UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11014
MUSICLAND STORES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 41-1623376
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10400 Yellow Circle Drive,
Minnetonka, Minnesota 55343
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (952) 931-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
---
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant on March 10, 2000 was approximately $213,243,536 based on the
closing stock price of $6.9375 on the New York Stock Exchange on such date (only
directors and executive officers of the Registrant are considered affiliates for
this calculation).
The Registrant had 33,078,941 shares of common stock outstanding on
March 10, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held May 8, 2000 (the "Proxy Statement") are incorporated by
reference into Part III.
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PART I
ITEM 1. BUSINESS
General
The Company is the leading specialty retailer of home entertainment
products in the United States and is one of the largest national full-media
retailers of music, video, books, computer software, video games and other
entertainment related products. The Company's stores operate in one segment
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 ("Suncoast"), and (ii) non-mall based full-media
superstores ("Superstores"), operating under the trade names Media Play and On
Cue. At December 31, 1999, the Company operated 1,345 stores in 49 states, the
District of Columbia, the Commonwealth of Puerto Rico and the Virgin Islands,
with total store square footage of 8.6 million.
The Company met its stated objectives for 1999 of (i) increasing
profitability, (ii) improving net cash position, (iii) adding retail square
footage and (iv) establishing an e-commerce presence. Total sales of $1.89
billion and net earnings of $58.4 million, or $1.60 per diluted share, set new
records for the Company, exceeding the previous record sales and net earnings in
1998 by 2.4% and 53.5%, respectively. Operating performance continued to improve
in all of the Company's retail store chains in 1999. These performance
improvements contributed to increases in inventory turnover and cash flows
during 1999. Cash and cash equivalents, which are generally highest at the end
of December following the Christmas season, reached $335.7 million by year-end,
while total debt, all of which is long-term, remained at approximately $259
million.
Total store square footage increased 3.4% to 8.6 million in 1999,
representing the first net increase in total square footage since 1995. The
Company opened 39 new stores in 1999 and closed 40 stores, including the 14
remaining stores in the United Kingdom. Media Play and On Cue stores accounted
for the majority of the total new store square footage and store count,
respectively. In addition to new stores, the Company continued to remodel or
relocate existing stores and established an e-commerce presence with the launch
of four e-commerce sites in June of 1999. Capital expenditures in 1999 for these
and other capital projects totaled approximately $45.0 million, net of landlord
and other funding. The Company's board of directors has authorized the
repurchase of up to six million shares of the Company's common stock on the open
market. During 1999, the Company repurchased 2.0 million shares for an aggregate
cost of $14.7 million.
The Company's objectives in 2000 are to (i) strengthen its e-commerce
presence through increased investment, (ii) begin the first phase in the
development of new, web-enabled store systems, (iii) invest capital to remodel
Mall Stores and expand Superstores and (iv) continue to improve the
profitability of the base brick-and-mortar business. During 2000, the Company
plans to open approximately 60 new stores and close 30 or more stores. The
remodeling and closing of stores will occur primarily at the end of the lease
term in connection with management's ongoing review of store profitability.
Capital expenditures in 2000 for these programs and other capital projects are
expected to be approximately $60 million.
Musicland Stores Corporation ("MSC") was incorporated in Delaware in
1988 and acquired The Musicland Group, Inc. ("MGI") on August 25, 1988. MGI was
incorporated in Delaware in 1977 as a successor corporation to a number of
companies that participated in the music business as early as 1956. The
principal asset of Musicland Stores Corporation is 100% of the outstanding
common stock of MGI, and, since its formation, MSC has engaged in no independent
business operations. MSC and MGI, together with MGI's subsidiaries, are
collectively referred to as the "Company."
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Mall Stores
Sam Goody. Sam Goody is a leading specialty music retailer offering a
broad product selection in an exciting, customer friendly shopping environment.
Sam Goody stores specialize in providing music entertainment products, including
compact discs, audiocassettes, music and movie videos, sheet music, music
inspired apparel, posters and novelties and other music-related accessories. The
music stores are predominantly found in mall locations and range in size from
1,000 to 30,000 square feet, averaging 4,500 square feet. The larger music
stores are often in more prominent mall or downtown locations and carry a
broader inventory of catalog product, including substantial classical and jazz
offerings as well as deep video assortments.
During 1999, the Company opened five new Sam Goody stores and closed 21
stores. In recent years, the Company has relocated several stores. Most of the
relocations are part of an ongoing strategy to replace one or more smaller
stores in a mall with a store in a more prominent location in the same mall.
Many of the moves position Sam Goody as the exclusive music retailer in the
mall. Sam Goody was the single music retailer in 301 malls at the end of 1999.
Most of the music stores previously operated under the Musicland name have been
converted to the Sam Goody name.
As of December 31, 1999, the Company operated 680 music stores in 49
states, the District of Columbia, the Commonwealth of Puerto Rico and the Virgin
Islands. The total square footage of music stores was approximately 3.1 million
square feet, or 35.4% of the Company's total store square footage as of December
31, 1999. In 2000, the Company plans to open approximately ten new stores and
close 20 or more stores. The Company also plans to remodel or relocate
approximately 83 stores throughout the year.
Suncoast. Suncoast is the dominant mall based video retailer in the
United States, emphasizing a broad product selection and a high level of
customer service in an entertaining atmosphere. Suncoast stores average 2,400
square feet in size and feature newly released and classic movies, special
interest videos and episodes from popular TV shows. Complementary products
include Hollywood inspired apparel, posters and other products, as well as blank
videotapes, storage cases and other video-related accessories. Most movies on
videocassette are priced at less than $20 and more than half sell for less than
$15. Each store also offers a wide selection of feature films and videos for
less than $10. Suncoast stores present DVD in a very visible display in the
front of its stores. Although most of the DVD titles are priced at $20 to $30,
an increasing number of titles are priced below $20.
At December 31, 1999, there were 411 Suncoast stores in 46 states, the
District of Columbia and the Commonwealth of Puerto Rico. The Company opened
nine new Suncoast stores during 1999 and closed three stores. The total square
footage of Suncoast stores was approximately 1.0 million square feet, or 11.7%
of the Company's total store square footage as of December 31, 1999. The Company
plans to open approximately 10 new stores and close 10 or more stores in 2000.
The Company also plans to remodel or relocate approximately 30 stores during the
year.
Superstores
Media Play Stores. Media Play is a full-media superstore retailer
located in major metropolitan markets offering a superior assortment of home
entertainment products at competitive prices. The family-oriented Media Play
stores are operated primarily in freestanding and strip mall locations in urban
and suburban areas. Media Play's extensive merchandise assortment provides
customers with one-stop shopping for music, books, movie and specialty videos,
computer software, video games, storage products, personal/portable electronics
and licensed movie, music and sports apparel, as well as other media and related
products including magazines, trading cards, posters and toys. Store features
such as M.P. Kids, Game Zone and Jam Central provide a family oriented and
exciting shopping environment appealing to customers of all ages. The vendor
sponsored M.P. Kids
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department functions as a play area for children and has a wide array of popular
movies, books and interactive and educational toys for children. Game Zone is an
interactive department in which customers can buy both new and used video games,
sample product on one of two game stations and also sell or trade their used
video games. The Jam Central area combines musical instruments, sheet music and
accessories into an exciting in-store boutique.
The Company opened four Media Play stores in 1999 and plans to open six
Media Play stores in 2000. Media Play will enter the Pittsburgh market in 2000
with three of the planned new stores while the remainder of the new stores will
be additions to existing markets. The new stores opened in 1999 and planned for
2000 average approximately 35,000 square feet. The Company also plans to
downsize a select number of existing Media Play stores, which currently average
47,000 square feet, to the current prototype of 30,000 to 40,000 square feet.
The smaller stores are part of the Company's strategy to create a smaller, more
streamlined store format with enhanced departments and upgraded signage and
graphics. At December 31, 1999, the Company operated 73 Media Play stores in 19
states with total square footage of approximately 3.4 million square feet, or
39.8% of the Company's total store square footage.
On Cue Stores. On Cue is a full-media retailer located in small cities,
generally with populations between 10,000 and 30,000 people, providing a wide
assortment of entertainment products at competitive prices and superior customer
service to encourage repeat business. On Cue stores average 6,200 square feet in
size and offer customers a convenient local store to shop for music, books,
videos, computer software, video games and related products. On Cue customers
also have access to over 200,000 music and video titles as well as a
comprehensive selection of book titles through the Company's special order
program. The in-store boutique, Jam Central, is also in On Cue stores and
features an expanded selection of musical instruments and accessories including
keyboards, guitars, microphones, amps, starter drum sets and P.A. systems.
The Company opened 21 On Cue stores and closed two stores in 1999. At
December 31, 1999, the Company operated 181 On Cue stores in 31 states with
total square footage of approximately 1.1 million square feet, or 13.1% of the
Company's total store square footage. The Company plans to open approximately 35
On Cue stores in the Midwest, West Coast and Pacific Northwest during 2000.
E-Commerce
In June of 1999, the Company launched four e-commerce sites:
SamGoody.com, Suncoast.com, MediaPlay.com and OnCue.com. The sites offer a
diverse selection of products frequently cross-merchandised around entertainment
personalities and themes. A full line of music and video (VHS and DVD) products
are complemented by selected licensed apparel, electronics, accessories, toys,
sheet music, entertainment books, video games and computer software. The
e-commerce strategy integrates the Company's strong store brands and capitalizes
on the Company's nationwide presence, broad fashion-forward merchandise and
state-of-the-art inventory and distribution systems. E-commerce product orders
are fulfilled from the Company's distribution facility in Franklin, Indiana.
Customers accumulate Replay loyalty points for both online and in-store
purchases. The Company's electronic gift card can be purchased and used in any
of the Company's stores or e-commerce sites once it is activated. The gift cards
allow younger buyers who do not have a credit card to shop online. During 2000,
the Company plans to implement upgrades to the e-commerce sites that will
increase online capacity and merchandise offerings. The e-commerce sites are
ready to deliver direct music downloading as demand develops.
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Products
Sales and percentage of total sales attributable to each product group
are as follows:
Years Ended December 31,
------------------------------------------------------
1999 1998 1997
--------------- ---------------- ---------------
Sales % Sales % Sales %
-------- ----- -------- ----- -------- -----
(dollars in millions)
Music:
Compact discs...... $ 832.8 44.0 % $ 781.7 42.3 % $ 707.0 40.0 %
Audiocassettes and
other............ 146.9 7.8 183.0 9.9 223.0 12.6
-------- ----- -------- ----- -------- -----
Total music... 979.7 51.8 964.7 52.2 930.0 52.6
Video:
DVD................ 110.9 5.9 55.4 3.0 9.3 0.5
Videocassettes and
other ........... 404.6 21.3 475.6 25.8 499.8 28.3
-------- ----- -------- ----- -------- -----
Total video... 515.5 27.2 531.0 28.8 509.1 28.8
Books and other
entertainment
products........... 396.6 21.0 351.2 19.0 329.2 18.6
-------- ----- -------- ----- -------- -----
Total...... $1,891.8 100.0 % $1,846.9 100.0 % $1,768.3 100.0 %
======== ===== ======== ===== ======== =====
Music. Sales of music in the U.S. market climbed 6.3% to $14.6 billion
in 1999 from $13.7 billion in 1998 and are expected to grow at a compound annual
rate of 5.5% through 2003, according to such sources as the Recording Industry
Association of America.
Sam Goody stores typically carry 6,000 to 10,000 compact disc titles,
depending upon store size and location, while the largest Sam Goody stores carry
up to 30,000 compact disc titles. Media Play and On Cue stores carry up to
40,000 and 9,000 compact disc titles, respectively. These titles include "hits,"
which are the best selling newer releases, and "catalog" items, which are older
but still popular releases that customers purchase to build their collections.
Video. The video sell-through market, including VHS and DVD, totaled an
estimated $9.9 billion in 1999 and is expected to grow at a compound annual rate
of 4.6% over the next ten years, according to Paul Kagan Associates, Inc. In
1999, the third year of DVD merchandising, the Company's DVD sales exceeded $100
million and were double that of the previous year. The Company expects the
significant growth in DVD sales to continue over the next several years as more
consumers purchase DVD players and more titles become available on the DVD
format. The DVD Video Group reported that DVD players reached an installed base
of nearly 5 million players by the end of 1999.
Nearly all of the Company's stores carry DVD in addition to the
videocassette format. Suncoast and Media Play stores, in particular, devote
significant space and special displays to DVD product. Suncoast stores feature
up to 12,000 titles, including 3,200 in the DVD format. Media Play stores carry
up to 15,000 titles, including 3,200 DVD titles. Sam Goody stores typically
carry 800 DVD titles and 3,000 video titles in total, while the largest Sam
Goody stores carry up to 3,000 DVD titles out of a total of 12,000 video titles.
On Cue stores carry up to 3,500 titles, including 800 DVD titles.
Books and Other Entertainment Products. Media Play and On Cue stores
carry up to 45,000 and 8,500 titles of books, respectively. Other entertainment
products include computer software, video games, electronics, storage cases,
educational toys, sheet music, instruments and brand name blank audio and video
tapes, as well as entertainment related accessories, apparel, posters and
various other trend related items. The Company's stores carry a limited variety
of electronic equipment such as portable compact disc and audio cassette
players, portable stereo systems and kids' electronic products
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at retail prices under $200. DVD players are currently offered in all Media Play
and On Cue stores. Movie and artist related accessories and apparel products are
highly influenced by the trends and fads surrounding popular movies, TV shows,
actors and artists.
Computer software and video games are available primarily in Media Play
and On Cue stores. All Media Play stores and a limited number of On Cue stores
allow customers to buy, sell and trade used video games through the in-store
boutique, Game Zone. The in-store boutique Jam Central is in all Media Play and
On Cue stores and features a selection of guitars, basses, amps, keyboards,
drums, accessories and sheet music. The Company introduced a private-label
Fairmont guitar brand for the 1999 holiday season. Jam Central merchandise will
be available through the Company's e-commerce sites in 2000.
Suppliers
Substantially all of the home entertainment products sold by the
Company are purchased directly from manufacturers. The Company purchases
inventory for its stores from approximately 1,100 suppliers, exclusive of
consignment arrangements. In 1999, approximately 67% of all purchases, net of
returns, were made from the 10 largest suppliers in terms of net purchase
volume. The Company has no long-term contracts with its suppliers and transacts
business principally on an order-by-order basis as is typical throughout the
industry.
The Company received confirmation from its major product vendors
representing 93% of total purchase volume that their systems are Year 2000
ready. The Company made efforts by telephone and the Internet to obtain
information from the remaining product vendors who had not responded to the
Company's Year 2000 readiness inquiries. To date, the Company has not
experienced delays in receiving product from its suppliers related to the Year
2000 issue. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition - Other Matters - Year 2000."
Marketing
The Company's major suppliers offer cooperative advertising support and
provide funds for the placement and position of product. The Company's marketing
programs are designed to build each store's brand image, encourage first-time
visits and reinforce store loyalty among existing customers through a wide
variety of traffic-driving special events and promotions. The Company has
developed marketing and advertising partnerships with its vendors and nationally
recognized corporations for cross promotions, events and sweepstakes that the
Company believes are attractive to shoppers. For the fifth consecutive year, the
Company has run a nationally televised/advertised unsigned band competition, or
"Bandemonium" search, which appeals to its target customers. In addition to the
Sam Goody stores, sponsors of the Bandemonium event in 1999 included the
presenting sponsor PepsiCo, as well as Gibson and L'Oreal. Bandemonium was
expanded in 1999 to include dedicated in-store space for the promotion of
unsigned band product throughout the year. The product will be promoted on the
Company's e-commerce sites in 2000.
Nearly 900,000 customers are members of the Replay program, a frequent
shopper program designed to promote customer loyalty and encourage repeat visits
through special offers and targeted marketing. During 1999, customers of
Suncoast and On Cue stores were added to the existing base of Sam Goody
customers. The program will be expanded to Media Play customers in 2000. The
Company publishes Request, a cutting-edge music and video entertainment
newsmagazine for younger customers distributed in Sam Goody, Media Play and On
Cue stores and also at limited magazine stands. The magazine has a pass-along
readership estimated in the millions. The Request web site, requestmagazine.com,
offers an online version of the music reviews from the magazine together with
downloadable sound clips.
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Store Operations
Sam Goody, Suncoast and On Cue stores are typically managed by a store
manager and an assistant manager. Media Play stores are typically managed by a
general manager, an assistant general manager and three to five department
managers. Most stores are open up to 80 hours per week, seven days a week. The
Company does not extend credit to customers, but most major credit cards are
accepted. In November of 1999, the Company launched a new electronic stored
value card that can be purchased in any denomination and can be reloaded with
additional value at any time. Once activated, the card can be purchased, used
and reloaded at any of the Company's stores as well as its four e-commerce
sites. The cards allow younger consumers who do not have a credit card to shop
online.
The Company has completed and tested the necessary Year 2000
remediations to all of its store systems. To date, the Company has not
experienced any significant business disruption related to the Year 2000. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Other Matters - Year 2000."
Industry and Competitive Environment
The retail home entertainment industry is highly competitive. The
Company competes with other brick-and-mortar retailers and a growing number of
direct-to-consumer alternatives.
Brick-and-Mortar Retailers. The Company competes with large,
established music and video chains, such as those operated by Trans World
Entertainment Corporation, The Wherehouse and Tower Records; consumer
electronics superstores such as Best Buy and Circuit City; mass merchants such
as Wal-Mart, Kmart and Target and other specialty retail stores such as Barnes &
Noble and Borders. Some of these competitors may have greater financial or other
resources than the Company. In addition, the Company also faces competition from
video rental stores, variety discounters and warehouse clubs.
Direct-to-Consumer. The Internet has become an established avenue for
retailing. The purchase of music, video and books, in particular, through the
Internet is increasing in popularity with consumers. The Company's e-commerce
competitors include Amazon.com, CDnow.com, Barnesandnoble.com, mp3.com and
others, most of which have one or more marketing alliances. In addition to the
Internet, consumers receive television and mail order offers and have access to
mail order clubs. The largest mail order clubs are affiliated with major
manufacturers of prerecorded music and video and may have advantageous marketing
relationships with their affiliates. Consumers also have access to cable
television and digital satellite systems, including pay-per-view television.
Many retailers as well as certain distributors are testing technology that
allows for the purchase of music through a digital download via either the
Internet in the home or from an in-store kiosk unit. Although sales to date have
been minimal, consumer interest in this form of distribution could increase as
the technology improves and the assortment of titles available for download
widens.
While consolidation of brick-and-mortar retailers slowed during 1999,
significant consolidation is occurring elsewhere in the home entertainment
industry. Time Warner Inc. recently agreed to be acquired by America Online,
Inc. and also agreed to combine its music operation with Britain's EMI Group
plc. The Sony Corporation of America and Time Warner Music Inc., two of the
Company's largest suppliers, agreed to form a strategic alliance with CDnow,
Inc. for music sales and delivery over the Internet. The Universal Music Group
of Seagram Co. Ltd., another major supplier to the Company, agreed to purchase
50% of an Internet music retailing company operated by Bertelsmann AG, also a
major supplier to the Company.
The Company has adopted strategies to address these industry
developments. The Company began Internet retailing in June of 1999 and plans to
make investments during 2000 to strengthen its e-
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commerce presence and to develop strategic alliances. Web technology will be
utilized to enhance the interactive environment both online and in the stores.
The Company participated in a limited test of digital delivery of music and is
ready to offer music downloading on its e-commerce sites as demand develops.
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. Seasonal purchases of inventory
typically begin during the third quarter and continue into the fourth quarter,
while payment is typically due near the beginning of the following year. 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. See Note 15 of Notes to Consolidated Financial Statements for
quarterly financial data.
Trademarks and Service Marks
The Company owns a number of trademarks, trade names and service marks,
many of which have become key components of the Company's marketing and branding
programs. The Company operates its Mall Stores under the names Sam
Goody(registered), Musicland(registered) and Suncoast Motion Picture
Company(registered) and operates its Superstores under the names Media
Play(registered) and On Cue(registered). In addition, the Company operates five
commercial Web sites using the trade names SamGoody.com-sm
(http://www.samgoody.com), Suncoast.com-sm, Mediaplay.com-sm, OnCue.com-sm and
Requestline.com-sm, and has trademark applications pending for them. The Company
also uses the names REQUEST(registered) and REPLAY(registered) in its
advertising and promotional activities.
Personnel
As of February 21, 2000, the Company employed approximately 5,900
full-time employees and 10,000 part-time employees. Unions represent hourly
employees at 14 of the Company's stores. All other facilities are non-union and
the Company believes that its employee relations are good.
ITEM 2. PROPERTIES
Corporate Headquarters and Distribution Facilities. The Company owns
its corporate headquarters facility in Minneapolis, Minnesota, consisting of an
office building with approximately 94,000 square feet of space on approximately
5.4 acres of land. Additional office, warehouse and storage space located in
Minneapolis, Minnesota totaling approximately 150,000 square feet are under
operating leases that expire at various dates through February 2002. The Company
owns its distribution facilities located in Franklin, Indiana, consisting of a
715,000 square foot building on approximately 66.6 acres of land, with options
on approximately 33.4 additional acres of land. The Company also has
approximately 105,000 square feet of storage space in a building located in
Indianapolis, Indiana, under an operating lease expiring in January 2001.
Retail Stores. At December 31, 1999, the Company operated 1,345 retail
stores, including 1,336 stores in the United States, seven stores in Puerto Rico
and two stores in the Virgin Islands. The Company owns three Media Play stores
and has operating leases for all other stores that expire in various years
through 2016. The leases have noncancelable terms that generally range from
three to 20 years and many include renewal options for additional periods.
Certain store leases provide the Company with an early cancellation option if
sales for a designated period do not reach a specified
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level as defined in the lease. Most of the store leases contain escalation
clauses and require payment of real estate taxes, utilities, common area
maintenance costs and contingent rentals based on percentages of sales in excess
of specified minimums. Certain store leases contain provisions restricting
assignment, merger, change of control or transfer. The following table lists the
number of store leases due to expire or terminate in each year based on the
fixed lease term, giving effect to early cancellation options and excluding
renewal options.
2000..................... 256 2005..................... 169
2001..................... 250 2006..................... 53
2002..................... 125 2007..................... 14
2003..................... 184 2008...................... 22
2004..................... 168 2009 and thereafter....... 101
Of the 506 leases expiring in 2000 and 2001, 123 have renewal options.
