<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, 1997
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, 1997 was 34,310,008 shares.
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements.
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Report of Independent Public Accountants 10
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition. 11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders. 18
Item 6. Exhibits and Reports on Form 8-K. 18
Signature 19
2
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- --------------------------
1997 1996 1997 1996
------------- -------------- ----------- -------------
(AS ADJUSTED) (AS ADJUSTED)
(NOTE 5) (NOTE 5)
<S> <C> <C> <C> <C>
Sales .............................................. $ 373,283 $ 366,634 $ 1,092,109 $ 1,122,614
Cost of sales ...................................... 244,213 238,932 716,148 738,497
----------- ----------- ----------- -----------
Gross profit .................................... 129,070 127,702 375,961 384,117
Selling, general and administrative expenses ....... 123,299 136,714 374,788 412,017
Depreciation and amortization ...................... 10,048 11,102 29,527 33,836
Restructuring charge ............................... -- -- -- 35,000
----------- ----------- ----------- -----------
Operating loss .................................. (4,277) (20,114) (28,354) (96,736)
Interest expense ................................... 8,107 8,800 23,338 23,834
----------- ----------- ----------- -----------
Loss before income taxes ........................ (12,384) (28,914) (51,692) (120,570)
Income taxes ....................................... -- (4,713) -- (19,653)
----------- ----------- ----------- -----------
Net loss ........................................ $ (12,384) $ (24,201) $ (51,692) $ (100,917)
=========== =========== =========== ===========
Loss per common share ........................... $ (0.37) $ (0.72) $ (1.54) $ (3.02)
=========== =========== =========== ===========
Weighted average number of common shares outstanding 33,533 33,429 33,507 33,401
=========== =========== =========== ===========
</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)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------- DECEMBER 31,
1997 1996 1996
-------------- ----------- ---------
(AS ADJUSTED)
(NOTE 5)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ....................................... $ 12,958 $ 17,349 $ 161,976
Inventories ..................................................... 467,431 557,376 506,093
Deferred income taxes ........................................... 11,800 1,521 11,800
Other current assets ............................................ 9,167 46,692 31,492
--------- --------- ---------
Total current assets .......................................... 501,356 622,938 711,361
Property, at cost .................................................. 421,924 416,087 430,116
Accumulated depreciation and amortization .......................... (165,188) (143,862) (152,120)
--------- --------- ---------
Property, net ................................................... 256,736 272,225 277,996
Goodwill ........................................................... -- 96,004 --
Deferred income taxes .............................................. 1,200 1,432 1,200
Other assets ....................................................... 8,081 6,138 6,358
--------- --------- ---------
Total Assets .................................................. $ 767,373 $ 998,737 $ 996,915
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ............................ $ 3,571 $ -- $ 2,060
Revolver ........................................................ 180,000 321,000 272,000
Accounts payable ................................................ 317,581 338,160 406,642
Restructuring reserve ........................................... 3,772 14,464 33,963
Other current liabilities ....................................... 68,499 63,006 100,866
--------- --------- ---------
Total current liabilities ..................................... 573,423 736,630 815,531
Long-term debt ..................................................... 192,242 110,000 122,539
Other long-term liabilities ........................................ 49,936 57,152 56,226
Stockholders' equity (deficit):
Preferred stock ($.01 par value; authorized: 5,000,000
shares; issued and outstanding: none) ........................ -- -- --
Common stock ($.01 par value; authorized: 75,000,000 shares;
issued and outstanding: September 30, 1997, 34,302,508 shares;
December 31,1996 and September 30, 1996, 34,301,956 shares) .. 343 343 343
Additional paid-in capital ...................................... 254,741 254,411 253,896
Accumulated deficit ............................................. (290,341) (145,828) (238,649)
Deferred compensation ........................................... (7,998) (8,998) (7,998)
Common stock subscriptions ...................................... (4,973) (4,973) (4,973)
--------- --------- ---------
Total stockholders' equity (deficit) .......................... (48,228) 94,955 2,619
--------- --------- ---------
Total Liabilities and Stockholders' Equity (Deficit) .......... $ 767,373 $ 998,737 $ 996,915
========= ========= =========
</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,
--------------------------
1997 1996
------------ -----------
(AS ADJUSTED)
(NOTE 5)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss .................................................................. $ (51,692) $(100,917)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................... 30,114 34,318
Disposal of property .................................................... 3,215 1,104
Restructuring charge .................................................... -- 35,000
Deferred income taxes ................................................... -- 10,547
Changes in operating assets and liabilities:
Inventories ............................................................. 38,662 (23,682)
Other current assets .................................................... 22,325 (25,882)
Accounts payable ........................................................ (89,061) (65,688)
Restructuring reserve ................................................... (8,872) (5,666)
Other current liabilities ............................................... (32,336) (44,549)
Other assets ............................................................ (1,067) (181)
Other long-term liabilities ............................................. (2,558) 3,418
--------- ---------
Net cash used in operating activities .................................. (91,270) (182,178)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures ...................................................... (6,477) (12,855)
Proceeds from property sales .............................................. -- 11,719
--------- ---------
Net cash used in investing activities .................................. (6,477) (1,136)
--------- ---------
FINANCING ACTIVITIES:
Decrease in checks drawn in excess of bank balances ....................... -- (69,321)
Borrowings (repayments) under revolver .................................... (92,000) 268,000
Net proceeds from issuance of long-term debt .............................. 49,500 --
Principal payments on long-term debt ...................................... (8,773) --
Proceeds from sale of common stock ........................................ 2 13
--------- ---------
Net cash provided by (used in) financing activities .................... (51,271) 198,692
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................ (149,018) 15,378
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............................ 161,976 1,971
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................. $ 12,958 $ 17,349
========= =========
CASH PAID (RECEIVED) DURING THE PERIOD FOR:
Interest ................................................................. $ 22,051 $ 19,770
Income taxes, net ........................................................ (22,703) 10,381
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Musicland Stores Corporation ("MSC") and its wholly-owned subsidiary, The
Musicland Group, Inc. ("MGI") and MGI's wholly-owned subsidiaries, after
elimination of all material intercompany balances and transactions. MSC and MGI
are collectively referred to as the "Company."
