<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
- --------------------------------------------------------------------------------
(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/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
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 July 31, 1997
------------------------
NOTICE IS HEREBY GIVEN that the 1997 Annual Meeting of Shareholders of
Musicland Stores Corporation (the "Company") will be held:
TIME: 11:00 a.m. (Central Daylight Time) on Thursday, July 31, 1997
PLACE: Company Headquarters, 10400 Yellow Circle Drive, Minnetonka,
Minnesota
for the following purposes:
1. To elect three Class II 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 1997 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 June 2, 1997 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
June 20, 1997
<PAGE>
MUSICLAND STORES CORPORATION
10400 Yellow Circle Drive
Minnetonka, Minnesota 55343
------------------------
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
To Be Held July 31, 1997
------------------------
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 1997
Annual Meeting of Shareholders (the "Annual Meeting") to be held at 11:00 a.m.
(Central Daylight Time) on Thursday, July 31, 1997, 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 July 30, 1997 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 June 20, 1997.
VOTING SECURITIES AND VOTING RIGHTS
The Board of Directors has fixed June 2, 1997 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 34,301,956 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.
1
<PAGE>
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 established the number of directors to serve on the Board
as nine effective May 13, 1997. 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 William A. Hodder and Gilbert L. Wachsman, who were elected
by action of the Board of Directors.
At this Annual Meeting, three Class II directors will be elected to hold
office for a term expiring at the annual meeting of shareholders to be held in
2000, 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 II whose terms are expiring, Keith A. Benson,
Gilbert L. Wachsman and Tom F. Weyl, 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
KEITH A. BENSON, age 53
Mr. Benson has been a director of the Company since January 1992 and served
a prior term as a director from August 1988 until December 1989. Mr. Benson has
been an executive officer of the Company since 1988 and, most recently, became
President, Mall Stores Division on August 12, 1996. Previously, Mr. Benson had
served as President of the Music Stores division since 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
2
<PAGE>
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 Premium Wear, Inc.
GILBERT L. WACHSMAN, age 49
Mr. Wachsman was elected a director of the Company on May 13, 1997. He
became the Vice Chairman of the Company on July 17, 1996. Prior to joining the
Company, Mr. Wachsman held the position of Senior Vice President Hardlines at
Kmart Corporation from 1995 to 1996. From 1990 to 1995 Mr. Wachsman was a
management consultant for major retail, distribution and manufacturing
companies. Prior to that he was Chief Executive Officer at Lieberman
Enterprises, Inc., President and Chief Executive Officer for Child World Inc.
and Senior Vice President of Marketing/Merchandising for Target Stores. Mr.
Wachsman is a director of Cincinnati Microwave Inc.
TOM F. WEYL, age 54
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 51
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 66
Mr. Hodder has been a director of the Company since July 1995. He is the
retired 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
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. Mr. Hodder is a director of Norwest
Corporation, ReliaStar Financial, SUPERVALU INC. and Tennant Company.
MICHAEL W. WRIGHT, age 59
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
3
<PAGE>
Food Marketing Institute, the International Center for Companies of the Food
Trade Industry and the Food Distributors International. 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.
CONTINUING CLASS I DIRECTORS (TERMS EXPIRING IN 1999)
KENNETH F. GORMAN, age 58
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
Dove Audio, Doane Farm Management Co., IDC Services, Inc., and International
Post Limited.
LLOYD P. JOHNSON, age 67
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 58
Mr. Low has been a director of the Company since July 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 and St. Laurent Paperboard Inc.
COMPENSATION OF DIRECTORS
In 1996, 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 $14,000, payable in five installments, and a meeting
fee of $1,250 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. 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"). The grant formula in effect in 1996
provided that each newly elected Unaffiliated Directors receives 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 receives 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. As of
4
<PAGE>
the Record Date, Messrs. Gorman, Johnson, Weyl and Wright each had 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 had 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, 1996 ("Fiscal Year 1996"), the
Board of Directors held nine 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.
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 met once in Fiscal Year 1996.
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. Hodder (Chairman), Weyl
and Wright. The Compensation Committee met six times in Fiscal Year 1996. 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 1996.
PROPOSAL NO. 2
RATIFICATION OF APPOINTMENT OF AUDITORS
The Company's independent auditors for Fiscal Year 1996 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, 1997 ("Fiscal Year 1997") and for
the following fiscal year which ends December 31, 1998. 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. 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 1997 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 1997.
