends, distributions and payments in respect of said shares, as and
when the same may be paid by the Company (except that shares of Common Stock
issued as a dividend, distribution or other payment will also be subject to the
Voting Trust Agreement).
COMPLIANCE WITH SECTION 16(A) REQUIREMENTS
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers and persons who
beneficially own more than 10% of a registered class of the Company's equity
securities to file initial reports of ownership ("Form 3") and reports of
changes in ownership ("Form 4") with the SEC and the New York Stock Exchange.
Such persons are also required to furnish the Company with copies of all Section
16(a) forms they file.
Based on the Company's review of the copies of such forms received by it
with respect to Fiscal Year 1995 and written representations received from
certain reporting persons that no Forms 5 were required for such persons, the
Company believes that all Section 16(a) filing requirements have been complied
with, with the following exceptions: Mr. Gorman's Form 4 filing for the month of
January 1995 mistakenly understated the size of the transaction reported by
5,000 shares and Mr. Hodder's Form 3 inadvertently omitted 4,030 shares. Both
filings were subsequently amended.
CERTAIN TRANSACTIONS
RESTRICTED SHARES
As part of the acquisition of MGI by the Company, the officers of MGI at the
time (the "Management Investors") entered into a subscription agreement with the
Company (the "Management Subscription Agreement") pursuant to which the
Management Investors purchased approximately 21% of the Company's then
outstanding shares of common stock as follows. On August 25, 1988, the
Management Investors purchased at $2.50 per share, for an aggregate purchase
price of $5.5 million, 2,200,000 shares of common stock ("Cash Shares"). The
Management Investors also purchased 2,000,000 shares of common stock
("Restricted Shares") in consideration for the payment of $5,000, or $.0025 per
share, on August 25, 1988. At December 31, 1995, 1,991,308 shares of the
Restricted Stock were outstanding, the remainder having been converted to Cash
Shares (valued at $4.50 per share) and purchased by the remaining Management
Investors when one officer resigned from the Company. The Restricted Shares were
originally subject to a four-year vesting schedule, which is now completed.
Although holders of Restricted Shares have voting and dividend rights, no
Restricted Shares are transferable by the holder thereof until such holder has
paid the Company an additional $2.4975 or $4.4975 per share, as applicable. The
Management Investors are not obligated to make such additional payment. However,
after August 25, 2003, the Company may buy back the Restricted Shares for $.0025
per share.
REGISTRATION RIGHTS
The Company has granted to the Management Investors Group and to DLJ certain
demand and piggy-back registration rights with respect to the Common Stock. The
Company is obligated to pay the expenses (excluding underwriting discounts and
commissions) of such registrations and to indemnify the other parties for
certain registration related liabilities.
8
<PAGE>
INVESTMENT BANKING SERVICES
The Company engaged DLJSC in 1995 for certain investment banking services.
The Company has paid DLJSC a retainer of $100,000 and will reimburse DLJSC's
reasonable out of pocket expenses incurred in rendering such services. The
Company believes that the engagement of DLJSC is upon terms that are fair to the
Company and reasonable in the marketplace.
EXECUTIVE OFFICERS AND COMPENSATION
The Company's executive officers, other than Messrs. Eugster and Benson, are
identified below. Executive officers of the Company currently hold the same
respective positions with MGI.
Gary A. Ross, age 49, has been President, Suncoast Division since 1990.
Since joining MGI in 1984, he has served in the positions of Executive Vice
President of Marketing and Merchandising, Senior Vice President of Marketing and
Merchandising, Senior Vice President of Marketing and Merchandising of the
Retail Division and Senior Vice President of Planning and Administration of the
Retail Division. Mr. Ross served as a director of the Company from January 1,
1990 to December 31, 1990. Mr. Ross is a past chairman and currently a director
of the Video Software Dealers Association. Prior to joining MGI, he was with The
Gap Stores and Target Stores.
Larry C. Gaines, age 48, became President, Media Play Division on November
1, 1993. Prior thereto he was Senior Vice President of Media Play and On Cue
Divisions from May 1, 1992 through October 31, 1993 and was Senior Vice
President of Music Stores from 1990 through April 1992. Mr. Gaines joined MGI in
1981 and has served in the positions of Senior Vice President of Stores --
Eastern Division, Vice President of Stores -- Eastern Division, Vice President
- -- Sam Goody, Vice President -- Sam Goody for the Retail Division, Vice
President/General Manager of Discount Records for the Retail Division, Regional
Director and Regional Manager. Previously, he had retail experience with Cole
National Corporation.
Reid Johnson, age 53, became Executive Vice President of Finance and
Administration and Chief Financial Officer on August 4, 1994. Prior to joining
the Company, Mr. Johnson held the position of Vice Chairman and Chief
Administrative Officer for the Dayton Hudson Department Store division of the
Dayton Hudson Corporation from 1985 to 1994. He was employed by Dayton Hudson
beginning in 1968 and his positions also included Senior Vice President and
Chief Financial Officer for Target Stores, Vice President and Controller, Vice
President and Treasurer, Treasurer, Director of Business Development and
Financial Analyst.
