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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 1, 1995 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 29, 1995, there were 19,216,522 shares of Class A
Common Stock and 25,000,000 shares of Class B Common Stock of the
Registrant outstanding.
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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
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MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF INCOME
(Millions of dollars, except per share amounts)
For the 13-Week
Period Ended
April 1, April 2,
1995 1994
Revenues
Net sales, including leased and licensed
department sales . . . . . . . . . . . . . . $1,359 $1,216
Direct response marketing revenues,
including insurance. . . . . . . . . . . . . 130 107
Total Revenues . . . . . . . . . . . . . . 1,489 1,323
Costs and Expenses
Cost of goods sold, including net occupancy
and buying expense . . . . . . . . . . . . . 1,076 930
Operating, selling, general and
administrative expenses, including
benefits and losses of direct
response operations. . . . . . . . . . . . . 401 366
Interest expense, net of investment
income . . . . . . . . . . . . . . . . . . . 19 11
Total Costs and Expenses . . . . . . . . . 1,496 1,307
Income (Loss) Before Income Taxes. . . . . . . (7) 16
Income Tax (Benefit) Expense . . . . . . . . . (3) 6
Net Income (Loss). . . . . . . . . . . . . . . (4) 10
Preferred Stock Dividend Requirements. . . . . 1 -
Net Income (Loss) Applicable to
Common Shareholders . . . . . . . . . . . . . $ (5) $ 10
Net Income per Class A Common Share. . . . . . $ (.12) $ .23
Net Income per Class B Common Share. . . . . . $ (.10) $ .20
See notes to consolidated condensed financial statements.
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MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED CONDENSED BALANCE SHEET
(Millions of dollars)
ASSETS
April 1, December 31,
1995 1994
Cash and cash equivalents. . . . . . . . . . $ 48 $ 33
Short-term investments . . . . . . . . . . . 6 3
Investments of insurance operations. . . . . 316 314
Total Cash and Investments . . . . . . . 370 350
Trade and other accounts receivable. . . . . 104 112
Accounts and notes receivable
from affiliates . . . . . . . . . . . . . . 18 6
Total Receivables. . . . . . . . . . . . 122 118
Merchandise inventories. . . . . . . . . . . 1,628 1,625
Prepaid pension contribution . . . . . . . . 326 324
Federal income taxes receivable. . . . . . . 3 -
Properties, plants and equipment,
net of accumulated depreciation
and amortization. . . . . . . . . . . . . . 1,378 1,396
Direct response and insurance
acquisition costs . . . . . . . . . . . . . 338 322
Other assets . . . . . . . . . . . . . . . . 410 402
Total Assets . . . . . . . . . . . . . . . . $4,575 $4,537
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings. . . . . . . . . . . . $ 777 $ 144
Trade accounts payable . . . . . . . . . . . 1,245 1,719
Federal income taxes payable . . . . . . . . - 14
Accrued liabilities and other
obligations . . . . . . . . . . . . . . . . 1,127 1,231
Insurance policy claim reserves. . . . . . . 238 236
Long-term debt . . . . . . . . . . . . . . . 225 228
Obligations under capital leases . . . . . . 80 81
Deferred federal income taxes. . . . . . . . 126 122
Total Liabilities. . . . . . . . . . . . 3,818 3,775
Redeemable Preferred Stock . . . . . . . . . 75 75
Shareholders' Equity
Common stock. . . . . . . . . . . . . . . . - -
Capital in excess of par value. . . . . . . 23 23
Retained earnings . . . . . . . . . . . . . 746 751
Unrealized gain on marketable equity
securities . . . . . . . . . . . . . . . . 5 2
Less: Treasury stock, at cost. . . . . . . (92) (89)
Total Shareholders' Equity . . . . . . . 682 687
Total Liabilities and
Shareholders' Equity. . . . . . . . . . . . $4,575 $4,537
See notes to consolidated condensed financial statements.
