-----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, OKQmo4zXI1LrHGcDhmUyTGdoqAvwY3On/3tNS/78z0YrKTFdQn93S0+TrQ8W8zd/ htZIyU11mREAQdIjkAH8cw== 0000912057-96-006350.txt : 19981230 0000912057-96-006350.hdr.sgml : 19981230 ACCESSION NUMBER: 0000912057-96-006350 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960412 DATE AS OF CHANGE: 19981228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MUSICLAND STORES CORP CENTRAL INDEX KEY: 0000832995 STANDARD INDUSTRIAL CLASSIFICATION: 5731 IRS NUMBER: 411623376 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11014 FILM NUMBER: 96546439 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-K405 1 10-K405 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 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 [FEE REQUIRED] For the fiscal year ended December 31, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES -- EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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: NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS 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 15, 1996 was $103,183,757, based on the closing price of $3 3/8 per common share 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 March 15, 1996 was 34,296,956. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of stockholders to be held May 7, 1996 (the "Proxy Statement") are incorporated by reference into Part III. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- Exhibit Index on sequential pages through . This Document consists of pages. PART I ITEM 1. BUSINESS GENERAL The Company operates principally in the United States and is engaged in one industry segment as a specialty retailer of home entertainment products, including prerecorded music, prerecorded video cassettes, books, computer software and related accessories. The Company's two principal business categories are non-mall based full-media superstores operating under the names Media Play and On Cue and mall based music and video sell-through stores operating under the names Sam Goody, Musicland and Suncoast Motion Picture Company ("Suncoast"). The Company is the leading specialty retailer of prerecorded music in the United States and is the only full-media specialty retailer of books, computer software, prerecorded music and video products. At December 31, 1995, the Company operated 1,496 stores in 49 states, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands and the United Kingdom. During the past several years, the Company has pursued an aggressive expansion strategy. For the years ended December 31, 1995, 1994 and 1993, the Company had net increases of 110, 135 and 116 stores, respectively. In 1995, the Company opened 175 stores and closed 65 stores. The number and total square footage of non-mall stores has increased significantly since their introduction in 1992. At December 31, 1995, the Company operated 242 non-mall stores with total square footage of 5.3 million, or 54% of total store square footage, and 1,232 mall stores with total square footage of 4.5 million, or 45% of total store square footage. For the year ended December 31, 1995, the Company had consolidated revenues of $1.7 billion, including $0.5 billion from non-mall stores and $1.2 billion from mall stores. In order to support this expansion, the Company opened a new 715,000 square foot distribution center in Franklin, Indiana in March 1995. This distribution center has more than double the combined capacity of the Company's distribution center in Minneapolis, Minnesota and the former facility in Edison, New Jersey, which was closed in May 1995. The new location provides a strategic geographic advantage which promotes easy access to the Company's vendor base and is close to a majority concentration of the Company's stores. The Company plans to slow expansion in 1996 and focus on improving performance in its existing stores. The new stores expected to be opened in 1996 will include approximately 10 Media Play stores, 10 On Cue stores, 4 music stores and 10 Suncoast stores. The Company plans to close approximately 50 non-productive mall based music stores in 1996, the majority of which are at or near the end of their lease terms. In addition, during the first quarter of 1996, the Company began implementation of a program designed to improve profitability and increase inventory turnover. A pretax restructuring charge of $35 million was recorded in the first quarter of 1996 to reflect anticipated costs associated with the closing of 56 underperforming stores and certain facilities. The planned closings are expected to be completed within a year and include 36 mall stores and 20 non-mall stores. Assets from closed stores will be redeployed either to new stores or to existing stores that are more profitable. 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 herein as the "Company." 1 NON-MALL STORES MEDIA PLAY STORES. Media Play stores are full-media, low-price superstores in freestanding and strip mall locations averaging 49,000 square feet in size. These family oriented stores offer a broad merchandise assortment appealing to all ages, with up to 60,000 prerecorded music titles, 80,000 book titles, 15,000 prerecorded video titles, 2,000 computer software programs, 1,500 magazine titles and 200 titles of comic books, complemented by other media and related products including video games, greeting cards and licensed music, movie and sports apparel. Stores carry up to 175,000 SKU's of merchandise. Media Play stores provide a pleasing and exciting shopping environment featuring easy access to all merchandise categories, lounge areas for relaxed browsing, convenient customer service areas, live performances and other entertainment activities, children's play areas, coffee bars and popcorn stands. More aggressive marketing efforts are planned for 1996 that will include in-store events for new releases, celebrity visits, children's reading clubs, poetry groups, new video release screenings and in-store trials of new software. The first Media Play store opened in Rockford, Illinois in November 1992. The Company opened 43 Media Play stores in 1995 and had 89 Media Play stores in 22 states in operation at December 31, 1995. The total square footage of Media Play stores was approximately 4.4 million, or 44% of the Company's total store square footage at December 31, 1995. The Company plans to open approximately 10 Media Play stores in 1996. As part of the Company's effort to improve store productivity, these new stores will be smaller in size, averaging approximately 44,000 square feet. ON CUE STORES. On Cue stores are full-media stores for smaller markets of between 10,000 and 30,000 people and average 6,300 square feet in size. The stores emphasize competitive prices on new releases and everyday low prices on catalog titles. On Cue stores are promoted through highway billboards, direct mail, cable television and local radio. Customer loyalty is rewarded through such programs as in-store sweepstakes and unadvertised in-store specials. The stores offer prerecorded music, books, prerecorded video, computer software, accessories and entertainment related licensed products, such as apparel. Most stores carry approximately 28,000 SKU's of merchandise. On Cue customers have access to over 100,000 home entertainment titles through the Company's special order program. The first On Cue store opened in February 1992. The Company opened 76 On Cue stores in 1995 and operated 153 On Cue stores in 28 states at December 31, 1995. The total square footage of On Cue stores was approximately 1.0 million, or 10% of the Company's total store square footage at December 31, 1995. The Company plans to open 10 On Cue stores in 1996. MALL STORES MUSIC STORES. The mall based music stores are operated principally under the names Sam Goody and Musicland. At December 31, 1995, there were 820 music stores in 49 states, the District of Columbia, the Commonwealth of Puerto Rico and the Virgin Islands. These stores offer a full line of music, video and home entertainment products through stores averaging 4,200 square feet and ranging from 1,000 square feet to 30,000 square feet in size. The total square footage of music stores was approximately 3.5 million, or 35% of the Company's total store square footage at December 31, 1995. The Company's mall based music stores have been experiencing increased competition from non-mall discount stores and consumer electronics superstores that have recently added or expanded prerecorded music and video sell-through as product categories. These non-mall competitors are expanding into new markets and offer low prices on prerecorded music and video products. The Company has initiated several strategies to strengthen the mall based music stores. In recent years, the Company has focused on opening larger combo stores principally in malls and downtown locations. The combo stores combine a full line of both music and video products and offer computer 2 and entertainment software. When compared to traditional mall based music stores, "combo" stores are larger and more prominent in the mall and carry a broader inventory of catalog product, including substantial classical offerings and sell-through video, to appeal to the high volume purchaser. In 1995, several new in-store presentation and assortment programs were introduced to better tailor merchandise for local preferences and the number of in-store listening posts was increased to improve customer service. In 1996, more competitive everyday prices will be offered on certain catalog titles along with an intensified focus on customer service. The Company plans to build excitement through focused marketing programs. More than 500,000 mall based music store customers participate in the REPLAY frequent shopper program designed to promote customer loyalty. In addition, the Company owns "REQUEST," a music and video entertainment news magazine, which is distributed in the music stores and at limited magazine stand outlets. The magazine has an audited monthly circulation of 966,000 and an estimated monthly readership of 2.5 million. Growth of the mall based music division has been curtailed in order to focus on streamlining the existing store base and improving profitability. In 1995, the Company opened 15 new stores and closed 64 stores. Additionally, the names of certain Musicland stores were changed to Sam Goody. In 1996, the Company plans to open 4 new music stores and close approximately 50 non-productive stores, the majority of which are at or near the end of their lease terms. SUNCOAST MOTION PICTURE COMPANY STORES. The mall based Suncoast stores primarily offer sell-through video and average 2,450 square feet in size. The typical Suncoast store features 8,500 titles of prerecorded video cassettes along with movie and video related apparel and gift products, other accessories, blank video tapes, laser disks and special order prerecorded video cassettes. Most of the movies are priced at less than $20 and more than half sell for less than $15. Each store also offers a wide assortment of feature films and videos for less than $10. Suncoast's marketing programs include sweepstakes, instant rebates, phone card promotions and exclusive merchandise events featuring recent video releases. Suncoast has been testing a customer loyalty program, "Producers' Club," in certain of its stores. At December 31, 1995, there were 412 Suncoast stores in 46 states, the District of Columbia and the Commonwealth of Puerto Rico. In 1995, the Company opened 34 new Suncoast stores. The total square footage of Suncoast stores was approximately 1.0 million, or 10% of the Company's total store square footage at December 31, 1995. The Company plans to open approximately 10 Suncoast stores in 1996. INTERNATIONAL STORES The Company operates music stores in the United Kingdom under the name Sam Goody. The first two stores in the United Kingdom were opened in 1990. In 1995, the Company opened seven new stores and closed one store. At December 31, 1995, the Company had 21 stores in operation averaging approximately 2,400 square feet in size. The Company plans to open three stores in the United Kingdom in 1996. 3 PRODUCTS The following table shows the sales and percentage of total sales attributable to each product group.
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------- 1995 1994 1993 ----------------------- ----------------------- ----------------------- SALES % SALES % SALES % ---------- ----------- ---------- ----------- ---------- ----------- (DOLLARS IN MILLIONS) Prerecorded music: Compact discs............................ $ 610.1 35.4% $ 534.2 36.1% $ 408.1 34.5% Audio cassettes and other................ 284.9 16.5 314.7 21.3 327.5 27.7 ---------- ----- ---------- ----- ---------- ----- Total.................................. 895.0 51.9 848.9 57.4 735.6 62.2 Prerecorded video cassettes................ 505.9 29.4 413.5 28.0 312.8 26.5 Books...................................... 106.6 6.2 56.5 3.8 15.0 1.3 Computer software, accessories and apparel................................... 215.1 12.5 159.9 10.8 118.3 10.0 ---------- ----- ---------- ----- ---------- ----- Total................................ $ 1,722.6 100.0% $ 1,478.8 100.0% $ 1,181.7 100.0% ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
PRERECORDED MUSIC. The Company's non-mall based Media Play and On Cue stores and mall based music stores offer assortments of compact discs and prerecorded audio cassettes purchased from all major manufacturers. Media Play and On Cue stores carry up to 60,000 and 13,000 titles of prerecorded music, respectively. Music stores, other than combo stores, carry from 5,000 to 20,000 titles, while combo stores carry from 15,000 to 40,000 titles, depending upon store size and location. 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. The compact disc product category has grown significantly over the last few years, as household penetration of compact disc players has risen, while sales of prerecorded audio cassettes have declined. According to an industry source, an estimated 48% of homes in the United States owned compact disc players at the end of 1995. PRERECORDED VIDEO CASSETTES. The demand for movies and other prerecorded video cassettes has increased in direct response to the penetration of video cassette recorders into most homes in the United States, the lowering of prices and the growing consumer acceptance of owning videos. Prerecorded video cassettes are for sale at all of the Suncoast, Media Play and On Cue stores and at substantially all of the music stores. Suncoast stores carry 5,000 to 15,000 title selections. Media Play stores and On Cue stores typically carry up to 15,000 and 3,500 titles of prerecorded video cassettes, respectively. Music stores, other than combo stores, carry approximately 2,000 title selections while combo stores carry 5,000 to 14,000 title selections. Management, based on industry information, believes the demand for video cassettes will continue to increase, causing sales of prerecorded video cassettes to be a growing component of the Company's total revenues. Merchandising of digital video discs ("DVD"), a new video technology, is expected to begin in late 1996. DVD offers the consumer laser technology in a smaller disc format with superior picture quality and audio fidelity. The Company believes that in the next few years, sales of DVD players will begin to replace sales of laserdisc players and VCR's as the new technology becomes widely available. Management expects to capitalize on the release of DVD players by offering software as soon as it is available. BOOKS. The Company began selling books with the introduction of Media Play and On Cue stores in 1992. The Company believes that the market for sales of books in retail outlets presents a growth opportunity for the Company. Media Play and On Cue stores typically carry up to 80,000 and 12,000 titles of books, respectively. COMPUTER SOFTWARE, ACCESSORIES AND APPAREL. This product category includes computer and entertainment software, brand name blank audio and video tapes, storage containers, carrying cases 4 and guitar and piano sheet music, as well as entertainment related apparel, posters and various other items. Movie and artist related accessories and apparel are highly influenced by the trends and fads surrounding popular movies, actors and artists. The Company's stores also carry a limited variety of portable electronic equipment such as audio cassette players, radios and stereo audio cassette/radios, generally sold at retail prices of approximately $200 or less. SUPPLIERS Substantially all of the home entertainment products (other than books) sold by the Company are purchased directly from manufacturers. The Company purchases inventory for its stores from approximately 2,500 suppliers. Approximately 46% of purchases in 1995 were made from the six largest suppliers. 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 has not experienced difficulty obtaining satisfactory sources of supply and believes that adequate sources of supply will continue to exist. MARKETING The Company uses a high level of advertising and promotions in marketing its products. The Company's major suppliers offer cooperative advertising support and provide funds for the placement and position of product. A significant portion of the Company's total advertising costs have been funded by suppliers through these programs. The Company advertises principally through newspaper inserts. Because of the high concentration of its mall stores in major metropolitan areas such as New York, Chicago and Los Angeles, the Company has been able to expand its radio and local television advertising in those areas. The national distribution of the Company's mall stores has made it practical to advertise in certain national magazines and on nationally syndicated radio programs and cable television, including MTV. STORE OPERATIONS Media Play stores typically are managed by a general manager, an operations manager and four to six department managers. On Cue, music and Suncoast stores are managed by a store manager and one to three assistant 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. COMPETITION The retail sale of prerecorded music and video, books, computer software and related accessories is highly competitive. The Company's stores continue to face increased competition from non-mall discount stores, consumer electronics superstores and other music, video and book specialty retailers expanding into non-mall multimedia superstores of their own. The low prices offered by these non-mall stores create intense price competition and adversely affect the performance of both the Company's non-mall and mall stores. The Company anticipates that the challenging retail sales environment will continue into the foreseeable future. Some or all of these home entertainment products can also be purchased or rented through other mall retail chains, warehouse clubs, individual stores, video rental stores, grocery, convenience and drug stores, television mail order offers and mail order clubs. The Company believes that its ability to compete successfully depends on its ability to secure and maintain attractive and convenient locations, manage merchandise efficiently, offer broad product selections at competitive prices, provide effective management and control operating costs. SEASONALITY Approximately 40% of the Company's annual revenues are realized during the fourth quarter and all of the net earnings occur in the fourth quarter. Quarterly results are affected by the timing of holidays, new store openings and sales performance of existing stores. See Note 15 of Notes to Consolidated Financial Statements. TRADEMARKS AND SERVICE MARKS The Company operates its stores under various names, including "Media Play," "On Cue," "Sam Goody," "Musicland," and "Suncoast Motion Picture Company," which have become important to the 5 Company's business as a result of its advertising and promotional activities. These names, along with a number of others, including "Request," "REPLAY," "Readwell's," "Excelsior" and "Channel 1000," have been or are being registered with the U.S. Patent and Trademark Office. The Company intends to continue to use these names and marks and may use new names for specific stores depending on the type of store and its location. PERSONNEL As of January 24, 1996, the Company employed approximately 17,000 employees, excluding temporary employees. Hourly employees in the Company's Minneapolis distribution center and at 18 of its stores are represented by unions. 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 has its corporate headquarters and a distribution facility in Minneapolis, Minnesota. These facilities, which are owned by the Company, consist of two sites, one with office space of approximately 94,000 square feet on approximately 5.4 acres of land and a second with approximately 400,000 square feet of distribution space and approximately 113,000 square feet of office space on approximately 20.7 acres of land. The Company's primary distribution facility, a 715,000 square foot distribution facility located in Franklin, Indiana, is under an operating lease that expires in 1999 with a one year renewal option. The lease contains purchase options at the end of the original and renewal periods. STORE LEASES. All stores are under operating leases with various remaining terms through the year 2017. The leases have terms ranging from 3 to 25 years. Leases typically provide for a fixed minimum rental, payable monthly, plus a percentage of gross receipts in excess of certain sales levels. The following table lists the number of leases due to expire in each fiscal year, excluding renewal options. 1996................... 74 2001................... 185 1997................... 89 2002................... 109 1998................... 134 2003................... 145 1999................... 194 2004................... 131 2000................... 200 2005 and thereafter.... 235
The Company expects that, as these current leases expire, in most cases it should be able to obtain either renewal leases, if desired, or new leases at equivalent or better locations. ITEM 3. LEGAL PROCEEDINGS The Company is a party to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, all such matters are without merit or involve such amounts that unfavorable disposition will not have a material impact 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 fiscal year covered by this report. 6 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 8, 1996, MSC had approximately 540 holders of record of its common stock. MSC has never paid cash dividends on its capital stock and does not plan to pay cash dividends in the foreseeable future. The current policy of the Board of Directors of MSC is to reinvest earnings in the operation and expansion of the business of the Company. The terms of the Company's credit agreement and the indenture for the 9% senior subordinated notes restrict the amount of cash dividends that may be paid by MSC. See Note 3 of Notes to Consolidated Financial Statements. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data for the periods indicated. This information should be read in conjunction with the Consolidated Financial Statements and related notes contained in Item 14 herein and "Management's Discussion and Analysis of Results of Operations and Financial Condition" contained in Item 7 herein. The goodwill write-down in 1995, the public offerings of subordinated notes and common stock and early redemption of debt in 1993 and initial public offering of common stock and early redemption of debt and senior preferred stock in 1992 affect comparability of the Selected Financial Data. See Notes 2 and 9 of Notes to Consolidated Financial Statements. No cash dividends have ever been declared on the common stock of MSC. 7 SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND STORE DATA)
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 1995 1994 1993 1992 1991 ------------- ------------- ------------- ------------- ----------- STATEMENT OF EARNINGS DATA: Sales............................................. $ 1,722,572 $ 1,478,842 $ 1,181,658 $ 1,020,508 $ 932,231 Gross profit...................................... 606,070 542,199 470,951 414,167 372,591 Selling, general and administrative expenses...... 525,213 450,919 365,311 319,713 287,010 Depreciation and amortization..................... 45,531 37,243 29,057 24,715 23,293 Goodwill write-down............................... 138,000 -- -- -- -- ------------- ------------- ------------- ------------- ----------- Operating income (loss)........................... (102,674) 54,037 76,583 69,739 62,288 Interest expense.................................. 27,881 19,555 19,831 24,418 42,400 ------------- ------------- ------------- ------------- ----------- Earnings (loss) before income taxes and extraordinary charges............................ (130,555) 34,482 56,752 45,321 19,888 Income taxes...................................... 5,195 17,100 25,400 21,100 10,850 Senior preferred stock dividends.................. -- -- -- 703 1,326 ------------- ------------- ------------- ------------- ----------- Earnings (loss) before extraordinary charges (1).............................................. $ (135,750) $ 17,382 $ 31,352 $ 23,518 $ 7,712 ------------- ------------- ------------- ------------- ----------- ------------- ------------- ------------- ------------- ----------- Earnings (loss) per common share (1).............. $ (4.00) $ 0.51 $ 1.03 $ 0.83 $ 0.38 ------------- ------------- ------------- ------------- ----------- ------------- ------------- ------------- ------------- ----------- Weighted average number of common shares outstanding...................................... 33,898 34,238 30,548 28,398 20,045 ------------- ------------- ------------- ------------- ----------- ------------- ------------- ------------- ------------- ----------- DECEMBER 31, ----------------------------------------------------------------------- 1995 1994 1993 1992 1991 ------------- ------------- ------------- ------------- ----------- BALANCE SHEET DATA: Working capital (deficit)......................... $ (7,719) $ (27,690) $ 21,628 $ (68,455) $ (81,437) Total assets...................................... 996,957 1,079,632 905,682 689,349 629,334 Long-term debt, including current maturities...... 110,000 110,000 135,000 103,541 233,541 Redeemable senior preferred stock................. -- -- -- -- 11,885 Stockholders' equity.............................. 195,811 340,276 322,594 223,646 71,940 Book value per common share (2)................... 5.71 9.94 9.42 7.42 3.59 STORE DATA: Total store square footage (in millions).......... 9.9 7.2 4.9 3.8 3.4 Store count at end of year: Media Play stores............................... 89 46 13 1 -- On Cue stores................................... 153 77 32 13 -- Music stores.................................... 820 869 875 861 816 Suncoast stores................................. 412 378 320 252 220 Readwell's store................................ 1 1 1 -- -- United Kingdom stores........................... 21 15 10 8 5 ------------- ------------- ------------- ------------- ----------- Total......................................... 1,496 1,386 1,251 1,135 1,041 ------------- ------------- ------------- ------------- ----------- ------------- ------------- ------------- ------------- -----------
- - ------------------------ (1) Amounts for the years ended December 31, 1993 and 1992 are before extraordinary charges from early redemption of debt, net of income tax benefit, of $3,900, or $0.13 per share, and $8,440, or $0.30 per share, respectively. Net earnings applicable to common stockholders for the years ended December 31, 1993 and 1992 were $27,452, or $0.90 per share, and $15,078, or $0.53 per share, respectively. (2) Based on the number of common shares outstanding at year end. 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS GENERAL. The Company is engaged in one industry segment as a specialty retailer of home entertainment products through divisions operating principally in two business categories: non-mall based full-media, low-price superstores under the names Media Play and On Cue and mall based music and video sell-through stores under the names Sam Goody, Musicland and Suncoast. The following table presents sales, percentage increases, comparable store sales increases, the number of stores open at year end and total store square footage at year end for the two principal business categories and in total for the Company for the last three years.
YEARS ENDED DECEMBER 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ (DOLLARS AND SQUARE FOOTAGE IN MILLIONS) SALES: Non-mall................................................... $ 516.7 $ 247.9 $ 54.4 Mall....................................................... 1,187.0 1,217.0 1,116.9 Total (1)................................................ 1,722.6 1,478.8 1,181.7 PERCENTAGE CHANGE FROM PRIOR YEAR: Non-mall................................................... 108.5% 355.6% 981.9% Mall....................................................... (2.5) 9.0 11.0 Total (1)................................................ 16.5 25.1 15.8 COMPARABLE STORE SALES CHANGE FROM PRIOR YEAR: Non-mall................................................... 4.8% 33.3% 27.6% Mall....................................................... (4.9) 3.1 4.5 Total (1)................................................ (3.2) 4.6 4.6 NUMBER OF STORES OPEN AT YEAR END: Non-mall................................................... 242 123 45 Mall....................................................... 1,232 1,247 1,195 Total (1)................................................ 1,496 1,386 1,251 TOTAL STORE SQUARE FOOTAGE AT YEAR END: Non-mall................................................... 5.3 2.7 0.8 Mall....................................................... 4.5 4.4 4.1 Total (1)................................................ 9.9 7.2 4.9
- - ------------------------ (1) The totals include other divisions which individually are not significant. SALES. The superstore expansion accounted for most of the increase in total sales in 1995. The number of non-mall stores nearly doubled in 1995, increasing from 123 stores at December 31, 1994 to 242 stores at December 31, 1995. Non-mall stores have grown to 54% of the Company's total store square footage at December 31, 1995. Comparable store sales in 1995 were adversely impacted by weak sales during the fourth quarter coupled with aggressive price competition. Sales of music product were particularly soft due to a lack of strong releases in the latter part of the year. Comparable store sales of mall stores in 1995 were negatively impacted by increased competition from non-mall stores and weak music sales. New store openings and increases in total store square footage contributed to most of the sales growth in 1994. The superstore comparable store sales growth in 1994 was driven by the maturation of stores in the superstore divisions. The growth of comparable store sales in the mall-based divisions resulted primarily from the lowering of prices and increased promotional pricing as part of the Company's strategy to protect and build market share in the mall-based stores. 9 The Company's stores continue to face increased competition from non-mall discount stores, consumer electronics superstores and other music, video and book specialty retailers expanding into non-mall multimedia superstores of their own. The low prices offered by these non-mall stores create intense price competition and adversely affect the performance of both the Company's non-mall and mall stores. The Company anticipates that the challenging retail sales environment will continue into the foreseeable future. COMPONENTS OF EARNINGS. The following table sets forth certain operating results as a percentage of sales for the last three years.
