<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- -----------------------
Commission file number 1-11014
MUSICLAND STORES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 41-1623376
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10400 Yellow Circle Drive, Minnetonka, MN 55343
(Address of principal executive offices) (Zip Code)
(612) 931-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X . No .
----- -----
The number of shares outstanding of the Registrant's common stock as of
October 31, 1996 was 34,301,956 shares.
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements.
Consolidated Statements of Earnings 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Report of Independent Public Accountants 9
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition. 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 16
Signature 17
2
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -----------------------
1996 1995 1996 1995
-------- --------- ---------- ----------
<S> <C>
Sales $366,634 $ 357,585 $1,122,614 $1,035,665
Cost of sales 238,932 226,268 738,497 658,732
-------- --------- ---------- ----------
Gross profit 127,702 131,317 384,117 376,933
Selling, general and administrative expenses 136,714 124,359 412,017 362,779
Depreciation and amortization 11,102 11,778 33,836 33,940
Goodwill write-down - 138,000 - 138,000
Restructuring charge - - 35,000 -
-------- --------- ---------- ----------
Operating loss (20,114) (142,820) (96,736) (157,786)
Interest expense 8,800 7,898 23,834 19,815
-------- --------- ---------- ----------
Loss before income taxes (28,914) (150,718) (120,570) (177,601)
Income taxes (12,850) (6,168) (45,400) (19,206)
-------- --------- ---------- ----------
Net loss $(16,064) $(144,550) $ (75,170) $ (158,395)
-------- --------- ---------- ----------
-------- --------- ---------- ----------
Loss per common share $ (0.48) $ (4.28) $ (2.25) $ (4.65)
-------- --------- ---------- ----------
-------- --------- ---------- ----------
Weighted average number of common
shares outstanding 33,429 33,766 33,401 34,092
-------- --------- ---------- ----------
-------- --------- ---------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------- DECEMBER 31,
1996 1995 1995
---------- ---------- ------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 17,349 $ 1,302 $ 1,971
Inventories 557,376 642,099 533,694
Deferred income taxes 23,800 13,935 17,400
Other current assets 46,692 43,235 20,840
---------- ---------- -------------
Total current assets 645,217 700,571 573,905
Property, at cost 416,087 438,779 446,100
Accumulated depreciation and amortization (143,862) (121,059) (127,783)
---------- ---------- -------------
Property, net 272,225 317,720 318,317
Goodwill 96,004 99,009 98,258
Deferred income taxes 4,900 3,530 -
Other assets 6,138 6,042 6,477
---------- ---------- -------------
Total Assets $1,024,484 $1,126,872 $996,957
---------- ---------- -------------
---------- ---------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks drawn in excess of bank balances $ - $ 15,129 $ 69,321
Short-term notes payable - 16,400 -
Revolver 321,000 336,000 53,000
Accounts payable 338,160 366,333 403,848
Restructuring reserve 14,464 - -
Other current liabilities 63,006 61,997 108,455
---------- ---------- -------------
Total current liabilities 736,630 795,859 634,624
Long-term debt 110,000 110,000 110,000
Other long-term liabilities 57,152 48,945 52,622
Deferred income taxes - - 3,900
Stockholders' equity:
Preferred stock ($.01 par value; shares
authorized: 5,000,000;
shares issued and outstanding: none) - - -
Common stock ($.01 par value; shares
authorized: 75,000,000; shares issued and
outstanding: September 30, 1996,
34,301,956; September 30, 1995, 34,276,456;
December 31, 1995, 34,296,956) 343 343 343
Additional paid-in capital 254,411 254,251 254,350
Accumulated deficit (120,081) (67,556) (44,911)
Deferred compensation (8,998) (9,997) (8,998)
Common stock subscriptions (4,973) (4,973) (4,973)
---------- ---------- -------------
Total stockholders' equity 120,702 172,068 195,811
---------- ---------- -------------
Total Liabilities and Stockholders' Equity $1,024,484 $1,126,872 $996,957
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (75,170) $(158,395)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 34,318 34,323
Disposal of property 1,104 3,729
Goodwill write-down - 138,000
Restructuring charge 35,000 -
Deferred income taxes (15,200) (7,365)
Changes in operating assets and liabilities:
Inventories (23,682) (150,271)
Other current assets (25,882) (33,606)
Accounts payable (65,688) (90,903)
Restructuring reserve (5,666) -
Other current liabilities (44,549) (58,151)
Other assets (181) (499)
Other long-term liabilities 3,418 7,090
--------- ---------
Net cash used in operating activities (182,178) (316,048)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (12,855) (78,524)
Proceeds from property sales 11,719 5,538
--------- ---------
Net cash used in investing activities (1,136) (72,986)
--------- ---------
FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in excess of bank balances (69,321) 9,243
Increase in short-term notes payable - 16,400
Borrowings under revolver 268,000 336,000
Loan to KSOP - (9,997)
Net proceeds from sale of common stock 13 112
--------- ---------
Net cash provided by financing activities 198,692 351,758
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,378 (37,276)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,971 38,578
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,349 $ 1,302
--------- ---------
--------- ---------
CASH PAID DURING THE PERIOD FOR:
Interest $ 19,770 $ 15,835
Income taxes 10,381 18,976
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Musicland Stores Corporation ("MSC" or the "Company") and its wholly owned
subsidiary, The Musicland Group, Inc. ("MGI") and MGI's wholly owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
The accompanying interim consolidated financial statements of the
Company are unaudited; however, in the opinion of management, all adjustments
necessary for a fair presentation of such consolidated financial statements
have been reflected in the interim periods presented. Such adjustments
consisted only of normal recurring items. The Company's business is seasonal
and, accordingly, interim results are not indicative of results for a full
year. The significant accounting policies and certain financial information
which are normally included in financial statements prepared in accordance
with generally accepted accounting principles, but which are not required for
interim reporting purposes, have been condensed or omitted. The accompanying
consolidated financial statements of the Company should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K.
2. DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The Company's stores continue to face increased competition from
non-mall discount stores, consumer electronics superstores and other music,
video and book specialty retailers expanding into non-mall multimedia
superstores of their own. The low prices offered by these non-mall stores
create intense price competition and adversely affect the performance of both
the Company's non-mall and mall stores. The Company anticipates that the
challenging retail sales environment will continue into the foreseeable
future. These facts and circumstances led to an evaluation of the carrying
amount of goodwill for impairment which resulted in a write-down of $138,000
in the third quarter of 1995.
