-----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, OKPxiLmNIDaSHKTBHIOfzVB5wvV/dTd2iuTQlFxxYosRhUc/8m/iFyoqQyHUrO7I llvWvGUA8rVkh9aMAO+pwg== 0000832995-99-000016.txt : 19990630 0000832995-99-000016.hdr.sgml : 19990630 ACCESSION NUMBER: 0000832995-99-000016 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990629 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: 99654661 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 10-K/A 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, 1998 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 March 12, 1999 was approximately $340,250,739 based on the closing stock price of $10 1/16 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 36,065,271 shares of common stock outstanding on March 12, 1999. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held May 10, 1999 (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, 1998. 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 [xvii] 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 [ii] 4.1(b) - First Supplemental Indenture dated as of June 13, 1997 to the Senior Subordinated Note Indenture [xiii] 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 [iii] 4.2(b) - Amendment No. 1 dated as of February 28, 1995 to the Credit Agreement [vii] 4.2(c) - Amendment No. 2 dated as of April 9, 1996 to the Credit Agreement [ix] 4.2(d) - Amendment No. 3 dated as of October 18, 1996 to the Credit Agreement [x] 4.2(e) - Waivers and Agreements under Credit Agreement dated as of March 7, 1997 to the Credit Agreement [xi] 4.2(f) - Waivers and Agreements under Credit Agreement dated as of May 19, 1997 to the Credit Agreement [xiii] 4.2(g) - Amendment No. 4 and Waiver dated as of June 16, 1997 to the Credit Agreement [xiii] 4.2(h) - Amendment No. 5 dated as of March 17, 1998 to the Credit Agreement [xvi] 4.3(a) - 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 [xiii] 4.3(b) - 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 [xiii] 4.3(c) - Warrant and Registration Rights Agreement dated as of June 16, 1997 among MSC and the Investors listed therein [xiii] 4.4 - Rights Agreement dated as of March 14, 1995, between MSC and Norwest Bank Minnesota, National Association, as Rights Agent [iv] 4.5(a) - 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 [xiv] 4.5(b) - Registration Rights Agreement dated as of April 6, 1998 by and among MGI, MSC, as Guarantor, and Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex Brown Incorporated, and NationsBanc Montgomery Securities LLC, as Intitial Purchasers [xiv] *10.1(a) - Subscription Agreement among MSC and the Management Investors [v] *10.1(b) - Form of amendment to Management Subscription Agreement [i] *10.2 - Form of Registration Rights Agreement among MSC, DLJ and the Management Investors [vi] *10.3 - 1988 Stock Option Plan, as amended [i] *10.4 - Stock Option Plan for Unaffiliated Directors of MSC, as amended [xiii] *10.5 - 1992 Stock Option Plan [i] 2 Exhibit Sequential No. Description Page No. - ----------- --------------------------------------------------- ---------- *10.6 - Musicland Stores Corporation 1994 Employee Stock Option Plan [vii] *10.7 - Musicland Stores Corporation 1998 Stock Incentive Plan [xvi] *10.8 - Management Incentive Plan dated as of January 1, 1998 [xv] *10.9(a) - Long Term Incentive Plan dated as of January 1, 1996 [xi] *10.9(b) - Long Term Incentive Plan dated as of January 1, 1998 [xv] *10.10 - Executive Officer Salary Continuation Plan dated as of March 10, 1997 [xii] *10.11 - The Musicland Group, Inc. Supplemental Executive Retirement Plan adopted as of October 26, 1998 [xix] *10.12(a) - Employment Agreement with Mr. Eugster [v] *10.12(b) - Form of amendment to Employment Agreement with Mr. Eugster [i] *10.12(c) - Amendment No. 2 to Employment Agreement with Mr. Eugster [viii] *10.13(a) - Change of Control Agreement with Mr. Eugster [v] *10.13(b) - Form of amendment to Change of Control Agreement with Mr. Eugster [i] *10.13(c) - Amendment No. 2 to Change of Control Agreement with Mr. Eugster [viii] *10.13(d) - Amendment No. 3 to Change of Control Agreement with Mr. Eugster [xi] *10.14 - Form of Executive Severence Agreement with Mr. Wachsman [xi] *10.15 - Change of Control Agreement with Mr. Wachsman [xii] *10.16(a) - Form of Employment Agreement