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[LOGO]
10400 YELLOW CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343
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NOTICE OF 1999 ANNUAL MEETING OF SHAREHOLDERS
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TIME......................... 11:00 a.m. (Central Daylight Time) on Monday, May 10, 1999
PLACE........................ Company Headquarters
10400 Yellow Circle Drive
Minnetonka, Minnesota
ITEMS OF BUSINESS............ (1) To elect three Class I directors to the Board of
Directors to serve for three-year terms.
(2) To approve the Alternate Incentive Plan for Designated
Senior Officers.
(3) To approve Arthur Andersen LLP as independent auditors
for the 1999 fiscal year.
(4) To transact such other business as may properly come
before the Annual Meeting.
RECORD DATE.................. You can vote if you are a shareholder of record on March 12,
1999.
ANNUAL REPORT................ The 1998 Annual Report to Shareholders, which is not a part
of the proxy soliciting material, is enclosed.
PROXY VOTING................. It is important that your shares be represented and voted at
the Annual Meeting. Please complete, date and sign the
enclosed proxy card and return it promptly in the envelope
provided. All shareholders are cordially invited to attend
the Annual Meeting, and, if you do attend, you may revoke
your proxy and vote in person.
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SIGNING AND PROMPTLY RETURNING THE PROXY WILL ASSURE YOUR
REPRESENTATION AT THE ANNUAL MEETING
By Order of the Board of Directors
HEIDI M. HOARD
Secretary
Minnetonka, Minnesota
March 29, 1999
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MUSICLAND STORES CORPORATION
10400 YELLOW CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343
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PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 10, 1999
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SOLICITATION OF PROXIES AND VOTING RIGHTS
These proxy materials are delivered to you in connection with the
solicitation by the Board of Directors of Musicland Stores Corporation, a
Delaware corporation (the "Company"), of proxies to be voted at the 1999 Annual
Meeting of Shareholders (the "Annual Meeting") or at any adjournment or
postponement thereof. The Company is mailing this proxy statement and the
accompanying proxy card to shareholders starting on or about March 29, 1999.
VOTING OF PROXIES
If you give a proxy pursuant to this solicitation, the shares represented
will be voted at the Annual Meeting and, if a choice is specified on the proxy
card, will be voted in accordance with such specification. In the event no
choice is specified on the proxy card, the shares represented will be voted: FOR
the nominees for directors set forth herein; FOR approval of the Alternate
Incentive Plan for Designated Senior Officers; and FOR the ratification of the
appointment of Arthur Andersen LLP as independent auditors. If any other matters
properly come before the Annual Meeting, or if any of the persons named to serve
as directors should decline or be unable to serve, the persons named in the
proxy card will vote on the same in accordance with their discretion. At the
date this proxy statement went to press, the Company did not know of any other
matter to be raised at the Annual Meeting.
Completing a proxy card now will not limit your right to vote at the Annual
Meeting if you later decide to attend in person and revoke your proxy as
outlined below. If your shares are held in the name of a broker, bank or other
holder of record, you must obtain a proxy, executed in your favor, from the
holder of record to be able to vote at the Annual Meeting.
REVOCATION OF PROXIES
Any proxy may be revoked by the person giving it before it is voted by:
- delivering to the Secretary of the Company, at the address listed at the
beginning of this Proxy Statement, a written notice of revocation, which
must be signed in exactly the same manner as the Proxy;
- filing with the Secretary of the Company a duly executed proxy which bears
a later date; or
- delivering the written, signed revocation to the election inspectors at
the Annual Meeting.
Revocations and subsequent Proxies will be honored only if received at the
Company's offices on or before May 7, 1999, or delivered to the election
inspectors at the Annual Meeting prior to the convening thereof. Presence at the
Annual Meeting alone will not revoke the Proxy.
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SHAREHOLDERS ENTITLED TO VOTE
The Board of Directors has fixed March 12, 1999 as the record date (the
"Record Date") for the determination of the shareholders entitled to notice of
and to vote at the Annual Meeting. At the close of business on the Record Date
there were outstanding 36,065,271 shares of the Company's common stock, $.01 par
value (the "Common Stock"), which is the only class of equity securities of the
Company currently outstanding.
LIST OF SHAREHOLDERS
A complete list of the shareholders entitled to vote at the Annual Meeting
will be available at the Annual Meeting and during the ten day period preceding
the Annual Meeting at 10400 Yellow Circle Drive, Minnetonka, Minnesota in the
office of the Company's Secretary. Any shareholder may examine the list during
ordinary business hours for any purpose germane to the Annual Meeting.
VOTE REQUIRED AND METHOD OF VOTING
Each share of Common Stock is entitled to one vote. There are no cumulative
voting rights with respect to the election of directors. The presence, in person
or by proxy, of the holders of a majority of the outstanding shares of Common
Stock is necessary to constitute a quorum at the Annual Meeting. Any holder of
shares represented by a proxy which has been returned properly signed by the
shareholder of record will be considered present for the purpose of determining
whether a quorum exists even if such proxy contains abstentions or broker
non-votes.
Directors are elected by a majority of the votes cast, in person or by
proxy, at the Annual Meeting. If you do not wish to have your shares voted for a
particular nominee, you may withhold authority as indicated on the proxy card.
For all other matters, approval requires the affirmative vote by holders of
at least a majority of the shares voting on such matter. Proxies submitted by
brokers, banks and other such holders of record which include "broker non-votes"
with respect to any matter brought to a vote will not be counted as shares voted
on the particular matter as to which the broker non-vote is indicated. A broker
non-vote occurs when a nominee holding shares for a beneficial owner does not
vote on a particular matter because the nominee does not have discretionary
voting power for that particular matter and has not received voting instructions
from the beneficial owner. Therefore, broker non-votes will have no effect when
determining whether the requisite vote has been obtained to pass a particular
matter. However, proxies indicating "abstain" with respect to any matter brought
to a vote will be counted as shares voted on the particular matter as to which
the abstention is indicated and will have the effect of voting against the
matter. You may also vote against a matter by marking "against" on the proxy
card.
SHAREHOLDER ACCOUNT MAINTENANCE
The Company's transfer agent is Norwest Bank Minnesota, N.A., Shareowner
Services, South St. Paul, Minnesota. All communications concerning accounts of
shareholders of record, including address changes, name changes, inquiries as to
requirements to transfer shares, lost certificates, and similar issues can be
handled by calling the Norwest Shareowner Services toll free number
1-800-468-9716 or contacting Norwest via e-mail, [email protected]. For
additional information about the Company, shareholders can visit its website at
www.musicland.com.
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PROPOSAL NO. 1
ELECTION OF DIRECTORS
The Company's Restated Certificate of Incorporation provides that the Board
of Directors shall consist of not more than nine nor fewer than five directors.
The Board of Directors has established the number of directors to serve on the
Board as nine. The directors are divided into three classes, designated as Class
I, Class II and Class III, respectively, with staggered three-year terms of
office. At each annual meeting of shareholders, directors who are elected to
succeed the class of directors whose terms expire at that meeting will be
elected for three-year terms. Vacancies may be filled by a majority of the
directors then in office, and the directors so chosen hold office until the next
election of the class to which such directors belong. All current directors were
previously elected by the Company's shareholders, except Terry T. Saario who was
elected by action of the Board of Directors.
At this Annual Meeting, three Class I directors will be elected to hold
office for a term expiring at the annual meeting of shareholders to be held in
2002, or until their successors have been elected and qualify, or until their
death, resignation or removal, if earlier.
The three directors in Class I whose terms are expiring, Kenneth F. Gorman,
Josiah O. Low, III and Terry T. Saario, have been nominated by the Board of
Directors for reelection. Each of the nominees has consented to serve as
director, if elected, and the Board of Directors has no reason to believe that
any of the nominees will be unable to serve. THE BOARD OF DIRECTORS RECOMMENDS A
VOTE FOR THE ELECTION OF THESE NOMINEES. In the absence of instructions to the
contrary, shares represented by all proxies will be voted for the election of
all such nominees. If for any reason any nominee is unable to serve, the Board
of Directors may designate a substitute nominee, in which event the shares
represented by the proxies will be voted for such substitute nominee, unless an
instruction to the contrary is indicated on the proxy card.
All directors of the Company also serve on the Board of Directors of The
Musicland Group, Inc. ("MGI"), the Company's operating subsidiary.
The following biographical information has been furnished by the nominees
and continuing directors:
NOMINEES FOR ELECTION
KENNETH F. GORMAN, age 59
Mr. Gorman has been a director of the Company since November 1988. He has
been in the merchant banking and private investment fields since 1987 as an
owner and Managing Director of Apollo Partners L.L.C. From 1970 until 1987, he
was in the communications/entertainment business as a director and Executive
Vice President of Viacom International Inc. Mr. Gorman is also a director of New
Star Media Inc., Doane Agricultural Services, Inc. and IDC Services, Inc.