In most cases, the Company expects that it should be able either to obtain
renewal leases, if desired, or to obtain leases for other suitable locations. In
2000, the Company plans to close 30 or more stores and relocate 36 stores. Most
of the relocations are part of a strategy to replace one or more smaller stores
in a mall with a store in a more prominent location in the same mall. The
relocation and closing of stores will occur primarily at the end of the lease
term in connection with management's ongoing review of store profitability.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings that arise in the
course of conducting its business. It is management's opinion that the ultimate
resolution of such proceedings is not likely to have a material adverse effect
on the financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders by MSC during
the fourth quarter of the year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of MSC is traded on the New York Stock Exchange under
the symbol MLG. For common stock price information, see Note 15 of Notes to
Consolidated Financial Statements. As of March 10, 2000, MSC had approximately
484 holders of record of its common stock.
MSC has never paid cash dividends on its capital stock and has no plans
to pay cash dividends in the future. The current policy of the Board of
Directors of MSC is to reinvest in the business of the Company. The terms of the
Company's indentures for the 9% and 9 7/8% senior subordinated notes restrict
the amount of cash dividends that may be paid by MSC. See Note 3 of Notes to
Consolidated Financial Statements.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data for the years
indicated. This information should be read in conjunction with the Consolidated
Financial Statements and related notes contained in Item 14 and "Management's
Discussion and Analysis of Results of Operations and Financial Condition"
contained in Item 7.
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts and store data)
Years Ended December 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
Statement of
Operations Data:
Sales................ $1,891,828 $1,846,882 $1,768,312 $1,821,594 $1,722,572
Gross profit......... 690,835 656,300 614,829 611,759 606,070
Selling, general
and administrative
expenses............ 543,518 532,018 529,427 576,658 525,213
Depreciation and
amortization........ 41,276 39,471 39,411 44,819 45,531
Goodwill write-down.. - - - 95,253 138,000
Restructuring
charges............. - - - 75,000 -
Operating income
(loss).............. 106,041 84,811 45,991 (179,971) (102,674)
Interest expense..... 22,661 30,478 31,720 32,967 27,881
Earnings (loss)
before income taxes. 83,380 54,333 14,271 (212,938) (130,555)
Income taxes......... 25,000 16,300 300 (19,200) 5,195
Net earnings (loss).. 58,380 38,033 13,971 (193,738) (135,750)
Earnings (loss) per
common share:
Basic............. $ 1.65 $ 1.10 $ .42 $ (5.80)$ (4.00)
Diluted........... 1.60 1.04 .41 (5.80) (4.00)
December 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
Balance Sheet Data:
Total assets......... $1,063,574 $ 973,640 $ 733,895 $ 996,915 $ 996,957
Long-term debt,
including current
maturities.......... 258,950 258,871 193,087 396,599 163,000
Stockholders' equity. 109,358 63,982 18,770 2,619 195,811
Store Data:
Total store square
footage (in
millions)........... 8.6 8.3 8.3 9.5 9.9
Store count:
Sam Goody stores.... 680 696 713 777 820
Suncoast stores..... 411 405 409 422 412
Media Play stores... 73 69 68 87 89
On Cue stores....... 181 162 157 158 153
Other retail
strategies......... - 14 16 22 22
---------- ---------- ---------- ---------- ----------
Total.......... 1,345 1,346 1,363 1,466 1,496
========== ========== ========== ========== ==========
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
The Company's performance in 1999 set new sales and earnings records,
surpassing the previous records achieved in 1998. Total sales rose 2.4% to $1.89
billion while operating income improved by $21.2 million to $106.0 million, an
increase of 25.0%. Net earnings in 1999 increased 53.5% to $58.4 million, or
$1.60 per diluted share, from $38.0 million, or $1.04 per diluted share, in
1998. The earnings improvements resulted primarily from comparable store sales
increases, gross margin improvements and lower interest expense. The loss from
e-commerce operations, net of tax benefit, reduced net earnings by $0.10 per
share in 1999.
The table below presents certain sales and store data for Mall Stores,
Superstores and in total for the Company for the last three years. Because both
Mall Stores and Superstores are supported by centralized corporate services and
have similar economic characteristics, products, customers and retail
distribution methods, the stores are reported as a single operating segment. The
Company formed an e-commerce operation in 1998 and began online retailing in
June of 1999. To date, the Company's e-commerce operations have not been
significant.
Years Ended December 31,
----------------------------------------
1999 1998 1997
---------- ---------- ------------
(dollars and square footage in millions)
Sales Data:
Sales:
Mall Stores (1)..................... $ 1,222.1 $ 1,206.8 $ 1,165.0
Superstores (1)..................... 668.6 627.9 589.5
Total (2)........................ 1,891.8 1,846.9 1,768.3
Percentage change from prior year:
Mall Stores (1)..................... 1.3 % 3.6 % 0.4 %
Superstores (1)..................... 6.5 6.5 (8.4)
Total (2)........................ 2.4 4.4 (2.9)
Comparable store sales increase (3):
Mall Stores......................... 2.0 % 6.5 % 4.7 %
Superstores......................... 3.7 7.2 4.1
Total (2)........................ 2.6 6.7 4.5
Store Data:
Number of stores open at year end:
Mall Stores ........................ 1,091 1,101 1,122
Superstores......................... 254 231 225
Total (2)........................ 1,345 1,346 1,363
Total store square footage at year end:
Mall Stores......................... 4.1 4.0 4.0
Superstores......................... 4.5 4.3 4.2
Total (2)........................ 8.6 8.3 8.3
- -------------------------------------
(1) Mall Store sales in 1999 include sales from SamGoody.com and Suncoast.com;
Superstore sales in 1999 include sales from MediaPlay.com and OnCue.com.
(2) The totals include other retail strategies.
(3) Comparable store sales percentages are computed for stores open for a full
year during each year.
10
<PAGE>
Sales. The increases in total sales for the year ended December 31,
1999 were led by the comparable store sales increases and sales from 25 new
superstores opened in 1999, which included four Media Play stores and 21 On Cue
stores. The music product category continued as the main contributor to
comparable store sales growth, generating comparable store sales increases of
2.4% on top of strong comparable store sales gains in 1998 and 1997. DVD sales
in 1999 of $110.9 million were double the 1998 DVD sales of $55.4 million. The
significant growth of DVD sales partially offset declines in consumer demand for
videocassettes and the difficult comparisons against the record video sales of
the blockbuster movie "Titanic" released in September 1998.
The increases in total sales for the year ended December 31, 1998 were
attributable primarily to the comparable store sales increases, partially offset
by the decrease in sales from the closing of stores. The comparable store sales
gains were attributable primarily to sales increases in music and video.
Soundtracks from popular movies, led by the soundtrack from the movie "Titanic,"
as well as the diverse popularity of music titles, contributed to the growth in
music sales. The movie "Titanic," released in September 1998, produced the
strongest sales for a video title in the Company's history.
In recent years, the Company has expanded product offerings of popular
items such as musical instruments, educational toys, portable electronics and
video games, which has enabled the Company to achieve sales growth outside of
its core music and video product categories. As a result of this sales growth,
combined sales in the trend, contemporary, electronics and other product
categories increased to 21% of total sales in 1999 while music and video sales
were 79% of total sales. The comparable store sales percentage increase
(decrease) and the percentage of total sales attributable to the Company's music
and video product categories for the last three years are presented below.
Years Ended December 31,
-----------------------------------
1999 1998 1997
-------- -------- --------
Music........................... 2.4 % 6.4 % 7.5 %
Video........................... (3.2) 5.7 0.2
Music and video as a percentage
of total sales................. 79.0 81.0 81.4
The table below presents certain components of earnings as a percentage
of sales for the last three years.
Years Ended December 31,
------------------------------------
1999 1998 1997
--------- --------- ---------
Gross profit.................... 36.5 % 35.5 % 34.8 %
Selling, general and
administrative expenses........ 28.7 28.8 29.9
Depreciation and amortization... 2.2 2.1 2.2
Gross Profit. The gross margin improvement in 1999 was the result of
the Company's ongoing strategy of selective price increases and conservatively
managed promotional pricing. A decrease in inventory shrinkage added 0.1% to
gross margin in 1999. Most of the gross margin improvement in 1998 was
attributable to less promotional pricing and selective price increases made
during the second half of 1997 and in 1998. Inventory shrinkage decreased in
1998 and accounted for 0.2% of the gross margin improvement.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in 1999 increased $11.5 million, or 2.2%, over 1998.
Expenditures for the e-commerce operation totaled approximately $6 million, the
majority of which related to marketing and infrastructure costs. This
incremental expense in 1999 was offset by a decrease in the provision for store
closings due to lower estimated closing costs, because most closings are planned
to occur after the lease expiration. Excluding e-commerce expenses, selling,
general and administrative expenses as a percentage of sales were 28.4%. The
lower expense rate in 1999 compared with 1998 was primarily the result of
comparable store sales growth.
11
<PAGE>
Selling, general and administrative expenses in 1998 increased slightly
over 1997, but decreased as a percentage of sales by 1.1%. The decrease in the
expense rate was attributable to the comparable store sales increases and the
continued benefit of cost saving initiatives that began in 1997. The
consolidation of distribution facilities into a single facility, completed in
January 1997, resulted in greater operating efficiency and lower distribution
costs. Advertising effectiveness was improved while advertising expenditures
were decreased by focusing resources on a wide range of traffic driving events
and promotions and by partnering with vendors and nationally recognized
corporations.
As part of a strategy to build market share, 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,
net of tax benefit, to reduce earnings per share by up to $0.30 or more in 2000.
Depreciation and Amortization. Capital spending for new stores and
upgrades to existing stores caused depreciation and amortization to increase in
1999 over the prior year. This increase was partially offset by decreases to
depreciation and amortization resulting from the closing of stores. Depreciation
and amortization in 1998 was comparable to 1997. Increases to depreciation and
amortization in 1998 resulting from capital expenditures and the Company's
distribution facility in Franklin, Indiana were offset by decreases to
depreciation and amortization resulting from store closings.
Interest Expense. Components of interest expense for the last three
years were as follows:
Years Ended December 31,
-------------------------------
1999 1998 1997
------- ------- -------
(in millions)
Interest on revolver borrowings...... $ - $ 3.5 $ 19.0
Interest on term loan................ - 3.6 1.2
Interest on senior subordinated
notes............................... 24.8 20.8 9.9
Other interest, net of interest
income.............................. (2.1) 2.6 1.6
------- ------- -------
Total............................. $ 22.7 $ 30.5 $ 31.7
======= ======= =======
The decrease in interest expense in 1999 compared with 1998 and 1997
resulted from improvements in operating performance and the issuance of $150
million of 9 7/8% senior subordinated notes in April 1998, which enabled the
Company to forgo revolver borrowings. During 1999, the Company had monthly
average total cash and cash equivalents of $87.8 million, which generated $4.3
million of interest income. For the years ended December 31, 1998 and 1997,
average daily revolver borrowings, based upon the number of days with
outstanding borrowings, weighted average interest rates, based on the average
daily revolver borrowings, and the highest balances outstanding under the
revolving credit facility were as follows:
Years Ended
December 31,
------------------
1998 1997
------ ------
(dollars in millions)
Average daily revolver borrowings............... $ 56.4 $238.5
Number of days with outstanding revolver
borrowings..................................... 201 362
Weighted average interest rate, excluding
facility costs................................. 7.8 % 7.4 %
Highest level of revolver borrowings............ $152.0 $273.0
For the years ended December 31, 1999, 1998 and 1997, the Company
incurred facility costs related to revolving credit facilities of $0.6 million,
$1.1 million and $1.5 million, respectively. Most of the increase in the
interest rate in 1998 over 1997 resulted from amendments to the Company's former
credit agreement that increased the margin added to variable interest rates on
revolver borrowings.
12
<PAGE>
Income Taxes. The effective income tax rates of 30.0% in 1999 and 1998
and 2.1% in 1997 vary from the federal statutory rate as a result of deferred
tax valuation allowances and state income taxes. Valuation allowances reduce
deferred income tax balances to the approximate amount of recoverable income
taxes based on assessments of taxable income within the carryback or
carryforward periods for each year. Valuation allowances, established in 1996,
were reduced by $8.9 million, $4.0 million and $7.5 million for the years ended
December 31, 1999, 1998 and 1997, respectively. See Note 4 of Notes to
Consolidated Financial Statements.
Liquidity and Capital Resources
The Company's financial position has strengthened in recent years as a
result of increased profitability, operating improvements and the completion in
April 1998 of an offering of $150 million of 9 7/8% senior subordinated notes
due in 2008. The Company had no revolver borrowing activity during 1999 and had
minimal revolver borrowing activity in 1998 after completion of the offering. At
December 31, 1999 and 1998, the Company had no outstanding revolver borrowings
and had cash and cash equivalents of $335.7 million and $257.2 million,
respectively. In September 1999, the Company cancelled its revolving credit
facility, which would have expired in October 1999, and replaced it with a
standby $25 million secured facility with an initial term of three years. The
maximum available under the facility requires a minimum inventory of $150
million at specified locations and is reduced by outstanding letters of credit.
Management currently intends to have no more than minimal use of this revolving
credit facility, relying on internally generated cash as the Company's primary
source of capital. See "- Financing Activities" and Note 3 of Notes to
Consolidated Financial Statements.
Operating Activities. Net cash provided by operating activities
(including the increase (decrease) in outstanding checks in excess of cash
balances which primarily related to vendor payments) was $141.1 million in 1999,
$215.6 million in 1998 and $86.7 million in 1997. The significant increases in
operating cash flows since 1997 have been attributable to increased
profitability and operating improvements achieved through better store
performance and working capital management. More frequent purchases closer to
the time of sale and better in-stock positions have enabled the Company to
maintain lower inventory levels and increase inventory turnover.
Inventories decreased slightly at December 31, 1999 versus the prior
year while total store square footage increased in 1999 by 300,000 square feet.
Inventory turnover improved to 2.33 in 1999 from 2.28 in 1998. Accounts payable
at December 31, 1999 increased by $23.8 million over 1998 as a result of the
improvement in inventory turnover. The increase in other current liabilities at
December 31, 1999 was primarily due to increases in gift certificate deferred
revenue and income taxes payable. The Company's introduction of a new electronic
gift card in November 1999 contributed to higher Christmas season purchases
versus the paper gift certificates in 1998, which increased approximately 23%
over the November-December holiday period of the previous year. The increase in
income taxes payable is due to the increase in earnings.
For the year ended December 31, 1998, inventory turnover was 2.28
compared with 2.05 in 1997. The significant increase was a result of the
inventory management programs discussed above as well as the closing of
underperforming stores and the completion of the Company's restructuring
programs in the first quarter of 1997. At December 31, 1998, although
inventories remained comparable to the prior year, accounts payable increased by
$107.3 million over December 31, 1997, reflecting normal extended payment terms
for seasonal inventory purchases as well as later purchases of seasonal
inventory. In addition, accounts payable at December 31, 1997 was impacted by
the combination of earlier payments to product vendors for seasonal purchases
and the completion in the fourth quarter of payment of certain accounts payable
balances that had been temporarily deferred from the first quarter. The most
significant increase in other current liabilities relates to the increase in
income taxes payable as a result of higher earnings in 1998.
13
<PAGE>
Investing Activities. Capital expenditures and store data for the last
three years are as follows:
Years Ended December 31,
----------------------------
1999 1998 1997
------- ------- -------
Capital expenditures (in millions)....... $ 48.3 $ 27.2 $ 10.9
Store openings:
Mall Stores........................... 14 7 2
Superstores........................... 25 7 1
Total (1).......................... 39 14 3
Store closings:
Mall Stores........................... (24) (28) (79)
Superstores........................... (2) (1) (21)
Total (1).......................... (40) (31) (106)
Net increase (decrease) in store count:
Mall Stores........................... (10) (21) (77)
Superstores........................... 23 6 (20)
Total (1).......................... (1) (17) (103)
- -----------------
(1) The totals include other retail strategies.
The most significant portion of the Company's capital expenditures in
each year related to the remodeling, relocation and general upkeep of existing
stores and, to a lesser extent, the opening of new stores. The number of stores
closed in 1997 included 61 stores closed under restructuring programs. All other
closings in 1997 and in 1999 and 1998 resulted from the Company's ongoing
monitoring of store performance in conjunction with lease expirations.
The Company used primarily internally generated cash to finance capital
expenditures in 1999. In addition, the Company received landlord and other
funding of $3.3 million, typically in the form of contributions and rent
abatements for new stores and relocations of existing stores. In 1998, the
Company used internally generated cash and, to a lesser extent, borrowings under
the revolving credit facility to finance capital expenditures.
The Company's planned capital expenditures for 2000 are expected to be
approximately $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. Media
Play and On Cue stores will continue to account for the majority of the total
new store square footage and store count, respectively. In addition to store
spending, 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 the expansion of the Company's headquarters facilities. Management
plans to use primarily internally generated cash to finance these capital
expenditures. The Company anticipates closing 30 or more stores in 2000,
primarily when the leases expire, as part of management's ongoing review of
store profitability.
Financing Activities. The Company's primary source of financing during
1999 was internally generated cash. During 1999, the Company used internally
generated cash to purchase 2,015,700 shares of its common stock at a cost of
$14.7 million. The stock purchase is part of a program authorized by the
Company's board of directors to repurchase up to six million shares of common
stock on the open market. The shares repurchased will be held as treasury stock
until reissued for purposes to be determined by the board of directors. The
Company plans to finance these purchases with internally generated cash.
14
<PAGE>
Financing activities in 1998 include net proceeds of $144.3 million
received by the Company from the offering of $150 million of 9 7/8% senior
subordinated notes. The net proceeds were used to repay $32.1 million of
outstanding mortgage notes payable and to reduce outstanding revolver
borrowings. Excess cash generated from strong Christmas season sales in 1998 was
used to repay the $50 million term loan in December 1998.
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
Inflation, Economic Trends and Seasonality. Although its operations are
affected by general economic trends, the Company does not believe that inflation
has had a material effect on the results of its operations during the past three
years. The Company's business is highly seasonal. See "Seasonality" and Note 15
of Notes to Consolidated Financial Statements for quarterly financial data.
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. However, if
third parties upon which the Company relies fail to adequately address any of
their Year 2000 problems, it could disrupt the Company's business. In the most
reasonably likely worst case scenarios the Company could experience delays in
receiving product from vendors, shipping product to stores, accessing various
types of information or communicating effectively with financial institutions or
vendors. The Company's Year 2000 task force has developed a contingency plan,
which generally follows an approach similar to the Company's disaster recovery
plan should any significant business disruption related to the Year 2000 occur.
The task force has also confirmed with the Company's major product vendors,
representing 93% of total purchase volume, that their systems are Year 2000
ready. Efforts were made by telephone and the Internet to obtain information
from the remaining product vendors who had not responded to the Company's Year
2000 readiness inquiries. The task force also received responses to Year 2000
readiness surveys from the majority of the Company's other business partners and
service providers.
The Company's Year 2000 readiness process for its internal systems was
substantially complete by the third quarter of 1999. Incremental costs of
addressing the Year 2000 issue, which have totaled approximately $3 million,
were charged to expense as incurred. The Company primarily utilized internal
resources for the completion of Year 2000 remediations. The cost for the
purchase of any new, Year 2000 compliant system was capitalized in accordance
with SOP 98-1.
Forward-Looking Statements. This annual report on Form 10-K contains
certain forward-looking statements, as defined in the Private Securities
Litigation Reform Act of 1995, 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,"
15
<PAGE>
"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: general economic and market conditions; changes
in consumer demand and demographics; increased or unanticipated costs or other
effects associated with Year 2000 compliance by the Company or its service or
supply providers; 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; 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 which may be outside of the Company's control. The Company's repurchase
of its common stock 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.
16
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company holds no derivative instruments and does not engage in
hedging activities. Information about fair value of financial instruments is
included in Note 12 of Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and related notes are included in
Item 14 of this report. See Index to Consolidated Financial Statements contained
in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by these items of Part III will be set forth
in the Proxy Statement under similar captions and is incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
(1) Consolidated Financial Statements
See Index to Consolidated Financial Statements on page 20.
(2) Financial Statement Schedules
Financial Statement Schedules have been omitted because they
are not required or are not applicable, or because the
information required either is not material or is included in
the Consolidated Financial Statements or related notes.
(3) Exhibits
See Exhibit Index on pages 39 through 40.
17
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
fourth quarter of the year ended December 31, 1999.
(c) Exhibits
See Exhibit Index on pages 39 through 40.
(d) Other Financial Statements
Not applicable.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ Jack W. Eugster
----------------------------------------
Jack W. Eugster, Chairman of the Board,
President and Chief Executive Officer
Date: March 24, 2000
--------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Capacity Date
--------- -------- ----
Chairman of the Board, President
and Chief Executive Officer
/s/ Jack W. Eugster (principal executive officer) March 24, 2000
- -------------------------
Jack W. Eugster
Vice Chairman, Chief Financial
Officer and Director
(principal financial and
/s/ Keith A. Benson accounting officer) March 24, 2000
- -------------------------
Keith A. Benson
/s/ Gilbert L. Wachsman Vice Chairman and Director March 24, 2000
- -------------------------
Gilbert L. Wachsman
/s/ Kenneth F. Gorman Director March 24, 2000
- -------------------------
Kenneth F. Gorman
/s/ William A. Hodder Director March 24, 2000
- -------------------------
William A. Hodder
/s/ Josiah O. Low III Director March 24, 2000
------------------------
Josiah O. Low III
/s/ Terry T. Saario Director March 24, 2000
- -------------------------
Terry T. Saario
/s/ Tom F. Weyl Director March 24, 2000
- -------------------------
Tom F. Weyl
/s/ Michael W. Wright Director March 24, 2000
- -------------------------
Michael W. Wright
19
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants 21
Consolidated Statements of Earnings 22
Consolidated Balance Sheets 23
Consolidated Statements of Cash Flows 24
Consolidated Statements of Stockholders' Equity 25
Notes to Consolidated Financial Statements 26
20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Musicland Stores Corporation:
We have audited the accompanying consolidated balance sheets of
Musicland Stores Corporation (a Delaware Corporation) and Subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of earnings,
cash flows and stockholders' equity for each of the three years in the period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Musicland
Stores Corporation and Subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
January 21, 2000
21
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
Years Ended December 31,
-------------------------------------------
1999 1998 1997
------------- ------------- ------------
Sales............................... $ 1,891,828 $ 1,846,882 $ 1,768,312
Cost of sales....................... 1,200,993 1,190,582 1,153,483
------------- ------------- ------------
Gross profit.................... 690,835 656,300 614,829
Selling, general and
administrative expenses............ 543,518 532,018 529,427
Depreciation and amortization....... 41,276 39,471 39,411
------------- ------------- ------------
Operating income................ 106,041 84,811 45,991
Interest expense.................... 22,661 30,478 31,720
------------- ------------- ------------
Earnings before income taxes.... 83,380 54,333 14,271
Income taxes........................ 25,000 16,300 300
------------- ------------- ------------
Net earnings.................... $ 58,380 $ 38,033 $ 13,971
============= ============= ============
Basic earnings per common share..... $ 1.65 $ 1.10 $ 0.42
============= ============= ============
Diluted earnings per common share... $ 1.60 $ 1.04 $ 0.41
============= ============= ============
See accompanying Notes to Consolidated Financial Statements.