with Messrs. Benson and Ross [v] *10.16(b) - Amendment to Employment Agreement with Mr. Benson [xi] *10.16(c) - Amendment to Employment Agreement with Mr. Ross [xi] *10.17(a) - Change of Control Agreement with Messrs. Benson and Ross [v] *10.17(b) - Amendment No. 1 to Change of Control Agreement with Mr. Benson [xi] *10.17(c) - Amendment No. 1 to Change of Control Agreement with Mr. Ross [xi] 11 - Statement re computation of per share earnings [xviii] 21 - Subsidiaries of MSC [xix] 23 - Consent of Independent Public Accountants ___ 27 - Financial Data Schedules [xix] 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 MGI's Registration Statement covering 9% Senior Subordinated Notes initially filed with the Commission on May 19, 1993 (Commission File No. 33-62928). [iii] 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). [iv] 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. [v] 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). 3 [vi] 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). [vii] 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). [viii] 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). [ix] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996 filed with the Commission on May 10, 1996 (Commission File No. 1-11014). [x] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996 filed with the Commission on November 13, 1996 (Commission File No. 1-11014). [xi] 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.) [xii] 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 (Commission File No. 1-11014). [xiii] 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 (Commission File No. 1-11014). [xiv] 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 (Commission File No. 333-50951). [xv] Incorporated by reference to MSC's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998 filed with the Commission on May 12, 1998 (Commission File No. 1-11014). [xvi] 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 (Commission File No. 1-11014). [xvii] 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 (Commission File No. 1-11014). [xviii] The requirements of this exhibit are met by Note 1 and Note 4 of Notes to Consolidated Financial Statements. [xix] Previously filed. * Indicates Management Contract or Compensatory Plan or Agreement required to be filed as an Exhibit to this form. 4 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 28, 1999 -------------------------- 5 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 3, 1999 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, 333-51401 and 333-68275. Minneapolis, Minnesota, June 28, 1999 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, 1998 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, 1998 and 1997 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, 1998 4 Statement of Net Assets Available for Benefits as of December 31, 1997 5 Statement of Changes in Net Assets Available for Benefits for the Year Ended December 31, 1998 6 Notes to Financial Statements 7 Schedule I - Item 27a - Schedule of Assets Held for Investment Purposes as of December 31, 1998 13 Schedule II - Item 27d - Schedule of Reportable Transactions for the Year Ended December 31, 1998 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, 1998 and 1997, and the related statement of changes in net assets available for benefits for the year ended December 31, 1998. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements 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, 1998 and 1997, and the changes in net assets available for benefits for the year ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were performed 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 the purpose 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. These supplemental schedules are the responsibility of the Plan's management. The supplemental schedules have been subjected to the auditing procedures applied in the audits 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 3, 1999 3
THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS As of December 31, 1998 AET Neuberger Franklin AET Founders Equity Templeton & Berman IDS New Small Cap Income Balanced Index Foreign Partners Dimensions Growth Fund II Fund Fund II Fund Trust Fund [Y] Fund ----------- ----------- ---------- ---------- ---------- ----------- ----------- Investments, at market value: Common/ collective trust funds $ 5,557,808 $ - $1,688,470 $ - $ - $ - $ - Mutual funds - 2,169,029 - 1,457,549 550,769 13,260,054 632,481 ----------- ----------- ---------- ---------- ---------- ----------- ----------- Total investments 5,557,808 2,169,029 1,688,470 1,457,549 550,769 13,260,054 632,481 ----------- ----------- ---------- ---------- ---------- ----------- ----------- Interest income receivable 629 381 421 215 108 1,890 186 Contributions receivable: Employee contributions 12,054 8,258 8,562 5,739 4,668 31,371 5,258 Employer contributions 215,652 28,991 18,999 15,341 7,937 80,582 8,561 ----------- ----------- ---------- ---------- ---------- ----------- ----------- Total contributions receivable 227,706 37,249 27,561 21,080 12,605 111,953 13,819 ----------- ----------- ---------- ---------- ---------- ----------- ----------- Participant loan repayments (withdrawals) 1,417 859 948 483 244 4,259 420 ----------- ----------- ---------- ---------- ---------- ----------- ----------- Total assets 5,787,560 2,207,518 1,717,400 1,479,327 563,726 13,378,156 646,906 Liabilities Administrative expenses payable 16,136 - - - - - - Interest payable - - - - - - - Note payable - - - - - - - ----------- ----------- ---------- ---------- ---------- ----------- ----------- Total liabilities 16,136 - - - - - - ----------- ----------- ---------- ---------- ---------- ----------- ----------- Net assets available for benefits $ 5,771,424 $ 2,207,518 $1,717,400 $1,479,327 $ 563,726 $13,378,156 $ 646,906 =========== =========== ========== ========== ========== =========== =========== Musicland Common Stock ------------------------ Loans to Allocated Unallocated Participants TOTAL ----------- ----------- ------------ ----------- Investments, at market value: Common/ collective trust funds $ - $ - $ - $ 7,246,278 Mutual funds 9,042,699 11,224,212 1,319,655 39,656,448 ----------- ----------- ----------- ----------- Total investments 9,042,699 11,224,212 1,319,655 46,902,726 ----------- ----------- ----------- ----------- Interest income receivable 499 - - 4,329 Contributions receivable: Employee contributions 6,932 - - 82,842 Employer contributions 43,938 1,594,599 - 2,014,600 ----------- ----------- ----------- ----------- Total contributions receivable 50,870 1,594,599 - 2,097,442 ----------- ----------- ----------- ----------- Participant loan repayments (withdrawals) 1,124 - (9,754) - ----------- ----------- ----------- ----------- Total assets 9,095,192 12,818,811 1,309,901 49,004,497 Liabilities Administrative expenses payable - - - 16,136 Interest payable - 594,851 - 594,851 Note payable - 6,998,239 - 6,998,239 ----------- ----------- ----------- ----------- Total liabilities - 7,593,090 - 7,609,226 ----------- ----------- ----------- ----------- Net assets available for benefits $ 9,095,192 $ 5,225,721 $ 1,309,901 $41,395,271 =========== =========== =========== ===========
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, 1997 AET Neuberger Franklin Stable Founders Equity Templeton & Berman IDS New Small Cap Value Balanced Index Foreign Partners Dimensions Growth Fund Fund Fund II Fund Trust Fund [Y] Fund ----------- ----------- ---------- ---------- ---------- ----------- ----------- Investments, at market value: Common/ collective trust funds $ 5,579,115 $ - $ 603,214 $ - $ - $ - $ - Mutual funds - 1,835,011 - 1,471,497 90,904 11,094,043 107,814 ----------- ----------- ---------- ---------- ---------- ----------- ----------- Total investments 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 $ 5,727,817 $ 1,977,757 $ 741,178 $1,479,608 $ 91,677 $11,131,792 $ 108,708 benefits =========== =========== ========== ========== ========== =========== =========== Musicland Common Stock ------------------------ Loans to Allocated Unallocated Participants TOTAL ----------- ----------- ------------ ----------- Investments, at market value: Common/ collective trust funds $ - $ - $ - $ 6,182,329 Mutual funds 3,863,113 6,100,965 914,999 25,478,346 ----------- ----------- ------------ ----------- Total investments 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 $ 3,868,659 $ (897,274) $ 919,297 $25,149,219 benefits =========== =========== =========== ===========