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MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)
For the 13-Week
Period Ended
April 1, April 2,
1995 1994
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . $ (4) $ 10
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization. . . . . . . 31 25
Deferred income taxes . . . . . . . . . . 2 (6)
Changes in operating assets and liabilities:
(Increase) decrease in:
Trade and other accounts receivable. . . . 8 2
Accounts and notes receivable from
affiliates. . . . . . . . . . . . . . . . (12) (22)
Merchandise inventories. . . . . . . . . . (3) (6)
Prepaid pension contribution . . . . . . . (2) (3)
Other assets . . . . . . . . . . . . . . . (25) (11)
Increase (decrease) in:
Trade accounts payable . . . . . . . . . . (474) (286)
Federal income taxes payable, net. . . . . (17) (2)
Accrued liabilities and other
obligations . . . . . . . . . . . . . . . (104) (65)
Insurance policy claim reserves. . . . . . 2 -
Net cash used in operations . . . . . . . (598) (364)
Cash flows from investing activities:
Acquisition of Lechmere, net
of cash acquired . . . . . . . . . . . . . . - (109)
Purchase of short-term investments. . . . . . (28) (25)
Purchase of investments of insurance
operations . . . . . . . . . . . . . . . . . (91) (116)
Sale of short-term investments. . . . . . . . 25 37
Sale of investments of insurance
operations . . . . . . . . . . . . . . . . . 94 103
Capital expenditures. . . . . . . . . . . . . (18) (12)
Disposition of properties, plants and
equipment, net . . . . . . . . . . . . . . . 6 -
Net cash used for
investing activities . . . . . . . . . . $(12) $(122)
See notes to consolidated condensed financial statements.
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MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)
For the 13-Week
Period Ended
April 1, April 2,
1995 1994
Cash flows from financing activities:
Proceeds from issuance of
short-term borrowings. . . . . . . . . . . . $3,369 $1,727
Payments on short-term borrowings . . . . . .(2,736) (1,360)
Proceeds from issuance of
long-term debt . . . . . . . . . . . . . . . - 165
Payments of Montgomery Ward
long-term debt . . . . . . . . . . . . . . . (3) (2)
Payments of Lechmere
long-term debt . . . . . . . . . . . . . . . - (88)
Payments of obligations under
capital leases . . . . . . . . . . . . . . . (1) (2)
Cash dividends paid . . . . . . . . . . . . . (1) -
Purchase of treasury stock, at cost . . . . . (3) (2)
Net cash provided by
financing activities. . . . . . . . . . . 625 438
Increase (decrease) in cash and
cash equivalents. . . . . . . . . . . . . . . 15 (48)
Cash and cash equivalents at
beginning of period . . . . . . . . . . . . . 33 98
Cash and cash equivalents at
end of period . . . . . . . . . . . . . . . . $ 48 $ 50
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Income taxes . . . . . . . . . . . . . . . $ 20 $ 15
Interest . . . . . . . . . . . . . . . . . $ 16 $ 13
Non-cash investing activity:
Change in unrealized gain on
marketable securities . . . . . . . . . . $ 3 $ -
See notes to consolidated condensed financial statements.
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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 1994 Annual Report on Form
10-K. Certain prior period amounts have been reclassified to be
comparable with the current period presentation.
2. Net Income Per Common Share
Net income (loss) per common share is computed as follows:
13-Week Period Ended
April 1, 1995
Class A Class B
Earnings (loss) available for
Common Shareholders . . . . . . . $(2) $(3)
Weighted average number of common
and common equivalent shares
(stock options) outstanding. . . . 20,882,543 25,000,000
Earnings (loss) per share . . . . . $(.12) $(.10)
13-Week Period Ended
April 2, 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
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MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Millions of dollars)
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 $113.
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
results of asset valuations and liability and contingency
assessments.
The allocation is summarized as follows:
Inventory . . . . . . . . . . . . . . . . . . . . .$140
Properties, Plants and Equipment. . . . . . . . . . 54
Goodwill. . . . . . . . . . . . . . . . . . . . . . 124
Other Assets. . . . . . . . . . . . . . . . . . . . 50
Due to Montgomery Ward. . . . . . . . . . . . . . . (88)
Other Liabilities . . . . . . . . . . . . . . . . .(167)
$113
4. Benefits and Losses
Operating, selling, general and administrative expenses include
benefits and losses related to direct response marketing operations
of $28 and $27 for the 13-week periods ended April 1, 1995 and
April 2, 1994, respectively.
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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 1995 to the first
quarter of 1994. 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 1995 Compared with First Quarter 1994
Consolidated net loss for the first quarter of 1995 was $4, as
compared to net income of $10 for the first quarter of 1994.
Lechmere was acquired on March 30, 1994. Consequently, Lechmere's
loss from operations and the interest cost on the financing of the
acquisition are not reflected in the first quarter 1994 results.
Had these results been reflected in 1994, overall net income would
have been $6 million lower.
Consolidated total revenues (net sales and direct response
marketing revenues, including insurance) were $1,489 compared with
$1,323 in 1994. The net sales increase is due to the inclusion of
Lechmere sales in the first quarter of 1995, partially offset by
the impact of the shift in the Easter selling season from the first
quarter of 1994 to the second quarter of 1995. Sales on a
comparable store basis, which reflects only the stores in operation
for both the first quarter of 1995 and 1994, decreased 5%. Direct
response marketing revenues increased $23, or 21%, to $130. The
increase was primarily due to increased clubs membership levels as
well as increased revenues generated from the April 1994
acquisition of SmileSaver, Inc. and the October 1994 acquisition of
Credit Card Sentinel.
