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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
____________
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 1996
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-17540
MONTGOMERY WARD HOLDING CORP.
(Exact Name Of Registrant As Specified In Its Charter)
DELAWARE 36-3571585
(State Of Incorporation) (I.R.S. Employer Identification No.)
Montgomery Ward Plaza, Chicago, Illinois 60671
(Address Of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number Including Area Code: 312/467-2000
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
--- -----
As of October 26, 1996 the Registrant had 18,695,859 shares of Class A
Common Stock and 25,000,000 shares of Class B Common Stock of the Registrant
outstanding.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX
Page
Montgomery Ward Holding Corp.
Consolidated Statement of Income........................... 2
Consolidated Balance Sheet................................. 4
Consolidated Statement of Cash Flows....................... 5
Notes to Consolidated Financial Statements................. 7
1
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the 13-Week
Periods Ended
September 28, September 30,
1996 1995
(Millions, except per share amounts)
Revenues
Net sales, including leased and
licensed department sales........... $1,376 $1,562
Direct response marketing revenues,
including insurance................. 191 142
------ ------
Total Revenues................... 1,567 1,704
------ ------
Costs and Expenses
Cost of goods sold, including net
occupancy and buying expense.......... 1,096 1,240
Operating, selling, general and
administrative expenses, including
benefits and losses of direct response
operations............................ 501 435
Interest expense....................... 28 24
------ ------
Total Costs and Expenses........... 1,625 1,699
------ ------
(Loss)/Income Before Taxes.............. (58) 5
Income Tax (Benefit)/Expense............ (23) 2
------ ------
Net (Loss)/Income....................... (35) 3
Preferred Stock Dividend Requirements... 3 1
------ ------
Net (Loss)/Income Applicable to
Common Shareholders.................... $ (38) $ 2
====== ======
Net (Loss)/Income per Common Share
Class A................................ $(.95) $.05
Class B................................ $(.82) $.04
See notes to consolidated financial statements.
2
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the 39-Week
Periods Ended
September 28, September 30,
1996 1995
(Millions, except per share amounts)
Revenues
Net sales, including leased and
licensed department sales............. $3,984 $4,439
Direct response marketing revenues,
including insurance................. 553 407
------------- -------------
Total Revenues................... 4,537 4,846
------------- -------------
Costs and Expenses
Cost of goods sold, including net
occupancy and buying expense.......... 3,233 3,528
Operating, selling, general and
administrative expenses, including
benefits and losses of
direct response operations............ 1,349 1,237
Interest expense........................ 75 67
------------- -------------
Total Costs and Expenses......... 4,657 4,832
------------- -------------
(Loss)/Income Before Taxes................ (120) 14
Income Tax (Benefit)/Expense.............. (48) 4
------------- -------------
Net (Loss)/Income......................... (72) 10
Preferred Stock Dividend Requirements..... 9 3
------------- -------------
Net (Loss)/Income Applicable to
Common Shareholders..................... $ (81) $ 7
============= =============
Net (Loss)/Income per Common Share
Class A................................. $(1.99) $ .17
Class B................................. $(1.73) $ .14
Cash dividends per Common Share........... $ - $ -
See notes to consolidated financial statements.
3
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
September 28, December 30,
1996 1995
(Unaudited)
ASSETS
(Millions)
Cash and cash equivalents.................... $ 42 $ 37
Short-term investments....................... 3 1
Investments of insurance operations.......... 311 345
------ ------
Total Cash and Investments.............. 356 383
Trade and other accounts receivable.......... 243 166
Accounts and notes receivable from
affiliates.................................. 32 22
------ ------
Total Receivables....................... 275 188
Merchandise inventories...................... 1,762 1,770
Prepaid pension cost......................... 337 335
Prepaid federal income taxes................. 48 -
Properties, plants and equipment, net of
accumulated depreciation and
amortization............................... 1,319 1,366
Direct response and insurance
acquisition costs.......................... 579 395
Other assets................................. 541 447
------ ------
Total Assets............................ $5,217 $4,884
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt.............................. $ 819 $ 160
Trade accounts payable....................... 1,507 1,804
Federal income taxes payable................. - 6
Accrued liabilities and other
obligations................................. 1,158 1,195
Insurance policy claim reserves.............. 237 236
Long-term debt............................... 495 423
Obligations under capital leases............. 62 66
Deferred income taxes........................ 165 119
------ ------
Total Liabilities....................... 4,443 4,009
Commitments and Contingent Liabilities
Redeemable Preferred Stock................... 175 175
Shareholders' Equity
Common stock............................... 1 1
Capital in excess of par value............. 49 45
Retained earnings.......................... 677 758
Unrealized gain on marketable
securities............................... 6 10
Less: Treasury stock, at cost............. (134) (114)
------ ------
Total Shareholders' Equity.............. 599 700
------ ------
Total Liabilities and Shareholders'
Equity..................................... $5,217 $4,884
====== ======
See notes to consolidated financial statements.
