<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the fiscal year ended December 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
Commission file number 1-11014
MUSICLAND STORES CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 41-1623376
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10400 YELLOW CIRCLE DRIVE,
MINNETONKA, MINNESOTA 55343
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 931-8000
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------------
Common stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
-----
The aggregate market value of the voting stock held by nonaffiliates
of the Registrant on March 26, 1997 was $38,371,268.75, based on the closing
price of $1 1/4 per common share on the New York Stock Exchange on such date
(only members of the Management Investors Group are considered affiliates for
this calculation).
The number of shares outstanding of the Registrant's common stock on March 26,
1997 was 34,301,956.
<PAGE>
The only purpose of this amendment is to add Part III, Items 10 through 13 to
the Registrant's Annual Report on Form 10-K for the year ended December 31,
1996, originally filed April 11, 1997.
2
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the directors and
executive officers of Musicland Stores Corporation (the "Company"). The
directors and executive officers of the Company also hold the same
respective positions with The Musicland Group, Inc. ("MGI"), the Company's
operating subsidiary.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
<S> <C> <C>
Jack W. Eugster 51 Chairman of the Board, President and Chief Executive Officer
and Class III Director
Keith A. Benson 53 President Mall Stores Division and Class II Director
Kenneth F. Gorman 58 Class I Director
William A. Hodder 65 Class III Director
Lloyd P. Johnson 66 Class I Director
Josiah O. Low, III 57 Class I Director
Tom F. Weyl 54 Class II Director
Michael W. Wright 58 Class III Director
Gilbert L. Wachsman 49 Vice Chairman
Gary A. Ross 50 President, Superstores Division
Reid Johnson 54 Executive Vice President of Finance and Administration
and Chief Financial Officer
Marcia F. Appel 46 Senior Vice President of Corporate Advertising, Partnership Marketing
and Communications
Douglas M. Tracey 43 Senior Vice President of Distribution
</TABLE>
The Company's Restated Certificate of Incorporation provides that the
Board of Directors shall consist of not more than nine nor fewer than five
directors. The Board of Directors has established the number of directors to
serve on the Board as eight. The directors are divided into three classes,
designated as Class I, Class II and Class III, with staggered three-year
terms of office. The terms of Class I, Class II and Class III directors
expire in 1999, 1997 and 1998, respectively. 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,
who was elected by action of the Board of Directors.
Executive Officers are elected by the Board of Directors and serve at
its discretion.
3
<PAGE>
BUSINESS EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS
Jack W. 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.
Keith A. Benson served as a director of the Company from August 1988
until December 1989 and was again elected director in January 1992. He became
President, Mall Division on August 12, 1996. Previously, he served as President
of the Music Stores division from August 1, 1994. From May 1, 1992 through July
1994 he filled the position of Vice Chairman and Chief Financial Officer for
both the Company and MGI. Prior to that he was Executive Vice President and
Chief Financial Officer from 1988 through April 1992. Mr. Benson joined MGI in
1980 as its Controller and also served successively as its Senior Vice President
and Chief Financial Officer, Senior Vice President and Chief Financial Officer
for the Retail Division and Senior Vice President of Finance and Administration
for the Retail Division. Previously, he was with The May Company and Dayton
Hudson Corporation. Mr. Benson is also a director of Premium Wear, Inc.
Kenneth F. 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.
William A. Hodder has been a director of the Company since July 31,
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.
Lloyd P. 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, has been a director of the Company since
July 31, 1995. He has been an investment banker with Donaldson, Lufkin &
Jenrette Securities Corporation since 1985, where he is currently a Managing
Director. Previously he spent 24 years with Merrill Lynch, Pierce, Fenner and
Smith. Mr. Low is also a director of Centex Development Corporation and St.
Laurent Paperboard Inc.
4
<PAGE>
Tom F. 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.
Michael W. Wright has been a director of the Company since January
1989. He has been in the food distribution and retail business since 1977 when
he joined SUPERVALU INC. as Senior Vice President. He was elected President and
Chief Operating Officer of SUPERVALU INC. in 1978 and became its Chief Executive
Officer in June 1981. He assumed the additional responsibilities of Chairman of
the Board in October 1982. In addition to SUPERVALU INC., Mr. Wright is a
director of Cargill, Incorporated, Honeywell Inc., Norwest Corporation and
ShopKo Stores, Inc. He also serves as a director of the Food Marketing
Institute, the International Center for Companies of the Food Trade Industry and
the 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.
Gilbert L. Wachsman 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.
Gary A. Ross 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 has been Executive Vice President of Finance and
Administration and Chief Financial Officer since August 4, 1994. Prior to
joining the Company, Mr. Johnson held the position of Vice Chairman and Chief
Administrative Officer for the Dayton Hudson Department Store division of the
Dayton Hudson Corporation from 1985 to 1994. He was employed by Dayton Hudson
beginning in 1968, and his positions also included Senior Vice President and
Chief Financial Officer for Target Stores, Vice President and Controller, Vice
President and Treasurer, Treasurer, Director of Business Development and
Financial Analyst.
Marcia F. Appel 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 1993
as Vice President, Communications and Publications. Prior to joining the
Company, 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 serves on the
Minnesota Women's Press Advisory Board.
5
<PAGE>
Douglas M. Tracey 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.
