-----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, EciZ8DAlG4aIPnGz9AXcN5HAjhLU1sIksrRkBaNYNldcTzA76/tG/DfHhrluioof 0Lqbue/BueZqzXhjWxBcAg== 0000836974-96-000020.txt : 19960814 0000836974-96-000020.hdr.sgml : 19960814 ACCESSION NUMBER: 0000836974-96-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960629 FILED AS OF DATE: 19960813 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17540 FILM NUMBER: 96609529 BUSINESS ADDRESS: STREET 1: ONE MONTGOMERY WARD PLZ CITY: CHICAGO STATE: IL ZIP: 60671 BUSINESS PHONE: 3124672000 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 ___________ FORM 10-Q (MARK ONE) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 29, 1996 OR __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-17540 MONTGOMERY WARD HOLDING CORP. (Exact Name Of Registrant As Specified In Its charter) Delaware 36-3571585 (State Of Incorporation) (I.R.S.Employer Identification No.) Montgomery Ward Plaza, Chicago, Illinois 60671 (Address Of Principal Executive Offices) (Zip Code) Registrant's Telephone Number Including Area Code: 312/467-2000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No______ As of July 27, 1996 the Registrant had 18,722,038 shares of Class A Common Stock and 25,000,000 shares of Class B Common Stock of the Registrant outstanding. PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements INDEX Page Montgomery Ward Holding Corp. Consolidated Statement of Income............................2 Consolidated Balance Sheet..................................4 Consolidated Statement of Cash Flows........................5 Notes to Consolidated Financial Statements.................7 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) For the 13-Week Periods Ended June 29, July 1, 1996 1995 (Millions, except per share amounts) Revenues Net sales, including leased and licensed department sales............... $ 1,354 $ 1,520 Direct response marketing revenues, including insurance..................... 180 135 Total Revenues....................... 1,534 1,655 Costs and Expenses Cost of goods sold, including net occupancy and buying expense............ 1,210 1,098 Operating, selling, general and administrative expenses, including benefits and losses of direct response operations (Note 3)............ 396 405 Interest expense........................ 25 24 Total Costs and Expenses.............. 1,519 1,639 Income Before Taxes........................ 15 16 Income Tax Expense......................... 4 5 Net Income..................................... 11 11 Preferred Stock Dividend Requirements (Note 4). 3 1 Net Income Applicable to Common Shareholders... $ 8 $ 10 Net Income per Common Share (Note 2) Class A........................................ $ .20 $ .25 Class B........................................ $ .18 $ .20 Cash dividends per Common Share $ - $ - See notes to consolidated financial statements. MONTGOMERY WARD HOLDING CORP. CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) For the 26-Week Periods Ended June 29, July 1, 1996 1995 (Millions, except per share amounts) Revenues Net sales, including leased and licensed department sales............... $ 2607 $ 2,877 Direct response marketing revenues, including insurance..................... 362 265 Total Revenues........................ 2,969 3,142 Costs and Expenses Cost of goods sold, including net occupancy and buying expense............. 2,136 2,286 Operating, selling, general and administrative expenses, including benefits and losses of direct response operations (Note 3)............. 848 804 Interest expense......................... 47 43 Total Costs and Expenses.............. 3,031 3,133 (Loss)/Income Before Taxes................ (62) 9 Income Tax (Benefit)/Expense.............. (25) 2 Net (Loss)/Income......................... (37) 7 Preferred Stock Dividend Requirements (Note 4) 6 2 Net (Loss)/Income Applicable to Common Shareholders...................... (43) 5 Net (Loss)/Income per Common Share (Note 2) Class A................................... (1.05) .12 Class B................................... (.90) .10 Cash dividends per Common Share $ - $ - See notes to consolidated financial statements. MONTGOMERY WARD HOLDING CORP. CONSOLIDATED BALANCE SHEET June December 29, 30, 1996 1995 (Unaudi ted) ASSETS (Millions) Cash and cash equivalents..................$ 47 $ 37 Short-term investments..................... - 1 Investments of insurance operations........ 315 345 Total Cash and Investments.............. 362 383 Trade and other accounts receivable........ 224 166 Accounts and notes receivable from affiliates................................. 30 22 Total Receivables....................... 254 188 Merchandise inventories................... 1,580 1,770 Prepaid pension cost........................ 340 335 Prepaid federal income taxes................ 23 - Properties, plants and equipment, net of accumulated depreciation and amortization.............................. 