-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LlNkVRsamr+Z1WQx9vJUr0WS14Hi5U8ZxQx8Es9Q94RQP5E7HMmLyTeyMRsw3bg/ tP2u8V6oGKJ3D5ei8TSn2g== 0000832995-98-000011.txt : 19980626 0000832995-98-000011.hdr.sgml : 19980626 ACCESSION NUMBER: 0000832995-98-000011 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980625 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MUSICLAND STORES CORP CENTRAL INDEX KEY: 0000832995 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RADIO TV & CONSUMER ELECTRONICS STORES [5731] IRS NUMBER: 411623376 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-11014 FILM NUMBER: 98654225 BUSINESS ADDRESS: STREET 1: 10400 YELLOW CIRCLE DR CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129318000 MAIL ADDRESS: STREET 1: 10400 YELLOW CIRCLE DR CITY: MINNETONKA STATE: MN ZIP: 55343 10-K/A 1 1997 10-K/A REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Mark one) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 For the fiscal year ended December 31, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the transition period from to -------- -------- Commission file number 1-11014 MUSICLAND STORES CORPORATION (Exact name of Registrant as specified in its charter) Delaware 41-1623376 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 10400 Yellow Circle Drive, Minnetonka, Minnesota 55343 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (612) 931-8000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common stock, $.01 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- The aggregate market value of the voting stock held by nonaffiliates of the Registrant on December 31, 1997 was approximately $225,235,947 based on the closing stock price of $7 5/16 on the New York Stock Exchange on such date (only members of the Management Investors Group are considered affiliates for this calculation). The number of shares outstanding of the Registrant's common stock on February 10, 1998 was 34,458,037. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held May 11, 1998 (the "Proxy Statement") are incorporated by reference into Part III. EXHIBIT INDEX The following documents are filed as part of this Annual Report on Form 10-K for the year ended December 31, 1997. Exhibit Sequential No. Description Page No. - ------- -------------------------------------------------------- ---------- 3.1 - Restated Certificate of Incorporation of MSC, as amended [i] 3.2 - By-laws of MSC, as amended [ii] 4.1 - 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 [iii] 4.1(a) - First Supplemental Indenture dated as of June 13, 1997 to the Senior Subordinated Note Indenture [xv] 4.2(a) - Credit Agreement dated as of October 7, 1994 (the "Credit Agreement") among MGI, MSC, the banks listed therein and Morgan Guaranty Trust Company of New York, as agent [iv] 4.2(b) - Amendment No. 1 dated as of February 28, 1995 to the Credit Agreement [viii] 4.2(c) - Amendment No. 2 dated as of April 9, 1996 to the Credit Agreement [xi] 4.2(d) - Amendment No. 3 dated as of October 18, 1996 to the Credit Agreement [xii] 4.2(e) - Waiver and Agreements under Credit Agreement dated as of March 7, 1997 to the Credit Agreement [xiii] 4.2(f) - Waivers and Agreements under Credit Agreement dated as of May 19, 1997 to the Credit Agreement [xv] 4.2(g) - Amendment No. 4 and Waiver dated as of June 16, 1997 to the Credit Agreement [xv] 4.3 - Term Loan Agreement dated as of June 16, 1997, (the "Term Loan") among MGI, MSC, the banks listed therein and Morgan Guaranty Trust Company of New York, as agent [xv] 4.3(a) - Security Agreement dated as of June 16, 1997 among MGI and the subsidiaries listed therein, the Debtors listed therein, and Morgan Guaranty Trust Company of New York, as agent [xv] 4.3(b) - Warrant and Registration Rights Agreement dated as of June 16, 1997 among MSC and the Investors listed therein [xv] 4.4 - Rights Agreement dated as of March 14, 1995 between MSC and Norwest Bank Minnesota, National Association, as Rights Agent [v] 9 - Voting Trust Agreement among DLJ, certain of its affiliates, the Equitable Investors and Meridian Trust Company [i] 10.1(a) - Lease Agreement dated March 31, 1994 between Shawmut Bank Connecticut, N.A. as Owner Trustee and Musicland Retail, Inc., as Lessee [viii] 10.1(b) - Participation Agreement dated March 31, 1994 among Musicland Retail, Inc., as Lessee, Shawmut Bank Connecticut, N.A. as Owner Trustee, Kleinwort Benson Limited, as Owner Participant, Lender and Agent and The Long-Term Credit Bank of Japan, Ltd. Chicago Branch, Credit Lyonnais Cayman Island Branch, The Fuji Bank, Limited, as Lenders [viii] 10.1(c) - Guaranty of MGI dated March 31, 1994 [viii] 10.1(d) - Amendment No. 1 dated as of June 16, 1997 to the Lease Agreement [xv] 10.1(e) - Amendment No. 