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 June 30, 1998
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 (I.R.S. Employer Identification No.)
of 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
July 15, 1998 was 35,372,793 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 8
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition. 9
PART II - OTHER INFORMATION
Item 2. Changes in Securities. 14
Item 4. Submission of Matters to a Vote of Security Holders. 14
Item 6. Exhibits and Reports on Form 8-K. 15
Signature 16
2
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales .............................................. $ 367,203 $ 342,746 $ 759,608 $ 718,826
Cost of sales ...................................... 231,398 222,318 487,050 471,935
--------- --------- --------- ---------
Gross profit .................................... 135,805 120,428 272,558 246,891
Selling, general and administrative expenses ....... 124,377 121,543 249,444 251,489
Depreciation and amortization ...................... 9,818 9,627 19,645 19,479
--------- --------- --------- ---------
Operating income (loss) ......................... 1,610 (10,742) 3,469 (24,077)
Interest expense ................................... 8,270 7,583 15,202 15,231
--------- --------- --------- ---------
Loss before income taxes ........................ (6,660) (18,325) (11,733) (39,308)
Income taxes ....................................... (1,998) -- (3,520) --
--------- --------- --------- ---------
Net loss ........................................ $ (4,662) $ (18,325) $ (8,213) $ (39,308)
========= ========= ========= =========
Basic loss per common share ..................... $ (0.14) $ (0.55) $ (0.24) $ (1.17)
========= ========= ========= =========
Weighted average number of common shares outstanding 34,064 33,507 33,896 33,494
========= ========= ========= =========
</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>
June 30,
---------------------- December 31,
1998 1997 1997
--------- ---------- ----------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents .................................... $ 8,455 $ 13,210 $ 3,942
Inventories .................................................. 399,307 452,696 450,258
Deferred income taxes ........................................ 9,400 11,800 10,600
Other current assets ......................................... 8,960 8,647 8,768
--------- --------- ----------
Total current assets ....................................... 426,122 486,353 473,568
Property, at cost ............................................... 424,611 421,278 423,862
Accumulated depreciation and amortization........................ (189,744) (156,525) (173,841)
--------- --------- ----------
Property, net ................................................ 234,867 264,753 250,021
Deferred income taxes ........................................... 3,000 1,200 2,400
Other assets .................................................... 10,960 8,850 7,906
--------- --------- ----------
Total Assets ............................................... $ 674,949 $ 761,156 $ 733,895
========= ========= ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C> <C>
Current liabilities:
Current maturities of long-term debt ......................... $ 50,000 $ 6,786 $ 26,657
Accounts payable ............................................. 226,647 304,307 357,183
Restructuring reserve ........................................ -- 4,755 --
Other current liabilities .................................... 78,290 65,331 115,660
--------- --------- ----------
Total current liabilities .................................. 354,937 381,179 499,500
Long-term debt .................................................. 258,834 365,255 166,430
Other long-term liabilities ..................................... 46,516 50,568 49,195
Stockholders' equity (deficit):
Preferred stock ($.01 par value; shares authorized: 5,000,000;
shares issued and outstanding: none) ...................... -- -- --
Common stock ($.01 par value; shares authorized: 75,000,000;
shares issued and outstanding: June 30, 1998, 35,372,793;
December 31, 1997, 34,372,592; June 30, 1997, 34,301,956) . 354 343 344
Additional paid-in capital ................................... 258,060 254,739 255,075
Accumulated deficit .......................................... (232,891) (277,957) (224,678)
Deferred compensation ........................................ (6,498) (7,998) (6,998)
Common stock subscriptions ................................... (4,363) (4,973) (4,973)
--------- --------- ----------
Total stockholders' equity (deficit) ....................... 14,662 (35,846) 18,770
--------- --------- ----------
Total Liabilities and Stockholders' Equity (Deficit) ....... $ 674,949 $ 761,156 $ 733,895
========= ========= ==========
</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>
Six Months Ended
June 30,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss .................................................... $ (8,213) $ (39,308)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ............................. 21,430 19,711
Disposal of property ...................................... 1,977 2,334
Deferred income taxes ..................................... 600 --
Changes in operating assets and liabilities:
Inventories ............................................... 50,951 53,397
Other current assets ...................................... 838 22,845
Accounts payable .......................................... (118,475) (102,335)
Restructuring reserve ..................................... -- (7,667)
Other current liabilities ................................. (37,219) (35,504)
Other assets .............................................. (61) (1,957)
Other long-term liabilities ............................... (2,674) (1,905)
--------- ---------
Net cash used in operating activities .................... (90,846) (90,389)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures ........................................ (6,464) (3,819)
--------- ---------
FINANCING ACTIVITIES:
Decrease in outstanding checks in excess of cash balances ... (12,061) --
Borrowings (repayments) under revolver ...................... -- (49,000)
Net proceeds from issuance of long-term debt ................ 144,317 --
Principal payments on long-term debt ........................ (32,933) (5,558)
Proceeds from sale of common stock .......................... 2,500 --
--------- ---------
Net cash provided by (used in) financing activities ...... 101,823 (54,558)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......... 4,513 (148,766)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .............. 3,942 161,976
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................... $ 8,455 $ 13,210
========= =========
CASH PAID (RECEIVED) DURING THE PERIOD FOR:
Interest ................................................... $ 10,643 $ 16,410
Income taxes, net .......................................... 689 (22,954)
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands)
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 Company operates primarily in
the United States as a specialty retailer of home entertainment products,
including prerecorded music, video sell-through, books, computer software and
related products. The Company's stores operate under two principal strategies:
(i) mall based music and video sell-through stores (the "Mall Stores"),
operating predominantly under the trade names Sam Goody and Suncoast Motion
Picture Company, and (ii) non-mall based full-media superstores ("Superstores"),
operating under the trade names Media Play and On Cue. Because both Mall Stores
and Superstores are supported by centralized corporate services and have similar
economic characteristics, products, customers and retail distribution methods,
the stores are reported as one industry segment.
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 has no significant items of other
comprehensive income. 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. Long-term Debt
In April 1998, the Company completed an offering of $150,000 of 9 7/8%
senior subordinated notes due 2008 with an original issue discount of $1,183.
The net proceeds to the Company from the offering, after discounts, commissions
and other offering costs were $144,317 and were used to repay $32,076 of
outstanding mortgage notes payable and $112,241 of revolver borrowings. In 1998,
the effective interest rate on the mortgage notes payable ranged from 8.4% to
8.6%. The effective interest rate on the revolver, exclusive of fees, ranged
from 7.4% to 9.0% for the six months ending June 30, 1998.
In connection with and effective upon completion of the offering, the
Company obtained an amendment to its credit agreement that permitted the
issuance of the senior subordinated notes and allowed the repayment of the
mortgage notes payable. The amendment also allows the Company to seek to extend
the maturities of its $50,000 term loan and reduces the maximum available
borrowings under the revolving credit facility to the lesser of: (i) 60% of
eligible inventory or (ii) $132,000 while the term loan is outstanding or
$182,000 if the term loan is repaid.
3. Income Taxes
The effective income tax rates for the three months and six months
ended June 30, 1998 and 1997 were based on the federal statutory income tax
rate, increased for the effect of state income taxes, net of federal benefit,
and adjusted for anticipated changes to the deferred tax valuation allowance
based on estimates of future earnings.
6
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands)
4. Loss Per Common Share
Basic loss per common share amounts were computed by dividing net loss
by the weighted average number of common shares outstanding in each period.
Potential common shares related to outstanding stock options and warrants were
anti-dilutive due to the net loss in each of the three month and six month
periods ended June 30, 1998 and 1997.
5. Recently Issued Accounting Standards
Accounting Standards Executive Committee Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), issued in March 1998 and effective for fiscal years
beginning after December 15, 1998, provides guidance on accounting for the costs
of computer software developed or obtained for internal use. SOP 98-1 requires
all costs related to the development of internal-use software other than those
incurred during the application development stage to be expensed as incurred.
Costs incurred during the application development stage are required to be
capitalized and amortized over the estimated useful life of the software. The
Company plans to adopt SOP 98-1 effective with the first quarter of 1999.
Adoption is not expected to have a material effect on the Company's financial
position or results of operations.
Accounting Standards Executive Committee Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), issued in April
1998 and effective for fiscal years beginning after December 15, 1998, requires
an entity to expense all start-up activities, including preopening and
organization costs, as incurred. The Company is currently in compliance with the
provisions of SOP 98-5, and, accordingly, the adoption of SOP 98-5 will not
impact the Company's financial position or results of operations.
7
<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 June 30, 1998
and 1997, and the related consolidated statements of operations for the
three-month and six-month periods ended June 30, 1998 and 1997, and the
consolidated statements of cash flows for the six-month periods ended June 30,
1998 and 1997. 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, 1997, and, in our report dated January 21, 1998,
we expressed an unqualified opinion on that statement. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1997, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
July 31, 1998
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
The Company's stores operate under two principal strategies: (i) mall
based music and video sell-through stores (the "Mall Stores"), operating
predominantly under the trade names Sam Goody and Suncoast Motion Picture
Company ("Suncoast"), and (ii) non-mall based full-media superstores (the
"Superstores"), operating under the trade names Media Play and On Cue. The
following table presents certain unaudited sales and store data for Mall Stores,
Superstores and in total for the Company for the three months and six months
ended June 30, 1998 and 1997. Because both Mall Stores and Superstores are
supported by centralized corporate services and have similar economic
characteristics, products, customers and retail distribution methods, the stores
are reported as one industry segment.
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------------------------
Percent Percent of Total
Incr. ----------------
1998 1997 (Decr.) 1998 1997
-------- -------- -------- ------- --------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Sales:
Mall Stores ........................... $ 241.8 $ 225.6 7.2% 65.8% 65.8%
Superstores ........................... 123.1 114.4 7.6 33.5 33.4
Total (1) ........................... 367.2 342.7 7.1 100.0 100.0
Comparable store sales increase (decrease):
Mall Stores ........................... 10.5% (0.5)% N/A N/A N/A
Superstores ........................... 7.6 (3.8) N/A N/A N/A
Total (1) ........................... 9.5 (1.6) N/A N/A N/A
<CAPTION>
Six Months Ended June 30,
---------------------------------------------
Percent Percent of Total
Incr. ----------------
1998 1997 (Decr.) 1998 1997
--------- -------- --------- ------- --------
(Dollars and square footage in millions)
<S> <C> <C> <C> <C> <C>
Sales:
Mall Stores ........................... $ 498.3 $ 468.7 6.3% 65.6% 65.2%
Superstores ........................... 256.5 244.7 4.9 33.8 34.0
Total (1) ........................... 759.6 718.8 5.7 100.0 100.0
Comparable store sales increase:
Mall Stores ........................... 10.0% 0.7% N/A N/A N/A
Superstores ........................... 7.6 0.9 N/A N/A N/A
Total (1) ........................... 9.2 0.7 N/A N/A N/A
Number of stores open at end of period:
Mall Stores ........................... 1,102 1,137 (3.1) 82.2 82.4
Superstores ........................... 224 224 -- 16.7 16.2
Total (1) ........................... 1,341 1,380 (2.8) 100.0 100.0
Total store square footage at end of period:
Mall Stores ........................... 4.0 4.1 (2.9) 48.2 48.6
Superstores ........................... 4.2 4.3 (1.1) 51.3 50.8
Total (1) ........................... 8.2 8.4 (2.1) 100.0 100.0
</TABLE>
------------------------------------------------------------------------------
(1) The totals include United Kingdom stores.
9
<PAGE>
Sales. The increases in total sales for the second quarter and first
six months of 1998 compared to the same periods in 1997 were attributable to the
comparable store sales increases, partially offset by the decrease in sales from
the closing of stores. The top selling soundtracks, "City of Angels" in the
second quarter and "Titanic" in the first half, contributed to the comparable
store sales growth in music, while strong sales of "The Little Mermaid" in the
second quarter led to the comparable store sales gains in video. The Company
continued to benefit from a less competitive environment due to the closing of
stores by certain mall competitors and less near or below cost pricing of music
product by certain non-mall competitors.
