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, 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 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 March 12, 1999 was approximately $340,250,739 based on the
closing stock price of $10 1/16 on the New York Stock Exchange on such date
(only directors and executive officers of the Registrant are considered
affiliates for this calculation).
The Registrant had 36,065,271 shares of common stock outstanding on
March 12, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held May 10, 1999 (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, 1998.
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 [xvii]
4.1(a) - 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 [ii]
4.1(b) - First Supplemental Indenture dated as of June 13,
1997 to the Senior Subordinated Note Indenture [xiii]
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 [iii]
4.2(b) - Amendment No. 1 dated as of February 28, 1995 to
the Credit Agreement [vii]
4.2(c) - Amendment No. 2 dated as of April 9, 1996 to the
Credit Agreement [ix]
4.2(d) - Amendment No. 3 dated as of October 18, 1996 to the
Credit Agreement [x]
4.2(e) - Waivers and Agreements under Credit Agreement dated
as of March 7, 1997 to the Credit Agreement [xi]
4.2(f) - Waivers and Agreements under Credit Agreement dated
as of May 19, 1997 to the Credit Agreement [xiii]
4.2(g) - Amendment No. 4 and Waiver dated as of June 16,
1997 to the Credit Agreement [xiii]
4.2(h) - Amendment No. 5 dated as of March 17, 1998 to the
Credit Agreement [xvi]
4.3(a) - 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 [xiii]
4.3(b) - 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 [xiii]
4.3(c) - Warrant and Registration Rights Agreement dated as
of June 16, 1997 among MSC and the Investors
listed therein [xiii]
4.4 - Rights Agreement dated as of March 14, 1995, between
MSC and Norwest Bank Minnesota, National Association,
as Rights Agent [iv]
4.5(a) - Indenture including Form of Note dated as of April 6,
1998 between MGI, as Issuer, MSC, as Guarantor, and
Bank One, N.A., as Trustee [xiv]
4.5(b) - Registration Rights Agreement dated as of April 6,
1998 by and among MGI, MSC, as Guarantor, and
Donaldson, Lufkin & Jenrette Securities Corporation,
BT Alex Brown Incorporated, and NationsBanc
Montgomery Securities LLC, as Intitial Purchasers [xiv]
*10.1(a) - Subscription Agreement among MSC and the Management
Investors [v]
*10.1(b) - Form of amendment to Management Subscription Agreement [i]
*10.2 - Form of Registration Rights Agreement among MSC, DLJ
and the Management Investors [vi]
*10.3 - 1988 Stock Option Plan, as amended [i]
*10.4 - Stock Option Plan for Unaffiliated Directors of MSC,
as amended [xiii]
*10.5 - 1992 Stock Option Plan [i]
2
<PAGE>
Exhibit Sequential
No. Description Page No.
- ----------- --------------------------------------------------- ----------
*10.6 - Musicland Stores Corporation 1994 Employee Stock
Option Plan [vii]
*10.7 - Musicland Stores Corporation 1998 Stock Incentive
Plan [xvi]
*10.8 - Management Incentive Plan dated as of January 1,
1998 [xv]
*10.9(a) - Long Term Incentive Plan dated as of January 1, 1996 [xi]
*10.9(b) - Long Term Incentive Plan dated as of January 1, 1998 [xv]
*10.10 - Executive Officer Salary Continuation Plan dated as
of March 10, 1997 [xii]
*10.11 - The Musicland Group, Inc. Supplemental Executive
Retirement Plan adopted as of October 26, 1998 [xix]
*10.12(a) - Employment Agreement with Mr. Eugster [v]
*10.12(b) - Form of amendment to Employment Agreement with Mr.
Eugster [i]
*10.12(c) - Amendment No. 2 to Employment Agreement with Mr.
Eugster [viii]
*10.13(a) - Change of Control Agreement with Mr. Eugster [v]
*10.13(b) - Form of amendment to Change of Control Agreement
with Mr. Eugster [i]
*10.13(c) - Amendment No. 2 to Change of Control Agreement with
Mr. Eugster [viii]
*10.13(d) - Amendment No. 3 to Change of Control Agreement with
Mr. Eugster [xi]
*10.14 - Form of Executive Severence Agreement with Mr.