1 dated as of June 16, 1997 to the Participation Agreement [xv] 2 Exhibit Sequential No. Description Page No. - ------- ------------------------------------------------------- ---------- 10.1(f) - Amendment No. 1 dated as of June 16, 1997 to the Guaranty [xv] 10.2(a) - Master Lease dated as of May 12, 1995 between Media Play Trust, as Landlord, and Media Play, Inc., as Tenant [ix] 10.2(b) - Participation Agreement dated as of May 12, 1995 among Natwest Leasing Corporation, as Owner Participant, Media Play Trust, As Trust, Yasuda Bank and Trust Company (U.S.A.), as Owner Trustee, National Westminster Bank PLC, as Agent and Lender, Media Play, Inc., as Tenant and the Long-Term Credit Bank of Japan, Ltd. Chicago Branch and The Yasuda Trust & Banking Company, Ltd., Chicago Branch, as Other Lenders [ix] 10.2(c) - Amendment No. 1 dated as of April 9, 1996 to the Participation Agreement [xi] 10.2(d) - Lease Guaranty dated May 12, 1995 between MGI, as Guarantor, and Media Play Trust, as Landlord [ix] 10.2(e) - Amendment No. 1 dated as of April 9, 1996 to the Lease Guaranty [xi] 10.2(f) - Second Limited Waiver and Amendment dated as of June 16, 1997 of Certain Loan Documents and Key Agreements [xv] *10.3(a) - Subscription Agreement among MSC and the Management Investors [vi] *10.3(b) - Form of amendment to Management Subscription Agreement [i] *10.4 - Form of Registration Rights Agreement among MSC, DLJ and the Management Investors [vii] *10.5(a) - Employment Agreement with Mr. Eugster [vi] *10.5(b) - Form of amendment to Employment Agreement with Mr. Eugster [i] *10.5(c) - Amendment No. 2 to Employment Agreement with Mr. Eugster [x] *10.6(a) - Form of Employment Agreement with Messrs. Benson and Ross [vi] *10.6(b) - Amendment to Employment Agreement with Mr. Benson [xiii] *10.6(c) - Amendment to Employment Agreement with Mr. Ross [xiii] *10.7(a) - Form of Employment Agreement with Messrs. Bausman and Henderson [vi] *10.7(b) - Form of amendment to Employment Agreements with Messrs. Bausman and Henderson [i] *10.7(c) - Amendment No. 2 to Employment Agreement with Mr. Bausman [x] *10.7(d) - Amendment No. 2 to Employment Agreement with Mr. Henderson [x] *10.8(a) - Change of Control Agreement with Mr. Eugster [vi] *10.8(b) - Form of amendment to Change of Control Agreement with Mr. Eugster [i] *10.8(c) - Amendment No. 2 to Change of Control Agreement with Mr. Eugster [x] *10.8(d) - Amendment No. 3 to Change of Control Agreement with Mr. Eugster [xiii] *10.9 - Management Incentive Plan dated as of January 1, 1997 [xvii] *10.10 - 1988 Stock Option Plan, as amended [i] *10.11 - Stock Option Plan for Unaffiliated Directors of MSC, as amended on June 12, 1997 [xv] *10.12 - 1992 Stock Option Plan [i] *10.13 - Musicland Stores Corporation 1994 Employee Stock Option Plan [viii] *10.14 - Employment Letter Agreement with Mr. Johnson [viii] *10.15(a)- Change of Control Agreement with Mr. Johnson [x] *10.15(b)- Amendment No. 1 to Change of Control Agreement with Mr. Johnson [xiii] *10.16(a)- Change of Control Agreement with Messrs. Benson and Ross [vi] *10.16(b)- Amendment No. 1 to Change of Control Agreement with Mr. Benson [xiii] *10.16(c)- Amendment No. 1 to Change of Control Agreement with Mr. Ross [xiii] *10.17 - Form of Executive Severance Agreement with Mr. Wachsman [xiii] 3 Exhibit Sequential No. Description Page No. - --------- ------------------------------------------------------ ---------- *10.18 - Change of Control Agreement with Mr. Wachsman [xiv] *10.19 - Long Term Incentive Plan dated as of January 1, 1996 [xiii] *10.20 - Executive Officer Short Term Incentive Plan dated as of November 15, 1996 [xiii] *10.20(a)- Executive Officer Short Term Incentive Plan dated as of March 10, 1997 [xv] *10.21 - Executive Officer Salary Continuation Plan dated as of March 10, 1997 [xiv] 11. - Statement re computation of per share earnings [xvi] 21. - Subsidiaries of MSC [ii] 23. - Consent of Independent Public Accountants __ 27. - Financial Data Schedules [xvii] 99. - Form 11-K for The Musicland Group's Capital Accumulation Plan __ [i] Incorporated by reference to MSC's Form S-1 Registration Statement covering common stock initially filed with the Commission on July 6, 1990 (Commission File No. 33-35774). [ii] Incorporated by reference to MSC's Annual Report on Form 10-K for the year ended December 31, 1992 filed with the Commission on March 2, 1993 (Commission File No. 1-11014). [iii] Incorporated by reference to MGI's Registration Statement covering 9% Senior Subordinated Notes initially filed with the Commission on May 19, 1993 (Commission File No. 33-62928). [iv] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994 filed with the Commission on November 11, 1994 (Commission File No. 1-11014). [v] Incorporated by