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 six months ended June 30, 1998 and 1997.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------- -------------
Music..... 8.1 % 4.0 % 10.2 % 4.4 %
Video..... 12.9 (7.8) 7.9 (2.9)
Digital video discs ("DVD") were first offered for sale in select
markets near the end of the first quarter of 1997 and were carried in most of
the Company's stores by the end of the third quarter of 1997. DVD sales were
10.8% and 9.7% of total movie sales in the second quarter and first half of
1998, respectively, and are expected to continue to gain momentum as more titles
become available and more consumers purchase DVD players.
Gross Profit. Gross profit as a percentage of sales was 37.0% in the
second quarter of 1998 compared with 35.1% in the second quarter of 1997, an
increase of 1.9%. For the first half, gross margin improved 1.6% to 35.9% in
1998 from 34.3% in 1997. The majority of the gross margin improvements in 1998
were attributable to less promotional pricing and selective price increases made
during the second half of 1997 and in 1998. Decreases in inventory shrinkage in
the second quarter and first half of 1998 improved gross margin by 0.8% and
0.3%, respectively. The Company expects an increase in promotional pricing in
the third quarter of 1998 with the release of the movie "Titanic" for video
sell-through in September.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of sales for the second quarter were
33.9% in 1998 compared with 35.5% in 1997 and for the first half were 32.8% in
1998 compared with 35.0% in 1997. The percentage rate decreases resulted from
the comparable store sales increases previously discussed. Selling, general and
administrative expenses in the second quarter and first half of 1997 included
financial and legal advisory services and related expenses of approximately $0.5
million and $2.6 million, respectively, most of which were incurred in
conjunction with the Company's credit agreement.
Depreciation and Amortization. The increases in depreciation and
amortization in the second quarter and first half of 1998 compared with the same
periods in 1997 were attributable to depreciation on certain financed property
related to the Company's distribution facility in Franklin, Indiana. The
property was capitalized at the end of the second quarter of 1997 when the
operating lease with a special purpose entity was amended. These increases were
partially offset by the decreases to depreciation and amortization resulting
from the store closings in the second half of 1997 and first half of 1998. See
"- Liquidity and Capital Resources - Investing Activities."
Interest Expense. The interest savings resulting from lower outstanding
revolver borrowings in 1998 were offset by increases to interest expense from
the term loan, the issuance of $150.0 million of 9 7/8% senior subordinated
notes and higher interest rates. For the second quarter of 1998 and 1997 and the
first half of 1998 and 1997, average daily revolver borrowings, based upon the
number of days with outstanding borrowings, were $23.9 million, $269.9 million,
$66.9 million and $271.3 million, respectively. The Company received the net
proceeds from the term loan in September 1997 and the senior subordinated notes
in April 1998. As all of the net proceeds from the senior subordinated notes
10
<PAGE>
were used to reduce existing debt at lower interest rates, the Company expects
an increase to interest expense for the year ending December 31, 1998 of
approximately $3 million. See "- Liquidity and Capital Resources" and Note 2 of
Notes to Consolidated Financial Statements.
Income Taxes. The effective income tax rates for the three months and
six months ended June 30, 1998 and 1997 were based on the federal statutory
income tax rate, increased for the effect of state income taxes, net of federal
benefit, and adjusted for anticipated changes to the deferred tax valuation
allowance based on estimates of future earnings.
Loss Per Common Share. Basic loss per common share amounts were
computed using the weighted average number of common shares outstanding during
each period. Potential common shares related to outstanding stock options
and warrants were anti-dilutive due to the net loss in each period. The
Company anticipates net earnings for the fourth quarter and year ending
December 31, 1998. For purposes of diluted earnings per share computations for
these periods, the weighted average number of common shares will be increased
by approximately 1.9 million and 2.1 million shares, respectively, for the
dilutive effect of shares assumed issued on the exercise of stock options and
warrants, compared with increases of 1.1 million shares and 0.6 million shares,
respectively, for the same periods in 1997. The higher number of incremental
shares in 1998 is due to the full year effect of warrants, issued in June 1997,
for the purchase of 1.8 million shares and higher stock prices. The actual
number of incremental shares may vary from the estimate based upon movements in
the Company's stock price, actual exercises of stock options and warrants and
new grants of stock options. See Note 4 of Notes to Consolidated Financial
Statements and "- Other Matters - Seasonality."
Recently Issued Accounting Standards. Accounting Standards Executive
Committee Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), issued in March
1998 and effective for fiscal years beginning after December 15, 1998, provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. SOP 98-1 requires all costs related to the development of
internal-use software other than those incurred during the application
development stage to be expensed as incurred. Costs incurred during the
application development stage are required to be capitalized and amortized over
the estimated useful life of the software. The Company plans to adopt SOP 98-1
effective with the first quarter of 1999. Adoption is not expected to have a
material effect on the Company's financial position or results of operations.
Accounting Standards Executive Committee Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), issued in April
1998 and effective for fiscal years beginning after December 15, 1998, requires
an entity to expense all start-up activities, including preopening and
organization costs, as incurred. The Company is currently in compliance with the
provisions of SOP 98-5, and, accordingly, the adoption of SOP 98-5 will not
impact the Company's financial position or results of operations.
Liquidity and Capital Resources
The Company's primary sources of working capital are borrowings under
the revolving credit facility pursuant to the terms of its credit agreement and
internally generated cash. Because of the seasonality of the retail industry,
the Company's cash needs fluctuate throughout the year and typically peak in
November as inventory levels build in anticipation of the Christmas selling
season. The Company's cash position is generally highest at the end of December
because of the higher sales volume during the Christmas season and extended
payment terms typically provided by most vendors for seasonal inventory
purchases. The Company's cash needs build during the first quarter as
inventories are replenished following the Christmas season and payments for
seasonal inventory purchases become due. In the first quarter of 1997, the
Company's largest vendors and a substantial majority of its remaining vendors
agreed to temporarily defer existing trade payables and provide continued
product supply, subject to payment terms reduced to ten days or less on new
purchases. The Company completed repayment of the deferred trade payables during
the fourth quarter of 1997 and since then has been on normal credit terms with
its vendors.
11
<PAGE>
In April 1998, the Company completed an offering of $150.0 million of
9 7/8% senior subordinated notes. The net proceeds to the Company from the
offering, after discounts, commissions and other offering expenses, were $144.3
million. The Company used $32.1 million of the net proceeds to repay all of the
outstanding mortgage notes payable and the remaining $112.2 million of net
proceeds and $0.8 million of additional cash to repay revolver borrowings. At
June 30, 1998, the Company had no revolver borrowings and had cash and cash
equivalents of $8.5 million. Effective with the completion of the offering, the
maximum available borrowings under the revolving credit facility are the lesser
of: (i) 60% of eligible inventory or (ii) $132.0 million while the $50 million
term loan is outstanding or $182.0 million if the term loan is repaid. See "-
Financing Activities" and Note 2 of Notes to Consolidated Financial Statements.
Operating Activities. Net cash used in operating activities (including
in 1998 the decrease in outstanding checks in excess of cash balances which
primarily relate to vendor payments) during the six months ended June 30, 1998
and 1997 was $102.9 million and $90.4 million, respectively. The level of cash
used in each period primarily relates to the amount of inventory purchases,
income tax refunds and net loss. Cash used for inventory purchases, as reflected
by the aggregate net changes in inventories, accounts payable and outstanding
checks in excess of cash balances, was $79.6 million in 1998 compared with $48.9
million in 1997. Cash payments for inventory in the first six months of 1998
reflect normal credit terms, while the deferral of trade payable balances in the
first half of 1997 increased accounts payable and reduced cash payments during
the first half of 1997 by approximately $50 million. Store closings and more
frequent purchases closer to the time of sale reduced cash payments for
inventory during the first six months of 1998 and contributed to lower
inventories at June 30, 1998 of $399.3 million, a decrease of $53.4 million from
inventories of $452.7 million at June 30, 1997. The Company had income tax
payments, net of refunds, of $0.7 million in the first six months of 1998,
compared to income tax refunds, net of payments, of $23.0 million in the first
six months of 1997. The refund in 1997 resulted from the carryback of the
taxable loss for the year ended December 31, 1996. The net loss for the six
months ended June 30, 1998 was $8.2 million compared with $39.3 million for the
six months ended June 30, 1997, an improvement of $31.1 million.
Cash used in operating activities for the six months ended June 30,
1997 includes $7.7 million related to restructuring programs initiated by
management in 1996 that included the closing of 114 underperforming stores and
one of the Company's two distribution centers. The restructuring programs were
completed in 1997. Other changes in operating assets and liabilities are
primarily related to the seasonal nature of the business and also reflect the
effect of store closings.
Investing Activities. Store expansion and closings were as follows for
the periods indicated:
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------- ----------------- -------------------
1998 1997 1998 1997 1998 1997
--------- --------- -------- --------- ------- --------
Openings:
Mall Stores....... - - - - 2 11
Superstores....... - - - - 1 6
Total (1)....... - - - - 3 18
Closings:
Mall Stores....... (8) (10) (20) (62) (37) (88)
Superstores....... - - (1) (21) (1) (25)
Total (1)....... (9) (12) (22) (86) (42) (117)
Net decrease:
Mall Stores....... (8) (10) (20) (62) (35) (77)
Superstores....... - - (1) (21) - (19)
Total (1)....... (9) (12) (22) (86) (39) (99)
- ----------------------------------------------------
(1) The totals include United Kingdom stores.
Most of the Company's capital expenditures in 1998 and 1997 consisted
of improvements to existing stores. While management does not currently intend
to significantly expand its store base, the
12
<PAGE>
Company plans to open selected new stores in order to fill out existing markets
or capitalize on attractive leasing opportunities. The Company anticipates
capital expenditures in 1998 of approximately $20 million, consisting primarily
of improvements to existing stores. The Company anticipates that these capital
expenditures will be financed by internally generated cash and revolver
borrowings. The Company will continue to assess the profitability of its stores
and will close a limited number of underperforming stores in the coming years,
if the closings can be accomplished economically. The number of stores closed
during the six months and twelve months ended June 30, 1997 included stores
closed under the Company's restructuring programs of 61 stores and 83 stores,
respectively.
Financing Activities. Cash provided by (used in) financing activities
(excluding in 1998 the decrease in outstanding checks in excess of cash balances
which relate to vendor payments) was $113.9 million and $(54.6) million during
the six months ended June 30, 1998 and 1997, respectively. In April 1998, the
Company received net proceeds of $144.3 million from the offering of $150.0
million of 9 7/8% senior subordinated notes. The net proceeds were used to repay
$32.1 million of outstanding mortgage notes payable and to reduce outstanding
revolver borrowings. The Company had no outstanding revolver borrowings at June
30, 1998 due to improvements in results of operations and the use of the
proceeds from the 9 7/8% senior subordinated notes to reduce revolver
borrowings. The Company had repaid all outstanding revolver borrowings by the
end of 1997 with excess cash generated from strong Christmas season sales.
Financing activities in 1997 principally consisted of revolver borrowings and
repayments.
The Company's 9% senior subordinated notes are due 2003 and the 9 7/8%
senior subordinated notes are due 2008. The Company may, at its option, redeem
the 9% senior subordinated notes prior to maturity at 103.375% of par on and
after June 15, 1998 and thereafter at prices declining annually to 100% of par
on and after June 15, 2001. The Company's revolving credit facility expires in
October 1999. The Company expects to enter into a new financing arrangement on
or before this expiration date. The term loan is due in two installments of $25
million in each of December 1998 and February 1999; however, the amendment to
the Company's credit agreement in April 1998 allows the Company to seek to
extend the maturities of the term loan.
Other Matters
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.