The 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. SUMMARY OF SIGNIFICANT RISKS AND UNCERTAINTIES AND GOING CONCERN
ASSESSMENT
In recent years, the Company's stores have faced increased competition
from non-mall discount stores, consumer electronics superstores and other mall
based music, video and book specialty retailers expanding into non-mall
multimedia superstores of their own. The low prices offered by these non-mall
stores created intense price competition and adversely affected the performance
of both the Company's non-mall and mall stores. The Company experienced
liquidity pressures as a result of the challenging retail sales environment, the
negative impact of underperforming existing stores and new Media Play stores
opened in 1995 and 1996, particularly those which performed below expectations.
During the second half of 1996, the Company encountered difficulty in obtaining
shipments from certain vendors, primarily due to concerns about the Company's
liquidity. The competitive environment and pricing pressure have eased somewhat
in 1997 as a result of the closing of stores by certain mall competitors and
less near or below cost pricing by certain non-mall competitors.
Management implemented programs during 1996 to improve profitability,
reduce inventory levels and increase inventory turnover. More focused marketing
and advertising programs were instituted in late 1996. The Company slowed store
expansion to focus on improving performance in its existing stores and recorded
pretax restructuring charges totaling $75,000 to reflect estimated costs
associated with the closing of 114 underperforming stores and the Company's
distribution facility in Minneapolis, Minnesota. The goodwill write-downs taken
in 1995 and 1996, following evaluations of goodwill for impairment, have
eliminated goodwill from the Company's balance sheet. In addition, during the
first quarter of 1997, the Company reached voluntary agreements with the
majority of its vendors to temporarily defer existing trade payables and provide
continued product supply, subject to payment terms reduced to 10 days or less on
new purchases.
In June 1997, the Company completed agreements with its banks to amend
the existing credit agreement to provide additional flexibility in the covenants
and to provide additional financing under a term facility. The Company also
obtained the necessary amendments to financing agreements relating to its
Franklin distribution facility, three of its Media Play stores and its senior
subordinated notes. The Company had previously obtained waivers of certain
financial covenants and technical defaults under the credit agreement that had
been extended through June 30, 1997 to allow for adequate time to complete
6
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT RISKS AND UNCERTAINTIES AND GOING CONCERN
ASSESSMENT (CONTINUED)
all of the necessary financing agreements and related amendments. During the
third quarter of 1997, the Company completed individual agreements or
understandings with most of its vendors, including the ten largest, for the
repayment of the deferred trade payables balances and to begin to return to
normal credit terms, including increased credit availability for seasonal
purchases subject to certain credit limits.
While the actions taken by management contributed to improved
performance in the first nine months of 1997 and an improvement in the Company's
financial position, a successful fourth quarter is essential to the Company's
ability to continue to receive adequate product from its vendors on acceptable
credit terms and to continue as a going concern. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
3. REVOLVING CREDIT FACILITY AND TERM LOAN
In June 1997, the Company obtained an amendment to its credit agreement
that modified and provided additional flexibility in financial covenants related
to fixed charge coverage, consolidated tangible net worth and debt to total
capitalization and removed financial covenants related to the debt and trade
payables to eligible inventory ratio and the annual one day clean-down
requirement of borrowings under the revolving credit facility. The amendment
also allowed for additional financing under a term loan facility. The Company
had previously obtained waivers of certain financial covenants and technical
defaults under the credit agreement that had been extended through June 30, 1997
to allow for adequate time to complete all of the necessary financing agreements
and related amendments.