reference to MSC's Form 8-A Exchange Act Registration Statement covering Preferred Share Purchase Rights filed with the Commission on March 16, 1995. [vi] Incorporated by reference to MSC's Form S-1 Registration Statement covering Senior Subordinated Notes initially filed with the Commission on May 20, 1988 (Commission File No. 33-22058). [vii] Incorporated by reference to MSC's Annual Report on Form 10-K for the year ended December 31, 1993 filed with the Commission on March 25, 1994 (Commission File No. 1-11014). [viii] Incorporated by reference to MSC's Annual Report on Form 10-K for the year ended December 31, 1994 filed with the Commission on March 27, 1995 (Commission File No. 1-11014). [ix] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the quarter period ended June 30, 1995 filed with the Commission on August 11, 1995 (Commission File No. 1-11014). [x] Incorporated by reference to MSC's Annual Report on Form 10-K for the year ended December 31, 1995 filed with the Commission on April 12, 1996 (Commission File No. 1-11014). 4 [xi] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the quarter period ended March 31, 1996 filed with the Commission on May 10, 1996 (Commission File No. 1-11014). [xii] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the quarter period ended September 30, 1996 filed with the Commission on November 13, 1996 (Commission File No. 1-11014). [xiii] Incorporated by reference to MSC's Annual Report on Form 10-K for the year ended December 31, 1996 filed with the Commission on April 11, 1997 (Commission File No. 1-11014.) [xiv] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the quarter period ended March 31, 1997 filed with the Commission on May 14, 1997 (Commission File No. 1-11014). [xv] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the quarter period ended June 30, 1997 filed with the Commission on August 13, 1997 (Commission File No. 1-11014). [xvi] The requirements of this exhibit are met by Note 1 of Notes to Consolidated Financial Statements. [xvii] Previously filed. * Indicates Management Contract or Compensatory Plan or Agreement required to be filed as an Exhibit to this form. 5 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized. MUSICLAND STORES CORPORATION (Registrant) By: /s/ Keith A. Benson Keith A. Benson Vice Chairman, Chief Financial Officer and Director (principal financial and accounting officer) Date: June 25, 1998 6 EX-23 2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated June 12, 1998 included in this Form 10-K/A, into The Company's previously filed Registration Statements, File Nos. 33-50520, 33-50522, 33-50524, 33-82130, 33-99146 and 333-51401. Minneapolis, Minnesota, June 25, 1998 EX-99 3 FORM 11-K EXHIBIT 99 FORM 11-K FOR ANNUAL REPORTS OF EMPLOYEE STOCK PURCHASE, SAVINGS AND SIMILAR PLANS PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark one) [ X ] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------- -------- Commission file number 33-99146 A. Full title of the Plan and the address of the Plan, if different than that of the issuer named below: THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN B. Name of issuer of the securities held pursuant to the Plan and the address of its principal executive office: MUSICLAND STORES CORPORATION 10400 Yellow Circle Drive, Minnetonka, MN 55343 REQUIRED INFORMATION The Plan is subject to ERISA. Accordingly, in lieu of the Securities and Exchange Commission requirements, Plan financial statements and schedules prepared in accordance with the financial reporting requirements of ERISA are being filed. THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN Financial Statements as of December 31, 1997 and 1996 Together With Report of Independent Public Accountants THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN Index to Financial Statements and Supplemental Schedules Page ---- Report of Independent Public Accountants 3 Financial Statements and Schedules: Statement of Net Assets Available for Benefits as of December 31, 1997 4 Statement of Net Assets Available for Benefits as of December 31, 1996 5 Statement of Changes in Net Assets Available for Benefits for the Year Ended December 31, 1997 6 Notes to Financial Statements 7 Schedule I - Item 27a - Schedule of Assets Held for Investment Purposes as of December 31, 1997 13 Schedule II - Item 27d - Schedule of Reportable Transactions for the Year Ended December 31, 1997 14 2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Administrator of The Musicland Group's Capital Accumulation Plan: We have audited the accompanying statements of net assets available for benefits of The Musicland Group's Capital Accumulation Plan as of December 31, 1997 and 1996, and the related statement of changes in