In April 1996, the Company obtained an amendment to its credit agreement
that modified certain existing covenants and approved a restructuring charge
of up to $35,000. The amendment added financial covenants including a
requirement that the Company meet certain debt and trade payables to eligible
inventory ratios and that outstanding borrowings under the revolving credit
facility be reduced to $25,000 for one day during the period from December
15, 1996 to February 15, 1997. An amendment to the credit agreement obtained
in October 1996 waived these additional financial covenants and further
modified certain existing covenants through March 30, 1997. This amendment
also reduced the maximum borrowings available under the revolving credit
facility. See Note 3.
The Company was in compliance with all covenants of the credit
agreement, as amended, at the end of the third quarter of 1996. The
Company's stores operate in a retail environment in which many factors that
are difficult to predict and outside the Company's control can have a
significant impact on store and Company sales and profits. These factors
include the timing and strength of new product offerings, pricing strategies
of competitors, openings and closings of competitors' stores, the Company's
ability to continue to receive adequate product from its vendors on
acceptable credit terms, effects of weather and overall economic conditions,
including inflation, consumer confidence, spending habits and disposable
income.
6
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(DOLLARS IN THOUSANDS)
2. DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES (CONTINUED)
Any of these factors, alone or in combination, could affect the
Company's ability to meet its financial covenants. If the Company does not
meet its financial covenants, the Company would be in default and the banks
could demand repayment of all amounts outstanding under the revolver.
Although the Company has engaged an investment banker to assist the Company
in pursuing strategic alternatives to improve the Company's financial
position, there can be no assurance that debt or equity to repay the
revolver, if necessary, will be available or can be arranged on similar terms.
3. REVOLVING CREDIT FACILITY
In April 1996, the Company obtained an amendment to its credit agreement
that modified certain existing covenants and approved a restructuring charge
of up to $35,000. The amendment added 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.
In October 1996, the credit agreement was amended to waive these
additional financial covenants and further modify certain existing covenants
through March 30, 1997. The amendment also permits the Company to close
additional underperforming stores after the holiday season if deemed
appropriate. With the October 1996 amendment, the maximum borrowings
available under the revolving credit facility (subject to certain
limitations) are reduced from $350,000 to $325,000 during the period from
December 9, 1996 through December 15, 1996 and are reduced to $300,000 on
December 16, 1996 (except for the period from December 20, 1996 through
September 11, 1997, during which borrowings are limited to $275,000). At
September 30, 1996, the maximum permitted borrowings under the revolver,
based upon the lesser of a percentage of inventory or the maximum available
for the period, were $322,000. The Company had borrowings under the revolver
of $321,000 at September 30, 1996.
4. RESTRUCTURING CHARGE
During the first quarter of 1996, the Company began implementation of a
program designed to improve profitability and increase inventory turnover. A
pretax restructuring charge of $35,000 was recorded in the first quarter of
1996 to establish a reserve for the anticipated costs associated with the
closing of 56 underperforming stores and certain facilities, including the
closing of the Company's distribution facility in Minneapolis, Minnesota.
The planned closings are expected to be substantially complete by the end of
the first quarter of 1997 and include 36 mall stores and 20 non-mall stores.
The restructuring charge includes $17,800 for anticipated non-cash
write-downs of leasehold improvements and certain equipment, net of
unamortized lease credits, and $17,200 of anticipated cash expenditures,
primarily consisting of estimated payments to landlords for the early
termination of operating leases and estimated legal and consulting fees.
During the first nine months of 1996, $20,500 of the restructuring reserve
had been utilized, consisting of $14,800 of non-cash charges and $5,700 of
cash charges. A total
7
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(DOLLARS IN THOUSANDS)
4. RESTRUCTURING CHARGE (CONTINUED)
of 38 stores have been closed through September 30, 1996, including 23 mall
stores and 15 non-mall stores. The Company expects to close the majority of
the remaining stores and certain facilities under the restructuring program
either late in the fourth quarter of 1996 or early in the first quarter of
1997.
5. INCOME TAXES
The effective income tax rates for the three months and nine months
ended September 30, 1996 and 1995 vary from the federal statutory rate
principally as a result of goodwill amortization and write-down, both of
which are nondeductible, and state income taxes.
6. LOSS PER COMMON SHARE
Loss per common share amounts are computed by dividing net loss by the
weighted average number of common shares outstanding. For purposes of loss
per share computations, shares of common stock under the Company's employee
stock ownership plan, established in the third quarter of 1995, are not
considered outstanding until they are committed to be released. Common stock
equivalents related to stock options are anti-dilutive due to the net loss in
each period.
8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Musicland Stores Corporation:
We have reviewed the accompanying consolidated balance sheets of Musicland
Stores Corporation (a Delaware corporation) and Subsidiaries as of September
30, 1996 and 1995, and the related consolidated statements of earnings for
the three-month and nine-month periods ended September 30, 1996 and 1995, and
the consolidated statements of cash flows for the nine-month periods ended
September 30, 1996 and 1995. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Musicland Stores Corporation and
Subsidiaries as of December 31, 1995, and, in our report dated April 10,
1996, we expressed an unqualified opinion on that statement. In our opinion,
the information set forth in the accompanying consolidated balance sheet as
of December 31, 1995, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
October 25, 1996
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following table presents certain unaudited sales and store data for
the non-mall based full-media superstores (Media Play and On Cue), the mall
based music and video sell-through stores (Sam Goody, Musicland and Suncoast
Motion Picture Company) and in total for the Company for the three months and
nine months ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------
PERCENT OF TOTAL
----------------
1996 1995 % CHANGE 1996 1995
-------- -------- --------- ------ ------
(DOLLARS AND SQUARE FOOTAGE IN MILLIONS)
<S> <C> <C> <C> <C> <C>
SALES:
Non-mall stores $ 129.9 $ 105.3 23.3 % 35.4% 29.5%
Mall stores 233.4 248.9 (6.2) 63.7 69.6
Total (1) 366.6 357.6 2.5 100.0 100.0
COMPARABLE STORE SALES % CHANGE:
Non-mall stores (0.1)% 9.1 % N/A N/A N/A
Mall stores (5.6) (3.5) N/A N/A N/A
Total (1) (4.0) (1.4) N/A N/A N/A
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------
PERCENT OF TOTAL
----------------
1996 1995 % CHANGE 1996 1995
-------- -------- --------- ------ ------
(DOLLARS AND SQUARE FOOTAGE IN MILLIONS)
<S> <C> <C> <C> <C> <C>
SALES:
Non-mall stores $ 397.1 $ 289.8 37.1 % 35.4% 28.0%
Mall stores 715.3 735.6 (2.8) 63.7 71.0
Total (1) 1,122.6 1,035.7 8.4 100.0 100.0
COMPARABLE STORE SALES % CHANGE:
Non-mall stores (0.1)% 16.7 % N/A N/A N/A
Mall stores (2.5) (2.1) N/A N/A N/A
Total (1) (1.8) 0.5 N/A N/A N/A
STORE COUNT AT END OF PERIOD:
Non-mall stores 243 205 18.5 16.5 14.0
Mall stores 1,212 1,244 (2.6) 82.1 84.7
Total (1) 1,476 1,468 0.5 100.0 100.0
STORE SQUARE FOOTAGE AT END OF PERIOD:
Non-mall stores 5.1 4.3 17.9 53.4 48.8
Mall stores 4.4 4.5 (2.5) 45.9 50.7
Total (1) 9.5 8.8 7.6 100.0 100.0
</TABLE>
- --------------------
(1) The totals include other divisions which individually are not
significant.
