UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission file number 1-11014
MUSICLAND STORES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 41-1623376
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
10400 Yellow Circle Drive, Minnetonka, MN 55343
(Address of principal executive offices) (Zip Code)
(952) 931-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
The Registrant had 32,632,085 shares of common stock outstanding on May
2, 2000.
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Statements of Earnings 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Report of Independent Public Accountants 8
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
PART II - OTHER INFORMATION
Item 2. Changes in Securities 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
2
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended
March 31,
---------------------
2000 1999
--------- ---------
Sales.................................................... $ 415,821 $ 401,797
Cost of sales............................................ 263,284 258,220
--------- ---------
Gross profit.......................................... 152,537 143,577
Selling, general and administrative expenses............. 134,808 126,395
Depreciation and amortization............................ 10,510 9,810
--------- ---------
Operating income...................................... 7,219 7,372
Interest expense......................................... 3,869 5,409
--------- ---------
Earnings before income taxes.......................... 3,350 1,963
Income taxes............................................. 1,306 589
--------- ---------
Net earnings.......................................... $ 2,044 $ 1,374
========= =========
Basic earnings per common share.......................... $ 0.06 $ 0.04
========= =========
Diluted earnings per common share........................ $ 0.06 $ 0.04
========= =========
See accompanying Notes to Consolidated Financial Statements.
3
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MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
March 31, December 31,
--------------------- ------------
2000 1999 1999
---------- ---------- ------------
ASSETS
Current assets:
Cash and cash equivalents............... $ 83,128 $ 55,856 $ 335,693
Inventories............................. 432,988 405,868 444,792
Deferred income taxes................... 27,266 16,012 27,300
Other current assets.................... 7,821 8,176 9,162
---------- ---------- -----------
Total current assets.................. 551,203 485,912 816,947
Property, at cost.......................... 472,098 435,050 467,526
Accumulated depreciation and amortization.. (235,297) (207,338) (230,976)
---------- ---------- -----------
Property, net........................... 236,801 227,712 236,550
Other assets............................... 11,227 9,535 10,077
---------- ---------- -----------
Total Assets.......................... $ 799,231 $ 723,159 $1,063,574
========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................ $ 297,127 $ 258,997 $ 476,191
Other current liabilities............... 104,922 96,637 179,171
---------- ---------- -----------
Total current liabilities............. 402,049 355,634 655,362
Long-term debt............................. 258,971 258,890 258,950
Other long-term liabilities................ 39,311 42,627 39,904
Stockholders' equity:
Preferred stock ($.01 par value;
shares authorized: 5,000,000;
shares issued and outstanding:
none)................................ - - -
Common stock ($.01 par value; shares
authorized: 75,000,000; shares
issued: March 31, 2000, 36,676,430;
December 31, 1999, 36,187,454;
March 31, 1999, 36,065,705).......... 367 361 362
Additional paid-in capital.............. 261,905 260,970 261,534
Accumulated deficit..................... (126,221) (185,271) (128,265)
Deferred compensation................... (5,034) (5,749) (5,237)
Common stock subscriptions.............. (4,303) (4,303) (4,303)
Treasury stock, at cost (March 31, 2000,
3,750,800 shares; December 31, 1999,
2,015,700 shares).................... (27,814) - (14,733)
---------- ---------- -----------
Total stockholders' equity............ 98,900 66,008 109,358
---------- ---------- -----------
Total Liabilities and Stockholders'
Equity............................... $ 799,231 $ 723,159 $1,063,574
========== ========== ===========
See accompanying Notes to Consolidated Financial Statements.
4
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MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Three Months Ended
March 31,
------------------------
2000 1999
----------- -----------
OPERATING ACTIVITIES:
Net earnings........................................ $ 2,044 $ 1,374
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization..................... 11,024 10,652
Disposal of property.............................. 456 1,543
Deferred income taxes............................. (67) (212)
Changes in operating assets and liabilities:
Inventories...................................... 11,804 40,842
Other current assets............................. 1,341 2,219
Accounts payable................................. (179,064) (193,413)
Other current liabilities........................ (74,179) (58,004)
Other assets..................................... (1,247) 164
Other long-term liabilities...................... (593) (1,007)
----------- -----------
Net cash used in operating activities.......... (228,481) (195,842)
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures................................ (11,217) (5,640)
----------- -----------
FINANCING ACTIVITIES:
Purchase of treasury stock.......................... (13,081) -
Proceeds from sale of common stock.................. 214 120
----------- -----------
Net cash provided by (used in) financing
activities....................................... (12,867) 120
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS............. (252,565) (201,362)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...... 335,693 257,218
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............ $ 83,128 $ 55,856
=========== ===========
CASH PAID DURING THE PERIOD FOR:
Interest........................................... $ 7,451 $ 7,746
Income taxes, net.................................. 28,765 15,011
See accompanying Notes to Consolidated Financial Statements.