4
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the 39-Week
Periods Ended
September 28, September 30,
(Millions) 1996 1995
Cash flows from operating activities:
Net (Loss) Income..................................... $ (72) $ 10
Adjustments to reconcile net (loss) income to net
cash provided by (used for) operating activities:
Depreciation and amortization....................... 93 89
Amortization of Goodwill............................ 7 4
Amortization of Direct response and
insurance costs.................................... 147 103
Deferred income taxes............................... (5) (5)
Gain on sale of assets.............................. (3) (10)
----- -----
Net (loss) income adjusted for non-cash expenses.. 167 191
----- -----
Changes in operating assets and liabilities:
(Increase) decrease in:
Trade and other accounts receivable................. (52) (24)
Accounts and notes receivable from affiliates....... (10) (14)
Merchandise inventories............................. 8 (169)
Prepaid pension cost................................ (3) (5)
Federal income taxes receivable, net................ (48)
Direct response insurance acquisition costs......... (208) (140)
Other assets........................................ (21) (47)
Increase (decrease) in:
Trade accounts payable.............................. (300) (233)
Federal income taxes payable, net................... (6) (10)
Accrued liabilities and other obligations........... (120) (159)
Insurance policy claim reserves..................... 1 2
----- -----
Net cash used for operations...................... (592) (608)
----- -----
Cash flows from investing activities:
Investment in ValueVision International, Inc.......... -- (8)
Investment in Merchant Partners....................... (7) --
Acquisition of Amoco Enterprises...................... (100) --
Purchase of short-term investments.................... (19) (14)
Purchase of investments of insurance operations....... (495) (465)
Sale of short-term investments........................ 31 14
Sale of investments of insurance operations........... 521 443
Capital expenditures.................................. (55) (90)
Disposition of properties, plants and equipment, net.. 12 24
----- -----
Net cash used for investing activities............ $(112) $ (96)
----- -----
See notes to consolidated financial statements.
5
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the 39-Week
Periods Ended
September 28, September 30,
(Millions) 1996 1995
Cash flows from financing activities:
Net proceeds from short-term borrowings.................... $ 635 $526
Proceeds from issuance of long-term debt................... 102 205
Payments of Montgomery Ward long-term debt................. (6) (6)
Payments of obligations under capital leases............... (5) (5)
Proceeds from issuance of Common Stock..................... 3 4
Cash dividends paid........................................ (6) (3)
Purchase of treasury stock, at cost........................ (14) (7)
----- ----
Net cash provided by financing activities................. 709 714
----- ----
Increase (decrease) in cash and cash equivalents............ 5 10
Cash and cash equivalents at beginning of period............ 37 33
----- ----
Cash and cash equivalents at end of period.................. $ 42 $ 43
===== ====
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes.............................................. $ 2 $ 22
Interest.................................................. $ 81 61
Non-cash financing activity:
Notes issued for purchase of Treasury stock................ $ 6 $ --
Non-cash investing activity:
Change in unrealized gain on marketable equity securities.. $ (4) $ 8
See notes to consolidated financial statements.
6
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
1. Accounting Policies
Basis of Presentation
The Consolidated Balance Sheet as of September 28, 1996 and the Consolidated
Statements of Income for the thirteen- and thirty-nine weeks ended September
28, 1996 and September 30, 1995, and the Consolidated Statement of Cash Flow
for the thirty-nine weeks then ended are unaudited. The interim financial
statements reflect all adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods
presented. The interim financial statements should be read in the context of
the financial statements and notes thereto filed with the Securities and
Exchange Commission in MW Holding's 1995 Annual Report on Form 10-K.
Capitalized terms not otherwise defined herein have the meaning ascribed to
such terms in the 1995 Annual Report on Form 10-K. Certain prior period
amounts have been reclassified to be comparable with the current period
presentation.
Accounting for Long-Lived Assets
Effective December 31, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." The provisions require a review of long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If it is determined that
an impairment loss has occurred based on expected undiscounted future cash
flows, the loss will be recognized in the income statement and certain
disclosures will be made regarding the impairment. There was no financial
impact from the adoption of this statement on the financial statements for
the thirty-nine weeks ended September 28, 1996.
