UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the fiscal year ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
Commission file number 1-11014
MUSICLAND STORES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 41-1623376
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10400 Yellow Circle Drive,
Minnetonka, Minnesota 55343
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 931-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant on December 31, 1997 was approximately $225,235,947 based on the
closing stock price of $7 5/16 on the New York Stock Exchange on such date (only
members of the Management Investors Group are considered affiliates for this
calculation).
The number of shares outstanding of the Registrant's common stock on
February 10, 1998 was 34,458,037.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held May 11, 1998 (the "Proxy Statement") are incorporated by
reference into Part III.
<PAGE>
EXHIBIT INDEX
The following documents are filed as part of this Annual Report on Form
10-K for the year ended December 31, 1997.
Exhibit Sequential
No. Description Page No.
- ------- -------------------------------------------------------- ----------
3.1 - Restated Certificate of Incorporation of MSC, as amended [i]
3.2 - By-laws of MSC, as amended [ii]
4.1 - Senior Subordinated Note Indenture, including form of
Note, dated as of June 15, 1993 among MGI, MSC and Bank One
Columbus, N.A. as successor Trustee to Harris Trust and
Savings Bank [iii]
4.1(a) - First Supplemental Indenture dated as of June 13, 1997 to
the Senior Subordinated Note Indenture [xv]
4.2(a) - Credit Agreement dated as of October 7, 1994 (the "Credit
Agreement") among MGI, MSC, the banks listed therein and
Morgan Guaranty Trust Company of New York, as agent [iv]
4.2(b) - Amendment No. 1 dated as of February 28, 1995 to the Credit
Agreement [viii]
4.2(c) - Amendment No. 2 dated as of April 9, 1996 to the Credit
Agreement [xi]
4.2(d) - Amendment No. 3 dated as of October 18, 1996 to the Credit
Agreement [xii]
4.2(e) - Waiver and Agreements under Credit Agreement dated as of
March 7, 1997 to the Credit Agreement [xiii]
4.2(f) - Waivers and Agreements under Credit Agreement dated as of
May 19, 1997 to the Credit Agreement [xv]
4.2(g) - Amendment No. 4 and Waiver dated as of June 16, 1997 to
the Credit Agreement [xv]
4.3 - Term Loan Agreement dated as of June 16, 1997, (the "Term
Loan") among MGI, MSC, the banks listed therein and Morgan
Guaranty Trust Company of New York, as agent [xv]
4.3(a) - Security Agreement dated as of June 16, 1997 among MGI and
the subsidiaries listed therein, the Debtors listed therein,
and Morgan Guaranty Trust Company of New York, as agent [xv]
4.3(b) - Warrant and Registration Rights Agreement dated as of June
16, 1997 among MSC and the Investors listed therein [xv]
4.4 - Rights Agreement dated as of March 14, 1995 between MSC and
Norwest Bank Minnesota, National Association, as Rights Agent [v]
9 - Voting Trust Agreement among DLJ, certain of its affiliates,
the Equitable Investors and Meridian Trust Company [i]
10.1(a) - Lease Agreement dated March 31, 1994 between Shawmut Bank
Connecticut, N.A. as Owner Trustee and Musicland Retail, Inc.,
as Lessee [viii]
10.1(b) - Participation Agreement dated March 31, 1994 among Musicland
Retail, Inc., as Lessee, Shawmut Bank Connecticut, N.A. as
Owner Trustee, Kleinwort Benson Limited, as Owner Participant,
Lender and Agent and The Long-Term Credit Bank of Japan, Ltd.
Chicago Branch, Credit Lyonnais Cayman Island Branch, The
Fuji Bank, Limited, as Lenders [viii]
10.1(c) - Guaranty of MGI dated March 31, 1994 [viii]
10.1(d) - Amendment No. 1 dated as of June 16, 1997 to the Lease
Agreement [xv]
10.1(e) - Amendment No. 1 dated as of June 16, 1997 to the
Participation Agreement [xv]
2
<PAGE>
Exhibit Sequential
No. Description Page No.