1,327 1,366 Direct response and insurance acquisition costs..................................... 564 395 Other assets.............................. 521 447 Total Assets.............................. 4,971 4,884 LIABILITIES AND SHAREHOLDERS' EQUITY Short-term debt........................... 676 160 Trade accounts payable.................... 1,435 1,804 Federal income taxes payable.............. - 6 Accrued liabilities and other obligations................................ 1,165 1,195 Insurance policy claim reserves................................... 237 236 Long-term debt ............................ 419 423 Obligations under capital leases..................................... 63 66 Deferred income taxes...................................... 160 119 Total Liabilities........................ 4,155 4,009 Commitments and Contingent Liabilities (Note 6) Redeemable Preferred Stock (Note 4)........ 175 175 Shareholders' Equity Common stock............................... 1 1 Capital in excess of par value............. 49 45 Retained earnings.......................... 715 758 Unrealized gain on marketable securities... 8 10 Less: Treasury stock, at cost........... (132) (114) Total Shareholders'Equity......... 641 700 Total Liabilities and Shareholders'Equity..$ 4,971 $ 4,884 See notes to consolidated financial statements. MONTGOMERY WARD HOLDING CORP. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) For the 26-Week Periods Ended June 29, July 1, (Millions) 1996 1995 Cash flows from operating activities: Net (Loss)/Income........................ $ (37) $ 7 Adjustments to reconcile net income loss to net cash provided by (used for) operating activities: Depreciation and amortization............ 61 59 Amortization of Goodwill................. 5 3 Amortization of Direct response and insurance acquisition costs ............. 95 68 Deferred income taxes.................... 1 22 Gain on sale of assets................... (3) - Net loss adjusted for non-cash expenses 122 159 Changes in operating assets and liabilities: (Increase) decrease in: Trade and other accounts receivable..... (33) (3) Accounts and notes receivable from affiliates.............................. (8) 6 Merchandise inventories................. 190 42 Prepaid pension cost.................... (5) (4) Federal income taxes receivable, net.. (28) (22) Direct response insurance acquisition costs.......................(140) (93) Other assets............................ (1) (34) Increase (decrease) in: Trade accounts payable.................(372) (500) Federal income taxes payable, net... - (10) Accrued liabilities and other obligations........................... (112) (158) Insurance policy claim reserves....... 1 4 Net cash used for operations........ (386) (613) Cash flows from investing activities: Investment in Merchant Partners....... (3) - Acquisition of Amoco Enterprises...... (100) - Purchase of short-term investments.... (20) (18) Purchase of investments of insurance operations............................ (335) (261) Sale of short-term investments........ 21 4 Sale of investments of insurance operations............................ 358 269 Capital expenditures.................. (29) (47) Disposition of properties, plants and equipment, net........................ 10 12 Net cash used for investing activities(98) (41) See notes to consolidated financial statements. MONTGOMERY WARD HOLDING CORP. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) For the 26-Week Periods Ended June 29, July 1, (Millions) 1996 1995 Cash flows from financing activities: Proceeds from short-term borrowings, net $ 516 $ 675 Payments of Montgomery Ward long-term debt (4) (5) Payments of obligations under capital leases(3) (3) Proceeds from issuance of common stock 3 1 Cash dividends paid....................... (6) (2) Purchase of treasury stock, at cost....... (12) (4) Net cash provided by financing activities 494 662 Increase in cash and cash equivalents...... 10 8 Cash and cash equivalents at beginning of period........................... 37 33 Cash and cash equivalents at end of period.................................... $ 47 41 Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes......................... $ 2 $ 22 Interest............................. $ 48 $ 41 Non-cash investing activity: Change in unrealized gain on marketable equity securities.................... $ (1) $ 8 Non-cash financing activity: Notes issued for purchase of treasury stock.................................. $ 6 $ - See notes to consolidated financial statements. MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Millions of dollars, except per share amounts) 1. Accounting Policies Basis of Presentation The Consolidated Balance Sheet as of June 29, 1996 and the Consolidated Statements of Income for the thirteen- and twenty six-weeks ended June 29, 1996 and July 1, 1995, and the Consolidated Statements of Cash Flows for the twenty-six