UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 32,128,905 shares of common stock outstanding on
July 3, 2000.
<PAGE>
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 14
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 17
2
<PAGE>
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 Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Sales............................... $ 402,486 $ 381,059 $ 818,307 $ 782,856
Cost of sales....................... 250,001 237,931 513,285 496,151
--------- --------- --------- ---------
Gross profit..................... 152,485 143,128 305,022 286,705
Selling, general and administrative
expenses........................... 133,876 124,551 268,684 250,946
Depreciation and amortization....... 10,857 10,082 21,367 19,892
--------- --------- --------- ---------
Operating income................. 7,752 8,495 14,971 15,867
Interest expense.................... 4,941 6,354 8,810 11,763
--------- --------- --------- ---------
Earnings before income taxes..... 2,811 2,141 6,161 4,104
Income taxes........................ 1,097 642 2,403 1,231
--------- --------- --------- ---------
Net earnings..................... $ 1,714 $ 1,499 $ 3,758 $ 2,873
========= ========= ========= =========
Basic earnings per common share..... $ 0.05 $ 0.04 $ 0.12 $ 0.08
========= ========= ========= =========
Diluted earnings per common share... $ 0.05 $ 0.04 $ 0.11 $ 0.08
========= ========= ========= =========
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)
June 30,
--------------------- December 31,
2000 1999 1999
---------- ---------- ------------
ASSETS
Current assets:
Cash and cash equivalents............... $ 53,570 $ 61,657 $ 335,693
Short-term investments.................. 10,000 - -
Inventories............................. 428,921 399,188 444,792
Deferred income taxes................... 27,238 16,200 27,300
Other current assets.................... 8,262 8,282 9,162
---------- ---------- ------------
Total current assets.................. 527,991 485,327 816,947
Property, at cost.......................... 484,177 439,467 467,526
Accumulated depreciation and amortization.. (243,246) (215,353) (230,976)
---------- ---------- ------------
Property, net........................... 240,931 224,114 236,550
Other assets............................... 11,113 9,638 10,077
---------- ---------- ------------
Total Assets.......................... $ 780,035 $ 719,079 $ 1,063,574
========== ========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................ $ 287,916 $ 258,415 $ 476,191
Other current liabilities............... 100,360 91,253 179,171
---------- ---------- ------------
Total current liabilities............. 388,276 349,668 655,362
Long-term debt............................. 258,493 258,909 258,950
Other long-term liabilities................ 38,040 42,482 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: June 30, 2000, 36,710,505;
December 31, 1999, 36,187,454;
June 30, 1999, 36,142,986)............ 367 361 362
Additional paid-in capital.............. 262,024 261,526 261,534
Accumulated deficit..................... (124,507) (183,772) (128,265)
Deferred compensation................... (4,732) (5,792) (5,237)
Common stock subscriptions.............. (4,303) (4,303) (4,303)
Treasury stock, at cost (June 30, 2000,
4,581,600 shares; December 31, 1999,
2,015,700 shares)..................... (33,623) - (14,733)
---------- ---------- ------------
Total stockholders' equity............ 95,226 68,020 109,358
---------- ---------- ------------
Total Liabilities and Stockholders'
Equity............................... $ 780,035 $ 719,079 $ 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)
Six Months Ended
June 30,
----------------------
2000 1999
---------- ----------
OPERATING ACTIVITIES:
Net earnings......................................... $ 3,758 $ 2,873
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization...................... 22,368 21,472
Disposal of property............................... 1,018 1,905
Deferred income taxes.............................. (123) (400)
Other.............................................. (50) -
Changes in operating assets and liabilities:
Inventories....................................... 15,871 47,522
Other current assets.............................. 900 2,113
Accounts payable.................................. (188,275) (193,995)
Other current liabilities......................... (78,671) (63,326)
Other assets...................................... (1,240) (332)
Other long-term liabilities....................... (1,864) (1,152)
---------- ----------
Net cash used in operating activities........... (226,308) (183,320)
---------- ----------
INVESTING ACTIVITIES:
Capital expenditures................................. (26,765) (12,485)
Increase in short-term investments................... (10,000) -
---------- ----------
Net cash used in investing activities........... (36,765) (12,485)
---------- ----------
FINANCING ACTIVITIES:
Principal payments on long-term debt................. (450) -
Purchase of treasury stock........................... (18,890) -
Proceeds from sale of common stock................... 290 244
---------- ----------
Net cash provided by (used in) financing
activities....................................... (19,050) 244
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS.............. (282,123) (195,561)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....... 335,693 257,218
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............. $ 53,570 $ 61,657
========== ==========
CASH PAID DURING THE PERIOD FOR:
Interest............................................ $ 12,514 $ 12,950
Income taxes, net................................... 32,955 21,226
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 and six months ended June 30, 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 Six Months Ended
June 30, June 30,
------------------ -----------------
2000 1999 2000 1999
-------- -------- -------- --------
Weighted average common shares
outstanding - basic.............. 32,002 35,517 32,543 35,480
Dilutive effect of stock options.. 508 676 510 711
Dilutive effect of warrants....... - 448 25 459
-------- -------- -------- --------
Weighted average common shares
outstanding - diluted............ 32,510 36,641 33,078 36,650
======== ======== ======== ========
Antidilutive stock options........ 2,405 1,797 2,647 1,568
======== ======== ======== ========
Antidilutive stock options outstanding had an exercise price greater than
the average market price during the period.