Wachsman [xi]
*10.15 - Change of Control Agreement with Mr. Wachsman [xii]
*10.16(a) - Form of Employment Agreement with Messrs. Benson
and Ross [v]
*10.16(b) - Amendment to Employment Agreement with Mr. Benson [xi]
*10.16(c) - Amendment to Employment Agreement with Mr. Ross [xi]
*10.17(a) - Change of Control Agreement with Messrs. Benson and
Ross [v]
*10.17(b) - Amendment No. 1 to Change of Control Agreement with
Mr. Benson [xi]
*10.17(c) - Amendment No. 1 to Change of Control Agreement with
Mr. Ross [xi]
11 - Statement re computation of per share earnings [xviii]
21 - Subsidiaries of MSC [xix]
23 - Consent of Independent Public Accountants ___
27 - Financial Data Schedules [xix]
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 MGI's Registration Statement covering 9%
Senior Subordinated Notes initially filed with the Commission on May
19, 1993 (Commission File No. 33-62928).
[iii] 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).
[iv] 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.
[v] 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).
3
<PAGE>
[vi] 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).
[vii] 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).
[viii] 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).
[ix] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1996 filed with the Commission on
May 10, 1996 (Commission File No. 1-11014).
[x] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1996 filed with the Commission
on November 13, 1996 (Commission File No. 1-11014).
[xi] 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.)
[xii] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1997 filed with the Commission on
May 14, 1997 (Commission File No. 1-11014).
[xiii] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1997 filed with the Commission on
August 13, 1997 (Commission File No. 1-11014).
[xiv] Incorporated by reference to MGI's Registration Statement on Form S-4
covering 9 7/8 % Senior Subordinated Notes initially filed with the
Commission on April 24, 1998 (Commission File No. 333-50951).
[xv] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1998 filed with the Commission on
May 12, 1998 (Commission File No. 1-11014).
[xvi] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1998 filed with the Commission on
August 12, 1998 (Commission File No. 1-11014).
[xvii] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1998 filed with the Commission
on November 13, 1998 (Commission File No. 1-11014).
[xviii] The requirements of this exhibit are met by Note 1 and Note 4 of Notes
to Consolidated Financial Statements.
[xix] Previously filed.
* Indicates Management Contract or Compensatory Plan or Agreement
required to be filed as an Exhibit to this form.
4
<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 28, 1999
--------------------------
5
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated June 3, 1999 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, 333-51401 and 333-68275.
Minneapolis, Minnesota,
June 28, 1999
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, 1998
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, 1998 and 1997
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, 1998 4
Statement of Net Assets Available for Benefits as of December 31, 1997 5
Statement of Changes in Net Assets Available for Benefits for the Year
Ended December 31, 1998 6
Notes to Financial Statements 7
Schedule I - Item 27a - Schedule of Assets Held for Investment
Purposes as of December 31, 1998 13
Schedule II - Item 27d - Schedule of Reportable Transactions for the
Year Ended December 31, 1998 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, 1998 and
1997, and the related statement of changes in net assets available for benefits
for the year ended December 31, 1998. These financial statements are the
responsibility of the Plan's management. Our responsibility is to express an
opinion on these financial statements 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, 1998 and 1997, and the
changes in net assets available for benefits for the year ended December 31,
1998, in conformity with generally accepted accounting principles.