weeks then ended are unaudited. The interim financial statements reflect all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The interim financial statements should be read in the context of the financial statements and notes thereto filed with the Securities and Exchange Commission in MW Holding's 1995 Annual Report on Form 10-K. Capitalized terms not otherwise defined herein have the meaning ascribed to such terms in the 1995 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to be comparable with the current period presentation. Accounting for Long-Lived Assets Effective December 31, 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The provisions require a review of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that an impairment loss has occurred based on expected undiscounted future cash flows, the loss will be recognized in the income statement and certain disclosures will be made regarding the impairment. There was no financial impact from the adoption of this statement on the financial statements for the first half of 1996. 2. Net Income/(Loss) Per Common Share Net Income/(Loss) per common share is computed as follows: For the 13 Week Periods Ended June 29, 1996 July 1, 1995 Class A Class B Class A Class B Net Earnings applicable to Common Shareholders $4 $4 $5 $5 Weighted average number of common shares outstanding 19,694,993 25,000,000 20,149,005 25,000,000 Net Earnings per share $.20 $.18 $.25 $.20 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Millions of dollars, except per share amounts) 2. Net Income/(Loss) Per Common Share (continued) For the 26-Week Periods Ended June 29, 1996 July 1, 1995 Class A Class B Class A Class B (Loss)/Earnings applicable to Common Shareholders $(20) $(23) $2 $3 Weighted average number of common shares outstanding 19,230,872 25,000,000 20,246,555 25,000,000 (Loss)/Earnings per share $(1.05) $(.90) $.12 $.10 3. Insurance Benefits and Losses Operating, selling, general and administrative expenses include insurance benefits and losses related to direct response marketing operations of $35 and $29 for the 13-week periods ended June 29, 1996 and July 1, 1995, respectively, and $74 and $57 for the 26-week periods then ended. The increases of $6 and $17, respectively, are due primarily to the acquisition of the Amoco Motor Club (see Note 5 to the Consolidated Financial Statements). 4. Preferred Stock On January 31, 1996, GE Capital exercised the exchange option contained in the MW Senior Preferred Stock subscription agreement which allowed an exchange of the MW Senior Preferred Stock for senior preferred stock of the Company with substantially the same terms. On March 28, 1996, the Company's Certificate of Incorporation was amended to authorize the issuance of a new series of senior preferred stock (New Senior Preferred Stock). On March 29, 1996, the Company issued all of the 1,750 shares of New Senior Preferred Stock to GE Capital in exchange for the 1,750 shares of MW Senior Preferred Stock held by GE Capital. Dividends on the New Senior Preferred Stock are payable quarterly at an annual rate of $7,010 per share. The Company is required to redeem the New Senior Preferred Stock on June 30, 2002, with the option of redeeming all or any portion prior to June 30, 2002. MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Millions of dollars, except per share amounts) 5. Acquisition of Amoco Enterprises, Inc. On December 31, 1995, Montgomery Ward acquired all of the outstanding capital stock of Amoco Enterprises, Inc. (Enterprises), operator of the Amoco Motor Club and a wholly- owned subsidiary of Amoco Oil Holding Company. The purchase price was $100. The acquisition was financed through the use of the majority of the proceeds generated from the issuance of the MW Senior Preferred Stock. On January 2, 1996, Montgomery Ward's wholly-owned subsidiary, Signature, purchased Enterprises from Montgomery Ward for $100. The acquisition was accounted for as a purchase. The purchase price has been allocated to Enterprises' net assets based upon preliminary results of asset valuations and liability and contingency assessments. Actual adjustments may differ based on the results of further evaluations of the fair value of the acquired assets and liabilities. Any differences between preliminary and actual adjustments are not expected to have a material impact on the Consolidated Financial Statements. The preliminary allocation is summarized as follows: Accounts receivable...................... $ 25 Federal income tax receivable............ 1 Properties, plant & equipment............ 3 Direct response and insurance acquisition costs....................... 123 Goodwill................................. 67 Other assets............................. 