SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant x
Filed by a Party other than the Registrant
Check the appropriate box:
X Preliminary Proxy Statement
Confidential, for Use of Commission
Only (as permitted by
Rule 14a-6(e)(2))
Definitive Proxy Statement
Definitive Additional Materials
Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Montgomery Ward Holding Corp.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
x $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
$500 per each party to the controversy pursuant to Exchange Act
Rules 14a-6(i)(3).
Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on
which the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
Fee paid previously with preliminary materials.
Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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PRELIMINARY COPIES
PROXY STATEMENT
MONTGOMERY WARD HOLDING CORP.
Montgomery Ward Plaza
Chicago, Illinois 60671
(312) 467-2000
This Proxy Statement, dated December __, 1995, is furnished in connection
with the solicitation by the Board of Directors of Montgomery Ward Holding Corp.
("MW Holding" or the "Company") of written consents to take the actions
contemplated hereby in lieu of a special meeting of the stockholders of the
Company. This Proxy Statement, the Company's Annual Report on Form 10-K for the
fiscal year ended January 1, 1995, the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1995 and an accompanying form of written
consent in lieu of meeting will be mailed to stockholders of record on or about
December __, 1995.
RECORD DATE AND OUTSTANDING VOTING SECURITIES
Stockholders of record at the close of business on December 2, 1995, are
entitled to vote the shares held on that date. The number of voting securities
of MW Holding outstanding on December 2, 1995 was 19,020,394 shares of Class A
Common Stock, Series 1, $0.01 par value ("Series 1 Shares"), owned by three
stockholders of record; 787,428 shares of Class A Common Stock, Series 2, $0.01
par value ("Series 2 Shares", and together with the Series 1 Shares, the "Class
A Shares"), owned by one stockholder of record; and 25,000,000 shares of Class
B Common Stock, $0.01 par value (the "Class B Shares" and together with the
Class A Shares, the "Common Stock"), owned by one stockholder of record. Each
share of Class A Common Stock, Series 1, Class A Common Stock, Series 2, and
Class B Common Stock is entitled to one vote. In addition, holders of outstand-
ing shares of Senior Preferred Stock, par value $1.00 per share ("Senior Pre-
ferred Stock"), voting as a class, will also be entitled to vote on the matter
set forth in this Proxy Statement. The number of shares of Preferred Stock out-
standing as of December 2, 1995 is 750 held by one stockholder of record.
GIVING OF CONSENTS
Stockholders are urged to read carefully the material in this Proxy
Statement, sign the written consent to the proposed amendment to the certificate
of incorporation of the Company (the "Certificate of Incorporation") and date
and return the written consent. A stockholder giving a written consent may
revoke it at any time prior to the filing of the amendment to the Certificate of
Incorporation by written notice of revocation to the Secretary of the Company.
Stockholders are requested to return the consent with respect to the amendment
to the Certificate of Incorporation to the Company by delivery to the attention
of Spencer H. Heine, Esq., Secretary, at the Company's executive offices by
December 29, 1995.
REQUISITE VOTE
The affirmative vote of a majority of the shares of Common Stock
outstanding and the Senior Preferred Stock outstanding is required for approval
of the amendment to the Certificate of Incorporation to be voted upon.
<PAGE>
AMENDMENT TO CERTIFICATE OF INCORPORATION
INTRODUCTION
On December __, 1995, by unanimous written consent, the Board of Directors
of the Company authorized an amendment to the Certificate of Incorporation (the
"Amendment"), a form of which amendment is attached to this Proxy Statement as
Annex A. The Board of Directors recommends a vote FOR the Amendment.
The Amendment would authorize a new series of senior preferred stock of the
Company (the "Class B Senior Preferred Stock") with characteristics as described
herein. The Board of Directors expects to issue 1,000 shares of the Class B
Senior Preferred Stock to General Electric Capital Corporation ("GE Capital") in
exchange for $__________ in cash. The Company is required to pay GE Capital's
legal fees in connection with the purchase of the Senior Preferred Stock. GE
Capital is presently the holder of all of the outstanding Class B Common Stock
and all of the outstanding Senior Preferred Stock. The Board of Directors has
determined that it is in the best interests of the Company to so issue the Class
B Senior Preferred Stock and use the proceeds to acquire from the Company's
wholly-owned subsidiary, Montgomery Ward & Co., Incorporated ("Montgomery Ward")
1,000 shares of a new issue of senior preferred stock of Montgomery Ward (the
"Montgomery Ward Class B Preferred") for $__________. Montgomery Ward has
agreed to reimburse the Company for its cost of issuing the Class B Senior
Preferred Stock and purchasing the Montgomery Ward Class B Preferred, includ-
ing GE Capital's legal fees and the Company's legal fees and expenses in connec-
tion therewith. The proceeds from the issuance of the Montgomery Ward Class B
Preferred to the Company will be applied by Montgomery Ward, in connection with
the proposed purchase by Montgomery Ward of all of the outstanding stock of
Amoco Enterprises, Inc., an indirect wholly-owned subsidiary of Amoco Oil
Company, a Maryland corporation. The Class B Senior Preferred Stock will be
preferred as to dividends and upon liquidation to the Common Stock on the terms
discussed below.
The terms of the Montgomery Ward Class B Preferred will be substantially
the same as the terms of the Class B Senior Preferred Stock, with the exceptions
that (i) Montgomery Ward will be required to redeem the Montgomery Ward Class B
Preferred upon two months prior written notice from the Company, provided that
such redemption cannot occur until the first day following the fifth anniversary
of the issuance of the Montgomery Ward Class B Preferred; (ii) the holders of
the Montgomery Ward Class B Preferred will not have any voting rights; and
(iii) the terms of the Montgomery Ward Class B Preferred will specifically
provide that (A) the restrictions on payments to holders of capital stock of
Montgomery Ward which are junior to the Montgomery Ward Class B Preferred shall
not apply to payments made pursuant to any tax sharing or tax allocation
arrangement and (B) without limitation, the Montgomery Ward Class B Preferred is
subordinate and junior in right of payment to indebtedness for borrowed money of
Montgomery Ward upon the occurrence and continuance of an event of default, as
defined in the documents governing such indebtedness.
RIGHTS OF THE CLASS B SENIOR PREFERRED STOCK
The Class B Senior Preferred Stock will have the rights and characteristics
described herein.
Voting Rights. Except as required by law, the holders of the Class B
Senior Preferred Stock will not have any voting rights, except the right of the
holders of the Senior Preferred Stock and the Class B Senior Preferred Stock,
voting together as a class, to elect one director to be an additional member of
the Board of Directors (a) during the period following a default in the payment
of accrued dividends on the Senior Preferred Stock and/or the Class B Senior
Preferred Stock for four consecutive quarters until such accrued dividends shall
have been paid in full and (b) during the period following any failure to make
a mandatory redemption of Senior Preferred Stock and/or Class B Senior Preferred
Stock until such failure shall have been cured.
Dividends. Holders of the Class B Senior Preferred Stock are entitled to
receive, before any dividends may be declared and paid upon or set aside for the
Common Stock, cumulative cash dividends of $______ per share per annum, in
equal quarterly payments on the last business day of March, June, September and
December, with the first payment due March 30, 1996. Dividend payments made
with respect to the Class B Senior Preferred Stock may be made only in cash and,
assuming issuance of all of the authorized shares of Class B Senior Preferred
Stock, will total $___________ per annum. No dividends may be declared or paid
on the Class B Senior Preferred Stock when such declaration or payment would
constitute a default under any agreements governing indebtedness for borrowed
money of the Company, Montgomery Ward or any of its subsidiaries (collectively,
the "Ward Group").
Optional Redemption. The Company may, upon ten business days notice to the
holders thereof, at any time redeem the whole or any part of the Class B Senior
Preferred Stock. Any such optional redemption shall be at a price of $100,000
per share of the Class B Senior Preferred Stock being redeemed plus unpaid
accrued dividends thereon. No redemption of Class B Senior Preferred Stock may
be made when such redemption would constitute a default under any agreements
governing indebtedness for borrowed money of the Company or any other member of
the Ward Group.
Mandatory Redemption. The Company is required to redeem from time to time
all or any portion of the Class B Senior Preferred Stock at a redemption price
of $100,000 per share plus unpaid accrued dividends, upon four months written
notice by GE Capital, provided, however, any such redemption cannot occur prior
to the first day following the fifth anniversary of the issuance of the Class B
Senior Preferred Stock. No redemption of Class B Senior Preferred Stock may be
made when such redemption would constitute a default under any agreements
governing indebtedness for borrowed money of the Company or any other member of
the Ward Group.
Liquidation Rights. Upon any liquidation, dissolution or winding up of the
Company, the holders of Class B Preferred Stock shall be entitled to be paid,
before any distribution or payment is made to any holder of Common Stock, an
amount in cash equal to $100,000 per share of their shares of Class B Senior
Preferred Stock outstanding plus unpaid accrued dividends.
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OWNERSHIP OF COMMON AND PREFERRED STOCK
The following table sets forth the beneficial ownership, as of December 2,
1995, of Class A Shares (i) by each person who is a director of the Company
(none of whom except the individuals identified beneficially owns any shares
of the Company's equity securities), (ii) by each executive officer whose
compensation was reflected in the Summary Compensation Table included in the
Company's Definitive Proxy Statement for its 1995 Annual Meeting, (iii) by each
person who is known to be a holder of more than 5% of Class A Shares and (iv)
by all directors and executive officers of the Company as a group.
Individual or Group Shares %
Bernard F. Brennan (a) 17,605,732 88.9%
Myron Lieberman (b) 2,512,392 12.7%
G. Joseph Reddington (c)(d) 250,000 1.2%
Richard M. Bergel (c)(e) 852,500 4.3%
Spencer H. Heine (c) 251,250 1.3%
John L. Workman (c)(f) 320,700 1.6%
Bernard W. Andrews (c)(g) 600,000 3.0%
Silas S. Cathcart (c)(h) 17,071 0.1%
Tamara Brennan (i) 2,200,000 11.1%
All directors and executive
officers as a group (18 persons) (j) __________ 86.5%
________________________________________________________________________
(a) Comprised of 13,025,750 Class A Shares (65.8% of the Class A Shares and
29.1% of the Common Stock outstanding as of December 2, 1995) owned of
record by Mr. Brennan and with respect to which Mr. Brennan has sole
investment and voting power, and 4,579,982 Class A Shares (23.1% of the
Class A shares and 10.2% of the Common Stock outstanding as of December 2,
1995) owned of record by Mr. Brennan as voting trustee and with respect to
which Mr. Brennan has sole voting power as voting trustee but no
investment power. Does not include 2,200,000 Class A Shares (11.1% of the
Class A Shares and 4.9% of the Common Stock outstanding as of December 2,
1995) which are owned by Myron Lieberman, as trustee of a trust (the
"Family Trust") for the benefit of members of Mr. Brennan's family, with
respect to which Mr. Brennan has no voting or investment power, but with
respect to which Tamara Brennan, Mr. Brennan's wife, may acquire shared
voting and dispositive power. See Note (i) below. Mr. Brennan disclaims
beneficial ownership of such 2,200,000 Class A Shares. Mr. Brennan's
business address is Montgomery Ward Plaza, Chicago, Illinois 60671.
(b) Includes 294,250 Class Shares represented by Voting Trust Certificates
owned by Lieberman Investment Limited Partnership, a limited partnership
of which Mr. Lieberman is the sole general partner. Also includes
2,200,000 Class A Shares with respect to which Mr. Lieberman has sole
voting and investment power as trustee of the Family Trust. Such
2,200,000 Class A Shares are not deposited in a voting trust under which
Mr. Brennan serves as voting trustee. See Note (c) below. All shares
other than the 2,200,000 Class A Shares as to which Mr. Lieberman has
beneficial ownership are represented by Voting Trust Certificates and such
shares are held in a voting trust as to which Mr. Brennan, as voting
trustee, has sole voting power. Does not include Class A Shares which can
be acquired pursuant to rights under the Montgomery Ward Holding Corp.
Directors Plan ("Conversion Rights"), which Conversion Rights will arise
on January 1, 1996 (a date within 60 days of the date of this Proxy
Statement) and which, pursuant to a prior election by Mr. Lieberman, will
automatically be exercised, because the number of such shares is not
determinable as of the date of this Proxy Statement. Mr. Lieberman's
business address is 10 South Wacker Drive, Chicago, Illinois 60606.
(c) Represents ownership of Voting Trust Certificates with respect to shares
held in a voting trust (a "Voting Trust") as to which Mr. Brennan, as
voting trustee, has sole voting power and the persons indicated have sole
investment power.
(d) Includes 150,000 Class A Shares which may be acquired by Mr. Reddington
pursuant to exercisable options. Also includes 100,000 Class A Shares
which may be acquired by Mr. Reddington pursuant to options which become
exercisable on January 21, 1996, a date within 60 days of the date of this
Proxy Statement.
(e) Includes 60,000 Class A Shares with respect to which Mr. Bergel has sole
investment power as trustee of trusts for the benefit of members of the
family of Robert A. Kasenter, an officer of the Company. Does not include
90,000 Class A Shares with respect to which Mr. Kasenter, as trustee of a
trust for the benefit of members of Mr. Bergel's family, has sole
investment power, but with respect to which Mr. Bergel has no voting or
investment power. Mr. Bergel retired effective November 30, 1995.
(f) Includes 253,900 Class A Shares which may be acquired by Mr. Workman
pursuant to exercisable options.
(g) Mr. Andrews resigned from the Company in 1995. The Company purchased all
of such shares from Mr. Andrews on December 18, 1995.
(h) Does not include Class A Shares which can be acquired pursuant to
Conversion Rights which will arise on January 1, 1996 (a date within 60
days of the date of this Proxy Statement) and which, pursuant to a prior
election by Mr. Cathcart, will automatically be exercised, because the
number of such shares is not determinable as of the date of this Proxy
Statement.
(i) Represents Class A Shares with respect to which Mrs. Brennan, if she were
to elect to become an advisor to the trustee of the Family Trust, may
acquire shared power to vote or direct the vote of, and shared power to
dispose or direct the disposition of, such shares. See Notes (a) and (b)
above. Mrs. Brennan's address is Montgomery Ward Plaza, Chicago, Illinois
60671.
(j) Represents all Class A Shares with respect to which officers and directors
have investment power, which is in each case sole investment power. Does
not include 2,797,219 Class A Shares with respect to which Mr. Brennan has
sole voting power as voting trustee, but with respect to which neither he
nor any other officer or director of the Company has investment power.
Includes 709,783 Class A Shares which may be acquired by executive
officers or directors at purchase prices ranging from $0.20 to $26.50 per
share pursuant to exercisable options. Does not include Class A Shares
which can be acquired by directors pursuant to Conversion Rights which
will arise on January 1, 1996 (a date within 60 days of the date of this
Proxy Statement) and which, pursuant to prior elections by Messrs.
Cathcart and Lieberman, will automatically be exercised, because the
number of such shares is not determinable as of the date of this Proxy
Statement. Includes 175,200 Class A Shares which can be acquired pursuant
to options which become exercisable on January 1, 1996, January 21, 1996
and January 31, 1996 (all dates within 60 days of the date hereof).
GE Capital owns 100% of the 25,000,000 Class B Shares and 750 shares of
Senior Preferred Stock currently outstanding. GE Capital's address is 260 Long
Ridge Road, Stamford, Connecticut 06927. Such shares represented 55.8% of the
Common Stock and 100% of the Senior Preferred Stock outstanding as of December
2, 1995. The Common Stock and the Senior Preferred Stock represent all of the
equity securities of the Company currently outstanding. If the amendment to the
Certificate of Incorporation of the Company, in support of which this Proxy
Statement is issued, is adopted, GE Capital intends to purchase 100% of the
authorized shares of Class B Senior Preferred Stock.
CONTROL MATTERS
Voting of Shares. In the event that a Voting Trust is not in effect or in
the event shares of Common Stock of MW Holding deposited therein are not subject
to a Voting Trust, all such shares held by the stockholders, except those held
by Mr. Brennan, certain trusts for the benefit of members of his family, GE
Capital and its affiliates, are subject to a voting agreement under which the
holders have agreed to vote their shares in the same way Mr. Brennan votes his
shares until June 17, 1998.
Directors. The Board of Directors consists of eleven directorships. The
Stockholders' Agreement dated as of June 17, 1988, as amended and restated to
date (the "Stockholders Agreement") provides that six of the Company's directors
shall be designated by the Designator, presently Mr. Brennan for this purpose,
and five shall be designated by GE Capital. Two of the directorships, one to be
designated by the Designator and the other to be designated by GE Capital, are
currently vacant.
If GE Capital and its affiliates cease to own more than 50% of the number
of shares of Common Stock initially purchased by them, the number of directors
which the Designator is permitted to designate will be increased by one, and the
number of directors which GE Capital may designate shall be reduced by one. If
GE Capital and its affiliates cease to own 20% or more of such shares of Common
Stock, except as described below, GE Capital shall have no right to designate
any directors, and the number of directors shall be reduced to nine, seven to be
elected by the holders of Class A Common Stock, voting as a class, and two to be
elected by the holders of Class B Common Stock, voting as a class, provided
that, so long as the Account Purchase Agreement between Montgomery Ward and
Montgomery Ward Credit Corporation, a wholly-owned subsidiary of GE Capital
("Montgomery Ward Credit"), relating to the purchase by Montgomery Ward Credit
of customer receivables of Montgomery Ward, remains in effect, and GE Capital or
any of its affiliates owns any Common Stock, GE Capital will have the right to
elect one of the two directors to be elected by the holders of Class B Common
Stock.
Holders of Senior Preferred Stock, voting together as a class, have the
right to elect one director to be an additional member of the Board of Directors
(a) during the period following a default in the payment of accrued dividends on
the Senior Preferred Stock for four consecutive quarters until such accrued
dividends shall have been paid in full and (b) during the period following any
failure to make a mandatory redemption of Senior Preferred Stock until such
failure shall have been cured. If the Amendment is adopted, holders of shares
of Senior Preferred Stock and Class B Senior Preferred Stock will have the
voting rights as set forth above. See "RIGHTS OF THE CLASS B SENIOR PREFERRED
STOCK--Voting Rights" for a description of such voting rights.
The Company's By-laws contain supermajority provisions which require that
certain actions, such as mergers, substantial asset sales, certain amendments to
the Company's Certificate of Incorporation or By-laws, payment of dividends and
redemption of Shares other than in accordance with the terms of the Stockholders
Agreement, public offerings and certain other major corporate transactions be
undertaken only upon the approval of two-thirds of the directors of the Company.
CERTAIN RELATIONSHIPS
If the amendment to the Certificate of Incorporation of the Company, in
support of which this Proxy Statement is issued, is adopted, GE Capital will own
all of the shares of Class B Senior Preferred Stock issued and outstanding.
Daniel Porter, Denis J. Nayden and James A. Parke, directors of the Company, are
executive officers of GE Capital or one of its subsidiaries and Mr. Cathcart is
a director of GE Capital and of General Electric Company, the parent of GE
Capital.
PROXY SOLICITATION AND REVOCATION
The enclosed form of written consent is solicited on behalf of the Board
of Directors and is revocable at any time prior to the filing of the amendment
to the Certificate of Incorporation to be authorized thereby. The cost of
soliciting consents will be borne by MW Holding.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the 1996 annual
meeting of stockholders must be received by the Company no later than December
29, 1995, in order to be considered for inclusion in the Company's proxy
statement and form of proxy relating to such meeting.
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FINANCIAL AND OTHER INFORMATION
The following information is incorporated herein by reference to the
Company's annual report on Form 10-K for its fiscal year ended January 1, 1995,
a copy of which is included herewith:
Information Page No.
Audited Financial Statements of the Company 28-70
Supplementary Financial Information N/A
Management's Discussion and Analysis of Financial
Condition and Results of Operations 20-27
The following information is incorporated herein by reference to the
Company's quarterly report on Form 10-Q for the period ended September 30, 1995
a copy of which is included herewith:
Information Page No.
Consolidated Financial Statements of the Company 2-9
Supplementary Financial Information N/A
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
The Company has not had, during the Company's two most recent fiscal years,
any disagreements with Arthur Andersen LLP, the Company's independent
accountants, with respect to accounting matters. Arthur Andersen LLP has served
as the Company's independent auditors since the Company's organization in 1988.
By Order of the Board of Directors,
Spencer H. Heine
Executive Vice President,
Secretary and General Counsel
<PAGE>
ANNEX A
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
MONTGOMERY WARD HOLDING CORP.
MONTGOMERY WARD HOLDING CORP., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify as follows:
1. The original Certificate of Incorporation of the Corporation was filed in
the Office of the Secretary of State of Delaware on February 8, 1988 and re-
corded in the Office of the Recorder of Kent County, Delaware. The name under
which the Corporation was originally incorporated is BFB Acquisition Corp.
2. The Certificate of Correction of Certificate of Incorporation of the
Corporation was filed in the Office of the Secretary of State of Delaware on
February 9, 1988.
3. The original Restated Certificate of Incorporation was filed in the
office of the Secretary of State of Delaware on June 17, 1988 and amendments
thereto were filed on each of June 20, 1988; June 24, 1988; January 30, 1990;
and March 20, 1992.
4. The Second Restated Certificate of Incorporation of the Corporation
was filed in the office of the Secretary of State of Delaware on June 25, 1992
and an amendment thereto was filed on April 27, 1994.
5. The Third Restated Certificate of Incorporation was filed in the
office of the Secretary of State of Delaware on June 28, 1994, and an amendment
thereto was filed on October 25, 1994.
6. The Board of Directors of the Corporation, by unanimous written
consent, authorized, adopted and approved resolutions proposing and declaring
advisable this amendment to the Third Restated Certificate of Incorporation of
the Corporation, setting forth amendments to Articles FOURTH and SIXTH as
follows:
The introduction to Article FOURTH and Part A thereof are amended in their
entirety to read as follows:
"FOURTH: The total number of shares of capital stock which the
Corporation shall have authority to issue is fifty-seven million eight
hundred thirteen thousand seven hundred fifty (57,813,750) consisting of
the following amounts in the following designations:
1. Common Stock. Fifty-seven million eight hundred twelve
thousand (57,812,000) shares of Common Stock, par value one cent
($0.01) per share (hereinafter referred to as "Common Stock"), which
shall consist of the following classes:
(a) thirty-two million eight hundred twelve thousand
(32,812,000) shares of Class A Common Stock (hereinafter
referred to as "Class A Common Stock"), which shall consist of
the following series:
(i) twenty-five million (25,000,000) shares of
Class A Common Stock, Series 1 (hereinafter referred to
as "Class A Common Stock, Series 1"), and
(ii) five million four hundred twelve thousand
(5,412,000) shares of Class A Common Stock, Series 2
(hereinafter referred to as "Class A Common Stock,
Series 2"), and
(iii) two million four hundred thousand
(2,400,000) shares of Class A Common Stock, Series 3
(hereinafter referred to a "Class A Common Stock, Series
3"), and
(b) twenty-five million (25,000,000) shares of Class
B Common Stock (hereinafter referred to as the "Class B Common
Stock").
2. Preferred Stock. One thousand seven hundred fifty
(1,750) shares of Preferred Stock, par value one dollar ($1.00) per
share (hereinafter referred to as "Preferred Stock") which shall
consist of the following classes:
(a) Seven hundred fifty (750) shares of Preferred
Stock, par value one dollar ($1.00) per share (hereinafter
referred to as "Senior Preferred Stock"), and
(b) One thousand (1,000) shares of Class B Preferred
Stock, par value one dollar ($1.00) per share (hereinafter
referred to as "Class B Senior Preferred Stock")
Such shares of Common Stock and Preferred Stock may be issued for
such consideration, not less than the par value thereof, as shall be fixed
from time to time by the Board of Directors, and shares issued for not
less than the consideration so fixed shall be fully paid and non-
assessable.
A statement of the powers, preferences, rights, qualifications,
limitations, restrictions and the relative, participating, optional and
other special rights in respect of the shares of each class or series of
stock is as follows:
PART A. PREFERRED STOCK
Except as otherwise provided herein, each share of Senior Preferred Stock
shall be identical in all respects to all other shares of Senior Preferred Stock
and shall entitle the holder thereof to the same rights and privileges as to
which the holders of the other shares of Senior Preferred Stock are entitled.
PART A1. SENIOR PREFERRED STOCK
1. Rank. The Senior Preferred Stock shall, with respect to
dividend rights and rights on liquidation, winding up and dissolution,
rank prior to the Common Stock and shall rank on a parity with the Class
B Senior Preferred Stock.