Pursuant to the amendment, borrowings are available under the revolving
credit facility up to a maximum of the lesser of 60% of eligible inventory or
$275,000 through December 11, 1997, $255,000 during the period from December 12,
1997 through February 15, 1998 and $245,000 thereafter. However, for any
borrowings which result in a net increase in total outstanding revolver
borrowings, total trade accounts payable must be equal to or greater than the
total outstanding revolver borrowings. Outstanding revolver borrowings in excess
of $245,000 are secured by the Company's inventory. At September 30, 1997, the
maximum permitted borrowings under the revolver were $275,000. The Company had
revolver borrowings of $180,000 at September 30, 1997 and had cash and cash
equivalents of $12,958. In September 1997, the Company borrowed $50 million
under its term loan facility after having met all of the required conditions.
The term loan is due in two installments of $25,000 in each of December
1998 and February 1999 and is secured by the Company's inventory. Covenants of
the term loan agreement require a minimum inventory of $150,000 and a minimum
operating cash flow and limit additional liens.
4. RESTRUCTURING CHARGES
During 1996, the Company implemented programs designed to improve
profitability and increase inventory turnover. Pretax restructuring charges of
$35,000 and $40,000 were recorded in the first and fourth quarters of 1996,
respectively, to reflect estimated costs associated with the closing of 115
underperforming stores and the Company's distribution facility in Minneapolis,
Minnesota. The store closings included 79 mall stores and 36 non-mall stores.
Through September 30, 1997, the Company closed the distribution facility and 114
stores. The Company had entered into a lease termination
7
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. RESTRUCTURING CHARGES (CONTINUED)
agreement with the landlord of the one remaining non-mall store identified under
the restructuring program but exercised an option to reinstate the lease and
consequently removed the store from the closing list. As of September 30, 1997,
$71,228 of the restructuring reserve had been utilized, consisting of $32,964 of
cash payments, primarily related to payments to landlords for the early
termination of operating leases and legal and consulting fees, and $38,264 of
non-cash charges related to write-downs of leasehold improvements and certain
equipment, net of unamortized lease credits. Because of the remaining lease
obligations on certain non-mall stores which were closed without termination
agreements, the reserve balance of $3,772 was not reduced for the non-mall store
that was removed from the closing list.
5. INCOME TAXES
The effective income tax rates for the three months and nine months
ended September 30, 1996 have been adjusted from 44.4% and 37.7%, respectively,
to 16.3%, the income tax benefit was reduced from $12,850 and $45,400,
respectively, to $4,713 and $19,653, respectively, and the net current and
noncurrent deferred tax assets were decreased by $22,279 and $3,468,
respectively, to reflect the effect of the deferred tax valuation allowances
recorded in the fourth quarter of 1996. The valuation allowances were required
because of the uncertainty of future earnings and reduced the deferred income
tax balances at December 31, 1996 to approximate the remaining recoverable
income taxes after carryback of the taxable loss for the year ended December 31,
1996. Accordingly, the Company expects its tax provision for the year ending
December 31, 1997 to be minimal and no tax provision (benefit) has been recorded
on pretax earnings (loss) in interim periods during 1997. The effective income
tax rates for the three months and nine months ended September 30, 1996, before
consideration of the adjustment for valuation allowances, vary from the federal
statutory rate principally as a result of nondeductible goodwill amortization
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 and warrants are anti-dilutive due to the net loss in
each period.
7. COMMON STOCK WARRANTS
In connection with the term loan agreement completed in June 1997, the
Company issued warrants for the purchase of 1,822,087.16 shares of common stock
at $1.5625 per share. The warrants are exercisable over a period of five years
and expire in 2002. The difference between the exercise price and the fair value
of the warrants at the time of issuance of $890 was recorded as additional debt
issuance costs and an increase to additional paid-in capital.
8. SUPPLEMENTAL CASH FLOW INFORMATION
The Company's distribution facility in Franklin, Indiana and most of
the related equipment, which together had an original cost of approximately
$30,000, were financed under an operating lease with a special purpose entity
that had been formed for the purpose of purchasing the land and equipment and
constructing the facility using secured long-term financing. The land, building
and equipment, together
8
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
with the related mortgage note payable, were recorded on the Company's books
after the terms of an amendment to the operating lease required consolidation of
the special purpose entity as of June 1997, the date of the amendment. The terms
of the amendment required a principal payment of $3,214 with the effective date
of the amendment and another $3,214 in September 1997, and require additional
principal payments of $1,714 in December 1997 and $857 in February 1998, with
the balance due at the end of either the original term in March 1999 or the one
year renewal term in March 2000.
9. RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 128, "Earnings per
Share" ("Statement No. 128"), issued in February 1997 and effective for fiscal
years ending after December 15, 1997, establishes and simplifies standards for
computing and presenting earnings per share ("EPS"). Implementation of Statement
No. 128 will not have a material impact on the Company's computation or
presentation of EPS, as the Company's common stock equivalents either have had
no material effect on earnings per share amounts or have been anti-dilutive with
respect to losses.
Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income" ("Statement No. 130"), issued in June 1997 and effective
for fiscal years beginning after December 15, 1997, establishes standards for
reporting and display of the total of net income and the components of all other
nonowner changes in equity, or comprehensive income, either below net income
(loss) in the statement of operations, in a separate statement of comprehensive
income (loss) or within the statement of changes in stockholders' equity. The
Company has had no significant items of other comprehensive income.