- ------- ------------------------------------------------------- ----------
10.1(f) - Amendment No. 1 dated as of June 16, 1997 to the Guaranty [xv]
10.2(a) - Master Lease dated as of May 12, 1995 between Media Play
Trust, as Landlord, and Media Play, Inc., as Tenant [ix]
10.2(b) - Participation Agreement dated as of May 12, 1995 among
Natwest Leasing Corporation, as Owner Participant, Media
Play Trust, As Trust, Yasuda Bank and Trust Company (U.S.A.),
as Owner Trustee, National Westminster Bank PLC, as Agent
and Lender, Media Play, Inc., as Tenant and the Long-Term
Credit Bank of Japan, Ltd. Chicago Branch and The Yasuda
Trust & Banking Company, Ltd., Chicago Branch, as Other
Lenders [ix]
10.2(c) - Amendment No. 1 dated as of April 9, 1996 to the
Participation Agreement [xi]
10.2(d) - Lease Guaranty dated May 12, 1995 between MGI, as Guarantor,
and Media Play Trust, as Landlord [ix]
10.2(e) - Amendment No. 1 dated as of April 9, 1996 to the Lease
Guaranty [xi]
10.2(f) - Second Limited Waiver and Amendment dated as of June 16,
1997 of Certain Loan Documents and Key Agreements [xv]
*10.3(a) - Subscription Agreement among MSC and the Management
Investors [vi]
*10.3(b) - Form of amendment to Management Subscription Agreement [i]
*10.4 - Form of Registration Rights Agreement among MSC, DLJ and
the Management Investors [vii]
*10.5(a) - Employment Agreement with Mr. Eugster [vi]
*10.5(b) - Form of amendment to Employment Agreement with Mr. Eugster [i]
*10.5(c) - Amendment No. 2 to Employment Agreement with Mr. Eugster [x]
*10.6(a) - Form of Employment Agreement with Messrs. Benson and Ross [vi]
*10.6(b) - Amendment to Employment Agreement with Mr. Benson [xiii]
*10.6(c) - Amendment to Employment Agreement with Mr. Ross [xiii]
*10.7(a) - Form of Employment Agreement with Messrs. Bausman and
Henderson [vi]
*10.7(b) - Form of amendment to Employment Agreements with Messrs.
Bausman and Henderson [i]
*10.7(c) - Amendment No. 2 to Employment Agreement with Mr. Bausman [x]
*10.7(d) - Amendment No. 2 to Employment Agreement with Mr. Henderson [x]
*10.8(a) - Change of Control Agreement with Mr. Eugster [vi]
*10.8(b) - Form of amendment to Change of Control Agreement with Mr.
Eugster [i]
*10.8(c) - Amendment No. 2 to Change of Control Agreement with Mr.
Eugster [x]
*10.8(d) - Amendment No. 3 to Change of Control Agreement with Mr.
Eugster [xiii]
*10.9 - Management Incentive Plan dated as of January 1, 1997 [xvii]
*10.10 - 1988 Stock Option Plan, as amended [i]
*10.11 - Stock Option Plan for Unaffiliated Directors of MSC, as
amended on June 12, 1997 [xv]
*10.12 - 1992 Stock Option Plan [i]
*10.13 - Musicland Stores Corporation 1994 Employee Stock Option
Plan [viii]
*10.14 - Employment Letter Agreement with Mr. Johnson [viii]
*10.15(a)- Change of Control Agreement with Mr. Johnson [x]
*10.15(b)- Amendment No. 1 to Change of Control Agreement with Mr.
Johnson [xiii]
*10.16(a)- Change of Control Agreement with Messrs. Benson and Ross [vi]
*10.16(b)- Amendment No. 1 to Change of Control Agreement with Mr.
Benson [xiii]
*10.16(c)- Amendment No. 1 to Change of Control Agreement with Mr.
Ross [xiii]
*10.17 - Form of Executive Severance Agreement with Mr. Wachsman [xiii]
3
<PAGE>
Exhibit Sequential
No. Description Page No.
- --------- ------------------------------------------------------ ----------
*10.18 - Change of Control Agreement with Mr. Wachsman [xiv]
*10.19 - Long Term Incentive Plan dated as of January 1, 1996 [xiii]
*10.20 - Executive Officer Short Term Incentive Plan dated as of
November 15, 1996 [xiii]
*10.20(a)- Executive Officer Short Term Incentive Plan dated as of
March 10, 1997 [xv]
*10.21 - Executive Officer Salary Continuation Plan dated as of
March 10, 1997 [xiv]
11. - Statement re computation of per share earnings [xvi]
21. - Subsidiaries of MSC [ii]
23. - Consent of Independent Public Accountants __
27. - Financial Data Schedules [xvii]
99. - Form 11-K for The Musicland Group's Capital Accumulation
Plan __
[i] Incorporated by reference to MSC's Form S-1 Registration Statement
covering common stock initially filed with the Commission on July 6,
1990 (Commission File No. 33-35774).
[ii] Incorporated by reference to MSC's Annual Report on Form 10-K for the
year ended December 31, 1992 filed with the Commission on March 2, 1993
(Commission File No. 1-11014).