2. Dividends.
(a) In each year, the holders of the shares of Senior
Preferred Stock shall be entitled to receive, before any dividends
shall be declared and paid upon or set aside for the Common Stock,
when and as declared by the Board of Directors, except as may be
prohibited by Section A1.5, out of funds legally available for that
purpose, cumulative cash dividends at the annual rate of four
thousand eight hundred fifty dollars ($4,850) per share (the
"Dividend Rate"), and no more, in equal quarterly payments of one
thousand two hundred twelve dollars and fifty cents ($1,212.50) per
share, on the last business day of March, June, September and
December (each of such dates being a "Dividend Payment Date"),
commencing with the Dividend Payment Date in June, 1994. The
dividend payable on the Dividend Payment Date in June, 1994 with
respect to any share of Senior Preferred Stock shall be the pro rata
amount of the Dividend Rate based upon the number of days from and
including the date of first issuance (the "Issuance Date") of the
Senior Preferred Stock up to and including the Dividend Payment Date
in June, 1994 and a 365-day year. (The period from the Issuance
Date to the first Dividend Payment Date, and each quarterly period
between consecutive Dividend Payment Dates, shall hereinafter be
referred to as a "Dividend Period.") Such dividends shall be paid
to the holders of record at the close of business on the date
specified by the Board of Directors of the Corporation at the time
such dividend is declared; provided, however, that such date shall
not be more than sixty (60) days nor less than ten (10) days prior
to the respective Dividend Payment Date. Dividends on the Senior
Preferred Stock shall be cumulative from the Issuance Date (whether
or not there shall be net profits or net assets of the Corporation
legally available for the payment of such dividends), so that:
(i) except as provided in Section A1.2(a)(ii), the
Corporation shall not take any of the following actions:
(A) declare, order to pay any dividend on any
class of stock ranking as to dividends or on liquidation
junior to the Senior Preferred Stock (such junior stock
being herein sometimes referred to as the "Stock Junior
to the Senior Preferred Stock"), or
(B) redeem any Stock Junior to the Senior
Preferred Stock,
(each of such actions described in clauses A1.2(a)(i)(A) or
(B) above being herein sometimes referred to as a "Junior
Distribution" and the proposed date of each such action being
herein sometimes referred to as a "Proposed Junior
Distribution Date") if the Corporation shall not, on or before
the Proposed Junior Distribution Date, have completed both of
the following:
(1) declared on the outstanding shares of
Senior Preferred Stock, and paid or set apart for
payment, all "Accrued Dividends" (defined in
Section A1.4(c)(i)) to the Proposed Junior
Distribution Date; and
(2) paid or deposited as required in this
Part A1 all amounts payable to holders of Senior
Preferred Stock in respect of all mandatory
redemptions required to have been paid or
deposited for their benefit on or before the
Proposed Junior Distribution Date; and
(ii) the Corporation may redeem or purchase any shares
of Common Stock in accordance with either (x) the terms,
conditions and provisions of the "Stockholders Agreement"
(defined in Section B.1) or (y) the terms, conditions and
provisions of the "Employee Stock Option Plan" (defined in
Section B.1), if on or before the date of each such proposed
Common Stock redemption or purchase (each such time, with
respect to redemptions or purchases under either the
Stockholders Agreement or the Employee Stock Option Plan,
being herein sometimes referred to as a "Proposed Common Stock
Repurchase Date"), the Corporation shall have:
(A) declared on the outstanding shares of Senior
Preferred Stock, and paid or set apart for payment, all
Accrued Dividends (defined in Section A1.4(c)(i))
through all Dividend Payment Dates occurring on or prior
to such Proposed Common Stock Repurchase Date, and
(B) paid or deposited as required in this Part
A1 all amounts payable to holders of Senior Preferred
Stock in respect of all mandatory redemptions required
to have been paid or deposited for their benefit on or
before all "Mandatory Redemption Dates" (defined in
Section A1.4(a)(i)) occurring on or prior to such
Proposed Common Stock Repurchase Date.
All dividends declared upon Senior Preferred Stock and any other
class of stock ranking on a parity as to dividends with the Senior
Preferred Stock (including, without limitation, the Class B Senior
Preferred Stock) shall be declared pro rata per share. Accrued but
unpaid dividends shall not bear interest.
(b) Each fractional share of the Senior Preferred Stock
outstanding shall be entitled to a ratably proportionate amount of
all dividends to which each outstanding full share of the Senior
Preferred Stock is entitled pursuant to Section A1.2(a) hereof, and
all of such dividends with respect to such outstanding fractional
shares shall be fully cumulative and shall accrue (whether or not
declared) and shall be payable in the same manner and at such times
as provided for in Section A1.2(a) with respect to dividends on each
outstanding full share of the Senior Preferred Stock.
3. Rights on Liquidation, Dissolution or Winding Up.
(a) In the event of any liquidation, dissolution or winding
up of the Corporation, the holders of shares of Senior Preferred
Stock then outstanding shall be entitled to be paid out of the
assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, except as
may be prohibited by Section A1.5, but before any payment shall be
made to the holders of any stock ranking on liquidation junior to
the Senior Preferred Stock, an amount equal to one hundred thousand
dollars ($100,000) per share, plus an amount equal to Accrued
Dividends (as defined in Section A1.4(c)(i)) to the date of payment
(the "Liquidation Payment"). If upon any liquidation, dissolution
or winding up of the Corporation the assets of the Corporation
available for distribution to its stockholders shall be insufficient
to pay the holders of shares of Senior Preferred Stock the full
amounts to which they respectively shall be entitled, the holders of
shares of Senior Preferred Stock, and any class of stock ranking on
liquidation on a parity with the Senior Preferred Stock (including,
without limitation, the Class B Senior Preferred Stock), shall share
ratably in any distribution of assets according to the respective
amounts which would be payable in respect of the shares held by them
upon such distribution if all amounts payable on or with respect to
said shares were paid in full. In the event of any liquidation,
dissolution or winding up of the Corporation after payment shall
have been made to the holders of shares of Senior Preferred Stock
and any class of stock ranking on liquidation on a parity with the
Senior Preferred Stock (including, without limitation, the Class B
Senior Preferred Stock) of the full amount to which they shall be
entitled as aforesaid, the holders of any class or classes of stock
ranking on liquidation junior to the Senior Preferred Stock shall be
entitled, to the exclusion of the holders of shares of Senior
Preferred Stock, to share, according to their respective rights and
preferences, in all remaining assets of the Corporation available
for distribution to its stockholders.
(b) The Liquidation Payment with respect to each fractional
share of the Senior Preferred Stock outstanding or accrued but
unpaid, shall be equal to a ratably proportionate amount of the
Liquidation Payment with respect to each outstanding share of Senior
Preferred Stock.
(c) For the purposes of this Section A1.3, neither the
consolidation or merger of the Corporation into or with any other
corporation or corporations, nor the sale or transfer by the
Corporation of all or any part of its assets shall be deemed to be
a liquidation, dissolution or winding up of the Corporation, unless
such transaction shall be in connection with the liquidation,
dissolution or winding up of the Corporation.
4. Redemption.
(a) Mandatory Redemption.
(i) The holders of not less than a majority of the
outstanding shares of Senior Preferred Stock may, by notice
served on the Corporation, require the Corporation to redeem,
on the date which is four (4) months after the effective date
of such notice, but not prior to the date which is one day
after the fifth anniversary of the Issuance Date, all or any
portion, as set forth in such notice, of the outstanding
shares of Senior Preferred Stock at a redemption price of (A)
one hundred thousand dollars ($100,000) per share (payable in
cash or other consideration as the Corporation and holders of
a majority of the Senior Preferred Stock may agree), plus (B)
an amount equal to Accrued Dividends (defined in Section
A1.4(c)(i)) to the date of payment (the "Redemption Price")
(each such date being herein sometimes referred to as a
"Mandatory Redemption Date"). Such notice may be given from
time to time with respect to any partial or full redemptions.
Notice of every redemption pursuant to this Section A1.4(a)
shall be personally delivered or sent by certified mail,
postage prepaid and return receipt requested, to the
Corporation at the address of its principal executive offices
to the attention of its Secretary. Such notice shall be
effective upon receipt by the Corporation. The procedures set
forth in Section A1.4(b)(i) shall be followed for partial
redemptions.
(ii) On and after any Mandatory Redemption Date (unless
default shall be made by the Corporation in depositing moneys
for the payment of the Redemption Price as hereinafter
provided), all rights of the holders of shares of Senior
Preferred Stock as stockholders of the Corporation with
respect to those shares of Senior Preferred Stock to be
redeemed, except the right to receive the Redemption Price as
hereinafter provided, shall cease and terminate.
(iii) The Corporation shall provide moneys for the
payment of the Redemption Price by depositing on the Mandatory
Redemption Date the amount thereof for the account of the
holders of record of the Senior Preferred Stock entitled
thereto with the Continental Bank N.A., or such other bank or
trust company doing business in the City of Chicago, as may be
designated by (A) the holders of not less than a majority of
the outstanding shares of Senior Preferred Stock, and, failing
said designation, (B) the Corporation, as paying agent for the
benefit of such holders. The holders of the shares of Senior
Preferred Stock redeemed shall surrender to the Corporation
the certificates for the shares of Senior Preferred Stock so
redeemed. Upon notification by such designated bank or trust
company to the holders of the Senior Preferred Stock that such
moneys representing the Redemption Price have been deposited
by the Corporation, the shares designated for redemption shall
no longer be outstanding, whether or not the certificates for
the shares so redeemed have been received by the Corporation
on the date of such notification and all rights relating
thereto shall cease and terminate.
(b) Optional Redemption.
(i) So long as any shares of Senior Preferred Stock
are outstanding, except as may be prohibited by Section A1.5,
the Corporation may, at the option of the Board of Directors,
at any time or from time to time after the Issuance Date,
redeem the whole or any part of such Senior Preferred Stock.
Any redemption pursuant to this Section A1.4(b)(i) shall be at
the Redemption Price. If less than all the shares of Senior
Preferred Stock at any time outstanding shall be called for
redemption, the redemption shall be made pro rata with respect
to such shares in such manner as may be prescribed by
resolution of the Board of Directors. The date of each such
redemption is herein sometimes referred to as an "Optional
Redemption Date."
(ii) Notice of every redemption pursuant to this
Section A1.4(b) shall be sent by first-class mail, postage
prepaid, to the holders of record of the shares of Senior
Preferred Stock so to be redeemed at their respective
addresses as the same shall appear on the books of the
Corporation. Such notice shall be mailed not less than ten
(10) business days in advance of the Optional Redemption Date
to the holders of record of the shares of Senior Preferred
Stock so to be redeemed. On and after the Optional Redemption
Date, unless default shall be made by the Corporation in
providing moneys to the bank or trust company for the account
of the holders of record of the Senior Preferred Stock as
provided in Section A1.4(a)(iii) for the payment of the
Redemption Price, all rights of the holders of Senior
Preferred Stock as stockholders of the Corporation with
respect to those shares of Senior Preferred Stock to be
redeemed, except the right to receive the Redemption Price,
shall cease and terminate whether or not the certificates for
the shares so redeemed have been received by the Corporation
as provided in Section A1.4(a)(iii). In this Section
A1.4(b)(ii), a business day refers to any day, except a
Saturday, Sunday or any day on which banks in the City of
Chicago are authorized or required by law to close.
(c) Definitions.
(i) The term "Accrued Dividends" with respect to the
Senior Preferred Stock shall mean, as of any given time, the
then "Full Cumulative Dividends" (defined in Section
A1.4(c)(ii)) less the amount of all dividends theretofore paid
upon the relevant shares of Senior Preferred Stock.
(ii) The term "Full Cumulative Dividends" with respect
to the Senior Preferred Stock shall mean (whether or not in
any Dividend Period, or any part thereof, in respect of which
such term is used there shall have been net profits or net
assets of the Corporation legally available for the payment of
such dividends) that amount which shall be equal to dividends
upon the relevant shares at the full rate fixed for Senior
Preferred Stock as provided herein for the period of time
elapsed from the date of issuance thereof to the date as of
which Full Cumulative Dividends are computed.
(d) Shares of Senior Preferred Stock which have been issued
and reacquired in any manner, including shares purchased or redeemed
or exchanged, shall not be reissued.
(e) Each fractional share of the Senior Preferred Stock
outstanding shall be entitled to a ratably proportionate fraction of
the Redemption Price payable in respect of each outstanding full
share of the Senior Preferred Stock pursuant to this Section A1.4,
and such fraction of the price shall be payable in the same manner
and at such times as provided for in this Section A1.4 with respect
to redemptions of each outstanding full share of the Senior
Preferred Stock.
(f) The foregoing provisions of this Section A1.4 to the
contrary notwithstanding but without limitation of the Corporation's
obligations to make mandatory redemptions as required by Section
A1.4(a), unless the Accrued Dividends on all outstanding shares of
Senior Preferred Stock shall have been paid or contemporaneously are
declared and paid through the date of a proposed optional
redemption, none of the shares of Senior Preferred Stock shall be
redeemed unless all outstanding shares of Senior Preferred Stock are
simultaneously redeemed and the Corporation shall not purchase by
optional redemption or otherwise acquire any shares of Senior
Preferred Stock; provided, however, that the foregoing shall not
prevent the purchase or acquisition of shares of Senior Preferred
Stock pursuant to a purchase or exchange offer made on the same
terms to holders of all outstanding shares of Senior Preferred
Stock.
(g) If fewer than all the outstanding shares of Senior
Preferred Stock are to be redeemed, the number of shares to be
redeemed shall be determined by the Board of Directors in accordance
with the provisions of this Part A1, and the shares to be redeemed
shall be determined by lot or pro rata as may be determined by the
Board of Directors.
5. Restriction on Payments. Anything contained in this Article to the
contrary notwithstanding, no cash dividends or dividends paid by transfer of any
other property on shares of the Senior Preferred Stock shall be declared by the
Board of Directors or paid or set apart for payment by the Corporation, no
distribution in respect of the Senior Preferred Stock shall be paid or set apart
for payment by the Corporation, and no payment shall be made by the Corporation
with respect to any redemption of the Senior Preferred Stock (such payments,
distributions and settings aside being herein sometimes referred to collectively
as "Distributions") at any time when the terms and provisions of any agreement
to which the Corporation or any other member of the "Ward Group" (defined in
Section B.1) is a party relating to indebtedness for money borrowed specifically
prohibits or limits such Distribution (and such Distribution exceeds said
limits), or such Distribution would constitute a breach, default or event of
default thereunder.
6. Voting Rights.
(a) Except as expressly provided in Section A1.6(b) or elsewhere
in this certificate of incorporation or as required by law (in relation to
which the holders of shares of Senior Preferred Stock shall be treated as
a class), the holders of shares of Senior Preferred Stock shall not have
voting rights and at every meeting of the stockholders of the Corporation,
or by written consent in lieu of any such meeting, all voting power in the
election of directors and/or for all other purposes shall be vested
exclusively in the holders of shares of Common Stock. Without limitation
of the next preceding sentence and without implication that the contrary
would otherwise be true, no consent of the holders of Senior Preferred
Stock shall be required for (a) the creation of any indebtedness of any
kind of the Corporation, (b) the creation of any class of stock of the
Corporation junior in right as to dividends and upon liquidation to the
Senior Preferred Stock, or (c) any increase or decrease in the amount of
authorized Common Stock or any increase, decrease or change in the par
value thereof.
(b) Anything elsewhere in this certificate of incorporation to the
contrary notwithstanding, if (i) Accrued Dividends on the Senior Preferred
Stock are not paid in full on any of four (4) consecutive Dividend Payment
Dates, or (ii) the Corporation shall have failed to effect the redemption
of shares of Senior Preferred Stock on a Mandatory Redemption Date as
required in Section A1.4(a), the holders of shares of Senior Preferred
Stock, together with the holders of Class B Senior Preferred Stock, shall
have voting rights as specified in this Section A1.6(b). In the event of
the occurrence of either of the foregoing events, such occurrence shall
mark the beginning of a period (the "Default Period") which shall continue
until such time as (i) Accrued Dividends on the Senior Preferred Stock
have been paid in full through the date of payment, or (ii) the failure to
redeem shares of Senior Preferred Stock as required by Section A1.4(a) has
been cured by the Corporation. Any provision of the by-laws of the
Corporation to the contrary notwithstanding, during any Default Period,
the holders of shares of the Senior Preferred Stock then outstanding shall
have the exclusive and special right (but not the obligation), voting
together with the holders of Class B Senior Preferred Stock, as a class
(each share of Senior Preferred Stock and Class B Senior Preferred Stock
being entitled to one (1) vote), to elect one (1) director to the Board of
Directors of the Corporation (the "Preferred Stock Director") and the
number of directors constituting the Board of Directors of the Corporation
shall be automatically increased in order to provide one (1) vacancy for
the Preferred Stock Director. Upon written request, made at any time
after the beginning of the Default Period, by the holders of not less than
a majority of the shares of the Senior Preferred Stock then outstanding,
the Corporation shall call a special meeting of all of the stockholders of
the Corporation, at which meeting the holders of shares of Senior
Preferred Stock, voting together with the holders of Class B Senior
Preferred Stock, as a class, shall elect the Preferred Stock Director as
set forth above; provided, however, that if such meeting shall not have
been called by the Corporation within ten (10) days after the beginning of
a Default Period, such meeting may be called, upon like notice, at the
expense of the Corporation, by the holders of not less than a majority of
the outstanding shares of Senior Preferred Stock and Class B Senior
Preferred Stock. After the first such election during any Default Period,
the holders of the shares of Senior Preferred Stock, voting together with
the holders of Class B Senior Preferred Stock, as a class, may continue to
exercise their voting rights, as set forth above, at each annual meeting
of the stockholders of the Corporation occurring during such Default
Period. During any Default Period, no Preferred Stock Director may be
removed from office without the vote or consent of the holders of a
majority of the number of shares of the Senior Preferred Stock and Class
B Senior Preferred Stock at the time outstanding. If at any time during
a Default Period the directorship of the Preferred Stock Director is
vacant, the secretary of the Corporation shall, upon the written request
of the holders of shares representing at least a majority of the Senior
Preferred Stock and Class B Senior Preferred Stock then outstanding, call
a special meeting of all of the stockholders at the expense of the
Corporation, upon the notice required for special meetings of
stockholders. At any meeting held for the purpose of electing directors
at which the holders of the Senior Preferred Stock shall have the right,
voting as a class, together with the holders of Class B Senior Preferred
Stock, to elect the Preferred Stock Director, the presence, in person or
by proxy, of the holders of a majority of the Senior Preferred Stock and
Class B Senior Preferred Stock then outstanding shall be required to
constitute a quorum of the Senior Preferred Stock and Class B Senior
Preferred Stock on such election. At any such meeting or adjournment
thereof, the absence of the quorum of the Senior Preferred Stock and Class
B Senior Preferred Stock shall not prevent the election of directors other
than the Preferred Stock Director, and the absence of a quorum for the
election of such other directors shall not prevent the election of the
Preferred Stock Director, and in the absence of either or both such
quorums, a majority of the holders present in person or by proxy of the
stock which lacks a quorum shall have the power to adjourn the meeting for
the election of directors which they are entitled to elect from time to
time without notice other than announcement at the meeting until a quorum
shall be present. A vacancy in the directorship of the Preferred Stock
Director may be filled only by the vote or written consent of holders of
a majority of the shares of the outstanding Senior Preferred Stock and
Class B Senior Preferred Stock. Upon termination of a Default Period, the
term of office of the then Preferred Stock Director shall automatically
terminate, the shares of Senior Preferred Stock shall cease to have the
voting rights specified in this Section A1.6(b), the number of directors
constituting the Board of Directors of the Corporation shall be
automatically reduced to eliminate the vacancy caused by the termination
of the office of the Preferred Stock Director and all voting rights shall
be vested exclusively in the holders of shares of Common Stock, subject to
the revesting of voting rights in the shares of Senior Preferred Stock and
Class B Senior Preferred Stock in the event of the beginning of another
Default Period.
7. Amendment. This certificate of incorporation of the Corporation
shall not be amended in any manner which would alter or change the powers,
preferences or special rights of the Senior Preferred Stock so as to affect them
adversely (including, without limitation, providing for the creation of any new
class of capital stock senior to, or on a parity with, the Senior Preferred
Stock as to dividends, redemption rights or on liquidation) without the
affirmative vote of the holders of at least a majority of the outstanding shares
of Senior Preferred Stock, voting together as a single class. The Board of
Directors reserves the right to act by resolution from time to time to decrease
the number of shares which constitute Senior Preferred Stock (but not below the
number of shares thereof outstanding).
PART A2. CLASS B SENIOR PREFERRED STOCK
1. Rank. The Class B Senior Preferred Stock shall, with respect
to dividend rights and rights on liquidation, winding up and dissolution,
rank prior to the Common Stock and shall rank on a parity with the Senior
Preferred Stock.
2. Dividends.
(a) In each year, the holders of the shares of Class B
Senior Preferred Stock shall be entitled to receive, before any
dividends shall be declared and paid upon or set aside for the
Common Stock, when and as declared by the Board of Directors, except
as may be prohibited by Section A2.5, out of funds legally available
for that purpose, cumulative cash dividends at the annual rate of
______________ dollars ($______) per share (the
"Dividend Rate"), and no more, in equal quarterly payments of
______________ dollars ($______) per
share, on the last business day of March, June, September and
December (each of such dates being a "Dividend Payment Date"),
commencing with the Dividend Payment Date in March, 1996. The
dividend payable on the Dividend Payment Date in March, 1996 with
respect to any share of Class B Senior Preferred Stock shall be the
pro rata amount of the Dividend Rate based upon the number of days
from and including the date of first issuance (the "Issuance Date")
of the Class B Senior Preferred Stock up to and including the
Dividend Payment Date in March, 1996 and a 365-day year. (The
period from the Issuance Date to the first Dividend Payment Date,
and each quarterly period between consecutive Dividend Payment
Dates, shall hereinafter be referred to as a "Dividend Period.")
Such dividends shall be paid to the holders of record at the close
of business on the date specified by the Board of Directors of the
Corporation at the time such dividend is declared; provided,
however, that such date shall not be more than sixty (60) days nor
less than ten (10) days prior to the respective Dividend Payment
Date. Dividends on the Class B Senior Preferred Stock shall be
cumulative from the Issuance Date (whether or not there shall be net
profits or net assets of the Corporation legally available for the
payment of such dividends), so that:
(i) except as provided in Section A2.2(a)(ii), the
Corporation shall not take any of the following actions:
(A) declare, order to pay any dividend on any
class of stock ranking as to dividends or on liquidation
junior to the Class B Senior Preferred Stock (such
junior stock being herein sometimes referred to as the
"Stock Junior to the Class B Senior Preferred Stock"),
or
(B) redeem any Stock Junior to the Class B
Senior Preferred Stock,
(each of such actions described in clauses A2.2(a)(i)(A) or
(B) above being herein sometimes referred to as a "Junior
Distribution" and the proposed date of each such action being
herein sometimes referred to as a "Proposed Junior
Distribution Date") if the Corporation shall not, on or before
the Proposed Junior Distribution Date, have completed both of
the following:
(1) declared on the outstanding shares of
Class B Senior Preferred Stock, and paid or set
apart for payment, all "Accrued Dividends"
(defined in Section A2.4(c)(i)) to the Proposed
Junior Distribution Date; and
(2) paid or deposited as required in this
Part A2 all amounts payable to holders of Class B
Senior Preferred Stock in respect of all
mandatory redemptions required to have been paid
or deposited for their benefit on or before the
Proposed Junior Distribution Date; and
(ii) the Corporation may redeem or purchase any shares
of Common Stock in accordance with either (x) the terms,
conditions and provisions of the "Stockholders Agreement"
(defined in Section B.1) or (y) the terms, conditions and
provisions of the "Employee Stock Option Plan" (defined in
Section B.1), if on or before the date of each such proposed
Common Stock redemption or purchase (each such time, with
respect to redemptions or purchases under either the
Stockholders Agreement or the Employee Stock Option Plan,
being herein sometimes referred to as a "Proposed Common Stock
Repurchase Date"), the Corporation shall have:
(A) declared on the outstanding shares of Class
B Senior Preferred Stock, and paid or set apart for
payment, all Accrued Dividends (defined in Section
A2.4(c)(i)) through all Dividend Payment Dates occurring
on or prior to such Proposed Common Stock Repurchase
Date, and
(B) paid or deposited as required in this Part
A2 all amounts payable to holders of Class B Senior
Preferred Stock in respect of all mandatory redemptions
required to have been paid or deposited for their
benefit on or before all "Mandatory Redemption Dates"
(defined in Section A2.4(a)(i)) occurring on or prior to
such Proposed Common Stock Repurchase Date.
All dividends declared upon Class B Senior Preferred Stock and any
other class of stock ranking on a parity as to dividends with the
Class B Senior Preferred Stock (including, without limitation, the
Senior Preferred Stock) shall be declared pro rata per share.
Accrued but unpaid dividends shall not bear interest.
(b) Each fractional share of the Class B Senior Preferred
Stock outstanding shall be entitled to a ratably proportionate
amount of all dividends to which each outstanding full share of the
Class B Senior Preferred Stock is entitled pursuant to Section
A2.2(a) hereof, and all of such dividends with respect to such
outstanding fractional shares shall be fully cumulative and shall
accrue (whether or not declared) and shall be payable in the same
manner and at such times as provided for in Section A2.2(a) with
respect to dividends on each outstanding full share of the Class B
Senior Preferred Stock.
3. Rights on Liquidation, Dissolution or Winding Up.
(a) In the event of any liquidation, dissolution or winding
up of the Corporation, the holders of shares of Class B Senior
Preferred Stock then outstanding shall be entitled to be paid out of
the assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, except as
may be prohibited by Section A2.5, but before any payment shall be
made to the holders of any stock ranking on liquidation junior to
the Class B Senior Preferred Stock, an amount equal to one hundred
thousand dollars ($100,000) per share, plus an amount equal to
Accrued Dividends (as defined in Section A2.4(c)(i)) to the date of
payment (the "Liquidation Payment"). If upon any liquidation,
dissolution or winding up of the Corporation the assets of the
Corporation available for distribution to its stockholders shall be
insufficient to pay the holders of shares of Class B Senior
Preferred Stock the full amounts to which they respectively shall be
entitled, the holders of shares of Class B Senior Preferred Stock,
and any class of stock ranking on liquidation on a parity with the
Class B Senior Preferred Stock (including, without limitation, the
Senior Preferred Stock), shall share ratably in any distribution of
assets according to the respective amounts which would be payable
in respect of the shares held by them upon such distribution if all
amounts payable on or with respect to said shares were paid in full.
In the event of any liquidation, dissolution or winding up of the
Corporation after payment shall have been made to the holders of
shares of Class B Senior Preferred Stock and any class of stock
ranking on liquidation on a parity with the Class B Senior Preferred
Stock (including, without limitation, the Senior Preferred Stock) of
the full amount to which they shall be entitled as aforesaid, the
holders of any class or classes of stock ranking on liquidation
junior to the Class B Senior Preferred Stock shall be entitled, to
the exclusion of the holders of shares of Class B Senior Preferred
Stock, to share, according to their respective rights and
preferences, in all remaining assets of the Corporation available
for distribution to its stockholders.
(b) The Liquidation Payment with respect to each fractional
share of the Class B Senior Preferred Stock outstanding or accrued
but unpaid, shall be equal to a ratably proportionate amount of the
Liquidation Payment with respect to each outstanding share of Class
B Senior Preferred Stock.
(c) For the purposes of this Section A2.3, neither the
consolidation or merger of the Corporation into or with any other
corporation or corporations, nor the sale or transfer by the
Corporation of all or any part of its assets shall be deemed to be
a liquidation, dissolution or winding up of the Corporation, unless
such transaction shall be in connection with the liquidation,
dissolution or winding up of the Corporation.
4. Redemption.
(a) Mandatory Redemption.