YEARS ENDED DECEMBER 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Gross profit............................ 35.2% 36.7% 39.9% Selling, general and administrative expenses............................... 30.5 30.5 30.9 Operating income before depreciation, amortization and goodwill write-down... 4.7 6.2 8.9 Operating income (loss)................. (6.0) 3.7 6.5
GROSS PROFIT. The increase in sales from the low-price non-mall stores relative to total Company sales accounted for substantially all of the decrease in the gross profit rate in 1995 and approximately half of the decrease in the gross profit rate in 1994. The balance of the gross profit rate decrease in 1994 was primarily attributable to the increased promotional pricing in mall stores, most of which occurred during the fourth quarter. The Company also experienced distribution capacity constraints during the 1994 Christmas season which required some inventory to be purchased at a higher cost from one stop distributors who deliver directly to the stores. The Company expects that the gross profit rate will continue to decline in 1996 as revenues from non-mall stores increase as a percentage of total sales and the Company places increased emphasis on promotional pricing and low-price marketing strategies. The gross profit decline is expected to be partially offset by lower operating expenses in the non-mall stores, principally related to occupancy costs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses as a percentage of sales of 30.5% in 1995 remained flat compared to 1994 because of the weak comparable store sales growth and the impact of $13 million of store opening expenses. The 1995 expense includes a net reduction to expense of $3.4 million related to two nonrecurring items. The Company recorded income of $8.8 million from the termination of certain service and business development agreements and a charge of $5.4 million for the closing of an additional 35 mall based music stores. Expenses in 1995 also included approximately $1.4 million related to costs associated with the opening of the new distribution center in Franklin, Indiana opened in March 1995. Selling, general and administrative expenses as a percentage of sales decreased to 30.5% in 1994 from 30.9% in 1993. This improvement was attributable to the lower cost structure of non-mall stores, principally related to occupancy costs. The 1994 expense includes store opening expenses of approximately $11 million and a charge of approximately $3 million for the additional cost of closing facilities and changing the name of certain Musicland stores to Sam Goody. The Company expects to obtain cost reductions with the Franklin distribution center, which has more than double the combined capacity of the Company's distribution center in Minneapolis, Minnesota and the former facility in Edison, New Jersey, which was closed in May 1995. These cost reductions may be offset by contingent rentals on the Franklin distribution facility, which fluctuate based upon changes in certain interest rates and the Company's credit rating. The Company also anticipates further improvements in expenses as a percentage of sales from the lower cost structure of the non-mall stores as the existing stores mature and realize comparable store sales growth. 10 GOODWILL WRITE-DOWN AND ADOPTION OF NEW ACCOUNTING STANDARD. During the third quarter of 1995, the Company adopted Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("Statement No. 121"), issued in March 1995. In August 1995, in connection with the adoption of Statement No. 121, the Company recorded a goodwill write-down of $138 million, or $4.07 per share for the year ended December 31, 1995. This write-down reduced goodwill amortization by $1.4 million, or $0.04 per share, in 1995, and will reduce future goodwill amortization by $4.2 million, or $0.13 per share, annually. Most of the goodwill was established in conjunction with the 1988 leveraged buyout of The Musicland Group, Inc. by Musicland Stores Corporation. At that time, nearly all of the Company's stores were mall based music stores. The carrying values of long-lived assets, primarily goodwill and property, of the music division were reviewed for recoverability and possible impairment because of recent developments. Since the beginning of 1995, the music division has been experiencing sales declines. These sales declines coincide with general declines in customer traffic in malls and an increase in traffic at high-volume, low-price superstores. While the mall based music stores have responded with increased promotional pricing and lower prices, they are at a competitive disadvantage to non-mall stores because of their higher cost structure, principally related to occupancy costs. The Company updated its operating projections for the music division during the third quarter of 1995 to reflect the continued weak retail environment and competitive pricing. The sum of the projected undiscounted future cash flows over the remaining goodwill amortization period was less than the carrying amount of goodwill, which indicated impairment had occurred. The amount of goodwill impairment was determined from a range of values of the music division developed from the operating projections and future discounted cash flows. See Note 2 of Notes to Consolidated Financial Statements. INTEREST EXPENSE. The components of interest expense for the last three years are as follows:
YEARS ENDED DECEMBER 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- (IN MILLIONS) Interest on revolver.................... $ 17.0 $ 7.4 $ 4.6 Interest on term loan................... -- 1.1 2.6 Interest on subordinated debt........... 9.9 9.9 11.3 Other interest, net..................... 1.0 1.2 1.3 ----- ----- ----- $ 27.9 $ 19.6 $ 19.8 ----- ----- ----- ----- ----- -----
Higher average outstanding borrowings on the revolver increased interest expense by $7.9 million in 1995 and $1.5 million in 1994. The remainder of the increase in revolver interest expense was caused by higher interest rates. For the years ended December 31, 1995, 1994 and 1993, the weighted average revolver borrowings were $254.0 million, $128.6 million and $97.3 million, respectively, and the weighted average interest rates on the revolver were 7.1%, 6.4% and 5.3%, respectively. Interest expense on the term loan, which was repaid in October 1994, decreased primarily as a result of reductions in the principal balance. Interest on subordinated debt was higher in 1993 because of the issuance of $110 million of 9% subordinated notes and the redemption of $53.5 million of 14 3/4% subordinated debentures in 1993. Other interest expense consists primarily of amortization of debt issuance costs. In the first quarter of 1996, Moody's Investor's Service, Inc. and Standard & Poor's Corporation lowered the Company's corporate credit rating and the rating of its $110 million senior subordinated notes. The lower credit rating will increase the interest rate on the Company's revolver borrowings by 0.625%. This downgrade occurred as a result of recent developments that include the weak retailing environment coupled with the Company's increased capital requirements because of the aggressive expansion of non-mall stores. See "Liquidity and Capital Resources." 11 INCOME TAXES. The Company's effective income tax rates of (4.0%) in 1995, 49.6% in 1994 and 44.8% in 1993 vary from the Federal statutory rate due to goodwill amortization and write-down, both of which are nondeductible, and state income taxes. SEASONALITY. The Company's business is highly seasonal, with approximately 40% of the annual revenues and all of the net earnings generated in the fourth quarter. See Note 15 of Notes to Consolidated Financial Statements for quarterly financial data. RECENTLY ISSUED ACCOUNTING STANDARDS. Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement No. 123"), issued in October 1995 and effective for fiscal years beginning after December 15, 1995, encourages, but does not require, a fair value based method of accounting for employee stock options or similar equity instruments. It also allows an entity to elect to continue to measure compensation cost under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), but requires pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. The Company expects to adopt Statement No. 123 in 1996. While the Company is still evaluating Statement No. 123, it currently expects to elect to continue to measure compensation cost under APB No. 25 and comply with the pro forma disclosure requirements. If this election is made, this statement will have no impact on results of operations or financial position of the Company because the plans of the Company are fixed stock option plans. Options granted under such plans have no intrinsic value at the grant date under APB No. 25. RESTRUCTURING CHARGE. During the first quarter of 1996, the Company began implementation of a program designed to improve profitability and increase inventory turnover. A pretax restructuring charge of $35 million was recorded in the first quarter of 1996 to reflect the anticipated costs associated with the closing of 56 underperforming stores and certain facilities. The planned closings are expected to be completed within a year and include 36 mall stores and 20 non-mall stores. The restructuring charge will include the write-down of leasehold improvements and certain equipment, estimated cash payments to landlords for the early termination of operating leases and estimated legal and consulting fees. LIQUIDITY AND CAPITAL RESOURCES The Company's principal capital requirements are for working capital, new store expansion and improvements to existing stores. The majority of the Company's financing for operations, expansion and working capital is provided by internally generated cash and borrowings under the revolving credit facility pursuant to the terms of its credit agreement. Because of the seasonality of the retail industry, the Company's cash needs fluctuate throughout the year and typically peak in November as inventory levels build in anticipation of the Christmas selling season. The Company's cash position is generally highest at the end of December following the Christmas season. The Company's practice has been to use the excess cash generated from operations in the fourth quarter to repay all or a portion of the outstanding borrowings under its revolving credit facility. The amount of revolver borrowings, if any, outstanding at year end depends upon the level of store expansion and sales performance during the Christmas season. The Company's credit agreement contains covenants that limit additional indebtedness, liens, capital expenditures and cash dividends. Additionally, the Company must meet financial covenants relating to fixed charge coverage, consolidated net worth and debt to total capitalization. In February 1995, the credit agreement was amended to revise certain financial covenants and provide the Company with additional flexibility. The debt agreement for the subordinated notes also contains covenants. The Company was in compliance with all such covenants at December 31, 1995. In April 1996, the Company obtained an amendment to its credit agreement that modifies certain existing covenants and approves a restructuring charge of up to $35 million. The amendment adds financial covenants which require the Company to meet certain debt and trade payables to eligible inventory ratios and to reduce outstanding borrowings under the facility to $25 million for one day 12 during the period from December 15, 1996 to February 15, 1997, and to zero for one day during the period from December 15 to January 15 in each subsequent year. As a result of this amendment and because of the lowering of the Company's credit ratings in the first quarter of 1996, the annual facility fee rate will increase from 0.30% to 0.50% and the margin added to variable interest rates on revolver borrowings will increase by 0.93%. The Company believes that it will be in compliance with all covenants of the credit agreement, as amended, at the end of the first quarter of 1996. OPERATING ACTIVITIES. Net cash provided by (used in) operating activities was ($56.2) million in 1995, $71.5 million in 1994 and $61.7 million in 1993. The use of cash in 1995 was impacted by early payments made to certain vendors near the end of the year to obtain discounts. These payments caused the amount of checks issued but not presented to the Company's banks for payment at year end to exceed the Company's year end bank balances by $69.3 million. When netted with checks drawn in excess of bank balances, cash provided by operations during 1995 was $7.2 million. The reduction in cash provided by operating activities in 1995 was attributable to the inventory purchased for store expansion and weak sales in the latter part of 1995. The Company reduced inventory levels at the end of 1995 in response to the weak retailing environment. The $9.8 million increase in cash provided by operating activities in 1994 over 1993 resulted primarily from the increase in the amount of change in accounts payable, net of inventories, of $20.9 million in 1994. The Company typically receives extended payment terms on seasonal purchases for the Christmas season and on purchases for new store openings. This results in accounts payable balances that are significantly higher at year end than at other times of the year. The inventory increases are primarily the result of store expansion and the shift to non-mall stores which have higher inventory levels than mall stores. INVESTING ACTIVITIES. Capital expenditures and store data for the last three years are as follows:
YEARS ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- Capital expenditures, net of sale/leasebacks and other property sales (in millions).................... $ 87.0 $ 109.6 $ 77.1 Store openings.......................... 175 175 153 Store closings.......................... (65) (40) (37) --------- --------- --------- Net increase in store count............. 110 135 116 --------- --------- --------- --------- --------- ---------
Most of the Company's capital expenditures are for store expansion. The level of capital expenditures over the last three years reflects the Company's aggressive expansion strategy and shift in focus to the more capital intensive Media Play stores. More than half of the capital expenditures in 1995 and 1994 were for new Media Play stores. The Company typically receives financing from landlords in the form of contributions and rent abatements for a portion of the capital expenditures. The Company financed a portion of the Media Play capital expenditures in 1995 and 1994 with proceeds from sale/ leaseback transactions totalling $26.2 million in 1995 and $10.0 million in 1994. The balance of the financing for capital expenditures was provided by internally generated cash and borrowings under the revolving credit facility. The new Franklin distribution facility and most of the related equipment, which together had an original cost of approximately $30 million, were financed under an operating lease. The lease contains a residual value guarantee in an amount not to exceed $24.9 million at the end of the original four year lease term and $25.7 million at the end of the one year renewal term. The lease also contains purchase options at the end of the original and renewal periods. The Company entered into a similar operating lease agreement to finance a portion of its capital expenditures for new Media Play stores in 1996. The Company expects that it will be able to obtain adequate financing to meet its obligations under these lease agreements. 13 The Company has aggressively expanded during the past three years. In recognition of the current retailing environment, which began to weaken during 1995, the Company plans to reduce capital spending to approximately $25 million in 1996. The Company anticipates that these capital expenditures will be financed by internally generated cash, borrowings under the revolving credit facility and, to a lesser extent, landlord contributions and rent abatements. The Company plans to close approximately 50 nonproductive mall based music stores in 1996, the majority of which are at or near the end of their lease terms. In addition, the Company plans to close 56 stores within the next year as part of its restructuring program. Assets from closed stores will be redeployed either to new stores or to existing stores that are more profitable. FINANCING ACTIVITIES. The Company's financing activities principally consist of borrowings and repayments under its long-term revolving credit facility. The revolver balance outstanding at year end is dependent upon the amount of cash generated from the Christmas season and the level of store expansion. Because of the weak retailing environment in the latter part of 1995 which continued through the Christmas season, $53.0 million of borrowings remained outstanding under the revolving credit facility at December 31, 1995. In prior years, sufficient cash was generated from the Christmas season to fully pay down the revolver at year end; however, the revolver is generally not subject to repayment until expiration of the revolving credit facility in October 1999. During the third quarter of 1995, the Company loaned $10.0 million to its 401(k) trust to finance the purchase of 1,042,900 shares of common stock of the Company in the open market. The stock will be used for a "KSOP" plan, which combines features of a 401(k) plan and an employee stock ownership plan. See Note 6 of Notes to Consolidated Financial Statements. In October 1994, the Company replaced its $175 million revolving credit facility and term loan with a new $350 million revolving credit facility with similar terms and conditions. The new revolving credit facility allows the Company to borrow up to $350 million (subject to certain limitations) and expires on October 7, 1999. Borrowings under the new revolver were used to repay all outstanding borrowings under the former revolver and to make the final $25 million principal payment on the term loan that was due on December 31, 1994. The Company financed a significant portion of capital expenditures in 1994 with $70.7 million in net proceeds from a common stock offering completed in December 1993. In June 1993, the Company completed an offering of $110 million of 9% senior subordinated notes ("9% Notes"). The 9% Notes are due in June 2003. A significant portion of the proceeds from this offering were used in September 1993 to redeem $53.5 million of 14 3/4% junior subordinated debentures. The remaining proceeds were used principally to finance capital expenditures for store expansion. INFLATION AND ECONOMIC TRENDS 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 fiscal years. Forward-looking statements herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause results to differ materially from those anticipated by some of the statements made herein. Investors are cautioned that all forward-looking statements involve risks and uncertainty. In addition to the factors discussed above, among the factors that could cause actual results to differ materially are the following: strength of new product offerings, pricing strategies of competitors, effects of weather and overall economic conditions, including inflation and consumer confidence. 14 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 herein. 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 herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) DOCUMENTS FILED AS PART OF THIS REPORT: (1) CONSOLIDATED FINANCIAL STATEMENTS See Index to Consolidated Financial Statements and Schedules on page 18. (2) FINANCIAL STATEMENT SCHEDULES Financial Statement Schedules have been omitted because they are not required or are not applicable or because the information required to be set forth therein either is not material or is included in the Consolidated Financial Statements or notes thereto. (3) EXHIBITS See Exhibit Index on pages 34 through 36. (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, 1995. (C) EXHIBITS See Exhibit Index on pages 34 through 36. (D) OTHER FINANCIAL STATEMENTS Not applicable. 15 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: April 11, 1996 --------------------------------------- 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 dates indicated.
SIGNATURE CAPACITY DATE - - ------------------------------------ ------------------------ ---------------- Chairman of the Board, /s/ JACK W. EUGSTER President, Chief - - ------------------------------------ Executive Officer and April 11, 1996 Jack W. Eugster Director (principal executive officer) Executive Vice President /s/ REID JOHNSON and Chief Financial - - ------------------------------------ Officer (principal April 11, 1996 Reid Johnson financial and accounting officer) /s/ KEITH A. BENSON - - ------------------------------------ Director April 11, 1996 Keith A. Benson /s/ KENNETH F. GORMAN - - ------------------------------------ Director April 11, 1996 Kenneth F. Gorman /s/ WILLIAM A. HODDER - - ------------------------------------ Director April 11, 1996 William A. Hodder /s/ LLOYD P. JOHNSON - - ------------------------------------ Director April 11, 1996 Lloyd P. Johnson /s/ JOSIAH O. LOW, III - - ------------------------------------ Director April 11, 1996 Josiah O. Low III
16
SIGNATURE CAPACITY DATE - - ------------------------------------ ------------------------ ---------------- /s/ TOM F. WEYL - - ------------------------------------ Director April 11, 1996 Tom F. Weyl /s/ MICHAEL W. WRIGHT - - ------------------------------------ Director April 11, 1996 Michael W. Wright
17 MUSICLAND STORES CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants.............................. 19 Consolidated Statements of Earnings................................... 20 Consolidated Balance Sheets........................................... 21 Consolidated Statements of Cash Flows................................. 22 Consolidated Statements of Stockholders' Equity....................... 23 Notes to Consolidated Financial Statements............................ 24
18 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, 1995 and 1994, and the related consolidated statements of earnings, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company'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 financial position of Musicland Stores Corporation and Subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, April 10, 1996 19 MUSICLAND STORES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ------------------------------------------- 1995 1994 1993 ------------- ------------- ------------- Sales................................................................ $ 1,722,572 $ 1,478,842 $ 1,181,658 Cost of sales........................................................ 1,116,502 936,643 710,707 ------------- ------------- ------------- Gross profit....................................................... 606,070 542,199 470,951 Selling, general and administrative expenses......................... 525,213 450,919 365,311 Depreciation and amortization........................................ 45,531 37,243 29,057 Goodwill write-down.................................................. 138,000 -- -- ------------- ------------- ------------- Operating income (loss)............................................ (102,674) 54,037 76,583 Interest expense..................................................... 27,881 19,555 19,831 ------------- ------------- ------------- Earnings (loss) before income taxes and extraordinary charges...... (130,555) 34,482 56,752 Income taxes......................................................... 5,195 17,100 25,400 ------------- ------------- ------------- Earnings (loss) before extraordinary charges....................... (135,750) 17,382 31,352 Extraordinary charges from early redemption of debt, net of income tax benefit......................................................... -- -- 3,900 ------------- ------------- ------------- Net earnings (loss)................................................ $ (135,750) $ 17,382 $ 27,452 ------------- ------------- ------------- ------------- ------------- ------------- Earnings (loss) per common share: Earnings (loss) before extraordinary charge........................ $ (4.00) $ 0.51 $ 1.03 Extraordinary charge............................................... -- -- 0.13 ------------- ------------- ------------- Net earnings (loss) per common share............................... $ (4.00) $ 0.51 $ 0.90 ------------- ------------- ------------- ------------- ------------- ------------- Weighted average number of common shares outstanding................. 33,898 34,238 30,548 ------------- ------------- ------------- ------------- ------------- -------------
See accompanying Notes to Consolidated Financial Statements. 20 MUSICLAND STORES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS
DECEMBER 31, --------------------------- 1995 1994 ------------ ------------- Current assets: Cash and cash equivalents.......................................................... $ 1,971 $ 38,578 Inventories........................................................................ 533,694 491,828 Deferred income taxes.............................................................. 17,400 15,600 Other current assets............................................................... 20,840 9,574 ------------ ------------- Total current assets............................................................. 573,905 555,580 Property, at cost.................................................................... 446,100 374,620 Accumulated depreciation and amortization............................................ (127,783) (98,586) ------------ ------------- Property, net...................................................................... 318,317 276,034 Goodwill............................................................................. 98,258 242,051 Other assets......................................................................... 6,477 5,967 ------------ ------------- Total Assets..................................................................... $ 996,957 $ 1,079,632 ------------ ------------- ------------ ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Checks drawn in excess of bank balances............................................ $ 69,321 $ 5,886 Revolver........................................................................... 53,000 -- Accounts payable................................................................... 403,848 457,236 Other current liabilities.......................................................... 108,455 120,148 ------------ ------------- Total current liabilities........................................................ 634,624 583,270 Long-term debt....................................................................... 110,000 110,000 Other long-term liabilities.......................................................... 52,622 40,586 Deferred income taxes................................................................ 3,900 5,500 Commitments and contingent liabilities Stockholders' equity: Preferred stock ($.01 par value; authorized: 5,000,000 shares; issued and outstanding: none)................................................................ -- -- Common stock ($.01 par value; authorized: 75,000,000 shares; issued and outstanding: December 31, 1995, 34,296,956 shares; December 31, 1994, 34,246,856 shares)........................................................................... 343 342 Additional paid-in capital......................................................... 254,350 254,068 Retained earnings (accumulated deficit)............................................ (44,911) 90,839 Deferred compensation.............................................................. (8,998) -- Common stock subscriptions......................................................... (4,973) (4,973) ------------ ------------- Total stockholders' equity....................................................... 195,811 340,276 ------------ ------------- Total Liabilities and Stockholders' Equity....................................... $ 996,957 $ 1,079,632 ------------ ------------- ------------ -------------
See accompanying Notes to Consolidated Financial Statements. 21 MUSICLAND STORES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, --------------------------------------- 1995 1994 1993 ------------ ------------ ----------- OPERATING ACTIVITIES: Net earnings (loss).................................................... $ (135,750) $ 17,382 $ 27,452 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization........................................ 45,531 37,243 29,057 Goodwill write-down.................................................. 138,000 -- -- Loss on disposal of property......................................... 7,587 3,475 3,844 Amortization of debt issuance and other costs........................ 516 872 1,117 Other amortization................................................... 364 1 33 Extraordinary charge exclusive of income taxes....................... -- -- 6,486 Deferred income taxes................................................ (3,400) (6,100) (2,000) Changes in operating assets and liabilities: Inventories.......................................................... (41,866) (155,026) (86,166) Other current assets................................................. (11,172) (1,991) (2,364) Accounts payable..................................................... (53,388) 154,196 64,459 Other current liabilities............................................ (11,445) 16,829 16,888 Other assets......................................................... (1,079) (1,333) (435) Other long-term liabilities.......................................... 9,875 5,914 3,291 ------------ ------------ ----------- Net cash provided by (used in) operating activities................ (56,227) 71,462 61,662 ------------ ------------ ----------- INVESTING ACTIVITIES: Capital expenditures................................................... (113,983) (119,608) (77,139) Sale/leasebacks and other property sales............................... 26,969 10,000 -- ------------ ------------ ----------- Net cash used in investing activities.............................. (87,014) (109,608) (77,139) ------------ ------------ ----------- FINANCING ACTIVITIES: Increase in checks drawn in excess of bank balances.................... 63,435 5,886 -- Borrowings under revolver.............................................. 53,000 -- -- Net proceeds from issuance of long-term debt........................... -- -- 107,281 Principal payments on long-term debt................................... -- (25,000) (25,000) Redemption of long-term debt........................................... -- -- (58,074) Loan to KSOP........................................................... (9,997) -- -- Net proceeds from sale of common stock................................. 196 72 70,952 ------------ ------------ ----------- Net cash provided by (used in) financing activities................ 106,634 (19,042) 95,159 ------------ ------------ ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................... (36,607) (57,188) 79,682 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................... 38,578 95,766 16,084 ------------ ------------ ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR................................. $ 1,971 $ 38,578 $ 95,766 ------------ ------------ ----------- ------------ ------------ ----------- CASH PAID DURING THE YEAR FOR: Interest............................................................... $ 27,268 $ 19,666 $ 20,414 Income taxes........................................................... 17,884 29,394 18,110