6
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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.
Three Months Ended June 30,
------------------------------------------------------------
2000 1999
----------------------------- -----------------------------
Stores Stores
and Other E-commerce Total and Other E-commerce Total
--------- ---------- -------- --------- ---------- --------
Sales (1)......... $ 400,814 $ 1,672 $402,486 $ 381,031 $ 28 $381,059
Operating income
(loss)........... 10,892 (3,140) 7,752 9,708 (1,213) 8,495
Depreciation and
amortization..... 10,557 300 10,857 10,021 61 10,082
Income taxes...... 2,319 (1,222) 1,097 1,114 (472) 642
Net earnings
(loss)........... 3,632 (1,918) 1,714 2,240 (741) 1,499
Six Months Ended June 30,
------------------------------------------------------------
2000 1999
----------------------------- -----------------------------
Stores Stores
and Other E-commerce Total and Other E-commerce Total
--------- ---------- -------- --------- ---------- --------
Sales (1)......... $ 814,720 $ 3,587 $818,307 $ 782,828 $ 28 $782,856
Operating income
(loss)........... 20,582 (5,611) 14,971 17,361 (1,494) 15,867
Depreciation and
amortization..... 20,774 593 21,367 19,831 61 19,892
Income taxes...... 4,586 (2,183) 2,403 1,812 (581) 1,231
Net earnings
(loss)........... 7,186 (3,428) 3,758 3,786 (913) 2,873
-----------------------
(1) Sales for E-commerce include shipping and handling charges to customers.
The Company's management utilizes various measurements to assess
segment performance. Corporate administration, certain other indirect expenses
and interest expense, none of which are allocated to E-commerce, are identified
as "other" and are combined 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.
7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Musicland Stores Corporation:
We have reviewed the accompanying consolidated balance sheets of Musicland
Stores Corporation (a Delaware corporation) and Subsidiaries as of June 30, 2000
and 1999, and the related consolidated statements of earnings for the
three-month and six-month periods ended June 30, 2000 and 1999, and the
consolidated statements of cash flows for the six-month periods ended June 30,
2000 and 1999. 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,
July 28, 2000
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Second quarter 2000 net earnings grew to $1.7 million, or $0.05 per
share, compared with net earnings of $1.5 million, or $0.04 per share, in 1999.
For the first half, net earnings were $3.8 million, or $0.11 per diluted share,
in 2000 compared with $2.9 million, or $0.08 per diluted share, in 1999. The
principal factors leading to the earnings improvements in 2000 were the growth
in comparable store sales, gross margin improvements and reduced interest
expense, which more than offset the loss generated from E-commerce operations.
The loss from E-commerce operations in the second quarter, including
certain corporate expenses related to E-commerce and net of income tax benefit,
reduced net earnings in 2000 by $1.9 million, or $0.06 per share, versus a
reduction of $0.7 million, or $0.02 per share, in 1999. The loss from E-commerce
operations for the six months ended June 30, 2000 and 1999 was $3.4 million and
$0.9 million, respectively, or a loss $0.11 and $0.03, respectively, on a per
share basis. The Company plans to continue to make investments in its E-commerce
operations during the second half of 2000. 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 and
net of income tax benefit, to reduce earnings per share by up to $0.30 for the
year ended December 31, 2000. See Note 4 of Notes to Consolidated Financial
Statements.