(i) The holders of not less than a majority of the
outstanding shares of Class B Senior Preferred Stock may, by
notice served on the Corporation, require the Corporation to
redeem, on the date which is four (4) months after the
effective date of such notice, but not prior to the date which
is one day after the fifth anniversary of the Issuance Date,
all or any portion, as set forth in such notice, of the
outstanding shares of Class B Senior Preferred Stock at a
redemption price of (A) one hundred thousand dollars
($100,000) per share (payable in cash or other consideration
as the Corporation and holders of a majority of the Class B
Senior Preferred Stock may agree), plus (B) an amount equal to
Accrued Dividends (defined in Section A2.4(c)(i)) to the date
of payment (the "Redemption Price") (each such date being
herein sometimes referred to as a "Mandatory Redemption
Date"). Such notice may be given from time to time with
respect to any partial or full redemptions. Notice of every
redemption pursuant to this Section A2.4(a) shall be
personally delivered or sent by certified mail, postage
prepaid and return receipt requested, to the Corporation at
the address of its principal executive offices to the
attention of its Secretary. Such notice shall be effective
upon receipt by the Corporation. The procedures set forth in
Section A2.4(b)(i) shall be followed for partial redemptions.
(ii) On and after any Mandatory Redemption Date (unless
default shall be made by the Corporation in depositing moneys
for the payment of the Redemption Price as hereinafter
provided), all rights of the holders of shares of Class B
Senior Preferred Stock as stockholders of the Corporation with
respect to those shares of Class B Senior Preferred Stock to
be redeemed, except the right to receive the Redemption Price
as hereinafter provided, shall cease and terminate.
(iii) The Corporation shall provide moneys for the
payment of the Redemption Price by depositing on the Mandatory
Redemption Date the amount thereof for the account of the
holders of record of the Class B Senior Preferred Stock
entitled thereto with the Continental Bank N.A., or such other
bank or trust company doing business in the City of Chicago,
as may be designated by (A) the holders of not less than a
majority of the outstanding shares of Class B Senior Preferred
Stock, and, failing said designation, (B) the Corporation, as
paying agent for the benefit of such holders. The holders of
the shares of Class B Senior Preferred Stock redeemed shall
surrender to the Corporation the certificates for the shares
of Class B Senior Preferred Stock so redeemed. Upon
notification by such designated bank or trust company to the
holders of the Class B Senior Preferred Stock that such moneys
representing the Redemption Price have been deposited by the
Corporation, the shares designated for redemption shall no
longer be outstanding, whether or not the certificates for the
shares so redeemed have been received by the Corporation on
the date of such notification and all rights relating thereto
shall cease and terminate.
(b) Optional Redemption.
(i) So long as any shares of Class B Senior Preferred
Stock are outstanding, except as may be prohibited by Section
A2.5, the Corporation may, at the option of the Board of
Directors, at any time or from time to time after the Issuance
Date, redeem the whole or any part of such Class B Senior
Preferred Stock. Any redemption pursuant to this Section
A2.4(b)(i) shall be at the Redemption Price. If less than all
the shares of Class B Senior Preferred Stock at any time
outstanding shall be called for redemption, the redemption
shall be made pro rata with respect to such shares in such
manner as may be prescribed by resolution of the Board of
Directors. The date of each such redemption is herein
sometimes referred to as an "Optional Redemption Date."
(ii) Notice of every redemption pursuant to this
Section A2.4(b) shall be sent by first-class mail, postage
prepaid, to the holders of record of the shares of Class B
Senior Preferred Stock so to be redeemed at their respective
addresses as the same shall appear on the books of the
Corporation. Such notice shall be mailed not less than ten
(10) business days in advance of the Optional Redemption Date
to the holders of record of the shares of Class B Senior
Preferred Stock so to be redeemed. On and after the Optional
Redemption Date, unless default shall be made by the
Corporation in providing moneys to the bank or trust company
for the account of the holders of record of the Class B Senior
Preferred Stock as provided in Section A2.4(a)(iii) for the
payment of the Redemption Price, all rights of the holders of
Class B Senior Preferred Stock as stockholders of the
Corporation with respect to those shares of Class B Senior
Preferred Stock to be redeemed, except the right to receive
the Redemption Price, shall cease and terminate whether or not
the certificates for the shares so redeemed have been received
by the Corporation as provided in Section A2.4(a)(iii). In
this Section A2.4(b)(ii), a business day refers to any day,
except a Saturday, Sunday or any day on which banks in the
City of Chicago are authorized or required by law to close.
(c) Definitions.
(i) The term "Accrued Dividends" with respect to the
Class B Senior Preferred Stock shall mean, as of any given
time, the then "Full Cumulative Dividends" (defined in Section
A2.4(c)(ii)) less the amount of all dividends theretofore paid
upon the relevant shares of Class B Senior Preferred Stock.
(ii) The term "Full Cumulative Dividends" with respect
to the Class B Senior Preferred Stock shall mean (whether or
not in any Dividend Period, or any part thereof, in respect of
which such term is used there shall have been net profits or
net assets of the Corporation legally available for the
payment of such dividends) that amount which shall be equal to
dividends upon the relevant shares at the full rate fixed for
Class B Senior Preferred Stock as provided herein for the
period of time elapsed from the date of issuance thereof to
the date as of which Full Cumulative Dividends are computed.
(d) Shares of Class B Senior Preferred Stock which have been
issued and reacquired in any manner, including shares purchased or
redeemed or exchanged, shall not be reissued.
(e) Each fractional share of the Class B Senior Preferred
Stock outstanding shall be entitled to a ratably proportionate
fraction of the Redemption Price payable in respect of each
outstanding full share of the Class B Senior Preferred Stock
pursuant to this Section A2.4, and such fraction of the price shall
be payable in the same manner and at such times as provided for in
this Section A2.4 with respect to redemptions of each outstanding
full share of the Class B Senior Preferred Stock.
(f) The foregoing provisions of this Section A2.4 to the
contrary notwithstanding but without limitation of the Corporation's
obligations to make mandatory redemptions as required by Section
A2.4(a), unless the Accrued Dividends on all outstanding shares of
Class B Senior Preferred Stock shall have been paid or
contemporaneously are declared and paid through the date of a
proposed optional redemption, none of the shares of Class B Senior
Preferred Stock shall be redeemed unless all outstanding shares of
Class B Senior Preferred Stock are simultaneously redeemed and the
Corporation shall not purchase by optional redemption or otherwise
acquire any shares of Class B Senior Preferred Stock; provided,
however, that the foregoing shall not prevent the purchase or
acquisition of shares of Class B Senior Preferred Stock pursuant to
a purchase or exchange offer made on the same terms to holders of
all outstanding shares of Class B Senior Preferred Stock.
(g) If fewer than all the outstanding shares of Class B
Senior Preferred Stock are to be redeemed, the number of shares to
be redeemed shall be determined by the Board of Directors in
accordance with the provisions of this Part A2, and the shares to be
redeemed shall be determined by lot or pro rata as may be determined
by the Board of Directors.
5. Restriction on Payments. Anything contained in this Article to the
contrary notwithstanding, no cash dividends or dividends paid by transfer of any
other property on shares of the Class B Senior Preferred Stock shall be declared
by the Board of Directors or paid or set apart for payment by the Corporation,
no distribution in respect of the Class B Senior Preferred Stock shall be paid
or set apart for payment by the Corporation, and no payment shall be made by the
Corporation with respect to any redemption of the Class B Senior Preferred Stock
(such payments, distributions and settings aside being herein sometimes referred
to collectively as "Distributions") at any time when the terms and provisions of
any agreement to which the Corporation or any other member of the "Ward Group"
(defined in Section B.1) is a party relating to indebtedness for money borrowed
specifically prohibits or limits such Distribution (and such Distribution
exceeds said limits), or such Distribution would constitute a breach, default or
event of default thereunder.
6. Voting Rights.
(a) Except as expressly provided in Section A2.6(b) or elsewhere
in this certificate of incorporation or as required by law (in relation to
which the holders of shares of Class B Senior Preferred Stock shall be
treated as a class), the holders of shares of Class B Senior Preferred
Stock shall not have voting rights and at every meeting of the
stockholders of the Corporation, or by written consent in lieu of any such
meeting, all voting power in the election of directors and/or for all
other purposes shall be vested exclusively in the holders of shares of
Common Stock. Without limitation of the next preceding sentence and
without implication that the contrary would otherwise be true, no consent
of the holders of Class B Senior Preferred Stock shall be required for (a)
the creation of any indebtedness of any kind of the Corporation, (b) the
creation of any class of stock of the Corporation junior in right as to
dividends and upon liquidation to the Class B Senior Preferred Stock, or
(c) any increase or decrease in the amount of authorized Common Stock or
any increase, decrease or change in the par value thereof.
(b) Anything elsewhere in this certificate of incorporation to the
contrary notwithstanding, if (i) Accrued Dividends on the Class B Senior
Preferred Stock are not paid in full on any of four (4) consecutive
Dividend Payment Dates, or (ii) the Corporation shall have failed to
effect the redemption of shares of Class B Senior Preferred Stock on a
Mandatory Redemption Date as required in Section A2.4(a), the holders of
shares of Class B Senior Preferred Stock, together with the holders of
Senior Preferred Stock, shall have voting rights as specified in this
Section A2.6(b). In the event of the occurrence of either of the
foregoing events, such occurrence shall mark the beginning of a period
(the "Default Period") which shall continue until such time as (i) Accrued
Dividends on the Class B Senior Preferred Stock have been paid in full
through the date of payment, or (ii) the failure to redeem shares of Class
B Senior Preferred Stock as required by Section A2.4(a) has been cured by
the Corporation. Any provision of the by-laws of the Corporation to the
contrary notwithstanding, during any Default Period, the holders of shares
of the Class B Senior Preferred Stock then outstanding shall have the
exclusive and special right (but not the obligation), voting together with
the holders of Senior Preferred Stock, as a class (each share of Class B
Senior Preferred Stock and Senior Preferred Stock being entitled to one
(1) vote), to elect one (1) director to the Board of Directors of the
Corporation (the "Preferred Stock Director") and the number of directors
constituting the Board of Directors of the Corporation shall be
automatically increased in order to provide one (1) vacancy for the
Preferred Stock Director. Upon written request, made at any time after
the beginning of the Default Period, by the holders of not less than a
majority of the shares of the Class B Senior Preferred Stock then
outstanding, the Corporation shall call a special meeting of all of the
stockholders of the Corporation, at which meeting the holders of shares of
Class B Senior Preferred Stock, voting together with the holders of Senior
Preferred Stock, as a class, shall elect the Preferred Stock Director as
set forth above; provided, however, that if such meeting shall not have
been called by the Corporation within ten (10) days after the beginning of
a Default Period, such meeting may be called, upon like notice, at the
expense of the Corporation, by the holders of not less than a majority of
the outstanding shares of Class B Senior Preferred Stock and Senior
Preferred Stock. After the first such election during any Default Period,
the holders of the shares of Class B Senior Preferred Stock, voting
together with the holders of Senior Preferred Stock, as a class, may
continue to exercise their voting rights, as set forth above, at each
annual meeting of the stockholders of the Corporation occurring during
such Default Period. During any Default Period, no Preferred Stock
Director may be removed from office without the vote or consent of the
holders of a majority of the number of shares of the Class B Senior
Preferred Stock and Senior Preferred Stock at the time outstanding. If at
any time during a Default Period the directorship of the Preferred Stock
Director is vacant, the secretary of the Corporation shall, upon the
written request of the holders of shares representing at least a majority
of the Class B Senior Preferred Stock and Senior Preferred Stock then
outstanding, call a special meeting of all of the stockholders at the
expense of the Corporation, upon the notice required for special meetings
of stockholders. At any meeting held for the purpose of electing
directors at which the holders of the Class B Senior Preferred Stock shall
have the right, voting as a class, together with the holders of Senior
Preferred Stock, to elect the Preferred Stock Director, the presence, in
person or by proxy, of the holders of a majority of the Class B Senior
Preferred Stock and Senior Preferred Stock then outstanding shall be
required to constitute a quorum of the Class B Senior Preferred Stock and
Senior Preferred Stock on such election. At any such meeting or
adjournment thereof, the absence of the quorum of the Class B Senior
Preferred Stock and Senior Preferred Stock shall not prevent the election
of directors other than the Preferred Stock Director, and the absence of
a quorum for the election of such other directors shall not prevent the
election of the Preferred Stock Director, and in the absence of either or
both such quorums, a majority of the holders present in person or by proxy
of the stock which lacks a quorum shall have the power to adjourn the
meeting for the election of directors which they are entitled to elect
from time to time without notice other than announcement at the meeting
until a quorum shall be present. A vacancy in the directorship of the
Preferred Stock Director may be filled only by the vote or written consent
of holders of a majority of the shares of the outstanding Class B Senior
Preferred Stock and Senior Preferred Stock. Upon termination of a Default
Period, the term of office of the then Preferred Stock Director shall
automatically terminate, the shares of Class B Senior Preferred Stock
shall cease to have the voting rights specified in this Section A2.6(b),
the number of directors constituting the Board of Directors of the
Corporation shall be automatically reduced to eliminate the vacancy caused
by the termination of the office of the Preferred Stock Director and all
voting rights shall be vested exclusively in the holders of shares of
Common Stock, subject to the revesting of voting rights in the shares of
Class B Senior Preferred Stock and Senior Preferred Stock in the event of
the beginning of another Default Period.
7. Amendment. This certificate of incorporation of the Corporation
shall not be amended in any manner which would alter or change the powers,
preferences or special rights of the Class B Senior Preferred Stock so as to
affect them adversely (including, without limitation, providing for the creation
of any new class of capital stock senior to, or on a parity with, the Class B
Senior Preferred Stock as to dividends, redemption rights or on liquidation)
without the affirmative vote of the holders of at least a majority of the
outstanding shares of Class B Senior Preferred Stock, voting together as a
single class. The Board of Directors reserves the right to act by resolution
from time to time to decrease the number of shares which constitute Class B
Senior Preferred Stock (but not below the number of shares thereof out-
standing)."
The first sentence of Section B.2(a) of Article FOURTH is amended in its
entirety to read as follows:
" (a) In General. Except as otherwise provided in Section A1.6(b),
A2.6(b), B.1 and B.2(b), each share of Common Stock shall entitle the
holder thereof to vote, in person or by proxy, at any and all meetings of
the stockholders of the Corporation, or by written consent in lieu
thereof, on all propositions submitted to vote or consent of
stockholders."
Section 2 of Article SIXTH is amended in its entirety to read as follows:
" 2. Number, Tenure and Qualifications. Subject to Sections
A1.6(b), A2.6(b) and B.2(b) of Article Fourth hereof, the total number of
directors which shall constitute the whole board shall be fixed from time
to time in the manner provided in the by-laws of the Corporation and may
be increased or decreased from time to time in the manner provided in the
by-laws. Subject to Section A1.6(b) and A2.6(b) of Article FOURTH hereof,
at each annual election of directors, the directors shall be elected to a
term of office expiring at the next annual meeting of stockholders and
shall hold office until their respective successors are elected and
qualified. Directors need not be stockholders or residents of Delaware
but must satisfy such other qualifications as may be provided in the by-
laws."
8. The Stockholders of the Corporation, by unanimous written consent,
adopted resolutions authorizing, adopting and approving the aforesaid amendment
to Articles FOURTH and SIXTH of the Third Restated Certificate of Incorporation
of the Corporation.
9. Except to the extent specifically provided to the contrary in this
Certificate of Amendment, the terms, provisions and conditions of the Third
Restated Certificate of Incorporation of the Corporation shall remain unamended
and in full force and effect.
10. This Certificate of Amendment has been duly adopted in accordance
with the provisions of Section 242 of the General Corporation Law of the State
of Delaware.
IN WITNESS WHEREOF, MONTGOMERY WARD HOLDING CORP. has caused this
certificate to be signed by Bernard F. Brennan, its Chairman of the Board, and
attested by Spencer H. Heine, its Secretary, this day of December, 1995.
MONTGOMERY WARD HOLDING CORP.
By:
Bernard F. Brennan
Chairman of the Board
(CORPORATE SEAL)
ATTEST:
By:
Spencer H. Heine
Secretary
<PAGE>
CONSENT OF STOCKHOLDERS
OF
MONTGOMERY WARD HOLDING CORP.
The undersigned stockholders of MONTGOMERY WARD HOLDING CORP., a
corporation organized and existing under and by virtue of the General Corpora-
tion Law of the State of Delaware (the "Corporation"), holding at least a major-
ity of the outstanding common stock of the Corporation ("Common Stock") and a
majority of the outstanding preferred stock of the Corporation (the "Preferred
Stock"), do hereby consent and agree to the adoption of the following recitals
and resolutions pursuant to Section 228 of the General Corporation Law of the
State of Delaware, in lieu of holding a special meeting of the stockholders of
the Corporation:
WHEREAS, the Board of Directors of the Corporation has adopted resolutions
authorizing an amendment to the Certificate of Incorporation of the
Corporation to authorize the issuance of a new class of senior preferred
stock of the Corporation (the "Amendment"); and
WHEREAS, the stockholders of the Corporation deem it desirable and in the
best interest of the Corporation to amend the Certificate of Incorporation
of the Corporation through the adoption of the Amendment,
NOW, THEREFORE, BE IT RESOLVED: That the Amendment, in the form attached
hereto as Exhibit A, is hereby approved and adopted.
FURTHER RESOLVED: That the President or any Vice President of the
Corporation, alone or with the Secretary or any Assistant Secretary of the
Corporation, and each of them hereby are, authorized, empowered and
directed to execute, deliver and file, in the name and on behalf of the
Corporation, the Amendment, in substantially the form of Exhibit A
attached hereto, with such changes thereto as such officers shall deem
appropriate, the approval of which shall be conclusively established by
the execution thereof.
<PAGE>
FURTHER RESOLVED: That this Consent may be signed in any number of
counterparts, each of which shall be deemed to be an original, and all of
which taken together shall be deemed to be a single document.
Dated: December , 1995
_______________________________________
Bernard F. Brennan
_______________________________________
Bernard F. Brennan, as Voting Trustee
under that certain Voting Trust under
Trust Agreement dated June 21, 1988
_______________________________________
Bernard F. Brennan, as Voting Trustee
under that certain Voting Trust under
Trust Agreement dated October 21, 1994
_______________________________________
Myron Lieberman, as Trustee of
the Brennan 1988 MW Trust
GENERAL ELECTRIC CAPITAL CORPORATION
By:____________________________________
Its:____________________________________
<PAGE>
EXHIBIT A
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
MONTGOMERY WARD HOLDING CORP.
MONTGOMERY WARD HOLDING CORP., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify as follows:
1. The original Certificate of Incorporation of the Corporation was filed in
the Office of the Secretary of State of Delaware on February 8, 1988 and re-
corded in the Office of the Recorder of Kent County, Delaware. The name under
which the Corporation was originally incorporated is BFB Acquisition Corp.
2. The Certificate of Correction of Certificate of Incorporation of the
Corporation was filed in the Office of the Secretary of State of Delaware on
February 9, 1988.
3. The original Restated Certificate of Incorporation was filed in the
office of the Secretary of State of Delaware on June 17, 1988 and amendments
thereto were filed on each of June 20, 1988; June 24, 1988; January 30, 1990;
and March 20, 1992.
4. The Second Restated Certificate of Incorporation of the Corporation
was filed in the office of the Secretary of State of Delaware on June 25, 1992
and an amendment thereto was filed on April 27, 1994.
5. The Third Restated Certificate of Incorporation was filed in the
office of the Secretary of State of Delaware on June 28, 1994, and an amendment
thereto was filed on October 25, 1994.
6. The Board of Directors of the Corporation, by unanimous written
consent, authorized, adopted and approved resolutions proposing and declaring
advisable this amendment to the Third Restated Certificate of Incorporation of
the Corporation, setting forth amendments to Articles FOURTH and SIXTH as
follows:
The introduction to Article FOURTH and Part A thereof are amended in their
entirety to read as follows:
"FOURTH: The total number of shares of capital stock which the
Corporation shall have authority to issue is fifty-seven million eight
hundred thirteen thousand seven hundred fifty (57,813,750) consisting of
the following amounts in the following designations:
1. Common Stock. Fifty-seven million eight hundred twelve
thousand (57,812,000) shares of Common Stock, par value one cent
($0.01) per share (hereinafter referred to as "Common Stock"), which
shall consist of the following classes:
(a) thirty-two million eight hundred twelve thousand
(32,812,000) shares of Class A Common Stock (hereinafter
referred to as "Class A Common Stock"), which shall consist of
the following series:
(i) twenty-five million (25,000,000) shares of
Class A Common Stock, Series 1 (hereinafter referred to
as "Class A Common Stock, Series 1"), and
(ii) five million four hundred twelve thousand
(5,412,000) shares of Class A Common Stock, Series 2
(hereinafter referred to as "Class A Common Stock,
Series 2"), and
(iii) two million four hundred thousand
(2,400,000) shares of Class A Common Stock, Series 3
(hereinafter referred to a "Class A Common Stock, Series
3"), and
(b) twenty-five million (25,000,000) shares of Class
B Common Stock (hereinafter referred to as the "Class B Common
Stock").
2. Preferred Stock. One thousand seven hundred fifty
(1,750) shares of Preferred Stock, par value one dollar ($1.00) per
share (hereinafter referred to as "Preferred Stock") which shall
consist of the following classes:
(a) Seven hundred fifty (750) shares of Preferred
Stock, par value one dollar ($1.00) per share (hereinafter
referred to as "Senior Preferred Stock"), and
(b) One thousand (1,000) shares of Class B Preferred
Stock, par value one dollar ($1.00) per share (hereinafter
referred to as "Class B Senior Preferred Stock")
Such shares of Common Stock and Preferred Stock may be issued for
such consideration, not less than the par value thereof, as shall be fixed
from time to time by the Board of Directors, and shares issued for not
less than the consideration so fixed shall be fully paid and non-
assessable.
A statement of the powers, preferences, rights, qualifications,
limitations, restrictions and the relative, participating, optional and
other special rights in respect of the shares of each class or series of
stock is as follows:
PART A. PREFERRED STOCK
Except as otherwise provided herein, each share of Senior Preferred Stock
shall be identical in all respects to all other shares of Senior Preferred Stock
and shall entitle the holder thereof to the same rights and privileges as to
which the holders of the other shares of Senior Preferred Stock are entitled.
PART A1. SENIOR PREFERRED STOCK
1. Rank. The Senior Preferred Stock shall, with respect to
dividend rights and rights on liquidation, winding up and dissolution,
rank prior to the Common Stock and shall rank on a parity with the Class
B Senior Preferred Stock.
2. Dividends.
(a) In each year, the holders of the shares of Senior
Preferred Stock shall be entitled to receive, before any dividends
shall be declared and paid upon or set aside for the Common Stock,
when and as declared by the Board of Directors, except as may be
prohibited by Section A1.5, out of funds legally available for that
purpose, cumulative cash dividends at the annual rate of four
thousand eight hundred fifty dollars ($4,850) per share (the
"Dividend Rate"), and no more, in equal quarterly payments of one
thousand two hundred twelve dollars and fifty cents ($1,212.50) per
share, on the last business day of March, June, September and
December (each of such dates being a "Dividend Payment Date"),
commencing with the Dividend Payment Date in June, 1994. The
dividend payable on the Dividend Payment Date in June, 1994 with
respect to any share of Senior Preferred Stock shall be the pro rata
amount of the Dividend Rate based upon the number of days from and
including the date of first issuance (the "Issuance Date") of the
Senior Preferred Stock up to and including the Dividend Payment Date
in June, 1994 and a 365-day year. (The period from the Issuance
Date to the first Dividend Payment Date, and each quarterly period
between consecutive Dividend Payment Dates, shall hereinafter be
referred to as a "Dividend Period.") Such dividends shall be paid
to the holders of record at the close of business on the date
specified by the Board of Directors of the Corporation at the time
such dividend is declared; provided, however, that such date shall
not be more than sixty (60) days nor less than ten (10) days prior
to the respective Dividend Payment Date. Dividends on the Senior
Preferred Stock shall be cumulative from the Issuance Date (whether
or not there shall be net profits or net assets of the Corporation
legally available for the payment of such dividends), so that:
(i) except as provided in Section A1.2(a)(ii), the
Corporation shall not take any of the following actions:
(A) declare, order to pay any dividend on any
class of stock ranking as to dividends or on liquidation
junior to the Senior Preferred Stock (such junior stock
being herein sometimes referred to as the "Stock Junior
to the Senior Preferred Stock"), or
(B) redeem any Stock Junior to the Senior
Preferred Stock,
(each of such actions described in clauses A1.2(a)(i)(A) or
(B) above being herein sometimes referred to as a "Junior
Distribution" and the proposed date of each such action being
herein sometimes referred to as a "Proposed Junior
Distribution Date") if the Corporation shall not, on or before
the Proposed Junior Distribution Date, have completed both of
the following:
(1) declared on the outstanding shares of
Senior Preferred Stock, and paid or set apart for
payment, all "Accrued Dividends" (defined in
Section A1.4(c)(i)) to the Proposed Junior
Distribution Date; and
(2) paid or deposited as required in this
Part A1 all amounts payable to holders of Senior
Preferred Stock in respect of all mandatory
redemptions required to have been paid or
deposited for their benefit on or before the
Proposed Junior Distribution Date; and
(ii) the Corporation may redeem or purchase any shares
of Common Stock in accordance with either (x) the terms,
conditions and provisions of the "Stockholders Agreement"
(defined in Section B.1) or (y) the terms, conditions and
provisions of the "Employee Stock Option Plan" (defined in
Section B.1), if on or before the date of each such proposed
Common Stock redemption or purchase (each such time, with
respect to redemptions or purchases under either the
Stockholders Agreement or the Employee Stock Option Plan,
being herein sometimes referred to as a "Proposed Common Stock
Repurchase Date"), the Corporation shall have:
(A) declared on the outstanding shares of Senior
Preferred Stock, and paid or set apart for payment, all
Accrued Dividends (defined in Section A1.4(c)(i))
through all Dividend Payment Dates occurring on or prior
to such Proposed Common Stock Repurchase Date, and
(B) paid or deposited as required in this Part
A1 all amounts payable to holders of Senior Preferred
Stock in respect of all mandatory redemptions required
to have been paid or deposited for their benefit on or
before all "Mandatory Redemption Dates" (defined in
Section A1.4(a)(i)) occurring on or prior to such
Proposed Common Stock Repurchase Date.
All dividends declared upon Senior Preferred Stock and any other
class of stock ranking on a parity as to dividends with the Senior
Preferred Stock (including, without limitation, the Class B Senior
Preferred Stock) shall be declared pro rata per share. Accrued but
unpaid dividends shall not bear interest.