5
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MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands)
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts
of Musicland Stores Corporation ("MSC") and its wholly-owned subsidiary, The
Musicland Group, Inc. ("MGI") and MGI's wholly-owned subsidiaries, after
elimination of all material intercompany balances and transactions. MSC and MGI
are collectively referred to as the "Company." The Company operates principally
in the United States as a specialty retailer of home entertainment products,
including prerecorded music and video, books, computer software, video games and
related products.
The interim consolidated financial statements of the Company are
unaudited; however, in the opinion of management, all adjustments necessary for
a fair presentation of such consolidated financial statements have been
reflected in the interim periods presented. Such adjustments consisted only of
normal recurring items. The Company has no significant items of other
comprehensive income. The Company's business is seasonal and, accordingly,
interim results are not indicative of results for a full year. The significant
accounting policies and certain financial information which are normally
included in financial statements prepared in accordance with generally accepted
accounting principles, but which are not required for interim reporting
purposes, have been condensed or omitted. The accompanying consolidated
financial statements of the Company should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K.
2. Income Taxes
Income taxes for the three months ended March 31, 2000 and 1999 were
based on the estimated annual effective tax rates for each year. The annual
effective tax rate is estimated using the federal statutory income tax rate,
increased for the effect of state income taxes, net of federal benefit, and
estimated earnings before income taxes for the full year.
3. Weighted Average Common Shares Outstanding
A reconciliation of weighted average common shares used in the
computation of basic and diluted earnings per common share is as follows:
Three Months Ended
March 31,
------------------
2000 1999
--------- --------
Weighted average common shares outstanding - basic.. 33,085 35,443
Dilutive effect of stock options.................... 513 746
Dilutive effect of warrants......................... 48 470
--------- --------
Weighted average common shares outstanding
- diluted.......................................... 33,646 36,659
========= ========
Antidilutive stock options.......................... 2,885 1,325
========= ========
Antidilutive stock options had an exercise price greater than the average
market price during the period.
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MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In thousands)
4. Segment Information
The Company's two reportable segments, stores and E-commerce, have been
identified based on their method of retail distribution - stores and
direct-to-consumer. The Company's stores operate under two principal strategies:
(i) mall based music and video stores ("Mall Stores"), operating predominantly
under the trade names Sam Goody and Suncoast Motion Picture Company, and (ii)
non-mall based full-media superstores ("Superstores"), operating under the trade
names Media Play and On Cue. The stores are supported by centralized corporate
services and have similar economic characteristics, products and customers. In
June of 1999, the Company launched four e-commerce sites ("E-commerce")
operating under the names SamGoody.com, Suncoast.com, MediaPlay.com and
OnCue.com.
Stores
Three Months Ended March 31, 2000 and Other E-commerce Total
------------------------------------ ---------- ---------- ---------
Sales (1).......................... $ 413,906 $ 1,915 $ 415,821
Operating income (loss)............ 9,690 (2,471) 7,219
Depreciation....................... 10,217 293 10,510
Income taxes....................... 2,267 (961) 1,306
Net earnings (loss)................ 3,554 (1,510) 2,044
Stores
Three Months Ended March 31, 1999 and Other E-commerce Total
------------------------------------ ---------- ---------- ---------
Sales.............................. $ 401,797 $ - $ 401,797
Operating income (loss)............ 7,653 (281) 7,372
Depreciation....................... 9,810 - 9,810
Income taxes....................... 698 (109) 589
Net earnings (loss)................ 1,546 (172) 1,374
--------------------------
(1) Sales for E-commerce include shipping and handling charges to
customers.