[iii] Incorporated by reference to MGI's Registration Statement covering 9%
Senior Subordinated Notes initially filed with the Commission on May
19, 1993 (Commission File No. 33-62928).
[iv] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1994 filed with the Commission
on November 11, 1994 (Commission File No. 1-11014).
[v] Incorporated by reference to MSC's Form 8-A Exchange Act Registration
Statement covering Preferred Share Purchase Rights filed with the
Commission on March 16, 1995.
[vi] Incorporated by reference to MSC's Form S-1 Registration Statement
covering Senior Subordinated Notes initially filed with the Commission
on May 20, 1988 (Commission File No. 33-22058).
[vii] Incorporated by reference to MSC's Annual Report on Form 10-K for the
year ended December 31, 1993 filed with the Commission on March 25,
1994 (Commission File No. 1-11014).
[viii] Incorporated by reference to MSC's Annual Report on Form 10-K for the
year ended December 31, 1994 filed with the Commission on March 27,
1995 (Commission File No. 1-11014).
[ix] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for
the quarter period ended June 30, 1995 filed with the Commission on
August 11, 1995 (Commission File No. 1-11014).
[x] Incorporated by reference to MSC's Annual Report on Form 10-K for the
year ended December 31, 1995 filed with the Commission on April 12,
1996 (Commission File No. 1-11014).
4
<PAGE>
[xi] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for
the quarter period ended March 31, 1996 filed with the Commission on
May 10, 1996 (Commission File No. 1-11014).
[xii] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for
the quarter period ended September 30, 1996 filed with the Commission
on November 13, 1996 (Commission File No. 1-11014).
[xiii] Incorporated by reference to MSC's Annual Report on Form 10-K for the
year ended December 31, 1996 filed with the Commission on April 11,
1997 (Commission File No. 1-11014.)
[xiv] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for
the quarter period ended March 31, 1997 filed with the Commission on
May 14, 1997 (Commission File No. 1-11014).
[xv] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for
the quarter period ended June 30, 1997 filed with the Commission on
August 13, 1997 (Commission File No. 1-11014).
[xvi] The requirements of this exhibit are met by Note 1 of Notes to
Consolidated Financial Statements.
[xvii] Previously filed.
* Indicates Management Contract or Compensatory Plan or Agreement
required to be filed as an Exhibit to this form.
5
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
MUSICLAND STORES CORPORATION
(Registrant)
By: /s/ Keith A. Benson
Keith A. Benson
Vice Chairman, Chief Financial
Officer and Director
(principal financial and
accounting officer)
Date: June 25, 1998
6
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated June 12, 1998 included in this Form 10-K/A, into The Company's
previously filed Registration Statements, File Nos. 33-50520, 33-50522,
33-50524, 33-82130, 33-99146 and 333-51401.
Minneapolis, Minnesota,
June 25, 1998
EXHIBIT 99
FORM 11-K
FOR ANNUAL REPORTS OF EMPLOYEE STOCK PURCHASE, SAVINGS
AND SIMILAR PLANS PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
-------- --------
Commission file number 33-99146
A. Full title of the Plan and the address of the Plan, if different than
that of the issuer named below:
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN
B. Name of issuer of the securities held pursuant to the Plan and the
address of its principal executive office:
MUSICLAND STORES CORPORATION
10400 Yellow Circle Drive, Minnetonka, MN 55343
REQUIRED INFORMATION
The Plan is subject to ERISA. Accordingly, in lieu of the Securities and
Exchange Commission requirements, Plan financial statements and schedules
prepared in accordance with the financial reporting requirements of ERISA are
being filed.