The following tables present 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 June 30,
-----------------------------------------------
Percent of Total
Percent ----------------
2000 1999 Incr.(Decr.) 2000 1999
-------- -------- ------------ ------- -------
(Dollars in millions)
Sales:
Mall Stores............... $ 255.9 $ 248.9 2.8% 63.6% 65.3%
Superstores............... 144.9 132.1 9.7 36.0 34.7
E-commerce (1)............ 1.7 - N/A 0.4 -
Total (2)............... 402.5 381.1 5.6 100.0 100.0
Comparable store sales
increase (3):
Mall Stores............... 4.9% 3.7% N/A N/A N/A
Superstores............... 3.3 5.7 N/A N/A N/A
E-commerce (1)............ N/A N/A N/A N/A N/A
Total (2)............... 4.5 4.4 N/A N/A N/A
9
<PAGE>
Six Months Ended June 30,
-----------------------------------------------
Percent of Total
Percent ----------------
2000 1999 Incr.(Decr.) 2000 1999
-------- -------- ------------ ------- -------
(Dollars and square footage in millions)
Sales:
Mall Stores............... $ 517.7 $ 506.1 2.3% 63.3% 64.7%
Superstores............... 297.0 275.6 7.8 36.3 35.2
E-commerce (1)............ 3.6 - N/A 0.4 -
Total (2)............... 818.3 782.9 4.5 100.0 100.0
Comparable store sales
increase (3):
Mall Stores............... 3.9% 2.7% N/A N/A N/A
Superstores............... 2.2 6.0 N/A N/A N/A
E-commerce (1)............ N/A N/A N/A N/A N/A
Total (2)............... 3.3 3.8 N/A N/A N/A
Number of stores open at
end of period:
Mall Stores............... 1,065 1,093 (2.6) 80.2 82.5
Superstores............... 263 232 13.4 19.8 17.5
Total................... 1,328 1,325 0.2 100.0 100.0
Total store square footage
at end of period:
Mall Stores............... 4.0 4.0 0.8 46.1 48.2
Superstores............... 4.7 4.3 9.5 53.9 51.8
Total................... 8.7 8.3 5.3 100.0 100.0
Mall stores include Sam Goody/Musicland and Suncoast stores.
Superstores include Media Play and On Cue stores.
----------------------------------------------
(1) E-commerce sales in June of 1999, the first month of online retailing, were
$0.03 million. E-commerce sales in 2000 include shipping and handling
revenues of $0.3 million and $0.6 million for the respective three months
and six months ended June 30, 2000.
(2) The 1999 totals include United Kingdom stores.
(3) 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 and six months
ended June 30, 2000 were primarily the result of the comparable store sales
growth in existing stores and the incremental sales contributed by the 32 new
Superstores opened since June 30, 1999. Comparable store sales results for the
second quarter of 2000 reflect the 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. Significant sales
increases in video also contributed to the comparable store sales growth in
2000. The comparable store sales percentage increase (decrease) and the
percentage of total sales attributable to the Company's music and video product
categories are presented below.
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------
2000 1999 2000 1999
-------- -------- ------- -------
Music, including music video........ (0.3)% 4.5 % 1.8 % 2.7 %
Video, excluding music video........ 15.5 (2.2) 6.2 0.8
Music and video as a percentage
of total sales.................... 80.2 80.6 80.1 80.7
DVD sales as a percentage of
total video sales................. 32.1 20.0 32.4 19.4
The lack of major music releases in June slowed the comparable store
sales growth in music for the second quarter and first half of 2000. The main
contributors to the comparable store sales growth in video for both the second
quarter and first half of 2000 were the strong sales of the recent box office
hit movie Star Wars Episode I: The Phantom Menace and the significant growth in
DVD sales.