10
<PAGE>
SALES. Sales growth in the superstore divisions accounted for the
increases in total sales in the third quarter and first nine months of 1996
compared to the same periods in 1995. See "Liquidity and Capital Resources
- -Investing Activities." The lack of strong product releases in music and
video contributed to decreases in comparable store sales results in the third
quarter and first nine months of 1996. Sales results in 1995 benefited from
the very successful LION KING video released in the first quarter, FORREST
GUMP released in the second quarter and STAR WARS TRILOGY released in the
third quarter. Inventory levels were lowered during 1996 as part of an
overall corporate business strategy to improve inventory turnover. In
addition, the Company has been experiencing difficulty in obtaining shipments
from certain vendors in the books, computer software, video games and trend
product categories. The Company's performance may depend upon its ability to
continue to receive adequate product from its vendors on acceptable credit
terms.
The Company's stores continue to face increased competition from
non-mall discount stores, consumer electronics superstores and other music,
video and book specialty retailers expanding into non-mall multimedia
superstores of their own. The low prices offered by these non-mall stores
create intense price competition and adversely affect the performance of both
the Company's non-mall and mall stores. The Company anticipates that the
challenging retail sales environment will continue into the foreseeable
future.
GROSS PROFIT. Gross profit as a percentage of sales was 34.8% in the
third quarter of 1996 compared with 36.7% in the third quarter of 1995, a
decrease of 1.9%. For the first nine months, gross margin fell to 34.2% in
1996 from 36.4% in 1995. Inventory shrinkage in the third quarter increased
to 1.4% in 1996 from 0.4% in 1995, and in the first nine months increased to
1.2% in 1996 from 0.6% in 1995, which accounted for margin decreases in the
1996 periods of 1.0% and 0.6%, respectively. The higher proportion of sales
from the low-price superstore divisions relative to total Company sales
accounted for declines in the 1996 periods of 0.6% and 0.7%, respectively.
Increased promotional pricing, primarily in non-mall stores in the third
quarter and in both mall and non-mall stores during the nine month period
and, to a lesser extent, lower prices in mall stores in 1996 compared to 1995
accounted for the balance of the declines. Sales in the non-mall divisions
will further reduce gross margin during the balance of 1996 and in future
periods as their revenues increase as a percentage of the Company's total
sales. The rate of decrease, however, is expected to slow because of the
curtailment of store expansion.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Increases in selling,
general and administrative expenses in the third quarter and first nine
months of 1996 compared with the same periods in 1995 were primarily due to
the store expansion over the past twelve months, most of which occurred in
the fourth quarter of 1995. Selling, general and administrative expenses as
a percentage of sales were 37.3% in the third quarter of 1996 compared with
34.8% in the third quarter of 1995, and for the first nine months were 36.7%
in 1996 compared with 35.0% in 1995. These rate increases were attributable
to the increase in fixed occupancy costs related to the store expansion over
the past year and to the comparable store sales decreases in stores open for
one year or more. Although non-mall stores have a lower cost structure than
mall stores, principally related to occupancy costs, the full benefit is not
realized until the stores mature and experience comparable store sales gains.
DEPRECIATION AND AMORTIZATION. The write-down of goodwill in the third
quarter of 1995 decreased goodwill amortization in the three month and nine
periods of 1996 by $0.7 million and $2.8 million, respectively. The increase
in depreciation and amortization resulting from store expansion has been
partially offset by the closing of stores.
11
<PAGE>
RESTRUCTURING CHARGE. During the first quarter of 1996, the Company
began implementation of a program designed to improve profitability and
increase inventory turnover. A pretax restructuring charge of $35 million
was recorded in the first quarter of 1996 to establish a reserve for the
anticipated costs associated with the closing of 56 underperforming stores
and certain facilities, including the closing of the Company's distribution
facility in Minneapolis, Minnesota. The planned closings are expected to be
substantially complete by the end of the first quarter of 1997 and include
36 mall stores and 20 non-mall stores. The restructuring charge includes
$17.8 million for anticipated non-cash write-downs of leasehold improvements
and certain equipment, net of unamortized lease credits, and $17.2 million of
anticipated cash expenditures, primarily consisting of estimated payments to
landlords for the early termination of operating leases and estimated legal
and consulting fees. During the first nine months of 1996, a total of 38
stores were closed under this program consisting of 23 mall stores and 15
non-mall stores. See "Liquidity and Capital Resources - Investing
Activities."
INTEREST EXPENSE. Interest expense in the third quarter and first nine
months of 1996 increased $0.9 million and $4.0 million, respectively, over
the same periods in 1995. Interest expense increased $1.3 million in the
first nine months of 1996 due to an increase in the number of days revolver
borrowings were outstanding. Higher average revolver borrowings in the third
quarter and first nine months of 1996 increased interest expense by $0.2
million and $2.1 million, respectively. The balance of the increase in each
period was due to higher interest rates. For the third quarters of 1996 and
1995 and the first nine months of 1996 and 1995, the average daily revolver
balances, based upon the number of days outstanding, were $310.4 million,
$291.6 million, $282.4 million and $233.6 million, respectively. The
weighted average interest rates on the revolver, based upon the average daily
balances, were 7.7%, 6.9%, 7.5% and 7.2%, respectively.
During the first nine months of 1996, Moody's Investor's Service, Inc.
and Standard & Poor's Corporation issued downgrades to the Company's
corporate credit rating and the rating of its $110 million senior
subordinated notes. These downgrades occurred as a result of a number of
factors including the continued weak retailing environment, increased
competition from nontraditional music retailers, declining mall traffic and
fundamental changes in the way recorded music is distributed, which, along
with high fixed costs from poorly performing stores and aggressive store
expansion in previous years, have negatively impacted the Company's financial
performance and limited the Company's financial flexibility. The Company has
significantly reduced its capital expenditure program in 1996. As a result
of the lower credit ratings and an amendment to the Company's credit
agreement in April 1996, the annual facility fee rate increased from 0.30% to
0.50% and the margin added to variable interest rates on revolver borrowings
increased by 0.93%. See "Liquidity and Capital Resources."