<PAGE>
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN
Financial Statements as of December 31, 1997 and 1996
Together With Report of Independent Public Accountants
<PAGE>
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN
Index to Financial Statements and Supplemental Schedules
Page
----
Report of Independent Public Accountants 3
Financial Statements and Schedules:
Statement of Net Assets Available for Benefits as of December 31, 1997 4
Statement of Net Assets Available for Benefits as of December 31, 1996 5
Statement of Changes in Net Assets Available for Benefits for
the Year Ended December 31, 1997 6
Notes to Financial Statements 7
Schedule I - Item 27a - Schedule of Assets Held for Investment Purposes
as of December 31, 1997 13
Schedule II - Item 27d - Schedule of Reportable Transactions for the
Year Ended December 31, 1997 14
2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Administrator of
The Musicland Group's Capital Accumulation Plan:
We have audited the accompanying statements of net assets available for benefits
of The Musicland Group's Capital Accumulation Plan as of December 31, 1997 and
1996, and the related statement of changes in net assets available for benefits
for the year ended December 31, 1997. These financial statements and the
schedules referred to below are the responsibility of the Plan's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of The Musicland
Group's Capital Accumulation Plan as of December 31, 1997 and 1996, and the
changes in net assets available for benefits for the year ended December 31,
1997, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supplemental schedules of assets held for
investment purposes and reportable transactions are presented for purposes of
additional analysis and are not a required part of the basic financial
statements but are supplementary information required by the Department of
Labor's Rules and Regulations for Reporting and Disclosure under the Employee
Retirement Income Security Act of 1974. The supplemental schedules have been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, are fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
June 12, 1998
3
<PAGE>
<TABLE>
<CAPTION>
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
As of December 31, 1997
Neuberger &
Founders AET Templeton Berman IDS New Franklin
Stable Value Balanced Equity Index Foreign Partners Dimensions Small Cap
Fund Fund Fund II Fund Trust Fund[Y] Growth Fund
----------- ---------- ----------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Investment funds,
at market value $5,579,115 $1,835,011 $ 603,214 $1,471,497 $ 90,904 $ 11,094,043 $ 107,814
---------- ---------- ---------- ---------- ----------- ------------ -----------
Interest income receivable 723 352 136 145 - 1,846 -
Contributions receivable:
Employee contributions 15,318 8,925 4,301 7,813 773 39,571 894
Employer contributions 133,333 133,334 133,333 - - - -
---------- ---------- ---------- ---------- ----------- ------------ -----------
Total contributions
receivable 148,651 142,259 137,634 7,813 773 39,571 894
---------- ---------- ---------- ---------- ----------- ------------ -----------
Participant loan
repayments
(withdrawals) (672) 135 194 153 - (3,668) -
---------- ---------- ---------- ---------- ----------- ------------ -----------
Total assets 5,727,817 1,977,757 741,178 1,479,608 91,677 11,131,792 108,708
Liabilities
Interest payable - - - - - - -
Note payable - - - - - - -
---------- ---------- ---------- ---------- ----------- ------------ -----------
Total liabilities - - - - - - -
---------- ---------- ---------- ---------- ----------- ------------ -----------
Net assets available for
benefits $5,727,817 $1,977,757 $ 741,178 $1,479,608 $ 91,677 $ 11,131,792 $ 108,708
========== ========== ========== ========== =========== ============ ===========
<PAGE>
<CAPTION>
Musicland Common
Stock Fund
------------------------- Loans to
Allocated Unallocated Participants TOTAL
------------ ----------- ---------- ------------
<S> <C> <C> <C> <C>
Assets
Investment funds,
at market value $ 3,863,113 $ 6,100,965 $ 914,999 $ 31,660,675
------------ ----------- ---------- ------------
Interest income receivable 174 - - 3,376
Contributions receivable:
Employee contributions 5,812 - - 83,407
Employer contributions - 1,659,584 - 2,059,584
------------ ----------- ---------- ------------
Total contributions
receivable 5,812 1,659,584 - 2,142,991
------------ ----------- ---------- ------------
Participant loan
repayments (withdrawals) (440) - 4,298 -
------------ ----------- ---------- ------------
Total assets 3,868,659 7,760,549 919,297 33,807,042
Liabilities
Interest payable - 659,835 - 659,835
Note payable - 7,997,988 - 7,997,988
------------ ----------- ---------- ------------
Total liabilities - 8,657,823 - 8,657,823
------------ ----------- ---------- ------------
Net assets available for
benefits $ 3,868,659 $ (897,274) $ 919,297 $ 25,149,219
============ =========== ========== ============
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
<TABLE>
<CAPTION>
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
As of December 31, 1996
American
Collective Income Aim Century Vanguard Templeton
Stable Asset Fund of Charter Growth Index 500 Foreign
Fund America Fund Investors Fund Fund
------------ ------------ ------------ ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 23,184 $ 2,491 $ 5,976 $ 13,157 $ 13 $ 2,251
Investment funds,
