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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
Quarterly Report under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
April 2, 1994 No. 0-17540
MONTGOMERY WARD HOLDING CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3571585
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One 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 .
At April 30, 1994, there were 19,528,646 shares of Class A
Common Stock and 25,000,000 shares of Class B Common Stock of the
Registrant outstanding.
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
INDEX
Page
Montgomery Ward Holding Corp.
Consolidated Statement of Income . . . . . . . . .2
Consolidated Condensed Balance Sheet . . . . . . .3
Consolidated Statement of Cash Flows . . . . . . .4
Notes to Consolidated Condensed Financial
Statements . . . . . . . . . . . . . . . . . . .6
<PAGE>
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF INCOME
(Millions of dollars, except per share amounts)
For the 13-Week
Period Ended
April 2, April 3,
1994 1993
Revenues
Net sales, including leased and licensed
department sales . . . . . . . . . . . . . . $1,211 $1,151
Direct response marketing revenues,
including insurance. . . . . . . . . . . . . . 107 97
Total Revenues . . . . . . . . . . . . . . .1,318 1,248
Costs and Expenses
Cost of goods sold, including net occupancy
and buying expense . . . . . . . . . . . . . . 926 868
Benefits, losses and expenses of direct
response operations. . . . . . . . . . . . . . 81 73
Operating, selling, general and
administrative expenses. . . . . . . . . . . . 284 283
Interest expense, net of investment
income . . . . . . . . . . . . . . . . . . . . 11 9
Total Costs and Expenses . . . . . . . . . .1,302 1,233
Income Before Income Taxes . . . . . . . . . . . 16 15
Income Tax Expense . . . . . . . . . . . . . . . 6 5
Net Income Applicable to
Common Shareholders . . . . . . . . . . . . . .$ 10 $ 10
Net Income per Class A Common Share. . . . . . .$ .23 $ .21
Net Income per Class B Common Share. . . . . . .$ .20 $ .19
See notes to consolidated condensed financial statements.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED CONDENSED BALANCE SHEET
(Millions of dollars)
ASSETS
April 2, January 1,
1994 1994
Cash and cash equivalents. . . . . . . . . . $ 50 $ 98
Short-term investments . . . . . . . . . . . 7 19
Investments of insurance operations. . . . . 326 296
Total Cash and Investments . . . . . . . 383 413
Trade and other accounts receivable. . . . . 72 62
Accounts and notes receivable
from affiliates . . . . . . . . . . . . . . 26 4
Total Receivables. . . . . . . . . . . . 98 66
Merchandise inventories. . . . . . . . . . . 1,391 1,242
Prepaid pension contribution . . . . . . . . 313 310
Properties, plants and equipment,
net of accumulated depreciation
and amortization. . . . . . . . . . . . . . 1,315 1,263
Other assets . . . . . . . . . . . . . . . . 667 541
Total Assets . . . . . . . . . . . . . . . . $4,167 $3,835
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings. . . . . . . . . . . . $ 367 $ -
Trade accounts payable . . . . . . . . . . . 1,141 1,358
Federal income taxes payable . . . . . . . . 3 7
Accrued liabilities and other
obligations . . . . . . . . . . . . . . . . 1,195 1,197
Insurance policy claim reserves. . . . . . . 237 237
Long-term debt . . . . . . . . . . . . . . . 402 213
Obligations under capital leases . . . . . . 87 89
Deferred federal income taxes. . . . . . . . 109 127
Total Liabilities. . . . . . . . . . . . 3,541 3,228
Shareholders' Equity
Common stock. . . . . . . . . . . . . . . . - -
Capital in excess of par value. . . . . . . 19 19
Retained earnings . . . . . . . . . . . . . 668 658
Unrealized gain on marketable equity
securities . . . . . . . . . . . . . . . . 14 3
Less: Treasury stock, at cost. . . . . . . (75) (73)
Total Shareholders' Equity . . . . . . . 626 607
Total Liabilities and
Shareholders' Equity. . . . . . . . . . . . $4,167 $3,835
See notes to consolidated condensed financial statements.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)
For the 13-Week
Period Ended
April 2, April 3,
1994 1993
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . .$ 10 $ 10
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization. . . . . . . 25 25
Deferred income taxes . . . . . . . . . . (6) (4)
Changes in operating assets and liabilities:
(Increase) decrease in:
Trade and other accounts receivable. . . . 2 (2)
Accounts and notes receivable from
affiliates. . . . . . . . . . . . . . . . (22) (2)
Merchandise inventories. . . . . . . . . . (6) (133)
Prepaid pension contribution . . . . . . . (3) (3)
Other assets . . . . . . . . . . . . . . . (11) (15)
Increase (decrease) in:
Trade accounts payable . . . . . . . . . . (286) (174)
Federal income taxes payable, net. . . . . (2) 3
Accrued liabilities and other
obligations . . . . . . . . . . . . . . . (65) (55)