Year 2000 Compliance. The Company has assessed its systems and
equipment with respect to Year 2000 compliance and has completed many of the
system modifications required for the Year 2000. The remaining Year 2000 issues
will be addressed either with scheduled system upgrades or through maintenance
to existing systems to be completed by the Company's internal systems
development staff. The Company plans to capitalize the cost of new systems in
accordance with SOP 98-1. The incremental costs related to modifications to
existing systems for the Year 2000 will be charged to expense as incurred and
are not expected to have a material impact on the financial position or results
of operations of the Company. However, the Company could be adversely impacted
if Year 2000 modifications are not properly completed by either the Company or
its vendors, banks or any other entity with whom the Company conducts business.
Accordingly, the Company plans to devote the necessary resources to resolve all
significant Year 2000 issues in a timely manner.
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 and technology; pricing
strategies of competitors; openings and closings of competitors' stores; the
Company's ability 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.
13
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities.
(c) Warrants for the purchase of common stock have been exercised as
follows:
<TABLE>
<CAPTION>
Shares of Warrants Warrants
Common Aggregate Cancelled With Cancelled For
Stock Cash Cashless Fractional
Exercise Date Warrant Holder Issued Proceeds Exercise Shares
---------------- ------------------------- ------------- ------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
June 4, 1998 Morgan Guaranty Trust 273,313 $427,050.47 N/A .08
Company of New York
June 18, 1998 NationsBanc Montgomery 282,826 N/A 36,038.12 1.13
Securities LLC
June 18, 1998 NationsBank, N.A. 96,969 N/A 12,355.93 .30
</TABLE>
The shares of common stock issued upon exercise of the warrants were
issued pursuant to an exemption from registration under Section 4(2) and/or 4(6)
of the 1933 Act and/or Regulation D of the General Rules and Regulations
promulgated under the Securities Act of 1933 ( the "1933 Act") and have not been
registered under the 1933 Act . The warrants were issued in June 1997 and are
exercisable over a period of five years at a price of $1.5625 per share.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Company held its Annual Stockholders' meeting on May 11, 1998.
(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
----------------- ----------- ----------------
Jack W. Eugster 31,231,753 119,545
William A. Hodder 30,969,115 382,183
Michael W. Wright 30,975,211 376,087
There were no abstentions and no broker non-votes.
Continuing as directors were Keith A. Benson, Gilbert L. Wachsman,
Tom F. Weyl, Kenneth F. Gorman, Josiah O. Low, III and Terry T.
Saario.
(2) The appointment of Arthur Andersen LLP, independent public
accountants, as auditors of the Company for the year ending December
31, 1998, was voted on and approved. There were 30,662,983 votes
for, 296,319 votes against, 391,996 abstentions and no broker
non-votes.
(3) The Musicland Stores Corporation 1998 Stock Incentive Plan was voted
on and approved. There were 27,751,633 votes for, 2,824,005 votes
against, 642,403 abstentions and 133,257 broker non-votes.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The following are filed as exhibits to Part I of this Form 10-Q:
Exhibit No. Description
- ----------- -------------------------------------------------------
15. Letter re unaudited interim financial information
------
27. Financial Data Schedules
------
The following are filed as exhibits to Part II of this Form 10-Q:
Exhibit No. Description
- ----------- -------------------------------------------------------
4.2(h) Amendment No. 5 dated as of March 17, 1998 to the Credit
Agreement
------
10.22 Musicland Stores Corporation 1998 Stock Incentive Plan
------
(b) Reports on Form 8-K
On April 2, 1998, the Company filed a Form 8-K reporting under Item 5,
Other Events, that it had issued a notice pursuant to Rule 135c of the
Securities Act of 1933 of the placement of $150,000 of 9 7/8% Senior
Subordinated Notes due March 15, 2008, at a purchase price of 99.211% of face
value.
15
<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: August 12, 1998
-----------------
16
FIFTH AMENDMENT TO CREDIT AGREEMENT
THIS FIFTH AMENDMENT TO CREDIT AGREEMENT dated as of March 17, 1998
(this "Fifth Amendment") amends the Credit Agreement dated as of October 7, 1994
(as heretofore amended, the "Credit Agreement") among THE MUSICLAND GROUP, INC.
(the "Borrower"), MUSICLAND STORES CORPORATION ("MSC"), various financial
institutions (the "Banks") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as
Agent (in such capacity, the "Agent"). Terms defined in the Credit Agreement
are, unless otherwise defined herein or the context otherwise requires, used
herein as defined therein.
WHEREAS, the Borrower, MSC, the Banks and the Agent have entered into
the Credit Agreement; and
WHEREAS, the parties hereto desire to amend the Credit Agreement as
hereinafter set forth;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION I Amendments. Effective on (and subject to the occurrence of)
the Fifth Amendment Effective Date (as defined below), the Credit Agreement
shall be amended as set forth below:
1.1 Addition of Definitions. Section 1.1 shall be amended by: (i)
adding the following definitions in appropriate alphabetical position:
"Designated Assets" means the Designated Media Play Stores and
Franklin Distribution Center.
"Designated Media Play Stores" means the Media Play stores
located at 2132 Gunbarrel Road, Chattanooga, Tennessee, the Media Play
store located at 23269 Eureka Road, Taylor, Michigan and the Media Play
store located at 120 Slater Road, Manchester, Connecticut.
"Excess Securities Proceeds" means the lesser of (i) the gross
cash proceeds received by the Borrower from the issuance of the 1998
Senior Subordinated Notes in excess of $150,000,000 minus all amounts
which would be deducted to determine the Net Securities Proceeds from
such issuance and (ii)$114,000,000.
"Franklin Distribution Center" means the distribution center
located at 2001 Musicland Drive, Franklin, Indiana 46131.
"1998 Senior Subordinated Indenture" means the Indenture among
MSC, the Borrower and Banc One, N.A., as Trustee, pursuant to which the
1998 Senior Subordinated Notes shall be issued, as amended or otherwise
modified from time to time.
"1998 Senior Subordinated Notes" means the Borrower's Senior
Subordinated Notes due 2008 to be issued pursuant to the 1998 Senior
Subordinated Indenture.
"Term Loan Extension" means any extension of the maturity date
of the loans under the Term Loan Agreement for a period of two years or
more (or any refinancing of such loans which has the effect of
extending the maturity date thereof for such a period).
1
<PAGE>
1.2 Amendment to Definition of Change of Control. The definition of
"Change of Control", shall be amended by (a) deleting the word "or" immediately
preceding clause(y) of such definition and inserting in lieu thereof a semicolon
(";") and (b) inserting the following at the end of such definition; or
(z) any "Change of Control" as defined in the Senior Subordinated
Indenture or the 1998 Senior Subordinated Indenture or any other
similar event, regardless of how designated, if the occurrence of such
event would require the Borrower to redeem or repurchase any
Subordinated Debt prior to its expressed maturity."
1.3 Amendment to Definition of Subordinated Debt Guarantee. The
definition of "Subordinated Debt Guarantee" shall be amended to read in its
entirety as follows:
"Subordinated Debt Guarantee" means, as applicable, MSC's guarantee of
the obligations of the Borrower under the Senior Subordinated Notes or
the 1998 Senior Subordinated Notes.
1.4 Amendment to Commitments. The first sentence of Section 2.1 shall
be amended to read in its entirety as follows:
Each Bank severally agrees, on the terms and conditions set forth in
this Agreement, to make loans to the Borrower pursuant to this Section
2.1 from time to time during the Term of this Agreement; provided that
(i) the amount of all Outstanding Credit Extensions shall not at any
time exceed (x) the aggregate amount of the Commitments minus (y) the
sum of (1) so long as the Term Loan Extension has not occurred, the
aggregate principal amount of Debt outstanding under the Term Loan
Agreement and (2) the amount of Excess Securities Proceeds which has
not been applied either to reduce the Commitments or to prepay, redeem,
repurchase or retire Senior Subordinated Notes (the "Subordinated Note
Prepayment Reserve"), it being understood that, notwithstanding the
limitations set forth in this clause (i) the Borrower may borrow all or
any portion of the Subordinated Note Prepayment Reserve so long as the
Borrower certifies that all of the proceeds of such Borrowing will be,
and such proceeds are, applied to prepay, redeem, repurchase or retire
Senior Subordinated Notes; and (ii) the aggregate principal amount of
Committed Loans by any Bank at any one time outstanding shall not
exceed the lesser of (x) its Commitment and (y) its pro rata share of
the amount set forth in clause (i) of this proviso.
1.5 Amendment to Mandatory Commitment Termination Provision. Section
2.11 shall be amended to read in its entirety as follows:
SECTION 2.11 Mandatory Reduction or Termination of Commitments. (a)
Promptly upon receipt by the Borrower or any Subsidiary of any Net Cash
Proceeds from any sale of, or any Net Securities Proceeds from any
financing secured by, any Designated Asset, the Commitments shall be
reduced by an amount (rounded down, if necessary, to an integral
multiple of $1,000,000) equal to (i) the aggregate amount of all Net
Cash Proceeds and all Net Securities Proceeds from all sales of, and
financings secured by, Designated Assets after March 1, 1998 minus (ii)
the aggregate amount of all such Net Cash Proceeds and Net Securities
Proceeds previously
2
<PAGE>
applied to reduce the Commitments pursuant to this sentence; provided
that the amount of the reduction of the Commitments required pursuant
to this clause (a) in respect of (x) the Designated Media Play Stores
shall not exceed $11,000,000 and (y) the Franklin Distribution Center
shall not exceed $22,000,000.
(b) On the date on which the Term Loan Extension occurs, the
Commitments shall be reduced by $50,000,000.
(c) If the Net Securities Proceeds of the 1998 Senior
Subordinated Notes exceed $264,000,000, then on the date of the
issuance of the 1998 Senior Subordinated Notes the Commitments shall be
reduced in an amount equal to such excess (rounded upward, if
necessary, to an integral multiple of $1,000,000).
(d) If the Borrower receives Excess Securities Proceeds from
the issuance of the 1998 Senior Subordinated Notes, then on March 31,
1999 the Commitments shall be reduced by an amount (rounded upward, if
necessary, to an integral multiple of $1,000,000) equal to the positive
remainder, if any, of (i) the amount of such Excess Securities Proceeds
minus (ii) the aggregate amount of all prepayments, redemptions,
repurchases or retirements of Senior Subordinated Notes which have
occurred after the date of the issuance of the 1998 Senior Subordinated
Notes.
(e) The Commitments shall terminate on the Termination Date,
and any Loans then outstanding (together with accrued interest thereon)
shall be due and payable on such date.
1.6 Amendment to Mandatory Prepayment Provision. Section 2.13 shall
be amended to read in its entirety as follows:
SECTION 2.13 Mandatory Prepayments. If at any time the
Outstanding Credit Extensions exceed the lesser of (x)
Aggregate Available Commitment and (y) the amount set forth in
clause (i) of the proviso to the first sentence of Section
2.1, the Borrower will immediately prepay Loans or provide
cash collateral as provided in Section 10.14 in an amount at
least equal to such excess.
1.7 Amendment to Restricted Payments Covenant. Section 5.10(b) shall
be amended by adding the following at the end thereof:
provided that so long as (i) no Default or Event of Default then exists
or would result therefrom, (ii) the Borrower will be in pro forma
compliance with Sections 5.7, 5.8 and 5.9 for the four fiscal quarters
ended immediately prior to the date of such prepayment (assuming the
prepayment, repurchase, redemption or retirement described below had
occurred on the first day of such period), the Borrower may prepay,
repurchase, redeem or retire Senior Subordinated Notes in an amount
equal to 100% of the amount, if any, by which (x) all Net Securities
Proceeds received by the Borrower after March 1, 1998 and not required
to be applied to reduce the Commitments pursuant to Section 2.11(c) of
this Agreement or Section 3(b) of the Fifth Amendment to this Agreement
or to
3
<PAGE>
prepay Synthetic Lease Obligations pursuant to Section 5.12(c)
exceed (y) $50,000,000.