at market value 5,888,417 1,462,156 3,789,994 5,342,393 87,622 1,242,244
Contributions receivable:
Employee contributions 4,044 1,888 3,687 4,162 - 1,366
Employer contributions 153,606 116,790 52,069 71,073 90,001 20,895
----------- ----------- ----------- ------------ --------- ----------
Total contributions
receivable 157,650 118,678 55,756 75,235 90,001 22,261
----------- ----------- ----------- ------------ --------- ----------
Total assets 6,069,251 1,583,325 3,851,726 5,430,785 177,636 1,266,756
Liabilities
Interest payable - - - - - -
Note payable - - - - - -
----------- ----------- ------------ ------------ --------- ----------
Total liabilities - - - - - -
----------- ----------- ----------- ------------ --------- ----------
Net assets available for
benefits $ 6,069,251 $ 1,583,325 $ 3,851,726 $ 5,430,785 $ 177,636 $1,266,756
=========== =========== =========== ============ ========= ==========
<CAPTION>
Musicland Common
Stock Fund
------------------------ Loans to
Allocated Unallocated Participants TOTAL
--------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 3,085 $ 5 $ - $ 50,162
Investment funds,
at market value 459,039 1,407,915 673,928 20,353,708
Contributions receivable:
Employee contributions 1,646 - - 16,793
Employer contributions 17,535 1,764,556 - 2,286,525
---------- ----------- ----------- ------------
Total contributions
receivable 19,181 1,764,556 - 2,303,318
---------- ----------- ----------- ------------
Total assets 481,305 3,172,476 673,928 22,707,188
Liabilities
Interest payable - 764,808 - 764,808
Note payable - 8,997,737 - 8,997,737
---------- ----------- ----------- ------------
Total liabilities - 9,762,545 - 9,762,545
---------- ----------- ----------- ------------
Net assets available for
benefits $ 481,305 $(6,590,069) $ 673,928 $ 12,944,643
========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE>
<TABLE>
<CAPTION>
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
For the Year Ended December 31, 1997
American
Collective Income Aim Century Vanguard Stable Founders AET
Stable Asset Fund of Charter Growth Index 500 Value Balanced Equity Index
Fund America Fund Investors Fund Fund Fund Fund II
----------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest and dividends $ 983 $ 55,853 $ 41,941 $ 1,418 $ 2,709 $ - $ 122,902 $ -
Net gain (loss)
on investments 297,712 187,813 776,639 1,405,981 35,334 52,548 (98,546) 19,276
CONTRIBUTIONS:
Employee 368,273 226,663 429,667 553,310 55,453 78,775 44,780 22,533
Employer 25,000 - - - - 133,333 133,334 133,333
INTERFUND TRANSFERS (362,086) (97,617) (10,847) (171,250) 288,686 (23,907) 32,123 43,726
TRANSFER TO/FROM SUCCESSOR
TRUSTEE (5,522,019) (1,753,043) (4,540,436) (6,382,715) (521,307) 5,522,019 1,753,043 521,307
BENEFITS PAID
TO PARTICIPANTS (750,406) (195,799) (516,572) (753,321) (40,478) (138) (166) (194)
ADMINISTRATIVE EXPENSES (64,010) (2,307) (6,100) (8,597) (275) - - -
INTEREST EXPENSE - - - - - - - -
LOANS TO PARTICIPANTS,
NET OF REPAYMENTS (62,698) (4,888) (26,018) (75,611) 2,242 (34,813) (9,713) 1,197
PRINCIPAL PMT ON LOAN FROM
TMG / RELEASED SHARES - - - - - - - -
----------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
CHANGE IN NET ASSETS
AVAILABLE FOR BENEFITS (6,069,251) (1,583,325) (3,851,726) (5,430,785) (177,636) 5,727,817 1,977,757 741,178
NET ASSETS AVAILABLE
FOR BENEFITS AT
BEGINNING OF YEAR 6,069,251 1,583,325 3,851,726 5,430,785 177,636 - - -
----------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
NET ASSETS AVAILABLE
FOR BENEFITS AT
END OF YEAR $ - $ - $ - $ - $ - $5,727,817 $1,977,757 $ 741,178
=========== ========== ========== ========== ========== ========== ========== =========
<PAGE>
<CAPTION>
Neuberger Musicland Common
Templeton & Berman IDS New Franklin Stock Fund
Foreign Partners Dimensions Small Cap ------------------------ Loans to
Fund Trust Fund [Y] Growth Fund Allocated Unallocated Participants TOTAL
---------- ---------- ------------ ------------ ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest and dividends $ 68,740 $ 8,549 $ 828,511 $ 1,322 $ 602 $ 2 $ 48,099 $ 1,181,631
Net gain (loss)
on investments 18,208 (7,968) (569,840) 778 3,064,712 4,771,267 - 9,953,914
CONTRIBUTIONS:
Employee 256,803 1,552 214,691 1,801 146,372 - - 2,400,673
Employer - - - - - 1,659,584 - 2,084,584
INTERFUND TRANSFERS (574) 89,544 (206,210) 104,807 (559,822) 921,526 (48,099) -
TRANSFER TO/FROM SUCCESSOR
TRUSTEE - - 10,923,151 - - - - -
BENEFITS PAID
TO PARTICIPANTS (118,233) - (1,530) - (256,647) - (37,030) (2,670,514)
ADMINISTRATIVE EXPENSES (2,065) - - - (2,523) - - (85,877)
INTEREST EXPENSE - - - - - (659,835) - (659,835)
LOANS TO PARTICIPANTS,
NET OF REPAYMENTS (10,027) - (56,981) - (5,089) - 282,399 -
PRINCIPAL PMT ON LOAN FROM
TMG / RELEASED SHARES - - - - 999,749 (999,749) - -
---------- --------- ----------- ----------- ---------- ---------- --------- -----------
CHANGE IN NET ASSETS
AVAILABLE FOR BENEFITS 212,852 91,677 11,131,792 108,708 3,387,354 5,692,795 245,369 12,204,576
NET ASSETS AVAILABLE
FOR BENEFITS AT
BEGINNING OF YEAR 1,266,756 - - - 481,305 (6,590,069) 673,928 12,944,643
---------- --------- ----------- ----------- ---------- ---------- --------- -----------
NET ASSETS AVAILABLE
FOR BENEFITS AT
END OF YEAR $1,479,608 $ 91,677 $11,131,792 $ 108,708 $3,868,659 $ (897,274) $ 919,297 $25,149,219
========== ========= =========== =========== ========== ========== ========= ===========
The accompanying notes are an integral part of this statement.