net assets available for benefits for the year ended December 31, 1997. These financial statements and the schedules referred to below are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of The Musicland Group's Capital Accumulation Plan as of December 31, 1997 and 1996, and the changes in net assets available for benefits for the year ended December 31, 1997, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules of assets held for investment purposes and reportable transactions are presented for purposes of additional analysis and are not a required part of the basic financial statements but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The supplemental schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, June 12, 1998 3
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS As of December 31, 1997 Neuberger & Founders AET Templeton Berman IDS New Franklin Stable Value Balanced Equity Index Foreign Partners Dimensions Small Cap Fund Fund Fund II Fund Trust Fund[Y] Growth Fund ----------- ---------- ----------- ---------- ----------- ------------- ----------- Assets Investment funds, at market value $5,579,115 $1,835,011 $ 603,214 $1,471,497 $ 90,904 $ 11,094,043 $ 107,814 ---------- ---------- ---------- ---------- ----------- ------------ ----------- Interest income receivable 723 352 136 145 - 1,846 - Contributions receivable: Employee contributions 15,318 8,925 4,301 7,813 773 39,571 894 Employer contributions 133,333 133,334 133,333 - - - - ---------- ---------- ---------- ---------- ----------- ------------ ----------- Total contributions receivable 148,651 142,259 137,634 7,813 773 39,571 894 ---------- ---------- ---------- ---------- ----------- ------------ ----------- Participant loan repayments (withdrawals) (672) 135 194 153 - (3,668) - ---------- ---------- ---------- ---------- ----------- ------------ ----------- Total assets 5,727,817 1,977,757 741,178 1,479,608 91,677 11,131,792 108,708 Liabilities Interest payable - - - - - - - Note payable - - - - - - - ---------- ---------- ---------- ---------- ----------- ------------ ----------- Total liabilities - - - - - - - ---------- ---------- ---------- ---------- ----------- ------------ ----------- Net assets available for benefits $5,727,817 $1,977,757 $ 741,178 $1,479,608 $ 91,677 $ 11,131,792 $ 108,708 ========== ========== ========== ========== =========== ============ =========== Musicland Common Stock Fund ------------------------- Loans to Allocated Unallocated Participants TOTAL ------------ ----------- ---------- ------------ Assets Investment funds, at market value $ 3,863,113 $ 6,100,965 $ 914,999 $ 31,660,675 ------------ ----------- ---------- ------------ Interest income receivable 174 - - 3,376 Contributions receivable: Employee contributions 5,812 - - 83,407 Employer contributions - 1,659,584 - 2,059,584 ------------ ----------- ---------- ------------ Total contributions receivable 5,812 1,659,584 - 2,142,991 ------------ ----------- ---------- ------------ Participant loan repayments (withdrawals) (440) - 4,298 - ------------ ----------- ---------- ------------ Total assets 3,868,659 7,760,549 919,297 33,807,042 Liabilities Interest payable - 659,835 - 659,835 Note payable - 7,997,988 - 7,997,988 ------------ ----------- ---------- ------------ Total liabilities - 8,657,823 - 8,657,823 ------------ ----------- ---------- ------------ Net assets available for benefits $ 3,868,659 $ (897,274) $ 919,297 $ 25,149,219 ============ =========== ========== ============
The accompanying notes are an integral part of this statement. 4
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS As of December 31, 1996 American Collective Income Aim Century Vanguard Templeton Stable Asset Fund of Charter Growth Index 500 Foreign Fund America Fund Investors Fund Fund ------------ ------------ ------------ ------------- ---------- ----------- Assets Cash and cash equivalents $ 23,184 $ 2,491 $ 5,976 $ 13,157 $ 13 $ 2,251 Investment funds, at market value 5,888,417 1,462,156 3,789,994 5,342,393 87,622 1,242,244 Contributions receivable: Employee contributions 4,044 1,888 3,687 4,162 - 1,366 Employer contributions 153,606 116,790 52,069 71,073 90,001 20,895 ----------- ----------- ----------- ------------ --------- ---------- Total contributions receivable 157,650 118,678 55,756 75,235 90,001 22,261 ----------- ----------- ----------- ------------ --------- ---------- Total assets 6,069,251 1,583,325 3,851,726 5,430,785 177,636 1,266,756 Liabilities Interest payable - - - - - - Note payable - - - - - - ----------- ----------- ------------ ------------ --------- ---------- Total liabilities - - - - - - ----------- ----------- ----------- ------------ --------- ---------- Net assets available for benefits $ 6,069,251 $ 1,583,325 $ 3,851,726 $ 5,430,785 $ 177,636 $1,266,756 =========== =========== =========== ============ ========= ========== Musicland Common Stock Fund ------------------------ Loans to Allocated Unallocated Participants TOTAL --------- ------------ ------------ ------------- Assets Cash and cash equivalents $ 3,085 $ 5 $ - $ 50,162 Investment funds, at market value 459,039 1,407,915 673,928 20,353,708 Contributions receivable: Employee contributions 1,646 - - 16,793 Employer contributions 17,535 1,764,556 - 2,286,525 ---------- ----------- ----------- ------------ Total contributions receivable 19,181 1,764,556 - 2,303,318 ---------- ----------- ----------- ------------ Total assets 481,305 3,172,476 673,928 22,707,188 Liabilities Interest payable - 764,808 - 764,808 Note payable - 8,997,737 - 8,997,737 ---------- ----------- ----------- ------------ Total liabilities - 9,762,545 - 9,762,545 ---------- ----------- ----------- ------------ Net assets available for benefits $ 481,305 $(6,590,069) $ 673,928 $ 12,944,643 ========== =========== =========== ============
The accompanying notes are an integral part of this statement. 5
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS For the Year Ended December 31, 1997 American Collective Income Aim Century Vanguard Stable Founders AET Stable Asset Fund of Charter Growth Index 500 Value Balanced Equity Index Fund America Fund Investors Fund Fund Fund Fund II ----------- ---------- ---------- ---------- ---------- ---------- ---------- --------- INVESTMENT INCOME: Interest and dividends $ 983 $ 55,853 $ 41,941 $ 1,418 $ 2,709 $ - $ 122,902 $ - Net gain (loss) on investments 297,712 187,813 776,639 1,405,981 35,334 52,548 (98,546) 19,276 CONTRIBUTIONS: Employee 368,273 226,663 429,667 553,310 55,453 78,775 44,780 22,533 Employer 25,000 - - - - 133,333 133,334 133,333 INTERFUND TRANSFERS (362,086) (97,617) (10,847) (171,250) 288,686 (23,907) 32,123 43,726 TRANSFER TO/FROM SUCCESSOR TRUSTEE (5,522,019) (1,753,043) (4,540,436) (6,382,715) (521,307) 5,522,019 1,753,043 521,307 BENEFITS PAID TO PARTICIPANTS (750,406) (195,799) (516,572) (753,321) (40,478) (138) (166) (194) ADMINISTRATIVE EXPENSES (64,010) (2,307) (6,100) (8,597) (275) - - - INTEREST EXPENSE - - - - - - - - LOANS TO PARTICIPANTS, NET OF REPAYMENTS (62,698) (4,888) (26,018) (75,611) 2,242 (34,813) (9,713) 1,197 PRINCIPAL PMT ON LOAN FROM TMG / RELEASED SHARES - - - - - - - - ----------- ---------- ---------- ---------- ---------- ---------- ---------- --------- CHANGE IN NET ASSETS AVAILABLE FOR BENEFITS (6,069,251) (1,583,325) (3,851,726) (5,430,785) (177,636) 5,727,817 1,977,757 741,178 NET ASSETS AVAILABLE FOR BENEFITS AT BEGINNING OF YEAR 6,069,251 1,583,325 3,851,726 5,430,785 177,636 - - - ----------- ---------- ---------- ---------- ---------- ---------- ---------- --------- NET ASSETS AVAILABLE FOR BENEFITS AT END OF YEAR $ - $ - $ - $ - $ - $5,727,817 $1,977,757 $ 741,178 =========== ========== ========== ========== ========== ========== ========== ========= Neuberger Musicland Common Templeton & Berman IDS New Franklin Stock Fund Foreign Partners Dimensions Small Cap ------------------------ Loans to Fund Trust Fund [Y] Growth Fund Allocated Unallocated Participants TOTAL ---------- ---------- ------------ ------------ ---------- ---------- ------------ ----------- INVESTMENT INCOME: Interest and dividends $ 68,740 $ 8,549 $ 828,511 $ 1,322 $ 602 $ 2 $ 48,099 $ 1,181,631 Net gain (loss) on investments 18,208 (7,968) (569,840) 778 3,064,712 4,771,267 - 9,953,914 CONTRIBUTIONS: Employee 256,803 1,552 214,691 1,801 146,372 - - 2,400,673 Employer - - - - - 1,659,584 - 2,084,584 INTERFUND TRANSFERS (574) 89,544 (206,210) 104,807 (559,822) 921,526 (48,099) - TRANSFER TO/FROM SUCCESSOR TRUSTEE - - 10,923,151 - - - - - BENEFITS PAID TO PARTICIPANTS (118,233) - (1,530) - (256,647) - (37,030) (2,670,514) ADMINISTRATIVE EXPENSES (2,065) - - - (2,523) - - (85,877) INTEREST EXPENSE - - - - - (659,835) - (659,835) LOANS TO PARTICIPANTS, NET OF REPAYMENTS (10,027) - (56,981) - (5,089) - 282,399 - PRINCIPAL PMT ON LOAN FROM TMG / RELEASED SHARES - - - - 999,749 (999,749) - - ---------- --------- ----------- ----------- ---------- ---------- --------- ----------- CHANGE IN NET ASSETS AVAILABLE FOR BENEFITS 212,852 91,677 11,131,792 108,708 3,387,354 5,692,795 245,369 12,204,576 NET ASSETS AVAILABLE FOR BENEFITS AT BEGINNING OF YEAR 1,266,756 - - - 481,305 (6,590,069) 673,928 12,944,643 ---------- --------- ----------- ----------- ---------- ---------- --------- ----------- NET ASSETS AVAILABLE FOR BENEFITS AT END OF YEAR $1,479,608 $ 91,677 $11,131,792 $ 108,708 $3,868,659 $ (897,274) $ 919,297 $25,149,219 ========== ========= =========== =========== ========== ========== ========= =========== The accompanying notes are an integral part of this statement. 6