4 Trade accounts payable................... (3) Accrued liabilities and other obligations............................. (76) Deferred income taxes.................... (44) ____ $ 100 6. Commitments and Contingent Liabilities MW Holding, Montgomery Ward and its subsidiaries are engaged in various litigation and have a number of unresolved claims. While the amounts claimed are substantial and the ultimate liability with respect to such litigation and claims cannot be determined at this time, management is of the opinion that such liability, to the extent not provided for through insurance or otherwise, is not likely to have a material impact on the financial condition and the results of operations of the Company. MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Millions of dollars, except per share amounts) 7. Customer Credit Agreement A. Effective April 1, 1996, Montgomery Ward entered into interim agreements with GE Capital and its wholly-owned subsidiaries Montgomery Ward Credit Corporation ("Montgomery Ward Credit") and Monogram Credit Card Bank of Georgia ("Monogram") reflecting a prior memorandum of understanding with GE Capital pursuant to which Monogram is extending credit to retail customers of Montgomery Ward under open-ended revolving credit plans on a non recourse basis. In the Montgomery Ward memorandum of understanding, interim agreements provide for the sharing of certain additional revenues generated by increases in interest rates and late fee charges to customers with the extension of credit to the customers made directly by Monogram. Certain of these additional revenues will be applied to reduce the obligations of Montgomery Ward for prior losses incurred under the original Account Purchase Agreement with Montgomery Ward Credit and Montgomery Ward's obligation to pay Credit losses in excess of 3.9% of the average receivable balance up to 5%, and 50% of the losses in excess of 5% up to 8%, incurred by Monogram under the new agreements. Except as noted above, the new agreements together generally impose obligations upon and provide benefits to Montgomery Ward and GE Capital and its subsidiaries, Montgomery Ward Credit and Monogram similar to the prior arrangements under the Account Purchase Agreement. The interim agreement provided that if definitive agreements are not entered into by July 31, 1996 by Montgomery Ward, Monogram, Montgomery Ward Credit and GE Capital permanently implementing the changes contemplated by the memorandum of understanding and interim agreements for the Montgomery Ward credit customers, Montgomery Ward credit transactions will revert to the original Account Purchase Agreement. The date for entering into the definitive agreement was amended to August 14, 1996 by the parties. B. Effective March 13, 1996, Lechmere, Inc., a subsidiary of Montgomery Ward, entered into interim agreements with GE Capital and its wholly-owned subsidiaries Montgomery Ward Credit and Monogram reflecting a prior memorandum of understanding with GE Capital pursuant to which Monogram is extending credit to retail customers of Lechmere under open- end revolving credit plans on a non-recourse basis. MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Millions of dollars, except per share amounts) 7. Customer Credit Agreement (continued) The Lechmere memorandum of understanding and interim agreements provide for a guaranteed Monogram Bank/GE Capital annual return on its equity of 17.50%. For any shortfalls, an annual payment would be made by Lechmere. Any return above 17.50% will be shared equally by Lechmere and Monogram/GE Capital. For any annual credit losses over 4.25% and less than 8% of the average receivable balance, Lechmere is responsible for 50% of said losses. It is envisioned that a similar relationship will be established for Montgomery Ward's "Electric Ave. & More" credit card customer receivables. If definitive agreements are not executed by August 31, 1996, the Lechmere interim agreements will expire. C. Pursuant to an agreement dated April 3, 1996, Montgomery Ward and Lechmere agreed to sell to Montgomery Ward Credit receivables from certain commercial customers of Montgomery Ward and Lechmere. 8. Related Party Transactions A. Montgomery Ward Direct L.P. (MW Direct) The Company was a partner in a joint venture, MW Direct, formed through a partnership in 1991 between subsidiaries of Montgomery Ward and subsidiaries of Fingerhut Companies, Inc., a Minneapolis, Minnesota specialty-based catalog merchandiser. In June of 1996, the subsidiaries of Fingerhut Companies withdrew from the partnership. Immediately prior to the withdrawal, the Fingerhut Partners contributed to the capital of MW Direct cash and all claims that the Fingerhut subsidiaries had against MW Direct. Also in June of 1996, the Company and ValueVision International, Inc. (ValueVision) a Minneapolis, Minnesota based television home shopping enterprise entered into a memorandum of understanding, whereby ValueVision would acquire the assets and assume the liabilities of MW Direct as part of a restructuring of the marketing agreement