2. Net (Loss)/Earnings Per Common Share
Net (Loss)/Earnings per common share is computed as follows:
For the 13-Week
Periods Ended
September 28, 1996 September 30, 1995
Class A Class B Class A Class B
Net (Loss) Earnings applicable to
Common Shareholders............ $(18) $(21) $1 $1
Weighted average number of common
shares outstanding............. 19,230,539 25,000,000 20,919,243 25,000,000
Net (Loss) Earnings per share...... $(.95) $(.82) $.05 $.04
7
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
2. Net (Loss)/Earnings Per Common Share (continued)
For the 39-Week
Periods Ended
September 28, 1996 September 30, 1995
Class A Class B Class A Class B
Net (Loss)/Earnings applicable to
Common Shareholders............. $(38) $(43) $3 $4
Weighted average number of
common shares outstanding....... 19,269,681 25,000,000 19,915,677 25,000,000
Net (Loss)/Earnings per share...... $(1.99) $(1.73) $.17 $.14
3. Insurance Benefits and Losses
Operating, selling, general and administrative expenses include insurance
benefits and losses related to direct response marketing operations of $43
and $28 for the 13-week periods ended September 28, 1996 and September 30,
1995, respectively, and $115 and $83 for the 39-week periods then ended. The
increases of $15 and $32, respectively, are due primarily to the costs of the
Amoco Motor Club.
4. Preferred Stock
On January 31, 1996, GE Capital exercised the exchange option contained in
the MW Senior Preferred Stock subscription agreement which allowed an
exchange of the MW Senior Preferred Stock for senior preferred stock of the
Company with substantially the same terms. On March 28, 1996, the Company's
Certificate of Incorporation was amended to authorize the issuance of a new
series of senior preferred stock (New Senior Preferred Stock). On March 29,
1996, the Company issued all of the 1,750 shares of New Senior Preferred
Stock to GE Capital in exchange for the 1,750 shares of MW Senior Preferred
Stock held by GE Capital.
Dividends on the New Senior Preferred Stock are payable quarterly at an
annual rate of $7,010 per share. The Company is required to redeem the New
Senior Preferred Stock on June 30, 2002, with the option of redeeming all or
any portion prior to June 30, 2002.
8
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
5. Acquisition of Amoco Enterprises, Inc.
On December 31, 1995, Montgomery Ward acquired all of the outstanding capital
stock of Amoco Enterprises, Inc. (Enterprises), operator of the Amoco Motor
Club and a wholly-owned subsidiary of Amoco Oil Holding Company. The
purchase price was $100. The acquisition was financed through the use of the
majority of the proceeds generated from the issuance of the MW Senior
Preferred Stock. On January 2, 1996, Montgomery Ward's wholly-owned
subsidiary, Signature, purchased Enterprises from Montgomery Ward for $100.
The acquisition was accounted for as a purchase. The purchase price has been
allocated to Enterprises' net assets based upon preliminary results of asset
valuations and liability and contingency assessments. Actual adjustments may
differ based on the results of further evaluations of the fair value of the
acquired assets and liabilities. Any differences between preliminary and
actual adjustments are not expected to have a material impact on the
Consolidated Financial Statements.
The preliminary allocation is summarized as follows:
Accounts receivable........ $ 25
Federal income tax
receivable................ 1
Properties, plant &
equipment................. 3
Direct response and
insurance acquisition
costs.................... 126
Goodwill................... 67
Other assets............... 4
Trade accounts payable..... (3)
Accrued liabilities and
other obligations......... (76)
Deferred income taxes...... (47)
----
$100
====
6. Commitments and Contingent Liabilities
MW Holding, Montgomery Ward and its subsidiaries are engaged in various
litigation and have a number of unresolved claims. While the amounts claimed
are substantial and the ultimate liability with respect to such litigation
and claims cannot be determined at this time, management is of the opinion
that such liability, to the extent not provided for through insurance or
otherwise, is not likely to have a material impact on the financial condition
and the results of operations of the Company.
9
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
7. Customer Credit Agreement
A. Effective April 1, 1996, Montgomery Ward entered into interim agreements
with GE Capital and its wholly-owned subsidiaries Montgomery Ward Credit
Corporation ("Montgomery Ward Credit") and Monogram Credit Card Bank of
Georgia ("Monogram") reflecting a prior memorandum of understanding with
GE Capital pursuant to which Monogram is extending credit to retail
customers of Montgomery Ward under open-ended revolving credit plans on a
non recourse basis.