JOSIAH O. LOW, III, age 59
Mr. Low has been a director of the Company since July 1995. He has been an
investment banker with Donaldson, Lufkin & Jenrette Securities Corporation since
1985, where he is currently a Managing Director. Previously he spent 24 years
with Merrill Lynch, Pierce, Fenner and Smith. Mr. Low is also a director of
Centex Development Corporation, St. Laurent Paperboard Inc. and Hvide Marine
Corporation.
TERRY T. SAARIO, age 57
Dr. Saario has been a director of the Company since February 1998.
Currently, Dr. Saario is a partner of Bravo LLC, a restaurant holding company.
From 1984 to 1996, Dr. Saario served as President
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of the Northwest Area Foundation, a regional charitable and civic organization.
Previously, she held positions of Vice President of Community Relations at the
Pillsbury Company, Deputy Assistant Secretary in the United States Department of
Education and Program Officer at the Ford Foundation.
CONTINUING CLASS II DIRECTORS (terms expiring in 2000)
KEITH A. BENSON, age 54
Mr. Benson has been a director of the Company since January 1992 and served
a prior term as a director from August 1988 until December 1989. Mr. Benson was
elected Vice Chairman and Chief Financial Officer on August 4, 1997 and, prior
to that, was President of the Mall Stores Division. Mr. Benson has been an
executive officer of the Company since 1988 and has held various positions,
including President of the Music Stores Division, Vice Chairman and Chief
Financial Officer and Executive Vice President and Chief Financial Officer. Mr.
Benson joined MGI in 1980 as its Controller and also served successively as its
Senior Vice President and Chief Financial Officer, Senior Vice President and
Chief Financial Officer for the Retail Division and Senior Vice President of
Finance and Administration for the Retail Division. Previously he was with The
May Company and Dayton Hudson Corporation. Mr. Benson is also a director of
Premium Wear, Inc.
GILBERT L. WACHSMAN, age 51
Mr. Wachsman has been a director of the Company since May 1997. He became
the Vice Chairman of the Company on July 17, 1996. Prior to joining the Company,
Mr. Wachsman held the position of Senior Vice President Hardlines at Kmart
Corporation from 1995 to 1996. From 1990 to 1995, Mr. Wachsman was a management
consultant for major retail, distribution and manufacturing companies. Prior to
that, he was Chief Executive Officer at Lieberman Enterprises, Inc., President
and Chief Executive Officer for Child World Inc. and Senior Vice President of
Marketing/Merchandising for Target Stores.
TOM F. WEYL, age 55
Mr. Weyl has been a director of the Company since December 1992. He is the
President/Chief Creative Officer at Martin/Williams Advertising, Minneapolis and
has been with that company since 1973. Mr. Weyl is a director of River Road
Productions. He is a past Chairman of the Board of Directors of the Twin Cities
Council of the American Association of Advertising Agencies.
CONTINUING CLASS III DIRECTORS (terms expiring 2001)
JACK W. EUGSTER, age 53
Mr. Eugster has been a director of the Company since August 1988. He has
been the Chairman of the Board, President and Chief Executive Officer of MGI
since August 1986 and has served the Company in the same capacity since its
acquisition of MGI in August 1988. Mr. Eugster joined MGI in 1980 as Executive
Vice President and General Manager and has held the positions of President and
Chairman of the Retail Division. Previously, he was with The Gap Stores and
Target Stores. Mr. Eugster is also a director of Damark International, Inc.,
Donaldson Company, Inc., MidAmerican Energy Company, ShopKo Stores, Inc. and
Jostens, Inc. He is a director and past president of the National Association of
Recording Merchandisers and a past chairman of the Country Music Association.
WILLIAM A. HODDER, age 67
Mr. Hodder has been a director of the Company since July 1995. He is the
retired Chairman and Chief Executive Officer of Donaldson Company, Inc., a
manufacturer of filtration devices. Mr. Hodder
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joined Donaldson Company in 1973 as its President. Previously, he spent seven
years in retailing with Dayton Hudson Corporation and held various positions,
including President of Target Stores. Mr. Hodder is a director of Wells Fargo &
Company, ReliaStar Financial Corp. and SUPERVALU INC.
MICHAEL W. WRIGHT, age 60
Mr. Wright has been a director of the Company since January 1989. He has
been in the food distribution and retail business since 1977 when he joined
SUPERVALU INC. as Senior Vice President. He was elected President and Chief
Operating Officer of SUPERVALU INC. in 1978 and became its Chief Executive
Officer in June 1981. He assumed the additional responsibilities of Chairman of
the Board in October 1982. In addition to SUPERVALU INC., Mr. Wright is a
director of Cargill, Incorporated, Honeywell Inc. and Wells Fargo & Company. He
also serves as Chairman of the Food Marketing Institute.
COMPENSATION OF DIRECTORS
In 1998, all non-employee directors of the Company received as compensation
for their services to the Company and MGI, in addition to reimbursement for
out-of-pocket expenses in connection with attending Board and committee
meetings, an annual fee of $20,000, payable in five installments, and a meeting
fee of $1,250 for regularly scheduled meeting days and $500 for any short board
or committee meetings, held in person or by telephone, not on the date of a
regularly scheduled meeting. The non-employee directors are currently Messrs.
Gorman, Hodder, Low, Weyl and Wright and Dr. Saario.
STOCK OPTION PLAN FOR UNAFFILIATED DIRECTORS
All non-employee members of the Board of Directors participate in the 1998
Stock Incentive Plan which was adopted in May 1998 (the "1998 Plan").
Previously, Messrs. Hodder, Gorman, Weyl and Wright and Dr. Saario participated
in the Stock Option Plan for Unaffiliated Directors (the "Directors Plan") which
was adopted in 1988 and expired in November 1998 (the "1988 Plan"). Mr. Low did
not participate in the 1988 Plan because of his affiliation with Donaldson,
Lufkin & Jenrette, Inc., which was a large institutional equity investor in the
Company in 1988. The Board has established that each non-employee director will
receive an annual grant of a stock option to purchase 3,000 shares of Common
Stock on January 1 of each year, subject to availability of shares under the
1998 Plan. Any new directors will receive an initial grant as determined by the
Board at the time of their joining the Board. All grants have an exercise price
equal to the fair market value on the day of grant and a term of ten years and
are fully vested and exercisable six months after the date of the grant. All
unvested portions of an option are immediately forfeited upon resignation of a
director or failure to stand for reelection. Stock options are not transferable
other than by will or by the laws of descent and distribution. Grants awarded
prior to June 12, 1997 were exercisable six months after the date of grant but
vested at the rate of 20% per year over a period of five years. Participants
have agreed to sell, at the Company's option, any shares received upon the
exercise of an unvested option back to the Company at the exercise price if the
director's service terminates for any reason prior to the time of vesting. As of
the Record Date, Messrs. Gorman, Weyl and Wright each had options to purchase
19,000 shares of Common Stock at exercise prices that range from $1.875 to
$12.50 per share, Mr. Hodder had options to purchase 14,000 shares at exercise
prices ranging from $1.875 to $12.25 per share, Dr. Saario had options to
purchase 6,000 shares at exercise prices ranging from $8.00 to $12.25 per share,
and Mr. Low had options to purchase 6,000 shares at exercise prices ranging from
$12.25 to $13.75 per share.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During the fiscal year ended December 31, 1998 ("Fiscal Year 1998"), the
Board of Directors held five meetings. All of the directors attended more than
75% of the meetings of the Board and the committees on which they served.
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The Board of Directors has three standing committees, the Executive
Committee, the Compensation Committee and the Audit Committee.
The Executive Committee, which is currently composed of Messrs. Eugster
(Chairman), and Wright, exercises the powers of the Board of Directors during
intervals between Board meetings and acts as an advisory body to the Board by
reviewing various matters prior to their submission to the Board. The Executive
Committee did not meet in Fiscal Year 1998.
The Compensation Committee reviews and makes recommendations to the Board of
Directors regarding salaries, compensation, incentive bonuses and benefits of
executive officers and other key employees of the Company and grants all stock
options to employees under the Company's employee stock option plans. It also
functions as the nominating committee by locating and recommending candidates to
fill vacancies on the Board of Directors. The Compensation Committee is
currently composed of Messrs. Hodder (Chairman), Weyl and Wright. The
Compensation Committee met four times in Fiscal Year 1998. See "Report of the
Compensation Committee on Executive Compensation."