9
<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,
1997 and 1996, and the related consolidated statements of operations for the
three-month and nine-month periods ended September 30, 1997 and 1996, and the
consolidated statements of cash flows for the nine-month periods ended September
30, 1997 and 1996. 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, 1996, and, in our report dated February 25,
1997, we expressed an unqualified opinion on that statement with an explanatory
fourth paragraph regarding the Company's ability to continue as a going concern.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 1996, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has experienced declining
operating results and liquidity constraints that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
October 31, 1997
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
In recent years, the Company's stores have faced increased competition
from non-mall discount stores, consumer electronics superstores and other mall
based music, video and book specialty retailers expanding into non-mall
multimedia superstores of their own. The low prices offered by these non-mall
stores created intense price competition and adversely affected the performance
of both the Company's non-mall and mall stores. The Company experienced
liquidity pressures as a result of the challenging retail sales environment, the
negative impact of underperforming existing stores and new Media Play stores
opened in 1995 and 1996, particularly those which performed below expectations.
During the second half of 1996, the Company encountered difficulty in obtaining
shipments from certain vendors, primarily due to concerns about the Company's
liquidity. The competitive environment and pricing pressure have eased somewhat
in 1997 as a result of the closing of stores by certain mall competitors and
less near or below cost pricing by certain non-mall competitors.
Management implemented programs during 1996 to improve profitability,
reduce inventory levels and increase inventory turnover. More focused marketing
and advertising programs were instituted in late 1996. The Company slowed store
expansion to focus on improving performance in its existing stores and recorded
pretax restructuring charges totaling $75 million to reflect estimated costs
associated with the closing of 114 underperforming stores and the Company's
distribution facility in Minneapolis, Minnesota. The goodwill write-downs taken
in 1995 and 1996, following evaluations of goodwill for impairment, have
eliminated goodwill from the Company's balance sheet. In addition, during the
first quarter of 1997, the Company reached voluntary agreements with the
majority of its vendors to temporarily defer existing trade payables and provide
continued product supply, subject to payment terms reduced to 10 days or less on
new purchases.
In June 1997, the Company completed agreements with its banks to amend
the existing credit agreement to provide additional flexibility in the covenants
and to provide additional financing under a term facility. The Company also
obtained the necessary amendments to financing agreements relating to its
Franklin distribution facility, three of its Media Play stores and its senior
subordinated notes. The Company had previously obtained waivers of certain
financial covenants and technical defaults under the credit agreement that had
been extended through June 30, 1997 to allow for adequate time to complete all
of the necessary financing agreements and related amendments. During the third
quarter of 1997, the Company completed individual agreements or understandings
with most of its vendors, including the ten largest, for the repayment of the
deferred trade payables balances and to begin to return to normal credit terms,
including increased credit availability for seasonal purchases subject to
certain credit limits. See "- Liquidity and Capital Resources."
While the actions taken by management contributed to improved
performance in the first nine months of 1997 and an improvement in the Company's
financial position, a successful fourth quarter is essential to the Company's
ability to continue to receive adequate product from its vendors on acceptable
credit terms and to continue as a going concern. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
11
<PAGE>
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, 1997 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------
PERCENT PERCENT OF TOTAL
INCR. ----------------
1997 1996 (DECR.) 1997 1996
--------- --------- --------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
SALES:
Non-mall stores ................. $ 121.5 $ 129.9 (6.5)% 32.5% 35.4 %
Mall stores ..................... 249.1 233.4 6.7 66.7 63.7
Total (1) ..................... 373.3 366.6 1.8 100.0 100.0
COMPARABLE STORE SALES INCREASE
(DECREASE):
Non-mall stores ................. 5.8 % (0.1)% N/A N/A N/A
Mall stores ..................... 11.7 (5.6) N/A N/A N/A
Total (1) ..................... 9.7 (4.0) N/A N/A N/A
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------
PERCENT PERCENT OF TOTAL
INCR. -----------------
1997 1996 (DECR.) 1997 1996
--------- --------- --------- ------- -------
(DOLLARS AND SQUARE FOOTAGE IN MILLIONS)
<S> <C> <C> <C> <C> <C>
SALES:
Non-mall stores .................. $ 366.2 $ 397.1 (7.8)% 33.5% 35.4%
Mall stores ...................... 717.8 715.3 0.3 65.7 63.7
Total (1) ...................... 1,092.1 1,122.6 (2.7) 100.0 100.0
COMPARABLE STORE SALES INCREASE
(DECREASE):
Non-mall stores .................. 2.5% (0.1)% N/A N/A N/A
Mall stores ...................... 4.3 (2.5) N/A N/A N/A
Total (1) ...................... 3.6 (1.8) N/A N/A N/A
NUMBER OF STORES OPEN AT END OF
PERIOD:
Non-mall stores .................. 225 243 (7.4) 16.4 16.5
Mall stores ...................... 1,131 1,212 (6.7) 82.4 82.1
Total (1) ...................... 1,372 1,476 (7.0) 100.0 100.0
STORE SQUARE FOOTAGE AT END OF PERIOD:
Non-mall stores .................. 4.3 5.1 (16.3) 51.0 53.4
Mall stores ...................... 4.1 4.4 (7.2) 48.5 45.9
Total (1) ...................... 8.4 9.5 (12.2) 100.0 100.0
</TABLE>
------------------------------------------------------------------------------
(1) The totals include other divisions which individually are not significant.