Bruce B. Bausman, age 53, has been Senior Vice President of Real Estate
since 1988. Since joining MGI in 1985, he has served in the positions of Vice
President of Human Resources and Store Development and Vice President of Human
Resources and Store Development of the Retail Division. Mr. Bausman is a past
director of the Country Music Association. Prior to joining MGI, he was with
Montgomery Ward, Bausman Associates, Inc., National Super Market, Team Central
and Red Owl Stores.
Robert A. Henderson, age 51, has been Senior Vice President and General
Merchandise Manager since 1988. He joined MGI in 1982 and has held the positions
of Vice President and General Merchandise Manager, Vice President and General
Merchandise Manager of the Retail Division, Vice President of Hardlines of the
Retail Division and General Merchandise Manager of Hardlines of the Retail
Division. Previously, Mr. Henderson was with Modern Merchandising and Target
Stores.
Douglas M. Tracey, age 42, has been Senior Vice President of Distribution
since August 1994. Within the last few years he has also served in the positions
of General Manager of the On Cue Division, Senior Vice President of Marketing
Services and Senior Vice President of Administration and Distribution.
Previously, from 1986 through April 1992, he served as Vice President,
Distribution.
9
<PAGE>
Mr. Tracey joined MGI in 1971 and has held the positions of Managing Director of
National Distribution, General Manager Minneapolis Distribution Center, Manager
of Policies and Procedures, National Store Operations Manager, District
Supervisor and Store Manager.
The following tables set forth information concerning total compensation
earned by the Company's Chief Executive Officer and the other four most highly
compensated executive officers in Fiscal Year 1995 (collectively the "Named
Executive Officers" or "NEOs") for all services rendered to the Company and its
subsidiaries during each of the last three fiscal years.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
--------------
Awards
Annual Compensation --------------
-------------------------------------------- Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary ($) Bonus ($)(1) Compensation ($) Options (#)(2) Compensation ($)
- --------------------------------------- ------- ---------- ------------ ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Jack W. Eugster Chairman of the Board, 1995 $507,500 $ 0 $ 7,915(3) 60,000 $301,012(4)
President and C.E.O. 1994 500,000 0 11,943 40,000 304,374
1993 470,000 225,000 13,660 75,000 310,144
Keith A. Benson President, Music Stores 1995 $293,012 $ 0 $ 2,100(3) 22,500 $130,981(5)
1994 280,769 0 6,870 15,000 129,975
1993 260,885 90,000 5,402 25,000 102,930
Gary A. Ross 1995 $280,887 $ 38,940 $ 7,700(3) 22,500 $116,803(6)
President, Suncoast 1994 275,692 12,062 16,257 15,000 110,342
1993 260,885 142,000 13,302 25,000 89,739
Larry C. Gaines 1995 $245,369 $ 0 $ 2,917(3) 22,500 $ 25,365(7)
President, Media Play 1994 237,000 10,369 12,921 20,000 21,675
1993 181,192 60,000 6,907 30,000 11,079
Reid Johnson 1995 $278,808 $ 0 $36,012(3) 22,500 $ 5,574(9)
Executive Vice President, 1994(8) 102,067 4,500 178 90,000 240
Chief Financial Officer
</TABLE>
- --------------------------
(1) Reflects bonus earned for service during the fiscal year indicated under the
Company's Management Incentive Plan although all or a portion of the bonus
may have been awarded during the next fiscal year.
(2) The number indicated is the number of shares of Common Stock which can be
acquired upon the exercise of options subject to vesting restrictions. The
Company has not granted any stock appreciation rights ("SARs").
(3) Other Annual Compensation for 1995 includes amounts reimbursed for the
payment of taxes and above-market earnings on deferral awards under the
Company's Management Incentive Plan (See "Compensation Committee Report on
Executive Compensation") and, with respect to Mr. Johnson, on deferred
salary (See "Employment and Change in Control Agreements").
(4) All Other Compensation for Mr. Eugster for 1995 includes the following:
401(k) Company match: $1,500; medical/dental plans, incremental cost:
$3,822; life insurance and excess liability insurance imputed income:
$13,336; and a premium of $282,354 paid for a life insurance policy under a
split-dollar arrangement whereby the Company will recoup the premium and the
executive will be entitled to the accrued earnings from the policy (See
"Pension Plan").
(5) All Other Compensation for Mr. Benson for 1995 includes the following:
401(k) Company match: $1,500; medical/dental plans, incremental cost:
$2,641; life insurance and excess liability insurance imputed income:
$7,511; and a premium of $119,329 paid for a life insurance policy under a
split-dollar arrangement whereby the Company will recoup the premium and the
executive will be entitled to the accrued earnings from the policy (See
"Pension Plan").