INCOME TAXES. The effective income tax rates for the three months and
nine months ended September 30, 1996 and 1995 vary from the federal statutory
rate principally as a result of goodwill amortization and write-down, both of
which are nondeductible, and state income taxes. A revision to the
estimated full year 1996 effective income tax rate from 35.5% to 37.7%
increased the income tax provision (benefit) recorded in the third quarter by
$2.0 million.
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.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are borrowings under its
revolving credit facility pursuant to the terms of its credit agreement and
internally generated cash. The credit agreement, as amended in October 1996,
expires in October 1999 and permits borrowings under the revolving credit
facility of up to $350 million (subject to certain limitations and except for
the period from March 29, 1996 through September 10, 1996, during which
borrowings were limited to $325 million) through December 8, 1996.
Subsequently, the maximum borrowings available under the revolving credit
facility (subject to certain limitations) are reduced to $325 million during
the period from December 9, 1996 through December 15, 1996 and are reduced to
$300 million on December 16, 1996 (except for the period from December 20,
1996 through September 11, 1997, during which borrowings are limited to $275
million). At September 30, 1996, the maximum permitted borrowings under the
revolver, based upon the lesser of a percentage of inventory or the maximum
available for the period, were $322 million. The Company had borrowings
under the revolver of $321 million at September 30, 1996.
The credit agreement contains covenants that limit additional
indebtedness, liens, capital expenditures and cash dividends. Additionally,
the Company must meet financial covenants relating to fixed charge coverage,
consolidated tangible net worth and debt to total capitalization. In April
1996, the Company obtained an amendment to its credit agreement that modified
certain existing covenants and approved a restructuring charge of up to $35
million. The amendment added 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
during the period from December 15, 1996 to February 15, 1997, and to zero
for one day during the period from December 15 to January 15 in each
subsequent year. The amendment to the credit agreement obtained in October
1996 waived these additional financial covenants and further modified certain
existing covenants through March 30, 1997. The amendment also permits the
Company to close additional underperforming stores after the holiday season
if deemed appropriate.
The Company was in compliance with all covenants of the credit
agreement, as amended, at the end of the third quarter of 1996. The
Company's stores operate in a retail environment in which many factors that
are difficult to predict and outside the Company's control can have a
significant impact on store and Company sales and profits. These factors
include the timing and strength of new product offerings, pricing strategies
of competitors, openings and closings of competitors' stores, the Company's
ability to continue to receive adequate product from its vendors on
acceptable credit terms, effects of weather and overall economic conditions,
including inflation, consumer confidence, spending habits and disposable
income. Any of these factors, alone or in combination, could affect the
Company's ability to meet its financial covenants. If the Company does not
meet its financial covenants, the Company would be in default and the banks
could demand repayment of all amounts outstanding under the revolver.
Although the Company has engaged an investment banker to assist the Company
in pursuing strategic alternatives to improve the Company's financial
position, there can be no assurance that debt or equity to repay the
revolver, if necessary, will be available or can be arranged on similar terms.
OPERATING ACTIVITIES. Net cash used in operating activities during the
nine months ended September 30, 1996 and 1995 was $182.2 million and $316.0
million, respectively. Early payments made to certain vendors near the end
of 1995 to obtain discounts caused the amount of checks issued but not
presented to banks for payment to exceed the Company's bank balances at
December 31, 1995 by $69.3 million. When the changes in checks drawn in
excess of bank balances are included, cash used in operating activities
during the nine months ended September 30, 1996 and 1995 was $251.5 million
and
13
<PAGE>
$306.8 million, respectively. The most significant operating uses of cash
related to payments after December 31, 1995 and 1994 for seasonal merchandise
purchases, as reflected by the aggregate net changes in inventories, accounts
payable and checks drawn in excess of bank balances during these periods of
$158.7 million and $231.9 million, respectively. The decrease in merchandise
purchases during the first nine months of 1996 is due to the reduced level of
store expansion, lower inventory levels in stores and the shift of certain
merchandise purchases for the Christmas season to the fourth quarter.
Changes in the deferred income tax balances and most of the increase in
other current assets during the first nine months of 1996 and 1995 from the
year end balances were due to the tax provision (benefit) recorded on the
losses in each period. The utilization of the restructuring reserve
primarily related to the closing of stores and consisted of $14.8 million of
non-cash charges and $5.7 million of cash charges. Changes in other
operating assets and liabilities are primarily related to the seasonal nature
of the business, store expansion and store closings.
INVESTING ACTIVITIES. Most of the Company's capital expenditures are
for store expansion. The Company has aggressively expanded in recent years.
Because of the weak retailing environment, which has adversely impacted the
Company's performance in recent periods, the Company plans to reduce capital
spending to approximately $25 million in 1996 and to approximately $20
million in 1997. The Company anticipates that these capital expenditures
will be financed by borrowings under the revolving credit facility,
internally generated cash and, to a lesser extent, landlord contributions and
rent abatements.
Store expansion and closings were as follows for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------- -------------------
1996 1995 1996 1995 1996 1995
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
OPENINGS:
Non-mall stores 3 32 16 82 53 114
Mall stores 7 16 10 29 30 69
Total (1) 10 51 27 115 87 191
CLOSINGS:
Non-mall stores (3) - (15) - (15) -
Mall stores (9) (5) (30) (32) (62) (43)
Total (1) (13) (5) (47) (33) (79) (44)
NET INCREASE (DECREASE):
Non-mall stores - 32 1 82 38 114
Mall stores (2) 11 (20) (3) (32) 26
Total (1) (3) 46 (20) 82 8 147
</TABLE>
- --------------------
(1) The totals include other divisions which individually are not
significant.
The Company has closed 23 mall stores and 15 non-mall stores through
September 30, 1996 under a restructuring program which includes closing a
total of 56 stores. The Company expects to close the majority of the
remaining stores and certain facilities under this restructuring program
either late in the fourth quarter of 1996 or early in the first quarter of
1997. The Company is closely monitoring other nonproductive mall based music
stores and may close additional stores as they approach the end of their
14
<PAGE>
lease terms. The October 1996 amendment to the Company's credit agreement
also permits the Company to close additional underperforming stores after the
holiday season if deemed appropriate. Assets from closed stores will be
redeployed either to new stores or to existing stores that are more
profitable, although a portion of the inventory from closed stores will be
returned to vendors.
In the third quarter of 1996, the Company completed a sale-leaseback of
its Minneapolis, Minnesota corporate headquarters and distribution facilities
together with certain equipment. Net proceeds from the sale were $11.7
million. The Company will lease from the buyer all 513,000 square feet of
the office and distribution facilities through January 1997 and subsequently
will lease 60,000 square feet of office space and 13,000 square feet of
storage space through 2002. The Company plans to close its Minneapolis,
Minnesota distribution facility in January 1997 and consolidate its
distribution operations into the Franklin, Indiana facility, which opened in
March 1995. The Company continues to own a second corporate headquarters
facility in Minneapolis with approximately 94,000 square feet of office
space. Proceeds from the sale-leaseback were used to reduce revolver
borrowings.