(b) Each fractional share of the Senior Preferred Stock
outstanding shall be entitled to a ratably proportionate amount of
all dividends to which each outstanding full share of the Senior
Preferred Stock is entitled pursuant to Section A1.2(a) hereof, and
all of such dividends with respect to such outstanding fractional
shares shall be fully cumulative and shall accrue (whether or not
declared) and shall be payable in the same manner and at such times
as provided for in Section A1.2(a) with respect to dividends on each
outstanding full share of the Senior Preferred Stock.
3. Rights on Liquidation, Dissolution or Winding Up.
(a) In the event of any liquidation, dissolution or winding
up of the Corporation, the holders of shares of Senior Preferred
Stock then outstanding shall be entitled to be paid out of the
assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, except as
may be prohibited by Section A1.5, but before any payment shall be
made to the holders of any stock ranking on liquidation junior to
the Senior Preferred Stock, an amount equal to one hundred thousand
dollars ($100,000) per share, plus an amount equal to Accrued
Dividends (as defined in Section A1.4(c)(i)) to the date of payment
(the "Liquidation Payment"). If upon any liquidation, dissolution
or winding up of the Corporation the assets of the Corporation
available for distribution to its stockholders shall be insufficient
to pay the holders of shares of Senior Preferred Stock the full
amounts to which they respectively shall be entitled, the holders of
shares of Senior Preferred Stock, and any class of stock ranking on
liquidation on a parity with the Senior Preferred Stock (including,
without limitation, the Class B Senior Preferred Stock), shall share
ratably in any distribution of assets according to the respective
amounts which would be payable in respect of the shares held by them
upon such distribution if all amounts payable on or with respect to
said shares were paid in full. In the event of any liquidation,
dissolution or winding up of the Corporation after payment shall
have been made to the holders of shares of Senior Preferred Stock
and any class of stock ranking on liquidation on a parity with the
Senior Preferred Stock (including, without limitation, the Class B
Senior Preferred Stock) of the full amount to which they shall be
entitled as aforesaid, the holders of any class or classes of stock
ranking on liquidation junior to the Senior Preferred Stock shall be
entitled, to the exclusion of the holders of shares of Senior
Preferred Stock, to share, according to their respective rights and
preferences, in all remaining assets of the Corporation available
for distribution to its stockholders.
(b) The Liquidation Payment with respect to each fractional
share of the Senior Preferred Stock outstanding or accrued but
unpaid, shall be equal to a ratably proportionate amount of the
Liquidation Payment with respect to each outstanding share of Senior
Preferred Stock.
(c) For the purposes of this Section A1.3, neither the
consolidation or merger of the Corporation into or with any other
corporation or corporations, nor the sale or transfer by the
Corporation of all or any part of its assets shall be deemed to be
a liquidation, dissolution or winding up of the Corporation, unless
such transaction shall be in connection with the liquidation,
dissolution or winding up of the Corporation.
4. Redemption.
(a) Mandatory Redemption.
(i) The holders of not less than a majority of the
outstanding shares of Senior Preferred Stock may, by notice
served on the Corporation, require the Corporation to redeem,
on the date which is four (4) months after the effective date
of such notice, but not prior to the date which is one day
after the fifth anniversary of the Issuance Date, all or any
portion, as set forth in such notice, of the outstanding
shares of Senior Preferred Stock at a redemption price of (A)
one hundred thousand dollars ($100,000) per share (payable in
cash or other consideration as the Corporation and holders of
a majority of the Senior Preferred Stock may agree), plus (B)
an amount equal to Accrued Dividends (defined in Section
A1.4(c)(i)) to the date of payment (the "Redemption Price")
(each such date being herein sometimes referred to as a
"Mandatory Redemption Date"). Such notice may be given from
time to time with respect to any partial or full redemptions.
Notice of every redemption pursuant to this Section A1.4(a)
shall be personally delivered or sent by certified mail,
postage prepaid and return receipt requested, to the
Corporation at the address of its principal executive offices
to the attention of its Secretary. Such notice shall be
effective upon receipt by the Corporation. The procedures set
forth in Section A1.4(b)(i) shall be followed for partial
redemptions.
(ii) On and after any Mandatory Redemption Date (unless
default shall be made by the Corporation in depositing moneys
for the payment of the Redemption Price as hereinafter
provided), all rights of the holders of shares of Senior
Preferred Stock as stockholders of the Corporation with
respect to those shares of Senior Preferred Stock to be
redeemed, except the right to receive the Redemption Price as
hereinafter provided, shall cease and terminate.
(iii) The Corporation shall provide moneys for the
payment of the Redemption Price by depositing on the Mandatory
Redemption Date the amount thereof for the account of the
holders of record of the Senior Preferred Stock entitled
thereto with the Continental Bank N.A., or such other bank or
trust company doing business in the City of Chicago, as may be
designated by (A) the holders of not less than a majority of
the outstanding shares of Senior Preferred Stock, and, failing
said designation, (B) the Corporation, as paying agent for the
benefit of such holders. The holders of the shares of Senior
Preferred Stock redeemed shall surrender to the Corporation
the certificates for the shares of Senior Preferred Stock so
redeemed. Upon notification by such designated bank or trust
company to the holders of the Senior Preferred Stock that such
moneys representing the Redemption Price have been deposited
by the Corporation, the shares designated for redemption shall
no longer be outstanding, whether or not the certificates for
the shares so redeemed have been received by the Corporation
on the date of such notification and all rights relating
thereto shall cease and terminate.
(b) Optional Redemption.
(i) So long as any shares of Senior Preferred Stock
are outstanding, except as may be prohibited by Section A1.5,
the Corporation may, at the option of the Board of Directors,
at any time or from time to time after the Issuance Date,
redeem the whole or any part of such Senior Preferred Stock.
Any redemption pursuant to this Section A1.4(b)(i) shall be at
the Redemption Price. If less than all the shares of Senior
Preferred Stock at any time outstanding shall be called for
redemption, the redemption shall be made pro rata with respect
to such shares in such manner as may be prescribed by
resolution of the Board of Directors. The date of each such
redemption is herein sometimes referred to as an "Optional
Redemption Date."
(ii) Notice of every redemption pursuant to this
Section A1.4(b) shall be sent by first-class mail, postage
prepaid, to the holders of record of the shares of Senior
Preferred Stock so to be redeemed at their respective
addresses as the same shall appear on the books of the
Corporation. Such notice shall be mailed not less than ten
(10) business days in advance of the Optional Redemption Date
to the holders of record of the shares of Senior Preferred
Stock so to be redeemed. On and after the Optional Redemption
Date, unless default shall be made by the Corporation in
providing moneys to the bank or trust company for the account
of the holders of record of the Senior Preferred Stock as
provided in Section A1.4(a)(iii) for the payment of the
Redemption Price, all rights of the holders of Senior
Preferred Stock as stockholders of the Corporation with
respect to those shares of Senior Preferred Stock to be
redeemed, except the right to receive the Redemption Price,
shall cease and terminate whether or not the certificates for
the shares so redeemed have been received by the Corporation
as provided in Section A1.4(a)(iii). In this Section
A1.4(b)(ii), a business day refers to any day, except a
Saturday, Sunday or any day on which banks in the City of
Chicago are authorized or required by law to close.
(c) Definitions.
(i) The term "Accrued Dividends" with respect to the
Senior Preferred Stock shall mean, as of any given time, the
then "Full Cumulative Dividends" (defined in Section
A1.4(c)(ii)) less the amount of all dividends theretofore paid
upon the relevant shares of Senior Preferred Stock.
(ii) The term "Full Cumulative Dividends" with respect
to the Senior Preferred Stock shall mean (whether or not in
any Dividend Period, or any part thereof, in respect of which
such term is used there shall have been net profits or net
assets of the Corporation legally available for the payment of
such dividends) that amount which shall be equal to dividends
upon the relevant shares at the full rate fixed for Senior
Preferred Stock as provided herein for the period of time
elapsed from the date of issuance thereof to the date as of
which Full Cumulative Dividends are computed.
(d) Shares of Senior Preferred Stock which have been issued
and reacquired in any manner, including shares purchased or redeemed
or exchanged, shall not be reissued.
(e) Each fractional share of the Senior Preferred Stock
outstanding shall be entitled to a ratably proportionate fraction of
the Redemption Price payable in respect of each outstanding full
share of the Senior Preferred Stock pursuant to this Section A1.4,
and such fraction of the price shall be payable in the same manner
and at such times as provided for in this Section A1.4 with respect
to redemptions of each outstanding full share of the Senior
Preferred Stock.
(f) The foregoing provisions of this Section A1.4 to the
contrary notwithstanding but without limitation of the Corporation's
obligations to make mandatory redemptions as required by Section
A1.4(a), unless the Accrued Dividends on all outstanding shares of
Senior Preferred Stock shall have been paid or contemporaneously are
declared and paid through the date of a proposed optional
redemption, none of the shares of Senior Preferred Stock shall be
redeemed unless all outstanding shares of Senior Preferred Stock are
simultaneously redeemed and the Corporation shall not purchase by
optional redemption or otherwise acquire any shares of Senior
Preferred Stock; provided, however, that the foregoing shall not
prevent the purchase or acquisition of shares of Senior Preferred
Stock pursuant to a purchase or exchange offer made on the same
terms to holders of all outstanding shares of Senior Preferred
Stock.
(g) If fewer than all the outstanding shares of Senior
Preferred Stock are to be redeemed, the number of shares to be
redeemed shall be determined by the Board of Directors in accordance
with the provisions of this Part A1, and the shares to be redeemed
shall be determined by lot or pro rata as may be determined by the
Board of Directors.
5. Restriction on Payments. Anything contained in this Article to the
contrary notwithstanding, no cash dividends or dividends paid by transfer of any
other property on shares of the Senior Preferred Stock shall be declared by the
Board of Directors or paid or set apart for payment by the Corporation, no
distribution in respect of the Senior Preferred Stock shall be paid or set apart
for payment by the Corporation, and no payment shall be made by the Corporation
with respect to any redemption of the Senior Preferred Stock (such payments,
distributions and settings aside being herein sometimes referred to collectively
as "Distributions") at any time when the terms and provisions of any agreement
to which the Corporation or any other member of the "Ward Group" (defined in
Section B.1) is a party relating to indebtedness for money borrowed specifically
prohibits or limits such Distribution (and such Distribution exceeds said
limits), or such Distribution would constitute a breach, default or event of
default thereunder.
6. Voting Rights.
(a) Except as expressly provided in Section A1.6(b) or elsewhere
in this certificate of incorporation or as required by law (in relation to
which the holders of shares of Senior Preferred Stock shall be treated as
a class), the holders of shares of Senior Preferred Stock shall not have
voting rights and at every meeting of the stockholders of the Corporation,
or by written consent in lieu of any such meeting, all voting power in the
election of directors and/or for all other purposes shall be vested
exclusively in the holders of shares of Common Stock. Without limitation
of the next preceding sentence and without implication that the contrary
would otherwise be true, no consent of the holders of Senior Preferred
Stock shall be required for (a) the creation of any indebtedness of any
kind of the Corporation, (b) the creation of any class of stock of the
Corporation junior in right as to dividends and upon liquidation to the
Senior Preferred Stock, or (c) any increase or decrease in the amount of
authorized Common Stock or any increase, decrease or change in the par
value thereof.
(b) Anything elsewhere in this certificate of incorporation to the
contrary notwithstanding, if (i) Accrued Dividends on the Senior Preferred
Stock are not paid in full on any of four (4) consecutive Dividend Payment
Dates, or (ii) the Corporation shall have failed to effect the redemption
of shares of Senior Preferred Stock on a Mandatory Redemption Date as
required in Section A1.4(a), the holders of shares of Senior Preferred
Stock, together with the holders of Class B Senior Preferred Stock, shall
have voting rights as specified in this Section A1.6(b). In the event of
the occurrence of either of the foregoing events, such occurrence shall
mark the beginning of a period (the "Default Period") which shall continue
until such time as (i) Accrued Dividends on the Senior Preferred Stock
have been paid in full through the date of payment, or (ii) the failure to
redeem shares of Senior Preferred Stock as required by Section A1.4(a) has
been cured by the Corporation. Any provision of the by-laws of the
Corporation to the contrary notwithstanding, during any Default Period,
the holders of shares of the Senior Preferred Stock then outstanding shall
have the exclusive and special right (but not the obligation), voting
together with the holders of Class B Senior Preferred Stock, as a class
(each share of Senior Preferred Stock and Class B Senior Preferred Stock
being entitled to one (1) vote), to elect one (1) director to the Board of
Directors of the Corporation (the "Preferred Stock Director") and the
number of directors constituting the Board of Directors of the Corporation
shall be automatically increased in order to provide one (1) vacancy for
the Preferred Stock Director. Upon written request, made at any time
after the beginning of the Default Period, by the holders of not less than
a majority of the shares of the Senior Preferred Stock then outstanding,
the Corporation shall call a special meeting of all of the stockholders of
the Corporation, at which meeting the holders of shares of Senior
Preferred Stock, voting together with the holders of Class B Senior
Preferred Stock, as a class, shall elect the Preferred Stock Director as
set forth above; provided, however, that if such meeting shall not have
been called by the Corporation within ten (10) days after the beginning of
a Default Period, such meeting may be called, upon like notice, at the
expense of the Corporation, by the holders of not less than a majority of
the outstanding shares of Senior Preferred Stock and Class B Senior
Preferred Stock. After the first such election during any Default Period,
the holders of the shares of Senior Preferred Stock, voting together with
the holders of Class B Senior Preferred Stock, as a class, may continue to
exercise their voting rights, as set forth above, at each annual meeting
of the stockholders of the Corporation occurring during such Default
Period. During any Default Period, no Preferred Stock Director may be
removed from office without the vote or consent of the holders of a
majority of the number of shares of the Senior Preferred Stock and Class
B Senior Preferred Stock at the time outstanding. If at any time during
a Default Period the directorship of the Preferred Stock Director is
vacant, the secretary of the Corporation shall, upon the written request
of the holders of shares representing at least a majority of the Senior
Preferred Stock and Class B Senior Preferred Stock then outstanding, call
a special meeting of all of the stockholders at the expense of the
Corporation, upon the notice required for special meetings of
stockholders. At any meeting held for the purpose of electing directors
at which the holders of the Senior Preferred Stock shall have the right,
voting as a class, together with the holders of Class B Senior Preferred
Stock, to elect the Preferred Stock Director, the presence, in person or
by proxy, of the holders of a majority of the Senior Preferred Stock and
Class B Senior Preferred Stock then outstanding shall be required to
constitute a quorum of the Senior Preferred Stock and Class B Senior
Preferred Stock on such election. At any such meeting or adjournment
thereof, the absence of the quorum of the Senior Preferred Stock and Class
B Senior Preferred Stock shall not prevent the election of directors other
than the Preferred Stock Director, and the absence of a quorum for the
election of such other directors shall not prevent the election of the
Preferred Stock Director, and in the absence of either or both such
quorums, a majority of the holders present in person or by proxy of the
stock which lacks a quorum shall have the power to adjourn the meeting for
the election of directors which they are entitled to elect from time to
time without notice other than announcement at the meeting until a quorum
shall be present. A vacancy in the directorship of the Preferred Stock
Director may be filled only by the vote or written consent of holders of
a majority of the shares of the outstanding Senior Preferred Stock and
Class B Senior Preferred Stock. Upon termination of a Default Period, the
term of office of the then Preferred Stock Director shall automatically
terminate, the shares of Senior Preferred Stock shall cease to have the
voting rights specified in this Section A1.6(b), the number of directors
constituting the Board of Directors of the Corporation shall be
automatically reduced to eliminate the vacancy caused by the termination
of the office of the Preferred Stock Director and all voting rights shall
be vested exclusively in the holders of shares of Common Stock, subject to
the revesting of voting rights in the shares of Senior Preferred Stock and
Class B Senior Preferred Stock in the event of the beginning of another
Default Period.
7. Amendment. This certificate of incorporation of the Corporation
shall not be amended in any manner which would alter or change the powers,
preferences or special rights of the Senior Preferred Stock so as to affect them
adversely (including, without limitation, providing for the creation of any new
class of capital stock senior to, or on a parity with, the Senior Preferred
Stock as to dividends, redemption rights or on liquidation) without the affirma-
tive vote of the holders of at least a majority of the outstanding shares of
Senior Preferred Stock, voting together as a single class. The Board of
Directors reserves the right to act by resolution from time to time to decrease
the number of shares which constitute Senior Preferred Stock (but not below the
number of shares thereof outstanding).
PART A2. CLASS B SENIOR PREFERRED STOCK
1. Rank. The Class B Senior Preferred Stock shall, with respect
to dividend rights and rights on liquidation, winding up and dissolution,
rank prior to the Common Stock and shall rank on a parity with the Senior
Preferred Stock.
2. Dividends.
(a) In each year, the holders of the shares of Class B
Senior Preferred Stock shall be entitled to receive, before any
dividends shall be declared and paid upon or set aside for the
Common Stock, when and as declared by the Board of Directors, except
as may be prohibited by Section A2.5, out of funds legally available
for that purpose, cumulative cash dividends at the annual rate of
___________ dollars ($_______) per share (the
"Dividend Rate"), and no more, in equal quarterly payments of
___________ dollars ($_______) per
share, on the last business day of March, June, September and
December (each of such dates being a "Dividend Payment Date"),
commencing with the Dividend Payment Date in March, 1996. The
dividend payable on the Dividend Payment Date in March, 1996 with
respect to any share of Class B Senior Preferred Stock shall be the
pro rata amount of the Dividend Rate based upon the number of days
from and including the date of first issuance (the "Issuance Date")
of the Class B Senior Preferred Stock up to and including the
Dividend Payment Date in March, 1996 and a 365-day year. (The
period from the Issuance Date to the first Dividend Payment Date,
and each quarterly period between consecutive Dividend Payment
Dates, shall hereinafter be referred to as a "Dividend Period.")
Such dividends shall be paid to the holders of record at the close
of business on the date specified by the Board of Directors of the
Corporation at the time such dividend is declared; provided,
however, that such date shall not be more than sixty (60) days nor
less than ten (10) days prior to the respective Dividend Payment
Date. Dividends on the Class B Senior Preferred Stock shall be
cumulative from the Issuance Date (whether or not there shall be net
profits or net assets of the Corporation legally available for the
payment of such dividends), so that:
(i) except as provided in Section A2.2(a)(ii), the
Corporation shall not take any of the following actions:
(A) declare, order to pay any dividend on any
class of stock ranking as to dividends or on liquidation
junior to the Class B Senior Preferred Stock (such
junior stock being herein sometimes referred to as the
"Stock Junior to the Class B Senior Preferred Stock"),
or
(B) redeem any Stock Junior to the Class B
Senior Preferred Stock,
(each of such actions described in clauses A2.2(a)(i)(A) or
(B) above being herein sometimes referred to as a "Junior
Distribution" and the proposed date of each such action being
herein sometimes referred to as a "Proposed Junior
Distribution Date") if the Corporation shall not, on or before
the Proposed Junior Distribution Date, have completed both of
the following:
(1) declared on the outstanding shares of
Class B Senior Preferred Stock, and paid or set
apart for payment, all "Accrued Dividends"
(defined in Section A2.4(c)(i)) to the Proposed
Junior Distribution Date; and
(2) paid or deposited as required in this
Part A2 all amounts payable to holders of Class B
Senior Preferred Stock in respect of all
mandatory redemptions required to have been paid
or deposited for their benefit on or before the
Proposed Junior Distribution Date; and
(ii) the Corporation may redeem or purchase any shares
of Common Stock in accordance with either (x) the terms,
conditions and provisions of the "Stockholders Agreement"
(defined in Section B.1) or (y) the terms, conditions and
provisions of the "Employee Stock Option Plan" (defined in
Section B.1), if on or before the date of each such proposed
Common Stock redemption or purchase (each such time, with
respect to redemptions or purchases under either the
Stockholders Agreement or the Employee Stock Option Plan,
being herein sometimes referred to as a "Proposed Common Stock
Repurchase Date"), the Corporation shall have:
(A) declared on the outstanding shares of Class
B Senior Preferred Stock, and paid or set apart for
payment, all Accrued Dividends (defined in Section
A2.4(c)(i)) through all Dividend Payment Dates occurring
on or prior to such Proposed Common Stock Repurchase
Date, and
(B) paid or deposited as required in this Part
A2 all amounts payable to holders of Class B Senior
Preferred Stock in respect of all mandatory redemptions
required to have been paid or deposited for their
benefit on or before all "Mandatory Redemption Dates"
(defined in Section A2.4(a)(i)) occurring on or prior to
such Proposed Common Stock Repurchase Date.
All dividends declared upon Class B Senior Preferred Stock and any
other class of stock ranking on a parity as to dividends with the
Class B Senior Preferred Stock (including, without limitation, the
Senior Preferred Stock) shall be declared pro rata per share.
Accrued but unpaid dividends shall not bear interest.
(b) Each fractional share of the Class B Senior Preferred
Stock outstanding shall be entitled to a ratably proportionate
amount of all dividends to which each outstanding full share of the
Class B Senior Preferred Stock is entitled pursuant to Section
A2.2(a) hereof, and all of such dividends with respect to such
outstanding fractional shares shall be fully cumulative and shall
accrue (whether or not declared) and shall be payable in the same
manner and at such times as provided for in Section A2.2(a) with
respect to dividends on each outstanding full share of the Class B
Senior Preferred Stock.
3. Rights on Liquidation, Dissolution or Winding Up.
(a) In the event of any liquidation, dissolution or winding
up of the Corporation, the holders of shares of Class B Senior
Preferred Stock then outstanding shall be entitled to be paid out of
the assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, except as
may be prohibited by Section A2.5, but before any payment shall be
made to the holders of any stock ranking on liquidation junior to
the Class B Senior Preferred Stock, an amount equal to one hundred
thousand dollars ($100,000) per share, plus an amount equal to
Accrued Dividends (as defined in Section A2.4(c)(i)) to the date of
payment (the "Liquidation Payment"). If upon any liquidation,
dissolution or winding up of the Corporation the assets of the
Corporation available for distribution to its stockholders shall be
insufficient to pay the holders of shares of Class B Senior
Preferred Stock the full amounts to which they respectively shall be
entitled, the holders of shares of Class B Senior Preferred Stock,
and any class of stock ranking on liquidation on a parity with the
Class B Senior Preferred Stock (including, without limitation, the
Senior Preferred Stock), shall share ratably in any distribution of
assets according to the respective amounts which would be payable
in respect of the shares held by them upon such distribution if all
amounts payable on or with respect to said shares were paid in full.
In the event of any liquidation, dissolution or winding up of the
Corporation after payment shall have been made to the holders of
shares of Class B Senior Preferred Stock and any class of stock
ranking on liquidation on a parity with the Class B Senior Preferred
Stock (including, without limitation, the Senior Preferred Stock) of
the full amount to which they shall be entitled as aforesaid, the
holders of any class or classes of stock ranking on liquidation
junior to the Class B Senior Preferred Stock shall be entitled, to
the exclusion of the holders of shares of Class B Senior Preferred
Stock, to share, according to their respective rights and
preferences, in all remaining assets of the Corporation available
for distribution to its stockholders.
(b) The Liquidation Payment with respect to each fractional
share of the Class B Senior Preferred Stock outstanding or accrued
but unpaid, shall be equal to a ratably proportionate amount of the
Liquidation Payment with respect to each outstanding share of Class
B Senior Preferred Stock.
(c) For the purposes of this Section A2.3, neither the
consolidation or merger of the Corporation into or with any other
corporation or corporations, nor the sale or transfer by the
Corporation of all or any part of its assets shall be deemed to be
a liquidation, dissolution or winding up of the Corporation, unless
such transaction shall be in connection with the liquidation,
dissolution or winding up of the Corporation.
4. Redemption.
(a) Mandatory Redemption.
(i) The holders of not less than a majority of the
outstanding shares of Class B Senior Preferred Stock may, by
notice served on the Corporation, require the Corporation to
redeem, on the date which is four (4) months after the
effective date of such notice, but not prior to the date which
is one day after the fifth anniversary of the Issuance Date,
all or any portion, as set forth in such notice, of the
outstanding shares of Class B Senior Preferred Stock at a
redemption price of (A) one hundred thousand dollars
($100,000) per share (payable in cash or other consideration
as the Corporation and holders of a majority of the Class B
Senior Preferred Stock may agree), plus (B) an amount equal to
Accrued Dividends (defined in Section A2.4(c)(i)) to the date
of payment (the "Redemption Price") (each such date being
herein sometimes referred to as a "Mandatory Redemption
Date"). Such notice may be given from time to time with
respect to any partial or full redemptions. Notice of every
redemption pursuant to this Section A2.4(a) shall be
personally delivered or sent by certified mail, postage
prepaid and return receipt requested, to the Corporation at
the address of its principal executive offices to the
attention of its Secretary. Such notice shall be effective
upon receipt by the Corporation. The procedures set forth in
Section A2.4(b)(i) shall be followed for partial redemptions.
(ii) On and after any Mandatory Redemption Date (unless
default shall be made by the Corporation in depositing moneys
for the payment of the Redemption Price as hereinafter
provided), all rights of the holders of shares of Class B
Senior Preferred Stock as stockholders of the Corporation with
respect to those shares of Class B Senior Preferred Stock to
be redeemed, except the right to receive the Redemption Price
as hereinafter provided, shall cease and terminate.
(iii) The Corporation shall provide moneys for the
payment of the Redemption Price by depositing on the Mandatory
Redemption Date the amount thereof for the account of the
holders of record of the Class B Senior Preferred Stock
entitled thereto with the Continental Bank N.A., or such other
bank or trust company doing business in the City of Chicago,
as may be designated by (A) the holders of not less than a
majority of the outstanding shares of Class B Senior Preferred
Stock, and, failing said designation, (B) the Corporation, as
paying agent for the benefit of such holders. The holders of
the shares of Class B Senior Preferred Stock redeemed shall
surrender to the Corporation the certificates for the shares
of Class B Senior Preferred Stock so redeemed. Upon
notification by such designated bank or trust company to the
holders of the Class B Senior Preferred Stock that such moneys
representing the Redemption Price have been deposited by the
Corporation, the shares designated for redemption shall no
longer be outstanding, whether or not the certificates for the
shares so redeemed have been received by the Corporation on
the date of such notification and all rights relating thereto
shall cease and terminate.