6
</TABLE>
<PAGE>
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN
NOTES TO FINANCIAL STATEMENTS
1. Description of Plan
The following description of The Musicland Group's Capital Accumulation
Plan (the "Plan") is provided for general information purposes only and
is not a comprehensive description of the Plan. Therefore, it does not
include all situations and limitations covered by the Plan.
Participants should refer to the Plan document, as amended, for more
complete information.
GENERAL:
The Plan is a defined contribution plan covering eligible salaried and
hourly employees of The Musicland Group, Inc. ("TMG" or the "Company")
who have attained age 21 and completed one year of service, as defined.
The Plan also provides certain profit sharing benefits for eligible
employees who commenced employment after June 30, 1990 and who have
attained age 21 and completed six months of continuous employment or
one year of service, as defined. The Plan is subject to the provisions
of the Employee Retirement Income Security Act of 1974 ("ERISA").
Benefits under the Plan are covered by a trust agreement. In August
1995 the Plan was amended to add an Employee Stock Ownership Plan
("ESOP"), effective January 1, 1995, for the purpose of replacing the
Company's matching contributions.
As of November 1, 1997, American Express Trust Company (the "Trustee")
serves as the Plan's trustee and administers the assets of the Plan,
directs execution of transactions, makes benefit payments on behalf of
the Plan and maintains records for the loans to participants. Prior to
November 1, 1997, William M. Mercer, Inc. was the service provider to
the Plan and Piper Trust Company ("Piper") was the Plan's trustee. The
parent company of A. Foster Higgins & Co., Inc., the service provider
to the Plan at December 31, 1996, was acquired by the parent company of
William M. Mercer, Inc. in 1997.
NOTE PAYABLE:
During 1995 the Company loaned the Plan $9,997,485 through the issuance
of a promissory note to purchase 1,042,900 shares of Musicland Stores
Corporation common stock ("Musicland Common Stock"). The promissory
note is due in ten equal annual principal installments on December 31
of each year, with interest on the unpaid principal balance at the
prime rate on December 31 of the previous year (8.25% at December 31,
1996 and 8.5% at December 31, 1997). As the Company makes contributions
to the Plan, the Plan makes principal payments to the Company and
allocates an appropriate percentage of Musicland Common Stock to
eligible employees' accounts. The promissory note is collateralized by
the unallocated shares held by the Plan.
7
<PAGE>
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Description of Plan (Continued)
CONTRIBUTIONS:
Participants may elect to make pretax salary reduction contributions of
up to 17% of annual base salaries. Highly compensated participants are
limited to pretax salary reduction contributions of 4% of annual base
pay up to the 401(a)(17) and 408(k)(3)(C) compensation limit. Annual
salary reduction contributions are limited to $9,500 for non-highly
compensated employees, and 4% of the 401(a)(17) and 408(k)(3)(C)
compensation limit for highly compensated employees. The Company may,
at its discretion, make a supplementary matching contribution of 0%
to 100% of eligible salary reduction contributions to the extent that
such contributions for the plan year do not exceed 4% of participants'
earnings. The Company may make an annual profit sharing contribution
for eligible employees under an age-and-service-weighted unit
allocation formula. Forfeitures greater than administrative costs are
used to reduce the Company's matching contributions.
INVESTMENT FUNDS:
Participants may allocate their contributions to any of eight
investment funds, which are administered by American Express Trust
Company. As of December 31, 1997, the investment funds were as follows:
1. Stable Value Fund, a conservative investment fund that invests
in insurance and bank investment contracts, stable value
contracts and short term investments.