(6) All Other Compensation for Mr. Ross for 1995 includes the following: 401(k)
Company match: $1,500; medical/ dental plans, incremental cost: $2,902; life
insurance and excess liability insurance imputed income: $6,022
10
<PAGE>
and a premium of $106,379 paid for a life insurance policy under a
split-dollar arrangement whereby the Company will recoup the premium and the
executive will be entitled to the accrued earnings from the policy (See
"Pension Plan").
(7) All Other Compensation for Mr. Gaines for 1995 includes the following:
401(k) Company match: $1,500; medical/dental plans, incremental cost:
$3,103; life insurance and excess liability insurance income: $2,062; and a
premium of $18,700 paid for a life insurance policy under a split-dollar
arrangement whereby the Company will recoup the premium and the executive
will be entitled to the accrued earnings from the policy (See "Pension
Plan").
(8) Mr. Johnson became an executive officer of the Company in August 1994.
(9) All Other Compensation for Mr. Johnson for 1995 includes the following:
401(k) Company match: $1,018; medical/dental plans, incremental cost:
$1,623; and life insurance and excess liability insurance imputed income:
$2,933.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants Potential Realizable Value
----------------------------------------------------------------
Number of at Assumed Annual Rates of
Securities Percent of Total Stock Price Appreciation
Underlying Options Granted for Option Term
Options to Employees in Exercise Expiration --------------------------
Name Granted (#)(1) Fiscal Year Price ($/Sh)(2) Date 5% ($)(3) 10% ($)(3)
- -------------------------------------- -------------- ---------------- --------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Jack W. Eugster....................... 60,000(4) 17.84% $ 6.75 11/27/05 $ 242,484 $ 626,010
Keith A. Benson....................... 22,500(4) 6.69% 6.75 11/27/05 90,932 234,754
Gary A. Ross.......................... 22,500(4) 6.69% 6.75 11/27/05 90,932 234,754
Larry C. Gaines....................... 22,500(4) 6.69% 6.75 11/27/05 90,932 234,754
Reid Johnson.......................... 22,500(4) 6.69% 6.75 11/27/05 90,932 234,754
All Shareholders (5)................................................................................ $142,894,837 $362,124,410
</TABLE>
- --------------------------
(1) The number indicated is the number of shares of Common Stock which can be
acquired upon the exercise of options. The Company has not granted any SARs.
(2) Fair market value of the Common Stock on the date of grant (November 27,
1995) was $6.75.
(3) The assumed rates of 5% and 10% are hypothetical rates of stock price
appreciation selected by the SEC and are not intended to, and do not,
forecast or assume actual future stock prices. The Company believes that
future stock appreciation, if any, is unpredictable and is not aware of any
formula that will determine with any reasonable accuracy the present value
of stock options based on future factors which are unknowable and volatile.
No gain to optionees is possible without an appreciation in stock prices,
and any such increase will benefit all shareholders commensurately. There
can be no assurance that the amounts reflected in this table will be
achieved.
(4) All options have a term of ten years, but provide for early termination upon
termination of employment, are not transferable and become exercisable in
equal installments on January 31, 1998, 1999 and 2000, subject to
acceleration of vesting upon a change in control.
(5) Calculated using the closing price on November 27, 1995, $6.625, and the
total number of shares outstanding, 34,296,956, with appreciation calculated
until November 27, 2005, the expiration date of the above option grant.
11
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options
Acquired on Value Fiscal Year-End (#)(1) at Fiscal Year-End ($)(2)
Name Exercise (#) Realized ($) (Exercisable/Unexercisable) (Exercisable/Unexercisable)
- ------------------------------------------ ------------- ------------ --------------------------- ---------------------------
<S> <C> <C> <C> <C>
Jack W. Eugster........................... 0 $0 233,700/247,300 $138,600/0
Gary A. Ross.............................. 0 0 92,000/91,300 53,200/0
Keith A. Benson........................... 0 0 92,000/91,300 53,200/0
Larry C. Gaines........................... 0 0 53,035/87,765 35,000/0
Reid Johnson.............................. 0 0 0/112,500 0/0
</TABLE>
- ------------------------
(1) The Company does not have any outstanding SARs.
(2) Value is calculated as the difference between the closing market price of
the Common Stock on December 29,1995, which was $4.25, and the option
exercise price (if less than $4.25) multiplied by the number of shares
underlying the option.
Report of the Compensation Committee on Executive Compensation
The Compensation Committee of the Board of Directors (the "Committee"),
composed entirely of independent outside directors, reviews and makes
recommendations to the Board on an annual basis with respect to the Company's
executive compensation policies and the compensation to be paid to the Chief
Executive Officer and each of the other executive officers of the Company.
