-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D2lPWHz0PKNhGD8IAvwAR9IRTKl6KtVi59wkcqYembL/Y3XEVphfZnAjOjwZ2XgC PrWAxYtHtIkC0wcd/1t78Q== 0000836974-95-000025.txt : 19951220 0000836974-95-000025.hdr.sgml : 19951220 ACCESSION NUMBER: 0000836974-95-000025 CONFORMED SUBMISSION TYPE: PRE 14A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951219 FILED AS OF DATE: 19951219 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MONTGOMERY WARD HOLDING CORP CENTRAL INDEX KEY: 0000836974 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 363571585 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: PRE 14A SEC ACT: 1934 Act SEC FILE NUMBER: 000-17540 FILM NUMBER: 95602761 BUSINESS ADDRESS: STREET 1: ONE MONTGOMERY WARD PLZ CITY: CHICAGO STATE: IL ZIP: 60671 BUSINESS PHONE: 3124672000 PRE 14A 1 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: 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. 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. 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. 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 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 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. 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:____________________________________ 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 EX-1 2 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. 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%. 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. 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 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. 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. 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. 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. 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 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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 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 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 $296 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollar amounts in millions) 3. Investments of Insurance Operations (continued) The amounts of fixed maturities as of December 31, 1994 are as follows: Amortized Market Cost Value Due in 1995. . . . . . . . . . . . . . . . .$ 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 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. 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. 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% 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. 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 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. 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 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. 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. 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% 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. 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 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. 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 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. 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. 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 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. 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. 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. 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. 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 $27 for 1994, 1993 and 1992. MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollar amounts in millions) 21. Parent Company Financial Information Following is the MW Holding balance sheet as of December 31, 1994 and January 1, 1994 and the statements of income and cash flows for the 52-week periods ended December 31, 1994 and January 1, 1994 and the 53-week period ended January 2, 1993. MONTGOMERY WARD HOLDING CORP. BALANCE SHEET ASSETS December 31, January 1, 1994 1994 Federal Income Taxes Receivable . . . . . .$ 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 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 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 EX-2 3 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. 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. 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. 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. 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. 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 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. 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. 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. 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. 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. -----END PRIVACY-ENHANCED MESSAGE-----