UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
___________
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 29, 1996
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-17540
MONTGOMERY WARD HOLDING CORP.
(Exact Name Of Registrant As Specified In Its charter)
Delaware 36-3571585
(State Of Incorporation) (I.R.S.Employer Identification No.)
Montgomery Ward Plaza, Chicago, Illinois 60671
(Address Of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number Including Area Code:
312/467-2000
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No______
As of July 27, 1996 the Registrant had 18,722,038 shares of
Class A Common Stock and 25,000,000 shares of Class B Common
Stock of the Registrant outstanding.
<PAGE> PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX
Page
Montgomery Ward Holding Corp.
Consolidated Statement of Income............................2
Consolidated Balance Sheet..................................4
Consolidated Statement of Cash Flows........................5
Notes to Consolidated Financial Statements.................7
<PAGE> MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
For the 13-Week
Periods Ended
June 29, July 1,
1996 1995
(Millions, except per share amounts)
Revenues
Net sales, including leased and
licensed department sales............... $ 1,354 $ 1,520
Direct response marketing revenues,
including insurance..................... 180 135
Total Revenues....................... 1,534 1,655
Costs and Expenses
Cost of goods sold, including net
occupancy and buying expense............ 1,210 1,098
Operating, selling, general and
administrative expenses, including
benefits and losses of direct
response operations (Note 3)............ 396 405
Interest expense........................ 25 24
Total Costs and Expenses.............. 1,519 1,639
Income Before Taxes........................ 15 16
Income Tax Expense......................... 4 5
Net Income..................................... 11 11
Preferred Stock Dividend Requirements (Note 4). 3 1
Net Income Applicable to Common Shareholders... $ 8 $ 10
Net Income per Common Share (Note 2)
Class A........................................ $ .20 $ .25
Class B........................................ $ .18 $ .20
Cash dividends per Common Share $ - $ -
See notes to consolidated financial statements.
<PAGE> MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
For the 26-Week
Periods Ended
June 29, July 1,
1996 1995
(Millions, except per share amounts)
Revenues
Net sales, including leased and
licensed department sales............... $ 2607 $ 2,877
Direct response marketing revenues,
including insurance..................... 362 265
Total Revenues........................ 2,969 3,142
Costs and Expenses
Cost of goods sold, including net
occupancy and buying expense............. 2,136 2,286
Operating, selling, general and
administrative expenses, including
benefits and losses of direct
response operations (Note 3)............. 848 804
Interest expense......................... 47 43
Total Costs and Expenses.............. 3,031 3,133
(Loss)/Income Before Taxes................ (62) 9
Income Tax (Benefit)/Expense.............. (25) 2
Net (Loss)/Income......................... (37) 7
Preferred Stock Dividend Requirements (Note 4) 6 2
Net (Loss)/Income Applicable to
Common Shareholders...................... (43) 5
Net (Loss)/Income per Common Share (Note 2)
Class A................................... (1.05) .12
Class B................................... (.90) .10
Cash dividends per Common Share $ - $ -
See notes to consolidated financial statements.
<PAGE> MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED BALANCE SHEET
June December
29, 30,
1996 1995
(Unaudi
ted)
ASSETS
(Millions)
Cash and cash equivalents..................$ 47 $ 37
Short-term investments..................... - 1
Investments of insurance operations........ 315 345
Total Cash and Investments.............. 362 383
Trade and other accounts receivable........ 224 166
Accounts and notes receivable from
affiliates................................. 30 22
Total Receivables....................... 254 188
Merchandise inventories................... 1,580 1,770
Prepaid pension cost........................ 340 335
Prepaid federal income taxes................ 23 -
Properties, plants and equipment, net of
accumulated depreciation and
amortization.............................. 1,327 1,366
Direct response and insurance acquisition
costs..................................... 564 395
Other assets.............................. 521 447
Total Assets.............................. 4,971 4,884
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt........................... 676 160
Trade accounts payable.................... 1,435 1,804
Federal income taxes payable.............. - 6
Accrued liabilities and other
obligations................................ 1,165 1,195
Insurance policy claim
reserves................................... 237 236
Long-term debt ............................ 419 423
Obligations under capital
leases..................................... 63 66
Deferred income
taxes...................................... 160 119
Total Liabilities........................ 4,155 4,009
Commitments and Contingent Liabilities (Note 6)
Redeemable Preferred Stock (Note 4)........ 175 175
Shareholders' Equity
Common stock............................... 1 1
Capital in excess of par value............. 49 45
Retained earnings.......................... 715 758
Unrealized gain on marketable securities... 8 10
Less: Treasury stock, at cost........... (132) (114)
Total Shareholders'Equity......... 641 700
Total Liabilities and Shareholders'Equity..$ 4,971 $ 4,884
See notes to consolidated financial statements.