The Committee oversees the Company's executive compensation program,
including the Company's qualified and non-qualified benefit plans as they
pertain to executive officers. The Company currently maintains a variety of
employee benefit plans in which its executive officers may participate,
including the Pension Plan, the Capital Accumulation (KSOP) Plan, stock option
and incentive plans and a split-dollar life insurance program.
EXECUTIVE COMPENSATION PROGRAM
The components of the Company's executive compensation program include (a)
base salaries (subject to the terms of applicable employment agreements), (b)
performance-based bonuses, (c) stock options and other stock-based awards, (d)
miscellaneous fringe benefits comparable to those of similar companies, and (e)
qualified and non-qualified retirement plans and programs previously mentioned.
The combination of base salary, bonuses, stock options and other benefits
reflects the following Company objectives:
- correlating compensation with the Company's profitability;
- attracting and retaining highly qualified and motivated key executives who
are necessary for the long-term success of the Company; and
- recognizing and rewarding outstanding individual performance.
In order to make its recommendations to the Board concerning executive
officer compensation, the Committee reviews and evaluates the Company's
operating and net earnings as compared to the budgeted plan for the current year
and to the prior year's actual performance. The Committee also reviews and
considers the Company's return on investment as a factor in making compensation
decisions.
12
<PAGE>
In addition, the Committee reviews a compensation study compiled by the
Company. The Company participates in several nationally recognized surveys on
the compensation of executives prepared by such consultants as Mercer and
Management Compensation Services. The information from such surveys which is
used by the Compensation Committee is summary information for companies in the
retail business which are similar in size to the Company (based on annual
revenues). The survey information received is not company specific. Over a
hundred companies participate in the overall surveys. The Company uses this
broad comparison group for compensation purposes because the Company believes
that it competes with a wide range of companies for executive talent. In 1994,
the Company's executive compensation packages were determined to be competitive
by an outside consultant engaged at the request of the Committee.
Although currently the base salaries of the Company's executive officers
generally fall near the salary medians for similarly sized companies in the
retail business, as derived from the national survey information, it is not a
set policy of the Compensation Committee that such base salaries should be at
the median. Instead, the Compensation Committee recognizes that variances may be
appropriate when also considering the experience, performance and
responsibilities of the individual executive officer.
The weight given corporate performance factors is mainly reflected in the
bonus program of the Company. This program, as embodied in the current
Management Incentive Plan ("MIP"), puts approximately 52% of the CEO's maximum
cash compensation at risk since bonuses are awarded only if the Company achieves
certain corporate performance goals. The percentage at risk for the other
executive officers is slightly less, at approximately 41% for the executives
named in the compensation tables.
The funding of the MIP bonus pool is determined by corporate performance
goals that are set by the Board during the first quarter of each year. For 1995
the corporate performance goals were tied to the Company's earnings per share
("EPS") and return on net assets employed ("RONAE"), with no funding to occur if
1995 EPS did not exceed 1994 EPS (51 cents) by at least 5 cents. The MIP also
allows the Board to determine whether discretionary incentive funds are to be
made available for awards to participants based on their individual performance
and not contingent upon the attainment of business goals. To further encourage
retention of key employees, the Company's current policy is to pay out 80% of
each bonus in cash and defer 20%. The deferred portion is paid out over a four
year period (contingent upon the participant remaining with the Company) and
increases or decreases annually based upon an adjusted calculation of the net
worth of the Company.
Since 1995 EPS was less than 56 cents, no MIP bonuses, other than
discretionary awards, were payable. Discretionary awards totaling $158,376 were
awarded to 17 participants (including one of the NEOs) to recognize both the
performance gains of certain business units and exceptional individual
contributions.
The Company also maintains a stock option plan for its key employees,
including the executive officers, under which awards are made from time to time.
The Committee's policy is that the exercise price of each stock option awarded
is at least the market value of the Company's stock on the day of the award. The
number of stock options awarded is discretionary and determined subjectively by
the Committee with a view toward what will attract, retain and motivate senior
management and other key employees as well as what is adequate to reward Company
and individual performance. The Committee believes that awarding stock options
aligns the interests of the executives more closely with the interests of
shareholders.
The Company's 1994 Employee Stock Option Plan satisfies the requirements of
the Internal Revenue Service for performance-based compensation under Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Stock
option awards to the executive officers in 1995 were made from such plan. The
Committee has no other policy with respect to qualifying compensation paid to
the executive officers under Section 162(m). The compensation paid in 1995 and
anticipated to be paid in 1996 will not exceed the $1 million deductibility
limit for any of the affected individuals.
13
<PAGE>
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The minimum base salary of the Chief Executive Officer ("CEO") is set by,
and subject to the terms of, his employment agreement, which was executed in
August 1988 and amended in 1995 to increase his base salary to $515,000.