See accompanying Notes to Consolidated Financial Statements. 22 MUSICLAND STORES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
RETAINED COMMON STOCK ADDITIONAL EARNINGS TOTAL ------------------ PAID-IN (ACCUMULATED DEFERRED COMMON STOCK STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT) COMPENSATION SUBSCRIPTIONS EQUITY -------- ------- ----------- ------------- ------------- ------------- ------------- January 1, 1993............... 30,133 $ 301 $ 182,313 $ 46,005 $ -- $ (4,973) $ 223,646 Net earnings.................. 27,452 27,452 Other, including exercise of stock options and related tax benefit...................... 97 1 835 836 Sale of common stock in public offering, net of offering costs........................ 4,000 40 70,620 70,660 -------- ------- ----------- ------------- ------------- ------------- ------------- December 31, 1993............. 34,230 342 253,768 73,457 -- (4,973) 322,594 Net earnings.................. 17,382 17,382 Other, including exercise of stock options and related tax benefit...................... 17 -- 300 300 -------- ------- ----------- ------------- ------------- ------------- ------------- December 31, 1994............. 34,247 342 254,068 90,839 -- (4,973) 340,276 Net loss...................... (135,750) (135,750) Other, including exercise of stock options and related tax benefit...................... 50 1 282 283 Loan to KSOP.................. (9,997) (9,997) Amortization of deferred compensation................. 999 999 -------- ------- ----------- ------------- ------------- ------------- ------------- December 31, 1995............. 34,297 $ 343 $ 254,350 $ (44,911) $ (8,998) $ (4,973) $ 195,811 -------- ------- ----------- ------------- ------------- ------------- ------------- -------- ------- ----------- ------------- ------------- ------------- -------------
See accompanying Notes to Consolidated Financial Statements. 23 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND 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 and resulting foreign currency translation adjustments have not been material. The preparation of the accompanying 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 and is engaged in one industry segment as a specialty retailer of home entertainment products, including prerecorded music, prerecorded video cassettes, books, computer software and related accessories. The retail sale of home entertainment products is highly competitive. The Company's two principal business categories are non-mall based full-media superstores and mall based music and video sell-through stores. At December 31, 1995, 82% of the store count consisted of mall stores, but 54% of the total store square footage was in non-mall stores. The Company operated 1,496 stores in 49 states, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands and the United Kingdom at December 31, 1995. The Company's stores continue to face increased competition from non-mall discount stores, consumer electronics superstores and other music, video and book specialty retailers expanding into non-mall multimedia superstores of their own. The low prices offered by these non-mall stores create intense price competition and adversely affect the performance of both the Company's non-mall and mall stores. The Company anticipates that the challenging retail sales environment will continue into the foreseeable future. These facts and circumstances led to an evaluation of the carrying amount of goodwill for impairment which resulted in a write-down of $138,000 in 1995 (See Note 2). In April 1996, the Company obtained an amendment to its credit agreement that modifies certain existing covenants, approves a restructuring charge of up to $35,000 (See Note 16) and adds new financial covenants (See Note 3). 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. CASH MANAGEMENT. The Company's cash management system provides for the reimbursement of all major bank disbursement accounts on a daily basis. Checks issued but not presented for payment to the bank are reflected as checks drawn in excess of bank balances in the accompanying financial statements. Prior year amounts have been reclassified to conform to the current year presentation. 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. Property consists principally of store leasehold improvements, fixtures and other equipment and is stated at cost. Leasehold improvements are amortized on a straight-line basis over an estimated useful life of ten years, which is generally equal to or less than the lease term. Store fixtures and other equipment are depreciated on a straight-line basis over their estimated useful lives. 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 income. Depreciation and amortization expense for property was $39,653, $29,816 and $21,407 for the years ended December 31, 1995, 1994 and 1993, respectively. 24 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) GOODWILL. Goodwill represents the cost in excess of fair value of net assets of businesses acquired and primarily resulted from the acquisition of MGI by MSC in 1988. The carrying amount of goodwill is evaluated if facts and circumstances indicate that it may be impaired. If an evaluation is required, the estimated future undiscounted cash flows of the entity acquired over the remaining amortization period would be compared to the carrying amount of goodwill to determine if a write-down is required. In August 1995, the Company recorded a write-down of $138,000. Prior to the write-down, goodwill was amortized using the straight-line method over a forty year period. Subsequent to the write-down, goodwill is amortized using the straight-line method over the remaining life of 33 years. Accumulated amortization at December 31, 1995 and 1994 was $1,002 and $45,431, respectively. DEBT ISSUANCE COSTS. Debt issuance costs are amortized over the terms of the related financing using the interest method. STORE OPENING AND ADVERTISING COSTS. Costs associated with store openings are amortized over expected sales to the end of the fiscal year in which the store opens. Advertising costs are charged to expense as they are incurred. INCOME TAXES. The provision for deferred income taxes represents the tax effects of differences in the timing of income and expense recognition for tax and financial reporting purposes under the liability method of accounting. EARNINGS (LOSS) PER COMMON SHARE. Earnings (loss) per common share amounts are computed by dividing net earnings by the weighted average number of common shares outstanding. For purposes of earnings per share computations, shares of common stock under the Company's employee stock ownership plan are not considered outstanding until they are committed to be released. Common stock equivalents related to stock options which would have a dilutive effect based upon current market prices had no material effect on net earnings (loss) per common share in each of the years presented. RECENTLY ISSUED ACCOUNTING STANDARDS. Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement No. 123"), issued in October 1995 and effective for fiscal years beginning after December 15, 1995, encourages, but does not require, a fair value based method of accounting for employee stock options or similar equity instruments. It also allows an entity to elect to continue to measure compensation cost under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), but requires pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. The Company expects to adopt Statement No. 123 in 1996. While the Company is still evaluating Statement No. 123, it currently expects to elect to continue to measure compensation cost under APB No. 25 and comply with the pro forma disclosure requirements. If the Company makes this election, this statement will have no impact on the Company's results of operations or financial position because the Company's plans are fixed stock option plans. Options granted under such plans have no intrinsic value at the grant date under APB No. 25. 2. WRITE-DOWN OF GOODWILL During the third quarter of 1995, the Company adopted Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("Statement No. 121"), issued in March 1995. Goodwill primarily resulted from the acquisition of MGI by MSC in a leveraged buyout in 1988, when nearly all of the Company's stores 25 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 2. WRITE-DOWN OF GOODWILL (CONTINUED) were mall based music stores. In connection with the adoption of Statement No. 121, the carrying values of long-lived assets, primarily goodwill and property, of the music division were reviewed for recoverability and possible impairment because of recent developments. Since the beginning of 1995, the music division has been experiencing sales declines. These sales declines are occurring in connection with a consumer shift away from mall based stores to non-mall superstores that offer low prices. While the Company's mall based music stores have responded with increased promotional pricing and lower prices, they are at a competitive disadvantage to non-mall stores because of their higher cost structure, principally related to occupancy costs. The Company updated its operating projections for the music division during the third quarter of 1995 to reflect the continued weak retail environment and competitive pricing. The sum of the projected undiscounted future cash flows over the remaining goodwill amortization period of 33 years was less than the carrying amount of goodwill, which indicated impairment had occurred. An estimated fair value of the music division was determined from a range of valuations based on the operating projections and future discounted cash flows. Based on this estimated fair value, a goodwill write-down of $138,000 was recorded in August 1995. 3. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT The Company's bank credit agreement provides for a $350,000 revolving credit facility through October 1999 at variable interest rates. The revolving credit facility enables the Company to borrow from 50% to 60% of inventory. The Company is required to pay a facility fee at an annual rate of 0.15% to 0.50% on the maximum credit amount available. The annual facility fee rate is currently 0.30% and is subject to adjustment based on the Company's credit rating. The Company has pledged the common stock of certain of the Company's wholly owned subsidiaries as collateral for borrowings under the credit agreement During the years ended December 31, 1995, 1994 and 1993, the highest balances outstanding under the revolving credit facility were $350,000, $216,000 and $171,000, respectively, and the average daily balances were $254,000, $128,600 and $97,300, respectively. The weighted average interest rates on the revolver during such periods, based on the average daily balances, were 7.13%, 6.38% and 5.26%, respectively. Long-term debt consists of 9% senior subordinated notes maturing in 2003. The senior subordinated notes are unsecured and are subordinate to borrowings under the credit agreement, with interest payable semi-annually. The Company's credit agreement contains covenants that limit additional indebtedness, liens, capital expenditures and cash dividends. Additionally, the Company must meet financial covenants relating to fixed charge coverage, consolidated net worth and debt to total capitalization. In February 1995, the credit agreement was amended to revise certain financial covenants and provide the Company with additional flexibility. The debt agreement for the senior subordinated notes also contains covenants. The Company was in compliance with all such covenants at December 31, 1995. In April 1996, the Company obtained an amendment to its credit agreement that modifies certain existing covenants and approves a restructuring charge of up to $35,000. The amendment adds financial covenants which require the Company to meet certain debt and trade payables to eligible inventory ratios and to reduce outstanding borrowings under the facility to $25,000 for one day during the period from December 15, 1996 to February 15, 1997, and to zero for one day during the period from December 15 to January 15 in each subsequent year. As a result of this amendment and because of the lowering of the Company's credit ratings in the first quarter of 1996, the annual facility fee rate 26 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 3. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT (CONTINUED) will increase from 0.30% to 0.50% and the margin added to variable interest rates on revolver borrowings will increase by 0.93%. The Company believes that it will be in compliance with all covenants of the credit agreement, as amended, at the end of the first quarter of 1996. 4. OTHER LIABILITIES
DECEMBER 31, --------------------- 1995 1994 --------- --------- OTHER CURRENT LIABILITIES CONSIST OF THE FOLLOWING: Income taxes................................................ $ 10,351 $ 20,033 Payroll and related taxes and benefits...................... 18,183 19,426 Gift certificates payable................................... 28,716 22,822 Sales taxes payable......................................... 19,694 20,024 Accrued store expenses and other............................ 31,511 37,843 --------- --------- Total..................................................... $ 108,455 $ 120,148 --------- --------- --------- --------- OTHER LONG-TERM LIABILITIES CONSIST OF THE FOLLOWING: Straight-line recognition of leases with scheduled rent increases.................................................. $ 35,915 $ 27,632 Deferred rent credits....................................... 11,882 7,316 Other....................................................... 4,825 5,638 --------- --------- Total..................................................... $ 52,622 $ 40,586 --------- --------- --------- ---------
27 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 5. INCOME TAXES
YEARS ENDED DECEMBER 31, --------------------------------- 1995 1994 1993 --------- --------- --------- INCOME TAXES CONSIST OF: Current: Federal................................................... $ 7,395 $ 18,900 $ 22,100 State, local and other.................................... 1,200 4,300 5,300 --------- --------- --------- 8,595 23,200 27,400 --------- --------- --------- Deferred: Federal................................................... (3,200) (5,000) (1,600) State, local and other.................................... (200) (1,100) (400) --------- --------- --------- (3,400) (6,100) (2,000) --------- --------- --------- Total................................................... $ 5,195 $ 17,100 $ 25,400 --------- --------- --------- --------- --------- --------- THE COMPANY'S EFFECTIVE INCOME TAX RATE DIFFERED FROM THE FEDERAL STATUTORY RATE AS FOLLOWS: Federal statutory tax rate.................................. 35.0% 35.0% 35.0% Goodwill amortization and write-down (38.5) 7.3 4.4 State and local income taxes, net of Federal benefit........ (0.5) 6.0 5.5 Other items, net*........................................... 0.0 1.3 (0.1) --------- --------- --------- Effective income tax rate................................. (4.0)% 49.6% 44.8% --------- --------- --------- --------- --------- ---------
- - ------------------------ * None of which individually exceeds 5% of Federal tax at the statutory rate on earnings before income taxes.
DECEMBER 31, ------------------ 1995 1994 -------- -------- THE COMPONENTS OF THE NET DEFERRED TAX ASSET AND LIABILITY ARE AS FOLLOWS: Net deferred tax asset: Capitalized inventory costs............................... $ 5,877 $ 5,914 Inventory valuation....................................... 5,012 3,942 Compensation related...................................... 2,264 1,771 Facility closings......................................... 2,251 2,174 Other accruals............................................ 1,562 1,304 Other, net................................................ 434 495 -------- -------- Total current deferred income taxes..................... $ 17,400 $ 15,600 -------- -------- -------- -------- Net deferred tax liability Depreciation.............................................. $(22,796) $(20,105) Rent expense.............................................. 19,572 14,666 Amortization of intangible assets......................... (2,034) (1,732) Net pension liability..................................... 807 725 Other, net................................................ 551 946 -------- -------- Total long-term deferred income taxes................... $ (3,900) $ (5,500) -------- -------- -------- --------
Based on the Company's history of operating earnings, management believes that future operating earnings will be sufficient to fully realize the deferred tax assets. 28 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 6. 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 established a defined contribution plan in 1992 for those employees.
DECEMBER 31, ------------------- 1995 1994 -------- -------- PENSION DATA HAVE BEEN COMPUTED BASED ON THE FOLLOWING ASSUMPTIONS: Discount rate for benefit obligations....................... 7.50% 8.50% Rate of increase for future compensation levels............. 5.50 5.50 Expected long-term rate of return on plan assets............ 8.50 8.75 THE FUNDED STATUS OF THE PENSION PLAN AND THE RELATED AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS WERE AS FOLLOWS: Funded assets at fair value (primarily listed stocks and U.S. bonds)................................................ $ 9,289 $ 7,888 Projected benefit obligation: Vested benefits............................................. (9,141) (7,134) Non-vested benefits......................................... (142) (218) -------- -------- Accumulated benefit obligation.............................. (9,283) (7,352) Projected future salary increases........................... (47) (211) -------- -------- Projected benefit obligation................................ (9,330) (7,563) -------- -------- Assets in excess of (less than) projected benefit obligation................................................. (41) 325 Net unamortized gains....................................... (1,983) (2,142) -------- -------- Net pension liability....................................... $(2,024) $(1,817) -------- -------- -------- --------
The decrease in the discount rate at December 31, 1995 increased the accumulated benefit obligation by $1,482 and increased the projected benefit obligation by $1,490.
YEARS ENDED DECEMBER 31, --------------------------- 1995 1994 1993 ------- ------- ----- THE COMPONENTS OF NET PENSION EXPENSE WERE AS FOLLOWS: Service cost for benefits earned.................. $ 260 $ 407 $ 429 Interest cost on projected benefit obligation..... 631 648 615 Actual return on plan assets...................... (1,814) 512 (620) Net amortization and deferred amounts............. 1,130 (1,225) (94) ------- ------- ----- Net pension expense............................. $ 207 $ 342 $ 330 ------- ------- ----- ------- ------- -----
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. Beginning in 1996, the Company's matching contribution to the 401(k) plan will be paid in stock of MSC under an employee stock ownership plan ("KSOP"). 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 29 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 6. EMPLOYEE BENEFIT PLANS (CONTINUED) 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. At December 31, 1995, the number of KSOP shares committed to be released and held in suspense was 104,290 and 938,610, respectively. The market value of the shares held in suspense at December 31, 1995 was $3,989. Expenses for the 401(k) and defined contribution plans for the years ended December 31, 1995, 1994 and 1993 totalled $570, $591 and $556, respectively. Expenses for postemployment benefits were not material. The Company does not offer or provide postretirement benefits other than pensions to its employees. 7. STOCK PLANS The Company's 1994, 1992 and 1988 Stock Option Plans authorize the grant of stock options and stock appreciation rights to officers and other key employees. The Company's Directors Stock Option Plan authorizes the grant of stock options to its directors who are not employees of the Company or its affiliates. The number of shares of common stock that may be issued to employees and directors under each of these plans is 950,000 shares, 1,500,000 shares, 1,000,000 shares and 200,000 shares, respectively. The stock options become exercisable over a period not to exceed ten years after the date they are granted. Exercise prices are based upon the stock's market price at the grant date. No stock appreciation rights were outstanding as of December 31, 1995.
NUMBER OF SHARES -------------------- EMPLOYEE DIRECTORS STOCK STOCK OPTION OPTION OPTION PRICE PLANS PLAN RANGE PER SHARE --------- --------- --------------- INFORMATION WITH RESPECT TO STOCK OPTIONS IS AS FOLLOWS: Balance, January 1, 1993.......................... 1,329,800 10,000 $ 2.50 - $14.50 Granted........................................... 357,900 30,000 12.38 - 21.75 Exercised......................................... (96,400) -- 2.50 - 4.50 Cancelled......................................... (3,050) -- 14.50 --------- --------- Balance, December 31, 1993........................ 1,588,250 40,000 2.50 - 21.75 Granted........................................... 215,000 -- 13.50 - 16.00 Exercised......................................... (17,206) -- 2.50 - 14.50 Cancelled......................................... (77,128) -- 4.50 - 21.75 --------- --------- Balance, December 31, 1994........................ 1,708,916 40,000 2.50 - 21.75 Granted........................................... 393,350 5,000 6.63 - 9.88 Exercised......................................... (50,100) -- 2.50 - 4.50 Cancelled......................................... (204,182) -- 4.50 - 21.75 --------- --------- Balance, December 31, 1995........................ 1,847,984 45,000 2.50 - 21.75 --------- --------- --------- --------- Options exercisable at December 31, 1995.......... 800,838 40,000 2.50 - 14.50 --------- --------- --------- --------- Shares available for future grants................ 1,425,060 35,000 --------- --------- --------- ---------
30 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 8. COMMON STOCK SUBSCRIPTIONS Certain members of management of the Company own 1,991,308 shares of common stock with restrictions ("Restricted Stock") at $0.0025 per share. The Restricted Stock is not transferable until the Company is paid the balance of the subscription price of $2.4975 or $4.4975 per share. The amount of subscriptions due from the holders of Restricted Stock upon transfer is reflected as a reduction of stockholders' equity. 9. PUBLIC OFFERINGS AND EARLY REDEMPTION OF DEBT On December 1, 1993, the Company completed a public offering of 8,591,353 shares of common stock, of which 4,000,000 shares were sold by the Company and 4,591,353 shares were sold by existing stockholders of the Company, at $18.50 per share. The proceeds to the Company from the offering were $70,660, net of offering costs. On June 17, 1993, the Company completed an offering of $110,000 of 9% senior subordinated notes from which net proceeds to the Company, after offering costs, were $107,281. A significant portion of the proceeds were used to redeem on September 30, 1993, $53,541 principal amount of 14 3/4% junior subordinated debentures. An extraordinary charge of $3,900 (net of related income tax benefit of $2,586, using a combined Federal statutory tax rate plus state and local taxes of approximately 39.9%) was recorded in connection with this early redemption of debt. 10. PREFERRED STOCK PURCHASE RIGHTS In March 1995, the Company's Board of Directors adopted a stockholder rights plan and declared a dividend of one preferred share purchase right ("Right") per share for each outstanding share of common stock. 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. 11. COMMITMENTS The Company leases all of its retail stores under operating leases for terms ranging from three to twenty-five years. In most instances, the Company pays, in addition to minimum rent, real estate taxes, utilities, common area maintenance costs and percentage rentals which are based upon sales volume. Certain store leases contain provisions restricting assignment, merger, change of control or transfer. The Company's operating lease for its distribution facility in Franklin, Indiana contains an original term of 4 years, a one year renewal option and purchase options at the end of the original and 31 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 11. COMMITMENTS (CONTINUED) renewal periods. The lease contains a residual value guarantee in an amount not to exceed $24,900 at the end of the original lease term and $25,650 at the end of the renewal term. The Company also leases certain store fixtures and equipment, computers, and automobiles under operating leases. AT DECEMBER 31, 1995, FUTURE ANNUAL MINIMUM RENTALS FOR NONCANCELLABLE OPERATING LEASES WITH REMAINING TERMS GREATER THAN ONE YEAR ARE: 1996....................................................... $ 164,040 1997....................................................... 163,585 1998....................................................... 157,569 1999....................................................... 168,706 2000....................................................... 129,052 Thereafter................................................. 602,133 ---------- Total.................................................... $1,385,085 ---------- ----------
YEARS ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 -------- -------- -------- TOTAL RENT EXPENSE CONSISTS OF THE FOLLOWING: Minimum cash rents.......................................... $148,736 $120,118 $ 98,412 Straight-line recognition of leases with scheduled rent increases.................................................. 7,304 4,892 5,013 Percentage rents............................................ 2,000 3,408 3,764 -------- -------- -------- Total rent expense........................................ $158,040 $128,418 $107,189 -------- -------- -------- -------- -------- --------
12. RELATED PARTY TRANSACTIONS Donaldson, Lufkin & Jenrette, Inc. ("DLJ") and certain of its affiliates owned approximately 7.5% of the Company's common stock at December 31, 1995, including approximately 0.6% owned by DLJ employees. Of the common stock owned by DLJ and its affiliates, approximately 5% of the Company's outstanding common stock is held directly with the remainder held by a voting trust. In 1993, DLJ and certain of its affiliates sold 2,191,353 shares and received $38,984, net of underwriting discount, in the Company's public stock offering. Donaldson, Lufkin & Jenrette Securities Corporation, a wholly-owned subsidiary of DLJ, received compensation as underwriter of approximately $1,769 in connection with the public stock offering and approximately $1,600 in connection with the public offering of senior subordinated notes. DLJ acts as a market maker in the Company's senior subordinated notes. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the consolidated balance sheets at December 31, 1995 and 1994 for cash and cash equivalents, other current assets, checks drawn in excess of bank balances, accounts payable and other current liabilities approximate fair value because of the immediate or short-term maturity of these financial instruments. The fair value of the senior subordinated notes at December 31, 1995 and 1994, based on the last quoted price on those dates, was $66,000 and $91,850, respectively. The fair value of the revolver at December 31, 1995, based on current market rates, was $45,050. 32 MUSICLAND STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 14. LITIGATION The Company is a party to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, all such matters are without merit or involve such amounts that unfavorable disposition will not have a material impact on the financial position or results of operations of the Company. 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
EARNINGS COMMON STOCK PRICE NET (LOSS) PER GROSS EARNINGS COMMON --------------------- SALES PROFIT (LOSS) SHARE HIGH LOW ---------- -------- --------- ----------- --------- --------- 1995: First............... $ 346,360 $122,244 $ (6,314) $(0.18) $ 10 3/4 $ 6 3/4 Second.............. 331,720 123,372 (7,531) (0.22) 10 5/8 8 7/8 Third............... 357,585 131,317 (144,550) (4.28) 11 8 1/4 Fourth.............. 686,907 229,137 22,645 0.68 10 3 3/4 ---------- -------- --------- ----------- Total............. $1,722,572 $606,070 $(135,750) $(4.00) ---------- -------- --------- ----------- ---------- -------- --------- ----------- 1994: First............... $ 269,435 $104,457 $ (2,108) $(0.06) $ 22 1/2 $ 17 3/4 Second.............. 273,059 106,773 (2,198) (0.06) 22 14 3/4 Third............... 302,479 117,324 (2,554) (0.07) 18 1/2 14 1/4 Fourth.............. 633,869 213,645 24,242 0.71 16 3/8 8 3/4 ---------- -------- --------- ----------- Total............. $1,478,842 $542,199 $ 17,382 $ 0.51 ---------- -------- --------- ----------- ---------- -------- --------- -----------
Approximately 40% of the Company's annual revenues are realized during the fourth quarter and all of the net earnings occur in the fourth quarter. Quarterly results are affected by the timing of holidays, new store openings and sales performance of existing stores. Due to changes in the number of common shares outstanding during 1994, quarterly earnings per share do not add to the total for the year. 16. RESTRUCTURING CHARGE During the first quarter of 1996, the Company began implementation of a program designed to improve profitability and increase inventory turnover. A pretax restructuring charge of $35,000 was recorded in the first quarter of 1996 to reflect anticipated costs associated with the closing of 56 underperforming stores and certain facilities. The planned closings are expected to be completed within a year and include 36 mall stores and 20 non-mall stores. The restructuring charge will include the write-down of leasehold improvements and certain equipment, estimated cash payments to landlords for the early termination of operating leases and estimated legal and consulting fees. 33 EXHIBIT INDEX The following documents are filed as part of this Annual Report on Form 10-K for the year ended December 31, 1995.