1.8 Amendment to Debt Covenant. Section 5.11 shall be amended by
amending clause (c) thereof to read as follows:
(c) Debt consisting of the Senior Subordinated Notes, the 1998
Senior Subordinated Notes and the Subordinated Debt Guarantees;
1.9 Amendment to Synthetic Lease Covenant. Section 5.12(c) shall be
amended by adding the following sentence at the end thereof:
Notwithstanding the foregoing, the Borrower shall prepay Synthetic
Lease Obligations with proceeds of the 1998 Senior Subordinated Notes
in an amount equal to the Synthetic Lease Prepayment Amount (as defined
in Section 3 of the Fifth Amendment to this Agreement) and, if any
Synthetic Lease Obligations are outstanding after such prepayment,
clause (iii) above shall be amended automatically (and without any
other action by any party hereto) in its entirety to read as follows:
(iii) provide for any payment of any Synthetic Lease
Obligation which would result in the lenders thereunder having
received payment of a greater amount of the outstanding
Synthetic Lease Obligations thereunder after giving effect to
the prepayment thereof with the proceeds of the 1998 Senior
Subordinated Notes than the amount of the reductions in the
Commitments hereunder which have been made since the
reductions in the Commitments required to be made with the
proceeds of the 1998 Senior Subordinated Notes.
1.10 Amendment to Asset Sale Covenant. Section 5.13 shall be amended by
(i) adding the following proviso to the end of clause (ii) of the first sentence
thereof "and provided, further, that there shall be excluded from this clause
(ii) any sale of the Designated Media Play Stores" and (ii) adding the following
proviso to the end of clause (b) of the second sentence thereof ", provided,
however, that there shall be excluded from this clause (b) sales of the
Designated Media Play Stores."
1.11 Amendment to Merger Covenant. Section 5.15(b) shall be amended by
adding the following proviso at the end thereof ", provided, however, that the
Borrower may sell its assets currently located in the United Kingdom."
1.12 Amendment to Capital Expenditure Covenant. Section 5.16(a) shall
be amended by deleting the parenthetical in the second sentence of such section
and inserting in lieu thereof the following:
(provided that (i) the amount permitted for the 1998 fiscal year shall
be increased by the amount, if any, by which $20,000,000 exceeds the
actual Capital Expenditures made by the Borrower and its Subsidiaries
in the 1997 fiscal year and (ii) any prepayment of Borrower's Synthetic
Lease Obligations in connection with any Designated Asset shall be
disregarded for purposes of this Section 5.16(a))
1.13 Amendment to Guarantee Covenant. Section 5.18(b) shall be amended
in its entirety to read as follows: o(b) the Subordinated Debt Guarantees,".
4
<PAGE>
1.14 Amendment to Amendments to Senior Subordinated Indenture Covenant.
Section 5.22 shall be amended to read in its entirety as follows:
SECTION 5.22. Amendments to Subordinated Indentures. The
Borrower will not consent to any amendment, modification, supplement or
waiver of any of the provisions of the Senior Subordinated Indenture,
the 1998 Senior Subordinated Indenture or any other document governing
any Subordinated Debt that, in any such case, would have an adverse
impact on the Banks.
1.15 Amendment to Events of Default. Section 6.1(1) shall be amended in
its entirety to read as follows:
(1) any court of competent jurisdiction shall have determined
that the subordination of the Senior Subordinated Notes, the 1998
Senior Subordinated Notes or MSC's Subordinated Debt Guarantees thereof
to the obligations of MSC and the Borrower to the Banks and the Agent
under the Loan Documents shall not be in accordance in any material
respect with the terms and conditions set forth in the Senior
Subordinated Indenture or the 1998 Senior Subordinated Indenture, as
applicable, or the validity or enforceability of any provision of such
subordinations shall at any time be contested by any Loan Party, or any
Affiliate of any Loan Party, or a proceeding shall be commenced by any
Loan Party or any Affiliate of any Loan Party seeking to establish the
invalidity or unenforceability thereof;
SECTION 2 Representations and Warranties. The Borrower and MSC
represent and warrant to the Agent and the Banks that (a) except to the extent
disclosed in annual and quarterly filings filed by MSC or the Borrower with the
Securities and Exchange Commission since October 7, 1994, each representation
and warranty set forth in Section 4 of the Credit Agreement, as amended hereby
(as so amended, the "Amended Credit Agreement"), is true and correct as of the
date of the execution and delivery of this Fifth Amendment by the Borrower and
MSC (and assuming the effectiveness hereof), with the same effect as if made
on such date; (b) the execution and delivery by the Borrower and MSC of this
Fifth Amendment and the performance by the Borrower and MSC of their respective
obligations under the Amended Credit Agreement (i) are within the corporate
powers of the Borrower and MSC, (ii) have been duly authorized by all necessary
corporate action on the part of the Borrower and MSC, (iii) have received all
necessary governmental and regulatory approval and (iv) do not and will not
contravene or conflict with, or result in or require the creation or imposition
of any Lien under, any provision of Applicable Law or of the respective
certificate of incorporation or by-laws of the Borrower or MSC or of any
agreement, instrument, order or decree which is binding upon the Borrower, MSC
or any applicable Subsidiary; and (c) the Amended Credit Agreement is the legal,
valid and binding obligation of each of the Borrower and MSC, enforceable
against the Borrower and MSC in accordance with its terms.
SECTION 3 Effectiveness. The amendments set forth in Section 1 above
shall become effective or the date (the "Fifth Amendment Effective Date") when:
(a) the Agent shall have received:
5
<PAGE>
(i) counterparts of this Fifth Amendment executed by the
Borrower, MSC and the Required Banks (it being understood that, in the
case of any Bank, the Agent may rely upon facsimile confirmation of the
execution of a counterpart hereof by such Bank for purposes of
determining the effectiveness hereof);
(ii) an opinion of Linda Alsid Ruehle, Assistant General
Counsel of the Borrower, substantially in the form of Attachment 1
hereto; and
(iii) all documents the Agent may reasonably request relating
to the existence of the Borrower and MSC, the corporate authority for
and the validity of this Agreement and the other Loan Documents, and
any other matters relevant hereto, all in form and substance
satisfactory to the Agent; and
(b) the Borrower shall have issued (or shall concurrently issue) not
less than $100,000,000 of Senior Subordinated Notes due 2008 (the "1998 Senior
Subordinated Notes") for net proceeds of not less than $95,000,000, shall have
applied (or shall concurrently apply) not less than the sum of $50,000,000 plus
the Specified Amount (as defined below) of the net proceeds thereof to the
prepayment of the Loans and shall have permanently reduced (or shall
concurrently reduce) the Commitments by an amount not less than the Specified
Amount (it being understood that (i) the Agent shall have received true, correct
and complete copies of all documents related to the 1998 Senior Subordinated
Notes and the terms and provisions of each such document shall be substantially
as described in the "Description of Notes" delivered to the Banks on March 17,
1998 and (ii) the interest rate on the 1998 Senior Subordinated Notes shall not
exceed 10% per annum).
For purposes of clause (b) above, the "Specified Amount" shall be an
amount (rounded upward, if necessary, to an integral multiple of $1,000,000)
equal to (x) the lesser of the gross cash proceeds of the issuance of the 1998
Senior Subordinated Notes o2, $150,000,000 minus (y) the sum of (I) all amounts
which -.would be deducted to determine the Net Securities Proceeds of such
issuance, (II) $50,000,000 and (III) the Synthetic Lease Prepayment Amount (as
defined below). The "Synthetic Lease Prepayment Amount" shall be equal to: (i)
if the gross cash proceeds of the issuance of the 1998 Senior Subordinated Notes
are $120,000,000 or more, the aggregate amount of the Synthetic Lease
Obligations of the Borrower and its Subsidiaries on the date of the issuance of
the 1998 Senior Subordinated Notes (such aggregate amount, the "Outstanding
Synthetic Lease Obligations"); and (ii) if the gross cash proceeds of the 1998
Senior Subordinated Notes are less than $120,000,000, an amount (rounded upward,
if necessary, to an integral multiple of $1,000,000) equal to the outstanding
Synthetic Lease Obligations minus 50% of the amount by which such gross cash
proceeds are less than $120,000,000.
SECTION 4 Miscellaneous.
4.1 Continuing Effectiveness, etc. As herein amended, the Credit
Agreement shall remain in full force and effect and is hereby ratified and
confirmed in all respects. After the Fifth Amendment Effective Date, all
references in the Credit Agreement and the other Loan Documents to "Credit
Agreement", "Agreement" or similar terms shall refer to the Amended Credit
Agreement.
6
<PAGE>
4.2 Counterparts. This Fifth Amendment may be executed in any number of
counterparts and by the different parties on separate counterparts, and each
such counterpart shall be deemed to be an original but all such counterparts
shall together constitute one and the same Fifth Amendment.
4.3 Governing Law. This Fifth Amendment shall be a contract made under
and governed by the internal laws of the State of New York applicable to
contracts made and to be performed entirely within such State.
4.4 Successors and Assigns. This Fifth Amendment shall be binding upon
the Borrower, MSC, the Banks and the Agent and their respective successors and
assigns, and shall inure to the benefit of the Borrower, MSC, the Banks and the
Agent and the respective successors and assigns of the Banks and the Agent.
IN WITNESS WHEREOF, the parties hereto have caused this Fifth Amendment
to be duly executed by their respective authorized officers as of the day and
year first above written.
THE MUSICLAND GROUP, INC.
By:
-----------------------------------
Title:
MUSICLAND STORES CORPORATION
By:
-----------------------------------
Title:
MORGAN GUARANTY TRUST COMPANY OF NEW
YORK
By:
-----------------------------------
Title:
CITIBANK, N.A.
By:
-----------------------------------
Title:
CREDIT LYONNAIS NEW YORK BRANCH
By:
-----------------------------------
Title:
THE LONG-TERM CREDIT BANK OF JAPAN,
LTD., CHICAGO BRANCH
By:
-----------------------------------
Title:
PNC BANK, NATIONAL ASSOCIATION
By:
-----------------------------------
Title:
SOCIETE GENERALE
By:
-----------------------------------
Title:
BEAR, STEARNS INVESTMENT PRODUCTS INC.
By:
-----------------------------------
Title:
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By:
-----------------------------------
Title:
DLJ CAPITAL FUNDING, INC.
By:
-----------------------------------
Title:
NATIONSBANK, N.A.
By:
-----------------------------------
Title:
FERNWOOD RESTRUCTURINGS LTD.
By:
-----------------------------------
Title:
HALCYON DISTRESSED SECURITIES, L.P.
By:
-----------------------------------
Title:
BANK OF MONTREAL
By:
-----------------------------------
Title:
WAYLAND INVESTMENT FUND, LLC
By:
-----------------------------------
Title:
LEHMAN COMMERCIAL PAPER, INC.