(b) Optional Redemption.
(i) So long as any shares of Class B Senior Preferred
Stock are outstanding, except as may be prohibited by Section
A2.5, the Corporation may, at the option of the Board of
Directors, at any time or from time to time after the Issuance
Date, redeem the whole or any part of such Class B Senior
Preferred Stock. Any redemption pursuant to this Section
A2.4(b)(i) shall be at the Redemption Price. If less than all
the shares of Class B Senior Preferred Stock at any time
outstanding shall be called for redemption, the redemption
shall be made pro rata with respect to such shares in such
manner as may be prescribed by resolution of the Board of
Directors. The date of each such redemption is herein
sometimes referred to as an "Optional Redemption Date."
(ii) Notice of every redemption pursuant to this
Section A2.4(b) shall be sent by first-class mail, postage
prepaid, to the holders of record of the shares of Class B
Senior Preferred Stock so to be redeemed at their respective
addresses as the same shall appear on the books of the
Corporation. Such notice shall be mailed not less than ten
(10) business days in advance of the Optional Redemption Date
to the holders of record of the shares of Class B Senior
Preferred Stock so to be redeemed. On and after the Optional
Redemption Date, unless default shall be made by the
Corporation in providing moneys to the bank or trust company
for the account of the holders of record of the Class B Senior
Preferred Stock as provided in Section A2.4(a)(iii) for the
payment of the Redemption Price, all rights of the holders of
Class B Senior Preferred Stock as stockholders of the
Corporation with respect to those shares of Class B Senior
Preferred Stock to be redeemed, except the right to receive
the Redemption Price, shall cease and terminate whether or not
the certificates for the shares so redeemed have been received
by the Corporation as provided in Section A2.4(a)(iii). In
this Section A2.4(b)(ii), a business day refers to any day,
except a Saturday, Sunday or any day on which banks in the
City of Chicago are authorized or required by law to close.
(c) Definitions.
(i) The term "Accrued Dividends" with respect to the
Class B Senior Preferred Stock shall mean, as of any given
time, the then "Full Cumulative Dividends" (defined in Section
A2.4(c)(ii)) less the amount of all dividends theretofore paid
upon the relevant shares of Class B Senior Preferred Stock.
(ii) The term "Full Cumulative Dividends" with respect
to the Class B Senior Preferred Stock shall mean (whether or
not in any Dividend Period, or any part thereof, in respect of
which such term is used there shall have been net profits or
net assets of the Corporation legally available for the
payment of such dividends) that amount which shall be equal to
dividends upon the relevant shares at the full rate fixed for
Class B Senior Preferred Stock as provided herein for the
period of time elapsed from the date of issuance thereof to
the date as of which Full Cumulative Dividends are computed.
(d) Shares of Class B Senior Preferred Stock which have been
issued and reacquired in any manner, including shares purchased or
redeemed or exchanged, shall not be reissued.
(e) Each fractional share of the Class B Senior Preferred
Stock outstanding shall be entitled to a ratably proportionate
fraction of the Redemption Price payable in respect of each
outstanding full share of the Class B Senior Preferred Stock
pursuant to this Section A2.4, and such fraction of the price shall
be payable in the same manner and at such times as provided for in
this Section A2.4 with respect to redemptions of each outstanding
full share of the Class B Senior Preferred Stock.
(f) The foregoing provisions of this Section A2.4 to the
contrary notwithstanding but without limitation of the Corporation's
obligations to make mandatory redemptions as required by Section
A2.4(a), unless the Accrued Dividends on all outstanding shares of
Class B Senior Preferred Stock shall have been paid or
contemporaneously are declared and paid through the date of a
proposed optional redemption, none of the shares of Class B Senior
Preferred Stock shall be redeemed unless all outstanding shares of
Class B Senior Preferred Stock are simultaneously redeemed and the
Corporation shall not purchase by optional redemption or otherwise
acquire any shares of Class B Senior Preferred Stock; provided,
however, that the foregoing shall not prevent the purchase or
acquisition of shares of Class B Senior Preferred Stock pursuant to
a purchase or exchange offer made on the same terms to holders of
all outstanding shares of Class B Senior Preferred Stock.
(g) If fewer than all the outstanding shares of Class B
Senior Preferred Stock are to be redeemed, the number of shares to
be redeemed shall be determined by the Board of Directors in
accordance with the provisions of this Part A2, and the shares to be
redeemed shall be determined by lot or pro rata as may be determined
by the Board of Directors.
5. Restriction on Payments. Anything contained in this Article to the
contrary notwithstanding, no cash dividends or dividends paid by transfer of any
other property on shares of the Class B Senior Preferred Stock shall be declared
by the Board of Directors or paid or set apart for payment by the Corporation,
no distribution in respect of the Class B Senior Preferred Stock shall be paid
or set apart for payment by the Corporation, and no payment shall be made by the
Corporation with respect to any redemption of the Class B Senior Preferred Stock
(such payments, distributions and settings aside being herein sometimes referred
to collectively as "Distributions") at any time when the terms and provisions of
any agreement to which the Corporation or any other member of the "Ward Group"
(defined in Section B.1) is a party relating to indebtedness for money borrowed
specifically prohibits or limits such Distribution (and such Distribution ex-
ceeds said limits), or such Distribution would constitute a breach, default or
event of default thereunder.
6. Voting Rights.
(a) Except as expressly provided in Section A2.6(b) or elsewhere
in this certificate of incorporation or as required by law (in relation to
which the holders of shares of Class B Senior Preferred Stock shall be
treated as a class), the holders of shares of Class B Senior Preferred
Stock shall not have voting rights and at every meeting of the
stockholders of the Corporation, or by written consent in lieu of any such
meeting, all voting power in the election of directors and/or for all
other purposes shall be vested exclusively in the holders of shares of
Common Stock. Without limitation of the next preceding sentence and
without implication that the contrary would otherwise be true, no consent
of the holders of Class B Senior Preferred Stock shall be required for (a)
the creation of any indebtedness of any kind of the Corporation, (b) the
creation of any class of stock of the Corporation junior in right as to
dividends and upon liquidation to the Class B Senior Preferred Stock, or
(c) any increase or decrease in the amount of authorized Common Stock or
any increase, decrease or change in the par value thereof.
(b) Anything elsewhere in this certificate of incorporation to the
contrary notwithstanding, if (i) Accrued Dividends on the Class B Senior
Preferred Stock are not paid in full on any of four (4) consecutive
Dividend Payment Dates, or (ii) the Corporation shall have failed to
effect the redemption of shares of Class B Senior Preferred Stock on a
Mandatory Redemption Date as required in Section A2.4(a), the holders of
shares of Class B Senior Preferred Stock, together with the holders of
Senior Preferred Stock, shall have voting rights as specified in this
Section A2.6(b). In the event of the occurrence of either of the
foregoing events, such occurrence shall mark the beginning of a period
(the "Default Period") which shall continue until such time as (i) Accrued
Dividends on the Class B Senior Preferred Stock have been paid in full
through the date of payment, or (ii) the failure to redeem shares of Class
B Senior Preferred Stock as required by Section A2.4(a) has been cured by
the Corporation. Any provision of the by-laws of the Corporation to the
contrary notwithstanding, during any Default Period, the holders of shares
of the Class B Senior Preferred Stock then outstanding shall have the
exclusive and special right (but not the obligation), voting together with
the holders of Senior Preferred Stock, as a class (each share of Class B
Senior Preferred Stock and Senior Preferred Stock being entitled to one
(1) vote), to elect one (1) director to the Board of Directors of the
Corporation (the "Preferred Stock Director") and the number of directors
constituting the Board of Directors of the Corporation shall be
automatically increased in order to provide one (1) vacancy for the
Preferred Stock Director. Upon written request, made at any time after
the beginning of the Default Period, by the holders of not less than a
majority of the shares of the Class B Senior Preferred Stock then
outstanding, the Corporation shall call a special meeting of all of the
stockholders of the Corporation, at which meeting the holders of shares of
Class B Senior Preferred Stock, voting together with the holders of Senior
Preferred Stock, as a class, shall elect the Preferred Stock Director as
set forth above; provided, however, that if such meeting shall not have
been called by the Corporation within ten (10) days after the beginning of
a Default Period, such meeting may be called, upon like notice, at the
expense of the Corporation, by the holders of not less than a majority of
the outstanding shares of Class B Senior Preferred Stock and Senior
Preferred Stock. After the first such election during any Default Period,
the holders of the shares of Class B Senior Preferred Stock, voting
together with the holders of Senior Preferred Stock, as a class, may
continue to exercise their voting rights, as set forth above, at each
annual meeting of the stockholders of the Corporation occurring during
such Default Period. During any Default Period, no Preferred Stock
Director may be removed from office without the vote or consent of the
holders of a majority of the number of shares of the Class B Senior
Preferred Stock and Senior Preferred Stock at the time outstanding. If at
any time during a Default Period the directorship of the Preferred Stock
Director is vacant, the secretary of the Corporation shall, upon the
written request of the holders of shares representing at least a majority
of the Class B Senior Preferred Stock and Senior Preferred Stock then
outstanding, call a special meeting of all of the stockholders at the
expense of the Corporation, upon the notice required for special meetings
of stockholders. At any meeting held for the purpose of electing
directors at which the holders of the Class B Senior Preferred Stock shall
have the right, voting as a class, together with the holders of Senior
Preferred Stock, to elect the Preferred Stock Director, the presence, in
person or by proxy, of the holders of a majority of the Class B Senior
Preferred Stock and Senior Preferred Stock then outstanding shall be
required to constitute a quorum of the Class B Senior Preferred Stock and
Senior Preferred Stock on such election. At any such meeting or
adjournment thereof, the absence of the quorum of the Class B Senior
Preferred Stock and Senior Preferred Stock shall not prevent the election
of directors other than the Preferred Stock Director, and the absence of
a quorum for the election of such other directors shall not prevent the
election of the Preferred Stock Director, and in the absence of either or
both such quorums, a majority of the holders present in person or by proxy
of the stock which lacks a quorum shall have the power to adjourn the
meeting for the election of directors which they are entitled to elect
from time to time without notice other than announcement at the meeting
until a quorum shall be present. A vacancy in the directorship of the
Preferred Stock Director may be filled only by the vote or written consent
of holders of a majority of the shares of the outstanding Class B Senior
Preferred Stock and Senior Preferred Stock. Upon termination of a Default
Period, the term of office of the then Preferred Stock Director shall
automatically terminate, the shares of Class B Senior Preferred Stock
shall cease to have the voting rights specified in this Section A2.6(b),
the number of directors constituting the Board of Directors of the
Corporation shall be automatically reduced to eliminate the vacancy caused
by the termination of the office of the Preferred Stock Director and all
voting rights shall be vested exclusively in the holders of shares of
Common Stock, subject to the revesting of voting rights in the shares of
Class B Senior Preferred Stock and Senior Preferred Stock in the event of
the beginning of another Default Period.
7. Amendment. This certificate of incorporation of the Corporation
shall not be amended in any manner which would alter or change the powers,
preferences or special rights of the Class B Senior Preferred Stock so as to
affect them adversely (including, without limitation, providing for the creation
of any new class of capital stock senior to, or on a parity with, the Class B
Senior Preferred Stock as to dividends, redemption rights or on liquidation)
without the affirmative vote of the holders of at least a majority of the
outstanding shares of Class B Senior Preferred Stock, voting together as a
single class. The Board of Directors reserves the right to act by resolution
from time to time to decrease the number of shares which constitute Class B
Senior Preferred Stock (but not below the number of shares thereof out-
standing)."
The first sentence of Section B.2(a) of Article FOURTH is amended in its en-
tirety to read as follows:
" (a) In General. Except as otherwise provided in Section A1.6(b),
A2.6(b), B.1 and B.2(b), each share of Common Stock shall entitle the
holder thereof to vote, in person or by proxy, at any and all meetings of
the stockholders of the Corporation, or by written consent in lieu
thereof, on all propositions submitted to vote or consent of
stockholders."
Section 2 of Article SIXTH is amended in its entirety to read as follows:
" 2. Number, Tenure and Qualifications. Subject to Sections
A1.6(b), A2.6(b) and B.2(b) of Article Fourth hereof, the total number of
directors which shall constitute the whole board shall be fixed from time
to time in the manner provided in the by-laws of the Corporation and may
be increased or decreased from time to time in the manner provided in the
by-laws. Subject to Section A1.6(b) and A2.6(b) of Article FOURTH hereof,
at each annual election of directors, the directors shall be elected to a
term of office expiring at the next annual meeting of stockholders and
shall hold office until their respective successors are elected and
qualified. Directors need not be stockholders or residents of Delaware
but must satisfy such other qualifications as may be provided in the by-
laws."
8. The Stockholders of the Corporation, by unanimous written consent,
adopted resolutions authorizing, adopting and approving the aforesaid amendment
to Articles FOURTH and SIXTH of the Third Restated Certificate of Incorporation
of the Corporation.
9. Except to the extent specifically provided to the contrary in this
Certificate of Amendment, the terms, provisions and conditions of the Third
Restated Certificate of Incorporation of the Corporation shall remain unamended
and in full force and effect.
10. This Certificate of Amendment has been duly adopted in accordance
with the provisions of Section 242 of the General Corporation Law of the State
of Delaware.
IN WITNESS WHEREOF, MONTGOMERY WARD HOLDING CORP. has caused this
certificate to be signed by Bernard F. Brennan, its Chairman of the Board, and
attested by Spencer H. Heine, its Secretary, this day of December, 1995.
MONTGOMERY WARD HOLDING CORP.
By:
Bernard F. Brennan
Chairman of the Board
(CORPORATE SEAL)
ATTEST:
By:
Spencer H. Heine
Secretary
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion and analysis of results of operations
for the Company compares 1994 to 1993, as well as 1993 to 1992.
Montgomery Ward is on a 52- or 53-week fiscal year basis. As a
result, 1994 and 1993 are 52-week years, and 1992 is a 53-week
year. All dollar amounts are in millions, and all income and
expense items and gains and losses are shown before income taxes,
unless specifically stated otherwise.
The Company's retail business is seasonal, with one-third of the
sales traditionally occurring in the fourth quarter.
Results of Operations: 1994 Compared with 1993
Consolidated net income increased $16, or 16%, from the prior
year. Consolidated net income applicable to common shareholders
for 1994 was $115, which was 14% greater than the prior year.
Consolidated total revenues (net sales and direct response
marketing revenues, including insurance) were $7,038 compared with
$6,029 in 1993. Net sales increased $944, or 17%. Sales on a
comparable store basis, which reflects only the stores in operation
for both 1994 and 1993, increased 3%. Non-comparable sales include
Lechmere sales of $694. Lechmere was acquired on March 30, 1994.
Non-comparable sales also include the sales of six "Electric Avenue
& More" stores opened during 1994. This new specialty power format
combines the appliances/electronics (Electric Avenue), furniture
(Rooms & More) and fine jewelry (Gold 'N Gems) specialty formats.
The stores, which include an expanded assortment, contain
Montgomery Ward's and Lechmere's most successful merchandise
categories in a format designed for mid-sized markets.
Direct response marketing revenues increased $65, or 16%, to
$465. The increase was primarily due to increased clubs membership
and insurance policyholder levels.
Gross margin (net sales less cost of goods sold) dollars,
including Lechmere, were $1,484, an increase of $111, or 8%, from
1993. This increase was due to the gross margin impact of the
increased sales ($273), partially offset by the decrease in the
margin rate on sales ($107), increased occupancy costs related to
new store openings ($40) and increased buying and other expenses
($15). The decrease in the margin rate was impacted by a heavier
emphasis in appliances and electronics and the lower margin rates
that accompany these businesses (which includes Lechmere) and
continued competitive pressures.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
Results of Operations: 1994 Compared with 1993 (continued)
Operating, selling, general and administrative expenses increased
$142, or 9%, from the prior year. Excluding Lechmere's expenses,
operating, selling, general and administrative expenses increased
by $37. The increase was due to the impact of new store openings
of $48 and increased benefits and losses of direct response
operations of $9, partially offset by increased income generated
from the sale of product service contracts of $18 (See Note 9 to
the Consolidated Financial Statements) and decreased other
operating and administrative costs of $2.
Net interest expense increased $15, or 35%, from the prior year.
The increase is due to a combination of increased borrowings,
primarily due to the acquisition of Lechmere, as well as increased
rates in 1994.
Income tax expense was $62, or 34% of income before income taxes,
for 1994 as compared to $59, or 37% of income before income taxes,
for 1993. The decrease in the effective income tax rate was caused
by an income tax adjustment due to the settlement of issues with
the Internal Revenue Service for the 1988 through 1990 tax years.
Results of Operations: 1993 Compared with 1992
Net income applicable to common shareholders before applying the
cumulative impact of accounting changes on retained earnings as of
December 29, 1991 increased by $9, or 10%. Consolidated net income
in 1993 was $101, an increase of $41, or 68%, from the prior year.
Net income for 1992 reflects a charge of $40 for the cumulative
effect of changes in accounting principles as a result of adoption
of Financial Accounting Standards Board (FASB) Statements No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions"
and No. 109, "Accounting for Income Taxes". Income tax expense of
$59 increased $9, or 18%, from 1992, of which $2 was due to the
impact of the increase in the Federal income tax rate from 34% to
35%.
Consolidated total revenues were $6,029, compared with $5,806 in
1992. Net sales increased $202, or 4%, over 1992, with an increase
of $303, or 6%, from prior year net of the impact of the 53rd week
in 1992. Apparel sales increased 1%, and hardlines sales
experienced increases of 6%. Net of the impact of the 53rd week in
1992, apparel sales increased 2%, and hardlines sales increased 8%.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
Results of Operations: 1993 Compared with 1992 (continued)
Management believes merchandise sales increases reflect the
positive impact of new strategic programs implemented throughout
Montgomery Ward. Sales on a comparable store basis, which reflect
only the stores in operation for 1993 and 1992, increased 2%.
Direct response marketing revenues increased $21, or 6%, to $400.
The increase was primarily due to increased clubs membership
levels.
Gross margin dollars were $1,373, a decrease of $7, or 1%, from
last year. This decrease was primarily due to the decrease in the
margin rate on sales ($57) and increased occupancy costs primarily
as a result of new store openings ($10) and increased buying and
other expenses ($2), partially offset by the gross margin impact
of the increased sales ($62). The strong sales increase in
Electric Avenue of 11% had an impact on the overall Company margin
rate as Electric Avenue generally has lower margin rates than other
merchandise categories.
Operating, selling, general and administrative expenses increased
$6 from the prior year. This increase was attributable to the
impact of new store openings of $33, increased provision for
estimated costs to be incurred in connection with the Account
Purchase Agreement of $17, increased payroll and operating costs of
$10. These increases were partially offset by decreased health
care and insurance costs of $21, decreased advertising and other
promotional costs of $19, increased product service income of $10,
and decreased benefits and losses of direct response operations of
$4.
Net interest expense of $43 decreased $2, or 4%, from the prior
year. The decrease in interest expense due to lower interest rates
on borrowings was offset by decreased investment income due to
lower investment balances and rates.
There was no preferred stock dividend requirement in 1993, as
there was no preferred stock outstanding during 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.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
Discussion of Financial Condition (continued)
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 December 31, 1994, no borrowings were 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 December
31, 1994, $144 was outstanding under the Short Term Agreement.
Proceeds from borrowings under the Long Term Agreement and the
Short Term Agreement (collectively, the Agreements) were used to
pay all borrowings outstanding under an Amended and Restated Credit
Agreement dated as of September 22, 1992 (Long Term Credit
Agreement), a Short Term Credit Agreement dated as of September 22,
1992 (Short Term Credit Agreement) and a Term Loan Agreement (Term
Loan Agreement) dated as of November 24, 1993 with various banks
and the agreements were terminated.
Under 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 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 the Short Term
Agreement. The aggregate notional principal amounts under the
interest rate exchange agreements are $100 in 1994, $175 in 1995
through 1997 and $75 in 1998 and 1999. Under the terms of the
interest rate exchange agreements, Montgomery Ward pays the banks
a weighted average fixed rate of 7.2% in the fourth quarter of
1994, 7.4% from 1995 through 1997 and 7.6% from 1998 through
1999 and will receive the one-month daily average London Inter-
bank Offered (LIBO) rate in each case multiplied by the notional
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
Discussion of Financial Condition (continued)
principal amount. The average aggregate notional principal amounts
under the various cap agreements are $63 in the fourth quarter of
1994, $154 in 1995, $158 in 1996 and $113 in 1997. Under the terms
of the cap agreements, Montgomery Ward receives payments from the
banks when the one-month daily average LIBO rate exceeds the 5.0%
cap strike rate in 1994, 5.5% cap strike rate in 1995, 6% cap
strike rate in 1996 and 7.0% cap strike rate in 1997. 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 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. At December 31,
1994, Montgomery Ward could pay dividends and make other
distributions to the Company of $124 pursuant to the terms of the
Agreements. To date, Montgomery Ward has been in compliance with
all such financial tests.
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. The Montgomery Ward
Preferred constitutes Debt-Like Preferred Stock for purposes of the
dividend restrictions under the Agreements.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
Discussion of Financial Condition (continued)
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 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, up to 400,000 shares of Class A Common
Stock, Series 3). The contingent price is dependent on Lechmere
achieving or exceeding a specified gross margin amount during the
period commencing February 27, 1994 and ending February 25, 1995.
Management believes that no payment of the contingent purchase
price will be required.
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 Short Term Credit Agreement, Long Term Credit Agreement
and the Term Loan Agreement.
The Company has repurchased 4,187,550 shares held by certain
former officers of the Company, Montgomery Ward and Signature and
their permitted transferees by making cash payments and issuing
installment notes in the aggregate of approximately $62. As of
December 31, 1994, the outstanding balance of these notes was $26.
See Note 14 to the Consolidated Financial Statements. These
installment notes bear interest at varying rates, are payable over
multi-year periods (generally three to five years) and are secured
by shares of Common Stock, the fair market value of which is equal
to the outstanding principal amount under each note. Under the
Agreements, Montgomery Ward expects to be able to advance the
Company sufficient funds to allow the Company to make the required
installment payments in 1995.
Currently available external sources of funds include $900 in
multi-year revolving loan commitments which were obtained in
September 1994 of which $297 will expire on September 14, 1995 and
$603 will expire on September 15, 1999. During 1994, the average
daily balance of borrowings under these commitments was $361.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
Discussion of Financial Condition (continued)
Under the laws and regulations applicable to insurance companies,
some subsidiaries of Signature are limited in the amount of
dividends they may pay. For information concerning limitations on
the amount of dividends Signature may pay, see Note 20 to the
Consolidated Financial Statements. During 1994, Signature paid
dividends aggregating $22.
Future cash needs are expected to be satisfied by ongoing
operations, the sale of customer receivables to Montgomery Ward
Credit, borrowings under the Agreements, and the disposition of
capital assets related to facility closings. See "Business -
Account Purchase Agreement" for a discussion of the terms of the
sales of customer receivables by Montgomery Ward to Montgomery Ward
Credit.
Montgomery Ward and Lechmere's capital expenditures of $184 for
1994 were primarily related to opening 16 new stores, closing 2
stores, relocating 2 stores and implementing conversion strategies
in conventional retail stores and various merchandise fixture and
presentation programs. Montgomery Ward regularly reviews
opportunities for acquisitions and joint ventures and regards such
transactions as a possible source for future growth.
1994 1993 1992
Total Capital Expenditures . . .$ 184 $ 142 $ 146
Capital appropriations
authorized during the year . .$ 247 $ 149 $ 154
Cancellations of prior
year's appropriations. . . . .$(25) $(23) $(62)
Unexpended capital
appropriations at year-end . .$ 181 $ 143 $ 159
Montgomery Ward and Lechmere are not contractually committed to
spend all of the capital appropriations unexpended at December 31,
1994, but generally expect to do so.
On May 20, 1994, the Board of Directors declared a cash dividend
of $.50 per common share to shareholders of record on June 15,
1994, for a total of $22. This dividend was paid on June 23, 1994.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
Discussion of Financial Condition (continued)
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 $20,
Deferred income taxes by $7 and Unrealized gain on marketable
securities by $13 as of January 2, 1994 and had no impact on the
results of operations of the Company.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Montgomery Ward Holding Corp.:
We have audited the accompanying consolidated balance sheet of
MONTGOMERY WARD HOLDING CORP. (a Delaware Corporation) AND
SUBSIDIARY as of December 31, 1994 and January 1, 1994, and the
related consolidated statements of income, shareholders' equity and
cash flows for the fiscal years ended December 31, 1994, January 1,
1994 and January 2, 1993. These consolidated financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Montgomery Ward Holding Corp. and Subsidiary as of
December 31, 1994 and January 1, 1994 and the results of their
operations and their cash flows for the fiscal years ended December
31, 1994, January 1, 1994 and January 2, 1993, in conformity with
generally accepted accounting principles.
As discussed in Notes 6 and 8 to the consolidated financial
statements, effective December 29, 1991, the Company changed its
methods of accounting for postretirement benefits other than
pensions and income taxes.