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 Harris Trust and Savings Bank, as Trustee [iii] 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] 4.3 -- 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] 10.2(a) -- Master Lease dated May 12, 1995 between Media Play Trust, as Landlord, and Media Play, Inc., as Tenant [ix] 10.2(b) -- Participation Agreement dated 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) -- Lease Guaranty dated May 12, 1995 between MGI, as Guarantor, and Media Play Trust, as Landlord [ix] *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 -- *10.6 -- Form of Employment Agreement with Messrs. Benson and Ross [vi] *10.7(a) -- Form of Employment Agreement with Messrs. Bausman, Gaines and Henderson [vi]
34
EXHIBIT SEQUENTIAL NO. DESCRIPTION PAGE NO. - - ----------- --------------------------------------------------------------------------------------- ----------- *10.7(b) -- Form of amendment to Employment Agreements with Messrs. Bausman, Gaines and Henderson [i] *10.7(c) -- Amendment No. 2 to Employment Agreement with Mr. Bausman -- *10.7(d) -- Amendment No. 2 to Employment Agreement with Mr. Gaines -- *10.7(e) -- Amendment No. 2 to Employment Agreement with Mr. Henderson -- *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 -- *10.9 -- Management Incentive Plan dated as of January 1, 1995 -- *10.10 -- 1988 Stock Option Plan, as amended [i] *10.11 -- Stock Option Plan for Unaffiliated Directors of MSC, as amended [i] *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 -- Change of Control Agreement with Mr. Johnson -- *10.16 -- Executive Deferred Compensation Plan for Mr. Johnson -- *10.17 -- Change of Control Agreement with Mr. Gaines -- 11. -- Statement re computation of per share earnings [x] 21. -- Subsidiaries of MSC [ii] 23. -- Consent of Arthur Andersen LLP -- 99. -- Form 11-K for The Musicland Group's Capital Accumulation Plan [xi]
- - ------------------------ [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). 35 [x] Earnings per common share amounts are computed by dividing net earnings applicable to common stockholders by the weighted average number of common shares outstanding, after giving retroactive effect to the four-for-one stock split that occurred in connection with the Company's initial public offering in 1992. Common stock equivalents related to stock options which would have a dilutive effect based upon the 1992 initial public offering price or current market prices had no effect on net earnings per common share in each of the years presented in the Company's Consolidated Statements of Earnings and, accordingly, this exhibit is not applicable to the Company. [xi] To be filed by amendment. * Indicates Management Contract or Compensatory Plan or Agreement required to be filed as an Exhibit to this form. 36 EX-10.5(C) 2 2ND AM TO EMPLOY AGMT W/ JACK EUGSTER EXHIBIT 10.5(c) SECOND AMENDMENT TO EMPLOYMENT AGREEMENT WITH JACK W. EUGSTER (formerly titled "Agreement") AMENDMENT dated November 27, 1995 to the Employment Agreement ("the Employment Agreement", formerly titled Agreement) dated as of August 25, 1988 by and among The Musicland Group, Inc., a Delaware corporation (the "Company"), Musicland Stores Corporations, a Delaware corporation (the "Parent") and Jack W. Eugster (the "Executive"). WHEREAS, the Board of Directors, on behalf of the Company and the Parent, and the Executive have determined it to be in their mutual best interests to amend the Employment Agreement in certain respects: NOW, THEREFORE, BE IT RESOLVED, that the Employment Agreement shall be amended as follows: 1. Section 3, COMPENSATION, is amended by deleting the salary of "$315,000" in subparagraph (a) and inserting in its place "$515,000. 2. Section 3, COMPENSATION, is further amended by adding to subparagraph (b)(iii) the words "and other subsequent Stock Plans" after the word "Plan." 3. Section 9, REDUCTION FOR EQUITY APPRECIATION, is hereby deleted in its entirety and is no longer of any force or effect. 4. Section 19, NOTICES, is amended by deleting Jack W. Eugster's home address of "6300 Knoll Drive, Edina, MN 55436" and inserting in its place "2655 Kelly Avenue, Excelsior, MN 55331." IN WITNESS WHEREOF, the undersigned have executed this Amendment of Employment Agreement as of the date set forth above. THE MUSICLAND GROUP, INC. By: /s/ Michael W. Wright ---------------------------------- Its: Chairman, Compensation Committee ---------------------------------- MUSICLAND STORES CORPORATION By: /s/ Michael W. Wright ---------------------------------- Its: Chairman, Compensation Committee ---------------------------------- EXECUTIVE /s/ Jack W. Eugster ----------------------------------- Jack W. Eugster EX-10.7(C) 3 2ND AM TO EMPLOY AGMT W/ BRUCE BAUSMAN EXHIBIT 10.7(c) SECOND AMENDMENT TO EMPLOYMENT AGREEMENT WITH BRUCE B. BAUSMAN (formerly titled "Agreement") AMENDMENT dated November 27, 1995 to the Employment Agreement ("the Employment Agreement", formerly titled Agreement) dated as of August 25, 1988 by and among The Musicland Group, Inc., a Delaware corporation (the "Company"), Musicland Stores Corporations, a Delaware corporation (the "Parent") and Bruce B. Bausman (the "Executive"). WHEREAS, the Board of Directors, on behalf of the Company and the Parent, and the Executive have determined it to be in their mutual best interests to amend the Employment Agreement in certain respects: NOW, THEREFORE, BE IT RESOLVED, that the Employment Agreement shall be amended as follows: 1. Section 3, COMPENSATION, is amended by deleting the salary of "$130,000" in subparagraph (a) and inserting in its place "$188,670." 2. Section 9, REDUCTION FOR EQUITY APPRECIATION, is hereby deleted in its entirety and is no longer of any force or effect. 3. Section 19, NOTICES, is amended by deleting Bruce B. Bausman's home address of "21800 Byron Circle South, Greenwood, MN 55331 and inserting in its place "1381 County Road 2401, Silverthorn, CO 80498." EXHIBIT 10.7(c) IN WITNESS WHEREOF, the undersigned have executed this Amendment of Employment Agreement as of the date set forth above. THE MUSICLAND GROUP, INC. By: \S\ JACK W. EUGSTER --------------------------- Its: Chairman -------------------------- MUSICLAND STORES CORPORATION By: \S\ JACK W. EUGSTER --------------------------- Its: Chairman ------------------------- EXECUTIVE \S\ BRUCE B. BAUSMAN ------------------------------ Bruce B. Bausman EX-10.7(D) 4 2ND AM TO EMPLOY AGMT W/ LARRY GAINES EXHIBIT 10.7(d) SECOND AMENDMENT TO EMPLOYMENT AGREEMENT WITH LARRY C. GAINES (formerly titled "Agreement") AMENDMENT dated November 27, 1995 to the Employment Agreement ("the Employment Agreement", formerly titled Agreement) dated as of August 25, 1988 by and among The Musicland Group, Inc., a Delaware corporation (the "Company"), Musicland Stores Corporations, a Delaware corporation (the "Parent") and Larry C. Gaines (the "Executive"). WHEREAS, the Board of Directors, on behalf of the Company and the Parent, and the Executive have determined it to be in their mutual best interests to amend the Employment Agreement in certain respects: NOW, THEREFORE, BE IT RESOLVED, that the Employment Agreement shall be amended as follows: 1. Section 1, TERM OF EMPLOYMENT; OFFICE AND DUTIES, is amended by deleting the title "Senior Vice President of Stores - Eastern and Central Division" as it appears in subparagraph (a) thereof, and inserting in its place "President, Media Play Division." 2. Section 3, COMPENSATION, is amended by deleting the salary of "$120,000" in subparagraph (a) and inserting in its place "$257,400." 3. Section 9, REDUCTION FOR EQUITY APPRECIATION, is hereby deleted in its entirety and is no longer of any force or effect. 4. Section 19, NOTICES, is amended by deleting Larry C. Gaines' home address of "Three Hudson Court, West Windsor, NJ 08512" and inserting in its place "5935 Boulder Bridge Lane, Shorewood, MN 55331." EXHIBIT 10.7(d) IN WITNESS WHEREOF, the undersigned have executed this Amendment of Employment Agreement as of the date set forth above. THE MUSICLAND GROUP, INC. By: \S\JACK W. EUGSTER ------------------- Its: Chairman MUSICLAND STORES CORPORATION By: \S\JACK W. EUGSTER ---------------------- Its: Chairman EXECUTIVE \s\LARRY C. GAINES ----------------------- Larry C. Gaines EX-10.7(E) 5 2ND AM TO EMPLOY AGMT W/ ROBERT HENDERSON EXHIBIT 10.7(e) SECOND AMENDMENT TO EMPLOYMENT AGREEMENT WITH ROBERT A. HENDERSON (formerly titled "Agreement") AMENDMENT dated November 27, 1995 to the Employment Agreement ("the Employment Agreement", formerly titled Agreement) dated as of August 25, 1988 by and among The Musicland Group, Inc., a Delaware corporation (the "Company"), Musicland Stores Corporations, a Delaware corporation (the "Parent") and Robert A. Henderson (the "Executive"). WHEREAS, the Board of Directors, on behalf of the Company and the Parent, and the Executive have determined it to be in their mutual best interests to amend the Employment Agreement in certain respects: NOW, THEREFORE, BE IT RESOLVED, that the Employment Agreement shall be amended as follows: 1. Section 3, COMPENSATION, is amended by deleting the salary of "$115,000" in subparagraph (a) and inserting in its place "$173,290." 2. Section 9, REDUCTION FOR EQUITY APPRECIATION, is hereby deleted in its entirety and is no longer of any force or effect. EXHIBIT 10.7(e) IN WITNESS WHEREOF, the undersigned have executed this Amendment of Employment Agreement as of the date set forth above. THE MUSICLAND GROUP, INC. By: \S\ JACK W. EUGSTER -------------------- Its: Chairman ------------------- MUSICLAND STORES CORPORATION By: \S\ JACK W. EUGSTER -------------------- Its: Chairman ------------------ EXECUTIVE \S\ ROBERt A. HENDERSON ----------------------- Robert A. Henderson EX-10.8(C) 6 2ND AM TO CHANGE OF CONTROL AGMT W/ JACK EUGSTER EXHIBIT 10.8(c) SECOND AMENDMENT TO CHANGE OF CONTROL AGREEMENT OF JACK W. EUGSTER AMENDMENT dated as of November 27, 1995 to the Change of Control Agreement (the "Change of Control Agreement" formerly called Employment Agreement) dated as of August 25, 1988 and as amended January 22, 1992, by and among The Musicland Group, Inc., a Delaware corporation (the "Company"), Musicland Stores Corporation, a Delaware corporation (the "Parent") and Jack W. Eugster of Excelsior, Minnesota (the "Executive"). WHEREAS, the Board of Directors, on behalf of the Company and the Parent, and the Executive have determined it to be in their mutual best interests to amend the Change of Control Agreement in certain respects; NOW, THEREFORE, BE IT RESOLVED, that the Change of Control Agreement shall be amended as follows: 1. Paragraph 1.02, "Change of Control"," subparagraph (a) is amended by deleting "30%" and inserting in its place "20%." 2. Paragraph 1.02, "Change in Control" is amended by deleting subparagraph (b) thereof and inserting in its place the following new subparagraph (b): "(b) a majority of the directors of the Company or the Parent are persons other than persons (i) for whose election proxies have been solicited by the Board of Directors of the Company or the Parent, or (ii) who are then serving as directors appointed by the Board of Directors of the Company or the Parent to fill vacancies on the applicable Board of Directors caused by death or resignation (but not by removal) or to fill newly-created directorships, but excluding for purposes of this clause (ii) any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of 1934) or other actual or threatened solicitation of proxies or consents, or" 3. Paragraph 2.01 of Section 2, EMPLOYMENT; PERIOD OF EMPLOYMENT, is amended by inserting, after the word, "subsidiary" the words "or affiliate". 4. Paragraph 4.01 of Section 4, COMPENSATION; COMPENSATION PLANS, PERQUISITES, is amended by deleting the salary of $315,000" in clause (i) thereof and inserting in its place "$515,000." 5. Paragraph 10.01 of Section 10, MINIMUM SEVERANCE PERIOD, is amended by deleting subparagraph (ii)(C) of the definition of "Severance Period" in its entirety and is no longer of any force or effect. 6. Section 11, REDUCTION FOR EQUITY APPRECIATION, is hereby deleted in its entirety and is no longer of any force or effect. EXHIBIT 10.8(c) 7. Paragraph 12.02 of Section 12, JOINT AND SEVERAL LIABILITY; TRUST AGREEMENT, relating to establishment of a trust, is amended by adding the following words at the end of that paragraph: "; provided, however, that Executive may request that such trust be established at any time on or after the date a Change in Control occurs and prior to the date all amounts to which Executive is or may become entitled from such trust have been paid to Executive." IN WITNESS WHEREOF, the undersigned have executed this Second Amendment of Change of Control Agreement as of the date set forth above. THE MUSICLAND GROUP, INC. By: /s/ Michael W. Wright ---------------------------------- Its: Chairman, Compensation Committee --------------------------------- MUSICLAND STORES CORPORATION By: /s/ Michael W. Wright ---------------------------------- Its: Chairman, Compensation Committee --------------------------------- EXECUTIVE /s/ Jack W. Eugster ---------------------------------- Jack W. Eugster EX-10.9 7 MANAGEMENT INCENTIVE PLAN EXHIBIT 10.9 THE MUSICLAND GROUP MANAGEMENT INCENTIVE PLAN JANUARY 1, 1995 I. PURPOSE The Management Incentive Plan (the "Plan") is designed to reward participants who make significant contributions to the success of The Musicland Group (the "Company"). The Plan recognizes the importance of individual contributions to Company performance. Awards under this Plan take into consideration such factors as the importance and impact of each participant's accomplishments, the relative difficulty and the degree of risk involved in those accomplishments, as well as Company performance. II. ADMINISTRATION The Plan is administered by the Compensation Committee of the Company's Board of Directors (the "Compensation Committee"). In the absence of a designated Compensation Committee, the Board as a whole will act as the Compensation Committee. The Chief Executive Officer of the Company (the "CEO") shall make recommendations to the Compensation Committee regarding participation, level of awards, changes to the Plan, annual funding percentages, and other aspects of the Plan's administration. The Compensation Committee has the authority to interpret the Plan, and, subject to the Plan's provisions, to make and amend rules and to make all other decisions necessary for the Plan's administration. Specifically, the Compensation Committee has the authority to approve funding percentages and to approve individual awards for participants whose base salary is equal to or greater than an amount to be designated by the Compensation Committee. The CEO has the authority to approve individual awards for participants whose base salary is less than the designated amount. Each Plan Year will run from January 1 through the following December 31 (the "Plan Year"). III. PARTICIPATION The CEO will recommend for approval by the Compensation Committee the individuals who are eligible to participate in the Plan, and their level of participation. All eligible participants will be given the funding for their participation level and a copy of this Plan. IV. INCENTIVE COMPENSATION MEASURES Early each year the Compensation Committee will approve the business goals on which incentive funds (the funding pool) will be made available for awards to participants for such year, as well as a performance range above and below such goals, and the amounts to be made available for such awards at each level of business performance. The percentage funding is a separate and distinct calculation from the determination of individual awards (see V. below). 1995 Management Incentive Plan Actual business results for the year and their relation to such pre-established ranges shall determine the amounts, if any, to be made available for awards to designated participants. The actual business results will be provided by the Chief Financial Officer. The Compensation Committee may approve adjustments to actual business results to reflect organizational, operational, or other changes which have occurred during the year, e.g., acquisitions, dispositions, expansions, contractions, material non-recurring items of income or loss, or events which might create unwarranted hardships or windfalls to participants. The Compensation Committee will also determine the discretionary incentive funds, if any, to be made available for awards to participants based on their individual performance, such awards not to be contingent upon the attainment of business goals. V. DISTRIBUTION OF THE FUNDING POOL The Compensation Committee approves the percentage of the funding pool to be distributed each year. Up to, but no more than, 100% of the funding pool can be approved for distribution. Individual awards for participants whose base salary is equal to or greater than an amount to be designated by the Compensation Committee will be recommended by the CEO to the Compensation Committee for final approval. Individual awards for participants whose base salary is below the designated amount will be approved by the CEO. Individual awards will be determined on the basis of 1) actual Company performance compared to target business goals and/or 2) individual performance compared to the individual's objectives. Awards will be directly related to each participant's contribution, considering such factors as importance and impact of accomplishments as well as the difficulty and degree of risk involved in those accomplishments. Individual awards may be less or greater than the percent funding since awards are directly related to individual contributions. Eligible salary is the employee's cumulative base salary earned while a participant in the Plan during the Plan Year. In determining the base salary earned during the Plan Year any delay in the receipt of a salary increase from the customary date of increase will be ignored, and the Participant will be deemed to have received the increase on the customary date. No minimum award amount is guaranteed, as the Plan is not intended to provide awards for marginally satisfactory performance and the Plan makes no guarantee that individual bonuses will be equal to the Plan funding percentage. VI. PAYMENT OF AWARDS Awards will consist of two parts, a cash payment and a deferred award, as follows: A. Eighty percent (80%) of the award will be paid in cash, less applicable tax and FICA withholding, during the quarter following the close of the plan year. It will be paid as soon as 1) the Company performance results are available, 2) individual achievements against objectives have been determined and 3) all approvals have been obtained. Page 2 of 6 B. Twenty percent (20%) of the award will be made in the of a growth participation deferral which will increase or decrease in value over a four year deferral period as described below, proportionately to the increase or decrease in book value of The Musicland Group. (Note, this deferral is not the same as ownership in TMG, Inc. but will grow proportionally with the growth of the company.) For example: a participant whose total bonus for the 1995 Plan Year is $10,000 will receive in the first quarter of 1996 a cash payment of $8,000 (less applicable tax and FICA withholding) and will receive a deferral award with a total value of $2,000 as of 1-1-95 (the beginning of the plan year). All deferral awards must be held to maturity before payment is made in accordance with the following schedule and rules: 1. MATURITY OF THE AWARD -- Twenty five percent of your deferral award will mature in four equal annual increments with the first increment maturing on the first anniversary date of the end of the Plan Year for which the award is made and subsequent increments maturing on the three succeeding anniversary dates (said four year period being the "Deferral Period"). Each matured portion of the deferred award will be paid out during the first quarter following the date maturity is reached, as soon as the then current book value has been calculated and approved. For example: if a participant receives a deferred bonus award for the Plan Year ending 12-31-95, the award will mature and be paid out in increments of twenty five percent (25%) as follows: % Matured and Date Matured To Be Paid Out ------------ -------------- 12-31-95 None 12-31-96 25% of the deferral award in 1st Q 1997 12-31-97 25% of the deferral award in 1st Q 1998 12-31-98 25% of the deferral award in 1st Q 1999 12-31-99 25% of the deferral award in 1st Q 2000 2. ELIGIBILITY OF RECEIPT -- If employment is terminated for any reason during the Deferral Period (and even if the participant is later re-employed prior to the end of the Deferral Period), all non-matured portions of the original deferral amount at the time of termination are forfeited; except that in the event termination is due to retirement, disability, death, disposition of a portion of the business or transfer to an ineligible position, payout may continue according to the original schedule or may be made on an accelerated basis, either at the discretion of the CEO. In both cases the CEO shall determine the method of valuation of such matured or non-matured portions of the deferral award prior to pay out. Page 3 of 6 1995 Management Incentive Plan 3. CALCULATION OF EACH MATURED AWARD -- The then current value of your deferral award will be determined on an annual basis during Deferral Period based upon changes in the "book value" of the Company from the end of the fiscal year immediately preceding the Plan Year. BOOK VALUE as used in this Plan for the calculation of the value of your matured deferral payment is a separate and distinct concept and will not necessarily be the same as a book value which could be derived from the Company's financial records for other purposes. For the purposes of this Plan, Book Value will increase with year end net income and will decrease with year end net losses, paid out dividends, or paid-in capital. Said Book value may be adjusted for plan purposes to exclude any such dividends or paid in capital as well as to reflect extraordinary events or extraneous accounting adjustments. The Book Value at each year end will be determined by the Chief Financial Officer, reviewed by the Company's outside auditors and approved by the Board of Directors. Once the Book Value has been approved by the Board of Directors, it cannot be challenged. In the event of a public offering of common stock or a re-capitalization, any non-matured portion of your deferral will be re-valued so as to prevent a hardship or windfall to participants. The amount of each matured increment will be calculated based on the Company's increased or decreased book value at the end of each year during the deferral period. For the purposes of determining each deferral payout, we will establish a growth ratio by comparing the then current book value with the book value of the company on the beginning of the plan year. Twenty-five percent of your original deferral times the growth ratio will be paid out during the 1st quarter of the year following the date of maturity. This calculation will occur four times during the deferral period as each quarter of your performance deferral matures: Calculation: ------------ Current Book Value ------------------ Original Deferral Amount Base Book Value X .25 = payout For example: for Plan Year 1989 the deferred portion of a participant's award is $2,000. For the year end 12-31-88, the Book Value of the Company was 40MM. For the year end 12-31-90 (the first time a portion of your award matures) the Book Value of the Company is 50MM. The ratio of change in Book Value is 1.25 (50MM divided by 40MM), and, therefore, the value of your original deferral for purposes of calculating a payout on 12-31-90 is $2,500. Your subsequent payout would be $625 (25% of $2,500). Continuing the example, the Book Value of the Company at year end 12-31-91 is now 60MM. The ratio of change in Book Value is now 1.50 (60MM divided by 40MM) and therefore the value of your original deferral is $3,000 and your payout would be $750. If the Book Value at year end 12-31-91 has instead declined to 30MM, the ratio of change would be .75 (30MM divided by 40MM), and the value of your deferral would be $1,500 (or a $375 payout). Page 4 of 6 1995 Management Incentive Plan 4. Treatment of the 1992 IPO -- The 1992 public offering resulted in an extraordinary change in the Company's book value. Consequently, growth for all plan years will be calculated through 12/31/92 using interest and equity adjustments to factor out the effect of the IPO. Growth subsequent to 1/1/93 will use the actual book value reflecting the increased IPO equity. 5. There is no guarantee of the value of your deferral, as the value will fluctuate in accordance with the Company's performance, or even that any award will be paid since deferred compensation is subordinate to the claims of creditors in the event of bankruptcy. 6. The Company reserves the right to cancel deferred payment awards at any time after they have been granted and for any reason. At the time of cancellation, the value of any non-matured deferral increments will be updated based upon the Book Value of the Company at that time (seasonally adjusted for a partial year). The current value of the remaining increments, or the value of remaining increments at the previous year end, whichever is higher, will then be paid out whether such increments have matured or not. 7. All payments under the deferral program will be made in cash, less applicable tax and FICA withholding, and will be considered income in the year paid out. As an exception to the foregoing, and at the Company's option, at the time of maturity any unpaid deferral increments could be converted into an appropriate number of shares of the publicly traded stock which would be issued to the participant. The conversion formula for such an exchange would be recommended by the Chief Financial Officer, reviewed by the Company's outside auditors, and approved by the Board of Directors. Once a conversion formula is approved, it cannot be challenged. VII. AWARD CONDITIONS A. Employees hired or promoted into eligible positions on or before September 30 of the Plan Year will be eligible to participate in the Plan. Employees hired or promoted into eligible positions after September 30 may be eligible to participate upon approval by the CEO. In both cases, participation in the Annual Plan will be on a pro-rated basis, determined by the number of full weeks of employment in an eligible position. B. A participant who is promoted, at any time other than at the beginning of a Plan Year, into a position which calls for a higher participation level will be eligible to receive an award for that Plan Year which is a combination of pro-rated awards calculated at the two participation levels. Page 5 of 6 1995 Management Incentive Plan C. A participant whose employment ends prior to December 31st of a Plan Year due to retirement, disability, death, or disposition of part of the business, or who is transferred to an ineligible position prior to December 31st of a Plan Year, may be eligible for a pro-rated annual award for that Plan year, determined by the number of full weeks of employment in an eligible position, upon approval by the CEO. D. A participant whose employment terminates prior to December 31st of a Plan Year for reasons other than those listed in C above will not be eligible for any award for that Plan Year. E. A participant whose employment terminates after December 31st of a Plan Year, but prior to the payment of awards, may be eligible for an award for that Plan Year upon approval by the CEO. F. A participant who is on an approved unpaid leave of absence during a Plan Year may be eligible for a pro-rated award for that Plan Year upon approval by the CEO. A participant who is on an approved paid medical leave of absence during a Plan Year may be eligible for either a pro-rated or full award for that Plan Year upon approval by the CEO. G. If an increase in company book value occurs during any period when the participant is on an approved leave of absence (paid or unpaid), such increase (for purposes of calculating any portions of the matured deferral) may be adjusted downward at the CEO's sole discretion. H. Wherever in this Plan the CEO is given the authority to approve a participant's eligibility for a full or partial award, or to approve the pay out of any matured deferral increment, such approvals may be made at his sole discretion. VIII. GENERAL PROVISIONS A. This Plan does not guarantee, explicitly or implicitly, the right to continued employment for participants. B. MIP awards will be pensionable earnings under the 1989 pension plan. Legislation in effect at the time the award is approved will govern how much of the MIP awards are pensionable or non-pensionable earnings. Awards will be included in pensionable earnings in the year they are paid. C. This Plan can be terminated or its provisions changed at any time by the Compensation Committee of the Board of Directors acting upon the recommendation of the CEO. Page 6 of 6 t:\users\persnl\kim\mip\tmg95.doc 1995 Management Incentive Plan Page 6 of 6 EX-10.15 8 CHANGE OF CONTROL AGREEMENT/REID JOHNSON EXHIBIT 10.15 CHANGE OF CONTROL AGREEMENT between THE MUSICLAND GROUP, INC., MUSICLAND STORES CORPORATION and REID JOHNSON dated as of November 27, 1995 EXHIBIT 10.15 TABLE OF CONTENTS Page ---- 1. Operation of Agreement . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Employment; Period of Employment . . . . . . . . . . . . . . . . . . . 4 3. Position, Duties, Responsibilities . . . . . . . . . . . . . . . . . . 5 4. Compensation, Compensation Plans, Perquisites. . . . . . . . . . . . . 6 5. Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . 8 6. Retirement Program . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7. Effect of Death or Disability. . . . . . . . . . . . . . . . . . . . . 9 8. Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 9. Offset of Compensation and Benefits from Subsequent Employment . . . . 15 10. Minimum Severance Payment. . . . . . . . . . . . . . . . . . . . . . . 16 11. Joint and Several Liability; Trust Agreement . . . . . . . . . . . . . 18 12. Discount Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 13. Potential Excise Taxes . . . . . . . . . . . . . . . . . . . . . . . . 19 14. Indemnification and Insurance; Legal Expenses. . . . . . . . . . . . . 21 15. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 16. General Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . 23 EXHIBIT 10.15 CHANGE OF CONTROL AGREEMENT CHANGE OF CONTROL AGREEMENT ("Agreement"), dated as of November 27, 1995 among THE MUSICLAND GROUP, INC., a Delaware corporation (the "Company"), MUSICLAND STORES CORPORATION, a Delaware corporation (the "Parent") and REID JOHNSON (the "Executive"). WITNESETH: WHEREAS: A. The Executive is one of the principal officers of the Company and an integral part of its management. B. The Company wishes to assure itself and the Executive of continuity of management in the event of any actual or threatened Change in Control of the Company as hereafter defined. C. This Agreement is not intended to alter materially the compensation and benefits that the Executive could reasonably expect in the absence of a Change in Control of the Company or the Parent (as hereinafter defined) and, accordingly, this Agreement, though taking effect upon execution hereof, will be operative only upon a Change in Control and as set forth in paragraph 1.01 of this Agreement. NOW, THEREFORE, it is hereby agreed by and between the parties as follows: 1. OPERATION OF AGREEMENT 1.01 (a) This Agreement shall be effective immediately but shall not be operative unless and until there has been a Change in Control, as defined in Paragraph 1.02, while the Executive is in the employ of the Company. For purposes of this paragraph, such termination of employment of Eugster shall be deemed to have occurred as of the date the notice of termination EXHIBIT 10.15 is delivered to the Company or Eugster, as the case may be, in accordance with the terms of his employment agreement then operative and not the date stated in such notice as the date of termination as defined therein. Upon the date of a Change in Control, this Agreement shall become operative immediately. 1.02 "Change in Control" shall mean, except as provided in subparagraph (e) below, a change in control of the Company or the Parent that shall be deemed to have occurred if and when: (a) while the Company or the Parent maintains a class or series of equity securities that are registered under the Securities Exchange Act of 1934 and are publicly traded on a recognized securities exchange, any person (as such term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) shall become the beneficial owner, directly or indirectly, of 20% or more of the common stock of the Company or the Parent, or (b) a majority of the directors of the Company or the Parent are persons other than persons (i) for whose election proxies have been solicited by the Board of Directors of the Company or the Parent, or (ii) who are then serving as directors appointed by the Board of Directors of the Company or the Parent to fill vacancies on the applicable Board of Directors caused by death or resignation (but not by removal) or to fill newly-created directorships, but excluding for purposes of this clause (ii) any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of 1934) or other actual or threatened solicitation of proxies or consents, or (c) the Company's or the Parent's, or at least 70% of the Company's or the Parent's, assets are sold and transferred to another corporation or other enterprise that is not a 2 EXHIBIT 10.15 subsidiary, direct or indirect, or other affiliate of the Company or the Parent, if such other enterprise does not make arrangements with the Executive satisfactory to the Executive for his employment by such other enterprise, or (d) the Board of Directors of the Company or the Parent determines, by a vote of a majority of its entire membership, that a tender offer initiated by any person (as defined in subparagraph l.02(a) above) indicates an intention on the part of such person to acquire control of the Company or the Parent and there is a substantial likelihood that such tender offer will result in a Change in Control. Should any tender offer for shares of the Company or the Parent be initiated, the Board of Directors of the Company or the Parent, as the case may be, shall vote upon whether, in the good faith judgment of the Board, a substantial likelihood exists that such tender offer will result in a Change in Control. (e) No Change in Control shall be deemed to have occurred under subparagraph 1.02(c) or (d) above if: (i) the Company or the Parent is a debtor pursuant to a written loan agreement of the person so described in such subparagraph and (ii) either: (A) the right to nominate or elect directors by such person results from an event of default under a then operative provision of such loan agreement, or (B) the acquisition of securities described in such subparagraphs by such person results from a foreclosure by such person under a then operative provision of such loan agreement following an event of default, or (C) the acquisition of securities described in such subparagraphs by such person is pursuant to a plan of reorganization under the bankruptcy laws of the United States. For a period of 60 days following the date on which a Change in Control occurs, the Executive agrees to perform for the Company each and every one of his duties in effect immediately prior to the Change in Control as described in paragraph 3.01. 3 EXHIBIT 10.15 1.03 If there is a Change in Control of the type described in paragraph l.02(c), the Executive may elect to terminate the Period of Employment hereunder by giving written notice to the Company of his decision to terminate pursuant to this paragraph 1.03 within 30 days following the applicable sale or transfer, which termination shall be effective as of the 90th day following the date such notice is given or such earlier date as the Company may specify in a written notice given to the Executive. Any termination of the Period of Employment pursuant to this paragraph 1.03 shall be deemed a termination without Cause pursuant to the Executive's employment agreement dated as of July 25, 1994 (the "Prior Agreement"), as the same may have been amended to the date of such termination and the obligation set forth therein shall be and remain those of the Company (i.e., The Musicland Group, Inc.) and the Parent (i.e., Musicland Stores Corporation) prior to such sale or transfer and shall not be otherwise assignable. 2. EMPLOYMENT; PERIOD OF EMPLOYMENT. 2.01 The Company shall employ the Executive, and the Executive shall serve the Company, for the period set forth in paragraph 2.02 (the "Period of Employment"), in the position and with the duties and responsibilities set forth in Section 3, and upon the other terms and conditions hereinafter stated. Employment by a subsidiary or affiliate of the Company at the Company's request and with the Executive's consent shall constitute employment by the Company within the terms of this Agreement. 2.02 The Period of Employment shall commence on the date of a Change in Control and, subject only to the provisions of Section 7 relating to death or Disability and of paragraph 8.04 relating to termination for Cause, shall continue until the close of business on the last business day of the 24th calendar month following such Change in Control; provided, that on the last business day of the 12th calendar month following such Change in Control and on each 4 EXHIBIT 10.15 anniversary of such date thereafter, the Period of Employment shall be automatically extended by one additional year to the second subsequent such anniversary, but in no event shall the Period of Employment extend beyond the first day of the month next succeeding the month in which the Executive shall attain his 65th birthday) unless prior to the last business day of the 6th calendar month following such Change in Control, or any subsequent 12-month anniversary of such date thereafter, the Company shall deliver to the Executive or the Executive shall deliver to the Company written notice that the Period of Employment will not be extended, in which 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 by the Company and the Executive. 3. POSITION, DUTIES, RESPONSIBILITIES 3.01 (a)It is contemplated that during the Period of Employment the Executive shall serve in the position and have the duties and responsibilities as Executive Vice President and Chief Financial Officer or such other senior executive capacity with substantially the same nature and quality as those of the position of Executive Vice President and Chief Financial Officer, as the Company may from time to time determine. (b) During the Period of Employment, the Executive (i) shall hold a position of responsibility, importance and scope at least equal to his position referred to in subparagraph 3.01(a), (ii) shall, without compensation other than that herein provided, serve as an officer and director of any subsidiary or affiliate, provided the Executive has determined in his sole discretion that such service does not entail undue risk to the Executive in light of the financial condition of such subsidiary or affiliate and the extent of officers' and directors' liability insurance applicable to such service, and (iii) shall devote substantially all of his time, best efforts and undivided attention during normal business hours to the business and affairs of the Company and its subsidiaries except for reasonable vacations and except for illness or incapacity, but nothing in this Agreement shall preclude the Executive from devoting reasonable periods required for 5 EXHIBIT 10.15 (A) serving as a director or member of a committee of any organization or company involving no conflict of interest with the Company, (B) delivering lectures, fulfilling speaking engagements, teaching at educational institutions, (C) engaging in charitable and community activities, and (D) managing his personal investments; provided that such activities do not materially interfere with the performance of his duties hereunder. 3.02 The Executive's office shall be located in the Minneapolis, Minnesota metropolitan area. He shall not be required, without his written consent, to locate his office more than 20 miles distant by public highway from his office immediately prior to the Change in Control or to be absent therefrom on business more than 60 working days in any year or more than 14 consecutive days at any one time. 4. COMPENSATION, COMPENSATION PLANS, PERQUISITES 4.01 For all services rendered during the Period of Employment, the Executive shall receive: (i) a salary, payable no less often than monthly, at the annual rate of $286,000 or the rate of monthly salary of the Executive paid prior to the Change in Control, whichever is higher, subject to such periodic increases as shall be awarded in accordance with the Company's regular administrative practices of salary increases applicable to executives in effect prior to the Change in Control, and (ii) an annual award under the Company's Management Incentive 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 the annual salary payable to the Executive for such calendar year determined on the basis of the monthly salary payable to the Executive as of the beginning of such calendar year under clause (i) of this paragraph (after adjustment to reflect any increase therein awarded by the Company under clause (i)). Such percentage shall be the lesser of (A) 35% or (B) 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 the Executive's annual award under the Management Incentive Plan (or its successor) for such year by the Executive's annual salary for that year. 6 EXHIBIT 10.15 Increases in salary and annual awards under this Agreement or otherwise shall not diminish any other obligation of the Company hereunder. 4.02 (a)During the Period of Employment, the Executive shall continue to be a full participant in the performance awards and stock incentive aspects of the Company's Long-Term Incentive Plan and any other long-term incentive plans of the Company (provided that Executive was a participant in such plan or plans immediately prior to the Change in Control), and shall also be a participant in any and all other executive incentive plans in which executives of the Company participate that are in effect for Executive immediately prior to a Change in 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. (b) Upon a Change in Control, the right to exercise any and all stock options to purchase shares of the Company's or Parent's stock and any stock appreciation rights held by the 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 the Executive shall be deemed to have lapsed, the deferral period and all conditions pertaining to any deferred stock awards previously granted to the Executive shall be deemed to have expired or have been satisfied, as the case may be, and the Executive shall be entitled to receive all such shares of restricted or deferred stock. All restricted stock and all deferred stock awards granted to the Executive on or after the date hereof shall be awarded subject 7 EXHIBIT 10.15 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 in Control, as defined in Paragraph l.02 of the Optionee's Employment Agreement with the Company dated as of November 27, 1995 should occur and such Agreement becomes operative as provided in Paragraph 1.01, this Option shall immediately thereafter become exercisable in full. 4.03 During the Period of Employment the Executive shall be entitled to perquisites and to fringe benefits in each case at least equal to those attached to his office immediately prior to a Change in Control, as well as to reimbursement, upon proper accounting of reasonable expenses and disbursements incurred by him in the course of his duties. 4.04 The compensation provided for in this Section 4, together with other matters therein set forth, is in addition to the benefits provided for in Sections 5 and 6. 5. EMPLOYEE BENEFIT PLANS 5.01 The Executive shall be entitled to all payments, benefits and service credit for benefits during the Period of Employment to which Company officers are entitled, immediately prior to a Change in Control, as a result of their employment under the terms of employee plans and practices of the Company, other than the Retirement Program, for which specific provision is made in Section 6, but including, without limitation, (i) the Company's Capital Accumulation Plan, (ii) its death benefit plans (consisting of its Group Life Insurance Plan and accidental death and dismemberment insurance), (iii) its disability benefit plans (consisting of its short-term salary continuation, short-term disability and long-term disability plans), (iv) its senior officer medical, dental, health and welfare plans, and (v) other present or equivalent successor plans and practices of the Company for which officers are eligible, and to all payments or other benefits under any such plan or 8 EXHIBIT 10.15 practice subsequent to the Period of Employment as a result of participation in such plan or practice during the Period of Employment. 5.02 Nothing in this Agreement shall preclude the Company from amending or terminating any particular employee benefit plan or practice, provided that the Executive shall continue to be entitled during the Period of Employment to perquisites as set forth in paragraph 4.03 and to benefits and service credit for benefits under paragraph 5.01 at least as favorable to the Executive as those to which he is entitled immediately prior to a Change in Control. If and to the extent that such perquisites, benefits and service credits are not payable or provided under any such plans or practices by reason of such amendment or termination thereof, the Company itself shall pay or provide therefor. 6. RETIREMENT PROGRAM. The term "Retirement Program" shall mean the Company's Employees' Retirement Plan. Executive shall not be eligible for benefits under the Retirement Program, except that the Executive shall be eligible to participate in the Musicland Group's Capital Accumulation Plan upon satisfying the eligibility requirements of that Plan and in any retirement plans that may become applicable to Executives employed by the Company after the date of this Agreement. 7. EFFECT OF DEATH OR DISABILITY 7.01 If the Executive should die during the Period of Employment, his legal representative shall be entitled to the compensation provided for in paragraph 4.01 for the month in which death shall have occurred, and the Period of Employment shall end on the last day of such month without prejudice to any other payments due in respect of the Executive's death. 7.02 (a) The word "Disability" shall mean an illness or accident which prevents the Executive from performing his duties under this Agreement for a period of six 9 EXHIBIT 10.15 consecutive months. The Period of Employment shall end on the last day of such six months' period but without prejudice to any payments due the Executive in respect of Disability. (b) In the event of the Executive's Disability during the Period of Employment, the Executive shall be entitled to the compensation provided for in paragraph 4.01 for the period of such Disability but not in excess of six months. (c) The amount of any payments due under this paragraph shall be reduced by any payments to which the Executive may be entitled for the same period because of disability under any disability or pension plan of the Company. 8. TERMINATION 8.01 In the event of a Termination, as defined in paragraph 8.03, during the Period of Employment, the provisions of this Section 8 shall apply. 8.02 In the event of a Termination, the Company shall, as liquidated damages or severance pay, or both, pay to the Executive and provide him, his dependents, beneficiaries and estate, in lieu of all other remedies, damages or relief to which he might otherwise be entitled under this Agreement, with the following: (a) A lump sum equal to the total of the following future payments, discounted to present value at the Discount Rate as defined in Section 12 applied to each such future payment, that would have been made for the remainder of the Period of Employment, as if such Termination had not occurred: (i) the salary provided in subparagraph 4.01(i) at the time of such termination, at the times therein stated, for the month in which the Termination shall have occurred and for each month thereafter during the Period of Employment, less in respect of each such month the amounts, if any, the Executive would have paid in cash in respect of employee benefits provided for in subparagraphs 5.01 (ii), (iii) and (iv) if the Executive were still employed, and 10 EXHIBIT 10.15 (ii) the annual awards provided in subparagraph 4.01(ii), at the times therein stated, for the year in which the Termination shall have occurred and for each year thereafter during the Period of Employment; provided that, for the purpose of calculating the lump sum due under this subparagraph 8.02(a)(ii), the annual awards for the remainder of the Period of Employment shall be calculated pursuant to subparagraph 4.01(ii) using an annual salary at the time of such Termination. (b) In full substitution for any awards under the Long Term Incentive Plan, a lump sum equal to 35% of the annual rate of salary payable to the Executive in accordance with subparagraph 4.01(i) at the time of such Termination, for the year in which the Termination shall have occurred and for each year thereafter during the Period of Employment, as if such Termination had not occurred. (c) All lump-sum payments to be made by the Company under this Section 8 shall be made within 20 days after Termination. (d) The Executive shall continue to be entitled to all employee benefits provided for in subparagraphs 5.01(ii), (iii) and (iv), relating to death benefit, disability benefit, and senior officer medical, dental, health and welfare plans and all other present or equivalent successor plans and practices of the Company for which officers are eligible, until the Executive shall attain age 65, as if the Executive were still employed during such period under this Agreement, with benefits based upon the compensation provided in paragraph 4.01 at the time of such Termination as if the Executive continued to be employed until age 65, and if and to the extent that such benefits shall not be payable or provided under any such plan by reason of the Executive no longer being an employee of the Company as a result of Termination, the Company itself shall pay or provide therefor. (e) The payments made and benefits provided to the Executive, his beneficiaries, or estate pursuant to this paragraph 8.02 shall be in lieu of, and not in addition to, 11 EXHIBIT 10.15 any and all benefits to which the Executive is otherwise entitled upon termination of employment with the Company, including, but not limited to, any other Company policies, procedures, or practices, oral or written, now or hereafter established, and shall be in lieu of all other remedies, damages, or relief to which he might otherwise be entitled under this Agreement. 8.03 The word "Termination" shall mean: (a) Termination by the Company of the Executive's employment for any reason other than for Cause as defined in paragraph 8.04 or for Disability; or (b) Termination by the Executive of his employment upon the occurrence of any of the following events: (i) A significant change in the nature or scope of the authorities, powers, functions, duties or responsibilities attached to the position referred to in paragraph 3.01(a) or a position of comparable authorities, powers, functions, duties or responsibilities to that of senior officers generally or a reduction in compensation, which in either event is not remedied within 30 days after receipt by the Company of written notice from the Executive; (ii) A breach by the Company of any provision of this Agreement not embraced within the foregoing clause (i) which is not remedied within 30 days after receipt by the Company of written notice from the Executive; (iii) The liquidation, dissolution, consolidation or merger of the Company or transfer of 70% or more of its assets unless a successor or successors (by merger, consolidation or otherwise) to which all or 70% or more of its assets has been transferred shall have assumed all duties and obligations of the Company under this Agreement; provided that, in any event set forth in this subparagraph, the Executive shall have elected to terminate his employment under this Agreement upon not less than 30 and not more than 90 days' advance written notice to the Board of Directors of the Company, attention of the Chief Executive Officer, given, except in the case of a continuing breach, within three calendar months after (A) expiration of the 30-day cure period with respect to such event, or (B) the closing date of such liquidation, dissolution, consolidation, merger or transfer of assets. 12 EXHIBIT 10.15 An election by the Executive to terminate his employment under the provisions of this subparagraph shall not be deemed a voluntary termination of employment by the Executive for the purpose of this Agreement or any plan or practice of the Company. 8.04 The Company shall have the right, by not less than 60 days' notice in writing, to terminate for Cause the employment of the Executive and the Period of Employment. The termination of the Executive's employment shall be deemed to have been for Cause only (i) if termination of his employment shall have been the result of an act or acts of dishonesty by him or an act or acts resulting or intended to result directly or indirectly in gain to or personal enrichment of the Executive at the Company's expense; or (ii) if there has been a deliberate and intentional refusal by the Executive during the Period of Employment (except by reason of incapacity due to illness or accident) to comply with the provisions of subparagraph 3.01(b), relating to the time and best efforts to be devoted to the affairs of the Company, and such breach results in demonstrably material injury to the Company, and the Executive shall have either failed to remedy such alleged breach within 30 days from his receipt of written notice from the Secretary of the Company demanding that he remedy such alleged breach, or shall have failed to take all reasonable steps to that end during such 30- day period and thereafter; or (iii) if there has been a determination by the Chief Executive Officer or an affirmative vote (as described below) of the Board of Directors of the Company 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 office assigned to him and such failure has had an adverse impact upon the Company; provided that such determination may be made only after at least two formal reviews of the Executive's performance by the Chief Executive Officer conducted at an interval of at least six months at which the Executive shall be informed of the most significant deficiencies in performance and during such interval and a period of at least ninety days from and after the most recent such review, the Executive shall have failed to correct or failed to take all reasonable steps to correct such significant deficiencies; provided that there shall have been delivered to the Executive with the above- mentioned 60-day notice a certified copy of a resolution of the Board of Directors of the Company adopted by the affirmative vote of at least a majority of the entire membership (whether or not present) of the Board of Directors (other than the Executive) of the Company at a meeting called and held for that purpose and at which the Executive was given an opportunity to be heard, finding that the 13 EXHIBIT 10.15 Executive was guilty of conduct set forth in clause (i), (ii) or (iii) above, specifying the particulars thereof in detail. For purposes of the minimum number of directors required for the affirmative vote described in the next preceding sentence, any fraction shall be rounded to the next higher whole number of directors. Anything herein to the contrary notwithstanding, the employment of the Executive shall not be considered to have been terminated by the Company for Cause if termination of his employment took place (i) as the result of bad judgment or negligence on the part of the Executive, or (ii) as the result of an act or omission without intent of gaining therefrom directly or indirectly a profit to which the Executive was not legally entitled, or (iii) because of an act or omission believed by the Executive in good faith to have been in or not opposed to the interests of the Company. 8.05 If the Executive's employment shall be terminated by the Company during the Period of Employment and such termination is alleged to be for Cause, or the Executive's right to terminate his employment under subparagraph 8.03(b) shall be questioned by the Company, the Executive shall have the right, in addition to all other rights and remedies provided by law, at his election, either to seek arbitration in Minneapolis, Minnesota, under the rules of The American Arbitration Association, by serving a notice to arbitrate upon the Company, or to institute a judicial proceeding, in either case within 90 days after having received notice of termination of his employment or notice in any form that the termination of his employment under subparagraph 8.03(b) is subject to question or within such longer period as may reasonably be necessary for the Executive to take action in the event that his illness or incapacity should preclude his taking such action within such 90-day period. 14 EXHIBIT 10.15 9. OFFSET OF COMPENSATION AND BENEFITS FROM SUBSEQUENT EMPLOYMENT 9.01 In the event of a termination of his employment, the Executive shall not be required to minimize damages or severance payment under Sections 8 or 10 by seeking or accepting other employment or consulting position. 