22
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31,
--------------------------
1999 1998
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents........................ $ 335,693 $ 257,218
Inventories...................................... 444,792 446,710
Deferred income taxes............................ 27,300 15,800
Other current assets............................. 9,162 10,395
------------ -----------
Total current assets........................... 816,947 730,123
Property, net....................................... 236,550 233,424
Other assets........................................ 10,077 10,093
------------ -----------
Total Assets................................... $ 1,063,574 $ 973,640
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 476,191 $ 452,410
Other current liabilities........................ 179,171 154,743
------------ -----------
Total current liabilities...................... 655,362 607,153
Long-term debt...................................... 258,950 258,871
Other long-term liabilities......................... 39,904 43,634
Commitments and contingent liabilities
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: December 31, 1999,
36,187,454; December 31, 1998, 36,041,934)...... 362 360
Additional paid-in capital....................... 261,534 260,608
Accumulated deficit.............................. (128,265) (186,645)
Deferred compensation............................ (5,237) (5,998)
Common stock subscriptions....................... (4,303) (4,343)
Treasury stock, at cost (2,015,700 shares)....... (14,733) -
------------ -----------
Total stockholders' equity..................... 109,358 63,982
------------ -----------
Total Liabilities and Stockholders' Equity..... $ 1,063,574 $ 973,640
============ ===========
See accompanying Notes to Consolidated Financial Statements.
23
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
OPERATING ACTIVITIES:
Net earnings......................... $ 58,380 $ 38,033 $ 13,971
Adjustments to reconcile net
earnings to net cash provided by
operating activities:
Depreciation and amortization...... 41,276 39,471 39,411
Disposal of property............... 3,886 4,287 4,112
Amortization of debt issuance
costs and other................... 1,411 2,630 1,234
Other amortization................. 1,021 986 1,022
Deferred income taxes.............. (11,500) (2,800) -
Changes in operating assets and
liabilities:
Inventories...................... 1,918 3,548 55,835
Other current assets............. 1,233 (1,627) 22,724
Accounts payable................. 23,781 107,288 (61,520)
Restructuring reserve............ - - (12,231)
Other current liabilities........ 24,768 41,919 14,843
Other assets..................... (1,320) (492) (1,483)
Other long-term liabilities...... (3,730) (5,557) (3,305)
------------ ------------ ------------
Net cash provided by
operating activities.......... 141,124 227,686 74,613
------------ ------------ ------------
INVESTING ACTIVITIES:
Capital expenditures................. (48,284) (27,153) (10,940)
------------ ------------ ------------
Net cash used in
investing activities.......... (48,284) (27,153) (10,940)
------------ ------------ ------------
FINANCING ACTIVITIES:
Increase (decrease) in outstanding
checks in excess of cash balances... - (12,061) 12,061
Net repayments under revolver........ - - (272,000)
Net proceeds from issuance of
long-term debt...................... - 144,317 49,500
Principal payments on long-term debt. - (82,933) (11,487)
Purchase of treasury stock........... (14,733) - -
Proceeds from sale of common stock... 368 3,420 219
------------ ------------ ------------
Net cash provided by (used
in) financing activities...... (14,365) 52,743 (221,707)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS...................... 78,475 253,276 (158,034)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR..................... 257,218 3,942 161,976
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR........................... $ 335,693 $ 257,218 $ 3,942
============ ============ ============
CASH PAID (RECEIVED) DURING
THE YEAR FOR:
Interest............................. $ 25,533 $ 24,517 $ 33,035
Income taxes, net.................... 23,845 855 (22,908)
See accompanying Notes to Consolidated Financial Statements.
24
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Retained Common Total
Common Stock Additional Earnings Deferred Stock Treasury Stock-
-------------- Paid-in (Accumulated Compen- Sub- Stock, holders'
Shares Amount Capital Deficit) sation scriptions At Cost Equity
------ ------ ---------- ------------ --------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1997............ 34,302 $ 343 $ 253,896 $ (238,649) $ (7,998) $ (4,973) $ 2,619
Net earnings............... 13,971 13,971
Stock options exercised and
related tax benefit..... 71 1 275 276
Issuance of warrants....... 890 890
Amortization of deferred
compensation and
adjustment to fair
market value of KSOP
shares, net of tax...... 14 1,000 1,014
------ ------ ---------- ------------ --------- ----------- --------- ------------
December 31, 1997.......... 34,373 344 255,075 (224,678) (6,998) (4,973) 18,770
Net earnings............... 38,033 38,033
Stock options exercised and
related tax benefit..... 475 4 3,576 3,580
Net proceeds from exercise
of warrants............. 1,194 12 790 802
Amortization of deferred
compensation and
adjustment to fair
market value of KSOP
shares, net of tax...... (9) 1,000 991
Common stock subscriptions
paid and related tax
benefit................. 1,176 630 1,806
------ ------ ---------- ------------ --------- ----------- --------- ------------
December 31, 1998.......... 36,042 360 260,608 (186,645) (5,998) (4,343) 63,982
Net earnings............... 58,380 58,380
Stock options exercised and
related tax benefit..... 91 1 548 549
Net proceeds from exercise
of warrants............. 24 - 38 38
Issuance of restricted
stock................... 30 1 307 (308) -
Amortization of deferred
compensation and
adjustment to fair
market value of KSOP
shares, net of tax...... (29) 1,069 1,040
Common stock subscriptions
paid and related tax
benefit................. 62 40 102
Purchase of treasury stock. (14,733) (14,733)
------ ------ ---------- ------------ --------- ----------- --------- ------------
December 31, 1999.......... 36,187 $ 362 $ 261,534 $ (128,265) $ (5,237) $ (4,303) $(14,733) $ 109,358
====== ====== ========== ============ ========= =========== ========= ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
25
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation. The 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's foreign operations in the United Kingdom, which were discontinued in
1999, and resulting foreign currency translation adjustments have not been
material. The preparation of the accompanying consolidated financial statements
required management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. Actual results could
differ from those estimates.
Business. 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
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. Because both Mall Stores and Superstores are supported by
centralized corporate services and have similar economic characteristics,
products, customers and retail distribution methods, the stores are reported as
a single operating segment. The Company operates stores in 49 states, the
District of Columbia, the Commonwealth of Puerto Rico and the Virgin Islands. At
December 31, 1999, the Company operated a total of 1,345 stores, consisting of
1,091 Mall Stores with 4.1 million of total store square footage and 254
Superstores with 4.5 million of total store square footage. The Company formed
an e-commerce operation in 1998 and began online retailing in June of 1999. The
Company's e-commerce operations have not been significant.
Cash and Cash Equivalents. Cash equivalents consist principally of
short-term investments with original maturities of three months or less and are
recorded at cost, which approximates market value. Restricted cash amounts are
not material. The Company maintains cash and cash equivalents at various high
quality financial institutions and limits the amount of credit exposure at any
one institution.
Inventories. Inventories are valued at the lower of cost or market.
Cost is determined using the retail inventory method, on the first-in, first-out
(FIFO) basis.
Property. Buildings and improvements, store fixtures and other property
are depreciated using the straight-line method over the estimated useful lives
of the respective assets. Leasehold improvements are amortized on a
straight-line basis over an estimated useful life of 10 years, which is
generally equal to or less than the lease term. Accelerated depreciation methods
are used for income tax purposes. When assets are sold or retired, the costs and
related accumulated depreciation are removed from the accounts and the resulting
gain or loss is included in operations. Depreciation and amortization expense
for property was $41,272, $39,459 and $39,370 for the years ended December 31,
1999, 1998 and 1997, respectively. In the event that facts and circumstances
indicate that the carrying amount of property may not be recoverable, an
evaluation would be performed using such factors as recent operating results,
projected cash flows and management's plans for future operations.
26
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
Debt Issuance Costs. Debt issuance costs are amortized over the terms
of the related financing using the interest method.
Store Opening and Advertising Costs. Store opening and advertising
costs are charged to expense as they are incurred.
Stock-Based Compensation. Compensation expense for employee and
director stock options is measured based on the excess, if any, of the quoted
market price of the Company's stock on the date of grant over the amount that
must be paid to acquire the stock.
Income Taxes. Deferred income taxes are provided for temporary
differences between the financial reporting and tax basis of assets and
liabilities at currently enacted tax rates. A valuation allowance for deferred
income tax assets is recorded when it is more likely than not that some portion
or all of the deferred income tax assets will not be realized.
Derivative Instruments, Hedging Activities and Other Comprehensive
Income. The Company holds no derivative instruments, engages in no hedging
activities and has no significant items of other comprehensive income.
Earnings Per Common Share. Basic earnings per common share is computed
by dividing net earnings by the weighted average number of common shares
outstanding during each year. Diluted earnings per common share is computed by
dividing net earnings by the weighted average number of common shares
outstanding during each year, increased by the effect of the assumed exercise of
dilutive stock options and warrants. For purposes of earnings per share
computations, shares of common stock under the Company's employee stock
ownership plan, established in the third quarter of 1995, are not considered
outstanding until they are committed to be released.
2. 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:
Years Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Weighted average common shares
outstanding - basic.......... 35,316,000 34,485,000 33,528,000
Dilutive effect of stock
options...................... 686,000 856,000 299,000
Dilutive effect of warrants... 442,000 1,105,000 342,000
------------ ------------ ------------
Weighted average common shares
outstanding - diluted........ 36,444,000 36,446,000 34,169,000
============ ============ ============
Antidilutive stock options.... 1,969,000 831,000 1,803,000
============ ============ ============
Antidilutive stock options had an exercise price greater than the
average market price during the year.
27
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
3. Long-term Debt
Long-term debt consists of the following:
December 31,
--------------------------
1999 1998
------------ ------------
Revolver borrowings, variable rates........ $ - $ -
9% senior subordinated notes, unsecured,
due 2003.................................. 110,000 110,000
9 7/8% senior subordinated notes,
unsecured, due 2008....................... 148,950 148,871
------------ ------------
Total long-term debt...................... $ 258,950 $ 258,871
============ ============
In September 1999, the Company cancelled its revolving credit facility,
which would have expired in October 1999, and replaced it with a standby $25,000
secured facility. The new facility is collateralized by inventory in the
Company's Media Play stores and distribution facility in Franklin, Indiana,
which had an aggregate carrying value, net of certain valuation reserves, of
$172,663 at December 31, 1999. The maximum available under the facility requires
a minimum inventory in the aggregate of $150,000 at the specified locations and
is reduced by outstanding letters of credit. The facility expires in September
2002 and is renewable annually thereafter. The Company is required to pay
facility costs including an unused line fee and charges for outstanding letters
of credit. The Company also paid facility costs on the former revolving credit
facility. The Company had no revolver borrowing activity during 1999 under
either facility. For the years ended December 31, 1998 and 1997, the weighted
average interest rates, excluding facility costs, on revolver borrowings were
7.78% and 7.37%, respectively. Total facility costs incurred for the years ended
December 31, 1999, 1998 and 1997 were $576, $1,099 and $1,549, respectively.
In April 1998, the Company completed an offering of $150,000 of 9 7/8%
senior subordinated notes with an original issue discount of $1,183. The net
proceeds to the Company from the offering, after discounts, commissions and
other offering costs were $144,317 and were used to repay $32,076 of outstanding
mortgage notes payable and $112,241 of outstanding revolver borrowings.
The Company has options to redeem the senior subordinated notes prior
to maturity. The 9% issue may be redeemed 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 9 7/8% issue may be redeemed 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 $25,000 of either of its outstanding issues of senior
subordinated notes by redemption or through the market maker.
The indentures related to the senior subordinated notes contain
financial covenants which limit, among other things, the ability of the Company
to pay dividends, make certain other restricted payments or investments, incur
additional indebtedness, dispose of assets, create liens and enter into certain
transactions with related parties. The Company was in compliance with all
covenants at December 31, 1999.
28
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
4. Income Taxes
Income taxes consist of:
Years Ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Current:
Federal................... $ 30,600 $ 16,700 $ 100
State, local and other.... 5,900 2,400 200
----------- ----------- -----------
36,500 19,100 300
----------- ----------- -----------
Deferred:
Federal................... (10,300) (1,800) 1,400
State, local and other.... (1,200) (1,000) (1,400)
----------- ----------- -----------
(11,500) (2,800) -
----------- ----------- -----------
Total income taxes........... $ 25,000 $ 16,300 $ 300
=========== =========== ===========
The Company's effective income tax rates differ from the federal
statutory rate as follows:
Years Ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Federal statutory tax rate... 35.0% 35.0% 35.0%
State and local income taxes,
net of federal benefit.... 5.0 1.7 (5.5)
Valuation allowance.......... (10.7) (7.0) (32.6)
Other........................ .7 .3 5.2
----------- ----------- -----------
Effective income tax rate. 30.0% 30.0% 2.1%
=========== =========== ===========
Components of deferred income taxes are as follows:
December 31,
-------------------------
1999 1998
----------- -----------
Net current deferred tax asset:
Capitalized inventory costs............. $ 5,410 $ 5,540
Inventory valuation..................... 10,774 9,609
Compensation related.................... 4,399 3,542
Store closings.......................... 2,524 3,877
Other accruals.......................... 2,675 2,388
Other, net.............................. 1,518 644
----------- -----------
Total current deferred income taxes ....... 27,300 25,600
Valuation allowance..................... - (9,800)
----------- -----------
Net current deferred income taxes.......... $ 27,300 $ 15,800
=========== ===========
29
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
4. Income Taxes (Continued)
December 31,
---------------------------
1999 1998
------------ ------------
Net noncurrent deferred tax asset:
Depreciation.......................... $ (10,106) $ (12,453)
Rent expense.......................... 14,721 16,418
Amortization of intangible assets..... (1,960) (2,010)
Net pension liability................. 1,162 1,042
Other, net............................ 283 203
------------ ------------
Total noncurrent deferred income taxes... 4,100 3,200
Valuation allowance................... (4,100) (3,200)
------------ ------------
Net noncurrent deferred income taxes..... $ - $ -
============ ============
The Company's management believes it is more likely than not that the
deferred income tax assets, net of valuation allowances, will be realized based
on current income tax laws and assessments of taxable income within the
carryback or carryforward periods for each year. However, the amount of deferred
tax assets considered realizable could be adjusted in the future if estimates of
taxable income are revised.
5. Employee Benefit Plans
The Company has a non-contributory, defined benefit pension plan
covering certain employees. Retirement benefits are a function of both years of
service and the level of compensation. The Company's funding policy is to make
an annual contribution equal to or exceeding the minimum required by the
Employee Retirement Income Security Act of 1974. Effective December 31, 1991,
participation in the pension plan was frozen for employees hired on or after
July 1, 1990. The Company has been evaluating on a year to year basis the
continuation of benefit accruals under the pension plan. Accordingly, the
projected benefit obligation approximated the accumulated benefit obligation at
December 31, 1999 and 1998.
In October 1998, the Company established a non-qualified, unfunded
Supplemental Executive Retirement Plan ("SERP") to provide certain executives
with pension benefits in excess of limits imposed by federal tax law. The annual
benefit amount is a function of both years of service and the level of
compensation. For the years ended December 31, 1999 and 1998, pension expense
for the SERP was $310 and $136, respectively. The benefit obligation for the
SERP at December 31, 1999 and 1998 was $838 and $1,366, respectively. Changes in
actuarial assumptions in 1999 reduced the benefit obligation at December 31,
1999 by $789.
30
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
5. Employee Benefit Plans (Continued)
The funded status of the pension plans and the related accrued pension
cost, using a measurement date of September 30, are as follows:
December 31,
-----------------------
1999 1998
---------- ----------
Change in benefit obligation:
Benefit obligation at beginning of year... $ 13,931 $ 10,457
Service cost.............................. 755 513
Interest cost............................. 982 847
Effect of assumption change............... (2,240) 1,099
Unrecognized prior service cost from
inception of the SERP................... - 1,366
Actuarial loss (gain)..................... (524) 175
Benefits paid............................. (549) (526)
---------- ----------
Benefit obligation at end of year............ 12,355 13,931
---------- ----------
Change in plan assets:
Fair value of plan assets at beginning
of year................................. 9,979 10,925
Actual return on plan assets.............. 919 (972)
Employer contribution..................... 562 552
Benefits paid............................. (549) (526)
---------- ----------
Fair value of plan assets at end of year..... 10,911 9,979
---------- ----------
Funded status................................ (1,444) (3,952)
Unrecognized gains........................ (2,889) (22)
Unamortized prior service cost............ 1,180 1,278
---------- ----------
Accrued pension cost......................... $ (3,153) $ (2,696)
========== ==========
The components of net pension expense are as follows:
Years Ended December 31,
-------------------------------------
1999 1998 1997
----------- ---------- ----------
Service cost.................... $ 755 $ 513 $ 411
Interest cost................... 982 847 748
Expected return on plan assets.. (835) (916) (754)
Amortization of prior service
cost and gain................. 68 (6) (5)
----------- ---------- ----------
Net pension expense.......... $ 970 $ 438 $ 400
=========== ========== ==========
Assumptions used in computing pension data are as follows:
December 31,
-----------------------
1999 1998
---------- ----------
Discount rate for benefit obligations....... 8.00 % 7.00 %
Expected long-term rate of return on plan
assets.................................... 8.50 8.50
Rate of compensation increase for the SERP
obligation................................ 5.50 5.50
31
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
5. Employee Benefit Plans (Continued)
The Company established a defined contribution plan in 1992 for
employees not covered by the pension plan. The Company has a 401(k) plan, which
is based on contributions made through payroll deductions and partially matched
by the Company, covering substantially all employees. The Company's matching
contribution to the 401(k) plan is paid in stock of MSC under an employee stock
ownership plan ("KSOP"). The Company may also, at its discretion, make a
supplemental cash matching contribution. In 1995, to establish the KSOP, the
Company made a loan to the KSOP trust for the purchase of 1,042,900 shares of
the Company's common stock in the open market. In exchange, the Company received
a note, the balance of which is recorded as deferred compensation and is
reflected as a reduction of stockholders' equity. The Company recognizes
compensation expense during the period the match is earned equal to the expected
market value of the shares to be released to settle the match liability. The
number of KSOP shares committed to be released was 104,290 at December 31, 1999
and 1998. At December 31, 1999 and 1998, the number of shares held in suspense
was 521,450 and 625,740, respectively, and the market value of the shares held
in suspense was $4,400 and $9,621, respectively.
Expenses for the defined contribution and 401(k) plans for the years
ended December 31, 1999, 1998 and 1997 totaled $1,529, $1,332 and $1,749,
respectively. Expenses for postemployment benefits were not material. The
Company does not offer or provide postretirement benefits other than pensions to
its employees.
6. Stock Plans
The Company's stock plans authorize the grant of stock options and
other stock awards to officers, other employees and outside directors. Stock
options are generally exercisable over a period not to exceed 10 years after the
grant date. As stock options have been granted at exercise prices not less than
the fair market value of the Company's common stock on the date of the grant, no
compensation expense has been recognized in connection with the grant of stock
options.
In 1999, the Company issued a restricted stock award of 30,000 shares
to one of its officers. The shares are restricted from sale or transfer, with
such restrictions lapsing in three equal annual installments beginning in 2001.
The issuance of the restricted stock resulted in compensation expense equal to
the fair market value of the common stock at the date of the award, which is
being amortized over the period the restricted shares vest. The unamortized
deferred compensation expense is a reduction of stockholders' equity.
32
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
6. Stock Plans (Continued)
Stock option activity is as follows:
1999 1998 1997
--------------------- ------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- -------- ---------- -------- ---------- --------
Outstanding at
beginning of
year............ 3,513,414 $ 8.86 2,935,908 $ 6.20 2,681,294 $ 7.33
Granted........... 677,350 10.60 1,193,775 13.65 734,650 3.16
Exercised......... (91,227) 3.18 (475,292) 4.19 (70,636) 3.10
Canceled.......... (86,272) 8.37 (140,977) 9.57 (409,400) 8.67
----------- ----------- -----------
Outstanding at
end of year..... 4,013,265 9.29 3,513,414 8.86 2,935,908 6.20
=========== =========== ===========
Options
exercisable
at year end..... 1,383,106 955,997 1,084,642
=========== =========== ===========
Options
available for
future grant.... 370,641 966,052 341,500
=========== =========== ===========
Stock options outstanding and exercisable at December 31, 1999 are as
follows:
Stock Options
Stock Options Outstanding Exercisable
------------------------------ ---------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Number Life Exercise Number Exercise
Range of Exercise Prices Outstanding (Years) Price Exercisable Price
- ------------------------- ----------- ------- -------- ----------- ---------
$ 1.5000 to $ 2.5625.... 899,504 6.9 $ 1.947 358,524 $ 2.069
3.0000 to 4.5000.... 344,866 4.6 3.564 269,534 3.716
6.0625 to 10.3125.... 536,077 7.3 7.647 185,311 7.993
10.5625 to 14.8125.... 1,347,118 7.3 11.822 429,537 13.696
15.0625 to 21.7500.... 885,700 7.8 16.124 140,200 21.750
----------- -----------
4,013,265 1,383,106
=========== ===========
Pro forma data using the fair value of stock options is as follows:
1999 1998 1997
------------------ ----------------- ----------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
--------- -------- -------- -------- -------- -------
Net earnings........... $58,380 $56,030 $38,033 $37,002 $13,971 $13,168
Earnings per
common share:
Basic......... $ 1.65 $ 1.59 $ 1.10 $ 1.07 $ .42 $ .39
Diluted....... 1.60 1.54 1.04 1.02 .41 .39
33
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
6. Stock Plans (Continued)
The fair value of each stock option was estimated on the date of grant
using the Black-Scholes option pricing model. The pro forma data may not be
representative of the effects on net earnings in future years because pro forma
compensation expense related to grants made prior to 1996 is not considered,
stock options vest over several years and additional stock options may be
granted in the future.
Fair value and assumptions were as follows:
1999 1998 1997
----------- ----------- -----------
Weighted average fair value of
options granted....................... $7.37 $9.53 $2.00
Risk-free interest rate................ 6.0% 5.2% 6.3%
Expected stock price volatility........ 66% 69% 56%
Expected dividend yield................ - - -
Expected life of stock options......... 7 years 7 years 7 years
7. Common Stock
On August 25, 1988, certain members of current and former management of
the Company purchased common stock with restrictions ("Restricted Stock") at
$0.0025 per share. Although holders of Restricted Stock have voting and dividend
rights, no Restricted Stock is transferable until the holder has paid the
Company the balance of the subscription price of $2.4975 or $4.4975 per share.