Arthur Andersen LLP
Chicago, Illinois,
February 14, 1995
<PAGE>
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF INCOME
(Millions of dollars)
52-Week 53-Week
Period Ended Period Ended
Dec. 31, Jan. 1, Jan. 2,
1994 1994 1993
Revenues
Net sales, including
leased and licensed
department sales. . . . $6,573 $5,629 $5,427
Direct response
marketing revenues,
including insurance . . 465 400 379
Total Revenues . . . . 7,038 6,029 5,806
Costs and Expenses
Cost of goods sold,
including net
occupancy and
buying expense. . . . . 5,089 4,256 4,047
Operating, selling,
general and adminis-
trative expenses,
including benefits
and losses of direct
response operations
(Note 16) . . . . . . . 1,712 1,570 1,564
Interest expense
(Note 17) . . . . . . . 58 43 45
Total Costs and
Expenses. . . . . . . 6,859 5,869 5,656
Income Before
Income Taxes . . . . . . 179 160 150
Income Tax Expense
(Note 8) . . . . . . . . 62 59 50
Net Income before
cumulative effect
of changes in
accounting principles. . 117 101 100
Cumulative Effect of
Changes in Accounting
Principles:
Income Taxes
(Note 8) . . . . . . . - - 50
Postretirement
Benefits, net
(Note 6) . . . . . . . - - (90)
Net Income . . . . . . . . 117 101 60
Preferred Stock
Dividend Requirements
(Note 13). . . . . . . . 2 - 8
Net Income Applicable to
Common Shareholders. . . $ 115 $ 101 $ 52
See notes to consolidated financial statements.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF INCOME (Continued)
(Millions of dollars, except per share amounts)
52-Week 53-Week
Period Ended Period Ended
Dec. 31, Jan. 1, Jan. 2,
1994 1994 1993
Net Income Per Class A
Common Share before
cumulative effect of
changes in accounting
principles . . . . . . . . $2.68 $2.29 $2.01
Cumulative effect of
changes in accounting
principles . . . . . . . . $ - $ - $(.88)
Net Income per Class A
Common Share
(Note 14) . . . . . . . . . $2.68 $2.29 $1.13
Net Income Per Class B
Common Share before
cumulative effect of
changes in accounting
principles . . . . . . . . $2.30 $2.04 $ 1.87
Cumulative effect of
changes in accounting
principles . . . . . . . . $ - $ - $(.82)
Net Income per Class B
Common Share
(Note 14) . . . . . . . . $2.30 $2.04 $1.05
Cash Dividends declared
per Common Share
Class A . . . . . . . . $ .50 $ .50 $ .25
Class B . . . . . . . . $ .50 $ .50 $ .25
See notes to consolidated financial statements.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED BALANCE SHEET
(Millions of dollars)
ASSETS
December 31, January 1,
1994 1994
Cash and cash equivalents. . . . . . . . . $ 33 $ 98
Short-term investments . . . . . . . . . . 3 19
Investments of insurance operations
(Note 3) . . . . . . . . . . . . . . . . 314 296
Total Cash and Investments . . . . . . . 350 413
Trade and other accounts receivable. . . . . 112 62
Accounts and notes receivable from
affiliates (Note 4). . . . . . . . . . . 6 4
Total Receivables. . . . . . . . . . . . 118 66
Merchandise inventories (Note 5) . . . . . . 1,625 1,242
Prepaid pension contribution (Note 6). . . . 324 310
Properties, plants and equipment,
net of accumulated depreciation
and amortization (Note 7). . . . . . . . . 1,399 1,263
Direct response and insurance
acquisition costs. . . . . . . . . . . . . 322 295
Other assets . . . . . . . . . . . . . . . 402 246
Total Assets . . . . . . . . . . . . . . . $4,540 $3,835
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt (Note 11). . . . . . . . . $ 144 $ -
Trade accounts payable . . . . . . . . . . . 1,719 1,358
Federal income taxes payable (Note 8) . . . 14 7
Accrued liabilities and other
obligations (Notes 2, 4, 6, 9
and 14). . . . . . . . . . . . . . . . . 1,234 1,197
Insurance policy claim reserves
(Note 10). . . . . . . . . . . . . . . . . 236 237
Long-term debt (Note 11) . . . . . . . . . . 228 213
Obligations under capital leases
(Note 12). . . . . . . . . . . . . . . . 81 89
Deferred income taxes (Note 8) . . . . . . 122 127
Total Liabilities. . . . . . . . . . . . 3,778 3,228
Commitments and Contingent
Liabilities (Notes 11 and 18)
Redeemable Preferred Stock (Note 13) . . . . 75 -
Shareholders' Equity
Common stock (Note 14) . . . . . . . . . . - -
Capital in excess of par value . . . . . . 23 19
Retained earnings. . . . . . . . . . . . . 751 658
Unrealized gain on marketable
equity securities . . . . . . . . . . . 2 3
Less: Treasury stock, at cost . . . . . (89) (73)
Total Shareholders' Equity . . . . . . 687 607
Total Liabilities and
Shareholders' Equity . . . . . . . . . . $4,540 $3,835
See notes to consolidated financial statements.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Millions of dollars, except per share amounts)
Class A Class B Capital
Common Common in
Stock Stock Excess Treasury Total
$ .01 $ .01 of Unre- Stock, Share-
Par Par Par Retained alized at holders'
Value Value Value Earnings Gains Cost Equity
(Number of shares
in thousands)
Balance,
December
29,1991
as re-
stated 21,190 25,000 $13 $499 $ 2 $(34) $480
Net income
before
cumulative
effect of
changes in
accounting
principles - - - 100 - - 100
Cash divi-
dends paid - - - (19) - - (19)
Tax benefit
of stock
option exer-
cises and
other share
exchanges - - 2 - - - 2
Change in
unrealized
gain on mar-
ketable
equity
securities - - - - 1 - 1
Shares repur-
chased as
Treasury
stock (777) - - - - (12) (12)
Shares
issued
upon exer-
cise of
options 256 - 1 - - - 1
Shares
issued
upon exer-
cise of
conversion
rights 3 - - - - - -
Balance,
January
2,1993 20,672 25,000 $16 $580 $ 3 $(46) $553
See notes to consolidated financial statements.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Continued)
(Millions of dollars, except per share amounts)
Class A Class B Capital
Common Common in
Stock Stock Excess Treasury Total
$ .01 $ .01 of Unre- Stock, Share-
Par Par Par Retained alized at holders'
Value Value Value Earnings Gains Cost Equity
(Number of shares
in thousands)
Balance,
January
2,1993 20,672 25,000 $16 $580 $ 3 $(46) $553
Net
income - - - 101 - - 101
Cash
dividends
paid - - - (23) - - (23)
Tax benefit
of stock
option exer-
cises and
other share
exchanges - - 2 - - - 2
Shares repur-
chased as
Treasury
stock (1,258) - - - - (27) (27)
Shares
issued
upon exer-
cise of
options 193 - 1 - - - 1
Shares
issued
upon exer-
cise of
conversion
rights 3 - - - - - -
Balance,
January
1,1994 19,610 25,000 19 658 3 (73) 607
Cumulative
effect of
change in
accounting
principle - - - - 13 - 13
Balance,
January 1,
1994, as
restated 19,610 25,000 $19 $658 $16 $(73) $620
See notes to consolidated financial statements.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Continued)
(Millions of dollars, except per share amounts)
Class A Class B Capital
Common Common in
Stock Stock Excess Treasury Total
$ .01 $ .01 of Unre- Stock, Share-
Par Par Par Retained alized at holders'
Value Value Value Earnings Gains Cost Equity
(Number of shares
in thousands)
Balance,
January 1,
1994, as
restated 19,610 25,000 $19 $658 $16 $(73) $620
Net
income - - - 117 - - 117
Cash
dividends
paid - - - (24) - - (24)
Tax benefit
of stock
option exer-
cises - - 1 - - - 1
Change in
unrealized
gain on
marketable
securities - - - - (14) - (14)
Shares repur-
chased as
Treasury
stock (629) - - - - (16) (16)
Shares
issued
upon exer-
cise of
options 297 - 3 - - - 3
Shares
issued
upon exer-
cise of
conversion
rights 2 - - - - - -
Balance,
December
31,1994 19,280 25,000 $23 $751 $ 2 $(89) $687
See notes to consolidated financial statements.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)
52-Week 53-Week
Period Ended Period Ended
Dec. 31, Jan. 1, Jan. 2,
1994 1994 1993
Cash flows from operating
activities:
Net income before
cumulative effect of
changes in accounting
principles . . . . . . . $ 117 $ 101 $ 100
Adjustments to reconcile
net income to net cash
provided by operations:
Depreciation and
amortization. . . . . . 109 98 97
Deferred income taxes . . 29 25 32
Changes in operating
assets and liabilities,
net of businesses
acquired:
(Increase) decrease in:
Trade and other accounts
receivable (38) (9) 9
Accounts and notes
receivable from
affiliates (2) 14 (1)
Merchandise
inventories. . . . . . (243) (204) (38)
Prepaid pension
contribution . . . . . (15) (19) (18)
Other assets. . . . . . (51) (50) 57
Increase (decrease) in:
Accounts and notes
payable to affiliates. . - - (30)
Trade accounts
payable. . 291 148 (17)
Accrued liabilities
and other
obligations. . . . . ..(37) 33 21
Federal income taxes
payable, net . . . . . 5 (1) (34)
Insurance policy
claim reserves . . . . (1) (4) (21)
Deferred income taxes (8) - -
Net cash provided
by operations. . . . . 156 132 157
Cash flows from investing
activities:
Acquisition of Lechmere
net of cash acquired . . (109) - -
Acquisition of Smilesaver,
net of cash acquired . . (11) - -
Purchase of short-term
investments. . . . . . . (231) (248) (1,221)
Purchase of investments
of insurance
operations . . . . . . . (691) (688) (707)
Sale of short-term
investments. . . . . . . . 247 240 1,367
Sale of investments
of insurance
operations . . . . . . . . 671 669 698
Disposition of
properties, plants
and equipment, net . . . . 4 3 7
Capital expenditures. . . (184) (142) (146)
Net cash used for
investing
activities . . . . . . $(304) $(166) $ (2)
See notes to consolidated financial statements.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Millions of dollars)
52-Week 53-Week
Period Ended Period Ended
Dec. 31, Jan. 1, Jan. 2,
1994 1994 1993
Cash flows from financing
activities:
Proceeds from issuance
of short-term
debt . . . . . . . . . $11,160 $7,718 $1,823
Payments of short-term
debt . . . . . . . . . (11,016) (7,718) (1,823)
Proceeds from issuance
of long-term
debt . . . . . . . . . . 168 100 -
Payments of Montgomery
Ward long-term
debt . . . . . . . . . . (179) (12) (396)
Payments of Lechmere
long-term debt . . . . . (88) - -
Payments of obligations
under capital leases . . (8) (6) (7)
Proceeds from issuance
of common stock. . . . . 3 1 1
Proceeds from issuance
of preferred stock . . . 75 - -
Payments to redeem
preferred stock. . . . . - - (90)
Cash dividends paid . . . (24) (23) (19)
Purchase of treasury
stock, at cost . . . . . (9) (11) (7)
Tax benefit of stock
options exercised
and other share
exchanges. . . . . . . 1 2 2
Net cash provided
by (used for)
financing
activities. . . . . . 83 51 (516)
Increase (Decrease) in cash
and cash equivalents . . . (65) 17 (361)
Cash and cash equivalents
at beginning of period . . 98 81 442
Cash and cash equivalents
at end of period . . . . .$ 33 $ 98 $ 81
See notes to consolidated financial statements.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions)
1. Major Accounting Policies
Business Segments
Montgomery Ward Holding Corp. (the Company or MW Holding) and its
subsidiaries are engaged in retail merchandising and direct
response marketing (including insurance) in the United States.
Retail merchandising operations are conducted through Montgomery
Ward and Montgomery Ward's indirectly, wholly-owned subsidiary
Lechmere, Inc. (Lechmere), while direct response marketing
operations are conducted primarily through Signature
Financial/Marketing, Inc. (Signature), a wholly-owned subsidiary of
Montgomery Ward. Signature markets consumer club products and
insurance products through its subsidiaries. See Note 20 for
information regarding these segments.
Principles of Consolidation; Use of Estimates
The consolidated financial statements include the Company and all
subsidiaries. Certain prior period amounts have been reclassified
to be comparable with the current period presentation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, time deposits and
highly liquid debt instruments with a maturity of three months or
less from the date of purchase. The carrying amount reported in
the financial statements for cash and cash equivalents approximates
the fair value of these assets.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
1. Major Accounting Policies (continued)
Following is a summary of cash payments for interest and income
taxes and non-cash financing and investing activities:
52-Week 53-Week
Period Ended Period Ended
Dec. 31, Jan. 1, Jan. 2,
1994 1994 1993
Cash paid for:
Income taxes . . . . . . $ 33 $ 46 $ 53
Interest . . . . . . . . $ 56 $ 55 $ 50
Non-cash financing
activities:
Notes issued for
purchase of
Treasury stock. . . . $ 7 $ 16 $ 5
Non-cash investing
activities:
Change in unrealized
gain on marketable
securities. . . . . . $(14) $ - $ 1
Like-kind exchange of
assets. . . . . . . . $ 5 $ 6 $ -
The net cumulative effect of changes in accounting principles of
$13 in 1994 and $40 in 1992 has no cash impact.
Investments
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 Shareholder's Equity. The adoption of
FAS No. 115 increased Investments of insurance operations by $20,
Deferred income taxes by $7 and Unrealized gain on marketable
securities by $13 as of January 2, 1994 and had no impact on the
results of operations of the Company.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
1. Major Accounting Policies (continued)
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or
market, using the retail last-in, first-out (LIFO) method.
Depreciation, Amortization and Repairs
Depreciation is computed on a straight-line basis over the
estimated useful lives of the properties, with annual rates ranging
between 2% and 3% for buildings and between 12% and 25% for
fixtures and equipment. Leasehold improvements and assets under
capital leases are amortized on a straight-line basis over no
longer than the primary term of the lease. Upon retirement or
disposition, the cost and the related depreciation or amortization
are removed from the accounts, with the gains or losses included in
income.
Interest relating to construction in progress is capitalized and
amortized over the useful life of the property. Pre-operating
expenditures which are not capital in nature are charged against
income in the year the store is opened. Normal maintenance and
repairs are expensed as incurred. Major repairs that materially
extend the lives of properties are capitalized, and the assets
replaced, if any, are retired.
Direct Response Marketing Revenues
Life and accident and health insurance premiums, which are
recognized as revenue when due from policyholders, are associated
with related benefits and expenses to result in the recognition of
profit over the terms of the policies. Property-liability
insurance premiums and club membership dues are deferred and earned
on a pro-rata basis over the terms of the policies and memberships.
Unearned premiums and club memberships of $63 and $53 at December
31, 1994 and January 1, 1994, respectively, are included in Accrued
liabilities and other obligations.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
1. Major Accounting Policies (continued)
Direct Response and Insurance Acquisition Costs
Costs allocated to the insurance and club memberships in force at
June 24, 1988, as well as the costs of acquiring new club
memberships and insurance business (primarily marketing expenses),
are included in Direct response and insurance acquisition costs.
Costs of acquiring new business have been deferred when considered
recoverable.
Acquisition costs are amortized in proportion to the revenue
recognized. Amortization charged to income was $124, $111 and $106
for 1994, 1993 and 1992, respectively, and is included in
Operating, selling, general and administrative expenses.
Interest Rate Exchange and Cap Agreements
Amounts paid or received pursuant to interest rate exchange and
cap agreements are deferred and amortized as interest expense or
income over the remaining life of the applicable agreement.
Insurance Policy Claim Reserves
Liabilities for future policy benefits have been determined
principally by the net level premium method. These amounts have
been computed by using assumptions that include provisions for risk
of adverse deviation. The assumptions developed for interest rates
(average 6%-8%) and withdrawal rates are based on the experience of
Montgomery Ward Life Insurance Company, a wholly-owned subsidiary
of Signature. The principal mortality tables used to develop the
assumed mortality rates are the 1960 Commissioners' Standard Group
Table, the 1955-1960 and 1965-1970 Basic Mortality Tables and the
1969-1971 U.S. Life Tables. The reserve for claims and related
adjustment expenses is based on estimates of the costs of
individual claims reported and incurred but not reported prior to
year-end. While management believes the reserve for claims and
related adjustment expenses is adequate, the reserve is continually
reviewed and as adjustments become necessary, they are reflected in
current operations.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
1. Major Accounting Policies (continued)
Federal Income Tax
The Company and its subsidiaries file a consolidated Federal
income tax return. Insurance subsidiaries which had previously
filed separate Federal income tax returns are expected to be
included in the consolidated return to be filed for the 1994 tax
year.
Prior to 1992, the Company determined its income tax expense and
related deferred federal income taxes in accordance with Statement
of Financial Accounting Standards No. 96, "Accounting for Income
Taxes" (FAS 96). Effective December 29, 1991, the Company adopted
the provisions of FAS 109, "Accounting for Income Taxes". See Note
8 for discussion of the impact on financial position and results of
operations resulting from the adoption of FAS 109.
2. 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, on March 30, 1994. The aggregate purchase price was
comprised of an estimated price of $113 and a contingent purchase
price 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, up to 400,000 shares of Class A Common Stock, Series 3). The
contingent price is dependent on Lechmere achieving or exceeding a
specified gross margin amount during the period commencing February
27, 1994 and ending February 25, 1995. Management believes that no
payment of the contingent purchase price will be required.
The closing price included a $10 promissory note (the Note) of
Montgomery Ward, which bears interest at a rate of 4.87% per annum.
The Note is included in accrued liabilities and other obligations
at December 31, 1994. 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.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
2. Acquisition of Lechmere, Inc. (continued)
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 . . . . . . . . . . . . . . . . . . . . $140
Properties, Plants & Equipment. . . . . . . . . . 57
Goodwill . . . . . . . . . . . . . . . . . . . . 124
Other Assets. . . . . . . . . . . . . . . . . . . 50
Due to Montgomery Ward. . . . . . . . . . . . . . (88)
Accounts Payable and other Liabilities. . . . . .(170)
$113
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
3. Investments of Insurance Operations
Following is a summary of Investments of insurance operations
in securities other than related party investments. The fair
values for marketable debt and equity securities are based on
quoted market prices.
December 31, 1994
Gross Gross
Type of Unrealized Unrealized Market
Investment Cost Gains Losses Value
Fixed maturities
Bonds:
United States
Govern-
ment and
government
agencies
and author-
ities. . . . . $ 51 $ - $ 2 $ 49
Public
utilities. . . . 73 6 - 79
All other
corporate
bonds. . . . . 26 1 1 26
Mortgage-backed
securities. . . 115 - 6 109
Total
fixed
maturi-
ties. . 265 7 9 263
Equity
securities:
Common
stock. . . . . 8 5 - 13
Total
equity
securi-
ties. . 8 5 - 13
Policy
loans. . . . . . . 7 - - 7
Short-term
investments. . . 31 - - 31
Total
Invest-
ments . $311 $12 $ 9 $314
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
3. Investments of Insurance Operations (continued)
January 1, 1994
Amount
at Which
Gross Gross Shown in
Type of Unrealized Unrealized Market Balance
Investment Cost Gains Losses Value Sheet
Fixed maturities
Bonds:
United States
Govern-
ment and
government
agencies
and author-
ities. . . $ 67 $ 3 $ - $ 70 $67
Public
utilities. 80 16 - 96 80
All other
corporate
bonds. . . 26 1 - 27 26
Mortgage-
backed
securities. 64 - - 64 64
Total
fixed
maturi-
ties. 237 20 - 257 237
Equity
securities:
Common
stock. . . 8 5 - 13 13
Total
equity
securi-
ties. 8 5 - 13 13
Policy
loans. . . . 7 - - 7 7
Short-term
investments. 39 - - 39 39
Total
Invest-
ents $291 $25 $ - $316 $296
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
3. Investments of Insurance Operations (continued)
The amounts of fixed maturities as of December 31, 1994 are as
follows:
Amortized Market
Cost Value
Due in 1995. . . . . . . . . . . . . . . . .$ 12 $ 12
Due in 1996 through 2000 . . . . . . . . . . 109 111
Due in 2001 through 2005 . . . . . . . . . . 28 30
Due in 2006 and beyond . . . . . . . . . . . 1 1
Mortgage-backed securities . . . . . . . . . 115 109
$265 $263
Realized capital gains before income tax and changes in
unrealized gains (losses) after income tax on fixed maturities,
mortgage loans and equity securities are as follows:
Fixed
Maturities
and Mortgage Equity
Loans Securities
52-Week Period Ended December 31, 1994
Realized. . . . . . . . . . . . . . . . . .$ - $ -
Unrealized. . . . . . . . . . . . . . . . $(2) $ 4
52-Week Period Ended January 1, 1994
Realized. . . . . . . . . . . . . . . . . .$ 1 $ -
Unrealized. . . . . . . . . . . . . . . . .$ - $ 3
53-Week Period Ended January 2, 1993
Realized. . . . . . . . . . . . . . . . . .$ 1 $ -
Unrealized. . . . . . . . . . . . . . . . .$ - $ 3
4. Accounts and Notes Receivable from Affiliates
Montgomery Ward and Montgomery Ward Credit Corporation
(Montgomery Ward Credit), a subsidiary of GE Capital Corporation
(GE Capital) have entered into an Account Purchase Agreement
pursuant to which Montgomery Ward Credit purchases receivables from
time to time and provides services to Montgomery Ward. Under this
agreement, Montgomery Ward Credit has the exclusive right to
operate the Montgomery Ward private label credit card system and
the obligation to purchase for their face value (and Montgomery
Ward is obligated to sell) all the receivables generated by the
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
4. Accounts and Notes Receivable from Affiliates (continued)
Montgomery Ward private label credit card system, including those
generated through MW Direct, up to $6,000 at any time
outstanding. Montgomery Ward accounts for the transfer as a sale
of the applicable receivables. Sales of receivables to
Montgomery Ward Credit were $4,092, $3,991 and $3,489 for 1994,
1993 and 1992, respectively. At December 31, 1994 and January 1,
1994, there were $5,221 and $4,947 of Montgomery Ward credit card
receivables owned by Montgomery Ward Credit, respectively.
Amounts receivable from Montgomery Ward Credit pursuant to the
sale of such receivables are included in Accounts and notes
receivable from affiliates.
Montgomery Ward is exposed to both market risk and credit risk
under the Account Purchase Agreement. Under the Account Purchase
Agreement, Montgomery Ward is required to pay Montgomery Ward
Credit the excess interest costs on a monthly basis if a blended
interest rate applicable to Montgomery Ward Credit's finance costs
with respect to the receivables exceeds 10% per annum. To date,
the blended interest rate has been less than 10%.
Should Montgomery Ward Credit or its guarantor, GE Capital, fail
to perform its obligations under the Account Purchase Agreement,
Montgomery Ward would suffer an accounting loss up to the amount of
Montgomery Ward's share of finance charges (as described below),
net of applicable reserves carried by Montgomery Ward Credit.
Montgomery Ward estimates that any accounting loss would be
immaterial at December 31, 1994. Montgomery Ward Credit's
obligations under the Account Purchase Agreement are not
collateralized.
Effective January 1, 1994, Montgomery Ward bears the entire risk
of credit losses. Previously credit losses were shared.
Montgomery Ward's remaining liability for credit losses for 1991
through 1994 are payable to Montgomery Ward Credit in early 1998.
In addition, the amounts payable by Montgomery Ward for credit
losses for 1995 through 1997 may be deferred, and such deferred
credit losses are also payable at Montgomery Ward's election in
early 1998. Interest on Montgomery Ward's liability for credit
losses is payable at a rate equal to rates on comparable borrowings
of Montgomery Ward.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
4. Accounts and Notes Receivable from Affiliates (continued)
In exchange for Montgomery Ward's agreement to allow Montgomery
Ward Credit to increase finance charge rates in selected states,
Montgomery Ward receives a share of incremental finance charges
resulting from such increases which is available for offset as
previously discussed and earns interest at the same rate.
Incremental finance charges are generated only on purchases
subsequent to the date such finance charge rates are increased.
In the event that, due to the increase in finance charge rates,
any
refunds are required to be made, Montgomery Ward and Montgomery
Ward Credit have agreed to share the financial risk. Legislation
has from time to time been introduced in certain states which, if
enacted, may require rescinding all or a portion of such rate
increases, in which case, Montgomery Ward's share of rate
increases may be substantially reduced.
In addition to sharing incremental finance charges, with respect
to each fiscal year, Montgomery Ward Credit will make a payment to
Montgomery Ward of a share of all finance charges in an amount
equal to (a) if credit losses are 5% or less of average gross
receivables, the lesser of 3.9% of average gross receivables or the
actual credit losses; (b) if credit losses are greater than 5% but
less than or equal to 8% of average gross receivables, 3.9% of
average gross receivables plus 50% of the amount by which actual
credit losses exceed 5% of average gross receivables; or (c) if
credit losses exceed 8% of average gross receivables, 5.4% of
average gross receivables plus the amount by which credit losses
exceed 8% of average gross receivables. In the event that finance
charges billed during a fiscal year less the incremental finance
charges referred to below are less than the amount computed above,
the payments will be reduced to the amount of the finance charge
less the incremental finance charge.
The Company has executed notes for the credit losses which
totalled $161 with respect to credit losses through 1994. The
finance charge offset as of the end of 1994 was $24. Under the
agreement, the notes payable to Montgomery Ward Credit are limited
to $300 at any time, with any excess to be paid currently in cash.
The Company does not expect credit losses for the period through
1997 to exceed the $300 limitation.
The Account Purchase Agreement will be in effect until December
31, 2005, and thereafter from year to year unless either party
gives ten years prior notice of its election to terminate.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
5. Merchandise Inventories
Merchandise inventories are valued using the retail LIFO method,
which matches current costs with current sales. If inventories had
been valued using the first-in, first-out (FIFO) method, they would
have been $133, $117 and $104 higher than those reported as of
December 31, 1994, January 1, 1994 and January 2, 1993,
respectively.
6. Retirement Plans
Retirement plans of a contributory nature cover a majority of
full-time associates of Montgomery Ward and its subsidiaries.
Retirement benefits are provided by a defined benefit pension plan
as well as by a savings and profit sharing plan. Montgomery Ward
and its subsidiaries contribute to the defined benefit pension plan
to cover any excess of defined minimum benefits over the benefits
available from the savings and profit sharing plan attributable to
the accumulated value of associate contributions.