In the Montgomery Ward memorandum of understanding, interim agreements
provide for the sharing of certain additional revenues generated by
increases in interest rates and late fee charges to customers with the
extension of credit to the customers made directly by Monogram. Certain
of these additional revenues will be applied to reduce the obligations of
Montgomery Ward for prior losses incurred under the original Account
Purchase Agreement with Montgomery Ward Credit and Montgomery Ward's
obligation to pay Credit losses in excess of 3.9% of the average
receivable balance up to 5%, and 50% of the losses in excess of 5% up to
8%, incurred by Monogram and Montgomery Ward Credit under the new
agreements. Except as noted above, the new agreements together generally
impose obligations upon and provide benefits to Montgomery Ward and GE
Capital and its subsidiaries, Montgomery Ward Credit and Monogram similar
to the prior arrangements under the Account Purchase Agreement.
The interim agreement provided that if definitive agreements are not
entered into by July 31, 1996 by Montgomery Ward, Monogram, Montgomery
Ward Credit and GE Capital permanently implementing the changes
contemplated by the memorandum of understanding and interim agreements for
the Montgomery Ward credit customers, Montgomery Ward credit transactions
will revert to the original Account Purchase Agreement. The date for
entering into the definitive agreements was amended to November 30, 1996
by the parties.
B. Effective March 13, 1996, Lechmere, Inc., a subsidiary of Montgomery Ward,
entered into interim agreements with GE Capital and its wholly-owned
subsidiaries Montgomery Ward Credit and Monogram reflecting a prior
memorandum of understanding with GE Capital pursuant to which Monogram is
extending credit to retail customers of Lechmere under open-end revolving
credit plans on a non-recourse basis.
10
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
7. Customer Credit Agreement (continued)
The Lechmere memorandum of understanding and interim agreements provide
for a guaranteed Monogram Bank/GE Capital annual return on its equity of
17.50%. For any shortfalls, an annual payment would be made by Lechmere.
Any return above 17.50% will be shared equally by Lechmere and Monogram/GE
Capital. For any annual credit losses over 4.25% and less than 8% of the
average receivable balance, Lechmere is responsible for 50% of said
losses. It is envisioned that a similar relationship will be established
for Montgomery Ward's "Electric Ave. & More" credit card customer
receivables. The original agreement provided that if definitive
agreements were not executed by August 31, 1996, the Lechmere interim
agreements would expire. The date for entering into the definitive
agreements has been amended to December 31, 1996 by the parties.
C. Pursuant to an agreement dated April 3, 1996, Montgomery Ward and Lechmere
agreed to sell to Montgomery Ward Credit receivables from certain
commercial customers of Montgomery Ward and Lechmere.
8. Related Party Transactions
A. Montgomery Ward Direct L.P. (MW Direct)
The Company was a partner in a joint venture, MW Direct, formed through a
partnership in 1991 between subsidiaries of Montgomery Ward and
subsidiaries of Fingerhut Companies, Inc., a Minneapolis, Minnesota
specialty-based catalog merchandiser. In June of 1996, the subsidiaries
of Fingerhut Companies withdrew from the partnership. Immediately prior
to the withdrawal, the Fingerhut Partners contributed to the capital of MW
Direct cash and all claims that the Fingerhut subsidiaries had against MW
Direct.
In July of 1996, the Company and ValueVision International, Inc.
(ValueVision) a Minneapolis, Minnesota based television home shopping
enterprise entered into an agreement where ValueVision acquired the assets
and assumed certain liabilities of MW Direct concurrent with the
restructuring of the marketing agreement between Montgomery Ward and
ValueVision as discussed below
B. ValueVision International, Inc. (ValueVision)
In July of 1996, ValueVision and Montgomery Ward & Co., entered into an
agreement for the expansion and restructuring of their ongoing marketing
agreement as well as ValueVision's acquisition of the assets and
assumption of substantially all liabilities of Montgomery Ward Direct,
L.P.
11
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
8. Related Party Transactions (continued)
B. ValueVision International, Inc. (ValueVision) (continued)
ValueVision's sales promotion rights will be expanded beyond the current
television home shopping arena to include the full use of the Montgomery
Ward name, servicemark, and 10 million-plus active credit card file for
direct mail catalogs and ancillary promotions. The new agreement also
extends to the use of the Lechmere servicemark and customer file, acquired
by Montgomery Ward in 1994 when it purchased the New England-based
electronics and appliance retailer.