The Audit Committee (i) reviews the internal and external financial
reporting and controls of the Company, (ii) reviews and discusses with the
Company's independent auditors the scope of the independent audit and (iii)
considers comments by the auditors regarding internal controls and accounting
procedures and management's response to those comments. The Audit Committee also
recommends the appointment of the independent auditors for the Company. The
Audit Committee currently consists of Messrs. Gorman (Chairman) and Low and Dr.
Saario. The Audit Committee met twice in Fiscal Year 1998.
PROPOSAL NO. 2
APPROVAL OF ALTERNATE INCENTIVE PLAN
FOR DESIGNATED SENIOR OFFICERS
The shareholders are asked to consider and vote upon a proposal to approve
the Musicland Stores Corporation Alternate Incentive Plan for Designated Senior
Officers (the "Plan"). The principal provisions of the Plan are described below.
The Plan is intended to qualify compensation paid thereunder as "qualified
performance based compensation" within the meaning of Section 162(m) of the
Internal Revenue Code (the "Code"). Section 162(m) generally places a $1 million
limit on the tax deduction allowable for compensation paid (or accrued for tax
purposes) with respect to each of the Company's chief executive officer and four
other highest-paid executives during a tax year unless the compensation meets
certain requirements. To the extent compensation, including base salary, annual
bonus, long-term incentive and other compensation, exceeds the $1 million limit,
the Company may not take a tax deduction for the excess. Section 162(m),
however, allows compensation which meets the requirements for being "performance
based" to be excluded in determining if the limit has been exceeded.
The Board of Directors has adopted the Plan, subject to and contingent upon
shareholder approval, in order to reconfigure the annual and long-term bonus
program for those senior officers whose compensation may be affected by the
Section 162(m) limit. It benefits the Company to have as much compensation as
possible excluded from the Section 162(m) limit. Section 162(m) requires
shareholder approval of the Plan. If the Plan is approved by shareholders, the
participants in the Plan will be eligible for annual and long-term bonuses under
the Plan and will not receive bonuses for the same periods under the Company's
existing incentive programs (See "Report of the Compensation Committee on
Executive Compensation"). If shareholders do not approve the Plan, no bonuses
will be paid under the Plan. The Board of Directors believes that adoption of
the Plan is in the best interests of the Company.
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Adoption of the Alternate Incentive Plan for Designated Senior Officers
requires the affirmative vote by holders of at least a majority of the shares
voting on such matter. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE
ADOPTION OF THE ALTERNATE PLAN FOR DESIGNATED SENIOR OFFICERS.
SUMMARY OF THE PLAN
ADMINISTRATION. The Plan is administered by the Compensation Committee
which will consist of not less than two directors (all of whom meet the Code
definition of "outside director"). The Plan will be interpreted and administered
in such a manner that all bonus payments under the Plan will qualify as
performance-based compensation under Section 162(m).
ELIGIBLE PARTICIPANTS. The Compensation Committee will designate
participants in the Plan each year to be the CEO and up to four other senior
officers of the Company who are likely to be "covered employees" (within the
meaning of Section 162(m)) for the relevant fiscal year. Participation in the
Plan will preclude participation in the Company's Management Incentive Plan and
Long Term Incentive Plan covering the same period. Messrs. Eugster, Wachsman,
Benson and Ross have been designated to participate in the Plan in 1999 if the
Plan receives shareholder approval.
FORMULA FOR DETERMINATION OF MAXIMUM PERFORMANCE AWARDS. Each fiscal year
will constitute a performance period for the annual portion of the bonus payable
under the Plan. For the long-term portion of the bonus payable under the Plan,
three consecutive fiscal year periods, beginning with 1999 to 2001, will
constitute the performance period with a new three-year period beginning each
year.
The performance goal for each annual performance period will be based on
achieving a pre-tax return on net assets employed ("RONAE") of 10%. The
performance goal for each long-term performance period will be based on
achieving an average annual pre-tax RONAE of 10% for the three-year period. If
the performance goal is not achieved, the bonus pool amount for the
corresponding performance period will not fund and no bonuses for that period
will be paid. After the end of each performance period, the Compensation
Committee will certify that the performance goal has been achieved.
The bonus pool for each annual performance period will be an amount equal to
4.9% of the Company's operating income for the fiscal year. The bonus pool for
each long-term performance period will be an amount equal to 1% of the Company's
cumulative operating income for the three-year performance period. For purposes
of determining operating income, extraordinary items, discontinued operations
and restructuring charges as reported by the Company in its financial statements
will not be taken into account.
The maximum bonus that can be paid to the CEO for any annual or long-term
performance period will equal 40% of the bonus pool for the applicable period.
The maximum bonus that can be paid to any other participant for any annual or
long-term performance period will equal 15% of the bonus pool for the applicable
period.
NEGATIVE DISCRETION. The Compensation Committee is not obligated to pay out
the maximum bonuses determined pursuant to the above formulas and will retain
sole negative discretion to reduce the amount of any bonus otherwise payable
under the Plan. In determining whether the share of any participant in the
applicable bonus pool will be reduced, the Compensation Committee will consider
those financial and individual performance factors that it determines to be
appropriate and in line with the Company's executive compensation philosophy and
past practices.
DISCONTINUATION OF PLAN AND AMENDMENTS. The Compensation Committee may
amend the Plan prospectively or terminate the Plan at any time and for any
reason without notice to any participant. No amendment to the Plan will require
shareholder approval unless such approval is required by Section 162(m).
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PRO FORMA BENEFITS UNDER THE PLAN
Because the payments under the Plan are determined by actual financial
performance of the Company, it is not possible to conclusively state the maximum
amount of benefits under the Plan for any performance period. Instead the
following table sets forth the maximum amounts determined under the formulas
described above for both the annual and long-term portions combined as if the
Plan had been in effect in 1998. In addition, the maximum amounts are subject to
reduction through the exercise of negative discretion by the Compensation
Committee as described above. Therefore the table also shows the actual bonuses,
annual and long-term combined, which were earned in 1998 under the terms of the
MIP and LTIP plans.
NEW PLAN BENEFITS
Alternate Incentive Plan for Designated Senior Officers
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MAXIMUM ALLOWED UNDER PLAN
NAME AND POSITION FORMULAS ($)(1) ACTUAL AMOUNTS($)(2)
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Jack W. Eugster, CEO...................................... $ 2,680,407 $ 1,150,500
Gilbert L. Wachsman, Vice Chairman........................ 1,005,153 568,601
Keith A. Benson, Vice Chairman............................ 1,005,153 443,153
Gary A. Ross, President................................... 1,005,153 406,462
Douglas M. Tracey, Senior Vice President.................. N/A(3) 179,928
Executive Group........................................... 5,695,866(3) 3,064,796
Non-Executive Director Group.............................. N/A(3) N/A
Non-Executive Officer Group............................... N/A(3) 2,608,633
</TABLE>
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(1) Maximum amount that could be paid based on achieving 1998 operating income
of $84,823,000 and a cumulative three year operating income of $254,469,000.
(2) Incentive amounts actually earned in 1998 based on meeting the Company goals
in the MIP and LTIP plans and achievement of individual goals. See "Report
of the Compensation Committee on Executive Compensation."
(3) Only Messrs. Eugster, Wachsman, Benson and Ross have been designated to
participate in the Plan in 1999.
PROPOSAL NO. 3
RATIFICATION OF APPOINTMENT OF AUDITORS
The Company's independent auditors for Fiscal Year 1998 were Arthur Andersen
LLP, independent public accountants. The Audit Committee of the Board of
Directors has considered the qualifications and experience of Arthur Andersen
LLP, and, based upon recommendation of the Audit Committee, the Board of
Directors has appointed them as independent auditors of the Company for the
current fiscal year which ends December 31, 1999 ("Fiscal Year 1999"). Although
the submission of this matter to the shareholders is not required by law, the
Board of Directors desires to obtain the shareholders' ratification of such
appointment. A resolution ratifying the appointment will be offered at the
Annual Meeting. If the resolution is not adopted, the adverse vote will be
considered as a direction to the Board to select other auditors. However,
because of the difficulty and expense of making any substitutions of auditors
for the fiscal year already in progress, it is contemplated that the appointment
for Fiscal Year 1999 will stand unless the Board finds other good reason for
making a change.
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It is expected that a representative of Arthur Andersen LLP will be present
at the Annual Meeting to respond to appropriate questions and to make a
statement if the representative so desires.
Ratification requires the affirmative vote by holders of at least a majority
of the shares voting on such matter. THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR THE RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS THE COMPANY'S
INDEPENDENT AUDITORS FOR FISCAL YEAR 1999.