FAMILY RELATIONSHIPS
No family relationships exist between any director or executive
officer and any other director or executive officer.
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 ("Form 3") and reports of
changes in ownership ("Form 4") with the SEC and the New York Stock Exchange.
Such persons are also required to furnish the Company with copies of all Section
16(a) forms they file. Based on the Company's review of the copies of such
forms received by it with respect to Fiscal Year 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.
6
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
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.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Awards
---------------------------------------------------- ------------
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 1996 $ 302,546 $ 26,473 $ 4,932(3) 47,500 $ 137,203(5)
President, Mall 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 1995 280,887 38,940 7,700 22,500 119,961
Division 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.
7
<PAGE>
(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) 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: $3,007.
8
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value at Assumed
Annual Rates of Stock Price
Individual Grants Appreciation for Option Term
-------------------------------------------------------------------- -------------------------------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise Price Expiration
Options Granted Employees ($/Sh) (2) Date 5% ($) (3) 10% ($) (3)
Name (#) (1) in Fiscal
Year
- ----------------------- ----------------- ---------------------------------------------------------------------------------------
<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.
9
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
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.
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.
"Unaffiliated Directors," defined as those members of the Board of
Directors who are not employed by the Company or MGI, or by Donaldson, Lufkin &
Jenrette, Inc., any affiliates thereof, or any successor institutional equity
investor, participate in the Stock Option Plan for Unaffiliated Directors of
Musicland Stores Corporation (the "Directors Plan"). Currently, newly elected
Unaffiliated Directors will receive an initial grant of a stock option to
purchase 5,000 shares of Common Stock. At any time that all prior grants under
the Directors Plan become fully vested, an Unaffiliated Director will receive a
new grant of an option to purchase 5,000 shares. The exercise price of all
options granted under the Directors Plan is the fair market value on the day of
grant. All grants have a term of ten years and are fully exercisable six months
after the date of the grant but vest at the rate of 20% per year over a period
of five years. All unvested portions of an option, whether exercised or not,
are immediately forfeited upon termination of service as a director for any
reason, and in the case of exercised unvested options, at the Company's option,
the participant agrees to sell such shares back to the Company at the exercise
price. Stock options granted under the Directors Plan are not transferable
other than by will or by the laws of descent
10
<PAGE>
and distribution. Currently, Messrs. Gorman, Johnson, Weyl and Wright each
has an option to purchase 10,000 shares of Common Stock at exercise prices
that range from $11.50 to $12.50 per share, and Mr. Hodder has an option to
purchase 5,000 shares at an exercise price of $9.375.
EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
The Company entered into employment agreements, effective August 25,
1988, with Messrs. Eugster, Benson and Ross (along with Mr. Johnson, 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. A Change in Control Agreement with
Mr. Johnson was entered into on November 27, 1995. 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 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.
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
11
<PAGE>
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. The Company is currently negotiating a change in control agreement
with Mr. Wachsman.
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 and Johnson 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 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 and Johnson,
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
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<PAGE>
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 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.
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<PAGE>
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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information as to the beneficial
ownership of the Company's Common Stock as of March 26, 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 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.
14
<PAGE>
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER, AMOUNT AND NATURE OF PERCENT OF
INCLUDING ADDRESS BENEFICIAL OWNERSHIP OF COMMON
OF OWNERS OF MORE THAN 5% COMMON STOCK 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 & Schulyler 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) *
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) *
Reid Johnson...................................... 55,200 (8) *
Gilbert L. Wachsman............................... 0 *
All directors and executive officers
as a group (13 persons)........................... 3,305,424 (7,8,9) 9.4%
________________________________________________
* Less than 1%
(1) Based on 34,301,956 shares outstanding on March 26, 1997
</TABLE>
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<PAGE>
(3) The Management Investors Group is currently a group of 21 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 (but forfeitable in the case of the
directors) as follows: Mr. Eugster, 369,334 shares; Messrs. Ross and
Benson, 142,467 shares each; Mr. Johnson, 55,000 shares; Messrs.
Gorman, Wright, Johnson and Weyl, 10,000 shares each; Mr. Hodder,
5,000 shares; and all directors and executive officers as a group (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
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<PAGE>
Agreement also calls for a restrictive legend to be put on all certificates
held by the Management Investors. Management Investors who sell shares
pursuant to Rule 144 or pursuant to a registered offering and later acquire a
number of shares equal to or less than such sold shares must vote the newly
acquired shares in the same manner. The Management Voting Agreement may be
terminated at any time by the vote of at least 80% of all shares held by all
Management Investors and, unless so terminated, will expire on August 24,
1998.
DLJ VOTING TRUST AGREEMENT
On March 4, 1992, DLJ (including certain affiliates) entered into a
voting trust agreement (the "Voting Trust Agreement") under which Meridian is
the voting trustee. Pursuant to this agreement DLJ 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).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 Shares 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.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment to be signed on its behalf by the
undersigned, thereto duly authorized.
MUSICLAND STORES CORPORATION
(Registrant)
By: /s/ Reid Johnson
---------------------------------
Reid Johnson
Executive Vice President and
Chief Financial Officer
(authorized officer, principal
financial and accounting officer)
Date: APRIL 30, 1997
---------------------------------
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