The Company's management utilizes various measurements to assess
segment performance and to allocate resources to segments. Corporate
administration, certain other indirect expenses and interest expense, none of
which are allocated to E-commerce, are identified as "other" and are included
with the segment information for stores. Segment information for E-commerce
includes an allocation of certain corporate expenses directly associated with
the E-commerce operation.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Musicland Stores Corporation:
We have reviewed the accompanying consolidated balance sheets of Musicland
Stores Corporation (a Delaware corporation) and Subsidiaries as of March 31,
2000 and 1999, and the related consolidated statements of earnings and cash
flows for the three-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States, the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Musicland
Stores Corporation and Subsidiaries as of December 31, 1999, and, in our report
dated January 21, 2000, we expressed an unqualified opinion on that statement.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 1999, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
April 25, 2000
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Net earnings for the first quarter of 2000 grew to $2.0 million, a
first quarter record, compared with net earnings of $1.4 million in the first
quarter of 1999. Diluted earnings per share for the quarter were $0.06, a 50%
increase over diluted earnings per share of $0.04 for the 1999 period. The loss
from E-commerce operations, including certain corporate expenses related to
E-commerce and net of income tax benefit, reduced net earnings for the first
quarter of 2000 by $0.05 per share. See Note 4 of Notes to Consolidated
Financial Statements.
The Company plans to significantly increase expenditures in 2000 for
its E-commerce operations. Most of the expenditures will be reported as selling,
general and administrative expenses and will focus on intensified marketing
efforts as well as infrastructure and site enhancements. The Company expects
these expenditures, including certain corporate expenses related to E-commerce
and net of income tax benefit, to reduce earnings per share by up to $0.30 for
the year ending December 31, 2000.
The following table presents certain unaudited sales and store data for
Mall Stores, Superstores, E-commerce and in total for the Company for the
periods indicated. The Company's E-commerce operation was formed in 1998 and
began online retailing in June of 1999.
Three Months Ended March 31,
------------------------------------------------------
Percent of Total
Percent -----------------
2000 1999 Incr.(Decr.) 2000 1999
-------- -------- ------------ ------- -------
(Dollars and square footage in millions)
Sales:
Mall Stores.......... $ 261.8 $ 257.2 1.8 % 63.0% 64.0%
Superstores.......... 152.1 143.5 6.0 36.6 35.7
E-commerce........... 1.9 - N/A 0.4 N/A
Total (1).......... 415.8 401.8 3.5 100.0 100.0
Comparable store sales
increase (2):
Mall Stores.......... 2.9% 1.9% N/A N/A N/A
Superstores.......... 1.2 6.3 N/A N/A N/A
E-commerce........... N/A N/A N/A N/A N/A
Total (1).......... 2.3 3.4 N/A N/A N/A
Number of stores open at
end of period:
Mall Stores.......... 1,070 1,095 (2.3)% 80.6% 82.5%
Superstores.......... 257 231 11.3 19.4 17.4
Total (1).......... 1,327 1,327 - 100.0 100.0
Total store square footage
at end of period:
Mall Stores.......... 4.0 4.0 0.7 % 47.0% 48.2%
Superstores.......... 4.5 4.3 5.6 53.0 51.8
Total (1).......... 8.5 8.2 3.2 100.0 100.0
- ---------------------------
(1) The 1999 totals include United Kingdom stores.
(2) Comparable store sales percentages are computed for stores open for a full
year during each period.
Sales. The increases in total sales for the three months ended March
31, 2000 were led by the sales growth in Superstores, primarily as a result of
the opening of 28 new Superstores over the last twelve months. Comparable store
sales results for the first quarter of 2000 reflect a shift of a majority of the
pre-Easter holiday sales to the second quarter as a result of the later Easter
holiday of April 23, as compared with the Easter holiday of April 4 in 1999. The
comparable store sales percentage increase
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(decrease)and the percentage of total sales attributable to the Company's music
and video product categories are presented below.
Three Months Ended
March 31,
------------------
2000 1999
-------- --------
Music, including music video....................... 3.8 % 1.0 %
Video, excluding music video....................... (1.8) 5.6
Music and video as a percentage of total sales..... 79.9 80.7
A new album released by the popular group `N Sync was the highlight of
music sales in the first quarter of 2000. Video sales in the first quarter of
2000 were adversely impacted by a lack of major releases. The Company expects a
recovery of video sales in the second quarter with the release of the recent box
office hit movie Star Wars Episode I: The Phantom Menace. DVD sales rose to 33%
of total video sales in the first three months of 2000 compared with 19% of
total video sales for the first three months of 1999.