By:
-----------------------------------
Title:
MELLON BANK, N.A., solely
in its capacity as Trustee
for First Plaza Group
Trust, as directed by
Contrarian Capital Advisors
LLC, and not in its
individual capacity
By:
-----------------------------------
Title:
MUSICLAND STORES CORPORATION
1998 STOCK INCENTIVE PLAN
ADOPTED: January 26, 1998
<PAGE>
Table of Contents
-----------------
SECTION 1.1 Name and Purpose of the Plan............................. 1
SECTION 1.2 Certain Definitions...................................... 1
SECTION 2.1 Authority and Duties of Committee........................ 4
SECTION 2.2 Delegation of Authority.................................. 5
SECTION 3.1 Total Shares Limitation.................................. 6
SECTION 3.2 Other Shares Limitations................................. 6
SECTION 3.3 Awards Not Exercised..................................... 6
SECTION 3.4 Dilution and Other Adjustments........................... 6
SECTION 4.1 Participant Eligibility.................................. 7
SECTION 5.1 Stock Option Grant and Agreement......................... 7
SECTION 5.2 Stock Option Terms and Conditions........................ 7
SECTION 5.3 Grant of Reload Options.................................. 9
SECTION 5.4 Termination of Stock Options............................. 9
SECTION 6.1 ISO Eligibility.......................................... 11
SECTION 6.2 Special ISO Rules........................................ 12
SECTION 6.3 IRS Code Amendments...................................... 12
SECTION 7.1 SAR Grant and Agreement.................................. 13
SECTION 7.2 Term of SARs............................................. 13
SECTION 7.3 SAR Exercise............................................. 13
SECTION 7.4 SAR Grant Terms and Conditions........................... 13
SECTION 8.1 Restricted Stock Grant and Agreement..................... 14
SECTION 8.2 Restricted Stock Terms and Conditions.................... 14
SECTION 9.1 Performance Stock Grant and Agreement.................... 16
SECTION 9.2 Performance Objectives................................... 16
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SECTION 9.3 Adjustment of Performance Objectives..................... 16
SECTION 9.4 Other Terms and Conditions............................... 17
SECTION 10.1 Transfer of Participant.................................. 18
SECTION 10.2 Effect of Leave of Absence............................... 18
SECTION 11.1 Change in Control Defined................................ 18
SECTION 11.2 Acceleration of Awards................................... 19
SECTION 12.1 Awards Deemed Non-transferable........................... 20
SECTION 12.2 Limited Transferability of NQSOs......................... 20
SECTION 13.1 Amendment and Discontinuation of Plan.................... 20
SECTION 13.2 Amendment of Grants...................................... 21
SECTION 14.1 Unfunded Status of Plan.................................. 21
SECTION 15.1 Delivery of Stock Certificates........................... 21
SECTION 15.2 Applicable Restrictions on Stock......................... 22
SECTION 15.3 Book Entry............................................... 22
SECTION 16.1 No Implied Rights to Awards or Employment................ 22
SECTION 16.2 Other Compensation Plans................................. 22
SECTION 16.3 Tax Withholding.......................................... 22
SECTION 16.4 Arbitration.............................................. 23
SECTION 16.5 Rule 16b-3 Compliance.................................... 23
SECTION 16.6 Deferrals................................................ 23
SECTION 16.7 Successors............................................... 23
SECTION 16.8 Severability............................................. 23
SECTION 16.9 Governing Law............................................ 23
SECTION 17.1 Plan Adoption............................................ 24
<PAGE>
MUSICLAND STORES CORPORATION
1998 STOCK INCENTIVE PLAN
ARTICLE I
General Purpose of Plan; Definitions
SECTION 1.1. Name and Purpose. The name of this plan is the
Musicland Stores Corporation 1998 Stock Incentive Plan (the "Plan"). The purpose
of the Plan is to enable Musicland Stores Corporation and its Affiliates to (i)
attract and retain directors, officers and other employees who contribute to the
Company's success by providing incentive compensation opportunities competitive
with other companies, (ii) motivate Plan participants to achieve long term
success and growth of the Company, and (iii) align the interests of the Plan
participants with those of the Company's public shareholders.
SECTION 1.2. Certain Definitions. For purposes of the Plan,
the following terms are defined as set forth below:
(a) "Affiliate" means any corporation, partnership, joint
venture or other entity controlling, controlled by, or under common
control with the Company as determined by the Board of Directors in its
discretion.
(b) "Award" means any grant under this Plan of a Stock Option,
Stock Appreciation Right, Restricted Stock or Performance Stock to any
Plan participant.
(c) "Board of Directors" means the Board of Directors of
Musicland Stores Corporation, with any individual members thereof being
referred to as a "Director."
(d) "Cause" means any failure by a participant to perform
substantially his or her duties with the Company, after reasonable
notice to the participant of such failure, conduct by a participant
that is in material competition with the Company or conduct by a
participant that breaches his or her duty of loyalty to the Company or
that is materially injurious to the Company, monetarily or otherwise,
which conduct may include, but is not limited to, (i) disclosing or
misusing any confidential information pertaining to the Company or an
Affiliate; (ii) attempting, directly or indirectly, to induce any
employee or agent of the Company to be employed or perform services
elsewhere or (iii) disparaging the Company or any of its respective
officers or directors. The determination of whether any conduct, action
or failure to act constitutes "Cause" is
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made by the Committee in its sole discretion, provided that, with
respect to any Director, "Cause" only refers to removal of the Director
by the shareholders for cause under Delaware law.
(e) "Code" means the Internal Revenue Code of 1986, as
amended. A reference to any provision of the Code includes a reference
to any regulation promulgated thereunder and to any successor
provision.
(f) "Committee" means the entity administering the Plan as
provided in Section 2.1 of the Plan or, if none has been appointed,
then the Board of Directors as a whole.
(g) "Company" means Musicland Stores Corporation, a
corporation organized under the laws of the State of Delaware (or any
successor corporation) and its consolidated subsidiaries.
(h) "Date of Grant" means the date on which the Committee
grants an Award or a future date that the Committee designates at the
time of the Award.
(i) "Disability" means a participant's physical or mental
incapacity resulting from personal injury, disease, illness or other
condition, which (i) prevents him or her from performing his or her
duties for the Company, as the same is determined by the Committee or
its designee after reviewing any medical evidence or requiring any
medical examinations which the Committee or its designee considers
necessary to its determination, and (ii) results in a termination of
his or her employment with the Company.
(j) "Early Retirement" means a participant's retirement from
active employment with the Company on or after the age of 60 with at
least ten years of service or on or after the age of 55 with at least
15 years of service.
(k) "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
(l) "Exercise Price" means the purchase price of a share of
Stock covered by a Stock Option.
(m) "Fair Market Value" means the last closing price of the
Stock (as reported on the Composite Tape of the New York Stock
Exchange, Inc. or as reported by a successor exchange on which the
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Stock may be listed) prior to the Date of Grant, or the closing price
on the Date of Grant if the grant is made after the market closes for
such day, or the fair market value as determined by any other method
adopted by the Committee, from time to time, which the Committee may
deem appropriate under the circumstances, or as may be required in
order to comply with or to conform to the requirements of applicable
laws or regulations.
(n) "Incentive Stock Option" or "ISO" means a Stock Option
that is designated by the Committee as such at the time of grant and
which meets the requirements of Section 422 of the Code, or any
successor provision, and therefore qualifies for favorable tax
treatment.
(o) "Nonqualified Stock Option" or "NQSO" means a Stock Option
that does not meet the requirements of Section 422 of the Code and
which is governed by Section 83 of the Code.
(p) "Normal Retirement" means retirement from active
employment with the Company on or after the age of 65.
(q) "Outside Director" means a Director who meets the
definition of "outside director" set forth in Section 162(m) of the
Code and regulations promulgated thereunder and the definition of
"non-employee director" set forth in Rule 16b-3 under the Securities
Exchange Act of 1934, as amended, or any successor definitions adopted
by the Internal Revenue Service and Securities and Exchange Commission,
respectively.
(r) "Performance Stock" is defined in Article IX.
(s) "QUADRO" means a qualified domestic relations order as
defined by the Code or Title I of ERISA.
(t) "Reload Option" is defined in Section 5.3.
(u) "Retirement" means both Normal Retirement and Early
Retirement.
(v) "Restricted Stock" is defined in Article VIII.
(w) "Stock" means the Common Stock, par value $.01 per share,
of Musicland Stores Corporation.
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(x) "Stock Appreciation Rights" or "SAR" means the right
pursuant to an Award granted under Article VII herein to surrender to
the Company all or a portion of a Stock Option in exchange for an
amount, paid in cash or in Stock, equal to the excess of (i) the Fair
Market Value, as of the date such Stock Option or such portion thereof
is surrendered, of the shares of Stock covered by such Stock Option or
such portion thereof, over (ii) the aggregate exercise price of such
Stock Option or such portion thereof.
(y) "Stock Option" means any right to purchase a specified
number of shares of Stock at a specified price which is granted
pursuant to Articles V and VI herein and may be either an Incentive
Stock Option, a Nonqualified Stock Option or a Reload Option.
(z) "Vested" means that the time has been reached, in
connection with Stock Options and Stock Appreciation Rights, when the
option to purchase stock first becomes exercisable and any accompanying
appreciation right may be surrendered for payment and, in connection
with Restricted Stock, when the shares are no longer subject to
forfeiture and restrictions on transferability.
ARTICLE II
Administration
SECTION 2. 1. Authority and Duties of the Committee.
(a) The Plan is administered by a Committee of not less than
two Directors who are appointed by the Board of Directors and serve at
its pleasure. Unless otherwise determined by the Board of Directors,
all of the members of the Committee are Outside Directors.
(b) The Board of Directors as a whole grants Awards to
Directors who are not employed by the Company and determines all terms
and conditions relating to such Awards.
(c) The Committee has the power and authority to grant Awards
pursuant to the terms of the Plan to officers and other employees
(including those who also serve as Directors).
(d) In particular, the Committee has the authority, subject to
any limitations specifically set forth in this Plan, to:
(i) select the officers and other employees of the Company
and its Affiliates to whom Awards are granted;
(ii) determine the types of Awards granted and the timing
of such Awards;
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(iii) determine the number of shares to be covered by
each Award granted hereunder;
(iv) determine the other terms and conditions, not
inconsistent with the terms of the Plan and any operative
employment agreement, of any Award granted hereunder;
(v) determine whether any conditions or objectives
related to Awards have been met;
(vi) subsequently modify or waive any terms and
conditions of Awards, not inconsistent with the terms of the
Plan and any operative employment agreement;
(vii) determine whether, to what extent and under
what circumstances, Stock and other amounts payable with
respect to any Award is deferred either automatically or at
the election of the participant;
(viii) adopt, alter and repeal such administrative
rules, guidelines and practices governing the Plan as it deems
advisable from time to time;
(ix) interpret the terms and provisions of the Plan
and any Award (and any agreements relating thereto); and
(x) otherwise supervise the administration of the
Plan.
(e) All decisions made by the Committee pursuant to the
provisions of the Plan are final and binding on all persons, including
the Company, its shareholders and Plan participants.
SECTION 2.2. Delegation of Authority. The Committee may
delegate its powers and duties under the Plan to the Chief Executive Officer of
the Company, subject to such terms, conditions and limitations as the Committee
may establish in its sole discretion, provided, however, that the Committee may
not delegate its powers and duties under the Plan with regard to Awards to the
Company's executive officers. In addition, the Committee may delegate to any
other person or persons ministerial duties, and it may employ attorneys,
consultants, accountants or other professional advisers.
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ARTICLE III
Stock Subject to Plan
SECTION 3.1. Total Shares Limitation. Subject to the
provisions of this Article III, the maximum number of shares of Stock that may
be newly issued pursuant to Awards granted under this Plan is 1,700,000 shares
plus up to 300,000 additional shares, to the extent authorized by the Board of
Directors, which are reacquired in the open market or in private transactions.
SECTION 3.2. Other Limitations.
(a) ISO Limitation. The maximum number of shares of Stock
available with respect to all options granted under this Plan that are
intended to be Incentive Stock Options is 750,000 shares.
(b) Stock Award Limitation. The maximum number of shares of
Stock available with respect to all Restricted Stock and Performance
Stock Awards granted under this Plan is 500,000 shares.
(c) Participant Limitation. The aggregate number of shares of
Stock underlying Awards granted under this Plan to any one participant
in any calendar year, regardless of whether such awards are thereafter
canceled, forfeited or terminated, cannot exceed 500,000 shares. The
foregoing annual limitation is intended to include the grant of all
Awards representing "qualified performance-based compensation" within
the meaning of Section 162(m) of the Code.
SECTION 3.3. Awards Not Exercised. In the event any
outstanding Award, or portion thereof, expires, or is terminated, canceled or
forfeited, the shares of Stock that would otherwise be issuable with respect to
the unexercised portion of such expired, terminated, canceled or forfeited Award
are available for subsequent Awards under the Plan.