2. Founders Balanced Fund, a moderate fund investing in a
balanced portfolio of common stocks, U.S. and foreign
government obligations, and a variety of corporate
fixed-income securities.
3. American Express Trust ("AET") Equity Index Fund II, a
moderate collective fund that invests primarily in medium to
large, well-established companies offering both long-term
capital appreciation and income potential.
4. Templeton Foreign Fund, a fund investing in foreign stocks
and securities.
5. Neuberger & Berman Partners Trust, an aggressive fund
investing primarily in common stocks of established medium to
large capitalization companies, using a value-oriented
investment approach.
6. IDS New Dimensions Fund [Y], an aggressive fund that invests
in a portfolio of stocks of U.S. and foreign companies.
8
<PAGE>
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Description of Plan (Continued)
7. Franklin Small Cap Growth Fund, an aggressive fund that
invests primarily in stocks of small capitalization growth
companies.
8. Musicland Common Stock Fund, a stock pool fund investing in
the common stock of Musicland Stores Corporation, which is
traded on the New York Stock Exchange under the symbol "MLG."
As of December 31, 1996, the investment funds included the Templeton
Foreign Fund and the Musicland Common Stock Fund described above, as
well as the following funds, which are no longer investment options:
1. Collective Stable Asset Fund, a stable asset fund investing
primarily in a diversified portfolio of insurance contracts
from insurance companies.
2. Income Fund of America, a current income and capital growth
fund with balanced investments in stocks and bonds.
3. Aim Charter Fund, a growth and income fund investing
primarily in dividend-paying common stocks.
4. American Century Growth Investors (formerly 20th Century
Growth Investors), an aggressive growth-oriented fund
primarily investing in stock of smaller companies that do not
pay regular dividends.
5. Vanguard Index 500 Fund, a fund which seeks to track, as
closely as possible, the investment performance of the
Standard & Poors Composite Price Index.
Beginning with the 1997 profit sharing contribution, the Company makes
its contribution to the various available investment funds based on the
participants' investment allocation elections. The Company's 1996
profit sharing contribution was made to the Collective Stable Asset
Fund, the Income Fund of America and the Vanguard Index 500 Fund.
Participants may change their investment elections at any time.
Periodically, investment earnings are credited to the participants'
accounts and investment losses are debited from their accounts. The
earnings and losses are allocated in accordance with participant fund
elections.
9
<PAGE>
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Description of Plan (Continued)
LOANS TO PARTICIPANTS:
Participants may obtain up to two loans of $500 or more at any one
time, limited to the lesser of 50% of the vested value of their
accounts or $50,000. Loans must be repaid within five years, except for
certain home loans. The interest rate charged on loans is fixed at
the prime rate plus 2% on the date of the loan.
VESTING:
Each participant's individual contributions are fully vested at all
times. Participants vest in Company matching contributions over a seven
year graduated vesting schedule. Participants will be 100% vested in
Company matching contributions seven years from their date of hire, or
at the time of death, disability or retirement, provided the person has
reached normal retirement age. Participants vest in profit sharing
contributions 100% after five years from their date of hire.
PLAN TERMINATION:
While the Company has not expressed any intent to discontinue the Plan,
it is free to do so at any time. If such discontinuance results in the
termination of the Plan, all accounts shall become fully vested and
nonforfeitable. The Company shall receive from the Plan the shares of
unallocated Musicland Common Stock in satisfaction of the note payable
to the Company. The Plan shall continue until all assets have been
distributed to the participants.
2. Summary of Significant Accounting Policies
BASIS OF ACCOUNTING:
The financial statements have been prepared under the accrual basis of
accounting.
VALUATION OF ASSETS:
Investments are valued at market value as reported by the Trustee as of
December 31, 1997 and Piper as of December 31, 1996, based on quoted
market prices of investments held by the funds. Net changes in the
market value of investments during the year are reported as unrealized
gains
10
<PAGE>
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN
NOTES TO FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
and losses. The realized gain or loss on investments sold is
determined based on the market value of the investment at the end of
the prior year or cost if purchased during the year. The net increase
in the market value of investments was as follows for the year ended
December 31, 1997:
Net realized gain on sale of investments $ 3,526,125
Unrealized gain 6,427,789
-------------
Net gain on investments $ 9,953,914
=============
The valuation and performance of the Plan's investment funds (the
"Funds") are subject to various risks such as interest rate, market
and credit. The investments held by the Funds, excluding the Musicland
Common Stock Fund, are made at the discretion of the investment
managers of the Funds and are subject to ERISA regulations. The Plan's
exposure to loss on investments is limited to the carrying value of
such investments. Except for the Musicland Common Stock Fund,
management believes that no significant concentration of credit risk
exists within each fund at December 31, 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
ADMINISTRATIVE COSTS:
Each participant is charged an annual trustee fee ranging from 0.30% to
1.12% of the funds deposited in each of the accounts except for the
Musicland Common Stock Fund, for which the Plan annual fee is $5,000.