Net cash used in operations . . . . . . . (364) (350)
Cash flows from investing activities:
Acquisition of Lechmere, net
of cash acquired . . . . . . . . . . . . . . (109) -
Purchase of short-term investments. . . . . . (25) (19)
Purchase of investments of insurance
operations . . . . . . . . . . . . . . . . . (116) (98)
Sale of short-term investments. . . . . . . . 37 30
Sale of investments of insurance
operations . . . . . . . . . . . . . . . . . 103 87
Capital expenditures. . . . . . . . . . . . . (12) (10)
Disposition of properties, plants and
equipment, net . . . . . . . . . . . . . . . - 1
Net cash used for
investing activities . . . . . . . . . . (122) (9)
See notes to consolidated condensed financial statements.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)
For the 13-Week
Period Ended
April 2, April 3,
1994 1993
Cash flows from financing activities:
Proceeds from issuance of
short-term borrowings. . . . . . . . . . . . $1,727 $1,742
Payments on short-term borrowings . . . . . .(1,360) (1,514)
Proceeds from issuance of
long-term debt . . . . . . . . . . . . . . . 165 100
Payments of Montgomery Ward
long-term debt . . . . . . . . . . . . . . . (2) (3)
Payments of Lechmere
long-term debt . . . . . . . . . . . . . . . (88) -
Payments of obligations under
capital leases . . . . . . . . . . . . . . . (2) (1)
Purchase of treasury stock, at cost . . . . . (2) (1)
Net cash provided by
financing activities. . . . . . . . . . . 438 323
Decrease in cash and cash equivalents. . . . . (48) (36)
Cash and cash equivalents at
beginning of period . . . . . . . . . . . . . 98 81
Cash and cash equivalents at
end of period . . . . . . . . . . . . . . . . $ 50 $ 45
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Income taxes . . . . . . . . . . . . . . . $ 15 $ 7
Interest . . . . . . . . . . . . . . . . . $ 13 $ 9
See notes to consolidated condensed financial statements.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
1. Condensed Financial Statements
Montgomery Ward Holding Corp. (the Company or MW Holding)
conducts its operations through its only direct subsidiary,
Montgomery Ward & Co., Incorporated (Montgomery Ward). In the
opinion of management, the unaudited financial statements of the
Company include all adjustments necessary for a fair presentation.
All such adjustments are of a normal recurring nature. The
condensed 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 1993 Annual Report on Form
10-K. Income from investments of insurance operations for 1993 has
been reclassified from Interest expense, net to Direct response
marketing revenues. Certain other prior period amounts have also
been reclassified to be comparable with the current period
presentation.
Effective January 2, 1994, the Company adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (FAS No. 115). Under
FAS No. 115, all debt securities are classified as "available-for-
sale" and are stated at fair market value with all changes in
unrealized gains or losses included in Shareholders' Equity. The
adoption of FAS No. 115 increased Investments of insurance
operations by $17, Deferred income taxes by $6 and Unrealized gain
on equity securities by $11 and had no impact on the results of
operations of the Company.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
2. Net Income Per Common Share
Net income per common share is computed as follows:
13-Week Period Ended
April 4, 1994
Class A Class B
Earnings available for Common
Shareholders . . . . . . . . . . . $ 5 $ 5
Weighted average number of common
and common equivalent shares
(stock options) outstanding. . . . 21,632,062 25,000,000
Earnings per share. . . . . . . . . $ .23 $ .20
13-Week Period Ended
April 3, 1993
Class A Class B
Earnings available for
Common Shareholders. . . . . . . . $ 5 $ 5
Weighted average number of common
and common equivalent shares
(stock options) outstanding. . . . 22,471,520 25,000,000
Earnings per share. . . . . . . . . $ .21 $ .19
3. Acquisition of Lechmere, Inc.
Montgomery Ward acquired in a merger transaction all the stock
of LMR Acquisition Corporation (LMR) which owns 100% of the stock
of Lechmere, Inc. (Lechmere) on March 30, 1994. The aggregate
purchase price was comprised of an estimated price of $113 and a
contingent purchase price payable in 1995 of up to $20 in cash and
the issuance of up to 400,000 shares of Class A Common Stock,
Series 1 (or at the option of Montgomery Ward, if duly authorized,
up to 400,000 shares of Class A common Stock, Series 3). The exact
amount, if any, of the contingent price to be paid is dependent on
Lechmere achieving or exceeding a specified gross margin amount
during the period commencing February 27, 1994 and ending February
25, 1995.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
3. Acquisition of Lechmere, Inc. (continued)
The closing price included a $10 promissory note (the Note) of
Montgomery Ward, which bears interest at a rate of 4.87% per annum.