Increases are considered and recommended by the Committee, if appropriate, at
the beginning of each fiscal year. In January 1995 a modest increase of 1.5% was
given. This increase was determined in order to keep the CEO's base salary
competitive as compared to the national compensation survey information
described previously and to award the CEO for the Company's achievements,
financial and otherwise, during the previous fiscal year. Although such increase
for 1995 was not quantitatively linked to any one or more Company performance
factors, the Committee subjectively evaluated the CEO's contribution in helping
the Company to achieve the following in 1994: increases in comparable store
sales, the increase in profitability of the Suncoast division and the continuing
growth and development of the Media Play and On Cue superstore divisions.
The CEO did not receive a discretionary bonus award for 1995.
In November 1995, the Company awarded nonqualified stock options to the CEO,
along with other executive officers, as disclosed in the compensation tables.
These awards vest over a period of at least four years and were granted at an
exercise price equal to fair market value as of the day of grant. The purpose of
granting options with a vesting period is to retain the services of the CEO and
other option recipients. The amount of the award to the CEO was based
principally on the Committee's assessment of his performance. Since the stock
options awarded to the CEO will only be of value if the market price of the
Company's stock increases, the Committee believes that such compensation
encourages the CEO to improve the performance of the Company. In determining the
award the Committee did not consider the amount and terms of stock options
previously granted.
The CEO's employment and change in control agreements were originally
negotiated in 1988 at the time of the leveraged buyout of MGI by the Company. In
view of the growth and evolution of the Company since that time, the Committee
approved changes to these agreements to bring them up to date. The principal
amendments included raising the floor for the CEO's base salary from $315,000 to
$515,000 and eliminating a partial reduction in severance payments based on
realization of gain above a certain threshold on the sale by the CEO of shares
of the Company's Common Stock obtained by him at the time of the leveraged
buyout. The CEO has not disposed of any such shares since 1988.
In the Committee's opinion, the total compensation package for the CEO in
1995 appropriately reflects the CEO's individual performance level in carrying
out his overall responsibility for the Company as well as the Company's mixed
performance in 1995 and the prior fiscal year.
The foregoing report is submitted by the members of the Committee.
Michael W. Wright, Chairman
William A. Hodder
Josiah O. Low, III
Tom F. Weyl
Compensation Committee Interlocks and Insider Participation
Mr. William A. Hodder and Mr. Josiah O. Low, III, joined the Compensation
Committee in November 1995. Mr. Hodder is the Chairman of the Board and Chief
Executive Officer of Donaldson Company, Inc. Mr. Eugster, the Chairman of the
Board and Chief Executive Officer of the Company, is also a director of
Donaldson Company, Inc. and serves on that company's compensation committee. Mr.
Low is a Managing Director of DLJSC. See "Certain Transactions -- Investment
Banking Services."
14
<PAGE>
Employment and Change of Control Agreements
The Company entered into employment agreements, effective August 25, 1988,
with Messrs. Eugster, Benson, Ross, Bausman, Gaines and Henderson (along with
Mr. Johnson, the "Executives"). Mr. Eugster's change in control agreement was
entered into at the same time. Change in control agreements with Mr. Gaines and
Mr. Johnson were entered into on November 27, 1995. As amended January 22, 1992
and November 27, 1995, the employment agreements provide for employment in each
Executive's current position (or, except in the case of Mr. Eugster, a similar
executive capacity) until August 31, 1999 for Mr. Eugster, August 31, 1998 for
Messrs. Benson and Ross, and August 31, 1996 for Messrs. Bausman, Gaines and
Henderson, all subject to automatic extensions of one additional year
continuously thereafter unless either party gives notice to the other that no
further extension is desired by, for the next such extension, February 28, 1997
for Messrs. Eugster, Benson and Ross, and July 1, 1996 for Messrs. Bausman,
Gaines and Henderson (in each case the "Employment Period"), and on each
anniversary of such dates for successive extensions thereafter. If notice of
termination is given by July 1, 1996 for any of Messrs. Bausman, Gaines and
Henderson, their agreement would terminate one year from the date of said
notice. The employment agreements provide that the annual base salaries of the
Executives will be no less than the following amounts plus periodic increases
granted pursuant to the Company's customary procedures and practices: $515,000
for Mr. Eugster; $170,000 for Mr. Benson; $195,000 for Mr. Ross; $188,670 for
Mr. Bausman; $257,400 for Mr. Gaines; and $173,290 for Mr. Henderson. The
purpose of these agreements is to assure the Company of the continued service of
each Executive.
The Company may terminate the employment of any Executive for cause (as
narrowly defined in the employment agreements) without further obligation by the
Company except for vested benefits under the Capital Accumulation Plan and the
Retirement Plan. Otherwise the agreements provide for certain severance benefits
in the event employment is terminated for other reasons, including resignation,
death or disability, except for voluntary resignation in the case of Messrs.