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN NOTES TO FINANCIAL STATEMENTS 1. Description of Plan The following description of The Musicland Group's Capital Accumulation Plan (the "Plan") is provided for general information purposes only and is not a comprehensive description of the Plan. Therefore, it does not include all situations and limitations covered by the Plan. Participants should refer to the Plan document, as amended, for more complete information. GENERAL: The Plan is a defined contribution plan covering eligible salaried and hourly employees of The Musicland Group, Inc. ("TMG" or the "Company") who have attained age 21 and completed one year of service, as defined. The Plan also provides certain profit sharing benefits for eligible employees who commenced employment after June 30, 1990 and who have attained age 21 and completed six months of continuous employment or one year of service, as defined. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). Benefits under the Plan are covered by a trust agreement. In August 1995 the Plan was amended to add an Employee Stock Ownership Plan ("ESOP"), effective January 1, 1995, for the purpose of replacing the Company's matching contributions. As of November 1, 1997, American Express Trust Company (the "Trustee") serves as the Plan's trustee and administers the assets of the Plan, directs execution of transactions, makes benefit payments on behalf of the Plan and maintains records for the loans to participants. Prior to November 1, 1997, William M. Mercer, Inc. was the service provider to the Plan and Piper Trust Company ("Piper") was the Plan's trustee. The parent company of A. Foster Higgins & Co., Inc., the service provider to the Plan at December 31, 1996, was acquired by the parent company of William M. Mercer, Inc. in 1997. NOTE PAYABLE: During 1995 the Company loaned the Plan $9,997,485 through the issuance of a promissory note to purchase 1,042,900 shares of Musicland Stores Corporation common stock ("Musicland Common Stock"). The promissory note is due in ten equal annual principal installments on December 31 of each year, with interest on the unpaid principal balance at the prime rate on December 31 of the previous year (8.25% at December 31, 1996 and 8.5% at December 31, 1997). As the Company makes contributions to the Plan, the Plan makes principal payments to the Company and allocates an appropriate percentage of Musicland Common Stock to eligible employees' accounts. The promissory note is collateralized by the unallocated shares held by the Plan. 7 THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN NOTES TO FINANCIAL STATEMENTS (Continued) 1. Description of Plan (Continued) CONTRIBUTIONS: Participants may elect to make pretax salary reduction contributions of up to 17% of annual base salaries. Highly compensated participants are limited to pretax salary reduction contributions of 4% of annual base pay up to the 401(a)(17) and 408(k)(3)(C) compensation limit. Annual salary reduction contributions are limited to $9,500 for non-highly compensated employees, and 4% of the 401(a)(17) and 408(k)(3)(C) compensation limit for highly compensated employees. The Company may, at its discretion, make a supplementary matching contribution of 0% to 100% of eligible salary reduction contributions to the extent that such contributions for the plan year do not exceed 4% of participants' earnings. The Company may make an annual profit sharing contribution for eligible employees under an age-and-service-weighted unit allocation formula. Forfeitures greater than administrative costs are used to reduce the Company's matching contributions. INVESTMENT FUNDS: Participants may allocate their contributions to any of eight investment funds, which are administered by American Express Trust Company. As of December 31, 1997, the investment funds were as follows: 1. Stable Value Fund, a conservative investment fund that invests in insurance and bank investment contracts, stable value contracts and short term investments. 2. Founders Balanced Fund, a moderate fund investing in a balanced portfolio of common stocks, U.S. and foreign government obligations, and a variety of corporate fixed-income securities. 3. American Express Trust ("AET") Equity Index Fund II, a moderate collective fund that invests primarily in medium to large, well-established companies offering both long-term capital appreciation and income potential. 4. Templeton Foreign Fund, a fund investing in foreign stocks and securities. 5. Neuberger & Berman Partners Trust, an aggressive fund investing primarily in common stocks of established medium to large capitalization companies, using a value-oriented investment approach. 