Our audits were performed 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 the
purpose 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. These supplemental
schedules are the responsibility of the Plan's management. The supplemental
schedules have been subjected to the auditing procedures applied in the audits
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 3, 1999
3
<PAGE>
<TABLE>
<CAPTION>
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
As of December 31, 1998
AET Neuberger Franklin
AET Founders Equity Templeton & Berman IDS New Small Cap
Income Balanced Index Foreign Partners Dimensions Growth
Fund II Fund Fund II Fund Trust Fund [Y] Fund
----------- ----------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments, at
market value:
Common/
collective
trust funds $ 5,557,808 $ - $1,688,470 $ - $ - $ - $ -
Mutual funds - 2,169,029 - 1,457,549 550,769 13,260,054 632,481
----------- ----------- ---------- ---------- ---------- ----------- -----------
Total
investments 5,557,808 2,169,029 1,688,470 1,457,549 550,769 13,260,054 632,481
----------- ----------- ---------- ---------- ---------- ----------- -----------
Interest income
receivable 629 381 421 215 108 1,890 186
Contributions
receivable:
Employee
contributions 12,054 8,258 8,562 5,739 4,668 31,371 5,258
Employer
contributions 215,652 28,991 18,999 15,341 7,937 80,582 8,561
----------- ----------- ---------- ---------- ---------- ----------- -----------
Total
contributions
receivable 227,706 37,249 27,561 21,080 12,605 111,953 13,819
----------- ----------- ---------- ---------- ---------- ----------- -----------
Participant
loan repayments
(withdrawals) 1,417 859 948 483 244 4,259 420
----------- ----------- ---------- ---------- ---------- ----------- -----------
Total assets 5,787,560 2,207,518 1,717,400 1,479,327 563,726 13,378,156 646,906
Liabilities
Administrative
expenses payable 16,136 - - - - - -
Interest payable - - - - - - -
Note payable - - - - - - -
----------- ----------- ---------- ---------- ---------- ----------- -----------
Total
liabilities 16,136 - - - - - -
----------- ----------- ---------- ---------- ---------- ----------- -----------
Net assets
available for
benefits $ 5,771,424 $ 2,207,518 $1,717,400 $1,479,327 $ 563,726 $13,378,156 $ 646,906
=========== =========== ========== ========== ========== =========== ===========
<PAGE>
<CAPTION>
Musicland Common Stock
------------------------ Loans to
Allocated Unallocated Participants TOTAL
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Investments, at
market value:
Common/
collective
trust funds $ - $ - $ - $ 7,246,278
Mutual funds 9,042,699 11,224,212 1,319,655 39,656,448
----------- ----------- ----------- -----------
Total
investments 9,042,699 11,224,212 1,319,655 46,902,726
----------- ----------- ----------- -----------
Interest income
receivable 499 - - 4,329
Contributions
receivable:
Employee
contributions 6,932 - - 82,842
Employer
contributions 43,938 1,594,599 - 2,014,600
----------- ----------- ----------- -----------
Total
contributions
receivable 50,870 1,594,599 - 2,097,442
----------- ----------- ----------- -----------
Participant loan
repayments
(withdrawals) 1,124 - (9,754) -
----------- ----------- ----------- -----------
Total assets 9,095,192 12,818,811 1,309,901 49,004,497
Liabilities
Administrative
expenses payable - - - 16,136
Interest payable - 594,851 - 594,851
Note payable - 6,998,239 - 6,998,239
----------- ----------- ----------- -----------
Total
liabilities - 7,593,090 - 7,609,226
----------- ----------- ----------- -----------
Net assets
available for
benefits $ 9,095,192 $ 5,225,721 $ 1,309,901 $41,395,271
=========== =========== =========== ===========
</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, 1997
AET Neuberger Franklin
Stable Founders Equity Templeton & Berman IDS New Small Cap
Value Balanced Index Foreign Partners Dimensions Growth
Fund Fund Fund II Fund Trust Fund [Y] Fund
----------- ----------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments, at
market value:
Common/
collective
trust funds $ 5,579,115 $ - $ 603,214 $ - $ - $ - $ -