5
<PAGE>
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 June 2, 1997, or as of December 31, 1996 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 (13 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 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>
Management Investors Group (2) ............................. 4,473,259(2,3) 12.7%
10400 Yellow Circle Drive
Minnetonka, MN 55343
Donaldson, Lufkin & Jenrette, Inc. (4) ..................... 2,379,534(4,5) 6.9%
The Equitable Companies Incorporated
(as parent)
277 Park Avenue
New York, NY 10172
Alfred and Annie Teo (6) ................................... 1,800,000(6) 5.3%
Page & Schuyler Avenues
P.O. Box 808
Lyndhurst, NJ 07071
Jack W. Eugster............................................. 1,717,075(7,8,9) 4.9%
Gary A. Ross................................................ 633,960(7,8) 1.8%
Keith A. Benson............................................. 589,544(7,8,9) 1.7%
Kenneth F. Gorman........................................... 80,000(8) *
Reid Johnson................................................ 55,200(8) *
Michael W. Wright........................................... 55,000(8) *
Josiah O, Low, III.......................................... 25,373 *
Tom F. Weyl................................................. 16,000(8) *
Lloyd P. Johnson............................................ 11,000(8) *
William A. Hodder........................................... 9,030(8) *
Gilbert L. Wachsman......................................... 0 *
All directors and executive officers as a group (13
persons)................................................... 3,305,424(7,8,9) 9.4%
</TABLE>
- ------------------------
* Less than 1%
(1) Based on 34,301,956 shares outstanding on June 2, 1997
6
<PAGE>
(2) The Management Investors Group is currently a group of 22 persons,
including Messrs. Eugster, Ross and Benson, 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.
(3) Includes 956,044 shares which may be acquired pursuant to the exercise of
vested stock options.
(4) Based on Amendment No. 4 to Schedule 13G, dated February 12, 1997 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 and 3,800 shares held by
Alliance Capital Management L.P. on behalf of client discretionary
investment advisory accounts.
(5) Meridian Assets Management, Inc. ("Meridian") has sole voting power of
1,187,763 shares as voting trustee of shares owned by DLJ and certain of its
affiliates and employees (See "DLJ Voting Trust Agreement" below). 977,412
of these shares are included in the numbers reported by Equitable.
(6) Based on Schedule 13D, dated February 5, 1997, filed by Alfred S. Teo and
Annie Teo, which shows 1,600,000 shares beneficially owned by Alfred and
Annie Teo as joint tenants and 200,000 shares in trust for Mark, Andrew and
Alfred Teo, Jr., Annie Teo and Teren Seto Handelman, co-trustees.
(7) Of the shares listed, the following are Restricted Shares: 632,068 shares
for Mr. Eugster; 243,104 shares each for Messrs. Ross and Benson; and
1,166,196 for all directors and executive officers as a group (13 persons
including Messrs. Eugster, Ross and Benson). See "Certain Transactions --
Transactions with Management and DLJ."
(8) Includes shares of Common Stock which may now be acquired pursuant to the
exercise of stock options as follows: Mr. Eugster, 369,334 shares; Messrs.
Ross and Benson, 142,467 shares each; Mr. Johnson, 55,000 shares; Messrs.
Gorman, Wright and Johnson, 10,000 shares each (2,000 each forfeitable); Mr.
Weyl, 10,000 shares; Mr. Hodder, 5,000 shares (4,000 forfeitable); and all
directors and executive officers as a group (13 persons including Messrs.
Eugster, Ross, Benson, Johnson, Gorman, Wright, Johnson, Weyl and Hodder),
796,281 shares.
(9) Includes 22,200 shares held by the children and 10,000 shares held by the
wife of Mr. Eugster who share the same household (Mr. Eugster disclaims
beneficial ownership of these shares); 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.
7
<PAGE>
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 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).
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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 and reports of changes in
ownership 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 1996 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 by the reporting persons.
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, 1996, 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>
EXECUTIVE OFFICERS AND COMPENSATION
The Company's executive officers, other than Mr. Eugster, Mr. Benson and Mr.
Wachsman, are identified below. Executive officers of the Company currently hold
the same respective positions with MGI.
Gary A. Ross, age 50, was named President, Superstores Division on August
12, 1996. Prior to that he had been the President of the 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.
Reid Johnson, age 55, has been Executive Vice President of Finance and
Administration and Chief Financial Officer since August 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.