9.02 If the Executive obtains other employment or a consulting position subsequent to a Termination and prior to the end of the Period of Employment, the Executive shall pay to the Company on a quarterly basis the Subsequent Compensation, as defined below, that he receives for such other employment through the last day of the Period of Employment, provided, however, that the amount of such quarterly payments shall be reduced by any liability with respect to such Subsequent Compensation that the Executive incurs for income taxes (after taking into account any income tax benefit available as a result of such quarterly payments) and payroll deductions required by law, and provided further that no such payments shall be made unless the Executive received a lump sum payment pursuant to and in accordance with subparagraphs 8.02(a) and (b). Subsequent Compensation for each calendar quarter during which the Executive engages in such other employment or consulting position shall equal the lesser of (i) the cash or other compensation that is payable to the Executive for such employment or consulting position during that particular quarter, or (ii) the figure obtained by multiplying the total amount of salary plus annual and prorated performance awards used in calculating a lump sum payment for the Executive under subparagraphs 8.02(a) and (b) (prior to discounting to present value as of the Termination) by a fraction, the numerator of which is 3 and the denominator of which is the number of months remaining in the Period of Employment after Termination. Notwithstanding the foregoing, the Executive shall not be required to minimize payments or benefits under this Agreement by seeking or accepting other employment or a consulting position. 15 EXHIBIT 10.15 9.03 The benefits to be provided by the Company under the provisions of subparagraph 8.02(d) shall be reduced to the extent of the death, disability, medical, dental, health and welfare benefits received by the Executive from any other employment or consulting position he obtains subsequent to a Termination and prior to his attaining age 65. 10. MINIMUM SEVERANCE PAYMENT 10.01 If the employment of the Executive shall be terminated by the Company for any reason other than Cause at a time prior to the attainment by the Executive of 65 years of age and when there are fewer than 12 months remaining in the Period of Employment, the Company shall pay the Executive a lump sum severance payment, in addition to any payment under Section 8, equal to the total of the following future payments, discounted to present value at the Discount Rate as defined in Section 12 applied to each such payment, for each month of the Severance Period (as defined below): the sum of (i) the monthly salary of the Executive in effect for the month immediately preceding the month in which termination of his employment shall have taken place, (ii) the average of the highest annual incentive awards paid to the Executive under the Management Incentive Plan for any three calendar years (or the actual number of years if fewer) during the last ten years of his employment by the Company (or the actual number of years if fewer) divided by 12, and (iii) the average of the highest incentive awards, if any, paid to the Executive under the Long-Term Incentive Plan for any three performance periods (or the actual number of performance periods if fewer) during the last ten years of his employment by the Company (or the actual number of years if fewer) divided by 12. The Severance Period shall (i) commence upon the first calendar month after the completion of the Period of Employment, and (ii) end upon the earliest of (A) 12 calendar months after the termination of his employment, or (B) the month in which the Executive shall attain 65 years of age. 16 EXHIBIT 10.15 The payments made and benefits provided to the Executive, his beneficiaries, or estate pursuant to this paragraph 10.01 shall be in lieu of, and not in addition to, any and all benefits to which the Executive is otherwise entitled upon termination of employment with the Company, including, but not limited to, any other Company policies, procedures, or practices, oral or written, now or hereafter established, and shall be in lieu of all other remedies, damages, or relief to which he might otherwise be entitled under this Agreement. 10.02 If the Executive receives payment under paragraph 10.01 and obtains other employment or consulting position within the Severance Period, the Executive shall pay to the Company on a quarterly basis the Post-Severance Compensation, as defined below, that he receives for such other employment or consulting position through the last day of the Severance Period, provided, however, that the amount of such quarterly payments shall be reduced by any liability with respect to such Post-Severance Compensation that the Executive incurs for income taxes (after taking into account any income tax benefit available as a result of such quarterly payments) and payroll deductions required by law. Post-Severance Compensation for each calendar quarter during which the Executive engages in such other employment or consulting position shall equal the lesser of (i) the cash or other compensation that is payable to the Executive for such employment or consulting position during that particular quarter, or (ii) the figure obtained by multiplying the total amount of salary plus annual awards used in calculating a lump-sum payment for the Executive under paragraph 10.01 (prior to discounting to present value as of the termination) by a fraction the numerator of which is 3 and the denominator of which is the number of months in the Severance Period. Notwithstanding the foregoing, the Executive shall not be required to minimize payments or benefits under this Agreement by seeking or accepting other employment or a consulting position. 17 EXHIBIT 10.15 11. JOINT AND SEVERAL LIABILITY; TRUST AGREEMENT 11.01 All duties, undertakings, obligations, and liabilities of the Company or the Parent arising under this Agreement shall be the joint and several liability of the Company and the Parent. 11.02 To assure the performance by the Company and the Parent of its obligations under this Agreement in the event of a Change in Control, the Company or the Parent shall, upon the request of the Executive immediately prior to a Change in Control, or at any time on or after the date a Change in Control occurs and prior to the date all amounts to which Executive is or may become entitled hereunder have been paid to Executive, deposit in an irrevocable trust with a trustee designated by the Executive, an amount of liquid assets equal to the present value based on the Discount Rate defined in Section 12 of the maximum amount of all lump sum amounts which could be paid to Executive in the event of a Termination of the Executive (as defined in paragraph 8.03) following a Change in 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 of which entering into, renegotiation, or amendment is such preclusion. The trust shall be reasonably satisfactory in form and substance to the Executive, with no greater rights in the Executive than an unsecured creditor of the Company and Parent. During the period described in the first sentence of this paragraph, the Executive may also elect that the Company or the Parent shall also deposit into such an irrevocable trust an amount of liquid assets equal to the entire accrued benefit to which the Executive is then entitled 18 EXHIBIT 10.15 under the Executive Deferred Compensation Plan between the Executive and the Parent and the Company effective January 1, 1995, as such plan may be amended from time to time; provided, however, that the provisions of the Executive Deferred Compensation Plan shall continue to apply to the portion of the trust established under this sentence. To the extent there are not amounts in trust sufficient to pay all amounts due to Executive under this Agreement, and under the Executive Deferred Compensation Plan, if applicable, the Company and Parent shall be and remain liable therefore. 12.DISCOUNT RATE For purposes of determining the present value of any payment or benefit under this Agreement, the term "Discount Rate" shall mean 10%; provided, that if the average of the prime rate (or its equivalent) charged by Morgan Guaranty Trust Company of New York during the 30 day Period which ends 15 days after the date of the Executive's Termination is 8% or less, the Discount Rate shall be 8%. 13.POTENTIAL EXCISE TAXES In the event that any excise tax is payable by the Executive by reason of section 4999 of the Internal Revenue Code of 1986, as that section may be amended, or any successor or similar provision thereto, or comparable state or local tax laws, as a direct or indirect result of the receipt of any payment, right or benefit received after November 27, 1995 by the Executive from the Company or from any interested person which is in the nature of compensation in connection with his employment with the Company, Parent, or any subsidiary of either of them, the Company shall pay to the Executive such additional compensation as is necessary (after taking into account all Federal, state and local taxes, including income and excise taxes, payable by the Executive as a result of the receipt of such additional compensation) to place the Executive in the same after-tax 19 EXHIBIT 10.15 position he would have been in had no such excise tax (and any interest and penalties thereon) been paid or incurred. The Company shall pay such additional compensation upon the earlier of (A) the time at which the Company withholds such excise tax from any payments to the Executive, or (B) 30 days after the Executive notifies the Company that the Executive has filed a tax return which takes the position that such excise tax is due and payable in reliance on a written opinion of the Executive's tax counsel that it is more likely than not that such excise tax is due and payable. If the Executive makes any payment with respect to any such excise tax as a result of an adjustment to the Executive's tax liability by any Federal, state or local authority, the Company will pay such additional compensation within 30 days after the Executive notifies the Company of such payment. Without limiting the obligation of the Company hereunder, the Executive agrees, in the event the Executive makes any payment pursuant to the preceding sentence, to negotiate with the Company in good faith with respect to procedures reasonably requested by the Company which would afford the Company the ability to contest the imposition of such excise tax; provided, however, that the Executive will not be required to afford the Company any right to contest the applicability of any such excise tax to the extent that the Executive reasonably determines that such contest is inconsistent with the overall tax interests of the Executive. The Company agrees to hold in confidence and not to disclose, without the Executive's prior written consent, any information with regard to the Executive's tax position which the Company obtains pursuant to this Section 13. 20 EXHIBIT 10.15 14. INDEMNIFICATION AND INSURANCE; LEGAL EXPENSES 14.01 The Company will indemnify the Executive (and his legal representatives or other successors) to the fullest extent permitted (including payment of expenses in advance of final disposition of the 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 date of this Agreement, or by the terms of any indemnification agreement between the Company and the Executive, whichever affords or afforded greater protection to the 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, the Executive shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any Company officer or director), against all costs, charges and expenses whatsoever incurred or sustained by him or his legal representatives in connection with any action, suit or proceeding to which he (or his legal representatives or other successors) may be made a party by reason of his being or having been a director, officer or employee of the Company or any of its subsidiaries or his serving or having served any other enterprise as a director, officer or employee at the request of the Company, provided that the Company shall cause to be maintained in effect for not less than six years from the date of a Change in Control (to the extent available) policies of directors' and officers' liability insurance of at least the same coverage as those maintained by the Company at any time within 180 days after the date of this Agreement and containing terms and conditions which are no less advantageous than such policies. 21 EXHIBIT 10.15 14.02 In the event of any litigation, arbitration or other proceeding between the Company and the Executive with respect to the subject matter of this Agreement or the enforcement of his rights hereunder, the Company shall periodically reimburse the Executive, regardless of the outcome, for all of his reasonable costs and expenses relating to such litigation, arbitration or other proceeding, including, without limitation, his reasonable attorneys' fees and expenses. In no event shall the Executive be required to reimburse the Company for any of the costs or expenses relating to such litigation, arbitration or other proceeding. 15. NOTICES All notices, requests, demands and other communications provided for by this Agreement shall be in writing and shall be sufficiently given if personally delivered or if actually received by mail, return receipt requested and postage prepaid, addressed to the party entitled thereto at the address stated below or to such changed address as the addressee may have given by a similar notice to the other: To the Company: The Musicland Group, Inc. 7500 Excelsior Boulevard Minneapolis, MN 55426 Attention: Chief Executive Officer To the Executive: The Musicland Group, Inc. 7500 Excelsior Boulevard Minneapolis, MN 55426 Attention: Reid Johnson With an additional copy to: Reid Johnson 9166 Breckenridge Lane ---------------------- Eden Prairie, MN 55347 ----------------------- Receipt by mail shall be established by a duly executed return receipt. 22 EXHIBIT 10.15 16. GENERAL PROVISIONS 16.01 Whenever, under this Agreement, it is necessary to determine whether one benefit is less than, equal to, or larger than another in value, whether or not such benefits are provided under this Agreement, such determination shall be made using mortality, interest and any other assumptions no less favorable to the Executive than those normally used as of the date of such determination in determining actuarial equivalents for the purpose of the Retirement Program. 16.02 This Agreement shall not confer any right or impose any obligation on the Executive to continue in the employ of the Company, or limit the right of the Company or the Executive to terminate his employment, at any time prior to a Change in Control. 16.03 The Company shall have no right of set-off or counterclaim in respect of any claim, debt or obligation against any payments provided for in this Agreement, except as otherwise provided in paragraphs 9.02 and 10.02. 16.04 No right to or interest in any payments shall be assignable by the Executive; provided, however, that this provision shall not preclude him from designating one or more beneficiaries to receive any amount that may be payable after his death and shall not preclude his executor or administrator from assigning any right hereunder to the person or persons entitled thereto. 16.05 No provision of this Agreement may be amended, modified or waived unless such amendment, modification or waiver shall be agreed to in writing signed by the Executive and by a duly authorized Company officer. 16.06 If any provision of this Agreement shall be determined to be invalid or unenforceable by a court of competent jurisdiction, the remaining provisions of this Agreement shall remain in full force and effect to the fullest extent permitted by law. 23 EXHIBIT 10.15 16.07 When this Agreement becomes operative, the obligations of the Company under paragraphs 11 (joint and several liability; trust agreement), 13 (potential excise taxes) and 14 (indemnification and insurance; legal expenses) shall survive the termination for any reason of this Agreement (whether such termination is by the Company, by the Executive, upon the expiration of this Agreement or otherwise). 16.08 This Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company including, without limitation, any corporation or corporations acquiring directly or indirectly all or substantially all of the assets of the Company, whether by merger, consolidation, sale or otherwise (and such successor shall thereafter be deemed "the Company" for the purposes of this Agreement), but shall not otherwise be assignable by the Company. 16.09 The word "Executive" shall wherever appropriate include his dependents, beneficiaries and legal representatives. 16.10 All payments required to be made by the Company hereunder to the Executive or his estate or beneficiaries shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. 16.11 The validity, interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of Minnesota, without giving effect to the principles of conflict of laws thereof. 24 EXHIBIT 10.15 IN WITNESS WHEREOF, the parties hereto have executed this Change of Control Agreement as of the day and year first above written to be effective and operative as set forth in Section 1.01. THE MUSICLAND GROUP, INC. By:\S\ JACK W. EUGSTER ------------------- Its: Chief Executive Officer MUSICLAND STORES CORPORATION By:\S\ JACK W. EUGSTER ------------------- Its: Chief Executive Officer REID JOHNSON \S\ REID JOHNSON ----------------- 25 EX-10.16 9 EXECUTIVE DEFERRED COMPENSATION PLAN EXHIBIT 10.16 EXECUTIVE DEFERRED COMPENSATION PLAN The purpose of this DEFERRED COMPENSATION PLAN (the "Plan") is to govern the terms and conditions by which The Musicland Group, Inc., a Delaware corporation, and its parent, Musicland Stores Corporation, a Delaware corporation, and all consolidated subsidiaries (collectively the "Company") will allow Reid Johnson (the "Executive") to defer receipt of compensation. RECITALS WHEREAS, the Executive is a highly compensated employee employed by the Company in a top management position; WHEREAS, the Company recognizes the valuable services performed by the Executive and wishes to encourage his retention; WHEREAS, Executive wishes to defer some or all of his compensation; WHEREAS, the Company is willing to pay such deferred compensation to the Executive; and WHEREAS, the Company and Executive intend that this Plan be considered an unfunded arrangement which is maintained primarily to provide deferred compensation benefits for the Executive for the purposes of the Employee Retirement Income Act of 1974, as amended ("ERISA"); NOW, THEREFORE, in consideration of the premises and the mutual promises and covenants contained herein, the parties do hereby agree as follows: ARTICLE 1 DEFINITIONS AND ADMINISTRATION SECTION 1.1 CERTAIN DEFINITIONS. For purposes of this Plan, the following terms shall be defined as set forth below: (a) "ACCRUED BENEFITS" means the sum of all Deferred Amounts credited to the Executive's Deferral Account and due and owing to the Executive, or his or her beneficiaries, pursuant to this Plan, adjusted for any Investment Additions or Losses thereto, minus any distributions hereunder. (b) "BOARD OF DIRECTORS" means the board of directors of Musicland Stores Corporation. (c) "CODE" means the Internal Revenue Code of 1986, as amended from time to time. 1 (d) "COMPENSATION" means total salary and bonuses of the Executive paid or accrued by Musicland, exclusive of Accrued Benefits, stock options, stock appreciation rights, restricted stock, and any employer contributions or payments to any other trust, fund, agreement or plan providing retirement, pension, profit sharing, health, welfare, death, insurance or similar benefits. (e) "DEFERRAL ACCOUNT" means book entries maintained by the Company reflecting Deferred Amounts and Investment Additions or Losses thereon; provided, however, that the existence of such book entries and the Deferral Account shall not create and shall not be deemed to create a trust of any kind, or a fiduciary relationship between the Company and the Executive, his or her designated beneficiary, or other beneficiaries under this Plan. If the Executive has elected differing deferral periods for portions of the Deferred Amounts, the Company may, in its discretion, establish subaccounts to reflect such differing deferral periods. (f) "DEFERRED AMOUNTS" means the amounts of Compensation actually deferred by an Executive pursuant to this Plan. (g) "DISABILITY" means an Executive's physical or mental incapacity resulting from personal injury, disease, illness or other condition, which (i) prevents him or her from performing his or her duties for the Company, as the same is determined in a uniform manner by the Committee after reviewing any medical evidence or requiring any medical examinations which the Committee considers necessary to its determination and (ii) results in a termination of his or her employment with the Company. (h) "EFFECTIVE DATE" means January 1, 1995. (i) "ELECTION OF DEFERRAL" means a written notice filed by the Executive with the Payroll Department of the Company in substantially the form attached hereto as Exhibit 1 specifying the amount of Compensation to be deferred. (j) "FISCAL YEAR" means the taxable year of the Company (currently January 1 - December 31). (k) "INVESTMENT ADDITIONS OR LOSSES" means any earnings or losses on Deferred Amounts calculated as set forth in Section 3.1 hereof. (l) "PLAN" means this Agreement and any amendments or supplements thereto. (m) "SUBSIDIARY" means any corporation in an unbroken chain of corporations beginning with Musicland Stores Corporation if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. SECTION 1.2 ADMINISTRATION. The Plan shall be administered by the Compensation Committee of the Board of Directors. The Compensation Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines 2 and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan; and to otherwise supervise the administration of the Plan. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and the Executive. ARTICLE 2 DEFERRED COMPENSATION SECTION 2.1 MAXIMUM ANNUAL DEFERRAL. (a) Commencing on the Effective Date, and continuing through the date on which the Executive's employment terminates for any reason, the Executive and the Company agree that the Executive shall be entitled to elect to defer into his Deferral Account up to the following percentages of the Compensation that the Executive would otherwise be entitled to receive from the Company in each Fiscal Year of the Company. (i) Up to 100% of base salary, with a minimum deferral of $5,000. (ii) Up to 100% of that portion of the Management Incentive Plan annual bonus (if any) which is not already deferred under the terms of the Management Incentive Plan, with a minimum deferral of $5,000. (b) The maximum percentages of Compensation that can be deferred as set forth above are hereinafter referred to collectively as the "Maximum Annual Deferral Sum." The amount actually selected for deferral pursuant to an Election of Deferral is referred to as the "Annual Deferral Sum." SECTION 2.2 ELECTION TO DEFER COMPENSATION. (a) The Executive may elect an Annual Deferral Sum hereunder by filing an Election of Deferral. The election to be effective for any Fiscal Year must be received by the Payroll Department by the close of business on the first business day following Christmas day of the preceding year. Deferrals will commence pursuant to such election beginning with the first pay period which begins after the filing of the Election of Deferral and is paid in January. (b) Each Election of Deferral shall be effective only for the Fiscal Year to which the Election of Deferral pertains. A new Election of Deferral must be filed in December for each succeeding Fiscal Year. (c) The Deferred Amounts shall be credited to the Executive's Deferral Account as of the dates such Deferred Amounts would, but for the deferral, be payable to the Executive. (d) An election to defer compensation, once made, may not be discontinued during the Fiscal Year to which the Election of Deferral applies unless an unforeseeable financial emergency (governed by Section 4.4 herein) occurs. 3 ARTICLE 3 EARNINGS ON DEFERRED COMPENSATION SECTION 3.1 INVESTMENT ADDITIONS OR LOSSES. (a) The Company hereby agrees to credit or debit Deferred Amounts in the Executive's Deferral Account on a quarterly basis with Investment Additions or Losses, if any, based on the performance of the Wilshire 5000 Index, an investment vehicle selected by the Executive, and calculated as follows. All Deferred Amounts as of January 1, 1995 will be converted into a beginning balance of investment units equal to the result of dividing the total Deferred Amounts by the value of the Wilshire 5000 Index on January 1, 1995. Thereafter, the number of investment units earned each quarter will be equal to the result of dividing the Deferred Amounts deferred during the quarter by the value of the Wilshire 5000 Index at the midpoint of the quarter. These will be added to the investment units balance at the end of each quarter. The investment units balance will be reduced by any distributions from the Deferral Account with the amount of the reduction equal to the result of dividing the total dollars distributed by the value of the Wilshire 5000 Index on the date of distribution. At any given time the dollar value of the Accrued Benefits in the Executive's Deferral Account will be equal to the number of investment units in the account times the value of the Wilshire 5000 Index on the date of value determination. (b) The Executive may select a different investment vehicle for any quarter if the Company is notified of the selection in writing prior to the beginning of the quarter. The quarterly performance of any investment vehicle selected must be readily ascertainable by the Company. Executive accepts all risk of loss in connection with the selection of an investment vehicle. (c) Investment Additions or Losses shall continue to accrue up to the date the Deferral Account has been completely distributed. (d) It will be in the Company's sole discretion to determine whether to actually invest the Deferred Amounts or whether to phantom the performance of the investment vehicle selected by the Executive. Any investments actually made will belong solely to the Company. ARTICLE 4 DISTRIBUTION OF DEFERRED COMPENSATION SECTION 4.1 EVENTS TRIGGERING DISTRIBUTION. Distribution of Accrued Benefits shall be made after the EARLIEST to occur of the following dates: (a) The date of expiration of a fixed deferral period pursuant to Section 4.2 below. (b) The date of the Executive's death. (c) The date of the Executive's termination of employment with the Company due to Disability. 