<PAGE> MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the 26-Week
Periods Ended
June 29, July 1,
(Millions) 1996 1995
Cash flows from operating activities:
Net (Loss)/Income........................ $ (37) $ 7
Adjustments to reconcile net income loss to net cash
provided by (used for) operating activities:
Depreciation and amortization............ 61 59
Amortization of Goodwill................. 5 3
Amortization of Direct response and
insurance acquisition costs ............. 95 68
Deferred income taxes.................... 1 22
Gain on sale of assets................... (3) -
Net loss adjusted for non-cash expenses 122 159
Changes in operating assets and
liabilities:
(Increase) decrease in:
Trade and other accounts receivable..... (33) (3)
Accounts and notes receivable from
affiliates.............................. (8) 6
Merchandise inventories................. 190 42
Prepaid pension cost.................... (5) (4)
Federal income taxes receivable, net.. (28) (22)
Direct response insurance
acquisition costs.......................(140) (93)
Other assets............................ (1) (34)
Increase (decrease) in:
Trade accounts payable.................(372) (500)
Federal income taxes payable, net... - (10)
Accrued liabilities and other
obligations........................... (112) (158)
Insurance policy claim reserves....... 1 4
Net cash used for operations........ (386) (613)
Cash flows from investing activities:
Investment in Merchant Partners....... (3) -
Acquisition of Amoco Enterprises...... (100) -
Purchase of short-term investments.... (20) (18)
Purchase of investments of insurance
operations............................ (335) (261)
Sale of short-term investments........ 21 4
Sale of investments of insurance
operations............................ 358 269
Capital expenditures.................. (29) (47)
Disposition of properties, plants and
equipment, net........................ 10 12
Net cash used for investing activities(98) (41)
See notes to consolidated financial statements.
<PAGE> MONTGOMERY WARD HOLDING CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the 26-Week
Periods Ended
June 29, July 1,
(Millions) 1996 1995
Cash flows from financing activities:
Proceeds from short-term borrowings, net $ 516 $ 675
Payments of Montgomery Ward long-term debt (4) (5)
Payments of obligations under capital leases(3) (3)
Proceeds from issuance of common stock 3 1
Cash dividends paid....................... (6) (2)
Purchase of treasury stock, at cost....... (12) (4)
Net cash provided by financing activities 494 662
Increase in cash and cash equivalents...... 10 8
Cash and cash equivalents at beginning of
period........................... 37 33
Cash and cash equivalents at end of
period.................................... $ 47 41
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Income taxes......................... $ 2 $ 22
Interest............................. $ 48 $ 41
Non-cash investing activity:
Change in unrealized gain on marketable
equity securities.................... $ (1) $ 8
Non-cash financing activity:
Notes issued for purchase of treasury
stock.................................. $ 6 $ -
See notes to consolidated financial statements.
<PAGE> MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
1. Accounting Policies
Basis of Presentation
The Consolidated Balance Sheet as of June 29, 1996 and the
Consolidated Statements of Income for the thirteen- and twenty
six-weeks ended June 29, 1996 and July 1, 1995, and the
Consolidated Statements of Cash Flows for the twenty-six weeks
then ended are unaudited. The interim financial statements
reflect all adjustments (consisting only of normal recurring
accruals) which are, in the opinion of management, necessary
for a fair statement of the results for the interim periods
presented. The interim financial statements should be read in
the context of the financial statements and notes thereto
filed with the Securities and Exchange Commission in MW
Holding's 1995 Annual Report on Form 10-K. Capitalized terms
not otherwise defined herein have the meaning ascribed to such
terms in the 1995 Annual Report on Form 10-K. Certain prior
period amounts have been reclassified to be comparable with
the current period presentation.