Douglas M. Tracey, age 43, has been Senior Vice President of Distribution
since August 1994. He was first appointed a senior vice president in April 1992
and has 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. 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.
Marcia F. Appel, age 47, was elected Senior Vice President of Corporate
Advertising, Partnership Marketing and Communications on October 28, 1996.
Previously, she had served as Vice President, Communications and Music Stores
Marketing since February 2, 1996. Ms. Appel joined the Company in April of 1993
as Vice President, Communications and Publications. Prior to joining the
Musicland Group, Inc., Ms. Appel was Executive Director of the National
Association of Area Business Publications, and she has also worked for Control
Data Corporation and Dorn Communications. Ms. Appel is deputy to the Chief
Executive Officer of the Minnesota Business Partnership and sits on the
Minnesota Women's Press Advisory Board.
The following table sets 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 1996 (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.
9
<PAGE>
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 1996 $515,000 $ 64,375 $12,465(3) 60,000 $309,433(4)
Chairman of the Board, 1995 507,500 0 7,915 60,000 304,170
President and C.E.O. 1994 500,000 0 11,943 40,000 304,374
Keith A. Benson President, Mall 1996 $302,546 $ 26,473 $ 4,932(3) 47,500 $137,203(5)
Division 1995 293,012 0 2,100 22,500 134,139
1994 280,769 0 6,870 15,000 129,975
Gary A. Ross 1996 $297,879 $ 26,064 $10,319(3) 47,500 $124,095(6)
President, Superstores Division 1995 280,887 38,940 7,700 22,500 119,961
1994 275,692 12,062 16,257 15,000 110,342
Gilbert L. Wachsman 1996(7) $188,346 $283,000 $ 7,319(3) 175,000 $ 46,392(8)
Vice Chairman
Reid Johnson 1996 $286,000 $ 25,025 $ 6,623(3) 47,500 $ 14,912(10)
Executive Vice President, 1995 278,808 0 36,012 22,500 6,691
Chief Financial Officer 1994(9) 102,067 4,500 178 90,000 240
</TABLE>
- --------------------------
(1) Reflects bonus earned for service during the fiscal year indicated under the
Company's incentive plans although all or a portion of the bonus may have
been awarded during the next fiscal year and beyond; the 1996 guaranteed
retention bonus is payable one-half in 1997 and one-half in 1998.
(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 1996 consists of amounts reimbursed for the
payment of taxes.
(4) All Other Compensation for Mr. Eugster for 1996 includes the following:
401(k) Company match: $5,961; medical/dental plans, incremental cost:
$3,725; life insurance and excess liability insurance imputed income:
$17,166; and a premium of $282,581 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 1996 includes the following:
401(k) Company match: $5,961; medical/dental plans, incremental cost:
$2,844; life insurance and excess liability insurance imputed income:
$8,915; and a premium of $119,483 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 1996 includes the following: 401(k)
Company match: $5,961; medical/ dental plans, incremental cost: $3,104; life
insurance and excess liability insurance imputed income: $8,379 and a
premium of $106,651 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) Mr. Wachsman became an executive officer of the Company in July 1996; Mr.
Wachsman's 1996 bonus payments reflect a sign-on agreement (See "Employment
and Change in Control Agreements").
(8) All Other Compensation for Mr. Wachsman for 1996 includes the following:
medical/dental plans, incremental cost: $1,762; life insurance and excess
liability imputed income: $319; and relocation expenses of $44,311.
(9) Mr. Johnson became an executive officer of the Company in August 1994.
10
<PAGE>
(10) All Other Compensation for Mr. Johnson for 1996 includes the following:
401(k) Company match: $5,961; Company contribution to Defined Contribution
Plan: $2,848; medical/dental plans, incremental cost: $3,096; and life
insurance and excess liability insurance imputed income: $3,007.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants Potential Realizable Value
----------------------------------------------------------------
Number of at Assumed Annual Rates of
Securities Percent of Total Stock Price Appreciation
Underlying Options Granted for Option Term
Options to Employees in Exercise Expiration --------------------------
Name Granted (#)(1) Fiscal Year Price ($/Sh)(2) Date 5% ($)(3) 10% ($)(3)
- -------------------------------------- -------------- ---------------- --------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Jack W. Eugster....................... 60,000(4) 5.85% $ 2.5625 01/29/06 $ 90,584 $ 235,311
Keith A. Benson....................... 22,500(4) 2.19% 2.5625 01/29/06 33,969 88,242
25,000(5) 2.44% 3.09(7) 08/12/06 39,827 109,175
Gary A. Ross.......................... 22,500(4) 2.19% 2.5625 01/29/06 33,969 88,242
25,000(5) 2.44% 3.09(7) 08/12/06 39,827 109,175
Gilbert L. Wachsman................... 175,000(6) 17.09% 3.00 07/17/06 294,538 779,977
Reid Johnson.......................... 22,500(4) 2.19% 2.5625 01/29/06 33,969 88,242
25,000(5) 2.44% 3.09(7) 08/12/06 39,827 109,175
All Shareholders (8)................................................................................ $ 53,922,928 $136,651,281
</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 each grant equaled the
exercise price, unless otherwise indicated.