Mutual funds - 1,835,011 - 1,471,497 90,904 11,094,043 107,814
----------- ----------- ---------- ---------- ---------- ----------- -----------
Total
investments 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 $ 5,727,817 $ 1,977,757 $ 741,178 $1,479,608 $ 91,677 $11,131,792 $ 108,708
benefits =========== =========== ========== ========== ========== =========== ===========
<PAGE>
<CAPTION>
Musicland Common Stock
------------------------ Loans to
Allocated Unallocated Participants TOTAL
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Investments, at
market value:
Common/
collective
trust funds $ - $ - $ - $ 6,182,329
Mutual funds 3,863,113 6,100,965 914,999 25,478,346
----------- ----------- ------------ -----------
Total
investments 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 $ 3,868,659 $ (897,274) $ 919,297 $25,149,219
benefits =========== =========== =========== ===========
</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, 1998
AET Neuberger Franklin
Stable AET Founders Equity Templeton & Berman IDS New Small Cap
Value Income Balanced Index Foreign Partners Dimensions Growth
Fund Fund II Fund Fund II Fund Trust Fund [Y] Fund
----------- ----------- ---------- ---------- ---------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest and
dividends $ - $ - $ 122,140 $ - $ 158,435 $ 13,781 $ 769,924 $ 10,453
Net gain (loss)
on investments 267,054 37,915 137,405 298,715 (232,409) 1,347 2,224,403 (9,275)
CONTRIBUTIONS:
Employee 325,118 58,690 254,243 252,722 202,179 122,697 1,057,775 120,028
Employer 33,797 215,652 (81,875) (99,610) 27,230 14,088 143,033 15,196
INTERFUND
TRANSFERS (5,771,670) 5,522,450 65,061 628,535 (7,257) 333,334 (1,073,628) 410,758
BENEFITS PAID
TO PARTICIPANTS (502,877) (37,379) (183,162) (86,676) (141,059) (9,359) (742,554) (9,933)
ADMINISTRATIVE
EXPENSES (102,973) (38,347) (965) (821) (154) (3) (1,099) (8)
INTEREST EXPENSE - - - - - - - -
LOANS TO
PARTICIPANTS,
NET OF REPAYMENTS
AND FORFEITURES 23,734 12,443 (83,086) (16,643) (7,246) (3,836) (131,490) 979
PRINCIPAL PMT ON
LOAN FROM TMG/
RELEASED SHARES - - - - - - - -
----------- ---------- ---------- --------- ---------- -------- --------- --------
CHANGE IN NET
ASSETS AVAILABLE
FOR BENEFITS (5,727,817) 5,771,424 229,761 976,222 (281) 472,049 2,246,364 538,198
NET ASSETS
AVAILABLE FOR
BENEFITS AT
BEGINNING OF
YEAR 5,727,817 - 1,977,757 741,178 1,479,608 91,677 11,131,792 108,708
----------- ---------- ---------- ---------- ---------- -------- ----------- --------
NET ASSETS
AVAILABLE FOR
BENEFITS AT
END OF YEAR $ - $5,771,424 $2,207,518 $1,717,400 $1,479,327 $563,726 $13,378,156 $646,906
============ ========== ========== ========== ========== ======== =========== ========
<PAGE>
<CAPTION>
Musicland Common Stock
------------------------- Loans to
Allocated Unallocated Participants TOTAL
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest and
dividends $ - $ - $ 118,329 $ 1,193,062
Net gain (loss)
on investments 4,847,259 5,892,385 - 13,464,799
CONTRIBUTIONS:
Employee 214,582 - - 2,608,034
Employer 79,147 1,594,599 - 1,941,257
INTERFUND
TRANSFERS (219,864) 230,610 (118,329) -
BENEFITS PAID
TO PARTICIPANTS (458,722) - (48,734) (2,220,455)
ADMINISTRATIVE
EXPENSES (1,425) - - (145,795)
INTEREST EXPENSE - (594,850) - (594,850)
LOANS TO
PARTICIPANTS,
NET OF REPAYMENTS
AND FORFEITURES (234,193) - 439,338 -
PRINCIPAL PMT ON
LOAN FROM TMG/
RELEASED SHARES 999,749 (999,749) - -
------------ ----------- ---------- -----------
CHANGE IN NET
ASSETS AVAILABLE
FOR BENEFITS 5,226,533 6,122,995 390,604 16,246,052
NET ASSETS
AVAILABLE FOR
BENEFITS AT
BEGINNING OF
YEAR 3,868,659 (897,274) 919,297 25,149,219
------------ ----------- ---------- -----------
NET ASSETS
AVAILABLE FOR
BENEFITS AT
END OF YEAR $ 9,095,192 $ 5,225,721 $1,309,901 $41,395,271
============ =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE>
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN
NOTES TO FINANCIAL STATEMENTS
1. Description of the 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.
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.