COMMON STOCK OWNERSHIP OF
CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT
The following table provides information as to the beneficial ownership of
the Company's Common Stock as of March 12, 1999, or as of December 31, 1998 for
that information which is reported based upon Schedule 13G filings, by (i) each
person or group known by the Company to be the beneficial owner of more than 5%
of such Common Stock, (ii) each nominee and continuing director of the Company,
(iii) the Named Executive Officers (see "Summary Compensation Table"), and (iv)
all directors and executive officers as a group (13 persons). Beneficial
ownership has been determined for this purpose in accordance with Rule 13d-3 of
the Securities and Exchange Commission (the "SEC") under which a person is
deemed to be the beneficial owner of securities if he or she has or shares
voting power or dispositive power with respect to such securities or has the
right to acquire beneficial ownership of such securities within 60 days by
exercise of an option or otherwise. The persons named in the table have sole
voting and dispositive powers with respect to all shares of Common Stock unless
otherwise stated in the notes following the table.
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NAME OF BENEFICIAL OWNER, AMOUNT AND NATURE OF
INCLUDING ADDRESS BENEFICIAL OWNERSHIP PERCENT OF
OF OWNERS OF MORE THAN 5% OF COMMON STOCK COMMON STOCK (1)
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Alfred and Annie Teo, joint tenants (2) ................ 6,000,600(2) 16.7%
Alpha Industries, Inc.
Page & Schuyler Avenues
P.O. Box 808
Lyndhurst, NJ 07071
Barclays Global Investors, N.A. (3) .................... 1,986,912(3) 5.5%
45 Fremont Street
San Francisco, CA 94105
Jack W. Eugster ........................................ 1,624,040(4,5,6) 4.5%
Gary A. Ross ........................................... 608,306(4,5) 1.7%
Keith A. Benson ........................................ 520,610(4,5) 1.4%
Douglas M. Tracey ...................................... 108,394(4,5) *
Michael W. Wright ...................................... 61,000(5) *
Gilbert L. Wachsman .................................... 58,783(5) *
Josiah O. Low, III ..................................... 28,373(5) *
Tom F. Weyl ............................................ 22,000(5) *
Kenneth F. Gorman ...................................... 21,000(5) *
William A. Hodder ...................................... 15,030(5) *
Terry T. Saario ........................................ 3,000(5) *
All directors and executive officers as a group (13
persons) .............................................. 3,157,004(4,5,6) 8.5%
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- - ------------------------
* Less than 1%
(1) Based on 36,065,271 shares outstanding on March 12, 1999.
(2) Based on Schedule 13D, Amendment No. 8, dated August 31, 1998, filed jointly
by the following entities with the following holdings: 5,672,100 shares
beneficially owned by Alfred and Annie Teo as joint tenants with right of
survivorship; 10,000 shares by Alpha Industries, Inc. Retirement Plan,
Alfred Teo, Trustee; 26,600 shares by Alpha Technologies, Inc., a computer
network company with Alfred Teo as Secretary, Treasurer and Chairman of the
Board; and 291,900 shares by Lambda Financial Service Corp., a financial
services company with Alfred Teo as President, Treasurer and Chairman of the
Board.
(3) Based on Schedule 13G, dated February 12, 1999, filed by Barclays Global
Investors, N.A., 943112180, and Barclays Global Fund Advisors, both banks,
showing 1,983,047 shares beneficially owned by Barclays Global Investors
(only 1,664,647 shares with sole voting power) and 3,865 shares beneficially
owned by Barclays Global Fund Advisors.
(4) Of the shares listed, the following are Restricted Shares: 632,068 shares
for Mr. Eugster; 243,104 shares each for Messrs. Ross and Benson; 48,640 for
Mr. Tracey; and 1,188,984 for all directors and executive officers as a
group (13 persons including Messrs. Eugster, Ross, Benson and Tracey). See
"Certain Transactions -- Transactions with Management."
(5) Includes shares of Common Stock which may now be acquired pursuant to the
exercise of stock options as follows: Mr. Eugster, 421,800 shares; Mr. Ross,
115,000 shares; Mr. Benson, 153,534 shares; Mr. Wachsman, 58,334 shares; Mr.
Tracey, 53,566 shares; Messrs. Gorman, Weyl and Wright, 16,000 shares each;
Mr. Hodder, 11,000 shares (2,000 of which are exercisable but not vested);
Mr. Low, 3,000 shares; Dr. Saario, 3,000 shares; and all directors and
executive officers as a group (13 persons), 905,471 shares.
10
<PAGE>
(6) Includes 6,700 shares held by the children of Mr. Eugster who share the same
household (Mr. Eugster disclaims beneficial ownership of these shares).
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers and persons who
beneficially own more than 10% of a registered class of the Company's equity
securities to file initial reports of ownership and reports of changes in
ownership with the SEC and the New York Stock Exchange. Such persons are also
required to furnish the Company with copies of all Section 16(a) forms they
file.
Based on the Company's review of the copies of such forms received by it
with respect to Fiscal Year 1998 and written representations received from
certain reporting persons that no SEC Forms 5 were required for such persons,
the Company believes that all Section 16(a) filing requirements have been
complied with by the reporting persons. However, the Form 5 filed by Mr. Gorman
in 1998 covering 1997 inadvertently omitted a disposition of 5,000 shares from
Mr. Gorman's indirect holdings.
CERTAIN TRANSACTIONS
RESTRICTED SHARES
As part of the acquisition of MGI by the Company, the officers of MGI at the
time (the "Management Investors") entered into a subscription agreement with the
Company (the "Management Subscription Agreement") pursuant to which the
Management Investors purchased approximately 21% of the Company's then
outstanding shares of Common Stock as follows. On August 25, 1988, the
Management Investors purchased at $2.50 per share, for an aggregate purchase
price of $5.5 million, 2,200,000 shares of Common Stock ("Cash Shares"). The
Management Investors also purchased 2,000,000 shares of Common Stock
("Restricted Shares") in consideration for the payment of $5,000, or $.0025 per
share, on August 25, 1988. The Restricted Shares were originally subject to a
four-year vesting schedule, which has been completed. Although holders of
Restricted Shares have voting and dividend rights, no Restricted Shares are
transferable by the holder thereof until such holder has paid the Company an
additional $2.4975 or $4.4975 per share, as applicable. The Management Investors
are not obligated to make such additional payment. However, after August 25,
2003, the Company may buy back the Restricted Shares for $.0025 per share. At
December 31, 1998, 1,740,204 shares of the Restricted Stock remained
outstanding.
REGISTRATION RIGHTS
The Company has granted to the Management Investors certain demand and
piggy-back registration rights with respect to the Common Stock. The Company is
obligated to pay the expenses (excluding underwriting discounts and commissions)
of such registrations and to indemnify the Management Investors for certain
registration related liabilities. The Restricted Shares were registered with the
Securities and Exchange Commission on a Form S-3 Registration Statement filed
April 30, 1998.
EXECUTIVE OFFICERS AND COMPENSATION
The Company's executive officers (other than Messrs. Eugster, Benson and
Wachsman whose biographical information is included under "Election of
Directors" herein) are identified below. Executive officers of the Company
currently hold the same respective positions with MGI.
Gary A. Ross, age 52, has been President, Superstores Division since August
1996. Prior to that he served in the position of President of the Suncoast
Division since 1990. Since joining MGI in 1984, he
11
<PAGE>
has served in the positions of Executive Vice President of Marketing and
Merchandising, Senior Vice President of Marketing and Merchandising, Senior Vice
President of Marketing and Merchandising of the Retail Division and Senior Vice
President of Planning and Administration of the Retail Division. Mr. Ross served
as a director of the Company from January 1, 1990 to December 31, 1990. Mr. Ross
is a past chairman and currently a director of the Video Software Dealers
Association. Prior to joining MGI, he was with The Gap Stores and Target Stores.
Douglas M. Tracey, age 45, has been Senior Vice President, Distribution
since August 1994. He was first appointed a senior vice president in April 1992
and has served in the positions of General Manager of the On Cue Division,
Senior Vice President of Marketing Services and Senior Vice President of
Administration and Distribution. Previously, from 1986 through April 1992, he
served as Vice President, Distribution. Mr. Tracey joined MGI in 1971 and has
held the positions of Managing Director of National Distribution, General
Manager Minneapolis Distribution Center, Manager of Policies and Procedures,
National Store Operations Manager, District Supervisor and Store Manager.
Marcia F. Appel, age 48, has been Senior Vice President, Advertising and
Communication since October 1996. Previously, she had served as Vice President,
Communications and Music Stores Marketing since February 1996. Ms. Appel joined
the Company in April of 1993 as Vice President, Communications and Publications.
Prior to joining MGI, Ms. Appel was Executive Director of the National
Association of Area Business Publications, and she has also worked for Control
Data Corporation and Dorn Communications.