FINANCING ACTIVITIES. The Company's financing activities principally
consist of borrowings and repayments under its revolving credit facility.
While the average revolver borrowings in the third quarter and first nine
months of 1996 are higher than in the same periods in 1995, the Company has
taken steps during 1996 to reduce revolver borrowings, which were $321
million at September 30, 1996 compared to $336 million at September 30, 1995.
The Company also had $16.4 million of other short-term borrowings outstanding
at September 30, 1995. The revolver balance is lower at September 30, 1996
compared to September 30, 1995 as a result of the reduced level of store
expansion in 1996, lower inventory levels in stores and the shift of certain
merchandise purchases for the Christmas season to the fourth quarter. The
Company is obligated under operating leases for its Franklin distribution
facility and certain Media Play stores for residual value guarantees of
approximately $25 million and $12 million, respectively, either at the end of
the original four year lease terms in 1999 and 2000, respectively, or at the
end of the respective one year renewal terms. The Company expects that it
will be able to obtain adequate financing to meet its obligations under these
lease agreements.
FORWARD-LOOKING STATEMENTS
Forward-looking statements herein are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. There
are certain important factors that could cause results to differ materially
from those anticipated by some of the statements made herein. Investors are
cautioned that all forward-looking statements involve risks and uncertainty.
In addition to the factors discussed above, among the factors that could
cause actual results to differ materially are the following: the timing and
strength of new product offerings, pricing strategies of competitors,
openings and closings of competitors' stores, the Company's ability to
continue to receive adequate product from its vendors on acceptable credit
terms, effects of weather and overall economic conditions, including
inflation, consumer confidence, spending habits and disposable income.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
4.2(d) Amendment No. 3 dated as of October 18, 1996
to the Credit Agreement
----------
15. Letter re unaudited interim financial
information
----------
27. Financial Data Schedules
----------
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended
September 30, 1996.
- --------------------
Omitted from this Part II are items which are not applicable or to which the
answer is negative for the period covered.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MUSICLAND STORES CORPORATION
By: \s\Reid Johnson
------------------------------------
Reid Johnson
Executive Vice President and
Chief Financial Officer
(authorized officer, principal
financial and accounting officer)
Date: November 13, 1996
---------------------------------
17
<PAGE>
THIRD AMENDMENT AND WAIVER
THIS THIRD AMENDMENT AND WAIVER dated as of October 18, 1996 (this "Third
Amendment") amends and/or waives certain provisions of the Credit Agreement
dated as of October 7, 1994 (as heretofore amended or otherwise modified, the
"Credit Agreement") among THE MUSICLAND GROUP, INC. (the "Borrower"), MUSICLAND
STORES CORPORATION ("MSC"), various financial institutions (the "Banks") and
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (in such capacity, the
"Agent"). Terms defined in the Credit Agreement are, unless otherwise defined
herein or the context otherwise requires, used herein as defined therein.
WHEREAS, the Borrower, MSC, the Banks and the Agent have entered into the
Credit Agreement; and
WHEREAS, the parties hereto desire to amend and/or waive certain provisions
of the Credit Agreement as hereinafter set forth;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1 WAIVERS. Effective on (and subject to the occurrence of) the
Third Amendment Effective Date (as defined below), the Required Banks waive
compliance with, and waive any Default or Event of Default arising from any
failure to comply with, the following provisions of the Credit Agreement for the
dates and periods indicated:
(a) Section 5.23 (Debt and Trade Payables to Eligible Inventory Ratio) for
the months ending December 31, 1996, January 31, 1997, February 28,
1997 and for the 1996 Clean-down Date (as defined in Section 5.23).
(b) Section 5.24 (Clean-Down of Loans) for the period from December 15,
1996 through February 15, 1997.
(c) The requirement set forth in Section 3.2 that the Borrower make the
representation and warranty set forth in Section 4.4(c) for all Credit
Extensions prior to March 31, 1997.
SECTION 2 AMENDMENTS. Effective on (and subject to the occurrence of) the
Third Amendment Effective Date, the Credit Agreement shall be amended as set
forth below:
<PAGE>
2.1 AMENDMENT TO DEFINITION OF 1996 RESTRUCTURING CHARGE. The definition
of "1996 Restructuring Charge" is amended in its entirety to read as follows:
"1996 Restructuring Charge" means liabilities recorded on the books of
MSC in 1996 and the first two quarters of 1997 in connection with facility
closing decisions which may be made, termination of employees and costs
related to the foregoing and for professional fees.
2.2 AMENDMENTS RELATING TO INCREASE IN 1996 RESTRUCTURING CHARGE. The
definitions of "Consolidated Net Worth" and "Net Income" are each amended by
deleting the language "up to $35,000,000 of the 1996 Restructuring Charge" and
inserting in lieu thereof the language "up to $60,000,000 of the 1996
Restructuring Charge for facility closing decisions which may be made,
termination of employees and costs related to the foregoing and up to $5,000,000
of the 1996 Restructuring Charge for professional fees."
2.3 AMENDMENT TO ELIGIBLE INVENTORY LIMIT. Clauses (b)(i) and (b)(ii) of
the definition of "Eligible Inventory Limit" are amended in their entirety to
read as follows:
(i) during the fiscal months of May, June, July, August, September and
October of each year, and during November and December of 1996 and
January, February and March of 1997 (except for March 31, 1997), 60%;
(ii) during the fiscal months of March and April of 1996 and on March 31,
1997 and during April of 1997, 55%; and.
2.4 AMENDMENTS TO CONDITIONS PRECEDENT TO CREDIT EXTENSIONS. (a) Section
3.2 is amended by deleting the word "and" after the semi-colon at the end of
clause (e), deleting the period at the end of clause (f) and substituting a
semi-colon therefor, and inserting the following new clauses (g) and (h):
(g) in the case of any Credit Extension (other than a Refunding
Borrowing) made after October 25, 1996 and before December 23, 1996, the
fact that, as of the most recent date reported on by the Borrower, the
aggregate amount of all trade accounts payable of MSC and its Subsidiaries
arising out of the purchase of inventory is not less than the amount set
forth for such date in the chart set forth in clause (p) of Section 6.1;
and
(h) except in the case of a Refunding Borrowing, the fact that the
Borrower shall have delivered a duly-completed certificate in the form of
Exhibit M hereto.
-2-
<PAGE>
(b) Section 3.2 is further amended by (i) deleting the language "and (f)"
in the last paragraph thereof and substituting therefor the language ", (f) and
(g)" and (ii) adding the following sentence at the end thereof:
The Borrower will provide such information as the Agent or the
Required Banks may reasonably request to demonstrate the accuracy of
such representation and warranty.