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, 1998 AET Neuberger Franklin Stable AET Founders Equity Templeton & Berman IDS New Small Cap Value Income Balanced Index Foreign Partners Dimensions Growth Fund Fund II Fund Fund II Fund Trust Fund [Y] Fund ----------- ----------- ---------- ---------- ---------- --------- ----------- -------- INVESTMENT INCOME: Interest and dividends $ - $ - $ 122,140 $ - $ 158,435 $ 13,781 $ 769,924 $ 10,453 Net gain (loss) on investments 267,054 37,915 137,405 298,715 (232,409) 1,347 2,224,403 (9,275) CONTRIBUTIONS: Employee 325,118 58,690 254,243 252,722 202,179 122,697 1,057,775 120,028 Employer 33,797 215,652 (81,875) (99,610) 27,230 14,088 143,033 15,196 INTERFUND TRANSFERS (5,771,670) 5,522,450 65,061 628,535 (7,257) 333,334 (1,073,628) 410,758 BENEFITS PAID TO PARTICIPANTS (502,877) (37,379) (183,162) (86,676) (141,059) (9,359) (742,554) (9,933) ADMINISTRATIVE EXPENSES (102,973) (38,347) (965) (821) (154) (3) (1,099) (8) INTEREST EXPENSE - - - - - - - - LOANS TO PARTICIPANTS, NET OF REPAYMENTS AND FORFEITURES 23,734 12,443 (83,086) (16,643) (7,246) (3,836) (131,490) 979 PRINCIPAL PMT ON LOAN FROM TMG/ RELEASED SHARES - - - - - - - - ----------- ---------- ---------- --------- ---------- -------- --------- -------- CHANGE IN NET ASSETS AVAILABLE FOR BENEFITS (5,727,817) 5,771,424 229,761 976,222 (281) 472,049 2,246,364 538,198 NET ASSETS AVAILABLE FOR BENEFITS AT BEGINNING OF YEAR 5,727,817 - 1,977,757 741,178 1,479,608 91,677 11,131,792 108,708 ----------- ---------- ---------- ---------- ---------- -------- ----------- -------- NET ASSETS AVAILABLE FOR BENEFITS AT END OF YEAR $ - $5,771,424 $2,207,518 $1,717,400 $1,479,327 $563,726 $13,378,156 $646,906 ============ ========== ========== ========== ========== ======== =========== ======== Musicland Common Stock ------------------------- Loans to Allocated Unallocated Participants TOTAL ------------ ----------- ------------ ---------- INVESTMENT INCOME: Interest and dividends $ - $ - $ 118,329 $ 1,193,062 Net gain (loss) on investments 4,847,259 5,892,385 - 13,464,799 CONTRIBUTIONS: Employee 214,582 - - 2,608,034 Employer 79,147 1,594,599 - 1,941,257 INTERFUND TRANSFERS (219,864) 230,610 (118,329) - BENEFITS PAID TO PARTICIPANTS (458,722) - (48,734) (2,220,455) ADMINISTRATIVE EXPENSES (1,425) - - (145,795) INTEREST EXPENSE - (594,850) - (594,850) LOANS TO PARTICIPANTS, NET OF REPAYMENTS AND FORFEITURES (234,193) - 439,338 - PRINCIPAL PMT ON LOAN FROM TMG/ RELEASED SHARES 999,749 (999,749) - - ------------ ----------- ---------- ----------- CHANGE IN NET ASSETS AVAILABLE FOR BENEFITS 5,226,533 6,122,995 390,604 16,246,052 NET ASSETS AVAILABLE FOR BENEFITS AT BEGINNING OF YEAR 3,868,659 (897,274) 919,297 25,149,219 ------------ ----------- ---------- ----------- NET ASSETS AVAILABLE FOR BENEFITS AT END OF YEAR $ 9,095,192 $ 5,225,721 $1,309,901 $41,395,271 ============ =========== ========== ===========
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 the 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. 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. 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 (8.5% at December 31, 1997 and 8.25% at December 31, 1998). 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. 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 7 THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN NOTES TO FINANCIAL STATEMENTS (Continued) 1. Description of the Plan (Continued) limit. Annual salary reduction contributions are limited to $9,500 for nonhighly compensated employees, and 4% of the annual base pay up to 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 the Trustee. As of December 31, 1998, the investment funds were as follows: 1. American Express Trust ("AET") Income Fund II, 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. 7. Franklin Small Cap Growth Fund, an aggressive fund that invests primarily in stocks of small capitalization growth companies. 8 THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN NOTES TO FINANCIAL STATEMENTS (Continued) 1. Description of the Plan (Continued) 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, 1997, the investment funds included all of the funds described above, except for the AET Income Fund II, which replaced the Stable Value Fund in November 1998. 