After August 25, 2003, the Company may, at its option, buy back the outstanding
shares of Restricted Stock for $0.0025 per share. At December 31, 1999 and 1998,
the amount of subscriptions due for Restricted Stock outstanding of 1,724,204
shares and 1,740,204 shares, respectively, is reflected as a reduction of
stockholders' equity.
In connection with a term loan agreement completed in June 1997, the
Company issued warrants for the purchase of 1,822,087.16 shares of common stock
at $1.5625 per share. The fair value of the warrants at the time of issuance of
$890 was recorded as additional debt issuance costs and an increase to
additional paid-in capital. During 1999 and 1998, 24,293 and 1,194,050 shares of
common stock, respectively, were issued in connection with the exercise of
warrants and a total of 0.97 and 84,660.70 warrants, respectively, were canceled
for cashless exercises and fractional shares. In January 2000, 417,220 shares of
common stock were issued in connection with the cashless exercise of the
remaining warrants. A total of 101,862.49 warrants were canceled for the
cashless exercise and fractional shares.
The Company's board of directors has authorized the repurchase of up to
6,000,000 shares of common stock on the open market. The shares repurchased will
be held as treasury stock until reissued for purposes to be determined by the
board of directors. During 1999, the Company purchased 2,015,700 shares at an
aggregate cost of $14,733.
34
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
8. Preferred Stock Purchase Rights
In March 1995, the Company's Board of Directors declared a dividend of
one preferred share purchase right ("Right") per share for each outstanding
share of common stock pursuant to a stockholder rights plan. The Rights will be
distributed 20 days after a person or group (an "Acquiring Person") either
acquires beneficial ownership of, or commences a tender or exchange offer for,
17.5% or more of the Company's outstanding common stock.
Each Right then may be exercised to purchase one one-hundredth of a
share of Series A Junior Participating Preferred Stock, $0.01 par value (the
"Preferred Shares"), at an exercise price of $70.00 per one-hundredth Preferred
Share. Thereafter, upon the occurrence of certain events, the Rights entitle
holders other than the Acquiring Person to acquire common stock having a value
of twice the exercise price of the Rights. Alternatively, upon the occurrence of
certain other events, the rights would entitle holders other than the Acquiring
Person to acquire common stock of the Acquiring Person having a value of twice
the exercise price of the Rights.
The Rights may be redeemed by the Company at a redemption price of
$.001 per Right at any time until the 20th day after a public announcement of an
acquisition of 17.5% or more of the common stock of the Company. The Rights
expire on March 20, 2005.
9. Commitments
Most of the Company's retail stores are under operating leases with
various remaining terms through 2016. The leases have noncancelable terms that
generally range from three to 20 years and many include renewal options for
additional periods. Certain store leases provide the Company with an early
cancellation option if sales for a designated period do not reach a specified
level as defined in the lease. Most of the store leases contain escalation
clauses and require payment of real estate taxes, utilities, common area
maintenance costs and contingent rentals based on percentages of sales in excess
of specified minimums. Certain store leases contain provisions restricting
assignment, merger, change of control or transfer. The Company also leases
certain office and storage facilities, store fixtures and equipment, computers
and automobiles under operating leases.
Future minimum payments under operating leases with noncancelable terms
in excess of one year at December 31, 1999 are: 2000, $125,994; 2001, $111,526;
2002, $96,179; 2003, $80,999; 2004, $62,679 and thereafter, $235,968.
Total rent expense consists of the following:
Years Ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Minimum cash rents............ $ 151,918 $ 149,432 $ 152,343
Straight-line recognition of
leases with scheduled
rent increases.............. (2,936) (2,676) (910)
Percentage rents.............. 2,231 2,169 2,143
----------- ----------- -----------
Total rent expense......... $ 151,213 $ 148,925 $ 153,576
=========== =========== ===========
35
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MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
10. Litigation
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of business. It is the opinion of management that
the ultimate resolution of these matters will not have a material adverse effect
on the financial position or results of operations of the Company.
11. Related Party Transactions
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC"), a wholly
owned subsidiary of Donaldson, Lufkin & Jenrette, Inc. ("DLJ"), acts as a market
maker for the Company's senior subordinated notes. A Managing Director of DLJSC
is a member of the Company's board of directors. In 1998, DLJSC received
compensation as underwriter of approximately $2,322 in connection with the
Company's offering of the 9 7/8% senior subordinated notes.
12. Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets at
December 31, 1999 and 1998 for cash and cash equivalents, other current assets,
accounts payable and other current liabilities approximate fair value because of
the immediate or short-term maturity of these financial instruments.
The carrying amount of long-term debt and the related fair value, based
on quoted market prices, are as follows:
December 31, 1999 December 31, 1998
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
9% senior subordinated notes.. $110,000 $105,600 $110,000 $104,885
9 7/8% senior subordinated
notes........................ 148,950 138,945 148,871 139,860
13. Supplemental Balance Sheet Information
Property consists of the following, at cost:
December 31,
---------------------------
1999 1998
------------ ------------
Land and land improvements............... $ 10,003 $ 10,003
Buildings................................ 32,568 32,242
Leasehold improvements................... 250,064 237,596
Store fixtures and other property........ 174,891 157,508
------------ ------------
467,526 437,349
Less accumulated depreciation and
amortization........................... (230,976) (203,925)
------------ ------------
Property, net......................... $ 236,550 $ 233,424
============ ============
36
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
13. Supplemental Balance Sheet Information (Continued)
Other current liabilities consist of the following:
December 31,
---------------------------
1999 1998
------------ ------------
Payroll and related taxes and benefits.... $ 31,157 $ 29,003
Gift certificates payable................. 57,613 46,384
Sales taxes payable....................... 20,380 19,823
Accrued store expenses and other.......... 37,733 39,559
Income taxes payable...................... 32,288 19,974
------------ ------------
Total other current liabilities........ $ 179,171 $ 154,743
============ ============
Other long-term liabilities consist of the following:
December 31,
---------------------------
1999 1998
------------ ------------
Straight-line recognition of leases with
scheduled rent increases................ $ 25,893 $ 29,193
Deferred rent credits..................... 10,482 11,165
Other..................................... 3,529 3,276
------------ ------------
Total other long-term liabilities...... $ 39,904 $ 43,634
============ ============
14. Supplemental Cash Flow Information
Investing and financing activities for the year ended December 31, 1997
exclude the addition of certain distribution facility property, which had an
original cost of approximately $30,000, and the related mortgage note payable.
The Company had an operating lease for the distribution facility property that
provided secured financing to the lessor, a special purpose entity, through a
third party lender. The property and related mortgage note payable, which was
repaid in 1998, were recorded on the Company's Consolidated Balance Sheet in
1997 after an amendment to the lease required consolidation of the special
purpose entity.
37
<PAGE>
MUSICLAND STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
15. Quarterly Financial Data (Unaudited)
Basic Diluted
Earnings Earnings
(Loss) (Loss)
Net per per Common Stock Price
Gross Earnings Common Common ------------------
Sales Profit (Loss) Share Share High Low
---------- --------- --------- ------- ------- --------- -------
1999:
First.... $ 401,797 $ 143,577 $ 1,374 $ .04 $ .04 $15.2500 $8.7500
Second... 381,059 143,128 1,499 .04 .04 12.0625 8.3750
Third.... 386,337 145,971 728 .02 .02 11.1875 8.5000
Fourth... 722,635 258,159 54,779 1.58 1.53 9.5625 6.7500
---------- --------- --------- ------- -------
Total.. $1,891,828 $ 690,835 $ 58,380 $ 1.65 $ 1.60
========== ========= ========= ======= =======
1998:
First.... $ 392,405 $ 136,753 $ (3,551) $(0.11) $(0.11) $12.0625 $6.5000
Second... 367,203 135,805 (4,662) (0.14) (0.14) 15.1250 9.8750
Third.... 387,368 137,795 (3,779) (0.11) (0.11) 16.1875 9.1250
Fourth... 699,906 245,947 50,025 1.42 1.36 18.0000 8.5000
---------- --------- --------- ------- -------
Total.. $1,846,882 $ 656,300 $ 38,033 $ 1.10 $ 1.04
========== ========= ========= ======= =======
The totals of basic and diluted earnings (loss) per common share by
quarter may not equal the totals for the year as there are changes in the
weighted average number of common shares outstanding each quarter and basic and
diluted earnings (loss) per common share are calculated independently for each
quarter.
38
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ----------- ---------------------------------------------------------------
3.1 - Restated Certificate of Incorporation of MSC, as amended
(incorporated by reference to Amendment No. 1 to MSC's Form S-1
Registration Statement covering common stock filed with the
Commission on July 20, 1990, File No. 33-35774)
3.2 - By-laws of MSC, as amended (incorporated by reference to MSC's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1998 filed with the Commission on November 13,
1998, File No. 1-11014)
4.1(a) - Senior Subordinated Note Indenture, including form of Note,
dated as of June 15, 1993 among MGI, MSC and Bank One Columbus,
N.A. as Successor Trustee to Harris Trust and Savings Bank
(incorporated by reference to Amendment No. 1 to MGI's
Registration Statement covering 9% Senior Subordinated Notes
filed with the Commission on June 3, 1993, File No. 33-62928)
4.1(b) - First Supplemental Indenture dated as of June 13, 1997 to the
Senior Subordinated Note Indenture (incorporated by reference
to MSC's Quarterly report on Form 10-Q for the quarterly period
ended June 30, 1997 filed with the Commission on August 13,
1997, File No. 1-11014)
4.2 - Amended and Restated Rights Agreement dated as of March 13,
2000, between MSC and Norwest Bank Minnesota, National
Association, Rights Agent (incorporated by reference to
Amendment No. 1 to MSC's Form 8-A Exchange Act Registration
Statement covering Preferred Share Purchase Rights filed with
the Commission on March 15, 2000)
4.3 - Indenture including Form of Note dated as of April 6, 1998
between MGI, as Issuer, MSC, as Guarantor, and Bank One, N.A.,
as Trustee (incorporated by reference to MGI's Registration
Statement on Form S-4 covering 9 7/8% Senior Subordinated Notes
initially filed with the Commission on April 24, 1998, File No.
333-50951)
4.4(a) - Loan and Security Agreement dated as of September 29, 1999 by
and between Congress Financial Corporation (Central) as Lender
and The Musicland Group, Inc. as Borrower (incorporated by
reference to MSC's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999 filed with the
Commission on November 12, 1999, File No. 1-11014)
4.4(b) - Form of Guarantee on behalf of Musicland Stores Corporation,
Musicland Retail, Inc. and Media Play, Inc. dated as of
September 29, 1999 in favor of Congress Financial Corporation
(Central) (incorporated by reference to MSC's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1999
filed with the Commission on November 12, 1999, File No.
1-11014)
4.4(c) - Form of General Security Agreement on behalf of Musicland
Retail, Inc. and Media Play, Inc. dated as of September 29,
1999 in favor of Congress Financial Corporation (Central)
(incorporated by reference to MSC's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1999 filed
with the Commission on November 12, 1999, File No. 1-11014)
*10.1(a) - Form of Subscription Agreement among MSC and the Management
Investors (incorporated by reference to Amendment No. 2 to
MSC's Form S-1 Registration Statement covering Senior
Subordinated Notes filed with the Commission on August 17,
1988, File No. 33-22058)
*10.1(b) - Form of amendment to Management Subscription Agreement
(incorporated by reference to Amendment No. 1 to MSC's Form S-1
Registration Statement covering common stock filed with the
Commission on July 20, 1990, File No. 33-35774)
*10.2 - Form of Registration Rights Agreement among MSC, DLJ and the
Management Investors (incorporated by reference to MSC's Annual
Report on Form 10-K for the year ended December 31, 1993 filed
with the Commission on March 25, 1994, File No. 1-11014)
39
<PAGE>
Exhibit
No. Description
- ----------- ---------------------------------------------------------------
*10.3 - 1988 Stock Option Plan, as amended (incorporated by reference
to Amendment No. 1 to MSC's Form S-1 Registration Statement
covering common stock filed with the Commission on July 20,
1990, File No. 33-35774)
*10.4 - Stock Option Plan for Unaffiliated Directors of MSC, as amended
(incorporated by reference to MSC's Quarterly report on Form
10-Q for the quarterly period ended June 30, 1997 filed with
the Commission on August 13, 1997, File No. 1-11014)
*10.5 - 1992 Stock Option Plan (incorporated by reference to Amendment
No. 4 to MSC's Form S-1 Registration Statement covering common
stock filed with the Commission on January 27, 1992, File No.
33-35774)
*10.6 - Musicland Stores Corporation 1994 Employee Stock Option Plan
(incorporated by reference to MSC's Annual Report on Form 10-K
for the year ended December 31, 1994 filed with the Commission
on March 27, 1995, File No. 1-11014)
*10.7 - Musicland Stores Corporation 1998 Stock Incentive Plan
(incorporated by reference to MSC's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998 filed with
the Commission on August 12, 1998, File No. 1-11014)
*10.8(a) - Management Incentive Plan dated as of January 1, 1999
(incorporated by reference to MSC's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1999 filed with
the Commission on May 13, 1999, File No. 1-11014)
*10.8(b) - Alternate Incentive Plan for Designated Senior Officers
(incorporated by reference to MSC's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999 filed with
the Commission on August 12, 1999, File No. 1-11014)
*10.9 - Three-Year Cycle Long Term Incentive Plan (incorporated by
reference to MSC's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1999 filed with the Commission
on May 13, 1999, File No. 1-11014)
*10.10 - Executive Officer Salary Continuation Plan dated as of March
10, 1997 (incorporated by reference to MSC's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1997
filed with the Commission on May 14, 1997, File No. 1-11014)
*10.11 - The Musicland Group, Inc. Supplemental Executive Retirement
Plan adopted as of October 26, 1998 (incorporated by reference
to MSC's Annual Report on Form 10-K for the year ended December
31, 1998 filed with the Commission on March 25, 1999, File No.
1-11014)
*10.12 - Form of Employment Agreement for Chief Executive Officer, as of
July 26, 1999
*10.13 - Form of Employment Agreement for Other Senior Executive
Officers, as of July 26, 1999
11 - Statement re computation of per share earnings (requirements
met by Note 1 and Note 2 of Notes to Consolidated Financial
Statements)
21 - Subsidiaries of MSC
23 - Consent of Arthur Andersen LLP
27 - Financial Data Schedule
99 - Form 11-K for The Musicland Group's Capital Accumulation Plan
(to be filed by amendment)
- --------------------------------------------
* Indicates Management Contract or Compensatory Plan or Agreement required
to be filed as an Exhibit to this form
40
FORM OF EMPLOYMENT AGREEMENT
FOR CHIEF EXECUTIVE OFFICER
This Agreement is made as of July 26, 1999 by and between The Musicland
Group, Inc., a Delaware corporation (the "Company"), Musicland Stores
Corporation, a Delaware corporation (the "Parent") and _______________ (the
"Executive").
WHEREAS the Company and the Parent have employed Executive pursuant to
the terms of Employment and Change of Control Agreements dated August 25, 1988,
as amended January 22, 1992 and November 27, 1995 (the "Prior Agreements");
WHEREAS the Company and the Parent desire to continue to employ
Executive in accordance with the terms and conditions stated in this Agreement,
which shall replace and supersede the Prior Agreements; and
WHEREAS Executive desires to continue employment pursuant to the terms
and conditions of this Agreement and acknowledges that this Agreement replaces
and supersedes the Prior Agreements;
NOW, THEREFORE, for the consideration described below, the parties
agree as follows:
I. EMPLOYMENT
1.1 Employment As Executive. During the Period of Employment described in
Section 1.3 below, the Company and the Parent hereby agree to employ Executive
as Chairman and Chief Executive Officer of the Company and the Parent, unless
terminated earlier pursuant to Article III of this Agreement. Executive accepts
such employment pursuant to the terms of this Agreement. Executive shall be
responsible for managing the Company and the Parent and shall perform such
duties and responsibilities as may be determined from time to time by the Boards
of Directors of the Company and the Parent, which shall be consistent with his
position as a Chief Executive Officer of the Company and the Parent. The Company
and the Parent shall nominate and use their best efforts to secure the election
of Executive as a member of the Boards of Directors of the Company and the
Parent, and Executive shall serve as Director of the Company and the Parent
without additional compensation other than as provided herein. Executive shall
not be required to perform his duties hereunder for more than 60 working days in
any year, or for more than 21 consecutive days at any one time, at any office
located in any place other than the Minneapolis, Minnesota metropolitan area.
1.2 Exclusive Services. Executive agrees to devote his full time,
attention, and energy to performing his duties and responsibilities to the
Company and the Parent
1
<PAGE>
under this Agreement during the period that this Agreement is in effect, except
for reasonable vacations, illness, or incapacity, provided that nothing in this
Agreement shall preclude Executive from devoting time during reasonable periods
required for (i) serving as a director or member of a committee of any
organization or company involving no conflict of interest with the Company or
the Parent; (ii) delivering lectures, fulfilling speaking engagements; (iii)
engaging in charitable and community activities; and (iv) managing personal or
family finances and investments; provided that such activities do not materially
interfere with the performance of his duties hereunder.
1.3 Period of Employment. The Period of Employment shall be determined as
follows:
(a) Except as provided in subsection (b) in the event of a Change of
Control as defined in Section 4.1, the Period of Employment hereunder
shall be from July 26, 1999 through July 26, 2002, subject to extension
or termination as hereinafter provided. The then-existing Period of
Employment shall be automatically extended by one additional year (to
the next subsequent July 26, but in no event shall the Period of
Employment extend beyond the first day of the month next succeeding the
month in which Executive attains age 65) unless the Company shall
deliver to Executive or Executive shall deliver to the Company written
notice at least 30 months prior to the expiration of the then-existing
Period of Employment that the Period of Employment will not be
extended. In such case, the Period of Employment will end at the
expiration of the then-existing Period of Employment hereunder,
including any previous extension, and shall not be further extended
except by agreement of the Company and Executive. (For example, in
order to avoid the automatic extension of the expiration of the Period
of Employment from July 26, 2002 to July 26, 2003, notice must be given
by January 26, 2000.)
(b) If upon an event constituting a Change of Control the remaining period
in the then-existing Period of Employment (as determined under
subsection (a) above) is less than 36 months, the Period of Employment
shall be extended so that the expiration is on the last business day of
the 36th calendar month following such Change of Control. No adjustment
will be made if the remaining period is more than 36 months at the time
of the Change in Control. In either case, the automatic one year
extensions shall continue to apply as provided in subsection (a) above.
(For example, if a Change in Control occurs January 1, 2000, the
remaining period in the Period of Employment (ending July 26, 2002) is
less than 36 months and would be extended to expire January 1, 2003. In
order to avoid automatic extension of the adjusted Period of Employment
to January 1, 2004, notice must be given by July 1, 2000.)
2
<PAGE>
(c) The Period of Employment shall continue until the expiration of all
automatic extensions effected as aforesaid, unless and until it sooner
ceases or is terminated as provided in Article III.
II. COMPENSATION, BENEFITS, AND PERQUISITES
2.1 Salary. During the Period of Employment, the Company shall pay
Executive a base salary at the annual rate of $___________ commencing January 1,
1999. The base salary shall be payable in equal bi-weekly installments. The
Compensation Committee of the Board of Directors of the Company may review the
salary periodically and may in its sole discretion increase it to reflect
performance and other factors in accordance with the Company's customary
procedures and practices regarding the salaries of senior officers.
2.2 Disability Pay. In the event of the disability of Executive (within the
meaning of the Company's disability benefit plans in effect at the time of
Executive's disability), the obligation of the Company to make payments of
salary under Section 2.1 shall cease as of the date Executive begins receiving
benefits under the Company's short-term salary continuation plan, and Executive
shall be entitled to benefits under the Company's disability benefit plans in
accordance with the terms of such plans. Notwithstanding the terms of this
Agreement, the Company retains the right to amend, reduce or terminate its
disability benefit plans at any time so long as such amendments, reductions or
terminations apply equally to all senior officers.
2.3 Employee Benefits. Executive shall be entitled to the benefits and
perquisites which the Company generally provides to its other senior officers
under the applicable Company plans and policies. Executive's participation in
such benefit plans shall be on the same basis as applies to other senior
officers of the Company and subject to the terms of applicable law, plan
documents, and insurance policies. Executive shall pay contributions, if any,
which are generally required of the Company's senior officers in order to
receive any such benefits. Specifically, Executive shall:
(a) participate in the Company's Management Incentive Plan and Long-Term
Incentive Plan, or, if applicable, the shareholder approved Alternate
Incentive Plan for Designated Senior Officers (the "Alternate Plan");
(b) be considered by the Compensation Committee of the Board of Directors
for possible grants of stock options, stock appreciation rights,
restricted stock and deferred stock awards, under the Company's stock
option plans, stock incentive plans, or any similar plan adopted by the
Company or the Parent during the Period of Employment;
(c) participate to the permitted extent he wishes in the Company's Capital
Accumulation Plan;
3
<PAGE>
(d) participate in the Company's Employees' Retirement Plan and
Supplemental Executive Retirement Plan;
(e) participate in the Company's death benefit plans (consisting of its
Group Life Insurance Plan, and accidental death and dismemberment
insurance);
(f) participate in the Company's disability benefit plans (consisting of
its short-term salary continuation, short-term disability and long-term
disability plans);
(g) participate in its senior officer medical, dental, health and welfare
plans;
(h) participate in equivalent successor plans of the Company for which
officers are eligible; and
(i) be provided with one golf membership paid for by the Company regardles
if any other senior officers are provided such perquisite.
Notwithstanding the foregoing, nothing in this agreement shall preclude any
amendment or termination by the Company of any employee benefit plan or practice
(other than (i) above), provided such amendment or termination is applicable to
all of the Company's senior officers generally; provided, however, that in the
event of a Change of Control as defined in Section 4.1 and through the Period of
Employment described in Section 1.3(b), Executive shall be entitled to
perquisites and benefits at least as favorable as those to which Executive was
entitled immediately prior to the Change of Control, and to the extent such
perquisites or benefits are not payable or provided under any such plan of the
Company by reason of the amendment or termination thereof, the Company itself
shall pay or provide therefor.
2.4 Incentive Compensation Following Change of Control. In the event of a
Change of Control as defined in Section 4.1 and through the Period of Employment
described in Section 1.3(b), Executive shall receive an annual award under the
Company's Management Incentive Plan, or, if applicable, the Alternate Plan, or a
plan with substantially equivalent incentives and benefits that may be adopted
by the Company, for each calendar year, or portion thereof, during the Period of
Employment, which shall be payable as soon as practicable after the end of such
calendar year and shall be equal to a percentage of Executive's base salary for
such calendar year. Such percentage shall be the greater of (i) 60% or (ii) the
average of the percentages, for each of the three preceding calendar years (or
such lesser number of years that the Executive has been a participant in the
plan), that result from dividing Executive's annual award under the Management
Incentive Plan (or its successor) for such year by Executive's annual base
salary for that year. Furthermore, Executive shall continue to be a full
participant in the performance awards of the Company's Long-Term Incentive Plan,
or, if applicable, the Alternate Plan, and any other long-term incentive plans
of the Company, and any and all executive incentive plans in which executives of
the
4
<PAGE>
Company participate that are in effect immediately prior to a Change of Control,
or any amended or successor plans with at least as favorable terms that may be
substituted and that may hereafter be adopted, including, without limitation,
any plan relating to stock options, stock appreciation rights, restricted stock
and deferred stock awards, or equivalent successor plans that may be adopted by
the Company with at least the same reward opportunities that have heretofore
been provided and with such improvements in such plans or other plans as may
from time to time be made in accordance with the present practices of the
Company.