Gross Profit. Gross profit as a percentage of sales was 36.7% in the
first quarter of 2000 compared with 35.7% in the first quarter of 1999, an
increase of 1.0%. A decrease in inventory shrinkage added 0.3% to gross margin
in the first quarter of 2000. The balance of the gross margin improvement was
attributable to less promotional pricing and selective price increases since
March 31 of the previous year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the first quarter of 2000 increased $8.4 million, or
6.7%, over the first quarter of 1999. Store expenses, excluding depreciation
and amortization, increased $5.8 million in 2000, reflecting the impact of
annual increases in payroll and occupancy costs, current market lease rates for
lease renewals and new stores and additional store expense associated with the
increase in square footage from new and remodeled stores. Expenditures for
E-commerce operations, inclusive of corporate expenses related to E-commerce,
were $2.6 million in 2000 compared with $0.3 million in 1999. Expenditures for
the Company's E-commerce operations will continue to increase during 2000 as the
Company implements its strategy to make enhancements to the sites and build
market share. See Note 4 of Notes to Consolidated Financial Statements.
Selling, general and administrative expenses as a percentage of sales
were 32.4% in the first quarter of 2000 compared with 31.5% in the first quarter
of 1999, an increase of 0.9%. The percentage rate increase resulted primarily
from the increases to expense previously discussed.
Depreciation and Amortization. Depreciation and amortization for the
first three months of 2000 increased $0.7 million over the same period in 1999.
The increase was attributable primarily to capital expenditures over the last
twelve months for the remodel and relocation of existing stores, new stores and
the new E-commerce sites.
Interest Expense. Interest expense for the first quarters of 2000 and
1999 is net of interest income of $2.6 million and $1.5 million, respectively.
The increase in interest income accounted for most of the decrease to interest
expense in 2000 and was the result of higher average cash balances and higher
interest rates earned on investments during 2000. The Company had monthly
average total cash and cash equivalents of $183.6 million during the three
months ended March 31, 2000 compared with $129.3 million in the three months
ended March 31, 1999.
Income Taxes. Income taxes for the three months ended March 31, 2000
and 1999 were based on the estimated annual effective tax rates for each year.
The annual effective tax rate is estimated using the federal statutory income
tax rate, increased for the effect of state income taxes, net of federal
benefit, and estimated earnings before income taxes for the full year.
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Liquidity and Capital Resources
The Company's primary source of capital in both 2000 and 1999 was
internally generated cash. Cash and cash equivalents at March 31, 2000 were
$83.1 million compared with $55.9 million at March 31, 1999, an increase of
$27.3 million, while total debt, all of which is long-term, remained at
approximately $259 million. The Company has a standby $25 million secured
revolving credit facility with an initial term expiring in 2002. Management
currently intends no more than minimal use of this revolving credit facility and
expects that internally generated cash will continue to be the Company's primary
source of capital in 2000 and for the foreseeable future.
Operating Activities. Net cash used in operating activities during the
three months ended March 31, 2000 and 1999 was $228.5 million and $195.8
million, respectively. The most significant use of cash in each period related
to payments for both seasonal and nonseasonal inventory purchases, as evidenced
by the net decreases in accounts payable during each period of $179.1 million
and $193.4 million, respectively. Seasonal inventory purchases typically begin
during the third quarter and continue into the fourth quarter, while payment is
typically due near the beginning of the following year. Nonseasonal inventory
purchases are made throughout the year and fluctuate with the timing and
strength of new releases and store count. While inventory levels typically
decline following the Christmas season, the decrease was not as significant for
the first quarter of 2000 compared with the first quarter of 1999 due to
purchases in the first quarter of the movie Star Wars Episode I to be released
in April 2000. Inventories at March 31, 2000 of $433.0 million were $27.1
million higher than at March 31, 1999 primarily as a result of the purchasing
activity for the new release.
The decreases in other current liabilities at March 31, 2000 and 1999
from the respective December 31 of the previous year primarily relate to income
taxes and redemption of gift certificates. For the three months ended March 31,
2000 and 1999, the Company made income tax payments, net of refunds, of $28.8
million and $15.0 million, respectively. The increase in the amount of payments
in 2000 was due to the increase in earnings for the year ended December 31, 1999
over 1998 and higher estimated tax payments for 2000. Redemption of gift
certificates, net of new gift certificates issued, were $17.1 million in the
first quarter of 2000 compared with $15.1 million in the first quarter of 1999.
Other changes in operating assets and liabilities are primarily related to the
seasonal nature of the business and also reflect the effect of store openings
and closings.
Investing Activities. Store expansion and closings were as follows for
the periods indicated:
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------ -------------------
2000 1999 2000 1999
-------- -------- -------- ---------
Openings:
Mall Stores..................... 2 2 14 9
Superstores..................... 3 - 28 7
Total (1)..................... 5 2 42 16
Closings:
Mall Stores..................... (23) (8) (39) (24)
Superstores..................... - - (2) -
Total (1)..................... (23) (21) (42) (39)
Net increase (decrease):
Mall Stores..................... (21) (6) (25) (15)
Superstores..................... 3 - 26 7
Total (1)..................... (18) (19) - (23)
- ------------------------------
(1) The totals include United Kingdom stores.