6. IDS New Dimensions Fund [Y], an aggressive fund that invests in a portfolio of stocks of U.S. and foreign companies. 8 THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN NOTES TO FINANCIAL STATEMENTS (Continued) 1. Description of Plan (Continued) 7. Franklin Small Cap Growth Fund, an aggressive fund that invests primarily in stocks of small capitalization growth companies. 8. Musicland Common Stock Fund, a stock pool fund investing in the common stock of Musicland Stores Corporation, which is traded on the New York Stock Exchange under the symbol "MLG." As of December 31, 1996, the investment funds included the Templeton Foreign Fund and the Musicland Common Stock Fund described above, as well as the following funds, which are no longer investment options: 1. Collective Stable Asset Fund, a stable asset fund investing primarily in a diversified portfolio of insurance contracts from insurance companies. 2. Income Fund of America, a current income and capital growth fund with balanced investments in stocks and bonds. 3. Aim Charter Fund, a growth and income fund investing primarily in dividend-paying common stocks. 4. American Century Growth Investors (formerly 20th Century Growth Investors), an aggressive growth-oriented fund primarily investing in stock of smaller companies that do not pay regular dividends. 5. Vanguard Index 500 Fund, a fund which seeks to track, as closely as possible, the investment performance of the Standard & Poors Composite Price Index. Beginning with the 1997 profit sharing contribution, the Company makes its contribution to the various available investment funds based on the participants' investment allocation elections. The Company's 1996 profit sharing contribution was made to the Collective Stable Asset Fund, the Income Fund of America and the Vanguard Index 500 Fund. Participants may change their investment elections at any time. Periodically, investment earnings are credited to the participants' accounts and investment losses are debited from their accounts. The earnings and losses are allocated in accordance with participant fund elections. 9 THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN NOTES TO FINANCIAL STATEMENTS (Continued) 1. Description of Plan (Continued) LOANS TO PARTICIPANTS: Participants may obtain up to two loans of $500 or more at any one time, limited to the lesser of 50% of the vested value of their accounts or $50,000. Loans must be repaid within five years, except for certain home loans. The interest rate charged on loans is fixed at the prime rate plus 2% on the date of the loan. VESTING: Each participant's individual contributions are fully vested at all times. Participants vest in Company matching contributions over a seven year graduated vesting schedule. Participants will be 100% vested in Company matching contributions seven years from their date of hire, or at the time of death, disability or retirement, provided the person has reached normal retirement age. Participants vest in profit sharing contributions 100% after five years from their date of hire. PLAN TERMINATION: While the Company has not expressed any intent to discontinue the Plan, it is free to do so at any time. If such discontinuance results in the termination of the Plan, all accounts shall become fully vested and nonforfeitable. The Company shall receive from the Plan the shares of unallocated Musicland Common Stock in satisfaction of the note payable to the Company. The Plan shall continue until all assets have been distributed to the participants. 2. Summary of Significant Accounting Policies BASIS OF ACCOUNTING: The financial statements have been prepared under the accrual basis of accounting. VALUATION OF ASSETS: Investments are valued at market value as reported by the Trustee as of December 31, 1997 and Piper as of December 31, 1996, based on quoted market prices of investments held by the funds. Net changes in the market value of investments during the year are reported as unrealized gains 10 THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN NOTES TO FINANCIAL STATEMENTS (Continued) 2. Summary of Significant Accounting Policies (Continued) and losses. The realized gain or loss on investments sold is determined based on the market value of the investment at the end of the prior year or cost if purchased during the year. The net increase in the market value of investments was as follows for the year ended December 31, 1997: Net realized gain on sale of investments $ 3,526,125 Unrealized gain 6,427,789 ------------- Net gain on investments $ 9,953,914 ============= The valuation and performance of the Plan's investment funds (the "Funds") are subject to various risks such as interest rate, market and credit. The investments held by the Funds, excluding the Musicland Common Stock Fund, are made at the discretion of the investment managers of the Funds and are subject to ERISA regulations. The Plan's exposure to loss on investments is limited to the carrying value of such investments. Except for the Musicland Common Stock Fund, management believes that no significant concentration of credit risk exists within each fund at December 31, 1997. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. ADMINISTRATIVE COSTS: Each participant is charged an annual trustee fee ranging from 0.30% to 1.12% of the funds deposited in each of the accounts except for the Musicland Common Stock Fund, for which the Plan annual fee is $5,000. Forfeitures are used or the Company pays for all other administrative costs of the Plan, except for a $50 loan processing fee, which is paid by participants. For the year ended December 31, 1997, the Company paid administrative costs of $65,403 for the Plan. 3. Reconciliation of Financial Statements to Form 5500 As of December 31, 1997, the Plan had $4,722,264 of pending distributions to participants who elected distributions from their accounts. These amounts are recorded as a liability in the Plan's Form 5500; however, these amounts are not recorded as a liability in the accompanying statement of net assets available for benefits in accordance with generally accepted accounting principles. 11 THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN NOTES TO FINANCIAL STATEMENTS (Continued) 3. Reconciliation of Financial Statements to Form 5500 (Continued) The following table reconciles net assets available for benefits per the financial statements to the Form 5500 as filed by the Plan for the year ended December 31, 1997: Increase in Net Assets Net Assets Benefits Benefits Available Available Payable to Paid to for for Participants Participants Benefits Benefits Per financial ----------- ----------- ------------ ----------- statements $ - $ 2,670,514 $12,204,576 $25,149,219 Accrued benefit payments at December 31, 1997 (4,722,264) 1,975,381 (1,975,381) (4,722,264) ----------- ----------- ------------ ---------- Per Form 5500 $(4,722,264) $ 4,645,895 $10,229,195 $20,426,955 =========== =========== ============ =========== 4. Tax Status The Plan is a qualified plan under Section 401(a) of the Internal Revenue Code (the "Code"). Pursuant to the favorable Internal Revenue Service (the "IRS") determination letter dated April 10, 1997, the Plan is exempt from Federal income taxes under Section 501(a) of the Code. The Plan sponsor and legal counsel are of the opinion that the Plan meets the IRS requirements and therefore continues to be tax exempt. 12 THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN (Employer Identification Number: 41-1307776) (Plan Number: 002) ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES As of December 31, 1997 Number Market Description of Investment of Units Cost Value - ------------------------------------------ ---------- ----------- ------------ Stable Value Fund 551,242 5,513,901 $ 5,579,115 Founders Balanced Fund 161,643 1,933,076 1,835,011 American Express Trust Equity Index Fund II* 23,250 582,573 603,214 Templeton Foreign Fund 147,872 1,467,546 1,471,497 Neuberger & Berman Partners Trust 5,206 98,872 90,904 IDS New Dimensions Fund [Y]* 464,874 11,666,361 11,094,043 Franklin Small Cap Growth Fund 4,694 106,864 107,814 Musicland Common Stock Fund* 1,165,849 10,298,431 9,964,078 Loans to Participants, at interest rates ranging from 4% to 11% 914,999 ------------ TOTAL INVESTMENTS $ 31,660,675 ============ * Party in interest to the Plan. 13
Schedule II THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN (Employer Identification Number: 41-1307776) (Plan Number: 002) ITEM 27d - SCHEDULE OF REPORTABLE TRANSACTIONS For the Year Ended December 31, 1997 Number of Number Value of Value of Cost of Net Gain Description of Investment Purchases of Sales Purchases Sales Assets Sold (Loss) - ---------------------------------------- ------------ ---------- ---------- ----------- ----------- ----------- Collective Stable Asset Fund 13 44 $ 375,567 $ 1,279,545 $ 1,095,199 $ 184,346 Income Fund of America 73 84 486,754 2,136,723 1,843,189 293,534 Aim Charter Fund 84 80 778,269 5,344,902 3,993,117 1,351,785 American Century Growth Investors 70 89 798,827 7,537,241 5,878,024 1,659,217 Vanguard Index 500 Fund 65 21 478,235 601,144 546,252 54,892 Founders Balanced Fund 15 7 1,945,258 12,072 12,182 (110) Templeton Foreign Fund 83 72 547,892 247,107 217,598 29,509 IDS New Dimensions Fund [Y]* 14 10 11,938,682 276,030 272,320 3,710 Musicland Common Stock Fund* 59 55 544,610 270,786 655,513 (384,727)
* Party in interest to the Plan. 14 -----END PRIVACY-ENHANCED MESSAGE-----