2.5 AMENDMENTS TO INFORMATION COVENANTS. Section 5.1 is amended by
deleting the word "and" after the semi-colon at the end of clause (j),
redesignating clause (k) as clause (o), and adding the following clauses (k),
(l), (m) and (n) thereto in appropriate sequence:
(k) weekly not later than the Friday following the week ended
the previous Saturday, a certificate of the chief financial
officer or the Treasurer (or, in the absence of both of the
foregoing, an Assistant Treasurer) of MSC with respect to
inventory and trade accounts payable, substantially in the form
of Exhibit N hereto;
(l) not later than October 16, 1996, a weekly cash flow budget
through December 31, 1996 and a monthly cash flow budget through
March 31, 1997, substantially in the form of Exhibit O hereto;
(m) within five Domestic Business Days after the end of each
fiscal month, a weekly cash flow budget for the 13 weeks
following such month substantially in the form of Exhibit P
hereto (which budget shall be updated to reflect the results of
the most recently-ended month);
(n) weekly not later than the Wednesday following the week ended
the previous Saturday, a certificate of the chief financial
officer or the Treasurer (or, in the absence of both of the
foregoing, an Assistant Treasurer) of MSC with respect to cash
flows for such most recently-ended week, substantially in the
form of Exhibit Q; and.
2.6 AMENDMENT TO FIXED CHARGE COVERAGE RATIO. Clauses (c) and (d) of
Section 5.7 are amended in their entirety to read as follows:
(c) 0.75 to 1 for the period from July 1, 1996 to September 30, 1996;
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<PAGE>
(d) 0.75 to 1 for the period from October 1, 1996 to December 31,
1996;.
2.7 AMENDMENT TO CONSOLIDATED TANGIBLE NET WORTH. The chart in clause (a)
of Section 5.8 is amended in its entirety to read as follows:
Period or Date Amount
-------------- ------
3/31/96 - 6/30/96 $50,000,000
7/1/96 - 3/30/97 $10,000,000
3/31/97 - 12/30/97 $50,000,000
12/31/97 $80,000,000
1/1/98 - 12/30/98 $65,000,000
12/31/98 and thereafter $80,000,000.
2.8 AMENDMENT TO DEBT TO CAPITALIZATION COVENANT. Clauses (b) and (c) of
Section 5.9 are amended in their entirety to read as follows:
(b) .85 to 1.0 for the period from July 1, 1996 to September 30,
1996;
(c) .85 to 1.0 for the period from October 1, 1996 to December 31,
1996;.
2.9 AMENDMENT TO DEBT COVENANT. Clause (e) of Section 5.11 is amended in
its entirety to read as follows:
(e) Intentionally deleted;
2.10 AMENDMENT TO SALE OF ASSETS COVENANT. Section 5.13 is amended by
adding the following sentence thereto:
"In addition to (and not in limitation of) the foregoing, MSC will
not, and will not permit any Subsidiary to, sell, exchange, lease, assign,
transfer or otherwise dispose of any asset outside the ordinary course of
business (excluding (a) sales of fixed assets (other than leasehold
interests) in connection with store closings and (b) the sale of the
Minneapolis distribution facility in 1996) if, after giving effect thereto,
the Net Cash Proceeds of all such transactions in any fiscal year would
exceed $10,000,000."
2.11 AMENDMENT TO LIEN COVENANT. Clause (g) of Section 5.14 is amended in
its entirety to read as follows:
"(g) other Liens securing Debt in an aggregate principal amount not
in excess of $5,000,000."
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<PAGE>
2.12 AMENDMENT TO EVENTS OF DEFAULT. Section 6.1 is amended by deleting
the word "or" after the semi-colon at the end of clause (m), and adding the
following clauses (o) and (p):
(o) the aggregate amount of all trade accounts payable of MSC and its
Subsidiaries arising out of the purchase of inventory shall at any time
(including after giving effect to the use of the proceeds of any Credit
Extension) be less than the aggregate amount of the Outstanding Credit
Extensions; or
(p) the aggregate amount of all trade accounts payable of MSC and its
Subsidiaries arising out of the purchase of inventory is less than the
applicable amount set forth below for any two consecutive dates shown
below:
Date Amount
---- ------
October 26, 1996 $346,000,000
November 2, 1996 $374,000,000
November 9, 1996 $403,000,000
November 16, 1996 $432,000,000
November 23, 1996 $422,000,000
November 30, 1996 $419,000,000
December 7, 1996 $428,000,000
December 14, 1996 $413,000,000;
2.13 AMENDMENT OF EXHIBIT E. Exhibit E to the Credit Agreement is
replaced in its entirety by the EXHIBIT E attached hereto.
2.14 ADDITION OF EXHIBITS. EXHIBITS M, N, O, P and Q attached hereto are
added to the Credit Agreement as Exhibits M, N, O, P and Q thereto.
SECTION 3 ADDITIONAL AGREEMENTS. Effective on (and subject to the
occurrence of) the Third Amendment Effective Date, and in consideration of the
waivers and amendments set forth in SECTIONS 1 an 2, MSC and the Borrower agree
with the Agent and the Banks as follows:
3.1 CASH SWEEP. Commencing on the Third Amendment Effective Date and
continuing until the time on December 20, 1996 at which the aggregate amount of
all Credit Extensions is $275,000,000 or less, all cash and cash equivalents of
MSC and its Subsidiaries in excess of the amounts permitted to be retained as
Investments pursuant to SECTION 3.4 below shall be transferred on each Domestic
Business Day to a demand deposit account maintained by the Borrower (for the
benefit of the Borrower, MSC and other Subsidiaries of MSC) with the Agent (such
account, the "Concentration Account"). Funds received in the
-5-
<PAGE>
Concentration Account shall (except to the extent used by MSC or a Subsidiary
thereof in compliance with the Credit Agreement) be promptly applied to prepay
Loans under the Credit Agreement (without any reduction of the Commitments
except as provided in SECTION 3.2 below).
3.2 REDUCTIONS OF COMMITMENTS AND AVAILABILITY; PREPAYMENTS. (a) The
aggregate amount of the Commitments shall be permanently reduced to $325,000,000
on December 9, 1996 and to $300,000,000 on December 16, 1996 (and each Bank's
Commitment shall be reduced by its pro rata share of each such reduction).
(b) Effective on December 20, 1996, the definition of Aggregate Available
Commitment is amended in its entirety to read as follows:
"Aggregate Available Commitment" means at any time the lesser of (i)
the aggregate amount of the Commitments of all Banks and (ii) the
Eligible Inventory Limit; PROVIDED that (unless the Required Banks
otherwise consent in writing with respect to any period after March
31, 1997), during the period from and including December 20, 1996 to
and including September 11, 1997, the Aggregate Available Commitment
shall not exceed $275,000,000.