12
<PAGE>
Sales. The comparable store sales gains in 1997 are primarily the
result of strong sales of music product and of the Star Wars Trilogy Special
Edition video set released during the third quarter. Prerecorded video sales
have otherwise been weak due to the lack of strong product releases. The
following table shows the comparable store sales percentage increase (decrease)
attributable to the Company's two principal product categories for the three
months and nine months ended September 30, 1997 and 1996.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1997 1996 1997 1996
----------- --------- --------- ---------
Prerecorded music 12.3 % (2.8) % 7.1 % .5 %
Prerecorded video cassettes 12.0 (5.9) 1.6 (3.9)
The increase in total sales in the third quarter of 1997 despite fewer
stores resulted primarily from comparable store sales gains during the period.
The decrease in total sales in the first nine months of 1997 compared with 1996
was principally due to the net decrease in store count. The expansion of
non-mall stores accounted for most of the increase in total sales in the third
quarter and first nine months of 1996. See "- Liquidity and Capital Resources -
Investing Activities."
During the second half of 1996, the Company encountered difficulty in
obtaining shipments from certain vendors in the books, computer software, video
games and trend product categories, primarily due to concerns about the
Company's liquidity. In the first quarter of 1997, the Company's largest vendors
and a substantial majority of the remaining vendors agreed to temporarily defer
existing trade payables and provide continued product supply, subject to payment
terms reduced to 10 days or less on new purchases. During the third quarter of
1997, the Company completed individual agreements or understandings with most of
its vendors, including the ten largest, for the repayment of the deferred trade
payables balances and to begin to return to normal credit terms, including
increased credit availability for seasonal purchases subject to certain credit
limits. See "- Liquidity and Capital Resources."
Gross Profit. Gross profit as a percentage of sales was 34.6% in the
third quarter of 1997 compared with 34.8% in the third quarter of 1996, a
decrease of 0.2%. For the first nine months of 1997, gross margin improved 0.2%
to 34.4% from 34.2% in the first nine months of 1996. The proportion of sales
from the lower margin non-mall stores relative to total sales decreased in the
third quarter and first nine months of 1997 due to store closings and resulted
in improvements to total Company gross margin of 0.4% and 0.3%, respectively.
Inventory shrinkage in the third quarter and first nine months of 1997 increased
by 0.2% and 0.4%, respectively, from 1996. The balance of the gross margin
changes in the third quarter and first nine months of 1997 compared with the
same periods in 1996 was attributable to the level of promotional pricing in
each period. In the third quarter of 1997, gross margin was negatively impacted
by promotional pricing of the strong selling Star Wars Trilogy Special Edition
during the period. Less promotional pricing and price increases improved gross
margin during the first nine months of 1997.
The Company's low-price, non-mall superstores have a lower gross margin
than the mall stores. The expansion of non-mall stores in previous periods
negatively impacted total Company gross margin as their sales increased in
proportion to total Company sales. The Company expects a reduced impact on gross
margin from the non-mall stores because of the non-mall store closings and the
curtailment of non-mall store expansion. The Company may also continue to
benefit from the reduction in near or below cost pricing by certain non-mall
competitors.
Selling, General and Administrative Expenses. The decreases in selling,
general and administrative expenses in the third quarter and first nine months
of 1997 compared with the 1996 periods were primarily due to store closings. The
Company also achieved cost savings in 1997 from lease concessions for certain
mall stores, a reduction in advertising and the closing of the Minneapolis
distribution facility. Financial and legal advisory services and related
expenses, most of which were required or incurred in conjunction with the
Company's credit agreement, totaled approximately $0.3 million and $2.8 million
for the three months and nine months ended September 30, 1997, respectively,
compared with $0.5 million in the third quarter and first nine months of 1996.
Selling, general and
13
<PAGE>
administrative expenses as a percentage of sales were 33.0% in the third quarter
of 1997 compared with 37.3% in the third quarter of 1996 and for the first nine
months were 34.3% in 1997 compared with 36.7% in 1996. These rate decreases were
mainly due to the cost savings discussed above. The comparable store sales gains
in 1997 also contributed to the rate improvements.
Depreciation and Amortization. Depreciation and amortization in the
third quarter and first nine months of 1997 decreased $1.1 million and $4.3
million, respectively, over the same periods in 1996. Goodwill amortization,
eliminated after the write-down of the remaining goodwill balance in the fourth
quarter of 1996, was $0.8 million and $2.3 million for the third quarter and
first nine months of 1996, respectively. The decreases in other depreciation and
amortization were primarily attributable to store closings.