ValueVision issued to Montgomery Ward vested warrants (Class P Warrants)
to purchase 2.97 million shares of ValueVision common stock at an exercise
price of $0.01 per share. The new warrants replaced 18.0 million unvested
warrants (Class C-O Warrants) from an earlier grant of 25.0 million
ValueVision warrants exercisable at prices ranging from $7.00-$17.00 per
share. Concurrent with this agreement, ValueVision issued to Merchant
Partners L.P. (Merchant Partners) vested Class P warrants to purchase
199,100 shares of ValueVision common stock at an exercise price of $0.01
per share. Montgomery Ward is a limited partner in Merchant Partners.
Montgomery Ward recognized a pretax gain of $8 from the exchange
of the Class C-O invested warrants and the exchange of Montgomery Ward
Direct assets and liabilities. The gain was included in Operating,
selling, general and administrative expense.
In September of 1996, Montgomery Ward and ValueVision exchanged warrants
to purchase ValueVision common stock. Montgomery Ward exchanged 6.0
million of vested warrants (Class A-B Warrants) from the earlier grant of
25.0 million warrants which were exercisable at prices ranging from $6.50
to $6.75. In return for these warrants, ValueVision exchanged vested
warrants (Class P Warrants) to purchase 2.2 million shares of ValueVision
common stock at an exercisable price of $0.01 per share. Montgomery Ward
recognized a pretax gain of $7 from this transaction which is
included in Operating, selling, general and administrative expense.
The earlier warrant program had been subject to certain vesting conditions
and termination rights which do not apply to the replacement grant. Under
the new agreements, Montgomery Ward's potential ownership of ValueVision,
on a fully diluted basis, following the exercise of all warrants would be
12.95%. Montgomery Ward will account for ValueVision on the Equity Method
effective with the agreement commencing on July 28, 1996. No material
gains or losses were recognized in the third quarter from this equity
investment.
12
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
8. Related Party Transactions (continued)
B. ValueVision International, Inc. (continued)
Effective with the agreement, consolidation of the Montgomery Ward Direct
business in ValueVision's operations commenced on July 28, 1996.
C. Merchant Partners L.P.
In September of 1996, Montgomery Ward made a capital contribution to
Merchant Partners which consisted of vested warrants (Class P Warrants) to
purchase 1.33 million of ValueVision common stock at an exercise price of
$.01 per share. These Class P warrants were from those acquired pursuant
to the agreement above which exchanged the unvested Class C-O warrants for
vested Class P warrants. The value of the capital contribution recorded
as an investment in Merchant Partners was $10. Montgomery Ward
is a limited partner in Merchant Partners.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of results of operations for MW Holding
compares the third quarter of 1996 to the third quarter of 1995, as well as
the first nine months of 1996 to the first nine months of 1995. All dollar
amounts referred to in this discussion are in millions, and all income and
expense items are shown before income taxes, unless specifically stated
otherwise.
MW Holding's business is seasonal, with one-third of the sales traditionally
occurring in the fourth quarter; accordingly, the results of operations for
the quarter and the first nine months are not necessarily indicative of the
results for the entire year.
13
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations (continued)
Third Quarter 1996 Compared with Third Quarter 1995
Consolidated total revenues (net sales and direct response marketing
revenues, including insurance) were $1,567 in 1996 compared with $1,704 in
1995, a decrease of $137 or 8%.
Net sales were $1,376 in 1996 compared with $1,562 in 1995, a decrease of
$186 or 12%. Montgomery Ward store sales for the quarter decreased 12% in
softlines (Apparel, Jewelry and Domestics), and 13% in hardlines
(Electronics, Appliances, Furniture and Automotive). Comparable sales for
Montgomery Ward and Lechmere decreased 14% for the quarter and comparable
store sales decreased 17%.
Sales were negatively impacted by competitive conditions and the Company's
decision to reduce and redeploy inventory in concert with its strategic
direction. The Company plans to grow its retail business with narrowed and
lower inventory levels in merchandise lines that provide sale and gross
margin opportunities. The current transition period is negatively impacted by
significant liquidation sales that result in lower retail prices and
reduction of new merchandise receipts during the transition period. In
Hardlines, the Company is working with its major brand relationships
(including Sony, Bose, GE, Maytag, La-Z-Boy, Goodyear and Sealy) to emphasize
"Exclusive Values" which are offered at pre-emptive prices by leveraging the
Company's volume buying in key categories and items. In Apparel, the
assortment is shifting to a focus on casual, lifestyle categories with
universal appeal -- denim, active wear, team sports wear (college and
professional) and topical (featuring Disney and Warner Bros. characters).
These focus categories will competitively position the company in the niche
between discounters and department stores and expand the Company's customer
base due to their appeal across consumer demographics. The brand assortment
in apparel is being strengthened with the addition of Bum, Champion, and
Converse to supplement the Company's dominant market share in Lee, Bugle Boy
and BIKE.