4 (d) At the Company's sole election, the date of the Executive's termination of employment with the Company for any other reason. SECTION 4.2 FIXED DEFERRAL PERIOD ELECTION. At the time of filing an Election of Deferral, the Executive must designate that the Annual Deferral Sum be deferred for a specified period of time. The ending date of such deferral period may not be earlier than the January 1st following the third anniversary of the last day of the Fiscal Year for which the Election of Deferral has been made. The period of time, once specified, may not be extended. SECTION 4.3 MANNER OF DISTRIBUTION. (a) The Accrued Benefits will be paid in a lump sum no later than thirty (30) days following the earliest triggering event specified in Section 4.1 above, unless (b) or (c) below applies. (b) In the event the triggering event specified in Section 4.1(d) is elected by the Company, the Company may further elect to pay out the Accrued Benefits in a lump sum or in monthly installments over a period of thirty-six months. The dollar amount of each installment shall be equal to the investment units balance in the Deferral Account (or subaccount, as applicable) divided by the number of months remaining in the thirty-sixth month period times the value of the Wilshire 5000 Index on the date of distribution. (c) If, at the time of any lump sum distribution, the Company has a reasonable expectation that the Executive will receive total compensation from the Company exceeding the $1 million cap defined by Section 162(m) of the Code (with or without such lump sum payment), then the Company may either delay the lump sum distribution to the next succeeding Fiscal Year or distribute the Accrued Benefits in two or more installments in such amounts and at such times as the Company reasonably deems necessary to insure maximum deductibility of such payments for the Company within the constraints of Section 162(m). (d) Any lump sum or installment payment made hereunder shall be subject to all tax withholdings required by federal, state or local laws. SECTION 4.4 EMERGENCY DISTRIBUTIONS. If the Executive incurs an unforeseeable financial emergency prior to an event triggering distribution, the Executive may request an early distribution of Accrued Benefits in an amount reasonably necessary to satisfy the emergency need. An "unforeseeable financial emergency" shall be determined by the Compensation Committee in its sole and absolute discretion and is intended to be a severe and unexpected need for cash resulting from an illness or injury of the Executive or a dependent, loss of property due to a casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Executive. Cash needs arising from foreseeable events such as the purchase of a house or education expenses for children shall not be considered to be the result of an unforeseeable financial emergency. An emergency withdrawal will not be allowed to the extent that the financial hardship is or may be relieved: (i) through reimbursement or compensation by insurance or other source; (ii) by liquidation of the Executive's assets, to the extent the liquidation would not itself cause severe financial hardship; or (iii) by cessation of deferrals under this Plan. 5 SECTION 4.5 DISTRIBUTION OF TAXED AMOUNTS. If the Executive is required by administrative ruling or court order to include in his gross income any Deferred Amounts, the Company shall, as soon as practicable after receipt of notification of such ruling or order, distribute to the Executive the amount so required to be included in the Executive's gross income. SECTION 4.6 OFFSET FOR OBLIGATIONS TO COMPANY. If, at such time as the Executive becomes entitled to any distribution of Accrued Benefits hereunder, the Executive has due any debt, obligation or other liability representing an amount owing to the Company, the Company may offset the amount owing it against the amount of benefits otherwise distributable hereunder. SECTION 4.7 BENEFICIARY DESIGNATION. (a) The Executive shall have the right, at any time, to submit in substantially the form attached hereto as Exhibit 2, a written designation of primary and secondary beneficiaries to whom payment under this Plan shall be made in the event of the Executive's death prior to complete distribution of the Accrued Benefits. To be effective, a beneficiary designation must be filed prior to the Executive's death. (b) The filing of a new beneficiary designation form will cancel all beneficiary designations previously filed. (c) The finalized divorce of an Executive subsequent to the date of filing a beneficiary designation shall revoke such designation if the previous spouse was designated as a beneficiary. (d) The marriage (other than a common law marriage) of an Executive subsequent to the date of filing a beneficiary designation shall revoke such designation unless the new spouse had already been named a beneficiary. (e) If the Executive fails to make an effective beneficiary designation, or if his designation is revoked by divorce or marriage or otherwise without execution of a new designation, or if all designated beneficiaries predecease the Executive or die prior to complete distribution of the Accrued Benefits, then the remaining Accrued Benefits shall be distributed to the Executive's estate. (f) In the event of incapacity, Accrued Benefits may be distributed to a legal representative. ARTICLE 5 AMENDMENT AND DISCONTINUANCE SECTION 5.1 AMENDMENT OF THE PLAN. At any regularly scheduled or special meeting of the Compensation Committee, it may by majority vote amend the Plan, in whole or in part, due to tax, accounting or insurance changes or whenever such change is determined to be in the best interests of the Company. Such changes may result in a termination or reduction of future benefits. Written notice of any amendment shall be given the Executive. 6 SECTION 5.2 DISCONTINUANCE OF THE PLAN. (a) At any regularly scheduled or special meeting of the Board of Directors, it may by majority vote of the board members terminate the Plan, if in the Board's judgment the continuation of the Plan, the tax, accounting and insurance or other effects thereof, or potential payouts thereunder would not be in the best interests of the Company. (b) The Company may terminate the Plan with respect to any Executive only if it terminates all deferred compensation arrangements with respect to all similarly situated executives. (c) Upon termination of the Plan, deferrals of compensation shall cease as of any future date determined by the Company. ARTICLE 6 UNFUNDED STATUS OF THE PLAN SECTION 6.1 UNFUNDED STATUS. This Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. In its sole discretion, the Committee may authorize the creation of trusts, purchase insurance or make arrangements to meet the obligations created under the Plan with respect to distributions hereunder, provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan. SECTION 6.2 NO TRUST CREATED Nothing contained in this Plan, and no action taken pursuant to its provisions by any party hereto shall create, or be construed to create, a trust of any kind, or a fiduciary relationship between the Company and the Executive, his designated beneficiaries, other beneficiaries of the Executive or any other persons. ARTICLE 7 GENERAL CREDITOR STATUS; INSURANCE SECTION 7.1 GENERAL CREDITOR STATUS OF EXECUTIVE. The payments to the Executive or his designated beneficiaries or any other beneficiaries hereunder shall be made from assets which shall continue, for all purposes, to be a part of the general, unrestricted assets of the Company; no person shall have any interest in any such assets by virtue of the provisions of this Plan. The Company's obligation hereunder shall be an unfunded and unsecured promise to pay money in the future. To the extent that any person acquires a right to receive payments from the Company under the provisions hereof, such right shall be no greater than the right of any unsecured general creditor of the Company; no such person shall have nor require any legal or equitable right, interest or claim in or to any property or assets of the Company. 7 SECTION 7.2 INSURANCE AND INVESTMENTS. (a) In the event that, in its discretion, the Company purchases an insurance policy or policies insuring the life of the Executive (or any other property) or making an investment, to allow the Company to recover the cost of providing benefits, in whole or in part, hereunder, neither the Executive, his designated beneficiaries nor any other beneficiaries shall have any rights whatsoever therein or in the proceeds therefrom. The Company shall be the sole owner and beneficiary of any such insurance policies or investments and shall possess and may exercise all incidents of ownership therein. No such policies, or investments or other property shall be held in any trust for the Executive or any other persons nor as collateral security for any obligation of the Company hereunder. (b) The Executive agrees to fully cooperate with the Company to enable it to purchase any such insurance or investments. Failure to cooperate will make the Executive ineligible to participate in this Plan. SECTION 7.3 BENEFITS NOT TRANSFERABLE. Neither the Executive, his designated beneficiaries, nor any other beneficiaries under this Plan shall have any power or right to transfer, assign, anticipate, hypothecate or otherwise encumber any part or all of the amounts payable hereunder. No such amounts shall be subject to seizure by any creditor of any such Executive or beneficiary, by a proceeding at law or in equity, nor shall such amounts be transferable by operation of law in the event of bankruptcy, insolvency or death. Any such attempted assignment or transfer shall be void. The Executive also shall have no right to borrow against Accrued Benefits. ARTICLE 8 GENERAL PROVISIONS SECTION 8.1 NO CONTRACT OF EMPLOYMENT. Nothing contained herein shall be construed to be a contract of employment for any term of years, nor as conferring upon the Executive the right to continue to be employed by the Company in his present capacity, or in any capacity. It is expressly understood by the parties hereto that this Plan relates solely to the payment of deferred compensation for the Executive's service and is not intended to be an employment contract. SECTION 8.2 CLAIM FOR BENEFITS. A person who believes that he is being denied a benefit to which he is entitled under the Plan (hereinafter referred to as a "Claimant") may file a written request for such benefit setting forth his claim, addressed to the Human Resources Department at the Company's then principal place of business. Human Resources will either resolve the problem to the claimant's satisfaction or the matter will be referred to the Compensation Committee for a determination. If the claim is denied in whole or in part, the Claimant shall receive a written opinion setting forth the reasons for the denial. The determination of the Compensation Committee shall be final and binding. SECTION 8.3 GOVERNING LAW. This Plan, and the rights of the parties hereunder, shall be governed by and construed in accordance with the laws of the State of Minnesota. 8 SECTION 8.4 SUCCESSORS. This Plan is binding on and shall inure to the benefit of any successor to the Company. SECTION 8.5 VALIDITY. In the event any provision of this Plan is held to be invalid, void, or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of this Plan. SECTION 8.6 NO REPRESENTATION. The Company makes no representation, and this Plan shall not be construed as a representation, regarding the tax treatment of Deferred Amounts. Under current laws, the Executive will be responsible for paying FICA (including Medicare) withholdings on Deferred Amounts at the time of deferral. IN WITNESS WHEREOF, the undersigned have executed this plan as of the first day of January 1995. THE COMPANY THE EXECUTIVE BY: \s\ Jack W. Eugster \s\ Reid Johnson --------------------- --------------------- JACK W. EUGSTER REID JOHNSON ITS: CHAIRMAN AND CEO 9 EX-10.17 10 CHANGE OF CONTROL AGREEMENT/LARRY GAINES EXHIBIT 10.17 CHANGE OF CONTROL AGREEMENT BETWEEN THE MUSICLAND GROUP, INC., MUSICLAND STORES CORPORATION AND LARRY C. GAINES DATED AS OF NOVEMBER 27, 1995 EXHIBIT 10.17 TABLE OF CONTENTS PAGE 1. Operation of Agreement. . . . . . . . . . . . . . . . . . . . . . . .1 2. Employment; Period of Employment. . . . . . . . . . . . . . . . . . .4 3. Position, Duties, Responsibilities. . . . . . . . . . . . . . . . . .5 4. Compensation, Compensation Plans, Perquisites . . . . . . . . . . . .6 5. Employee Benefit Plans. . . . . . . . . . . . . . . . . . . . . . . .8 6. Retirement Program. . . . . . . . . . . . . . . . . . . . . . . . . .9 7. Effect of Death or Disability . . . . . . . . . . . . . . . . . . . .9 8. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 9. Offset of Compensation and Benefits from Subsequent Employment. . . 15 10. Minimum Severance Payment . . . . . . . . . . . . . . . . . . . . . 16 11. Joint and Several Liability; Trust Agreement. . . . . . . . . . . . 18 12. Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 13. Potential Excise Taxes. . . . . . . . . . . . . . . . . . . . . . . 19 14. Indemnification and Insurance; Legal Expenses . . . . . . . . . . . 21 15. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 16. General Provisions. . . . . . . . . . . . . . . . . . . . . . . . . 23 EXHIBIT 10.17 CHANGE OF CONTROL AGREEMENT CHANGE OF CONTROL AGREEMENT ("Agreement"), dated as of November 27, 1995 among THE MUSICLAND GROUP, INC., a Delaware corporation (the "Company"), MUSICLAND STORES CORPORATION, a Delaware corporation (the "Parent") and LARRY C. GAINES (the "Executive"). WITNESSETH: WHEREAS: A. The Executive is one of the principal officers of the Company and an integral part of its management. B. The Company wishes to assure itself and the Executive of continuity of management in the event of any actual or threatened Change in Control of the Company as hereafter defined. C. This Agreement is not intended to alter materially the compensation and benefits that the Executive could reasonably expect in the absence of a Change in Control of the Company or the Parent (as hereinafter defined) and, accordingly, this Agreement, though taking effect upon execution hereof, will be operative only upon a Change in Control and as set forth in paragraph 1.01 of this Agreement. NOW, THEREFORE, it is hereby agreed by and between the parties as follows: 1. OPERATION OF AGREEMENT 1.01 (a) This Agreement shall be effective immediately but shall not be operative unless and until there has been a Change in Control, as defined in Paragraph 1.02, while EXHIBIT 10.17 the Executive is in the employ of the Company. For purposes of this paragraph, such termination of employment of Eugster shall be deemed to have occurred as of the date the notice of termination is delivered to the Company or Eugster, as the case may be, in accordance with the terms of his employment agreement then operative and not the date stated in such notice as the date of termination as defined therein. Upon the date of a Change in Control and such termination of the employment of Eugster, this Agreement shall become operative immediately. 1.02 "Change in Control" shall mean, except as provided in subparagraph (e) below, a change in control of the Company or the Parent that shall be deemed to have occurred if and when: (a) while the Company or the Parent maintains a class or series of equity securities that are registered under the Securities Exchange Act of 1934 and are publicly traded on a recognized securities exchange, any person (as such term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) shall become the beneficial owner, directly or indirectly, of 20% or more of the common stock of the Company or the Parent, or (b) a majority of the directors of the Company or the Parent are persons other than persons (i) for whose election proxies have been solicited by the Board of Directors of the Company or the Parent, or (ii) who are then serving as directors appointed by the Board of Directors of the Company or the Parent to fill vacancies on the applicable Board of Directors caused by death or resignation (but not by removal) or to fill newly-created directorships, but excluding for purposes of this clause (ii) any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of 1934) or other actual or threatened solicitation of proxies or consents, or 2 EXHIBIT 10.17 (c) the Company's or the Parent's, or at least 70% of the Company's or the Parent's, assets are sold and transferred to another corporation or other enterprise that is not a subsidiary, direct or indirect, or other affiliate of the Company or the Parent, if such other enterprise does not make arrangements with the Executive satisfactory to the Executive for his employment by such other enterprise, or (d) the Board of Directors of the Company or the Parent determines, by a vote of a majority of its entire membership, that a tender offer initiated by any person (as defined in subparagraph l.02(a) above) indicates an intention on the part of such person to acquire control of the Company or the Parent and there is a substantial likelihood that such tender offer will result in a Change in Control. Should any tender offer for shares of the Company or the Parent be initiated, the Board of Directors of the Company or the Parent, as the case may be, shall vote upon whether, in the good faith judgment of the Board, a substantial likelihood exists that such tender offer will result in a Change in Control. (e) No Change in Control shall be deemed to have occurred under subparagraph 1.02(c) or (d) above if: (i) the Company or the Parent is a debtor pursuant to a written loan agreement of the person so described in such subparagraph and (ii) either: (A) the right to nominate or elect directors by such person results from an event of default under a then operative provision of such loan agreement, or (B) the acquisition of securities described in such subparagraphs by such person results from a foreclosure by such person under a then operative provision of such loan agreement following an event of default, or (C) the acquisition of securities described in such subparagraphs by such person is pursuant to a plan of reorganization under the bankruptcy laws of the United States. 3 EXHIBIT 10.17 For a period of 60 days following the date on which a Change in Control occurs, the Executive agrees to perform for the Company each and every one of his duties in effect immediately prior to the Change in Control as described in paragraph 3.01. 1.03 If there is a Change in Control of the type described in paragraph l.02(c), the Executive may elect to terminate the Period of Employment hereunder by giving written notice to the Company of his decision to terminate pursuant to this paragraph 1.03 within 30 days following the applicable sale or transfer, which termination shall be effective as of the 90th day following the date such notice is given or such earlier date as the Company may specify in a written notice given to the Executive. Any termination of the Period of Employment pursuant to this paragraph 1.03 shall be deemed a termination without Cause pursuant to Section 8(b) of the Executive's employment agreement dated as of August 25, 1988 (the "Prior Agreement"), as the same may have been amended to the date of such termination, with the consequences set forth in Sections 8(b)(i) through (vii) thereof (which shall, for purposes of this Paragraph, be incorporated herein as though fully set forth) and the obligation set forth in said Sections 8(b)(i) through (vii) shall be and remain those of the Company (i.e., The Musicland Group, Inc.) and the Parent (i.e., Musicland Stores Corporation) prior to such sale or transfer and shall not be otherwise assignable. 2. EMPLOYMENT; PERIOD OF EMPLOYMENT. 2.01 The Company shall employ the Executive, and the Executive shall serve the Company, for the period set forth in paragraph 2.02 (the "Period of Employment"), in the position and with the duties and responsibilities set forth in Section 3, and upon the other terms and conditions hereinafter stated. Employment by a subsidiary or affiliate of the Company at the Company's request and with the Executive's consent shall constitute employment by the Company within the terms of this Agreement. 4 EXHIBIT 10.17 2.02 The Period of Employment shall commence on the date of a Change in Control and, subject only to the provisions of Section 7 relating to death or Disability and of paragraph 8.04 relating to termination for Cause, shall continue until the close of business on the last business day of the 24th calendar month following such Change in Control; provided, that on the last business day of the 12th calendar month following such Change in Control and on each anniversary of such date thereafter, the Period of Employment shall be automatically extended by one additional year to the second subsequent such anniversary, but in no event shall the Period of Employment extend beyond the first day of the month next succeeding the month in which the Executive shall attain his 65th birthday) unless prior to the last business day of the 6th calendar month following such Change in Control, or any subsequent 12-month anniversary of such date thereafter, the Company shall deliver to the Executive or the Executive shall deliver to the Company written notice that the Period of Employment will not be extended, in which 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 by the Company and the Executive. 3. POSITION, DUTIES, RESPONSIBILITIES 3.01 (a) It is contemplated that during the Period of Employment the Executive shall serve in the position and have the duties and responsibilities as President, Media Play Division, or such other senior executive capacity with substantially the same nature and quality as those of the position of President, Media Play Division, as the Company may from time to time determine. (b) During the Period of Employment, the Executive 5 EXHIBIT 10.17 (i) shall hold a position of responsibility, importance and scope at least equal to his position referred to in subparagraph 3.01(a), (ii) shall, without compensation other than that herein provided, serve as an officer and director of any subsidiary or affiliate, provided the Executive has determined in his sole discretion that such service does not entail undue risk to the Executive in light of the financial condition of such subsidiary or affiliate and the extent of officers' and directors' liability insurance applicable to such service, and (iii) shall devote substantially all of his time, best efforts and undivided attention during normal business hours to the business and affairs of the Company and its subsidiaries except for reasonable vacations and except for illness or incapacity, but nothing in this Agreement shall preclude the Executive from devoting reasonable periods required for (A) serving as a director or member of a committee of any organization or company involving no conflict of interest with the Company, (B) delivering lectures, fulfilling speaking engagements, teaching at educational institutions, (C) engaging in charitable and community activities, and (D) managing his personal investments; provided that such activities do not materially interfere with the performance of his duties hereunder. 3.02 The Executive's office shall be located in the Minneapolis, Minnesota metropolitan area. He shall not be required, without his written consent, to locate his office more than 20 miles distant by public highway from his office immediately prior to the Change in Control or to be absent therefrom on business more than 60 working days in any year or more than 14 consecutive days at any one time. 4. COMPENSATION, COMPENSATION PLANS, PERQUISITES 4.01 For all services rendered during the Period of Employment, the Executive shall receive: (i) a salary, payable no less often than monthly, at the annual rate of $257,400 or the rate of monthly salary of the Executive paid prior to the Change in Control, whichever is higher, subject to such periodic increases as shall be awarded in accordance 6 EXHIBIT 10.17 with the Company's regular administrative practices of salary increases applicable to executives in effect prior to the Change in Control, and (ii) an annual award under the Company's Management Incentive 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 the annual salary payable to the Executive for such calendar year determined on the basis of the monthly salary payable to the Executive as of the beginning of such calendar year under clause (i) of this paragraph (after adjustment to reflect any increase therein awarded by the Company under clause (i)). Such percentage shall be the lesser of (A) 35% or (B) 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 the Executive's annual award under the Management Incentive Plan (or its successor) for such year by the Executive's annual salary for that year. Increases in salary and annual awards under this Agreement or otherwise shall not diminish any other obligation of the Company hereunder. 4.02 (a) During the Period of Employment, the Executive shall continue to be a full participant in the performance awards and stock incentive aspects of the Company's Long-Term Incentive Plan and any other long-term incentive plans of the Company (provided that Executive was a participant in such plan or plans immediately prior to the Change in Control), and shall also be a participant in any and all other executive incentive plans in which executives of the Company participate that are in effect for Executive immediately prior to a Change in 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. 7 EXHIBIT 10.17 (b) Upon a Change in Control, the right to exercise any and all stock options to purchase shares of the Company's or Parent's stock and any stock appreciation rights held by the 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 the Executive shall be deemed to have lapsed, the deferral period and all conditions pertaining to any deferred stock awards previously granted to the Executive shall be deemed to have expired or have been satisfied, as the case may be, and the Executive shall be entitled to receive all such shares of restricted or deferred stock. All restricted stock and all deferred stock awards granted to the 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 in Control, as defined in Paragraph l.02 of the Optionee's Employment Agreement with the Company dated as of November 27, 1995 should occur and such Agreement becomes operative as provided in Paragraph 1.01, this Option shall immediately thereafter become exercisable in full. 4.03 During the Period of Employment the Executive shall be entitled to perquisites and to fringe benefits in each case at least equal to those attached to his office immediately prior to a Change in Control, as well as to reimbursement, upon proper accounting of reasonable expenses and disbursements incurred by him in the course of his duties. 4.04 The compensation provided for in this Section 4, together with other matters therein set forth, is in addition to the benefits provided for in Sections 5 and 6. 8 EXHIBIT 10.17 5. EMPLOYEE BENEFIT PLANS 5.01 The Executive shall be entitled to all payments, benefits and service credit for benefits during the Period of Employment to which Company officers are entitled, immediately prior to a Change in Control, as a result of their employment under the terms of employee plans and practices of the Company, other than the Retirement Program, for which specific provision is made in Section 6, but including, without limitation, (i) the Company's Capital Accumulation Plan, (ii) its death benefit plans (consisting of its Group Life Insurance Plan and accidental death and dismemberment insurance), (iii) its disability benefit plans (consisting of its short-term salary continuation, short-term disability and long-term disability plans), (iv) its senior officer medical, dental, health and welfare plans, and (v) other present or equivalent successor plans and practices of the Company for which officers are eligible, and to all payments or other benefits under any such plan or practice subsequent to the Period of Employment as a result of participation in such plan or practice during the Period of Employment. 5.02 Nothing in this Agreement shall preclude the Company from amending or terminating any particular employee benefit plan or practice, provided that the Executive shall continue to be entitled during the Period of Employment to perquisites as set forth in paragraph 4.03 and to benefits and service credit for benefits under paragraph 5.01 at least as favorable to the Executive as those to which he is entitled immediately prior to a Change in Control. If and to the extent that such perquisites, benefits and service credits are not payable or provided under any such plans or practices by reason of such amendment or termination thereof, the Company itself shall pay or provide therefor. 9 EXHIBIT 10.17 6. RETIREMENT PROGRAM 6.01 The term "Retirement Program" shall mean the Company's Employees' Retirement Plan and any other similar retirement plans that may be applicable to the Executive. 6.02 During the Period of Employment the Executive shall be entitled to payments and benefits at least equal to those that would be due to him under the Retirement Program as in effect immediately prior to a Change in Control, taking into account the compensation provided in paragraph 4.01 and any increases granted by the Company, and service credit for benefits under any plan in the Retirement Program during the Period of Employment and to all payments or other benefits which would be due to him or on his account subsequent to the Period of Employment as a result of participation in any such plan during the Period of Employment. 6.03 Nothing in this Agreement shall preclude the amendment or termination of the Retirement Program, or any plan constituting a part thereof, provided that the Executive shall continue to be entitled to the level of payments and benefits, the compensation upon which benefits are based and service credits for benefits under any such plan at least as favorable as those to which he would be entitled under the Retirement Program as in effect immediately prior to the Change in Control. If and to the extent that such benefits and service credits are not payable or provided under any such plans or practices by reason of any amendment or termination thereof, the Company itself shall pay or provide therefor. 7. EFFECT OF DEATH OR DISABILITY 7.01 If the Executive should die during the Period of Employment, his legal representative shall be entitled to the compensation provided for in paragraph 4.01 for the month in 10 EXHIBIT 10.17 which death shall have occurred, and the Period of Employment shall end on the last day of such month without prejudice to any other payments due in respect of the Executive's death. 7.02 (a) The word "Disability" shall mean an illness or accident which prevents the Executive from performing his duties under this Agreement for a period of six consecutive months. The Period of Employment shall end on the last day of such six months' period but without prejudice to any payments due the Executive in respect of Disability. (b) In the event of the Executive's Disability during the Period of Employment, the Executive shall be entitled to the compensation provided for in paragraph 4.01 for the period of such Disability but not in excess of six months. (c) The amount of any payments due under this paragraph shall be reduced by any payments to which the Executive may be entitled for the same period because of disability under any disability or pension plan of the Company. 8. TERMINATION 8.01 In the event of a Termination, as defined in paragraph 8.03, during the Period of Employment, the provisions of this Section 8 shall apply. 