Accounting for Long-Lived Assets
Effective December 31, 1995, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The provisions require
a review of long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. If it is determined that
an impairment loss has occurred based on expected undiscounted
future cash flows, the loss will be recognized in the income
statement and certain disclosures will be made regarding the
impairment. There was no financial impact from the adoption
of this statement on the financial statements for the first
half of 1996.
2. Net Income/(Loss) Per Common Share
Net Income/(Loss) per common share is computed as follows:
For the 13 Week
Periods Ended
June 29, 1996 July 1, 1995
Class A Class B Class A Class B
Net Earnings applicable to
Common Shareholders $4 $4 $5 $5
Weighted average number of common
shares outstanding 19,694,993 25,000,000 20,149,005 25,000,000
Net Earnings per share $.20 $.18 $.25 $.20
<PAGE> MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
2. Net Income/(Loss) Per Common Share (continued)
For the 26-Week
Periods Ended
June 29, 1996 July 1, 1995
Class A Class B Class A Class B
(Loss)/Earnings applicable to
Common Shareholders $(20) $(23) $2 $3
Weighted average number of
common shares outstanding 19,230,872 25,000,000 20,246,555 25,000,000
(Loss)/Earnings per share $(1.05) $(.90) $.12 $.10
3. Insurance Benefits and Losses
Operating, selling, general and administrative expenses
include insurance benefits and losses related to direct
response marketing operations of $35 and $29 for the 13-week
periods ended June 29, 1996 and July 1, 1995, respectively,
and $74 and $57 for the 26-week periods then ended. The
increases of $6 and $17, respectively, are due primarily to
the acquisition of the Amoco Motor Club (see Note 5 to the
Consolidated Financial Statements).
4. Preferred Stock
On January 31, 1996, GE Capital exercised the exchange option
contained in the MW Senior Preferred Stock subscription
agreement which allowed an exchange of the MW Senior Preferred
Stock for senior preferred stock of the Company with
substantially the same terms. On March 28, 1996, the
Company's Certificate of Incorporation was amended to
authorize the issuance of a new series of senior preferred
stock (New Senior Preferred Stock). On March 29, 1996, the
Company issued all of the 1,750 shares of New Senior Preferred
Stock to GE Capital in exchange for the 1,750 shares of MW
Senior Preferred Stock held by GE Capital.
Dividends on the New Senior Preferred Stock are payable
quarterly at an annual rate of $7,010 per share. The Company
is required to redeem the New Senior Preferred Stock on June
30, 2002, with the option of redeeming all or any portion
prior to June 30, 2002.
<PAGE> MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
5. Acquisition of Amoco Enterprises, Inc.
On December 31, 1995, Montgomery Ward acquired all of the
outstanding capital stock of Amoco Enterprises, Inc.
(Enterprises), operator of the Amoco Motor Club and a wholly-
owned subsidiary of Amoco Oil Holding Company. The purchase
price was $100. The acquisition was financed through the use
of the majority of the proceeds generated from the issuance of
the MW Senior Preferred Stock. On January 2, 1996, Montgomery
Ward's wholly-owned subsidiary, Signature, purchased
Enterprises from Montgomery Ward for $100.
The acquisition was accounted for as a purchase. The purchase
price has been allocated to Enterprises' net assets based upon
preliminary results of asset valuations and liability and
contingency assessments. Actual adjustments may differ based
on the results of further evaluations of the fair value of the
acquired assets and liabilities. Any differences between
preliminary and actual adjustments are not expected to have a
material impact on the Consolidated Financial Statements.