2.5 Employment Taxes and Withholding. Executive recognizes that the
compensation, benefits, and other amounts provided by the Company under this
Agreement may be subject to federal, state, or local income taxes. All such
taxes shall be the responsibility of the Executive. To the extent that federal,
state, or local law requires withholding of taxes on compensation, benefits, or
other amounts provided under this Agreement, the Company shall withhold the
necessary amounts from the amounts payable to Executive under this Agreement.
2.6 Company Not Responsible for Insured Benefits. In this Article II, the
Company is agreeing to provide certain benefits in the form of premiums for
insurance coverage. The Company and the Parent are not themselves promising to
pay the benefit an insurance company is obligated to pay under the policy the
insurance company has issued. If an insurance company does not or cannot pay
benefits it owes to Executive or his beneficiaries under the insurance policy,
neither Executive nor his personal representative or beneficiary shall have any
claim for benefits against the Company or the Parent.
2.7 Expenses. Executive shall be entitled to receive reimbursement from the
Company (in accordance with the policies and procedures then in effect for the
Company's employees) for all reasonable travel and other expenses incurred by
him in connection with his services under this Employment Agreement.
III.TERMINATION OF EXECUTIVE'S EMPLOYMENT
3.1 Termination of Employment. Notwithstanding any other provision of this
Agreement, Executive's employment and the Period of Employment may be terminated
pursuant to the following:
(a) Executive's employment may be terminated by the Company or the Parent,
on not less than 60 days' notice in writing, for Cause as defined in
Section 3.2. After payment of all amounts accrued to Executive
hereunder through the date of such notice, the Company and the Parent
shall have no further obligation to the Executive hereunder except for
the payment of benefits under the Company's Employees' Retirement Plan
and Supplemental Executive Retirement Plan and Capital Accumulation
Plan vested on such date.
5
<PAGE>
(b) Executive's employment may be terminated by the Company at any time for
any reason other than Cause as defined in Section 3.2, or Executive may
terminate his employment with the Company and the Parent for Good
Reason as defined in Section 3.3. In the event of termination of
employment by the Company without Cause, or termination by the
Executive for Good Reason, the Company shall pay to Executive, as
liquidated damages or severance pay or both, the amounts described in
Section 3.4.
(c) Executive may terminate his employment with the Company and the Parent
for other than Good Reason. In such event, the Executive's employment
shall terminate as of the 90th day following the giving of written
notice by the Executive to the Company of his decision to terminate
other than for Good Reason, or such earlier date as the Company may
specify in written notice to Executive, and the Company shall pay to
Executive, as severance pay, the amounts described in Section 3.5.
3.2 Termination for Cause.
(a) For purposes of this Article III, "Cause" shall mean only the
following:
(1) an intentional act or acts of dishonesty by the Executive
constituting a felony and resulting or intended to result directly
or indirectly in gain to or personal enrichment of the Executive
at the Company's expense;
(2) a deliberate and intentional refusal by the Executive to comply
with Sections 1.1 and 1.2 of this Agreement (other than any such
failure to comply resulting from the Executive's incapacity due to
illness or accident) and which failure to comply results in
demonstrably material injury to the Company, provided, however,
that the Executive shall have either failed to remedy such failure
to comply within 30 days from his receipt of written notice from
the Secretary of the Company demanding that he remedy such failure
to comply, or shall have failed to take all reasonable steps to
that end during such 30-day period and thereafter; or
(3) failure by the Executive, on at least three separate occasions
(each occurring less than 24 months apart), to comply with
Sections 1.1 and 1.2 of this Agreement for a significant period of
time (other than any such failure to comply resulting from the
Executive's incapacity due to illness or accident), and provided
that the Company has, on each such occasion, promptly advised the
Executive of such failure to comply by a written notice which sets
forth the details of such failure to comply.
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(b) Termination shall not be for Cause pursuant to the foregoing unless
there shall be delivered to Executive, along with the termination
notice, a certified copy of a resolution of the Board of Directors of
the Company finding that Executive was guilty of conduct set forth in
subsections (a)(1), (2) or (3) above and specifying the particulars
thereof in detail. The resolution must be adopted by the affirmative
vote of not less than that number of directors equal to the greater of
(i) 4 directors or (ii) two-thirds of the entire membership (whether or
not present) of the Board of Directors (other than Executive and
directors who are employees of the Company or the Parent) at a meeting
called and held for that purpose and at which Executive was given an
opportunity to be heard. For purposes of the minimum number of
directors required in the preceding sentence, any fraction shall be
rounded up to the next higher whole number of directors.
(c) Anything herein to the contrary notwithstanding, the employment of
Executive shall not be considered to have been terminated by the
Company for Cause if termination of his employment took place solely
because of one or more of the following:
(1) as a result of bad judgment of negligence on the part of
Executive, or
(2) as the result of an act or omission without intent of gaining
therefrom directly or indirectly a profit to which Executive was
not legally entitled; provided, however, that this subsection
(c)(2) shall not apply to a termination pursuant to subsection
(a)(3) above, or
(3) because of an act or omission believed by Executive in good faith
to have been in or not opposed to the interests of the Company, or
(4) as the result of an act or omission which occurred more than 12
calendar months prior to Executive's having been given notice of
the termination of his employment for such act or omission unless
the commission of such act or such omission could not at the time
of such commission or omission have been known to a member of the
Board of Directors of the Company (other than Executive), in
which case more than 12 calendar months prior to the date that the
commission of such act or such omission was or could reasonably
have been so known; provided, however, that this subsection (c)(4)
shall not apply to a termination pursuant to subsection (a)(3)
above; or
(5) as a result of a continuing course of action which commenced and
was or could reasonably have been known to a member of the
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Board of Directors of the Company (other than Executive) more than
12 calendar months prior to notice having been given to the
Executive of the termination of his employment; provided, however,
that this subsection (c)(5) shall not apply to a termination
pursuant to subsection (a)(3) above.
3.3 Good Reason
(a) For the purposes of this Article III, "Good Reason" shall mean:
(1) the authority, powers, functions, responsibilities or duties
assigned to Executive pursuant to this Agreement are materially
and adversely diminished without his written consent (except any
diminution that occurs solely as a result of the fact that the
Company or Parent ceases to be a public company);
(2) Executive is removed as a director of the Company and Parent (or
any successor thereto);
(3) a breach of Article II of this Agreement with respect to the
salary, incentive compensation and benefits of Executive; or
(4) after a Change of Control (as defined in Section 4.1), Executive
is required, without his written consent, to locate his office
more than 35 miles distant by public highway from his office
immediately prior to the Change of Control (but only if the
distance between the Executive's residence and such new office is
greater than the distance between his residence and office
immediately prior to the Change in Control) or to travel on
business more than 60 working days in any year or more than 21
consecutive days at any one time.
(b) Executive shall give written notice to the Company of termination for
Good Reason within six months of the event giving rise to such notice
and allow the Company 30 days after the Company's receipt of such
notice to cure such breach. If the Company disputes any contention by
Executive that there has been Good Reason, such dispute shall be
resolved by binding arbitration held in Minneapolis, Minnesota in
accordance with the Employment Dispute Resolution Rules of The American
Arbitration Association then in effect. The arbitrator shall be an
attorney with experience in employment disputes who is mutually
selected by the parties. Judgment may be entered on the arbitration
award in any court having jurisdiction.
(c) In the event of the liquidation, dissolution, consolidation or merger
of the Company or transfer (in one transaction or a series of
transactions) of 70% or more of its assets (regardless of whether such
event is not a
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Change of Control within the meaning of Section 4.1(c) because it is
approved by the Continuing Directors), and the successor entity does
not assume all duties and obligations of the Company under this
Agreement or otherwise make arrangements with Executive satisfactory to
Executive for employment of the Executive by the successor, then
Executive may within 90 days following such event give written notice
to the Company of his termination of employment (effective as of 90
days following such notice or such earlier date as specified by the
Company in written notice to Executive), which shall be deemed
termination for Good Reason.
3.4 Severance Benefits. In the event of termination of Executive's
employment by the Company without Cause, or termination by the Executive for
Good Reason, the Company shall provide Executive with the following compensation
and benefits:
(a) Salary. The Company shall pay Executive during the remainder of the
Period of Employment as in effect immediately prior to such
termination, as if such termination had not occurred, an amount equal
to the base salary provided in Section 2.1, including any increases
therein provided, at the times therein stated, for the month in which
termination shall have occurred and for each month thereafter during
such Period, less in respect of each such month the amounts, if any,
paid to him pursuant to the Company's Employees' Retirement Plan and
Supplemental Executive Retirement Plan and the amounts the Executive
would have paid in cash in respect of employee benefits provided for in
Section 2.3, if Executive were still employed.
Notwithstanding the foregoing, in the event of a termination following
a Change of Control, the salary amount described above shall be (i)
determined based on a remaining Period of Employment of not less than
36 months (even if the actual Period of Employment is shorter) and (ii)
paid in a single lump sum within 20 days after such termination.
(b) Annual Incentive. The Company shall pay the Executive during the
remainder of the Period of Employment as in effect immediately prior to
such termination, as if such termination had not occurred, in full
substitution for his rights under the Company's Management Incentive
Plan, or, if applicable, the Alternate Plan, or any successor plan then
in effect, a substitute incentive award, for the year in which
termination occurred and for each subsequent calendar year, or portion
thereof (in which case such substitute award shall be only in
proportion to such portion), during such Period which shall be equal to
the greater of:
(1) 60% of Executive's base salary for the applicable calendar year as
described in Section 2.1 (including any increases therein
provided), or
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(2) the average percentage (of salary) of the awards received by
Executive in respect of the three calendar years next preceding
the year in which the first such substitute incentive award is
paid times such base salary.
The substitute incentive award shall be paid in a single lump sum on
the first day of February of each year, except that a pro rata award
for that portion of the calendar year in which the Period of Employment
ends shall be paid in a single lump sum on the last day of the Period
of Employment.
Notwithstanding the foregoing, in the event of a termination following
a Change of Control, the substitute incentive awards described above
shall be (i) determined based on a remaining Period of Employment of
not less than 36 months (even if the actual Period of Employment is
shorter) and (ii) paid at one time within 20 days after such
termination in an amount equal to the aggregate lump sum value of such
substitute awards.
(c) Long-Term Incentive. The Company shall pay Executive in full
substitution for any rights under all outstanding performance awards
under the Long-Term Incentive Plan, or, if applicable, the Alternate
Plan, or any successor plan then in effect, held by Executive at the
time of such termination, for each year during the remainder of the
Period of Employment a substitute long-term award as follows:
(1) If the termination occurs after the completion of any performance
cycle under the applicable plan but before the award for such
cycle has been paid, the substitute award for the year in which
termination occurs will equal the percentage of Executive's base
salary actually earned under the terms of the applicable plan for
such completed cycles and will be paid at the same time other
participants are paid for such completed cycles. Otherwise, a
substitute long-term award will not be paid in the year of
termination if Executive has already received in such year a
long-term incentive payment pursuant to the applicable plan.
(2) The substitute long-term award for all other years will equal the
greater of (i) 50% of Executive's then current annual base salary
as provided in subsection (a) above or (ii) the average percentage
(of salary) of the two most recent long-term awards paid to the
Executive times such base salary and will be paid by February 1st
of the year for which the payment is being made.
(3) If the final year of the Period of Employment is a partial year,
the substitute long-term award for such year (determined as in
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subparagraph (2) above) will be prorated based on the number of
days in such partial year.
For example: If the Executive is terminated in January 2001 before
payment is made for the completed 1999 - 2000 performance cycle,
the Executive's substitute long-term award for the year of
termination (2001) will be equal to the award earned by the
Executive under such completed cycle and will be paid at the same
time as other participants are paid. If the Executive is
terminated in the year 2001 after the payment for the 1999-2000
performance cycle has been made, the first substitute long-term
award will be paid in the year 2002. In either case, the
Executive's substitute long-term award for the year 2002 will be
paid by February 1, 2002 and will equal the greater of (i) 50% of
Executive's then current annual base salary or (ii) the average
percentage (of salary) of the long-term awards paid to the
Executive in 2000 and 2001 times such base salary.
Notwithstanding the foregoing, in the event of a termination following
a Change of Control, the substitute long term incentive awards
described above shall be (i) determined based on a remaining Period of
Employment of not less than 36 months (even if the actual Period of
Employment is shorter) and (ii) paid at one time within 20 days after
such termination in an amount equal to the aggregate lump sum value of
such substitute awards.
(d) Stock Awards. Each outstanding stock option to purchase shares of the
Company's or the Parent's common stock and any stock appreciation right
that is held by Executive at the time of such termination shall become
vested and exercisable in full. Each stock option to purchase shares of
the Company's or the Parent's common stock granted to Executive on or
after the date hereof shall contain the following provision:
In the event that the Optionee's Period of Employment under his
Employment Agreement with the Company dated as of July 26, 1999 is
terminated pursuant to Section 3.1(b) thereof, this Option shall
become exercisable in full.
In addition, all restrictions upon any restricted stock previously
granted to Executive by the Company or the Parent shall be deemed to
have lapsed and Executive shall be entitled to receive all such shares
of restricted stock. Similarly, Executive shall be entitled to receive
all shares covered by outstanding deferred stock awards previously
granted to Executive by the Company or the Parent as if the deferral
period and all conditions pertaining thereto had expired or been
satisfied, as the case may be.
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(e) Death, Disability and Medical Benefits. During the remainder of the
Period of Employment as in effect immediately prior to such
termination, as if such termination had not occurred, the Executive
shall continue to be entitled to all employee benefits provided for in
Section 2.3(f), (g), and (h), as if Executive were still employed
during such period under this Agreement, with benefits based upon the
compensation and increases provided in subsection (a), and upon the
assumption that Executive was continuing to pay or continued to be
deemed to have paid in cash in respect of such benefits the amounts
(and only the amounts) by which the payments otherwise due Executive
under subsection (a) were reduced in respect to such benefits, and if
and to the extent the said benefits shall not be payable or provided
under any plan by reason of Executive no longer being an employee of
the Company as a result of Executive's termination, the Company itself
shall pay or provider therefor. Notwithstanding the foregoing, if
Executive is entitled to death, disability or medical benefit coverage
of the kind described in Section 2.3(f), (g) or (h) from other
employment or a consulting position during the Period of Employment,
such benefits provided under this Agreement shall be reduced or
coordinated as provided in subsection (g) below.
(f) Retirement Benefits. The Company shall pay to Executive during the
remainder of his life following the expiration of the Period of
Employment as in effect immediately prior to such termination, and,
after his death, to his surviving spouse (subject to such optional
method of payment election as may be made under the Company's
Employees' Retirement Plan and Supplemental Executive Retirement Plan
and as further described below), a supplemental retirement benefit
which shall be equal to the excess of:
(1) an aggregate benefit at least equal to the benefit that would have
been paid under the Employees' Retirement Plan and Supplemental
Executive Retirement Plan, subject to any plan amendments or
terminations generally applicable to all of the Company's senior
officers which are adopted prior to the date of such termination,
if the Executive had continued to be employed and to be entitled
to service credit for benefits during the remainder of such Period
of Employment at an annual rate of compensation equal to his
compensation and increases provided in subsections (a) and (b)
(unless during such remainder the Executive dies or becomes
disabled, in which event such benefit shall be reduced to reflect
application of the last two sentences of subsection(e), over
(2) the aggregate benefit actually payable to the Executive under the
Employees' Retirement Plan and Supplemental Executive Retirement
Plan.
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In clarification of the foregoing paragraph (1), in determining
whether any actuarial reduction would apply (and the amount of such
reduction, if any) under the early retirement provisions of the
Employees' Retirement Plan and Supplemental Executive Retirement Plan
(to reflect the early commencements of benefits), the age which the
Executive would have attained at the expiration of such Period, and the
accredited service he would have had at such time, shall be used. An
election made by Executive under the Employees' Retirement Plan and
Supplemental Executive Retirement Plan as to a joint and survivor or
other optional method of payment and as to the time for commencement of
payments shall be applicable to such supplemental retirement benefit,
with application of discount factors no less favorable to Executive
than those in effect under the Employees' Retirement Plan and
Supplemental Executive Retirement Plan on the date of such termination.
Notwithstanding the foregoing, Executive may, by a notice in writing
filed with the Plan Administrator for the Employees' Retirement Plan
and Supplemental Executive Retirement Plan, designate any person as the
payee of amounts due hereunder after his death (in the manner, and with
the effect, described in the Company's Employees' Retirement Plan and
Supplemental Executive Retirement Plan).
Notwithstanding the foregoing, in the event of a termination following
a Change of Control, the supplemental retirement benefit described
above shall be (i) calculated based upon the Executive's years of
service at the time of the termination plus an additional five years
and disregarding the requirement of five years of participation in the
Supplemental Executive Retirement Plan, and (ii) paid in a single sum
within 20 days after such termination in an amount equal to the lump
sum value of such benefit.
(g) Subsequent Employment. Notwithstanding the foregoing, to the extent
that the Executive shall receive cash compensation that is subject to
federal income taxation in respect of other employment or a consulting
position with another company and that is payable to Executive solely
in respect of the remainder of the Period of Employment as in effect
immediately prior to such termination, or a portion thereof, the
payments to be made by the Company under subsections (a), (b), and (c)
for the remainder of the Period of Employment as in effect immediately
prior to such termination or such portion thereof, as the case may be,
shall be correspondingly reduced, and any supplemental retirement
benefit payments pursuant to subsection (f) shall be calculated after
taking such reduction into account. In the event Executive has received
lump sum payments following a Change of Control as provided above,
Executive agrees to re-pay the Company in quarterly payments the
reductions described in the foregoing sentence.
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Furthermore, to the extent that benefits of the kind provided for in
Section 2.3 (f), (g) and (h) are payable in respect of such other
employment or consulting position, any death or disability benefits so
payable under subsequent employment shall reduce benefits of such kind
otherwise payable under subsection (e) above and any medical/dental/
welfare benefits so payable under subsequent employment shall be deemed
the primary coverage for purposes of coordination of benefits under
subsection (e) above and avoiding duplication of benefits.
Notwithstanding the foregoing, Executive shall not be required to
minimize damages or severance payments under this Agreement by seeking
or accepting other employment or a consulting position.
(h) After Death or Disability. Upon the death of Executive during the
period that payment of the amounts specified in subsection (a) above
are required to be made, the obligation of the Company to make payments
to the Executive under this Section 3.4 shall cease as of the date of
death and the benefits described in Section 3.7 shall become payable.
In the event of the disability of the Executive during such Period, the
obligation to make payments under subsections (a) and (b) above shall
be suspended as of the date specified in Section 2.2 for the cessation
of payments of salary and Executive shall be entitled to the benefits
described in Section 3.6, and such obligation shall be reinstated again
only if during such period Executive ceases to be disabled.
3.5 Severance Pay Upon Voluntary Termination. In the event Executive
terminates employment with the Company other than for Good Reason, the Company
shall provide Executive with the following compensation and benefits:
(a) Executive shall receive monthly an amount equal to his monthly salary
(at his annual rate of salary in effect on the date of such
termination) for the month in which termination shall have occurred and
for each month thereafter during the period ending the earlier of
(1) the expiration of the 12 months immediately following the date of
such termination, or
(2) the end of the Period of Employment under Section 1.3,
less in respect of each such month the amount, if any, paid to him
pursuant to the Company's Employees' Retirement Plan and Supplemental
Executive Retirement Plan and the amounts Executive would have paid in
cash in respect of employee benefits provided for in Section 2.3 if the
executive were still employed.
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(b) During the period that the payments of the amounts specified in
subsection (a) are required to be made, Executive shall continue to be
entitled to all employee benefits provided for in Section 2.3(f), (g),
and (h) as if Executive were still employed during such period under
this Agreement, with benefits based upon the compensation provided in
subsection (a) and upon the assumption that Executive was continuing to
pay or continued to be deemed to have paid in cash in respect to such
benefits the amounts (and only the amounts) by which the payments
otherwise due Executive under subsection (a) were reduced in respect of
such benefits, and if and to the extent that such benefits shall not be
payable or provided under any such plan by reason of Executive no
longer being an employee of the Company as a result of Executive's
termination, the Company itself shall pay or provide therefor.
Notwithstanding the foregoing, if Executive is entitled to disability
or medical benefit coverage of the kind described in Section 2.3(g) or
(h) from other employment or a consulting position during the Period of
Employment, such benefits provided under this Agreement shall be
coordinated as provided in subsection (d) below.
(c) The Company shall pay to the Executive during the remainder of his life
following the expiration of the period specified in subsection (a) and,
after his death, to his surviving spouse (subject to such optional
method of payment election as may be made under the Company's
Employees' Retirement Plan and Supplemental Executive Retirement Plan
and as further described below), a supplemental retirement benefit
which shall be equal to the excess of
(1) an aggregate benefit at least equal to the benefit that would have
been paid under the Company's Employees' Retirement Plan and
Supplemental Executive Retirement Plan, subject to any plan
amendments or terminations generally applicable to all of the
Company's senior officers which are adopted prior to the date of
such termination, if the Executive had continued to be employed
and to be entitled to service credit for benefits during such
period specified in subsection (a) at an annual rate of
compensation equal to his compensation provided in subsection (a)
(unless during such remainder the Executive dies or becomes
disabled, in which event such benefit shall be reduced to reflect
application of the last two sentences of subsection (b)), over
(2) the aggregate benefit actually payable to Executive under the
Employees' Retirement Plan and Supplemental Executive Retirement
Plan .
In clarification of the foregoing paragraph (1), in determining whether
any actuarial reduction would apply (and the amount of such reduction,
if any,
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under the early retirement provisions of the Employees' Retirement Plan
and Supplemental Executive Retirement Plan (to reflect the early
commencement of benefits), the age which Executive would have attained
at the expiration of such period, and the accredited service he would
have had at such time, shall be used. An election made by Executive
under the Employees' Retirement Plan and Supplemental Executive
Retirement Plan as to a joint and survivor or other optional method of
payment and as to the time for commencement of payments shall be
applicable to such supplemental retirement benefit, with application of
discount factors no less favorable to Executive than those in effect
under the Employees' Retirement Plan and Supplemental Executive
Retirement Plan on the date of such termination. Notwithstanding the
foregoing, Executive may, by a notice in writing filed with the Plan
Administrator for the Employees' Retirement Plan and Supplemental
Executive Retirement Plan, designate any person as the payee of amounts
due hereunder after his death (in the manner, and with the effect,
described in the Company's Employees' Retirement Plan and Supplemental
Executive Retirement Plan).