between Montgomery Ward and ValueVision as discussed below. MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Millions of dollars, except per share amounts) 8. Related Party Transactions (continued) B. ValueVision International, Inc. ValueVision and Montgomery Ward & Co., announced an expansion and restructuring of their ongoing marketing agreement as well as ValueVision's acquisition of the assets and assumption of liabilities of Montgomery Ward Direct, L.P. ValueVision's sales promotion rights will be expanded beyond the current television home shopping arena to include the full use of the Montgomery Ward name, servicemark, and 10 million-plus active credit card file for direct mail catalogs and ancillary promotions. The new agreement also extends to the Lechmere name and customer file, acquired by Montgomery Ward in 1994 when it purchased the New England-based electronics and appliance retailer. ValueVision will issue to Montgomery Ward warrants to purchase 3.0 million shares of ValueVision common stock at an exercise price of $0.01 per share. The new warrants will replace 18,000,000 unvested warrants from an earlier grant of 25,000,000 ValueVision warrants exercisable at prices ranging from $7.00-$17.00. ValueVision will also issue to Merchant Partners L.P. (Merchant Partners) warrants to purchase 0.2 million shares of ValueVision common stock at an exercise price of $0.01 per share. Montgomery Ward is a limited partner in Merchant Partners. The earlier warrant program had been subject to certain vesting conditions and termination rights which do not apply to the replacement grant. Under the new agreements, Montgomery Ward's potential ownership of ValueVision, on a fully diluted basis, following the exercise of all warrants would be 26%. Subject to the completion of due diligence, definitive agreements are expected to be signed in the Third Quarter of 1996 with consolidation of the Montgomery Ward Direct business in ValueVision's operations expected to begin immediately thereafter. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of results of operations for MW Holding compares the second quarter of 1996 to the second quarter of 1995, as well as the first six months of 1996 to the first six months of 1995. All dollar amounts referred to in this discussi1on are in millions, and all income and expense items are shown before income taxes, unless specifically stated otherwise. MW Holding's business is seasonal, with one-third of the sales traditionally occurring in the fourth quarter; accordingly, the results of operations for the quarter and the first six months are not necessarily indicative of the results for the entire year. MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Millions of dollars, except per share amounts) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations (continued) Second Quarter 1996 Compared with Second Quarter 1995 Consolidated total revenues (net sales and direct response marketing revenues, including insurance) were $1,534 in 1996 compared with $1,655 in 1995, a decrease of $121 or 7%. Net sales were $1,354 in 1996 compared with $1,520 in 1995, a decrease of $166 or 11%. Sales were negatively impacted by inventory reduction initiatives. The Company is in the process of implementing a merchandising program which focuses on narrowing the assortments and obtaining significant volume through key items and categories. This program should have a positive impact on sales in the Fall season. Net sales were also negatively impacted by a reduction in advertising pages of 16% and other promotional activity which were done in response to the significant increases in paper and printing costs. As paper costs have continued to moderate, the Fall season should reflect an increase over the prior year in terms of the number of advertising pages. The Company will invest over $40 in its retail business in the Third Quarter with the opening of six new "Home Image" stores and one new full-line store. "Home Image" is a new retailing concept which integrates home furnishings, electronics, home office products and appliances in room settings that complement the individual product lines' presentations. The first six stores are located in middle markets and combine merchandising elements of Electric Avenue & More, Home Ideas and Lechmere operations in order to maximize sales potential. These store openings should have a positive sales impact for the Fall season. Montgomery Ward store sales for the quarter decreased 14% in softlines (Apparel and Domestics) and 6% in hardlines (Electronics and Furniture). Comparable store sales decreased 9%. Lechmere total and comparable store sales decreased 22% for the quarter. As was the case in the First Quarter of 1996, Lechmere continued to be negatively impacted by three major issues. First, was the integration of Lechmere systems into those of Montgomery Ward which temporarily created inventory