The preliminary allocation is summarized as follows:
Accounts receivable...................... $ 25
Federal income tax receivable............ 1
Properties, plant & equipment............ 3
Direct response and insurance
acquisition costs....................... 123
Goodwill................................. 67
Other assets............................. 4
Trade accounts payable................... (3)
Accrued liabilities and other
obligations............................. (76)
Deferred income taxes.................... (44)
____
$ 100
6. Commitments and Contingent Liabilities
MW Holding, Montgomery Ward and its subsidiaries are engaged
in various litigation and have a number of unresolved claims.
While the amounts claimed are substantial and the ultimate
liability with respect to such litigation and claims cannot
be determined at this time, management is of the opinion
that such liability, to the extent not provided for through
insurance or otherwise, is not likely to have a material
impact on the financial condition and the results of
operations of the Company.
<PAGE> MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
7. Customer Credit Agreement
A. Effective April 1, 1996, Montgomery Ward entered into
interim agreements with GE Capital and its wholly-owned
subsidiaries Montgomery Ward Credit Corporation
("Montgomery Ward Credit") and Monogram Credit Card Bank of
Georgia ("Monogram") reflecting a prior memorandum of
understanding with GE Capital pursuant to which Monogram is
extending credit to retail customers of Montgomery Ward
under open-ended revolving credit plans on a non recourse
basis.
In the Montgomery Ward memorandum of understanding,
interim agreements provide for the sharing of certain
additional revenues generated by increases in interest
rates and late fee charges to customers with the extension
of credit to the customers made directly by Monogram.
Certain of these additional revenues will be applied to
reduce the obligations of Montgomery Ward for prior losses
incurred under the original Account Purchase Agreement with
Montgomery Ward Credit and Montgomery Ward's obligation to
pay Credit losses in excess of 3.9% of the average
receivable balance up to 5%, and 50% of the losses in
excess of 5% up to 8%, incurred by Monogram under the new
agreements. Except as noted above, the new agreements
together generally impose obligations upon and provide
benefits to Montgomery Ward and GE Capital and its
subsidiaries, Montgomery Ward Credit and Monogram similar
to the prior arrangements under the Account Purchase
Agreement.
The interim agreement provided that if definitive
agreements are not entered into by July 31, 1996 by
Montgomery Ward, Monogram, Montgomery Ward Credit and GE
Capital permanently implementing the changes contemplated
by the memorandum of understanding and interim agreements
for the Montgomery Ward credit customers, Montgomery Ward
credit transactions will revert to the original Account
Purchase Agreement. The date for entering into the
definitive agreement was amended to August 14, 1996 by the
parties.
B. Effective March 13, 1996, Lechmere, Inc., a subsidiary
of Montgomery Ward, entered into interim agreements with GE
Capital and its wholly-owned subsidiaries Montgomery Ward
Credit and Monogram reflecting a prior memorandum of
understanding with GE Capital pursuant to which Monogram is
extending credit to retail customers of Lechmere under open-
end revolving credit plans on a non-recourse basis.
<PAGE> MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
7. Customer Credit Agreement (continued)
The Lechmere memorandum of understanding and interim
agreements provide for a guaranteed Monogram Bank/GE
Capital annual return on its equity of 17.50%. For any
shortfalls, an annual payment would be made by Lechmere.
Any return above 17.50% will be shared equally by Lechmere
and Monogram/GE Capital. For any annual credit losses over
4.25% and less than 8% of the average receivable balance,
Lechmere is responsible for 50% of said losses. It is
envisioned that a similar relationship will be established
for Montgomery Ward's "Electric Ave. & More" credit card
customer receivables. If definitive agreements are not
executed by August 31, 1996, the Lechmere interim
agreements will expire.
C. Pursuant to an agreement dated April 3, 1996, Montgomery
Ward and Lechmere agreed to sell to Montgomery Ward Credit
receivables from certain commercial customers of Montgomery
Ward and Lechmere.
8. Related Party Transactions
A. Montgomery Ward Direct L.P. (MW Direct)
The Company was a partner in a joint venture, MW
Direct, formed through a partnership in 1991 between
subsidiaries of Montgomery Ward and subsidiaries of
Fingerhut Companies, Inc., a Minneapolis, Minnesota
specialty-based catalog merchandiser.