Richard J. Odette, age 55, has been Senior Vice President, Music
Merchandising since January 1998. Previously, Mr. Odette had served as Vice
President, Prerecorded Audio since 1988. Mr. Odette joined MGI in 1982 and has
held the positions of Managing Director of Software, Director of Software
Merchandising, National Merchandising Manager of Software, and Zone
Merchandising Manager for the Retail Division. Prior to joining MGI, Mr. Odette
was with Richard's Inc. and Target Stores, Inc.
The following table sets forth information concerning total compensation
earned by the Company's Chief Executive Officer and the other four most highly
compensated executive officers in Fiscal Year 1998 (collectively the "Named
Executive Officers" or "NEOs") for all services rendered to the Company and its
subsidiaries during each of the last three fiscal years.
12
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
----------------------------------------------------- SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(1) COMPENSATION ($) OPTIONS (#)(2) COMPENSATION ($)
- - ------------------------ ------ ---------- ------------ ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Jack W. Eugster 1998 $590,000 $1,150,500(3) $ 9,718(4) 300,000 $306,313(5)
Chairman of the Board, 1997 535,600 983,474 8,741 95,000 306,204
President and C.E.O. 1996 515,000 64,375 12,465 60,000 309,433
Gilbert L. Wachsman 1998 $439,075 $ 568,602(3) $ 4,045(4) 160,000 $ 16,748(6)
Vice Chairman 1997 423,208 518,127 964 52,500 7,553
1996(7) 188,346 283,000 7,319 175,000 46,392
Keith A. Benson 1998 $342,203 $ 443,153(3) $ 4,093(4) 160,000 $135,883(8)
Vice Chairman & CFO 1997 323,146 388,308 4,965 42,500 136,523
1996 302,546 26,473 4,932 47,500 137,203
Gary A. Ross 1998 $340,136 $ 406,462(3) $ 8,959(4) 60,000 $122,809(9)
President, Superstores 1997 327,052 367,700 13,111 42,500 122,541
Division 1996 297,879 26,064 10,319 47,500 124,095
Douglas M. Tracey 1998 $184,542 $ 179,928(3) $ 3,845(4) 20,000 $ 3,664(10)
Senior Vice President 1997 177,438 173,497 1,427 15,000 3,579
of Distribution 1996 171,600 12,870 2,747 10,000 2,775
</TABLE>
- - ------------------------
(1) Reflects bonus earned for service during the fiscal year indicated under the
Company's incentive plans although all or a portion of the bonus may have
been or will be awarded during the next fiscal year and beyond. (See "Report
of Compensation Committee on Executive Compensation" and footnote (3)
below.)
(2) The number indicated is the number of shares of Common Stock which can be
acquired upon the exercise of options subject to vesting restrictions. The
Company has not granted any stock appreciation rights ("SARs").
(3) Includes the following amounts earned for 1998 under the LTIP described in
the Report of the Compensation Committee on Executive Compensation which
have not been paid to the NEOs and are not payable until January 2000: Mr.
Eugster, $442,500; Mr. Wachsman, $217,342; Mr. Benson, $169,391; Mr. Ross,
$168,367; and Mr. Tracey, $69,203.
(4) Other Annual Compensation for 1998 consists of amounts reimbursed for the
payment of taxes.
(5) All Other Compensation for Mr. Eugster for 1998 includes the following:
401(k) Company match: $5,992; medical/dental plans, incremental cost:
$4,370; life insurance and excess liability insurance imputed income:
$13,217; and a premium of $282,734 paid for a life insurance policy under a
split-dollar arrangement whereby the Company will recoup the premium and the
executive will be entitled to the accrued earnings from the policy (See
"Pension Plan").
(6) All Other Compensation for Mr. Wachsman for 1998 includes the following:
401(k) Company match: $5,992; medical/dental plans, incremental cost:
$7,053; life insurance and excess liability insurance imputed income:
$3,168; and relocation expense reimbursement of $535.
(7) Mr. Wachsman joined the Company in July 1996.
(8) All Other Compensation for Mr. Benson for 1998 includes the following:
401(k) Company match: $5,992; medical/dental plans, incremental cost:
$2,844; life insurance and excess liability insurance imputed income:
$7,461; and a premium of $119,586 paid for a life insurance policy under a
split-dollar arrangement whereby the Company will recoup the premium and the
executive will be entitled to the accrued earnings from the policy (See
"Pension Plan").
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<PAGE>
(9) All Other Compensation for Mr. Ross for 1998 includes the following: 401(k)
Company match: $5,992; medical/dental plans, incremental cost: $3,372; life
insurance and excess liability insurance imputed income: $6,716 and a
premium of $106,729 paid for a life insurance policy under a split-dollar
arrangement whereby the Company will recoup the premium and the executive
will be entitled to the accrued earnings from the policy (See "Pension
Plan").
(10) All Other Compensation for Mr. Tracey for 1998 includes the following:
Company contribution to medical/dental plans, incremental cost: $3,012; and
life insurance and excess liability insurance imputed income: $652.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
------------------------------------------------------------------
NUMBER OF AT ASSUMED ANNUAL RATES OF
SECURITIES PERCENT OF TOTAL STOCK PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED TO FOR OPTION TERM
OPTIONS EMPLOYEES IN FISCAL EXERCISE PRICE EXPIRATION --------------------------
NAME GRANTED (#)(1) YEAR ($/SH)(2) DATE 5% ($)(3) 10% ($)(3)
- - --------------------------- --------------- ------------------- --------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Jack W. Eugster............ 300,000(4) 25.57% $ 15.0625 07/26/08 $ 2,689,109 $ 6,958,560
Gilbert L. Wachsman........ 160,000(4) 13.64% $ 15.0625 07/26/08 $ 1,434,191 $ 3,711,232
Keith A. Benson............ 160,000(4) 13.64% $ 15.0625 07/26/08 $ 1,434,191 $ 3,711,232
Gary A. Ross............... 60,000(4) 5.11% $ 15.0625 07/26/08 $ 537,822 $ 1,391,712
Douglas M. Tracey.......... 20,000(4) 1.70% $ 15.0625 07/26/08 $ 179,274 $ 463,904
All Shareholders(5)........................................................................ $334,332,035 $847,263,018
</TABLE>
- - --------------------------
(1) The number indicated is the number of shares of Common Stock which can be
acquired upon the exercise of options. The Company has not granted any SARs.
(2) The exercise price equaled fair market value of the Common Stock on the date
of each grant under the 1998 Stock Incentive Plan.
(3) The assumed rates of 5% and 10% are hypothetical rates of stock price
appreciation selected by the SEC and are not intended to, and do not,
forecast or assume actual future stock prices. The Company believes that
future stock appreciation, if any, is unpredictable and is not aware of any
formula that will determine with any reasonable accuracy the present value
of stock options based on future factors which are unknowable and volatile.
No gain to option holders is possible without an appreciation in stock
prices, and any such increase will benefit all shareholders commensurately.
THERE CAN BE NO ASSURANCE THAT THE AMOUNTS REFLECTED IN THIS TABLE WILL BE
ACHIEVED.
(4) All options have a term of ten years, but provide for early termination upon
termination of employment, are not transferable other than to immediate
family members and become exercisable in equal installments on July 27,
2000, 2001 and 2002 subject to acceleration of vesting upon a change in
control. All options are nonqualified options under the tax code.
(5) Calculated using the market closing price on July 27, 1998 and the total
number of shares then outstanding, 36,041,934, with appreciation calculated
until July 26, 2008, the expiration date of the option grant listed above.
14
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE FISCAL YEAR-END (#)(1) AT FISCAL YEAR-END ($)(2)
NAME EXERCISE (#) REALIZED ($) (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)
- - -------------------------- ------------- ------------ --------------------------- ---------------------------
<S> <C> <C> <C> <C>
Jack W. Eugster........... 79,200 $ 659,488 368,467/488,333 $ 1,533,551/2,146,562
Gilbert L. Wachsman....... 0 0 58,334/329,166 721,883/2,146,086
Keith A. Benson........... 45,600 459,950 133,534/254,166 524,089/1,103,648
Gary A. Ross.............. 84,134 757,881 95,000/154,166 95,625/1,072,398
Douglas M. Tracey......... 12,688 66,715 41,900/53,332 54,663/339,465
</TABLE>
- - ------------------------
(1) The Company does not have any outstanding SARs.
(2) Value is calculated as the difference between the closing market price of
the Common Stock on December 31, 1998 which was $15.375, and the option
exercise price (if less than $15.375) multiplied by the number of shares
underlying the option.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Compensation
Committee"), composed entirely of independent outside directors, reviews and
makes recommendations to the Board on an annual basis with respect to the
Company's executive compensation policies and the compensation to be paid to the
Chief Executive Officer and each of the other executive officers of the Company.