imbalances and significant out-of-stock problems in key items. Second, was the dispute involving the credit portfolio and its previous provider which delayed the transfer to Monogram Bank/GE Capital (which services the Montgomery Ward credit card) until April 1996. The credit portfolio transition is complete and should not impact the Fall season. Third, was a reduction in advertising pages as discussed above. Lechmere has begun a new advertising strategy in the Third Quarter in an effort to bring back customers. This strategy emphasizes Lechmere's strength in outstanding value on key brands and should positively affect Fall season sales. MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Millions of dollars, except per share amounts) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations (continued) Second Quarter 1996 Compared with Second Quarter 1995 (continued) Credit sales continued to decline compared to last year in the Second Quarter for Montgomery Ward. The decrease was attributable to a decline in the number of new accounts which started in the Fourth Quarter of 1995 and also due to a March, 1996 notification to the credit card customer base of the transfer of their accounts from Montgomery Ward Credit to Monogram Bank/GE Capital. Programs for acquisition of new credit card customers were established at the end of the First Quarter to provide an increase in new accounts for the entire year. For the Second Quarter new accounts from the continuous store base increased 23% over the prior year. Direct response marketing revenues were $180 in 1996 compared with $135 in 1995, an increase of $45 or 33%. The increase was primarily due to the Amoco acquisition of $26 (see Note 5 to Consolidated Financial Statements) with the remaining increase of $19 due to increases in club memberships, club prices and insurance policyholders. Gross margin (net sales less cost of goods sold) dollars were $260, a decrease of $50 or 16%. The decrease was due to decreases in gross margin rate of $13 and sales volume of $43 offset by a decrease in other expenses of $4. The decrease in gross margin rate was due to continued competitive pressures and aggressive liquidation efforts designed to narrow merchandise assortments which began in the First Quarter and continued into the Second Quarter. Operating, selling, general and administrative expenses decreased $9, primarily due to decreased operating and other administrative expenses of Montgomery Ward and Lechmere of $54, offset by the Second Quarter benefits and expenses of the Amoco Motor Club of $24; increased payroll and other administrative expenses of Signature of $18, primarily due to Signature's continued growth of business; and decreased income from the sale of product service contracts of $3. Net income was $11 for the second quarters of 1996 and 1995. MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Millions of dollars, except per share amounts) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations (continued) First Six Months of 1996 Compared with First Six Months of 1995 Consolidated total revenues were $2,969 compared with $3,142 in 1995, a decrease of $173 or 6%. Net sales decreased $270 or 9%. Comparable store sales decreased 7%. Montgomery Ward store sales for the six months decreased 13% in apparel and domestics and 4% in hardlines. Lechmere total and comparable store sales decreased 22%. In addition to the competitive Retail environment, a material reduction in advertising pages of 28% coupled with the inventory reduction initiatives negatively impacted sales. Fall season sales should be positively impacted by new merchandising and advertising strategies, increased advertising page counts, better in-stock position on key items and categories and programs initiated for the acquisition of new credit card customers. Direct response marketing revenues increased $97 or 37%, primarily due to the Amoco acquisition of $53 and increases in club, insurance and other revenues of $44. Gross margin dollars decreased $116 due to decreases in gross margin rate of $51 and sales volume of $71 offset by a decrease in other expenses of $6. Continued competitive pressures and inventory liquidation efforts contributed to the decrease in gross margin rate for the six months. Operating, selling, general and administrative expenses increased $44 from the prior year, primarily due to the 1996 benefits and expenses of the Amoco Motor Club of $50. Other factors included increased payroll and other administrative expenses of Signature of $40, primarily due to Signature's continued growth of business; decreased income from the sale of product service contracts of $8 and the impact of new store openings of $5; partially offset by decreased operating and other administrative expenses of Montgomery Ward and Lechmere of $59. Net interest expense increased $4 from the prior year due to increased borrowings (as more fully discussed