(c) On each of December 9, 1996, December 16, 1996 and December 20, 1996,
the Borrower will prepay Loans (or otherwise reduce Outstanding Credit
Extensions) in an amount so that the Outstanding Credit Extensions as of the
close of business on such date do not exceed the aggregate amount of the
Commitments (or, in the case of December 20, the Aggregate Available Commitment)
as reduced on such date.
3.3 LIMITATION ON FIXED RATE BORROWINGS. To facilitate the prepayments
described in CLAUSE (c) of SECTION 3.2, the Borrower agrees that it will not
select any Interest Period for a Fixed Rate Borrowing which would result in the
aggregate amount of all Fixed Rate Borrowings having Interest Periods ending
after (i) December 9, 1996 being in excess of $325,000,000, (ii) December 16
being in excess of $300,000,000 or (iii) December 20, 1996 (other than
Borrowings made after September 11, 1997) being in excess of $275,000,000.
3.4 LIMITATION ON INVESTMENTS. Notwithstanding the provisions of Section
5.17 of the Credit Agreement, during the period from the Third Amendment
Effective Date to the time on December 20, 1996 at which the aggregate amount of
all Credit Extensions is $275,000,000 or less, MSC will not, and will not permit
any Subsidiary to, make or acquire any Investment in any Person other than:
-6-
<PAGE>
(a) Investments described in clause (c) of Section 5.17;
(b) Investments in deposit accounts maintained for retail stores of the
Borrower and its Subsidiaries, PROVIDED that the aggregate available
balance in all accounts maintained by any individual store shall not
exceed such store's receipts for the two preceding days on which the
financial institution maintaining such accounts was open for business
(except for exigencies beyond the control of the Borrower and the
applicable Subsidiary, which shall be corrected by the close of
business not later than the next day the applicable financial
institution is open for business);
(c) Investments in other deposit accounts, PROVIDED that the aggregate
available balance in all deposit accounts (excluding the retail store
accounts referred to in CLAUSE (b)) shall not at any time exceed
$10,000,000; and
(d) Subject to the last sentence of SECTION 3.1, Investments in the
Concentration Account.
3.5 CONTINUED RETENTION OF FINANCIAL CONSULTANT. Unless the Required
Banks otherwise agree in writing, MSC and the Borrower shall at all times
continue to retain Price Waterhouse LLP, or another consultant consented to by
the Required Banks (which consent shall not be unreasonably withheld), to advise
MSC and the Borrower on operational and financial matters.
3.6 BUSINESS PLAN, ETC. MSC agrees that it will use reasonable efforts
to implement one or more asset sales and/or to issue additional equity the
proceeds of which will be used, pursuant to agreement between MSC and the
Banks, in part to reduce the Commitments and prepay the Credit Extensions. In
furtherance of the foregoing, MSC shall deliver to the Banks, not later than
January 31, 1997, a business plan which shall include a comprehensive
business and debt restructuring and asset sale program.
3.7 AMENDMENT FEE. The Borrower agrees to pay to the Agent for the
account of the Banks (pro rata according to their Commitments) an amendment fee
of $875,000. The first $100,000 of such fee shall be paid on or before the
Third Amendment Effective Date. The remaining $775,000 of such fee shall be
paid on January 15, 1997. The Agent shall, promptly after receipt thereof from
the Borrower, remit to each Bank its pro rata share of the amendment fee.
3.8 FAILURE TO COMPLY WITH CERTAIN PROVISIONS OF THIS AMENDMENT. MSC and
the Borrower acknowledge and agree that
-7-
<PAGE>
failure of MSC or the Borrower to comply with or to perform any provision of
this SECTION 3 shall constitute an Event of Default under the Credit Agreement.
3.9 ACKNOWLEDGMENT BY AGENT AND BANKS. The Agent and the Required Banks
acknowledge and agree that no Default shall arise under Section 5.7, 5.8, 5.9 or
5.23 of the Credit Agreement at any time prior to March 31, 1997 based on
anticipated ratios or financial condition as of March 31, 1997 or any date
thereafter.
SECTION 4 REPRESENTATIONS AND WARRANTIES. The Borrower and MSC
represent and warrant to the Agent and the Banks that (a) the execution and
delivery by the Borrower and MSC of this Third Amendment and the performance
by the Borrower and MSC of their respective obligations under the Credit
Agreement, as amended hereby (as so amended, the "Amended Credit Agreement"),
(i) are within the corporate powers of the Borrower and MSC, (ii) have been
duly authorized by all necessary corporate action on the part of the Borrower
and MSC, (iii) have received all necessary governmental and regulatory
approval and (iv) do not and will not contravene or conflict with, or result
in or require the creation or imposition of any Lien under, or create any
default under, any provision of Applicable Law or of the respective
certificate of incorporation or by-laws of the Borrower or MSC or of any
agreement, instrument, order or decree which is binding upon the Borrower or
MSC; (b) the Amended Credit Agreement is the legal, valid and binding
obligation of each of the Borrower and MSC, enforceable against the Borrower
and MSC in accordance with its terms; and (c) after giving effect to this
Third Amendment, no Default shall have occurred and be continuing.
SECTION 5 EFFECTIVENESS. The waivers set forth in SECTION 1, the
amendments set forth in SECTION 2 and the agreements set forth in SECTIONS 3 and
6.5 shall become effective on such date (the "Third Amendment Effective Date")
when the Agent shall have received all of the following:
(i) Counterparts of this Third Amendment executed by the Borrower,
MSC and the Required Banks (it being understood that, in the case of any
Bank, the Agent may rely upon facsimile confirmation of the execution of a
counterpart hereof by such Bank for purposes of determining the
effectiveness hereof).
(ii) The first installment of the amendment fee referred to in
SECTION 3.7 (it being understood that promptly upon receipt thereof the
Agent shall distribute to each Bank its pro rata share thereof).
-8-
<PAGE>
(iii) An opinion of Linda Alsid Ruehle, Assistant General Counsel of
the Borrower, substantially in the form of ATTACHMENT I hereto.
(iv) Confirmation that the Borrower has paid (a) to the Agent, all
reasonable out-of-pocket expenses payable to the Agent pursuant to Section
10.3 of the Credit Agreement to the extent then billed and (b) to each of
Ernst & Young LLP, Mayer, Brown & Platt and Zalkin Rodin & Goodman LLP,
professional advisors to the Agent and the Banks, (x) all reasonable fees
and charges relating to the Credit Agreement (including any waivers or
amendments thereto) to the extent then billed and (y) a deposit, in each
case in the amount of $100,000 (inclusive of any remaining balance of any
previously paid deposit), to cover future fees and charges relating to the
Credit Agreement.