In June of 1996, the subsidiaries of Fingerhut
Companies withdrew from the partnership. Immediately prior
to the withdrawal, the Fingerhut Partners contributed to
the capital of MW Direct cash and all claims that the
Fingerhut subsidiaries had against MW Direct.
Also in June of 1996, the Company and ValueVision
International, Inc. (ValueVision) a Minneapolis, Minnesota
based television home shopping enterprise entered into a
memorandum of understanding, whereby ValueVision would
acquire the assets and assume the liabilities of MW Direct
as part of a restructuring of the marketing agreement
between Montgomery Ward and ValueVision as discussed below.
<PAGE> MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
8. Related Party Transactions (continued)
B. ValueVision International, Inc.
ValueVision and Montgomery Ward & Co., announced an
expansion and restructuring of their ongoing marketing
agreement as well as ValueVision's acquisition of the
assets and assumption of liabilities of Montgomery Ward
Direct, L.P.
ValueVision's sales promotion rights will be expanded
beyond the current television home shopping arena to
include the full use of the Montgomery Ward name,
servicemark, and 10 million-plus active credit card file
for direct mail catalogs and ancillary promotions. The new
agreement also extends to the Lechmere name and customer
file, acquired by Montgomery Ward in 1994 when it purchased
the New England-based electronics and appliance retailer.
ValueVision will issue to Montgomery Ward warrants to
purchase 3.0 million shares of ValueVision common stock at
an exercise price of $0.01 per share. The new warrants
will replace 18,000,000 unvested warrants from an earlier
grant of 25,000,000 ValueVision warrants exercisable at
prices ranging from $7.00-$17.00. ValueVision will also
issue to Merchant Partners L.P. (Merchant Partners)
warrants to purchase 0.2 million shares of ValueVision
common stock at an exercise price of $0.01 per share.
Montgomery Ward is a limited partner in Merchant Partners.
The earlier warrant program had been subject to
certain vesting conditions and termination rights which do
not apply to the replacement grant. Under the new
agreements, Montgomery Ward's potential ownership of
ValueVision, on a fully diluted basis, following the
exercise of all warrants would be 26%.
Subject to the completion of due diligence, definitive
agreements are expected to be signed in the Third Quarter
of 1996 with consolidation of the Montgomery Ward Direct
business in ValueVision's operations expected to begin
immediately thereafter.
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 second quarter of 1996 to the
second quarter of 1995, as well as the first six months of
1996 to the first six months of 1995. All dollar amounts
referred to in this discussi1on 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 six
months are not necessarily indicative of the results for the
entire year.
<PAGE> MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
Results of Operations (continued)
Second Quarter 1996 Compared with Second Quarter 1995
Consolidated total revenues (net sales and direct response
marketing revenues, including insurance) were $1,534 in 1996
compared with $1,655 in 1995, a decrease of $121 or 7%.
Net sales were $1,354 in 1996 compared with $1,520 in 1995, a
decrease of $166 or 11%. Sales were negatively impacted by
inventory reduction initiatives. The Company is in the
process of implementing a merchandising program which focuses
on narrowing the assortments and obtaining significant volume
through key items and categories. This program should have a
positive impact on sales in the Fall season. Net sales were
also negatively impacted by a reduction in advertising pages
of 16% and other promotional activity which were done in
response to the significant increases in paper and printing
costs. As paper costs have continued to moderate, the Fall
season should reflect an increase over the prior year in terms
of the number of advertising pages.
The Company will invest over $40 in its retail business in the
Third Quarter with the opening of six new "Home Image" stores
and one new full-line store. "Home Image" is a new retailing
concept which integrates home furnishings, electronics, home
office products and appliances in room settings that
complement the individual product lines' presentations. The
first six stores are located in middle markets and combine
merchandising elements of Electric Avenue & More, Home Ideas
and Lechmere operations in order to maximize sales potential.
These store openings should have a positive sales impact for
the Fall season.
Montgomery Ward store sales for the quarter decreased 14% in
softlines (Apparel and Domestics) and 6% in hardlines
(Electronics and Furniture). Comparable store sales decreased
9%.