The components of the pension credit were as follows:
52-Week 53-Week
Period Ended Period Ended
Dec. 31, Jan. 1, Jan. 2,
1994 1994 1993
Service cost-benefits
earned during the
period. . . . . . . . . .$(13) $(11) $(9)
Interest cost on
projected benefit
obligation. . . . . . . . (46) (45) (44)
Actual return on
assets. . . . . . . . . . 4 101 (20)
Deferral of unantici-
pated investment
performance . . . . . . . 72 (26) 91
Amortization of
unrecognized
net loss. . . . . . . . . (2) - -
Net pension credit . . . .$ 15 $ 19 $18
Assumptions:
Discount rate . . . . . . 7.5% 8.5% 9.0%
Increase in future
compensation . . . . . . 6.0% 6.0% 6.0%
Rate of return
on plan assets . . . . . 9.5% 9.5% 9.0%
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
6. Retirement Plans (continued)
The funded status of the defined benefit pension plan was as
follows:
December 31, January 1,
1994 1994
Actuarial present value of
accumulated benefit
obligation:
Vested . . . . . . . . . . . . . . . . $576 $565
Nonvested. . . . . . . . . . . . . . . 4 4
Accumulated benefit obligation . . . . . 580 569
Additional amounts related
to projected increases in
compensation levels . . . . . . . . . . 23 9
Projected benefit obligation . . . . . . 603 578
Plan assets at fair value,
primarily in equity and
fixed income securities . . . . . . . . 789 863
Plan assets in excess of projected
benefit obligation. . . . . . . . . . . $186 $285
Consisting of:
Unrecognized net loss
since initial
application of FAS 87. . . . . . . . $(140) $(28)
Unrecognized prior
service cost since
initial application
of FAS 87. . . . . . . . . . . . . . $ 2 $ 3
Prepaid pension contribution . . . . $324 $ 310
The projected benefit obligation was determined using an assumed
discount rate of 8.5% at December 31, 1994 and 7.5% at January 1,
1994 and an assumed rate of increase in future compensation levels
of 6% for 1994 and 1993. Unrecognized net gains and losses and
prior service costs are amortized over the average future service
period.
The savings and profit sharing plan includes a voluntary savings
feature for eligible associates and matching company contributions
based on a fixed percentage of certain associates' contributions.
The company matching expense was $6 for each of 1994, 1993 and
1992.<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
6. Retirement Plans (continued)
Substantially all associates who retire after participation in
the retirement plan for ten years and who are members of the health
care plan for the year prior to retirement are eligible for certain
health care and life insurance benefits, the cost of which is
shared with the retirees. In 1992, the Company established a limit
on its future annual contributions on behalf of retirees at a
maximum of 125% of the projected 1992 company contributions.
In the fourth quarter of 1992, the Company adopted Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" as of December 29, 1991.
This statement requires the accrual of the cost of providing
postretirement benefits, including medical and life insurance
coverage, during the active service period of the associate. The
Company elected to immediately recognize the accumulated
postretirement liability. This resulted in a one-time, after-tax
charge of $90 (after reduction for income taxes of $59). The
effect of this change on 1992 earnings was not material. Prior to
1992, the Company recognized expense in the year the benefits were
provided.
The components of the net periodic postretirement benefit cost
were as follows:
1994 1993 1992
Service Cost. . . . . . . . . . . . . $ 2 $ 2 $ 2
Interest cost on accumulated
postretirement benefit
obligation . . . . . . . . . . . . . 11 12 12
Net periodic postretirement
benefit cost . . . . . . . . . . . . $13 $14 $14
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
6. Retirement Plans (continued)
The status of the Company's liability for postretirement benefits
at December 31, 1994 and January 1, 1994, which are included in
Accrued liabilities and other obligations is as follows:
1994 1993
Accumulated postretirement
benefit obligation:
Retirees. . . . . . . . . . . . . . . . . .$104 $120
Fully eligible active associates. . . . . . 18 20
Other active associates . . . . . . . . . . 26 25
Total accumulated
postretirement benefit
obligation. . . . . . . . . . . . . . . . 148 165
Unrecognized loss. . . . . . . . . . . . . . (4) (22)
Accrued postretirement
benefit obligation. . . . . . . . . . . . .$144 $143
The weighted average discount rate used in measuring the
accumulated postretirement benefit obligation was 8.5% at December
31, 1994 and 7.5% at January 1, 1994. The assumed health care cost
trend rate and the impact of a 1% increase in the medical trend
rate on the accumulated postretirement benefit obligation, service
cost and interest cost are not applicable due to caps established
on current cost levels.
The Company continues to evaluate ways in which it can better
manage retiree benefits and control the costs. Any changes in the
plan or revisions to assumptions that affect the amount of expected
future benefits may have a significant effect on the amount of the
reported obligation and annual expense.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
7. Properties, Plants and Equipment
The details of the properties, plants and equipment accounts are
shown below at cost:
December 31, January 1,
1994 1994
Land . . . . . . . . . . . . . . $ 197 $ 177
Buildings. . . . . . . . . . . . . . 860 778
Leasehold improvements . . . . . . . 319 289
Fixtures and equipment . . . . . . . 503 401
Assets under capital leases. . . . . 111 113
Less accumulated depreciation
and amortization. . . . . . (591) (495)
Properties, Plants, and
Equipment, net. . . . . . . $1,399 $1,263
Gains or (losses) on the sale of properties were $1, $0 and $(2)
for 1994, 1993 and 1992, respectively. Accumulated amortization on
capital lease assets was $49 and $43 for 1994 and 1993,
respectively.
8. Income Taxes
In the fourth quarter of 1992, the Company adopted FAS 109,
"Accounting for Income Taxes", as of December 29, 1991. The
cumulative effect on prior years' net income of the adoption of
this statement was a credit of $50.
The Company has alternative minimum tax (AMT) credits of $24, $31
and $31 as of December 31, 1994, January 1, 1994 and January 2,
1993, respectively, available to offset future Federal income tax
liabilities. The Company also has targeted jobs tax credit
carryforwards of $9 available as of December 31, 1994, which expire
beginning in 2007.
The approximate tax effects of temporary differences and
carryforwards that give rise to the deferred tax liability are as
follows:
December 31, January 1,
1994 1994
Accrued liabilities. . . . . . . . . $(169) $(222)
Postretirement benefits. . . . . . . (56) (56)
Insurance reserves . . . . . . . . . (61) -
Other deferred tax assets. . . . . . (23) (27)
Total deferred tax assets . . . . . (309) (305)
Prepaid pension contribution . . . . 128 121
Direct response and insurance
acquisition costs . . . . . . . . . 127 114
Property, plants and equipment . . . 133 133
Other deferred tax liabilities . . . 47 68
Total deferred tax liabilities. . . 435 436
AMT and other credit carryforwards . (36) (31)
Valuation allowance. . . . . . . . . 32 27
Net deferred tax liability. . . . . $ 122 $ 127
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
8. Income Taxes (continued)
Income tax expense consists of:
52-Week 53-Week
Period Ended Period Ended
Dec. 31, Jan. 1, Jan. 2,
1994 1994 1993
Federal
Currently payable . . . .$25 $28 $15
Deferred. . . . . . . . . 29 25 32
State, local
and foreign . . . . . . . 8 6 3
Total income
tax expense . . . . . . .$62 $59 $50
A reconciliation of the statutory to effective federal income tax
rate is as follows:
52-Week 53-Week
Period Ended Period Ended
Dec. 31, Jan. 1, Jan. 2,
1994 1994 1993
Federal income
tax rate. . . . . . . . .35% 35% 34%
State taxes, net
of reduction of
Federal tax . . . . . . . 3 2 1
Targeted Jobs
Tax Credit. . . . . . . .(3) (1) (2)
Impact of increase
in statutory rate . . . . - 1 -
Permanent differences. . (1) - -
Effective income
tax rate. . . . . . . . 34% 37% 33%
Permanent differences include the 1994 settlement of income tax
assessments for the taxable years ending December 31, 1988 through
December 29, 1990. Montgomery Ward had previously provided for
these assessments and the related deferred income taxes were
adjusted in 1994 to reflect the impact of this settlement.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
9. Deferred Service Contract Revenue
The Company sells product service contracts on its own behalf,
and beginning in 1994, on behalf of Virginia Surety Company, Inc.
(VSC). The Company recognizes the revenue related to sales of
Montgomery Ward service contracts in proportion to the costs
expected to be incurred in performing services under the contracts.
Deferred service contract revenue of $231 and $239 at December 31,
1994 and January 1, 1994, respectively, is included in Accrued
liabilities and other obligations. The Company recognizes the
revenue, net of the fixed payment due to VSC on sales of VSC
contracts at time of the sale. VSC insured contracts comprised 17%
of sales of service contracts to Montgomery Ward customers in 1994.
Montgomery Ward has contracted with VSC to provide repair services
to VSC.
10. Insurance Policy Claim Reserves
The Company's insurance subsidiaries are involved in both the
cession and assumption of reinsurance with other companies. Risks
are reinsured with other companies to permit the recovery of a
portion of the direct losses. Policy related liabilities and
accruals, including incurred but not reported claims, are included
in the financial statements as Insurance policy claim reserves, and
reinsurance ceded is reflected as a component of Other assets. The
Company remains liable to the extent the reinsuring companies
cannot meet their obligations under these reinsurance treaties.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
10. Insurance Policy Claim Reserves (continued)
Premium revenues, which are included in Direct response marketing
revenues, are as follows:
Percentage
Ceded To Assumed of Amount
Gross Other from Other Net Assumed
Amount Companies Companies Amount To Net
52-Week Period
Ended Decem-
ber 31, 1994:
Life insurance
in force . .$5,729 $ 93 $ - $5,636 0.0%
Premiums
Life
insurance .$ 50 $ 1 $ 3 $ 52 5.8%
Accident and
health
insurance . . 76 - 11 87 12.6%
Property and
liability
insurance . 62 9 - 53 0.0%
Total. . .$ 188 $ 10 $ 14 $ 192 7.3%
52-Week Period
Ended Janu-
ary 1, 1994:
Life insurance
in force . .$5,438 $102 $ - $5,336 0.0%
Premiums
Life
insurance .$ 45 $ 1 $ 3 $ 47 6.4%
Accident and
health
insurance . . 67 - 13 80 16.3%
Property and
liability
insurance . 51 8 - 43 0.0%
Total. . .$ 163 $ 9 $16 $ 170 9.4%
53-Week Period
Ended Janu-
ary 2, 1993:
Life
insurance
in force . .$5,325 $114 $ - $5,211 0.0%
Premiums
Life
insurance .$ 45 $ 1 $ 3 $ 47 6.4%
Accident and
health
insurance . . 66 - 16 82 19.5%
Property and
liability
insurance . 49 8 - 41 0.0%
Total. . .$ 160 $ 9 $19 $ 170 11.2%
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
11. Short-Term and Long-Term Debt
The long-term debt of Montgomery Ward and its subsidiaries is as
follows:
December 31, January 1,
1994 1994
Montgomery Ward
Note Purchase Agreements; Senior Notes
Series A to Series G due in 1998
to 2005 at 7.07% to 8.18% interest
rates. . . . . . . . . . . . . . . . . . $100 $100
Economic Development Revenue Bonds,
due in 1994 at 9.5% interest rate. . . . . - 5
Commercial Development Revenue Bonds,
due in 2013 at 4.15% interest rate,
adjusted at three-year intervals . . . . 5 5
Other . . . . . . . . . . . . . . . . . . . 2 2
Montgomery Ward Real Estate Subsidiaries
4 3/4% Secured Notes, due serially
to January 15, 1995. . . . . . . . . . . . 1 2
11 1/2% Secured Note, due serially
to September 1, 2001 . . . . . . . . . . 15 17
7 1/2% Secured Note, due serially
to November 30, 2002 . . . . . . . . . . . 6 7
9.45% Secured Notes, due serially
to November 30, 2003 . . . . . . . . . . . 18 19
7 3/4% Secured Notes, due serially
to August 31, 2004 . . . . . . . . . . . . 20 22
7 7/8% Secured Notes, due serially
to December 15, 2005 . . . . . . . . . . . 9 10
9% Secured Notes, due serially to
January 1, 2006. . . . . . . . . . . . . . 13 14
Other . . . . . . . . . . . . . . . . . . . 10 10
Lechmere
9.65% Secured Mortgage Notes, due
October 31, 1996 . . . . . . . . . . . . . 24 -
Other . . . . . . . . . . . . . . . . . . . 5 -
Total long-term debt. . . . . . . . . .$228 $213
The amounts of long-term debt that become due during the fiscal
years 1995 through 1999 are as follows: 1995--$8, 1996--$33,
1997--$10, 1998--$20 and 1999--$10.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
11. Short-Term and Long-Term Debt (continued)
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 December 31, 1994, no borrowings were 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 December
31, 1994, $144 was outstanding under the Short Term Agreement.
Proceeds from borrowings under the Long Term Agreement and the
Short Term Agreement (collectively, the Agreements) were used to
pay all borrowings outstanding under an Amended and Restated Credit
Agreement dated as of September 22, 1992, a Short Term Credit
Agreement dated as of September 22, 1992 and a Term Loan Agreement
dated as of November 24, 1993 and the agreements were terminated.
Under 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 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. The weighted average interest rate paid under the Agreements
was 4.9% for 1994.
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 $100 in 1994, $175 in 1995 through 1997 and
$75 in 1998 through 1999. Under the terms of the interest rate
exchange agreements, Montgomery Ward pays the banks a weighted
average fixed rate of 7.2% in 1994, 7.4% from 1995 through 1997 and
7.6% from 1998 through 1999 and will receive the one-month daily
average London Interbank Offered (LIBO) rate in each case
multiplied by the notional principal amount. The average aggregate
notional principal amounts under the various cap agreements is $63
in the fourth quarter of 1994, $154 in 1995, $158 in 1996 and $113
in 1997. Under the terms of the cap agreements, Montgomery Ward
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
11. Short-Term and Long-Term Debt (continued)
receives payments from the banks when the one-month daily average
LIBO rate exceeds the 5.0% cap strike in 1994, 5.5% cap strike
rate
in 1995, 6% cap strike rate in 1996 and 7.0% cap strike rate in
1997. Such payments will equal the amount determined by
multiplying the notional principal amount by the percentage, if
any, by which the one-month daily average LIBO rate exceeds 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 fair
market value of the exchange and cap agreements at December 31,
1994 was $11. Fair value is estimated based upon the amount that
Montgomery Ward would receive or pay to terminate the agreements
as of the reporting date, utilizing quoted prices for comparable
contracts.
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. The Montgomery
Ward Preferred discussed in Note 13 constitutes Debt-Like Preferred
Stock for purposes of the dividend restrictions under the
Agreements. At December 31, 1994, Montgomery Ward could pay
dividends and make other distributions to the Company of $124
pursuant to the terms of the Agreements. To date, Montgomery Ward
has been in compliance with all such financial tests.
Montgomery Ward has outstanding Commercial Development Revenue
Bonds, which are adjusted to the market rate of interest at
three-year intervals. The rate was adjusted to 4.15% in 1992.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
11. Short-Term and Long-Term Debt (continued)
The Secured Notes of the real estate subsidiaries and the secured
Mortgage Notes of Lechmere are secured by mortgage liens and/or
assignments of rental agreements whereby the real estate
subsidiaries have assigned to trustees certain monies payable under
leases with Montgomery Ward. At December 31, 1994, assets with a
net book value of approximately $228 represented collateral for
certain of these secured notes.
The market value of the Company's long-term debt of $212 is
estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of
borrowing arrangements.
12. Leases
The Company leases real and personal property principally through
noncancelable capital and operating leases, which generally provide
for the payment of minimum rentals and, in certain instances,
executory costs and additional rentals based upon a percentage of
sales. The terms of the real estate leases typically contain
renewal options for additional periods.
At December 31, 1994, the minimum lease payments under all
noncancelable operating leases with an initial term of more than
one year, not including $17 of future sublease rentals, and under
capital leases are as follows:
Capital Operating
Leases Leases
1995 . . . . . . . . . . . . . . . . . . . .$ 15 $113
1996 . . . . . . . . . . . . . . . . . . . . 14 105
1997 . . . . . . . . . . . . . . . . . . . . 13 95
1998 . . . . . . . . . . . . . . . . . . . . 13 87
1999 . . . . . . . . . . . . . . . . . . . . 12 79
Later Years. . . . . . . . . . . . . . . . . 57 807
Total Minimum Lease Payments. . . . . . . .$124 $1,286
Less Executory Costs, principally
real estate taxes to be paid
by the lessor . . . . . . . . . . . . . . . (5)
Less Imputed Interest. . . . . . . . . . . .(38)
Present Value of Net Minimum
Capital Lease Payments
Including Portion due within
one year of $7 . . . . . . . . . . . . . .$ 81
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
12. Leases (continued)
Net rent expense charged to earnings was $130 for 1994, $104 for
1993 and $101 for 1992 after deducting rentals from subleases of
$9 in 1994, $9 in 1993 and $10 in 1992. Rent expense includes
contingent lease rentals for capital and operating leases of $13
for 1994, $11 for 1993 and $11 for 1992. These contingent lease
rentals are generally based on sales revenues.
Some rental agreements contain escalation provisions that may
require higher future rent payments. Rent expense incurred under
rental agreements which contain escalation clauses is recognized on
a straight-line basis over the life of the lease.
13. Redeemable Preferred Stock
Effective September 30, 1992, Montgomery Ward declared a dividend
payable to the Company and the Company redeemed all of its
outstanding shares of Preferred Stock, including 500 shares of
Senior Preferred Stock, par value $1.00 per share, and 400 shares
of Junior Preferred Stock, par value $1.00 per share, all of which
were held by GE Capital. The aggregate redemption prices for the
Senior Preferred Stock and the Junior Preferred Stock were $50 and
$40, respectively, and accrued dividends thereon were $3.
Dividends had been paid quarterly at an annual rate of $11,500 per
share and $12,000 per share for the Senior Preferred Stock and
Junior Preferred Stock, respectively.
On April 27, 1994, the Company's Certificate of Incorporation was
amended to authorize the issuance of a new series of senior
preferred stock (Senior Preferred Stock). On that date, the
Company issued all of the 750 shares of Senior Preferred Stock
authorized by the Certificate of Incorporation to General Electric
Capital Corporation 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.
Dividends on the Senior Preferred Stock are payable quarterly at
an annual rate of $4,850 per share. The Company is required to
redeem all or any portion of the Senior Preferred Stock upon four
months' written notice by the holders on or after April 28, 1999.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions, except per share amounts)
14. Common Stock
The Company has the following authorized classes of common stock:
Class A Common Stock, Series 1; $.01 par value; 25,000,000
shares authorized; 19,074,118 shares issued and outstanding,
net of 5,925,882 shares held in treasury.
Class A Common Stock, Series 2; $.01 par value; 5,412,000
shares authorized; 206,364 shares issued and outstanding, net
of 678,982 shares held in treasury.
Class A Common Stock, Series 3; $.01 par value; 2,400,000
shares authorized; no shares issued or outstanding.
Class B Common Stock; $.01 par value; 25,000,000 shares
authorized, issued and outstanding; all owned by GE Capital.
The Company has repurchased 4,187,550 shares held by certain
former officers of the Company, Montgomery Ward and Signature and
their permitted transferees by making cash payments and issuing
installment notes in the aggregate of approximately $62. As of
December 31, 1994, the outstanding balance of these notes was $26.
These installment notes bear interest at varying rates, are payable
over multi-year periods (generally three to five years) and are
secured by shares of Common Stock, the fair market value of which
is equal to the outstanding principal amount under each note. The
notes are classified as Accrued liabilities and other obligations.
Under all of the Agreements, Montgomery Ward expects to be able to
advance the Company sufficient funds to allow the Company to make
the required installment payments in 1995.
Each share of Class B Common Stock entitles the holder thereof
to one vote. All shares of Class A Common Stock entitle the
holders to a total of 25,000,000 votes, or one vote per share if
the total number of Class A shares issued and outstanding is less
than 25,000,000.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions, except per share amounts)
14. Common Stock (continued)
Net income per common share is computed as follows:
52-Week Period Ended
December 31, 1994
Class A Class B
Earnings available for Common Share-
holders, after deducting preferred
stock dividend requirements. . . . . $57 $58
Weighted average number of common
and common equivalent shares
(stock options) outstanding. . . . . 21,407,379 25,000,000
Earnings per share . . . . . . . . . . $2.68 $2.30
52-Week Period Ended
January 1, 1994
Class A Class B
Earnings available for Common
Shareholders . . . . . . . . . . . . $50 $51
Weighted average number of common
and common equivalent shares
(stock options) outstanding. . . . . 21,805,203 25,000,000
Earnings per share . . . . . . . . . . $2.29 $2.04
53-Week Period Ended
January 2, 1993
Class A Class B
Earnings available for Common Share-
holders, after deducting preferred
stock dividend requirements and
cumulative effect of changes in
accounting principles. . . . . . . . $26 $26
Weighted average number of common
and common equivalent shares
(stock options) outstanding. . . . . 22,537,539 25,000,000
Earnings per share . . . . . . . . . . $1.13 $1.05
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions, except per share amounts)
15. Stock Ownership Plan
The Montgomery Ward & Co., Incorporated Stock Ownership Plan was
adopted effective July 19, 1988. A total of 1,000,000 Class A
Common Stock, Series 1, 5,412,000 shares of Class A Common Stock,
Series 2, and 2,000,000 shares of Class A Common Stock, Series 3,
have been reserved for issuance under the plan. Key associates of
Montgomery Ward and its subsidiaries are eligible to participate
and may receive awards, purchase rights and options. Awards are
grants of shares for no consideration. Options for 2,926,286 and
1,484,302 of Class A Common Stock, Series 2 shares were exercisable
at December 31, 1994 and January 1, 1994, respectively.
Following is a summary of activity under the plan.
Option Price
Options Range
Outstanding December 28, 1991 . . . . 2,944,967 $0.20-$14.79
Granted, 1992 . . . . . . . . . . . . 1,377,478 $15.11-$18.75
Exercised, 1992 . . . . . . . . . . . (256,367) $0.20-$15.11
Cancellations, 1992 . . . . . . . . . (469,170) $0.20-$18.75
Outstanding January 2, 1993 . . . . . 3,596,908 $0.20-$18.75
Granted, 1993 . . . . . . . . . . . . 1,979,105 $18.75-$22.50
Exercised, 1993 . . . . . . . . . . . (192,864) $0.20-$18.75
Cancellations, 1993 . . . . . . . . . (520,083) $0.20-$22.50
Outstanding January 1, 1994 . . . . . 4,863,066 $0.20-$22.50
Granted, 1994 . . . . . . . . . . . . 2,010,236 $12.50-$26.50
Exercised, 1994 . . . . . . . . . . . (297,415) $0.20-$22.50
Cancellations, 1994 . . . . . . . . . (890,285) $0.20-$26.50
Outstanding, December 31, 1994. . . . 5,685,602 $0.20-$26.50
During 1991, the Board of Directors approved the Directors Plan.
The Directors Plan was established to, among other things, allow
outside directors to receive all or any portion of the fees for
their services as directors of the Company and Montgomery Ward via
conversion rights in Series 1 or Series 2 shares. In 1994, 1993
and 1992, 2,489, 3,466 and 3,332 Series 1 shares were issued from
treasury as payment for directors fees, respectively.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
16. Benefits and Losses
Operating, selling, general and administrative expenses include
benefits and losses related to direct response marketing operations
of $102, $93 and $97 for the 52-week periods ended December 31,
1994 and January 1, 1994 and the 53-week period ended January 2,
1993, respectively.
17. Interest Expense, Net of Investment Income
Net interest expense is as follows:
52-Week 53-Week
Period Ended Period Ended
Dec. 31, Jan. 1, Jan. 2,
1994 1994 1993
Interest on short-term
borrowings. . . . . . . . .$19 $ 12 $ 4
Interest on long-term
debt and obligations
under capital leases. . . . 30 24 41
Miscellaneous interest,
net . . . . . . . . . . . . 11 8 6
Investment income. . . . . (2) (1) (6)
Total interest expense,
net of investment
income. . . . . . . . . . .$58 $43 $45
18. Litigation and Other Proceedings
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.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions, except per share amounts)
19. Related Party Transactions
Substantially all shares of Class A Series 1 and Series 2
Common Stock, except those held by the Chairman and Chief Executive
Officer of the Company and a trust established for the benefit of
his children, are held by a Voting Trust which was created in 1988.
In 1994, a second voting trust was created to hold shares of Class
A Series 3 Common Stock. A Voting Trustee (currently the Chairman
and Chief Executive Officer of the Company) has sole voting power
and control of all shares held by both Voting Trusts. The 1988
Voting Trust will expire June 21, 1998 or upon the occurrence of
certain specified events in accordance with the Voting Trust
Agreement. The 1994 Voting Trust has no expiration date but may
expire upon the occurrence of certain specified events in
accordance with the Voting Trust Agreement.
The Company engages in various transactions with GE Capital as
described in Notes 4, 13 and 14.
In December, 1994, Montgomery Ward signed a letter of intent to
acquire an equity interest in ValueVision International, Inc.
(ValueVision). ValueVision provides television programming within
the emerging home shopping industry. Under the proposed agreement,
Montgomery Ward will purchase 1,280,000 unregistered shares of
common stock of ValueVision at $6.25 per share, which represents
approximately 4.7% of the issued and outstanding shares of common
stock of ValueVision. Montgomery Ward will also receive warrants
to purchase an additional 25 million shares of common stock of
ValueVision with exercise prices ranging from $6.50 to $17.00 per
share, with an average exercise price of $9.16 per share. The
warrants vest over time, subject to the vesting termination and
acceleration provisions in the agreement.
In July, 1994, Montgomery Ward, through a subsidiary, became a
limited partner in Merchant Partners Limited Partnership. The
purpose of this partnership is to invest in new and emerging growth
businesses and leveraged buy-outs to achieve a superior rate of
return. Montgomery Ward made a capital contribution of $1 in
1994. Per the terms of the agreement, additional funding may be
required within limitations set forth in the agreement. The
cumulative maximum capital contribution is $40.
In October 1991, the Company entered into a joint venture, MW
Direct L.P. (MW Direct), formed through a partnership between
subsidiaries of Montgomery Ward and subsidiaries of Fingerhut
Companies, Inc., a Minneapolis-based specialty catalog marketer.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
19. Related Party Transactions (continued)
Montgomery Ward made a $5 initial capital contribution in 1992.
Per the terms of the agreement, no further capital contributions
are required.
Montgomery Ward paid on behalf of those associates and past
associates of Montgomery Ward and certain of its subsidiaries who
purchased stock in the Company in 1988, the legal fees and related
costs and expenses in connection with certain deficiencies in tax
assessed by the Internal Revenue Service, and certain Tax Court
cases. All assessments were settled in 1994. Montgomery Ward paid
approximately $4 in 1993 and $1 in 1992 for services rendered in
connection with the aforementioned matters.