To make way for the new strategies in Hardlines and Apparel, the Company is
reducing certain lines of merchandise such as exiting suit separates in
Apparel and narrowing the number of computers to be carried in Hardlines at
Montgomery Ward. These efforts are estimated to have resulted in $36 of
incremental markdowns in the Third Quarter. Similar efforts are planned
during the Fourth Quarter when the Company has the most customer traffic in
its stores. The Company has also planned for additional staffing to
accommodate customers and replenish the sales floor during this peak selling
period.
14
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations (continued)
Third Quarter 1996 Compared with Third Quarter 1995 (continued)
Credit sales during the Third Quarter in 1996 were 59% of total sales
compared to 62% in 1995. The Company's New Account Acquisition program
resulted in new card holder additions exceeding the prior year during
September and reversed the decline in new accounts experienced since the
fourth quarter of 1995. The Third Quarter increase in new accounts is on plan
with management's goal of achieving a 15% increase in new accounts for full
year 1996.
The Company invested $26 in capital expenditures in the Third Quarter,
including the opening of six new "Home Image" by Lechmere stores and one new
full-line store by Montgomery Ward. "Home Image" is the Company's new
retailing concept which leverages its market share and brand dominance in
home oriented goods. Home Image has lifestyle merchandising presentations
which integrate home furnishings, electronics, home office products and
appliances in room settings to provide ease of shopping and generate add-on
purchases and higher overall margin. The stores combine the strongest
competitive elements of the Company's Electric Avenue & More, Home Ideas and
Lechmere concepts to maximize sales potential, and they are located in middle
markets where the Company can capitalize on its buying and expense leverage
versus smaller regional competitors.
Direct response marketing revenues were $191 in 1996 compared with $142 in
1995, an increase of $49 or 35%; $28 of the increase was primarily due to the
Amoco Motor Club acquisition (see Note 5 to Consolidated Financial
Statements) with the remaining increase of $21 due to increases in club
membership levels combined with price increases especially in credit card
registration, home protection, dental and dining.
Gross margin (net sales, less cost of goods sold) dollars were $280, 20% of
net sales, a decrease of $42 or 13%. The decrease was due to a decrease in
gross margin rate of $20 and sales volume of $50 offset by a decrease in
other expense of $28. The decrease in gross margin rate was due to
competitive pressures and liquidation efforts designed to narrow merchandise
assortments and dispose of inactive inventory in concert with its strategic
direction.
15
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations (continued)
Third Quarter 1996 Compared with Third Quarter 1995 (continued)
Operating, selling, general and administrative expenses increased $66, due to
increased operating and other administrative expenses of Montgomery Ward and
Lechmere of $22, and by the increased payroll and other administrative
expenses of Signature of $44, with $22 due to the Amoco acquisition and $22
due to Signature's continued growth of business.
As was discussed in Note 8 of the financial statements, "Related Party
Transactions," a gain of $15 was included in selling, general and
administrative expense as a result of the exchange of unvested warrants
(Class C-O) pursuant to the restructuring of the agreement between Montgomery
Ward and ValueVision International, Inc. and the exchange of vested warrants
(Class A-B) for new warrants (Class P).
The net loss for the Third Quarter 1996 was $35 compared to net income of $3
for the Third Quarter 1995.
16
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations (continued)
First Nine Months of 1996 Compared with First Nine Months of 1995
Consolidated total revenues were $4,537 compared with $4,846 in 1995, a
decrease of $309 or 6%.
Net sales decreased $455 or 10%. Comparable store sales decreased 12%.
Montgomery Ward store sales for the nine months decreased 10% in apparel,
jewelry and domestics and 8% in hardlines.
Direct response marketing revenues increased $146 or 36%; $81 of the increase
was primarily due to the Amoco acquisition and $65 was due to increases in
club, insurance and other revenues.
Gross margin dollars (net sales, less cost of goods sold) were $751, 19% of
net sales, a decrease of $160 due to decreases in gross margin rate of $74
and sales volume of $119 offset by a decrease in other expense of $33.
Continued competitive pressures and inventory liquidation efforts contributed
to the decrease in gross margin rate for the nine months.
Operating, selling, general and administrative expenses increased $112 from
the prior year. Signature's expense increased $138, primarily due to an
increase of $67 in 1996 benefits and expenses of the Amoco Motor Club and due
to Signature's continued growth of business. Montgomery Ward and Lechmere's
expenses decreased $26 from the prior year which included the impact from new
store openings.