Lechmere total and comparable store sales decreased 22% for
the quarter. As was the case in the First Quarter of 1996,
Lechmere continued to be negatively impacted by three major
issues. First, was the integration of Lechmere systems
into those of Montgomery Ward which temporarily created
inventory imbalances and significant out-of-stock problems in
key items. Second, was the dispute involving the
credit portfolio and its previous provider which delayed the transfer
to Monogram Bank/GE Capital (which services the Montgomery
Ward credit card) until April 1996. The credit portfolio
transition is complete and should not impact the Fall season.
Third, was a reduction in advertising pages as discussed above.
Lechmere has begun a new advertising strategy in the Third
Quarter in an effort to bring back customers. This strategy
emphasizes Lechmere's strength in outstanding value on key brands and
should positively affect Fall season sales.
<PAGE> MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
Results of Operations (continued)
Second Quarter 1996 Compared with Second Quarter 1995 (continued)
Credit sales continued to decline compared to last year in the
Second Quarter for Montgomery Ward. The decrease was
attributable to a decline in the number of new accounts which
started in the Fourth Quarter of 1995 and also due to a March,
1996 notification to the credit card customer base of the
transfer of their accounts from Montgomery Ward Credit to
Monogram Bank/GE Capital. Programs for acquisition of new
credit card customers were established at the end of the First
Quarter to provide an increase in new accounts for the entire
year. For the Second Quarter new accounts from the continuous
store base increased 23% over the prior year.
Direct response marketing revenues were $180 in 1996 compared
with $135 in 1995, an increase of $45 or 33%. The increase
was primarily due to the Amoco acquisition of $26 (see Note 5
to Consolidated Financial Statements) with the remaining
increase of $19 due to increases in club memberships, club
prices and insurance policyholders.
Gross margin (net sales less cost of goods sold) dollars were
$260, a decrease of $50 or 16%. The decrease was due to
decreases in gross margin rate of $13 and sales volume of $43
offset by a decrease in other expenses of $4. The decrease in
gross margin rate was due to continued competitive pressures
and aggressive liquidation efforts designed to narrow merchandise
assortments which began in the First Quarter and continued into
the Second Quarter.
Operating, selling, general and administrative expenses
decreased $9, primarily due to decreased operating and other
administrative expenses of Montgomery Ward and Lechmere of
$54, offset by the Second Quarter benefits and expenses of the
Amoco Motor Club of $24; increased payroll and other
administrative expenses of Signature of $18, primarily due to
Signature's continued growth of business; and decreased income
from the sale of product service contracts of $3.
Net income was $11 for the second quarters of 1996 and 1995.
<PAGE> MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
Results of Operations (continued)
First Six Months of 1996 Compared with First Six Months of 1995
Consolidated total revenues were $2,969 compared with $3,142
in 1995, a decrease of $173 or 6%.
Net sales decreased $270 or 9%. Comparable store sales
decreased 7%. Montgomery Ward store sales for the six months
decreased 13% in apparel and domestics and 4% in hardlines.
Lechmere total and comparable store sales decreased 22%. In
addition to the competitive Retail environment, a material
reduction in advertising pages of 28% coupled with the
inventory reduction initiatives negatively impacted sales.
Fall season sales should be positively impacted by new
merchandising and advertising strategies, increased
advertising page counts, better in-stock position on key items
and categories and programs initiated for the acquisition of
new credit card customers.
Direct response marketing revenues increased $97 or 37%,
primarily due to the Amoco acquisition of $53 and increases in
club, insurance and other revenues of $44.
Gross margin dollars decreased $116 due to decreases in gross
margin rate of $51 and sales volume of $71 offset by a
decrease in other expenses of $6. Continued competitive
pressures and inventory liquidation efforts contributed to the
decrease in gross margin rate for the six months.
Operating, selling, general and administrative expenses
increased $44 from the prior year, primarily due to the 1996
benefits and expenses of the Amoco Motor Club of $50. Other
factors included increased payroll and other administrative
expenses of Signature of $40, primarily due to Signature's
continued growth of business; decreased income from the sale
of product service contracts of $8 and the impact of new store
openings of $5; partially offset by decreased operating and
other administrative expenses of Montgomery Ward and Lechmere
of $59.