(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 other than to immediate
family members and become exercisable in equal installments on January 31,
1998, 1999 and 2000, subject to acceleration of vesting upon a change in
control.
(5) All options have a term of ten years, but provide for early termination upon
termination of employment, are not transferable other than to immediate
family members and become exercisable in equal installments on August 12,
1998, 1999 and 2000, subject to acceleration of vesting upon a change in
control.
(6) All options have a term of ten years, but provide for early termination upon
termination of employment, are not transferable other than to immediate
family members and become exercisable in equal installments on July 17,
1998, 1999 and 2000, subject to acceleration of vesting upon a change in
control.
(7) The exercise price of these options was 10% over the fair market value on
the date of grant.
(8) Calculated using the market closing price on January 29, 1996 and the total
number of shares outstanding, 34,301,956, with appreciation calculated until
January 29, 2006, the expiration date of the first option grant listed
above.
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 $0 317,800/223,200 $ 0/0
Gary A. Ross.............................. 0 0 124,134/106,666 0/0
Keith A. Benson........................... 0 0 124,134/106,666 0/0
Gilbert L. Wachsman....................... 0 0 0/175,000 0/0
Reid Johnson.............................. 0 0 25,000/135,000 0/0
</TABLE>
- ------------------------
(1) The Company does not have any outstanding SARs.
(2) No options were in-the-money at December 31, 1996.
Report of the Compensation Committee on Executive Compensation
The Compensation Committee of the Board of Directors (the "Compensation
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 Company considers the maintenance of a stable and effective management
group to be essential to protecting and enhancing the best interests of the
Company and its shareholders. 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 Compensation 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.
In addition, the Compensation 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
12
<PAGE>
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 1996, the Company's executive compensation packages were
analyzed by Frederic W. Cook & Co. ("Cook") which determined them to be
generally competitive. Cook also reviewed a proposal for a long term incentive
plan (described below), which was developed jointly by the Company and Cook, and
supported adopting it as part of the Company's overall executive compensation
strategy.
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. In view of the financial
performance of the Company, the Compensation Committee did not approve any
salary increases for the executive officers, however, during the year three
executive officers received promotion raises from 3% to 11% in conjunction with
a restructuring that created new positions with additional responsibilities.
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") and new Long Term Incentive Plan, puts
approximately 64% of the CEO's maximum cash compensation at risk since bonuses
are generally awarded only if the Company achieves certain corporate performance
goals. The percentage at risk for the other executive officers named in the
compensation tables is approximately 55%. The Board made an exception to this
general policy in 1996 by authorizing a guaranteed bonus providing a payout
equal to 25% of the target bonus for each participant if the MIP plan goals for
the year were not met. The award is paid out in two equal installments on
February 1, 1997 and February 1, 1998 but only to those participants still
actively employed on those dates. The Compensation Committee felt it necessary
for the Company's turnaround effort to institute this special retention bonus
which is not related to Company performance but does encourage employee
retention. Several valuable employees have been contacted by recruitment firms
and competitors, and employee turnover has become a concern.
The funding of the MIP bonus pool is determined by corporate performance
goals that are set by the Compensation Committee during the first quarter of
each year. For 1996, the corporate performance goals were tied to the Company's
pre-tax income. The MIP also allows the Compensation Committee 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 policy has been 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 the 1996 MIP threshold target was not met, no MIP bonuses, other than
the guaranteed awards, were payable. Guaranteed awards totaling $514,294 were
awarded to 125 participants, and, of this amount, $141,937 was awarded to the
NEO's. Only half of the awarded amount has been paid with the remainder deferred
until February 1998.