SECTION 3.4. Dilution and Other Adjustments. In the event that
the Committee determines that any dividend or other distribution (whether in the
form of cash, Stock, other securities or other property), recapitalization,
stock split, reverse stock split, reorganization, merger, consolidation,
split-up, spin-off, combination, repurchase or exchange of Stock or other
securities of the Company, issuance of warrants or other rights to purchase
Stock or other securities of the Company or other similar corporate transaction
or event affects the Stock such that an adjustment is determined by the
Committee to be appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan,
then the Committee may, in such manner as it deems equitable, adjust any or all
of (i)
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the number and type of Stock (or other securities or other property) which
thereafter may be made the subject of Awards, (ii) the number and type of Stock
(or other securities or other property) subject to outstanding Awards, (iii) the
limitations set forth above, and (iv) the purchase or exercise price or any
performance measure with respect to any Award; provided, however, that the
number of shares of Stock or other securities covered by any Award or to which
such Award relates is always a whole number.
ARTICLE IV
Participants
SECTION 4. 1. Eligibility. Directors, officers and other
regular active employees of the Company and its Affiliates are eligible to
participate in this Plan by receiving, as a reward for past performance and as
an incentive for future performance, Awards under the Plan. Other than for
non-employee Directors whose Awards are determined by the Board of Directors as
a whole, the Plan participants may be selected from time to time by the
Committee in its sole discretion, or, with respect to employees other than
executive officers, by the Chief Executive Officer with proper delegation from
the Committee. (See Article XVII of the Plan with respect to shareholder
approval requirement.)
ARTICLE V
Stock Option Awards
SECTION 5.1. Option Grant and Agreement. Each Stock Option
granted under the Plan (or delegation of authority to the Chief Executive
Officer to grant Stock Options) will be evidenced by minutes of a meeting, or by
a unanimous written consent without a meeting, of the Committee and by a written
agreement dated as of the Date of Grant and executed by the Company and by the
Plan participant. With respect to non-employee Directors, the Board of Directors
may establish by resolution or unanimous consent a formula for periodic Stock
Option grants and may change the formula at any time and from time to time.
SECTION 5.2. Terms and Conditions of Grants. Stock Options
granted under the Plan are subject to the following terms and conditions and may
contain such additional terms, conditions, restrictions and contingencies with
respect to exercisability and/or with respect to the shares of Stock acquired
upon exercise, not inconsistent with the terms of the Plan and any operative
employment agreement, as the Committee deems desirable:
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(a) Exercise Price. The Exercise Price fixed at the time of
grant will not be less than 100% of the Fair Market Value of the Stock
as of the Date of Grant. If a variable Exercise Price price is
specified at the time of grant, the Exercise Price may vary pursuant to
a formula or other method established by the Committee which provides a
floor of Fair Market Value as of the Date of Grant. Unless pursuant to
the antidilution provisions of Section 3.4 of this Plan, no subsequent
amendment of an outstanding Stock Option may reduce the Exercise Price
to be less than 100% of the Fair Market Value of the Stock as of the
Date of Grant.
(b) Option Term. Any unexercised portion of a Stock Option
granted hereunder expires at the end of the stated term of the Stock
Option. The Committee determines the term of each Stock Option at the
time of grant and may thereafter extend the term in its discretion. If
a definite term is not specified by the Committee at the time of grant,
then the term is deemed to be ten years.
(c) Vesting. Stock Options, or portions thereof, are
exercisable at such time or times as determined by the Committee in its
discretion at or after grant. If the Committee provides that any Stock
Option becomes Vested over a period of time, in full or in
installments, the Committee may waive such Vesting provisions at any
time. If no other Vesting provision is specified by the Committee at
the time of grant, then the Stock Option is deemed to Vest in three
installments (as equal as possible to the whole share) on the second,
third and fourth anniversaries of the Date of Grant. (Also see Change
in Control provisions in Article XI.)
(d) Method of Exercise. Vested portions of any Stock Option
may be exercised in whole or in part at any time during the option term
by giving written notice of exercise to the Company specifying the
number of shares to be purchased. The notice must be accompanied by
payment in full of the Exercise Price, along with any required tax
withholding pursuant to Section 16.3 of this Plan. The Exercise Price
may be paid:
(i) in cash in any manner satisfactory to the
Company;
(ii) by tendering (by either actual delivery of
shares or by attestation) previously owned shares of Stock
acquired at least six months prior to such tender and having
an aggregate Fair Market Value on the date of exercise equal
to the Exercise Price applicable to such Stock Option
exercise, and, with respect to the
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exercise of NQSO's, including Restricted Stock granted at
least six months prior to such tender;
(iii) by a combination of cash and Common Stock; or
(iv) by authorizing a broker to sell, on behalf of
the participant, the appropriate number of shares otherwise
issuable to the participant upon the exercise of a Stock
Option with the proceeds of sale applied to pay the Exercise
Price and tax withholding, provided that the Company has
implemented such a broker-handled same day sale program.
If the Exercise Price of a NQSO is paid by tendering Restricted Stock,
then the shares of Stock received upon the exercise will contain
identical restrictions as the Restricted Stock so tendered. Required
tax withholding can only be paid by cash received from the optionee or
through a same day sale transaction.
(e) Issuance of Stock. No shares of Stock will be issued until
full payment has been made. An optionee will have the rights to
dividends and other rights of a shareholder with respect to shares
subject to a Stock Option only after the optionee has become the holder
of record of such shares issued upon the proper exercise of the Stock
Option.
(f) Form. Unless the grant of a Stock Option is designated at
the time of grant as an ISO, it is deemed to be an NQSO. ISOs are
subject to the terms and conditions stated in Article VI of this Plan.
SECTION 5.3. Grant of Reload Options. If the Committee so
provides in its discretion at or after grant, an optionee who exercises all or
part of a Nonqualified Stock Option by payment of the Exercise Price with
previously owned shares of Stock will be granted an additional Stock Option (a
"Reload Option") for a number of shares of Stock equal to the number of shares
tendered in the exercise of the original Stock Option. Each Reload Option will
have a Date of Grant which is the date as of which the original Stock Option to
which it applies is exercised and will Vest on the six-month anniversary of Date
of Grant. The Reload Option will have the same expiration and all other terms
and conditions as the original Stock Option to which it applies, except that the
Exercise Price will be equal to at least 100% of the Fair Market Value as of the
Date of Grant.
SECTION 5.4. Termination of Grants Prior to Expiration. Unless
otherwise provided in an employment agreement entered into between the
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holder of a Stock Option and the Company and approved by the Committee, either
before or after the Date of Grant, or otherwise specified at or after the time
of grant, and subject to Article VI hereof with respect to ISOs, the following
early termination provisions apply to all Stock Options:
(a) Termination by Death. If an optionee's employment by the
Company or its Affiliates terminates by reason of his or her death, all
Stock Options held by such optionee immediately become Vested but
thereafter may only be exercised (by the legal representative of the
optionee's estate, or by the legatee or heir of the optionee pursuant
to a will or the laws of descent and distribution) for a period of
three years (or such other period as the Committee may specify at or
after the time of grant) from the date of such death, or until the
expiration of the original term of the Stock Option, whichever period
is the shorter.
(b) Termination by Reason of Disability. If an optionee's
employment by the Company or its Affiliates terminates by reason of his
or her Disability, all Stock Options held by such optionee immediately
become Vested but thereafter may only be exercised for a period of
three years (or such other period as the Committee may specify at or
after the time of grant) from the date of such termination of
employment, or until the expiration of the original term of the Stock
Option, whichever period is the shorter. If the optionee dies within
such three-year period (or such other period as applicable), any
unexercised Stock Option held by such optionee will thereafter be
exercisable by the legal representative of the optionee's estate, or by
the legatee or heir of the optionee pursuant to a will or the laws of
descent and distribution, for the greater of the remainder of the
three-year period (or other period as applicable) or for a period of
twelve months from the date of such death, but in no event shall any
portion of the Stock Option be exercisable after its original stated
expiration date.
(c) Termination by Reason of Retirement. If an optionee's
employment by the Company or its Affiliates terminates by reason of his
or her Retirement, all Stock Options held by such optionee immediately
become Vested but thereafter may only be exercised for a period of
three years (or such other period as the Committee may specify at or
after the time of grant) from the date of such termination of
employment, or until the expiration of the original term of the Stock
Option, whichever period is the shorter. If the optionee dies within
such three-year period (or such other period as applicable), any
unexercised Stock Option held by such optionee will thereafter be
exercisable by the legal representative of the optionee's estate, or by
the legatee or heir of the optionee pursuant to a will or the laws of
descent and distribution,
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for the greater of the remainder of the three-year period (or such
other period as applicable) or for a period of twelve months from the
date of such death, but in no event shall any portion of the Stock
Option be exercisable after its original stated expiration date.
(d) Involuntary Termination for Cause. If an optionee's
employment by the Company or its Affiliates is terminated for Cause,
all Stock Options (or portions thereof) which have not been exercised,
whether Vested or not, are automatically forfeited upon the close of
business on the last day of employment.
(e) Other Termination. If an optionee's employment by the
Company or its Affiliates terminates, voluntarily or involuntarily, for
any reason other than death, Disability, Retirement or for Cause, any
Vested portions of Stock Options held by such optionee at the time of
termination may be exercised by the optionee for a period of three
months (or such other period as the Committee may specify at or after
the time of grant) from the date of such termination or until the
expiration of the original term of the Stock Option, whichever period
is the shorter. No portion of any Stock Option which is not Vested at
the time of such termination will thereafter become Vested.
(f) Non-employee Directors. If a non-employee Director dies or
becomes disabled (as determined by the Board of Directors) while
serving as a member of the Board of Directors, all Stock Options held
by such Director immediately become Vested but thereafter may only be
exercised for a period of three years (or such other period as the
Board of Directors may specify at or after the time of grant) from the
date of such death or resignation due to disability, or until the
expiration of the original term of the Stock Option, whichever period
is the shorter. If a non-employee Director's resignation (or failure to
stand for reelection) occurs for any other reason, any Vested portions
of Stock Options held by the Director at the time of resignation (or
failure to stand for reelection) may be exercised for a period of three
months (or such other period as the Board of Directors may specify at
or after the time of grant) from such date or until the expiration of
the original term of the Stock Option, whichever period is the shorter.
No portion of any Stock Option which is not Vested at the time of such
resignation (or failure to stand for reelection) will thereafter become
Vested.
ARTICLE VI
Special Rules Applicable to Incentive Stock Options
SECTION 6.1. Eligibility. Notwithstanding any other provision
of this Plan to the contrary, an ISO may only be granted to full or part-time
employees (including officers and directors who are also employees) of the
Company or of an Affiliate, provided that the Affiliate is also a "subsidiary
corporation" within the meaning of Section 424(f) of the Code.
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SECTION 6.2 Special ISO Rules.
(a) Term. No ISO may be exercisable on or after the tenth
anniversary of the Date of Grant, and no ISO may be granted under this
Plan on or after the tenth anniversary of the effective date of the
Plan. (See Section 17.1 of the Plan.)
(b) Ten Percent Stockholder. No grantee may receive an ISO
under the Plan if such grantee, at the time the Award is granted, owns
(after application of the rules contained in Section 424(d) of the
Code) stock possessing more than 10% of the total combined voting power
of all classes of the Company's stock, unless (i) the option price for
such ISO is at least 110% of the Fair Market Value on the Date of Grant
and (ii) such ISO is not exercisable on or after the fifth anniversary
of the Date of Grant.
(c) Limitation on Grants. The aggregate fair market value
(determined with respect to each ISO at the time such ISO is granted)
of the shares of Stock with respect to which ISOs are exercisable for
the first time by a grantee during any calendar year (under this Plan
or any other plan adopted by the Company) shall not exceed $100,000.