As was discussed in Note 8 of the financial statements, "Related Parties
Transactions," a gain of $15 was included in selling, general and
administrative expense as a result of the exchange of unvested (Class C-O)
warrants pursuant to the restructuring of the agreement between Montgomery
Ward and ValueVision International, Inc. and the exchange of vested warrants
(Class A-B) for new warrants (Class P).
Net interest expense increased $8 from the prior year due to increased
borrowings (as more fully discussed in the Discussion of Financial
Condition), and higher average borrowing rates related to long-term
borrowings placed in 1995 to extend the maturity and fix the interest rate on
a significant portion of the Company's debt.
Net loss for the nine months was $72 versus net income of $10 in 1995.
17
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Discussion of Financial Condition
Montgomery Ward is the only direct subsidiary of MW Holding and, therefore,
Montgomery Ward and its subsidiaries are MW Holding's sole source of funds.
Montgomery Ward entered into a Long Term Credit Agreement (Long Term
Agreement) dated as of September 15, 1994 with various banks and agents named
therein, which expires September 6, 2000, providing a revolving facility in
the principal amount of $603. As of September 28, 1996, $603 was outstanding
under the Long Term Agreement.
On September 6, 1996, the Short Term Credit Agreement (Short Term Agreement)
dated as of September 15, 1994 among Montgomery Ward and various banks and
agents named therein, which was extended to August 29, 1997 and was further
amended to increase the principal amount of this revolving loan facility from
$297 million to $436. On October 24, 1996, this facility was further
increased from $436 to $456. As of September 28, 1996, $145 was outstanding
under the Short Term Agreement.
Montgomery Ward also entered into a Credit Agreement (Seasonal Credit
Agreement) dated as of October 4, 1996 with various lenders, including GE
Capital. The Seasonal Credit Agreement expires March 1, 1997 and provides a
revolving loan facility in the principal amount of $165. The purpose of this
facility is to provide back-up liquidity as the Company reduces its inventory
levels during the Fourth Quarter. Unless the lenders otherwise agree, Loans
may be made under this facility only after the commitments under the Short
Term Agreement and the Long Term Agreement are fully used. Under the Seasonal
Credit Agreement, Montgomery Ward may select among several interest rate
options which are based on market rates. A commitment fee is payable based
upon the unused commitment.
The recent amendments to the Long Term Agreement and the Short Term Agreement
and the Seasonal Credit Agreement have added an earnings to fixed charges
test to the debt to total capitalization, minimum equity and dividend and
distributions financial tests contained in these Agreements.
On September 28, 1996, Montgomery Ward borrowed $45 under short-term
uncommitted lines of credit, which the company periodically uses at seasonal
working capital peaks to diversify its borrowings.
Montgomery Ward has entered into interest rate exchange and cap agreements
with various banks to offset the market risk associated with an increase in
interest rates under both the Long Term and Short Term Agreement. The
aggregate notional principal amounts under the interest rate exchange
agreement is $175 in 1996. Under the terms of the interest rate exchange
agreements, Montgomery Ward pays the banks a weighted average fixed rate of
7.4% multiplied by the notional principal amount in 1996 and will receive the
one-month daily average London Interbank Offered (LIBO) rate multiplied by
the notional principal amount.
18
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Discussion of Financial Condition (continued)
The average aggregate notional principal amount under the various cap
agreements is $158 in 1996. Under the terms of the cap agreements,
Montgomery Ward receives payments from the banks when the one-month daily
average LIBO rate exceeds the 6.0% cap strike rate in 1996. Such payments
will equal the amount determined by multiplying the notional principal amount
by the excess of the percentage rate, if any, of the one-month daily average
LIBO rate over the cap strike rate. The interest rate exchange and cap
agreements increased the effective borrowing rate under the Agreements by
.80% for the 39-week period ended September 28, 1996. Montgomery Ward is
exposed to credit risk in the event of nonperformance by the other parties to
the interest rate exchange and cap agreements; however, Montgomery Ward
anticipates full performance by the counterparties.
Signature Financial/Marketing, Inc. (Signature), a wholly owned subsidiary of
Montgomery Ward, borrowed $102 under a Credit Agreement (Signature Credit
Agreement) dated as of September 27, 1996 between Signature and various
lenders. The proceeds were used to repay the inter-company loan from
Montgomery Ward to Signature arising from Signature's acquisition of the
Amoco Motor Club on December 31, 1995. The Signature Credit Agreement
expires on March 1, 1997 and is expected to be refinanced on a long-term
basis at that time.