The Committee oversees the Company's Executive Compensation Program,
including the Company's qualified and non-qualified benefit plans as they
pertain to executive officers. The Company currently maintains a variety of
employee benefit plans in which some or all of its executive officers
participate, including the Pension Plan, the Capital Accumulation (KSOP) Plan,
stock option and incentive plans, and supplemental retirement programs.
EXECUTIVE COMPENSATION PROGRAM
The Company considers the maintenance of a stable and effective management
group to be essential to protecting and enhancing the best interests of the
Company and its shareholders. The components of the Company's executive
compensation program include (a) base salaries (subject to the terms of
applicable employment agreements), (b) performance-based bonuses, (c) stock
options and other stock-based awards, (d) miscellaneous fringe benefits
comparable to those of similar companies, and (e) qualified and non-qualified
retirement plans and programs previously mentioned. The combination of base
salary, bonuses, stock options and other benefits reflects the following Company
objectives:
- correlating compensation with the Company's profitability;
- attracting and retaining highly qualified and motivated key executives who
are necessary for the long-term success of the Company; and
- recognizing and rewarding outstanding individual performance.
In order to make its recommendations to the Board concerning executive
officer compensation, the Compensation Committee reviews and evaluates the
Company's operating results as compared to the budgeted plan for the current
year and to the prior year's actual performance. Generally, salary decisions for
the current year are made in January of that year based on the prior year's
performance
15
<PAGE>
while bonus decisions for the current year are not made until the financial
results for the current year are calculated in the following year.
In addition, in January the Compensation Committee reviews a compensation
study compiled by the Company. The Company participates in several nationally
recognized surveys on the compensation of executives. The information from these
surveys consists of summary information for companies in the retail business
with comparable annual revenues. The survey information received is not company
specific. Over one hundred companies participate in the overall surveys. The
Compensation Committee reviews comparison information from companies in retail
generally, rather than just the Company's specialty area, because the Company
believes that it competes with a wide range of companies for executive talent.
Compared to these surveys, the base salaries of the Company's executive
officers, except for the CEO, generally fell near the salary medians for
similarly sized companies in the retail business. It is not a set policy of the
Compensation Committee that such base salaries should be at the median. Instead,
the Compensation Committee recognizes that variances may be appropriate when
also considering the experience, performance and responsibilities of the
individual executive officer. In view of the financial performance of the
Company for the prior year, in 1998 the Compensation Committee generally
approved 4% merit salary increases for the executive officers other than the
CEO.
During June 1998, the Committee engaged Frederic W. Cook & Co. ("Cook") to
complete a comprehensive review of the company's entire Executive Compensation
program relative to proxy information from a peer group of 21 other specialty
retailers. Cook found annual, long-term and overall total compensation for the
CEO and other Company executives (on an aggregate and not individual basis) to
be at the 23rd percentile of the peer group.
Cook examined the annual survey data presented by the Company to the
Committee and found the comparisons appropriate and valid. Cook also evaluated
stock options practices and the potential dilution resulting from the grant of
stock options using information from the peer group proxies. Cook found that the
Company was at or below the median for the peer group in stock option grants.
Using the data in the proxy portion of the study, the Committee approved
general annual guidelines for stock option grants to the Company's executives
and others. The Committee believes that awarding stock options aligns the
interests of the executives with the interests of the shareholders. Cook
additionally reviewed with the Company the possibility of adopting a
Supplemental Executive Retirement Plan ("SERP"), which the Committee
subsequently approved in October 1998 and is discussed below.
The weight given corporate performance factors is mainly reflected in the
bonus program of the Company. This program, as embodied in the current
Management Incentive Plan ("MIP") and Long Term Incentive Plan ("LTIP"), puts
approximately 66% of the CEO's maximum cash compensation at risk since bonuses
are generally awarded only if the Company achieves certain corporate performance
goals. The percentage at risk for the other executive officers named in the
compensation tables ranges from 49% to 56%.
The funding of the MIP bonus pool is determined by corporate performance
goals that are set by the Compensation Committee during the first quarter of
each year. For 1998, the corporate performance goals were tied to the Company's
earnings before income taxes, depreciation and amortization ("EBITDA") adjusted
for a portion of interest expense. However, for the CEO the performance goal was
based on earnings per share. Each award may be adjusted upwards or downwards to
reflect personal performance on individual goals. To further encourage long-term
retention of key employees, the Company pays out 80% of each bonus in cash and
defers 20%. The deferred portion is paid out over a three year period
(contingent upon the participant remaining with the Company) and increases or
decreases annually based upon annual changes in the Company's earnings per
share.
16
<PAGE>
For 1998 the maximum EBITDA target was achieved and MIP awards totaling
$4,485,638 were awarded to 132 participants, and, of this amount, $1,681,842 was
awarded to the NEOs.
The LTIP for the Company's executive officers sets Company performance goals
for each year of a three-year period. The three-year cycles overlap, with a new
three-year cycle beginning each year. For the initial years of the plan, 1996,
1997 and 1998, a cash award was earned for each year that the applicable goal
was met. Payout of any earned award was deferred for one year. Beginning with
the 1998 to 2000 three-year cycle, awards will be earned based on meeting the
combined goals for the three-year cycle, and earned awards will be paid out
immediately after the end of the three-year cycle. The CEO is eligible to earn a
LTIP bonus of up to 75% of his base salary on an annual basis and the other
executive officers may earn bonuses of up to 37.5% to 49.5% of their base
salaries on an annual basis. Aggressive target goals were set for the years
1996, 1997 and 1998 based on EBITDA (weighted at 75% and adjusted for average
minimum rent and certain special professional fees) and working capital
(weighted at 25% and defined as average inventory less average accounts
payable). LTIP awards are in addition to any MIP awards. Actual Company
performance for 1998 exceeded the maximum goals and LTIP awards totaling
$1,187,791 were earned by seven participants, and, of this amount, $1,066,802
was earned by the NEOs. These awards will be paid out in January 2000.
SECTION 162(m) LIMITATIONS
The Board has considered the impact of the Section 162(m) limitations on the
Company and has determined that it would be in the best interests of the Company
to preserve the tax deduction for compensation paid to the CEO an other NEOs as
much as possible consistent with the principles of the executive compensation
program. Therefore, the shareholders are being asked to approve the material
terms of the Alternative Incentive Plan for Designated Senior Officers described
under Proposal No. 2 in this Proxy Statement. The Company's 1994 Employee Stock
Option Plan and the 1998 Stock Incentive Plan also satisfy the requirements for
performance-based compensation under Section 162(m). Stock option awards to the
executive officers since 1994 have been made from the 1994 and 1998 plans and it
is intended that future stock option awards will be made from these plans. Any
compensation realized by the executive officers when exercising such options
will not count toward the $1 million limit. The existing MIP and LTIP plans do
not meet the requirements of Section 162(m) and bonus payments earned in 1998
under those plans will count against the $1 million limit. The compensation paid
to the CEO in 1998 exceeded the limit.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The minimum base salary of the Chief Executive Officer ("CEO") is set by,
and subject to the terms of, his employment agreement which was executed in
August 1988, as amended. Increases are considered and recommended by the
Compensation Committee, if appropriate, at the beginning of each fiscal year.
The Compensation Committee found that the CEO's base salary is well below that
of the average for CEOs employed in similar sized corporations. Based on this
information coupled with substantial progress towards the Company's turnaround,
the Committee approved a 10.2% increase in the CEO's base salary for 1998. Under
the MIP Plan the CEO earned the maximum award of $708,000 and, under the LTIP
plan, earned an award of $442,500 which will not be payable until January 2000.
The Compensation Committee feels that the CEO's individual efforts contributed
greatly to the Company's turnaround.
In July 1998, the Company awarded nonqualified stock options to the CEO,
along with other executive officers, as disclosed in the compensation tables.
These awards vest over a period of three years, beginning two years after grant
date, and were granted at an exercise price equal to fair market value as of the
day of grant. The amount of the award to the CEO was based principally on the
compensation study performed by Cook and is comparable to other CEOs in the
study's peer group. The Compensation Committee believes that such compensation
encourages the CEO to improve the
17
<PAGE>
performance of the Company. Based on Cook's recommendation, the Compensation
Committee increased the stock option awards to the CEO and the two Vice Chairmen
in 1998 with the intention that they would front-end load options from 1999 into
1998. This front-end loading was considered appropriate in view of the low
number of stock options awarded by the Company compared to other companies and
the difficulty in valuing the Company's stock options due to the stock's
volatility.