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 (8.5% at December
31, 1997 and 8.25% at December 31, 1998). 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.
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
7
<PAGE>
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Description of the Plan (Continued)
limit. Annual salary reduction contributions are limited to $9,500 for
nonhighly compensated employees, and 4% of the annual base pay up to
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 the Trustee. As of December
31, 1998, the investment funds were as follows:
1. American Express Trust ("AET") Income Fund II, 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.
7. Franklin Small Cap Growth Fund, an aggressive fund that
invests primarily in stocks of small capitalization growth
companies.
8
<PAGE>
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Description of the Plan (Continued)
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, 1997, the investment funds included all of the funds
described above, except for the AET Income Fund II, which replaced the
Stable Value Fund in November 1998.
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.
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.
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 the Company matching contributions over a
seven year graduated vesting schedule. Participants will be 100% vested
in the 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.
9
<PAGE>
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN
NOTES TO FINANCIAL STATEMENTS (Continued)
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, 1998 and 1997, 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 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 invesments was as follows for the year ended December
31, 1998:
Net realized gain on sale of investments $ 1,210,979
Net unrealized gain 12,253,820
-------------
Net gain on investments $ 13,464,799
=============
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. Management believes that no significant concentration
of credit risk exists within each fund at December 31, 1998.
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
10
<PAGE>
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN
NOTES TO FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
costs of the Plan, except for a $50 loan processing fee which is paid
by participants. For the year ended December 31, 1998, the Company paid
administrative costs of $5,608 for the Plan.
RECLASSIFICATIONS:
Certain 1997 amounts have been reclassified to conform to the 1998
presentations. These reclassifications had no effect on net assets
available for benefits as previously reported.
3. Reconciliation of Financial Statements to Form 5500
As of December 31, 1998, the Plan had $4,929,686 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.
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, 1998:
December 31,
1998 1997
------------- --------------
Net assets available for benefits per
the financial statements $ 41,395,271 $ 25,149,219
Accrued benefit payments (4,929,686) (4,722,264)
------------- --------------
Net assets available for benefits per
the Form 5500 $ 36,465,585 $ 20,426,955
============= ==============
The following is a reconciliation of benefits paid to participants per
the financial statements to the Form 5500:
Year ended
December 31, 1998
------------------
Benefits paid to participants per the
financial statements $ 2,220,455
Add: Amounts currently payable at
December 31, 1998 4,929,686
Less: Amounts currently payable at
December 31, 1997 (4,722,264)
-----------------
Benefits paid to participants per the Form 5500 $ 2,427,877
=================
11
<PAGE>
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN
NOTES TO FINANCIAL STATEMENTS (Continued)
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>
Schedule I
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, 1998
Number Market
Description of Investment of Units Cost Value
- ----------------------------------- -------------- ----------- ------------
AET Income Fund II* 301,367 $ 5,520,284 $ 5,557,808
Founders Balanced Fund 177,935 2,134,162 2,169,029
AET Equity Index Fund II* 50,848 1,414,533 1,688,470
Templeton Foreign Fund 173,724 1,685,312 1,457,549
Neuberger & Berman Partners Trust 30,480 549,888 550,769
IDS New Dimensions Fund [Y]* 459,700 11,681,364 13,260,054
Franklin Small Cap Growth Fund 28,023 616,473 632,481
Musicland Common Stock* 1,113,500 9,778,781 20,266,911
Loans to Participants, at interest
rates ranging from 8% to 12% 1,319,655
------------
TOTAL INVESTMENTS $ 46,902,726
============
* 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, 1998
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>
Stable Value Fund 80 126 $ 1,996,455 $6,729,406 $6,394,811 $ 334,595
AET Income Fund II* 11 13 5,653,396 133,510 133,112 398
AET Equity Index Fund II* 123 81 1,097,370 309,234 265,409 43,825
Neuberger Berman Partners Trust 112 41 594,201 135,616 143,185 (7,569)
IDS New Dimensions Fund [Y]* 83 155 2,016,538 2,073,704 2,001,535 72,169
Musicland Common Stock* 88 255 1,115,544 1,548,181 758,961 789,220
</TABLE>
* Party in interest to the Plan.
14