Restructuring Charges. During 1996, the Company implemented programs
designed to improve profitability and increase inventory turnover. Pretax
restructuring charges of $35 million and $40 million were recorded in the first
and fourth quarters of 1996, respectively, to reflect estimated costs associated
with the closing of 115 underperforming stores and the Company's distribution
facility in Minneapolis, Minnesota. The store closings included 79 mall stores
and 36 non-mall stores. Through September 30, 1997, the Company closed the
distribution facility and 114 stores. The Company had entered into a lease
termination agreement with the landlord of the one remaining non-mall store
identified under the restructuring program but exercised an option to reinstate
the lease and consequently removed the store from the closing list. As of
September 30, 1997, $71.2 million of the restructuring reserve had been
utilized, consisting of $33.0 million of cash payments, primarily related to
payments to landlords for the early termination of operating leases and legal
and consulting fees, and $38.2 million of non-cash charges related to
write-downs of leasehold improvements and certain equipment, net of unamortized
lease credits. Because of the remaining lease obligations on certain non-mall
stores which were closed without termination agreements, the reserve balance of
$3.8 million was not reduced for the non-mall store that was removed from the
closing list. See "- Liquidity and Capital Resources - Investing Activities."
Interest Expense. Interest expense in the third quarter and first nine
months of 1997 decreased $0.7 million and $0.5 million, respectively, from the
same periods in 1996 primarily due to lower outstanding revolver borrowings,
partially offset by higher interest rates. For the third quarters of 1997 and
1996 and the first nine months of 1997 and 1996, the average daily revolver
balances, based upon the number of days outstanding, were $224.6 million, $310.4
million, $250.7 million and $282.4 million, respectively. The weighted average
interest rates on the revolver during the periods, based upon the average daily
balances, were 8.2%, 7.7%, 8.1% and 7.5%, respectively. See "- Liquidity and
Capital Resources."
Income Taxes. The effective income tax rates for the third quarter and
first nine months of 1996 have been adjusted from 44.4% and 37.7%, respectively,
to 16.3% and the income tax benefit was reduced from $12.9 million and $45.4
million, respectively, to $4.7 million and $19.7 million, respectively to
reflect the effect of the deferred tax valuation allowances recorded in the
fourth quarter of 1996. The valuation allowances were required because of the
uncertainty of future earnings and reduced the deferred income tax balances at
December 31, 1996 to approximate the remaining recoverable income taxes after
carryback of the taxable loss for the year ended December 31, 1996. Accordingly,
the Company expects its tax provision for the year ending December 31, 1997 to
be minimal and no tax provision (benefit) has been recorded on pretax earnings
(loss) in interim periods during 1997. The effective income tax rates for the
three months and nine months ended September 30, 1996, before consideration of
the adjustment for valuation allowances, vary from the federal statutory rate
principally as a result of nondeductible goodwill amortization and state income
taxes. See Note 5 of Notes to Consolidated Financial Statements.
Seasonality. The Company's business is highly seasonal, with nearly
40% of the annual revenues and all of the net earnings generated in the fourth
quarter.
Recently Issued Accounting Standards. Financial Accounting Standards
Board Statement No. 128, "Earnings per Share" ("Statement No. 128"), issued in
February 1997 and effective for fiscal years ending after December 15, 1997,
establishes and simplifies standards for computing and presenting
14
<PAGE>
earnings per share ("EPS"). Implementation of Statement No. 128 will not have a
material impact on the Company's computation or presentation of EPS, as the
Company's common stock equivalents either have had no material effect on
earnings per share amounts or have been anti-dilutive with respect to losses.
Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income" ("Statement No. 130"), issued in June 1997 and effective
for fiscal years beginning after December 15, 1997, establishes standards for
reporting and display of the total of net income and the components of all other
nonowner changes in equity, or comprehensive income, either below net income
(loss) in the statement of operations, in a separate statement of comprehensive
income (loss) or within the statement of changes in stockholders' equity. The
Company has had no significant items of other comprehensive income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are borrowings under the
revolving credit facility pursuant to the terms of its bank credit agreement and
internally generated cash. The credit agreement provides for a revolving credit
facility and expires in October 1999. In June 1997, the Company completed
agreements with its banks to amend the existing credit agreement and to provide
additional financing under a term loan facility of up to $50 million. Pursuant
to the amendment, borrowings are available under the revolving credit facility
up to a maximum of the lesser of 60% of eligible inventory or $275 million
through December 11, 1997, $255 million during the period from December 12, 1997
through February 15, 1998 and $245 million thereafter. However, for any
borrowings which result in a net increase in total outstanding revolver
borrowings, total trade accounts payable must be equal to or greater than the
total outstanding revolver borrowings. Outstanding revolver borrowings in excess
of $245 million and the term loan are secured by the Company's inventory. At
September 30, 1997, the maximum permitted borrowings under the revolver were
$275 million. The Company had revolver borrowings of $180 million at September
30, 1997 and had cash and cash equivalents of $13.0 million. In September 1997,
the Company borrowed $50 million under its term loan facility after having met
all of the required conditions. See "- Financing Activities" and Note 3 of Notes
to Consolidated Financial Statements.