In October 1998, the Compensation Committee approved a Supplemental
Executive Retirement Plan ("SERP") for the CEO and Messrs. Wachsman, Ross and
Benson which was recommended by Cook. This plan will supplement retirement
benefits to provide a pension that each executive would have received under the
Pension Plan assuming that the limitations of both Section 415 and Section
417(e) of the Internal Revenue Code were not in effect. Under the SERP, average
annual cash compensation is defined as the highest paid 5 years of the last 10
years worked prior to retirement. Participants must attain 5 years of service
following eligibility in order to vest in the SERP retirement benefit. Upon
reaching 5 years, all prior service is recognized. The SERP is an unfunded,
non-qualified plan under which benefits are reduced by amounts payable through
the Pension Plan, the Split Dollar Life Insurance policies and any other
Company-funded pension benefits.
In the Compensation Committee's opinion, the total compensation package for
the CEO in 1998 appropriately reflects the Company's improved financial
performance and the CEO's individual efforts in carrying out his overall
responsibility for the Company.
The foregoing report is submitted by the members of the Compensation
Committee.
WILLIAM A. HODDER, CHAIRMAN
MICHAEL W. WRIGHT
TOM F. WEYL
EMPLOYMENT AND CHANGE IN CONTROL AGREEMENTS
The Company entered into employment agreements, effective August 25, 1988,
with Messrs. Eugster, Benson and Ross (along with Mr. Wachsman, where
applicable, the "Executives") and, at the same time, entered into change in
control agreements with Messrs. Eugster, Benson and Ross. The change in control
agreements for Messrs. Benson and Ross which had expired September 1, 1991 were
reinstated on December 3, 1996. As amended January 22, 1992, November 27, 1995
and December 3, 1996, the employment agreements provide for employment in each
Executive's current position (or, except in the case of Mr. Eugster, a similar
executive capacity) until August 31, 2002 for Mr. Eugster and August 31, 2001
for Messrs. Benson and Ross, all subject to automatic extensions of one
additional year continuously thereafter unless either party gives notice to the
other that no further extension is desired by, for the next such extension,
February 28, 2000, and on each anniversary of such date for successive
extensions thereafter(in each case the "Employment Period"). The employment
agreements provide that the annual base salaries of the Executives will be no
less than the following amounts plus periodic increases granted pursuant to the
Company's customary procedures and practices: $535,600 for Mr. Eugster; $323,146
for Mr. Benson; and $327,052 for Mr. Ross. The purpose of these agreements is to
assure the Company of the continued service of each Executive.
The Company may terminate the employment of any Executive for cause (as
narrowly defined in the employment agreements) without further obligation by the
Company except for vested benefits under the Capital Accumulation Plan and the
Retirement Plan. Otherwise the agreements provide for certain severance benefits
in the event employment is terminated for other reasons, including resignation,
death or disability, except for voluntary resignation in the case of Messrs.
Benson and Ross. If the Executive is terminated due to a material breach by the
Company (including a significant reduction in the Executive's authority or
responsibility), the Executive would be entitled for the remainder of the
current Employment Period to his salary and all other benefits, including a
supplemental retirement benefit and substitute incentive award and immediate
vesting of all stock options. The foregoing
18
<PAGE>
payments and benefits are reduced for compensation and benefits received from
other employment or consulting positions.
Upon the employment of Mr. Wachsman on July 17, 1996, he and the Company
entered into a severance agreement. The severance agreement is effective until
July 31, 2001 and provides that in the event of termination without cause or for
good reason Mr. Wachsman will be paid 12 months of salary continuation and a
substitute incentive award equal to 40% of base salary. A Change in Control
Agreement similar to that of the other Executives was entered into with Mr.
Wachsman on March 10, 1997.
The change in control agreements for the Executives, as amended November 27,
1995 and December 3, 1996, only become operative upon the occurrence of a change
in control of the Company which as defined in the agreements occurs when any
person becomes the beneficial owner of 20% or more of the Company's Common Stock
(whether or not the Common Stock is publicly traded at the time), or makes a
tender offer for such control with a substantial likelihood of success, or 70%
of the Company's or MGI's assets are sold, or a majority of the directors of the
Company are persons who generally were not nominated for election nor appointed
to fill vacancies by the incumbent board of directors. The agreements provide
for continued employment of Mr. Eugster for a period of three years, and of
Messrs. Benson, Ross and Wachsman for a period of two years, following a change
in control, subject to automatic extensions of one additional year continuously
thereafter unless either party gives notice to the other that no further
extension is desired by, for the first such extension, the end of the sixth
month following the change in control, and on each anniversary of such date for
successive extensions thereafter. During said period the Executive will be
entitled to terminate his employment if there has been a significant change in
the nature or scope of his authority, powers, functions, duties or
responsibilities, a reduction in compensation, another material breach of the
agreement by the Company, or the liquidation, dissolution or reorganization of
the Company where the successor shall not have assumed the obligations of the
agreement. In such event, the Executive is entitled to a lump sum payment equal
to the present value of his salary, bonuses and a substitute retirement benefit
for the remaining term of the agreement, but not less than 24 months for Mr.
Eugster and 12 months for Messrs. Benson, Ross and Wachsman, and all other
death, disability and health benefits continue until age 65. The foregoing
payments and benefits are reduced (by way of quarterly reimbursements) for
compensation and benefits received from other employment or consulting
positions. Any stock options held by the Executive become fully vested upon a
change in control and after a change in control the Executive may request that a
trust be established by the Company to fund all amounts to which the Executive
is or may become entitled.
Should payments under any of the above agreements become subject to the 20%
excise tax under Section 4999 of the Code, the Company will pay such additional
amounts as would put the Executive in the same after-tax position as if such
excise tax did not apply.
PENSION PLAN
The Company maintains a non-contributory defined benefit plan, The Musicland
Group, Inc. Employees' Retirement Plan (the "Retirement Plan"), qualified under
Section 401 of the Code, in which its regular, non-union employees hired before
July 1, 1990, except hourly store clerk employees hired after January 1, 1989,
participate. Messrs. Eugster, Benson, Ross, and Tracey participate in the
Retirement Plan.
Prior to January 1, 1989, accrued retirement benefits were calculated by
using a formula that took into account average base compensation, credited
service and primary Social Security benefits payable at retirement, with the
normal monthly retirement benefit being an amount equal to 4% of average base
compensation times years of credited service (maximum 15 years), less two-thirds
of monthly primary Social Security benefits. An employee's average base
compensation was defined as
19
<PAGE>
one-twelfth of his or her average annual base compensation during all his or her
plan years of participation while an employee.
Effective January 1, 1989, for any participant who completes at least one
hour of service on or after January 1, 1989, the accrued retirement benefit
formula was amended to be 1% of the participant's average pensionable
compensation that does not exceed the participant's covered compensation for
such plan year plus a percentage (from 1.65% to 1.75% depending upon the
participant's applicable Social Security retirement age, but limited to 1.65%
for all employees after January 1, 1992) of the participant's average base
compensation which exceeds the participant's covered compensation for such plan
year times the years of benefit service (maximum 35 years). A participant keeps
his or her accrued retirement benefit calculated as of December 31, 1988 under
the old formula as long as the same is greater than his or her current accrued
retirement benefit calculated under the new formula. For purposes of calculating
the new formula, a participant's base compensation for years prior to January 1,
1984 is deemed to be the same as the base compensation in effect on that date
and, for years beginning with January 1, 1989, will include all cash
compensation (including bonuses and overtime). Covered compensation relates to
the average of the taxable wage bases in effect for each calendar year during
the 35-year period prior to the participant reaching Social Security retirement
age.
A participant whose employment terminates prior to age 65 and who does not
qualify for an early retirement benefit, disability retirement benefit or death
benefit (all of which are also provided for by the Retirement Plan) is entitled
to a fully vested and nonforfeitable deferred retirement benefit if the
participant has been credited with "elapsed time as an employee" of at least 5
years. The basic pension is a monthly pension payable during the participant's
lifetime commencing at age 65. Early retirement, disability retirement and
deferred retirement benefits are reduced if payment of any such benefits
commences prior to the participant's normal retirement date (age 65 and 5 years
of participation in the Retirement Plan). The Retirement Plan contains
provisions for optional methods of benefit payments including lump sum payments
under certain circumstances.