Bausman, Gaines and Henderson. If the Executive is terminated due to a material
breach by the Company (including, in the case of Messrs. Eugster, Benson and
Ross, a significant reduction in the Executive's authority or responsibility),
the Executive would be entitled for the remainder of the current Employment
Period to his salary and all other benefits, including a supplemental retirement
benefit and substitute incentive award and immediate vesting of all stock
options, and in the case of Messrs. Benson and Ross, subject to a reduction in
the Employment Period (to a maximum ranging from six to eighteen months) if the
Executive's cumulative proceeds from sale of Company Common Stock is four times
or more the amount paid for all such stock bought in 1988.
Upon the employment of Mr. Johnson in 1994, the Company agreed that, if he
were terminated without cause within a period of three years from the start of
his employment, he would be paid twelve months salary continuation plus a bonus
equal to the bonus that would have been earned under the MIP plan assuming
target level performance. The Company also agreed to institute a deferred
compensation plan for Mr. Johnson whereby he could elect to defer up to 100% of
his salary and bonus with any deferrals earning interest in accordance with the
actual performance of an investment vehicle selected by Mr. Johnson, except that
beginning October 1, 1995 the investment measure must be a 7-year U.S. treasury
bill.
The new change in control agreements for Messrs. Gaines and Johnson and Mr.
Eugster's change in control agreement, as amended November 27, 1995, only become
operative upon the occurrence of a change in control of the Company which as
defined in the agreements occurs when any person becomes the beneficial owner of
20% or more of the Company's Common Stock, or makes a tender offer for such
control with a substantial likelihood of success, or 70% of the Company's or
MGI's assets are sold, or a majority of the directors of the Company are persons
who generally were not nominated for election nor appointed to fill vacancies by
the incumbent board of directors. The agreements provide for continued
employment of Mr. Eugster for a period of three years, and of Messrs. Johnson
and Gaines for a period of two years, following a change in control, subject to
automatic extensions of one additional year continuously thereafter unless
either party gives notice to the other that no further
15
<PAGE>
extension is desired by, for the first such extension, the end of the sixth
month following the change in control for Mr. Eugster and the end of the twelfth
month following the change in control for Messrs. Gaines and Johnson, and on
each anniversary of such date for successive extensions thereafter. During said
period the Executive will be entitled to terminate his employment if there has
been a significant change in the nature or scope of his authority and
responsibility or he believes that he is unable to carry out his position as a
result of the change in control, another material breach of the agreement by the
Company, or the liquidation, dissolution or reorganization of the Company where
the successor shall not have assumed the obligations of the agreement. In such
event, the Executive is entitled to a lump sum payment equal to the present
value of his salary, bonuses and a substitute retirement benefit for the greater
of 24 months or the remaining term of the agreement, and all other death,
disability and health benefits continue until age 65. The foregoing payments and
benefits are reduced (by way of quarterly reimbursements) for compensation and
benefits received from other employment or consulting positions. Any stock
options held by the Executive become fully vested upon a change in control and
after a change in control the Executive may request that a trust be established
by the Company to fund all amounts to which the Executive is or may become
entitled.
Should payments under any of the above agreements become subject to the 20%
excise tax under Section 4999 of the Code, the Company will pay such additional
amounts as would put the Executive in the same after-tax position as if such
excise tax did not apply.
Pension Plan
The Company maintains a non-contributory defined benefit plan, The Musicland
Group, Inc. Employees' Retirement Plan (the "Retirement Plan"), qualified under
Section 401 of the Code, in which its regular non-union employees hired before
July 1, 1990, except hourly store clerk employees hired after January 1, 1989,
participate. Union employees also participate if specifically included in their
bargaining agreement.
Prior to January 1, 1989, accrued retirement benefits were calculated by
using a formula that took into account average base compensation, credited
service and primary Social Security benefits payable at retirement, with the
normal monthly retirement benefit being an amount equal to 4% of average base
compensation times years of credited service (maximum 15 years), less two-thirds
of monthly primary Social Security benefits. An employee's average base
compensation was defined as one-twelfth of his or her average annual base
compensation during all his or her plan years of participation while an
employee.
Effective January 1, 1989, for any participant who completes at least one
hour of service on or after January 1, 1989, the accrued retirement benefit
formula was amended to be 1% of the participant's average pensionable
compensation that does not exceed the participant's covered compensation for
such plan year plus a percentage (from 1.65% to 1.75% depending upon the
participant's applicable Social Security retirement age, but limited to 1.65%
for all employees after January 1, 1992) of the participant's average base
compensation which exceeds the participant's covered compensation for such plan
year times the years of benefit service (maximum 35 years). A participant keeps
his or her accrued retirement benefit calculated as of December 31, 1988 under
the old formula as long as the same is greater than his or her current accrued
retirement benefit calculated under the new formula. For purposes of calculating
the new formula, a participant's base compensation for years prior to January 1,
1984 is deemed to be the same as the base compensation in effect on that date
and, for years beginning with January 1, 1989, will include all cash
compensation (including bonuses and overtime). Covered compensation relates to
the average of the taxable wage bases in effect for each calendar year during
the 35-year period prior to the participant reaching Social Security retirement
age.