The Company's planned capital expenditures for the year ending December
31, 2000 are expected to be in the range of $55 to $60 million, the majority of
which will include expenditures for existing stores as well as approximately 60
new stores. The Company's expenditures for existing stores include the remodel
or relocation of over 100 stores as well as the general upkeep of both Mall
Stores and Superstores. The Company's current plans for new store openings
include five music stores, up to
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16 Suncoast stores, up to five Media Play stores and up to 35 On Cue stores. In
addition, capital expenditures are planned for the improvement of the Company's
E-commerce sites, the first phase in the development of new web-enabled store
systems and enhancements to the Company's distribution facilities in Franklin,
Indiana. Management plans to use primarily internally generated cash to finance
these capital expenditures. The Company currently plans to close a total of
approximately 38 stores during the year, primarily when the leases expire, as
part of management's ongoing review of store profitability.
The most significant portion of the Company's capital expenditures
during the first three months of 1999 related to the remodeling, relocation and
general upkeep of existing stores. The closings resulted from the Company's
ongoing monitoring of store performance in conjunction with lease expirations.
Financing Activities. The Company's predominant source of financing for
the three months ended March 31, 2000 and 1999 was internally generated cash.
There was no revolver borrowing activity during either period. During the first
three months of 2000, the Company used internally generated cash to purchase
1,735,100 shares of its common stock at a cost of $13.1 million. The stock
purchase is part of a program authorized by the Company's board of directors to
use excess cash to repurchase up to six million shares of common stock on the
open market. From inception of the program in the fourth quarter of 1999 through
March 31, 2000, the Company has repurchased a total of 3,750,800 shares for an
aggregate cost of $27.8 million. The shares repurchased will be used for stock
issued in connection with awards under the Company's stock option and incentive
plans.
The initial term of the $25 million standby revolving credit facility
expires in September 2002 and is renewable annually thereafter. Maturities of
the senior subordinated notes are $110 million in 2003 and $150 million in 2008.
The $110 million senior subordinated notes may be redeemed prior to maturity, at
the Company's option, at 102.25% of par on and after June 15, 1999 and
thereafter at prices declining annually to 100% of par on and after June 15,
2001. The $150 million senior subordinated notes may be redeemed prior to
maturity, at the Company's option, at 104.938% of par on and after March 15,
2003 and thereafter at prices declining annually to 100% of par on and after
March 15, 2006. The Company's board of directors has authorized the repurchase
of up to $25 million of either of its outstanding issues of senior subordinated
notes by redemption or through the market maker. The timing and amount of
purchases will depend primarily on market conditions. Management expects to use
internally generated cash for any such repurchases and believes it will be able
to secure adequate financing to repay the senior subordinated notes when they
mature.
Other Matters
Seasonality. The Company's business is highly seasonal, with sales
peaking during the Christmas holiday season as is typical for most retailers.
Because of the higher sales volume and extended payment terms generally provided
by most product vendors for seasonal inventory purchases, the Company's cash
position is generally highest at the end of December. For the year ended
December 31, 1999, 38.2% of the Company's sales and 93.8% of the Company's net
earnings were generated in the fourth quarter. Quarterly results are affected
by, among other things, the timing and strength of new product offerings, the
timing of holidays, new store openings and sales performance of existing stores.
Year 2000. To date, the Company has not experienced any significant
business disruptions and has had no delays in receiving product from its
suppliers as a result of the Year 2000. While the risks associated with Year
2000 readiness peaked with the change of the date from December 31, 1999 to
January 1, 2000, there is a risk that a Year 2000 related issue could surface
within the year. The Company plans to continue to devote the necessary resources
to resolve all significant Year 2000 issues in a timely manner.
Forward-Looking Statements. This quarterly report on Form 10-Q contains
certain forward-looking statements, as defined in the Private Securities
Litigation Reform Act of 1995, relating to the
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Company's operations that are based on management's current expectations,
estimates and projections about the Company and the home entertainment industry.
Words such as "believes," "expects," "may," "will," "should," "seeks,"
"anticipates," "intends" or "plans," either in the positive or negative, or
discussions of strategy or intentions are used to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions that are difficult to predict.