Pursuant to the recommendations of Cook, the Company adopted a Long Term
Incentive Plan ("LTIP") for the Company's executive officers. This plan sets
Company performance goals for each year of a three year period with a cash award
earned each year that the applicable goal is met. Payout
13
<PAGE>
of an earned award is deferred for one year. The CEO is eligible to earn an
annual bonus of up to 75% of his base salary and the other executive officers
may earn bonuses of up to 37.5% to 49.5% of their base salaries. The target
goals set for the years 1996, 1997 and 1998 are aggressive and are based on
EBITDA (weighted at 75% and adjusted for average minimum rent and special
professional fees) and working capital (weighted at 25% and defined as average
inventory less average accounts payable). LTIP awards are in addition to any MIP
awards. The performance goals set for 1996 were not met and no LTIP award was
earned for 1996.
In addition, the Board, on recommendation of the Compensation Committee,
adopted a short term incentive program to incent the executive officers to focus
on the Company's turnaround during this particularly critical period. Under this
plan, aggressive goals based on the Company's EBITDA (adjusted for average
minimum rent and special professional fees) were set for the Fourth Quarter of
1996 and the First Quarter of 1997. Each executive officer could earn an
immediately payable cash bonus equal to 10% to 15% of base salary each time a
quarterly goal was met. Any awards under this plan would be deducted from any
awards payable under the MIP plan. The performance goal set for the Fourth
Quarter of 1996 was not met and no award was paid.
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 Compensation 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 Compensation 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.
SECTION 162(M) LIMITATIONS
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code")
generally places a $1 million limit on the tax deduction allowable for
compensation paid to the NEO's during a tax year unless the compensation meets
certain requirements. The Board is not planning to change the process for
determining awards under the Company's incentive plans to meet the requirements
of Section 162(m) because it believes that the exercise of discretion in
determining bonus awards in the same manner as in the past is in the best
interests of the Company. Therefore, bonus payments will count against the $1
million limit. The Company's 1994 Employee Stock Option Plan does satisfy the
requirements for performance-based compensation under Section 162(m). Stock
option awards to the executive officers since 1994 have been made from this
plan. Any compensation realized by the executive officers when exercising such
options will not count toward the $1 million limit. The Compensation Committee
has no other policy with respect to qualifying compensation paid to the
executive officers under Section 162(m). The compensation paid in 1996 and
anticipated to be paid in 1997 will not exceed the $1 million deductibility
limit for any of the affected individuals.
CHANGE IN CONTROL AGREEMENTS.
The Board recognizes that, as is the case with many publicly held
corporations, there is a possibility of a change in control of the Company, and
that the uncertainty and questions which such a possibility raises may result in
the departure or distraction of management personnel to the detriment of the
Company and its shareholders. The Board believes it imperative that the Company
be able to rely upon retention of its valuable senior executives. It is also
important that the Board be able to receive the best advice of the senior
executives as to the best interests of the Company and its stockholders without
concern that the executives might be distracted by the personal uncertainties
and risks created by a potential change in control. For these reasons, the Board
in December 1996
14
<PAGE>
reinstated the change in control agreements for Messrs. Benson and Ross and
amended the respective change in control agreements for Messrs. Eugster, Benson,
Ross and Johnson to include certain acquisitions of the Company's common stock
whether or not it is publicly traded at the time. A similar change in control
agreement was negotiated with Mr. Wachsman and became effective in March 1997.
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. Increases are considered and recommended by the
Compensation Committee, if appropriate, at the beginning of each fiscal year. No
salary increase was given to the CEO in 1996, and the CEO did not receive a
discretionary bonus award for 1996. (Mr. Eugster's base salary as shown in the
Summary Compensation Table increased from 1995 to 1996 only because Mr. Eugster
did not begin receiving his 1995 increase until July 1995.) The CEO did receive
an award under the special guaranteed bonus described above of $64,375 payable
in equal installments on February 1, 1997 and February 1, 1998. Although the
Company's financial performance in 1996 was not satisfactory, the Compensation
Committee feels this award was appropriate considering the CEO's importance to
the turnaround efforts.
In January 1996, 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 Compensation Committee's assessment of his performance and
his importance to the turnaround efforts. Since the stock options awarded to the
CEO will only be of value if the market price of the Company's stock increases,
the Compensation Committee believes that such compensation encourages the CEO to
improve the performance of the Company. In determining the award the
Compensation Committee did not consider the amount and terms of stock options
previously granted.