Seventy-five percent of the accrued interest on and principal of
the Note are payable 540 days after the date of the Note and the
balance is payable three years after the date of the Note. The
Note, which is secured by a standby letter of credit, is to be
reduced upon the occurrence of certain specified circumstances.
As part of the closing, Montgomery Ward advanced approximately
$88 and assumed $3 in obligations to enable Lechmere to retire its
outstanding bank debt and subordinated debt.
The acquisition was accounted for as a purchase. The purchase
price has been allocated to Lechmere's 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:
Inventory . . . . . . . . . . . . . . . . . . . . .$143
Properties, Plants and Equipment. . . . . . . . . . 65
Goodwill. . . . . . . . . . . . . . . . . . . . . . 108
Other Assets. . . . . . . . . . . . . . . . . . . . 23
Due to Montgomery Ward. . . . . . . . . . . . . . . (88)
Other Liabilities . . . . . . . . . . . . . . . . .(138)
$113
4. Subsequent Event
On April 27, 1994, the Company issued 750 shares of a new series
of Senior Preferred Stock (Senior Preferred Stock) to GE Capital in
exchange for $75 in cash. The Company used the proceeds to
acquire 750 shares of a new issue of Senior Preferred Stock of
Montgomery Ward (Montgomery Ward Preferred) for $75 and Montgomery
Ward used the proceeds to reduce short-term borrowings.
Holders of the Senior Preferred Stock are entitled to receive
cumulative cash dividends of $4,850 per share, per annum, in equal
quarterly payments.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
4. Subsequent Event (continued)
The Company may, upon 10 days notice, redeem the Senior
Preferred Stock at a price of $100,000 per share. On or after
April 28, 1999, upon four months written notice by the holders, the
Company is required to redeem the Senior Preferred Stock at a price
of $100,000 per share.
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 first quarter of 1994 to the first
quarter of 1993. 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 are not necessarily
indicative of the results for the entire year.
Results of Operations
First Quarter 1994 Compared with First Quarter 1993
Consolidated net income for the first quarter of 1994 was $10,
which was even with the prior year.
Consolidated total revenues (net sales and direct response
marketing revenues, including insurance) were $1,318 compared with
$1,248 in 1993. Apparel and domestics sales increased 7% and
Hardlines sales increased 5%. While Apparel sales benefitted from
the pre-Easter selling period as a result of the earlier holiday in
1994, all categories were negatively impacted by the Los Angeles
earthquake. Sales on a comparable store basis, which reflects only
the stores in operation for both the first quarter of 1994 and
1993, increased 3%. Direct response marketing revenues increased
$10, or 10%, to $107. The increase was primarily due to increased
club membership levels.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Results of Operations (continued)
First Quarter 1994 Compared with First Quarter 1993 (continued)
Gross margin (net sales less cost of goods sold) dollars were
$285, an increase of $2, or 1%, from the first quarter of last
year. This increase was due to the gross margin impact of the
increased sales ($18), partially offset by the decrease in the
margin rate on sales ($13) and increased occupancy costs related to
new stores ($3). Benefits, losses and expenses of direct response
operations increased $8, or 11% over the first quarter of last
year. The increase was primarily due to increased expenses as a
result of increased club memberships.
Operating, selling, general and administrative expenses
increased $1 from the prior year. This increase was attributable
to the impact of new store openings of $11, offset by decreased
advertising and other promotional costs of $4 and decreased store
payroll and other costs of $6.
Net interest expense increased $2, or 22%, from the prior year
due primarily to increased interest expense on borrowings under the
Note Purchase Agreements. The borrowings were outstanding for the
entire first quarter of 1994 compared to a portion of the first
quarter in 1993.
Income tax expense increased by $1 or 20% due to the combined
impact of the increase in pretax earnings and the increase in the
effective income tax rate. The increased effective income tax rate
is due to Federal income tax rate increase enacted during the third
quarter of 1993.
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.
During the first quarter of 1994, Montgomery Ward borrowed the
entire amount available under a Term Loan Agreement dated as of
November 24, 1993 with various banks (Term Loan Agreement).
Borrowings under the Term Loan Agreement are payable upon the fifth
anniversary of the Term Loan Agreement and under the same interest
rate options as the Restated Credit Agreement (as defined below).
This loan was used to partially finance the acquisition of Lechmere
as discussed below. As of April 2, 1994, $165 was outstanding
under the Term Loan Agreement.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Discussion of Financial Condition (continued)
Montgomery Ward has entered into an Amended and Restated Credit
Agreement dated as of September 22, 1992, as amended (Restated
Credit Agreement) with various lenders. The Restated Credit
Agreement, which expires September 23, 1996, provides for a
revolving facility in the principal amount of $350. As of April 2,
1994, $242 is outstanding under the Restated Credit Agreement.