In November 1991, the Board of Directors approved a line of
credit program for certain associates, including directors who are
associates and executive officers of the Company (Line of Credit
Program). Under the Line of Credit Program, the Company arranged
with banks (Program Banks) for lines of credit of up to $10 in the
aggregate for all participants in the Line of Credit Program. As
of December 31, 1994, an aggregate of $5 was available under the
Line of Credit Program. Any associate who borrows money from the
Program Banks under the Line of Credit Program is required to
pledge to such Program Banks as collateral a number of shares owned
by such associate, the fair market value of which is equal to twice
the amount the associate borrows. In the event any associate
should default upon his or her repayment obligations, the Company
anticipates that it will repurchase that individual's note from the
Program Banks, together with the Banks' security interest in the
pledged stock, at the face amount of the note plus up to one year's
interest. At December 31, 1994, the borrowings outstanding under
the Line of Credit Program were less than $1.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
20. Business Segments
Montgomery Ward and its subsidiaries are engaged in retail
merchandising and direct response marketing, including insurance,
in the United States. Following is information regarding revenues,
earnings and assets of the Company by segment.
52-Week 53-Week
Period Ended Period Ended
Dec. 31, Jan. 1, Jan. 2,
1994 1994 1993
Total Revenues
Retail Merchandising. . $6,573 $5,629 $5,427
Direct Response
Marketing. . . . . . . 465 400 379
Total . . . . . . . . $7,038 $6,029 $5,806
Operating Earnings
Retail Merchandising. . $ 208 $ 171 $ 198
Direct Response
Marketing. . . . . . . . 60 54 52
Corporate and Other . . (89) (65) (100)
Total. . . . . . . . . $ 179 $ 160 $ 150
Identifiable Assets
Retail Merchandising. . $3,317 $ 2,627 $2,391
Direct Response
Marketing. . . . . . . . 789 753 702
Corporate and Other. . 434 455 392
Total . . . . . . . . $4,540 $3,835 $3,485
Depreciation and
Amortization
Retail Merchandising. . $ 105 $ 95 $ 94
Direct Response
Marketing. . . . . . . 4 3 3
Total . . . . . . . . $ 109 $ 98 $ 97
Capital Expenditures
Retail Merchandising. . $ 180 $ 139 $ 141
Direct Response
Marketing. . . . . . . 4 3 5
Total . . . . . . . . $ 184 $ 142 $ 146
Under the laws and regulations applicable to insurance companies,
certain subsidiaries of Signature are limited in the amount of
dividends they may pay without the approval of the Illinois
Insurance Department and are prohibited from making any loans and
advances to Montgomery Ward and its affiliates. Under these laws,
the restricted subsidiaries, which had aggregate retained earnings
of $141, and aggregate total shareholders equity of $192, can pay
dividends of $41 during 1995 subject to the availability of earned
surplus as determined on a statutory basis. Dividends received
from insurance subsidiaries were $22, $35 and $27 for 1994, 1993
and 1992. <PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
21. Parent Company Financial Information
Following is the MW Holding balance sheet as of December 31, 1994
and January 1, 1994 and the statements of income and cash flows for
the 52-week periods ended December 31, 1994 and January 1, 1994 and
the 53-week period ended January 2, 1993.
MONTGOMERY WARD HOLDING CORP.
BALANCE SHEET
ASSETS
December 31, January 1,
1994 1994
Federal Income Taxes Receivable . . . . . .$ 4 $ 4
Investment in Montgomery Ward . . . . . . . 766 671
Redeemable Preferred Stock of
Montgomery Ward. . . . . . . . . . . . . . 75 -
Total Assets . . . . . . . . . . . . . . .$845 $675
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts Payable to Montgomery Ward . . . .$ 57 $ 35
Accrued Liabilities . . . . . . . . . . . . 26 33
Total Liabilities. . . . . . . . . . . . . 83 68
Redeemable Preferred Stock. . . . . . . . . 75 -
Common Stock. . . . . . . . . . . . . . . - -
Capital in excess of par value. . . . . . . 23 19
Retained Earnings . . . . . . . . . . . . . 751 658
Unrealized gain on marketable equity
securities . . . . . . . . . . . . . . . . 2 3
Less: Treasury stock, at cost. . . . . . .(89) (73)
Total Shareholders' Equity . . . . . . . . 687 607
Total Liabilities and
Shareholders' Equity . . . . . . . . . . .$845 $675
STATEMENT OF INCOME
52-Week 53-Week
Period Ended Period Ended
Dec. 31, Jan. 1, Jan. 2,
1994 1994 1993
Miscellaneous Costs . . . .$(2) $(1) $(2)
Total Costs and
Expenses. . . . . . . . . (2) (1) (2)
Tax Benefits. . . . . . . . - - -
Net Loss Before
Earnings of
Montgomery Ward. . . . . . (2) (1) (2)
Equity in Net Income
of Montgomery Ward,
net of cumulative
effect of
accounting changes . . . . 119 102 62
Net Income. . . . . . . . . 117 101 60
Preferred Stock Dividend
Requirements . . . . . . . 2 - 8
Net Income Available
for Common
Shareholders . . . . . . .$115 $101 $ 52
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions)
21. Parent Company Financial Information (continued)
STATEMENT OF CASH FLOWS
December 31, January 1, January 2,
1994 1994 1993
Net Income. . . . . . . . . .$117 $101 $ 60
Adjustments to reconcile
net income to net cash
provided:
Change in undis-
tributed earnings
of subsidiary . . . . . .(96) (79) 48
Decrease (increase) in:
Federal income taxes
receivable . . . . . . . - - (1)
Other assets. . . . . . . - 1 -
Increase (decrease) in:
Accounts payable to
Montgomery Ward. . . . . 22 12 10
Accrued liabilities . . (14) (4) (4)
Net cash provided
before financing
activities . . . . . . . . (29) 31 113
Cash flows from financing
activities:
Proceeds from issuance
of common stock . . . . . 3 1 1
Proceeds from issuance
of preferred stock. . . . 75 - -
Purchase of Montgomery
Ward preferred
stock. . . . . . . . . . .(75) - -
Cash dividends paid . . . .(24) (23) (19)
Payments to redeem
preferred stock . . . . . - - (90)
Purchase of treasury
stock, at cost. . . . . . (9) (11) (7)
Tax benefit of stock
options exercise
and other stock
exchanges . . . . . . . 1 2 2
Net cash used for
financing activities . . . (29) (31) (113)
Cash at end of period . . . $ - $ - $ -
Non-cash investing
activities:
Change in unrealized
gain on investments . . . $ (1) $ - $ 1
Non-cash financing
activities:
Notes issued for
purchase of
treasury stock. . . . . . $ 7 $ 16 $ 5
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in millions, except per share amounts)
22. Quarterly Financial Data (unaudited)
The quarterly operations of MW Holding are summarized as follows:
Quarter
First Second Third Fourth Year
52-Week Period Ended
December 31, 1994
Net sales. . . . . . .$1,216 $1,520 $1,574 $2,263 $6,573
Cost of goods sold . . . 930 1,183 1,234 1,742 5,089
Net Income . . . . . . . .10 28 15 64 117
Net Income per Class A
Common Share. . . . . .23 .62 .33 1.51 2.68
Net Income per Class B
Common Share. . . . . .20 .53 .29 1.28 2.30
52-Week Period Ended
January 1, 1994
Net sales. . . . . . .$1,160 $1,283 $1,327 $1,859 $5,629
Cost of goods sold . 876 963 1,009 1,408 4,256
Net Income . . . . . 10 27 14 50 101
Net Income per Class A
Common Share. . . . .21 .61 .33 1.16 2.29
Net Income per Class B
Common Share. . . . .19 .56 .29 1.01 2.04
<PAGE>
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF INCOME
(Millions of dollars, except per share amounts)
For the 13-Week
Period Ended
September 30, October 1,
1995 1994
Revenues
Net sales, including leased and licensed
department sales . . . . . . . . . . . . . . $1,562 $1,571
Direct response marketing revenues,
including insurance. . . . . . . . . . . . . . .142 119
Total Revenue. . . . . . . . . . . . . . . . . .1,704 1,690
Costs and Expenses
Cost of goods sold, including net occupancy
and buying expense . . . . . . . . . . . . . .1,240 1,235
Operating, selling, general and
administrative expenses, including
benefits and losses of direct response
operations. 435 416
Interest expense, net of investment
income . . . . . . . . . . . . . . . . . . . 24 16
Total Costs and Expenses . . . . . . . . . 1,699 1,667
Income Before Income Taxes . . . . . . . . . . . . .5 23
Income Tax Expense . . . . . . . . . . . . . 2 8
Net Income . . . . . . . . . . . . . . . . . . . . .3 15
Preferred Stock Dividend Requirements. . . . . 1 1
Net Income Applicable to
Common Shareholders . . . . . . . . . . . . . .$ 2 $ 14
Net Income per Common Share
Class A . . . . . . . . . . . . . . . . . . . $ .05 $ .33
Class B . . . . . . . . . . . . . . . . . . . $ .04 $ .29
See notes to consolidated condensed financial statements.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF INCOME
(Millions of dollars, except per share amounts)
For the 39-Week
Period Ended
September 30, October1,
1995 1994
Revenues
Net sales, including leased and licensed
department sales . . . . . . . . . . . . . . $4,439 $4,305
Direct response marketing revenues,
including insurance. . . . . . . . . . . . . 407 339
Total Revenues . . . . . . . . . . . . . . . 4,846 4,644
Costs and Expenses
Cost of goods sold, including net occupancy
and buying expense . . . . . . . . . . . . . . 3,528 3,350
Operating, selling, general and
administrative expenses, including
benefits and losses of direct
response operations. . . . . . . . . . . . . . 1,237 1,174
Interest expense, net of investment
income . . . . . . . . . . . . . . . . . . . 67 41
Total Costs and Expenses . . . . . . . . . 4,832 4,565
Income Before Income Taxes . . . . . . . . . . . . 14 79
Income Tax Expense . . . . . . . . . . . . . . 4 26
Net Income . . . . . . . . . . . . . . . . . . . . 10 53
Preferred Stock Dividend Requirements. . . . . 3 2
Net Income Applicable to
Common Shareholders . . . . . . . . . . . . . . . $7 $51
Net Income per Common Share
Class A . . . . .$ .17 $ 1.18
Class B . . . . . . . . . . . . . . . . . . . .$ .14 $ 1.02
Cash Dividends Declared Per Common Share
Class A . . . . . $ - $ .50
Class B . . . . . $ - $ .50
See notes to consolidated condensed financial statements.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED CONDENSED BALANCE SHEET
(Millions of dollars)
ASSETS
September 30, December 31,
1995 1994
Cash and cash equivalents. . . . . . . . . $ 43 $ 33
Short-term investments . . . . . . . . . . . . . . 3 3
Investments of insurance operations. . . . . . . .
Total Cash and Investments . . . . . . . . . . 395 350
Trade and other accounts receivable. . . . . . . 136 112
Accounts and notes receivable from affiliates 20 6
Total Receivables
Merchandise inventories. . . . . . . . . . . . 1,794 1,625
Prepaid pension contribution . . . . . . . . . . 329 324
Properties, plants and equipment, net of
accumulated depreciation and amortization. . . . .1,374 1,396
Direct response and insurance acquisition costs. 359 322
Other assets . . . . . . . . . . . . . . . . 472 402
Total Assets . . . . . . . . . . . . . . . . $4,879 $4,537
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings. . . . . . . . . . . . $ 670 $ 144
Trade accounts payable 1,486 1,719
Accrued liabilities and other obligations. . . 1,090 1,231
Federal income taxes payable . . . . . . . . . . . 5 14
Insurance policy claim reserves. . . . . . . . 238 236
Long-term debt . . . . . . . . . . . . . . . . . 427 228
Obligations under capital leases . . . . . . . . 68 81
Deferred federal income taxes. . . . . . . . . . 121 122
Total Liabilities. . . . . . . . . . . . . 4,105 3,775
Redeemable Preferred Stock . . . . . . . . . . . 75 75
Shareholders' Equity
Common stock. . . . . . . . . . . . . . . . . . . - -
Capital in excess of par value. . . . . . . . . 27 23
Retained earnings . . . . . . . . . . . . . . . 758 751
Unrealized gain on marketable equity securities 10 2
Less: Treasury stock, at cost. . . . . . (96) (89)
Total Shareholders' Equity . . . . . . . 699 687
Total Liabilities and Shareholders' Equity. $4,879 $4,537
See notes to consolidated condensed financial statements.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)
For the 39-Week
Period Ended
September 30, October 1,
1995 1994
Cash flows from operating activities:
Net income $ 10. . $ 53
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization. . . . . . . . 93 78
Deferred income taxes. . . . . . . . . . . . (5) 10
Gain on sales/retirements of assets. . . . . . . (10) -
Changes in operating assets and liabilities:
(Increase) decrease in:
Trade and other accounts receivable. . . . . (24) (20)
Accounts and notes receivable from affiliates. . . (14) (10)
Merchandise inventories. . . . . . . . . . . . .
Prepaid pension contribution . . . . . . . . (5) (11)
Other assets . . . . . . . . . . . . . . . . (84) (43)
Increase (decrease) in:
Trade accounts payable . . . . . . . . . . . . . (233) (17)
Federal income taxes payable, net. . . . . . (10) (4)
Accrued liabilities and other obligations (159) (125)
Insurance policy claim reserves. . . . . . 2 (1)
Net cash used in operations . . . . . . . (608) (338)
Cash flows from investing activities:
Acquisition of Lechmere, net of cash acquired . . - (109)
Investment in ValueVision International, Inc. . . . (8) -
Purchase of short-term investments. . . . . . . (14) (183)
Purchase of investments of insurance operations . . .(465) (476)
Sale of short-term investments. . . . . . . . . . 14 177
Sale of investments of insurance operations . . 443 470
Capital expenditures. . . . . . . . . . . . . . (90) (114)
Disposition of properties, plants and equipment, net. .24 1
Sale of assets held for disposition. . - 1
Net cash used for investing activities. (96) (233)
See notes to consolidated condensed financial statements.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)
For the39-Week
Period Ended
September 30, October 1,
1995 1994
Cash flows from financing activities:
Proceeds from short-term borrowings . . . . . 10,529 $6,255
Payments on short-term borrowings . . . . . . (10,003) (5,693)
Proceeds from issuance of long-term debt. . . . 205 166
Payments of Montgomery Ward long-term debt . . (6) (172)
Payments of Lechmere long-term debt . . . . . . . . - (88)
Payments of obligations under capital leases. (5) (6)
Proceeds from issuance of Common Stock. . . . . . . 4 2
Proceeds from issuance of Preferred Stock . . . . . - 75
Cash dividends paid . . . . . . . . . . . . . . . (3) (24)
Purchase of treasury stock, at cost . . . . . . (7) (5)
Net cash provided by financing activities. . . 714 510
Increase (decrease) in cash and cash equivalents . 10 (61)
Cash and cash equivalents at beginning of period . 33 98
Cash and cash equivalents at end of period . . $ 43 $ 37
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes . . . . . . . . . . . . . . . . . $ 22 $ 25
Interest . . . . . . . . . . . . . . . . . . . . $ 61 $ 40
Non-cash financing activity:
Notes issued for purchase of Treasury stock. $ - $ 3
Non-cash investing activity:
Change in unrealized gain on marketable
equity securities $ 8 $ 2
Like-kind exchange of assets. . . . . . . . . $ - $ 4
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 opera-
tions through its only direct subsidiary, Montgomery Ward & Co., Incorporated
(Montgomery Ward). In the opinion of management, the unaudited financial state-
ments 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 per common share is computed as follows:
13-Week Period Ended
September 30, 1995
Class A Class B
Earnings available for Common Shareholders. . $ 1 $ 1
Weighted average number of common and common
equivalent shares (stock options) outstanding. . . . 20,919,243 25,000,000
Earnings per share. . . . . . . . . . . . $ .05 $ . 04
13-Week Period Ended
October 1, 1994
Class A Class B
Earnings available for Common
Shareholders . . . . . . . . . . . . . . . . $ 7 $ 7
Weighted average number of common and common
equivalent shares (stock options) outstanding. . 21,309,266 25,000,000
Earnings per share. . . . . . . . . . . . . . $ .33 $ .29
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
2. Net Income Per Common Share (continued)
39-Week Period Ended
September 30, 1995
Class A Class B
Earnings available for Common Shareholders. . $ 3 $ 4
Weighted average number of common and common
equivalent shares (stock options) outstanding 19,915,677 25,000,000
Earnings per share. . . . . . . . . . . . . . $ .17 $ .14
39-Week Period Ended
October 1, 1994
Class A Class B
Earnings available for Common Shareholders. . $ 25 $ 26
Weighted average number of common and common
equivalent shares (stock options) outstanding.. 21,459,648 25,000,000
Earnings per share. . . . . . . . . . . . . . $ 1.18 $ 1.02
3. Benefits and Losses
Operating, selling, general and administrative expenses include benefits and
losses related to direct response marketing operations of $28 and $26 for the
13-week periods ended September 30, 1995 and October 1, 1994, respectively and
$83 and $78 for the 39-week periods ended September 30, 1995 and October 1,
1994, respectively.
4. Debt Agreements
On July 11, 1995, Montgomery Ward entered into a Note Purchase Agreement
(1995 Note Purchase Agreement) with various lenders involving the private
placement of $180 of Senior Notes which have maturities of from five to ten
years at fixed interest rates varying from 6.52% to 6.98%. Proceeds from the
debt issue were used to pay short-term borrowings incurred to fund the acquisi-
tion of Lechmere.
On September 29, 1995, Montgomery Ward borrowed $25 under a Term Loan
Agreement (Term Loan Agreement) with a bank. The borrowings mature on Sept-
ember 30, 1999. Under the Term Loan Agreement, Montgomery Ward may select among
several interest rate options which are based on market rates.
Borrowings under the 1995 Note Purchase Agreement and the Term Loan Agreement
are subject to various restrictions on Montgomery Ward, including the
satisfaction of certain financial tests which include restrictions on the
payment of dividends. The dividend restrictions under the 1995 Note Purchase
Agreement and the Term Loan Agreement are currently no more restrictive than the
restrictions imposed by the Long Term Credit Agreement and Short Term Credit
Agreement.
<PAGE>
MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Millions of dollars)
5. Subsequent Event
Subsequent to quarter end, Signature Financial/Marketing, Inc. ( Signature
and, together with its subsidiaries, the Signature Group ) and Amoco Oil
Holding Company entered into a letter of intent for the sale of all the out-
standing capital stock of Amoco Enterprises, Inc., operator of the Amoco Motor
Club, to the Signature Group. Signature is a wholly-owned subsidiary of Mont-
gomery Ward & Co., Incorporated, which is, in turn, a wholly-owned subsidiary of
Montgomery Ward Holding Corp. The purchase price is $100 million, subject to
certain specified adjustments based upon the closing balance sheet of Amoco
Enterprises, Inc. The transaction is subject to certain conditions, including
the completion of a due diligence review, the approval of both its Board of
Directors, the receipt of all regulatory and third party approvals, as well as
the execution of a definitive agreement between the two companies.
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 1995 to the third quarter of 1994, as well as the
first nine months of 1995 to the first nine months 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 and the first nine months are not necessarily indicative of the results
for the entire year.
Results of Operations
Third Quarter 1995 Compared with Third Quarter 1994
Net income for the third quarter of 1995 was $3, a decrease of $12 from the
prior year.
Consolidated total revenues (net sales and direct response marketing
revenues, including insurance) were $1,704 compared with $1,690 in 1994. Net
sales decreased $9. Apparel and Domestics sales decreased 6%, while Hardlines
sales increased 3%. Comparable store sales decreased 3%. The Apparel and
Domestics sales decrease includes the impact of Montgomery Ward s decision to
exit the sale of paint and painting supplies in 1995.
Direct response marketing revenues increased $23, or 19%, to $142. The
increase was due to increased insurance revenues of $6, primarily due to
increased policyholders obtained from Montgomery Ward in-store promotions, and
increased club revenues of $17, primarily due to acquisitions as well as
increased marketing efforts.
Gross margin (net sales less cost of goods sold) dollars were $322, a
decrease of $14, or 4%, from the third quarter of last year. The decrease in
gross margin was due to a decrease in the gross margin rate ($10), primarily due
to decreased Hardlines margin rates, and increased occupancy costs ($4). The
occupancy cost increase was primarily due to increased depreciation expense as
a result of 1994 and 1995 capital investments in new and existing stores.
Competitive pressures continue to have a negative impact on margin rates.
Operating, selling, general and administrative expenses increased $19, or
4%, from the prior year. This increase was due to the impact of new store
openings of $9, increased advertising and promotional costs of $10 and increased
operating and other administrative expenses of $5, partially offset by increased
income generated from the sale of product service contracts of $5. In addition,
the Company continued to incur expenditures associated with the integration of
Lechmere's operations, stores and merchandise information systems.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations (continued)
Third Quarter 1995 Compared with Third Quarter 1994 (continued)
Net interest expense increased $8, or 50%, from the prior year due to
increased borrowings (as more fully described in the Discussion of Financial
Condition), as well as increased interest rates.
First Nine Months of 1995 Compared with First Nine Months of 1994
Consolidated net income was $10, a decrease of $43 from the prior year. Net
income for 1995 includes a first quarter loss from operations of Lechmere.
Lechmere was acquired on March 30, 1994, therefore 1994 results exclude
Lechmere s first quarter 1994 results. In addition, the prior year results
include a favorable income tax adjustment of $3.
Consolidated total revenues were $4,846 compared with $4,644 in 1994. Net
sales increased $134, or 3%, of which $192 was attributable to the first quarter
impact of Lechmere, as described above. Excluding Lechmere's first quarter
impact, net sales decreased $58. The decreased sales reflect a 3% decrease in
Apparel and Domestics, which includes the negative impact of exiting the sale of
paint and paint supplies, while Hardlines sales remained even with the prior
year. Sales on a comparable store basis, which reflects only the stores in
operation for both the first nine months of 1995 and 1994, decreased 3%.
Direct response marketing revenues increased $68, or 20%, to $407. The
increase was due to increased insurance revenues of $20, primarily due to
increased policyholders obtained from Montgomery Ward in-store promotions, and
increased club revenues of $48, primarily due to acquisitions as well as
increased marketing efforts. The acquisitions of Smilesaver in April, 1994 and
Credit Card Sentinel in October, 1994 accounted for an increase in revenues of
$8.
Gross margin dollars, including Lechmere, were $911, a decrease of $44, or
5%, from the first nine months of last year. The decrease was due to the
decreased gross margin rate ($61) and increased occupancy costs ($26), partially
offset by the gross margin impact of the increase in sales ($37) and decreased
buying office and other expenses ($6). Continued competitive pressures also had
a negative impact on margin rates. See Third Quarter 1995 Compared with Third
Quarter 1994 for a discussion of the increase in occupancy costs. The 1995
gross margin rate reflects the gross margin results for Lechmere for nine months
while the 1994 rate reflects Lechmere s results for only six months. Lechmere s
emphasis in appliances and electronics, which tend to have lower gross margin
rates, contributed to the decrease in the 1995 gross margin rate.
Operating, selling, general and administrative expenses, including the first
quarter impact of Lechmere, increased $63, or 5%, from the prior year.
Excluding Lechmere's first quarter impact, operating, selling, general and
administrative expenses increased by $29. This increase was due to the impact of
new store openings of $29, increased advertising and promotional costs of $14
and increased operating and other administrative expenses of $8, partially off-
set by the increased income generated from the sales of product service
contracts of $22.
Net interest expense increased $26, or 63%, from the prior year due to
increased borrowings (as more fully described in the Discussion of Financial
Condition), the first quarter impact of higher borrowings due to the Lechmere
acquisition, and increased interest rates.
<PAGE>
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 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 was extended during the third quarter of 1995 and currently
expires on September 6, 2000, provides for a revolving facility in the principal
amount of $603. As of September 30, 1995, $444 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 was extended during the
third quarter of 1995 and currently expires on September 6, 1996, provides for
a revolving facility in the principal amount of $297. As of September 30,
1995, $181 was outstanding under the Short Term Agreement. In addition, $45 was
outstanding under short-term uncommitted bank lines of credit as of
September 30, 1995, which the Company uses to diversify its borrowings when
interest rates under the uncommitted lines are attractive.
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 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% multiplied by the notional principal amount in 1995
and will receive the one-month daily average London Interbank Offered (LIBO)
rate multiplied by the notional principal amount. The average aggregate no-
tional principal amount 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. The interest rate
exchange and cap agreements increased the effective borrowing rate under the
Agreements by .45% for the 39-week period ended October 1, 1995. 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.
On July 11, 1995, Montgomery Ward entered into a Note Purchase Agreement
(1995 Note Purchase Agreement) with various lenders involving the private
placement of $180 of Senior Notes which have maturities of from five to ten
years at fixed interest rates varying from 6.52% to 6.98%. Proceeds from the
debt issue were used to repay short-term borrowings incurred to fund the
Company's acquisition of Lechmere. See Note 4 to the Consolidated Condensed
Financial Statements.
On September 29, 1995, Montgomery Ward borrowed $25 under a Term Loan
Agreement (Term Loan Agreement) with a bank. The borrowings mature on
September 30, 1999. Under the Term Loan Agreement, Montgomery Ward may select
among several interest rate options which are based on market rates. See Note 5
to the Consolidated Condensed Financial Statements.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Discussion of Financial Condition (continued)
The Agreements, the 1993 Note Purchase Agreements, the 1995 Note Purchase
Agreement and the Term Loan Agreement 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 and
the Term Loan Agreement, 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 re-
deem 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 Jan-
uary 1,1994, plus (5) net proceeds received by Montgomery Ward from (a) the
issuance of capital stock including treasury stock but excluding Debt-Like Pre-
ferred 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.
Financing requirements were expected to increase in 1995 due to new store
openings and the Lechmere acquisition. The Company has made, and will continue
to make significant investments in Lechmere's operations, particularly in the
computer systems used by store and buying office associates. However, lower
than expected sales and lower inventory turnover also contributed to the in-
crease in debt levels and interest expense over the prior year. The prior year
debt levels were reduced by a dividend received by Montgomery Ward from Sig-
nature of $15. Signature did not pay a 1995 dividend. Increased short term in-
terest rates also caused an increase in interest expense. Inventory management
initiatives are underway which are intended to reduce working capital and debt
levels by year-end, although management can not assure these initiatives will be
successful.
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 General Electric Capital Corporation and borrowings
under the Agreements.
Capital expenditures during the first nine months of 1995 of $90 were
primarily related to expenditures for the opening of three Electric Avenue &
More stores, the relocation of one Lechmere store and various merchandise fix-
ture and presentation programs. Capital expenditures for the comparable 1994
period were $114.
<PAGE>