On October 24, 1996, Montgomery Ward prepaid a $25 term loan which had been
outstanding under the Term Loan Agreement dated September 29, 1995.
Net cash used in the Company's operating activities totaled $592 for the
first nine months of 1996 compared to $608 for the same period in 1995.
Net cash provided by financing activities totaled $709 for the first nine
months of 1996, compared to $714 for the same period in 1995.
Capital expenditures during the first nine months of 1996 of $55 were
primarily related to expenditures for the opening of one full-line store and
six Home Image stores in August. Capital expenditures for the comparable
1995 period were $90. The decrease in capital expenditures from the prior
year was due to a reduction in new stores of $13, major remodels and
conversions of $15, and corporate and store capital programs of $7.
19
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Discussion of Financial Condition (continued)
Future cash needs are expected to be provided by ongoing operations, the
arrangements with Monogram Bank/GE Capital and Montgomery Ward Credit
pertaining to the extension of credit to the Company's customers, the
disposition of capital assets and borrowings under the revolving loan
facilities and uncommitted lines. While cash flow remains positive, the
liquidation of inventories has a negative earnings impact. The Company is
currently evaluating the impact of the numerous activities of its financing
facilities, including the various financial tests, and the related future
financing needs.
20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
Information included in this Report on Form 10-Q relating to sales and
earnings expectations constitutes forward-looking statements that involve a
number of risks and uncertainties. From time to time, information provided
by the Company or statements made by its employees may contain other forward-
looking statements. Factors that could cause actual results to differ
materially from the forward-looking statements include but are not limited
to: general economic conditions including inflation, consumer debt levels,
trade restrictions and interest rate fluctuations; competitive factors
including pricing pressures, technological developments and products offered
by competitors; inventory risks due to changes in market demand or the
Company's business strategies; and changes in effective tax rates. Readers
are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date made. The Company undertakes no
obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.(i)(H)(3) Amendment to the Long Term Credit Agreement dated as of
September 15, 1994 among Montgomery Ward & Co.,
Incorporated, various banks, The First National Bank of
Chicago, as Documentary Agent, The Bank of Nova Scotia,
as Administrative Agent, The Bank of New York, as
Negotiated Loan Agent, and Bank of America National Trust
and Savings Association, as Advisory Agent, which became
effective September 6, 1996.
21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. (continued)
(a) Exhibits. (continued)
10.(i)(I)(3) Amendment dated September 6, 1996 to the Short Term
Credit Agreement dated as of September 15, 1994 among
Montgomery Ward & Co., Incorporated, various banks, The
First National Bank of Chicago, as Documentary Agent, The
Bank of Nova Scotia, as Administrative Agent, The Bank of
New York, as Negotiated Loan Agent, and Bank of America
National Trust and Savings Association, as Advisory
Agent.
10.(i)(I)(4) Confirmation of New Bank executed by The Industrial Bank
of Japan, Limited, Chicago Branch and The Bank of Nova
Scotia, as Administrative Agent, pursuant to Section
2.6(c) of the Short Term Credit Agreement dated as of
September 15, 1994 among Montgomery Ward & Co.,
Incorporated, various Banks, The First National Bank of
Chicago, as Documentary Agent, The Bank of Nova Scotia,
as Administrative Agent, The Bank of New York, as
Negotiated Loan Agent, and Bank of America National Trust
and Savings Association, as Advisory Agent, as amended
and extended, and (b) a letter dated October 24, 1996
from The Bank of Nova Scotia, as Administrative Agent, to
the Banks and other Agents who are parties to said Short
Term Credit Agreement transmitting an attached revised
Schedule 1 to such Agreement.
10.(i)(K)(2) Amendment dated September 27, 1996 to the Term Loan
Agreement dated as of September 29, 1995 between
Montgomery Ward & Co., Incorporated and The Industrial
Bank of Japan, Limited, Chicago Branch.
10.(i)(L) Credit Agreement dated as of September 27, 1996 among
Signature Financial/Marketing, Inc., The Bank of New York
and The Bank of Nova Scotia.
10.(i)(M) Credit Agreement dated October 4, 1996 among Montgomery
Ward & Co., Incorporated, various Lenders, The Bank of
Nova Scotia, as Administrative Agent, and The Bank of New
York, as Documentation Agent.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
None.
22
SIGNATURE
Pursuant to the requirements 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.
REGISTRANT MONTGOMERY WARD HOLDING CORP.
BY JOHN L. WORKMAN
NAME AND TITLE John L. Workman, Executive Vice President
and Chief Financial Officer
DATE: November 12, 1996
23