The following table sets forth the estimated annual benefits payable upon
normal retirement at age 65 (calculated as a straight life annuity) assuming
retirement in 1998 at age 65 and based upon the specified cash compensation
(which for Messrs. Eugster, Benson and Ross would be the amounts listed under
the salary and bonus columns) and years-of-service classifications. The amounts
shown below are maximum amounts and do not take into consideration the Social
Security offset portion of the formula nor the limits on retirement benefits
imposed by Sections 415 and 417(e) of the Code.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------
AVERAGE CASH COMPENSATION 15 20 25 30 35
- - -------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 125,000....................... $ 28,600 $ 38,100 $ 47,600 $ 57,100 $ 66,700
150,000....................... 34,800 46,300 57,900 69,500 81,100
175,000....................... 40,900 54,600 68,200 81,900 95,500
200,000....................... 47,100 62,800 78,500 94,300 110,000
225,000....................... 53,300 71,100 88,900 106,600 124,400
300,000....................... 71,900 95,800 119,800 143,800 167,700
400,000....................... 96,600 128,800 161,000 193,300 225,500
450,000....................... 109,000 145,300 181,700 218,000 254,300
500,000....................... 121,400 161,800 202,300 242,800 283,200
750,000....................... 183,300 244,300 305,400 366,500 427,600
1,000,000...................... 245,100 326,800 408,500 490,300 572,000
</TABLE>
20
<PAGE>
Section 415 of the Code places a limit (at $125,000 beginning in 1997) on
the amount of annual benefits that may be paid from a plan such as the
Retirement Plan. Section 417(e) of the Code also imposes a combined limitation
where an employee is covered by benefits from both a defined benefit pension
plan and a defined contribution plan, and, beginning in 1997, only the first
$160,000 of compensation (annually indexed for inflation) may be considered for
Retirement Plan purposes. In October 1998, the Company adopted an unfunded SERP
as described in the Report of the Compensation Committee. In addition, the
Company has enabled Messrs. Eugster, Benson and Ross to obtain life insurance
policies under a "split-dollar" arrangement, which should not result in a
long-term cost to the Company due to the features of the policies. The earnings
from these policies along with the SERP will offset the losses to the
individuals resulting from the foregoing tax limitations.
As of December 31, 1998, the estimated years of benefit service for Messrs.
Eugster, Benson, Ross and Tracey were 18.5 years, 18.5 years, 14.3 years and 27
years, respectively.
STOCK PERFORMANCE GRAPH
The following performance graph compares the Company's cumulative total
stockholder return on its Common Stock for the period beginning December 31,
1993, until December 31, 1998, with the cumulative total returns of the Standard
& Poor's Corporation ("S&P") 500 Stock Index and the S&P Retail Stores Composite
Index. The comparison assumes $100 was invested in the Company's Common Stock
and in each index at the beginning of the comparison period and reinvestment of
dividends.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
DEC. 31, 1993 DEC. 31, 1994 DEC. 31, 1995 DEC. 31, 1996 DEC. 31, 1997 DEC. 31, 1998
<S> <C> <C> <C> <C> <C> <C>
Musicland Stores Corp. 100 43 20 7 35 74
S&P 500 100 101 139 171 229 294
S&P Retail Composite 100 91 102 121 174 281
</TABLE>
21
<PAGE>
EXPENSES OF SOLICITATION
The costs of this solicitation have been or will be borne by the Company. In
addition to the use of the mails, Proxies may be solicited by the Company's
directors, officers and employees, without extra compensation, by personal
interview, telephone and telegram. Arrangements will be made with brokerage
houses and other custodians, nominees and fiduciaries for the forwarding of
solicitation material and annual reports to the beneficial owners of stock held
of record by such persons, and the Company will reimburse them for reasonable
out-of-pocket and clerical expenses incurred by them in connection therewith.
ANNUAL REPORT ON FORM 10-K
UPON WRITTEN REQUEST OF ANY SHAREHOLDER SOLICITED HEREBY, THE COMPANY WILL
PROVIDE WITHOUT CHARGE A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1998. REQUESTS SHOULD BE DIRECTED TO TIMOTHY
J. SCULLY, INVESTOR RELATIONS, 10400 YELLOW CIRCLE DRIVE, MINNETONKA, MINNESOTA
55343. ANY BENEFICIAL OWNER SHOULD INCLUDE A GOOD FAITH REPRESENTATION THAT AS
OF THE RECORD DATE HE OR SHE IS A BENEFICIAL OWNER OF COMMON STOCK.
SHAREHOLDER PROPOSALS FOR 2000
In order for any shareholder proposal to be considered for inclusion in the
Company's Proxy Statement and form of Proxy relating to the annual meeting of
shareholders to be held in 2000, the same must be received by the Company at its
principal executive offices no later than November 30, 1999.
In addition, under the Company's By-Laws any nominations for directors to be
elected at the annual meeting of shareholders to be held in 2000 or intentions
to bring other matters up at the annual meeting must be submitted by
shareholders in writing to the Company at its principal executive offices no
later than February 10, 2000. If not properly submitted by that date, such
nominations or other matters will not be considered at the annual meeting.
Dated: March 29, 1999
By Order of the Board of Directors
HEIDI M. HOARD
Secretary
22
<PAGE>
<TABLE>
<S><C>
- Please detach here -
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2 AND 3.
1. ELECTION OF DIRECTORS: 01 Kenneth F. Gorman 02 Josiah O. Low, III / / Vote FOR / / Vote WITHHELD
03 Terry T. Saario all nominees from all nominees
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE,
WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.)
2. PROPOSAL TO APPROVE THE ALTERNATE INCENTIVE PLAN FOR / / For / / Against / / Abstain
DESIGNATED SENIOR OFFICERS.
3. PROPOSAL TO APPROVE THE APPOINTMENT OF ARTHUR ANDERSEN LLP, / / For / / Against / / Abstain
INDEPENDENT PUBLIC ACCOUNTANTS, AS AUDITORS OF THE COMPANY
FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED FOR EACH PROPOSAL.
Address Change? Mark Box / /
Indicate changes below: Date ________________________________
/ /
Signature(s) in Box
PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR
ON PROXY. IF HELD IN JOINT TENANCY, ALL
PERSONS MUST SIGN. TRUSTEES, ADMINISTRATORS,
ETC., SHOULD INCLUDE TITLE AND AUTHORITY.
CORPORATIONS SHOULD PROVIDE FULL NAME OR
CORPORATION AND TITLE OF AUTHORIZED OFFICER
SIGNING THE PROXY.
<PAGE>
MUSICLAND STORES CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
MONDAY, MAY 10, 1999
11:00 A.M.
MUSICLAND STORES CORPORATION
10400 YELLOW CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343
[LOGO]
PROXY
- - ----------------------------------------------------------------------------------------------------------------------------
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE ANNUAL MEETING ON MAY 10, 1999.
The shares of stock you hold in your account or in a dividend reinvestment account will be voted as you specify below.
IF NO CHOICE IS SPECIFIED, THE PROXY WILL BE VOTED "FOR" ITEMS 1, 2 AND 3.
By signing the proxy, you revoke all prior proxies and appoint Jack W. Eugster, and Keith A. Benson, and each of them,
with full power of substitution, to vote your shares on the matters shown on the reverse side and any other matters which
may come before the Annual Meeting and all adjournments.
SEE REVERSE FOR VOTING INSTRUCTIONS
</TABLE>
<PAGE>
<TABLE>
<S><C>
PLEASE DETACH HERE
- - ------------------------------------------------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2 AND 3.
1. Election of directors: 01 Kenneth F. Gorman 02 Josiah O. Low, III / / Vote FOR / / Vote WITHHELD
03 Terry T. Saario all nominees from all nominees
-----------------------------------------
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE,
WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.) -----------------------------------------
2. PROPOSAL TO APPROVE THE ALTERNATE INCENTIVE PLAN FOR / / For / / Against / / Abstain
DESIGNATED SENIOR OFFICERS.
3. PROPOSAL TO APPROVE THE APPOINTMENT OF ARTHUR ANDERSEN LLP, / / For / / Against / / Abstain
INDEPENDENT PUBLIC ACCOUNTANTS, AS AUDITORS OF THE COMPANY
FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED
FOR EACH PROPOSAL.
Address Change? Mark Box / / Date ____________________
Indicate changes below:
-----------------------------------------
Signature(s) in Box
PLEASE SIGN EXACTLY AS THE NAME(S) APPEAR
ON PROXY. IF HELD IN JOINT TENANCY, ALL
PERSONS MUST SIGN. TRUSTEES, ADMINISTRATORS,
ETC., SHOULD INCLUDE TITLE AND AUTHORITY.
CORPORATIONS SHOULD PROVIDE FULL NAME OF
CORPORATION AND TITLE OF AUTHORIZED OFFICER
SIGNING THE PROXY.
</TABLE>
<PAGE>
<TABLE>
<S><C>
MUSICLAND STORES CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
MONDAY, MAY 10, 1999
11:00 A.M.
MUSICLAND STORES CORPORATION
10400 YELLOW CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343
[LOGO] PROXY
- - ---------------------------------------------------------------------------------------------------------
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE ANNUAL MEETING ON MAY 10, 1999.
The shares of stock you hold in your account or in a dividend reinvestment account will be voted as you
specify below.
By signing the proxy, you revoke all prior proxies and appoint American Express Company as proxy, and hereby authorize it to
represent and vote your shares on the matters shown on the reverse side.
</TABLE>
SEE REVERSE FOR VOTING INSTRUCTIONS