8.02 In the event of a Termination, the Company shall, as liquidated damages or severance pay, or both, pay to the Executive and provide him, his dependents, beneficiaries and estate, in lieu of all other remedies, damages or relief to which he might otherwise be entitled under this Agreement, with the following: (a) A lump sum equal to the total of the following future payments, discounted to present value at the Discount Rate as defined in Section 12 applied to each such future payment, 11 EXHIBIT 10.17 that would have been made for the remainder of the Period of Employment, as if such Termination had not occurred: (i) the salary provided in subparagraph 4.01(i) at the time of such termination, at the times therein stated, for the month in which the Termination shall have occurred and for each month thereafter during the Period of Employment, less in respect of each such month the amounts, if any, the Executive would have paid in cash in respect of employee benefits provided for in subparagraphs 5.01 (ii), (iii) and (iv) if the Executive were still employed, and (ii) the annual awards provided in subparagraph 4.01(ii), at the times therein stated, for the year in which the Termination shall have occurred and for each year thereafter during the Period of Employment; provided that, for the purpose of calculating the lump sum due under this subparagraph 8.02(a)(ii), the annual awards for the remainder of the Period of Employment shall be calculated pursuant to subparagraph 4.01(ii) using an annual salary at the time of such Termination. (b) In full substitution for any awards under the Long Term Incentive Plan, a lump sum equal to 35% of the annual rate of salary payable to the Executive in accordance with subparagraph 4.01(i) at the time of such Termination, for the year in which the Termination shall have occurred and for each year thereafter during the Period of Employment, as if such Termination had not occurred. (c) A lump sum equal to the present value of a straight life annuity benefit commencing at the earliest date the Executive could have elected to receive benefits under the Retirement Program if he had continued to be employed during the remainder of the Period of Employment (using as the interest rate the Discount Rate defined in Section 12 and the mortality table then in use under the Retirement Program) to provide the excess of (i) an aggregate benefit equal to the benefit that would have been paid under the Retirement Program if he had continued to be employed during the remainder of the Period of Employment and the Retirement Program had continued during the remainder of the Period of Employment without change from the date of this Agreement, taking into account amounts that would have been due in order to conform to the requirements of paragraph 4.01 (calculated using the assumptions set forth in subparagraph 8.02(a)) and of Section 6 if the Executive had remained employed by the Company to the end of the Period 12 EXHIBIT 10.17 of Employment and had continued to be entitled to service credit for benefits to the end of the Period of Employment, over (ii) the aggregate benefit actually payable under the Retirement Program (increased by any additional payments required to conform to Section 6). (d) All lump-sum payments to be made by the Company under this Section 8 shall be made within 20 days after Termination. (e) The Executive shall continue to be entitled to all employee benefits provided for in subparagraphs 5.01(ii), (iii) and (iv), relating to death benefit, disability benefit, and senior officer medical, dental, health and welfare plans and all other present or equivalent successor plans and practices of the Company for which officers are eligible, until the Executive shall attain age 65, as if the Executive were still employed during such period under this Agreement, with benefits based upon the compensation provided in paragraph 4.01 at the time of such Termination as if the Executive continued to be employed until age 65, and if and to the extent that such benefits shall not be payable or provided under any such plan by reason of the Executive no longer being an employee of the Company as a result of Termination, the Company itself shall pay or provide therefor. (f) The payments made and benefits provided to the Executive, his beneficiaries, or estate pursuant to this paragraph 8.02 shall be in lieu of, and not in addition to, any and all benefits to which the Executive is otherwise entitled upon termination of employment with the Company, including, but not limited to, any other Company policies, procedures, or practices, oral or written, now or hereafter established, and shall be in lieu of all other remedies, damages, or relief to which he might otherwise be entitled under this Agreement. 13 EXHIBIT 10.17 8.03 The word "Termination" shall mean: (a) Termination by the Company of the Executive's employment for any reason other than for Cause as defined in paragraph 8.04 or for Disability; or (b) Termination by the Executive of his employment upon the occurrence of any of the following events: (i) A significant change in the nature or scope of the authorities, powers, functions, duties or responsibilities attached to the position referred to in paragraph 3.01(a) or a position of comparable authorities, powers, functions, duties or responsibilities to that of senior officers generally or a reduction in compensation, which in either event is not remedied within 30 days after receipt by the Company of written notice from the Executive; (ii) A breach by the Company of any provision of this Agreement not embraced within the foregoing clauses (i) and (ii) which is not remedied within 30 days after receipt by the Company of written notice from the Executive; (iii) The liquidation, dissolution, consolidation or merger of the Company or transfer of 70% or more of its assets unless a successor or successors (by merger, consolidation or otherwise) to which all or 70% or more of its assets has been transferred shall have assumed all duties and obligations of the Company under this Agreement; provided that, in any event set forth in this subparagraph, the Executive shall have elected to terminate his employment under this Agreement upon not less than 30 and not more than 90 days' advance written notice to the Board of Directors of the Company, attention of the Chief Executive Officer, given, except in the case of a continuing breach, within three calendar months after (A) expiration of the 30-day cure period with respect to such event, or (B) the closing date of such liquidation, dissolution, consolidation, merger or transfer of assets. An election by the Executive to terminate his employment under the provisions of this subparagraph shall not be deemed a voluntary termination of employment by the Executive for the purpose of this Agreement or any plan or practice of the Company. 14 EXHIBIT 10.17 8.04 The Company shall have the right, by not less than 60 days' notice in writing, to terminate for Cause the employment of the Executive and the Period of Employment. The termination of the Executive's employment shall be deemed to have been for Cause only (i) if termination of his employment shall have been the result of an act or acts of dishonesty by him or an act or acts resulting or intended to result directly or indirectly in gain to or personal enrichment of the Executive at the Company's expense; or (ii) if there has been a deliberate and intentional refusal by the Executive during the Period of Employment (except by reason of incapacity due to illness or accident) to comply with the provisions of subparagraph 3.01(b), relating to the time and best efforts to be devoted to the affairs of the Company, and such breach results in demonstrably material injury to the Company, and the Executive shall have either failed to remedy such alleged breach within 30 days from his receipt of written notice from the Secretary of the Company demanding that he remedy such alleged breach, or shall have failed to take all reasonable steps to that end during such 30- day period and thereafter; or (iii) if there has been a determination by the Chief Executive Officer or an affirmative vote (as described below) of the Board of Directors of the Company 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 office assigned to him and such failure has had an adverse impact upon the Company; provided that such determination may be made only after at least two formal reviews of the Executive's performance by the Chief Executive Officer conducted at an interval of at least six months at which the Executive shall be informed of the most significant deficiencies in performance and during such interval and a period of at least ninety days from and after the most recent such review, the Executive shall have failed to correct or failed to take all reasonable steps to correct such significant deficiencies; provided that there shall have been delivered to the Executive with the above- mentioned 60-day notice a certified copy of a resolution of the Board of Directors of the Company adopted by the affirmative vote of at least a majority of the entire membership (whether or not present) of the Board of Directors (other than the Executive) of the Company at a meeting called and held for that purpose and at which the Executive was given an opportunity to be heard, finding that the Executive was guilty of conduct set forth in clause (i), (ii) or (iii) above, specifying the particulars thereof in detail. For purposes of the minimum number of directors required for the affirmative 15 EXHIBIT 10.17 vote described in the next preceding sentence, any fraction shall be rounded to the next higher whole number of directors. Anything herein to the contrary notwithstanding, the employment of the Executive shall not be considered to have been terminated by the Company for Cause if termination of his employment took place (i) as the result of bad judgment or negligence on the part of the Executive, or (ii) as the result of an act or omission without intent of gaining therefrom directly or indirectly a profit to which the Executive was not legally entitled, or (iii) because of an act or omission believed by the Executive in good faith to have been in or not opposed to the interests of the Company. 8.05 If the Executive's employment shall be terminated by the Company during the Period of Employment and such termination is alleged to be for Cause, or the Executive's right to terminate his employment under subparagraph 8.03(b) shall be questioned by the Company, the Executive shall have the right, in addition to all other rights and remedies provided by law, at his election, either to seek arbitration in Minneapolis, Minnesota, under the rules of The American Arbitration Association, by serving a notice to arbitrate upon the Company, or to institute a judicial proceeding, in either case within 90 days after having received notice of termination of his employment or notice in any form that the termination of his employment under subparagraph 8.03(b) is subject to question or within such longer period as may reasonably be necessary for the Executive to take action in the event that his illness or incapacity should preclude his taking such action within such 90-day period. 16 EXHIBIT 10.17 9. OFFSET OF COMPENSATION AND BENEFITS FROM SUBSEQUENT EMPLOYMENT 9.01 In the event of a termination of his employment, the Executive shall not be required to minimize damages or severance payment under Sections 8 or 10 by seeking or accepting other employment or consulting position. 9.02 If the Executive obtains other employment or a consulting position subsequent to a Termination and prior to the end of the Period of Employment, the Executive shall pay to the Company on a quarterly basis the Subsequent Compensation, as defined below, that he receives for such other employment through the last day of the Period of Employment, provided, however, that the amount of such quarterly payments shall be reduced by any liability with respect to such Subsequent Compensation that the Executive incurs for income taxes (after taking into account any income tax benefit available as a result of such quarterly payments) and payroll deductions required by law, and provided further that no such payments shall be made unless the Executive received a lump sum payment pursuant to and in accordance with subparagraphs 8.02(a) and (b). Subsequent Compensation for each calendar quarter during which the Executive engages in such other employment or consulting position shall equal the lesser of (i) the cash or other compensation that is payable to the Executive for such employment or consulting position during that particular quarter, or (ii) the figure obtained by multiplying the total amount of salary plus annual and prorated performance awards used in calculating a lump sum payment for the Executive under subparagraphs 8.02(a) and (b) (prior to discounting to present value as of the Termination) by a fraction, the numerator of which is 3 and the denominator of which is the number of months remaining in the Period of Employment after Termination. Notwithstanding the foregoing, the Executive shall not be required to minimize payments or benefits under this Agreement by seeking or accepting other employment or a consulting position. 17 EXHIBIT 10.17 9.03 The benefits to be provided by the Company under the provisions of subparagraph 8.02(e) shall be reduced to the extent of the death, disability, medical, dental, health and welfare benefits received by the Executive from any other employment or consulting position he obtains subsequent to a Termination and prior to his attaining age 65. 10. MINIMUM SEVERANCE PAYMENT 10.01 If the employment of the Executive shall be terminated by the Company for any reason other than Cause at a time prior to the attainment by the Executive of 65 years of age and when there are fewer than 12 months remaining in the Period of Employment, the Company shall pay the Executive a lump sum severance payment, in addition to any payment under Section 8, equal to the total of the following future payments, discounted to present value at the Discount Rate as defined in Section 12 applied to each such payment, for each month of the Severance Period (as defined below): the sum of (i) the monthly salary of the Executive in effect for the month immediately preceding the month in which termination of his employment shall have taken place, (ii) the average of the highest annual incentive awards paid to the Executive under the Management Incentive Plan for any three calendar years (or the actual number of years if fewer) during the last ten years of his employment by the Company (or the actual number of years if fewer) divided by 12, and (iii) the average of the highest incentive awards, if any, paid to the Executive under the Long-Term Incentive Plan for any three performance periods (or the actual number of performance periods if fewer) during the last ten years of his employment by the Company (or the actual number of years if fewer) divided by 12. The Severance Period shall (i) commence upon the first calendar month after the completion of the Period of Employment, and (ii) end upon the earliest of (A) 12 calendar months after the termination of his employment, or (B) the month in which the Executive shall attain 65 years of age. 18 EXHIBIT 10.17 The payments made and benefits provided to the Executive, his beneficiaries, or estate pursuant to this paragraph 10.01 shall be in lieu of, and not in addition to, any and all benefits to which the Executive is otherwise entitled upon termination of employment with the Company, including, but not limited to, any other Company policies, procedures, or practices, oral or written, now or hereafter established, and shall be in lieu of all other remedies, damages, or relief to which he might otherwise be entitled under this Agreement. 10.02 If the Executive receives payment under paragraph 10.01 and obtains other employment or consulting position within the Severance Period, the Executive shall pay to the Company on a quarterly basis the Post-Severance Compensation, as defined below, that he receives for such other employment or consulting position through the last day of the Severance Period, provided, however, that the amount of such quarterly payments shall be reduced by any liability with respect to such Post-Severance Compensation that the Executive incurs for income taxes (after taking into account any income tax benefit available as a result of such quarterly payments) and payroll deductions required by law. Post-Severance Compensation for each calendar quarter during which the Executive engages in such other employment or consulting position shall equal the lesser of (i) the cash or other compensation that is payable to the Executive for such employment or consulting position during that particular quarter, or (ii) the figure obtained by multiplying the total amount of salary plus annual awards used in calculating a lump-sum payment for the Executive under paragraph 10.01 (prior to discounting to present value as of the termination) by a fraction the numerator of which is 3 and the denominator of which is the number of months in the Severance Period. Notwithstanding the foregoing, the Executive shall not be required to minimize payments or benefits under this Agreement by seeking or accepting other employment or a consulting position. 19 EXHIBIT 10.17 11. JOINT AND SEVERAL LIABILITY; TRUST AGREEMENT 11.01 All duties, undertakings, obligations, and liabilities of the Company or the Parent arising under this Agreement shall be the joint and several liability of the Company and the Parent. 11.02 To assure the performance by the Company and the Parent of its obligations under this Agreement in the event of a Change in Control, the Company or the Parent shall, upon the request of the Executive immediately prior to a Change in Control, or at any time on or after the date a Change in Control occurs and prior to the date all amounts to which Executive is or may become entitled hereunder have been paid to Executive, deposit in an irrevocable trust with a trustee designated by the Executive, an amount of liquid assets equal to the present value based on the Discount Rate defined in Section 12 of the maximum amount of all lump sum amounts which could be paid to Executive in the event of a Termination of the Executive (as defined in paragraph 8.03) following a Change in 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 of which entering into, renegotiation, or amendment is such preclusion. The trust shall be reasonably satisfactory in form and substance to the Executive, with no greater rights in the Executive than an unsecured creditor of the Company and Parent. To the extent there are not amounts in trust sufficient to pay all amounts due to Executive under this Agreement, the Company and Parent shall be and remain liable therefore. 20 EXHIBIT 10.17 12. DISCOUNT RATE For purposes of determining the present value of any payment or benefit under this Agreement, the term "Discount Rate" shall mean 10%; provided, that if the average of the prime rate (or its equivalent) charged by Morgan Guaranty Trust Company of New York during the 30 day Period which ends 15 days after the date of the Executive's Termination is 8% or less, the Discount Rate shall be 8%. 13. POTENTIAL EXCISE TAXES In the event that any excise tax is payable by the Executive by reason of section 4999 of the Internal Revenue Code of 1986, as that section may be amended, or any successor or similar provision thereto, or comparable state or local tax laws, as a direct or indirect result of the receipt of any payment, right or benefit received after November 27, 1995 by the Executive from the Company or from any interested person which is in the nature of compensation in connection with his employment with the Company, Parent, or any subsidiary of either of them, the Company shall pay to the Executive such additional compensation as is necessary (after taking into account all Federal, state and local taxes, including income and excise taxes, payable by the Executive as a result of the receipt of such additional compensation) to place the Executive in the same after-tax position he would have been in had no such excise tax (and any interest and penalties thereon) been paid or incurred. The Company shall pay such additional compensation upon the earlier of (A) the time at which the Company withholds such excise tax from any payments to the Executive, or (B) 30 days after the Executive notifies the Company that the Executive has filed a tax return which takes the position that such excise tax is due and payable in reliance on a written opinion of the Executive's tax counsel that it is more likely than not that such excise tax is due and payable. 21 EXHIBIT 10.17 If the Executive makes any payment with respect to any such excise tax as a result of an adjustment to the Executive's tax liability by any Federal, state or local authority, the Company will pay such additional compensation within 30 days after the Executive notifies the Company of such payment. Without limiting the obligation of the Company hereunder, the Executive agrees, in the event the Executive makes any payment pursuant to the preceding sentence, to negotiate with the Company in good faith with respect to procedures reasonably requested by the Company which would afford the Company the ability to contest the imposition of such excise tax; provided, however, that the Executive will not be required to afford the Company any right to contest the applicability of any such excise tax to the extent that the Executive reasonably determines that such contest is inconsistent with the overall tax interests of the Executive. The Company agrees to hold in confidence and not to disclose, without the Executive's prior written consent, any information with regard to the Executive's tax position which the Company obtains pursuant to this Section 13. 14. INDEMNIFICATION AND INSURANCE; LEGAL EXPENSES 14.01 The Company will indemnify the Executive (and his legal representatives or other successors) to the fullest extent permitted (including payment of expenses in advance of final disposition of the 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 date of this Agreement, or by the terms of any indemnification agreement between the Company and the Executive, whichever affords or afforded greater protection to the 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 22 EXHIBIT 10.17 officers (and to the extent the Company maintains such an insurance policy or policies, the Executive shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any Company officer or director), against all costs, charges and expenses whatsoever incurred or sustained by him or his legal representatives in connection with any action, suit or proceeding to which he (or his legal representatives or other successors) may be made a party by reason of his being or having been a director, officer or employee of the Company or any of its subsidiaries or his serving or having served any other enterprise as a director, officer or employee at the request of the Company, provided that the Company shall cause to be maintained in effect for not less than six years from the date of a Change in Control (to the extent available) policies of directors' and officers' liability insurance of at least the same coverage as those maintained by the Company at any time within 180 days after the date of this Agreement and containing terms and conditions which are no less advantageous than such policies. 14.02 In the event of any litigation, arbitration or other proceeding between the Company and the Executive with respect to the subject matter of this Agreement or the enforcement of his rights hereunder, the Company shall periodically reimburse the Executive, regardless of the outcome, for all of his reasonable costs and expenses relating to such litigation, arbitration or other proceeding, including, without limitation, his reasonable attorneys' fees and expenses. In no event shall the Executive be required to reimburse the Company for any of the costs or expenses relating to such litigation, arbitration or other proceeding. 23 EXHIBIT 10.17 15. NOTICES All notices, requests, demands and other communications provided for by this Agreement shall be in writing and shall be sufficiently given if personally delivered or if actually received by mail, return receipt requested and postage prepaid, addressed to the party entitled thereto at the address stated below or to such changed address as the addressee may have given by a similar notice to the other: To the Company: The Musicland Group, Inc. 7500 Excelsior Boulevard Minneapolis, MN 55426 Attention: Chief Executive Officer To the Executive: The Musicland Group, Inc. 7500 Excelsior Boulevard Minneapolis, MN 55426 Attention: Larry C. Gaines With an additional copy to: Larry C. Gaines 5935 Boulder Bridge Lane Shorewood, MN 55331 Receipt by mail shall be established by a duly executed return receipt. 16. GENERAL PROVISIONS 16.01 Whenever, under this Agreement, it is necessary to determine whether one benefit is less than, equal to, or larger than another in value, whether or not such benefits are provided under this Agreement, such determination shall be made using mortality, interest and any other assumptions no less favorable to the Executive than those normally used as of the date of such determination in determining actuarial equivalents for the purpose of the Retirement Program. 24 EXHIBIT 10.17 16.02 This Agreement shall not confer any right or impose any obligation on the Executive to continue in the employ of the Company, or limit the right of the Company or the Executive to terminate his employment, at any time prior to a Change in Control. 16.03 The Company shall have no right of set-off or counterclaim in respect of any claim, debt or obligation against any payments provided for in this Agreement, except as otherwise provided in paragraphs 9.02 and 10.02. 16.04 No right to or interest in any payments shall be assignable by the Executive; provided, however, that this provision shall not preclude him from designating one or more beneficiaries to receive any amount that may be payable after his death and shall not preclude his executor or administrator from assigning any right hereunder to the person or persons entitled thereto. 16.05 No provision of this Agreement may be amended, modified or waived unless such amendment, modification or waiver shall be agreed to in writing signed by the Executive and by a duly authorized Company officer. 16.06 If any provision of this Agreement shall be determined to be invalid or unenforceable by a court of competent jurisdiction, the remaining provisions of this Agreement shall remain in full force and effect to the fullest extent permitted by law. 16.07 When this Agreement becomes operative, the obligations of the Company under paragraphs 11 (joint and several liability; trust agreement), 13 (potential excise taxes) and 14 (indemnification and insurance; legal expenses) shall survive the termination for any reason of this Agreement (whether such termination is by the Company, by the Executive, upon the expiration of this Agreement or otherwise). 25 EXHIBIT 10.17 16.08 This Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company including, without limitation, any corporation or corporations acquiring directly or indirectly all or substantially all of the assets of the Company, whether by merger, consolidation, sale or otherwise (and except as provided in Section 1.03, such successor shall thereafter be deemed "the Company" for the purposes of this Agreement), but shall not otherwise be assignable by the Company. 16.09 The word "Executive" shall wherever appropriate include his dependents, beneficiaries and legal representatives. 16.10 All payments required to be made by the Company hereunder to the Executive or his estate or beneficiaries shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. 16.11 The validity, interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of Minnesota, without giving effect to the principles of conflict of laws thereof. 16.12 The Prior Agreement, as defined in Paragraph 1.03 herein shall terminate on the date this Agreement becomes operative pursuant to Section l. 26 EXHIBIT 10.17 IN WITNESS WHEREOF, the parties hereto have executed this Change of Control Agreement as of the day and year first above written to be effective and operative as set forth in Section 1.01. THE MUSICLAND GROUP, INC. By: \S\ JACK W. EUGSTER --------------------------------------- Its: Chief Executive Officer MUSICLAND STORES CORPORATION By: \S\ JACK W. EUGSTER --------------------------------------- Its: Chief Executive Officer LARRY C. GAINES \S\ LARRY C. GAINES --------------------------------------- 27 EX-23 11 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 April 10, 1996, included in this form 10-K, into the Company's previously filed Registration Statements, File Nos. 33-50520, 35-50522, 33-50524, 33-52322, 33-82130 and 33-99146. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, April 10, 1996 EX-27 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET OF MUSICLAND STORES CORPORATION AND SUBSIDIARIES AS OF DECEMBER 31, 1995, AND THE RELATED CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1,971 0 0 0 533,694 573,905 446,100 127,783 996,957 634,624 0 0 0 343 195,468 996,957 1,722,572 1,722,572 1,116,502 1,116,502 708,744 0 27,881 (130,555) 5,195 (135,750) 0 0 0 (135,750) (4.00) 0
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