In the Compensation Committee's opinion, the total compensation package for
the CEO in 1996 appropriately reflects the CEO's individual performance level in
carrying out his overall responsibility for the Company.
The foregoing report is submitted by the members of the Compensation
Committee.
William A. Hodder, Chairman
Michael W. Wright
Tom F. Weyl
Employment and Change of Control Agreements
The Company entered into employment agreements, effective August 25, 1988,
with Messrs. Eugster, Benson and Ross (along with Messrs. Johnson and Wachsman,
where applicable, the "Executives") and, at the same time, entered into change
in control agreements with Messrs. Eugster, Benson and Ross. The change in
control agreements for Messrs. Benson and Ross which had expired September 1,
1991 were reinstated on December 3, 1996. As amended January 22, 1992, November
27, 1995 and December 3, 1996, 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, 2000 for Mr. Eugster and August 31,
1999 for Messrs. Benson and Ross, 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, 1998 (in each case the "Employment Period"), and on each
anniversary of such dates for successive extensions thereafter. The employment
agreements provide that the annual base salaries of the Executives will be no
less
15
<PAGE>
than the following amounts plus periodic increases granted pursuant to the
Company's customary procedures and practices: $515,000 for Mr. Eugster; $308,700
for Mr. Benson; and $316,340 for Mr. Ross. 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.
Benson and Ross. If the Executive is terminated due to a material breach by the
Company (including 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. The foregoing payments and benefits are reduced
for compensation and benefits received from other employment or consulting
positions.
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 12 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 deferred compensation plan was terminated upon the agreement of Mr.
Johnson and the Company on May 7, 1996. A Change in Control Agreement similar to
that of the other Executives was entered into with Mr. Johnson on November 27,
1995.
Upon the employment of Mr. Wachsman on July 17, 1996, the Company agreed to
pay him a sign-on bonus and guaranteed bonus for 1996 and entered into a
severance agreement. The severance agreement is effective until July 31, 2001
and provides that in the event of termination without cause or for good reason
Mr. Wachsman will be paid 12 months of salary continuation and a substitute
incentive award equal to 40% of base salary. If the termination occurs prior to
July 17, 1997, he would receive sufficient additional months of salary
continuation so that his pay before and after such termination totaled 24
months. A Change in Control Agreement similar to that of the other Executives
was entered into with Mr. Wachsman on March 10, 1997.
The change in control agreements for the Executives, as amended November 27,
1995 and December 3, 1996, 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
(whether or not the Common Stock is publicly traded at the time), 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. Benson, Ross, Johnson and Wachsman 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 extension is desired by, for the first such extension, the end of the
sixth month following the change in control, 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, powers, functions, duties or
responsibilities, a reduction in compensation, 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
16
<PAGE>
entitled to a lump sum payment equal to the present value of his salary, bonuses
and a substitute retirement benefit for the remaining term of the agreement, but
not less than 24 months for Mr. Eugster and 12 months for Messrs. Benson, Ross,
Johnson and Wachsman, 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 have participated in the Plan in the past as part
of their bargaining agreement. Messrs. Eugster, Benson and Ross participate in
the Retirement Plan but Messrs. Johnson and Wachsman do not.
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
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
17
<PAGE>
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 1996 at age 65 and based upon the specified cash compensation
(which for Messrs. Eugster, Benson and Ross 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 Messrs. Eugster, Benson and
Ross 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, 1996, the estimated years of benefit service for Messrs.
Eugster, Benson, and Ross were 16.5 years, 16.5 years and 12.3 years,
respectively.
18
<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, 1996 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 Dec 31, 1996
<S> <C> <C> <C> <C> <C> <C>
Musicland Stores Corp. $ 100.00 $ 79.00 $ 143.00 $ 62.00 $ 29.00 $ 10.00
S&P 500 $ 100.00 $ 108.00 $ 119.00 $ 121.00 $ 166.00 $ 204.00
S&P Retail Composite $ 100.00 $ 116.00 $ 111.00 $ 101.00 $ 113.00 $ 133.00
</TABLE>
19
<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. 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, 1996. 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 1998
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 1998, the same must be received by the Company at its
principal executive offices no later than February 20, 1998.
Dated: June 20, 1997
By Order of the Board of Directors
HEIDI M. HOARD
SECRETARY
20