(d) Notwithstanding the foregoing, to the extent that Executive shall
receive cash compensation that is subject to federal income taxation in
respect of other employment or a consulting position with another
company and that is payable to Executive solely in respect to the
period specified in subsection (a) or a portion thereof, the payments
to be made by the Company under subsection (a) for such period or such
portion thereof, as the case may be, shall be correspondingly reduced,
and any supplemental retirement benefit payments pursuant to subsection
(c) shall be calculated after taking such reduction into account.
Furthermore, to the extent that benefits of the kind provided for in
Section 2.3(g) and (h) are payable in respect of such other employment
or consulting position, disability benefits of the kind described in
Section 2.3(g) so payable shall reduce benefits of such kind otherwise
payable under subsection(b) and medical and dental benefits of the kind
described in Section 2.3(h) so payable shall be deemed the primary
coverage for purposes of coordination of benefits and avoiding
duplication of benefits. Notwithstanding the foregoing, the Executive
shall not be required to minimize payments of benefits under this
Agreement by seeking or accepting other employment or a consulting
position.
(e) Upon the death of the Executive during the period that payments of the
amounts specified in subsection (a) are required to be made, the
obligation of the Company to make payments to the Executive under this
Section 3.5 shall cease as of the date of death and the benefits
described in Section 3.7 shall become payable. In the event of the
disability of the Executive during the period that payments of the
amounts specified in subsection (a) are required to be made, the
obligation to make payments
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under subsection (a) shall be suspended as of the date specified in
Section 2.2 and Executive shall be entitled to the benefits described
in Section 3.6, and such obligation shall be reinstated again only if
during such period Executive ceases to be disabled.
3.6 Disability. If Executive has become disabled from performing his duties
under this Agreement and the disability has continued for a period of six
consecutive months or for an aggregate of 180 days during nine consecutive
months, the Period of Employment under this Agreement shall terminate. Such
termination shall not result in payments pursuant to Sections 3.4 or 3.5 above,
the disability benefits provided by the Company being in full satisfaction of
the Company's obligation to Executive.
3.7 Death. Upon the death of Executive during the Period of Employment, the
Period of Employment and the obligation of the Company to make payments under
Section 2.1 shall cease as of the date of death, and benefits shall become
payable under the death benefit plans described in Section 2.3(f) in accordance
with their terms, exclusive of any plan amendments that reduce or terminate
benefits thereunder not generally applicable to all of the Company's senior
officers.
3.8 Non-Competition and Confidentiality. In consideration for the payments
and benefits to be provided to Executive under this Agreement, Executive agrees
to comply with the following requirements:
(a) Agreement Not to Compete. Executive agrees that, on or before the first
anniversary of the date Executive's employment under this Agreement
terminates under Section 3.1, he will not, unless he receives the prior
written approval of the Chairman of the Board of the Parent, directly
or indirectly engage in any of the following actions:
(1) Own an interest in (except as provided below), manage, operate,
join, control, lend money or render financial or other assistance
to, or participate in or be connected with, as an officer,
director, employee, partner, stockholder, consultant or otherwise,
any entity that is a competitor of the Company if the amount of
competition is significant, i.e., the competition is in a line of
business or products that constitute more than five percent of the
gross revenues of both the Company and its consolidated
subsidiaries and the competitor. However, nothing in this
subsection (a) shall preclude Executive from (i) holding less than
one percent of the outstanding capital stock of any corporation
required to file periodic reports with the Securities and Exchange
Commission under Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the securities of which are listed on any
securities exchange, quoted on the National Association of
Securities Dealers Automated Quotation System or traded in the
over-the-counter market or (ii) continuing to engage in any
activities or investments that the Executive
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participated in prior to his termination of employment if such
activities or investments did not violate Company policy.
(2) Intentionally solicit, endeavor to entice away from the Parent or
the Company, or any of their subsidiaries, or otherwise interfere
with the relationship of the Parent or the Company, or any of
their subsidiaries with, any person who is employed by or
otherwise engaged to perform services for the Parent or the
Company, or any of their subsidiaries (including, but not limited
to, any independent sales representatives or organizations), or
any persons or entity who is, or was within the then most recent
12-month period, a customer or client of the Parent or the
Company, or any of their subsidiaries, whether for Executive's own
account or for the account of any other individual, partnership,
firm corporation or other business organization.
If the scope of the restrictions in this subsection are determined by a
court of competent jurisdiction to be too broad to permit enforcement
of such restrictions to their full extent, then such restrictions shall
be construed or rewritten (blue-lined) so as to be enforceable to the
maximum extent permitted by law, and Executive hereby consents, to the
extent he may lawfully do so, to the judicial modification of the scope
of such restrictions in any proceeding brought to enforce them.
(b) Non-Disclosure of Information. During the period of his employment
hereunder, and at all times thereafter, Executive shall not, without
the written consent of the Chief Executive Officer of the Parent,
disclose to any person, other than an employee of the Parent or the
Company, or any of their subsidiaries or a person to whom disclosure is
reasonably necessary or appropriate in connection with the performance
by Executive of his duties as an executive of the Parent or the
Company, except where such disclosure may be required by law, any
material confidential information obtained by him while in the employ
of the Parent or the Company with respect to any of their products,
technology, know-how or the like, services, customers, methods or
future plans, all of which Executive acknowledges are valuable, special
and unique assets the disclosure of which Executive acknowledges may be
materially damaging to the Parent or the Company.
(c) Remedies. Executive acknowledges that the Parent's or the Company's
remedy at law for any breach or threatened breach by Executive of
subsection (a) or (b) will be inadequate. Therefore, the Parent or the
Company shall be entitled to injunctive and other equitable relief
restraining Executive from violating those requirements, in addition to
any other remedies that may be available to the Parent or the Company
under this Agreement or applicable law.
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IV. CHANGE OF CONTROL
4.1 Change of Control Defined. For purposes of this Agreement, "Change of
Control" means the occurrence of any of the following:
(a) The acquisition by any person, entity or "group" within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended ("the 1934 Act"), other than the Company, the Parent or any of
their affiliates, or any employee benefit plan of the Company and/or
its affiliates, of beneficial ownership (within the meaning of Rule
13(d)-3 under the 1934 Act) of shares of stock of the Company or the
Parent having twenty five percent (25%) or more of the total number of
votes that may be cast for election of the Directors of the Company or
the Parent in a transaction or series of transactions not approved in
advance by a vote of at least three-quarters of the Continuing
Directors (as defined below).
(b) A change in the composition of the Board of Directors of the Company or
the Parent such that at any time a majority of the Board are not
Continuing Directors. "Continuing Directors" refers to the individuals
who serve as Directors at the effective date of this Agreement and any
individual whose term of office as a Director begins thereafter if the
nomination or election of such Director was approved in advance by a
vote of at least three-quarters of the then serving Continuing
Directors (other than a nomination of an individual whose initial
assumption of office is in connection with an actual or threatened
solicitation with respect to the election or removal of the Directors,
as such terms are used in Rule 14a-11 of Regulation 14A under the 1934
Act).
(c) The approval by the shareholders of the Company or the Parent of a
reorganization, merger, consolidation, liquidation or dissolution of
the Company or the Parent, or of the sale (in one transaction or a
series of transactions) of all or substantially all of the assets of
the Company or the Parent other than a reorganization, merger,
consolidation, liquidation, dissolution or sale approved in advance by
a vote of at least three-quarters of the Continuing Directors.
(d) Any other occurrence if at least a majority of the Continuing Directors
determine in their discretion that there has been a Change of Control
of the Company or the Parent.
4.2 Vesting of Stock Options and Restricted Stock. Upon a Change of
Control, the right of Executive to exercise any and all stock options to
purchase shares of the Company's or the Parent's stock and any stock
appreciation rights held by Executive shall, to the extent that such options and
rights shall not theretofore have been exercised, become fully vested and
exercisable immediately, all restrictions upon any restricted stock previously
granted to Executive shall be deemed to have lapsed
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and the deferral period and all conditions pertaining to any deferred stock
awards previously granted to Executive shall be deemed to have expired or have
been satisfied, as the case may be, and Executive shall be entitled to receive
all such shares of restricted or deferred stock. All restricted stock and all
deferred stock awards granted to Executive on or after the date hereof shall be
awarded subject to the conditions described in the immediately preceding
sentence. All options issued or awarded to the Executive on or after the date
hereof shall contain the following provision:
Notwithstanding anything herein contained to the contrary, in the event
that a Change of Control, as defined in Section 4.1 of the Optionee's
Employment Agreement with the Company dated as of July 26, 1999 should
occur, this Option shall immediately thereafter become exercisable in
full.
4.3 Trust Requirement After Change of Control. To assure the performance of
the Company and the Parent of their obligations under this Agreement in the
event of a Change of Control, the Company or the Parent shall, upon the request
of Executive immediately prior to a Change of Control, deposit in an irrevocable
trust with a trustee designated by Executive, an amount of liquid assets equal
to the present value of the maximum amount of all lump amounts which could be
paid to Executive under Section 3.4 in the event of a termination of employment
of Executive without Cause following a Change of Control. Such trust shall be
established and funded only if and to the extent that the establishment of such
trust does not contravene the provisions of any loan agreement under which the
Company or the Parent is obligated; provided, however, that the Company and
Parent (as opposed to the lender under any such loan agreement) may not seek to
preclude the establishment of such trust by initiating the entering into,
renegotiating or amending of any such loan agreement, a principal purpose which
entering into, renegotiating or amendment is such preclusion. The trust shall be
reasonably satisfactory in form and substance to the Executive, with no greater
rights in Executive than an unsecured creditor of the Company and Parent. To the
extent there are not amounts in trust sufficient to pay Executive under this
Agreement, the Company and Parent shall be and remain liable therefore.
V. MISCELLANEOUS
5.1 Amendment. This Agreement may be amended only in a writing that is
signed by all parties.
5.2 Entire Agreement. This Agreement contains the entire understanding of
the parties with regard to the employment of the Executive by the Company and
the Parent. There are no other agreements, conditions, or representations, oral
or written, expressed or implied, with regard thereto. This Agreement supersedes
all prior agreements, promises, and representations relating to the employment
of Executive by the Company and the Parent.
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5.3 Assignment. The Company may in its sole discretion assign this
Agreement to any entity which succeeds to some or all of the business of the
Company through merger, consolidation, a sale of some or all of the assets of
the Company, or any similar transaction. Executive acknowledges that the
services to be rendered by him are unique and personal. Accordingly, Executive
may not assign any of his rights or obligations under this Agreement.
5.4 Successors. Subject to Section 5.3, the provisions of this Agreement
shall be binding upon the parties hereto, upon any successor to or assign of the
Company and the Parent, and upon Executive's heirs and the personal
representative of Executive or Executive's estate.
5.5 Notices. Any notice required to be given under this Agreement shall be
in writing and shall be delivered either in person or by certified or registered
mail, return receipt requested. Any notice by mail shall be addressed as
follows:
If to the Company, to:
The Musicland Group, Inc.
10400 Yellow Circle Drive
Minnetonka, Minnesota 55343
Attention: Secretary
If to Executive, to:
The Musicland Group, Inc.
10400 Yellow Circle Drive
Minnetonka, Minnesota 55343
Attention: _________________
With an additional copy to (home address):
----------------------
----------------------
----------------------
or to such other addresses as either party may be designate in writing to the
other party from time to time.
5.6 Waiver of Breach. Any waiver by either party of compliance with any
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any other provision of this Agreement or of any subsequent breach
by such party of a provision of this Agreement.
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5.7 Potential Excise Taxes.
(a) Gross-Up Payment. Anything to the contrary notwithstanding, in the
event it shall be determined that any payment, distribution
or benefit made or provided by or on behalf of the Company or
Parent to or for the benefit of the Executive (whether pursuant to
this Agreement or otherwise) (a "Payment"), would be subject to
the excise tax imposed by Section 4999 of the Internal Revenue
Code of 1986. as amended (the "Code"), or any interest or
penalties with respect to such excise tax (such excise tax,
together with any such interest and penalties, being, collectively
referred to as the "Excise Tax"), then the Company shall pay the
Executive in cash an additional amount (the "Gross-Up Payment")
such that, after payment by the Executive of all taxes (including
any interest or penalties imposed with respect to such taxes),
including but not limited to income taxes (and any interest and
penalties imposed with respect thereto) and the Excise Tax imposed
upon the Gross-Up Payment, the Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed on the Payments.
Notwithstanding the foregoing, no amount shall be paid under this
Section 5.7, and the amounts payable to Executive under this
Agreement shall be reduced to the amount at which no such Excise
Tax is payable, if the result of such reduction is to place
Executive in the same or a better after-tax position than would
result from making the additional payments provided under this
Section.
(b) Determination of Gross-Up Payment. Subject to sub-paragraph (c)
below, all determinations required to be made under this Section
5.7, including whether a Gross-Up Payment is required and the
amount of the Gross-Up Payment, shall be made by the firm of
independent public accountants selected by the Company to audit
its financial statements for the year immediately preceding the
Change of Control (the "Accounting Firm") which shall provide
detailed supporting calculations to the Company and the Executive
within 30 days after the date of the Executive's termination of
employment. In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group
affecting the Change of Control, the Executive may appoint another
nationally recognized accounting firm to make the determinations
required under this Section 5.7 (which accounting firm shall then
be referred to as the "Accounting Firm"). All fees and expenses of
the Accounting Firm in connection with the work it performs
pursuant to this Section 5.7 shall be promptly paid by the
Company. Any Gross-Up Payment shall be paid by the Company to the
Executive within 5 days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise
Tax is payable by the Executive, it shall furnish the Executive
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with a written opinion that failure to report the Excise Tax on
the Executive's applicable federal income tax return would not
result in the imposition of a penalty. Any determination by the
Accounting Firm shall be binding upon the Company and the
Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination
by the Accounting Firm, it is possible that Gross-Up Payments
which will not have been made by the Company should have been made
("Underpayment"). In the event that the Company exhausts its
remedies pursuant to sub-paragraph (c) below, and the Executive is
thereafter required to make a payment of Excise Tax, the
Accounting Firm shall promptly determine the amount of the
Underpayment that has occurred and any such Underpayment shall be
paid by the Company to the Executive within 5 days after such
determination.
(c) Contest. The Executive shall notify the Company in writing of any
claim made by the Internal Revenue Service that if successful,
would require the Company to pay a Gross-Up Payment. Such
notification shall be given as soon as practicable but no later
than 10 business days after the Executive knows of such claim and
shall apprise the Company of the nature of such claim and the date
on which such claim is requested to be paid. The Executive shall
not pay such claim prior to the expiration of the 30-day period
following the date on which the Executive gives such notice to the
Company (or such shorter period ending on the date that any
payment of taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to the expiration
of such period that it desires to contest such claim, the Employee
shall:
(1) give the Company any information reasonably requested by the
Company relating to such claim;
(2) take such action in connection with contesting such claim as
the Company shall reasonably request in waiting from time to
time, without limitation, accepting legal representation with
respect to such claim by an attorney selected by the Company
and reasonably acceptable to the Executive;
(3) cooperate with the Company in good faith in order to
effectively contest such claim; and
(4) permit the Company to participate in any proceedings relating
to such claim, provided that the Company shall bear and pay
directly all costs and expenses (including interest and
penalties) incurred in connection with such contest and shall
indemnify and hold the Executive harmless, on an after-tax
basis, for any Excise Tax or income tax, including interest
and penalties with respect thereto,
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imposed as a result of such representation and payment of
costs and expenses.
Without limitation on the foregoing provisions of this
subparagraph (c), the Company shall control all proceedings taken
in connection with such contest. At its sole option, the Company
may pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in
respect of such claim and may either direct the Executive to pay
the tax claimed and sue for a refund or contest the claim in any
permissible manner. The Executive agrees to prosecute such contest
to a determination before any administrative tribunal, in a court
of initial jurisdiction and in one or more appellate courts, as
the Company shall determine, provided that any extension of the
statute of limitations relating to payment of taxes for the
taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested
amount. The Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable
hereunder, and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
Furthermore, the Company agrees to hold in confidence and not to
disclose, without Executive's prior written consent, any
information with regard to Executive's tax position which the
Company obtains pursuant to this Section 5.7.
(d) Suit for Refund. If the Company directs the Executive to pay any
claim and sue for a refund, the Company shall advance the amount
of such payment to the Executive, on an interest-free basis. If
the Executive becomes entitled to receive any refund with respect
to such claim, the Executive shall promptly pay to the Company the
amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If a determination is
made that the Executive shall not be entitled to any refund with
respect to such claim and the Company does not notify the
Executive in writing of its intent to contest such denial of
refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not
be required to be repaid and the amount of such advance shall
offset, to the extent thereof, the amount of Gross-Up Payment
required to be paid.
5.8 Indemnification. The Company will indemnify Executive (and his legal
representatives or other successors) to the fullest extent permitted (including
payment of expenses in advance of final disposition of a proceeding) by the laws
of the State of Delaware, as in effect at the time of the subject act or
omission, or by the Restated Certificate of Incorporation and By-Laws of the
Company, as in effect at such time or on the effective date of this Agreement,
or by the terms of any indemnification agreement between the Company and
Executive, whichever affords or afforded greater protection
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to Executive, and the Executive shall be entitled to the protection of any
insurance policies the Company may elect to maintain generally for the benefit
of its directors and officers (and to the extent the Company maintains such an
insurance policy or policies, Executive shall be covered by such policy or
policies, in accordance with its or their terms, to the maximum extent of the
coverage affordable for any Company officer or director), against all costs,
charges and expenses whatsoever incurred or sustained by him or his legal
representatives at the time such costs, charges and expenses are incurred or
sustained, in connection with any actions, suit or proceeding to which he (or
his legal representatives or their successors) may be made a party by reason of
his being or having been a director, officer or employee of the Company, the
Parent or any subsidiary of either of them, or his serving or having served any
other enterprise as a director, officer or employee at the request of the
Company.
5.9 Attorney's Fees. In the event of any litigation, arbitration, or other
proceeding between the Company and Executive with respect to this Agreement or
the enforcement of Executive's rights hereunder, the Company shall periodically
reimburse Executive for all of the reasonable costs and expenses relating to
such litigation, arbitration or proceeding (including, without limitation,
reasonable attorneys' fees), regardless of outcome. In no event shall Executive
be required to reimburse the Company or the Parent for any of the costs or
expenses relating to such litigation, arbitration, or proceeding.
5.10 Joint and Several Liability. All duties, undertakings, obligations, and
liabilities of the Company and the Parent arising under this Agreement shall be
the joint and several liability of the Company and the Parent.
5.11 Severability. If any one or more of the provisions (or portions
thereof) of this Agreement shall for any reason be held by a final determination
of a court of competent jurisdiction to be invalid, illegal, or unenforceable in
any respect, such invalidity, illegality, or unenforceability shall not affect
any other provisions (or portions of the provisions) of this Agreement, and the
invalid, illegal, or unenforceable provision shall be deemed replaced by a
provision that is valid, legal, and enforceable and that comes closest to
expressing intention of the parties.
5.12 Governing Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Minnesota, without giving effect to
conflict of law principles.
5.13 Headings. The headings of articles and sections herein are included
solely for convenience and reference and shall not control the meaning of
interpretation of any of the provisions of this Agreement.
5.14 Counterparts. This Agreement may be executed by either of the parties
in counterparts, each of which shall be deemed to be an original, but all such
counterparts shall constitute a single instrument.
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IN WITNESS WHEREOF, the parties have executed this Agreement effective as of
the date set forth above.
MUSICLAND STORES CORPORATION
THE MUSICLAND GROUP, INC.
By:
-----------------------------------
William A. Hodder
Chairman, Compensation Committee
EXECUTIVE
--------------------------------------
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FORM OF EMPLOYMENT AGREEMENT
FOR OTHER SENIOR EXECUTIVE OFFICERS
This Agreement is made as of July 26, 1999 by and between The Musicland
Group, Inc., a Delaware corporation (the "Company"), Musicland Stores
Corporation, a Delaware corporation (the "Parent") and _______________ (the
"Executive").
WHEREAS the Company and the Parent have employed Executive pursuant to
the terms of Employment and Change of Control Agreements dated August 25, 1988,
as amended December 3, 1996 (the "Prior Agreements");
WHEREAS the Company and the Parent desire to continue to employ
Executive in accordance with the terms and conditions stated in this Agreement,
which shall replace and supersede the Prior Agreements; and
WHEREAS Executive desires to continue employment pursuant to the terms
and conditions of this Agreement and acknowledges that this Agreement replaces
and supersedes the Prior Agreements;
NOW, THEREFORE, for the consideration described below, the parties
agree as follows:
I. EMPLOYMENT
1.1 Employment As Executive. During the Period of Employment described in
Section 1.3 below, the Company and the Parent hereby agree to employ Executive
as ____________________ or in such other executive officer position as the Board
of Directors of the Company and the Parent may from time to time determine,
unless terminated earlier pursuant to Article III of this Agreement. Executive
accepts such employment pursuant to the terms of this Agreement. Executive shall
perform such duties and responsibilities as may be determined from time to time
by the Board of Directors of the Company and the Parent, which shall be
consistent with his position as an executive officer. Executive shall not be
required to perform his duties hereunder for more than 60 working days in any
year, or for more than 21 consecutive days at any one time, at any office
located in any place other than the Minneapolis, Minnesota metropolitan area.
1.2 Exclusive Services. Executive agrees to devote his full time,
attention, and energy to performing his duties and responsibilities to the
Company and the Parent under this Agreement during the period that this
Agreement is in effect, except for reasonable vacations, illness, or incapacity,
provided that nothing in this Agreement shall preclude Executive from devoting
time during reasonable periods required for (i) serving as a director or member
of a committee of any organization or company involving no conflict of interest
with the Company or the Parent; (ii) delivering lectures,
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fulfilling speaking engagements; (iii) engaging in charitable and community
activities; and (iv) managing personal or family finances and investments;
provided that such activities do not materially interfere with the performance
of his duties hereunder.