A participant whose employment terminates prior to age 65 and who does not
qualify for an early retirement benefit, disability retirement benefit or death
benefit (all of which are also provided for by the Retirement Plan) is entitled
to a fully vested and nonforfeitable deferred retirement benefit if the
16
<PAGE>
participant has been credited with "elapsed time as an employee" of at least 5
years. The basic pension is a monthly pension payable during the participant's
lifetime commencing at age 65. Early retirement, disability retirement and
deferred retirement benefits are reduced if payment of any such benefits
commences prior to the participant's normal retirement date (age 65 and 5 years
of participation in the Retirement Plan). The Retirement Plan contains
provisions for optional methods of benefit payments including lump sum payments
under certain circumstances.
The following table sets forth the estimated annual benefits payable upon
normal retirement at age 65 (calculated as a straight life annuity) assuming
retirement in 1995 at age 65 and based upon the specified cash compensation
(which for the executive officers named in the Summary Compensation Table would
be the amounts listed under the salary and bonus columns) and years-of-service
classifications. The amounts shown below are maximum amounts and do not take
into consideration the Social Security offset portion of the formula nor the
limits on retirement benefits imposed by Sections 415 and 417(e) of the Code.
Pension Plan Table
<TABLE>
<CAPTION>
Years of Service
Average Cash ------------------------------------------------
Compensation 15 20 25 30 35
- ------------------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 125,000..................... $ 28,600 $ 38,100 $ 47,600 $ 57,100 $ 66,700
150,000..................... 34,800 46,300 57,900 69,500 81,100
175,000..................... 40,900 54,600 68,200 81,900 95,500
200,000..................... 47,100 62,800 78,500 94,300 110,000
225,000..................... 53,300 71,100 88,900 106,600 124,400
300,000..................... 71,900 95,800 119,800 143,800 167,700
400,000..................... 96,600 128,800 161,000 193,300 225,500
450,000..................... 109,000 145,300 181,700 218,000 254,300
500,000..................... 121,400 161,800 202,300 242,800 283,200
750,000..................... 183,300 244,300 305,400 366,500 427,600
1,000,000.................... 245,100 326,800 408,500 490,300 572,000
</TABLE>
Section 415 of the Code places a limit (at $120,000 beginning in 1995) on
the amount of annual benefits that may be paid from a plan such as the
Retirement Plan. Section 417(e) of the Code also imposes a combined limitation
where an employee is covered by benefits from both a defined benefit pension
plan and a defined contribution plan, and, beginning in 1994, only the first
$150,000 of compensation (annually indexed for inflation) may be considered for
Retirement Plan purposes. The Company has enabled the executive officers to
obtain life insurance policies under a "split-dollar" arrangement, which should
not result in a long-term cost to the Company due to the features of the
policies. The earnings from these policies will help offset the losses to the
individuals resulting from the foregoing tax limitations.
As of December 31, 1995, the estimated years of benefit service for Messrs.
Eugster, Benson, Ross and Gaines were 15.5 years, 15.5 years, 11.3 years and
14.1 years, respectively. Mr. Johnson is not a participant in the Pension Plan.
17
<PAGE>
Stock Performance Graph
The following performance graph compares the Company's cumulative total
stockholder return on its Common Stock for the period beginning February 26,
1992, the date the Common Stock was registered under Section 12 of the
Securities Exchange Act of 1934, until December 31, 1995 with the cumulative
total returns of the Standard & Poor's Corporation ("S&P") 500 Stock Index and
the S&P Retail Stores Composite Index. The comparison assumes $100 was invested
in the Company's Common Stock and in each index at the beginning of the
comparison period and reinvestment of dividends.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
Feb. 26,1992 Dec. 31, 1992 Dec. 31, 1993 Dec 31, 1994 Dec 31, 1995
<S> <C> <C> <C> <C> <C>
Musicland
Stores Corp. 100 79 143 62 29
S&P 500 100 108 119 121 166
S&P Retail
Composite 100 116 111 101 113
</TABLE>
18
<PAGE>
EXPENSES OF SOLICITATION
The costs of this solicitation have been or will be borne by the Company. In
addition to the use of the mails, Proxies may be solicited by the Company's
directors, officers and employees, without extra compensation, by personal
interview, telephone and telegram. The Company has also retained MacKenzie
Partners, Inc. to assist in the solicitation of proxies at an expense estimated
to be $5,000. Arrangements will be made with brokerage houses and other
custodians, nominees and fiduciaries for the forwarding of solicitation material
and annual reports to the beneficial owners of stock held of record by such
persons, and the Company will reimburse them for reasonable out-of-pocket and
clerical expenses incurred by them in connection therewith.