The credit agreement contains financial covenants and covenants that
limit additional indebtedness, liens, capital expenditures and cash dividends.
The amendment to the credit agreement in June 1997 modified and provided
additional flexibility in financial covenants related to fixed charge coverage,
consolidated tangible net worth and debt to total capitalization and removed
financial covenants related to the debt and trade payables to eligible inventory
ratio and the annual one day clean-down requirement of borrowings under the
revolving credit facility. The Company had previously obtained waivers of
certain financial covenants and technical defaults under the credit agreement
that had been extended through June 30, 1997 to allow for adequate time to
complete all of the necessary financing agreements and related amendments.
Covenants of the term loan agreement require a minimum inventory of $150 million
and a minimum operating cash flow and limit additional liens.
During the first quarter of 1997, the Company's largest vendors and a
substantial majority of the remaining vendors agreed to temporarily defer
existing trade payables and provide continued product supply, subject to payment
terms reduced to 10 days or less on new purchases. During the third quarter of
1997, the Company completed individual agreements or understandings with most of
its vendors, including the ten largest, for the repayment of the deferred trade
payables balances and to begin to return to normal credit terms, including
increased credit availability for seasonal purchases subject to certain credit
limits. The repayment schedule includes weekly payments for a major portion of
the amount deferred, with the balance to be paid in December 1997. The Company
expects that these payments will be financed by revolver borrowings and
internally generated cash.
Operating Activities. Net cash used in operating activities (including
in 1996 the decrease in checks drawn in excess of bank balances which relate to
vendor payments) during the nine months ended September 30, 1997 and 1996 was
$91.3 million and $251.5 million, respectively. The lower level of cash used in
the first nine months of 1997 was primarily due to lower inventory levels as a
result of the
15
<PAGE>
consolidation of distribution centers into a single facility, store closings and
other initiatives designed by management to increase inventory turnover.
Additionally, the deferral of trade payable balances in the first quarter of
1997 increased accounts payable and reduced cash payments during the first nine
months of 1997 by approximately $30 million. Cash used for inventory purchases,
as reflected by the aggregate net changes in inventories, accounts payable and
checks drawn in excess of bank balances, was $50.4 million in 1997 compared with
$158.7 million in 1996. The Company received income tax refunds in the first
nine months of 1997 totaling approximately $23 million from the carryback of the
taxable loss for the year ended December 31, 1996, while taxes paid in the first
nine months of 1996 on taxable income in 1995 were approximately $9 million.
Cash used in operating activities in the first nine months of 1997 and 1996
included cash expenditures related to store closings under the Company's
restructuring programs of $8.9 million and $5.7 million, respectively.
Changes in the deferred income tax balances and most of the increase in
other current assets during the first nine months of 1996 from December 31, 1995
were due to the tax provision (benefit) recorded on the loss in the first nine
months of 1996. The net current and noncurrent deferred tax assets were
decreased by $22.3 million and $3.5 million, respectively, to reflect the effect
of the deferred tax valuation allowances established in the fourth quarter of
1996. See Note 5 of Notes to Consolidated Financial Statements. The increase in
other assets in 1997 reflects $1.7 million of cash payments related to fees
incurred in connection with the bank agreements and other financing agreements
completed in June 1997 that will be amortized over the remaining terms of the
related agreements. Other changes in other operating assets and liabilities are
primarily related to the seasonal nature of the business and also reflect the
effect of store closings and the curtailment of store expansion.
Investing Activities. Store expansion and closings were as follows for
the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
---------------- -------------- --------------
1997 1996 1997 1996 1997 1996
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
OPENINGS:
Non-mall stores ........... 1 3 1 16 4 53
Mall stores ............... 1 7 1 10 5 30
Total (1) ............... 2 10 2 27 10 87
CLOSINGS:
Non-mall stores ........... -- (3) (21) (15) (22) (15)
Mall stores ............... (7) (9) (69) (30) (86) (62)
Total (1) ............... (10) (13) (96) (47) (114) (79)
NET INCREASE (DECREASE):
Non-mall stores ........... 1 -- (20) 1 (18) 38
Mall stores ............... (6) (2) (68) (20) (81) (32)
Total (1) ............... (8) (3) (94) (20) (104) 8
</TABLE>
- -----------------------------------------------------------
(1) The totals include other divisions which individually are not significant.
Through September 30, 1997, the Company has closed 114 stores,
including 79 mall stores and 35 non-mall stores, under restructuring programs
established in 1996. Inventories from closed stores were either redeployed to
more profitable existing stores, returned to vendors or sold in preclosing
liquidation sales. The Company is closely monitoring other nonproductive stores
and may close additional stores as those stores reach the end of their lease
terms.