1.3 Period of Employment. The Period of Employment shall be determined as
follows:
(a) Except as provided in subsection (b) in the event of a Change of
Control as defined in Section 4.1, the Period of Employment hereunder
shall be from July 26, 1999 through July 26, 2001, subject to extension
or termination as hereinafter provided. The then-existing Period of
Employment shall be automatically extended by one additional year (to
the next subsequent July 26, but in no event shall the Period of
Employment extend beyond the first day of the month next succeeding the
month in which Executive attains age 65) unless the Company shall
deliver to Executive or Executive shall deliver to the Company written
notice at least 18 months prior to the expiration of the then-existing
Period of Employment that the Period of Employment will not be
extended. In such case, the Period of Employment will end at the
expiration of the then-existing Period of Employment hereunder,
including any previous extension, and shall not be further extended
except by agreement of the Company and Executive. (For example, in
order to avoid the automatic extension of the expiration of the Period
of Employment from July 26, 2001 to July 26, 2002, notice must be given
by January 26, 2000.)
(b) If upon an event constituting a Change of Control the remaining period
in the then-existing Period of Employment (as determined under
subsection (a) above) is less than 24 months, the Period of Employment
shall be extended so that the expiration is on the last business day of
the 24th calendar month following such Change in Control. No adjustment
will be made if the remaining period is more than 24 months at the time
of the Change in Control. In either case, the automatic one year
extensions shall continue to apply as provided in subsection (a) above.
(For example, if a Change of Control occurs January 1, 2000, the
remaining period in the Period of Employment (ending July 26, 2001) is
less than 24 months and would be extended to expire January 1, 2002. In
order to avoid automatic extension of the adjusted Period of Employment
to January 1, 2003, notice must be given by July 1, 2000.)
(c) The Period of Employment shall continue until the expiration of all
automatic extensions effected as aforesaid, unless and until it sooner
ceases or is terminated as provided in Article III.
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II. COMPENSATION, BENEFITS, AND PERQUISITES
2.1 Salary. During the Period of Employment, the Company shall pay
Executive a base salary at the annual rate of $__________ commencing February
21, 1999. The base salary shall be payable in equal bi-weekly installments. The
Compensation Committee of the Board of Directors of the Company may review the
salary periodically and may in its sole discretion increase it to reflect
performance and other factors in accordance with the Company's customary
procedures and practices regarding the salaries of senior officers.
2.2 Disability Pay. In the event of the disability of Executive (within the
meaning of the Company's disability benefit plans in effect at the time of
Executive's disability), the obligation of the Company to make payments of
salary under Section 2.1 shall cease as of the date Executive begins receiving
benefits under the Company's short-term salary continuation plan, and Executive
shall be entitled to benefits under the Company's disability benefit plans in
accordance with the terms of such plans. Notwithstanding the terms of this
Agreement, the Company retains the right to amend, reduce or terminate its
disability benefit plans at any time so long as such amendments, reductions or
terminations apply equally to all senior officers.
2.3 Employee Benefits. Executive shall be entitled to the benefits and
perquisites which the Company generally provides to its other senior officers
under the applicable Company plans and policies. Executive's participation in
such benefit plans shall be on the same basis as applies to other senior
officers of the Company and subject to the terms of applicable law, plan
documents, and insurance policies. Executive shall pay contributions, if any,
which are generally required of the Company's senior officers in order to
receive any such benefits. Specifically, Executive shall:
(a) participate in the Company's Management Incentive Plan and Long-Term
Incentive Plan, or, if applicable, the shareholder approved Alternate
Incentive Plan for Designated Senior Officers (the "Alternate Plan");
(b) be considered by the Compensation Committee of the Board of Directors
for possible grants of stock options, stock appreciation rights,
restricted stock and deferred stock awards, under the Company's stock
option plans, stock incentive plans, or any similar plan adopted by the
Company or the Parent during the Period of Employment;
(c) participate to the permitted extent he wishes in the Company's Capital
Accumulation Plan;
(d) participate in the Company's Employees' Retirement Plan and
Supplemental Executive Retirement Plan;
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(e) participate in the Company's death benefit plans (consisting of its
Group Life Insurance Plan, and accidental death and dismemberment
insurance);
(f) participate in the Company's disability benefit plans (consisting of
its short-term salary continuation, short-term disability and long-term
disability plans);
(g) participate in its senior officer medical, dental, health and welfare
plans; and
(h) participate in equivalent successor plans of the Company for which
officers are eligible.
Notwithstanding the foregoing, nothing in this agreement shall preclude any
amendment or termination by the Company of any employee benefit plan or
practice, provided such amendment or termination is applicable to all of the
Company's senior officers generally; provided, however, that in the event of a
Change of Control as defined in Section 4.1 and through the Period of Employment
described in Section 1.3(b), Executive shall be entitled to perquisites and
benefits at least as favorable as those to which Executive was entitled
immediately prior to the Change of Control, and to the extent such perquisites
or benefits are not payable or provided under any such plan of the Company by
reason of the amendment or termination thereof, the Company itself shall pay or
provide therefor.
2.4 Incentive Compensation Following Change of Control. In the event of a
Change of Control as defined in Section 4.1 and through the Period of Employment
described in Section 1.3(b), Executive shall receive an annual award under the
Company's Management Incentive Plan, or, if applicable, the Alternate Plan, or a
plan with substantially equivalent incentives and benefits that may be adopted
by the Company, for each calendar year, or portion thereof, during the Period of
Employment, which shall be payable as soon as practicable after the end of such
calendar year and shall be equal to a percentage of Executive's base salary for
such calendar year. Such percentage shall be no less than the percentage at plan
target in effect preceding the Change of Control. Furthermore, Executive shall
continue to be a full participant in the performance awards of the Company's
Long-Term Incentive Plan, or if applicable, the Alternate Plan, and any other
long-term incentive plans of the Company, and any and all executive incentive
plans in which executives of the Company participate that are in effect
immediately prior to a Change of Control, or any amended or successor plans with
at least as favorable terms that may be substituted and that may hereafter be
adopted, including, without limitation, any plan relating to stock options,
stock appreciation rights, restricted stock and deferred stock awards, or
equivalent successor plans that may be adopted by the Company with at least the
same reward opportunities that have heretofore been provided and with such
improvements in such plans or other plans as may from time to time be made in
accordance with the present practices of the Company.
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2.5 Employment Taxes and Withholding. Executive recognizes that the
compensation, benefits, and other amounts provided by the Company under this
Agreement may be subject to federal, state, or local income taxes. All such
taxes shall be the responsibility of the Executive. To the extent that federal,
state, or local law requires withholding of taxes on compensation, benefits, or
other amounts provided under this Agreement, the Company shall withhold the
necessary amounts from the amounts payable to Executive under this Agreement.
2.6 Company Not Responsible for Insured Benefits. In this Article II, the
Company is agreeing to provide certain benefits in the form of premiums for
insurance coverage. The Company and the Parent are not themselves promising to
pay the benefit an insurance company is obligated to pay under the policy the
insurance company has issued. If an insurance company does not or cannot pay
benefits it owes to Executive or his beneficiaries under the insurance policy,
neither Executive nor his personal representative or beneficiary shall have any
claim for benefits against the Company or the Parent.
2.7 Expenses. Executive shall be entitled to receive reimbursement from the
Company (in accordance with the policies and procedures then in effect for the
Company's employees) for all reasonable travel and other expenses incurred by
him in connection with his services under this Employment Agreement.
III.TERMINATION OF EXECUTIVE'S EMPLOYMENT
3.1 Termination of Employment. Notwithstanding any other provision of this
Agreement, Executive's employment and the Period of Employment may be terminated
pursuant to the following:
(a) Executive's employment may be terminated by the Company or the Parent,
on not less than 60 days' notice in writing, for Cause as defined in
Section 3.2. After payment of all amounts accrued to Executive
hereunder through the date of such notice, the Company and the Parent
shall have no further obligation to the Executive hereunder except for
the payment of benefits under the Company's Employees' Retirement Plan
and Supplemental Executive Retirement Plan and Capital Accumulation
Plan vested on such date.
(b) Executive's employment may be terminated by the Company at any time for
any reason other than Cause as defined in Section 3.2, or Executive may
terminate his employment with the Company and the Parent for Good
Reason as defined in Section 3.3. In the event of termination of
employment by the Company without Cause, or termination by the
Executive for Good Reason, the Company shall pay to Executive, as
liquidated damages or severance pay or both, the amounts described in
Section 3.4.
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(c) Executive may terminate his employment with the Company and the Parent
for other than Good Reason. In such event, the Executive's employment
shall terminate as of the 90th day following the giving of written
notice by the Executive to the Company of his decision to terminate
other than for Good Reason, or such earlier date as the Company may
specify in written notice to Executive. After such termination, the
Company and the Parent shall have no further obligation to the
Executive hereunder except for the payment of benefits under the
Company's Employees' Retirement Plan and Supplemental Executive
Retirement Plan and Capital Accumulation Plan vested on such date.
3.2 Termination for Cause.
(a) For purposes of this Article III, "Cause" shall mean only the
following:
(1) an intentional act or acts of dishonesty by the Executive or an
act or acts by him resulting or intended to result directly or
indirectly in gain to or personal enrichment of the Executive at
the Company's expense;
(2) a conviction of the Executive or an admission by the Executive of
committing a felony or any crime involving moral turpitude, or
any other criminal activity or unethical conduct which, in the
good faith opinion of the Company, would impair Executive's
ability to perform his duties or impair the business reputation of
the Company;
(3) a deliberate and intentional refusal by the Executive to comply
with Sections 1.1 and 1.2 of this Agreement (other than any such
failure to comply resulting from the Executive's incapacity due to
illness or accident) and which failure to comply results in
demonstrably material injury to the Company, provided, however,
that the Executive shall have either failed to remedy such failure
to comply within 30 days from his receipt of written notice from
the Secretary of the Company demanding that he remedy such failure
to comply, or shall have failed to take all reasonable steps to
that end during such 30-day period and thereafter; or
(4) a determination by the Chief Executive Officer or an affirmative
vote of at least a majority of the entire membership (whether
present or not) of the Company's Board of Directors (other than
the Executive if also a director) at a meeting called and held for
that purpose and at which the Executive is given an opportunity to
be heard, that, in the judgment of the Chief Executive Officer or
the Board, the Executive has, over an extended period of time,
consistently failed to satisfactorily perform the material duties
of his
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office assigned to him, and such failure has had an adverse impact
upon the Company; provided, however, that such determination may
be made only after a period of at least 90 days following the last
of two formal reviews (which are at least six months apart) of the
Executive's performance by the Chief Executive Officer, at which
the Executive was informed of the most significant deficiencies in
performance, and during such 90-day period the Executive shall
have failed to correct, or failed to take all reasonable steps to
correct, such significant deficiencies. For purposes of the
minimum number of directors required in the preceding sentence,
any fraction shall be rounded up to the next higher whole number
of directors.
(b) Anything herein to the contrary notwithstanding, the employment of
Executive shall not be considered to have been terminated by the
Company for Cause if termination of his employment took place solely
because of one or more of the following:
(1) as a result of bad judgment or negligence on the part of
Executive, or
(2) as the result of an act or omission without intent of gaining
therefrom directly or indirectly a profit to which Executive was
not legally entitled; provided, however, that this subsection
(b)(2) shall not apply to a termination pursuant to subsection
(a)(3) above, or
(3) because of an act or omission believed by Executive in good faith
to have been in or not opposed to the interests of the Company, or
(4) as the result of an act or omission which occurred more than 12
calendar months prior to Executive's having been given notice of
the termination of his employment for such act or omission unless
the commission of such act or such omission could not at the time
of such commission or omission have been known to a member of the
Board of Directors of the Company (other than Executive), in which
case more than 12 calendar months prior to the date that the
commission of such act or such omission was or could reasonably
have been so known; provided, however, that this subsection (b)(4)
shall not apply to a termination pursuant to subsection (a)(3)
above, or
(5) as a result of a continuing course of action which commenced and
was or could reasonably have been known to a member of the Board
of Directors of the Company (other than Executive) more than 12
calendar months prior to notice having been given to the Executive
of the termination of his employment; provided, however,
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that this subsection (b)(5) shall not apply to a termination
pursuant to subsection (a)(3) above.
3.3 Good Reason.
(a) For the purposes of this Article III, "Good Reason" shall mean:
(1) the authority, powers, functions, responsibilities or duties
assigned to Executive pursuant to this Agreement are materially
and adversely diminished without his written consent (except any
diminution that occurs solely as a result of the fact that the
Company or Parent ceases to be a public company);
(2) a breach of Article II of this Agreement with respect to the
salary, incentive compensation and benefits of Executive; or
(3) after a Change of Control (as defined in Section 4.1), Executive
is required, without his written consent, to locate his office
more than 35 miles distant by public highway from his office
immediately prior to the Change in Control (but only if the
distance between Executive's residence and such new office is
greater than the distance between his residence and office
immediately prior to the Change of Control) or to travel on
business more than 60 working days in any year or more than 21
consecutive days at any one time.
(b) Executive shall give written notice to the Company of termination for
Good Reason within six months of the event giving rise to such notice
and allow the Company 30 days after the Company's receipt of such
notice to cure such breach. If the Company disputes any contention by
Executive that there has been Good Reason, such dispute shall be
resolved by binding arbitration held in Minneapolis, Minnesota in
accordance with the Employment Dispute Resolution Rules of The American
Arbitration Association then in effect. The arbitrator shall be an
attorney with experience in employment disputes who is mutually
selected by the parties. Judgment may be entered on the arbitration
award in any court having jurisdiction.
(c) In the event of the liquidation, dissolution, consolidation or merger
of the Company or transfer (in one transaction or a series of
transactions) of 70% or more of its assets (regardless of whether such
event is not a Change of Control within the meaning of Section 4.1(c)
because it is approved by the Continuing Directors), and the successor
entity does not assume all duties and obligations of the Company under
this Agreement or otherwise make arrangements with Executive
satisfactory to Executive for employment of the Executive by the
successor, then Executive may
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within 90 days following such event give written notice to the Company
of his termination of employment (effective as of 90 days following
such notice or such earlier date as specified by the Company in written
notice to Executive), which shall be deemed termination for Good
Reason.
3.4 Severance Benefits. In the event of termination of Executive's
employment by the Company without Cause, or termination by the Executive for
Good Reason, the Company shall provide Executive with the following compensation
and benefits; provided, that, the Company shall not be obligated to provide any
severance benefits unless and until the Executive (if he is then so serving)
resigns as a director of the Parent or the Company or any subsidiaries:
(a) Salary. The Company shall pay Executive during the remainder of the
Period of Employment as in effect immediately prior to such
termination, as if such termination had not occurred, an amount equal
to the base salary provided in Section 2.1, including any increases
therein provided, at the times therein stated, for the month in which
termination shall have occurred and for each month thereafter during
such Period, less in respect of each such month the amounts, if any,
paid to him pursuant to the Company's Employees' Retirement Plan and
Supplemental Executive Retirement Plan and the amounts the Executive
would have paid in cash in respect of employee benefits provided for in
Section 2.3, if Executive were still employed.
Notwithstanding the foregoing, in the event of a termination following
a Change of Control, the salary amount described above shall be (i)
determined based on a remaining Period of Employment of not less than
24 months (even if the actual Period of Employment is shorter) and (ii)
paid in a single lump sum within 20 days after such termination.
(b) Annual Incentive. The Company shall pay the Executive during the
remainder of the Period of Employment as in effect immediately prior to
such termination, as if such termination had not occurred, in full
substitution for his rights under the Company's Management Incentive
Plan, or, if applicable, the Alternate Plan, or any successor plan then
in effect, a substitute incentive award, for the year in which
termination occurred and for each subsequent calendar year, or portion
thereof (in which case such substitute award shall be only in
proportion to such portion), during such Period which shall be equal to
the then current percentage at plan target of Executive's base salary
for the applicable calendar year as described in Section 2.1 (including
any increases therein provided).
The substitute incentive award shall be paid in a single lump sum on
the first day of February of each year, except that a pro rata award
for that
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portion of the calendar year in which the Period of Employment ends
shall be paid in a single lump sum on the last day of the Period of
Employment.
Notwithstanding the foregoing, in the event of a termination following
a Change of Control, the substitute incentive awards described above
shall be (i) determined based on a remaining Period of Employment of
not less than 24 months (even if the actual Period of Employment is
shorter) and (ii) paid at one time within 20 days after such
termination in an amount equal to the aggregate lump sum value of such
substitute awards.
(c) Long-Term Incentive. The Company shall pay Executive in full
substitution for any rights under all outstanding performance awards
under the Long-Term Incentive Plan, or, if applicable, the Alternate
Plan, or any successor plan then in effect, held by Executive at the
time of such termination, for each year during the remainder of the
Period of Employment a substitute long-term award as follows:
(1) If the termination occurs after the completion of any performance
cycle under the applicable plan but before the award for such
cycle has been paid, the substitute award for the year in which
termination occurs will equal the percentage of Executive's base
salary actually earned under the terms of the applicable plan for
such completed cycles and will be paid at the same time other
participants are paid for such completed cycles. Otherwise, a
substitute long-term award will not be paid in the year of
termination if Executive has already received in such year a
long-term incentive payment pursuant to the applicable plan.
(2) The substitute long-term award for all other years will equal the
then current percentage (of salary) at plan target times
Executive's then current annual base salary as provided in
subsection (a) above and will be paid by February 1st of the year
for which the payment is being made.
(3) If the final year of the Period of Employment is a partial year,
the substitute long-term award for such year (determined as in
subparagraph (2) above) will be prorated based on the number of
days in such partial year.
For example: If the Executive is terminated in January 2001 before
payment is made for the completed 1999 - 2000 performance cycle,
the Executive's substitute long-term award for the year of
termination (2001) will be equal to the award earned by the
Executive under such completed cycle and will be paid at the same
time as other participants are paid. If the Executive is
terminated in the year 2001 after the payment for the 1999-2000
performance
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cycle has been made, the first substitute long-term award will be
paid in the year 2002. In either case, the Executive's substitute
long-term award for the year 2002 will be paid by February 1, 2002
and will equal the then current percentage (of salary) at plan
target times Executive's then current annual base.
Notwithstanding the foregoing, in the event of a termination following
a Change of Control, the substitute long term incentive awards
described above shall be (i) determined based on a remaining Period of
Employment of not less than 24 months (even if the actual Period of
Employment is shorter) and (ii) paid at one time within 20 days after
such termination in an amount equal to the aggregate lump sum value of
such substitute awards.
(d) Stock Awards. Each outstanding stock option to purchase shares of the
Company's or the Parent's common stock and any stock appreciation right
that is held by Executive at the time of such termination shall become
vested and exercisable in full. Each stock option to purchase shares of
the Company's or the Parent's common stock granted to Executive on or
after the date hereof shall contain the following provision:
In the event that the Optionee's Period of Employment
under his Employment Agreement with the Company dated
as of July 26, 1999 is terminated pursuant to Section
3.1(b) thereof, this Option shall become exercisable in
full.
In addition, all restrictions upon any restricted stock previously
granted to Executive by the Company or the Parent shall be deemed to
have lapsed and Executive shall be entitled to receive all such shares
of restricted stock. Similarly, Executive shall be entitled to receive
all shares covered by outstanding deferred stock awards previously
granted to Executive by the Company or the Parent as if the deferral
period and all conditions pertaining thereto had expired or been
satisfied, as the case may be.
(e) Death, Disability and Medical Benefits. During the remainder of the
Period of Employment as in effect immediately prior to such
termination, as if such termination had not occurred, the Executive
shall continue to be entitled to all employee benefits provided for in
Section 2.3(f), (g), and (h), as if Executive were still employed
during such period under this Agreement, with benefits based upon the
compensation and increases provided in subsection (a), and upon the
assumption that Executive was continuing to pay or continued to be
deemed to have paid in cash in respect of such benefits the amounts
(and only the amounts) by which the payments otherwise due Executive
under subsection (a) were reduced in respect to such benefits, and if
and to the extent the said benefits shall
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not be payable or provided under any plan by reason of Executive no
longer being an employee of the Company as a result of Executive's
termination, the Company itself shall pay or provider therefor.
Notwithstanding the foregoing, if Executive is entitled to death,
disability or medical benefit coverage of the kind described in Section
2.3(f), (g) or (h) from other employment or a consulting position
during the Period of Employment, such benefits provided under this
Agreement shall be reduced or coordinated as provided in subsection (g)
below.
(f) Retirement Benefits. The Company shall pay to Executive during the
remainder of his life following the expiration of the Period of
Employment as in effect immediately prior to such termination, and,
after his death, to his surviving spouse (subject to such optional
method of payment election as may be made under the Company's
Employees' Retirement Plan and Supplemental Executive Retirement Plan
and as further described below), a supplemental retirement benefit
which shall be equal to the excess of:
(1) an aggregate benefit at least equal to the benefit that would have
been paid under the Employees' Retirement Plan and Supplemental
Executive Retirement Plan, subject to any plan amendments or
terminations generally applicable to all of the Company's senior
officers which are adopted prior to the date of such termination,
if the Executive had continued to be employed and to be entitled
to service credit for benefits during the remainder of such Period
of Employment at an annual rate of compensation equal to his
compensation and increases provided in subsections (a) and (b)
(unless during such remainder the Executive dies or becomes
disabled, in which event such benefit shall be reduced to reflect
application of the last two sentences of subsection (e), over
(2) the aggregate benefit actually payable to the Executive under the
Employees' Retirement Plan and Supplemental Executive Retirement
Plan.
In clarification of the foregoing paragraph (1), in determining whether
any actuarial reduction would apply (and the amount of such reduction,
if any) under the early retirement provisions of the Employees'
Retirement Plan and Supplemental Executive Retirement Plan (to reflect
the early commencements of benefits), the age which the Executive would
have attained at the expiration of such Period, and the accredited
service he would have had at such time, shall be used. An election made
by Executive under the Employees' Retirement Plan and Supplemental
Executive Retirement Plan as to a joint and survivor or other optional
method of payment and as to the time for commencement of payments
shall be applicable to such supplemental retirement benefit, with
application of discount factors no less favorable to Executive than
those in
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effect under the Employees' Retirement Plan and Supplemental Executive
Retirement Plan on the date of such termination. Notwithstanding the
foregoing, Executive may, by a notice in writing filed with the Plan
Administrator for the Employees' Retirement Plan and Supplemental
Executive Retirement Plan, designate any person as the payee of amounts
due hereunder after his death (in the manner, and with the effect,
described in the Company's Employees' Retirement Plan and Supplemental
Executive Retirement Plan).
Notwithstanding the foregoing, in the event of a termination following
a Change of Control, the supplemental retirement benefit described
above shall be (i) calculated based upon the Executive's years of
service at the time of the termination plus an additional five years
and disregarding the requirement of five years of participation in the
Supplemental Executive Retirement Plan, and (ii) paid in a single sum
within 20 days after such termination in an amount equal to the lump
sum value of such benefit.