Concurrently, Montgomery Ward also entered into a Short Term Credit
Agreement dated as of September 22, 1992, as amended (Short Term
Agreement) with various lenders. The Short Term Agreement, which
expires September 22, 1994, provides for a revolving facility in
the principal amount of $200. As of April 2, 1994, $125 is
outstanding under the Short Term Agreement. For the first quarter
of 1994, the weighted average interest rate applicable to
borrowings under the Restated Credit Agreement and the Short Term
Agreement was 3.8%, and such borrowings have been used for working
capital purposes and to partially finance the acquisition of
Lechmere. The aforementioned borrowings are unsecured.
The Restated Credit Agreement, the Short Term Agreement, the
Term Loan Agreement (collectively, the Agreements) and the Note
Purchase Agreements impose various restrictions on Montgomery Ward,
including the satisfaction of certain financial tests which include
restrictions on payment of dividends. Under the terms of the
Agreements, which are currently the most restrictive of the
financing agreements as to dividends, distributions and
redemptions, Montgomery Ward may not pay dividends or make any
other distributions to the Company or redeem any Common Stock in
excess of (1) $50 on a cumulative basis, plus (2) 50% of
Consolidated Net Income of Montgomery Ward (as defined in the
Agreements) after December 28, 1991, plus (3) $90, which represents
a distribution made by Montgomery Ward for the purpose of redeeming
the preferred stock of the Company on September 30, 1992, plus (4)
capital contributions received by Montgomery Ward after December
28, 1991, plus (5) net proceeds received by Montgomery Ward from
(a) the issuance of capital stock including treasury stock but
excluding Debt-Like Preferred Stock (as defined in the Agreements),
or (b) any indebtedness which is converted into shares of capital
stock other than Debt-Like Preferred Stock, after December 28,
1991, plus (6) an adjustment of $45 for 1994 through 1996, $30 in
1997 and $15 in 1998.
Montgomery Ward acquired in a merger transaction all the stock
of LMR Acquisition Corporation (LMR) which owns 100% of the stock
of Lechmere, Inc. (Lechmere) on March 30, 1994. The aggregate
purchase price was comprised of an estimated price of $113 and a
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Conditio
and Results of Operations (continued)
Discussion of Financial Condition (continued)
contingent purchase price payable in 1995 of up to $20 in cash and
the issuance of up to 400,000 shares of Class A Common Stock,
Series 1 (or at the option of Montgomery Ward, if duly authorized,
up to 400,000 shares of Class A common Stock, Series 3). The exact
amount, if any, of the contingent price to be paid is dependent on
Lechmere achieving or exceeding a specified gross margin amount
during the period commencing February 27, 1994 and ending February
25, 1995.
The closing price included a $10 promissory note (the Note) of
Montgomery Ward, which bears interest at a rate of 4.87% per annum.
Seventy-five percent of the accrued interest on and principal of
the Note are payable 540 days after the date of the Note and the
balance is payable three years after the date of the Note. The
Note, which is secured by a standby letter of credit, is to be
reduced upon the occurrence of certain specified circumstances.
As part of the closing, Montgomery Ward advanced approximately
$88 and assumed $3 of obligations to enable Lechmere to retire its
outstanding bank debt and subordinated debt. The purchase of and
advances to Lechmere were financed by the proceeds from borrowings
under the Agreements.
Subsequent to quarter end, on April 27, 1994, the Company issued
750 shares of a new series of Senior Preferred Stock to GE Capital
in exchange for $75 in cash. The Company used the proceeds to
acquire the Montgomery Ward Preferred and Montgomery Ward used the
proceeds to reduce borrowings under the Restated Credit Agreement
and the Short Term Credit Agreement. The Montgomery Ward Preferred
constitutes Debt-Like Preferred Stock for purposes of the dividend
restrictions under the Agreements.
Future cash needs are expected to be provided by ongoing
operations, the sale of customer receivables to Montgomery Ward
Credit, pursuant to the Account Purchase Agreement with Montgomery
Ward Credit Corporation, a subsidiary of GE Capital, borrowings
under the Restated Credit Agreement and the Short Term Agreement
and the disposition of capital assets related to facility closings.
Capital expenditures during the first three months of 1994 of
$12 were primarily related to expenditures for opening one full
line store, and various merchandise fixture and presentation
programs. Capital expenditures for the comparable 1993 period were
$10.
<PAGE>
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
None.
Item 6. Exhibits and Reports on Form 8-K.
On April 5, 1994, the registrant filed a Form 8-K to communicate
the completion of the acquisition of Lechmere, Inc. The press
release issued by the registrant on March 30, 1994 was included as
an exhibit thereto.
<PAGE>
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,
Chief Financial Officer and Assistant Secretary
DATE May 16, 1994