in the Discussion of Financial Condition), and higher average borrowing rates related to long-term borrowings placed in 1995 to extend the maturity and fix the interest rate on a significant portion of the Company's debt. Net loss for the six months was $37 versus net income of $7 in 1995. MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Millions of dollars, except per share amounts) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Discussion of Financial Condition Montgomery Ward is the only direct subsidiary of MW Holding and, therefore, Montgomery Ward and its subsidiaries are MW Holding's sole source of funds. Montgomery Ward has entered into interest rate exchange and cap agreements with various banks to offset the market risk associated with an increase in interest rates under both the Long Term and Short Term Agreement. The aggregate notional principal amounts under the interest rate exchange agreement is $175 in 1996. Under the terms of the interest rate exchange agreements, Montgomery Ward pays the banks a weighted average fixed rate of 7.4% multiplied by the notional principal amount in 1996 and will receive the one-month daily average London Interbank Offered (LIBO) rate multiplied by the notional principal amount. The average aggregate notional principal amount under the various cap agreements is $158 in 1996. Under the terms of the cap agreements, Montgomery Ward receives payments from the banks when the one-month daily average LIBO rate exceeds the 6.0% cap strike rate in 1996. Such payments will equal the amount determined by multiplying the notional principal amount by the excess of the percentage rate, if any, of the one-month daily average LIBO rate over the cap strike rate. The interest rate exchange and cap agreements increased the effective borrowing rate under the Agreements by .86% for the 26-week period ended June 29, 1996. Montgomery Ward is exposed to credit risk in the event of nonperformance by the other parties to the interest rate exchange and cap agreements; however, Montgomery Ward anticipates full performance by the counterparties. Net cash used in the Company's operating activities totaled $386 for the first half of 1996, which was $227 favorable to the cash used in operating activities of $613 for the same period in 1995. The improvement in cash flow primarily resulted from a $148 net cash source improvement due to inventory reduction with a corresponding accounts payable improvement of $128 over the same period in 1995, which was a result of inventory management initiatives. Net cash provided by financing activities totaled $494 for the first six months of 1996, compared to $662 for the same period in 1995. The decrease was primarily due to decreased borrowings under the Agreements. Borrowings decreased as inventory purchases decreased in conjunction with inventory management initiatives. MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Millions of dollars, except per share amounts) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Discussion of Financial Condition (continued) Future cash needs are expected to be provided by ongoing operations, the arrangements with Monogram Bank/GE Capital and Montgomery Ward Credit pertaining to the extension of credit to the Company's customers. Capital expenditures during the first half of 1996 of $29 were primarily related to expenditures for the opening of one full- line store and six Home Image stores. Capital expenditures for the comparable 1995 period were $47. PART II - OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. Information included in this Report on Form 10-Q relating to sales and earnings expectations constitutes forward-looking statements that involve a number of risks and uncertainties. From time to time, information provided by the Company or statements made by its employees may contain other forward- looking statements. Factors that could cause actual results to differ materially from the forward-looking statements include but are not limited to: general economic conditions including inflation, consumer debt levels, trade restrictions and interest rate fluctuations; competitive factors including pricing pressures, technological developments and products offered by competitors; inventory risks due to changes in market demand or the Company's business strategies; and changes in effective tax rates. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 27. Financial Data Schedule. (b) Reports on Form 8-K. None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. REGISTRANT MONTGOMERY WARD HOLDING CORP. BY JOHN L. WORKMAN NAME AND TITLE John L. Workman, Executive Vice President and Chief Financial Officer DATE: August 12, 1996 EX-27 2
5 1,000,000 6-MOS DEC-28-1996 JUN-29-1996 47 315 254 0 1580 0 2079 752 4971 0 0 175 0 1 640 4971 2607 2969 2136 3031 0 0 47 (62) (25) 0 0 0 0 (37) (1.05) (1.05)
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