(g) Subsequent Employment. Executive shall be required to minimize damages
or severance payments under this Agreement by seeking and accepting
other executive employment or a comparable consulting position. To the
extent that the Executive shall receive cash compensation that is
subject to federal income taxation in respect of other employment or a
consulting position with another company and that is payable to
Executive solely in respect of the remainder of the Period of
Employment as in effect immediately prior to such termination, or a
portion thereof, the payments to be made by the Company under
subsections (a), (b), and (c) for the remainder of the Period of
Employment as in effect immediately prior to such termination or such
portion thereof, as the case may be, shall be correspondingly reduced,
and any supplemental retirement benefit payments pursuant to subsection
(f) shall be calculated after taking such reduction into account. In
the event Executive has received lump sum payments following a Change
in Control as provided above, Executive agrees to re-pay the Company in
quarterly payments the reductions described in the foregoing sentence.
Furthermore, to the extent that benefits of the kind provided for
in Section 2.3 (f), (g) and (h) are payable in respect of such other
employment or consulting position, any death or disability benefits so
payable under subsequent employment shall reduce benefits of such kind
otherwise payable under subsection (e) above and any medical/dental/
welfare benefits so payable under subsequent employment shall be deemed
the primary coverage for purposes of coordination of benefits under
subsection (e) above and avoiding duplication of benefits.
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(h) After Death or Disability. Upon the death of Executive during the
period that payment of the amounts specified in subsection (a) above
are required to be made, the obligation of the Company to make payments
to the Executive under this Section 3.4 shall cease as of the date of
death and the benefits described in Section 3.6 shall become payable.
In the event of the disability of the Executive during such Period, the
obligation to make payments under subsections (a) and (b) above shall
be suspended as of the date specified in Section 2.2 for the cessation
of payments of salary and Executive shall be entitled to the benefits
described in Section 3.5, and such obligation shall be reinstated again
only if during such period Executive ceases to be disabled.
3.5 Disability. If Executive has become disabled from performing his duties
under this Agreement and the disability has continued for a period of six
consecutive months or for an aggregate of 180 days during nine consecutive
months, the Period of Employment under this Agreement shall terminate. Such
termination shall not result in payments pursuant to Section 3.4 above, the
disability benefits provided by the Company being in full satisfaction of the
Company's obligation to Executive.
3.6 Death. Upon the death of Executive during the Period of Employment, the
Period of Employment and the obligation of the Company to make payments under
Section 2.1 shall cease as of the date of death, and benefits shall become
payable under the death benefit plans described in Section 2.3(f) in accordance
with their terms, exclusive of any plan amendments that reduce or terminate
benefits thereunder not generally applicable to all of the Company's senior
officers.
3.7 Non-Competition and Confidentiality. In consideration for the payments
and benefits to be provided to Executive under this Agreement, Executive agrees
to comply with the following requirements:
(a) Agreement Not to Compete. Executive agrees that, on or before the first
anniversary of the date Executive's employment under this Agreement
terminates under Section 3.1, he will not, unless he receives the prior
written approval of the Chief Executive Officer of the Company,
directly or indirectly engage in any of the following actions:
(1) Own an interest in (except as provided below), manage, operate,
join, control, lend money or render financial or other assistance
to, or participate in or be connected with, as an officer,
director, employee, partner, stockholder, consultant or otherwise,
any entity that is a competitor of the Company if the amount of
competition is significant, i.e., the competition is in a line of
business or products that constitute more than five percent of the
gross revenues of both the Company and its consolidated
subsidiaries and the competitor. However, nothing in this
subsection (a) shall preclude Executive from (i) holding less than
one percent of the outstanding capital stock of any corporation
required
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to file periodic reports with the Securities and Exchange
Commission under Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the securities of which are listed on any
securities exchange, quoted on the National Association of
Securities Dealers Automated Quotation System or traded in the
over-the-counter market or (ii) continuing to engage in any
activities or investments that the Executive participated in prior
to his termination of employment if such activities or investments
did not violate Company policy.
(2) Intentionally solicit, endeavor to entice away from the Parent or
the Company, or any of their subsidiaries, or otherwise interfere
with the relationship of the Parent or the Company, or any of
their subsidiaries with, any person who is employed by or
otherwise engaged to perform services for the Parent or the
Company, or any of their subsidiaries (including, but not limited
to, any independent sales representatives or organizations), or
any persons or entity who is, or was within the then most recent
12-month period, a customer or client of the Parent or the
Company, or any of their subsidiaries, whether for Executive's own
account or for the account of any other individual, partnership,
firm, corporation or other business organization.
If the scope of the restrictions in this subsection are determined by a
court of competent jurisdiction to be too broad to permit enforcement
of such restrictions to their full extent, then such restrictions shall
be construed or rewritten (blue-lined) so as to be enforceable to the
maximum extent permitted by law, and Executive hereby consents, to the
extent he may lawfully do so, to the judicial modification of the scope
of such restrictions in any proceeding brought to enforce them.
(b) Non-Disclosure of Information. During the period of his employment
hereunder, and at all times thereafter, Executive shall not, without
the written consent of the Chief Executive Officer of the Parent,
disclose to any person, other than an employee of the Parent or the
Company, or any of their subsidiaries or a person to whom disclosure is
reasonably necessary or appropriate in connection with the performance
by Executive of his duties as an executive of the Parent or the
Company, except where such disclosure may be required by law, any
material confidential information obtained by him while in the employ
of the Parent or the Company with respect to any of their products,
technology, know-how or the like, services, customers, methods or
future plans, all of which Executive acknowledges are valuable, special
and unique assets the disclosure of which Executive acknowledges may be
materially damaging to the Parent or the Company.
(c) Remedies. Executive acknowledges that the Parent's or the Company's
remedy at law for any breach or threatened breach by Executive of
subsection (a) or (b) will be inadequate. Therefore, the Parent or the
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Company shall be entitled to injunctive and other equitable relief
restraining Executive from violating those requirements, in addition to
any other remedies that may be available to the Parent or the Company
under this Agreement or applicable law.
IV. CHANGE OF CONTROL
4.1 Change of Control Defined. For purposes of this Agreement, "Change of
Control" means the occurrence of any of the following:
(a) The acquisition by any person, entity or "group" within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended ("the 1934 Act"), other than the Company, the Parent or any of
their affiliates, or any employee benefit plan of the Company and/or
its affiliates, of beneficial ownership (within the meaning of Rule
13(d)-3 under the 1934 Act) of shares of stock of the Company or the
Parent having twenty five percent (25%) or more of the total number of
votes that may be cast for election of the Directors of the Company or
the Parent in a transaction or series of transactions not approved in
advance by a vote of at least three-quarters of the Continuing
Directors (as defined below).
(b) A change in the composition of the Board of Directors of the Company or
the Parent such that at any time a majority of the Board are not
Continuing Directors. "Continuing Directors" refers to the individuals
who serve as Directors at the effective date of this Agreement and any
individual whose term of office as a Director begins thereafter if the
nomination or election of such Director was approved in advance by a
vote of at least three-quarters of the then serving Continuing
Directors (other than a nomination of an individual whose initial
assumption of office is in connection with an actual or threatened
solicitation with respect to the election or removal of the Directors,
as such terms are used in Rule 14a-11 of Regulation 14A under the 1934
Act).
(c) The approval by the shareholders of the Company or the Parent of a
reorganization, merger, consolidation, liquidation or dissolution of
the Company or the Parent, or of the sale (in one transaction or a
series of transactions) of all or substantially all of the assets of
the Company or the Parent other than a reorganization, merger,
consolidation, liquidation, dissolution or sale approved in advance by
a vote of at least three-quarters of the Continuing Directors.
(d) Any other occurrence if at least a majority of the Continuing Directors
determine in their discretion that there has been a Change of Control
of the Company or the Parent.
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4.2 Vesting of Stock Options and Restricted Stock. Upon a Change of
Control, the right of Executive to exercise any and all stock options to
purchase shares of the Company's or the Parent's stock and any stock
appreciation rights held by Executive shall, to the extent that such options and
rights shall not theretofore have been exercised, become fully vested and
exercisable immediately, all restrictions upon any restricted stock previously
granted to Executive shall be deemed to have lapsed and the deferral period and
all conditions pertaining to any deferred stock awards previously granted to
Executive shall be deemed to have expired or have been satisfied, as the case
may be, and Executive shall be entitled to receive all such shares of restricted
or deferred stock. All restricted stock and all deferred stock awards granted to
Executive on or after the date hereof shall be awarded subject to the conditions
described in the immediately preceding sentence. All options issued or awarded
to the Executive on or after the date hereof shall contain the following
provision:
Notwithstanding anything herein contained to the contrary, in the event
that a Change of Control, as defined in Section 4.1 of the Optionee's
Employment Agreement with the Company dated as of July 26, 1999 should
occur, this Option shall immediately thereafter become exercisable in
full.
4.3 Trust Requirement After Change of Control. To assure the performance of
the Company and the Parent of their obligations under this Agreement in the
event of a Change of Control, the Company or the Parent shall, upon the request
of Executive immediately prior to a Change of Control, deposit in an irrevocable
trust with a trustee designated by Executive, an amount of liquid assets equal
to the present value of the maximum amount of all lump amounts which could be
paid to Executive under Section 3.4 in the event of a termination of employment
of Executive without Cause following a Change of Control. Such trust shall be
established and funded only if and to the extent that the establishment of such
trust does not contravene the provisions of any loan agreement under which the
Company or the Parent is obligated; provided, however, that the Company and
Parent (as opposed to the lender under any such loan agreement) may not seek to
preclude the establishment of such trust by initiating the entering into,
renegotiating or amending of any such loan agreement, a principal purpose which
entering into, renegotiating or amendment is such preclusion. The trust shall be
reasonably satisfactory in form and substance to the Executive, with no greater
rights in Executive than an unsecured creditor of the Company and Parent. To
the extent there are not amounts in trust sufficient to pay Executive under this
Agreement, the Company and Parent shall be and remain liable therefore.
V. MISCELLANEOUS
5.1 Amendment. This Agreement may be amended only in a writing that is
signed by all parties.
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5.2 Entire Agreement. This Agreement contains the entire understanding of
the parties with regard to the employment of the Executive by the Company and
the Parent. There are no other agreements, conditions, or representations, oral
or written, expressed or implied, with regard thereto. This Agreement supersedes
all prior agreements, promises, and representations relating to the employment
of Executive by the Company and the Parent.
5.3 Assignment. The Company may in its sole discretion assign this
Agreement to any entity which succeeds to some or all of the business of the
Company through merger, consolidation, a sale of some or all of the assets of
the Company, or any similar transaction. Executive acknowledges that the
services to be rendered by him are unique and personal. Accordingly, Executive
may not assign any of his rights or obligations under this Agreement.
5.4 Successors. Subject to Section 5.3, the provisions of this Agreement
shall be binding upon the parties hereto, upon any successor to or assign of the
Company and the Parent, and upon Executive's heirs and the personal
representative of Executive or Executive's estate.
5.5 Notices. Any notice required to be given under this Agreement shall be
in writing and shall be delivered either in person or by certified or registered
mail, return receipt requested. Any notice by mail shall be addressed as
follows:
If to the Company, to:
The Musicland Group, Inc.
10400 Yellow Circle Drive
Minnetonka, Minnesota 55343
Attention: Secretary
If to Executive, to:
The Musicland Group, Inc.
10400 Yellow Circle Drive
Minnetonka, Minnesota 55343
Attention: ______________
With an additional copy to (home address):
-----------------------
-----------------------
-----------------------
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or to such other addresses as either party may be designate in writing to the
other party from time to time.
5.6 Waiver of Breach. Any waiver by either party of compliance with any
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any other provision of this Agreement or of any subsequent breach
by such party of a provision of this Agreement.
5.7 Potential Excise Taxes.
(a) Gross-Up Payment. Anything to the contrary notwithstanding, in the
event it shall be determined that any payment, distribution or benefit
made or provided by or on behalf of the Company or Parent to or for the
benefit of the Executive (whether pursuant to this Agreement or
otherwise) (a "Payment"), would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986. as amended (the
"Code"), or any interest or penalties with respect to such excise tax
(such excise tax, together with any such interest and penalties, being,
collectively referred to as the "Excise Tax"), then the Company shall
pay the Executive in cash an additional amount (the "Gross-Up Payment")
such that, after payment by the Executive of all taxes (including any
interest or penalties imposed with respect to such taxes), including
but not limited to income taxes (and any interest and penalties imposed
with respect thereto) and the Excise Tax imposed upon the Gross-Up
Payment, the Executive retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed on the Payments. Notwithstanding the
foregoing, no amount shall be paid under this Section 5.7, and the
amounts payable to Executive under this Agreement shall be reduced to
the amount at which no such Excise Tax is payable, if the result of
such reduction is to place Executive in the same or a better after-tax
position than would result from making the additional payments provided
under this Section.
(b) Determination of Gross-Up Payment. Subject to sub-paragraph (c) below,
all determinations required to be made under this Section 5.7,
including whether a Gross-Up Payment is required and the amount of the
Gross-Up Payment, shall be made by the firm of independent public
accountants selected by the Company to audit its financial statements
for the year immediately preceding the Change in Control (the
"Accounting Firm") which shall provide detailed supporting calculations
to the Company and the Executive within 30 days after the date of the
Executive's termination of employment. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or
group affecting the Change in Control, the Executive may appoint
another nationally recognized accounting firm to make the
determinations required under this Section 5.7 (which accounting firm
shall then be referred to as the
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"Accounting Firm"). All fees and expenses of the Accounting Firm in
connection with the work it performs pursuant to this Section 5.7 shall
be promptly paid by the Company. Any Gross-Up Payment shall be paid by
the Company to the Executive within 5 days of the receipt of the
Accounting Firm's determination. If the Accounting Firm determines that
no Excise Tax is payable by the Executive, it shall furnish the
Executive with a written opinion that failure to report the Excise Tax
on the Executive's applicable federal income tax return would not
result in the imposition of a penalty. Any determination by the
Accounting Firm shall be binding upon the Company and the Executive. As
a result of the uncertainty in the application of Section 4999 of the
Code at the time of the initial determination by the Accounting Firm,
it is possible that Gross-Up Payments which will not have been made by
the Company should have been made ("Underpayment"). In the event that
the Company exhausts its remedies pursuant to sub-paragraph (c) below,
and the Executive is thereafter required to make a payment of Excise
Tax, the Accounting Firm shall promptly determine the amount of the
Underpayment that has occurred and any such Underpayment shall be paid
by the Company to the Executive within 5 days after such determination.
(c) Contest. The Executive shall notify the Company in writing of any claim
made by the Internal Revenue Service that if successful, would require
the Company to pay a Gross-Up Payment. Such notification shall be given
as soon as practicable but no later than 10 business days after the
Executive knows of such claim and shall apprise the Company of the
nature of such claim and the date on which such claim is requested to
be paid. The Executive shall not pay such claim prior to the expiration
of the 30-day period following the date on which the Executive gives
such notice to the Company (or such shorter period ending on the date
that any payment of taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to the expiration of
such period that it desires to contest such claim, the Employee shall:
(1) give the Company any information reasonably requested by the
Company relating to such claim;
(2) take such action in connection with contesting such claim as the
Company shall reasonably request in waiting from time to time,
without limitation, accepting legal representation with respect to
such claim by an attorney selected by the Company and reasonably
acceptable to the Executive;
(3) cooperate with the Company in good faith in order to effectively
contest such claim; and
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(4) permit the Company to participate in any proceedings relating to
such claim, provided that the Company shall bear and pay directly
all costs and expenses (including interest and penalties) incurred
in connection with such contest and shall indemnify and hold the
Executive harmless, on an after-tax basis, for any Excise Tax or
income tax, including interest and penalties with respect thereto,
imposed as a result of such representation and payment of costs
and expenses.
Without limitation on the foregoing provisions of this subparagraph
(c), the Company shall control all proceedings taken in connection with
such contest. At its sole option, the Company may pursue or forego any
and all administrative appeals, proceedings, hearings and conferences
with the taxing authority in respect of such claim and may either
direct the Executive to pay the tax claimed and sue for a refund or
contest the claim in any permissible manner. The Executive agrees to
prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine, provided that any
extension of the statute of limitations relating to payment of taxes
for the taxable year of the Executive with respect to which such
contested amount is claimed to be due is limited solely to such
contested amount. The Company's control of the contest shall be limited
to issues with respect to which a Gross-Up Payment would be payable
hereunder, and the Executive shall be entitled to settle or contest,
as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority. Furthermore, the Company agrees
to hold in confidence and not to disclose, without Executive's prior
written consent, any information with regard to Executive's tax
position which the Company obtains pursuant to this Section 5.7.
(d) Suit for Refund. If the Company directs the Executive to pay any claim
and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis. If the Executive
becomes entitled to receive any refund with respect to such claim, the
Executive shall promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes
applicable thereto). If a determination is made that the Executive
shall not be entitled to any refund with respect to such claim and the
Company does not notify the Executive in writing of its intent to
contest such denial of refund prior to the expiration of 30 days after
such determination, then such advance shall be forgiven and shall not
be required to be repaid and the amount of such advance shall offset,
to the extent thereof, the amount of Gross-Up Payment required to be
paid.
21
<PAGE>
5.8 Indemnification. The Company will indemnify Executive (and his legal
representatives or other successors) to the fullest extent permitted (including
payment of expenses in advance of final disposition of a proceeding) by the laws
of the State of Delaware, as in effect at the time of the subject act or
omission, or by the Restated Certificate of Incorporation and By-Laws of the
Company, as in effect at such time or on the effective date of this Agreement,
or by the terms of any indemnification agreement between the Company and
Executive, whichever affords or afforded greater protection to Executive, and
the Executive shall be entitled to the protection of any insurance policies the
Company may elect to maintain generally for the benefit of its directors and
officers (and to the extent the Company maintains such an insurance policy or
policies, Executive shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage affordable for
any Company officer or director), against all costs, charges and expenses
whatsoever incurred or sustained by him or his legal representatives at the time
such costs, charges and expenses are incurred or sustained, in connection with
any actions, suit or proceeding to which he (or his legal representatives or
their successors) may be made a party by reason of his being or having been a
director, officer or employee of the Company, the Parent or any subsidiary of
either of them, or his serving or having served any other enterprise as a
director, officer or employee at the request of the Company.
5.9 Attorney's Fees. In the event of any litigation, arbitration, or other
proceeding between the Company and Executive with respect to this Agreement or
the enforcement of Executive's rights hereunder, if the Executive prevails on
any issue which is a material part of such litigation, arbitration or other
proceeding, the Company shall periodically reimburse Executive for all of the
reasonable costs and expenses relating to such litigation, arbitration or
proceeding (including, without limitation, reasonable attorneys' fees). In no
event shall Executive be required to reimburse the Company or the Parent for any
of the costs or expenses relating to such litigation, arbitration, or
proceeding.
5.10 Joint and Several Liability. All duties, undertakings, obligations, and
liabilities of the Company and the Parent arising under this Agreement shall be
the joint and several liability of the Company and the Parent.
5.11 Severability. If any one or more of the provisions (or portions
thereof) of this Agreement shall for any reason be held by a final determination
of a court of competent jurisdiction to be invalid, illegal, or unenforceable in
any respect, such invalidity, illegality, or unenforceability shall not affect
any other provisions (or portions of the provisions) of this Agreement, and the
invalid, illegal, or unenforceable provision shall be deemed replaced by a
provision that is valid, legal, and enforceable and that comes closest to
expressing intention of the parties.
5.12 Governing Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Minnesota, without giving effect to
conflict of law principles.
22
<PAGE>
5.13 Headings. The headings of articles and sections herein are included
solely for convenience and reference and shall not control the meaning of
interpretation of any of the provisions of this Agreement.
5.14 Counterparts. This Agreement may be executed by either of the parties
in counterparts, each of which shall be deemed to be an original, but all such
counterparts shall constitute a single instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as of
the date set forth above.
MUSICLAND STORES CORPORATION
THE MUSICLAND GROUP, INC.
By:--------------------------------------
Jack W. Eugster
Chairman and CEO
EXECUTIVE
-----------------------------------------
23
SUBSIDIARY INFORMATION EXHIBIT 21
UPDATED AS OF DECEMBER 31, 1999
I. SUBSIDIARIES OF MUSICLAND STORES CORPORATION
State of Name(s) Under Which
Name Of Corporation Incorporation Corporation Does Business
- ------------------- ------------- -------------------------
The Musicland Group, Inc. Delaware Discount Records
Excelsior
Musicland
Musicland/Suncoast Motion
Picture Company
On Cue
Replay
Sam Goody
Sam Goody's Music & Video
Sam Goody's Musicland
Sam Goody/Suncoast Motion
Picture Company
II. SUBSIDIARIES OF THE MUSICLAND GROUP, INC.
State of Name(s) Under Which
Name Of Corporation Incorporation Corporation Does Business
- ------------------- ------------- -------------------------
Media Play, Inc. Delaware Media Play
MG Financial Services, Inc. Delaware
MLG Internet, Inc. Delaware mediaplay.com
oncue.com
samgoody.com
suncoast.com
Musicland Retail, Inc. Delaware Musicland
Musicland/Suncoast Motion
Picture Company
Replay
Sam Goody
Sam Goody/Suncoast Motion
Picture Company
On Cue, Inc. Delaware On Cue
Request Media, Inc. Delaware Request
requestline.com
Suncoast Group, Inc. Delaware Producers Club
Suncoast Motion Picture
Company
Suncoast Pictures
Suncoast Motion Picture
Company, Inc. Delaware
Suncoast Retail, Inc. Delaware Producers Club
Suncoast Motion Picture
Company
TMG Caribbean, Inc. Delaware Musicland
Sam Goody
Suncoast Motion Picture
Company
TMG-Virgin Islands, Inc. Delaware Sam Goody
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated January 21, 2000, included in this form 10-K, into the Company's
previously filed Registration Statement File Nos. 33-50520, 33-50522, 33-50524,
33-82130, 33-99146, 333-51401 and 333-68275.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extraced from the
consolidated balance sheet of Musicland Stores Corporation and subsidiaries
as of December 31, 1999, and the related consolidated statement of
operations for the year then ended, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<CASH> 335,693
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 444,792
<CURRENT-ASSETS> 816,947
<PP&E> 467,526
<DEPRECIATION> 230,976
<TOTAL-ASSETS> 1,063,574
<CURRENT-LIABILITIES> 655,362
<BONDS> 258,950
0
0
<COMMON> 362
<OTHER-SE> 108,996
<TOTAL-LIABILITY-AND-EQUITY> 1,063,574
<SALES> 1,891,828
<TOTAL-REVENUES> 1,891,828
<CGS> 1,200,993
<TOTAL-COSTS> 1,200,993
<OTHER-EXPENSES> 584,794
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,661
<INCOME-PRETAX> 83,380
<INCOME-TAX> 25,000
<INCOME-CONTINUING> 58,380
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58,380
<EPS-BASIC> 1.65
<EPS-DILUTED> 1.60
</TABLE>