(d) Non-transferability. No ISO granted hereunder may be
transferred except by will or by the laws of descent and distribution.
(e) Termination of Employment. No ISO may be exercisable more
than three months following termination of employment for any reason
(including retirement) other than death or disability, nor more than
one year following termination of employment for the reason of
disability (as defined in Section 422 of the Code).
(f) Holding Period. Stock acquired upon the exercise of an ISO
must be held for a minimum period of two years from the Date of Grant
and one year from the date of exercise, otherwise the disposition
constitutes a taxable "disqualifying disposition."
SECTION 6.3. Subject to Code Amendments. The foregoing
limitations are designed to comply with the requirements of Section 422 of the
Code and are automatically amended or modified to comply with amendments or
modifications to Section 422 or any successor provisions. Any ISO which fails to
comply with Section 422 of the Code is automatically treated as a NQSO under
this Plan.
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ARTICLE VII
Stock Appreciation Rights
SECTION 7.1. SAR Grant and Agreement. Stock Appreciation Rights may be
granted in conjunction with all or part of any Stock Option granted under the
Plan, either at the same time or after the grant of the Stock Option. Each SAR
granted under the Plan (or delegation of authority to the Chief Executive
Officer to grant SARs) will be evidenced by minutes of a meeting, or by a
unanimous written consent without a meeting, of the Committee and by a written
agreement dated as of the Date of Grant and executed by the Company and by the
Plan participant.
SECTION 7.2. Term of SARs. A Stock Appreciation Right, or applicable
portion thereof, granted with respect to a given Stock Option or potion thereof
terminates and is no longer exercisable upon the termination or exercise of the
related Stock Option, or applicable portion thereof.
SECTION 7.3. SAR Exercise. A Stock Appreciation Right may be exercised
by an optionee by surrendering the applicable portion of the related Stock
Option. Stock Options which have been so surrendered, in whole or in part, are
no longer exercisable to the extent the related Stock Appreciation Rights have
been exercised and are deemed to have been exercised for the purpose of the
limitation set forth in Article III of this Plan on the number of shares of
Stock to be issued under the Plan, but only to the extent of the number of
shares of Stock actually issued under the Stock Appreciation Right at the time
of exercise. Upon exercise and surrender, the optionee is entitled to receive an
amount determined in the manner prescribed in Section 7.4 below. However, the
participant is responsible for the payment of any required tax withholding as
provided in Section 16.3 herein.
SECTION 7.4. Terms and Conditions of SAR Grants. Stock
Appreciation Rights are subject to the following terms and conditions:
(a) Stock Appreciation Rights are exercisable only at such
time or times and to the extent that the Stock Options to which they
relate are Vested and exercisable in accordance with the provisions of
Article V of this Plan or otherwise as the Committee may determine at
or after the time of grant;
(b) Upon the exercise of a Stock Appreciation Right, an
optionee is entitled to receive up to, but not more than, an amount in
cash or shares of Stock equal in value to the excess of the Fair Market
Value of one share of Stock over the Exercise Price per share specified
in the related Stock Option multiplied by the number of shares in
respect
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of which the Stock Appreciation Right is exercised, with the Committee
having the right in its discretion to determine the form of payment;
(c) Stock Appreciation Rights are transferable only when and
to the extent that the underlying Stock Option would be transferable
under Article XII of this Plan; and
(d) Such other terms and conditions, not inconsistent with the
provisions of this Plan and any operative employment agreement, as are
determined from time to time by the Committee.
ARTICLE VIII
Restricted Stock Awards
SECTION 8.1. Restricted Stock Grant and Agreement. Restricted Stock
Awards consist of shares of Stock which are issued by the Company to a
participant at a purchase price which may be well below their fair market value
but are subject to forfeiture and restrictions on their sale or other transfer
by the participant. Each Restricted Stock Award granted under the Plan will be
evidenced by minutes of a meeting, or by a unanimous written consent without a
meeting, of the Committee and by a written agreement dated as of the Date of
Grant and executed by the Company and by the Plan participant. The timing of
Restricted Stock Awards and the number of shares to be issued (subject to
Section 3.2(b) of this Plan) is to be determined by the Committee in its
discretion. By accepting a grant of Restricted Stock, the participant agrees to
remit to the Company when due any required tax withholding as provided in
Section 16.3 herein.
SECTION 8.2. Terms and Conditions of Restricted Stock Grants.
Restricted Stock granted under the Plan is subject to the following terms and
conditions, which need not be the same for each participant, and may contain
such additional terms, conditions, restrictions and contingencies not
inconsistent with the terms of the Plan and any operative employment agreement,
as the Committee deems desirable:
(a) Purchase Price. The Committee determines the prices at
which shares of Restricted Stock are to be issued to a participant,
which may vary from time to time and among participants and which may
be below the Fair Market Value of such shares of Stock at the date of
grant but may not be less than the par value of the Stock.
14
<PAGE>
(b) Restrictions. All shares of Restricted Stock issued under
this Plan will be subject to such restrictions as the Committee may
determine, including, without limitation, the following:
(i) a prohibition against the sale, transfer, pledge
or other encumbrance of the shares of Restricted Stock, such
prohibition to lapse at such time or times as the Committee
determines (whether in installments, at the time of the death,
Disability or Retirement of the holder of such shares, or
otherwise, but see Change in Control provisions in Article
XI);
(ii) a requirement that the participant forfeit such
shares of Restricted Stock in the event of termination of the
participant's employment prior to Vesting; and
(iii) a prohibition against employment of the
participant by any competitor of the Company or its
affiliates, or against dissemination by the participant of any
secret or confidential information belonging to the Company or
a subsidiary of the Company.
The Committee may at any time waive such restrictions or accelerate the
date or dates on which the restrictions will lapse. However, if the
Committee determines that restrictions lapse upon the attainment of
specified performance objectives then the provisions of Section 9.2 and
9.3 below will apply.
(c) Delivery of Shares. Shares of Restricted Stock will be
registered in the name of the participant and deposited, together with
a stock power endorsed in blank, with the Company. Each such
certificate will bear a legend in substantially the following form:
"The transferability of this certificate and the shares of
Common Stock represented by it are subject to the terms and
conditions (including conditions of forfeiture) contained in
the 1998 Stock Incentive Plan of the Company, and an agreement
entered into between the registered owner and the Company. A
copy of the Plan and agreement is on file in the office of the
Secretary of the Company."
At the end of any time period during which the shares of Restricted
Stock are subject to forfeiture and restrictions on transfer, such
shares will be delivered free of all restrictions to the participant.
15
<PAGE>
(d) Forfeiture of Shares. If a participant who holds shares of
Restricted Stock fails to satisfy the restrictions and other conditions
relating to the Restricted Stock prior to the lapse or waiver of such
restrictions and conditions, the participant is required to forfeit the
shares and transfer them back to the Company in exchange for a refund
of the consideration paid by the participant or such other amount which
may be specifically set forth in the Award agreement.
(e) Voting and Other Rights. During any period in which shares
of Restricted Stock are subject to forfeiture and restrictions on
transfer, the participant holding such Restricted Stock has all the
rights of a stockholder with respect to shares of Stock, including,
without limitation, the right to vote such shares and the right to
receive any dividends paid with respect to such shares.
ARTICLE IX
Performance Stock Awards
SECTION 9.1. Performance Stock Grant and Agreement. A
Performance Stock Award is a right to receive shares of Stock in the future
conditioned upon the attainment of specified performance objectives and such
other conditions, restrictions and contingencies as the Committee may determine.
Each Performance Stock Award granted under the Plan will be evidenced by minutes
of a meeting, or by a unanimous written consent without a meeting, of the
Committee and by a written agreement dated as of the Date of Grant and executed
by the Company and by the Plan participant. The timing of Performance Stock
Awards and the number of shares covered by each Award (subject to Section 3.2(b)
of this Plan) is to be determined by the Committee in its discretion. By
accepting a grant of Performance Stock, the participant agrees to remit to the
Company when due any required tax withholding as provided in Section 16.3
herein.
SECTION 9.2. Performance Objectives. At the time of grant of a
Performance Stock Award, the Committee will specify the performance objectives
which, depending on the extent to which they are met, will determine the number
of shares that will be paid out to the participant. The Committee will also
specify the time period or periods (the "Performance Period") during which the
performance objectives must be met. The performance objectives and periods need
not be the same for each participant nor for each grant. The Committee may use
performance objectives based on one or more of the following targets: cash
generation, profit, revenue, market share, profit or investment return ratios,
shareholder returns and/or specific, objective and measurable non-financial
objectives. The Committee may
16
<PAGE>
designate a single goal criterion or multiple goal criteria for performance
measurement purposes, with the measurement based on absolute Company or business
unit performance and/or on performance as compared with that of other publicly-
traded companies.
SECTION 9.3. Adjustment of Performance Objectives. The
Committee may modify, amend or otherwise adjust the performance objectives
specified for outstanding Performance Stock Awards if it determines that an
adjustment would be consistent with the objectives of the Plan and taking into
account the interests of the participants and the public shareholders of the
Company. Any such adjustments must comply with the requirements of Section
162(m) of the Code. The types of events which could cause an adjustment in the
performance objectives include, without limitation, accounting changes which
substantially affect the determination of performance objectives, changes in
applicable laws or regulations which affect the performance objectives, and
divisive corporate reorganizations, including spin-offs and other distributions
of property or stock.
SECTION 9.4. Other Terms and Conditions. Performance Stock
Awards granted under the Plan are subject to the following terms and conditions
and may contain such additional terms, conditions, restrictions and
contingencies not inconsistent with the terms of the Plan and any operative
employment agreement, as the Committee deems desirable:
(a) Delivery of Shares. As soon as practicable after the
applicable Performance Period has ended, the participant will receive a
payout of the number of shares of Stock earned during the Performance
Period, depending upon the extent to which the applicable performance
objectives were achieved. Such shares will be registered in the name of
the participant and will be free of all restrictions except for any
pursuant to Section 15.2 of this Plan.
(b) Termination. A Performance Stock Award or unearned portion
thereof will terminate without the issuance of shares on the
termination date specified at the time of grant or upon the termination
of employment of the participant during the Performance Period. If a
participant's employment by the Company or its Affiliates terminates by
reason of his or her death, Disability or Retirement, the Committee in
its discretion at or after the time of grant may determine that the
participant (or the heir, legatee or legal representative of the
participant's estate) will receive a payout of a portion of the
participant's then outstanding Performance Stock Awards in an amount
which is not more than the number of shares which would have been
earned by the participant if 100% of the performance objectives for the
current Performance Period had been achieved prorated based on the
ratio of the number of months of active employment in the Performance
Period to the total number of months in the Performance Period.
(c) Voting and Other Rights. Awards of Performance Stock do
not provide the participant with voting rights or rights to dividends
prior to the participant becoming the holder of record of shares issued
pursuant to an Award. Prior to the issuance of shares, Performance
Stock Awards may not be sold, transferred, pledged, assigned or
otherwise encumbered.
17
<PAGE>
ARTICLE X
Transfers and Leaves of Absence
SECTION 10.1. Transfer of Participant. For purposes of the
Plan, the transfer of a participant among the Company and its Affiliates is
deemed not to be a termination of employment.
SECTION 10.2. Effect of Leaves of Absence. For purposes of the
Plan, the following leaves of absences are deemed not to be a termination of
employment:
(a) a leave of absence, approved in writing by the Company,
for military service, sickness or any other purpose approved by the
Company, if the period of such leave does not exceed ninety (90) days;
(b) a leave of absence in excess of ninety (90) days, approved
in writing by the Company, but only if the employee's right to
reemployment is guaranteed either by a statute or by contract, and
provided that, in the case of any such leave of absence, the employee
returns to work within 30 days after the end of such leave; and
(c) any other absence determined by the Committee in its
discretion not to constitute a break in service.