Capital expenditures in 1997 will be limited to approximately $15
million and will consist principally of improvements to existing stores. The
estimate of capital spending in 1997 was lowered from earlier projections
primarily due to a delay in plans for the downsizing of Media Play stores from
previous expectations. The Company anticipates that these capital expenditures
will be financed by borrowings under its revolving credit and term loan
facilities and internally generated cash. Since 1995, capital expenditures have
been significantly lower than in previous years, primarily due to the
curtailment of store expansion in response to the challenging retail
environment. Historically, most of the Company's
16
<PAGE>
capital expenditures have been for store expansion, and the majority of the
store expansion in recent years has consisted of new Media Play stores.
The Company's Franklin, Indiana distribution facility and most of the
related equipment, which together had an original cost of approximately $30
million, were financed under an operating lease with a special purpose entity.
The land, building and related equipment, together with the related mortgage
note payable, were recorded on the Company's books after the terms of an
amendment to the operating lease required consolidation of the special purpose
entity as of June 1997, the date of the amendment.
Financing Activities. The Company's financing activities principally
consist of borrowings and repayments under its revolving credit facility. Cash
provided by (used in) financing activities (excluding in 1996 the decrease in
checks drawn in excess of bank balances which relate to vendor payments) was
($51.3) million and $268.0 million during the nine months ended September 30,
1997 and 1996, respectively. The improvement in the Company's financial position
at September 30, 1997 was principally due to the closing of underperforming
stores, reduced inventory levels, expense reductions and comparable store sales
improvements. Revolver borrowings and cash and cash equivalents were $180
million and $13.0 million, respectively, at September 30, 1997 compared with
$321 million and $17.3 million, respectively, at September 30, 1996. Proceeds
received in September 1997 from the $50 million term loan, net of $0.5 million
of cash debt issuance costs, were used to reduce revolver borrowings.
In March 1997, the Company made a principal payment of $1.8 million on
the mortgage note payable for three of its Media Play stores. The terms of an
amendment in June 1997 to the financing agreements for the three Media Play
stores required a principal payment in June 1997 of $0.5 million and require
payments of $1.0 million and $0.8 million in December 1997 and 1998,
respectively, with the balance due at the end of either the original term in May
2000 or the one year renewal term in May 2001. The terms of an amendment in June
1997 to the financing agreements related to the mortgage note payable for the
Company's distribution facility in Franklin, Indiana required principal payments
of $3.2 million in each of June and September 1997 and require principal
payments of $1.7 million in December 1997 and $0.9 million in February 1998,
with the balance due at the end of either the original term in March 1999 or the
one year renewal term in March 2000. The Company plans to either sell and lease
back these properties or seek other sources of financing on or before the
expiration of the mortgage notes payable. The term loan is due in two
installments of $25 million in each of December 1998 and February 1999. The
Company's revolving credit facility expires in October 1999. There can be no
assurance that the Company will be able to obtain adequate or alternative
sources of financing or otherwise meet its obligations under these 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 and to obtain sufficient
financing to meet its liquidity needs, effects of weather and overall economic
conditions, including inflation, consumer confidence, spending habits and
disposable income.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its Annual Stockholders' meeting on July 31, 1997.
(c) (1) The stockholders voted for three directors for three-year terms. The
vote was as follows for each of the nominees:
Affirmative Voting Authority
Name Votes Withheld
-----------------------------------------------------------------
Keith A. Benson 32,130,794 715,146
Gilbert L. Wachsman 32,106,649 739,291
Tom F. Weyl 32,150,929 695,011
There were no abstentions and no broker non-votes.
Continuing as directors were Jack W. Eugster, Michael W. Wright,
William A.Hodder, Lloyd P. Johnson, Kenneth F. Gorman and Josiah O.
Low, III.
(2) The appointment of Arthur Andersen LLP, independent public
accountants, as auditors of the Company for the year ending December
31, 1997, was voted on and approved. There were 32,496,315 votes for,
254,834 votes against, 94,791 abstentions and no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
15. Letter re unaudited interim financial information
------
27. Financial Data Schedules
------
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
September 30, 1997.
18
<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
(Registrant)
By: /s/ Keith A. Benson
Keith A. Benson
Vice Chairman, Chief Financial
Officer and Director
(authorized officer, principal
financial and accounting officer)
Date: November 13, 1997
19
EXHIBIT 15
LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION
November 12, 1997
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, 1997, which includes
our report dated October 31, 1997, 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>
<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, 1997, AND THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR
THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 12,958
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 467,431
<CURRENT-ASSETS> 501,356
<PP&E> 421,924
<DEPRECIATION> 165,188
<TOTAL-ASSETS> 767,373
<CURRENT-LIABILITIES> 573,423
<BONDS> 192,242
0
0
<COMMON> 343
<OTHER-SE> (48,571)
<TOTAL-LIABILITY-AND-EQUITY> 767,373
<SALES> 1,092,109
<TOTAL-REVENUES> 1,092,109
<CGS> 716,148
<TOTAL-COSTS> 716,148
<OTHER-EXPENSES> 404,315
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,338
<INCOME-PRETAX> (51,692)
<INCOME-TAX> 0
<INCOME-CONTINUING> (51,692)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51,692)
<EPS-PRIMARY> (1.54)
<EPS-DILUTED> 0
</TABLE>