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. 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. 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 the Company matching contributions over a seven year graduated vesting schedule. Participants will be 100% vested in the 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. 9 THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN NOTES TO FINANCIAL STATEMENTS (Continued) 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, 1998 and 1997, 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 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 invesments was as follows for the year ended December 31, 1998: Net realized gain on sale of investments $ 1,210,979 Net unrealized gain 12,253,820 ------------- Net gain on investments $ 13,464,799 ============= 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. Management believes that no significant concentration of credit risk exists within each fund at December 31, 1998. 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 10 THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN NOTES TO FINANCIAL STATEMENTS (Continued) 2. Summary of Significant Accounting Policies (Continued) costs of the Plan, except for a $50 loan processing fee which is paid by participants. For the year ended December 31, 1998, the Company paid administrative costs of $5,608 for the Plan. RECLASSIFICATIONS: Certain 1997 amounts have been reclassified to conform to the 1998 presentations. These reclassifications had no effect on net assets available for benefits as previously reported. 3. Reconciliation of Financial Statements to Form 5500 As of December 31, 1998, the Plan had $4,929,686 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. 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, 1998: December 31, 1998 1997 ------------- -------------- Net assets available for benefits per the financial statements $ 41,395,271 $ 25,149,219 Accrued benefit payments (4,929,686) (4,722,264) ------------- -------------- Net assets available for benefits per the Form 5500 $ 36,465,585 $ 20,426,955 ============= ============== The following is a reconciliation of benefits paid to participants per the financial statements to the Form 5500: Year ended December 31, 1998 ------------------ Benefits paid to participants per the financial statements $ 2,220,455 Add: Amounts currently payable at December 31, 1998 4,929,686 Less: Amounts currently payable at December 31, 1997 (4,722,264) ----------------- Benefits paid to participants per the Form 5500 $ 2,427,877 ================= 11 THE MUSICLAND GROUP'S CAPITAL ACCUMULATION PLAN NOTES TO FINANCIAL STATEMENTS (Continued) 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 Schedule I 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, 1998 Number Market Description of Investment of Units Cost Value - ----------------------------------- -------------- ----------- ------------ AET Income Fund II* 301,367 $ 5,520,284 $ 5,557,808 Founders Balanced Fund 177,935 2,134,162 2,169,029 AET Equity Index Fund II* 50,848 1,414,533 1,688,470 Templeton Foreign Fund 173,724 1,685,312 1,457,549 Neuberger & Berman Partners Trust 30,480 549,888 550,769 IDS New Dimensions Fund [Y]* 459,700 11,681,364 13,260,054 Franklin Small Cap Growth Fund 28,023 616,473 632,481 Musicland Common Stock* 1,113,500 9,778,781 20,266,911 Loans to Participants, at interest rates ranging from 8% to 12% 1,319,655 ------------ TOTAL INVESTMENTS $ 46,902,726 ============ * 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, 1998 Number of Number Value of Value of Cost of Net Gain Description of Investment Purchases of Sales Purchases Sales Assets Sold (Loss) - --------------------------------- ----------- -------- ----------- ----------- ------------ ----------- Stable Value Fund 80 126 $ 1,996,455 $6,729,406 $6,394,811 $ 334,595 AET Income Fund II* 11 13 5,653,396 133,510 133,112 398 AET Equity Index Fund II* 123 81 1,097,370 309,234 265,409 43,825 Neuberger Berman Partners Trust 112 41 594,201 135,616 143,185 (7,569) IDS New Dimensions Fund [Y]* 83 155 2,016,538 2,073,704 2,001,535 72,169 Musicland Common Stock* 88 255 1,115,544 1,548,181 758,961 789,220
* Party in interest to the Plan. 14 -----END PRIVACY-ENHANCED MESSAGE-----