Net interest expense increased $4 from the prior year due to
increased borrowings (as more fully discussed in the
Discussion of Financial Condition), and higher average
borrowing rates related to long-term borrowings placed in 1995
to extend the maturity and fix the interest rate on a
significant portion of the Company's debt.
Net loss for the six months was $37 versus net income of $7 in
1995.
<PAGE> MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
Discussion of Financial Condition
Montgomery Ward is the only direct subsidiary of MW Holding
and, therefore, Montgomery Ward and its subsidiaries are MW
Holding's sole source of funds.
Montgomery Ward has entered into interest rate exchange and
cap agreements with various banks to offset the market risk
associated with an increase in interest rates under both the
Long Term and Short Term Agreement. The aggregate notional
principal amounts under the interest rate exchange agreement
is $175 in 1996. Under the terms of the interest rate
exchange agreements, Montgomery Ward pays the banks a weighted
average fixed rate of 7.4% multiplied by the notional
principal amount in 1996 and will receive the one-month daily
average London Interbank Offered (LIBO) rate multiplied by the
notional principal amount. The average aggregate notional
principal amount under the various cap agreements is $158 in
1996. Under the terms of the cap agreements, Montgomery Ward
receives payments from the banks when the one-month daily
average LIBO rate exceeds the 6.0% cap strike rate in 1996.
Such payments will equal the amount determined by multiplying
the notional principal amount by the excess of the percentage
rate, if any, of the one-month daily average LIBO rate over
the cap strike rate. The interest rate exchange and cap
agreements increased the effective borrowing rate under the
Agreements by .86% for the 26-week period ended June 29, 1996.
Montgomery Ward is exposed to credit risk in the event of
nonperformance by the other parties to the interest rate
exchange and cap agreements; however, Montgomery Ward
anticipates full performance by the counterparties.
Net cash used in the Company's operating activities totaled
$386 for the first half of 1996, which was $227 favorable to
the cash used in operating activities of $613 for the same
period in 1995. The improvement in cash flow primarily
resulted from a $148 net cash source improvement due to
inventory reduction with a corresponding accounts payable
improvement of $128 over the same period in 1995, which was a
result of inventory management initiatives.
Net cash provided by financing activities totaled $494 for the
first six months of 1996, compared to $662 for the same period
in 1995. The decrease was primarily due to decreased
borrowings under the Agreements. Borrowings decreased as
inventory purchases decreased in conjunction with inventory
management initiatives.
<PAGE> MONTGOMERY WARD HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
Discussion of Financial Condition (continued)
Future cash needs are expected to be provided by ongoing
operations, the arrangements with Monogram Bank/GE Capital and
Montgomery Ward Credit pertaining to the extension of credit
to the Company's customers.
Capital expenditures during the first half of 1996 of $29 were
primarily related to expenditures for the opening of one full-
line store and six Home Image stores. Capital expenditures
for the comparable 1995 period were $47.
<PAGE> PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
Information included in this Report on Form 10-Q relating to
sales and earnings expectations constitutes forward-looking
statements that involve a number of risks and uncertainties.
From time to time, information provided by the Company or
statements made by its employees may contain other forward-
looking statements. Factors that could cause actual results
to differ materially from the forward-looking statements
include but are not limited to: general economic conditions
including inflation, consumer debt levels, trade restrictions
and interest rate fluctuations; competitive factors including
pricing pressures, technological developments and products
offered by competitors; inventory risks due to changes in
market demand or the Company's business strategies; and
changes in effective tax rates. Readers are cautioned not to
place undue reliance on these forward-looking statements,
which speak only as of the date made. The Company undertakes
no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future
events or otherwise.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27. Financial Data Schedule.
(b) Reports on Form 8-K.
None.
<PAGE> SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
REGISTRANT MONTGOMERY WARD HOLDING CORP.
BY JOHN L. WORKMAN
NAME AND TITLE John L. Workman, Executive Vice
President and
Chief Financial Officer
DATE: August 12, 1996
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