ANNUAL REPORT ON FORM 10-K
UPON WRITTEN REQUEST OF ANY SHAREHOLDER SOLICITED HEREBY, THE COMPANY WILL
PROVIDE WITHOUT CHARGE A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1995. REQUESTS SHOULD BE DIRECTED TO TIMOTHY
J. SCULLY, INVESTOR RELATIONS, 10400 YELLOW CIRCLE DRIVE, MINNETONKA, MINNESOTA
55343. ANY BENEFICIAL OWNER SHOULD INCLUDE A GOOD FAITH REPRESENTATION THAT AS
OF THE RECORD DATE HE OR SHE IS A BENEFICIAL OWNER OF COMMON STOCK.
SHAREHOLDER PROPOSALS FOR 1997
In order for any shareholder proposal to be considered for inclusion in the
Company's Proxy Statement and form of Proxy relating to the annual meeting of
shareholders to be held in 1997, the same must be received by the Company at its
principal executive offices no later than December 16, 1996.
Dated: April 15, 1996
By Order of the Board of Directors
HEIDI M. HOARD
SECRETARY
19
<PAGE>
MUSICLAND STORES CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING ON MAY 7, 1996
The undersigned hereby appoints JACK W. EUGSTER, KEITH A. BENSON and REID
JOHNSON, and each of them, as Proxies, each with the power to appoint his
substitute, and hereby authorizes each of them to represent and to vote, as
designated below, all the shares of Common Stock of Musicland Stores Corporation
held of record by the undersigned on March 8, 1996, at the Annual Meeting of
Shareholders to be held on May 7, 1996, or any adjournment thereof.
1. ELECTION OF DIRECTORS.
FOR all nominees listed below
(except as marked to the
contrary below) / /
WITHHOLD AUTHORITY
to vote for all nominees
listed below / /
Nominees: KENNETH F. GORMAN LLOYD P. JOHNSON JOSIAH O. LOW, III
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
STRIKE A LINE THROUGH THE NOMINEE'S NAME)
2. PROPOSAL TO RATIFY THE APPOINTMENT OF ARTHUR ANDERSEN LLP, INDEPENDENT
PUBLIC ACCOUNTANTS, AS AUDITORS OF THE COMPANY FOR THE FISCAL YEAR ENDING
DECEMBER 31, 1996.
<TABLE>
<S> <C> <C>
/ / FOR / / AGAINST / / ABSTAIN
</TABLE>
(PLEASE DATE AND SIGN ON REVERSE SIDE)
<PAGE>
3. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 2 AND TO GRANT AUTHORITY TO VOTE FOR ALL NOMINEES NAMED IN
PROPOSAL 1 ABOVE. Please sign exactly as name appears below. When signing as
attorney, executor, administrator, trustee or guardian, please give full title
as such. If a corporation, please sign in full corporate name by President or
other authorized officer. If a partnership, please sign in partnership name by
authorized person.
- --------------------------------------------------------------------------------
Dated: ___________________, 1996
________________________________
Signature
________________________________
Signature if held jointly
PLEASE MARK, SIGN, DATE AND
RETURN THE PROXY CARD
PROMPTLY
USING THE ENCLOSED ENVELOPE
<PAGE>
MUSICLAND STORES CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING ON MAY 7, 1996
The undersigned hereby appoints PIPER TRUST COMPANY, as Proxy, and hereby
authorizes it to represent and to vote, as designated below, all the shares of
Common Stock of Musicland Stores Corporation held of record by the undersigned
on March 8, 1996, at the Annual Meeting of Shareholders to be held on May 7,
1996, or any adjournment thereof.
1. ELECTION OF DIRECTORS.
FOR all nominees listed below
(except as marked to the
contrary below) / /
WITHHOLD AUTHORITY
to vote for all nominees
listed below / /
Nominees: KENNETH F. GORMAN LLOYD P. JOHNSON JOSIAH O. LOW, III
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
STRIKE A LINE THROUGH THE NOMINEE'S NAME)
2. PROPOSAL TO RATIFY THE APPOINTMENT OF ARTHUR ANDERSEN LLP, INDEPENDENT
PUBLIC ACCOUNTANTS, AS AUDITORS OF THE COMPANY FOR THE FISCAL YEAR ENDING
DECEMBER 31, 1996.
<TABLE>
<S> <C> <C>
/ / FOR / / AGAINST / / ABSTAIN
</TABLE>
(PLEASE DATE AND SIGN ON REVERSE SIDE)
<PAGE>
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. Please sign exactly as name appears below. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such. If a corporation, please sign in full corporate name by
President or other authorized officer. If a partnership, please sign in
partnership name by authorized person.
- --------------------------------------------------------------------------------
Dated: ___________________, 1996
________________________________
Signature
________________________________
Signature if held jointly
PLEASE MARK, SIGN, DATE AND
RETURN THE PROXY CARD NO
LATER
THAN MAY 3, 1996 USING THE
ENCLOSED ENVELOPE