ARTICLE XI
Effect of Change in Control
SECTION 11.1. Change in Control Defined. "Change of Control"
means the occurrence of any of the following:
(a) the acquisition by any person, entity or "group" within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended ("the 1934 Act"), other than the Company or any
of its Affiliates, or any employee benefit plan of the Company and/or
its Affiliates, of beneficial ownership (within the meaning of Rule
13d-3 under the 1934 Act) of shares of Stock of the Company having
twenty five percent (25%) or more of the total number of votes that may
be cast for election of the Directors of the Company in a transaction
or series of transactions not approved in advance by a vote of at least
three-quarters of the Continuing Directors (as defined below);
(b) a change in the composition of the Board of Directors such
that at any time a majority of the Board are not Continuing Directors.
18
<PAGE>
"Continuing Directors" refers to the individuals who serve as Directors
at the effective date of this Plan and any individual whose term of
office as a Director begins thereafter if the nomination or election of
such Director was approved in advance by a vote of at least
three-quarters of the then serving Continuing Directors (other than a
nomination of an individual whose initial assumption of office is in
connection with an actual or threatened solicitation with respect to
the election or removal of the Directors, as such terms are used in
Rule 14a-11 of Regulation 14A under the 1934 Act);
(c) the approval by the shareholders of the Company of a
reorganization, merger, consolidation, liquidation or dissolution of
the Company or of the sale (in one transaction or a series of
transactions) of all or substantially all of the assets of the Company
other than a reorganization, merger, consolidation, liquidation,
dissolution or sale approved in advance by a vote of at least
three-quarters of the Continuing Directors; or
(d) any other occurrence if at least a majority of the
Continuing Directors determine in their discretion that there has been
a change in Control of the Company.
SECTION 11.2. Acceleration of Awards. Except as otherwise
provided in this Plan or an Award agreement, immediately upon the occurrence of
a Change in Control:
(a) all outstanding Stock Options automatically become fully
exercisable;
(b) all Restricted Stock Awards automatically become fully
Vested; and
(c) all participants holding Performance Stock Awards become
entitled to receive a partial payout in an amount which is the number
of shares which would have been earned by the participant if 100% of
the performance objectives for the current Performance Period had been
achieved prorated based on the ratio of the number of months of active
employment in the Performance Period to the total number of months in
the Performance Period.
Notwithstanding the foregoing, the Committee will retain the right to revoke the
automatic acceleration of vesting in connection with any business combination if
the acceleration will cause the use of pooling of interests accounting to be
disallowed and such accounting is determined to be in the best interests of the
Company.
19
<PAGE>
ARTICLE XII
Transferability of Awards
SECTION 12.1. Awards Deemed Non-transferable. Other than
pursuant to Section 12.2 below, Awards are deemed to be non-transferable. Awards
may be exercised only by the participant and may not be transferred other than
by will or by the laws of descent and distribution or, with regard to Vested
Awards, pursuant to a QUADRO. Awards are exercisable during a participant's
lifetime only by the participant or, as permitted by applicable law, the
participant's guardian or other legal representative. No Award may be assigned,
pledged, hypothecated or otherwise alienated or encumbered (whether by operation
of law or otherwise) and any attempts to do so are null and void.
SECTION 12.2. Limited Transferability of NQSOs. The Committee
in its discretion may allow (at or after the time of grant) for the
transferability of Vested Nonqualified Stock Options (with or without
accompanying Stock Appreciation Rights) only by the participant for no
consideration to Immediate Family Members or to a bona fide trust, partnership
or other entity controlled by and for the benefit of one or more Immediate
Family Members or to a charitable organization qualified under Section 501(c) of
the Code. "Immediate Family Members" means the participant's spouse, children,
stepchildren, parents, siblings and grandchildren. With respect to children,
parents, siblings and grandchildren, the relationship may be natural or
adoptive. Any permitted transfer is conditioned on the participant and
transferee agreeing to abide by the Company's then current stock option transfer
guidelines
ARTICLE XIII
Amendment and Discontinuation
SECTION 13. 1. Amendment or Discontinuation of the Plan. The
Board of Directors may amend, alter, or discontinue the Plan at any time,
provided that no amendment, alteration, or discontinuance may be made:
(a) which would adversely affect the rights of a participant
under any Award granted prior to the date such action is adopted by the
Board of Directors without the participant's express consent thereto;
and
(b) without shareholder approval, if shareholder approval is
required under applicable laws, regulations or exchange requirements
(including for the purpose of qualification under Section 162(m) of the
Code as "performance-based compensation").
20
<PAGE>
SECTION 13.2. Amendment of Grants. The Committee may amend,
prospectively or retroactively, the terms of any outstanding Award or substitute
new Awards for previously granted Awards, provided that no amendment or
substitution is inconsistent with the terms of this Plan or impairs the rights
of any holder without his or her consent.
ARTICLE XIV
Unfunded Status of the Plan
SECTION 14.1. Unfunded Status. The Plan is not funded and is
intended to constitute an "unfunded" plan for incentive and deferred
compensation. Nothing contained in this Plan gives any participant any rights
that are greater than those of a general creditor of the Company. In its
discretion, the Committee may authorize the creation of trusts or other
arrangements to meet the obligations created under the Plan with respect to
Awards hereunder, provided, however, that the existence of such trusts or other
arrangements is consistent with the unfunded status of the Plan and no
participant acquires any right in or title to any assets, funds or property of
the Company. Participants have only a contractual right to benefits under Vested
Awards unsecured by any assets of the Company.
ARTICLE XV
Stock Certificates
SECTION 15. 1. Delivery of Stock Certificates. The Company is
not required to issue or deliver any certificates for shares of Stock issuable
with respect to Awards under this Plan prior to the fulfillment of all of the
following conditions:
(a) payment in full for the shares and for any required tax
withholding (See Section 16.3 of the Plan);
(b) completion of any registration or other qualification of
such shares under any federal or state laws or under the rulings or
regulations of the Securities and Exchange Commission ("SEC") or any
other regulating body which the Committee in its discretion deems
necessary or advisable;
(c) admission of such shares to listing on all stock exchanges
on which the Stock is so listed;
21
<PAGE>
(d) in the event the Stock is not registered under the
Securities Act of 1933, qualification as a private placement under said
Act; and
(e) obtaining of any approval or other clearance from any
federal or state governmental agency which the Committee in its
discretion determines to be necessary or advisable.
SECTION 15.2. Applicable Restrictions on Stock. Shares of
Stock issued with respect to Awards may be subject to such stock transfer orders
and other restrictions as the Committee may determine necessary or advisable
under the rules, regulations and other requirements of the SEC, any stock
exchange upon which the Stock is then listed, and any applicable federal or
state securities law and will include any restrictive legends the Committee may
deem appropriate to include.
SECTION 15.3. Book Entry. In lieu of the issuance of stock
certificates evidencing shares of Sock, the Company may use a "book entry"
system in which a computerized or manual entry is made in the records of the
Company to evidence the issuance of such shares. Such Company records are,
absent manifest error, binding on all parties.
ARTICLE XVI
General Provisions
SECTION 16.1. No Implied Rights to Awards or Employment. No
potential participant has any claim or right to be granted an Award under the
Plan, and there is no obligation of uniformity of treatment of participants
under the Plan. Neither the Plan nor any Award thereunder shall be construed as
giving any employee any right to continued employment with the Company or any
Affiliate. The Plan does not constitute a contract of employment, and the
Company and each Affiliate expressly reserve the right at any time to dismiss a
participant free from liability, or any claim under the Plan, except as may be
specifically provided in this Plan or in an Award agreement.
SECTION 16.2. Other Compensation Plans. Nothing contained in
this Plan prevents the Board of Directors from adopting other or additional
compensation arrangements, subject to shareholder approval if such approval is
required, and such arrangements may be either generally applicable or applicable
only in specific cases.
SECTION 16.3. Tax Withholding. Each participant must, no later
than the date as of which the value of an Award first becomes includible in the
gross income of the participant for income tax purposes, pay to the Company, or
22
<PAGE>
make arrangements satisfactory to the Company regarding payment of, any federal,
state or local taxes of any kind required by law to be withheld with respect to
the Award. The obligations of the Company under the Plan are conditional on such
payment, and the Company, to the extent permitted by law, has the right to
deduct any such taxes from any payment of any kind otherwise due to a
participant.
SECTION 16.4. Arbitration. All Award agreements will include
appropriate provisions respecting mediation and/or arbitration of any disputes
thereunder. If arbitrated, notice of demand for arbitration must be given in
writing within a reasonable time after the claim or dispute has arisen. Any
decision rendered by an arbitrator must be made in accordance with the
provisions of the Plan, will be final and judgment may be entered upon it in
accordance with applicable law in any court having proper jurisdiction.
SECTION 16.5. Rule 16 b-3 Compliance. The Plan is intended to
comply with all applicable conditions of Rule 16b-3 of the 1934 Act, as such
rule may be amended from time to time. All transactions involving any
participant subject to Section 16(a) shall be subject to the conditions set
forth in Rule 16b-3, regardless of whether such conditions are expressly set
forth in the Plan. Any provision of the Plan that is contrary to Rule 16b-3 does
not apply to such participants.
SECTION 16.6. Deferrals. The Committee may unilaterally
postpone the exercising of Awards, the issuance or delivery of Stock under any
Award or any action permitted under the Plan to prevent the Company or any
Affiliate from being denied a Federal income tax deduction with respect to any
Award other than an Incentive Stock Option. The Committee, in its discretion,
may permit a participant to defer receipt of the payment of cash or the delivery
of Stock that would otherwise be delivered to a participant under the Plan. Any
deferral elections are subject to such rules and procedures as the Committee may
determine.
SECTION 16.7. Successors. All obligations of the Company with
respect to Awards granted under the Plan are binding on any successor to the
Company, whether as a result of a direct or indirect purchase, merger,
consolidation or otherwise of all or substantially all of the business and/or
assets of the Company.
SECTION 16.8. Severability. In the event any provision of the
Plan, or the application thereof to any person or circumstances, is held illegal
or invalid for any reason, the illegality or invalidity shall not affect the
remaining parts of the Plan, or other applications, and the Plan is to be
construed and enforced as if the illegal or invalid provision had not been
included.
23
<PAGE>
SECTION 16.9. Governing Law. To the extent not preempted by
federal law, the Plan and all Award agreements pursuant thereto are construed in
accordance with and governed by the laws of the State of Minnesota, or, if
applicable, the General Corporation Law of the State of Delaware.
ARTICLE XVII
Effective Date of the Plan
SECTION 17.1. Plan Adoption. Subject to the approval of the
shareholders of the Company at the Annual Meeting of Shareholders held in 1998,
the effective date of this Plan is the date of its adoption by the Board of
Directors on January 26, 1998. To the extent that Awards are made under the Plan
prior to its approval by shareholders, they shall be contingent on shareholder
approval of the Plan.
24
Exhibit 15
Letter re unaudited interim financial information
August 12, 1998
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,
33-99146 and 333-51401, its Form 10-Q for the quarter ended June 30, 1998, which
includes our report dated July 31, 1998, 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 June 30, 1998, and the related consolidated statement of operations
for the six-month period ended June 30, 1998, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Jun-30-1998
<CASH> 8,455
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 399,307
<CURRENT-ASSETS> 426,122
<PP&E> 424,611
<DEPRECIATION> 189,744
<TOTAL-ASSETS> 674,949
<CURRENT-LIABILITIES> 354,937
<BONDS> 258,834
0
0
<COMMON> 354
<OTHER-SE> 14,308
<TOTAL-LIABILITY-AND-EQUITY> 674,949
<SALES> 759,608
<TOTAL-REVENUES> 759,608
<CGS> 487,050
<TOTAL-COSTS> 487,050
<OTHER-EXPENSES> 269,089
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,202
<INCOME-PRETAX> (11,733)
<INCOME-TAX> (3,520)
<INCOME-CONTINUING> (8,213)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,213)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> 0
</TABLE>