Basically, Electronics-to-electronics monitoring, to allow monitoring of the input, thru the machine on to the output. Common in 'REC + Pause' mode for setting levels (if that is permitted on this MD) but also on cassette and video recorders. So if this was in use as a D-A converter, that converter circuit would need to be active for a signal to be present on the outputs. But we're just third-hand speculating about the possible use for a device set up this way, and subsequently its operation.
But aside from what the device does in its current config, what is your goal for it? If you want to turn it back into a functioning MD recorder, start getting rid of tacked-on stuff, while keeping photo and written notes about how it was configured. Then look at the historical failure modes mentioned above, and address them. Do Google searches on popular mods for these type devices. You'll need to scrounge up known-good MDs, and recordable ones, for your testing to mean anything.
I presume you've browsed minidisc.org?
Chip