Further, some forward-looking statements are based upon assumptions as to future
events that may not prove to be accurate. Examples of factors that could cause
actual outcomes and results to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements are: changes in consumer demand and demographics; increases in labor
costs; the ability to attract and retain qualified personnel; effects of
competition, especially in the retailing of music and video products; possible
disruptions or delays in the opening of new stores or the inability to obtain
suitable sites for new stores; higher than anticipated store closing or
relocation costs; unanticipated increases in merchandise or occupancy costs; the
performance of the Company's E-commerce sites; the Company's ability to
integrate enhancements to its existing systems and to implement new
technologies; possible increases in shipping rates or interruptions in shipping
service; changes in prevailing interest rates and the availability of and terms
of financing to fund the anticipated growth of the Company's business and other
factors that may be outside of the Company's control. The Company's repurchase
of its common stock and senior subordinated notes is also dependent on the
availability of excess cash, the attractiveness of prevailing market prices and
restrictive covenants by which the Company is bound. Therefore, actual outcomes
and results may differ materially from what is expressed or forecasted in such
forward-looking statements. Management undertakes no obligation to update
publicly any forward-looking statement for any reason, even if new information
becomes available or other events occur in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company holds no derivative instruments and does not engage in
hedging activities.
13
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities
(c) During the quarterly period ended March 31, 2000, the remaining
outstanding warrants for the purchase of common stock were exercised as follows:
Warrants Warrants
Shares of Cancelled Cancelled
Common Aggregate With For
Stock Cash Cashless Fractional
Exercise Date Warrant Holder Issued Proceeds Exercise Shares
- ------------- ----------------- --------- ------------ ----------- ----------
Jan. 12, 2000 Triton Capital 208,371 N/A 50,872.04 0.88
Investments, Ltd.
Jan. 12, 2000 JMG Convertible 208,849 N/A 50,988.73 0.84
Investments LP
These shares were issued pursuant to an exemption from registration
under Section 4(2) and/or Regulation D of the General Rules and Regulations
promulgated under the Securities Act of 1933 as a sale by the issuer not
involving a public offering. The warrants were originally issued in June 1997 to
12 accredited investors. No underwriters were used for either the issuance or
the exercise of the warrants.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following are filed as exhibits to Part I of this Form 10-Q:
Exhibit No. Description
- ----------- -----------------------------------------------------------------
11. Statement re computation of per share earnings (the requirements
of this exhibit are met by Note 3 of Notes to Consolidated
Financial Statements)
15. Letter re unaudited interim financial information
27. Financial Data Schedules
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended March
31, 2000.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MUSICLAND STORES CORPORATION
(Registrant)
By: /s/ Keith A. Benson
------------------------------
Keith A. Benson
Vice Chairman, Chief Financial
Officer and Director
(authorized officer, principal
financial and accounting officer)
Date: May 12, 2000
-----------------------------
15
Exhibit 15
Letter re unaudited interim financial information
May 12, 2000
To Musicland Stores Corporation:
We are aware that Musicland Stores Corporation has incorporated by reference in
its Registration Statements Nos. 33-50520, 33-50522, 33-50524, 33-82130,
33-99146, 333-51401 and 333-68275, its Form 10-Q for the quarter ended March 31,
2000, which includes our report dated April 25, 2000, covering the unaudited
interim financial information contained therein. Pursuant to Regulation C of the
Securities Act of 1933, that report is not considered a part of those
registration statements prepared or certified by our firm or a report prepared
or certified by our firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Musicland Stores Corporation and subsidiaries
as of March 31, 2000, and the related consolidated statement of earnings
for the three-month period ended March 31, 2000, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-01-2000
<PERIOD-END> Mar-31-2000
<CASH> 83,128
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 432,988
<CURRENT-ASSETS> 551,203
<PP&E> 472,098
<DEPRECIATION> 235,297
<TOTAL-ASSETS> 799,231
<CURRENT-LIABILITIES> 402,049
<BONDS> 258,971
0
0
<COMMON> 367
<OTHER-SE> 98,533
<TOTAL-LIABILITY-AND-EQUITY> 799,231
<SALES> 415,821
<TOTAL-REVENUES> 415,821
<CGS> 263,284
<TOTAL-COSTS> 263,284
<OTHER-EXPENSES> 145,318
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,869
<INCOME-PRETAX> 3,350
<INCOME-TAX> 1,306
<INCOME-CONTINUING> 2,044
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,044
<EPS-BASIC> .06
<EPS-DILUTED> .06
</TABLE>