10
<PAGE>
Gross Profit. Gross profit as a percentage of sales was 37.9% in the
second quarter of 2000 compared with 37.6% in the second quarter of 1999, an
increase of 0.3%. For the first half of 2000, gross margin improved 0.7% to
37.3% from 36.6% in 1999. A decrease in inventory shrinkage added 0.3% to gross
margin in both the second quarter and first half of 2000. The balance of the
gross margin improvement in the first half was attributable to selective price
increases over the last twelve months.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the second quarter of 2000 increased $9.3 million, or
7.5%, over the second quarter of 1999. For the first half of 2000, selling,
general and administrative expenses were $268.7 million compared with $250.9
million for the same period in 1999, an increase of $17.7 million. The increases
were primarily attributable to store expenses and expenditures for the Company's
E-commerce operations. Store expenses, excluding depreciation and amortization,
increased by $4.6 million and $10.5 million, respectively, for the three months
and six months ended June 30, 2000 over the same periods in 1999. The higher
level of store expenses in 2000 reflects 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 $2.0 million and
$4.3 million higher in the second quarter and first half of 2000, respectively,
than in the same periods 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.
Selling, general and administrative expenses as a percentage of sales
for the second quarter were 33.3% in 2000 compared with 32.7% in 1999 and for
the first half were 32.8% in 2000 compared with 32.1% in 1999. The percentage
rate increases resulted primarily from the increases to expense previously
discussed.
Depreciation and Amortization. Depreciation and amortization for the
second quarter and first half of 2000 increased $0.8 million and $1.5 million,
respectively, over the same periods in 1999. The increases were 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 is reduced by interest income in
each period. The decrease in interest expense in 2000 was the result of the
additional interest income generated from higher levels of cash available for
investment and higher interest rates earned on investments during 2000.
Components of interest expense were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------
2000 1999 2000 1999
-------- -------- ------- -------
(in millions)
Revolver facility costs................ $ - $ 0.2 $ - $ 0.5
Interest on senior subordinated notes.. 6.2 6.2 12.4 12.4
Debt issuance costs, discount and
other interest..................... 0.2 0.5 0.5 1.0
Interest income........................ (1.5) (0.5) (4.1) (2.1)
-------- -------- ------- -------
Total.............................. $ 4.9 $ 6.4 $ 8.8 $ 11.8
======== ======== ======= =======
Monthly average total cash and cash
equivalents and short-term
investments........................ $ 76.4 $ 51.4 $130.5 $ 89.1
======== ======== ======= =======
Income Taxes. Income taxes for the three months and six months ended
June 30, 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.
11
<PAGE>
Liquidity and Capital Resources
The Company's primary source of capital in both 2000 and 1999 was
internally generated cash. At June 30, 2000, the Company had cash and cash
equivalents of $53.6 million and short-term investments of $10 million. The
Company has a standby $25 million secured revolving credit facility with an
initial term expiring in 2002. Management currently intends to have 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
six months ended June 30, 2000 and 1999 was $226.3 million and $183.3 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 decrease in accounts payable during each period of $188.3 million and
$194.0 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, store count and store square footage. Inventories at
June 30, 2000 of $428.9 million increased $29.7 over inventories of $399.2
million at June 30, 1999. The higher inventory levels are attributable to the
increases in store count and square footage over the last twelve months and
additional investments in DVD inventory in response to the rapid growth in
popularity of the format.
The decreases in income taxes and deferred gift certificate revenue at
June 30, 2000 and 1999 from the respective December 31 of the previous year
accounted for the majority of the decrease in other current liabilities in each
period. For the six months ended June 30, 2000 and 1999, the Company made income
tax payments, net of refunds, of $33.0 million and $21.2 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. Redemptions of gift certificates, net of new gift
certificates issued, were $19.8 million in the first six months of 2000 compared
with $16.2 million in the first six months of 1999. The majority of gift
certificate sales occur during the Christmas holiday season, while the majority
of gift certificate redemptions occur early in the following year. Other
operating assets and liabilities, such as payroll and related taxes and benefits
and sales taxes payable, fluctuate with the seasonality of the business and the
timing of store openings and closings.