(v) All documents the Agent may reasonably request relating to the
existence of the Borrower and the other Loan Parties, the corporate
authority for and the validity of this Third Amendment and the other Loan
Documents, and any other matters relevant hereto, all in form and substance
satisfactory to the Agent.
SECTION 6 MISCELLANEOUS.
6.1 CONTINUING EFFECTIVENESS, ETC. As herein amended, the Credit
Agreement shall remain in full force and effect and is hereby ratified and
confirmed in all respects. After the Third Amendment Effective Date, all
references in the Credit Agreement and the other Loan Documents to "Credit
Agreement", "Agreement" or similar terms shall refer to the Amended Credit
Agreement.
6.2 COUNTERPARTS. This Third Amendment may be executed in any number of
counterparts and by the different parties on separate counterparts, and each
such counterpart shall be deemed to be an original but all such counterparts
shall together constitute one and the same Third Amendment.
6.3 GOVERNING LAW. This Third Amendment shall be a contract made under
and governed by the internal laws of the State of New York applicable to
contracts made and to be performed entirely within such State.
6.4 SUCCESSORS AND ASSIGNS. This Third Amendment shall be binding upon
the Borrower, MSC, the Banks and the Agent and their respective successors and
assigns, and shall inure to the benefit of the Borrower, MSC, the Banks and the
Agent and the respective successors and assigns of the Banks and the Agent.
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<PAGE>
6.5 COSTS AND EXPENSES. Without limiting the provisions of Section 10.3
of the Credit Agreement, the Borrower agrees to pay (i) the reasonable fees
and charges of Mayer, Brown & Platt, Zalkin, Rodin & Goodman LLP and Ernst &
Young LLP, professional advisors to the Agent and the Banks, in connection
with the Credit Agreement, this Third Amendment and matters relating thereto
(including the monitoring and administration of the provisions hereof), and
any additional amendments to or waivers under the Credit Agreement (such fees
and charges to be billed monthly and paid, without application of any
deposit, not later than 20 days after receipt by the Borrower) and (ii) the
reasonable out-of-pocket expenses of the Banks (excluding professional fees
other than (x) those described above and (y) those provided for in Section
10.3 of the Credit Agreement; it being understood and agreed that the Banks
are not entitled to payment of any professional fees under Section
10.3(a)(ii) of the Credit Agreement based on any Event of Default occurring
prior to the Third Amendment Effective Date) in connection with the Credit
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to
be duly executed by their respective authorized officers as of the day and year
first above written.
THE MUSICLAND GROUP, INC.
By /s/ Reid Johnson
-------------------------------------
Title: Reid Johnson
Executive Vice Pres. & CFO
MUSICLAND STORES CORPORATION
By /s/ Reid Johnson
-------------------------------------
Title: Reid Johnson
Executive Vice Pres. & CFO
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK
By /s/ Houston A. Stebbins
-------------------------------------
Title: Vice President
-10-
<PAGE>
FIRST BANK NATIONAL ASSOCIATION
By
-------------------------------------
Title:
THE INDUSTRIAL BANK OF JAPAN,
LIMITED
By
-------------------------------------
Title:
THE BANK OF TOKYO - MITSUBISHI,
LTD.
By
-------------------------------------
Title:
THE BANK OF NOVA SCOTIA
By
-------------------------------------
Title:
COMERICA BANK
By
-------------------------------------
Title:
CREDIT AGRICOLE
By /s/ Dean Balice
-------------------------------------
Title: Dean Balice
Senior Vice President
Branch Manager
CREDIT LYONNAIS NEW YORK BRANCH
By
-------------------------------------
Title:
-11-
<PAGE>
WELLS FARGO BANK
By
-------------------------------------
Title:
THE FUJI BANK, LIMITED
By
-------------------------------------
Title:
THE HOKKAIDO TAKUSHOKU BANK, LTD.,
NEW YORK BRANCH
By
-------------------------------------
Title:
THE LONG-TERM CREDIT BANK OF JAPAN,
LTD., CHICAGO BRANCH
By /s/ Armund J. Schoen, Jr.
-------------------------------------
Title: Armund J. Schoen, Jr.
Vice President & Deputy
General Manager
NBD BANK, N.A.
By
-------------------------------------
Title:
PNC BANK, NATIONAL ASSOCIATION
By
-------------------------------------
Title:
THE SAKURA BANK, LIMITED
By
-------------------------------------
Title:
-12-
<PAGE>
FLEET BANK
By
-------------------------------------
Title:
SOCIETE GENERALE
By /s/ Nina M. Ross
-------------------------------------
Title: Vice President
BANK AUSTRIA AKTIENGESELLSCHAFT
By
-------------------------------------
Title:
BEAR STEARNS GOVERNMENT SECURITIES,
INC.
By
-------------------------------------
Title:
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
By
-------------------------------------
Title:
SWISS BANK CORPORATION
By
-------------------------------------
Title:
By
-------------------------------------
Title:
-13-
<PAGE>
EXHIBIT 15
LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION
To Musicland Stores Corporation:
We are aware that Musicland Stores Corporation has incorporated by reference
in its Registration Statements Nos. 33-50520, 33-50522, 33-50524, 33-82130
and 33-99146, its Form 10-Q for the quarter ended September 30, 1996, which
includes our report dated October 25, 1996, covering the unaudited interim
financial information contained therein. Pursuant to Regulation C of the
Securities Act of 1933, that report is not considered a part of those
registration statements prepared or certified by our firm or reports prepared
or certified by our firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
Arthur Andersen LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF MUSICLAND STORES CORPORATION AND SUBSIDIARIES AS
OF SEPTEMBER 30, 1996, AND THE RELATED CONSOLIDATED STATEMENT OF EARNINGS FOR
THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 17,349
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 557,376
<CURRENT-ASSETS> 645,217
<PP&E> 416,087
<DEPRECIATION> 143,862
<TOTAL-ASSETS> 1,024,484
<CURRENT-LIABILITIES> 736,630
<BONDS> 110,000
0
0
<COMMON> 343
<OTHER-SE> 120,359
<TOTAL-LIABILITY-AND-EQUITY> 1,024,484
<SALES> 1,122,614
<TOTAL-REVENUES> 1,122,614
<CGS> 738,497
<TOTAL-COSTS> 738,497
<OTHER-EXPENSES> 480,853<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,834
<INCOME-PRETAX> (120,570)
<INCOME-TAX> (45,400)
<INCOME-CONTINUING> (75,170)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (75,170)
<EPS-PRIMARY> (2.25)
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES RESTRUCTURING CHARGE OF $35,000.
</FN>
</TABLE>