Gross margin (net sales less cost of goods sold) dollars were
$283, a decrease of $3, or 1%, from the first quarter of last year.
This decrease was due to the gross margin impact of the decrease in
the margin rate on sales ($30) and increased occupancy costs
primarily related to new stores ($15), partially offset by the
gross margin impact of the increased sales ($42). The decrease in
the margin rate was impacted by a heavier emphasis in appliances
and electronics and the lower margin rate that accompany these
businesses (which includes Lechmere) and continued competitive
pressures.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Results of Operations (continued)
First Quarter 1995 Compared with First Quarter 1994 (continued)
Operating, selling, general and administrative expenses
increased $35 from the prior year. Excluding Lechmere's expenses,
operating, selling, general and administrative expenses increased
by $1. This increase was attributable to the impact of new store
openings of $7 and increased other operating and administrative
costs of $2, partially offset by increased income generated from
the sale of product service contracts of $8.
Net interest expense increased $8, or 73%. The increase is due
to increased borrowings, primarily due to the acquisition of
Lechmere, as well as increased interest rates.
Preferred stock dividend requirements were $1 for the first
quarter of 1995 due to the issuance of Senior Preferred Stock on
April 27, 1994.
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 has entered into a Long Term Credit Agreement
(Long Term Agreement) dated as of September 15, 1994 with various
lenders. The Long Term Agreement, which expires September 15,
1999, provides for a revolving facility in the principal amount of
$603. As of April 1, 1995, $492 was outstanding under the Long
Term Agreement. Concurrently, Montgomery Ward also entered into a
Short Term Credit Agreement (Short Term Agreement) dated as of
September 15, 1994 with various lenders. The Short Term Agreement,
which expires September 14, 1995, provides for a revolving facility
in the principal amount of $297. As of April 1, 1995, $210 was
outstanding under the Short Term Agreement. In addition, $75 was
outstanding under short-term uncommitted bank lines of credit as of
April 1, 1995, which the Company uses periodically at seasonal
working capital peaks to diversify its borrowings.
Under the Long Term Agreement and the Short Term Agreement
(collectively, the Agreements), Montgomery Ward may select among
several interest rate options, including a rate negotiated with one
or more of the various lenders. The interest rates for the
aforementioned bank borrowings are based on market rates and
significant increases in market interest rates will increase
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Discussion of Financial Condition (continued)
interest payments required. A commitment fee is payable based upon
the unused amount of each facility, although under certain
circumstances, an additional fee may be payable to lenders not
participating in a negotiated rate loan.
During the fourth quarter of 1994, Montgomery Ward 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 Agreement and Short Term Agreement.
The aggregate notional principal amounts under the interest rate
exchange agreements is $175 in 1995. Under the terms of the
interest rate exchange agreements, Montgomery Ward pays the banks
a weighted average fixed rate of 7.4% in 1995 and will receive the
one-month daily average London Interbank Offered (LIBO) rate
multiplied by the notional principal amount. The average aggregate
notional principal amounts under the various cap agreements is $154
in 1995. Under the terms of the cap agreements, Montgomery Ward
receives payments from the banks when the one-month daily average
LIBO rate exceeds the 5.5% cap strike rate in 1995. 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.
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.
The Agreements and the Note Purchase Agreements impose various
restrictions on Montgomery Ward, including the satisfaction of
certain financial tests which include restrictions on payments 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) $63 on a cumulative basis, plus
(2) 50% of Consolidated Net Income of Montgomery Ward (as defined
in the Agreements) after January 1, 1994, plus (3) any repayment by
the Company of any loan or advance made by Montgomery Ward to the
Company which was received after January 1, 1994, plus (4) capital
contributions received by Montgomery Ward after January 1, 1994,
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 of Montgomery Ward or the Company,
after January 1, 1994, plus (6) an adjustment of $45 for 1994
through 1996, $30 in 1997 and $15 in 1998.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Discussion of Financial Condition (continued)
On April 27, 1994, the Company issued 750 shares of a new series
of Senior Preferred Stock (Senior Preferred Stock) to General
Electric Capital Corporation (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. 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 Corporation (Montgomery Ward Credit), a subsidiary of GE
Capital, borrowings under the Agreements and the disposition of
capital assets related to facility closings.
Capital expenditures during the first three months of 1995 of
$18 were primarily related to expenditures for various merchandise
fixture and presentation programs. Capital expenditures for the
comparable 1994 period were $12.
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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.
None.
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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 15, 1995