Forfeitures are used or the Company pays for all other administrative
costs of the Plan, except for a $50 loan processing fee, which is paid
by participants. For the year ended December 31, 1997, the Company paid
administrative costs of $65,403 for the Plan.
3. Reconciliation of Financial Statements to Form 5500
As of December 31, 1997, the Plan had $4,722,264 of pending
distributions to participants who elected distributions from their
accounts. These amounts are recorded as a liability in the Plan's Form
5500; however, these amounts are not recorded as a liability in the
accompanying statement of net assets available for benefits in
accordance with generally accepted accounting principles.
11
<PAGE>
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN
NOTES TO FINANCIAL STATEMENTS (Continued)
3. Reconciliation of Financial Statements to Form 5500 (Continued)
The following table reconciles net assets available for benefits per
the financial statements to the Form 5500 as filed by the Plan for the
year ended December 31, 1997:
Increase in
Net Assets Net Assets
Benefits Benefits Available Available
Payable to Paid to for for
Participants Participants Benefits Benefits
Per financial ----------- ----------- ------------ -----------
statements $ - $ 2,670,514 $12,204,576 $25,149,219
Accrued benefit
payments at
December 31, 1997 (4,722,264) 1,975,381 (1,975,381) (4,722,264)
----------- ----------- ------------ ----------
Per Form 5500 $(4,722,264) $ 4,645,895 $10,229,195 $20,426,955
=========== =========== ============ ===========
4. Tax Status
The Plan is a qualified plan under Section 401(a) of the Internal
Revenue Code (the "Code"). Pursuant to the favorable Internal Revenue
Service (the "IRS") determination letter dated April 10, 1997, the Plan
is exempt from Federal income taxes under Section 501(a) of the Code.
The Plan sponsor and legal counsel are of the opinion that the Plan
meets the IRS requirements and therefore continues to be tax exempt.
12
<PAGE>
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN
(Employer Identification Number: 41-1307776) (Plan Number: 002)
ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
As of December 31, 1997
Number Market
Description of Investment of Units Cost Value
- ------------------------------------------ ---------- ----------- ------------
Stable Value Fund 551,242 5,513,901 $ 5,579,115
Founders Balanced Fund 161,643 1,933,076 1,835,011
American Express Trust Equity Index Fund II* 23,250 582,573 603,214
Templeton Foreign Fund 147,872 1,467,546 1,471,497
Neuberger & Berman Partners Trust 5,206 98,872 90,904
IDS New Dimensions Fund [Y]* 464,874 11,666,361 11,094,043
Franklin Small Cap Growth Fund 4,694 106,864 107,814
Musicland Common Stock Fund* 1,165,849 10,298,431 9,964,078
Loans to Participants, at interest
rates ranging from 4% to 11% 914,999
------------
TOTAL INVESTMENTS $ 31,660,675
============
* Party in interest to the Plan.
13
<PAGE>
<TABLE>
<CAPTION>
Schedule II
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN
(Employer Identification Number: 41-1307776) (Plan Number: 002)
ITEM 27d - SCHEDULE OF REPORTABLE TRANSACTIONS
For the Year Ended December 31, 1997
Number of Number Value of Value of Cost of Net Gain
Description of Investment Purchases of Sales Purchases Sales Assets Sold (Loss)
- ---------------------------------------- ------------ ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Collective Stable Asset Fund 13 44 $ 375,567 $ 1,279,545 $ 1,095,199 $ 184,346
Income Fund of America 73 84 486,754 2,136,723 1,843,189 293,534
Aim Charter Fund 84 80 778,269 5,344,902 3,993,117 1,351,785
American Century Growth Investors 70 89 798,827 7,537,241 5,878,024 1,659,217
Vanguard Index 500 Fund 65 21 478,235 601,144 546,252 54,892
Founders Balanced Fund 15 7 1,945,258 12,072 12,182 (110)
Templeton Foreign Fund 83 72 547,892 247,107 217,598 29,509
IDS New Dimensions Fund [Y]* 14 10 11,938,682 276,030 272,320 3,710
Musicland Common Stock Fund* 59 55 544,610 270,786 655,513 (384,727)
</TABLE>
* Party in interest to the Plan.
14