Investing Activities. Store expansion and closings were as follows for
the periods indicated:
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ---------------- -------------------
2000 1999 2000 1999 2000 1999
-------- -------- -------- ------- --------- --------
Openings:
Mall Stores........ 5 2 7 4 17 11
Superstores........ 7 3 10 3 32 10
Total (1)....... 12 5 17 7 49 21
Closings:
Mall Stores........ (10) (4) (33) (12) (45) (20)
Superstores........ (1) (2) (1) (2) (1) (2)
Total (1)....... (11) (7) (34) (28) (46) (37)
Net increase (decrease):
Mall Stores........ (5) (2) (26) (8) (28) (9)
Superstores........ 6 1 9 1 31 8
Total (1)....... 1 (2) (17) (21) 3 (16)
----------------------------------
(1) The 1999 totals include United Kingdom stores.
The Company's planned capital expenditures for the year ending December
31, 2000 are expected to be approximately $60 million, the majority of which
will include expenditures for existing stores as well as approximately 60 or
more 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
in 2000 include up to six music
12
<PAGE>
stores, up to 16 Suncoast stores, up to five Media Play stores and up to 37 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 up to 50 stores in 2000, 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 six 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.
The Company from time to time invests a portion of excess cash in
liquid investments which have a maturity greater than three months when
purchased. Short-term investments at June 30, 2000 were $10 million.
Financing Activities. The Company's predominant source of financing for
the six months ended June 30, 2000 and 1999 was internally generated cash. There
was no revolver borrowing activity during either period. During the first six
months of 2000, the Company used internally generated cash to purchase 2,565,900
shares of its common stock at a cost of $18.9 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 June 30,
2000, the Company has repurchased a total of 4,581,600 shares for an aggregate
cost of $33.6 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 101.125% of par up to June 15, 2001 and at 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. During the second
quarter of 2000, the Company used internally generated cash to purchase $0.5
million of the $110 senior subordinated notes at 90% of par. The timing and
amount of any additional 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.
Forward-Looking Statements. This quarterly report on Form 10-Q contains
certain forward-looking statements relating to the 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," "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
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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 competitive
business practices and new technology, 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 has not entered into any transactions using derivative
financial instruments or derivative commodity instruments and believes that its
exposure to market risk associated with other financial instruments (such as
cash equivalents and short-term investments) and interest rate risk is not
material.
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Stockholders' meeting on May 8, 2000.
(c) (1) The election of three directors to serve for three-year terms was
approved.
Affirmative Voting Authority
Name Votes Withheld
------------------- ------------ ----------------
Keith A. Benson 29,842,983 861,529
Gilbert L. Wachsman 29,819,496 885,016
Tom F. Weyl 29,937,774 766,738
There were no abstentions and no broker non-votes.
Continuing as directors were Jack W. Eugster, Kenneth F. Gorman,
William A. Hodder, Josiah O. Low, III, Terry T. Saario and Michael W.
Wright.
(2) The appointment by the Board of Directors of Arthur Andersen LLP,
independent public accountants, as independent auditors of the
Company for the year ending December 31, 2000, was voted on and
approved. There were 30,603,056 votes for, 75,057 votes against,
26,399 abstentions and no broker non-votes.
(3) The amendment of the Musicland Stores Corporation 1998 Stock
Incentive Plan to increase the number of authorized shares under the
plan was ratified. There were 18,600,877 votes for, 6,123,694 votes
against, 102,574 abstentions and 5,877,367 broker non-votes.
Item 5. Other Information
Jonathan T.M. Reckford was appointed President of Stores (Mall Stores
and Superstores) effective July 12, 2000. Mr. Reckford joined the Company in May
of 1999 as President, Mall Stores Division. Prior to joining the Company, Mr.
Reckford most recently held the position of Senior Vice President of Corporate
Planning and Communications at Circuit City. Gary A. Ross resigned as President,
Superstores Division and had served in that position since August 1996. Mr. Ross
joined the Company in 1984.
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 Schedule
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The following are filed as exhibits to Part II of this Form 10-Q:
Exhibit No. Description
----------- ----------------------------------------------------------------
10.7 Musicland Stores Corporation 1998 Stock Incentive Plan, as
amended
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended June
30, 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MUSICLAND STORES CORPORATION
(Registrant)
By: /s/ Keith A. Benson
----------------------------------
Keith A. Benson
Vice Chairman, Chief Financial
Officer and Director
(authorized officer, principal
financial and accounting officer)
Date: August 11, 2000
--------------------------------
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